CHINLUCK PROPERTIES LTD v. CASIL CLEARING LTD

HCA 11008/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11008 OF 1997

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BETWEEN

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J U D G M E N T

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Background:

1.  In 1995 Chinluck and Mr Shu were the owners of certain land on Peng Chau, (the Peng Chau land). Mr Shu, effectively the sole shareholder in Chinluck, intended to develop the Peng Chau land into a commercial and residential development, which he envisaged being, in a way, a replica of the Discovery Bay environment, but on Peng Chau, (the Project).

2.  On 18 August 1995, a Committee of the Planning and Lands Department approved zoning amendments, proposed by Chinluck for the purpose of implementing the Project. 

3.  On 2 December 1996, Casil agreed to lend Chinluck $20 million, to be secured by a First Charge over part of the Peng Chau land. 

4.  A land exchange was a necessary element of the Project.  Application for the land exchange had been made during 1996.  On 9 May 1997, the Planning Department notified planners acting on behalf of Chinluck that the Planning Department would not object to the Project as shown on the Revised Master Layout Plan.  Although approvals from other departments of Government would be required, this advice of “no objection”, was essentially the “green light” for the Project.  There were many matters yet to be dealt with, but with this advice Mr Shu and Chinluck could confidently proceed with the Project.

5.  On 24 July 1997, Chinluck executed a Loan Agreement and a mortgage over the Peng Chau land, in order to borrow the sum of $330 million from Casil.  Mr Shu entered into a Guarantee in respect of the loan.

6.  Casil did not advance the whole of the sum of $330 million to Chinluck following the execution of the security documents.  By early September 1997, a little over $251,500,000 had been advanced, leaving a balance is due of some $78,500,000, yet to be advanced.  Despite numerous demands by Mr Shu and Chinluck, this balance was not advanced by Casil. 

7.  On 25 September 1997, Chinluck made formal demand upon Casil for the immediate payment of the balance due.  On 17 October 1997, there being no response from Casil, Chinluck issued a writ seeking specific performance of the Loan Agreement, or alternatively damages for breach of contract for the failure to advance the full amount.

8.  Neither Chinluck nor Mr Shu paid any interest at all at any time in relation to the sums that had been advanced pursuant to the Loan Agreement.

9.  In November 1997, Hong Kong was suffering directly from the Asian Financial Crisis.  The consequence of that was a dramatic change in the economic fortunes of Hong Kong.  Property prices dropped dramatically, as did the demand for luxury and upper end property.  The consequences of the Asia financial Crisis were not in dispute

10.  The security documents executed by Chinluck in favour of Casil contained provisions, the consequence of which were that a material adverse change in Chinluck’s business, assets, general conditions or prospects of business, which could materially affect its ability to perform its payment obligations under the Loan Agreement, would constitute an Event of Default, entitling Casil to demand repayment of the loan.

11.  Although Chinluck had issued a writ demanding payment of the balance not advanced, neither Chinluck, nor Mr Shu as guarantor of the loan, make any payments of interest on the sum that had been advanced.  The provisions of the Loan Agreement, in relation to an Event of Default, were not incorporated in the mortgage itself.  Consequently, any adverse change in Chinluck’s conditions or prospects of business, while entitling Casil to call in the loan, did not entitle it to exercise its powers under the mortgage.

12.  On 4 December 1997, Casil demanded repayment of the sums that had been advanced pursuant to the Loan Agreement.  On 6 December 1997, Casil filed a defence to the writ, and by counterclaim sued Chinluck for the amount advanced under the Loan Agreement, and Mr Shu on the Guarantee.  Further demands on Chinluck, under both the Loan Agreement and the mortgage, and on Mr Shu, on the Guarantee, in relation to non-payment of interest, were made on 6 January 1999.

13.  For the reasons set out in paras 83-90 of the judgment on liability I am satisfied that the Asia Financial Crisis, and the general economic situation in Hong Kong in December 1997, constituted an Event of Default under the Loan Agreement entitling Casil to call in the loan.

14.  The failure to pay interest under the mortgage was also a clear breach of the mortgage.

15.  Those proceedings came before me for trial in June 2004.  At the commencement of the trial I ordered that the issues of liability and quantum should be tried separately.  In a reserved judgement delivered on 30 July 2004, I found:

(1)     Casil were in breach of the Loan Agreement in failing to advance the full amount due to be advanced under the Loan Agreement on 24 July 1997, and Chinluck were entitled to damages in respect of that breach.

