WELLFIT INVESTMENTS LTD v. POLY COMMERCE LTD

1990 No. A 8737

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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INTRODUCTION

1. The facts of this case are set out in the judgment with I handed down on 25^th July 1995. I now have to decide what remedies Wellfit is entitled to as a result of the confirmor’s breach of the sub-sale agreement. That issue has been fought with the tenacity which has been the hallmark of this litigation.

THE CLAIM FOR SPECIFIC PERFORMANCE

2. The primary remedy which Wellfit seeks is specific performance of the sub-sale agreement. That is not surprising. If the confirmor is required to assign the flat to Welfit, Wellfit will be acquiring an asset worth far more than the $4.75m which Wellfit was obliged to pay for it in December 1990 under the sub-sale agreement. However, as I indicated in my ruling of 13^th December, the jurisdiction to grant the equitable remedy of specific performance is based on the inadequacy of an award of damages, which is the only remedy which the common law affords for breach of contract. Accordingly, specific performance of the sub-sale agreement will not be ordered if damages at law will give Wellfit the full compensation to which it is entitled.

3. What this means is that it is necessary first to identify on what basis damages would be assessed at law. Once the basis of that assessment has been identified, it is then necessary to decide whether damages assessed on that basis would adequately put Wellfit into as beneficial a position as it would have been in if the sub-sale agreement had been performed. The effect of my ruling on 13^th December is that, in determining those questions, I am entitled to take into account the fact that in February 1991 the Hunts sold their shares in Wellfit to a company controlled by the partners of KLY (“KLY” Nominees”).

THE BASIS OF THE ASSESSMENT OF DAMAGES AT LAW

4. The relevant principles as to the measure of damages where the seller of property fails to convey it to the purchaser otherwise than for a defect in the seller’s title are conveniently set out in McGregor on Damages, 15^th. ed., paras. 904-907:

“ The normal measure of damages is the market value of the property at the contractual time for completion less the contract price … [B]ut such a measure could be grossly unfair to a buyer if prices had escalated between the contractual date for completion and the date of judgment in his action for damages, as the award he obtains will fall far short of giving him the means of acquiring an equivalent property. Of course he cannot complain of this if he ought to have acquired an equivalent property before the escalation of prices, but he may be able to show good reason why he did not do so. Thus if he brought a claim for specific performance in circumstance where he had a reasonable chance of obtaining such a decree but in the event was refused one and awarded damages instead, it would clearly be pointless for him to have acquired an equivalent property while he was awaiting the outcome of his specific performance suit … [T]here seems no good reason why [damages based on the market value of the property on the date of judgment] should not be available at law in appropriate case, and this has been accepted … in two cases where once again, before having to turn to the damages remedy, a reasonable and proper attempt to compel the defendant specifically to perform had been made, viz. in Malhotra v. Choudhury [1980] Ch. 52 by the Court of Appeal, where however the valuation was moved back from the date of judgment by one year because of the buyer’s delay in pursuing his claim, and in Johnson v. Agnew [1980] A.C. 367 by the House of Lords, where however the converse case of a buyer’s failure to complete was involved.”

5. I deal first with the period prior to the sale of the shares in Wellfit to KLY Nominees. I have no doubt that this was a case in which Wellfit had good reasons for not acquiring an equivalent property before then. Miss Maria Yuen for the confirmor did not argue otherwise. I accept that it must have been apparent to the Hunts very soon after 19^th December 1990 that the confirmor was not going to sell the property to Wellfit. But that does not mean that the Hunts should then have looked for an alternative property to buy through Wellfit. The property which they had wanted to buy was the flat to which the sub-sale agreement related, and the Hunts were entitled to press for specific performance of it. They would have had every expectation that the court would order specific performance of the sub-sale agreement if the confirmor was found to have repudiated it. Specific performance is, after all the usual remedy for a seller’s failure to complete. Even though there was no direct evidence that the Hunts bought the flat (albeit through Wellfit) because they intended to live in it themselves, the law assumes that property is unique to the purchaser, because the purchaser has chosen to purchase that particular property  and not another one. That is why the Court assumes that the purchaser cannot be adequately compensated by the mere payment of money.

