GALAXY CHINA OPPORTUNITIES FUND v. TANG JUN AND OTHERS

HCA 1629/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1629 OF 2011

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AND

HCA 1630/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1630 OF 2011

BETWEEN

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AND

HCA 1631/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1631 OF 2011

BETWEEN

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(Heard together)

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ASSESSMENT OF DAMAGES

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Introduction

1. This is an assessment of damages for three actions.  The plaintiff in each of the three actions is an entity that is part of what is known as the Galaxy Funds.  In these three actions, they claimed against the same six defendants.  In this judgment, I shall refer to Galaxy China Opportunities Fund, the plaintiff in HCA 1629/2011, as “P1”; Galaxy China Deep Value Fund, the plaintiff in HCA 1630/2011, as “P2”; and Galaxy Master Fund SPC, the plaintiff in HCA 1631/2011, as “P3”.  I shall refer to the 1^st to 6^th defendants as D1 to D6 respectively.

2. Save as to the name of the plaintiff, the number of shares and the consideration involved, the three actions are identical.

3. In HCA 1629/2011, P1 entered into a share sale and purchase agreement with D1 to D5 on 28 October 2010 to purchase 4 million shares (“the P1 Shares”) in a NASDAQ listed company called China Architectural Engineering, Inc (the “Company”) from D5 for US$2.2 million.  The share sale and purchase was duly completed. The Company changed its name to China CGame Inc in March 2011.

4. In HCA 1630/2011 and HCA 1631/2011, P2 and P3 respectively entered into identical transactions with D1 to D5 except that the number of shares concerning P2 was 1.6 million (the “P2 Shares”) and the number of shares concerning P3 was 0.4 million (the “P3 Shares”).  I shall refer to the share sale and purchase agreements entered between the plaintiffs and D1 to D5 collectively as “the Agreements”.

5. Under clause 4.1(2) of the Agreements, D1 to D5 jointly and severally undertook to procure the delivery to each of the plaintiffs within four months after the completion of the sale and purchase of the P1 Shares, the P2 Shares and the P3 Shares (as the case may be), a company guarantee (together “the Company Guarantees”) issued by the Company in the form to the satisfaction of the plaintiff concerned which would entitle the plaintiffs to demand the Company to re-purchase such portion of the P1 Shares, the P2 Shares or the P3 Shares (as the case may be) not yet disposed of during the period of three months after the lock-up period for the shares under Rule 144 of the Rules of the Securities and Exchange Commission of United States of America at the price of US$0.55 per share (the “Price”).

6. Pursuant to the Agreements, each of the plaintiffs entered into an option deed with each of D5 and D6 (together the “Option Deeds”).  Each of the plaintiffs was granted a put option (the “Put Option”) which, upon exercise during the effective period, required the grantor of the Put Option to acquire such portion of the P1 Shares, the P2 Shares or the P3 Shares (as the case may be) not yet disposed of (together the “Put Option Shares”) from the plaintiffs at the Price and the grantor was bound to complete the purchase of the Put Option Shares within seven business days after the date of exercise of the Put Option.

7. With effect from 21 December 2010, the Company consolidated its shares. Every four shares of the Company were consolidated into one.  For the purpose of this assessment, we need not concern ourselves with this consolidation exercise except that I have to bear in mind that the transaction prices quoted for each share of the Company from 21 December 2010 onwards represented prices for four pre-consolidated shares of the Company.

8. D1 to D5 failed to procure the Company to deliver the Company Guarantees as required under the Agreements.  P1, P2 and P3 served their respective put option notices (the “Put Option Notices”) to D5 and D6 on 8 June 2011 requiring D5 and D6 to purchase the Put Option Shares on 17 June 2011.  Both D5 and D6 failed to buy back the Put Option Shares.

9. In these actions, the plaintiffs sought orders for specific performance by D1 to D5 of clause 4.1(2) of the Agreements and by D5 and D6 of the Option Deeds.  The plaintiffs also claimed damages and interest against the defendants.

10. Summary judgments were granted by the court on 17 October 2012 in favour of the plaintiffs in all three actions (together the “Judgments”).

11. The Judgments required D1 to D5 to procure the delivery to each of the plaintiffs a guarantee by the Company which would entitle the plaintiffs to demand the Company to re-purchase from the plaintiffs such portion of the P1 Shares, the P2 Shares or the P3 Shares (as the case may be) not yet disposed of at the Price.

