LINGRADE DEVELOPMENT LTD v. SECRETARY FOR THE ENVIRONMENT, TRANSPORT AND WORKS

CACV295/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 295 OF 2008

(ON APPEAL FROM LDRW 2 OF 2005)

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JUDGMENT

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Hon Wright J, giving the judgment of the court:

1.  This is an appeal from a decision of the Lands Tribunal which, after hearings in December 2006, April and May 2007 and August 2008, on 3 September 2008 made an award to Lingrade Development Limited, to which we shall refer as the respondent.

2.  The claim arose in unexceptional circumstances. The respondent was the owner and developer of a portion of land in Lam Tei, Tuen Mun, which was adjacent to the KCR West Rail Project. In order to construct the railway, the Government exercised its rights under the Railways Ordinance, Cap. 519, to take temporary occupation of a narrow strip of that land.

3.  As a result of that occupation the respondent sought compensation in accordance with Part II of the Schedule to the Railways Ordinance: first, pursuant to item 2(a)(ii), open market rent for the period of occupation; and, secondly, pursuant to item 2(b), a disturbance payment. A number of the amounts claimed by the respondent have been resolved by agreement in respect of which payment, in excess of $3 million, has been effected. The appellant does not dispute that compensation is payable to the respondent.

4.  The claim in respect of the disturbance payment was categorised under six Heads in respect of each of which the Tribunal made an order. However, it is only in respect of "Head A - Loss in sales proceeds" and "Head E - Extra finance costs" that the appellant appeals. In respect of Head A the respondent was awarded an amount of $10,200,000.00 whereas in respect of Head E the Tribunal discussed the reports of the expert witnesses, one of whom had been called by each side, expressed the view that it should be possible for the parties to reach agreement and directed them to do so with the observation that, absent agreement, they could return to the Tribunal.

5.  The Tribunal is, of course, the finder of the factual basis upon which the compensation is to be calculated in any given instance. It is empowered by s. 10(5)(a) of the Lands Tribunal Ordinance, Cap. 17, to conduct its proceedings "... with as much informality as is consistent with obtaining justice" but, where necessary, it is further empowered, by s. 10(1) to follow the practice and procedure of the High Court in the exercise of its civil jurisdiction.

6.  Section 11(1) of that Ordinance provides that the Tribunal's decision in regard to the amount of compensation payable by the Government in respect of claims submitted to it under s. 8(1) or (2) shall be the final determination, whilst s. 11(2) provides for an appeal to this court only on the ground that its determination or order is erroneous in point of law.  The present claim fell within the provisions of s. 8(1).  It is a specialist tribunal: courts consistently have recognised and deferred to the particular expertise and experience of the Tribunal in the determination of issues relating to valuation which come before it (see e.g. Commissioner of Rating and Valuation v Agrila Ltd & others (2001) HKCFAR 83).

7.  Part I of the Schedule to the Railways Ordinance provides, in relevant part, as follows:

“2. Definitions applicable to Part II

"disturbance payment" means a sum equal to-

(a)...

(b)  for disturbance of a trade or business on any land, the expenditure and loss of money actually and reasonably incurred or to be reasonably incurred and arising from the disturbance of that trade or business by reason of the matter for which the claimant is entitled to claim compensation under Part II,

but a disturbance payment is not to include any expenditure or loss which would not be recoverable, on the grounds that the expenditure or loss was too remote or was not caused by the disturbance, if that disturbance were a tort;

…

4. Disturbance payments

(1)   For assessing a disturbance payment, the Lands Tribunal is required, for any expenditure or loss to be incurred and for which the claimant is entitled under this Ordinance to be compensated, to assess the value of the expenditure or loss at the time of the award as if the expenditure or loss formed part of a claim for damages in tort.

... “

8.  Because the Government would have had the right to extend its temporary occupation of the strip of land rendering the cessation of the temporary occupation uncertain in time, the respondent abandoned its “Original Scheme” of development and implemented a “Revised Scheme”: amongst other consequences, the most prominent was the delay in the issue of the Occupation Certificate and Completion Certificate of the units, with concomitant delay in the marketing of the units. In the event, the temporary occupation lasted 23 months. The Government did not challenge the revision of the scheme as a measure of mitigation by the respondent.

9.  It was not in dispute that during the period of the temporary occupation, prices were declining in the property market generally. The effect of that was that the respondent was not simply kept out of its money for a period of time, but that when it was able to sell the units they were sold for a lower price and, so it argued, over a longer period than would have been the case had it been able to sell them as it had originally intended.

