MAN PING NAM AND ANOTHER v. MAN FONG HANG

FACV No. 5 of 2006

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

 FINAL APPEAL NO. 5 OF 2006 (CIVIL)

(ON APPEAL FROM CACV NO. 104 OF 2004)

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Mr Justice Bokhary PJ :

1.  I concur in the judgment of Mr Justice Litton NPJ.  Both he and Mr Justice Ribeiro PJ have dealt with the valuation evidence given by Mr Gilbert Yuen.  The disposal of this appeal does not require any further discussion of Mr Yuen’s evidence.  But in fairness to him, I would just mention this.  He had, in his report of 7 August 2003, expressly disavowed the notion that the value of this piece of land without vacant possession at the time of the sale to Earning Youth was to be found simply by taking 10% off the price at which it was on-sold to System Link with vacant possession shortly afterwards.  In that report he said that “there must exist a much higher discount”.

Mr Justice Chan PJ :

2.  I agree with the judgment of Mr Justice Litton NPJ and the orders proposed by him.

Mr Justice Ribeiro PJ :

3.  I am respectfully in complete agreement with the reasoning and judgment of Mr Justice Litton NPJ.  I would merely wish to add a few observations of my own.

4.  The core of the plaintiff’s case being that the land had been sold at a gross undervalue, it was essential that he should establish what value ought properly to have been realized by the managers.  Normally, this might be expected to be a matter of valuation evidence.  However, no doubt because of the very special situation and features of the land, effective comparables could not be found and the Judge quite rightly rejected the valuation evidence on both sides.  The plaintiff was therefore unable to rely on any expert opinion as to the value of the land in the hands of the managers.

5.  His response to this dilemma was to rely on the subsequent sale by Earning Youth to System Link.  However, that sale was on crucially different terms which required Earning Youth to deliver vacant possession within a specified period.  Plainly, it could not be taken as evidence of the value that the managers should properly have realized when selling without vacant possession.  But the plaintiff contended, and Judge and the Court of Appeal accepted, that such value – without vacant possession – could be arrived at by making a 10% downward “adjustment” from the vacant possession price agreed between Earning Youth and System Link. 

6.  To speak of “an adjustment” in this context is to draw a veil over the fundamental difficulties attending that approach.  It involved the Judge relying upon a single element extracted from the rejected valuation evidence of Mr Yuen, who had made a 10% notional downward adjustment on sales with vacant possession to produce a valuation without vacant possession in relation to certain purported (but rejected) comparables.  As Mr Jat SC acknowledged, this could only be of assistance if one regarded the 10% as capable of providing a general “benchmark” which was not “transaction specific”, a proposition that offends commonsense since the cost of obtaining vacant possession must depend in each case on the circumstances.  Moreover, this 10% “adjustment” ignores obvious commercial reality : any middleman who buys without vacant possession in order to on-sell with vacant possession must be expected to require a hefty profit margin commensurate with running the serious risk of not being able to deliver vacant possession to the sub-purchaser.  Merely to deduct from the subsequent sale price some notional percentage said to reflect the cost of acquiring vacant possession – even if an accurate estimate of such costs  (which is not shown to be the case here) – does not allow for such profit and so does not result in establishing the price which a middleman would have been prepared to pay to the managers.

7.  I respectfully agree with the conclusion that the plaintiff has failed to establish any loss.

Mr Justice Litton NPJ :

Introduction

8.  This appeal concerns the sale of a large piece of land in the Northwest New Territories, near the border with the Mainland.  It consists mainly of fish-ponds, measuring over 3.3 million square feet in all.  The land was registered in the name of a Wui (會), a traditional form of landholding in the New Territories, recognised as such in s.15 of the New Territories Ordinance, Cap.97.  (The statute refers to land held “in the name of a clan, family or t’ong” and it is common ground that land held in the name of a Wui (會) is a form of clan holding).  The beneficial owners of the land were, broadly speaking, the Man clan who had lived in the San Tin district for many generations.  The registered managers of the Wui were, at the relevant time, three members of that clan : Man Ping Nam (1st appellant), Man Ying Lam (2nd appellant) and Man Leung (3rd defendant but not a party to this appeal).  The respondent Man Fong Hang, a clan member, administrator of the estate of Man Mou Hei deceased, was entitled to an undivided share in the Wui, referred to since earliest times as a “Shek” (石); Man Mou Hei had 1.5 Sheks out of a total of 32 Sheks in the Wui.