12. The Judgments also required D5 and D6 to acquire from the plaintiffs such portion of the P1 Shares, the P2 Shares or the P3 Shares (as the case may be) not yet disposed of at the Price.

13. The defendants were also adjudged to pay to the plaintiffs damages and interest to be assessed as well as costs.

14. On 23 May 2014, the court directed that the assessment of damages for these three actions to be heard together.

15. On 28 November 2014, by consent orders made in all three actions the court ordered that the plaintiffs be at liberty to enforce the orders for damages and interest to be assessed in lieu of the specific performance orders (the “Consent Orders”).

16. The hearing before me was to assess the amount of damages payable by the defendants to the plaintiffs in each of the three actions in lieu of the specific performance orders granted by the court on 17 October 2012.

17. There was no dispute that none of the plaintiffs had disposed of any of the shares of the Company held by them prior to the assessment of damages hearing.  Accordingly, the total of the P1 Shares, the P2 Shares and the P3 Shares formed the total number of the Put Option Shares (ie 6 million (pre-consolidated) shares or 1.5 million (consolidated) shares of the Company).

18. The plaintiffs called Mr Chan Man Fai Joe (“Mr Chan”) to testify at the hearing.  On the defendants’ side, only D2 testified at the hearing.

The plaintiffs’ case and evidence

19. The plaintiffs’ case was that the plaintiffs were unable to dispose of their respective shareholdings in the Company in the open market and the residual value of the shares of the Company in their hands was nominal.

20. Mr Chan is the Managing Director of all the plaintiffs.  He had signed a witness statement in each action and adopted at the hearing all his signed witness statements as his evidence.

21. Mr Chan stated that D1 to D5 had failed to procure the delivery of the Company Guarantees to the plaintiffs as ordered by the Judgments.  The damages suffered by the plaintiffs were the amounts of re-purchase price for the P1 Shares, the P2 Shares and the P3 Shares at the Price.

22. He stated that on 16 November 2012, the plaintiffs through their solicitors demanded D5 and D6 to acquire the Put Option Shares from the plaintiffs at the Price.  D5 and D6 failed and/or refused to make the acquisition and the damages suffered by the plaintiffs were the amount of purchase price for the Put Option Shares at the Price.

23. Mr Chan signed his witness statements on 29 August 2013.  He stated that on 2 August 2013, the closing price for each (consolidated) share of the Company was US$0.11.  However, it was impossible for the plaintiffs to sell the whole of the P1 Shares, the P2 Shares or the P3 Shares (as the case may be) at that price in the open market.  He stated that from 2 August 2012 to 2 August 2013, only 1,026,427 (consolidated) shares of the Company were traded with a daily average of about 4,089 (consolidated) shares being traded in each trading day.

24. Mr Chan stated that the tiny market of the Company’s shares would collapse if the plaintiffs tried to sell the P1 Shares, the P2 Shares and the P3 Shares systematically in a row in the market.  The sale would simply drive out the open market investors/buyers and the price of the Company’s shares would plummet to bottom within one or two weeks.

25. He stated that the Company’s shares traded between US$0.245 and US$0.04 per each (consolidated) share from 2 August 2012 to 1 August 2013 with no transaction for 81 out of 251 trading days (ie in about one-third of the trading days there was no trading of the Company’s shares in the open market).  At the hearing, Mr Chan submitted to the court the trading records of the Company’s shares in the NASDAQ market for the period from 28 March 2011 to 31 December 2014 which was marked “Exhibit P-1”.

26. He stated that in practice, the plaintiffs were unable to sell their respective shareholdings in the Company in the open market.  He stated that the residual value of the P1 Shares, the P2 Shares and the P3 Shares was nominal. He estimated the nominal value of each of the P1 Shares, the P2 Shares and the P3 Shares at less than US$1,000.

The defendants’ case and evidence

27. The defendants’ case was that the plaintiffs had failed to mitigate their losses.

28. D2 was the Chief Executive Officer of D6 in 2010 but he resigned on 31 December 2010.  He had signed a witness statement in each action all dated 17 December 2013 and adopted at the hearing all his signed witness statements as his evidence.

