LEUNG WAN KEE SHIPYARD LTD v. DRAGON PEARL NIGHT CLUB RESTAURANT LTD AND ANOTHER

HCA 1288/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1288 of 2010

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D E C I S I O N
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A.  INTRODUCTION

1. On 31 August 2015, I handed down judgment in this matter after a 9‑day trial (“the Judgment”).[1] 

2. In the Judgment, I found in favour of the plaintiff and awarded sums and damages under various heads to it (with interest thereon).  However, I also ruled that, having been found by DHCJ Au‑Yeung (as she then was) (and affirmed by the Court of Appeal) in earlier proceedings that the plaintiff remained the owner of the Vessel[2], the 1^st defendant is entitled to a “credit” being the value of, or sale proceeds for, the Vessel.[3]

3. At §163 of the Judgment, I said:

“As I ruled at §83 above, the 1^st defendant is entitled to a ‘credit’ being the value or sale proceeds of the Vessel (which would include the materials and supplies installed on the Vessel by the 1^st defendant) up to the total monetary sum payable by it. I direct the plaintiff to file and serve submissions within 28 days of the date of this Judgment on how to give effect to this ‘credit’ (for example, by agreeing to a valuation by the parties or by an independent valuation, or by agreeing on terms of sale of the Vessel). The 1^st defendant shall file and serve its submissions in answer within 28 days thereafter, and the plaintiff shall file and serve its reply, if any, within 14 days thereafter. If any party has any issue about my jurisdiction to make any orders or to give any directions on this point then submissions should also be made accordingly as directed. If the parties can come to an agreement in the meantime as to how to give effect to this credit, they are to inform me by way of a joint letter”.

4. This is my decision on this issue.

B.  THE ISSUES IN DISPUTE

5. Written submissions have been filed and the parties have narrowed their differences significantly.  As a result, only three issues remain:

(1) Should the court assess the “credit” by reference to the actual sale proceeds of the Vessel, if and when such sale takes place?  Or should the court assess the credit here and now, by reference to the marketable or saleable value of the Vessel? (“1^st Issue”)

(2) Should the court deduct such “credit” from (as the plaintiff contends) the award of contractual damages only or (as the 1^st defendant contends) all sums paid or payable under the contract if the value of the Vessel turns out to be out of proportion to the damages? (“2^nd Issue”)

(3) Should the court deduct the value of the materials and supplies (“Materials”) installed on the Vessel from (as the plaintiff contends) the award of contractual damages only, or (as the 1^st defendant contends) all sums due to the plaintiff, including debts and tortious damages? (“3^rd Issue”)

6. I shall deal with these in turn.

C.  THE 1^ST ISSUE

7. The 1^st Issue concerns the method of valuing the Vessel.  There are, in essence, two proposals put forward by the plaintiff.  The primary proposal is that the “credit” should be calculated by reference to the actual sale proceeds of the Vessel, if and when a sale occurs (“Primary Proposal”).  The alternative proposal, which for the most part is agreeable to the 1^st defendant, is that the court should assess the credit here and now, by reference to the marketable or saleable value of the Vessel (“Alternative Proposal”).

8. For the reasons set out in this section, I reject the Primary Proposal and accept the Alternative Proposal.

C1.  The primary proposal

9. There are three reasons why I do not accept the Primary Proposal:

(1) it is inconsistent with the rules of mitigation;

(2) it is inconsistent with the object of contractual damages; and

(3) the fact that there is no available market for the Vessel, or that it is uncertain how much the Vessel will be sold for, is not a sufficient reason for postponing the deduction.

C1A.  The rules of mitigation

10. The plaintiff’s main argument in support of the Primary Proposal runs as follows:

(1) By seeking to give “credit” for the value of the Vessel, the court is in effect applying the rules of mitigation.

(2) However, the rules of mitigation only require a plaintiff to act “reasonably”.

(3) In this case, since there is presently no available market for the Vessel, it will not be “reasonable” to require the plaintiff to sell the Vessel now.

(4) If it is only reasonable for the plaintiff to sell the Vessel sometime in the future, then it follows that the plaintiff should only give credit to the Vessel in the future, ie if and when it sells the Vessel.

