FILA MARKETING (HONG KONG) LTD. v. FAITHFUL PROPERTIES CO. LTD. AND ANOTHER

HCCL 66/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 66 OF 1997

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J U D G M E N T

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These Proceedings

1. On 9 July 1999 judgment was handed down in this case, wherein the plaintiff, Fila Marketing (Hong Kong) Ltd claimed against the defendants, Faithful Properties Ltd and Target Power Ltd for damages for breach of a term within a Tenancy Agreement, Clause 4.13 (ii) of which granted Fila an option to purchase the four shop premises, Shops G5-G8, in Hankow Centre, Hankow Road, Kowloon, which it had leased from the defendants.

2. The judgment on liability speaks for itself. After a trial ultimately lasting seven days although regrettably spread over a period of several months, the court ordered that interlocutory judgment be entered in favour of Fila, with damages to be assessed. This, therefore, is the second part of this case, the assessment of damages, which somewhat curiously has taken place some three years after the initial judgment on liability.

The Evidence

3. The transcript of the initial trial served to confirm the plaintiff's assertion that it had been conducted on the basis that, save for expert evidence, all other evidence on liability and damages had been called. In the circumstances, and in face of the plaintiff's strong objection, I declined to permit further factual evidence to be put in on behalf of the defendants.

4. Thus this tranche of the case focused solely upon the expert evidence as to valuation. In this regard, the plaintiff relied upon the evidence and two expert reports of Mr Ian Cullen, of Ian Cullen & Associates, whilst the defendants relied upon Mr Simon Lynch of Chesterton Petty, who had produced three reports.

Issues for Decision

5. Shorn of detail (and there is much of that) at bottom there are but three issues requiring further decision:

(i) the open market value of the four shop premises;

(ii) the 'apportionment issue'; and

(iii) the measure of damages.

I consider these issues in turn.

(i) Open market value

6. The four shop premises the subject of the Tenancy Agreement dated 16 September 1996 between Fila and the defendants were shops G5, G6, G7 and G8 on the Ground Floor of Hankow Centre in the heart of Tsimshatsui.

7. As their numbers indicate, these shop units are adjoining, with a combined street frontage of 21.98 metres. Units G5 and G6 were at the material time owned by the first defendant, Faithful Properties Ltd, and units G7 and G8 by Target Power Ltd, the 2nd defendant. For the purposes of this case, however, nothing turns on this separate ownership and there is no need to distinguish between the defendants, both of these companies being part of the Lai Sun group.

8. Differing valuation conclusions aside, there appeared to be two primary matters of disagreement between the respective experts. The first was the correct valuation approach, namely whether the 'comparative method' should be adopted, or alternatively whether the 'investment method' is the more appropriate. In this case Mr Cullen preferred the former, whilst Mr Lynch opted for the latter.

9. I am in little doubt that as a matter of general approach the comparative method is to be preferred in this case, the more so because the heated atmosphere of the property market in the first half of 1997 did and does not lend itself readily to analysis on an investment basis. In this connection I was referred to the observations of His Honour Judge Cruden in his seminal work 'Land Compensation and Valuation Law in Hong Kong', 2nd Ed., 1999, who states (at p 514):

"The comparative method is universally regarded as the best method of valuation. It simply involves comparing the property to be valued with sale or rental transactions of similar properties, which are described as comparables. A comparable is another occasionally identical but more often similar property, which has recently been subject to a market transaction. The valuer uses the financial details and other relevant particulars of comparable market transactions as indicators of the market value of the property being valued. This process is professionally described as comparing like with like. The Lands Tribunal has repeatedly expressed its preference for the comparative method : Director of Lands and Survey v Fung Ping Chung [1977] HKLTR 37 at 40 :

The Tribunal again in this claim wishes to indicate that its considered opinion is that comparables are the best evidence and are to be preferred to other methods of valuations."

10. The other matter upon which the experts disagreed was the valuation rating to be applied to a small part of the floor area of the subject premises. The divergence of opinion is a small one. It is this. Mr Cullen and Mr Lynch are agreed as to absolute measurements in terms of the shop zonal analysis which has been adopted, namely Zone A (street frontage area at a 6 metre depth from the pavement) at 134.5 sq.m., Zone B (the next 6 metre depth back in internal area) at 109.53 sq. m., and Zone C (the small strip at the rear of shops G6-G8 12 metres or more from the shop front and bordering on the internal arcade frontage). But where they disagree is whether the Zone C area should be rated for valuation purposes as Zone B area (that is, at 50% of the Zone A rate), or whether it should be rated, as is more usual, at 50% of the Zone B rate (that is, at 25% of the Zone A rate).

