SENG SUN DEVELOPMENT CO LTD v. HONG KONG RESOURCES INVESTMENT CO., LTD

HCA2231/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2231 OF 2007

-----------------------

BETWEEN

-----------------------

------------------------------

J U D G M E N T

-------------------------------

Introduction

1.  This is the second trial of the action. The first trial, which took place on 15 April 2009, is a trial of several issues relating to the rights and liabilities of the parties under the Substitution Agreement and the plaintiff’s entitlement to the relief of specific performance. The issues for determination and the determinations had been set out in the Judgment handed down on 21 April 2009.

2.  For the purpose of this second trial, it will suffice to mention only the determination on Issue (1), which is that the defendant should procure 誠信置業(厦門)有限公司 (“Seng Sun Xiamen”) to deliver to the plaintiff those portion of the Units in the plans at Annexure 2 of the Re-Re-Amended Statement of Claim.

3.  On 8 May 2009, partial judgment was entered for the plaintiff against the defendant for an order that the defendant do procure 誠信置業(厦門)有限公司 (Seng Sun Xiamen) to deliver to the plaintiff those portion of the Units in the plans at Annexure 2 of the Re-Re-Amended Statement of Claim with an abatement of price or damages to be assessed, together with costs of the 1^st trial and the application for partial judgment.

4.  This second trial is to determine the amount of price to be abated and/or the damages to be paid by the defendant to the plaintiff.

5.  In this judgment, the same abbreviations as used in the Judgment dated 21 April 2009 will be adopted.

Events since the two Judgment

6.  Before dealing with the issues for the second trial, two recent events that happened after the two Judgments dated 21 April and 8 May 2009 need to be mentioned. Firstly, the defendant rather belatedly commenced proceedings against the plaintiff in the Intermediate People’s Court in Xiamen disputing the validity of clause 12 of the Substitution Agreement. According to the 民事起訴狀 (statement of claim) dated 17 June 2009, the defendant seeks a declaration that the clause is void and of no legal effect. Clause 12 (which is similar in terms to clause 8.01 of the Agreement and clause 9 of the Supplemental Agreement) states that the governing law of the agreement shall be Hong Kong law and the parties agreed to submit to the jurisdiction of the Hong Kong court in the event of claim, dispute or differences arising out of the agreement. Mr Dawes informed this court that the parties had submitted their submissions and are awaiting the judgment of the Xiamen court.

7.  Secondly, the defendant had sent to the plaintiff a notice dated 23 June 2009, giving notice of rescission of the provisions in and plan annexed to the Substitution Agreement relating to the sale of the Units. This of course does not affect the validity and the binding effect of the findings made in the Judgment dated 21 April 2009 as well as the decree of specific performance in the Judgment dated 8 May 2009.

Issues in this trial

8.  The principal issue for determination in this trial is the amount for the purpose of the abatement of price and/or damages to be paid by the defendant to the plaintiff as a result of breach of the Substitution Agreement. This in turn entails two sub-issues. They are:

(1) What is the amount of the abatement of price or damages arising from the differences between the Units to be delivered to the plaintiff as defined in the Substitution Agreement and the portions of the Units as per Annexure 2 of the Re-Re-Amended Statement of Claim.

(2) What is the quantum of damages for late delivery of the Units; whether this should be calculated on the basis of RMB100,000 per month as provided in clause 6(2)(2) of the Substitution Agreement, and if so, for what period of time.

The witnesses and the evidence

9.  The defendant had been served with notice of this trial. It was however absent at this trial.

10.  The plaintiff had called three witnesses. The first witness is 何惠珍 (Ms Ho). She is employed by Chiyu Bank. She had since the end of 2004 been participated in the negotiations and meetings leading to the signing of the Substitution Agreement with the defendant. Her evidence relates to how the compensations provided for in clause 6(2)(2) of the Substitution Agreement came about. The clause refers to two compensations: The first is the sum of RMB 2 million, which is to compensate for the delay between 3 June 2005 (the delivery date specified in the Agreement) and 3 June 2007 (the extended delivery date under the Substitution Agreement). This sum had already been paid. The second is the sum of RMB 100,000 per month, which is to compensate for any further delay after 3 June 2007.

11.  According to Ms Ho’s evidence, it was in the end of April 2005 that Chiyu Bank first raised the amount of compensation for delay in delivery and inserted this into the draft agreement as clause 6(2)(2). Then at the meeting on 17 May 2005, the defendant’s lawyer, Mr Lam, expressed disagreement to it. At the meeting on the following day, the Bank explained the basis for the compensation, stating that the amount was fixed on the basis of surveyor’s opinion as to the market rent for alternative premises similar to those of the Units to be delivered. The compensation was also to make up for the fact that, pending delivery of the Units contracted for, the Bank was constrained to operate from a smaller rented accommodation.