29. D2 stated that the plaintiffs could recoup their losses by selling the Put Option Shares in the open market.

30. He stated that the plaintiffs notified D5 and D6 by letters on 23 June 2011 that the plaintiffs would accept the repudiation of D5 and D6.  He contended that the plaintiffs should start taking steps to mitigate their losses on that day.  He pointed out that on 23 June 2011 the closing price of the Company’s shares was US$1.26 for each (consolidated) share (ie US$0.315 for each (pre-consolidated) share).  He contended that if the plaintiffs sold all the Put Option Shares on 23 June 2011, the plaintiffs could have recoup altogether US$1,890,000.

31. D2 stated that there was still trading of the Company’s shares as at 16 December 2013 (ie the day before he signed his witness statements).  It would still be feasible for the plaintiffs to sell at least some of the Put Option Shares and reduce their losses.  However, D2 agreed under cross-examination that the plaintiffs would not be able to sell the Put Option Shares in the open market after 28 November 2014 to mitigate their losses.

Discussion

32. The starting point for assessing damages for breach of contract is no doubt set out in the often quoted statement of Parke B in Robinson v Harman (1848) 1 Exch 850 at 855 that:

“The rule of common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”

33. For non-performance of sale and purchase of shares by the purchaser, the normal measure of damages is the contract price less the market price at the contractual time of acceptance.  This represents what the seller must obtain to put himself in the position he would have been in had the contract been carried out.  (See para 27-009 of McGregor on Damages, 19^th ed, (2014) at p1026)  This legal principle is not in dispute.  However, this principle is applicable only when market price for the shares concerned can be ascertained.  This in turn premises on there being an available market for the shares concerned.  Whether there was an available market for the Put Option Shares was an issue in dispute, albeit the Company is a NASDAQ listed company.

34. Other issues in dispute for this assessment were:

(1)    whether the plaintiffs were under any duty to mitigate, and if so, when?

(2)    if the plaintiffs were under a duty to mitigate, whether they had failed to discharge such duty, and if so, to what extent?

The plaintiffs’ duty to mitigate

35. There was not much dispute on the legal principle on this issue.  The authority is found at the speech of Viscount Haldane L.C. in British Westinghouse Electronic & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 689 when his Lordship stated that:

“The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.”

36. The parties had no dispute on the aforesaid well established principle. However, they differed on when the plaintiffs should have taken actions to mitigate their losses to sell all or part of the Put Option Shares in the open market and whether there was an available market for the Put Option Shares.

The date when the plaintiffs should take actions to mitigate

37. The usual time when a seller shall start to take actions to mitigate his loss caused by a buyer’s breach of a sale and purchase contract is the time when the buyer’s breach is accepted by the seller and the seller is discharged from his contractual obligation to deliver the goods concerned to the buyer.

38. The defendants’ case was that the plaintiffs had accepted the repudiation of D5 and D6 on as early as 23 June 2011.  The plaintiffs should have mitigated their losses by selling all the Put Option Shares on 23 June 2011 when the share price of the Company closed at US$1.26 per each (consolidated) share.

39. Mr Wong SC, representing the plaintiffs, submitted that this argument was not open to the defendants as it was not argued before the court at the hearing for summary judgments when the court granted the specific performance orders.

40. Mr Wong submitted that when the defendants committed repudiatory breaches of the Agreements and the Option Deeds, the plaintiffs were entitled to seek both alternative remedies of specific performance and damages.

41. In Johnson and Another v Agnew [1980] AC 367 (HL) at 392 to 394, Lord Wilberforce set out some uncontroversial propositions of law in a contract for sale of land as follows:

“First, in a contract for sale of land, after time has been made, or has become, of the essence of the contract, if the purchaser has fails to complete, the vendor can either treat the purchaser as having repudiated the contract, accept the repudiation, and proceed to claim damages for breach of the contract, both parties being discharged from further performance of the contract; or he may seek from the court an order for specific performance with damages for any loss arising from delay in performance. (Similar remedies are of course available to purchasers against vendors.) This is simply the ordinary law of contract applied to contracts capable of specific performance.

Secondly, the vendor may proceed by action for the above remedies (viz. specific performance or damages) in the alternative. At the trial he will however have to elect which remedy to pursue.

Thirdly, if the vendor treats the purchaser as having repudiated the contract and accepts the repudiation, he cannot thereafter seek specific performance. This follows from the fact that, the purchaser having repudiated the contract and his repudiation having been accepted, both parties are discharged from further performance.