9.  In August 1997 the managers sold the land on behalf of the Wui.  It is that sale which has given rise to this litigation.

The land

10.  The rental income derived from leasing the fish-ponds was poor.  The evidence shows that in 1996 it was no more than $320,000 per year.

11.  The land was zoned as “Conservation Area” under the San Tin Outline Zoning Plan, intended essentially for agricultural and related use.  No filling-in of fish-ponds was allowed without the permission of the Town Planning Board.  Further, as the trial judge Lam J noted, the land is near to the Mai Po Nature Reserve and, in the explanatory statement attached to the Notes in the Outline Zoning Plan, the following appears :

“The area covered by the ‘CA’ zone is intended to give added protection to the Mai Po Nature Reserve from urban development …”

“Accordingly, new development will normally not be allowed unless it is required to support the conservation of the area’s natural features and scenic qualities”.

12.  Further, approximately two-thirds of the land fell within the Frontier Closed Area Boundary; right of access was restricted; it was hence subject to further development constraint.

Steps taken to sell

13.  In 1992 the members of the Wui, at a general meeting, resolved to sell the land and authorized the managers to apply to the District Officer for consent under s.15 of the New Territories Ordinance.  An application was made, but objections were received on the ground that the mode of sale had not been agreed by the members.  The Wui consists of numerous members; the interests of many of them were in turn held through T’ongs and Tso’s, represented by registered managers.  Many members resided overseas.  The managers attempted to contact the members by post and obtained written authorization from many (but by no means all) to sell at $65 per square foot.  Much controversy followed; and in the meanwhile the District Officer refused his consent.  A solicitor Mr George Yip was consulted; he gave advice as to how the withholding of consent was to be overcome.  In June 1994 a circular was sent out canvassing the views of the members with regard to the mode of sale.  That was necessary, as the trial judge Lam J found, “because the District Officer had asked them to sort out the differences on the sale procedures and the application for section 15 consent was held in abeyance in the meanwhile.”  The Commissioner for Administrative Complaints became involved in this controversy : caused, as the judge said, because some members of the Wui were “likely to compete with each other to seize the opportunity to act as agent with a view to gain commission”.  In August 1995 the Commissioner issued a report criticizing the District Officer’s process in entertaining the application for consent.  Eventually the District Officer gave consent in June 1996, but valid for only six months; no sale was achieved during that period; the consent was extended to 10 June 1997.

14.  The managers had, from time to time, received offers (without commitment) to sell.  For example, an offer (subject to contract) to purchase the land at $92 per square foot was received in November 1993 : giving it a value of $306-odd million.  There was then a hiatus, lasting several years, coinciding with the period when the District Officer withheld his consent.

15.  At the beginning of 1997 there was renewed interest from prospective purchasers.  On 20 February 1997 an offer from solicitors was received, to purchase the land at a price of $9,000,000 per Shek.  This placed a value of $288 million on the land without vacant possession.  Another offer from a different firm of solicitors (Leung Kin & Co.), dated 21 February 1997, was made at the price of $8,500,000 per Shek : Leung Kin & Co. wrote to the managers again in March 1997 offering to purchase at $96 per square foot, placing a value of $319-odd million on the land without vacant possession. 

16.  The managers called a meeting of the Wui to discuss the various offers.  It was held on 16 March 1997.  The proceedings were disrupted by youths wielding sticks and ended in pandemonium.

17.  As mentioned earlier, the District Officer’s consent was due to expire on 10 June 1997.  The solicitor Mr George Yip sought on the Wui’s behalf a further extension.  This was eventually granted, but only after the managers had entered into a provisional agreement to sell the land, as related below.  The consent was valid up to 10 December 1997.

18.  At all relevant times the managers’ personal interest in the Wui was as follows :

Man Ping Nam (1st appellant)   :	1 Shek
Man Ying Nam (2nd appellant) :	3.5 Sheks
Man Leung:	1.75 sheks

The sale

19.  At the end of July 1997 an estate agent, Wong Shui Ming, acting on behalf of a shell company with $2.00 issued capital, Earning Youth Investments Limited, approached the managers offering to purchase their personal interest in the Wui at a price of $10.5 million per Shek.  This equated to approximately $101 per square foot of the land.  The managers considered that a good price and resolved to sell.

