HU QINQIN trading under the name or style of 'FOOT PUNCTURE' (a firm) v. ACTION GAIN LTD

HCA 1522/2020

[2025] HKCFI 516

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1522 OF 2020

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D E C I S I O N

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A.  INTRODUCTION

1.  The Plaintiff entered into a tenancy agreement with the Defendant for 3 years with an option to renew for 2 years (“Tenancy Agreement”).  She spent 3 months and about $1.3 million on decoration and furniture.  After operating her business for 2 weeks, she terminated the tenancy due to water backflow problem, which the Defendant had allegedly failed to remedy.  She seeks leave to adduce expert evidence to support a claim of over $15.5 million for loss of profits or value of her business as a going concern had the original and extended term of tenancy been completed.

2.  Having considered the 2^nd draft expert report of the Plaintiff, Master MK Liu refused to give leave.  This is the Plaintiff’s appeal against the learned Master’s decision.

3.  An appeal against a master’s decision operates by way of rehearing.  The judge treats the matter as though it came before him/her for the first time.  Fresh points may be raised before the judge which were not raised before the master: Hong Kong Civil Procedure 2025, Vol. 1, §§58/1/2 and 58/1/5.

B.  UNDISPUTED FACTS

4.  The Defendant has, since 19 March 2018, been the owner of Shop A on the Ground Floor of No. 29 Yik Yam Street, Hong Kong (“the Premises”).

5.  Shortly after COVID-19 started, by the Tenancy Agreement dated 13 February 2020, the Plaintiff became the tenant of the Premises, which was part of a 6-storey building.  The tenancy was for a 3-year term (with option to renew for another 2 years), to be used for non-domestic purpose.  The monthly rent was $50,000.

6.  Clause 11 of the Tenancy Agreement provided that:

“… the [Defendant] shall keep and maintain the … Premises including the main drains, pipes … in proper state of repair provided that the [Defendant] shall not incur any liability unless and until written notice of any defect or want of repair has been given by the [Plaintiff] to the [Defendant] and the [Defendant] shall have failed to take reasonable steps to repair and remedy the same after the lapse of a reasonable time from the date of service of such notice …”

C.  PARTIES’ RESPECTIVE CASE

7.  The Plaintiff commenced her Chinese foot puncture business (“the Business”)  at the Premises since 15 May 2020.  However, due to regular backflow of soil water from the toilet, the Business was constantly interrupted.  On 30 May 2020, after a major soil water outbreak the day before, contaminating the entire Premises and rendering it unhygienic to continue the Business, the Plaintiff ceased her business completely. 

8.  In the meantime, apart from various oral complaints, between 18 May and 4 August 2020, the Plaintiff had issued 4 written demands (the last one being an ultimatum to remedy within 14 days)  for the Defendant to purge the soil water backflow but to no avail. 

9.  On 19 August 2020, the Plaintiff gave notice accepting the Defendant’s repudiation of the Tenancy Agreement.  Up till that date, no repair works had been carried out at the Premises or the building, whether by the Defendant or the Incorporated Owners (“IO”), if the duty rested on any of them.

10.  On 7 September 2020, the Plaintiff filed the writ in this action suing the Defendant for breach of contract, negligence and nuisance.  She seeks damages to the tune of $15.5 million.

11.  In the defence, whilst not disputing the express covenant to repair, the Defendant-asserts that:

(1)  It was entitled to 6 months’ notice to carry out repair and the notices given by the Plaintiff fell short of that time. 

(2)  The Defendant had discharged its contractual duty by demanding, on 8 July 2020, the IO to carry out repair.  In the meantime, the Defendant had proposed to carry out cleansing work, though none was carried out.

(3)  It was the Plaintiff who had wrongfully repudiated the Tenancy Agreement. 

12.  The Defendant re-let the Premises and counterclaims the Plaintiff for the difference between the contractual rent that should have been paid by the Plaintiff and the new rent upon re-letting to a third party.

13.  Pursuant to leave of the Court, only the Plaintiff filed expert evidence on liability. The expert opined, amongst others, that the soil water backflow in the Premises and in the building was caused by unauthorized building works. 

D.  PLAINTIFF’S APPLICATION FOR EXPERT DIRECTIONS ON QUANTUM

14.  By a summons filed on 16 June 2023, and amended on 31 July 2024 (“Amended Summons”), the Plaintiff seeks expert directions on quantum.  Two Masters have adjourned her application for argument till after the exchange of witness statements and the filing of a first and then a second draft expert report prepared by Mr Farnhaw Tan, a Chartered Financial Analyst.  The Plaintiff now relies on the 2^nd draft report (“the Draft Report”)  which quantifies her loss of profits at $6.5 million (Draft Report §17.1)  and evaluates the Business as a going concern at $7.2 million (Draft Report §25.1).

