Good Faith Prpoperties Ltd and Others v. Cibean Development Company Ltd

CACV 35/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 35 OF 2014

(ON APPEAL FROM LDCS NO. 42000 OF 2011)

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BETWEEN

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1.On 31 May 2013, after a trial which lasted for 17 days, the Lands Tribunal made an order pursuant to the Land (Compulsory Sale for Redevelopment) Ordinance Cap 545 [“the LCSRO”] for the sale of the remaining portion of Inland Lot No 1486 [“the Land”]. At that time, there was a composite building on the Land which is known as No 20 Caine Road, Hong Kong. There was a shop unit in the building and the Respondent to the application was the owner of that unit. All the other units in the building were domestic units. The Respondent opposed the application for sale.

2.Then, after hearing submissions from counsel, the Tribunal ordered on 11 November 2013 that the Respondent pay the costs of the Applicant in the proceedings except the costs for:

(a) Satisfying the age and repair test;

(b) Preparing and proving at trial the initial EUV and RDV reports as well as the updated RDV reports; and

(c) The application to adduce further report at the hearing of 6 November 2012.

3.In coming to that decision, the Tribunal rejected the compensation approach (applied in compulsory acquisition cases) and adopted a modified form of the costs follow the event approach.  The Tribunal referred to the decision in Intelligent House Ltd v Chan Tung Shing [2008] 5 HKC 390 as support for its approach.

4.The Respondent appealed against the order for costs.  Leave to appeal was granted by the Tribunal on 20 February 2014.  In granting leave, the Tribunal noted that the main dispute on the order for costs was whether the compensation approach should be applicable to cases under the LCSRO.  The question was decided for the first time and it involved a question of general principle.  The Tribunal considered that the determination of this question by the Court of Appeal would provide guidance for future cases.

The statutory regime

5.In light of that background, before we go into the issues raised in the present appeal, we shall have a brief overview of the LCSRO.  This ordinance had been considered by the Court of Final Appeal on at least two occasions.  In Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, Ribeiro PJ examined the scheme of the LCSRO at paras 10 to 21 of the judgment.  His Lordship identified four distinct phases for the whole process: (a) application; (b) determination by the Tribunal; (c) the sale; and (d) apportionment and application of the proceeds of sale.  The first phase is the application by the majority owner(s) who own(s) not less than 90% of the undivided shares in the lot in question.  There are statutory requirements as to the criteria which the applicant(s) must satisfy and the filing of valuation reports.

6.The second phase is the determination by the Tribunal.  Such determination usually falls into two parts.  First, the Tribunal must determine whether the applicant has satisfied the conditions under s 4(2) of the LCSRO.  Expert evidence is usually required to satisfy the first condition, viz redevelopment is justified due to the age or state of repair of the existing building.  As for the second condition, whether the majority owner(s) has taken reasonable steps to acquire all the shares, including negotiating on terms that are fair and reasonable, is a matter of fact and judgment.  On the question of whether the terms offered falls within a band of what represents a fair and reasonable assessment of the value of the minority interest, it may, subject to what was said by Ribeiro PJ at paras 32 to 36 of the judgment in Capital Well, supra, on the object of the exercise under this limb, depend on expert evidence on valuation. 

7.If those conditions are met, the Tribunal would have to set the reserve price and decide how the proceeds of sale are to be apportioned by reference to the valuations in the s 3(1) report.  The second stage is essentially a valuation exercise.  As highlighted by Ribeiro PJ, the pro rata apportionment is by reference to the existing use values [“EUVs”] whilst the setting of reserve price would take account of the redevelopment potential of the lot.

8.It is to be noted that though the Tribunal can order a sale, it has no power to order anyone to purchase  Even though very often the applicant would be a developer who intended to acquire the whole lot for redevelopment, there is no legal obligation on a successful applicant to purchase the land.  There could be cases where, perhaps due to change in market conditions, that the auction does not result in any sale.  In that case, as held by the Court of Final Appeal in Sin Ho Yuen v Fineway Properties Ltd (2011) 14 HKCFAR 497, the applicant can come back to the Tribunal to lower the reserve price.  In Intelligent House Ltd v China Superior Ltd CACV 241 of 2008, 27 August 2008, Tang VP (as he then was) agreed with the submission that the court may grant more than one period of extension under s 5(4) of LCSRO and adjust the reserve price in so doing.

9.In  Capital Well, supra, after discussing the four phases, Ribeiro PJ set out the objectives of LCSRO at para 21 of the judgment:

“21. The objectives of the Ordinance underlying this four-stage process are clear.  On the one hand, the Ordinance aims to facilitate urban renewal in respect of old and dilapidated buildings by assisting private developers to complete their acquisition where they already own at least 90% of the lot in question and by preventing the indefinite obstruction of a redevelopment by any minority owners who may seek to extract a wholly unreasonable price or “ransom” for permitting the redevelopment to proceed.  On the other hand, it aims to ensure that the minority owner receives fair and reasonable compensation for his interest in the lot.  Such compensation may be that which the minority owner agrees to accept or that which represents his share of the market value of the lot (reflecting its redevelopment value) as determined at a public auction, subject to a reserve price approved by the Tribunal.”

