FIRST SHANGHAI ENTERPRISES LTD v. DAHLIA PROPERTIES LTD

HCA 13426/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13426 OF 1997

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JUDGMENT

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Introduction

1. This is an assessment of damages consequent upon the entry of judgment by the Court of Appeal for the defendant on its counterclaim, inter alia, for damages to be assessed. The facts of the case, largely uncontroversial and arising out of an aborted property transaction can be shortly stated.

2. The suit premises, a substantial piece of real estate situated in a prime location, is the entire 38th floor of Tower One, Lippo Centre, at No. 89 Queensway, Hong Kong ("the property"). By a formal sale and purchase agreement dated 22nd October 1997, the plaintiff agreed to purchase and the defendant agreed to sell the property for the price of $223.41 million. The plaintiff paid an initial deposit of $22,341,000. Completion was contracted for 31st October 1997.

3. A day prior to completion, on 30th October 1997, the plaintiff's then solicitors communicated the plaintiff's acceptance of the defendant's repudiation of the agreement, purportedly upon the basis that there had been a failure on the part of the defendant to produce title deeds in good time for proper requisitions to be raised. The transaction did not proceed on 31st October 1997, the plaintiff having failed to pay the balance of the purchase monies. By letter dated 1st November 1997, the defendant in turn accepted the plaintiff's repudiation and forfeited the deposit paid.

4. On 10th December 1997, the plaintiff instituted proceedings against the defendant, seeking, inter alia, the return of the deposit, damages for breach of contract and a declaration in respect of a lien over the property. Two days later, the writ was registered against the property at the Land Registry.

5. On 7th March 1998, the defendant filed its Defence and Counterclaim (subsequently amended in June 1998) to pursue damages, a declaration that it had rightfully terminated the transaction and forfeited the deposit, and an order that the lis pendens be vacated. The suit came on before Yuen J (as she then was) on 3 May 2001. She gave judgment for the plaintiff. The defendant appealed and the Court of Appeal, reversing the lower court, awarded judgment to the defendant on its Counterclaim for damages to be assessed. The plaintiff has since appealed to the Court of Final Appeal and the hearing has been scheduled for 9th June 2003.

The contentious issues

6. The questions falling to be resolved are essentially two-fold. Of lesser import is the controversy over whether the wasted conveyancing costs of the aborted transaction are recoverable. The defendant contends that they are or at the very least a smaller sum based on the estimated costs of resale should be recoverable. The plaintiff urges rejection of this head of claim.

7. As to damages for loss of bargain, the plaintiff's primary contention is that none would have been suffered had the defendant acted diligently and expeditiously to re-sell the property. Countering that it has done precisely that with no success to the date of the assessment, the defendant seeks substantial recompense following the continuing slide in property values, an undisputed phenomenon that began in late 1997.

The guiding principles

8. These represent an area of common ground between the litigants.

9. It is accepted that the normal measure of damages is the contract price less the market price at the contractual date stipulated for formal completion: see McGregor on Damages, 16th Ed, para. 992. Damages are assessed so as to place an innocent party in the position he would have found himself, so far as is possible, were the contract to have been performed: Chitty on Contracts, 28th Ed., Vol. 1, 1-061. Where injustice may ensue, a subsequent assessment date can be taken instead for the purpose of calculating loss: Johnson v Agnew [1980] AC 367. An aggrieved party is duty bound to act reasonably in mitigation of his loss and damages, the failure of which falls decisively upon the plaintiff to demonstrate: McGregor on Damages, supra at para. 295. Bona fides, a question of fact, is plainly expected of the defendant in taking all reasonable steps to effect a resale. This is not an onerous burden and the defendant is under no obligation to do anything other than in the ordinary course of business: Westinghouse Electric Co Ltd v Underground Electric Railways [1912] AC 673 at 689. Nursing a property in attempting to achieve a better resale price would run counter to the duty to mitigate.

10. Thus reminded, where the property remains unsold for some 5 years after the sale was aborted, as here, what is the appropriate date for assessment of the defendant's loss and damages?