11. I do not accept this argument.  Whilst I agree that in dealing with the 1^st Issue the court is essentially concerned with the concept of mitigation, the principal rule of mitigation is that a plaintiff cannot recover for “avoidable loss”, and one must also not lose sight of the fact that the policy of this rule is to prevent the waste of resources in society: McGregor on Damages (19^th ed, 2014) at §9‑004; Chitty on Contracts (32^nd ed, 2015) at §26‑080; Peel, Treitel’s The Law of Contract (14^th ed, 2015) at §21‑013.

12. In my judgment, the Primary Proposal is at odds with these principles.  Under the proposal, since all the proceeds will go to the benefit (assuming the proceeds do not exceed the damages payable) of the first defendant, the plaintiff will have little, if any, incentive to sell the Vessel, especially if it has already been paid the damages in full without deduction for the credit first, as it proposes.  From the plaintiff’s perspective, there is nothing to be gained from selling the Vessel.  In short, the result is that it is possible that the plaintiff may well leave the Vessel idle, rather than taking any reasonable steps to sell it to an interested buyer.  This outcome is the antithesis of the principles I have just outlined.  While there is no evidence to suggest that the plaintiff would do so deliberately, this possibility suggests that the proposal cannot be correct as a matter of principle, or fairness between the parties. I therefore do not accept the argument that the Primary Proposal is consistent with the rules of mitigation.

13. In response, the plaintiff submits that:

“it is in the interests of P itself to fetch the highest purchase price for the Vessel to recoup its loss (particularly if Ds are unable to satisfy the judgment debt in full)”[4]

14. There is, however, nothing to suggest that the 1^st defendant will be unable to satisfy the judgment debt. It will be inappropriate for the court to proceed on the basis of a mere speculation.

C1B.  The object of contractual damages

15. It is trite that the object of an award of damages for breach of contract is to place the innocent party, so far as a monetary award can do so, in the same position as if the contract had been performed in accordance with its terms: Richly Bright International Ltd v De Monsa Investments Ltd (2015) 18 HKCFAR 232 at §15 per Ribeiro and Fok PJJ.  As stated in Frumston (ed), The Law of Contract (4^th ed, 2010) at §8.8:

“In pursuit of its compensatory aim damages for breach of contract are awarded on a ‘net loss’ basis. Or put another way an award of damages should not put the claimant in a better position than he would have been in if the contract had been performed and so secure a ‘massive and unwarranted windfall’. This means that the compensation which the claimant receives will prima facie be adjusted to take account of any ‘betterment’ or ‘saving’ he enjoys following the breach of contract.” (emphasis added)

16. The Primary Proposal is inconsistent with these principles.  Under the proposal, the plaintiff will have to transfer the benefit of the proceeds of sale to the 1^st defendant.  However, there is no suggestion that the plaintiff will have to relinquish other benefits derived from the Vessel in the meantime pending sale.  For example, no deduction to the damages will be made if the plaintiff makes a profit by renting out the Vessel.  Nor will any adjustment be made if the plaintiff simply utilises the Vessel for its own purposes.  Thus, the Primary Proposal will allow the plaintiff to use the Vessel and to retain benefits (apart from sale proceeds) derived from the Vessel.  These are “betterments” and “savings” which, had the Contract been performed, the plaintiff would not have enjoyed.  Therefore, the Primary Proposal will put the plaintiff in a better position than it would have been in if the Contract had been performed.  While there is no evidence of any such actual benefits, the fact that the plaintiff is in a position to derive any such possible benefits without having to account for them suggest that the proposal cannot be correct in principle.

17. The plaintiff has not addressed this issue. Instead, it argues that it will be unfair to it if the court does not adopt to the Primary Proposal.  It is submitted that:

“The Contract is a contract for construction and provision of services as well. As noted in §2 of the Judgment, D1 engaged P to design and build the Vessel. Having designed and constructed the Vessel (and thus rendered performance on its part), there is no reason why P (being the innocent party) should be kept out of pocket, because of repudiatory breach of D1 (being the wrongful party). Hence, P should get paid and recover damages in full, subject only to giving credit of the actual sale proceeds of the Vessel, if and when it is resold.

