HARMONY FIT CO LTD AND ANOTHER v. FAIRCAL LTD

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.13040/97

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Judgment

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1. This assessment of damages follows interlocutory judgment for the plaintiffs on the defendant's failure to complete a contract for the sale and purchase of property. The first plaintiff was the vendor of the residential premises, known as Flat D Heng Fa Villa in Heng Fa Chuen, and the second plaintiff was the vendor of the attaching car park area. The total purchase price was $14.5 million, divided as to $13.5 million for the flat and $1 million for the car park.

2. Completion date was 27 November 1997, and upon the defendant's failure to meet the deadline the plaintiffs forfeited the 10% deposit totalling $1.45 million, namely $1.35m for the residential premises and $100,000 for the car park. The right of the plaintiffs to make this forfeiture is not in issue. The properties were eventually sold to another purchaser by provisional agreements dated 20 February 1998. The formal agreements were dated 28 February, and the assignments took place on 20 March. The residential premises realised $9.5 million, and the carpark $1 million. The damages claimed by the first plaintiff in respect of the flat are therefore $4 million less the amount of the forfeited deposit in the sum of $1.35 million. The carpark however realised the same sum as contemplated in the original contract with the defendant.

3. The damages fall under five heads. For the first plaintiff there is the difference between the contract price and the resale price, plus the interest paid on its existing mortgage from date of breach to resale. For both plaintiffs there are commissions paid to estate agents in respect of the resales, surveyors charges, and the wasted legal costs of the two failed transactions.

4. Certain of these items are undisputed. These are, the estate agents' commissions from the two resales in the sums of $47,500 and $5,000 for the first and second plaintiffs respectively; surveyors' charges in the sum of $15,000 for the plaintiffs jointly; and the first plaintiff's bank interest in the sum of $310,344.58. The disputed items are therefore the first plaintiff's loss on resale, and the wasted legal costs of the contracts with the defendant.

5. Mr. Chain for the defendant addressed these outstanding issues on three fronts. As to the wasted legal costs he argued that this was simply not proven by the evidence. He also disputed that the price on resale was the best available, and additionally argued a further failure to mitigate in the plaintiffs' refusal of revised terms for new contracts proposed by the defendant. I shall consider this last argument first as these revised terms would, if accepted, have eliminated or drastically reduced the first plaintiff's loss on resale.

6. The negotiations between the parties after the defendant's failure to complete appear in correspondence between the solicitors. The defendant's initial proposals are contained in its solicitors' letters of 10 and 13 December 1997 (pages 59-62 of agreed bundle B). These contemplate two alternatives; firstly a 2 month delay in completion plus waiver of forfeiture and interim interest to the plaintiff - in other words the old agreement revived with a 2 month extension; alternatively a new agreement at 90% of the original purchase price with completion 2 months later, interest from the initial completion date and a further 10% deposit on signature within 7 days.

7. The plaintiff's solicitors responded on 6 January 1998 with a draft consent order in Tomlin form (pages 63-66). This stipulated inter alia further deposits of $1.35 million and $100,000 to be paid on signature, the balances of $12.15 million and $900,000 on completion on 13 February 1998, and interest from 27 November 1997 to 13 February 1998. The plaintiff's solicitors sent two reminders and eventually received a reply dated 15 January 1998, in which the defendant sought to revise the plaintiff's proposals. These counter proposals included the halving of the two deposits and the extension of the completion date by just over 4 months to 15 June 1998. The plaintiffs rejected this offer by letter dated 11 February 1998.

8. Thereafter the defendant declined to improve its proposal when the plaintiffs indicated on 16 February 1998 that they had offers at $10 million and $500,000 for the flat and carpark respectively, for completion 16 March 1998. By reply the following day the plaintiffs pointed out that the completion date and the amount of deposit were relevant factors, as well as price, and indicated that they would sell the properties unless better terms were received by 5:00 pm that day. Nothing of significance occurred and the plaintiffs entered into provisional agreements with the ultimate purchaser on 20 February 1998.

9. The defendant relies on these negotiations to establish that it had made a better offer than the plaintiffs eventually accepted, and that the plaintiffs had therefore failed to mitigate their damages. Accepting that the burden of proof is on the defendant, Mr. Chain argued forcefully that this was a clear case of a failure to mitigate. Apart from the higher price, he instanced the plaintiffs' lack of urgent need for the money, which was not disputed, and the defendant's offer to pay interest in respect of the extra time required for completion. He also pointed out the defendant's apparent good faith, as the failure to complete had been induced by the collapsed sale of another property and not merely by a reluctance to proceed in a falling market.