11. Mr Lynch says the latter, whilst Mr Cullen argues that the arcade footage elevates the utility and importance of this narrow rear strip, and that in these particular circumstances it should be regarded as Zone B area and assessed accordingly.

12. This is a point of relatively minor detail. Suffice to say that given the Zone C arcade footage (which in this case appears to be a long way from the storage usage customarily arrogated to Zone C areas) I prefer the Cullen approach, and thus the final valuation equation reflects this conclusion.

13. As to valuations per se, the court has had the advantage of a review of a number of comparable transactions in the immediate vicinity of Hankow Road, and indeed one (C3) within the same building. After analysis and appropriate weighting, Mr Cullen has arrived at a Zone A rate of $825,000 per sq.m., which by multiplying out the agreed areas, that is, by 199.35 sq.m., produces a vacant possession valuation of $164.5million for the four shops.

14. From Mr Lynch's standpoint it is worth noting that, at least at one stage of his expert analysis, namely the conclusion of his second report - the purpose of which was to comment upon Mr Cullen's methodology and conclusions - by utilizing comparables he arrived at a 'mid-point guide', after adjustments, of HK$820,400 RZA/sq.m., a figure which is not dissimilar to Mr Cullen's figure of $825,000 per sq.m. In this connection Mr Lynch stated :

"Having considered the evidence within the report I consider the best evidence to be the comparables in Hankow Centre, No. 1 and 3 as only locational adjustments are required and these are within the subject building. The value of the subject will fall between these two comparables. Comparable No 1 also benefits from being visible by pedestrians leaving Ashley Road which enhances its value. Adjusting the property for time and visibility the mid point between these two values is $820,400 RZA/sq.m. which is close to my valuation... Given that such large adjustments are required this value should only be used as a guide..."

15. Had this eminently sensible view been maintained, it seems likely that it may have proved possible to have achieved agreed valuations without the need for viva voce expert evidence. This was not to be, however, because in his third report, issued after judgment on liability was handed down, Mr Lynch made a considerable downward adjustment to comparable 3, with the result that the 'mid-point' that was previously considered is reduced to $766,000 per sq.m. In the event, Mr Lynch did not choose to adopt this figure, but instead, after considering rental values, opted for $772,000 per sq.m., which when multiplied out by the now agreed RZA area (subject only to the minor difference concerning the rating for Zone C) produced an overall vacant possession valuation of $150 million. This latter figure thus happily equated with the valuation of $150 million in his 1st report, a valuation wherein the attributed value per sq.m. had been considerably greater ($821,000) but the RZA area adopted was less (187.71), the consequential figure of $154,100 then being scaled down to $150 million as representing a mid-point between that and a capitalized rental value calculation of $145,400 per sq.m.

16. Notwithstanding the suggestion made by Mr Chow on behalf of the defendants that there is confusion about the specific figure of $820,408 only by reason of the way in which the analysis is presented, at the end of the day I remain unable to understand why a third report was necessary, nor the rationale for the sharp downward adjustment to Comparable 3. Nor do I wish to speculate, possibly unfairly, at the reason for this sharp downward adjustment at a stage but a month or so after judgment had been rendered on liability, although Mr Yu pointed out that the production of this third report after judgment on liability served to derail a pending application by the plaintiff for interim payment. Suffice to say that for present purposes I decline to accept this third report.