15.  The Defendant criticizes the issues for the expert as poorly formulated and plainly unworkable.  The Draft Report contains unhelpful speculation and does not meet the 3 conditions for adducing expert evidence, namely, Subject Matter Condition, Relevance Condition and Expertise Condition.  These will be analyzed in turn.

E.  LEGAL PRINCIPLES ON ADDUCING EXPERT EVIDENCE  

16.  The principles on an application to adduce expert evidence are well-established and are set out in Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd [2019] 2 HKC 175 (CA):

(1)  The subject matter of the opinion must fall within an area in which expert evidence may properly be given (“Subject Matter Condition”, §§4 & 5);

(2)  The witness must be qualified as an expert to give the evidence of the type in question (“Expertise Condition”, §4);

(3)  His evidence must be relevant to the issues being litigated (“Relevance Condition” §4);

(4)  The Court will not only examine pleadings, but also the documents and witness statements to determine the true evidential issues in dispute (§§10 and 18);

(5)  If the applicant is not able to formulate the expert issues more precisely, he or she should produce a draft expert report to support the application so that the court is able to assess the relevance, necessity and probative value of the expert evidence in exercising its case management powers (§18).

(6)  Expert evidence should not be allowed where the question can be determined on factual evidence and inferences to be drawn therefrom (§25).

(7)  The Court will not give directions for expert evidence to be adduced (carrying with it the incidence of substantial costs being incurred on its preparation and court time spent on the same)  simply on the basis that the Court cannot rule out a possibility of such evidence being relevant and helpful. If the applicant for expert directions fails to persuade the Court on relevance and necessity of such evidence, the application should be dismissed. Ultimately, it is a case management decision of the Court based on its assessment of whether expert directions should be given and if so on what terms (§§12-13).

17.  The courts have dismissed applications to adduce expert evidence where:

(1)  An expert is asked to “reconstruct” profit and loss account of a business when the underlying business records were lost.  This is because accounting principles cannot be applied in a vacuum, and the expert cannot be asked to fill in factual gaps in the instructions by assumptions or inferences: Lee Ying Lin v Lo Pik Yee (unrep., HCPI 93 and 94/2013, 5 May 2015), §§32-39, DHCJ Suffiad.

(2)  Where the applicant fails to identify the relevant factual basis upon which the expert can reliably give his opinion: Kader Industrial Co Ltd v Hop Shing Engineering & Construction Co Ltd[2021] HKCFI 3606, §§8-13, Mimmie Chan J.

(3)  Where a draft report is to a large extent based on the expert’s “optimistic guesswork or speculation” as to lack sufficient probative value, such that it would unlikely be of real assistance to the determination of the issues: Saatori v Raffles Medical Group (Hong Kong)  Ltd[2016] 4 HKLRD 735, §§23-24, Chow J (as he then was).  In that case, the Plaintiff’s alleged loss of profits was said to arise from his business in invention, production and marketability of board games.  The expert relied on “confidential” data, agreements and findings. 

F.  LEGAL PRINCIPLES ON DAMAGES FOR LOSS OF BUSINESS

18.  In the case of breach constituting repudiation of the contract for a lease, the claimant may recover loss of trade profits owing to loss of use of the premises, provided that the damages are within the ordinary rules of remoteness: McGregor on Damages, 22^nd edition, §§5-018, 29-003, 29-006 and 29-009.

19.  The Court may also recover the value of the business after deduction of avoidable loss in mitigation.  UYB Ltd v. British Railways Board (2001)  81 P & CR DG 19, §§19-22 (CA)  was a case where water had penetrated from the lessor’s contiguous property making it impossible for the lessee to use the premises.  The lessee’s business never started.  The Court of Appeal endorsed the trial judge’s award of (i)  lost profits, though only for a limited period as the claimants did not seek alternative accommodation to carry on their business; and (ii)  the award of the value of the business in the open market as at the time that the carrying on of the business became impossible.  See McGregor on Damages, §29- 11.

20.  UYB was applied in Crehan v Inntrepreneur Pub Co CPC (2004)  2 CLC 803, §§174-180.  The Court of Appeal in Crehan was aware of the difficulty that the measure of damages involved the hypothetical profits of a hypothetical business.  Damages were awarded as at the date the lessee gave up possession. The Court of Appeal was of the view that a 15% reduction in value of the business over a projected 10-year period was palpably insufficient having regard to a whole host of preponderables.