10. A vendor faced with a defaulting purchaser has a well recognised duty to mitigate any loss he may claim from the default. The loss may be established by the resale value of the property, or by its market price if that is higher. The mechanism for establishing the loss is however secondary to the principle that the defaulting party will only be responsible for the shortfall between the contract price and the highest price reasonably obtainable on resale. An offer at a price higher than the vendor eventually accepts may therefore, other things being equal, limit the vendor's recoverable damages accordingly. All this is trite law, but it forms the basis of the defendant's argument on mitigation.

11. The defendant's proposal must however be considered as a whole in deciding if the price offered will limit the plaintiffs' recoverable loss. To that extent the plaintiffs' solicitors are correct in saying that the date of completion and the amount of the deposit are relevant factors in addition to the price. Mr. Wong Pak Hung, testifying for the plaintiffs, mentioned the proposed variation of the completion date as a factor in rejecting the defendant's offer, and I readily accept that the time for completion is of major significance to contracting parties.

12. Whether or not an offer should have reasonably been accepted and hence serve to define recoverable damages is a question of fact. Although the price offered by the defendant was significantly higher than the offer the plaintiffs accepted, the proposed completion date was four months later than the defendant's original offer, and the defendant also proposed to halve the deposits.

13. I do not find in the circumstances that the plaintiffs' failure to accept the defendant's revised terms amounted to a failure to mitigate their losses. The severe downturn in the property market, a factor acknowledged by both sides, would cause legitimate anxiety in a vendor obliged to wait four months. for completion. Although less significant, the halving of the deposit would also serve to reduce the sanction immediately available to the plaintiffs on a failure to complete. I therefore find it reasonable that such an offer should be refused in favour of a lower offer which contemplated completion within a considerably shorter time.

14. Whilst the rejection of the defendant's offer does not of itself amount to a failure to mitigate, it does not necessarily follow that the resale price obtained by the plaintiffs will therefore establish the level of their damages. That is a matter for a separate examination as to the market price, a subject addressed by valuers called by the respective parties.

15. Evidence of the value of the properties was given by a surveyor, Mr. Chung Mei Kong, for the plaintiff. Mr. Chung produced his two valuation reports for the flat and the carpark (at pages 79 and 101 of Bundle B respectively), as well as a supplementary report for the flat only (page 253). The first two reports related to 22 January 1998, at which date Mr. Chung estimated the respective values at $9.4 million and $750,000. The supplementary report covered the flat only and related to both 27 November 1997 and 20 February 1998, which were respectively the original completion date on which the defendant defaulted and the date of the provisional agreement for resale. Mr. Chung's valuations were $12.5 million for the earlier date and $9.4 million for the later - that is the same figure as for 22 January.

16. The defendant's valuation evidence was offered by Mr. Cheung Hoi Tat, also a surveyor. Mr. Cheung valued the flat and the carpark together and produced a figure of $11.5 million as at 20 February 1998 (page 235). In his table of comparables (exhibit D.1) he assumed a figure of $900,000 for the carpark, leaving the remaining $10.6 million as his valuation for the flat. However as the carpark actually realised $1 million on resale I will assume that Mr. Cheung's valuation for the flat should now be adjusted to $10.5 million to fit in with his overall valuation of $11.5 million. The issue on valuation is therefore the $1 million difference between Mr. Cheung's adjusted figure for the flat and the total of $9.5 million obtained on resale. Resale of the carpark realised the original contract price and that factor may now be ignored except where it is relevant in the pricing of comparables.

17. For the plaintiff, Mr. Chung produced a schedule of comparable transactions (exhibit P.1) comprising the subject property and three others in the same development. The three comparables were all the same size, being five square feet less than the subject property. The respective prices in $millions were 10.5, 9.6 and 11.96, with the second of these excluding the carpark. At the time of Mr. Chung's first report there were apparently no available comparables, as no sales had taken place in Heng Fa Villa since the market crash in October 1997. Mr. Chung therefore considered the overall market in the Heng Fa Chuen development, of which the Heng Fa Villa flats are the largest. He estimated the overall drop in comparable Heng Fa Chuen flats to be 25.5% and increased that discount to 30% for Heng Fa Villa, as larger flats had suffered greater depreciation. Mr. Chung then applied this discount to the figure of $14.5 million representing his pre-crash estimate of the value of the two properties, and deducted $750,000 for the carpark to reach his valuation figure for the flat at 22 January of $9.4 million.