20.  On 4 August 1997 they entered into provisional agreements in Chinese to sell their own respective interests in the Wui at the offered price - $10.5 million per Shek.  At about the same time, but after they had agreed to sell their own interests, they agreed to sell the land on behalf of the Wui on the same basis ($10.5 million per Shek x 32) making the total consideration $336 million : but they also stipulated that the purchaser (Earning Youth) should pay to the “San Tin Man Families Fund” the sum of $6,657,710.40 : representing an additional $2.00 per square foot : said to be in the nature of a donation.  This was inserted as clause 5 of the provisional agreement.  Completion was to be within six months of issue of the District Officer’s consent to sell.

21.  The sale of the land to Earning Youth for $336 million, plus the $6,657,710.40 “donation”, was without vacant possession.  Apart from tenants of the various  fish-ponds, holding under written tenancy agreements, there were “squatters” with dwellings on various parts of the land.  We were told by counsel at the hearing before us that there were about “19 to 21 households” on the land at the relevant time.

22.  A conditional sale and purchase agreement, dated 22 August 1997, drafted by solicitors, replaced the provisional Chinese agreement : conditional, that is, upon the District Officer giving his consent to the sale.  This was, apparently, in ignorance of the fact that, on 15 August 1997, the District Officer had issued his letter of consent, extending the period up to 10 December 1997.  Nothing turns on this. 

Sub-sale

23.  On 21 August 1997 Earning Youth entered into a provisional agreement with System Link Development Ltd (a wholly-owned subsidiary of Henderson Land Development Co Ltd, one of the largest property development companies in Hong Kong) to re-sell the land at $134 per square foot, making the total purchase price $446,066,597.  Completion was to take place on 14 February 1998 when vacant possession was to be delivered.  This was followed by a formal agreement dated 8 September 1997, clause 37 of which provided that if Earning Youth was unable at completion to give vacant possession, System Link could deduct from the purchase price a sum calculated at HK$10 per square foot on such portion of the area of the land as vacant possession could not be given, to be held by solicitors as stake-holders.  If Earning Youth failed to deliver vacant possession of such portion of the land within 12 months of the date of completion, the amount held by the stake-holders would be forfeited, but without prejudice to the purchaser’s other rights and remedies.

24.  In early December 1997, before either agreement was completed, the sub-sale agreement was varied whereby (a) System Link was to pay to Earning Youth $241,857,710.40 on or before 10 December 1997.  This was precisely the sum needed by Earning Youth to pay to the Wui to complete the sale of the land ; (b) the balance of $64,208,886.60 was to be paid only when :

(i) System Link obtained written permission from the relevant government authority to change the user restriction on the land so that the value of the land would “at least be equivalent to the value of land of equivalent size permitted for the use of open storage of containers” (clause 4(a)(i)), and

(ii) Earning Youth gave vacant possession after receiving written demand from System Link requiring Earning Youth to do so (clause 4(a)(ii)).

25.  The supplemental agreement referred to in the paragraph above is dated 9 December 1997, the day when completion of the sale by the Wui took place.  Clause 4(b) of the agreement provided as follows :

“… if the [Vendor] fails to deliver … vacant possession of the Property or any part thereof to the Purchaser, so long as the said written permission or approval from the relevant Government authority as mentioned in clause 4(a)(i) has been obtained by the Purchaser, the Purchaser shall upon expiration of 18 months from the date of receipt of the said written demand by the [Purchaser] pay the said balance of the Purchase Price to the Vendor deducting therefrom as liquidated damages a sum calculated Dollars Ten (HK$10.00) per square foot on the area of such portion of the Property vacant possession of which the Vendor fails to deliver or procure to deliver”.

26.  The terms of the assignment whereby the Wui, through its managers, conveyed the land to System Link, with Earning Youth acting as confirmor, is worth noting.  It recites the sale at $336 million and the sub-sale at $446-odd million and then provides :

“IN CONSIDERATION of the sum of HK$446,066,597 … as to HK$336,000,000 paid by the Purchaser to the Vendor (receipt whereof the Vendor is hereby acknowledged) at the request and direction of the Confirmor … and as to HK$110,066,597.00 paid by the Purchaser to the Confirmor the Vendor as beneficial owner at the request and by the direction (hereby testified) of the Confirmor ASSIGNS and the Confirmor as Confirmor ASSIGNS and CONFIRMS to the Purchaser the Property to HOLD etc …” (italics added).