(2)     On 4 December 1997, an Event of Default had occurred, (the Asian Financial Crisis, which constituted a relevant material change in Chinluck’s prospects of business), entitling Casil to demand repayment of the sums advanced under the Loan Agreement.

(3)     The failure of Chinluck and Mr Shu to pay interest instalments constituted a breach of the Loan Agreement and the mortgage, entitling Casil to demand repayment of the sums and advanced under the Loan Agreement and to exercise its powers under the mortgage, and to make demand of Mr Shu under the Guarantee. 

(4)     Casil were entitled to judgement under the Loan Agreement for the amount of principal outstanding as at 4 December 1997, together with interest thereon, in terms of the Loan Agreement.

(5)     Casil were entitled to judgement, for the same sum, against Mr Shu on the Guarantee.

16.  The primary issue now arising for consideration is the amount of damages to which Chinluck are entitled, consequent upon Casil’s breach of contract.  The sum for which Casil are entitled to judgement under the Loan Agreement or the Guarantee is a matter of arithmetical calculation only.

The relevant law:

17.  The assessment of contractual damages requires an examination of two issues.  They are the issues of remoteness, and causation.  First, any loss of profit which is too remote cannot be recovered.  Second, the alleged damages must have resulted directly from the breach of contract.

Remoteness of damage:

18.  The classic test for remoteness of damage in contractual claims was laid down in Hadley v Baxendale (1854) 9 Ex 341 at 344-5.  I adopt Mr Tong’s statement of the two limb’s of the rule in the following terms:

(1)     Damages which are such as may fairly and reasonably be considered either arising naturally, (i.e., according to the usual course of things), from the breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time when they made the contract, as the probable result of the breach of that contract;

(2)     If the special circumstances under which the contract was actually made were communicated by the plaintiff to the defendant and are thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach under the special circumstances, so known and communicated.

19.  Mr Tong put his case, relying upon the second limb of this test.  Mr Ho did not dispute the proposition relied upon by Mr Tong.

Causation:

20.  Both Mr Tong and Mr Ho accepted that Chinluck carried the burden, on the balance of probabilities, of satisfying the court as to the fact of damage, i.e. causation.  Issue was joined as to whether or not the failure of Casil to pay the full amount of the Loan on 24 July 1997, was causative of the failure of the Project to proceed.  Central to this issue is the question as to the date at which the damages were to be assessed.

The case for Chinluck:

21.  The case for Chinluck may be simply stated.  I adopt the terms of Mr Tong’s submissions:

(1)     It was within both parties’ contemplation that if Casil failed to advance the loan as set out in the Loan Agreement Chinluck would not be able to complete the Project.  This was the only direct result of the Court’s finding that Casil knew at the time of the contract that Chinluck required to Loan for no other purpose, save to develop the Project.

(2)     Damages should be assessed as at the date of the breach, i.e. 24 July 1997.  The Court should assess, as damages, the profits which Chinluck, on 24 July 1997, could reasonably expect to make upon the completion of the Project, and which were lost by virtue of the failure of the Project to proceed.

(3)     This Court should not take into account the market fluctuations, subsequent to Casil’s breach on 24 July 1997, in assessing the loss of profit.  Market fluctuations were within both parties’ contemplation when the Loan Agreement was entered into.

(4)     The valuation approach as suggested by Casil’s expert Mr Alexander-Webber should be rejected.

The case for Casil:

22.  The contrary case for Casil may be equally simply stated.  I adopt the terms of Mr Ho’s submissions as follows:

(1)     Chinluck must prove the fact of damage, (i.e. causation), and the amount of damage, (i.e. quantum).  If  Chinluck fails on either count, the action must fail, or at most, Chinluck will be entitled to be awarded nominal damages where a right has been infringed.

(2)     In considering the damages occasioned by a wrongful act all those facts which have actually happened down to the date of trial must be taken into account.  The court cannot ignore the actual events which happened after the breach of contract, even though the damages would be assessed at the date of the breach.