10.Mr Mok (appearing for the Applicant) stressed the urban renewal objective identified in the first part of this paragraph whilst Mr Chang SC (appearing together with Mr Chan for the Respondent) placed emphasis on the objective of providing fair and reasonable compensation to the minority owner in the second part of this paragraph.

11.We must recognise that the LCSRO is a statutory compromise balancing the competing interests of the co-owners: the majority owner’s interest in utilising his property by releasing the land for redevelopment versus the minority owner’s proprietary interest in the disposal of his own property.  The right of private ownership protected under Article 6 of the Basic Law (see Litton NPJ in Sin Ho Yuen v Fineway Properties Ltd supra at para 24) should not be overridden without justification.  Even if the right of private ownership of the minority owner were to be overridden when there is proper justification, there must be fair and reasonable compensation.  Thus, the statutory compromise is to provide safeguards on two different levels:

(a) The majority owner(s) (who must hold at least 90% of the interest in the land) must establish his justification to the satisfaction of the Tribunal before he could override the private right of ownership of the minority owner.  To do this, he must produce evidence to satisfy the statutory criteria; and

(b) If he manages to establish the grounds to the satisfaction of the court, the minority owner would have to sell his property even though he does not wish to do so.  But he would get back a fair share of the sale proceeds on a pro rata apportionment determined by the Tribunal. 

12.It is necessary to analyse the first tier safeguard at greater length because the proper understanding of this safeguard is important for the purposes of this appeal.  First, until the Tribunal is satisfied that the statutory criteria are met, the majority owner(s) does not have any right to compel the minority owner to sell.  The minority owner is quite entitled to insist on his right as private owner in rejecting any offers from the majority owner(s).  After all, a person can have many reasons for refusing to sell his property and one should not simply focus on the monetary market value of a property to form views about the worth of one’s ownership. Though Hong Kong is a capitalistic society, we do not sell everything just because the price is right.  There are other abstract matters which we treasure and one cannot simply put a price tag on them.  Thus, it should not be regarded as a legal wrong for a minority owner to reject an offer from the majority owner even though such an offer may meet the statutory reasonable step requirement under s 4(2)(b). 

13.LCSRO gives the majority owner(s) a means to override the will of the minority owner not because the minority owner has done something wrong: there is no legal wrong committed by the minority owner against the legal interests of the majority owner(s).  It merely gives the majority owner(s) an opportunity to establish the justification for doing so to the satisfaction of the Tribunal.  And it is only upon the Tribunal deciding that the statutory criteria have been met that the minority owner becomes obliged to sell.

14.Therefore, the making of the application is a necessary step if the majority owner(s) wish to take advantage of the LCSRO and the costs incurred by him in making the application is the price he has to pay in order to bring him to the point where a minority owner can be compelled by an order to sell through no fault on the part of the latter.

15.Further, the LCSRO also gives a right to the minority owner to have his objections heard by the Tribunal.  Objections can be raised in several respects.  Under s 4(1)(a), the minority owner can dispute the value of the property.  Under s 4(2), objections can be raised as to whether the applicant has met the statutory criteria in s 4(2)(a) and (b).

16.Though the Tribunal will only come to the question of reserve price under Schedule 2 para 2 pursuant to s 5(1)(a) after it concludes that the statutory criteria under s 4(2) are met, the minority owner is also entitled to be heard on the setting of the reserve price because it would have a bearing on the quantum of the sale proceeds in which he has an interest.  Sin Ho Yuen v Fineway Properties Ltd, supra, is a case about the dispute between the majority owner and the minority owner in re-setting the reserve price. 

17.In our judgment, one should not be too ready to condemn the exercise of such rights to be heard by the minority owner as unreasonable conduct in resisting an application under LCSRO.  There is no justification for drawing a line between passive oppositions (in terms of putting the applicant to strict proof) and active oppositions (in terms of putting forward positive evidence to challenge the case of the applicant):

(a) First, it is an exercise of a statutory right in a statutory process which entails a potential exercise of statutory power on the part of the Lands Tribunal to compel a sale against the will of the minority owner. 

(b) Second, as discussed above, in several respects the determination of the Tribunal would depend on the assessment of expert opinions.  As highlighted by Ribeiro PJ in Capital Well, supra, at para 33, there is always room for differences of opinion in these areas.  In many cases, the expert opinions put forward by one side had to be calibrated in the wake of the opinions from another expert.  Thus, the exercise of the statutory right by the minority owner by putting forward respectable expert opinions from another expert will assist the Tribunal in coming to a proper assessment.  In the absence of another set of expert opinions, the Tribunal would only have the evidence adduced by an applicant (unless it directs an assessor to be appointed or independent experts to be engaged) which may or may not give the Tribunal a full and satisfactory picture.

