EAGLE SUCCESS HOLDINGS LTD. v. TAI MAN YIU AND ANOTHER

HCA 13724/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.13724 OF 1997

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ASSESSMENT OF DAMAGES

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1. This action arose out of a real property transaction. By a Provisional Sale and Purchase Agreement dated 15th October 1997 ("the Agreement"), the Plaintiff as vendor agreed to sell the property known as Flat B, G/F, Block 2, Stanford Villa, No.7 Stanley Village Road, Hong Kong with garden and one car park space ("the Property") to the Defendants as purchasers. The contract price was $12,500,000. However, the Defendants failed to the complete the sale of the Property on the agreed completion date of 10th December 1997, and as a result the Plaintiff brought the present action against the Defendants to claim for damages for breach of contract.

2. The Writ was issued on 16th December 1997. By way of Order 86 application, final and interlocutory judgment was obtained by the Plaintiff against the Defendants on 23rd March 1998 with damages to be assessed, and this is the assessment of the Plaintiff's loss relating to such claim.

3. In his opening speech, Mr. Lo, counsel for the Plaintiff, has indicated that the Plaintiff's claim is limited to the difference in value between the contract price and the market value of the Property on the agreed completion date i.e. 10th December 1997. The Plaintiff, therefore, abandons the claim for other items of loss. In such circumstances, my main task is to assess the market value of the Property on 10th December 1997.

4. It is common ground that the Asian financial crisis started to hit the property market in Hong Kong on or about 22nd October 1997. Since then, the property market has been very volatile and the confidence in the market has very much been weakened. Under such circumstances, the price for the sale of one or two isolated properties might have been affected by a number of subjective elements, for example, the financial conditions of the vendor and purchaser concerned, and so one must approach the use of individual comparable for valuation with extreme caution.

5. In the hearing, the Plaintiff and the Defendant have each called one expert valuer to testify. After hearing their evidence, I find that both of them are qualified as expert witnesses, and indeed they have tried their very best to assist the Court in assessing the market value of the Property. However, the Defendant's witness ("DW"), Mr. Joseph Leung, definitely appears to me to be a more impressive and well-equipped witness. In conducting the valuation, DW has undertaken extensive research into the circumstances relating to sale of the comparables, and so his knowledge of the market condition has been demonstrated to be more reliable. On the other hand, the Plaintiff's witness ("PW"), Mr. William Wong, quite surprisingly, is not aware that the main comparable that he is relying upon in his valuation was indeed sold subject to tenancy. This oversight on his part certainly has a grave impact on his creditability as a reliable witness. In such circumstances, I would prefer DW's evidence over that of PW.

6. PW assesses the value of the Property on 10th December 1997 as $8,000,000. In reaching such figure, PW relies upon Comparable No.3 as stated in page 5 of Exhibit P-1. Although the transaction date for the sale of such comparble (i.e. 27th November 1997) was nearest to the relevant valuation date, the sale of such comparable was subject to tenancy. It is common ground that the value of a property would be very much affected by such factor. PW, when he was recalled to testify in the witness box, supplied the Court with a formula and assessed that the value of the Property would only have been 5% lower by reason of the sitting tenancy. However, PW conceded that this assessment may be quite a subjective one. Indeed some other purchasers may have given a much greater discount of up to 10% for the price by reason of such sitting tenancy.

7. After hearing his evidence, I agree that PW's formula may have been useful in a stable market. However, according to evidence of DW, of which I accept, the inter-bank lending rate has risen drastically after 22nd October 1997 and so the banks in Hong Kong were very reluctant to lend money for the purchase of tenanted property. In such circumstances, the price for the sale of Comparable No.3 may have been greatly affected by such factor, and so I do not accept that such comparable is a reliable one for the purpose of valuation.

8. Likewise, I do not accept Comparable No.2 as stated in page 5 of Exhibit P-1 as a satisfactory comparable. According to DW, the provisional agreement for the sale of such comparable was concluded on 9th January 1998 which was shortly after the collapse of the Peregrine group. DW testified that the confidence in the market had very much been weakened by such event. In such circumstances, using this comparable to assess the value of the Property at a date which was one month earlier may not be very reliable.

