KAIFULL INVESTMENT LTD. v. SONNIX LTD.

IN THE COURT OF APPEAL

1993, No. 207
(Civil)

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J U D G M E N T

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Power, V.-P.:

1. This is the judgment of the Court.

2. This is an appeal from a decision of Godfrey J., as he then was, giving the respondent summary judgment under O.14.

3. The appellant Kaifull Investment ("the vendor") sold land and buildings known as the Sun Yuen Mansion, Nos. 171-173 Thomson Road and Nos.205, 207,209 and 211 Johnston Road to the respondent Sonnix Ltd. ("the purchaser"). The Sale and Purchase Agreement was dated 2nd June 1992 and the sale price was $145m.

4. Clause 8 of the Sale and Purchase Agreement was a site area adjustment clause:

"(e) The Vendor declares to the best of its knowledge and belief that the net site area of the Property to the taken for calculation of plot ratio for wholly commercial redevelopment purposes under the Buildings Ordinance (Cap.123) is 3,957 square feet. In the event that the aforesaid net site area of the property as verified shall be more or less than 3,957 square feet, the Purchase Price of the Property shall be increased or decreased accordingly at the rate of HK$36,644.00 per square foot and any adjustment as to payment of the Purchase Price under Clause 2 above shall be made on the balance of the Purchase Price payable on completion. In the event that the Vendor and the Purchaser cannot agree on the aforesaid net site area of the Property, a surveyor will be appointed by agreement between the Vendor and the Purchaser or failing such agreement by the Chairman of the Royal Institution of the Chartered Surveyors (Hong Kong Branch) on application by either party to the said Chairman, who will verify the net site area of the Property aforesaid and the costs of appointment of such surveyor shall be borne by the parties in equal shares."

5. The purchaser assessed the net site area at 3,731.815 square feet. The vendor did not agree with that assessment. On 29th August 1992 the parties agreed to complete on the basis of a price of $136,748,000 and upon the understanding that Messrs. Lawrence Ong and Chung would hold $8,252,000 to abide the outcome of the eventual agreement.

6. It was agreed that the site area verification would be obtained in accordance with C1.8(e). It was further agreed:

"(a) In the event that the verified net site area of the property should be equal to or more than 3,957 square feet, there should be paid to the defendant the stakeholder money together with all interest accrued thereon and the plaintiff should pay the defendant a sum equivalent to HK$36,644 per square foot in respect of the area by which the verified net site area of the Property should exceed 3,957 square feet; and

(b) In the event that the verified net site area of the property should be less than 3,957 square feet, there should be paid to the plaintiff out of the stakeholder money a sum equivalent to HK$36,644 per square foot in respect of the area by which the verified net site area of the Property shall be less than 3,957 square feet together with the interest accrued on such sum and the balance of the stakeholder money (if any) together with interest accrued thereon should be paid to the defendant, and, if such payment out of the stakeholder money shall be insufficient to cover the sum aforesaid payable to the plaintiff, the defendant shall pay the plaintiff forthwith the amount by which such sum shall exceed the stakeholder money.

Mr. Michael Mann, the Chairman of the Royal Institute of Chartered Surveyors, was appointed to verify the net site area. In his report dated 23rd March 1993, he stated that the area was 3,742.64 square feet. The purchaser therefore claimed $7,855,008 of the stake money being the shortfall of 211.36 sq.ft. x $36,644.

7. It was not contested at the hearing that a valuation such as this could not be impugned unless the surveyor departed in a material respect from his instructions. The authority for this is Jones v. Sherwood Computer Services Plc. (1992) 1 W.L.R. 277. The particular passage upon which reliance is placed comes from the earlier case of Collier v. Mason in the judgment of Sir John Rommilly M.R. where he said:

"this court, upon the principle laid down by Lord Eldon, must act on that valuation, unless there be proof of some mistake, or some improper motive, I do not say a fraudulent one: as if the valuer had valued something not included, or had valued it on a wholly erroneous principle ..."

8. The vendor contends that the surveyor has proceeded upon a wholly erroneous principle.

9. Clause 8(e) states that the area to be verified is "the net site area of the Property to the taken for calculation of plot ratio for wholly commercial redevelopment purposes under the Buildings Ordinance". This site has a little used service lane which runs round two sides of the site. Regulation 23(2) of the Building (Planning) Regulations provides, inter alia, that when determining the site coverage of a building under Reg.20 no account is to be taken of any service lane. The surveyor did not take account of the area of this lane when coming to his decision as to the site area.

10. The vendors originally contended at the hearing and in their original Notice of Appeal that the valuer had failed to heed the provisions of s.42 of the Buildings Ordinance which provides that modification may be made or exemptions granted from any of the provisions of the Building Ordinance or any subsidiary legislation which might otherwise apply. It is submitted that, had the valuer had taken account of s.42, he would have, bearing in mind that the service lane is required by virtue of Reg.28 for the service of domestic buildings only and that there is no corresponding regulation requiring such lanes for commercial buildings, he would have given weight to the real likelihood that an exemption would have been granted under s.42.

11. The trial judge, after argument, was satisfied:

"In fact, the surveyor came to the conclusion that by virtue of regulation 23(2)(a) it would not be right for him to take into account, in verifying the net site area, the area of the service lane. I accept that since, on the face of it, he makes no mention of s.42, he did not take the provisions of that section into account. But all that the surveyor had been instructed to was to 'verify the net site area of the property to be taken for calculation of plot ratio for wholly commercial redevelopment purposes under the Buildings Ordinance'.

In my judgment, the only exercise which fell to be performed by the surveyor was to verify what was, in his opinion, the net site area. It seems to me that the surveyor in no way failed to carry out his instructions. He did what he was instructed to do. That being so, there is no justification for impugning his verification."

