Bonnie Blair Ltd v. Witmore Ltd and Another

DCCJ 1871/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1871 OF 2011

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JUDGMENT
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Introduction

1.This case raises the following issues, namely in calculating the amount of mesne profits to be awarded to a landlord as a result of his tenant holding over and failing to deliver up vacant possession:-

(i) whether any account should be taken of the increase in rental value during the period when the tenant was in wrongful occupation of the property; and

(ii) whether any account should be taken of the landlord’s incidence of tax in relation to the property and, if so, who should bear the burden of proof in that regard.

Background

2.The plaintiff, a private company incorporated in Hong Kong, was the tenant of the first and the second floors of an industrial building in Kwun Tong (“the 1^st Floor premises” and the “2^nd Floor premises”).  The 1^st and the 2^nd defendants, also private companies incorporated in Hong Kong and were connected with each other, were respectively the owners of the 1^st Floor premises and the 2^nd Floor premises.  In 2007, the plaintiff rented the two subject premises separately from the defendants.  The monthly rental was at $25,000 each and the plaintiff was also responsible for paying rates, government rents, management fees and utilities.  Both of the leases expired on 26 August 2010.

3.After the leases had expired, however, the plaintiff held over and did not deliver vacant possession to the defendants, alleging that they had reached an oral agreement with the defendants (through agents) to renew for 2 years plus an option to extend for another 2 years with a break clause.  The defendants, however, denied that there was such an oral agreement.  They also alleged that the plaintiff had wrongfully obstructed their contractor by not allowing the latter to enter and carry out certain rectification works as demanded by two Building Orders issued against the two subject premises.

4.Eventually, the plaintiff sued the defendants for breach of the alleged oral agreement and their right to quiet enjoyment of the two subject premises, seeking declaratory relief, specific performance, damages and interests.  On the other hand, the defendants defended and counterclaimed for trespass and wrongful obstruction of the rectification works, seeking declaratory and injunctive reliefs, vacant possession, mesne profits, damages and interests.

5.However, when the case came before this court for trial, many of the disputes between the parties had become largely academic:-

(i) the plaintiff has vacated the two premises since 25 August 2012;

(ii) over the period in dispute the plaintiff has paid the defendants a total of $1,656,000 (for what they contended) as rent or interim payment; and

(iii) the plaintiff has also paid all the management fees[1] and government rents,[2] there being no rates payable for the period in question.[3]

As such, the plaintiff opened their case by saying that they no longer required any declaratory relief.  However, the defendants maintained that there were still serious issues to be tried in that, despite that amounts which the plaintiff has already paid, there remains a shortfall of $106,800 (for what they contended) as mesne profits and another $10,000 as damages for the fees to the contractors for two aborted attendances. 

6.It appeared that at that stage the major obstacle for the parties to settle was costs. 

7.As it turns out, there is no longer any need to resolve the factual disputes between the parties.  This is because on the second day of the trial, when the first witness[4] of the plaintiff was still under cross-examination, Mr Hung (counsel for the plaintiff) informed that his client conceded liability and requested that the case proceed to assessment of damages.  As a result, this court dismissed the plaintiff’s claim against the defendants and entered judgment in favour of the defendants on the counterclaim.  The effect of the concession is that the plaintiff accepts that after the expiration of the leases they had continued to occupy the two premises as trespasser for a period of two years and that the defendants had incurred additional fees to their contractor as a result of the plaintiff’s wrongful obstruction. 

Joint expert report

8.The defendants did not call any witnesses for the assessment of damages.  The evidence on this respect consists only of the joint expert report on the rental values of the two subject premises and the contractor’s invoices of the aborted work. 

9.The joint expert report was obtained pursuant to the order made by Master M Lam dated 31 March 2014.  The order asked for valuation of the open market rents of the two subject premises for the period between 27 August 2010 and 26 August 2012 as at 27 August 2010, 27 February 2012, 27 August 2011 and 27 February 2012.  The results are as follows:-

1^st Floor premises

Date of Valuation	Monthly Rent
27 August 2010	$33,500
27 February 2011	$36,200
27 August 2011	$39,400
27 February 2012	$41,400

2^nd Floor premises

Date of Valuation	Money Rent
27 August 2010	$31,900
27 February 2011	$34,600
27 August 2011	$37,600
27 February 2012	$39,200

10.The above valuations, which were based on comparable properties in the same locality, are exclusive of government rates, rent, management fees and utilities charges.