23.  Mr Ho submitted that where a new intervening force, between the date of the breach and the date of the trial, which must be evaluated in relation to damages, is an independent act which could not reasonably be expected by the parties, and that has caused the eventual loss, the liability would not reach Casil. 

24.  In other words, if the event causing the loss would have happened whether Casil had acted in breach or not, then Casil will not be liable for further damage following upon the happening of the event.

The date at which damages are assessed:

25.  If Mr Tong is right, and the damages are to be assessed at the date of breach by Casil, 24 July 1997, then the subsequent intervening factor of the Asian Financial Crisis and all that went with it, may be disregarded as having any impact upon the conclusion to be draw.

26.  Mr Tong relied upon two authorities to establish that the damages for loss of profit are to be assessed as at the date of breach, without taking into account matters which occurred after the breach and before the date of trial.  They are Jamal v Moolla Dawood, Sons & Co [1916] AC 175 and Campbell Mostyn (Provisions) Ltd v Barnett Trading Company [1954] 1 Lloyd’s Rep 65. Both are sale of goods cases, both support the proposition that in particular, market fluctuations are to be disregarded.

27.  I adopt the following passage from McGregor on Damages, 17^th Ed, para 16-002:

“Where damages are awarded for a loss in relation to property, the normal measure is based upon the market value of the property at the time of the wrong, whether in tort or breach of contract.  Thus in the case of the tort of conversion of goods the appropriate time is the time of conversion, while in the case of breach of a contract to sell goods the appropriate time is the time of due delivery, whether the breach be by seller or buyer.” 

Although not cited in this passage of the textbook, the cases cited by Mr Tong support that proposition.

28.  McGregor recognises that difficulties may arise by reason of a fluctuation in market values between the time of a wrong and the time the judgement is entered in the claimant’s action for damages.  In  Johnson v Agnew [1980] AC 367, the House of Lords held that the normal rule for sale of goods cases was that where there exist ready markets for the innocent party to sell the goods, damages should be assessed at the date of the breach.  The rule is not absolute and, as was done in Johnson v Agnew, a case involving damages for breach of contract, the court can order such other date as justice requires in an appropriate case.

29.  Mr Ho relied upon a number of authorities to contend that, in appropriate circumstances, events which have actually happened between the date of breach and the date of trial should be taken into account.  They are Carslogie S S Co v Royal Norwegian Government [1954] AC 292; Maredeanto Compaia Naviera S A v Bergbau-Handel GmbH, The Mihalis Angelos [1971] 1 QB 164; The Kingsway [1918] P 344 CA; B S & N Ltd, (BVI) v Micado Shipping Ltd (Malta), The Seaflower [2002] 2 Lloyds’ Rep 37; and Golden Strait Corpn v Nippon Yusen Kubishika Kaisha [2006] 1 WLR 533.  All of those authorities amply support the proposition that in appropriate circumstances, in assessing damages for breach of contract, events that have actually occurred between the date of breach in the date of trial should be taken into account.

30.  In The Mihalis Angelos, Megaw LJ said at p 206G-207B:

“In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost, subject to his duty to mitigate.  If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events.”

31.  In Golden Strait Corpn, the court was required to consider the impact of the Second Gulf War on an assessment of damages.  The contract involved a charter of a vessel for a seven year period.  In December 2001, the charterers repudiated the charterparty.  In March 2003, the United States and the United Kingdom went to war against Iraq.  In September 2003, the owners sought damages for the charterers’ repudiation, claiming the basic hire they would have received up to December 2005.  An arbitrator concluded that the charterers would have cancelled under a war clause on the outbreak of the Iraq war, and awarded damages only to the period up to March 2003.  Lord Mance said, at 545-5:

“24    Certainty, finality and ease of settlement are all of course important general considerations.  But the element of uncertainty, resulting from the war clause, meant that the owners were never entitled to absolute confidence that the charter would run for its full seven-year period.  They never had an asset which they could bank or sell on that basis.  There is no reason why the transmutation of their claims to performance of the charter into claims for damages for non-performance of the charter should improve their position in this respect. 

25     Further, as Mr Young submitted, the assessment of damages often depends on, or is informed by, subsequent events, and the claim for loss on the spot market from 17 December 2001 until 1 April 2002, the claim based on a substitute rate as from 1 April 2002 and the claim for loss of a profit share - which as I have said would surely depend on looking at actual market rates over the balance of the original charter - are all instances applicable in this case.  The additional need to take into account the now known fact of the Second Gulf War is simply another instance.

