BESTECH DEVELOPMENT LTD. v. FU WAI LOI AND ANOTHER

IN THE COURT OF APPEAL

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J U D G M E N T

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Litton, J.A.:

1. This appeal turns on a narrow compass. In essence, the question is whether an award of liquidated damages made by Barnett J. on 8 June 1992 in the sum of HK$2,434,865 is in law correct.

2. The background facts are straight-forward. The appellants are the purchasers of a shop on the ground floor of No. 55 Parkes Street, Yaumatei, Kowloon under an agreement dated 3 June 1989. The respondents, Bestech Development Limited, are the vendors. Under the agreement the pruchasers agreed to buy the property for HK$10.8 million, of which a deposit of HK$1.08 million was paid on the signing of the agreement and the balance of HK$9.72 million was to be paid on completion on 28 February 1990.

3. The agreement made provisions for the vendors to rescind the sale in the event of the purchasers failing to pay the balance of the purchase price on the due date. Clause 5(b) of the agreement provided as follows :

"Upon the Vendor exercising his right to rescind the sale ..... he may resell [the property] either by public auction or private contract and on such conditions as the Vendor shall deem fit. Any deficiency in price and all expenses attending such resale shall be borne by the Purchaser and shall be recoverable by the Vendor as and for liquidated damages. Any gain or profit made by the Vendor from such resale shall belong to the Vendor."

4. The purchasers failed to complete the transaction. The vendors, on 2 March 1990, exercised their right of rescission, gave notice to this effect and forfeited the deposit of HK$1.08 million.

5. On 7 March 1990 the vendors instituted proceedings for a declaration that they were entitled to resell the property and for a further declaration that upon such resale they were entitled to recover any deficiency in the purchase price. There was an alternative claim for damages for breach of contract.

6. On 23 May 1990 interlocutory judgment was entered in the vendors' favour, in default of defence, whereby the court declared that the vendors were entitled to recover any deficiency between the purchase price payable under the agreement and the amount realised by resale (after deducting the deposit of HK$1.08 million forfeited by the vendors).

7. On 19 July 1990 the property was put up for public auction, with a reserve price of $7 million, but the highest bid offered was $6.7 million and the property was withdrawn from auction.

8. Between 25 September 1990 and 24 March 1991 the property was let by the vendors at a monthly rental of $60,000. For the seven months of this tenancy, the vendors received a total of $420,000.

9. On 25 April 1991 the vendors entered into a new agreement to sell the property for $7.4 million; completion date was 10 June 1991 but completion was late and the property was finally assigned to the new purchasers on 20 June 1991. For this delay of 10 days the vendors got compensation in the sum of $20,000 by way of lost interest.

The Vendors' Claim

10. After the property was resold, the vendors pursued their claim for monetary compensation from the purchasers before Barnett, J. By his judgment of 8 June 1992, Barnett, J. gave judgment in the following terms :

"IT IS THIS DAY ADJUDGED that the Defendants do pay the Plaintiff the sum of HK$2,434,865.00 being the deficiency between the purchase price payable under the Sale and Purchase Agreement dated 3 June 1989 and the aggregate of the net amount realised by resale of the Property (after deducting expenses).....

AND IT IS FURTHER ADJUDGED that there be an order nisi that the Defendant do pay the Plaintiff interest on the sum of HK$2,434,865.00 at Judgment rate from today until payment ......

It is against this judgment that the purchasers now appeal to this court.

The sum of $2,434,865 is computed as follows :

Grounds of Appeal

11. The appellants advance two grounds of appeal :

(1) The judge should have deducted from the sum of $2,434,865 the amount of $420,000 being the rental income that the vendors received by letting out the property from 25 September 1990 to 24 April 1991.

(2)The judge should have made a further deduction of $20,000. This sum was paid by the new purchasers to the vendors by way of compensation for lost interest for late completion. The $20,000 represented lost interest to the vendors.

Rental Income amounting to $420,000

12. The agreement does not stipulate when the vendors must resell the property. Clause 5(b) gives the vendors a certain amount of latitude.

13. In this case, when the purchasers defaulted, the vendors contacted a number of estate agents, and, at the same time, obtained a valuation of the property from Messrs Jones Lang & Wootton. In a report dated 12 April 1990, Messrs Jones Lang & Wootton assessed the property as being worth HK$7.5 million. However, when the property was put up for auction, the highest bid made was only $6.7 million.