Contentions of the parties

11.Mr Ma submitted that for the purpose of assessing mesne profits, one should use the market rents as at 27 August 2010.  It is because it is unrealistic to expect a tenant to sign a lease for an industrial property for 6 months at a time.  Therefore, the total market rental value of the two subject premises for the 24 months in question should be:-

1^st Floor  $33,500 x 24 = $804,000

2^nd Floor  $31,900 x 24 = $765,600

12.Mr Ma further contended that from the above figures the court should deduct the following:-

(i) the property tax[5] which the defendants would have paid the Government had the two subject premises been rented out; and

(ii) the management fees[6] and government rents[7] which, the plaintiff submitted, should have been borne by the defendants.

13.If the plaintiff’s computation above were accepted, then the plaintiff would have in fact overpaid the defendants by way of interim payment.  Therefore, Mr Ma asked that the defendants be ordered to refund the plaintiff the excesses pursuant to Order 29, rule 17 of the Rules of the District Court (“RDC”), Cap 336. 

14.On the other hand, Mr Yeung argued that in assessing the mesne profits, account should be taken of the increases in market rental value over the relevant period.  As such, the mesne profits should be as follows:-

1st Floor:	$33,500 x 6 + $36,200 x 6 +
	$39,400 x 6 + $41,400 x 6 =  $903,000
2nd Floor:	$31,900 x 6 + $34,600 x 6 +
	$37,600 x 6 + $39,200 x 6 =  $859,800

15.Mr Yeung accepted that credit should be given to the interim payment already made by the plaintiff.  However, he submitted that no deductions should be made of the defendant’s incidence of tax, government rents and management fees.  He also sought exemplary damages from the plaintiff.

16.As regards the fees paid by the defendants’ to the contractor owing to the two aborted attendances, the parties agreed that the plaintiff should pay each of the defendants a sum of $5,000.[8]

Consideration

17.In Ministry of Defence v Ashman,[9] Hoffmann LJ (as his lordship then was) said,

“A person entitled to possession of land can make a claim against a person who has been in occupation without his consent on two alternative bases. The first is for the loss which he has suffered in consequence of the defendant's trespass. This is the normal measure of damages in the law of tort. The second is the value of the benefit which the occupier has received. This is a claim for restitution. The two bases of claim are mutually exclusive and the plaintiff must elect before judgment which of them he wishes to pursue. These principles are not only fiar but, as Kennedy LJ demonstrated, well established by authority.”[10]

18.The above dictum was followed in Ministry of Defence v Thompson.[11]  The point was also noted by the Privy Council in Inverugie Investments Ltd v Hackett.[12]  However, Lord Lloyd of Berwick, who gave the judgment of the Privy Council, said that since the claimant was not asserting a restitutionary claim as an independent cause of action, so the aforesaid dictum which divided the Court of Appeal in Ministry of Defence v Ashman did not arise for decision.  Therefore, the above dictum of Hoffmann LJ about election remains good law and it is now recognized that the owner of land which is occupied without his consent may elect whether to claim damages for the loss which he has been caused or restitution of the value of the benefit which the defendant has received. [13]  

19.On the orthodox approach, if the claim is in damages, then the pertinent question to ask in assessing mesne profits is not about the benefit to the plaintiff in occupying the premises.  Rather, the mesne profits is to be assessed in a sum representing the loss suffered by the defendants (as landowner) as a result of being deprived by the plaintiff of vacant possession of the promises. 

