JOYFUL HAPPY LTD v. KINGSWAY INT’L (HK) CORPORATION LTD

HCA 2211/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2211 OF 2013

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ASSESSMENT OF DAMAGES
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INTRODUCTION

1.  This is an assessment of damages.

BACKGROUND

2.  The defendant was and is the developer and registered owner of the property known as Nos 129 -131 Temple Street, Jordan, Kowloon, Hong Kong (“the Property”).

3.  In early 2013, the plaintiff agreed to purchase the Property at 150 million.

4.  Parties signed a provisional agreement (including a supplemental agreement) dated 15 January 2013 and the plaintiff paid the defendant an initial deposit of 3 million.

5.  On 6 February 2013, the plaintiff paid a further deposit of 12 million.  Parties entered into the formal sale and purchase agreement the next day.

6.  Under the said agreements, the defendant was required to obtain a hotel licence for the Property before 15 October 2013.  Clause 9 of the supplemental agreement further states that:

“Clause 9

“On completion, the Purchaser as the landlord and the Vendor or A3 Hotel Ltd. as the tenant shall enter into a Lease of Property incorporating the following fundamental terms and conditions: -

(a) Lessor: Purchaser

(b) Lessee: Vendor or A3 Hotel Ltd.

(c) Term: 5 years from the completion date

(d) Rent: HK$500,000.00 per calendar month (exclusive of rates, management fees and government rent) for the 1^st, 2^nd and 3^rd year;

HK$550,000 per calendar month (exclusive of rates, management fees and government rent) for the 4^th year; and

HK$600,000.00 per calendar month (exclusive of rates, management fees and government rent) for the 5^th year.

(e) Deposit and

One Month in

Advance: HK$3,500,000.00 to be deducted directly from the balance of the purchase price upon completion.

(f) The Vendor or A3 Hotel Ltd. shall not sublet the Property or any part thereof to or part with the possession of the Property or any part thereof with any third party throughout the term of the tenancy.

(g) During the term granted by the Lease, the Vendor or A3 Hotel Ltd. shall operate the Property as a hotel only and not otherwise in accordance with the occupation permit, the Licences and the relevant legislations of Hong Kong.

(h) Upon the execution of the Lease, the Vendor or A3 Hotel Ltd. shall procure at least 2 of its major shareholders to irrevocably give personal guarantees in respect of the due performance of the Vendor’s or A3 Hotel Ltd.’s obligations and liabilities under the Lease throughout the term thereby granted. In case the Vendor or A3 Hotel Ltd. has only 1 shareholder, such personal guarantee shall be given by the sole shareholder of the Vendor or A3 Hotel Ltd. instead.

(i) The Vendor or A3 Hotel Ltd. shall take out sufficient insurance coverage (to be reasonably determined by the Purchaser) with a reputable insurance company (with the Purchaser endorsed as the sole beneficiary) in respect of all claims, liabilities and losses suffered by the Purchaser arising out of the operation of the Property as a hotel throughout the term granted by the Lease.

(j) The stamp duty and all legal costs (at full scale costs) incidental to the Tenancy Agreement shall be borne by the Vendor or A3 Hotel Ltd. solely and shall be deducted from the balance of the purchase price upon completion of the sale and purchase of the Property.

(k) For the avoidance of doubt, the Lease shall be in such form prepared and provided by the Purchaser’s solicitors and no amendments to the Tenancy Agreement proposed by the Vendor or A3 Hotel Ltd. shall be accepted.

(l) If the Licence(s) is not issued in the name of the Purchaser, the Vendor or A3 Hotel Ltd. shall at any time at the request of the Purchaser transfer or procure the transfer of the Licence(s) to the name of the Purchaser or its nominee without consideration.”

7.  However, the defendant failed to obtain the hotel licence by the deadline.  The plaintiff therefore instructed its solicitors to give notice to rescind the agreements, demand for the deposits paid and reserve its right to claim loss and damages.

8.  On 14 October 2013, the plaintiff commenced the present action.  The defendant contested it.

9.  Later, the plaintiff succeeded in its application for summary judgment before Master S Lo on 31 March 2014.  The defendant was ordered to return to the plaintiff the deposits paid for 15 million, interest and costs.  At the same time, the defendant would also pay the plaintiff damages to be assessed.

10.  Pursuant to the judgment for assessment, parties appeared before me for 2 days in July 2015.  Both of them were represented by counsel, Mr Colin Shipp for the plaintiff, and Mr Roland Lau for the defendant.

11.  Here is my decision on the assessment.

PLAINTIFF’S CASE

12.  The plaintiff originally claimed $31,800,000 against the defendant.

13.  By paragraph 10A of the Amended Statement of Claim herein, it pleaded that:

“10A. Furthermore, the Plaintiff is entitled to claim against the Defendant for a total sum of HK$31,800,000.00 being the total loss of rental profit as contemplated under the said Clause 9 of the Supplemental Agreement (as pleaded in paragraph 5 above), particulars whereof are as follows.