The evidence

11. Completion failed to occur on 31st October 1997 as envisaged. The defendant having accepted the plaintiff's repudiation on 1st November 1997 very quickly thereafter took steps to resell the property. Miss Angel Lam Suk Fan, the defendant's business development assistant ("Miss Lam") was instructed in mid November 1997 to look for alternative buyers for the property. She reported directly to the manager who, it seemed, had the final say on whether offers received were acceptable or otherwise. She was closely cross-examined as to her role in marketing the property and on what other additional steps might have been taken to facilitate a resale at a time when potential buyers were particularly thin on the ground. Her testimony, unchallenged by any contrary evidence, I am able to accept. That the general economy was entering a period of poor performance and the market for properties was beginning dwindle since the end of 1997 were accepted facts.

12. Miss Lam described how she took immediate steps to contact estate agents. She explained that it was the normal practice of the defendant to use agents for the sale or lease of properties in the defendant's portfolio. The defendant did not market its own properties, preferring to leave the task to professionals. Accordingly, she gave instructions to such reputable agents as Vigers, Richard Ellis, Midland, Jones Lang & Wooten, Treasure Land, and Chartersince to look for buyers. The agents were kept apprised of the fact that litigation was on-going and that a lis pendens had been registered against the property. Miss Lam, as instructed, had informed the agents that the defendant would only consider formal offers only after which negotiations would begin. No intended resale price was ever communicated. Details were given of Open House for viewing and advertising in newspapers and in the Hong Kong Economic Journal and the Hong Kong Economic Times. There were enquiries from agents from time to time, principally regarding the litigation progress and whether the property was still available for sale or rental. There was little interest in the property, given the state of the prevailing property market and the encumbrance against the property.

13. In mitigation of its loss, the defendant found a rental client for the property. The tenant was Pebston Investments Limited (presently known as Zurich Investments Limited). After a customary rent-free period, the property began to generate rental income in April 1998. Details are furnished in Miss Lam's witness statement that she adopted as her evidence in chief. Credit will have to be given for this income in the final calculation.

14. There was no serious interest in the property until November 1998 when two formal offers were received to acquire it for the sum of $74,470,000, a drastic fall in value on any view. Miss Lam stated that her manager having considered the offers rejected them as being too low. Following that, the agents pressed on with marketing the property for the defendant. Meanwhile, Miss Lam dealt with the various agents much as she had done hitherto. She continued to liaise with them and fielded their various enquires. In June 1999 two new offers were received for $78,938,200 and $86,385,200 respectively. These too were considered by the manager and rejected as inadequate. To the date of the assessment, no other offers had been obtained.

15. The plaintiff criticized the defendant for not taking a more pro-active or aggressive role in finding potential buyers such as by offering free legal costs. One is not concerned with a domestic property where such consideration as free conveyancing costs might have undoubtedly greater attraction. The property being an entire floor of Lippo Centre would no doubt be principally of interest to institutional and investment purchasers for whom such costs would be minimal interest when compared to the price of the property even as depressed as the offers received in November 1998 and June 1999. In my considered opinion, the defendant has taken adequate and reasonable steps to secure prospective offers.

16. When ought the defendant to have re-sold the property? Was the defendant acting reasonably in rejecting the few offers made to date?

17. The plaintiff contends that had the property been swiftly unloaded immediately after the breach in October 1997, no loss would have been sustained. The agreed valuation for 31 October 1997 reflected an enhanced value of $232 million, some $8 million over the contract price. In my view, to expect the property to be sold in such a short time displays ignorance of real world conditions. Agents were taken on board almost immediately by mid November 1997. By 17 December 1997, the agreed valuations reflected a drop in the value of the property. On that date, its value was $193 million. From then, its value continued to plummet as evident from the valuations adduced and accepted by both sides, save the valuation for January 1998 to which I shall revert. By 8th February 2003, the realistic resale value was put at $83,684,970.