20.However, there is a rider to the orthodox approach in that mesne profits needs not be characterised as exclusively compensatory, or exclusively restitutionary.  As said by Lord Lloyd in Inverugie Investments Ltd v Hackett, supra, the remedy combines elements of both in that the wrongdoer is obliged to pay the claimant a reasonable rent for the use of the subject premises which he had enjoyed over the whole period of his wrongful occupation.  This is referred to as the “user principle”.[14] 

21.Indeed, there are situations where recovery will be the same on either bases and will be of rental market value because that constitutes both the loss to the landowner and the benefit to the trespasser.  The case of Shi v Jiangsu Native Produce Import & Export Corporation[15]provides a useful illustration.  In that case, a company, sued by its employee for arrears of salary, counterclaimed for mesne profits in respect of the employees’s occupation of a house for over five years after the termination by notice of his licence to occupy it rent-free, after which he had been a trespasser.  Dyson LJ pointed out that it was wrong for the first instance court to assess the claim for mesne profits on the footing that the company had elected to advance the claim in restitution, as the counterclaim was clearly pleaded as a claim for damages. The learned judge held that the company was entitled to damages by way of mense profits based on the rental market value of the house as that amount represented the company’s loss.  Whilst that disposed of the company’s cross-appeal, his lordship went on to say what should have been the decision of the trial judge had the counterclaim indeed been advanced on a restitutionary basis.  The learned judge found that there were no exceptional or special circumstances in that case for treating the value of the benefit of occupation to the employee as being less than the market value. 

22.Applying the above legal principles to the present case, it is noted that the parties have agreed that the defendants’ counterclaim against the plaintiff’s wrongful occupation of the two premises is one based on tort.  With respect, the parties are right to so agree.  This is because the counterclaim is clearly pleaded as a claim for damages and not as a claim in restitution.  Words such as “damages” and “mesne profits” are consistently used in the defendants’ Counterclaim.  On the other hand, “restitution” or words to that effect do not even appear.  The phrase “unjust enrichment” only appeared for the first time in the defendant’s Opening.  However, there has been no application to amend the defendant’s pleadings.  Therefore, the defendants should be deemed to have elected to pursue their claims on a damages basis and they should not be allowed to pursue a claim in restitution. This leads to the following discussion.

As to (i): assessment of mesne profits

23.The damages recoverable by the landlord will generally include a sum equal to the rental value of the premises during the time the landlord is kept out of possession (ie, mesne profits) and the reasonable damages and costs incurred by the landlord in respect of claims against him naturally arising out of the tenant’s failure to deliver possession: see Hill and Redman’s Law of Landlord and Tenant.[16] The precise basis of valuation for the purpose of calculating mesne profits is not the subject of authority.  However, it has generally been accepted that valuation should be done on the basis of “a short term letting at a rack rent on the terms which would in practice form the terms on which the landlord would let”: see Woodfall’s Law of Landlord and Tenant.[17]

24.This is not to say that a court in assessing mesne profits cannot take into account any variations in the rental value during the period the tenant was in wrongful occupation.  As a matter of principle, in appropriate cases variations in rental value could and should be taken into account.  In my view, mesne profits is a function of a host of factors including the length of the trespass, the type of property concerned and the market conditions.  Furthermore, the proposition that valuation should be based on “a short term letting” is capable of accommodating any adjustments in rental value in case the tenant held over as a trespasser for a prolonged period of time.  What constitutes “a short-term letting” on terms which the landlord would let is, however, not to be defined inflexibility, it is a case specific issue to be decided in each case after taking into account all the relevant circumstances. 

25.In Inverugie Investments v Hackett, supra, where the property in question consisted of 30 apartments in a much larger hotel, the Privy Council agreed that the mesne profits should be assessed by reference to the seasonal rates at which each apartment would have been let to a tour operator on a “wholesale” basis, without any deductions for void periods for quantum.  Lord Lloyd pointed out that as the defendant in that case accepted that the plaintiff was entitled to a reasonable rent, accordingly on the arguments present, no issue of legal principle arose.  The problem, as Lord Lloyd saw it, was how a reasonable rent should be calculated. 