Particulars of Loss of Rental Profit

Description	Amount (HK$)
(i)  Loss of Rental Profit for the 1st, 2nd & 3rd years  (HK$500,000 x 12 months x 3 years)	18,000,000
(ii)  Loss of Rental Profit for the 4th year  (HK$550,000 x 12 months)	6,600,000
(iii)  Loss of Rental Profit for the 5th year  (HK$600,000 x 12 months)	7,200,000
Total:	31,800,000.00”

14.  At the assessment before me, Mr Shipp agreed a deduction of stamp duty of $6,375,350.

15.  The plaintiff called 2 witnesses to give oral testimony, Mr Jeffrey Yu (“Yu”) and Mr Chan Pak Wai (“Chan”).  Yu was and is the sole director and shareholder of the plaintiff, and the latter, the personal assistant of Yu.

16.  Yu explained that, in his first witness statement that he decided to purchase the Property because, among others, he found the rent under the sale and lease back arrangement good and attractive.  It was also not necessary for the plaintiff to bear the rates, government rent, management fee, any costs and expenses for the repair and maintenance of the Property.  In his supplemental witness statement, he denied the case of the defendant, inter alia, that there would be a break clause in the tenancy for early termination by parties as well as the so called expenses payable by the plaintiff to earn the rent.

17.  Chan supplemented Yu’s case by explaining how he came to know the offer for sale of the Property together with the sell and lease back arrangement.  He also signed various documents for the plaintiff when Yu was out of town for other business.

DEFENDANT’S CASE

18.  The defendant disagreed with the claim by the plaintiff.

19.  In its Amended Defence and Counterclaim, it was said that:

“ 11. Each and every allegation of Paragraph 10A of ASOC is denied. Even if, which is denied, the Defendant has been in breach of the S & P Agreement as alleged or at all, the Plaintiff is not entitled to claim for loss of profit as pleaded.

  12. Further or alternatively, even if, which is denied, the Plaintiff is entitled to claim for loss of rental profit as alleged or at all, the quantum of the alleged loss of rental profit should be offset by all expenses, costs and payments that the Plaintiff would have been paid in order to acquire and maintain the Property for the period of 5 years commencing from 1^st October 2013.”

20.  At the assessment, Mr Lau said that the plaintiff had failed to mitigate its loss in the circumstances.

21.  The defendant prepared statements for 2 witnesses, one of its directors Mr Siu Kong Fai (“Siu”) and Mr Chan Lit Chun (the “estate agent”).

22.  Siu said in his two witness statements that no tenancy agreement was signed as the conveyance had been fallen through.  The plaintiff failed to take into account various items of expenditures interests and costs payable.  The plaintiff was also under a duty to mitigate.  There would be a break clause.  Each party could give 6 months’ notice to terminate the tenancy.

23.  The estate agent explained in his witness statement that parties did agree the lease for 5 years with rent thereof but some of the detailed terms such as which party should be responsible for the maintenance of the Property, utilities payments, government rent and rates had not been discussed.  Further, as to the said 5 years, parties did not emphasize whether it was a fixed term or not fixed term.  They did not clarify the terms and conditions for early termination.

24.  Siu came to the court to testify at the assessment but not the estate agent.

DISCUSSIONS

Credibility of witnesses

25.  Although the present assessment is primarily based on documents, there are still some factual disputes between the parties. Upon consideration, I prefer the evidence of the plaintiff than those of the defendant whenever there are conflicts and/or differences.

26.  The evidence of both Yu and Chan are simple and straight-forward.  Their oral testimony was not shaken during cross-examination.

27.  On the other hand, the oral evidence of Siu is far less satisfactory.

(a) There are different and inconsistent versions of facts within his case.  In the present assessment, it is important to decide if there was early termination in the tenancy because it greatly affects the quantum, if any.

(i) Early termination was never mentioned in the pleading of the defendant although it had amended its Defence and Counterclaim.

(ii) It was only raised in the witness statement of Siu and such case was not expressly made but based on implication.

“19. The reason why the Plaintiff and the Defendant agreed to such an amount of rental deposit was on the basis that in case either party does not want to continue this hotel lease, either party could give 6 months’ notice. This also reflects that it is within parties’ contemplation that there would be compensation of 6 months’ rentals should the Defendant decide to terminate the lease. Accordingly, I am advised and verily believe that even assuming that the Plaintiff is entitled to claim for loss of rentals, it is neither fair nor reasonable for it to claim for the full term of 5 years. The Plaintiff at most should only be entitled to claim for 6 months’ rental payments. In this regard, even though the Supplemental Agreement is silent on any clauses for termination as at that time, this term of early termination would be provided for should the parties eventually enter into a formal lease of the Property.”