17. Valuation is not an exact science, nor is it an issue which can be subjected to precise calibration, and at the end of the day the court has to take a broad view on the material before it. The picture which emerges on the evidence is thus:

Vacant possession - Cullen $164.5 million, Lynch $150 million

Subject to tenancy - Cullen $164 million, Lynch 147.6 million

18. On the basis of these figures, and given that I prefer Mr Cullen's approach both generally and in particular, I have come to the conclusion that on the evidence before the court an appropriate valuation figure for these four shops is $160 million on a 'subject to tenancy' basis. I note here the additional disagreement between the parties as to the basis upon which the valuation should be adopted, Mr Yu arguing for vacant possession, and Mr Chow for a 'subject to tenancy' valuation. At the end of the day it seems probable that if and in so far as the plaintiff had been able to purchase its premises for quick on-sale, one of the terms of such on-sale necessarily would have included a lease-back in favour of Fila, in this regard Mr Chow pointing to the 'Chow Nam' offer letters containing a lease back provision, and similarly to a draft conditional sale and purchase agreement prepared for the plaintiff by Messrs Richards Butler which also made provision for lease-back. In the circumstances of this case I agree with Mr Chow's submission on this point.

19. It must not be forgotten that the post facto valuations proffered by the experts are made against the background of an actual sale and purchase transaction involving both these and associated premises, namely that which generally is referred to as 'the Jumbo King transaction', which in its own right attracted its own share of extensive litigation, culminating in a judgment of the Court of Final Appeal in favour of the vendors and against Jumbo King as purchaser.

20. As the earlier judgment of this court records, the Jumbo King transaction involved not only the sale of shops G5-G8 owned by the defendants in these proceedings, but also shop units G9-10, together with certain utility and roof areas owned by Gold Nation Limited, which premises cumulatively were sold to Jumbo King at a price of $257.5 million with existing tenancies. It was this sale, which attracted very considerable interest at the time both in the press and in property circles, which initially prompted Fila's letter of April 1997 claiming its right to purchase pursuant to Clause 4.13 (ii) of the Tenancy Agreement covering shops G5-G8.

21. Not unnaturally the defendants in these proceedings assert that the best evidence of open market value at the time regarding shop spaces G5-G8 is represented by the Jumbo King transaction. Mr Chow submitted that the actual transaction, at $257.5 million, was an arm's length transaction reached after negotiation between two independent parties who could not be regarded as uninformed or amateurish. Whilst there could be endless debate as to whether the property could have been better marketed or whether there was a need for prior independent professional valuation, he said, at the end of the day this was the best evidence of what was the true open market value. To the contrary, on the basis of the evidence in this case Mr Yu disputed this line of argument, maintaining that 'open market value' necessarily connoted the best price at which an interest in property might reasonably be sold at the date of valuation assuming, inter alia, that the property will be fully exposed to the open market and a reasonable period is allowed to negotiate the sale taking into account the nature of the transaction. But in this particular case, he submitted, there were strong indications that this situation did not prevail and that the agreed price fell considerably below the prevailing open market value.

22. In this connection Mr Yu referred to various factors, notably a mortgage valuation by Wayfoong Property, less than 3 weeks after the sale to Jumbo King, for $260 million, an offer to Fila ("the Chow Nam offer" ) of $155.543 million for G5-G8 without any negotiation, and the current Cullen valuation for the overall premises of $283.5 million. Mr Yu further referred to what he described as "the haphazard manner of marketing and negotiation" which had resulted in the Jumbo King sale whereby no prior professional valuation had been obtained, no professional marketing employed, a Lai Sun administrative employee, Franky Tam, being delegated authority to make the decision to sell at that level, and the final price being agreed after only ninety minutes of negotiation with one agent by a Miss Wong Yee Man, who never had handled a transaction of this size and whose experience primarily was in residential property - all amounting, in effect, to a picture of an expensive game being played significantly less well than it should.

23. I accept these submissions. In the circumstances revealed by the evidence in this case, both in the earlier trial and now in this second part of the proceedings, it is difficult safely to regard the price struck with Jumbo King as accuratively reflective of the open market value at the time - which, as I have earlier indicated, for the purpose of the present valuation exercise for shops G5-G8 I have assessed at $160 million on a 'subject to tenancy' basis.

(ii) Apportionment

24. That which generally has been referred to as 'the apportionment issue' forms an integral element in assessing the value of that which has been lost by the plaintiff in being deprived of the right, pursuant to Clause 4.13(ii) of its Tenancy Agreement, to exercise its option to purchase shops G5-G8, since not only is it necessary to establish the open market value of the subject premises but also an estimate of the 'asking price' of these shops.

25. The evidence before the court is that the Jumbo King transaction, at the price of $257.5 million, covered not only shops G5-G8 but also the other properties owned by Gold Nation. It is also the case (indeed I believe it is undisputed) that Gold Nation, Faithful Properties and Target Power are associated companies ultimately controlled by one family.