10.  The respondent formulated Head A of its claim on the basis of loss of sales proceeds. The Tribunal summarised the initial claim:

"25. [The temporary occupation] caused a delay of the commencement of sales of flat. There is no dispute as to the actual sales proceeds of flats of the Revised Scheme. It took 47 months for the respondent to sell all of the flats. Mr Wong [the respondent’s witness] then made an estimate of the sale proceeds for the hypothetical sale of flats under the Original Scheme which would have been completed on a hypothetical date had there being no temporary occupation. According to Mr Wong's estimate, the hypothetical sales proceeds exceed the actual sales figures by about 24 millions. The [respondent] argued that it should be compensated for the same amount as a disturbance payment."

11.  The Tribunal found that the respondent was proceeding with the development on the land in order to sell the units at a profit; in this sense, the units would constitute the respondent's "stock in trade"; the respondent consequently was in trade or business on the land.  There is no challenge to that finding.

12.  The Tribunal went on to observe:

“26. Respondent must show he has actually suffered loss and damage as if in an action in tort...

27. ... Evidence must be adduced to show that the [respondent] has suffered loss and damage and that it was caused by the delay, there being no dispute the delay was caused by the [temporary occupation]. The ordinary test remoteness of damage in tort applies, not the simple "but for" test as appears to be adopted by both experts.

28.... Be that as it may, implicitly the [respondent] is claiming loss of profits though it relied on the fall in value of its land in support.... The ability of his making a profit of its investment or reducing its loss for that matter must depend on the value of his stock in trade. The starting point of assessing its loss of profits is exactly that amount of fall in value of its flats during the period when he could not trade with its stocks. Unless there is evidence to show that the [respondent] would have held onto these hypothetical flats up to the point when it was able to commence the sale, it has suffered loss and damage in the amount representing the fall in value.”

29. Both experts did not make an estimate of the bulk values of the flats at these two relevant dates..."

13.  The respondent based its calculation (the comparative approach) of the income it would have derived from the Original Scheme by comparing it with sales prices obtained in an estate known as Botania Villas, a development which it contended was comparable, which was situated in Lam Tei and which had been completed in 1998: by this method the respondent’s expert came to a claim of $24,518,900.00  Conversely, the appellant's expert used a method to calculate the notional total sale prices of units in the original scheme which involved applying reverse indices based on tables known as "Index for sale prices of selected popular developments in the New Territories" produced by the Rating and Valuation Department (the index approach): he arrived at a loss of sale proceeds of $4,979,000.00

14.  The Lands Tribunal attributed the differences in the calculations as being:

"39. ... the result of the different bases [the experts] adopted in their valuations, namely (i) the different starting dates for the hypothetical sale of units in the Original Scheme, (ii) the different time frames for the sale period of the Original Scheme and (iii) the different methods of valuation. It was the latter two that made a huge difference in their valuations."

15.  Thereafter the respondent reformulated its claim still based upon a comparison with Botania Villas, whilst the appellant then performed its own calculation using the comparative approach but based upon a development known as Kam Fung Garden. It is not entirely clear from the judgement of the Tribunal but it seems to us that this course may have been followed by the parties as a result of observations passed by the Tribunal.  Be that as it may, in the passage of time, the Tribunal decided to visit each of the two competing developments which were being used in the comparative approach.

16.  The Tribunal then heard further submissions from the appellant and the respondent, and reserved its decision.  In the course of its judgment the Tribunal expressed the conclusion, based on the site visits, that, hardly surprisingly, Botania Villas was more "upmarket" than the respondent's own development whilst Kam Fung Garden was more “downmarket”, and that neither was a true comparator.  It then decided, without further indication to the parties:

"62. There are no actual sales evidence for Lingrade Garden before 4 August 2001. As there are no acceptable suitable sales comparables, we consider appropriate to rely on the Rating and Valuation Department Index... using the August 2001 figure as base to estimate the figures for the 14 month period from June 2000 to July 2001, in the special circumstances of this case lacking reliable sales comparables."

17.  We do not suggest that the Tribunal was wrong in ultimately using the index approach but it does seem to us, in the circumstances of this case where the appellant had initially adopted this very approach, but then alternatively carried out an exercise using the comparative approach, that it was incumbent upon the Tribunal at least to have foreshadowed to the parties its intention to use the index approach.  As it is, the effect of the Tribunal’s decision was to reject the evidence of the expert witness called by the respondent, upon whom lay the onus to establish the quantum of compensation due to it.