(c) Third, in most cases an objection would not be too meaningful unless the minority owner adduces expert evidence to support his opposition.  Therefore it is well within the contemplation of the statutory scheme that such evidence would be adduced. The mere production of such evidence cannot be regarded as unreasonable conduct on the part of a minority owner, particularly bearing in mind that the purpose of the exercise is to examine whether there is sufficient ground to override his constitutionally guaranteed right to private ownership of his property.

(d) Fourth, as a corollary of the third proposition, if one were too ready to regard a challenge by the minority owner to an application by putting forward a positive case as unreasonable conduct, there is a serious risk that the exercise of the statutory right to be heard on his opposition is so unduly curtailed that it becomes illusory.  It is not conducive to the fairness of the process if a minority owner always has to wary of the risk of being labelled by the Tribunal as acting unreasonably, with the costs ramifications that may flow from being so characterised, whenever he chooses to adduce expert evidence to contradict the evidence adduced by the applicant. 

18.To sum up, the first tier safeguard is to ensure that the minority owner’s right of private ownership of property is not taken from him without the Tribunal being satisfied in the statutory process that there are sufficient justifications for the same in terms of the statutory criteria.  The proceedings in the Lands Tribunal should be regarded as a statutory means to justify this exceptional interference with the right of private ownership of property.  The right to raise objections is part and parcel of the process, without which the process cannot be a fair one.

19.Turning next to the second tier safeguard, the fair and reasonable compensation to the minority owner if an order for sale is to be made against his will.  In the context of the present appeal, the following observations by Bokhary PJ in Sin Ho Yuen v Fineway Properties Ltd, supra, at para 7 are pertinent:

“…One of the objectives of the [LCSRO] is, as Mr Justice Ribeiro PJ said in Capital Well Ltd v Bond Star Development Ltd at para 21, ‘to ensure that the minority owner receive fair and reasonable compensation for his interests in the lot’. That objective would be defeated if such compensation is swallowed up or materially eroded by the costs which the minority owner has to pay to his own or the other side’s lawyers. …”

20.To the same effect is what was said by Litton NPJ at para 25:

“In order that the entrenched right of private ownership of property in Articles 6 and 105 of the Basic Law be not infringed, the protection of minority interest under the Ordinance becomes therefore a key factor. In turn, it behoves the tribunal, in carrying out the scheme of the Ordinance, to ensure that such protection be not diminished … And there would be diminution if, for instance, the minority owner bore, at the end of the day, an inordinate burden of costs, so that what he got by way of his share of the proceeds of sale was largely taken away by the costs incurred in the legal process.”

21.As Mr Mok placed some reliance on the vast difference between the valuation under Part 1 of Schedule 1 (the EUV) and the notional amount the Respondent may get based on the assessment of the reserve price by the Tribunal which took into account the redevelopment potential, we need to say a few words about the difference.  As mentioned above, the EUV is to be used to work out the pro rata share of a minority owner in the sale proceeds.  However, on top of the EUV, the redevelopment value would be taken into account in the setting of the reserve price, see Schedule 2 para 2(a).

22.Mr Mok’s contention was that the minority owner would benefit from the sale as he could get a share of the redevelopment potential which he would not get if he were to sell his unit on its own.  With respect, that is quite beside the point if one were to consider the fair and reasonable compensation for the minority owner’s interest.  We cannot see how it can be suggested that the minority owner obtains a windfall because he would get a pro rata share of the redevelopment potential. There is no basis for suggesting that the minority owner should not be entitled to such a share as his fair and reasonable compensation for giving up his private property right in the land.

23.To be fair to Mr Mok, he referred to the redevelopment potential in the context of comparison with the compensation that a private owner would get from resumption by the government.  However, even in the latter context, compensation is payable on redevelopment potential if this is established by evidence, see Kwok Lee Sau Sang v Director of Lands and Survey [1977] HKLTLR 105.  In Director of Lands v Yin Shuen Enterprises Ltd (2003) 6 HKCFAR 1, the Court of Final Appeal decided that because of s 12(c) of the Lands Resumption Ordinance Cap 124, development potential which could not be realised without a modification of the lease should not be taken into account.  But this does not exclude redevelopment potential that the land can be put to use without any modification.  This is apparent from para 17(3) of the judgment of Lord Millett NPJ.

24.Whilst we accept that in a sale under the LCSRO, the auction price may include hope values stemming from potential which requires modification, thus a higher return than resumption situation, this is simply due to the absence of the equivalent of s 12(c) in the LCSRO scheme.  That in turn is due to the fact that the government should not be required to compensate the landowner for something which the government had not granted to him in the first place.  That rationale is not applicable in the context of LCSRO.  Hence, the fact that a higher return may be achieved in a sale under the LCSRO does not invalidate the proposition that the pro rata share of proceeds payable to a minority owner is a fair and reasonable compensation for him in respect of the compelled sale of his interest.  He does not get something more than what he should have got under the principle of equivalence.  Therefore we do not find the comparison made by Mr Mok to be of much assistance in resolving what should be the proper approach on costs in LCSRO.

25.We do not understand Mr Mok to be arguing that the fair and reasonable compensation for the interest of the minority owner should be confined to the EUV.  Such a proposition is clearly wrong.  The EUV is only adopted in the LCSRO as a mechanism for deciding the pro rata share in the apportionment of sale proceeds.