Had D1 performed its contractual obligations, the Vessel would have been delivered and P should receive the sums represented by the damages in full without any credit or deduction. If P is required to give a credit and deduct the total amount of damages in advance (by way of valuation of the Vessel), P will be in a worse‑off position. This cannot be right.”[5]

18. In my judgment, there is a simple answer to this contention.  Had the Contract been performed, the plaintiff would not have had the benefit of retaining the Vessel.  The deduction is designed to represent the value of this “benefit”.  Thus, even if the Court deducts the credit here and now, the plaintiff will not be “kept out pocket” or put in a “worse‑off position”.  The plaintiff will simply be restored to the position it would have been in had the Contract been performed.

C1C.  Absence of available market and uncertainty

19. The plaintiff seeks to justify the Primary Proposal on the ground that:

“the Vessel is tailored‑made and there is neither any plea nor any evidence adduced by Ds that there is an available market for the Vessel. P may or may not be able to resell the Vessel, and it may be that P can only resell it on the basis of scrap metal.”[6]

20. As such, there are two bases to the plaintiff’s argument.  The first is that there is no available market for the Vessel.  The second (and related) basis is that it is uncertain how much the Vessel can be sold for.

21. In my judgment, neither basis has merit.

22. In relation to the first basis, whilst I agree that there may not be an available market for the Vessel, which is accepted by the 1^st defendant, I do not accept that this is a valid reason to postpone the quantification (or deduction) of damages.  As stated in Treitel at §20‑056:

“If there is no market, the seller’s damages for non‑acceptance would prima facie be quantified by reference to the actual proceeds of the substitute sale, so long as that transaction was in all the circumstances a reasonable one. As in the case of failure to deliver, the substitute transaction would be evidence of the value of the goods at the time of breach only if it was concluded at, or close to, that time. If the seller did not resell, the value of the goods left on his hands would have to be assessed according to the general criterion stated above; and his damages would prima facie be the amount (if any) by which the contract price exceeded that value.” (emphasis added)

23. The “general criterion stated above” refers to the passage at §20‑055 of the same work, where it is stated that the court “must assess the loss as best it can”, taking into account factors such as “the cost of the goods and of their carriage, and a reasonable profit”.  Thus, there is no suggestion that the court should postpone the quantification if there was no available market for the goods.

24. Similarly, according to Tettenborn (ed), The Law of Damages (2^nd ed, 2010) at §22.105:

“No doubt where there was no ready market for the asset involved, the court would simply have to fix damages as best it could, either by obtaining a value of sorts to be attributed to the asset in the light of expert evidence or otherwise.”[7] (emphasis added)

25. In response, the plaintiff relies on Aercap Partners 1 Ltd v Avia Asset Management AB [2010] 2 CLC 578.  In that case, the seller of two aircrafts accepted the buyer’s repudiation and resold the aircrafts at a significantly lower price.  The seller sued the buyer for damages and one of the issues before the court was how the “market price” of the aircrafts should be assessed.  In holding that it should be assessed by reference to the resale agreement, Gross LJ said (§108):

“As further explained in McGregor, at para 20‑116, where there is an available market, the market price must generally be taken when assessing the seller's damages — rather than any price the seller might have obtained on a resale, if above or below the market price; thus a resale price cannot generally be used to increase or reduce the seller's damages, above or below the difference between the contract and market prices. Importantly however, where the market value is difficult to assess, then the resale price may be treated as evidence of the market price.” (emphasis added by the plaintiff in its submissions)

26. The plaintiff says this passage “reinforces P’s submissions that it should only give credit of the actual sale proceeds”.[8]  I disagree. What Gross LJ held was merely that past resale price could be treated as evidence of the “market price”.  His Lordship did not deal with the situation where, as here, the goods had not yet been sold and may be sold in the future. His Lordship therefore did not address the merit of the Primary Proposal.  Aercap therefore does not assist the plaintiff.

27. Accordingly, the lack of an available market is not a valid reason for accepting the Primary Proposal, and the first basis of the plaintiff’s argument must fail.

