CLP POWER HONG KONG LTD v. COMMISSIONER OF RATING AND VALUATION

LDGA 241/2004
& LDRA 365-369/2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

GOVERNMENT RENT APPEAL NO 241 OF 2004

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IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

RATING APPEAL NO 365-369 OF 2004

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D E C I S I O N
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Chan J:

1. The appellant CLP Power Hong Kong Ltd (“CLP”) brought appeals against the respondent the Commissioner of Rating and Valuation (“CRV”) in respect of the assessments of the rateable value and government rent of the tenement and leased land occupied by CLP for the year of 2004/05.  The tribunal (President: Au J and Member Lo) heard the appeals and gave judgment on 24 April 2013 allowing the appeals (“the original judgment”).  The tribunal also made a costs order nisi that the costs of the appeals be to CLP to be taxed with certificate for two counsel.

2. Thereafter, both CLP and CRV applied for review of certain parts of the original judgment.  The tribunal (President: Au J and Member Lo) heard the applications and gave judgment on 3 January 2014 (“the review judgment”). Since CLP was successful substantially in the review, the tribunal also made a costs order nisi in favour of CLP with certificate for two counsel.

3. There are now three applications.  The first one was issued by CRV on 8 May 2013 for variation of the costs order nisi made in the original judgment.  It does not relate to the costs order nisi in the review judgment.  The extent of the variation sought and the grounds in support thereof were filed and served by CRV on 28 February 2014.

4. The 2nd application was issued by CLP on 24 January 2014 seeking leave to appeal against the review judgment confirming the original judgment save as set aside, reversed or varied by the review judgment.  A draft notice of appeal with four grounds of appeal is annexed to the application for leave.

5. The 3rd application was also issued by CLP on 14 March 2014 which asked for the scale of taxation in the costs order nisi in the original judgment to be varied to common fund taxation.  This application is supported by the 4th affidavit of Mr Hardaker, a solicitor acting for CLP.  Owing to time constraint, this application was not dealt with orally but only by way of written submissions. 

6. There is also an argument on the costs for the resolution of a dispute on interest.  By reason of the appeals being allowed, there is an amount of rates and rent overpaid previously as CRV had not ordered the holdover of payment of rates under s 42A of the Rating Ordinance pending the determination of the appeals. The overpaid amount has to be refunded to CLP.  There was however an argument on what rate of interest was to accrue on the refund.  That issue was resolved between the parties shortly before the hearing on 27 March 2014.  What is left is the argument on the legal costs of that issue.

7. In this judgment, I will use the same abbreviations as used by the tribunal in the original and review judgments.

APPLICATION FOR LEAVE TO APPEAL

8. In accordance with the sequence adopted by the parties, I deal with the application for leave first. 

9. CLP brought this application pursuant to ss 11(2) and 11AA(6) of the Lands Tribunal Ordinance, Cap 17 and Rule 30B of the Lands Tribunal Rules.

10. S 11(2) provides:

“(2) Subject to s 11AA and the provisions of any Ordinance relating to appeals from the Tribunal, any party to proceedings before the Tribunal may appeal to the Court of Appeal against a judgment, order or decision of the Tribunal on the ground that such judgment, order or decision is erroneous in point of law.” (emphasis supplied)

11. S 11AA(6) provides:

“(6) Leave to appeal shall not be granted unless the Tribunal, the Court of Appeal or the registrar hearing the application for leave is satisfied that—

(a) the appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the appeal should be heard.” (emphasis supplied)

Ground 1

12. This ground is about the rateability of certain installations. It is about the interpretation of ss 8 and 8A of the Rating Ordinance.  The sub-grounds of this ground in the draft notice of appeal state:

“Non-rateable machinery

(i) The tribunal erred in law in holding that the items summarised in paragraph 227 of its original judgment fell within s 8A of the Rating Ordinance and should therefore be treated as rateable. The tribunal misconstrued ss 8(b) and 8A. It therefore failed to consider whether the items constituted machinery within s 8(b) so that those assets should be treated as non-rateable and/or their value disregarded in the assessment of the rateable value of the tenement; and/or

(ii) The tribunal erred in law by treating s 8(b) as not being concerned with the rateability of machinery and by treating s 8A in effect as overriding s 8(b).  The tribunal erred in law by construing s 8A as enabling assets situated within a rateable building to be treated as part of that tenement, and by not appreciating that s 8A only applies where land is occupied by means of plant so as to give rise to a separate, deemed tenement.  The tribunal misinterpreted the Ordinance as regards the relationship between ss 8(b) and 8A.”

13. Ss 8 and 8A provide:

“8. For the purpose of ascertaining the rateable value of a tenement under ss 7 and 7A –

(a) subject to paragraph (b), all machinery (including lifts) used as adjuncts to the tenement shall be regarded as part of the tenement, but the reasonable expenses incurred in working such machinery shall be allowed for in arriving at the rateable value of the tenement;

(b) no account shall be taken of the value of any machineryin or on the tenementfor the purpose of manufacturing operations or trade processes.

8A. (1) Where any land (including land covered with water) or any building or structure is occupied by a person by means of any plant, such land, building or structure shall, to the extent that the land, building or structure is so occupied, be deemed for rating purposes to be a separate tenement, whether or not such land, building or structure is otherwise a tenement and that person shall be deemed for rating purposes to be the occupier of such tenement and liable for payment of rates assessed thereon.

(2) For the purpose of ascertaining the rateable value of such tenement, the plant by means of which the person is occupying the tenement shall be regarded as part of the tenement.

(3) In this s ‘plant’ (工業裝置) includes cables, ducts, pipelines, railway lines, tramway lines, oil tanks, settings and supports for plant or machinery.” (emphasis supplied)”

14. This ground relates to the rateability of the boilers and supporting steelwork, the cooling water circuits, the ancillary pipe work and electrical cables within Castle Peak Power Station (“CPPS”) Station B (“B”) and Black Point Power Station (“BPPS”).

15. In the appeals, CLP submitted that these installations and items were not rateable because they were either structurally part of or functionally ancillary to the machinery (such as generators, transformers, pumps and other auxiliary equipment) of the hypothetical tenant (“HT”).  They were therefore part and parcel of the machinery used for manufacturing operations or trade processes and not rateable under s 8(b).

16. Mr Holgate, Q. C. leading Mr John Litton for CLP submitted in the appeals that s 8A(3) had to be interpreted not to include anything which had already been excluded by s 8(b) because s 8A(3) was enacted later than s 8(b).  Those items which were structurally part of or functionally ancillary to the principally machinery which had been excluded from rating assessment by s 8(b) should not be brought back by the later enacted s 8A(3).  Mr Holgate thus treated these installations and items as either structurally part of or functionally ancillary to the machinery which were exempt from rates under s 8(b).

17. CRV on the other hand submitted in the appeals that “plant”, which occupies the land or building is rateable under s 8A(2).  S 8A(3) provided that “plant” included “cables, ducts, pipelines … and supports for plant or machinery”.  Since these installationsand items fell within the definition of plant, they were therefore rateable. 

18. Au J dealt with this issue in paras 227 to 235 of the original judgment.  He referred to s 8 which excluded the value of machinery in or on the tenement for the purpose of manufacturing operations or trade processes from rating assessment.  However he took the view that s 8A dealt with the situation where land or building was occupied by a plant.  In that situation, the plant (including “the cables, ducts, pipelines … and supports for plant or machinery” per s 8A(3)) should be treated as part of the tenement for rating purposes.  The learned judge said that s 8A was not subject to s 8(b).  The installations covered by the two sections were different.  The plant which was within the scope of s 8A was not machinery within s 8(b).  Hence, Mr Holgate’s interpretation was incorrect.

19. The learned judge then held that the aforesaid installations and items all fell within the definition of “plant” under s 8A(3) and formed part of the tenement for rating assessment.

20. Mr Holgate submitted for CLP in this application that the relationship between ss 8 and 8A had not been considered by an appellate Court in Hong Kong.  He further submitted that it is a matter of great importance because it affects the general application of the rating legislation. 

21. He disagreed with Au J that ss 8 and 8A covered different subject matters.  He maintained that the same machinery could be within both sections and that the tribunal erred in just treating the installations and items were rateable under s 8A(3) but failed to consider whether they were rendered non-rateable by s 8(b). 

22. However, I think it is clear that s 8(b) covers “machinery in or on the tenement” for the purpose of manufacturing operations or trade processes. Such machinery may also be within the scope of s 8(a) so that it is also used as adjuncts to and be regarded as part of the tenement.  Machinery is an apparatus or equipment that operates mechanically.  There is no legal definition for it. Whether an article is machinery is a question of fact and not open to appeal.

23. It is also clear that s 8A covers “plant” by means of which land, building or structure is occupied.  It is not an adjunct to the land or building which it occupies and is not covered by s 8(a).  The plant together with the occupied land, building or structure constitute or is deemed to be a separate tenement.  It is an industrial installation.  It, together with the occupied land, building or structure, is an integral system.  It may have ancillary items like “cables, ducts, pipelines … and supports for plant or machinery” (as referred to in s 8A(3)) as part of the integral system.

24. I agree with Au J that ss 8 and 8A cover different subject matters.  Machinery that falls within s 8(b) is not covered by s 8A(3) and vice versa.  I do not think Au J had taken s 8A as overriding s 8(b) as alleged in CLP’s ground 1(ii).  I agree with Au J that the disputed items are within s 8A. Given the clear absence of relationship between ss 8 and 8A, I do not think leave should be given for this point to be argued on appeal.

25. CLP further submitted that the tribunal had in para 233(1) of the original judgment wrongly treated s 8 as being concerned simply with whether the value of machinery should or should not be taken into account in the rateable value.  It alleged that the tribunal had not dealt with whether machinery is to be treated as forming part of a tenement and thus non-rateable.  I think this is reading para 233(1) out of context.  Au J in this paragraph was discussing the different functions of ss 8 and 8A which covered different subject matters.  The learned judge was fully aware that machinery falling within s 8(a) “shall be regarded as part of the tenement”.  In para 31 of the original judgment, he said “[w]hile plant and fixed machinery both form part of the tenement, the value of such machinery used for manufacturing operations or trade processes is therefore to be disregarded in ascertaining the rateable value of the tenement.”

26. CLP further alleged that the tribunal had wrongly construed ss 8(b) and 8A by treating s 8A as overriding s 8(b) and thus undermined the statutory basis in s 8(b) upon which assets are required to be treated as non-rateable. I think this is also a misreading of the original judgment.  Au J made it clear that the two sections are to cover different subject matters and not one overriding the other.

27. CLP then submitted that s 8A had two objectives of (i) enabling property otherwise not rateable to be rated and (ii) creating a separate deemed tenement.  It further submitted that s 8A only applied where land was occupied by means of plant which warranted the deeming and creation of a separate tenement. It then alleged that the tribunal had erred in law in holding (in paras 229(2) and 234 of the original judgment) that s 8A enabled the disputed items to be treated as part of CLP’s overall “Tenement”.  CLP further submitted that since the power stations were rateable in any event, it was impossible to say that the power stations (as land and buildings) were being occupied by means of the disputed items of auxiliary plant in terms of s 8A.

28. This again is a misreading of paras 229(2) and 234 of the original judgment.  Au J defined “Tenement” in paras 4 and 33 to 37 of the original judgment to comprise of the land, buildings and structures occupied and used by CLP for the generation, transmission and supply of electricity to Kowloon and the New Territories.  It is not a separate tenement deemed under s 8A(1).  Au J did not hold that all the land, buildings, structures occupied and used by CLP were occupied by the disputed items in terms of s 8A so that all these land, buildings and structures as occupied by the disputed items together constitute a tenement. Para 241 of the original judgment made it clear that Au J had in mind separate tenements occupied by CLP that together constitute the “Tenement” as defined in para 4.  I understand Au J to mean that the disputed items constituted parts of separate tenements rateable under s 8A and these tenements constituted parts of the Tenement.

29. CLP also submitted that the tribunal had erroneously treated plant, which fell within s 8(b) and thus non-rateable, as being caught by s 8A so as to end up being rateable and that such treatment made no sense.  However, I do not see that the tribunal had committed such error. The tribunal was clear that the two sections covered different subject matters. As a matter of fact, whatever that is plant as defined in s 8A is not machinery as referred to in s 8. 

30. To sum up, I do not think CLP has demonstrated any reasonable chance of success of appeal on ground 1.  Though the interpretation of ss 8 and 8A is a matter of general application of rating legislation, there is no great importance and not in the interests of justice that the appeal on ground 1 should be heard as there is no issue that needs to be argued on appeal.  I would not grant leave to appeal on this ground.

Ground 2

31. This ground is about the rateability of dedicated customer substations (“DCSs”).  A DCS is a room provided by a customer within his building for housing a 11kV transformer to enable power to be distributed solely to the units in the building in which the transformer is situated.  A DCS is an integral part of the customer’s building.  A non-dedicated customer substation (NDCS”) provides power to two or more buildings.  A DCS is necessary for power supply to the building in which it is located so that the building may be occupied and used with electricity supply. 

32. The tribunal held in the original judgment that the DCSs were rateable.  However, it further held in the review judgment that the DCSs should not be included in the asset base under the asset split exercise.  The reason being that they were not on the Scheme of Control (“SoC”) register.  Hence, the fact that they were rateable assets was neither here nor there as they had no effect on the rateable value of CLP’s Tenement in the 2004/05 assessment.  CLP thus succeeded in this issue in the appeals.