26     In any event, I consider that this is a situation where any considerations of the type mentioned in the first sentence of para 24 above would have, so far as necessary, to yield to the greater importance of achieving an assessment of damages and compensation which more accurately reflects the actual loss which the owners can, at whatever is the date of assessment, now be seen to have suffered as a result of the charterers’ repudiation.”

32.  In a sale of goods case, there is invariably an immediately available alternative market for the goods.  That is why, in sale of goods cases such as those cited by Mr Tong, damages are invariably assessed at the date of the breach.  But where there is no immediately available market, such as in the present case, where the apartments to be sold to yield the profit did not yet, at the date of the breach exist, and whether they would actually come into existence was dependant on many factors, that date is readily seen as inappropriate for the assessment of damages.

33.  For precisely the same reasons as enunciated by Lord Mance, I am satisfied that Mr Ho is right, and that it is appropriate in the circumstances of this case, not to follow the usual rule in contractual sale of goods cases, but to assess the damages, having a proper regard to the now known facts.

34.  Mr Ho relied also on the decision of Glidewell LJ in Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 807, where the Court adopted the approach in the Australian decisions in this area.  The question posed was: “How does the court decide whether the breach of duty was the cause of the loss or merely the occasion for the loss?”  Glidewell LJ’s answer, at p 1374H-1375A, is in the following terms:

“The answer in my judgement is supplied by the Australian decisions to which I have referred, which I hold to represent the law of England as well as of Australia, in relation to a breach of the duty imposed on the defendant whether by contract or in tort in a situation analogous to breach of contract.  The answer in the end is by the application of the court’s common sense.”

35.  In my view it simply defies common sense to assert that in relation to a long-term, continuing event, such as the Project, an intervening events, of such immense significance, as the Asian Financial Crisis and its effect on Hong Kong, and Casil’s right, by 4 December 1997, to demand repayment of the whole of the sum then advanced, should be ignored.

The evidence:

Remoteness:

36.  In paragraphs 62-68 of the judgement delivered on 30 July 2004, as to liability, I dealt with the issue as to whether Casil were aware that the Loan would be utilised in the Project.  I held, (para 68), that Casil were fully aware that it was Chinluck’s intention to use the proceeds of the Loan for the development of the Project.

37.  Mr Ho did not challenge Mr Tong’s contention that in those circumstances the second limb of the test in Hadley v Baxendale was satisfied.  It follows that the parties must have reasonably contemplated that the failure of the Project might ordinarily follow from a breach of the Loan Agreement, and that Casil will be liable to the amount of injury which would ordinarily follow from that breach.

38.  The claim by Chinluck for loss of profits damages does not fail by reason of remoteness.

Causation:

39.  Chinluck relied upon two facts to assert that the cause of the failure of the Project to proceed was the failure of Casil to advance the full amount of the money due under the Loan Agreement.  It was contended first that the failure to advance the remaining sum of the Loan Agreement prevented Chinluck from concluding negotiation with the villagers on Peng Chau, to withdraw their objections against the Project, and second, that with the failure to advance the full sum under the Loan Agreement, Chinluck was unable to pay the land premium due to the Government upon the necessary land exchange.

Compensation to the villagers:

40.  A necessary part of the Project was the payment of compensation to villagers who were affected by the development of the Project.  The case for Chinluck was that because insufficient funds were available, they were unable to reach agreement with the villagers, and make payment of compensation.

41.  I accept Mr Ho’s submission that the evidence in this respect fell well short of that which would be required to establish the proposition relied upon, even on the balance of probabilities.  The only evidence there was in this respect came from Mr Leung Kai Hung, Ken, who was the personal assistant to Mr Shu from 1996 onwards.  His evidence was that objections to the Project had come from the indigenous villagers, and the Peng Chau Rural Committee, which must be overcome before the District Office would consider the land exchange application.  These objections related to the effect the Project on graves in the area, and on the loss of land that would become part of the Project, for the construction of a school.