27.  The words in the assignment, italicized above, are incorrect; the $110-odd million as such was never paid.  As the trial judge found, Earning Youth did not fulfill the conditions in clause 4 of the supplemental agreement and the balance of $64-odd million was withheld.  Six years later it was still not paid.

28.     Even before completion of the sale on 9 December 1997 there was opposition to the sale from persons claiming an interest (direct or indirect) in the Wui.  The District Officer was alerted to such opposition.  In late August 1997, as the trial judge found, the District Officer was considering withdrawal of his consent to the sale, due to expire on 10 December 1997 : this was a factor precipitating the supplemental agreement dated 9 December 1997 under which System Link paid $241,857,710.40 which enabled Earning Youth to complete the sale.

29.  The respondent, as administrator of the estate of Man Mou Hei, was one of the persons aggrieved by the sale.  Eventually, in May 1998, he issued a writ against the managers.  As set out in his statement of claim, the reliefs he sought, in substance, were :

(a) “damages for breach of trust”;

(b) an inquiry as to “secret profits and/or personal benefit derived by the Defendants from the management of the Wui and/or sale of the land”;

(c) “an account of all moneys received and expended by the Defendants in relation to the sale of the land”.

The statement of claim

30.  The trial before Lam J commenced on 21 July 2003.

31.  The statement of claim had, before the trial opened, gone through very many amendments.  What was placed before the trial judge was a pleading by substitution re-amended 5 times.  The last amendment was made in the second week of trial.

32.  Para.34 recites the assignment of 9 December 1997 and states that “the price paid by System Link to Earning Youth was HK$446,066,597.00”.  Para.35 then avers :

“on the face of the assignment, Earning Youth had made a profit of HK$110,066,597”.

That is what the face of the assignment shows.  It was palpably incorrect.

33.  Para.38 of the statement of claim asserts that, as at 25 August 1997, the “open market price” for the land was about HK$466 million or HK$140 per square foot.  Para.39 then says :

“The plaintiff further relies on the fact that (as shown by the assignment) Earning Youth sold the land to System Link for the price of HK$446,066,597.00 as evidence of the true value of the land”.

34.  What is noteworthy about the pleading is this : no distinction was made between the terms of the sale by the Wui to the confirmor without vacant possession, and the undertaking by Earning Youth to give vacant possession to System Link by 15 February 1998.

35.  At the commencement of the second week of trial, the plaintiff gave voluntary particulars of the equitable compensation claimed for breach of trust.  It was :

“(i) The difference between the market price of $466,000,000 and the sale price of $336,000,000, being $130,000,000.

(ii) Alternatively to (i) above, the difference between the price paid by System Link in the sum of $446,066,597 and the sale price of $336,000,000, being $110,066,597”.

36.  If either of these claims was made out, it would have been demonstrated that the sale in early August 1997 was, prima facie, at a gross undervalue, and it would then have been for the managers to satisfy the court that, in the circumstances of the case, they had nevertheless achieved the best price, or sought relief under s.60 of the Trustee Ordinance, Cap.29, on the basis that they had acted honestly and reasonably, and ought fairly to be excused.

37.  As will be observed, the plaintiff’s claim was built upon two assumptions : (1) That “the market price” for the land with and without vacant possession was the same; and (2) that “the price paid by System Link” was $446,066,597.  Both these assumptions were incorrect.

The “market price of $466,000,000”

38.  The figure of $466 million as seen in the pleadings, attributed as the market value of the land, was that appearing in the report of Mr C K Lau the valuer called as an expert witness by the plaintiff.  It was arrived at by the use of “comparables” : comparing the subject land with sales of other pieces of land in the New Territories which, in the event, were rejected by the judge as suitable comparables.

“Price paid by System Link”

39.  As to the figure of $446,066,597 Mr Lau took it uncritically from the assignment of 9 December 1997 as the price paid by System Link (at a unit price of $134 per square foot) and noted that this was an increase of 30% over “the sale price in the provisional sale and purchase agreement dated 4 August 1997 of $103 per square foot (including $2 per square foot for the donation)”.  He made no distinction between the terms of the two sales nor the fact that one was without vacant possession and the other was with vacant possession : despite the fact that, in his report, he noted that there were “dwelling houses / squatters … erected by the side of the fish-ponds within the lot”.