28. Turning to the second basis of the plaintiff’s argument, the contention here is that the court should accede to the Primary Proposal because it is uncertain how much the Vessel will be sold for.  I agree that such uncertainty exists.  I also agree that any valuation (or deduction) may ultimately be proved to be either too high or too low.  However, I am not satisfied that this is a sufficient reason to postpone the quantification of damages.  As Lord Pearce said in Murphy v Stone‑Wallwork (Charlton) Ltd [1969] 1 WLR 1023 at 1027B:

“…the assessment of damages for the future is necessarily compounded of prophecy and calculation. The court must do the best it can to reach what seems to be the right figure on a reasonable balance of the probabilities, avoiding undue optimism and undue pessimism.”

29. Lord Hodson also expressed the same view in Mulholland v Mitchell [1971] AC 666 at 674F:

“Damages are, accordingly, assessed once for all at the time of the trial notwithstanding that in many cases, and this applies especially to cases of personal injury, uncertain matters have to be taken into account. The court has to make the best estimate it can as to the future life of the injured person, not only as to his prospects of recovery or improvement but also, as in this case, as to the cost of caring for him either in his own home or in an institution suitably equipped to deal with his condition. This is the function of the court.” (emphasis added)

30. In my judgment, although Murphy and Mulhollandare personal injury cases which bear little resemblance to the present case, the sentiment to be distilled from these passages is one of universal application.  The idea is that quantification of damage is inevitably approximate, and the court should not postpone or disintegrate the assessment process at the price of finality, certainty and increased costs.

31. In this case, the concern about finality is not merely theoretical.  As rightly accepted by the plaintiff[9], if it acts unreasonably in selling the Vessel the rules of mitigation may limit the damages which he can recover from the 1^st defendant.  Thus, should the Primary Proposal be adopted, there may well be future dispute between the parties as to whether the plaintiff has acted reasonably (eg whether the plaintiff should have sold the Vessel, whether the Vessel should have been sold at a higher price etc).

32. I therefore reject the Primary Proposal.

C2.  The Alternative Proposal

33. As mentioned, the Alternative Proposal is that the court should deduct the credit here and now and that the credit should be assessed by reference to the Vessel’s marketable or saleable value.

34. I note that the Alternative Proposal is, for the most part, agreeable to the 1^st defendant.  Specifically, both sides have reached consensus on the following matters:

(1) An independent valuer engaged by the plaintiff shall conduct the assessment.  The plaintiff is to disclose the identity of the valuer within 28 days and the 1^st defendant may challenge the qualifications and expertise of the valuer within 14 days thereafter.[10]

(2) The assessed value of the Vessel shall be reduced by the amount of reasonable expenses expected to be incurred by the plaintiff in selling the Vessel.[11]

(3) Once credit is given for such value, it is up to the plaintiff to sell or otherwise dispose it at its own discretion.  The credit should remain unchanged, irrespective of the subsequent actual sale price.[12]

35. I shall accede accede to the parties’ agreement on these matters. There is no reason for me not to do so.

36. Nevertheless, three questions left to be resolved:

(1) Should the valuation take into account the potential course of adaptation of the Vessel?[13]

(2) If so, should the costs of such adaptation be taken into account in the valuation?[14]

(3) Should the valuation date be at the expiration of a reasonable period after the date of valuation report to allow time for resale by the plaintiff?[15]

37. I will answer the first two questions as follows:

(1) It is said that there may be circumstancesin which the seller should, under the duty to mitigate, adapt the goods to make it suitable for resale: Benjamin’s Sale of Goods (9^th ed, 2014) at §16‑078.  In my view, this is plainly such a case.  If, as the plaintiff says (which I agree), the Vessel is a tailor‑made product with no available market[16], then it is only reasonable for the plaintiff to take reasonable steps to adapt the Vessel for sale.

(2) A plaintiff may recover damages for expenses incurred by him in reasonably attempting to mitigate his loss: Chitty at §26‑102.  Thus, a seller will be compensated for the costs of adapting his goods for resale, provided that such costs are reasonably incurred: Benjamin at §16‑078; Re Vic Mill Ltd [1913] 1 Ch 465 at 473 per Hamilton LJ (where the plaintiff‑seller recovered from the defendant‑buyer the cost of adapting certain spinning machines, for which there was no available market, for the purposes of resale).  Accordingly, the plaintiff will be compensated for the costs of adapting the Vessel, provided that they are reasonably incurred.