(iii) During examinations, Siu said that early termination was indeed specifically mentioned by him with the estate agent during negotiation.  It was challenged by Mr Shipp as recently concocted.

(iv) If one goes to the witness statement of the estate agent, he actually only said that “both parties did not emphasize whether it is a fixed term or not fixed. Both parties did not clarify the terms and condition for early termination of the proposed lease.”

(b) Yu’s explanations regarding the absence of the estate agent are evasive.

“ Q. Right. Now, Mr Chan also made a witness statement for you in these proceedings. Is that correct?

A. Yes.

Q. Did you read the contents of his witness statement?

A. Yes, I did.

Q. Do you agree with what he said?

A. Which point are you referring to?

Q. Well, the whole witness statement. It’s only one page.

A. Yes, I read that and agree.

Q. Okay. So what said was true and accurate.

A. Yes.

Q. Good, good. Now, Mr Siu, why didn’t Mr Chan come to give evidence for you today?

A. Well, I have no idea why.

Q. I don’t understand your answer.

A. I don’t know why he chose not to come. There could be many reasons.

Q. Did you ask him to come?

A. Yes.

Q. When did you ask him to come?

A. Last week – last Thursday.

Q. All right. Good. Did he say he would come?

A. He said he would consider that.

Q. Did you ask him what he had to consider?

A. Well, I didn’t ask for details.

  Q. Did you ask that question, “What do you have to consider?”

A. I did not ask for the reason in detail, and I did not ask what he had to consider.

  Q. Mr Siu, do you agree with me that would be the natural reaction of any reasonable person in your circumstances?  You would ask Mr Chan, “Why are you not coming to give evidence for me?  You made a witness statement.”

A. Well, that day, I met him and I told him that he had to come to court, and he said he had to consider about it. I asked him what he had to consider about. He did not answer me. He just kept saying he needed to consider about it.

Q. Mr Siu, tell me which version is incorrect. You just told us you called Mr Chan, and now you changed your testimony by saying you met him in person. So which version is incorrect?

A. I did not say I rang him up, I just said I asked him to come. I just said I asked him to come.

Q. And tell us which version is incorrect. Just now you said you never asked him why he is not coming, but one minute ago, you changed and told us that you did ask him. Mr Siu, can you answer a very simple question with a very simple answer? I ask you which version is incorrect. You gave an inconsistent version just now. One, if I can remind you, you never asked him, “Why you not coming?” Then two minutes ago, you told us you did ask him why he was not coming.

A. Well, when I answered the question just now, I said I’ve asked him to come. He said he needed to consider about it, and then I asked him what he needed to consider. Because he did not say he wouldn’t come, so I didn’t ask him why he wouldn’t come.

  MR SHIPP: I shall move on, Master.”

(c) Last but not least, I also agree with the observations of Mr Shipp in his Closing Submissions.

“9. Siu’s oral testimony seldom engaged the questions that were put to him and he was intent on repeating what he wanted to say over and over again. He demonstrated incredible reluctance to give a simple answer to a simple question. Indeed, time and time again he changed his testimony and was incredibly evasive. As an example, when Siu was cross-examined on whether he was prone to make groundless assertions and an example given was regarding the fictitious agreement contained in his lawyer’s letter of 11 October 2013 ……, he testified that he was the one who gave instructions to issue the said letter. In re-examination, he changed his testimony to ‘at the time there was a Jackie Ng, who had helped me to handle the manner for a short time, I think the postponement was handled by him.”

28.  Having decided to prefer the case of the plaintiff than those of the defendant, I move to see if the plaintiff has proved the damages it sought, and if so, whether the deductions advanced by the defendant are to be allowed by the court.

29.  The plaintiff relied on clause 9 of the Supplemental Agreement to claim its loss of profit (rent) for 5 years.

30.  I have heard no argument that it is not something unreasonably expected by the plaintiff to earn should the conveyance transaction would have been gone through.  I agree to accept it as the starting point.

Duty to mitigate?

31.  Has the plaintiff failed to mitigate?

32.  There is no doubt that mitigation of loss is one of the most common issues in assessment of damages.  Burden lies on the defendant to put it in issue and to be precise, to show how and what the plaintiff should and could have done in the circumstances.  As stated in McGregor on Damages, 19^th edition paragraph 50-002 at page 1954:

“Occasionally, however, the defendant will be found to admit the claimant’s allegations of damage and then put in issue allegations in avoidance. This is the position where the defendant seeks to show that the claimant should have taken certain steps to mitigate his loss. It was established by Roper v Johnson that the burden of proof on this issue is on the defendant, and the normal measure of damages will not be cut down unless the defendant succeeds in showing that the claimant ought reasonably to have taken the suggested mitigating steps …”

33.  In our present case, there is no argument that the defendant does not mention the duty to mitigate in its pleadings.