6. I turn to the period after the acquisition by KLY Nominees of the shares in Wellfit. The effect of the purchase was that, for all practical purposed, the Husts were no longer interested in the action. They had the finance to proceed with the purchase of another property. I have had no evidence as to why the shares in Wellfit were sold to KLY Nominees, but I can, I think, be forgiven for assuming that that was the price which KLY had to pay to take over the litigation and thereby to avoid a potential claim against them for negligence by Wellfit. That is the assumption which Nazareth V-P made: his reference to KLY clearly being entitled “ to take action to limit the damages to which they might have been exposed by purchasing [Wellfit]” shows that he assumed that the acquisition was an exercise in damage control. The effect of it was that it was KLY Nominees who had the risks and the rewards of the litigation.

7. Could the new owners of Wellfit reasonably have concluded that, despite their acquisition of the shares, the Court might well order specific performance of the sub-sale agreement if the confirmor was found to have repudiated it? In my view, they could. They were obviously not interested in acquiring an equivalent property before property prices increased any further: the purchase of property was not the reason for their acquisition of the shares. But it would quite reasonably have been open to them to conclude that the Court would order specific performance of the sub-sale agreement on the basis of the following reasoning:

(i) Specific performance is the usual remedy for the failure of a seller of land to complete the transaction. That is because damages cannot adequately compensate the buyer because what he is buying is unique.

(ii) The fact that the shares in Wellfit had changed hands was irrelevant because the uniqueness of the asset which Wellfit had agreed to buy was wholly unaffected by the sale of the shares in Wellfit.

(iii) The fact that the shares in Wellfit had been sold to KLY Nominees in order to limit KLY’s exposure to claims from Wellfit did not make the asset which Wellfit had agreed to buy any the less unique to Wellfit. The flat remained of unique value to wellfit even if the claim for specific performance was being pursued by Wellfit for the purposes of re-selling the flat at a profit: a refusal to grant specific performance would deny to Wellfit what it could recover on the re-sale of the particular flat in question . It is true that the reason why the claim for specific performance was being pursued was not the same reason why Wellfit had agreed to buy the flat in the first place. But if specific performance is being sought for a reason compatible with the grant of specific performance, the fact that there has been a change in the reason why Wellfit wants the flat assigned to it is irrelevant.

8. There is no evidence before me of the current market value of the flat. Accordingly, if damages at law were to be awarded to Wellfit, those damages would have to be assessed on a date to be fixed. For these reasons, the basis of the assessment of damages at law for the confirmor’s failure in December 1990 to assign the flat to Wellfit is the market value of the flat on the date when damages would be assessed less the contract price of $4.75m.

9. Miss Yuen submitted that, when it became obvious that despite the issue of proceedings the confirmor was not going to complete the sub-sale, Wellfit should have mitigated its loss by accepting the confirmor’s repudiatory breach of the sub-sale agreement. I am not convinced that that would have had the effect of making the measure of damages the difference between the contract price of the flat and its market value when the agreement should have been terminated by the acceptance by Wellfit of the confirmor’s repudiatory breach. But even if it did, the question of mitigation of loss simply does not arise now that I have found that it was reasonable for Wellfit to hold out for an order of specific performance. In the light of that finding, there is no room for saying that Wellfit should have mitigated its loss by taking a course of action which would have resulted in specific performance no longer being available to it.

THE ADEQUACY OF DAMAGES AT LAW

10. Damages at law will enable Wellfit to reap the benefit of the significant increase in property prices since December 1990. if Wellfit intends to put the flat on the market as soon as the flat has been conveyed to it, damages at law could arguably be said to put Wellfit into as beneficial a position as it would have been in if the sub-sale agreement had been performed. That is because the date when Wellfit would have sold the flat, and the relevant date for the purpose of assessing its value, would have been the same.