……

Fourthly, if an order for specific performance is sought and is made, the contract remains in effect and is not merged in the judgment for specific performance. This is clear law, …

Fifthly, if the order for specific performance is not complied with by the purchaser, the vendor may either apply to the court for enforcement of the order, or may apply to the court to dissolve the order and ask the court to put an end to the contract. This proposition is as stated in Austins of East Ham Ltd v Macey [1941] Ch 338 (and see Singh (Sudagar) v Nazeer [1979] Ch 474, 480 per Megarry V-C) and is in my opinion undoubted law, both on principle and authority. It follows, indeed, automatically from the facts that the contract remains in force after the order for specific performance and that the purchaser has committed a breach of it of a repudiatory character which he has not remedied, or as Megrry V-C puts it [1979] Ch 474, 480, 790, that he is refusing to complete.” (Original emphasis in italic and emphasis in bold by me)”

42. The aforesaid propositions of law are applicable to sale and purchase of shares.  The plaintiffs herein had elected to seek specific performance and had obtained summary judgments for the same.  Mr Wong submitted that before the date of the Judgments, the plaintiffs could not be said to be under any duty to mitigate their losses as they were pursuing the contractual relief of specific performance and awaiting the court’s determination on their rights to decree of specific performance.  This contention of Mr Wong found support in Radford v De Froberville [1977] 1 WLR 1262 at 1286 F-G when Oliver J expressed the view that:

“… it is difficult to see how, assuming that it is reasonable for a plaintiff to seek specific performance, he can be under a duty to mitigate … until he knows whether or not the court is going to give him his decree.”

43. The court had granted specific performance orders to the plaintiffs.  Of course, the court had to be of the view that it was reasonable for the plaintiffs to seek specific performance.  The plaintiffs were not under a duty to mitigate until their applications for specific performance were determined by the court.  The court determined in favour of the plaintiffs on 17 October 2012 and the plaintiffs were not under a duty to mitigate prior to 17 October 2012.

44. Mr Wong further submitted that since the date of the Judgments, the plaintiffs had put into the hands of the court how the contracts were to be carried out.  The plaintiffs were not at liberty to sell the Put Option Shares to a third party without agreement of the defendants or obtaining a further order of the court.  This contention found support in Singh (Sudagar) v Nazeer [1979] Ch 474 when Sir Robert Megarry V.C. stated at 480-481 that:

“Second, it also seems clear that once an order for specific performance has been made, there are adequate remedies available to either party if the other does not appear to be proceeding under the order with due dispatch. Thus an application may be made for a time and place for completion to be fixed, or for an order rescinding the contract, either forthwith, if the other party is refusing to complete, or else in default of completion within a limited time. I need not set out all the possibilities in detail: they appear in Fry on Specific Performance, 6^th ed. (1921), pp 546-553; and see Capital and Suburban Properties Ltd v Swycher [1976] Ch 319, especially at pp 330, 331. By applying to the court for an order of specific performance, and obtaining it, I think that the applicant has put it into the hands of the court how the contract is to be carried out. As the court has become seised of the matter, and has made an order, it seems to me that subject to anything that the parties may then agree, the working out, variation or cancellation of that order is essentially a matter for the court.” (Emphasis added)

45. In GKN Distributors Ltd v Tyne Tees Fabrication Ltd [1985] 50 P & CR 403 the court had to deal with the question of whether a vendor who had entered judgment for specific performance could resell the land to a third party without obtaining the consent of the purchaser or first applying to the court to dissolve the order and asking the court to put an end to the contract. Nourse J answered this question in the negative.  After analysing in his judgment the “five uncontroversial propositions” set out by Lord Wilberforce in the Johnson case (supra) (see para 41 above), Nourse J held at 406-407 that:

“… The court has decreed that the agreement shall be specifically performed and carried into execution. That is a regulation of the rights of the parties in a specific manner. If those rights are subsequently to be regulated in some other manner it is obvious that that can be done by agreement or by first obtaining a further order of the court.”

46. Mr Wong submitted that the plaintiffs were obliged under the Judgments to sell the portion of the Put Option Shares quantified as at the date of the exercise of the Put Option when the whole lot of the Put Option Shares remained undisposed of.  He referred to clauses 2.1 and 2.2 of the Option Deeds which provides that:

“ 2.1 The Put Option may be exercised by the Grantee by serving a put option notice (the “Put Option Notice”) (in the form set out in Schedule) on the Grantor [D5 and D6] and the date of exercise of the Put Option shall be the date on which the Put Option Notice is despatched by the Grantee.