33. Despite the success on the issue, CLP still wants to have leave to appeal against the tribunal’s decision that DCSs are rateable. It says that the legal principle involved is important for identifying the extent of its rateable property in the future.  But it agrees that there is no legal requirement for the parties to adhere indefinitely to the valuation method adopted for 2004/05.

34. The sub-grounds in the draft notice of appeal say:

“Accommodation provided by customers for dedicated substations

(i) The tribunal erred in law by holding in its original judgment that the room provided by a customer within his building for a sub-station dedicated solely to that building is in the paramount occupation of CLP and therefore forms part of CLP’s rateable tenement, rather than part of the rateable tenement of the customer; and/or

(ii) The tribunal failed to consider first the definition of “tenement” in s 2 of the Ordinance and the absence of any interest held by CLP in a customer’s accommodation so as to bring that property within the tenement comprising CLP’s utility system; and/or

(iii) If, contrary to CLP’s submissions, the tribunal would have been entitled to conclude that the DCS was held or occupied by CLP under a separate tenancy or holding or licence, the tribunal failed to consider secondly whether any use of that property by CLP fulfilled all of the four ingredients of rateable occupation, but went directly instead to determine paramountcy of occupation; and/or

(iv) The conclusions reached by the tribunal in paragraph 225 of its original judgment were insufficient in law to found a decision that CLP was in paramount occupation of that part of the customer’s building. CLP’s sole access to the DCS room simply to enable the integrity of the transformer to be maintained was insufficient in law to result in CLP having paremountcy of occupation over the owner of the building, a fortiori where the electricity supplied via that room was solely for the benefit of the customer’s building; and/or

(v) The tribunal reached its conclusion without taking into account a material consideration, namely that the room within the customer’s building was provided in order to accommodate machinery belonging to CLP which was entirely non-rateable. Applying the “purpose” test, the function of the DCS was to supply electricity to the customer’s building alone, as an integral part thereof, without which the building could not be used or occupied at all; and/or

(vi) The tribunal failed to deal with a substantial matter, namely the absence of any material difference between the DCS and other parts of the customer’s building providing common services for the benefit of the building; and/or

(vii) The tribunal failed to comply with its legal obligation to give reasons for its decision dealing with the substantial points raised by CLP.”

35. CLP in its written submissions for this application referred to the tribunal’s finding that a DSC housing the substation belonged not to CLP but to the owners of the building and formed part of the customers’ tenements as follows:-

(i) rateability of a property depended upon whether it could meet the four ingredients of rateable occupation accepted by the CFA in HEC v Commissioner of Rating and Valuation [2011] 4 HKC 509;

(ii) whether CLP or its customer was in rateable occupation of a DCS depended upon who was in paramount occupation which in turn depended upon the degree of control exercised by the competing occupiers over the premises for the purposes for which they were occupied, having regard to the nature of the premises (para 220-222 of original judgment);

(iii) DCSs were in the paramount occupation of CLP because (para 225 of original judgment):-

(a) the rooms were provided for CLP’s use principally, if not solely, for installing its equipment for supplying electricity to the buildings;

(b) The building owners and CLP benefit equally from the supply of that electricity;

(c) For reasons of safety, DCSs were locked and only CLP staff had access thereto.  That sole access was to enable and facilitate CLP’s principal (and probably sole) use of the DCSs.

36. CLP submitted that the tribunal had not decided the question of whether CLP had held or occupied a DCS as a distinct or separate tenancy or holding or under licence that would amount to a tenement under s 2 of the ordinance. The tribunal just proceeded directly to the issue of paramountcy of occupation. CLP further submitted that it did not have any separate holding of a DCS from the building owner.  Its equipment was placed in the room pursuant to the “Supply Rules”. The effect of the rules was that the customer who wished to obtain electricity supply had to provide suitable accommodation for CLP’s equipment.  The customer was responsible for the “maintenance of such accommodation services and equipment in order to safeguard the Company’s equipment”.  The relationship was one whereby CLP simply supplied electricity to a customer within the latter’s property.  Hence, CLP submitted that the tribunal had erred in holding DCSs were CLP’s rateable property.

37. I disagree with these submissions.  The tribunal approached the issue of paramountcy of occupation directly because that was the issue raised in CLP’s closing submissions.  There was no express challenge by CLP on the issue of holding or licence under s 2 of the ordinance in the closing submissions. CLP had indeed contested this issue of holding or licence in its opening submissions. But that part of the opening was only repeated in the closing submissions in a wholesale manner without anything being mentioned in particular.  If this point should be regarded as having been taken in the closing submissions, it was taken in a rather incidental and unconspicuous manner. Furthermore, from the facts found by the tribunal, it is clear that CLP was occupying a DCS with a licence from the building owner.  It was something so obvious that no express ruling needed be made.

38. CLP further contended that the conclusions of the tribunal in para 225 of the original judgment were insufficient in law to found a decision that CLP was in paramount occupation of the DCSs because:-

(i) Even if a DCS was mainly for housing CLP’s equipment, the function of the equipment was to supply electricity to the building only.  The supply was equally beneficial to the building owner and CLP.  Therefore, the tribunal in applying the “purpose” test in para 225(1) could not have come to a decision that CLP was in paramount occupation of a DCS;

(ii) The only other matter relied upon by the tribunal was that CLP had a high degree of control over and the sole access to a DCS for reasons of safety (para 225(2)).  However, the tribunal also accepted that the purpose of the sole access was to facilitate CLP’s use of the DCS, which was equally beneficial to the owner and CLP;

(iii) But the tribunal had failed to deal with the question that denial of access by CLP to his customer to the DCS was for maintaining the integrity of the service equipment which did not result in CLP having paramountcy of occupation of the DCS as against the customer, a fortiori where the customer is solely entitled to the use of the electricity supplied through the DCS.  Reference was made to Vtesse Networks v. Bradford [2006] RA 427, para. 8 at p. 433 and p. 447.

39. CLP further submitted that the tribunal had failed to deal with a substantial matter, namely CLP’s contention that a DCS was not materially different from other parts of a building providing common services for the benefit of that entire building, e.g. lifts, water supply, air conditioning equipment, and toilets.

40. I also disagree with these submissions.  The tribunal did refer to Vtesse Networks in the original judgment.  The clear reference in para 225 of the original judgment to safety reasons as the cause for CLP’s sole access shows that the tribunal was fully aware that sole access was also for maintaining the integrity of the service equipment.  Reasons of safety must include the need to maintain the equipment.  To say one does not include the other is to make a hair splitting difference. 

41. I also agree with Mr Yu for CRV and reiterate that paramountcy of occupation is a question of fact and is not open to appeal.  The facts about the occupation of other common facilities in a building may not be the same as those of DCSs and each item must be considered individually (Westminster Council v Southern Railway [1936] AC 511 at 529, 532 per Lord Russell and Vtesse Networks paras 33 and 37). 

42. CLP further argued that the tribunal had erred in law in that it had treated the DCS, which was used to house a non-rateable transformer, as an area separately from the rest of the building in the rateable occupation of CLP, when the DCS was an integral part of and essential to and solely for the building in which it was located and without which that building could not be used at all (see Assessor for Lanarkshire v. Clydesdale Bank [2005] S.L.T. 167; Selector UK Ltd v. Lothian Valuation Assessor [2010] RA 37).

43. CRV submitted that this point had not been taken in the appeals and the review.  Hence, the tribunal had not erred in not considering this point and CLP should not be allowed to take it on appeal.  CLP in reply said that the facts constituting this point were all there. 

44. It is clear that CLP in the appeals only took the issue of paramountcy of occupation and not the point that the DCS was used to house non-rateable equipment.  In any case, rateability is determined by paramountcy of occupation of the accommodation, which is a question of fact, and not the rateability of the equipment housed in the accommodation.

45. The case of Clydesdale Bank does not assist CLP.  It is a case of the sites of autoteller machines within retail stores being treated as in the rateable occupation of the bank and not the stores.  The Lands Valuation Appeal Court held that each of the machines was a free standing piece of movable property.  The bank had no right of occupation of the floor space on which the machines were placed.  There was no question of rateable occupation. The court further opined that if the question of rateable occupation had indeed arisen, any right of occupation of the bank, as might have been conferred on it by its agreement with the store, would be subordinate to that of the store.  This case is thus irrelevant to the point that CLP wants to take now.

46. The case of Selector UK Ltd also does not assist CLP.  That is a case of some vending machines being installed within a main railway station.  The Lands Tribunal for Scotland held that the machine company was not in rateable occupation of machine stances or sites.  The tribunal found that there was no building or other rateable item on a unit of rateable occupation and no delineation of the unit and no site could be identified.  It was possible but difficult to identify a separate unit of rateable occupation.  A finding of rateable occupation also could not be made because there were various conditions in the agreement between the machine company and the station operator that had put the company in substantial control of the machines but the operator to retain control of the sites.  The sites were not identified and the machines were to be installed at sites as might be approved by the operator from time to time.  The machines could be removed at the instance of the operator with a minimum notice of three days. These facts make this case entirely different from CLP’s case on DCSs and is also irrelevant to the point that CLP now wants to take.

47. CLP in the last sub-ground submitted that the tribunal had failed to comply with its obligation to give reasons when dealing with substantial matters raised by CLP.  But CRV submitted that this ground had no merit as it did not specify what substantial matters that the tribunal had dealt with but without giving reasons.  CLP in its reply submissions said that the substantial matters were the tribunal’s failure to determine CLP’s occupation of a DCS as a tenement within s 2 of the ordinance and the issue that denial of access by CLP to its customers to DCSs was for maintaining the integrity of the service equipment which should not have resulted in CLP having paramountcy of occupation of DCSs as against the customers.  These matters had been discussed and dealt with above.

48. Apart from making the substantive objections against ground 2, CRV also objected that this ground is academic.  Mr Yu made the jurisdictional objection at the hearing.  He submitted that CLP could appeal against the tribunal’s order but not its reasoning.  Since the decision on DCSs was in favour of CLP, there was nothing in this issue for CLP to appeal against.  Mr Yu referred to para. 59/0/11 of Hong Kong Civil Procedure 2014, Vol. 1 which states:

“Appeals are against orders, not reasoned judgments —Appeal lies against the order made by the judge, not against the reasons he gave for his decision (Lake v Lake [1955] P.336; [1955] 2 All E.R. 538, CA). Thus a party who was succeeded in obtaining, or, as the case may be, resisting, all relief sought cannot appeal even though he disagrees with the reasons which the judge has given for deciding all points in his favour. On the other hand, if a party has succeeded in obtaining, or resisting, only part of the relief sought, he can, of course, appeal against the order to the extent that he was unsuccessful.”

49. Mr Holgate replied that CLP in the appeals was in a different situation as it was not a matter of obtaining all or part of the relief. The appeals were concerned with ascertaining the rateable value of CLP’s Tenement. Hence, there was no jurisdictional issue.

50. I however cannot see the distinction that Mr Holgate tried to draw.  One of the issues in the appeals was on the rateability of DCSs. CLP succeeded in that completely.  CLP may be unhappy about the first part of the decision in the original judgment that DCSs were rateable.  But CLP succeeded in this issue overall.  I cannot see what there is in the tribunal’s decision on this issue that CLP could appeal against.  On this reason alone, I would dismiss the application on ground 2.

51. Mr Holgate further relied on Chit Fai Motors Co Ltd. v Commissioner for Transport [2004] 1 HKC 465 and argued that an academic point could still be the subject matter of an appeal.  In Chit Fai Motors, Chit Fai sought judicial review of the Commissioner’s decision to allow another transportation company to operate free bus service in an area where Chit Fai was running franchised public light bus routes.  At the time of the hearing, the licence of the free bus service had already expired and the court held the matter was academic and did not proceed to resolve it.  However, the Court of Appeal took the view that where the same point was likely or might arise between the same parties and there was utility in the decision, then the court should hear it. 

52. In the present case and as pointed out by Mr Yu, the issue of DCS is not spent or academic, but had been decided in favour of CLP. There is no decision for CLP to appeal from.

53. Mr Holgate also submitted in the reply submissions that the academic point involved at least three assumptions that:

(i) CRV would not seek to challenge the tribunal’s decision in the review judgment that the DCSs should not be included in the asset split;

(ii) CRV accepted that the method laid down by the tribunal in the original and review judgments should be applied to the assessment of rateable value in the other years still under appeal; and

(iii) the correct ascertainment of the extent of CLP’s rateable, or taxable property is academic both now and in the future.

54. However, if the first assumption should be wrong and CRV should appeal against the review judgment on the DCS issue, CLP could put in a respondent’s notice and argue on appeal that the DCSs were not rateable at all.

55. For the second and third assumptions, if CRV should refuse to apply the same assessment method on the DCSs as laid down in the review judgment or refuse to accept the rateable property ascertained by the method in these appeals for the other years of assessment under appeal, then these issues had to be argued afresh.  CLP also acknowledged that CRV is not bound by these appeals to use the same method for the assessments in other years.

56. For these reasons, CLP has not shown any reasonable prospect of success in appealing against the DCS issue.  The tribunal also has no jurisdiction to grant leave to appeal on ground 2 as CLP has already succeeded in this issue.

Ground 3

57. The tribunal in para 34(2) the original judgment referred to BPPS.  It is a combined cycle gas fired power station comprising 8 generating units.  The installation and commissioning of units 7 and 8 was deferred from 1999 to 2005 and 2006 respectively.  Owing to the deferral, CLP and Castle Peak Power Company Ltd (“CAPCO”), in discharge of their contractual obligations, had to reimburse the vendor the additional costs incurred for the delayed delivery of the two units.