42.  The evidence from Ken Leung was that it took Chinluck a great deal of time and effort to negotiate with the villagers in order to reach agreement on compensation to them, before the objections were withdrawn.  That simple assertion, together with a letter dated 22 July 1998, (Ex D2 594-2), from the Peng Chau Rural Committee in which the Chairman of the Committee informed the District Officer that no objection was raised to the Project and that the Committee supported the development plan, constituted the entire evidence upon which Chinluck relied.

43.  The date at which agreement was reached with the villagers and the Rural Committee is important.  If that agreement was reached prior to Casil’s entitlement to demand repayment of the sums advanced under Loan Agreement, then it is arguable that the failure to advance the full amount on 24 July 1997, was a relevant causative factor in Chinluck’s inability to make payment of the compensation.  On the other hand, if the agreement was reached after December 1997, when Casil were entitled to repayment of the amount advanced, the failure to advance the full amount on 24 July 1997, could not have had any impact on Chinluck’s ability to make payment of the compensation.

44.  It was vaguely suggested by Mr Ken Leung that the agreement as to compensation had been reached well prior to the Rural Committee’s letter of 22 July 1998.  The inference was that the letter was withheld until such time as Chinluck were able to make payment of compensation, or alternatively that Chinluck, being unable to pay the compensation, delayed in reaching agreement until that time.  There was simply nothing in the documentary evidence, or the oral evidence from Chinluck to substantiate such an inference.

45.  Mr Ken Leung was obliged to concede that he personally was not involved in the negotiations with the villagers or the Rural Committee.  He knew nothing of the progress of the negotiations.  I accept Mr Ho’s submission that, in cross examination, Mr Ken Leung eventually accepted that agreement with the villagers was reached only closer to the time when the “no objection letter” was issued on 22 July 1998.

46.  Chinluck elected not to call Mr Shu, or any officer of Chinluck who was directly involved in the negotiation with the villagers, or any of the villagers themselves, or any of the members of the Pen Chau Rural Committee, to give evidence on this essential point.  The law is clear.  When a party elects to call no witnesses, thereby depriving the court of positive evidence as to important issues in the case, the court is entitled to draw any reasonable inference against that party, absent any explanation on its part: see Herrington v British Railways Board [1972] AC 877 at 930 and Grave v G A Bonus PLC [1992] 2 Lloyd’s Rep 716.

47.  Chinluck has failed on the balance of probabilities to establish that the failure of Casil to advance the full amount due under the Loan Agreement on 24 July 1997, in any way caused Chinluck to be unable to pay compensation to the villages. 

48.  The agreement for compensation, on the evidence, was not reached until 22 July 1998, by which time Casil had lawfully recalled the monies due under the mortgage and Loan Agreement, and were entitled to exercise their rights under those contracts.  In that circumstance it is simply unarguable that the failure to advance the full amount due under the Loan Agreement could have contributed to any inability to pay compensation to the villagers.

Payment of land premium:

49.  Again the only evidence called in this respect was from Mr Ken Leung.  He was not personally involved in any of the steps or negotiations in relation to the land exchange.  I regret that I have to say that in the circumstances most of his evidence in this respect amounted to little more than speculation.

50.  Mr Ken Leung had prepared a comprehensive and detailed development proposal in respect of the Project which had been submitted to Casil as part of the application for the loan.  That document contemplated a period of six months in which the land exchange arrangements would be completed.  The expert witnesses, (as to valuation), called by both sides agreed that a six-month period was over optimistic.  The timeframe required was plainly considerably longer than six months.

51.  In fact the first basic terms offer with an assessment of premium only came from the Government on 7 August 1998.  That was more than 13 months after Casil’s breach of the Loan Agreement, and 8 months after Casil were entitled to demand repayment of the full loan.  There was no evidence whatsoever to demonstrate that at any time prior to the occurrence of the Event of Default, (4 December 1997), Chinluck was even close to reaching an agreement with the Government on a land premium figure, or that any kind of offer had been made by the Government for the land exchange to proceed, prior to that date.

52.  Just as with the compensation issue, the date is crucial.  If the opportunity to make payment of the land premium had not arisen prior to 4 December 1997, at which date Casil were entitled to repayment of the actual amount advanced, then the failure of Casil to pay to Chinluck the full amount due under the Loan Agreement on 24 July 1997, cannot in any way be causative of Chinluck’s inability to make payment of the premium when assessed.