  2.2 The Grantee shall be entitled to exercise at its absolute discretion the Put Option during the Effective Period provided the Grantor is only bound to acquire from the Grantee such portion of Grantee’s Share not yet disposed of upon the exercise of the Put Option.”

47. Mr Wong submitted that prior to the date of the Consent Orders (ie 28 November 2014) there was no duty to mitigate on the part of the plaintiffs. Before that day, the plaintiffs were entitled to demand for specific performance under the Judgments and be paid US$3.3 million with interest to be accrued at judgment rate from 17 October 2012 (ie the date of the Judgments).  He submitted that D5 and D6 equally could demand the plaintiffs to deliver up the Put Option Shares pursuant to the Judgments.

48. In the GKN Distributors Ltd case (supra), Nourse J also pointed out that in that case “the purchaser never did anything which could have amounted to a decision not to complete the purchase or to an abandonment or waiver in some other way of its right to do so in pursuance of the [specific performance] order.” ([1985] 50 P & CR 403 at 405)  Thus, after the orders for specific performance were granted, not only the plaintiffs had the right to require D5 and D6 to purchase the Put Option Shares but  D5 and D6 also had the right to require the plaintiffs to sell the Put Option Shares to them.  The plaintiffs might not freely dispose of the Put Option Shares or any part of it to third parties without consent of D5 and D6 or order of the court.

49. Mr Wong further submitted that after 28 November 2014, it was practically impossible to sell the Put Option Shares in the open market to mitigate the plaintiffs’ losses.

50. I agree with Mr Wong that if the defendants contended that the plaintiffs were not entitled to the relief of specific performance on the ground that the plaintiffs had accepted the repudiation of D5 and D6 on 23 June 2011, the defendants should have argued that at the hearing for the summary judgments.  They chose not to and it was too late for the defendants now to argue that the plaintiffs had accepted the repudiation of D5 and D6 on 23 June 2011 and should have mitigated their losses prior to the Judgments by selling the Put Option Shares in the open market as from 23 June 2011.  The court had on 17 October 2012 ordered specific performance of the Option Deeds.  The court had to be of the view that the plaintiffs had not accepted the repudiation of D5 and D6 or the court would not have granted the specific performance orders. The defendants had not appealed against the specific performance orders.  The plaintiffs had no duty to sell the Put Option Shares to mitigate their losses when they were still seeking specific performance of the Option Deeds.  Such acts would be inconsistent with the relief pursuing by the plaintiffs and the plaintiffs’ entitlement to such relief was subsequently upheld by the court.

51. In the Johnson case (supra), Lord Wilberforce further stated at 401 that:

“In cases where a breach of a contract for sale has occurred, and the innocent party reasonably continues to try to have the contract completed, it would to me appear more logical and just rather than tie him to the date of the original breach, to assess damages as at the date when (otherwise than by his default) the contract is lost.”

52. After the court granted the specific performance orders on 17 October 2012, it was reasonable for the plaintiffs to continue to try to have the contracts completed.  The plaintiffs had on 16 November 2012 through their solicitors tried to require D5 and D6 to comply with the specific performance orders in vain.  Their contracts with D5 and D6 were eventually lost when the specific performance orders were discharged by the Consent Orders on 28 November 2014. In Wroth v Tyler [1974] Ch 30, it was held that where damages were awarded in lieu of specific performance, an appropriate date of assessment might be the date of judgment.  The plaintiffs’ damages in these cases shall be assessed as at 28 November 2014.  I agree with Mr Wong that the duty for the plaintiffs to take actions to mitigate their losses should only start from 28 November 2014.

Whether there was available market for the Put Option Shares

53. Mr Wong submitted that if the plaintiffs were under a duty to mitigate their losses, there was no reasonable action which the plaintiffs could take at any relevant date to avoid the losses suffered by them.

54. He pointed out that on 23 June 2011 (ie the day D2 said that the plaintiffs should have sold the Put Option Shares to mitigate their losses), only 29,000 (consolidated) shares of the Company were traded.  Only 8,100 (consolidated) shares were traded the day before and only 1,116 (consolidated) shares were traded the day after.  The evidence of Mr Chan showed that the average trading volume of the Company’s shares was extremely low up to August 2013 with extremely high volatility in price.  There was even no transaction for the Company’s shares in significant number of trading days.  Mr Wong contended that it was wholly unrealistic to assume that the Put Option Shares could all be sold on any given date or sold down systematically without driving the price to virtually zero.