58. There was a Development Fund set up to keep the profits in excess of the permitted return (“PR”) under the SoC.  The money in the Development Fund could not be appropriated and enjoyed by CLP as profit from its operation. The Development Fund was intended to assist in financing the acquisition of fixed assets for CLP. 

59. Owing to the need to reimburse premium to the vendor for deferral of generating units 7 and 8, CLP and CAPCO agreed to set aside HK$803 million from the Development Fund to a Special Provision Account for this purpose. The Special Provision Account was fully drawn down in 2004 to pay the premium to the vendor and is now closed.

60. There was a dispute in the appeals on how this deferral premium should be treated in the R&E valuation.  CLP treated this premium as expenses of the HT in the hypothetical tenancy for 2004/05.  It wanted to have this expenses deducted from the receipts so as to arrive at a smaller divisible balance (“DB”) and hence lower rateable value.  CRV disagreed and wanted to exclude this item from the HT’s expenses.  Member Lo dealt with it in paras 366 to 368 of the original judgment. 

61. CRV’s reasons in the appeals were that (a) the original source of the payment was the Development Fund which was borne by CLP’s customers instead of its shareholders; (b) it was an exceptional and not a recurrent expense, and (c) the transfer from the Development Fund to the Special Provision Account was made back in 2000.  CRV’s expert Ms Jim took the view that “the HT would not rely on, and as such would not expect to incur the deferral premium as an item of his estimated expenses to earn his estimated revenue during the hypothetical tenancy from 1 October 2003to 30 September 2004”. 

62. Member Lo agreed with Ms Jim’s reasons and held for CRV in para 368 that “(i) it not a necessary assumption that the HT would take over the incumbent’s liabilities; and (ii) it is an assumption that the HT would refer to the owner occupier’s accounts to estimate its own accounts to inform its rental bid, but the HT would not want or be forced to take over all of the incumbent’s commitments with other parties on payments, particularly if the commitments are liabilities”[1].”  Member Lo held with the agreement of Au J that this item should not be treated as an expense for deduction from the receipts in the computation of the DB.

63. The sub-grounds in the grounds of appeal state:

“Black Point Deferral Premium

(i) The tribunal erred in law in its original judgment by deciding that the deferral premium was not a relevant consideration to be taken into account in the deduction of expenses so as to arrive at the divisible balance; and/or

(ii) The tribunal failed to take into account and apply the reality principle. It failed to identify any legal principle which would justify departing from the requirements of the Hong Kong Government in the real world (a) that CLP should pay the premium rather than incur capital expenditure; and (b) to treat that premium as deductible revenue expenditure, and not as capital expenditure; and/or

(iii) The tribunal failed to take into account the said requirements as a restriction upon the profit earning capacity of the tenement and therefore as a relevant consideration in the assessment of the hypothetical rent;

(iv) The tribunal failed to take into account in its decision on this issue the “going concern” principle which has to be applied, according to the decision of the Court of Final Appeal in Hong Kong Electric Co Ltd v Commissioner of Rating and Valuation (No. 2) (2011) 14 HKCFAR 579; and/or

(v) Although the tribunal was obliged to apply the “going concern” principle, it erred in law (a) by asserting that the HT would take over some but not all, of the actual occupier’s obligations; and (b) failed to identify any legal principle or criteria to justify that conclusion or to enable any distinction to be drawn between such obligations; and/or

(vi) The tribunal failed to comply with its legal obligation to give reasons for its decision dealing with the substantial points raised by CLP.”

64. CLP said in its written submissions that the only reason given by the tribunal for this decision was that the HT would not take over all the liabilities of the incumbent occupier.  CLP submitted that the tribunal had erred in law for the following reasons individually and cumulatively:-

(i) the tribunal failed to take into account the substantial points relied upon by CLP in paragraphs 8.13 to 8.15 of its Closing Submissions and to give reasons in relation thereto;

(ii) the tribunal was as a matter of law obliged to adhere to the reality save in so far as the statutory rating hypothesis otherwise compelled and to make no assumption departing from reality unless provided for by statute or by decided cases (Hoare v. National Trust [1998] RA. 391, 408, 415);

(iii) the evidence before the tribunal was that the government required CLP to pay the deferral premium and to treat it as a revenue expense and not a capital expense.  In this way, CLP could not earn any profit on the payment under the SoC. CLP therefore argued that the profit-earning capacity of its tenement was reduced (see e.g. Supplemental Witness Statement of Roger Lancaster at paras 21-7 and London County Council v Erith Parish [1893] AC 562, 592; Sculcoates Union v Hull Docks [1895] AC 136 and the Hong Kong Electric case (2011) 14 HKCFAR at paras 164-6). The tribunal also failed to identify any legal principle to justify the departure from the reality;

(iv) the tribunal has failed to take into account of the fact that the receipts for use in the valuation are based on tariffs set so as to cover the expense of the deferral premium.  The tribunal’s ruling is thus inconsistent with the accounting basis that is required to be used in the valuation;

(v) in the Hong Kong Electric case the CFA held that the R&E valuation should be conducted on a going concern basis ((2011) 14 HKCFAR at paras. 150, 153, 181, 187 and 197).  The tribunal’s decision departed from such basis but has not identified any legal principle to justify the departure;

(vi) the tribunal decided that the incoming HT would take over some, but not all, of the incumbent’s liabilities, but failed to identify any legal principle or criteria (a) to justify the conclusion, or (b) to distinguish between those liabilities which would be assumed by the HT and those which would not, or (c) the legal justification for such distinction; and

(vii) the tribunal failed to comply with its legal obligation to give reasons for its decision on the substantial points raised.

65. CRV replied that the issue was whether the HT and hypothetical landlord (“HL”) would in negotiations consider the payment of premium as an expense of HT for calculating the DB for the tenancy year.  This is an issue of fact and valuation from which no appeal shall lie.

66. CRV further submitted that the premium was paid from the Development Fund which was funded by CLP’s customers and not its shareholders. The transfer from the Development Fund took place in 2000 and did not relate to CLP’s business in 2003 and 2004.  The payment of premium to CLP’s vendor was a one-off expense and not a recurrent expenditure.  The Joint Rating Forum Guidance Note on the R&E valuation method also indicated the need to determine whether there are one-off items.  Hence, even on the principal of reality, the tribunal was not bound to treat the deferral premium as an HT expense or an expense for the year of 2004/05.

67. I note that the tribunal had indeed accepted Ms Jim’s reason that the HT would not take over all the incumbent tenant’s commitments with other parties on payments, particularly if the commitments are liabilities.  However, it is clear that the tribunal had also paid heed to Ms Jim’s other reasons that (a) the Development Fund was from CLP’s customers instead of shareholders; (b) it was an exceptional and non-recurrent item, and (c) the transfer from the Development Fund took place back in 2000.  Mr Holgate said that these were not the tribunal’s reasons.  I would however consider that these were matters of reality that the tribunal had noted.  They were also the factors of reality that militated the HT not to take over the incumbent’s previously incurred one-off liability to pay the premium.  The tribunal was fully aware of the reality and the decision that the HT would not take over this liability was made pursuant to the reality. CLP submitted that the tribunal had not made clear what legal principle or criteria it had adopted in deciding what liability the HT would take over.  I think there is no legal principle but common sense that dictated the HT’s decision on this matter.

68. Regarding the implementation of the SoC, the government wanted the deferral premium to be treated as a revenue expense and not a capital expense.  If the premium should be treated as capital expense, CLP would be entitled to earn a PR on it.  However, the premium was funded not by CLP’s shareholders but by its customers, there was no basis for CLP or its shareholders to profit from it within the scope of the SoC. 

69. The rationale for treating the premium as a revenue expense for the purpose of the SoC does not apply to the calculation of the DB for the tenancy year, because in reality the premium was not an expense to be paid out of the revenue of the tenancy year.  It was a one-off liability which had been discharged from customers’ funds already set aside in the Special Provision Account back in 2000.  To blindly apply the SoC treatment to the premium to reduce the DB is to ignore the reality that the premium was a one-off payment and out of customers’ previous funds but not from revenue of the tenancy year.  To apply the SoC treatment would create confusion to a simple issue of calculating the DB from the R&E.

70. The tribunal has also not deviated from the going concern basis in excluding the premium from the expenses of the tenancy year as that was not an expense of the tenancy year of 2004/05 and not paid out of the revenue of that year.

71. Finally, I find that the tribunal has given adequate reasons for the decision on this point.  I also agree with CRV that this decision of the tribunal is on a matter of fact and valuation from which no appeal shall lie.  CLP has also not shown any reasonable chance of success of appeal on this ground.  I would dismiss the application in reliance on this ground.

Ground 4

72. This ground is on the sharing of the DB between the HT and HL.  Lord Millett NPJ said in para 154 of HEC v CRV (No. 2) (2011) 14 HKCFAR 579:

“154. The second step is to divide the DB between the HL and the HT. This forms the central issue in the present case. The division must be accomplished by determining the amount of the HT’s share and deducting it from the DB. The HT’s share represents the sum that provides him with a reasonable return on his capital and a reward for his efforts and risks sufficient to induce him to rent the tenement and embark on the enterprise. What is left over is prima facie[2] the rent.”

73. CLP in this ground complained that the tribunal, in deciding that the HL and HT each earned the same rate of return on their respective assets as actual occupier, had not given CLP a reasonable reward for its efforts and risks sufficient to induce it to rent the Tenement and embark on the enterprise.

74. The sub-grounds in the draft notice of appeal are:

“The hypothetical tenant’s share

(i) Failure to take into account in the original judgment the legal principle that the business is the HT’s alone

When assessing the hypothetical tenant’s share and the distribution of the divisible balance between the parties, the tribunal failed to take into account the legal principle that the business carried out on the tenement must be treated as being that of the hypothetical tenant alone and not a business in which the hypothetical landlord has any interest at all. The tribunal has failed to take into account the hypothetical landlord’s role simply as a landlord entitled to receive a rent but not to participate in the electricity undertaking. Leaving to one side the tribunal’s adjustment for China assets, the consequence of the tribunal’s approach is that the HL and HT each earn the same rate of return on their respective assets as the actual occupier, which is inconsistent with the said legal principles and/or not the subject of any reasoning on the part of the tribunal.

(ii) Legal errors in the original judgment as to the respective roles of the HL and HT

Further or alternatively, the tribunal erred in law by holding that the requirement to provide the hypothetical tenant with a reward for entrepreneurial skills is satisfied by the salaries and bonuses paid to directors and staff. The tribunal failed to address the true issue, namely, the need to compare, and take into account in the valuation, the fundamentally different functions and the effort required of the hypothetical tenant as the party solely responsible for operating the undertaking as contrasted with the hypothetical landlord simply letting just the rateable assets in return for an annual rent. As a matter of law it must be assumed that the former provides all the entrepreneurial skills required for the business whereas the latter provides none. In that context, the tribunal took into account immaterial considerations, namely (a) the fact that directors and staff are paid salaries and performance incentives, (b) the absence of any additional effort on the part of the hypothetical tenant (as represented by its shareholders) as compared with its directors and staff, and (c) the requirement to assess the hypothetical tenant by reference to the performance of an average tenant.

(iii) Failure to take into account and assess in the original judgment the different risks of the HL and the HT

When deciding to make no adjustment so as to increase the risk of the hypothetical tenant relative to the risk of the hypothetical landlord, the tribunal failed to take into account and/or give reasoning in relation to the legal requirement that the hypothetical tenant must be assumed to bear all the risks of the undertaking. Further or alternatively, the tribunal misdirected itself by purporting to rely upon an earlier finding that the risks of the hypothetical parties were roughly equal, when it had made no such finding to that effect and/or given any reasoning in relation to that point. The tribunal also failed to deal with the main points in CLP’s case for treating the risk of the hypothetical tenant as greater than the risk of the hypothetical landlord.

(iv) Further or alternatively, given that, as a matter of law, the tribunal was required to assume that all the risks of the utility business are borne by the HT, the tribunal’s rejection of the size of an adjustment for relative risk simply because it involved the use of valuer’s judgment was improper. The tribunal failed to have regard to (or give reasoning in relation to) its earlier decision on the use of valuation judgment in Best Origin Ltd v Commissioner of Rating and Valuation [2008] RA 155.

(v) Failure to take into account and assess in the original judgment all three elements of the HT’s share

Consequently, the tribunal’s decision that its asset split approach provided a proper basis to take into account all three elements of the hypothetical tenant’s share, as laid down in paragraph 154 of the judgment of Lord Millett NPJ in the Hong Kong Electric case (2011) 14 HKCFAR 579 is legally flawed and cannot stand.

(vi) Failure to give reasons

The tribunal failed in its original judgment to comply with its legal obligation to give reasons for its decision dealing with the substantial points raised by CLP.”

75. CLP in its written submissions referred to HEC (No. 2) (2011) 14 HKCFAR 579 of the CFA and submitted that the relationship between the parties was solely that of landlord and tenant and not a joint venture. The HT was not a mere investor in the shares of the undertaking to be compensated by the ordinary return on the investment.  The HT alone took all the risks of success or failure, the obligations (including the SoC) and rewards of that business.  The HT acquired not just all the non-rateable assets (“NRA”), but also the staff in order to take over the existing business with the existing assets in situ as a going concern.  There would also not be competition for the hypothetical letting with CLP being the only likely bidder.

76. CLP also pointed out that the tribunal had adopted the asset split approach as a starting point and took the China assets into account as adjustment to the basic asset split approach. 