12.  Mr Lam needed to consult Madam Chen and he requested for the basis of the calculation for the RMB 2 million compensation. Consequently, Ms Ho emailed him on 10 June 2005 with explanations for the calculation. Thereafter, neither Mr Lam nor the defendant raised any disagreement to clause 6(2)(2) and the Substitution Agreement was eventually signed. Ms Ho clarified in her oral testimony that the basis for calculating the RMB 2 million compensation is the same as that for the RMB 100,000 per month compensation.

13.  Ms Ho’s testimony was supported by minutes of the relevant meetings and the email she sent to Mr Lam.

14.  The plaintiff’s two other witnesses are expert witnesses. The first expert is吳至尊 (“Mr Ng”), who is a Class 1 Architect practising in mainland China. He had also given evidence in the first trial. In a nutshell, Mr Ng’s conclusion is that the differences in the實用面積 (usable area) of the Units contracted for (as per Annexure 3 of the Substitution Agreement) and those portions of the Units that the defendant is ordered to deliver by the Judgment of 8 May 2009 (as per Annexure 2 of the Re-Re-Amended Statement of Claim) are as follows:

一層 (ground floor)    43.537 square metres

二層 (first floor)         59.452 square metres

15.  The plaintiff’s second expert is 陈秀良 (Mr Chen). He is a Registered Real Estate Appraiser and is recognized by the PRC Ministry of Housing and Urban-Rural Development as qualified to conduct real estate appraisals. He was employed by a firm of property surveyors in Xiamen (厦門均和房地產土地評估咨詢有限公司), whom the plaintiff had commissioned to prepare valuations of the Units in question.

16.  Mr Chen and two colleagues were responsible for carrying out the valuation. He had made a site inspection of Chiyu Plaza in June or July 2009, the exact date of which he could not recall. From his observation, Units 101 and 201 were unoccupied. In fact, there was only one occupant (i.e. Standard Chartered Bank) on the ground and first floor, which forms the commercial portion of the Plaza. In the report that he and his colleagues compiled, two methods were used to assess the market value of the Units. The first method〔市場比較法〕takes account of the purchase price of comparable premises while the second method〔收益法〕takes account of the potential average rental income of the Units in the period from 1 June 2007 to 1 May 2009. Mr Chen explained that the report did not refer to comparables in Chiyu Plaza because there was no available information as to any sale and purchase of units in the commercial portion of the Plaza. They had also not been able to obtain the information on the amount of rent paid by Standard Chartered Bank, the only tenant in the commercial portion of the Plaza.

17.  The report concluded that the market value of the Units are:

Unit 101 RMB 36,908.63 per square metre

Unit 201 RMB 18,665.16 per square metre

Findings

18.   I accept the evidence of Ms Ho. On the basis of her evidence, I am satisfied that the amount of RMB 100,000 per month as stated in clause 6(2)(2) of the Substitution Agreement was arrived at after taking into account the Bank’s potential loss in not having the use of the Units contracted for by 3 June 2007.

19.  I also find both Mr Ng and Mr Chen to be qualified to give expert opinions on the areas of the Units contracted for and to be delivered and the market value of the Units in question. I accept their evidence and expert opinions as stated in their reports and in oral testimony. In particular, I am satisfied that the difference in the usable area of the Units contracted for and that to be delivered under the Judgement dated 8 May 2009 and also the market value of Units 101 and 201 are as stated by them and set out above.

Abatement of price / Damages for the difference in the usable area

20.  On the basis of the evidence of Mr Ng and the surveyor’s report, the difference in value between the Units contracted for and the portions of the Units that the defendant is ordered to deliver to the plaintiff under the Judgment dated 8 May 2009 is:

Unit 101	43.537 sq m x RMB 36,908.63
	= RMB 1,606,891.02
Unit 201	59.452 sq m x RMB 18,665.16
	= RMB 1,109,681.09
Total	RMB (1,606,891.02 + 1,109,681.09)
	= RMB 2,716,572.11

21.  The amount of abatement to the purchase price of the portions of the Units to be delivered under the Judgment dated 8 May 2009 should therefore be RMB 2,716,572.11. Alternatively, the amount of damages for breach of the Substitution Agreement as a result of the reduction in the usable area of the portions of the Units to be delivered is RMB 2,716,572.11.

Damages for late delivery

22.  I turn next to the damages for late delivery. In respect of the compensation money of RMB 100,000 per month for delay after 3 June 2007, two defences were raised by the defendant in the Defence (paragraph 14). The first is that this part of clause 6(2)(2) of the substitution Agreement is a penalty clause. The second is that even if the clause were valid, the liability was only for the period from 3 June to 3 December 2007.