26.In the present case, there is no real dispute between the parties that the defendants should be entitled to compensation for the whole of 24-month period during which the plaintiff was in wrongful occupation.  The issue, as aforesaid, is whether account should be taken of the variation in rental values during the relevant period.  In this regard, it is pertinent to note that the subject property in Inverugie Investments Ltd v Hackett consisted of hotel rooms.  Patrons come and go. Therefore, it is only natural that account should be taken of the seasonal changes in rental value.  In contrast, the subject premises here are industrial units.  It accords with common sense that tenants of this type of property would look for some continuity in occupation. In this context, what then would be “a short term letting” in practice which the landlord would let?

27.The evidence of the usual tenure of industrial properties like the two subject premises consists of the following:-

(a) The joint expert in his valuation says that,

“The estimated amount for which a property would be leased on the valuation date between a willing leasor and a willing lessee on appropriate lease terms in an arm’s-length transaction, after proper marketing and where the parties had each acted knowledgably, prudently, and without compulsion.” (Emphasis supplied)

As regards the eight comparables used by the joint expert in arriving at the estimated rental values, four of them have a tenure of 36 months, three of 60 months and one of 24 months. 

(b) As regards the leases the plaintiff previously had from the defendants, both of them lasted for 3 years.  After that, the parties had negotiated for new leases.  According to the plaintiff’s version, they had proposed a renewal for 2 years plus an option to extend for another 2 years with a break clause.[18]  According to the defendants’ version, they had proposed to “grant a fixed term of 2 years at the monthly rent of HK$36,000 (excluding management fee, government rent and rates)” for each of the two subject premises.[19]  Therefore, even according to the defendants’ version, no one had ever suggested that the new leases should be shorter than 2 years.

28.Based on the limited amount of evidence available, doing the best I can, I find that the usual tenure the defendants would let at rack rent for the two subject premises would be about 2 to 3 years.  Therefore, I find that the assessment of mesne profits shall be done by reference to a two-year lease rather than a succession of half-yearly ones.  Moreover, had the defendants and plaintiff committed on a lease of 2 years, they would not have been affected by any subsequent increases or decrease in rental value.  As such, I find that in the present case, like the case of Shi v Jiangsu Native Produce Import & Export Corp cited above, there is no reason for treating the value of the benefit of occupation to the plaintiff as being different to the loss suffered by the defendants.   

29.Mr Yeung submitted that because Master Lam ordered that valuations of the rental values be obtained for every half-year during the two-year period in question and that the plaintiff has not appealed against the master’s order, the mesne profits should be calculated by following the half-yearly figures as contained in the joint expert report. 

30.With respect, I am unable to accept Mr Yeung’s above submission.  My reasons are as follows:-

(a) It is clear that Master Lam’s order is purely administrative in nature and that it was granted only on the insistence of the defendants. The order cannot have the effect of binding the trial court in the way the mesne profits are to be calculated. 

(b) Mr Yeung’s contention is akin to a claim for restitution basing on the benefit which the plaintiff had received by remaining in occupation of the two premises, a basis which he has impliedly not relied upon by pleading and maintaining a claim in damages.

(c) Yeung’s contention is inconsistent with the generally accepted proposition for assessment of mesne profits as discussed above.

31.Based on the above, I find that the mesne profits to which the defendants are entitled should be calculated by reference to the market monthly rentals of the two premises as at 27 August 2010, which were respectively $33,500 and $31,900, for a period of 24 months.  In making this finding, I have not ignored the evidence that Mr Luk had been told by his estate agent that the market rent at the time was about $4 per square feet.  However, I attach no weight to that piece of hearsay evidence and prefer the objective and more reliable evidence of the joint expert.  In my view, the figures of $33,500 and $31,900 per month would reasonably and sufficiently compensate the defendants for their loss due to the plaintiff’s wrongful occupation of the two subject premises for the period in question.