55. Mr Wong submitted that the burden was on the defendants to demonstrate and persuade the court as to how the plaintiffs might mitigate in the absence of an available market.

56. Mr Li, representing the defendants, referred to Cash Smart Enterprises Ltd v Li Tat Ting (unrep, HCA 1677/2044, 27 January 2006) to submit that the plaintiffs should have mitigated their losses by selling the Put Option Shares in a smaller quantity at different stages or time.  In the Cash Smart case, the claimant did not seek relief of specific performance and did not attempt to sell the subject shares.  In the cases before me, orders for specific performance were granted and the plaintiffs should not sell the Put Option Shares or part thereof to third parties before the orders for specific performance were discharged.  Furthermore, the average daily trading volume of the shares concerned in the Cash Smart case was 500,000 shares whereas in the cases before me, the average trading volume of the Company’s shares was only a few thousand shares per day.  I agree with Mr Wong that it was not possible for the plaintiffs to break the Put Option Shares into small lots for sale in the tiny market for the Company’s shares.  I agree that the approach adopted in the Cash Smart case was inapplicable in the present case.  I do not find that the Cash Smart case may assist the defendants.

57. I am of the view that a market where only a few thousands (consolidated) shares of the Company were traded was not an available market for 1.5 million (consolidated) shares.  From after the date of the Consent Orders to 31 December 2014 (ie 5 days before the assessment of damages hearing), a total of 71,052 (consolidated) shares of the Company had been traded in the open market giving an average volume of about 3,230 (consolidated) shares per each trading day in that period.  Out of the 22 trading days in that period, there was no trading of the Company’s shares in eight trading days.  When there were transactions, the trading volume ranged between 307 (consolidated) shares and 14,675 (consolidated) shares. (See “Exhibit P-1”).

58. As pointed out by Sir John Donaldson MR in The “Solholt” [1983] 1 Lloyd’s Rep 605 at 608 that: “Whether a loss is avoidable by reasonable action on the part of the plaintiff is a question of fact not law.”

59. In Dunkirk Colliery Co v Lever [1878] 9 Ch 20, James LJ stated at 25 that:

“What I understand by a market in such a case as this is, that when the Defendant refused to take the 300 tons [of cannel coal] the first week or the first month, the Plaintiffs might have sent it in waggons somewhere else, where they could sell it, just as they sell corn on the Exchange, or cotton at Liverpool: that is to say, that there was a fair market where they could have found a purchaser either by themselves or through some agent at some particular place. That is my notion of the meaning of a market under those circumstances. There being no market, then, it seems to me impossible to lay down a general principle upon which the referee is to assess the damages, but what the Plaintiffs are entitled to is the full amount of the damage which they have really sustained by a breach of the contract; the person who has broken the contract not being exposed to additional costs by reason of the Plaintiffs not doing what they ought to have done as reasonable men, and the Plaintiffs not being under any obligation to do anything otherwise than in the ordinary course of business. …” (Emphasis added)

60. I do not consider that a reasonable businessman would in the ordinary course of business attempt to realize the residuary value of 1.5 million shares by dumping them into a market with a trading volume of a few thousand shares.

61. In Thompson v Robinson (Gunmakers) Ltd [1955] Ch 177 Upjohn J stated at 187 that:

“… an ‘available market’ merely means that the situation in the particular trade in the particular area was such that the particular goods could freely be sold, and that there was a demand sufficient to absorb readily all the goods that were thrust on it, so that if a purchaser defaulted, the goods in question could readily be disposed of.” (Emphasis added)

62. Was there a demand sufficient to absorb 1.5 million (consolidated) shares of the Company on any day from 17 June 2011 (the completion date under the Put Option Notices) to 31 December 2014 (the last recorded day showed in “Exhibit P-1”)?  The answer is definitely in the negative.

63. In Shearson Lehman Hutton v Maclaine Watson & Co [1990] 2 All ER 723, Webster J in answering the question: “what is the meaning of ‘available market’?” stated at 730-731 that:

“Approached in this way, the answer seems to me to be: that if the seller actually offers the goods for sale there is no available market unless there is one actual buyer on that day at a fair price; that if there is no actual offer for sale, but only a notional or hypothetical sale for the purposes of s.50(3) [of the Sale of Goods Act 1979], there is no available market unless on that day there are in the market sufficient traders potentially in touch with each other to evidence a market in which the actual or notional seller could if he wished sell the goods: see ABD (Metals and Waste) Ltd v Anglo Chemical and Ore Co Ltd [1955] 2 Lloyd’s Rep 456 at 466 per Sellers LJ and Charter v Sullivan [1957] 1 All ER 809, [1957] 2 QB 117.