77. CLP then submitted that the tribunal’s finding that both CLP and CRV had equal bargaining power was based on the only the factor of interdependency between the assets of the HL and HT, the rateable assets (“RA”) and NRA and that the tenement in its existing state could only be used in conjunction with the existing NRA in order to generate the returns of the integrated business.

78. CLP complained that the tribunal had rejected CLP’s claim for upward adjustments to the HT’s share for (a) the effort and entrepreneurial skill applied by the HT in running the undertaking and (b) the HT bearing all the risks of that business.  It referred to the tribunal’s reasons as follows:-

(i) The HT’s entitlement to a share of the DB that reflected the three elements of (a) interest on HT’s capital, (b) reward for effort and (c) compensation for risk might be taken into account by either (i) a single percentage of the DB to represent globally all three elements, or (ii) a separate percentage to represent each of those elements (para 161-164);

(ii) The asset split approach was sufficient to provide a proper valuation of those three elements globally because (para 165):-

(a) that approach gave the HT a significantly higher rate of return than “interest on capital”;

(b) a reward for effort had been adequately taken into account by the payments of remuneration and bonuses to directors and staff of the HT, which payments were deducted as expenses from the gross receipts before arriving at the DB.  There was no evidence that the shareholders of the HT would provide any significant effort on top of that of the directors and staff. Any additional reward would involve double-counting (or double payment for the same effort).  The hypothetical rent was to be assessed on the basis of the projected performance of an average tenant.  That would not merit any reward for effort; ( paras 320-322) and

(c) the tribunal had previously found that the risk level for the HL and HT was roughly equal.

79. CRV however pointed out that the assessment of the HT’s share of the DB is a matter of valuation and there is no legal principle prohibiting the assessment of the HT’s share by a global approach rather than element by element.

80. CLP agreed that there could be a global assessment but all relevant considerations should be taken into account whilst irrelevant considerations should be excluded.

The Business is the HT’s alone

81. Under this sub-heading, CLP reiterated that the tribunal had only paid regard to the interdependency of the RA and NRA in coming to the conclusion of equal bargaining position, but did not take into account the additional and separate considerations:-

(a) the legal principle that the business was and had to be treated as the HT’s alone;

(b) the HT alone was responsible for bringing all the necessary entrepreneurial skills to the business and bore all the risks thereof;

(c) the HT had to employ all the assets needed for the operation of the business as owner of the NRA (and China assets) and as the tenant of the RA; and

(d) the HL’s sole function was to act as the landlord of the RA.

82. CLP thus asserted that the tribunal had regarded both the HL and HT as earning the same rate of return on their respective assets (a) as each other and (b) as the actual operator of the electricity undertaking. In other words, CLP asserted that the tribunal had treated both the HT and HL as operators of the business and bearers of the risks thereof.

83. CRV replied that it was CLP’s stance at the review hearing that one of the fundamental rationales for the asset split approach in the R&E Method was that the respective assets of the HL and HT under the SoC should be earning the profit at the same rate.  Hence, CLP cannot complain against this being the consequence of the tribunal’s approach. 

84. CRV further pointed out the tribunal’s acknowledgement (by referring to Southern Railway) that the HT and HL should not be treated as joint partners, their relationship was that of landlord and tenant and it was the HT that would embark upon the undertaking (para 58).  There is thus no basis for CLP to assert that the tribunal had treated both the HT and HL as operators of the business and bearers of the risks thereof. 

85. I also note that Au J has said in para 110(3) of the original judgment:

“It is also inconsistent with the CFA’s decision (at paragraphs 163, 165 and 182) that the business undertaken on the tenement is the HT’s but not the HL’s, and the risks, obligations and rewards, must be treated as that of the HT alone[3]. In fact, Mr Hatchwell agreed in evidence that this was the case under the rating hypothesis.”

86. CRV also pointed out the tribunal’s decision that the wayleaves and DCSs, which had substantial rateable value, were excluded from HL’s asset base in calculating the DB.  Hence, the HT was given a higher rate of return on its assets.  Furthermore, CLP was given uplift by reason of its China Assets.

87. CLP in reply said that the exclusion of the wayleaves and DCSs from HL’s asset base was not the tribunal’s reason for holding that there should be the same rate of return for the HL and HT. 

88. I think there is no basis for CLP to say that the tribunal had treated both the HT and HL as operators of the business and bearers of its risks merely because it had held that their respective assets under the SoC should be earning the profit at the same rate.  Though the wayleaves and DCSs were not on the SoC register, they certainly contribute to the generation of profits for the DB.  Their exclusion from HL’s asset base thus benefited the HT.  The uplift given in respect of the China Assets was also an assessment that enhanced CLP’s share in the DB substantially.  These are matters that featured in the original and review judgments.

89. Given that valuation cannot be done with mathematical exactitude, the tribunal was endeavouring to reach a decision that was fair and just overall.  The exercise involved the balancing of various variables (paras 18 and 19 of Challenger Property Asset Management Pty Ltd v Stonnington City Council and Anor [2011] VSC 184).  The tribunal had made it clear that the asset split approach had given the HT a significantly higher rate of return than “interest on capital”.  The significantly higher rate of return was to represent globally all three elements of (a) interest on capital, (b) reward for effort and (c) compensation for risk (para 165).  I cannot see that the tribunal in so doing had taken into account any irrelevant consideration or excluded any relevant ones.  CLP cannot say that the tribunal has erred or failed to pay regard to relevant matters simply because the tribunal did not adopt the approach CLP contended for or give CLP a larger percentage of return in the asset split. 

90. The valuation is also a matter of fact and is not open to appeal.  CLP has not shown any reasonable chance of success of appeal on this point.  I would dismiss the application on this point.

The respective roles of the HL and HT and reward for CLP’s entrepreneurial skills

91. Au J said in para 165 of the original judgment that the percentage allocation based on the asset split approach already provided a proper valuation to globally represent the interest on capital, the reward for effort and the compensation for risk.  For reward for effort, the learned judge said in para 165 (2):

“Insofar as a reward for effort is concerned, we maintain the view as expressed in the HEC LT Judgment that the reward has been sufficiently or at the least largely reflected by the remuneration and bonuses paid to the directors and staff of CLP. CLP (or the HT) manages and runs the businesses through the directors and staff. Such directors and staff have been rewarded through their remunerations. These are treated as expenses and are then deducted from the gross receipts before arriving at the DB. There is no evidence in the present case which shows that other than through the board of directors and staff, the HT (as and qua shareholder of the company running the business as contended by Mr Holgate) has expended some extra significant effort in taking up and running the undertaking[4]. In the premises, other than the reward that has been already covered by the global reward made under asset split approach, it is not necessary to make a further reward for such insignificant effort.”

92. CLP submitted that the tribunal had erred in law by holding that the reward for the HT’s effort in running the business and the entrepreneurial skills required was adequately allowed for in the salaries and bonuses paid to directors and staff, which were deducted as expenses before arriving at the DB.  CLP’s grounds are that:-

(i) the tribunal has failed to take into account and deal with the difference between the effort and entrepreneurial skills applied by the HT to the running of the business and the absence of any such contributions to the business by the HL; and/or

(ii) the tribunal took into account an immaterial consideration that the directors and staff of the HT were paid salaries and incentives for performance. CLP said that that did not address the difference in the respective functions of the HL and HTand/or

(iii) the tribunal took into account a further immaterial consideration of the absence of any additional effort on the part of the HT (or its shareholders) over and above that of the HT’s directors and staff.  CLP said that the true issue was whether an adjustment should be made to the equal returns ascribed to the HL and the HT under the asset split approach in order to take into account the different functions and contributions of the HT, including its directors and staff, as compared with the HL; and/or

(iv) the tribunal had also paid regard to a further immaterial consideration of fact that the hypothetical rent is to be assessed on the basis of the performance of an average tenant.  CLP said that the notion of an average tenant was irrelevant, given that the tribunal had found that CLP would be the only bidder for the hypothetical letting, and the valuation was based solely on the accounts and performance of CLP. CLP reiterated that the true issue was whether an adjustment should be made to the equal returns ascribed to the HL and the HT under the asset split approach to take into account the different functions, responsibilities and contributions of the HT as compared with those of the HL; and/or

(v) the tribunal’s refusal to make an adjustment for the HT’s effort and entrepreneurial skills was inconsistent with its reasoning at para 106(1) when rejecting, on entirely sound grounds consistent with the decision of the CFA in the HEC case, the approach taken by Dr. Lam to assessing the number of bidders for the hypothetical letting; and/or

(vi) there was no basis for the tribunal to conclude that CLP’s case involved double counting.

93. CRV referred to para 165 of the original judgment. She rightly pointed out that the tribunal had dealt with the difference between the effort and entrepreneurial skills applied by the HT (through its directors and staff) in running the business and the absence of such contributions by the HL. The effort and entrepreneurial skills were provided by the directors and staff of CLP and not by its shareholders.  Such effort was rewarded adequately by the salaries and bonuses paid to the directors and staff.  Since there was no evidence that the shareholder of HT had expended extra and significant effort in running the business, the tribunal did not find it right to make an additional award for the HT to reward such non-existent effort.  The element of effort has thus been properly taken care of.  CLP cannot assert otherwise just because its quest for a further reward for the same effort of the directors and staff was not entertained by the tribunal. The equal rate of return under the asset split approach was also a global representation of the three elements including effort.

94. Regarding the performance of an average tenant, the tribunal referred to this when opining that CLP had not been able to identify what efforts the HT, as opposed to its staff, would contribute to achieving the PR. This was just to highlight the fact that the shareholders of HT were not expected to make any contribution to the effort in running the business.

95. The tribunal expressed the view in paras 106(1) that the HT was not a mere investor investing into the shares of the business but was required to supply entrepreneurial skills to run it.  That was not in contradiction with its refusal to make a separate and additional award for HT’s effort.  The global representation of the three elements was already an adequate award for effort and the effort was from the directors and staff.

96. The global representation is a permissible method of valuation and the tribunal had in truth and in fact taken all three elements of interest on capital, reward for effort and compensation for risk into account in applying the method.  CLP therefore does not have any reasonable prospect of success of appeal on this point.  I would dismiss the application on this point.

The different risks of the HL and HT

97. CLP referred to Au J’s rejection of its case that an adjustment should be made for CLP which bore all the risks of the business. CLP submitted that there was an error in the decision in that the tribunal had, in giving its reasoning, erroneously referred to its earlier acceptance of CLP’s contention that the risk level for HL and HT in the Tenement was roughly equal (para 165(3)).  However, CLP had not made the contention and there was no such earlier acceptance of such contention by the tribunal.  Au J’s reasoning was also adopted by Member Lo (para 338).

98. CLP further submitted that Au J had only rejected CRV’s arguments that the HL had a higher risk than the HT, but had not found that the risks of the parties were the same or similar. 

99. CLP further submitted that the tribunal, in asserting that the risks of the HT and HL were the same, had failed to take into account the legal principle that the HT bore all the risks of the business.  CLP referred to the tribunal’s opinion in para 110(3) that the business on the Tenement was that of the HT, not the HL.  Hence, the risk, obligations and rewards of the business must be treated as those of the HT alone.

100. CLP further submitted that the tribunal had wrongly accepted CRV’s criticism that there was no proper basis for adjustments made by Mr Davis (CLP’s valuer) because the adjustments were based upon “valuer’s judgment” in a context where adjustments of that kind had not previously been made (para 337-8). However, CLP submitted that given CRV’s insistence for years to use the “WACC approach” and the tribunal’s firm rejection of that approach, CLP had to put forward an alternative method to the tribunal which method took into account all relevant factors, even if that required the use of judgment because evidence for the size of necessary adjustments was not available. 

101. Since as a matter of law it was the HT, and not the HL, which bore all the risks of the business, CLP further submitted that the tribunal had (a) improperly discounted the evidence of Mr Davis on this point or (b) failed to consider what adjustment should be made or to direct the parties to address that matter further.  CLP further submitted that the tribunal’s criticism of Mr Davis’ use of “judgment” in this appeal was inconsistent with its endorsement of CRV’s use of valuer’s judgment to justify a 20% deduction from market yields in Best Origin Ltd v Commissioner of Rating and Valuation [2008] RA 155, 218 – 225 (see para. 234).

102. I refer to my reasoning of global representation given above for rejecting leave on the issues of (i) the business being the HT’s alone and (ii) effort.  They apply equally to this point.

103. It was also not CLP’s case in the appeals that the HL had no risk and all risks were borne by the HT.  CLP’s case was only that the risks of the HT in applying its assets to the business and in the uncertainty of the profit were greater than the risks of the HL as a property investor (para 333). Hence, the present contention of CLP that the HT bore all the risks is misplaced.

104. CLP referred to Au J’s reference in para 165 to an earlier acceptance of CLP’s contention that the level of risk was roughly equal. The learned judge then in para 166 rejected CLP’s claim for an additional award for effort and risks in the asset split percentage. Pursuant to this reasoning, the learned judge in para 235(4) rejected CLP’s claim for separate adjustment for risks.  The learned judge’s reasoning was adopted by Member Lo in para 338.  CLP now says that it had not made that contention and the tribunal had not accepted such contention.

105. Despite the adoption of Au J’s reasoning, Member Lo was clearly aware of CLP’s claim that the HT had a greater role, risk and responsibility (para 290).  Member Lo was also aware of Mr Davis’ suggestion that the tenant’s asset value had to be adjusted to reflect the tenant’s greater operational and asset risk and the nature of a tenancy (“HT/HL risk differential”) (paras 303, 307, 308, 315 and the whole section from 332 to 337).  Hence, Member Lo was very much alive to CLP’s claim that the HT had a higher level of risk, but not a roughly equal level as mentioned by Au J in para 165.