26. It is known that Gold Nation had agreed with Jumbo King to sell its portion of the properties for $119.022 million, as the letter from Gold Nation to Messrs Kok & Ha dated 28 July 1997 makes clear. Moreover, Mr Franky Tam, who was at the material time Company Secretary of Lai Sun, the parent company of the two defendants, was called by the defendants and testified that the shops were purchased by Lai Sun and the Crocodile group together, and that the Jumbo King transaction price was split according to the ratio derived from the original purchase price.

27. In light of this evidence, said Mr Yu, the logical and indeed the only available inference was that the defendants were selling the subject premises G5-G8 for $257.5 million minus $119.02 million, that is, for $138.48 million.

28. On behalf of the defendants Mr Chow attacked this approach as essentially artificial, maintaining that the Kok & Ha letter had to be seen in the context of the commencement by Jumbo King of a suit against the defendants and Gold Nation (HCA 5698/97) for specific performance of the preliminary agreement of 22 March 1997, that Gold Nation was not a party to the dispute between the plaintiff and the defendants and did not wish to be dragged into litigation with Jumbo King, and for that reason immediately had offered to perform its part of the bargain with Jumbo King. It followed, said Mr Chow, that the figure of $117.02 million bore no relation to what might have been the true or open market value of the Gold Nation premises.

29. I accept that this approach is open to criticism, but at the end of the day the court has to reach a view on the evidence before it. There may be something in the point which was also made, namely that the defendants and Gold Nation had since December 1996 been intending to try and sell the tenanted premises and the other premises together for a global sum, and thus sale of the whole may perhaps have represented sale at a slight discount when compared with sale of the component parts. On this basis it may thus not be unreasonable to consider that the notional asking price for the sale of shops G5-G8 can be pitched slightly higher than the figure of $138.48 million, and for present purposes, therefore, I intend to round up this sum and to pitch the notional asking price for these shops at $140 million. To go further, however, notwithstanding Mr Chow's arguments, would do undue violence to the available evidence.

30. In considering measure of damages, therefore, I propose to adopt the figure of $140 million as the relevant 'asking price' for shops G5-G8.

(iii) Measure of Damages

31. On this subject there is a fundamental difference in approach. For the plaintiff Mr Yu submitted that the normal measure of damages for breach of a contract of sale is the difference between market price and contract price as at the date of breach, and that breach of an agreement to grant an option to purchase is in effect a failure to complete a contract of sale and thus is assessed upon the same basis. In terms, therefore, of the facts of this case, given that the defendants acted in breach of Clause 4.13(ii), such breach deprived the plaintiff of an option which, on the evidence of Mr Merlatti, it would have exercised, and thus the value to the plaintiff of this option was the difference between the market price and the option price (that is, the defendants' asking price) as at the date of breach. By this argument Mr Yu thus sought to place the plaintiff in the classic 'loss of bargain' position as if the plaintiff and the defendants actually had entered into a contract for the sale and purchase of the tenanted premises. The culmination of this argument was that Mr Yu submitted that damages should be assessed in favour of his client at $164.5 million less $138.48 million, namely $26.2 million.

32. To the contrary. Mr Chow suggested that manifestly this was an incorrect manner of approaching the present situation. He submitted that what the plaintiff arguably had lost was the loss of the chance to exercise the option, and that it was the value of this loss which required to be assessed.

33. In this I agree with Mr Chow. In terms of basic approach to this problem I am in no doubt that what is required to be assessed is the value to be attributed to the loss of the chance, and nothing else. But how is this loss of chance to be assessed?

34. In this regard Mr Yu boldly submitted that the correct approach was for the court to determine, on a balance of probabilities, whether the plaintiff would have exercised the option, and if the court was so satisfied, damages should not be reduced on the basis that there was not a 100% chance that this would have occurred, citing in this context the decision of the English Court of Appeal in Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602, in particular the judgment of Stuart-Smith LJ. Alternatively, he submitted that if the court took the view that the correct approach was to quantify damages on the basis that the plaintiff had lost the chance of purchasing the subject premises, the court should first assess the full amount of damage on the basis that the plaintiff in fact had exercised the option, and then apply a discount to reflect loss of the chance.