What is the answer to the second question, ie the appropriate price issue? The answer seems to me to be: that, where there is no actual sale, the market price must be a fair market price for the total quantity of goods assuming them to have been sold by a seller on the relevant date; …” (Emphasis added)

64. The aforesaid cases were cases on sale of goods.  The learned authors of McGregor on Damages (supra) pointed out in para 27-011 at p 1027 when discussing time at which market price was to be taken in breach by buyer in sale of shares stated that: “In the absence of direct authorities assistance must be sought in the equivalent cases in the sale of goods.”  I am of the view that equivalent cases in the sale of goods may also throw light on other aspects in assessing damages for breach of sale and purchase of shares by the buyer.

65. The “goods” concerning us were: (1) 1 million (consolidated) shares of the Company for P1; (2) 400,000 (consolidated) shares of the Company for P2; and (3) 100,000 (consolidated) shares of the Company for P3.  Were there sufficient traders in the market on any relevant day potentially in touch with each other to evidence a market in which any of the plaintiffs could sell its “goods” if they wished?  The evidence adduced before me did not suggest the existence of such sufficient traders.  Even D2 agreed under cross-examination that the plaintiffs would not be able to sell the Put Option Shares in the open market after 28 November 2014 to mitigate their losses.  I find that there was no available market for the Put Option Shares throughout the whole period from the completion date under the Put Option Notices to the date of hearing before me.

Conclusion

66. In Jamal v Moolla Dawood, Sons & Co [1916] 1 AC 175 at 179, it was held that:

“It is undoubted law that a plaintiff who sues for damages owes the duty of taking all reasonable steps to mitigate the loss consequent upon the breach and cannot claim as damages any sum which is due to his own neglect. But the loss to be ascertained is the loss at the date of the breach. If at that date the plaintiff could do something or did something which mitigated the damage, the defendant is entitled to the benefit of it.”

67. Mr Li submitted that the time at which the market price was to be determined was the contractual time for acceptance, or the time of the breach. He conceded that it was unlikely that all the Put Option Shares could be disposed on a single trading day but contended that at least part of it could be absorbed by the market at a fair price.  However, no evidence had been adduced by the defendants to show how many of the Put Option Shares could have been disposed of by the plaintiffs in the open market without causing the market for the Company’s shares to collapse and at what “fair price.”  No evidence had been adduced to show that the Put Option Shares could be deposed of by the plaintiffs other than attempting to sell them in the open market.

68. In Wang Ruiyun v Gem Global Yeid Fund Ltd [2011] 3 HKLRD 785 the Court of Appeal referred to order 18, rule 12(1)(c) of the Rules of the High Court and said at 800 that:

“30. By this Order [order 18, rule 12(1)(c)] it is incumbent on the defendant, in order to be more informative about its defence to state the grounds on which it intends to contest the amount of damages by giving particulars of all the facts on which it relies to support any such ground as, for example, in mitigation of or otherwise in relation to, the amount of damages. The burden is cast on the defendant to plead and prove the facts it relies on to support any positive case to contest the amount of the damages claimed. …”

69. In these cases, judgments were entered against the defendants by way of summary judgments before the defendants served their pleadings.  However, I am of the view that the same principle shall apply to assessment of damages without pleadings from the defendants.  It was still incumbent on the defendants to state in their witness statements the grounds on which they intended to contest the amount of damages by giving particulars of all the facts on which they relied on to support any such ground and to prove the facts.

70. In the absence of any evidence to show the quantity of shares which could be disposed of in the open market without causing the share price to collapse and in view of the thin trading volume of the Company’s shares at all the material times, I am of the view that any attempted disposal of a portion of the Put Option Shares (in quantity making commercial sense out of the total quantity of 1.5 million (consolidated) shares) by the plaintiffs will more likely than not, in the words of Mr Wong, drive the price of the Company’s shares to virtually zero.

71. In my judgment, in the circumstances of these cases, there was no available market for all the Put Option Shares at all material times, be it the completion date under the Put Option Notices, the date of the writs, the date of the Judgments, or the date of the Consent Orders.  There was no way for the plaintiffs to mitigate their losses by disposing of the Put Option Shares in the open market.