32.Mr Ma submitted that payment of management fees and government rents were the responsibilities of the landlord.  He further submitted that the defendants should give credit for the management fees and government rents paid by the plaintiff.  Mr Ma based his submission on Chan Qun Yuk v Kwan Siu Mui.[20]

33.With respect, the case of Chan Qun Yuk does not establish the general principle that Mr Ma contended for.  In that case, the defendant, who was one of the apprentices of the deceased landowner, continued to be in wrongful occupation of the property after the death of the landowner and refused to return the property to the deceased’s estate.  In assessing quantum of the claim of the plaintiff, who was the administrator of the deceased’s estate, Judge Lok said that the plaintiff should give credit to the defendant for all the expenses that the defendant had incurred in respect of the property.  It was in that context that Judge Lok said that it was the duty of the plaintiff as the owner of the property to pay for the management fees, rates and contribution for the maintenance of the common parts of the building and that the plaintiff would be unjustifiably enriched if no such credit was given. 

34.In the present case, the facts are materially different in that the plaintiff had been the tenant of the defendants and that during the currency of the leases it was the plaintiff’s responsibility to pay and discharge the rates, government rent, management fees and all other outgoings as well as all charges for gas, water and electricity.[21] These facts, in my judgment, distinguish the present case from the case of Chan Qun Yuk and provide a backdrop against which one should consider whether deductions should be made for the expenses as Mr Ma contended for.

35.As to who should bear the rate, government rent and management fees of the property, it is generally a matter of negotiation between the landlord and the tenant and there are no fixed rules.  This point is illustrated by the comparables used by the joint expert. 

36.In my judgment, in the present case no deduction should be made from the mesne profits in respect of government rents and management fees.  This is because:-

(a) the market rents of the two premises ($33,500 & $31,900) given by the joint expert are stated to be “exclusive of government rates, rent, management fees and utilities charges”; and

(b) the plaintiff had been required to pay for rate, government rent and management fees under the old leases.  According to the statement of Mr Luk Ping Ho, company secretary of the plaintiff, after the expiration of the two leases there was a time when the parties continued to negotiate for renewal.  According to Mr Luk, the defendants asked for $36,000 per month per premises and the plaintiff counter-offered to pay $34,500, both figures were said to be “excluding building management fee, crown rent and rate”.[22] It is clear, therefore, that even according to the plaintiff’s version it had all along been contemplated by the parties that the rate, government rent and management fees should be borne by the plaintiff.

As to (ii): the incidence of tax and burden of proof

37.Despite the diligence of counsel, no local authority has been found as to whether in assessing the mesne profits for a trespass claim, the court should or should not take the landowner’s incidence of tax into account. 

38.Mr Hung relied on British Transport Commission v Gourley,[23] a well-known case on assessment of damages for personal injuries, and submitted that there should be deduction for property tax which the defendants would have to pay had there not been any trespass.  Mr Ma further submitted that the rule in Gourley is also applicable to claims for mesne profits and that matters relating to damages and quantum rest on the claimant, ie, the defendants in the present case.  As to this, Mr Ma relied on Hall v Pearlberg,[24] which was a decision of the Queen’s Bench.

39.It is established that for the principle in Gourley to apply, there are two factors to be satisfied:-

(1) the amount of the loss compensated would have been subject to tax; and

(2) the damages would not be subject to tax.

40.In the present case, there can be no dispute that the defendants would have been liable to pay property tax for any rental incomes they received for the two premises had they been rented out. 

41.Mr Ma submitted that the mesne profits to be awarded to the defendants are not liable to property tax because they are not “rent”.  As such, Mr Ma argued that account should be taken of the property tax; otherwise the defendants would be better off and over-compensated.

42.With respect, I am unable to accept the above submission of Mr Ma for the following reasons:-

(a) whilst it may be correct to say that mesne profits is not “rent” and therefore not susceptible to property tax, Mr Ma has failed to consider whether the mesne profits would be subject to profits tax;

(b) there is clear case authorities for the proposition that the burden of proving at least factor (2) above lies with the wrongdoer, ie, the plaintiff in this case; and

(c) the plaintiff has failed to discharge that burden.

43.As regards (a), the starting point is that the defendants are corporations who let property and as such they are deemed to be carrying on a business: see the definition of “business” in s 2(1) of the Inland Revenue Ordinance, Cap 112.  In fact, even without the deeming provision, on general principles it is a reasonable interference to be drawn that the defendants were and are renting out the two subject premises by way of business in Hong Kong.