26.The key issue is whether the adoption of a costs approach in LCSRO proceedings which would substantially diminish the compensation payable to the minor owner whenever objections by a minority owner are rejected is consistent with the second tier safeguard in the statutory regime.  Before we answer this question, we shall examine the compensation approach in resumption cases which Mr Chang urged us to adopt for LCSRO proceedings.

The compensation approach

27.In compulsory acquisition cases (where land is acquired by the government or public authorities), the general approach on costs is that it should not be dealt with in the same manner as ordinary hostile litigation.  Bearing in mind the special context (the process being one for the determination of the proper compensation for the taking of the land compulsorily), the expenses of such determination are regarded as the part of the reasonable and necessary expense attributable to the acquisition process as a whole.  The starting point is that such costs should be paid by the acquiring authority, see Emslie & Simpson Ltd v Aberdeen District Council (No 2) [1995] RVR 159; Purfleet Farms Ltd v Secretary of State for Transport [2003] 1 P & CR 20; Blakes Estates Ltd v Government of Montserrat [2006] 1 WLR 297; Penny’s Bay Investment Co Ltd v Director of Lands LDMR 23 of 1999, 7 Nov 2007.

28.For present purposes, we only need to refer to paras 29, 36 to 38 of the judgment of Potter LJ in Purfleet Farms, supra as a concise summary of the approach:

“29 Leaving aside the impact or influence (if any) of the CPR upon awards of costs in the Lands Tribunal it is my view that the proper approach of the Tribunal for the costs of a successful claimant (i.e. a claimant who is awarded more than the amount of an unconditional offer by the respondent) should be that he is entitled to his costs incurred in the proceedings in the absence of some “special reason” to the contrary.  Whether such special reason exists in any given case is a matter for the judgment of the Lands Tribunal.  Plainly it may exist where wasted or unnecessary costs have been incurred for procedural reasons as a result of the conduct of the claimant (e.g. abandoned issues, unnecessary adjournments, or failure to comply with directions of the Tribunal).  However, so far as the nature and substance of the case advanced by the claimant is concerned, special reasons should only be regarded as established where the Tribunal considers that an item of costs incurred or an issue raised was such that it could not on any sensible basis be regarded as part of the reasonable and necessary expenses of determining the amount of the disputed compensation.  This would apply not only to a claim advanced without any statutory basis but to other examples of manifestly unreasonable conduct which may give rise to unnecessary expense in the course of the proceedings.  It means, in my view, that, following the hearing of a compensation reference in the Lands Tribunal in which the claimant has been successful, a special reason for departing from the usual order for costs should only be found to exist in circumstances where the Tribunal can readily identify a situation in which the claimant’s conduct of, or in relation to, the proceedings has led to an obvious and substantial escalation in the costs over and above those costs which it was reasonable for the claimant to incur in vindication of his right to compensation.

…

36 I accept Mr Barnes’s submission that, if as a result of applying the principles of ordinary litigation to the hearing of compensation references, the Lands Tribunal adopts a practice of ‘ready departure’ from the principle that the successful claimant is entitled to his costs in the absence of a special reason to the contrary, that would involve a change of approach which has previously and properly been adopted in compensation reference cases.  However, I equally consider that, in exercising its wide discretion under s.3(5) of the 1949 Act and r.52(1) of the 1996 Rules, and in considering the question of whether or not special reason exists to depart from the usual order, it may usefully “have regard” to the matters set out in para.19.2 of the Lands Tribunal Practice Directions including whether or not the claimant has exaggerated his claim.  In considering that last question, however, exaggeration alone is not enough in the event of a large disparity between the sum claimed and the sum awarded.  The matters to which the Tribunal should have regard are (a) the reasons for that disparity, and (b) their effect upon the conduct of the claim.  As to (a), if the reasons are defensible, in the sense that there was a legitimate, albeit unsuccessful, argument put forward in support of the figure concerned, there can be no good reason to regard the claim as exaggerated in the pejorative sense necessary to justify a sanction in costs.  As to (b), if, in any event, the effect on the proceedings in terms of the time spent and the costs incurred in disposing of the issue or argument concerned is relatively insignificant, then again an adverse order is unlikely to be appropriate.

37 Turning to the question of expert evidence, if the amount of the “exaggerated” claim is based on the valuation, opinion and evidence of the claimant’s expert witness, it will rarely be appropriate in my view to make an adverse costs order against the successful claimant.  Valuation is an inexact science.  In any case where, by reason of the nature or features of the subject site and/or the state of the market in respect of sites for similar development, there is no close or obvious comparable available, there is bound to be legitimate room for argument and difference of opinion as to the validity or usefulness of a proffered comparable, whether by reason of its location, nature or proposed use.  If the Tribunal concludes that, on examination, or as a result of argument, the comparison between the comparable relied on and the subject site is inapt or unhelpful, that should not ordinarily invite a penalty in costs on the grounds that its assertion or resultant discussion has taken up the time of the Tribunal unnecessarily.