18.  The Tribunal, in its judgment, set out in detail the calculations by which it arrived at the figure of $10,200,000.00, which included its assessments as to the notional time by which the Occupation Certificate and Completion Certificate would have been granted in respect of the Original Scheme; the time period within which the units would have been sold under the Original Scheme; and the rate at which those units would have been sold. The basis of the compensation, thus, was the difference between what the Tribunal assessed would have happened in terms of sales had the Original Scheme continued, and what did happen in terms of sales in the Revised Scheme.

19.  The grounds of appeal contend that the Tribunal erred in law in taking this course in the following manner by finding:

"1. That the [respondent] was entitled to statutory compensation under the Railways Ordinance... by way of a disturbance payment calculated by reference to an estimated loss of sales proceeds, notwithstanding the absence of factual evidence of loss in any amount being incurred in fact, and notwithstanding the rejection by the Lands Tribunal of the [respondent’s] expert evidence as to valuation. The assessment made by the Lands Tribunal has no regard to either the profit that would have been made, or the profit that was made, from the development or reduction in such profit caused by the disturbance which was the subject of the claim.

2. That notwithstanding the obligation on the [respondent] to establish the fact and amount of loss, and notwithstanding the finding of the Tribunal that the [respondent] had failed to do so and notwithstanding the election by the [respondent] not to induce any factual witness evidence during the course of the hearing as to alleged financing expenses, that such finance expenses would be determined following further evidence and submissions from parties. The [respondent] having failed to reduce factual evidence of actual finance costs, the claims for such costs should have been dismissed."

20.  The approach of the appellant as expanded in argument by Mr Anthony Houghton SC is, put simply, threefold: first, in regard to Head A, that the Tribunal erred in law by basing its hypothetical calculation as to the gross sale proceeds which would have derived from the Original Scheme upon speculation, a course upon which it was driven to embark by virtue of the respondent’s failure to place before it any factual evidence whatsoever as to the terms of the Original Scheme, when such evidence must have been in existence and available to the respondent and thus to the Tribunal; secondly, also in regard to Head A, that it erred in awarding an amount equivalent to gross loss of income, whereas the correct approach was to award an amount equivalent to loss of profit; and, thirdly, in regard to Head E, similarly the respondent had failed to place any factual evidence as to the additional finance charges incurred, if any, before the Tribunal when, again, such evidence must have been in existence and available to the respondent and thus to the Tribunal.  The appellant contended that in the absence of such evidence the Tribunal was obliged, as a matter of law, to dismiss the two Heads of claim entirely, the respondent having failed to prove any loss and, consequently, that any compensation was payable to it under these Heads.

21.  Mr Anthony Ismail who appeared for the respondent before us, but not before the Tribunal, sought to support the Tribunal's decisions, submitting that it was entitled to "…award damages based on its own valuation method…" and to determine the quantum of those damages based upon the evidence given by the respondent’s expert who provided, he contended, sufficient evidence to enable the Tribunal to make assumptions and estimations in regard to the Original Scheme, and who also provided sufficient evidence to justify the Tribunal in making the order it did in regard to Head E.  Realistically, however, he accepted that factual evidence was available which could have been placed before the Tribunal in respect of both Heads.  In addition, Mr Ismail contended that the Tribunal was correct in using gross loss of proceeds as the measure of compensation rather than loss of profit, basing his contention on the definition of ‘disturbance payment’ contained in Part I of the Schedule to the Railways Ordinance.

22.  We accept, notwithstanding the reservation we expressed in paragraph 17 above, that the Tribunal was entitled to award damages on its own valuation method provided that, in so doing, the Tribunal did not make any error in law.

23.  The development, whilst not huge, was nonetheless substantial. It was clear from the evidence before the Tribunal, and from the claim under Head E, that the respondent had sought outside financing in order to carry out the development. Purely as a matter of common sense, it must be that the respondent, before embarking upon the proposed development, would have formulated a detailed plan, if for no purpose other than submission to its financiers, and which plan would have contained, at the least, assessments of costs; financing proposals; time schedules as to the various stages of work; estimations of dates for issuance of Occupation and Completion Certificates; anticipated timescales of sales; projected revenue; cash flow mile posts; the profitability of the scheme; and the like.