106. In fact, the analysis of the argument and counter-arguments on risks was mainly carried out by Member Lo.  Member Lo analyzed in paras 332 to 337 the arguments of Mr Davis for a higher risk level of the HT on the ground, among others, of the HT having a typical ownership of around 50% of the assets and responsibility for around 99% of the annual expenditure of the business and thus his proposal for an upward adjustment in favour of CLP.  He also considered the counter-arguments of CRV.  He then agreed with CRV and decided in para 339 that the so-called greater operational and asset risks of the HT as perceived by Mr Davis was not a proper basis for the risk adjustment proposed by Mr Davis.  In particular, Member Lo failed to see the casual link between the HT making 99% of the business expenditure and the alleged greater operational risk of the HT.  Member Lo then observed that the arguments of business expenditures under the issue of risk, like those arguments for effort, were by common sense similarly made by the directors and staff of the HT in the daily operation of the business.  The tribunal therefore rejected CLP’s contention for an extra compensation for risk and maintained the global representation of the three elements with equal rate of return on the assets.

107. Member Lo’s reasons and decisions were accepted by Au J in para 388.  Hence, the minor slip in para 165 cannot deflect the force and strength of the tribunal’s reasoning for rejecting any claim for extra compensation for the alleged higher risk level of the HT.

108. Furthermore, I do not think the fact that CRV had been insisting on applying the “WACC approach”, which had been rejected by the tribunal, would have mandated CLP to put forward an unworkable alternative method to the tribunal. I note that Member Lo’s rejection of the valuer’s judgment by Mr Davis was because of the acceptance by Mr Davis that “since (a) he had not made this type of adjustment before and (b) there was really nothing to go by in making such an adjustment, he could not really explain how the adjustment was quantified.” (para 337).  The tribunal’s acceptance of a valuer’s judgment in Best Origin Ltd. was based on a different scenario.  I cannot see how the ground for rejecting the valuer’s judgment by Mr Davis can be faulted on appeal.

109. It is also important to bear in mind that the tribunal had utilized a global approach to represent the three elements.  Since the tribunal had decided that the global approach to represent the three elements with equal rate of return on the assets was a proper valuation, there was no need to call for any further valuation evidence from the parties on risk.

110. Finally, I reiterate that the tribunal’s decision for a global approach and the rejection of CLP’s claim for a separate award to represent the compensation for risk are valuation decisions that are not open to appeal. CLP has not shown any reasonable prospect of success of appeal on the issue of risk. I would refuse the application for leave made under this issue.  This would dispose of the application for leave under ground 4 altogether.

VARIATION OF COSTS ORDER NISI

111. CRV, pursuant to her summons filed on 8 May 2013 and my direction dated 20 February 2014, served on CLP on 28 February 2014 a notice on the extent of the variation sought and the grounds thereof.  The notice states:

“The CRV seeks a variation of the Lands Tribunal’s costs order nisi in paragraph 390 of its judgment of 24th April 2013 (that costs of the appeals be to CLP to be taxed if not agreed, with certificate for two counsel) to the extent that (1) all costs of and relating to Adam Davis’ valuation Approach 2 be disallowed, (2) all costs of and relating to the Contractor’s Basis of valuation, other than costs of that part of the valuation which was necessary for, land directly adopted for use in, Adam Davis’ valuation Approach 1, be disallowed, (3) all costs of and relating to Adam Davis’ valuation Approach 3 be disallowed, and (4) all costs of and relating to years of assessment other than 2004/05 be disallowed , on the grounds that:

1. The Contractor’s Basis of valuation was not an appropriate method of valuation to employ in these appeals, not being a reliable, realistic or accurate method of valuation for the tenement (as indeed the tribunal found in both HEC v CRV, unreported, LDGA 224/04 (30.11.09) in respect of a similar tenement and in these appeals).

2. In any event, CLP did not carry out a proper Contractor’s Basis valuation.

3. The tribunal found that Approach 2 was unreliable and inappropriate as a valuation method.

4. Insofar as any part of the Contractor’s Basis of valuation was not necessary for, or directly adopted for use in, Adam Davis’ Approach 1, which was the only method of valuation advanced by CLP which was accepted by the tribunal, the costs therefor ought not to have been incurred.

5. It was CLP’s own case that Approach 3 was not a reliable method of valuation, and the tribunal so found.

6. CLP should not be allowed to recover costs of and relating to years of assessment other than the year which was the subject of the tribunal’s determination (2004/05).”

The legal principles

112. Costs are at the discretion of the tribunal (s 12 of the Lands Tribunal Ordinance).  O 62 rr 7(1) and (2) of the Rules of the High Court are relevant to this application:

“7. (1) Where in any cause or matter any thing is done or omission is made improperly or unnecessarily by or on behalf of a party, the Court may direct that any costs to that party in respect of it shall not be allowed to him and that any costs occasioned by it to other parties shall be paid by him to them.

(2) Without prejudice to the generality of paragraph (1), the Court shall for the purpose of that paragraph have regard in particular to the following matters, that is to say –

(aa) the underlying objectives set out in Order 1A, rule 1;

(a) the omission to do any thing the doing of which would have been calculated to save costs;

(b) the doing of any thing calculated to occasion, or in a matter or at a time calculated to occasion, unnecessary costs;

(c) any unnecessary delay in the proceedings.”

113. Mr Yu drew my attention to Wong Kam Tong v Tin Shing Court, Yuen Long (IO) [2012] 2 HKLRD 1128.  In that case, Cheung JA set out the objectives of the CJR in para 9, referred to the Elgindata principles on costs in para 10, referred to the comments of Lord Wolf in AEI Rediffusion Ltd v Phonographic Performance Ltd [1999] 1 WLR 1507 on the effect of CPR on the award of costs in paras 11 and 12 and set out his own observations on the similar effect of CJR on the award of costs in para 13:

“9. The underlying objectives set out in Order 1A, rule 1 are:

(a) to increase the cost-effectiveness of any practice and procedure to be followed in relation to proceedings before the Court;

(b) to increase the cost-effectiveness of any practice and procedure to be followed in relation to proceedings before the Court;

(c) to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings;

(d) to ensure fairness between the parties;

(e) to facilitate the settlement of disputes; and

(f) to ensure that the resources of the Court are distributed fairly.

Principles to be adopted

10. Prior to the Hong Kong Civil Justice Reform (‘CJR’) introduced on 2 April 2009, our Courts had adopted the approach on costs set out in the English case of In re Elgindata Ltd (No. 2) [1992] 1 WLR 1207 where Nourse LJ at 1214 held that :

‘(i) Costs are in the discretion of the court.

(ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made.

(iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs.

(iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs.’

11. England introduced the new Civil Procedure Rules (‘CPR’) which came into force on 26 April 1999. Lord Woolf MR in A.E.I. Ltd v. Phonographic Performance Ltd [1999] 1 WLR 1507 commented on the effect of the CPR on the award of costs. I will set out his comments in full because it is also relevant to the understanding of the new rules introduced by the CJR:

…

Part 44 also sets out the wide range of different orders which the court can make in paragraph 44.3(6).

I draw attention to the new Rules because, while they make clear that the general rule remains, that the successful party will normally be entitled to costs, they at the same time indicate the wide range of considerations which will result in the court making different orders as to costs. From 26 April 1999 the “follow the event principle” will still play a significant role, but it will be a starting point from which a court can readily depart. This is also the position prior to the new Rules coming into force. The most significant change of emphasis of the new Rules is to require courts to be more ready to make separate orders which reflect the outcome of different issues. In doing this the new Rules are reflecting a change of practice which has already started. It is now clear that too robust an application of the “follow the event principle” encourages litigants to increase the costs of litigation, since it discourages litigants from being selective as to the points they take. If you recover all your costs as long as you win, you are encouraged to leave no stone unturned in your effort to do so.’ (Emphasis added.)

12. Lord Woolf MR further held that:

‘The “well established practice” on which Nourse L.J. based his third principle is, as I have already indicated, less generally followed than it has been in the past and it is no longer necessary for a party to have acted unreasonably or improperly to be deprived of his costs of a particular issue on which he has failed.’

13. One can see immediately that Hong Kong has adopted a similar approach under Order 62, rule 3(2) in terms of the ‘follow the event principle’ and its departure and also under rule 5 in terms of the consideration whether a party has succeeded on part of the case, even if he has not been wholly successful, and conduct.  In our view, one can say with equal confidence that after 2 April 2009, while the ‘follow the event principle’ will still play a significant role in Hong Kong, it will nonetheless only be a starting point from which the Court can depart, the rationale being that a mechanistic adoption of the ‘follow the event principle’ may result in parties incurring unnecessary costs in civil litigation. We do not consider the provisions of Order 62, rule 7(1) (which enable the Court to disallow a party’s costs or order it to pay the other party’s costs if there is anything done or omitted which is improper or unnecessary) will by itself curtail the power of the Court under the new regime.  The amendment to rule 7(2) had specifically added the new (aa), namely, regard to the underlying objectives set out in Order 1A, rule 1.  In our view Order 62, rule 7 enables the Court to address the costs issue when there are improper or unnecessary acts or omissions but it does not confine the Court’s power only to such situations.”

114. The Court of Appeal’s approach in Wong Kam Tong was repeated in another decision of the Court of Appeal in Hung Fung Enterprises Holdings Ltd v Agriculture Bank of China [2012] 3 HKLRD 679 at para 100.

CRV’s submissions on CLP’s valuation approaches

115. CLP had carried out three methods to value the tenant’s share of the DB.  Approach 1 is the asset split method which split the DB according to the values of the assets of the HT and HL and subject to a number of adjustments.

116. Approach 2 is based on the contractor’s basis (“CB”) up to stage 4 of the 5 stages in the CB process.  This approach estimates the maximum rent that the HT is willing to pay.  It takes into account of HT’s costs of assets where the first approach did not.  Allocations are made from the DB for the CB rent to the HL and an initial return for the HT.  The residue of the DB is further allocated proportionately to each party’s share (para 310 of original judgment).  The setbacks of this approach include the failure to reflect the profit-making capabilities of the tenement.  It also could not incorporate the economic factors which influenced the negotiations for rental of a tenement used for profit making (para 268).  Au J and member Lo have explained this approach in detail in the original judgment and I am not going to repeat their explanations here. 

117. Approach 3 was put forward during the hearing of the appeals.  In a nutshell, it was to apportion the DB according to the net book value (“NBV”) of the parties’ assets.  This method benefits unfairly the HL at the expense of the HT (paras 311 and 312).

118. CLP claims that a vast amount of costs to the tune of HK$200 million has been incurred.  CRV says that a lot of those costs have been improperly or unnecessarily incurred.  CRV however is not asking for part of her costs to be paid by CLP, but that CLP should be deprived of parts of its costs.

CRV’s submissions on the costs of approach 2

119. CRV says that CLP has incurred costs improperly or unnecessarily for carrying out approach 2 of valuation.  CRV says that this approach was fundamentally flawed as it was based on a CB valuation up to stage 4.  CB valuation is based on the amount of interest on the capital that the HT would incur to build an alternative tenement.  But it was not possible as a matter of fact to build an alternative for the Tenement.  The CB method also could not capture the synergy or monopoly value of the Tenement.  Hence, it was not a reliable, realistic or accurate method of valuation for the Tenement.  It could not even be used as a cross-check.

120. CLP’s own witnesses also accepted that the CB valuations could not reflect the profit-making value, monopoly value, synergy value and wayleave value of the land element of the Tenement.

121. Mr Yu referred to Member Lo’s remarks at para 269 of the original judgment on the comments of CLP’s experts on the CB valuation:

“269. Second, in the valuation of the Tenement, even CLP’s witnesses support Mr Poon’s opinion that the CB valuations prepared by both parties are unable to reflect the profit-making value, the monopoly value, the synergy and the wayleave value:

(1) Professor Cooper acknowledged that the DRC did not measure value but only measured the cost of replacement. Therefore, the unique feature or the profit-earning capacity of the various parts of the Tenement would not be reflected by the DRC[5];

(2) Mr Rose accepted that the land values used by Mr Child had not taken into account the value arising from the Tenement’s monopoly of place, and he further agreed that the CB method did not capture the profit or monopoly element, or the profit-making ability of the Tenement[6];

(3) Likewise, Mr Child acknowledged in cross-examination that (a) the CB method would not capture the synergy value as a whole; (b) he had not tried to value the Tenement as a whole under the CB method. On the contrary, he only valued each discrete part of the land on which the plant and substations stood[7];

(4) On the values of the land, Mr Child, like Ms Tang, assessed the land values for the individual power stations, sub-stations and the control centre Strafford House by reference to the land premium valuation for industrial grants made by the Lands Department.  There were otherwise no comparables.  Both he and Mr Pendleton agreed that synergy value was not included in those land premium valuations[8].”

122. Moreover, approach 2 only applied the CB method to stage 4 but not the final stage 5.  The stage 4 CB rent could not be used as a proper CB rent.  Member Lo opined:

“345. I have set out above my reasons (together with Au J’s reasons) for rejecting the use of the CB method (whether alone or as an adjunct as proposed by Mr Davis) in the present case. I further agree with CRV that ‘the use of the CB Stage 4 figure is internally inconsistent as by definition it cannot represent the HL’s minimum rent.’