44.Secondly, in Raja’s Commercial College v Gian Singh & Co,[25] an appeal to the Privy Council from Singapore, which concerned a tenant who held over after service of a notice to quit and who was ordered to pay mesne profits to the landlords.  The tenant, like the plaintiff in the present case, argued that the mesne profits should be reduced by the tax which the landlords would have had to pay had the amount of the damages awarded been received as rent, following the principle in Gourley.  The Privy Council held, however, that the mesne profits received by a trader as compensation for loss of trading receipts were “income” and therefore they should not be reduced as they were taxable as a trading receipt. 

45.Thirdly, the mesne profits, as compensation for the defendants’ loss of income, are directly attributable to the plaintiff’s wrongful occupation of the two subject premises.  Therefore the mesne profits are not only “derived from” Hong Kong but also “from” the defendant’s business as landlords: see Pennine Raceway Ltd v Kirklees Metropolitan Council.[26]

46.As regards (b), whether or not the defendants have any assessable profits will depend on the conditions of their respective accounts.  However, it is held by the English Court of Appeal in Stoke-on-Trent City Council v Wood Mitchell[27] that it is the wrongdoer’s onus to show that factor (2) above is satisfied, ie, the damages would not be subject to tax, so that his failure to do so ousts the Gourley principle.  The Court took the view that the principle could only be applied if “it is clear beyond peradventure” that the sum received by the claimant would not be taxable in the claimant’s hands; otherwise the dangers of double taxation are too great.  Although Stoke-on-Trent City Council v Wood Mitchell was a case about statutory compensation, the learned authors of McGregor on Damages comment that the same principles apply to mesne profits.[28]  It is clear therefore that the law has moved on and Hall v Pearlberg no longer represents the law as far as the burden of proof in relation to the incidence of tax is concerned.

47.As regards (c), there is nothing before the court to suggest that the mesne profits to be awarded would not be taxable in the defendants’ hand.  As such, the plaintiff has failed to show that the principle in Gourley is applicable in the present case.  Therefore, in my judgment no deduction should be made from the mesne profits to be awarded in relation to the defendants’ tax liability.

48.In arriving at the above conclusion, I have not taken into account the letter of Messrs Ray W H Chan & Co, a firm of certified public accountants, dated 20 January 2015 which was attached to Mr Yeung’s written submission dated 23 January 2015.  No leave had been sought by the defendants to file the letter as a piece of additional evidence and it is not proper to refer the court to the said letter. 

Claim of other damages

49.Upon the Plaintiff’s concession on liability, Mr Yeung informed the court that the defendants would rely on the joint-expert reports.  The invoices of the contractor in relation to the two aborted attendances were also admitted.  Mr Ma and Mr Yeung then proceeded to make submissions on quantum.  It is noted that the Mr Yeung did not address the claim for exemplary damages in court at all.  At the end of the submissions, it was directed that written submissions be provided to further assist the court on just two points:-

(1) whether any account should be taken of the defendants’ incidence of tax when assessing the mesne profits; and

(2) the calculations showing the amounts, if any, to be refunded to the plaintiff.

50.In due course, written submissions were received from the parties.  However, Mr Yeung in his written submission[29] strayed outside the aforesaid boundaries and addressed (without leave) on the question of exemplary damages as well.  Mr Yeung wrote,

“The course adopted by the Plaintiff in this Action, namely making false allegation of an “Oral Agreement to Renew” but failing to call the estate agent as witness, and to wholly delete all references to “Oral Agreement to Review” during this trial, has amounted to an abuse of process and is utterly disgraceful. Obviously, the Plaintiff has calculated that “trespass pays” as it actually benefits more by staying on in the Premises even at the costs of fire hazard to life and property by willful obstruction of rectification works by the Defendants who are facing extreme hardship and agony by facing imminent prosecution by Buildings Authority with imprisonment sanctions for non-compliance of Building Orders.” [30]

51.Subsequently, Mr Yeung filed (again without leave) another document[31] which he called “Addendum” to his written submissions on quantum, submitting further on the claim for exemplary damages that the plaintiff “was making up false allegation of an “Oral Agreement to Renew” and is therefore “liable for contempt of court”[32].  Mr Yeung attached to the “Addendum” various correspondence between solicitors. 