11. But I do not know wheter Wellfit intends to sell the flat as soon as it can. Wellfit’s decision may well depend on its assessment of the market when an order for specific perfrormance is made. It may decide to sell the flat there and then. It may decide to hold on to the flat for a while, because it thinks it more likely than not that property price will rise further, and to let the flat out in the meantime. For all I know, it may wish to negotiate a sale of the flat back to the confirmor so that Mr. Cheung, who has lived in the flat since December 1990, can continue to live there. The point is that an award of damages would have the effect of removing all Wellfit’s options. It would be the equivalent of forcing Wellfit to exercise its option of selling the flat at the time the assessment of damages takes place. It would deny to Wellfit the option of deferring the re-sale of the flat to a time which Wellfit regarded as most opportune to sell. If the agreement had been performed, Wellfit (albeit owned by the Hunts) could have realised the value of the flat whenever it chose because it could have sold the flat at any time. If damages at law are awarded instead, Wellfit (albeit owned by KLY Nominees) can only realise the current value of the flat because its damages will be frozen by refernce to the value of the flat at the date of assessment. In that respect, an award of damages at law would not put Wellfit into as beneficial a position as it would have been in if the sub-sale agreement had been performed. Accordingly damages at law will not be an adequate remedy for Wellfit.

SHOULD SPECIFIC PERFORMANCE BE ORDERED?

12. The fact that damages are not an adequate remedy for Wellfit for the confirmor’s breach of the sub-sale agreement does not necessarily mean that specific performance of the sub-sale agreement must be ordered. Specific performance is discretionary remedy. “This does not mean that it will be granted or withheld arbitrarily; the discretion is a judicial discretion, and is exercised on well-settled principles. It means that in an action for the specific performance of a contract of the class usually enforced, the court may take into account, as a ground for refusing specific performance or granting it subject to conditions, circumstances which could not be taken into account in an action for damages for breach of contract, such as the conduct of the plaintiff, or the hardship which an order would inflict on the defendant”: Snell’s Equity, 29^th. ed., p.588.

13. I have already referred to the fact that contracts for the sale of land are a class of contract for which specific performance will usually be ordered. The only grounds on which the confirmor has wanted to allege that it is inequitable to order specific performance in this case relate to

(i) the conduct of Hunts in selling their shares in Wellfit to KLY Nominees,

(ii) the enormous profit which KLY Nominees will make as a result of acquiring the shares in Wellfit, and of Wellfit succeeding on liability, bearing in mind that its exposure in the event of Wellfit losing on liability was only to the legal costs of the action (significant though they might be), the forfeiture of Wellfit’s deposit of $475,000.00, and special damages of $117,425.00 and $13,125.00, being respectively the stamp duty which Wellfit would otherwise have had to pay and FZ’s costs of approving the bipartite assignment,

(iii) the hardship which Mr. Cheung would suffer in having to leave the flat which he has lived in with his family for the last 5 years,

(iv) the hardship which the confirmor would suffer in losing the value of the refurbishments which it mad to the flat at an approximate cost of $450,000.00, and

(v) the hardship which the confirmor has suffered by not having purchased an alternative flat for Mr. Cheung and his family to live in.

I regard all these grounds as being included in the re-re-amendments to the Defence and Counterclaim which the Court of Appeal refused, upholding Wong J.’s earlier refusal. I can discern no other grounds on which it would be inequitable to order specific performance. I therefore order specific performance of the sub-sale agreement.

14. I have, of course, not been addressed on whether any of the ground which the confirmor wished to argue would have justified refusing specific performance. But even if I had been, I think it very unlikely that I would have declined to order specific performance. It is extremely unlikely that I would have refused to order specific performance on grounds (i) and (ii): the reasons for that are the same as those which resulted in my concluding that it would quite reasonably have been open to Wellfit to conclude that the Court would order specific performance of the sub-sale agreement. Moreover, the risk which KLY Nominees assumed by its acquisition of the shares in Wellfit included the risk that property prices might fall, and was in any event the same as the risk which the Hunts would have assumed if the shares in Wellfit had remained in their hands. On the face of it, the hardship referred to in grounds (iii) and (iv) goes nowhere near far enough for depriving Wellfit of the order of specific performance to which it would otherwise be entitled: after all, the confirmor chose to redecorate the flat and to permit Mr. Cheung to live there knowing that Wellfit was seeking specific performance of the sub-sale agreement. And the hardship referred to in ground (v) does not arise as a result of the specific performance of the sub-sale agreement. It arises as a result of Mr. Cheung’s decision not to buy the two properties in which he was interested shortly after 19^th December 1990. The confirmor cannot rely on the fact that Mr. Cheung did not buy either of those flats because he would have had to borrow more than he had wanted to. The only reason why he would have had to borrow money to buy either of the flats was because, by not proceeding with the sale of the flat to Wellfit, he had deprived the confirmor of the proceeds of the sale of the flat which could have been used to pay for the flat in Grenville House or in part-payment of the flat in Rosemead.