346. I therefore do not accept the use of Mr Rose’s CB rent in the working of Approach 2, and reject Approach 2 as unreliable and inappropriate as a valuation method.”

123. Hence, CRV says that the second approach was wholly inappropriate and unnecessary and should not have been put forward by CLP.

CRV’s submissions on the costs of the CB method

124. For the same reasons, CRV says that she should not be required to pay the costs of the CB valuation except to the extent of the steps that overlapped with approach 1 in the assessment of the depreciated replacement cost (“DRC”) of the assets of the HT and HL and the capitalization of some of those values.

CRV’s submissions on the costs of approach 3

125. CLP put forward this approach but did not rely on it.  Its valuer Mr Davis took the view that this approach did not produce a reliable estimate of rental value.

126. Since Mr Davis recognized that this approach was unreliable, the tribunal also did not consider it.

127. CRV says that CLP’s embarking on this approach is a classic example of the “leaving no stone unturned” attitude as mentioned by Lord Woolf in AEI Rediffusion.  CRV does not see it right for her to bear the costs incurred by CLP in undertaking this approach.

CRV’s submissions on the costs of and relating to other years of assessment

128. CLP prepared expert reports for the appeals against the rateable values of eight years.  It did so without getting any order for the appeals to be heard together.  It applied in July 2008 for consolidation of the appeals.  Lam J declined it on 3 November 2008 and gave leave only for the appeals for 2004/05 to be restored.  CLP’s argument that the tribunal should consider the correct approach of valuation for all eight years was rejected.

129. CLP at a directions hearing on 24 November 2008 asked for leave again to file all expert evidence for all years under appeal, for the stay on all the appeals to be lifted and for directions for exchange of subsequent expert evidence.

130. Lam J’s decision on 3 November 2008 was reviewed on 3 December 2008.  CLP pressed for consolidation again.  It revealed to the tribunal that its expert reports for all the years under appeal had been prepared substantially and were close to completion.

131. Lam J again refused the review because it would be unduly complicated for all appeals to be heard together. 

132. At the opening of the appeals for 2004/05 on 22 February 2010, CLP still asked the tribunal to consider the valuation approach for the other years and to reach conclusions for them.

133. CRV now says that she should not be liable for the massive costs CLP incurred for the expert evidence of the other years when the tribunal had not allowed consolidation.  Such evidence is not useful even as a cross-check of the valuation for 2004/05.  Mr Yu referred to Member Lo’s remarks in paras 353 and 354:

“353. Although this case only deals with assessment of the rateable value of the Tenement for the year of assessment of 2004/2005, Mr Davis has carried out similar valuations for a number of years. He claimed that the results show a certain degree of consistency.

354. I have not considered the valuations for the other years, as I do not find these valuations to be necessary and in any way helpful for the determination of the rateable value of the Tenement for the particular year in the present case.  If anything, the workings of other years of assessment have made the experts’ evidence almost unwieldy.”

134. CRV further points out that the costs for the expert evidence of the other years should be dealt with in the relevant appeals.  CLP should not be given an additional chance to recover those costs in these appeals.

CLP’s reply on legal principles on costs

135. The first criticism raised by CLP against CRV was by reference to PCCW-HK Telephone Ltd v Telecommunications Authority [2004] HKCA 257.  However, Mr Holgate in his oral submissions made it clear that he was making the point that both CRV and CLP were late in pursuing their applications in relation to costs.  CRV was late in supplying notice of the extent of and grounds for variation of the costs order nisi and CLP was late in applying for common fund taxation.

136. Mr Holgate also referred to s 12(1) of the Lands Tribunal Ordinance which provides that costs of and incidental to all proceedings in the tribunal are in the discretion of the tribunal.  I do not think there is any dispute on the approach to award of costs as submitted by Mr Yu by reference to Wong Kam Tong.  However, Mr Holgate also referred to the principles in the Privy Council decision of Commissioner of Valuation v Jamaica Gypsum (1971) 17 RRC4 and the English Court of Appeal decision of John Walsh Ltd v Elliott (VO) (1972) 17 RRC 50.

137. The respondent landowner in Jamaica Gypsum, which contended for a valuation of £2,000, secured a reduction of valuation from £9,500 to £4,300.  Lord Wilberforce stated the principle for awarding costs at p 11:

“In principle their Lordships consider that a person who successfully secures a reduction in the valuation, unless this is of a minimal amount, should be entitled to his costs, and that, unless by doing so he has added to the length or expense of the proceedings, the fact that he has supported a figure which turns out to be less than that finally accepted should not be to his detriment. It is a matter of experience that there are not many cases where a valuation body, after the full enquiry which it is its duty to make, accepts a figure which is necessarily put forward before all the relevant factors have been ascertained and weighed: to confine the right to recover full costs to such cases would bear hardly on individuals. In the present case the assessments suggested by the respondent were responsibly put forward and even had they been somewhat higher the proceedings would have taken precisely the same course.”

138. Mr Holgate further referred to John Walsh at p 62 where Stephenson LJ repeated the statement of Lord Widgery LJ in Austin Motor Co Ltd v Woodward (VO) (1970) 16 RRC 1 at 11 that a ratepayer had a special standing and that he was entitled to special consideration in regard to costs.  However, Stephenson LJ also quoted Lord Widgery LJ at 16 RRC 1 at 11:

“… like my Lord, I think it would be extremely unwise if any kind of set rule were established whereby such a successful appellant always became entitled to all his costs. There ought to be some control exercised in the award of costs over the temptation which sometimes besets appellants to put their figure much too low. …”

139. Mr Holgate further referred to the remarks of Edmund Davies LJ in John Walsh at p 67:

“One knows, … that the investigation of different issues in rating matters cannot be put into watertight compartments when one comes to deal with the matter of costs. The exploration of one issue has its impact on others and there may occur a sort of cross-fertilisation, important features relevant to one issue becoming clear during the course of what is ostensibly the exploration of a quite different issue.”

CLP’s reply on its valuation approaches 

140. Mr Holgate submitted that CRV only criticized all three approaches of CLP without offering any constructive alternative to her WACC model.

141. He also said that the purpose of Mr Davis in introducing the third approach was to reflect the use of the SoC NBVs of the RA and NRA. 

142. Though CRV opposed the use of DRC and the valuation of RA, the tribunal adopted approach 1 which valued both the RA and NRA on DRC basis. Mr Holgate also said that all three CLP approaches produced similar valuations in the same ballpark of HK$3.185 billion, HK$2.887 billion and HK$3.866 billion.  They led Mr Davis to an estimated rateable value of HK$3 billion.

143. Mr Holgate further submitted that CLP had been largely successful in the appeals in that it had demolished CRV’s WACC model and reduced the rateable value from about HK$9.5 billion to HK$5 billion.

144. He also referred to a letter dated 12 February 2010 from CRV proposing to CLP a valuation of HK$7.2 billion and to pay CLP all the costs of the appeals upon CLP’s acceptance of this valuation.  CRV says that this letter was served under s 42B of the Rating Ordinance, but CLP says that this is just a Calderbank offer.  In any case, CLP did not accept the offer and the appeals went ahead.

145. Mr Holgate submitted that since CRV had failed to beat the HK$7.2 billion in the letter, CLP should not be denied any of its costs.

146. He also submitted that the fact that the CB method was also engaged in approach 1 demonstrated that the issues could not be put in watertight compartments but were interwoven.  Approaches 1 and 2 also overlapped and were interconnected and it was reasonable to present approach 2.

CLP’s reply on the costs for approach 2

147. Mr Holgate submitted that CRV only put forward the WACC approach.  In the absence of comparable evidence, it was reasonable and necessary for CLP to develop different approaches and to use both the R&E and CB methods as conventional alternatives to arrive indirectly at the annual rent and to divide the DB.  That would enable the tribunal to see which approach could arrive at a proper rateable value most reliably.  Of the three approaches, Mr Davis preferred approach 2.  The fact that the tribunal rejected approaches 2 and 3 did not mean that they were improper or unreasonable so that the costs for developing and presenting them should be disallowed.  He also referred to the remarks of Edmund Davies LJ in John Walsh on the exploration of one issue impacted on another and cross-fertilization of issues. 

148. Mr Holgate also said that approaches 2 and 3 produced realistic valuations broadly in line with that of approach 1 and not an exaggerated valuation like that of the CRV.  The three approaches enabled the parties and the tribunal to compare and weigh the relative advantages and disadvantages of each. That ultimately assisted the tribunal to arrive at its conclusion on a more informed basis.  There was therefore no proper basis for disallowing the costs for approach 2. 

149. Furthermore, Mr Holgate submitted that CRV, having accepted the use of the CB method to provide inputs for approach 1, cannot sensibly argue that approach 2 was improper or unreasonable as it used the same CB inputs. Mr Holgate also submitted that CRV had argued at the review that the CB decap rate provided by CLP should be applied to decapitalize the rental values of the wayleaves, DCSs and pole sites. 

150. He also submitted that since the CB method was used in both approaches 1 and 2, it is dangerous to exclude all costs of approach 2 as it would be treating approach 2 as a watertight compartment.  Furthermore, all CB costs for providing input for approach 2 were also incurred for approach 1.  Hence, there is no basis to exclude approach 2 because of the shortcoming of the CB method.

151. Mr Holgate further referred to CRV’s argument that CLP should not rely on approach 2 after the tribunal had handed down the judgment in the HEC case on 29 November 2009.  Mr Holgate said that this submission implicitly accepted that it was proper for CLP to have used this approach up to 30 November 2009.  But Mr Holgate also argued that it was then already too late as expert reports had been exchanged.  Furthermore, he submitted that even after the HEC judgment, CRV by her Calderbank letter was still willing to pay all CLP’s costs down to the first day of the trial.

CLP’s reply on the costs of the CB method

152. Regarding the costs for the CB method save those adopted for use in approach 1, Mr Holgate submitted that if the tribunal should accept that CLP had acted reasonably in preparing and presenting its CB evidence, then CLP should have all the costs for the CB method.

153. Mr Holgate further pointed out that CLP did not use CB as a free standing method but to provide input for approach 2 under the R&E method.

154. He also pointed out that CRV had called evidence by two witnesses on the CB method who gave an extremely high figure of HK$7.578 billion.

155. Furthermore, he said CRV had not identified which parts of the CB valuation costs were unnecessarily incurred.  The general order of disallowance sought by CRV would put the taxing master in difficulty in deciding what costs were or were not necessary for approach 1.

CLP’s reply on the costs of approach 3

156. Mr Holgate said that approach 3 was put forward by CLP following the HEC judgment to show what effect there would be if the asset split used NBV instead of DRC.  It was reasonable for CLP to do so given that:

(1) CRV was completely opposed to the use of DRC to determine the HT and HL’s asset values.

(2) The asset split approach using NBV had very recently been endorsed by the tribunal in the HEC case.

(3) There were clear parallels between the HEC and CLP tenements.

157. Mr Holgate submitted that the presentation of approach 3 was not “leaving no stone unturned”.  Since CRV opposed to approaches 1 and 2 and the use of DRC, it was reasonable for CLP to offer approach 3.  It took into account of the tribunal’s endorsement of NBV in the HEC case.

CLP’s reply on the costs of and relating to other years of assessment

158. Mr Holgate relied on para 107(1) of Au J’s review judgment and submitted that it was neither unreasonable nor unnecessary for CLP to prepare expert evidence for the other years.  Au J said:

“107. With respect, I am unable to accept these submissions. In my view CLP is not guilty of unjustified delay when the following matters are looked at realistically and in the round:

(1) I do not think it is unreasonable or unnecessary for CLP to instruct their experts to look at and prepare the expert reports covering also the Other Rating Appeals.  This is so because the Other Rating Appeals would raise similar issues concerning expert valuation as the present appeals. Therefore, it was not unreasonable for CLP to ask the experts to prepare the reports covering also all the Other Rating Appeals for saving time and costs, with a view of having a consolidated hearingof all the appeals together. This was in fact what it sought to do in the interlocutory application.  The fact that the consolidation application was later refused for reasons of case management with all the Other Rating Appeals stayed does not make this earlier conduct unreasonable.”

159. Mr Holgate also submitted that an examination of the appeals for the other years was necessary to understand and demonstrate CRV’s mechanistic and unreasonable application of the WACC model year on year on the rateable value of the Tenement.  He also said that it was sensible to examine how CLP’s suggested approaches would operate in other rating years.  He also referred to chapter 2 of his opening for the appeals in which he tried to demonstrate, among other matters, that the WACC approach of valuation had reduced CLP’s profit from the operation despite increase in investment and revenue year after year.

160. He also submitted that CLP should have proceeded to prepare the evidence in the other appeals despite it did not apply for consolidation until July 2008 as CLP had every intent to proceed with these other appeals.

161. He also referred to CRV’s concession to CLP’s summons in March 2009 for discovery of CRV’s working papers for calculating the rateable value for all the years under appeal.  The internal papers demonstrated CRV’s concerns that the WACC approach was producing unreasonable rateable values.

162. Mr Holgate also submitted that since there was no precedent for CLP’s approaches 1 and 2, it was necessary for CLP to consider how these approaches would work for the other years.

163. Regarding CRV’s argument that the costs of the expert evidence for the other years can be dealt with in the relevant appeals, Mr Holgate submitted that if approach 1 should also be applied for the other years, it would be unnecessary to examine what effect the valuation model CLP uses would have on the other years.  Hence, CLP would not enjoy multiple chances of recovery of the same costs.