72. As stated in para 23-117 of McGregor on Damages at p 900:

“If, however, there is clearly no available market, then, consequential losses apart, the damages will be assessed at the contract price less the value of the goods to the claimant at the time of breach …”

73. No trading of the Company’s shares was transacted on 28 November 2014 when the Consent Orders were granted to discharge the orders for specific performance.  On the next trading day (ie 1 December 2014) the price for the Company’s (consolidated) shares closed at US$0.0421.  Theoretically the value of the 1.5 million Put Option Shares at that closing price would worth US$63,150.  However, only 8,185 (consolidated) shares of the Company were traded on 1 December 2014.  On the following day (ie 2 December 2014) only 8,450 (consolidated) shares were traded when the closing price for the Company’s shares dropped by about 28.5% to US$0.0301.  No shares in the Company were traded on the next following day.  The evidence on its face showed that the market could not sustain a massive selling-off of the 1.5 million shares in the hands of the plaintiffs when the Consent Orders were granted on 28 November 2014.  One could well imagine the implication on the price of the shares of the Company if 1.5 million shares were to be offloaded in this tiny market over a short period of time.  The market would simply collapse with all buyers being driven away.  In such case, I agree that the shares of the Company in the plaintiffs’ hands would only have nominal residual value.  I put this nominal value at US$1,000 for each of the P1 Shares, the P2 Shares and the P3 Shares.

74. I assess that the damages suffered by the plaintiffs was the difference between the aforesaid nominal value and the value of the P1 Shares, the P2 Shares and the P3 Shares at US$0.55 per each (pre-consolidated) share.

75. Mr Li submitted that the case against D1 to D4 and the case against D5 and D6 were different.  The obligation of D1 to D4 was only to procure the Company to issue guarantees to re-purchase the P1 Shares, the P2 Shares and the P3 Shares at the Price whereas D5 and D6 had the obligation under the Option Deeds to purchase the Put Option Shares at the Price.  Mr Li submitted that D1 to D4 had not committed to actually purchase shares from the plaintiffs.  If the Company after providing the guarantees breached the guarantees, only the Company but not D1 to D4 would be liable.  He submitted that there was no real loss to the plaintiffs in respect of D1 to D4 failing to procure the Company to issue the Company Guarantees.  With respect, I do not agree.

76. The Company is a NASDAQ listed company.  No evidence had been adduced to show that the Company would not honour its contractual obligations if guarantees had been issued by the Company to the plaintiffs.  There was also no evidence to show that in the event of breach of the guarantees by the Company, the Company would be unable to pay the plaintiffs’ losses.  The failure of D1 to D4 to procure the Company to issue the Company Guarantees to the plaintiffs rendered the plaintiffs unable to require the Company to re-purchase their respective shareholdings in the Company at the Price.  The plaintiffs suffered in consequence the losses now sustained by them.  Although the grounds upon which D1 to D4 are liable to the plaintiffs and the grounds upon which D5 and D6 are liable to the plaintiffs are not identical, the plaintiffs sustained the same amount of loss.  The quantum of damages liable by D1 to D4 is the same as that liable by D5 and D6.

77. I find that all the defendants are liable to pay US$2,199,000 to P1, US$879,000 to P2 and US$219,000 to P3 being the value of the (pre-consolidated) shares at the Price less their respective nominal value as aforesaid.

Interest and costs

78. The Judgments also ordered interest to be assessed.  Mr Wong submitted in para 14 of his opening submissions that “pursuant to the Order of DHCJ Le Pichon, the Plaintiffs can still legitimately demand for specific performance and be paid US$3.3 million with interest to be accrued at judgment rate as from 17.10.2012”.

79. The plaintiffs adduced no evidence on further interest claim and Mr Wong in his closing submissions confirmed that the plaintiffs sought interest at judgment rate from the date of the Judgments.  In such case, I also order that interest on the aforesaid damages be paid by the defendants to the plaintiffs at the judgment rate from 17 October 2012 until payment.

80. I make an order nisi of costs in favour of the plaintiffs for the assessment of damages (including costs previously reserved in relation to the assessment of damages), such costs to be taxed if not agreed.  The costs for the assessment of damages hearing shall be apportioned equally between the three actions.

81. The aforesaid costs order nisi shall become absolute after 14 days from the date of this judgment unless application is received from any party within this 14 days period to vary the same.