38 In my view, Mr Barnes is corret when he submits that, in such cases, disallowance of a proportion of the claimant’s costs will usually only be justified where the Tribunal is satisfied that (a) no competent valuer could reasonably have regarded the comparable as of real relevance or assistance in the valuation exercise; (b) as a result of its introduction and discussion, a significant amount of the Tribunal’s time has been wasted and the proceedings unduly prolonged; (c) no equivalent or near equivalent proportion of the proceedings has been spent dealing with issues unreasonably and unsuccessfully raised by the respondent; (d) the amount or proportion of the costs disallowed is proportionate to the time wasted.”

29.This approach has been generally applied in the Lands Tribunal in Hong Kong, see So Kee Transportation Co Ltd v Secretary for the Environment, Transport and Works LDRW 36 of 2003, 17 April 2008; Chan Lok Tsun Tso v Secretary for the Environment, Transport and Works LDMR 2 of 2004, 27 Aug 2004; Leung Chuk Yau v Director of Lands LDRD 4 of 2006, 16 Oct 2008.  Whilst some of these cases were decided against the background of specific statutory provisions to such effect, Penny’s Bay Investment Co Ltd v Director of Lands LDMR 23 of 1999, 7 Nov 2007 was decided in the absence of such provision.

30.As a matter of principle, this must be the correct approach for land resumption cases in view of Article 105 of the Basic Law.  A substantial depletion of compensation by costs of the process (which cannot be regarded as unreasonably incurred) will not give the owner whose land was taken the real value of the property.

31.The Tribunal, relying on an earlier decision of the Tribunal in Intelligent House Ltd v Chan Tung Shing (No 2) [2008] 5 HKC 390, held that this approach is not applicable in LCSRO proceedings.  Mr Chang invited us to hold that the Tribunal was wrong in that conclusion.  On the contrary, Mr Mok submitted that the Tribunal was correct.

Applicability of the compensation approach to LCSRO proceedings

32.We appreciate there are differences in the inherent nature and special features of the proceedings when one compares LCSRO proceedings with resumption cases:

(a) The Tribunal has to decide whether an order for sale should be made in LCSRO proceedings whereas in resumption cases it only has to decide the quantum of compensation;

(b) When the Tribunal ordered a sale under LCSRO, it would be conducted by a trustee in an auction with a reserve price and the purchaser may not be the majority owner;

(c) Unlike ss 6(2A),8(4) and 10(2)(e)(ii) of the Lands Resumption Ordinance Cap 124, there is no statutory provision in LCSRO prescribing that reasonable costs of the proceedings of the minority owner shall be borne by the applicant; and

(d) As explained above, the minority owner may obtain the benefit of the hope value if this is reflected in the sale price achieved in an auction ordered under the LCSRO.

33.At the same time, it must be recognised that in common with compulsory acquisition by the government or other public authorities, a sale ordered by the Tribunal under the LCSRO is the compulsory deprivation of the minority owner’s private ownership of property.  Though there could be debate as to the applicability of Article 105 of the Basic Law in light of the expression “徵用” in the Chinese version[1], there is no doubt that Article 6 of the Basic Law is engaged.  As observed by Litton NPJ in Sin Ho Yuen v Fineway Properties Ltd, supra, the deprivation of private ownership without fair and reasonable compensation is an infringement of the constitutional right of the minority owner. Thus, even though Mr Mok sought to argue otherwise, we have no doubt that the principle of equivalence is as much engaged in LCSRO proceedings as in resumption cases notwithstanding the absence of specific provisions like ss 6(2A),8(4) and 10(2)(e)(ii) of the Lands Resumption Ordinance.

34.Like the case of a landowner in the context of compulsory acquisition, the minority owner in LCSRO proceedings does not wish to dispose of his private property.  The whole process, including the proceedings in the Lands Tribunal, is instigated by the majority owner.  To the extent that the exercise of the discretion should be informed by the principle that he who caused the litigation should pay for it, the consideration in proceedings under the LCSRO and resumption cases is the same.  In Emslie & Simpson Ltd v Aberdeen District Council (No 2), supra, Lord Hope said at p.164:

“It seems to me that the underlying principle in these cases is that the acquiring authority is liable to pay compensation to the owner or occupier of the lands taken. The expenses of determining the amount of disputed compensation may be seen to be part of the reasonable and necessary expense which is attributable to the taking of the lands compulsorily by the acquiring authority. The principle which applies to litigation … is that the cost of litigation should fall on him who caused it. The cost of determining the amount of the disputed compensation would seem, according to this principle, to fall on the acquiring authority without whose resort to the use of compulsory powers there would have been no need for the owner or occupier to be compensated. That seems to me to be the proper starting point for an examination of the question of expenses in these cases.”