24.  The inescapable conclusion is that this information, or its equivalent, had been in existence at the time the proceedings were before the Tribunal but, for whatever reason, the respondent chose not to make it available - and, for that matter, the Tribunal chose not to exercise its powers under section 10(2)(b)(i) of the Lands Tribunal Ordinance and to order the respondent to produce it. 

25.  If this information had been placed before the Tribunal it then would have had a solid basis, assuming that it accepted the data as credible, upon which to base its calculations, to extrapolate the figures so as to enable it properly to assess the difference between the costs of, gross sales proceeds from, and profit to be derived from each of the Original and the Revised Schemes so as to arrive at an informed calculation of any potential shortfall arising.

26.  Without this information before it, it seems to us that the Tribunal's calculations amounted to mere speculation. That is no basis in law upon which to award compensation where a claimant bears the onus of establishing the quantum of any compensation due to it.

27.  Similarly, it would have been simplicity itself for the respondent – and in our view the Tribunal should have required it - properly to have proven the amount of additional finance charges to which it had been put by, for example, calling as a witness a representative of its banker or a director of the respondent, either of whom could have testified to the actual charges raised, rather than leave it to the expert to testify based on speculative calculations.

28.  Absent any of that evidence, the appropriate course for the Tribunal to have followed would have been to have found that the respondent had failed to prove any loss, and to have dismissed the respondent’s claims under these Heads. The informal nature of the proceedings before the Tribunal does not justify dispensing with basic legal principles.

29.  Mr Houghton asked us to draw a line under the proceedings thus far, and to dismiss both the claims: the respondent, he said, had had more than enough opportunities properly to present its case.  We understand that submission.  He fairly accepted, however, that we do have the power to remit the matter to the Tribunal for its further consideration after taking into account this judgment, and that an order for costs would cure such prejudice as may be suffered by the appellant.  Mr Ismail accepted, understandably without enthusiasm, that that would be a course properly open to us to follow, and that in consequence he would be in no position realistically to resist an order for costs.

30.  The appellant, perfectly properly, never has sought to contend that the respondent was not entitled to such compensation as it could prove.  It has accepted that the delay in the completion of the project and in the marketing of the units was attributable to the period of temporary occupation.  In the circumstances we are of the view that the matter should be remitted to the Lands Tribunal for it to consider, afresh, the issue of quantum: in our judgment it would be unduly harsh to deprive the respondent of such compensation which it may properly be able to prove notwithstanding the fact that, as we acknowledge, it has eschewed the opportunities thus far presented to it.

31.  Although this effectively disposes of this appeal, in the circumstances we feel it prudent briefly to comment on the other aspect raised by the appellant, namely that of the appropriateness of the Tribunal having adopted ‘gross sales proceeds’ as opposed to ‘loss of profit’ as the measure of compensation payable.  Neither approach is strictly correct.

32.  In support of the Tribunal's approach it is suggested that the use of the phrase in the definition of ‘disturbance payment’ in item 2 of Part I of the First Schedule to the Railways Ordinance "... the expenditure and loss of money actually and reasonably incurred or to be reasonably incurred..." indicates that the legislature did not have in mind confining compensation to the actual, provable loss of profits.  We agree.  However that phrase must be read as being qualified both by the rest of the definition which provides “... a disturbance payment is not to include any expenditure or loss which would not be recoverable... if that disturbance were a tort" and by the express injunction in item 4 to the effect that "...the Lands Tribunal is required... to assess the value of the expenditure or loss at the time of award as if the expenditure or loss formed part of a claim for damages in tort".

33.  It is clear, therefore, that the measure of compensation which the legislature intended to be paid to a claimant is to be assessed in the ordinary manner of assessment of damages suffered consequent upon a tort: the claimant must be able to establish, first, that there has been a reduction in its estate as a result of the act which gave rise to the claim for compensation and, secondly, to quantify that reduction.

34.  There may be instances where a claimant is able factually to establish that that reduction is equal to a loss of income, but it is not open to the Tribunal to have assumed that to be the case in the absence of a proper evidential foundation having been laid to support the proposition and without satisfying itself that, factually, this was so: it is the Tribunal’s task to assess the loss actually suffered by a claimant in any given situation.

35.  In the circumstances, we order that this appeal is be allowed, that the order of the Tribunal is set aside, and that the matter is to be remitted to the Lands Tribunal for it to make a determination, in accordance with law, in respect of Heads A and E. We further make an order nisi that the respondent is to pay the appellant's costs of this appeal and in respect of the proceedings before the Lands Tribunal to date.