Reply of CRV

164. On legal principles, Mr Yu said in oral submissions that Lord Widgery LJ was not saying in John Walsh that the ratepayer could argue everything under the sun and provided that he could obtain a non-minimal reduction, he should get all costs.  Likewise, Lord Wilberforce did not say in Jamaica Gypsum that even if the ratepayer had done anything which added to the length and expense of the proceedings, that was to be ignored.

165. Regarding the CB method and approaches 2 and 3, Mr Yu in oral reply reiterated the views of CLP’s experts that they were not reliable.

166. Mr Yu also said that even if all three approaches produced figures in the same ballpark, that does not mean that all three approaches should be presented for the tribunal’s consideration.  No approach should be proffered to the tribunal if the expert considers it to be unreliable.  It is on this basis that CRV asks for some costs to be excluded from her liability.

167. For the part of the CB costs that related to approach 1, Mr Yu said that they were for the assessment of the DRC of the assets of the HL and HT.  CRV is willing to pay such costs.

168. Regarding the letter of 12 February 2010 from CRV to CLP offering a valuation at HK$7.2 billion, Mr Yu said that CLP could not rely on CRV’s offer as an admission of CRV’s liability as that would be contrary to public policy which encourages parties in litigation to explore settlement and compromise.

169. Regarding the expert evidence for the appeals in other years, Mr Yu also pointed out that CLP had started preparing for them in 2004 whilst its application for consolidation was only made in July 2008.  Furthermore, CRV’s argument of swing and roundabouts in other years did not depend on what would be the rateable value in the other years.

Decision on legal principles

170. I am of the view that the Elgidata principles apply to rating cases with the same vigour.  The “following the event principle” will only be a starting point from which the court can readily depart to ensure the observance of the underlying objectives of the CJR (see Wong Kam Tong, paras 10 to 13).  The standing of the ratepayer is special only to the extent that he will get the costs of the appeal if he can secure a reduction that is not minimal. The fact that he might have argued for a figure lower than the one accepted by the tribunal should not operate to his detriment.  But he is in no exception regarding conduct that adds to the length or expense of the hearing (Jamaica Gypsum, p 11 per Lord Wilberforce and John Wash at p 62 per Stephenson LJ).  The objectives of the CJR should be observed in rating appeals as in other civil proceedings.

171. Regarding CRV’s letter dated 12 February 2010 offering to accept a valuation at HK$7.2 billion.  I do not think CRV should be penalized for not beating her own offer.  The normal approach is to penalize the offeree who fails to beat the offer, not the offeror.  I also agree with CRV that it is wrong in principle to take an offer as admission of liability by the offeror.  To make CRV pay all costs to CLP on the ground that CRV has failed to beat her offer is also contrary to the public policy of encouraging compromise and settlement.

Decision on costs of approach 2

172. CLP’s main reason for putting forward all the unreliable approaches and methods is because CRV had put forward and insisted upon only the unworkable and ultimately rejected WACC approach.  CLP therefore said that it was reasonable for it to have developed the different approaches and to use both the R&E and CB methods as conventional alternatives to assess the rateable value of the Tenement. It said that in doing so, it would enable the tribunal to see which approach was most reliable for the purpose.  Hence, the costs for developing and presenting these approaches should all be borne by CRV.

173. I however agree with CRV that when CLP presented an approach for the tribunal’s consideration, it had to be an approach that CLP itself considered reasonable and useful for consideration in the appeals.  The fact that CRV was wrong in presenting and insisting on an inappropriate approach did not justify CLP in presenting other inappropriate, unnecessary and unreasonable approaches.  This is so even CRV’s assessment result should be most unrealistic and unreasonable.  CRV’s error has resulted in her being made liable to pay CLP the costs of the appeals.  But that should not mean that CRV has to pay whatever costs that CLP has incurred including those incurred improperly or unnecessarily.

174. I also consider approach 2 as an independent approach so that its exploration and development had no impact on approach 1 and did not assist the development of approach 1.

175. The fact that the figure resulted from approach 2 is in the same ballpark as that from approach 1 is entirely irrelevant as what needs to be considered is the appropriateness of the methodology but not the coincidence of the results.  If there are reasons to show a methodology to be inappropriate and unworkable, the apparent reasonableness of the incidental result can still not brush aside the reasoning and make the methodology workable.

176. If CLP’s own experts have proper reasons to regard an approach as unworkable, there is no reason or basis for the tribunal to use it for weighing and comparing with other approaches.  It is a waste of time to consider an approach which reasons dictate that it is unworkable and unreasonable.  Such would not assist the tribunal.

177. CLP also argued that CRV had accepted the use of the CB method for input to approach 1.  However, that was for the purpose of the assessing the DRC of the assets of the HT and HL and the capitalization of some of those assets.  Such works can clearly be identified and CRV has agreed to pay such costs.  Such works cannot justify the extensive use of the CB method up to stage 4 to calculate the unrealistic CB rental for use in approach 2.

178. CLP’s argument that all CB costs for producing input for approach 2 were also incurred for approach 1 is incorrect.  The CB method was used to assess the DRC of assets of HT and HL and decapitalize some of those assets in approach 1, but it was used extensively in approach 2 up to stage 4.  I also refer to the comments of CLP’s experts on CB as repeated by Member Lo in para 269 of the original judgment and Member Lo’s own view on the use of CB in approach 2 in paras 345 and 346. 

179. CLP further argued that CRV had used at the review hearing the CB decapitalization rate produced by CLP for decapitalizing the rental value of the wayleaves, DCSs and pole sites.  The short answer to that is that CRV failed in the review and was ordered to pay the costs for it.

180. Regarding the HEC judgment handed down on 29 November 2009, that was only one reason why CLP should not have used approach 2.  The view of CLP’s experts that CB was inappropriate was also an important reason why CLP should not have embarked on this approach.  Hence, 29 November 2009 was not a cut-off date on the inappropriateness of using approach 2.

181. For the above reasons, I am of the view that approach 2 was inappropriate and unnecessary for the appeals.  I would vary the costs order nisi to the extent that all costs of and relating to Adam Davis’ valuation by approach 2 be disallowed.

Decision on the CB costs

182. Regarding the CB costs save those used also for approach 1, CLP’s arguments are not much different from those it used for approach 2.

183. My reasons for disallowing the costs for approach 2 mainly depend on the inappropriateness of approach 2.  I do not think it reasonable for CLP to have applied the CB method at all save for the limited purposes of approach 1.

184. Regarding the point that CRV had also called evidence on the CB method, I agree with CRV that she only did so to respond to CLP’s case on the CB method.  I do not think CRV should be blamed for this.  CRV is also not asking for her CB costs to be borne by CLP.

185. CLP also raised the difficulties that the taxing master may face.  However, I do not think this point should affect the question of what decision is fair and just.  Nor do I agree that the task of the taxing master is difficult.  The costs of using the CB method to provide for input in approach 1 are identifiable.  I would therefore disallow the CB costs save those adopted for use in approach 1.

Decision on the costs of approach 3

186. CLP’s expert Mr Davis did not rely on approach 3 at all on the ground that it did not produce a reliable estimate of rental value. For this reason, the tribunal also did not consider this approach.  The costs incurred in presenting this approach were thus wasted.

187. CLP argued that approach 3, which used NAV instead of DRC, was presented because this was blessed in the HEC case and HEC was a parallel to CLP.  However, this argument cannot prevail over the fact that CLP’s expert did not consider approach 3 reliable.  I think CLP, in exploring an approach that its own expert did not find reliable, was really leaving no stone unturned.

188. For these reasons, I would disallow the costs of approach 3.

Decision on costs of other years of assessment

189. Regarding the costs for preparing the expert evidence for the appeals for the other years of assessment, they should normally be dealt with in the relevant appeals.  CLP however asks for an order in these appeals to require CRV to pay these costs to it as well.  One of CLP’s grounds is the view of Au J in para 107(1) of the original judgment.  Au J was of the view that it was reasonable and necessary for CLP to have spent time to prepare the expert evidence for the other appeals.  Hence, the learned judge did not order loss of time in the accrual of interest.

190. CLP had in fact started preparing such evidence in 2004 and by July 2008 had more or less completed all expert evidence for all appeals. On Au J’s view, it was reasonable for CLP to have prepared all expert evidence for all years.  The reason being that all appeals raised similar issues concerning expert valuation.  It was thus reasonable for CLP to instruct the experts to prepare their reports for all appeals to save time and costs and with a view to consolidate them for one hearing.  CLP in fact applied for the consolidation in July 2008 though it failed in the task.  Hence, Au J decided that CLP should have interest on the refund of the overpaid rates for 2004/05 during the period when CLP was preparing the expert evidence for the appeals for the other years.

191. I agree with Au J’s view on the reasonableness of CLP to prepare all the expert evidence for all appeals as there was no stay of the other appeals until 2008.  Before the appeals were stayed, CLP had to proceed with them and to prepare for them.  The appeals also raise similar issues and it was reasonable for CLP to have asked the experts to deal with all of them together. However, the evidence of each year should be prepared for the appeal of that year and not for other years.  The costs for the preparation should also be dealt with in the respective appeal.

192. Mr Holgate submitted that an examination of the other appeals was necessary in order to understand CRV’s mechanistic and unreasonable application of the WACC model year on year.  However, the unreasonableness of the WACC model did not lie in its mechanistic application year on year.  It was not necessary to consider the evidence for the other appeals in determining these two appeals.  Member Lo has also made it clear in para 354 of the original judgment that he had not considered the expert evidence for the other years.  I also agree with Mr Yu that it would be wrong in principle to take the expert evidence of later years for consideration of these two appeals as the situations of later years were not supposed to be known when HL and HT negotiated for the rent of the year in question.

193. Regarding CRV’s consent to discovery of her internal working papers for calculating the rates for all years under appeal, I do not think those papers were required for the consideration of these two appeals.  The tribunal did not refer to these papers in considering the appeals.  I also do not think that the taking of this unnecessary step by CRV should make her liable in these appeals for the costs of the expert evidence of the appeals for the other years.

194. Regarding Mr Holgate’s argument that if approach 1 should also be used for other years, then it would be unnecessary to examine the effect of CLP’s model on other years, but CRV has not indicated her approach for the other years.  I do not think we need to consider this argument now.

195. For the above reasons, I would exclude the costs of the expert evidence for the other years from the costs order in these appeals. Those costs will have to be dealt with in the relevant appeals.  I also say that this exclusion is more for prudence than necessity as the order nisi does not include the costs of the expert evidence for the appeals in the other years which are yet to be disposed of.  If CLP want those costs to be included in the costs order nisi, it would be for CLP to apply for the same.

COSTS FOR ARGUMENT OF INTEREST

196. CRV had required CLP to pay the rates and rent as assessed pending the appeals.  CRV did not make any holdover order under s 42A(1) of the Ordinance. Hence, depending on the outcome of the appeals, there was a possibility of refund of part of the sums paid.

197. At the hearing of the appeals, CLP sought interest on the refund from the date of payment to the dates of refund at the rate of its borrowing costs.  The rate was later agreed.  CLP at the review continued to seek interest at the agreed rate.

198. However, CLP on 8 January 2014, in the course of discussing with CRV on the terms of the order of the review, proposed in the draft order that CLP be given interest at judgment rate on the refund from 3 January 2014, the date of the review judgment. 

199. CRV replied on 20 February 2014 and pointed out that the judgment rate should only apply after the amount of rates has been crystallized in an award from the tribunal.  CRV referred to the judgment of the House of Lords in Thomas v Bunn [1991]1 AC 362 at p. 374C where it was held that (1) “until there is a quantified sum which the judgment debtor is obliged by the terms of the judgment to pay, there is no judgment which he is able to satisfy” and that (2) s 17 of the Judgment Act 1838 does not relate to an interlocutory or interim order or judgment establishing only the defendant’s liability but a judgment that quantifies the defendant’s liability.

200. However, CLP responded on 3 March 2014 and asked for judgment rate to apply from an even earlier date of 24 April 2013, the date of the original judgment.

201. On 10 March 2014, CRV wrote to the tribunal with copy to CLP and advised the tribunal that there was this dispute on interest.  CRV proposed to the tribunal to deal with it also at the hearing scheduled on 27 March 2014.  CRV also proposed directions that she should file her submissions on this matter by 14 March and CLP file its submissions on 21 March.  I made an order in terms of the proposal on the same day.

202. After the order was made on 10 March, CLP on 11 March wrote to CRV indicating its disagreement to CRV’s contention that judgment rate should only start to run when the rateable value for 2004/05 has been agreed or determined by the tribunal.  CLP further suggested to CRV to have this issue to be drafted in neutral terms in the review order as it would be determined by the tribunal on 27 March.

203. On 12 March, CRV filed an affirmation by Ms Wendy Tang in support of CRV’s argument on when judgment rate should apply.

204. CLP then had a change of heart on 13 March.  It advised CRV that it would not pursue any claim for post-judgment interest at judgment rate on any unrefunded overpayment up to the date of the original judgment of 24 April 2013, but would accept interest on such overpayment at CLP’s borrowing rate.  It further said that it would be unnecessary for the parties to seek the tribunal’s ruling on the application of the judgment rate for the post-judgment period.

205. CRV on the same day wrote back and asked CLP to confirm that the agreed rate of interest would apply to the unrefunded overpayment until refund.

206. CRV on the next day filed her submissions in accordance with my directions.

207. CLP later accepted that the agreed rate would apply to the unrefunded overpayment until refund.  No determination on this matter is needed.

208. CRV however asks for costs for arguing this issue on the ground that CLP’s concession on 13 March was too late and unclear.