40.  The defendants had, at trial, also adduced expert evidence on “open market value” of the land as at August 1997.  This was through Mr Gilbert Yuen, of the firm of Vigers.  By the use of comparables he concluded that the market value of the land was $283 million : which hardly supported the plaintiff’s case.  This then left as the only “comparable” transaction the sub-sale itself as evidence of undervalue upon which the plaintiff hoped to establish his case.

Vacant possession

41.  On the question of vacant possession and whether the sale and sub-sale were comparable, Mr Lau’s point was this.  Anyone buying this piece of land from the Wui would have done so with a view to redevelopment (it could hardly have been for the rental income of $320,000 per year); but considering the severe constraints on development, any attempt at modification of the user restrictions would have been a very long process, involving applications to the Town Planning Board and other government agencies; hence the presence on the land of “households” of indeterminate status was, according to Mr Lau, a “negligible” factor.

42.  This approach is intrinsically unsound.  Quite apart from the fact that Mr Lau had made no attempt to determine the status of the occupiers and what difficulties (legal and practical) might have been encountered in clearing them off the land, this approach fails to take into account the legal consequences of a failure to give vacant possession at the completion date.  As can be demonstrated by this very case.

43.  What happened was this.  Prior to completion, System Link had paid $39.2 million more in deposits to Earning Youth than the amount of deposits paid to the Wui.  This, according to Mr Allen Yam, the solicitor acting for System Link (testifying before Lam J on subpoena), was to enable Earning Youth (“a mere shell company”) to get vacant possession before completion.  Which they failed to do.  This placed System Link, of course, in a strong bargaining position.

44.  As mentioned earlier (para.24) the sub-sale agreement was amended in early December 1997 to provide for the withholding of $64-odd million from Earning Youth, conditioned upon two matters : one of which (clause 4(a)(i)) was the modification of the user restriction “so that the value of the Property [should] at least be equivalent to the value of land of equivalent size permitted for use [as] open storage of containers”.  The other condition was clause 4(a)(ii) dealing with vacant possession.  The balance of the purchase price in the sum of $64-odd million was payable to Earning Youth upon Earning Youth giving vacant possession after receipt of written demand from System Link requiring Earning Youth to do so : in other words, so long as System Link did not issue a written demand, the $64-odd million could be withheld.  The timing was entirely at the purchaser’s choosing. 

45.  In these circumstances to take the figure of $446-odd million in the sub-sale agreement as the market value of the land at the time of the sale by the Wui was untenable.  The trial judge rightly rejected this approach.

46.  What then was left of the plaintiff’s case for alleging that the sale by the Wui was at a gross undervalue?

Taking stock

47.  Pausing here, the evidence shows the following.  The managers sold the land in August 1997 to Earning Youth, without vacant possession, at $103 per square foot (treating the “donation”, as the judge rightly did, as part of the proceeds of sale); the transaction was successfully completed, mainly with funds coming from System Link (a wholly-owned subsidiary of Henderson, one of the biggest land developers in Hong Kong); apart from the sub-sale 17 days later, there was nothing to show that the price was not the best the managers could have obtained.  The finding of the courts below was that the “market” for this unique piece of land was extremely thin.  There were few potential purchasers of New Territories land such as this : consisting of fish-ponds lying within the “buffer zone” of the Mai Po Nature Reserve as appearing in the Outline Zoning Plan (it is less than 3km from Mai Po, not 30km as the judge said); with extreme restrictions on development, lying (as to two-thirds) within the Frontier Closed Area, with squatters in occupation over portions of the land.  In these circumstances, the expression “market”, used generally to denote a place of multiple transactions, would seem wholly inappropriate for the sale of this piece of land.  There was nothing remotely comparable, as the judge found.  But, using the terminology of the lower courts, the “market” for such a piece of land was, as Yuen JA said in the Court of Appeal, confined to that of “middlemen” prepared to take the risk of buying from the Wui without vacant possession, and selling on to a big developer with vacant possession; it was not the same “market” as that of the sale of, say, residential flats in the New Territories new towns like Yuen Long.  As to the latter, the evidence shows that the market collapsed in October 1997, in the wake of the Asian financial crisis of that year.  The consequence, as the judge said, was this :

“Given the collapse of the property market, I do not think it could be seriously suggested that the land could be sold at a higher price today as compared with August 1997 and this was not the plaintiff’s case”.