WELLFIT’S CLAIM FOR DAMAGES

15. The order for specific performance means, of course, that Wellfit cannot be awarded damages basesd on the difference between the contract price and the current value of the flat. However, Wellfit is entitled to damages to compensate it for not having had the flat conveyed to it earlier. “The normal measure of damages is the value of the user of the land, which will generally be taken as its rental value, for the period from the contractual time for completion to the date of actual completion. This is so whether the delay is brought to an end by the voluntary action of an indolent seller or by a decree of specific performance against a recalcitrant seller”: McGregor on Damages, 15^th. ed., para. 914.

16. Wellfit’s entitlement to damages on this basis was not disputed at trial (assuming, of course, that the confirmor was found to have been in repudiatory breach of the sub-sale agreement). Indeed, it was agreed that the value of the use of the land should be ascertained by taking the notional rent for which the flat could have been let and by deducting from it the interest which would have been payable on the loan which Wellfit would have had to obtain to complete the purchase. The figures for the period up to 15^th February 1995, i.e. the day when the trial began, were agreed as follows:

Notional rent	$2,418,096.00
Less interest payable on loan	$1,348,515.86
	$1,069,580.14

However, these sums will have increased since then. Then course I should take, therefore, is to order that Wellfit’s damages for not having had the flat conveyed to it earlier be assessed by a master, even though that assessment is unlikely to take place, since I suspect that it will not be difficult for the up-to-date figures to be agreed.

OTHER ORDERS

(i) Declaration. Wellfit seeks a declaration that the confirmor was not entitled to forfeit the deposit paid by Wellfit under the sub-sale agreement. That follows, of course, from the judgment which I handed down on 25^th July 1995, and I make a declaration to that effect.

(ii) Interest on damages. I have not been addressed on the appropriate rate of interest, or from when interest should be payable. In the normal course of events, I would leave it to the parties to agree those matters, giving them liberty to apply in the event of them failing to agree. However, I do not want the parties to incur further costs if it can be avoided. I propose, therefore, to make an order nisi in relation to interest, giving the parties liberty to apply, within 14days of the handing down of this judgment, if they wish to argue against it. Technically, Wellfit’s loss was a continuing loss incurred ever since 19^th December 1990 but increasing as notional rental payments became due. However, I propose to deal with the question of interest broadly, and the order nisi I make is that the confirmor must pay interest to Wellfit on the damages to be assessed if not agreed from 1^st July 1993 at the rate determined from time to time by the Chief Justice as the rate of interest on judgment debts.

(iii) Costs. I assume that the vendor’s costs of the proceedings were dealt with when the vendor was struck out of the action, and that Wellfit does not seek from the confirmor its costs of proceeding against the vendor. In case Wellfit’s costs of proceeding against the vendor have not been expressly dealt with. I make an order nisi that there be no order in relation to those costs. At present, I see no reason why the confirmor should not pay to Wellfit Wellfit’ costs of the proceedings against the confirmor to be taxed if not agreed, and I make an order nisi to that effect. It is true that part of the trial was taken up with the two issues referred to on pp. 23-25 of my judgment which I did not in the event need to resolve, buty I do not see why Wellfit should be denied its costs attributable to those issues, because it was the confirmor’s denial that it had acted in repudiatory breach of the sub-sale agreement which caused Wellfit to put its case on those alternative footings.