9. On the other hand, DW assesses the value of the Property on 10th December 1997 as $9,530,000. DW does not give a detailed analysis as to how he has arrived at such figure. He seems to take the contract price of $12,500,000 as the value of the Property on the date of the Agreement i.e. 15th October 1997, and discounts such figure by about 25%, which was the general percentage of fall in the property price over that relevant period of time, and arrives at the figure of $9,530,000. In my judgment, this method of assessment can only be correct if the market price of the Property on 15th October 1997 was indeed $12,500,000. On my part, I have great reservation whether it was indeed the case. With a purchase price of 12,500,000, the unadjusted value of the Property, which was 758 square feet in size, would have been over $16,000 per square foot on 15th October 1997. By comparing this figure with the other comparables, the price of 12,500,000 is certainly on the high side. Hence, despite the fact that I prefer DW's evidence over that of PW, I have some reservation with the approach of valuation adopted by DW.

10. In such circumstances, how should the value of the Property be assessed? As I mentioned above, Comparables No.2 and No.3 are not satisfactory comparables. In such circumstances, I agree with DW that the best comparable is No.6. Like the Property itself, Comparable No.6 is also situated on the ground floor with a garden. According to the record prepared by DW, the provisional sale and purchase agreement for that property was concluded on 21st May 1997. As DW has demonstrated himself to have a better knowledge of the market condition, in particular he has studied the price list issued by the developer for the sale of the units in the same development, I accept his evidence that, using No.6 as the comparable, the adjusted value of Property on 21st May 1997 was $14,260 per square foot, taking into account the following adjustments:

The gloss value of the Property on 21st May 1997 was therefore $10,809,000. ($14,260 x 758)

11. The next step is to adjust the value of the Property by reference to the time factor. In this regard, the chart included in Appendix V of the Defendant's valuation report does provide a useful tool. By comparing the average figures of the value of the properties in the luxury residential sector of Island South, the effect of the subjective elements affecting the sale of one or two isolated comparables in the volatile market can be reduced to a minimum. According to DW, the average price for the properties in such sector of Island South was $13,000 on or about 21st May 1997 and $11,000 on or about 10th December 1997. This reflects a 15.4% drop in the price over such period of time. In such circumstances, I can assess the market value of the Property on 10th December 1997 as follows:

$10,809,000 x 84.6%
= $9,144,414 (and I round up the figure to $9,150,000)

12. In giving his evidence, DW did mention that the Property, being unit of relatively small size and of limited supply in Island South, would have had a stronger resistance to the drop in price in a falling market. However, in the absence of evidence as to the extent of such resistance, I would not make any further adjustment to the market value of the Property assessed above. Indeed, in assessing such figure, I have already taken into account the 10% size adjustment factor as suggested by DW. Such 10% adjustment is by no means a small one, and I believe that all matters relating to the size factor have already been adequately reflected by such size adjustment.

13. In his final submission, Mr. Lo for the Plaintiff submits that the Court should not take into account the deposit retained by the Plaintiff in assessing the Plaintiff's loss. He cites the case of Daniell v Essex 10 C.P.D.538 in support of his contention that vendor, by reference to a similar clause in the contract, is entitled to retain the deposit. However, the facts of that case can easily be distinguished on the ground that there was no subsequent resale of the subject property. Indeed in the judgment of that case, Denman J. and Brett J. have expressly stated that the deposit retained by the vendor should be taken into account in the assessment of damages if there is a subsequent resale of the property.

14. It is trite law that innocent party such as the vendor in the present case is only entitled to claim for damages reasonably suffered by him as a result of the breach of contract. The principle of indemnity should apply and there is no reason why such innocent party is entitled to claim more than he actually suffers. This is also the reason why the authority of Daniell v Essex has been queried by learned judges in the subsequent case of Howe v Smith 27 Ch.D.89 and by the learned author in McGregor on Damages, 16 ed. para.997. I therefore reject Mr. Lo's submission in this regard.

15. By reason of my aforesaid analysis, I award the Plaintiff damages in the sum of $2,100,000, being the difference between the contract price and the market value of the Property on 10th December 1998 less the deposit in the amount of $1,250,000 retained by the Plaintiff.

16. Finally, I would express my gratitude to both Counsel for the assistance that they have rendered to this Court and I now hear the parties' submission on the issues of interest and costs.