The “today” was December 2003, six years after the sale.

48.  In these circumstances, to charge the managers with breach of trust and require them to compensate the members of the Wui out of their own pockets for sale at a gross undervalue might seem a little odd.

Deduction for vacant possession

49.  It was at this point that the case at trial took an unfortunate turn.  The judge embarked upon his own analysis and, taking the sub-sale as a “comparable”, made an adjustment of 10%.  That is, deducting 10% from the “sale price” of $446,066,597 he concluded that the “open market value” of the land without vacant possession was $401,459,937.  Hence the loss to the Wui was $58-odd million and the plaintiff’s share (1.5 Sheks out of 32 Sheks) was $2,756,354.39 which was the sum awarded to the plaintiff by way of equitable compensation. 

50.  In reaching this conclusion, the judge focused upon clause 4(b) of the supplemental agreement (see para.25 above) and thought that the $10 per square foot was some kind of “price tag” put by the parties on failure to give vacant possession.  He said it “could be used as a reference as to how [a] potential purchaser would adjust the price in relation to the factor of vacant possession bearing in mind that it was in the same category as the other potential purchasers for the land, viz. big developers with interest in land of large size in the New Territories for redevelopment purposes”. 

51.  The judge unfortunately overlooked the fact that, under the supplemental agreement, clause 4(b) is predicated upon the approval mentioned in clause 4(a)(i) having been given.  That is to say, the value of the land having been enhanced by change of the user restriction to enable use for open storage of containers.  Then, if System Link chose to complete, and pay the balance of $64-odd million, it could deduct as liquidated damages $10 per square foot on such area as Earning Youth failed to give vacant possession.  This is a wholly different scenario from that of the parties under the agreement of 4 August 1997.

52.  In this regard the judge also made reference to clause 37 of the sub-sale agreement which stipulated that System Link could withhold a sum calculated at $10 per square foot on such portions of the land as Earning Youth failed to give vacant possession of, to be held as security, liable to forfeiture in the event of Earning Youth failing to give vacant possession within 12 months from the date of completion.  This was without prejudice to the purchaser’s rights and remedies against the vendor.  It is difficult to see how this could be regarded as a “price tag” put by the parties on vacant possession.  And, of course, it does not take into account the confirmor’s profit margin for taking the risk of delivering vacant possession.

53.  The judge then turned to the evidence given by Mr Gilbert Yuen, the valuer called by the Wui who, as earlier mentioned, thought that open market value of the land was $283,000,000.  Whilst the judge rejected his opinion based upon comparables he thought that Mr Yuen nevertheless gave “useful evidence on discount adjustment regarding vacant possession”.

54.  The judge referred to a schedule attached to Mr Yuen’s valuation report which listed three properties, identified as “A1”, “A2” and “A3”, as comparables.  Taking A1, Mr Yuen made adjustments as follows :

Location	Accessibility	Size	Vacant Possession	Time
-5%	-5%	-20%	-10%	7.65%

In total, the adjustments for A1 were –32.35%, giving an adjusted “comparable” value of $94.70 per square foot for the subject piece of land.

Taking A3, Mr Yuen made adjustments as follows :

Location	Accessibility	Size	Vacant Possession	Others	Time
-10%	-5%	-10%	-10%	-15%	8.23%

In total, the adjustments for A3 were –11.77%, giving an adjusted “comparable” value of $77.90 per square foot for the subject piece of land.

In the notes to the schedule, the following statement appears :

“A1 and A3 delivered vacant possession … the uncertainty gave rises to the possession problem and the possible costs incurred have eliminated or largely eliminated, hence adjustment to this factor” (sic).

Mr Yuen did not explain how the deduction of 10% from the sale price of A1 and A3 reflected “the possession problem” of the subject land.  It was a purely arbitrary figure.  He had no idea what “the possession problem” was.