G.  EXPERT ISSUES FORMULATED

21.  The directions sought in the Amended Summons are for the Plaintiff to adduce an expert report:

(a)  on quantum of damages “suffered or to be suffered” by the Plaintiff by reason of the facts and matters set out in the Re-Re-Amended Statement of Claim (“RRASOC”)  (“the Issue”)  and

(b)  that consequent upon the order to be made the Plaintiff be at liberty to engage Mr Tan to prepare an expert report “on the Issue having regard to the terms of reference set out in the Schedule thereof …”

22.  The Schedule to the Amended Summons mandates the quantum expert to have regard to and/or address the following issues in his expert report:

(1)  That the 3 year Tenancy Agreement would be renewed for another 2 years.

(2)  Whether the amounts pleaded in paragraphs 2 and 3 of the Schedule to the RRASOC would be reasonable estimates of her loss or the value of her business as a going concern as at 19.8.2020, having regard to:

(a)   All factors considered by the quantum expert as relevant, or that a quantum expert need to take in to account, to give an opinion on the Issue;

(b)  The impact of COVID-19;

(c)  The fact that some of the customers/business of the Plaintiff came and would come from residents of the Happy Valley area and the in-patients of the Hong Kong Sanatorium Hospital as pleaded in paragraphs 2(a)  and 3(a)  of the 6^th Schedule to the RRASOC;

(3)  If the answer to (2)  is in the negative, what would be the quantum expert’s opinion of a reasonable estimate of the Plaintiff’s loss during this period or what is the value of her business to be sold as a going concern as at 19.8.2020 and, if so, identify all factors that need to be taken into account. :

(a)  on the basis that the water backflow problem described in the RRASOC had not occurred; and

(b)  on the basis that the Premises was in the condition as at that date.

(The words struck through and underlined represent an amended version of expert directions that Mr Chong proposed in this appeal.)

23.  Without disrespect to the draftsman, the directions sought are problematic.

24.  Firstly, the Plaintiff seeks 3 limbs of damages: 

(1)  Actual damages between 15 May and 19 August 2020; and

(2)  Estimated future loss of net profits for the unexpired term of the Tenancy Agreement and its extension for 2 years (collectively the “Unexpired Term”); or

(3)  Damages being the value of her Business as at 19 August 2020, which Mr Chong, counsel for the Plaintiff, confirms to be on the basis of the business as a going concern without the water backflow problem. 

It is only limbs (2)  and (3)  that justify, in principle, expert evidence on quantum.  Limb 1 should be proved by factual evidence and probably only involves arithmetic calculation.

25.  Secondly, the damages suffered should have been crystallized on the date of acceptance of repudiation, ie 19 August 2020.  The Plaintiff has not pleaded that there were/are damages “to be suffered” thereafter.

26.  Thirdly, the first term of reference (ie the duration of the Unexpired Term)  is not an issue that Mr Tan would need to address but the factual basis on which he should prepare his report.

27.  Fourthly, with regard to the second term of reference, it is for the Court and not the expert to comment on the reasonableness of the Plaintiff’s estimate.  If the Plaintiff’s estimate is only her own guess, one would expect that after obtaining proper expert evidence, the Plaintiff should amend her pleading to plead the proper quantum instead.

28.  The deletion of the term of reference in §2(a)  makes the expert directions more concise.  It goes without saying that the expert is to bring in his expertise and state the factors, supported by eg empirical data or appropriate industry literature, that may affect his valuation of the loss of profit or the value of the business.

29.  Fifthly, the proposed amended 3^rd term of reference assumes the Business to be sold.  Mr Dong, counsel for the Defendant, points out that the Tenancy Agreement expressly prohibits the Plaintiff from alienating the Premises. However, this term is not in the evidence and it is not open to the Defendant to give evidence from the bar table.  Any way, at this stage and on the basis of the UYB case, I am prepared to accept, for the purpose of the Amended Summons, that the Plaintiff can seek damages on the proposed amended 3^rd term of reference.

30.  Despite all these problems with formulation of the expert issues and with a view to achieving just resolution of disputes in accordance with the substantive rights of the parties, this Court looks at the Draft Report to see if it in substance can meet the 3 Conditions.

H.  SUBJECT MATTER CONDITION

31.  The short duration of the Business during the pandemic and 4 ½ years’ future loss of business necessarily mean that assessment of the Plaintiff’s loss of profits and valuation of the Business involve an element of guesswork.  I consider that the Plaintiff does need, in principle, expert evidence to assist the trial judge in coming to a correct view on quantum. 

