PAUL CHEN AND ANOTHER v. LORD ENERGY LTD.

FACV No. 14 of 2001

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 14 of 2001 (CIVIL)

(ON APPEAL FROM CACV NO. 128 OF 2000)

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J U D G M E N T

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Chief Justice Li:

1. I agree with the judgments of Mr Justice Chan PJ and Lord Hoffmann NPJ.

Mr Justice Bokhary PJ:

2. Mr John Griffiths SC for the appellants has ably argued a difficult brief. But for the reasons given by Mr Justice Chan PJ and Lord Hoffmann NPJ, I would dismiss this appeal with the orders as to costs which Mr Justice Chan PJ proposes.

Mr Justice Chan PJ:

Introduction

3. This is the second occasion the parties in this action have come before this Court. On the first occasion, the dispute involved a determination of (1) whether it was the respondent (purchaser) or the appellants (vendors) who were in breach of an agreement made in August 1991 for the sale and purchase of a certain property in Baguio Villas at the price of $2.5 million, and (2) if it was the vendors who were in breach, whether the purchaser was entitled to specific performance of the agreement. On 21 December 1998, in FACV No.11 of 1998, this Court, affirming the decisions of the lower courts, held in favour of the purchaser on both questions. See (1997-98) 1 HKCFAR 365. Among the orders made by this Court (by consent of the parties) after disposing of the appeal was one in these terms:

"An inquiry be made before a Master as to any loss sustained by the purchaser by reason of the stay ordered by the Court of Appeal by its order dated 7 April 1998 as continued by its order dated 5 May 1998."

The present dispute arises from the inquiry conducted pursuant to this order.

Events leading to this order

4. On 8 September 1997, at the end of the trial, Le Pichon J gave judgment for the purchaser and ordered specific performance directing the vendors to assign the property to the purchaser within 28 days. Upon application by the vendors, she ordered a stay of execution of that order pending an appeal by the vendors to the Court of Appeal.

5. When that appeal was dismissed, the stay order lapsed. The vendors then applied to the Court of Appeal for a further stay of the order for specific performance pending an application for leave to appeal to this Court. On 7 April 1998, Liu JA granted a stay on condition that the vendors provide a sum of $750,000, either by way of payment into court or by means of a bank guarantee, as good and sufficient security for the stay pending the application for leave to appeal. The condition was complied with by way of a bank guarantee.

6. On 5 May 1998, the Court of Appeal granted leave to appeal to this Court, continued the stay pending the appeal and directed that the bank guarantee do stand and remain as security until the disposal of the appeal. The Court of Appeal also imposed a condition for the provision of a sum of $400,000 as security for the due prosecution of the appeal and costs under s.25 of the Court of Final Appeal Ordinance, Cap 484. The parties subsequently agreed that if the appeal was to be dismissed, there should be an inquiry as to any loss which the purchaser might have sustained as a result of the stay granted by the Court of Appeal. Hence the order made by this Court for an inquiry.

The issue in this appeal

7. The issue presently before this Court is how the loss, if any, which the purchaser has suffered as a result of the stay of the order for specific performance granted by the Court of Appeal is to be assessed.

8. The purchaser contends that its loss is to be measured by the difference in the market value of the property as at 7 April 1998 when the Court of Appeal first ordered the stay and as at 18 January 1999 when the property was assigned by the vendors to the purchaser. The vendors, on the other hand, argue that the loss is to be assessed by reference to the loss of use of the property (calculated in terms of loss of rental) during the relevant period. The parties have agreed that if the purchaser is right, the loss would be in the sum of $1,360,000 and that if the vendors are correct, then taking into account the interest accrued on the balance of the purchase price and payable to the vendors, the purchaser has not suffered any loss and the amount would be assessed as nil.

The decisions in the courts below

9. The Master who conducted the inquiry accepted the vendors' contention and took the view that the purchaser had suffered no loss. The Court of Appeal, reversing the Master, held that the purchaser had suffered a loss as a result of a decline in the market value of the property between 7 April 1998 and 18 January 1999 and awarded $1.36 million to the purchaser. The vendors now appeal to this Court.

The stay orders made by the Court of Appeal

10. The order of stay granted by Liu JA on 7 April 1998 which was continued by the Court of Appeal on 5 May 1998 is relevant to the inquiry on two matters. First, it provides the starting point for the inquiry. Secondly, it throws light on the information available to the parties which is of relevance to the assessment of the loss alleged to have been sustained by the purchaser.