35.As regards the wider scope of LCSRO proceedings in terms of the onus on the applicant to satisfy the Tribunal of the statutory criteria, for reasons we have already canvassed in the overview of the LCSRO regime, the right of the minority owner to raise objections is an important element in the process.  Without such right, the determination by the Lands Tribunal would not have the legitimacy which provides the necessary justification for the interference with the constitutional right of private ownership.  Viewed thus, the observation by Lord Morison in  Emslie & Simpson Ltd v Aberdeen District Council (No 2), supra, at p.162 is equally apposite in the context of compulsory sale:

“… A person whose interest in land is under threat of compulsory acquisition is in an unenviable position. He is compelled either to accede to the acquisition or to take the steps provided by the legislature to oppose it. If the order is confirmed he has no option but to comply with it and to have the amount of compensation determined either by agreement, if he can secure it, or if not, by a reference to the tribunal within the statutory framework which is laid down for that purpose. In these respects it appears to me that he is in a different position from that of the ordinary litigant and my understanding is that, if a person unsuccessfully opposes confirmation of the compulsory purchase order, he is not ordinarily found liable for the expenses of the statutory procedures which are laid down for the hearing of his objection.”

36.In our judgment, the fact that the majority owner may not be the purchaser is not significant.  Even putting aside the scenario where the majority owner is a developer who had successfully acquired 90% of the interest in the land in question, it is no less a compulsory deprivation of private ownership of the minority if the majority owners are simply a large majority of the existing owners.  In the rather unusual (or maybe even unreal) situation where a group of majority owners combined together to make an application under the LCSRO, they are seeking to utilise the procedure of the statute to impose their will to sell the whole lot (as opposed to their individual units in it) on the unwilling minority owners.  The above analysis as to the need to safeguard the constitutional right of private ownership of the minority owners is equally applicable. 

37.In principle, we do not see any valid reason why the compensation approach on costs should not be equally applicable to proceedings under the LCSRO.

38.In Intelligent House Ltd v Chan Tung Shing (No 2) supra, the Tribunal held that there is a distinction between cases where a minority owner maintained a neutral stance (and put the majority owner to proof of its case under the LCSRO) and cases where the minority owner put forward positive grounds of opposition.  In the latter situations, the Tribunal took the view that the minority owners had unjustifiably caused more costs to be incurred and if they were unsuccessful in their oppositions, they should bear the cost consequences.  It would appear from the report that the Tribunal did not have the benefit of the relevant authorities which we have discussed above.

39.With respect, for the reasons we have explained in the overview of the statutory regime and the above paragraphs, the Tribunal in Intelligent House fell into error in drawing that distinction.  The Tribunal had failed to pay sufficient regard to the significance of the constitutionally entrenched right of private ownership.  The Tribunal had also failed to have proper regard to the principle of equivalence, which as we held is as much applicable to LCSRO proceedings as in resumption cases, in informing itself what is the correct approach.

40.In the present case, by following the approach of Intelligent House in rejecting the compensation approach, the Lands Tribunal has erred as a matter of law.

41.In so holding, we have not overlooked some concerns of the Tribunal and the submissions of Mr Mok that such an approach represents a fundamental change of the statutory framework of the LCSRO and risks the frustration of the urban renewal objective.  Mr Mok also highlighted the risk of a legitimate private re-development scheme being delayed or obstructed by a minority owner demanding a wholly unreasonable price or “ransom” as alluded to in the judgment of Ribeiro PJ in Capital Well.

42.With respect, for the reasons we have already canvassed, being in mind the whole statutory scheme in the context of a proportionate balance of competing interest and a justified interference with a constitutionally entrenched right of private ownership of property, we do not think what we decide represents a drastic change to the operation of the LCSRO.  That statute is silent on how the discretion of costs for LCSRO proceedings is to be exercised.  As discussed in Penny’s Bay Investment Co Ltd v Director of Lands, supra, in the absence of specific provision in the relevant statute which empowers the Tribunal to determine a particular kind of proceedings, the question of costs for proceedings in the Lands Tribunal is governed by Section 12 of the Lands Tribunal Ordinance.  It is therefore up to the Tribunal to apply a proper approach to deal with costs under the LCSRO.  In our judgment, what we have decided is perfectly in line with the overall scheme of the LCSRO when its objectives and the roles of the parties are understood in the proper perspective as discussed above.

43.As for the risk of a legitimate private re-development scheme being unduly delayed or obstructed, we do not think the answer lies in the rejection of compensation approach to costs.  First, as discussed above, the majority owner has to apply to the Tribunal in order to justify the taking away of the private property interest of the minority owner.  This is the statutory scheme of the LCSRO.  Also for reasons which we have endeavoured to give in the earlier parts of this judgment, it is within the right of a minority owner to reject an offer as such owner may have non-monetary considerations in holding onto his property.  Thus, when his offer is rejected (whether it is due to a ransom being extracted or otherwise) by a minority owner, the majority owner should make proper preparation for an application to the Tribunal in any event.