35. This alternative approach substantially mirrored Mr Chow's argument as to valuation of the lost chance. He submitted that the difference between the open market value of the shops and the asking price (including associated expenses of purchase) was relevant in that it set a ceiling for the amount of damages, but that the value of the lost chance depended upon the court's assessment of the likelihood that the plaintiff actually would have exercised the right to purchase the tenanted premises.

36. I agree with this latter approach, and in this regard I do not intend to follow that in Allied Maples, although I note in passing that I do not think that the court in that case went as far as Mr Yu suggested. The court in Allied Maples, a very different case on the facts to the present, was constrained to draw a line of demarcation between causation and quantification of loss, so that if the plaintiff succeeded in proving as a matter of causation that he had a real or substantial chance as opposed to a purely speculative one, then, as Stuart-Smith LJ expressed it, "the evaluation of the chance is part of the assessment of the quantum of damage, the range lying somewhere between something that just qualifies as real or substantial on the one hand and near certainty on the other."

37. In my view in the area of loss of a chance the observations of Lord Reid in Davies v Taylor [1974] AC 207 continue to be particularly apposite. Lord Reid said (at 213):

"You can prove that a past event happened, but you cannot prove that a future event will happen and I do not think that the law is so foolish as to suppose that you can. All that you can do is to evaluate the chance. Sometimes it is virtually 100 per cent: sometimes virtually nil. But often it is somewhere in between. And if it is somewhere in between I do not see much difference between a probability of 51 per cent and a probability of 49 per cent...If the balance of probability were the proper test what is to happen in the two cases which I have supposed of a 60 per cent and a 40 per cent probability?...I can see no ground for saying that the 40 per cent case fails altogether but the 60 per cent case gets 100 per cent..."

38. Looked at in this light, therefore, having established a ceiling figure for the damages in question, the task of this court now is to assess the percentage chance that this plaintiff actually would have exercised its right to purchase the tenanted premises pursuant to the option in its Tenancy Agreement.

39. Mr Yu submitted that the evidence stood firmly in his favour, and that if there could not be certainty at the least there was a strong probability, say in the high 80 - high 90% range, that his client would have bought its tenanted premises had it been accorded the opportunity. He stressed the significant fact that Mr Merlatti specifically had requested the option when he had been negotiating the lease, and that when the defendants did in fact put the option to the plaintiff in the so-called 'Julius Lau' letter dated 25 April 1997, the defendant had responded positively the next day. Mr Merlatti, he said, had met Mr Chow Nam, a Deacons' client, who wished to buy the premises, on two occasions, that prior to obtaining Deacons' 'subject to contract' offers of 16 April and 28 April he had asked for and had obtained approval from management of the plaintiff's parent company to purchase, whether by a conditional sale agreement or otherwise, and he also had obtained a valuation from Wayfoong. In short, Mr Yu argued that on the evidence before the court, which primarily was from Mr Merlatti but also was in statement form from Mr Frachey, there was a strong likelihood, if the defendants had honoured their obligation, that Fila indeed would have exercised the option to protect its interest, and that the steps which Mr Merlatti said he would have taken immediately in terms of obtaining management approval and the necessary valuation could all have been achieved within the seven day option period.

40. Unsurprisingly, Mr Chow for the defendants perceived the situation from a different perspective. He argued that whether the plaintiff actually would have purchased the premises depended upon a large number of variable factors, not least in terms of the acceptability of the asking price and whether in reality the plaintiff would have committed itself to a very substantial capital outlay, and raised the necessary finance, within seven days of notification, and not least whether the plaintiff could have placed itself in position to secure the quick sub-sale (whether to Mr Chow Nam or to the unnamed Indonesian buyer or to anyone else) that clearly it had primarily in mind. Indeed, said Mr Chow, notwithstanding the various assertions by the plaintiff's witnesses, the inherent probability of the plaintiff actually moving to purchase its tenanted premises was low, bearing in mind particularly that in 1996 and 1997 the Fila Group in Asia were retailers and not property speculators, at the time owning no real property in Hong Kong, and that the plaintiff itself, which was Fila's marketing arm in Hong Kong, owned little in way of substantial assets and certainly did not have the sort of money that would have been required to buy these shops, but instead would have had to borrow from Fila Sport Hong Kong.