209. CLP opposed the application for costs.  It referred to its proposal for judgment rate interest to run from the date of the review judgment on 8 January 2014 and said that CRV only replied on 20 February.  CLP wrote again on 3 March (asking for judgment rate interest to run from the earlier date of original judgment on 24 April 2013) and CRV asked the tribunal for directions on 10 March for the matter to be heard on 27 March. CLP then promptly conceded on 13 March.  Hence, CLP should not be liable for the costs of this issue.  Mr Holgate added in oral submissions that if there was any ambiguity in CLP’s letter of 13 March, it could have been clarified easily in a phone call.

210. I disagree with CLP’s submissions save the point about ambiguity.  Prior to 10 March, there was this disagreement on the application of the judgment rate.  It was entirely reasonable for CRV to have asked for the matter to be dealt with at the hearing on 27 March and to have proposed the directions for filing and service of submissions.  CRV’s letter of application with proposed directions was copied to CLP.  CLP did not oppose this application.  By its letter of 11 March, CLP indicated its willingness to have the matter decided on 27 March and did not comment on the directions for filing submissions.  CLP knew that CRV did not have the luxury of time in preparing these submissions and had to be prompt in doing so.  CRV also filed the affirmation of Ms Tang on 12 March.  Hence, the concession on 13 March was not soon enough to spare CRV’s effort in preparing the submissions.  CRV in fact filed the submissions on 14 March.

211. I would also point out that CRV had by her letter of 20 February 2014 set forth already the clear legal position on why judgment rate should only run from the date when the final rateable values are embodied in an award of the tribunal or agreed between the parties. CLP’s insistence on its position from then on was already unreasonable.

212. For these reasons, I am of the view that CLP should pay the costs for arguing out the issue on judgment rate interest though the issue was eventually settled.

COMMON FUND TAXATION

CLP’s application

213. CLP applied for taxation at the higher scale of common fund on 14 March 2014.  That was more than 10 months after the handing down of the original judgment on 24 April 2013.  CLP filed an affidavit by its solicitor Mr Hardaker in support of the application.  Mr Hardaker said in para 10 of his affidavit that CRV’s application to vary the costs order nisi had prevented the costs order from becoming absolute and preserved the position for both parties. 

214. CRV said that this application was late and was used by CLP as an attack to improve its defence against CRV’s application for variation of the costs order nisi.  However, as pointed out by Mr Holgate, CRV does not allege that the lateness of the application has caused her any prejudice.  Since CRV does not object to this application being made out of time, I will deal with it on the merits.

215. Mr Holgate referred to Town Planning Board v Society for Protection of the Harbour (No. 2) (2004) 7 HKCFAR 114 for the principles governing the award of indemnity costs.  The principles are that the case must have some special or unusual feature to justify indemnity costs.  The award of indemnity costs is not restricted to categories of cases that had been identified.  Nor is it limited to cases brought for improper purpose or ulterior motive or involving improper conduct of the losing party.  The grounds may extend to any matter relating to the conduct of the parties in litigating the case, the circumstances leading to the litigation and the attributes of the parties.

216. Mr Holgate then referred to Overseas Bank Trust Ltd v Coopers and Lybrand [1991] 1 HKLR 177.  He submitted that similar principles apply to common fund taxation though the special or unusual feature need not be to the degree that would justify indemnity taxation.  He also referred to the provisions for indemnity costs resulting from sanctioned offers in O 22 rr 23 and 24 and that these principles were also applied to Calderbank offers in Lung Po Kwan v Tang Kam Sheung, CACV 164/2010.

217. He also referred to Chiu Chi Lai v Well Speed Ltd, HCMP 1947/1997 where the defendant to a vendor and purchaser summons resisted an application by the purchaser to the very end despite clear authorities to the contrary.  That defendant was ordered to pay costs taxed at common fund basis.

218. He then referred to CRV’s offer letter dated 12 February 2010.  He said that the offer came very late and the result obtained by CLP in the appeals was far better than this offer.  He submitted that this should be a highly relevant factor in deciding the scale of taxation.

219. Regarding attributes, Mr Holgate referred to CRV as a taxing authority and CLP a rate payer.  He referred to CRV’s statutory obligation in preparing an accurate valuation list.  He also referred to the substantial payments made by CLP for rates and government rent as originally assessed despite the launching of the appeals by CLP because CRV did not make a holdover order under s 42A(1) of the Ordinance.  But he agreed that CRV did make significant refunds after the CFA had handed down the decision in the HEC case and before CLP’s appeals were determined.

220. With regard to special or unusual features in these appeals or circumstances leading to them, Mr Holgate again referred to the attributes of the parties and the need for CLP to pay a very large bill of rates and government rent because of CRV’s grossly exaggerated assessment.  He also referred to CLP’s special standing as a rate payer (see John Walsh) and CRV’s failure to make a sensible offer under s 42B of the Ordinance.  He also referred to CRV’s internal working papers as showing that CRV had serious doubts about the soundness of the WACC model, but she still maintained it throughout the appeals.  She just left the task of coming up with alternative models to CLP.

221. Mr Holgate also referred to the vulnerability of the WACC model by highlighting the evidence of CRV’s experts who agreed that the correctness of the model depended on the correctness of seven points or pillars. He also submitted that if CRV should have abandoned WACC at the outset, she would have been obliged to devise an alternative method of carrying out the R&E valuation to comply with her statutory duties.

222. Mr Holgate also referred to the review.  He submitted that CRV had pursued a number of points in the review hoping to increase the rateable value to above her offers.  However, I note that CLP is not applying to vary the costs order nisi made against CRV for the review.  If CRV’s conduct at and/or leading to the review was so special or unusual that it would justify a higher scale of taxation, CLP should have applied to vary the costs order nisi of the review.

223. Finally, Mr Holgate referred to CRV’s application to vary the costs order nisi to exclude some costs for preparing expert evidence. He regarded this as a special or unusual feature.  However, I have already expressed a favourable view on CRV’s application to vary the costs order nisi.  It is therefore not a special or unusual feature for CLP’s purpose.

CRV’s opposition

224. Mr Yu in response submitted that CRV’s use of the WACC model was not unreasonable.  This use had been approved by the tribunal in an earlier appeal of CLP v CRV [1997] 4 HKC 461 and thereafter in the Valuation Tribunal in England (BT v Central Valuation Officer [1998] RVR 86, Southampton Container Terminal (Hampshire Smith South Valuation Tribunal 17.10.2008)). The Joint Rating Forum’s Guidance Note on R&E Method of Valuation for Non-domestic Rating also listed WACC as one of the approaches in determining the tenant’s share by means of return on capital.

225. Mr Yu further submitted that the tribunal in the HEC case did not say that WACC was an impermissible approach.  The Court of Appeal’s judgment on the HEC case, which was handed down in the middle of the hearing of these appeals, also accepted this approach.  Hence, it was not unreasonable for CRV to continue with this approach.

226. The CFA’s judgment in the HEC case also did not say that the WACC approach was impermissible, but reinstated the tribunal’s judgment because the valuation method to be adopted was a matter of valuation to be decided by the tribunal (paras 133 and 171 of CFA’s judgment).

227. Furthermore, the CFA’s judgment was handed down a few months after the parties had finished their closing submissions in the present appeals.

228. Regarding CRV’s internal working papers, Mr Yu referred to the transcript of the hearing of the appeals.  The transcript showed that CLP’s representative Mr Booton also used the WACC approach when he discussed with CRV’s representative on the rates for 2004/05.  Mr Booton did not put forward any alternative method.  The evidence of Professor Cooper for CLP in the transcript also showed that CLP or its consultant had not suggested any other method of assessment in the communication with CRV on the assessment for 2004/05.

229. The transcript on the working papers also showed that CRV had proposed an alternative method of turnover rent.

230. Regarding the doubts of CRV’s officers about the soundness of the WACC model, Mr Yu pointed out that they were using WACC estimates different from those discussed in the CLP expert report.

CLP’s reply

231. Mr Holgate in reply said that by 2004/05, the WACC model return had fallen to below 10% and was lower than the actual return, but CLP should have at least the actual return.  The previous decision of CLP v CRV did not deal with such circumstances.  Hence, the WACC approach was no longer appropriate for the new circumstances and an alternative method should be employed.  For the same reasons, the UK valuation decisions were also of no relevance as they did not involve a tenement where the actual return exceeded the WACC of the operator.  CRV’s reliance on these cases was also rejected by the tribunal in the HEC’s case.

232. Mr Holgate also referred to the Joint Rating Forum Guide Note which warned against the use of the WACC approach as definitive.  The Guide Note likewise did not deal with the situation when the actual return was substantially higher than the WACC of the operator.

233. He also said that the Court of Appeal in the HEC case erred because the court accepted CRV’s erroneous submissions.

234. He also referred to CRV’s internal working papers and said that they revealed doubts of CRV’s officers about continued reliance on WACC when the economic circumstances were very different from those of 1991/92. He said such doubts were part of CRV’s pre-litigation conduct. 

235. He thus asked the tribunal to assess the conduct of CRV in persisting with the WACC model and failing to present alternatives to avoid the unreasonable outcome of this model despite the doubts about it.

236. Mr Holgate also submitted that CRV’s alternative approach as mentioned in the internal working papers was only a slight modification of her WACC approach.  Furthermore, the consideration of this approach never progressed to beyond a preliminary stage.

Analyses and decision

237. CLP’s main argument for common fund taxation is that CRV had persisted in the WACC model and failed to present any alternative model for the tribunal’s consideration despite the return of WACC in 2004/05 was significantly below the actual return.  The rates assessed by this model is at the very high figure of about 9 billion whilst the tribunal’s assessment is about 5 billion. 

238. I agree that these are legitimate reasons for requiring CRV to pay the costs of the appeals.  However, they may not be special or unusual features that justify common fund taxation.

239. This case is also different from Chiu Chi Lai where the losing side persisted till the end despite clear authorities to the contrary.  There was no clear authority to the contrary for these appeals until the CFA gave its decision in the HEC case.  But that was several months after the parties had filed their closing submissions.  Prior to that, the previous CLP decision for 1991/92 and the English decisions were based on the WACC method.

240. The WACC method might have appeared vulnerable as it depended on seven pillars.  However, in the light of the previous judicial decisions and the practice between the parties, I do not think CRV’s persistence in the WACC model in the appeals can be regarded as a special or unusual feature that would justify common fund taxation.  I also note that neither party had come up with any alternative in their negotiations.  The Court of Appeal’s decision in the HEC case handed down in the middle of these appeals is another reason against common fund taxation as it supported the use of WACC.

241. CRV’s assessed amount of rates is substantially above the tribunal’s determination but that was not the result of deliberate exaggeration. It was only an inappropriate professional assessment.

242. I also agree with Mr Yu that the CFA restored the tribunal’s decision in the HEC case not because WACC was a wrong or impermissible method, but because the choice of valuation method was a matter for the tribunal.

243. Unlike the CB method and approaches 2 and 3 which were criticized by CLP’s own experts, the WACC method had not been disowned by CRV’s own experts.

244. CLP referred to CRV’s attribute as a taxing authority and her statutory duty to prepare an accurate valuation.  But this in itself cannot be a special or unusual feature that can justify a higher scale of taxation when CRV errs and loses an appeal in the tribunal.

245. Mr Holgate has repeatedly referred to the Calderbank or s 42B letter.  I say that a late and not very generous offer is better than no offer.  It is contrary to public policy to penalize an offeror for not making a good and timely offer.  That would put him in a worse position then not making an offer.  That would discourage the making of offers.  That would not induce compromise and settlement and is wrong. 

246. Regarding the substantial overpayment of rates, CLP is now properly compensated with interest to cover its borrowing costs.  Hence, this is not a ground to justify common fund taxation.

247. Mr Holgate referred to John Walsh and reiterated the special standing of CLP as a rate payer.  But special consideration for a rate payer in regard to costs is just that if the rate payer can secure a non-minimal reduction in rates, he will get the costs of the appeal despite the fact that he might have argued for a lower figure.  No special standing of the rate payer can lower the hurdle for making CRV to pay common fund costs.

248. Regarding the doubt of CRV’s officer as expressed in the internal working papers, putting aside Mr Yu’s argument that the WACC estimates referred to were different from those in CLP’s expert reports, such doubt as pre-litigation conduct is sufficient to make CRV pay costs to CLP, but not so special or unusual to justify common fund taxation.  CRV’s assessment was a bona fide professional exercise though the result was inappropriate.  All these arguments put forward by CLP can amply justify a costs order against CRV, but not for common fund taxation.

249. For these reasons, I propose to dismiss CLP’s application to vary the costs order nisi for common fund taxation.

Member Lo:

250. I have read the draft by Chan, J.  I agree with the reasoning in the draft and all the proposed orders.  I have no further comment.

Chan J:

251. For the above reasons, we dismiss CLP’s application for leave to appeal against the review judgment confirming the original judgment save as set aside, reversed or varied by the review judgment. 

252. We also vary the costs order nisi to the extent that (i) all costs of and relating to Adam Davis’ valuation by approach 2 be disallowed; (ii) the CB costs save those adopted for use in approach 1 be disallowed; and (iii) the costs of approach 3 be disallowed.  We also exclude the costs of the expert evidence for the other years from the costs order in these appeals. 

253. We also order CLP to pay CRV the costs for arguing out the issue on judgment rate interest.

254. We also dismiss CLP’s application to vary the costs order nisi for common fund taxation.

255. Finally, we make a costs order nisi that CLP do pay CRV the costs of all these applications with certificate for two counsel.