44.If a minority owner raises objections and puts forward proper evidence to support his objections, as explained above, he is only exercising his legitimate right to object as conferred by the LCSRO.  He should not be penalised even though he is doing so for a motive which the applicant may, perhaps with some justification, characterise as an attempt to extract a ransom.  It is only in very plain cases where the rejection of an offer or the pursuit of a line of opposition is obviously unreasonable that the Tribunal should consider imposing costs sanction.  In this connection, Chadwick LJ said at para 43 of Purfleet Farms, supra:

“It follows that the fact that the claimant has not been awarded as much as he was seeking by way of compensation --- or that the award is nearer (even much nearer) to the amount that the acquiring authority had offered than to the amount sought – cannot, of itself, be a reason for depriving the claimant of his costs of the reference. But that does not lead to the conclusion that the claimant’s conduct in exaggerating his claim can be of no relevance. The Tribunal may be satisfied, in the particular case before it, that the fact that the claimant has exaggerated his claim has led to costs which were not reasonable for the claimant to incur in pursuit of the compensation to which he was entitled; or that it has been the pursuit of issues which it was not reasonable for the claimant to pursue that has led to the exaggeration of the claim. Where the Tribunal makes an award of compensation which is well below the amount claimed, it is appropriate for it consider, in the context of an award of costs, both whether the fact that the claim was exaggerated has led the claimant to incur costs which (given a more realistic evaluation of his claim) he would not have incurred and whether the explanation for the difference between the award and the amount claimed is that issues were pursued on which the claimant had no real chance of success.”

45.One of those instances was identified by Chadwick LJ at para 44:

“… the exaggeration of the claim was the product of the claimants’ reliance on expert evidence which should have been recognised as unreliable; and that the decision to rely on that evidence had led to the waste of substantial time and expense.”

46.In our view, in that sort of scenario, viz where a minority owner pursued an issue which had no real chance of success in an unreasonable manner, the Tribunal can, in addition to ordering that he be deprived of his costs in such pursuit, in a serious case, order him to bear the costs of the applicant in meeting such hopeless challenge.  In deciding whether it is a serious case, the Tribunal must also have regard to the position of the applicant.  Sometimes, experts engaged by both sides adopt polarised positions and their lack of realism often leads to protracted disputes on issues which should not have been litigated to the extent they were.  The lack of a realistic offer from one side sometimes leads to the lack of a realistic counter-offer from the other side.  In that kind of situation, it may be more appropriate to order each party to bear his own costs. 

47.Thus, the real concern is about the unreasonable conduct of proceedings and the delay and prolongation of the LCSRO process (with the attendant increase in costs) when a minority owner takes obviously unmeritorious point to challenge an application.  We do not think that such a concern has to be addressed by the rejection of the compensation approach to costs.  In our judgment, the proper solution to such concern is two-fold:

(a) The Tribunal should exercise firm and effective case management to ensure that its proceedings are conducted efficiently and in a proportionate manner; and

(b) The Tribunal should impose costs sanction against unreasonable litigation conduct, including the unreasonable rejection of reasonable offers.

48.We have already discussed (b) in the above paragraphs.  As for (a), we see some room for the exercise of firmer case management power by the Tribunal.  The civil justice reforms are as much applicable to the proceedings in the Tribunal as in other courts.  Like the Court of Final Appeal in Sin Ho Yuen v Fineway Properties Ltd, supra, we are very concerned about the length of hearing in the present case.  Mr Chang had prepared a chronology which set out each important development in the case and the use of the trial time for the 18-day trial before the Tribunal.  Mr Mok informed this court that he did not agree that it was a fair summary and if this court were to examine into the actual conducts of the parties at the trial, he had further submissions to make.  In such circumstances, and in view of what we shall do in the actual disposition of this appeal, we are not going to comment on the actual conducts of the parties in this judgment other than referring to some objective facts of the case by way of illustration.

49.However, by way of general comment, we would observe that nowadays the courts, including the Tribunal, should be more pro-active in case management in furtherance of the underlying objectives in Order 1A Rule 1.  It would appear from the chronology of Mr Chang that a large part of the trial was taken up in dealing with expert evidence (including applications for additional expert evidence).  4 days were spent on opening and closing submissions.  1 day for taken up for a site visit.  Though we are not going to express judgment on the conducts of the parties, we have to say on any view a 18-day trial for an application of this nature is exorbitant.

50.In view of the repeated concerns on the length of hearing in LCSRO cases, we have sought information from the Tribunal as to the length of hearing in such cases in the past three years.  We have furnished such information to the parties for comment.  Happily, we can say that the 18-day trial is not typical.  Actually, based on the information we have, a majority of LCSRO cases were completed within 3 days with quite a large number being completed within 1 day.  Apart from those (46 cases), there were 1 case which took 4 days, 5 cases which took 5 days, 1 case which took 10 days, 1 case which took 12 days and the present case which took 18 days. 

51.Again as a general comment, in light of the time spent on disputes between the experts in the present case, we think there is much to be said for the Tribunal to take a more robust approach.  To avoid the unnecessary proliferation of expert issues (both in respect of valuation as well as the state of the building), when it has reason to believe that the experts engaged by the parties are generating unreasonable differences instead of providing helpful assistance in narrowing the disputes^[2], the Tribunal should consider giving directions for the appointment of single joint experts or even a court appointed experts to provide expert evidence on these expert issues.  In many civil cases, single joint experts are appointed for valuation issues.  We do not see any reason in principle why the same practice should not be considered in the Lands Tribunal in respect of valuation issues as well as issues on age and state of repair of the building.  That could avoid experts acting for different parties taking polarised views serving the interests of their respective clients which, instead of providing assistance to the Tribunal, have the effect of generating many issues before the Tribunal.  It could also avoid the problems of inequality of arms (which sometimes occurs in LCSRO proceedings due to the inequality in the financial position of the parties).