53.  In fact Chinluck did not attempt to make payment of the premium after the assessment on 7 August 1998.  Negotiations with Government continued.  The premium, having been assessed at $99,370,000 on 7 August 1998, was reduced to $66,460,000, as a result of further negotiation, on 9 September 1999.  That is even further beyond the date at which Chinluck were obliged to make repayment to Casil of the funds actually advanced.

54.  I am satisfied that the failure of Casil to make full payment of the amount of the Loan on 24 July 1997, was not causative of Chinluck’s inability to make payment of the land premium, either after 7 August 1998, or after 9 September 1999.

55.  It is overwhelmingly plain that the real cause for the failure of the Project was the quite unexpected intervention of the Asian Financial Crisis in late 1997, which caused a dramatic decline in property values in Hong Kong, from late 1997 and continuing through until 1999.  With that decline in property values came a decline in demand.  The demand anticipated for the Project simply no longer existed.

Two further factors:

56.  There are two further factors to which I must have regard.  Mr Ho contended that in any event Chinluck did not have the financial capacity to complete the Project.  Further, he argued that with a change in Government land policy in 1998, the Project was in any event, financially precarious.

Chinluck’s financial capacity to complete the Project:

57.  Mr Ho submitted that, in the light of the fact that an Event of Default had occurred, entitling Casil to terminate the Loan Agreement and to demand repayment of the Loan, and the breach by Chinluck of the Loan Agreement on 28 December 1997, by failing to pay interest due, Chinluck must prove both that it could make up the initial shortfall of funds of $176.5 million, and that it could repay the balance advanced of $251.8 million when demanded by Casil, and also that it had the ability to arrange continuing finance for the Project.

58.  There is a pressing logic in the submission.  That the Loan was repayable, by reason alone of the failure to pay interest, could not be disputed.  In those circumstances, if Chinluck could not establish how it could make repayment and continue to fund the Project, the whole viability of the Project must inevitably be in question, irrespective of any default on the part of Casil to advance the whole of the Loan on 24 July 1997.

59.  Throughout the trial on liability Chinluck maintained the position that they were in urgent need of funds, and thus the whole sum of $330 million should have been advanced.  That position changed dramatically at the commencement of the trial for the assessment of damages.  Chinluck now said that the construction cost of the Project was not payable immediately, as credit would be supplied by Guangdong Water Conservancy & Hydro-Power Engineering Development Co Ltd, (Guangdong Water).  To substantiate this assertion, Chinluck relied upon a letter issued by Guangdong Water dated 1 July 1996. 

60.  Although plainly in the possession of Chinluck prior to the commencement of the trial on liability on 14 June 2004, it appears that that letter was not discovered, nor produced prior that date.  Indeed, it was not translated until 27 September 2006.

61.  The letter simply does not support the interpretation placed on it by Chinluck.  The first 5 1/2 pages serve simply to introduce Guangdong Water and its background.  The letter then sets out, over 2 1/2 pages the concept of the Project.  An assertion is made that Guangdong Water has “already negotiated and agreed on terms of co-operation” with Chinluck.  No documents setting out the agreed terms were produced.  An assertion is made that the whole development plan “will be” contracted to Guangdong Water, as the contractor responsible for the plan.  That is a statement of a future intention that ma not come about.  No documents substantiating the contract were produced.

62.  It is said that “if necessary”, Guangdong Water can provide teams to go into the land to undertake preparation and construction work.  It is said that “if necessary”, Chinluck can “first pay a small sum of money as earnest money” for the project.  The letter says further that:

“If the conditions allow and both parties have the intention to form a joint-venture in development some of the residential apartments which are in high market demand can become apartments of venture so that funds can be more sufficient and it would be more easy to put the (property) into the market.”

63.  The letter is vague and uncertain in the extreme.  In my view the letter amounts to little more than an assertion of an intention to enter into a contract at some time in the future, if appropriate terms can be agreed.  There is simply no concluded agreement established between Chinluck and Guangdong Water, that the work would be undertaken by Guangdong Water on credit.

64.  Surprisingly, although Mr Ken Leung joined Chinluck, “as the personal assistant to the managing director in 1996”, and had, as one of his responsibilities, assisting Mr Shu in completing the Project, he said that he did not know the details of the arrangement with Guangdong Water, “as he had not joined Chinluck at that time”.