18. In my considered judgment, the defendant was not entitled to hold on to the property as it did. Such behaviour tantamounted to nursing the property in the vain hope of seeing a reversal of market conditions which, as transpired from agreed valuations, never happened. It would neither be equitable nor right to expect the plaintiff to have to make good the resulting fall in property value. The defendant wholly aware that there was very little genuine interest in the property between 31st October 1997 and November 1998 when two offers had been received for the first time, ought to have resold the property for $74,470,000. That was the best market price it could legitimately have obtained at the time. It matters little that subsequently obtained valuation for November 1998 demonstrated a higher value of $90,973,800, a fact unknown at the material time. The reality was that no one was prepared to make any higher offer than those actually received in November 1998. However, for the purpose of assessing loss based on the difference between contract and market prices, I shall instead adopt the higher figure of $90,973,800. Both counsel have accepted this valuation for assessment in November 1998.

Damages are assessed as follows:
Contract Price	$232,410,000
Less agreed Market Price	$90,973,800
Total	$132,436,200

19. Before leaving this head of claim, I wish to deal briefly with the controversy relating to the valuation of the property as at January 1998. Much time was spent in this connection, but ultimately the date has not proved to be relevant or decisive. Had it been pertinent, in passing I would have preferred the valuation advanced by the defendant's surveyor. Counsel for the defendant highlighted the flawed approach adopted by PW1, the plaintiff's surveyor. I have considered his submissions in this regard and consider them justified.

Conveyancing expenses of the failed transaction

20. The authorities are in agreement that generally speaking, a vendor is not entitled to reimbursement of expenses wasted in an aborted land sale: Barnsely's Conveyancing Law and Practice (4th ed.) at p.654; Yeung Leung Wai Kwan v Tsang Nui Tai [1999] 3 HKC 618; Chow Kin Hing v Wong Yuen Sheung, HCA No. 2324 of 1999, unreported; and McGregor on Damages, supra at para. 995.

21. The defendant has sought to recover a relatively small sum of $70,900. This I will not accede to following the cited cases, as the amount represents expenses that would have been incurred even had the plaintiff not defaulted. I will, however, award $40,000, a fair recompense to cover the approximate costs of the resale as claimed in the alternative.

Interest

22. The defendant claims interest on his loss, such to include interest on the purchase price for the period between breach and when the property should have been resold and interest from resale until payment. I agree that this aspect of the claim is competent and should be allowed. Interest will be at judgment rate as follows:

1/11/1997	11.68%
1/1/1998	12.06%
1/4/1998	12.90%
1/7/1998	13.08%
1/10/1998	13.00%

23. This head of claim amounts to $9,350,075.12 and is computed as follows:

[($223,410,000 - $22,341,000) - ($223,410,000 - $90,973,800) × (2/12 × 11.68 %)]
+
[($223,410,000 - $22,341,000) - ($223,410,000 - $90,973,800) × (3/12 × 12.06 %)]
+
[($223,410,000 - $22,341,000) - ($223,410,000 - $90,973,800) × (3/12 × 12.09 %)]
+
[($223,410,000 - $22,341,000) - ($223,410,000 - $90,973,800) × (3/12 × 13.08 %)]
+
[($223,410,000 - $22,341,000) - ($223,410,000 - $90,973,800) × (2/12 × 13.08 %)]
= $9,350,075.12

Deductions

24. From the above awards, one must deduct the forfeited deposit and the rental income of $24,527,333 in arriving at the final quantum payable by the plaintiff.

Summary of award
(a)	Difference between contract price and market price	HK$132,436,200.00
(b)	Loss of interest on funds	HK$9,350,075.12
(c)	Prospective resale legal costs	HK$40,000.00
		HK$141,826,275.12
Less:
	Deposit forfeited	HK$22,341,000.00
	Rental income received	HK$24,527,333.00_
		HK$94,957,942.12

Conclusion

25. The adjudged sum attracts interest at judgment rate from the date of the writ until payment less the sum of $9,350,075.12 assessed above. The defendant is additionally entitled to the costs of the assessment, nisi in the first instance with liberty to apply to both parties within 14 days hereof. Such costs are to be taxed, if not agreed, with certificate for counsel.