38. As to the third question:

(1) The purpose of the rules of mitigation is to assess damages as if the plaintiff acted “reasonably”: Thai Airways International Public Company Ltd v KI Holdings Co Ltd [2015] EWHC 1250 (Comm) at §33 per Leggatt J.  It follows that if some period is required to enable a sale to be made, the relevant market price for the purpose of assessing the quantum of the recoverable loss will be the market price at the expiration of that period: Kaines (UK) Ltd v Österreichische Warrenhandelsgesellschaft (formerlyCGLHandelsgesellschaftmbH) [1993] 2 Lloyd’s Rep 1 at §§7‑8 per Steyn J and §§10‑11 per Bingham LJ, cited with approval in Golden Strait Corpn v Nippon Yusen Kubishika Kaisha (The “Golden Victory”) [2007] 2 AC 353 at §17 by Lord Bingham of Cornhill, and at §34 by Lord Scott of Foscote.

(2) In this case, I accept that it is only reasonable for the plaintiff to sell the Vessel after reading the valuation report.  I also accept that, given the highly specialised nature of the Vessel, the plaintiff should be given a reasonable period of time thereafter to locate a buyer and prepare a sale.  However, based on the materials presently available I am simply not in a position to decide how long this period should be. I think this question is best left for the valuer.  If, say, the valuer is of the view that it should reasonably take the plaintiff six months to enable a sale to be made, then the Vessel should be valued as at six months after the date of the report or, if any adaptation is suggested by the valuer, six months after the time reasonable necessary for the adaptation to be completed.

39. The plaintiff also seeks (i) a declaration that it is entitled to sell or otherwise dispose of the Vessel as owner thereof and (ii) a direction that it is entitled to sell the Vessel by way of private agreement.[17]  I note that there is no objection on the part of the 1^st defendant.  I shall order accordingly.

D. THE 2^ND ISSUE

40. This issue arises as follows.  At §162 of the Judgment, I ordered (among others) the 1^st defendant to pay damages as well as sums that had already accrued due under the Contract before termination.  It is common ground that the value of the Vessel should be deducted from the contractual damages.  The question is whether it is also deductible from the accrued contractual sums. The 1^st defendant contends that it can be. The plaintiff says that it is not.

5. The 1^st defendant’s argument is that if the value of the Vessel turns out to be out of all proportion to the amount of damages, it will be unconscionable for the plaintiff to retain all the sums due before the Contract was terminated, to recover the balance of the Contract price that would have been payable by way of damages, and to obtain a windfall profit from selling the Vessel.  Thus, it is said that the court should exercise its equitable jurisdiction to apply the credits to, or grant relief against forfeiture of, the 1^st to the 5^th instalments.

41. In my judgment, there are three reasons why this argument must be rejected.

42. First, this argument infringes the principle that rules of mitigation do not apply to claims in debt, a proposition which the 1^st defendant accepts:

(1) A claim for arrears for instalments already due is a claim in debt: Benjamin at §16‑005; Overstone Ltd v Shipway [1962] 1 WLR 117 at 123 per Pearce LJ and at 128‑129 per Davies LJ.  In turn, the rules of mitigation do not apply to claims in debt: Chittyat §26‑008; Tettenborn at §5.65; Abrahams v Performing Right Society Ltd [1995] ICR 1028 at 1039H per Hutchison LJ.  As stated in Treitel at §21‑013:

“mitigation is relevant only to a claim for damages and not to a claim for an agreed sum; and in many cases this is no doubt true. A seller of goods who claims damages for non‑acceptance may be under a duty to mitigate by reselling the goods; but once he has acquired the right to sue for the price there seems to be no suggestion that he must mitigate even though he can easily resell and even though he is in a much better position than the buyer to do so.”