18. Mr. Chung readily admitted that the use of comparables in valuation, if available, provides a more scientific approach than that he had adopted in his first valuation. I note however that his second valuation, dated 23 June and relating to 20 February 1998 and for which comparables were by then available, produced the same figure of $9.4 million. Moreover, the only discussion of these comparables appears in Mr. Chung's table of comparable transactions (exhibit D.1). In that document, a high price of $11.96 for a flat on the 15th floor is briefly dismissed as on the high side, as the sale was nearly three months later than the valuation date and was unsupported by other comparables - of which there were anyway only two. I do not consider that this comparable can be explained away lightly, particularly in a market which was apparently not then in any better shape than on the valuation date of 20 February. This factor, and the necessarily inexact approach adopted by Mr. Chung in his first valuation, lead me to conclude that his valuation of $9.4 million was low. I do however note that the closest comparable in both time and location produced an identical price to that of the subject premises, although Mr. Cheung for the defendant has applied adjustments to that figure in reaching his own higher valuation for the subject premises.

19. Mr. Cheung, the defendant's expert witness, used two of the three comparables adduced by Mr. Chung. These were flat C on the 7th floor - one below the subject premises, and flat B on the 3rd floor. Mr. Cheung found the former (the one sold for the same price as the subject property) to be the best comparable, but made adjustments for various factors he set out in exhibit D.1. The most prominent of these was a 6% upward adjustment in the notional value of the subject property to reflect the sale of the comparable being over 3 weeks later than the valuation date in a declining market. This 6% uplift was apparently based on a Hong Kong wide index maintained by Mr. Cheung's firm, which he agreed may not apply to individual areas. He also applied further increases of 1%,1%, and 2% respectively for the factors of higher level, better view, and the lucky number of the 8th floor.

20. All of this persuades me that valuation is more an art than a science, particularly with a relatively small and unique block and at a time when a slump in the property market is causing a dearth of genuine comparables. I appreciate that the two experts are attempting a difficult exercise in unusually difficult circumstances, however I am not satisfied on the evidence that a sale price of $9.5 million for the flat represents a full mitigation of the plaintiffs' loss. I have already discussed Mr. Chung's evidence for the plaintiffs; I find his valuation low and his approach too imprecise (perhaps necessarily so) to produce reliable figures as an exact basis for assessing loss. Turning to Mr. Cheung's evidence for the defendant, the percentage uplifts he has adopted seem arbitrary and at best are of general application throughout Hong Kong. There is no evidence of their relevance to the subject premises in particular. This point has particular force in relation to the 6% index uplift applied by Mr. Cheung. Balancing the various factors canvassed I place the fair market price for calculating loss at $10 million.

21. There remains the issue of the plaintiffs' wasted legal expenses following the defendant's failure to complete the original agreement by 27 November 1997. The plaintiffs seek to substantiate these by letters from their solicitors at pages 249 and 251 of the bundle, relating respectively to the flat and the carpark. The amounts claimed are $23,475 for the flat and $7,100 for the carpark.

22. Mr. Chain for the defendant resists this item, arguing that it is not proven by the two letters, which were written after the order for assessment was made. He also pointed out that there are now no scale fees for property transactions and that as clients can therefore negotiate fees, the solicitors may have charged one fee for the two transactions. The plaintiffs' witness, Mr. Wong Pak Hung, said that the solicitors' charges would be paid in the normal course of events, but he did not handle the plaintiffs' finances and had no idea whether or not payment had actually been made.

23. I am satisfied that there would necessarily have been wasted legal costs incurred by the plaintiffs as a result of the defendant's failure to complete. The quantum of these charges as appearing in the two letters is reasonable, and there is no cause to imagine that these are other than genuine bills reflecting charges for which the plaintiffs are liable. I am therefore satisfied with the amounts claimed.

24. The amounts awarded will therefore be - for the 1st plaintiff:

Estate Agents' commission	$ 47500
Surveyors' charges	$ 7,500
Bank interest	$310344.58
Wasted legal costs	$ 23,475
Damages for loss on resale ($13.5m-$10m)	$3.5 million
Less the amount of the forfeited deposit	$1. 35 million
	$2,538,819.58

25. The 2nd plaintiff did not suffer any loss on resale, as the price obtained was identical to that in the original contract. Accordingly, the various items of loss totalling $19,600 will abate against the $100,000 of the forfeited deposit and no award will be made. The award of $2,538,819.58 to the first plaintiff will carry interest at the judgment rate from writ to payment.

26. The plaintiffs have been substantially successful, although the defendant has achieved partial success on the valuation issue. This balance will be reflected in a 7-day order nisi that the plaintiffs will have 85% of their costs, including a certificate for counsel.