52.With the greatest respect, I have grave difficulties with the above submissions of Mr Yeung.  It is also difficult to see why the defendants should be entitled to any remedies other than mesne profits and damages for the aborted work of the contractor and why the said mesne profits and damages are not sufficient remedies in the present case. 

53.Firstly, there is the problem of lack of pleadings.  It is trite that (i) the factual basis for exemplary damages must be specifically pleaded in the body of the statement of claim (and in this case the defendants’ Counterclaim), not merely in the prayer, and in addition to any other claim for damages; and (ii) that the facts on which the party relies to support his claim for exemplary damages must be pleaded with proper particularity: see Order 18, Rule 8(3) of RDC; Hong Kong Civil Procedure 2015, at §18.8.11; and William Allan v Messrs Ng & Co (a firm) & Anor.[33]

54.Although the defendants deny the existence of an “Oral Agreement to Renew”, it has not been asserted in their pleadings that the plaintiff is “making up” false allegations and thus guilty of contempt.  More often than not, different parties to legal proceedings may have their own versions of the fact.  That may due to different prospective or understanding.  There are also possibilities of mistake and misunderstanding.  If it is alleged by one party that the other side is being dishonest, then as a matter of fairness that needs to be properly pleaded so that the other side may respond to it.  However, that has not been done in the present case. 

55.As regards the allegation that the Plaintiff’s holding over was a “calculated” act to obtain more benefit for themselves to the prejudice of the defendants, that again has not been pleaded in the Counterpart.

56.Whilst there are assertions in the Counterclaim that the plaintiff’s obstruction had put the defendants at risk of prosecution or enforcement action by the Building Authority, it is not at all clear from a reasonable reading of the pleadings as a whole that the defendants have been relying on that as the basis of the claim for exemplary damages.  Instead, the said risk was put forward to support an application for access and injunction[34] and also a claim for indemnity against the plaintiff for any penalty imposed relating to the Building Orders.[35]  

57.Secondly, even if I was wrong about the lack of pleadings, there is still the problem of lack of evidence.  There has not been a full trial and only Mr Luk has given evidence. It is not sufficient, in my view, for the defendants to just point to certain letters written by solicitors as contained in the trial bundle,[36] the contents of which are not tested, and then to invite the court to jump to the conclusion that the plaintiff had committed dishonest or even criminal conduct.  I note also that the letters relied upon by Mr Yeung in the “Addendum” were all written between July and October 2013 after the proceedings had commenced.  In my assessment, little weight can be attached to them.  The fact that the plaintiff concedes liability cannot be taken as an admission that they had “made up” false statements in the statement of claim.

58.Besides, there is also no basis for me to find that the plaintiff’s conduct of holding over was calculated to result in profit.[37] On the other hand, there is evidence, which I accept, that the parties had been engaged in discussions on renewal and that the plaintiff had from time to time sent cheques for payment.  Whilst it is obvious that the parties had held different views as to how the rectification work should go about, there is no evidence before me to show that the plaintiff’s alleged concern about the security of the premises regarding the proposed rectification work was false or unjustified.  Whether or not the plaintiff was right in stopping the defendants’ contractor carrying out the rectification work is a different matter and the plaintiff has conceded liability on this point.  As regards the risk of prosecution or enforcement action, there is no evidence before the court that the defendants had in fact been prosecuted by the Building Authority.  In my judgment, there is neither sufficient evidential basis nor sufficient justification for any exemplary damages.

59.I disallow this head of claim of the defendants. 

Adjustment on final judgment or order

60.Based on the above, the mesne profits and damages to which each of the defendants is entitled are as follows:-

	D1	D2
Mesne profits:	$804,000	$765,600
Damages for aborted works:	$5,000	$5,000
Total:	$809,000	$770,600

61.Since 13 June 2011, the plaintiff has already paid various sums to the total amount of $828,000 to each of the defendants.  Hence, the defendants have been overpaid.  Pursuant to Order 29 Rule 17 of RDC, the 1st defendant should refund $19,000 ($828,000 - $809,000) to the plaintiff.  Similarly, the 2^nd defendant should refund $57,400 ($809,000 - $770,600) to the plaintiff.