“Benchmark”

55.  In fact, as mentioned earlier, the judge rejected Mr Yuen’s opinion evidence as to value.  And by implication his methodology as reflected in his schedule.  Nevertheless the judge said that the 10% discount for vacant possession was “useful evidence” as it was a benchmark which could be applied to the sub-sale as a comparable.  With respect, when nothing was known about the occupiers of the land and the cost necessary to obtain vacant possession (assuming that was achievable), to take an arbitrary figure of 10% as a “benchmark” was unsound; it was a figure plucked out of the air.  Contrast this with the adjustment for the difference in location in Mr Yuen’s schedule.  This was a known factor.  The adjustment for location regarding A1 was –5%; for A3 was –10%.  Experts could reasonably argue whether those adjustments were too much or too little to account for the difference in location, and the dialogue would be based upon facts.  Likewise adjustments for differences as to the time of sale : market fluctuations in response to time could, to an extent, be gauged.  Not so for the cost of obtaining vacant possession of this 3.3 million sq. ft. piece of land in the absence of facts : cost, that is, both in terms of time and of expense.  The cost of obtaining possession could be as little as the cost of issuing a writ for possession, or it could be millions of dollars, or be simply unachievable.  It could take as little as a few days or it could take years.  All that is known with regard to the facts of this case is that the excess of $39.2 million in Earning Youth’s hands by way of deposits seemed insufficient for it to secure vacant possession : if indeed any of it was spent on clearing the site.

56.  Having reached this point, the conclusion is inevitable that the plaintiff’s case founded upon sale at a gross undervalue was never established at trial.  The judge’s approach to valuation is unsustainable.

Court of Appeal

57.  On appeal, Cheung JA gave a brief leading judgment.  He was struck by the difference between the figure $342,675,710.40 (being the sum of $336,000,000 and the $6,657,710.40 “donation”) and the “purchase price” of $446,066,597 in the sub-sale agreement.  He said : “The difference in price of the original sale (even taking into account the fund) and the resale was an astounding $103,390,886.60 and this was achieved within 17 days of the original sale” : hence the sale to Earning Youth was, he concluded, at a gross undervalue.  He considered Lam J amply justified in valuing the land without vacant possession in August 1997 on the basis of a 10% discount on the figure of $446,066,597.  He affirmed the trial judge’s award of equitable compensation in the sum of $2,756,354.39.

58.  Yuen JA concurred with Cheung JA’s judgment.  She noted that the market that the managers were dealing with was the middle-men market : persons who were prepared to take the risk of buying as confirmors, without vacant possession.  This was not the same market as that in which the large developers like Henderson operated : they would only be prepared to buy with vacant possession : nevertheless the “10% adjustment” was, she concluded, more than sufficient to allow for the “cost of obtaining vacant possession” : hence she affirmed the judge’s award of equitable compensation.

59.  Andrew Cheung J concurred with both judgments.

60.  The Court of Appeal did not appreciate that the plaintiff had failed to establish what was described in the courts below (and indeed in this Court) as his “crucial” point : sale of the land by the managers at an undervalue.

“Failure to act with diligence and care”

61.  The hearing before Lam J took 23 days and the evidence ranged over a very wide field.  The 1st appellant Mr Man Ping Nam was pressed in cross-examination over many matters : Why he did not “undergo a price discovery process”?  Why he did not familiarize himself with land price levels in 1997?  Why he did not seek professional advice over the sale?  Why he did not take steps to stir up more interest in the “market”?  Why he did not “cross-check” Earning Youth’s offer with a valuer?  Predictably, he gave no satisfactory answers to those questions.  If one starts from the stance taken by Cheung JA in the Court of Appeal : “the huge price difference that Earning Youth was able to obtain on the resale” : then indeed the managers had much to explain.

Causation

62.  A charge of breach of trust by persons in the role of trustees does not hang in the air.  It is grounded upon loss.  And it is for the party alleging loss to prove that the wrong caused the loss.  As at common law with regard to an award of damages, the liability in equity to pay compensation for loss is fault-based : see Target Holdings Ltd –v- Redferns [1996] 1AC 421 at 432G, per Lord Browne-Wilkinson.  The plaintiff adduced no evidence at trial to show that any of the matters, said to amount to failure of due diligence and reasonable care, caused any loss to the Wui.  It was said, for example, that the managers had failed to “undergo a price discovery process”.  This expression, used to denote bargaining in, say, commodities exchanges, is hardly appropriate for this piece of land.  This unique piece of New Territories land had been “in the market” since 1992 : a fact which must have been well-known to brokers dealing with rural land in the New Territories.  It could not have been mere coincidence that, shortly after the District Officer had (after a delay of some four years) given his consent to sell, interest from potential purchasers revived.