32.  Mr Dong submits that there can be many changes to the economic environment and factors that may affect the growth or failure of a particular business in the next few years, including the presence of competitors or some unforeseen circumstances. Valuation is a highly speculative exercise based on the hypothetical scenario that the Tenancy Agreement would continue on the original and renewed term.  This involves the Court in assessing the hypothetical profits of a hypothetical business: Crehan and UYB.

33.  With respect to Mr Dong, UYB is distinguishable on the facts as the business there had never started.  Here in this case, there was an up and running Business which had brought in revenue notwithstanding COVID-19. 

34.  Nor can Mr Dong complain that Mr Tan proceeds on the basis of the Unexpired Term. There is no indication that either party would have curtailed the tenancy but for the water backflow problem, or that the either party had reason not to continue the tenancy after the original term of 3 years had expired.

35.  Here, Mr Tan has taken into account the 2 week revenue of the Plaintiff and various factual matters that he could gather from the public domain.  He took into account the matters mandated in §22 above when valuing the Business on sale.  That approach is consistent with UYB and Crehan.

36.  I consider that the Subject Matter Condition to be satisfied. 

I.  RELEVANCE CONDITION

37.  Mr Tan compares the difference between net proceeds to be received by the Plaintiff within the original and renewed term of the tenancy under 2 scenarios: (a)  if there was no water backflow problem and the Business operated as usual; and (b)  where the Business was disrupted and ceased after the water backflow incident on 29 May 2020 (Draft Report §13.1). 

38.  He takes into account the number of operating days, the daily customer visits, spending per customer per visit, the 50:50 and 60:40 “revenue split” between the Business and the therapists, operating expenses in order to calculate the net proceeds under the 2 scenarios in the preceding paragraph and hence the loss (Draft Report §§14-17).  In so doing, he relies on the Purported Ledger of the Plaintiff.

39.  Mr Tan adopts the income approach based on the cash flow that can be expected in the future.  He also uses the discounted cash flow method and applied a discount to reflect the lack of marketability of the Business (Draft Report §18 & 24).

40.  Mr Tan takes 8 listed companies as comparables.  They run (a)  businesses providing massage, spa and wellness services globally and (b)  non-medical beauty services in Hong Kong.  Mr Tsang points out that listed companies are used as comparables because only they are obliged to publish information about their businesses, whereas private companies are not obliged to do so.

41.  The published reports and data that Mr Tan takes into account include the following:

(1)  The impact of COVID-19 to the economy in 2020 in USA, Japan, Thailand and India (Draft Report §6);

(2)  Unidentified “publicly available information” provided by the Plaintiff’s solicitors, Samuel Chow Solicitors (“SCS”)  (Draft Report, §8.1 & 9);

(3)  World Economic Outlook Database (April 2020 version)  prepared by IMF which expected economic full recovery back to 2019-level in Hong Kong in 2021;

(4)  The July 2020 estimate made by McKinsey, a management consultant firm, that it would be sometime between the second quarter of 2022 and the first quarter of 2025 that GDP of general sectors in USA would return to 2019 level;

(5)  Financial announcement made by Fureasu Co Ltd (a Japanese company), being the only company making such announcement on financial information covering post-outbreak of COVID-19, showing a drop of 33% in business for the period after the outbreak;

(6)  Statistics published by the Census & Statistics Department between 2016 and 2019 on fluctuation on building management fees, costs of utilities, wages, public spending and value of retail sales;

(7)  Consumption data published by the Hong Kong Electric Co Ltd which shows the compound annual growth rate between 2017 and 2019 to be 4%.

42.  I do not see any error in principle in his approach in these aspects.  Mr Tan does not “reconstruct the profit and loss accounts” as in the case of Lee Ying Lin v Lo Pik Yee.  Nor is he engaged in optimistic guesswork and speculation on a business that was not real as in Saatori.

43.  However, there are lots of problems in the comparables chosen by Mr Tan and his lack of explanation as to why they are comparable to the Business.

44.  Firstly, Mr Tan has relied on unidentified “publicly available information” provided by SCS.  The estimation of the loss of profits and value of the Business have relied mainly on the Purported Ledger for the 2 week operation of the Plaintiff and discussion with SCS, but he cannot verify the accuracy of the Purported Ledger and the information provided by the Plaintiff and SCS.  His reliance on those materials simply lacks objectivity: Kader Industrial.