(2) The 1^st defendant’s argument infringes these principles. As I have held in the Judgment[18], the 1^st to the 5^th instalments were accrued due before the termination of the Contract, and the plaintiff’s claim in relation to those instalments is one in debt.  Thus, by seeking to deduct the value of the Vessel from the 1^st to the 5^th instalments, the 1^st defendant is seeking to apply the rules of mitigation to the plaintiff’s claims in debt.

43. Second, insofar as the 1^st defendant is relying on the doctrine of relief against forfeiture, such a claim has never been pleaded:

(1) It is the pleadings that will define the issues in a trial and dictate the course of proceedings both before and at trial.  It will not be acceptable for unpleaded issues to be raised out of the evidence which is to be adduced: Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663 at §21 per Ma CJ.  As Ribeiro PJ said at §30 of Sinoearn International Ltd v Hyundai‑CCECC Joint Venture(2013) 16 HKCFAR 632:

“A party must raise all the issue he wishes to raise to be dealt with at the trial. Parties are not entitled to have issues recently thought up dealt with separately and piecemeal. The other party is entitled to know from a clear pleading what is the entire case he has to meet so that he can decide whether particulars should be sought; how he should plead in response; what discovery he is entitled to; what evidence he should adduce to meet it; and what points of law should be taken.”

(2) In this case, the plaintiff could potentially be prejudiced by the lack of pleadings.  This is because in determining whether a case is appropriate to grant relief from forfeiture, the court has a “broad discretion” and would take into account factors such as the conduct of the applicant for relief and the gravity of the breaches (Snell’s Equity (33^rd ed, 2015) at §13‑027).  Clearly, these are matters on which the plaintiff could have adduced (further) evidence and advanced legal arguments.

(3) There is also no excuse for the lack of pleadings.  The 1^st defendant had properly pleaded a counterclaim for the return of the 1^st to the 4^th instalments based on the alleged late delivery or the non‑delivery of the Vessel by the plaintiff.[19]  If it had intended to counterclaim for the same sum using a different basis (ie, relief against forfeiture), it could easily have done so.  In my judgment, this shows that the claim for relief against forfeiture is an afterthought and a blatant attempt to introduce a new claim after trial.

(4) The 1^st defendant cited Cadogan Petroleum Holdings Ltd v Global Process Systems LLC [2013] 2 Lloyd’s Rep 26 in support of its arguments.  In that case Eder J considered it appropriate to grant relief against forfeiture in favour of the defendant‑buyer.  However, as submitted by the plaintiff, it appears from §12(iii) of the judgment of that case that the issue of relief against forfeiture was properly raised and fully canvassed before the court.

(5) The 1^st defendant seeks to rely on Hong Kong Civil Procedure 2016 at §18/15/4, which essentially states that it is generally unnecessary to plead a specific relief.  However, as submitted by the plaintiff, we are not concerned with a mere failure to plead a “relief”. Rather, the 1^st defendant is in effect seeking the return of the instalments under this basis and is thus effectively bringing a counterclaim against the plaintiff on this basis.  Moreover, as mentioned above, such a claim may give rise to factual issues or legal arguments.  Thus, it should have been made clear in the pleadings.

(6) The 1^st defendant also places reliance on section 16 of the High Court Ordinance (Cap 4). However, this provision merely states (among others) that the rules of equity are to prevail and has nothing to do with pleadings at all.

44. Third and in any event, the doctrine of relief against forfeiture is not applicable in the present case:

(1) The doctrine of relief against forfeiture aims to prevent a contractual party from abusing an express provision inserted for the purpose of securing a primary obligation under the contract. As explained in Snell at§13‑001:

“… the particular form of unconscionability that the doctrine seeks to prevent consists of the abuse by A of a right acquired for the purpose of securing a particular, primary result (such as B’s performance of a particular contractual duty).” (emphasis added)

(2) At §13‑025, the editors set out the test for granting relief against forfeiture:

“the central question is whether B can show that it would be unconscionable for A to insist on enforcing a clause designed as security for a primary stipulation.” (emphasis added)

(3) Similarly, Treitel explained the doctrine in these terms at §18‑065:

“…the law has developed restrictions on the right of a party to rely on an express provision for determination. This is the position where a lease entitles the landlord to forfeit if the tenant breaks any covenant; and where a regulated hire-purchase agreement entitles the owner to terminate it if the hirer defaults in the payment of even a single instalment. In such cases the provision for determination would deprive a party who committed some quite minor breach of the benefit of a contract which he has for a long period performed satisfactorily; and the court may allow him a period of grace within which to make good his default.” (emphasis added)

(4) At §§9.164‑9.170 in Stannard, Delay in the Performance of Contractual Obligations (2007), the view taken appears to be that the doctrine only applies when there is a “contractual provision for forfeiture”.  Benjamin is to the same effect (see §§16‑038‑16‑040).