65.  It is simply remarkable that an officer of Chinluck, in the position of personal assistant to the managing director, would not know of such an important development in relation to the Project, allegedly occurring in the very year in which he joined the company, with responsibilities directly involving the circumstances of the letter, and the Project.  In all these circumstances, I place no weight whatsoever on the Guangdong Water letter.

The Change in Government Land Policy:

66.  The case for Chinluck was that it was anticipating the presale of flats, and that the proceeds of presale could be used to discharge its financial costs.  Mr Ho makes two strong arguments to demonstrate that Chinluck could not rely upon presale in the way in which it was contended. 

67.  First, it was not disputed that following the Asian Financial Crisis, the Hong Kong Government announced a new land policy which would substantially increase the supply of flats in Hong Kong.  Together with the crash of the property market consequent upon the Asian Financial Crisis, and the continued slump in property prices, this substantial increase in the supply of flats would inevitably have the consequence of lowering the price of property in the market.  Plainly, the amount for which flats in the Project could be sold by the time they were completed, would be greatly less than anticipated when the Project was first formulated in 1996.

68.  Second, there is a real argument as to whether or not the proceeds from the presale of flats could be used to discharge Chinluck’s financial costs.  It is not in dispute that consent would have to be obtained from the Lands Department for the presale of flats in the Project.  The various conditions of presale are contained in LACO Memorandum No 57, promulgated in 1979, (Ex B4 1173-76), and No 40, promulgated in 1999, (Ex B4 1192-1240). 

69.  The Loan Agreement from Casil to Chinluck was not a “Building Mortgage”.  Mr Ken Leung, and Mr Charles Chan, the expert valuer called for Chinluck, both acknowledged that unless Chinluck could make other financial arrangements, or arrange a Building Mortgage with a financial institution which was qualified to provide a Building Mortgage, consent to pre-sales would not be granted by the Lands Department.  Having regard to the state of the market, and Chinluck’s financial position at the time pre-sales would have been considered, the prospect of Chinluck finding alternative finance or obtaining a Building Mortgage was remote indeed.

Conclusion:

70.  For the foregoing reasons I am satisfied that the failure of the Project was the unexpected and unprecedented economic downturn caused in Hong Kong by the Asian Financial Crisis and its consequences in Hong Kong.  The failure of the Project cannot be attributed to Casil’s action in not paying the full amount of the Loan to Chinluck on 24 in July 1997.  In those circumstances Chinluck has failed to establish that the breach of contract on the part of Casil was causative in the failure of the Project.

Quantification of damages:

71.  Having reached that conclusion I do not need to consider the quantification of damages, and the competing contentions of the expert valuers called by the parties.

72.  It is sufficient if I say that having regard to the need to have regard to contingencies, when assessing damages for loss of profits, as demonstrated in Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602, the valuation method adopted by Mr Charles Chan, for Chinluck, while novel, and taking into account a developer’s expectation in 1997, fails to have proper regard to the reality of the events that occurred.

Nominal damages:

73.  Notwithstanding the fact that the breach of contract by Casil was not causative of the failure of the Project, Chinluck are entitled to nominal damages in relation that breach.  A plaintiff is entitled to nominal damages where his right has been infringed, but he has not in fact sustained any actual damage from the infringement: see McGregor on Damages, 17^th Ed, para 10-002, and Halsbury’s Laws of Hong Kong, 2004, Reissue Vol 12(1), para 340.171.

74.  In Hong Kong, HK$100 is usually awarded, see: Wong Ching Chi v Full Yue Bleaching & Dyeing Co Ltd [1994] 3 HKC 606.  I accordingly fix nominal damages to be paid by Casil to Chinluck in the sum of $100.  That sum may be set off against the amount due to Casil by way of principal and outstanding interest under the Loan Agreement and the mortgage, to be calculated, with judgement to be entered for Casil for that amount.  The same sum will be the sum for which Casil are entitled to judgement against Mr Shu under the guarantee.

75.  Leave is reserved to apply in the event of any disagreement in relation to calculation of the sum due.

Costs:

76.  Casil is plainly entitled to its costs on the Counterclaim. The award of nominal damages to Chinluck may have an impact on the issue of costs.  If agreement cannot be reached on costs, I will hear Counsel on a date to be fixed.