45.  Secondly, it can readily be seen that none of the businesses of the 8 listed companies are anywhere close to the Business.  Only 2 of them are Hong Kong companies: Water Oasis Group which is engaged in distributing skin-care products; and Modern Healthcare Technology with subsidiaries offering spa, massage, manicure and medical beauty services, and providing skincare and cosmetic products to customers worldwide.  Such businesses that promote beauty are very different in nature to the Business which emphasized the use of Chinese medicine, and “qi” and blood circulation in promoting health. 

46.  Thirdly, the 8 listed companies have market capitalization ranging from US$1 million to US$ 482 million, whereas the capital input to the Business was only HK$1.3 million.  It is not clear if the businesses of those listed company enjoy economy of scale not available to the present sole proprietorship serving only the small local market in Happy Valley.

47.  Mr Tan seeks to limit the use of the information of the 8 listed companies to the purpose of considering their relevance to maintenance, replacement for fixed assets and cash flows at the relevant time for the purpose of valuation of the Business. However, one does not even know what the fixed assets are and how they are comparable to the Business, which appears to be of a labour-intensive nature (with over 50% spent on revenue split and salaries).

48.  Fourthly, Mr Tan claims that any impact of COVID-19 on the Business would “go away” by around 2023: Draft Report §14.10.  This is based on estimations by IMF and recovery of GDP of USA.  It is not clear how such views of foreign economics apply to the local Business.

49.  Fifthly, the rate of recovery of the Business is said to be 33% and the average number of customer visits is adjusted to be 24 (ie 17.9 customers in the 2 week period of operation x 133% and rounded up).  This is based on the recovery rate of Fureasu Co Ltd, a listed company in Japan, with a market cap of US$17 million, which engages in massage and nursing business.  Without disrespect, the great divergence in business nature and market cap of a business operating in a different country with unspecified economic environment is a completely absurd comparable to the Business.

50.  Sixthly, no attempt is made to take into account material circumstances in Hong Kong, such as the presence of competitors in eg Happy Valley, economic environment or factors peculiar to the traditional Chinese foot puncture business.

51.  Although the Plaintiff and her witness Ms Liu have “explained that foot puncture is no ordinary massage and provided extensive explanation of the market positioning of the Business” (Draft Report, §9.2 and §§8-17 of Ms Liu’s witness statement), Mr Tan expressly admits that he has not verified the truth thereof.  He plainly failed to take into account these distinguishing features of the Business when choosing the comparables or analyzing the financial information.

52.  Mr Dong also submits that the Draft Report is inconsistent with the Plaintiff’s pleaded case on quantum.  The latter grossly exceeds the estimated loss of profits ($6.5 million)  and the value of business ($7.2 million)  in the former. The Plaintiff’s witness statement claims over $16.9 million, adopting the pleaded case without giving credit for profits tax.  Mr Dong complains that it is unclear which version the Plaintiff intends to advance at the trial and it would cause prejudice to the Defendant. 

53.  With respect, a claimant’s estimate is what it says, an estimate.  I repeat §27 above. I would not dismiss the application on the ground in the preceding paragraph. 

54.  However, based on the 6 factors in §§43-51 above, I find the comparables adopted by Mr Tan to be unsuitable, and hence have no probative value to the issue of quantum. The Relevance Condition is not met. 

J.  EXPERTISE CONDITION

55.  Mr Tan has had 10 years’ extensive experience in the valuation of businesses, intangible assets and financial instruments for various purposes.  He is the managing director of a firm which has provided valuation services to over 50 listed companies in Hong Kong and abroad.  He has listed the court proceedings in which he was an expert witness.

56.  Mr Dong points out that Mr Tan’s one-page CV is deficient.  No particulars have been provided of Mr Tan’s “experience”.  There is nothing to show that he has the experience and expertise in valuing a privately owned business in Hong Kong, similar to the Business. 

57.  I find that the CV has disclosed relevant qualification to satisfy the Expertise Condition.  Mr Dong’s submission is more appropriate for cross-examination.  It is not appropriate to exclude an expert report simply on the ground that the expert has no experience in valuing a privately owned business in Hong Kong, because every expert will have his first case of its kind.

K.  CONCLUSION AND COSTS

58.  The Draft Report fails to meet the Relevance Condition.  Although it is in principle justified for the Plaintiff to adduce expert evidence on quantum, she should not be given a third chance to produce another expert report.  The appeal is thus dismissed.

59.  On a nisi basis, costs should follow the event and be to the Defendant.  Summary assessment shall take place on 18 February 2025 on paper. 

60.  I thank counsel for their assistance.