(5) In Shiloh Spinners Ltd v Harding [1973] AC 691, Lord Wilberforce described the doctrine in this way (at 723G‑H):

“…the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result.” (emphasis added)

(6) This passage was quoted with approval recently in the joint judgment of Lord Neuberger of Abbotsbury and Lord Sumption in Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at §10.  In the same case Lord Mance added at §160:

“A penalty clause imposes a sanction for breach which is extravagant to the point where the court will in no circumstances enforce it according to its terms. The power to relieve against forfeiture relates to clauses which do not have that character, but which nonetheless operate on breach to deprive a party of an interest in a manner which would not be penal.” (emphasis added)

(7) In the light of these authorities, it appears to me that the 1^st defendant’s argument is fundamentally flawed.  It is relying on the doctrine in effect and in substance to seek the return of the 1^st to the 5^th instalments.  However, the plaintiff did not keep or claim those instalments by virtue of any forfeiture provision.  Instead, the plaintiff was awarded (or allowed to retain) those sums by the court, ie, by operation of the common law.  As such, the plaintiff cannot be said to have “abused” any contractual provision. The policy behind the doctrine of relief against forfeiture does not come into play.

(8) The 1^st defendant places reliance on Cadogan.  In that case, the defendant agreed to purchase, by instalments, two gas plants from the plaintiff.  The defendant fell into default.  The plaintiff therefore terminated the agreement and sought to retain the instalments paid as well as to recover further sums accrued before the termination.  Eder J held that it would be appropriate to grant the defendant relief against forfeiture.

(9) In my view, Cadogan does not assist the first defendant.  It is clear from §18 of the judgment of that case that in seeking to retain and recover the sums accrued before the termination of the agreement, the plaintiff was relying on an express provision in the agreement (ie, clause 22).  Cadogan is therefore consistent with my analysis above.

45. Accordingly, I decide the 2^nd Issue in favour of the plaintiff.

E.  THE 3^RD ISSUE

46. The 3^rd Issue is whether the court should deduct the value of the Materials from the award of contractual damages only, or from all sums awarded to the plaintiff, including debts and tortious damages.  The 1^st defendant argues for the former.  The plaintiff says it should be the latter.

47. It is helpful to set out the first defendant’s argument in full.  It is as follows:

“…the credits to be given for D1’s Materials sit on a different legal footing. P needs to give credit for the Materials not only because of the rules in mitigation, but also because they were purchased by D1 and are therefore in substance D1’s properties …

Accordingly, their value would serve to diminish P’s overall claim by way of set‑off.”[20]

48. Thus, there are two limbs to the 1^st defendant’s argument.  First, it relies on the rules of mitigation.  Second, the Materials are said to belong to it and so should diminish the plaintiff’s claims by way of set‑off.

49. I do not accept this argument.

50. In the first place, the two limbs are mutually exclusive. By the first limb, what the 1^st defendant seeks to argue is that the plaintiff should now sell the Materials so as to reduce its loss.  It therefore presupposes that the Materials now belong to the plaintiff, which contradicts the second limb.

51. In any event, neither limb has merit. In relation to the first limb, it is plain that the rules of mitigation cannot assist the 1^st defendant:

(1) Insofar as the 1^st defendant is seeking to deduct the value of the Materials from the unpaid contractual sums awarded to the plaintiff, as I held at §43(1) above, those sums were debts owed by the 1^st defendant and the rules of mitigation do not apply to claims in debt.  Thus, the argument that the plaintiff should reduce contractual sums owed by the 1^st defendant by selling the Materials is bound to fail.