11. The granting of a stay was clearly to preserve the status quo pending the application to the Court of Appeal for leave to appeal and in the event that leave was granted, pending the appeal before this Court. If a stay was to be granted, the court might require the vendors to provide security under s.26(3) of the Court of Final Appeal Ordinance. If a stay was to be refused, the purchaser might be asked to give an undertaking under s.26(2) of the Ordinance. The vendors chose to apply for a stay.

12. The purpose of requiring a party to provide good and sufficient security for a stay under s.26(3) of the Court of Final Appeal Ordinance is clearly to protect the other party against any loss which he might sustain as a result of the stay. The condition that the vendors provide security in the sum of $750,000 must have been imposed for the protection of the purchaser against such loss.

The approach to be adopted

13. Keith JA, delivering the judgment of the Court of Appeal, took the view that an inquiry to determine losses which arise as a result of a stay of execution for specific performance is analogous to an inquiry to assess losses payable pursuant to an undertaking as to damages given in order to obtain any interlocutory injunction subsequently discharged. He also considered that such losses were to be assessed on the same basis as damages for breach of contract are to be assessed.

14. Although this was an inquiry into the purchaser's loss as a result of the stay and not damages as a result of the vendors' breach of contract, it is common ground that the approach to be adopted in assessing such loss is analogous to that which is adopted in the case of a claim for damages based on a breach of contract.

15. The measure of damages to a purchaser as a result of a delay by a vendor to perform the contract pursuant to a court order for specific performance was discussed in Jaques v. Millar (1877) 6 Ch. D. 153. Fry J. took the view that the damages to which the purchaser was entitled should be :

"... damages which may be reasonably said to have naturally arisen from the delay, or which may be reasonably supposed to have been in the contemplation of the parties as likely to arise from the partial breach of the contract." (p.160)

This was accepted as the correct approach by Brightman J. in Ford-Hunt & another v. Raghbir Singh [1973] Ch. D. 738, 742 A-B.

The vendors' case

16. The approach in Jaques v. Millar is also accepted by Mr Griffiths SC, counsel for the vendors. His main complaint, however, is that according to the correct approach, the normal award of damages would be the loss of rental due to deprivation of use of the property resulting from the delay in completion unless the vendor was expressly put on notice of some special circumstances, in this case, the purchaser's intention to resell the property after assignment. He submits that it is necessary for the vendors to have actual knowledge of such intention before they can be held liable for the drop in the market value of the property which is being claimed by the purchaser. But the purchaser had never communicated such intention to them. On the contrary, its intention as stated by its director, Mr Simon Siu, at the trial was to use the property as a residence for its directors. Counsel argues that since the purchaser's intentions can be many, if they are not communicated to the vendors, the vendors will be at the mercy of whatever the purchaser chooses to do.

17. In support of his contention that it is necessary to show the vendors' actual knowledge of the purchaser's intention to resell the property, Mr Griffiths SC relies on a number of authorities: Seven Seas Properties Ltd v. Al-Essa & another (No.2) [1993] 1 WLR 1083; Brading v. F. McNeill & Co. Ltd [1946] 1 Ch. 145; Diamond v Campbell-Jones & others [1961] 1 Ch. 22; and James Finlay & Co. Ltd v. N.V. Kwik Hoo Tong Handel Maatschappij [1929] 1 KB 400.

18. Mr Griffiths SC further submits that the material time to consider whether the purchaser had the intention to resell the property after assignment and whether the vendors had actual knowledge of such intention is the time when the agreement for sale and purchase was entered into by the parties (i.e. August 1991) or alternatively, the time when Le Pichon J first granted the stay of execution pending appeal to the Court of Appeal (i.e. 31 October 1997). However, his fall back position is that the time when Liu JA granted the order of stay (i.e. 7 April 1998) is the appropriate time.

19. Mr Griffiths SC also criticises Keith JA for applying the "not unlikely" test. He submits that the judge had applied the wrong test.

Principles for assessing damages for breach of contract

20. The approach suggested in Jaques v. Millar (which Mr Griffiths SC accepts as the correct approach) is in effect the first limb of the rule for assessing damages for breach of contract as enunciated in the classic case of Hadley & another v. Baxendale & others (1854) 9 Ex. 341. This rule was explained by the Court of Appeal in Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528 and later qualified by the House of Lords in Koufos v. C. Czarnikow Ltd [1969] 1 AC 350 ("Heron II"). The rule is well-known. It is based on the premises that an innocent party should be restored to the same position, so far as possible, as if there was no breach and that damages, to be recoverable, must not be too remote.