63.  It was also said that the managers had failed to consult Mr George Yip, the solicitor who had sought consent from the District Officer on the Wui’s behalf.  But what advice might Mr Yip have given regarding the sale or the mode of sale?  Mr Yip was never called as a witness.  In the courts below the managers were charged with failure to offer the land for sale by public tender.  But no evidence was led that if they had adopted this process they would have got a better price.  In this Court Mr Jat SC, counsel for the respondent, said he was not relying on this. 

64.  Take another example.  The managers failed to “cross check” Earning Youth’s offer with a valuer.  Assuming they did and had gone to Mr Gilbert Yuen of Vigers : the advice they would have got, presumably, would have been that the land was worth not more than $283,000,000.  Take yet another example : the managers’ failure to bargain with Earning Youth.  It is pure speculation as to whether they would have obtained a better price if they had bargained.  But one thing is certain.  If the process had dragged on into October 1997 they would have met the collapse of the market, following the Asian financial crisis.

65.  In my judgment, the evidence led at trial failed to show any loss to the Wui.  Criticisms of the managers’ conduct remained as such.  They did not show that the managers’ action, or inaction, caused loss.  Hence, the award of equitable compensation must be set aside.

Accounts

66.  The question of accounts, or the equitable duty to account, stands on a different footing to the issue of breach.  Quite simply, the managers had an obligation properly to account for the proceeds of sale.  The judge’s order related to the following :

(i) Interest.  The plaintiff’s share of the proceeds of sale amounted to $15,549,195.  On 17 September 1998 $15,893,801.80 was paid into court.  This obviously included some interest.  The judge required the managers to verify by affidavit that it was the right amount, and to pay any shortfall.  We were told by counsel this has been done.

(ii) The “donation” amounting to $6,657,710.40.  The managers accept the judge’s finding that this should be treated as part of the proceeds of sale.  We were told by counsel that this has been done.

(iii) The solicitors acting for the Wui, Messrs David Y Y Fung & Co., on receipt of the proceeds of sale, paid $3,360,000 to a company called Ferdinand Group Limited, pursuant to a commission agreement in Chinese dated 4 August 1997.  The judge required the managers to account for this as a proper expenditure of the sale.  There was no appeal against this order.  We were told by counsel that this too has been done.

(iv) The solicitors David Y Y Fung & Co. charged fees of $1m for the transaction.  The judge required the managers to account for this as a proper fee to be charged.  There was no appeal against this order.  We were told by counsel that the $1m expenditure has been accounted for.

67.  When the trial opened the plaintiff’s claim was for “an account or inquiry as to secret profits and / or personal benefit derived by the defendants from the management of the Wui and / or the sale of the land”.  They failed on this issue before the trial judge.  It was only after the trial had been in progress for one week that the plaintiff amended the statement of claim to seek relief by way of an accounting for the proceeds of sale which resulted in the judge’s order referred to in para.66.

68.  The plaintiff was given 14 days after the lodging of the managers’ accounts to falsify and surcharge, and thereafter to apply to a Master for further directions regarding the accounts.  This time limit has long expired.  No application was made to us or to any court below to extend the time limit, and it is now far too late to make any such application.  There must be finality to this piece of litigation.

Conclusion

69.  I would allow the appeal and make the following orders :

(i) An order setting aside para.1 of the judge’s order of 11 December 2003 (as amended on 17 March 2004).

(ii) An order nisi that the plaintiff pays the defendants’ costs both in this Court and in the courts below, save for the defendants’ costs of complying with the judge’s order as to accounts.

(iii) An order that the 1st appellant’s costs be taxed under the Legal Aid Regulations.

 

Lord Scott of Foscote NPJ :

70.  I agree that no evidence adduced at trial justified the conclusion that the sale of the land in issue to Earning Youth under the sale agreement of 22 August 1997, a sale at a price of $336 million odd, plus the amount of the Donation, but without vacant possession, was a sale at less than market value, and am in full and respectful agreement with the reasons given by Mr Justice Litton NPJ for allowing this appeal.  I agree also with the comments made by Mr Justice Bokhary PJ and Mr Justice Ribeiro PJ.  I, too, would make the orders proposed in para.69.

Mr Justice Bokhary PJ :

71.  The Court unanimously allows the appeal to make the orders set out in the concluding paragraph of Mr Justice Litton NPJ’s judgment.