12. That decision was given after argument that proceeded upon the basis of a suggested failure to consider s.42. Leave has been given today to argue an amended Notice of Appeal which raises a new ground argued before us by Mr. Chang Q.C., with him Mr. Ma Q.C. and Miss Yip. This ground canvasses matters not really touched upon during the original application. It suggests that the surveyor was in fundamental error in his approach to the valuation or, to use the words of Collier v. Mason, that he assessed the net site area "on a wholly erroneous principle". It is suggested that he grounded his valuation on the effect of Reg.23(2)(a) on a service lane and that he should never have done so. In this regard it is necessary to bear in mind Reg.28 which makes it plain that service lanes are required for the purposes of a domestic building.

13. Mr. Chang says that the words of the report make it clear that the surveyor was in error when he made the assessment. He refers to the report generally but in particular to its final paragraph:

"Conclusion

1. It is quite clear that the service lane at the side and rear of Sun Yuen Mansion is an established service lane.

2. Consequently under Section (sic) 23(2)(a) of the Building (Planning) Regulations, (Cap.123) it states that no account shall be taken of any service lane in determining the area of the site on which a building is erected.

3. We believe that the area of the service lane should be excluded for site area calculations for Sun Yuen Mansion redevelopment.

4. Therefore, we would conclude that the net site area of 'the Property' to be taken for calculation of plot ratio for wholly commercial development purposes under the Buildings Ordinance (Cap. 123) is 347.7 sq.m."

Mr. Chang submits that the surveyor should not have had regard to the existing building and the existing lane but should have made his valuation upon the basis of a cleared site upon which it was proposed to put a commercial building. He refers, when dealing with the method of valuation, to Hinge Well Co. Ltd. v. The Attorney General (1988) 1 H.K.L.R. at 32. This is a decision of the Privy Council in which Lord Oliver said (at p.42):

"So far as the respondent's argument is based upon the area of the former scavenging lane being a service lane, it is difficult to see any logical answer to the appellant's argument. The concept of a service lane is to be found in regulation 28 and although that regulation provides that the lane is to have access to a street it creates no easement of passage in the landowner over adjoining land nor any similar easement in any adjoining landowner over the site of the service lane. It is moreover implicit in the regulation that the purpose of the service lane is solely that of serving the domestic building which is the reason for its existence. Once there ceases to be a building on the land capable of being served it is difficult to see how the area formerly dedicated to the purpose of serving it can realistically be treated as a "service' lane nor why the mere fact that there are adjoining properties which may enjoy rights of passage over the area from the service lanes forming parts of those properties should preserve its character as a 'service lane' in relation to the property of which it forms part."

He submits that the approach which based itself upon the existence of a service lane, which was, it must be said, adopted by all three valuers and it would seem also by the Building Authority and by counsel below, was wholly wrong. While Mr. Chang would seem to be prepared to concede that the valuer could properly have had regard to an indication from the Building Authority that an access lane under Reg.5 would be required, he says that such an indication was never given nor did the valuer make any attempt to assess the effect it would, had it been given, have had. It is not necessary for the purpose of this application to consider the further argument of Chang which suggested that the surveyor was in further error in that he failed to include in the site the set back area which exists in the lane.

14. Mr. Fung, who appears for the respondent, submitted that it could not be demonstrated that the valuer had departed from his instructions. He submits that the points which have been raised today were never taken up by the defendants' own experts which indicates that those experts were satisfied, correctly in Mr. Fung's argument, that it was not one which could properly be argued.

15. He submits that Mr. Mann's terms of reference included a direction that he was to have discussions with the Building Authority and that his report showed that he had had such discussions. He submits that we should proceed upon the basis that the full position was canvassed between him and the Building Authority in the course of those discussions and that he acted upon the basis of what he had learnt from them. Mr. Fung submits that there was no mistake but goes further saying that even if the surveyor did make a mistake of law the parties are bound by their contract as it has not been demonstrated that he went outside his terms of reference. He submits alternatively that even though the surveyor may have spoken of a service lane he may well have had in mind, given his discussions with the Building Authority, that what was being dealt with was a street in accordance with the meaning of that term as it is used in Reg. 23(2)(a). He argues also that the Hinge Well Co. Ltd. Case is of no real assistance as each case must be looked at in the light of its own facts.

16. This is an appeal against an O. 14 judgment. To succeed it is enough for a defendant to show that he has an arguable case.

17. We think we should do not more than indicate that the purchaser has shown a sufficient case in our view to entitle him to succeed in this appeal. It is proper to add that the arguments presented to this court were very different from those advanced to Godfrey J. which, as we have already indicated, for the most part relied upon a failure to consider the suggested effect of s.42.

Nazareth, J.A.:

18. I agree and have nothing that I can usefully add.

Rogers, J.:

19. I agree with the result. I only wish to emphasize that the appellants' arguments before this court owe nothing to the grounds put forward in their evidence and the exhibited experts' report. They were apparently no reflection on the arguments put forward before Godfrey J. They have little proximity to the Notice of Appeal as originally filed and if they be in the skeleton argument put in by the appellants they are shrouded in obscurity. The question is whether the defendants/appellants can establish they have an arguable case that the report of 23rd March was based on a wholly erroneous principle or that it was fundamentally wrong. I am by no means convinced that the point raised by the appellants will prove to be a good point nor that it is unanswerable. However I consider that there is a possible argument which will be sufficient to require us to allow the appeal.

Power, V.-P.:

20. The appeal is allowed. Leave to defend is given. Costs both here and below are to be costs in the cause.