34.  Siu only stated it in his witness statement. However, it did not suggest any step(s) that the plaintiff should have done.

35.  Mr Lau tried to save this point by raising a legal argument, namely, the plaintiff should have elected for specific performance rather than acceptance of breach/claim for damages.  I am unable to concede with the argument.  As pointed out by Mr Shipp, it is trite law that an innocent party under a contract is free to choose his remedies, specific performance or damages.  It is misconceived to argue that by opting one available relief will amount to failure to mitigate because he would have suffered less by picking another remedy.

Early termination?

36.  In my view, the defendant’s case that there would be an early termination clause of 6 months in the tenancy to be entered is bound to fail.

(a) It has never been the pleaded case of the defendant.

(b) Clause 9 (k) of the supplemental agreement is binding on the parties.

(c) With the finding of facts by me upon the disputed facts of the parties, there would be no early termination in the tenancy.

37.  I therefore am satisfied that the plaintiff is prima facie entitled to the damages of 31.8 million sought.

Any deductions?

38.  The defendant put a number of different deductions.

“Table 1: Overall Total

	Actually Incurred Costs*	6 months	5 years
Maintenance & Repair	$809,797	$647,837.60	$6,478,376
Utilities	$114,299.50	$91,439.60	$914,396
Stamp Duty & Related Expenses		$6,375,350	$6,375,350
Interest Costs		$2,362,500	$25,337,651.26
Licence Renewal Fee		$26,050	$130,250
Consultancy Fees		$168,000	$504,000
Total		$9,671,177.20	$39,740,023.26

*Costs incurred from 15 Oct 2013 to 4 Jun 2014 (about 7.5 months)”

39.  As said earlier, Mr Shipp agreed that stamp duty of $6,375,350 had to be paid by the plaintiff and therefore was to be deducted.

40.  Upon thought, the defendant has not been able to satisfy me that it is entitled to the deductions of maintenance & repair, utilities, licence renewal fee and consultancy fees.

(a) As in the argument on the issue of early termination, clause 9 (k) of the supplemental agreement will put the plaintiff in a position to decide on the exact terms of the tenancy.

(b) On balance, I have decided to prefer the evidence of Yu and Chan.

(c) All the maintenance & repairare not in capital nature. Utilities, licence renewal fee and consultancy fees are all in the nature of day-to-day expenses of running a hotel.

41.  Finally, it comes to the deduction of mortgage interests payable by the plaintiff to complete the conveyance.

42.  As a matter of evidence, Siu said in his witness statement that he had enquired from various banks and believed that the interest costs (at the borrowing rate of 3.5 %) on the balance of 135 million for 5 years ought to be 25,337,651.

43.  Yu disagreed and replied in his witness statement that the interest costs should not be taken into account in the plaintiff’s claim for loss of rental profit.

44.  Siu further explained in his supplemental witness statement that he had been told that the plaintiff would like to have the lease terms in writing so that it could apply for mortgage from the bank to pay off the balance of the purchase price.

45.  Upon consideration, I take the view that the mortgage interests are to be deducted from the rental payable to the plaintiff.

(a) As in the case of stamp duty, as a matter of principle, the innocent party should be put (as nearly as possible) in the same position as if he had not been injured.  Hence, in order to earn the rent, the plaintiff had to complete the conveyance and thereby pay the stamp duty.

(b) Such concept equally applies if the plaintiff had to pay the balance of the purchase price by borrowing monies from bank.

(c) In the present case, although I have accepted the evidence of Yu and Chan rather than of those of Siu, the case of the plaintiff regarding mortgage interests is not that it did not need to borrow money but only that such sum should not be deducted.  The plaintiff did not produce evidence to show that it could complete the conveyance within its own resources.

(d) Mr Shipp tried in his cross examination with Yu to attack the reliability of the case that the plaintiff needed to apply to bank for mortgage to pay the balance.  He also said that such piece of evidence was not admissible because Siu did not identify the name of the informant time and so forth.

(e) However, in my view, the crux lies in the weakness or insufficiency in the own case of the plaintiff.

(f) Notwithstanding having preferred the evidence of Yu and Chan, on balance, I find that the plaintiff had to borrow money from bank to complete the conveyance and therefore had to pay mortgage interests in order to earn the rent.

CONCLUSION

46.  To conclude, the defendant shall pay to the plaintiff damages in the sum of $86,999 ($31, 800,000 – $6,375,350 - $25,337,651).

COSTS

47.  The damages awarded by me falls within the jurisdiction of the District Court.  I therefore further order that the defendant do pay costs of the plaintiff in the assessment, including certificate of counsel for hearings on 28 and 29 July 2015, on District Court scale, to be taxed if not agreed.  Such costs order nisi will become absolute after 14 days.