14. Plainly, it would have been in the vendors' interest to resell the property as soon as possible, to get their money in and to mitigate their loss of interest on the purchase price. There was no visible advantage to the vendors to delay the re-sale, unless by so delaying they were hoping that the market would improve : and thus diminish the amount the purchasers would be obliged to pay by way of compensation.

15. Here, as things transpired, the delay in the resale did inure to the advantage of the purchasers because the vendors were able to resell the property in April 1991 for $7.4 million : a price which they were unable to obtain when the property was offered for sale by public auction in July 1990.

16. As it seems to me, the argument that the vendors were obliged to give credit to the purchasers for the rental income amounting to $420,000 is misconceived. The argument is put by counsel for the appellants on the basis of the vendors' duty to mitigate loss : as if the claim were couched as a common law claim for damages. However, as the formal judgment of Barnett, J. makes clear, the sum of HK$2,434,865 awarded to the vendors is the deficiency between the purchase price payable under the agreement and the amount realised by resale of the property, after deducting expenses. It is a liquidated damages claim under the contract.

17. Conceptually, there is a difference between a claim under clause 5(b) and a common law claim for damages. Obviously, as a matter of the proper construction of the contract, the vendors cannot simply delay the resale for an indefinite length of time. The right under clause 5(b) of the agreement to resell the property and claim against the purchasers for the deficiency in price must be exercised within a reasonable time. We do not have a copy of the judge's reasons for his judgment, but nothing suggests that the judge found the delay of approximately 7 months unreasonable. No argument has been advanced by counsel to this effect.

18. After rescission, the property reverted to the vendors who were entitled to deal with the property as they pleased. Upon a resale under clause 5(b) any gain or profit belonged to the vendors. It would be an odd thing if, before resale, they were somehow obliged to account to the purchasers for rental income received. Nothing in the agreement can properly lead to this conclusion or be construed as requiring the vendors to give credit for rental income upon a resale.

19. One matter which troubles us however is this : the expenses which the vendors can properly claim against the purchasers are the expenses of resale : not the expenses arising from the letting of the property prior to resale. The judge appears to have allowed, in awarding the sum of $2,434,865, two items which were not expenses of resale that is $30,000 for agent's fees for the letting of the property, and $4,995 by way of solicitors' fees for preparing the tenancy agreement. Counsel for the vendors conceded before us this morning that the judge was wrong in including these two sums in the award. Although the point was not specifically taken by counsel for the appellant, we feel that in the exercise of our powers under Order 59 r.10 we should interfere to the extent of reducing the award by those two sums, even though no formal application to amend the notice of appeal has been made. We come to this view because of the express concession which counsel for the respondent has very properly made.

Compensation  for Lost Interest

20. As regards the 2nd ground of appeal, namely the sum of $20,000, this was not paid to the vendors by the new purchasers as part of the purchase price. It was to compensate the' vendors for breach of contract on the part of the new purchasers : that is, their failure to complete on the date fixed for completion. I cannot see on what principle the vendors can be obliged to bring that into account, for the benefit of the appellants.

Conclusion

21. For the reasons above, I would order that the sum of $2,434,865 in the judgment of Barnett J. dated 8 June 1992 be reduced to $2,399,870 by deducting the respective sums of $30,000 and $4,995, but that the costs of the appeal be paid by the appellants to the respondents.

Godfrey, J:

22. I agree with the judgment which has just been delivered. This appeal must be dismissed but the order of the judge below must be varied to take account of the point made by my Lord Litton, J.A. In the judgment of Litton, JA he sets out the facts fully and I need not repeat them. On those facts the question for decision on the appeal is this: Is the purchaser entitled to be credited against his liability to the vendor for the deficiency on the resale with the sums received by the vendor which, but for the purchaser's breach of contract in failing to complete the original sale, the vendor would not have received? The answer is that the purchaser is not so entitled. It is clear law that the intention of the parties in the case of liquidated damages is to be implemented by holding the plaintiff entitled to recover the stipulated sum on breach without requiring proof of the actual damage and irrespective of the amount of the actual damage; and it is equally clear that where the plaintiff has recovered his liquidated damages and the stipulated sum has been greater than the actual or at least the provable damage nevertheless that cannot diminish his damages just as he cannot increase them. For these reasons I have no doubt that the appeal was as my Lord has said misconceived. I accordingly agree that it has to be dismissed.

Kaplan, J:

23. I agree with both judgments which have been delivered by my Lords and I concur in the order proposed.