52.There is no question of the Tribunal delegating the determination of these issues to the single joint expert or the court appointed expert.  In this type of cases, the Tribunal always sit with a Presiding Officer and a member who himself has some expert knowledge in the areas of valuation or surveying.  It is therefore well-positioned to decide on the extent to which the views of the single joint expert or the court appointed expert should be accepted.

53.The giving of such directions would not prevent a party from challenging the opinions of the joint expert or the court appointed expert.  However, a party should give serious consideration to whether he has any reasonable justification for doing so (bearing in mind the potential cost consequences for unreasonable litigation conducts) and there are authorities guiding the Tribunal as to the circumstances under which such challenge can be entertained, and to what extent evidence from a second expert should be admitted.

54.Moreover, the Tribunal should give directions for the lodging of written submissions (both opening and closing submissions) in heavy cases well in advance of the actual hearing so that the time spent on oral presentations could be reduced.

55.The Tribunal should also exercise firm control on the presentation of oral evidence by the experts.  With expert reports being exchanged and expert meetings narrowing down issues and remaining issues clearly and concisely identified in joint reports, there should be little room for oral evidence in chief.  The cross-examination should focus on the remaining issues identified in the joint reports.

56.Needless to say, the Tribunal must have sufficient time to read and digest the written materials before the trial in order to facilitate it to exercise its effective control on the conduct of the proceedings.  This should be factored into the listing practice.

57.For cases where parties ask for a longer than usual length of trial when they apply for setting down, the Tribunal should require them to provide templates explaining how trial time is to be distributed.  In an appropriate case, the Tribunal may explore with the parties whether the request is reasonable, bearing in mind the underlying objectives in Order 1A.

58.Thus, there are measures that the Tribunal can (and should) adopt to manage a trial to minimise the risk of undue prolongation of the process (and the associated increase in costs).  Whilst this is not to say that this would be a complete answer to unreasonable litigation conduct, such conduct could readily be spotted and it should be visited with cost sanctions. 

59.For these reasons, we do not think the real concern about an unreasonable minority owner provides justification for the rejection of the compensation approach.

60.The proper exercise of case management power and cost sanctions for unreasonable litigation conduct can also provide the answer to the concern that the compensation approach may encourage a minority owner to argue on every point and blow everything out of proportion.  Giving effect to the underlying objectives in Order 1A and the duty of the parties in Order 1A rule 3, the Tribunal should not allow him to do so.

61.In the circumstances, the Tribunal has applied the wrong approach in considering the question of costs.  Whilst there are certain findings of unreasonable conduct against the Respondent, it is not very clear to us the extent to which such findings were affected by the Tribunal’s view that the mere putting forward of a positive case and evidence to object is unreasonable.

62.We also have great reservations about the approach of the Tribunal at paras 29 and 30 of its judgment on costs.  It is too simplistic to say that because the ultimate assessment by the Tribunal is closer to the figure of the Applicant than those of the Respondent, the Respondent should be regarded as the losing party.  The proper approach is, as explained by Chadwick LJ, to examine whether for the Respondent acted unreasonably in relying on the evidence of Mr Lai so as to cause the proceedings to be unnecessarily prolonged, or to cause the unnecessary expenditure of additional costs.  It must be borne in mind that it is not in every case in which a respondent fails to achieve a valuation at (or very close to that put forward by his expect that it will have been unreasonable for him to have relied on his expert’s views, or for him to have refused the applicant’s offer.  Where he achieves a valuation in excess of the applicant’s offer, it would, prima facie, have been reasonable for him to have rejected that offer.  The focus should be on the way in which the application has been conducted by the parties – where costs are unreasonably incurred, or increased because of unreasonable conduct by one or other party, appropriate costs orders can and should be made.  As we have observed in paragraph 46 above, there may be cases in which both parties are at fault, and in such cases the costs order made should reflect this.           

Disposition

63.We shall allow the appeal and set aside the costs order of the Tribunal.

64.Mr Chang invited us to exercise the discretion on costs in light of what we determine to be the correct approach.  We do not think we are in a position to do so.  Though Mr Chang presented us with a detail chronology as to the history and conduct of the proceedings, Mr Mok said he would dispute the same.  There are issues on the reasonableness of the conducts of the Respondent and the impact of such conducts on costs.  The Tribunal is obviously better placed than this court to re-consider such matters again.

65.We will therefore remit the matter back to the Tribunal for a proper determination of the question of costs in accordance with the compensation approach.        

Mr Mok Yeuk Chi, instructed by Mayer Brown JSM, for the applicants

Mr Denis Chang, SC and Julian SF Chan, instructed by Clayton Wong & Co, for the respondent