23.  In relation to the first defence, the burden of proving that this is a penalty clause rests with the defendant: Robophone Facilities v. Blank [1966] 1 WLR 1428, 1447. There is, however, no evidence or material from the defendant to support this contention. On the other hand, the plaintiff’s evidence, notably the evidence of Ms Ho, shows that the two amounts of compensation stated in clause 6(2)(2) were based on calculations as to the likely loss and damage suffered by the Bank as a result of delay in having the use of the Units contracted for. It demonstrates that clause 6(2)(2) is a genuine pre-estimate of the loss and damage that the plaintiff would suffer as a result of the delay that had occurred between 3 June 2005 and 3 June 2007 and of any further delay thereafter. It is in the nature of a liquidated damage clause and not a specified penalty: Pneumatic Tyre Co v. New Garage and Motor Co [1915] AC 79, 86 and Philips Hong Kong v. Attorney-General of Hong Kong (1993) 61 B.L.R. 41, 63. The defendant’s pleaded defence that the clause is void is not made out.

24.  As for the second defence, it is a matter of construction of contract. The material part of clause 6(2) reads:

「按「協議書亅第2.05條規定，「交付單位亅不能遲於「協議書亅簽署日起計三年内即2005年6月3日前完成及交付予甲方使用，由於種種原因，丙方提出須延期交付使用，經甲、丙雙方協商同意延至2007年6日3日前交付使用，惟此延遲交付期間，丙方同意… ，以等值美元交付補償金人民幣貳佰萬元，若再延遲，則其後每月另補償人民幣壹拾萬元，但最遲不得超過2007年12日3日。…亅

25.  In essence, the clause provides that the delivery of the Units was extended to 3 June 2007 and that the defendant was to pay the plaintiff US dollars equivalent of RMB 2 million by way of compensation. The clause went on to provide that in the event of further delay, the defendant was to further compensate the plaintiff in the sum of RMB 100,000 per month, provided that the further delay shall not go beyond 3 December 2007.

26.  Mr Dawes argued that the plaintiff is entitled under clause 6(2)(2) to be paid liquidated damages in the sum of RMB 100,000 per month from 3 June 2007 until the actual delivery of the Units. I am unable to agree to this submission. On a plain reading of the clause, the parties’ clear intention is that any further delay should not go beyond 3 December 2007 and the amount of RMB 100,000 per month was only intended to cover any further delay that occurred between 3 June and 3 December 2007.

27.  As events unfolded, the defendant did not deliver the Units by 3 December 2007. This constitutes a breach of clause 6(2)(2) and the damages for the breach fall to be assessed under the law of contract. For this reason, Mr Dawes made the alternative submission that in the event I did not accept the plaintiff’s construction of the clause, the plaintiff may be allowed to further amend the Statement of Claim by deleting the word “liquidated” from paragraph (4) of the Prayer so that it reads:

“(4) Liquidated dDamages of the US dollar equivalent of RMB 100,000 per month from 3 June 2007 until the date of delivery of the Units or the portions of the Units under (2) above.”

28.   I grant the amendment and the Re-Re-Amended Statement of Claim will be amended as indicated above. The amendment is merely to reflect the true nature and the proper basis of the plaintiff’s claim for loss occasioned by late delivery of the Units for the period after 3 December 2007. There is no prejudice to the defendant as the plaintiff is limiting its claim to RMB 100,000 per month. On the evidence of the surveyor’s report, the average monthly rent for comparable alternative premises from 3 December 2007 to May 2009 was RMB 178 per sq m. The average monthly rent for premises of the size of the Units (which is no less than 870 sq m) is therefore more than RMB 154,860.

29.  For the reasons indicated above, the plaintiff is entitled to damages for late delivery in the amount of RMB 100,000 per month from 3 June 2007 until the date of the delivery of the Units as ordered by the Judgment dated 8 May 2009.

Conclusion

30.  I therefore enter judgment for the plaintiff against the defendant in the following terms:

(1) The amount of abatement of price or damages under paragraph 1 of the Judgment dated 8 May 2009 is assessed at RMB 2,716,572.11.

(2) The defendant shall pay the plaintiff damages for late delivery in the amount of RMB 100,000 per month from 3 June 2007 until the date of the delivery of the Units as ordered by the Judgment dated 8 May 2009, together with interest thereon at judgment rate.

(3) The defendant shall pay the plaintiff the costs of the action, including the costs of the trial on 10 August 2009, to be taxed if not agreed.