41. Mr Chow further submitted that the short time-frame within which to make such an important decision mitigated against taking what would have been a significant financial plunge, the more so if a conditional sale agreement could not be entered with a third party before the plaintiff had concluded a sale and purchase with its landlord; moreover in actuality the plaintiff had failed to clinch any sort of deal, conditional or otherwise, with any potential purchaser, notwithstanding the exploratory meetings with Chow Nam and the two "subject to contract" offers from Deacons dated 16 April and 28 April respectively. Moreover, said Mr Chow, too much reliance should not be placed upon the heavily qualified correspondence of 25 and 28 April 1997 between the defendants and Messrs Richards Butler acting for the plaintiff, not only because the plaintiff obviously wished to retain maximum flexibility, but also because at the date of the second letter of 28 April the plaintiff had received Deacons' offer dated 16 April and clearly had responded as it did because it saw the opportunity of quick speculative gain. However, he argued, these subsequent events begged the question of whether, had the tenanted premises been offered to the plaintiff on 22 March 1997, the plaintiff would have taken the risk and gone to the market and sought a sub-purchaser within seven days.

42. The arguments on each side have been persuasively advanced, and ultimately the court has to grasp the nettle, regrettably without the advantage of a reliable crystal ball, and do the best that it can upon the available evidence. Inevitably such evaluation necessarily involves a degree of artificiality given the nature of the exercise being undertaken, and equally inevitably there remains an acute awareness of the potential for self-serving assertions as to what would have occurred had the opportunity arisen as it should - albeit that when Mr Chow says, in effect, that 'talk is cheap', it must not to be overlooked that the plaintiff has been put in this position by reason of the defendant's breach of Clause 4.13(ii) of the Tenancy Agreement.

43. After reflecting on the evidence and the arguments of counsel, I have come to the conclusion, and so find, that in the circumstances prevailing at the time there was a 60 per cent likelihood of the plaintiff actually exercising its right to purchase had it been afforded the opportunity so to do. On the basis, therefore, of a $20 million differential between the assessed 'subject to tenancy' valuation for shops G5-G8 ($160 million) and the figure adopted as the notional 'asking price' for the shops ($140 million), this necessarily arbitrary exercise results in the figure of $12 million (60% of $20 million) as representing the value to the plaintiff for the loss of the chance.

44. The final question which arises is whether the sum assessed as damages for loss of the chance is subject to further deduction to take account of the purchase expenses that necessarily would have been incurred consequent upon purchase. To put it another way, can the putative vendor claim to be entitled to the benefit of such deduction? This is a question which usually arises in the context of loss of bargain rather than loss of chance cases, and in any event one of the further conceptual difficulties is that this begs the question of the nature of the transaction which would have taken place had the chance to enter into it not been lost. At this stage the disinterested observer might to tempted to comment that the nature of this assessment mandates the use of several crystal balls, but nevertheless the point remains to be addressed.

45. I am inclined to think that in the circumstances of this case, and in particular bearing in mind the 'bubble' which undoubtedly was occurring in the grossly overheated property market of early 1997, that the plaintiff may well have been able to sub-sell its premises on acceptable terms, including a lease-back provision, as confirmor, and hence avoid payment of stamp duty. If this hypothesis be correct, there is no requirement for a 2.75% deduction from the assessed sum of $12 million, although this line of reasoning does not extend to items such as legal fees and mortgage charges, for which in my view some not unreasonable allowance must be made. Accordingly, doing the best that I can I intend to deduct half a million dollars to take account of consequential expenses other than stamp duty.

46. At the end of the day, therefore, the conclusion of this court is that the value to be accorded to the loss of the chance for which the defendants earlier have been adjudged liable is in the sum of $11.5 million.

Order

47. I order that judgment be entered in favour of the plaintiff against the 1st and 2nd defendants in the sum of HK$11.5 million.

48. I make an order nisi that interest is to accrue upon such principal sum at the rate of 1% over HIBOR from the date of the writ to the date of judgment herein, and thereafter upon such principal sum at the judgment rate from time to time prevailing until payment.

49. I make a further order nisi that, subject to such cost orders as already have been made, the costs of this action be to the plaintiff, these costs to be taxed if not agreed.