Conclusion

62.The plaintiff’s claim against the defendants is dismissed. 

63.The defendants’ counterclaims for mesne profit and damages for the aborted work of the contractor are successful.  However,

(i) the 1^st defendant is to refund $19,000 to the plaintiff; and

(ii) the 2^nd defendant is to refund $57,400 to the plaintiff.

64.I consider it just to order interest on the refunds: see Hong Kong Civil Procedure 2015, at §29/17/1.  In order to reflect the fact the plaintiff’s interim payments to the defendants were not made in one go, I order that the aforesaid refunds of $19,000 and $57,400 should carry interest at the rate of 3% per annum from 13 June 2011 to the date of the judgment and thereafter at the judgment rate until full payment. 

Costs

65.It is trite that costs are at the discretion of the court and that the general rule is that costs should follow the event.  I appreciate that under the new rules made after the Civil Justice Reform the courts may be more ready to make separate orders which reflect the outcome of the different issues.  I also bear in mind the provisions of Order 62,r 5 of RDC, in particular r 5(1)(aa), (e)-(g) & (2).  I am alive to the principles stated in Re Elgindata Ltd (No 2) [1993] 1 All ER 232, in particular, that the aforesaid general rule does not cease to apply simply because the successful party raised issues or made allegations that failed, but that he could be deprived of his costs in whole or in part where he had caused a significant increase in the length of the proceedings and also that where the successful party raised issues or made allegations improperly or unreasonably the court can not only deprive him of his costs but can also order him to pay the whole or part of the unsuccessful party’s costs.

66.Mr Ma opened the plaintiff’s case by saying that the trial case was mainly for the issue of costs and he referred to Ta Tung China & Arts Ltd v Fontana Restaurant Ltd & Others [1999] 1 HKLRD 404.  In fact, at the beginning the plaintiff offered to dispense with the trial on the condition that there be no order as to costs.  However, Mr Yeung indicated that the defendants were only prepared to “settle” on the condition that (i) the plaintiff should pay an additional $100,000 (the amount was said to be “negotiable” and later lowered to $60,000) as mesne profits; (ii) the plaintiff should pay $10,000 as damages for the aborted work of the contractor; and (iii) each party should file written submissions on costs for the court’s decision.  As it now turns out, the defendants are unsuccessful as regards their claim for an additional sum for mesne profits and exemplary damages.  To the contrary, the defendants have been overpaid.  As regards the $10,000 damages for the aborted work, the plaintiff has conceded both liability and quantum. 

67.The respective claims of the parties arose from the same common factual origin and the issues were intertwined.  I have taken into account that the plaintiff only dropped their case on the second day of the trial.  Before that, the plaintiff had made an unsuccessful attempt to amend the statement of claim and had called a witness to give evidence for a day.  On the other hand, in view of the results the defendants should be treated as being not successful in their counterclaim either: see Hong Kong Civil Procedure 2015, at §62/5/A.  Furthermore, although many of the plaintiff’s arguments on assessment of damages are not accepted by this court, it cannot be said that those of the plaintiff’s arguments are improper or unreasonable.

68.I take into account that the defendants made submissions on exemplary damages when the opportunity for doing so had already gone.  I take into account the fact that the defendants sought to adduce further evidence, in the form of the letter from the certified account, without leave.  Such improper conduct of the defendants caused the plaintiff to respond and incur additional costs.

69.Bearing in mind the underlying objectives of the Civil Justice Reform as pronounced in Order 1A, r 1 of RDC, the aforesaid principles on costs, the circumstances of the case, the relative amount of work attributable to the Claim and the Counterclaim and the conduct of the parties,I make an order nisi that there be no order as to costs. 

Mr Andy Hung, instructed by Yam & Co, for the plaintiff

Mr Yeung Yeuk Chuen, instructed by Jimmie KS Wong & Partners, for the 1^st and 2^nd defendants