(2) As to whether the 1^st defendant may deduct the value of the Materials from the tortious damages awarded to the plaintiff, it is true that the rules of mitigation apply equally to tort cases and so the plaintiff in such cases cannot recover avoidable loss: McGregor at §9‑015; Clerk & Lindsell on Torts (21^st ed, 2014) at §28‑09.  However, one must not lose sight of the fact that the rules of mitigation are simply an aspect of the law of causation. As Goff J said in The Elena D’Amico [1980] 1 Lloyd’s Rep 75 at 88, the rules of mitigation:

“are all really aspects of a wider principle which is that, subject to the rules of remoteness, the plaintiff can recover, but can only recover, in respect of damage suffered by him which has been caused by the defendant’s legal wrong. In other words, they are aspects of the principle of causation.”

(3) Citing this with approval, Leggatt J recently said in Thai Airways at §33:

“the essential purpose of the mitigation rules is to identify, in the light of what the claimant has done or not done to avoid loss resulting from the defendant’s breach of contract or other legal wrong, which costs and benefits accruing to the claimant are to be treated as consequences of the defendant’s wrong and which are to be treated as caused by the claimant’s own action or inaction.” (emphasis added)

(4) In this case, I awarded the plaintiff $12,075 as tortious damages.[21]  This sum represents the expenses the plaintiff had incurred for towing the Vessel back to its shipyard after the defendants’ act of trespass and conversion.[22]  It is absurd to suggest that these expenses were somehow “caused” by the plaintiff’s failure to sell the Materials.  It follows that the 1^st defendant’s argument must be rejected.

52. As to the second limb of the 1^st defendant’s argument, it suffices to say that the Materials are not the 1^st defendant’s properties.  The Court of Appeal (affirming DHCJ Au‑Yeung (as she then was)) had held that the plaintiff remained at all times the owner of the Vessel.[23]  As no mention was made of the Materials, the implication must be that the Materials form part of the Vessel and thus also belong to the plaintiff.  This is also why I said at §163 of the Judgment that the value of the Vessel should “include” the Materials.

53. For these reasons, I decide the 3^rd Issue in favour of the plaintiff.  The Materials form part of the Vessel and there is no reason to treat them separately from the Vessel for the purpose of valuation.

E.  DISPOSITION

54. I make the following orders and directions:

(1) Leave be granted to the plaintiff to engage an independent valuer to opine on the marketable or saleable value of the Vessel.

(2) The plaintiff shall disclose the identity of the valuer within 28 days and the 1^st defendant may challenge the qualifications and expertise of the valuer within 14 days thereafter.

(3) The valuer shall opine whether the Vessel should be adapted in any manner whatsoever so as to enhance its value and marketability for sale, and if so the period of time and expenses reasonably required for each course of adaptation.

(4) The valuer shall opine on the period of time and expenses reasonably required for selling the Vessel (as adapted if so opined by the valuer).  The valuer shall then opine on the marketable or saleable value of the Vessel as at the expiration of the aforementioned period of time (and any period for adaptation if so opined by the valuer) after the date of the valuation report.

(5) The assessed value of the Vessel (including the Materials) shall be deducted from the award of contractual damages only. 

(6) The 1^st defendant is to pay the damages (and interest) for breach of the Contract, after deducting the assessed value of the Vessel by the valuer, within 28 days of the date of the valuer’s report, which shall be provided within two months of the date of this decision (subject to any extension by agreement or by order of the court).  All other sums payable by the defendants under the Judgment are to be paid forthwith as ordered.

(7) The plaintiff is entitled to sell or otherwise dispose of the Vessel as owner thereof.

(8) The plaintiff is entitled to sell the Vessel by way of private agreement.

(9) Liberty to apply to the Court for further directions.

55. The plaintiff is successful on the 2^nd and 3^rd Issues.  However, I consider the 1^st defendant to be the real winner on the 1^st Issue, which is the principal issue of this case.  In the premises, I consider the appropriate order is that there shall be no order as to costs for the resolution of this “credit” issue.  I so order on a nisi basis.

56. Lastly, I thank both counsel for their assistance.