21. Where damages have resulted from a breach of contract (or may fairly and reasonably be considered as arising naturally from the breach), the measure of damages would be such damages as the parties should reasonably have contemplated would flow from the breach. If the damages are within the reasonable contemplation of the parties, such damages would not be considered too remote and are therefore recoverable. What is within the reasonable contemplation of the parties is a question of fact depending on the circumstances of the case and the information available to the parties at the relevant time, usually the time of the contract.

22. Alternatively, where there were special circumstances under which the contract was made and which had been communicated or made known to the defaulting party, the damages resulting from the breach are such damages as they should reasonably contemplate would flow from such breach in such special circumstances. In such cases, it is necessary to show that the defaulting party has knowledge of the special circumstances giving rise to the damages which are being claimed. If the defaulting party has no such knowledge, the damages may be considered too remote and are not recoverable.

23. These two limbs of the rule in Hadley v. Baxendale are intended to cover different situations. As Asquith LJ explained in Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd (at p.539), "a reasonable person is taken to know the 'ordinary course of things' and consequently what loss is liable to result from a breach of contract in that ordinary course" and " ... a contract-breaker is assumed to possess [such knowledge] whether he actually possesses it or not". This applies to the majority of cases. In some cases, there may be "knowledge which he [the contract-breaker] actually possesses, of special circumstances outside the 'ordinary course of things', of such a kind that a breach in those special circumstances would be liable to cause more loss".

24. However, the demarcation between the two limbs is sometimes blurred and the court may decide the case on the basis of the first or the second limb or both. This is particularly the case where knowledge of a certain matter is imputed to the defaulting party from the circumstances of the case. (See the discussion in McGregor on Damages, 16th edition, paragraphs 265 to 266.) As Lord Pearce in Heron II said at p.416:

"According to whether one categorises a fact as basic knowledge or special knowledge the case may come under the first part of the rule or the second. For that reason there is sometimes difference of opinion as to which is the part which governs a particular case and it may be that both parts govern it." (emphasis added)

The remarks of Evans LJ in Kpohraror v. Woolwich Building Society [1996] 4 All E.R. 119 at 127g - 128a (quoted in McGregor, paragraph 265) are along the same lines:

"The contentions for both parties were presented as if in a straitjacket imposed by the strict application of the rule in Hadley v. Baxendale so as to require the separate consideration of each of the two limbs. ... I would prefer to hold that the starting point for any application of Hadley v Baxendale is the extent of the shared knowledge of both parties when the contract was made. ... When that is established, it may often be the case that the first and second parts of the rule overlap, or at least that it is unnecessary to draw a clear line of demarcation between them." (emphasis added)

Principles as applied in present case

25. In the present case, it is necessary to decide two questions: (1) whether on the information available to the parties at the relevant time, the possibility of a re-sale by the purchaser with the resultant loss due to a drop in the market value of the property which is being claimed by the purchaser, was within the reasonable contemplation of the parties, that is, whether such loss was liable to result in the ordinary course of things from the stay; and (2) if it was not within the parties' reasonable contemplation, whether in the circumstances of this case, the knowledge that the purchaser was liable to resell the property after assignment can be imputed to the vendors. It is only if the answers to both questions are in the negative that it is necessary for the purchaser to show that the vendors had actual knowledge of his intention to resell before it can succeed in recovering the loss due to the drop in the market value of the property. In my view, this is a case where there may well be an overlap between the first and second limb of the rule and as Evans LJ said, it is unnecessary to categorise the present case as falling strictly within either limb of the rule.

26. While it is true that the normal award of damages in the case of a breach of an agreement for the sale of land is the loss of rental due to loss of use of the property, this is displaced where other losses come within the reasonable contemplation of the parties or where it is possible to impute knowledge of special circumstances to the vendor. The authorities which counsel has cited in support of his contention do not assist him since they were cases involving damages suffered by a purchaser arising from a sub-contract or a project which the vendor did not know of at the time of his contract with the purchaser and which was not within the vendor's reasonable contemplation.

27. If it is suggested (as the vendors seem to be suggesting in their written case) that there is a difference between the measure of damages in respect of a breach of a contract for the sale of goods and that for a breach of a contract for the sale of land, this is clearly misconceived. For as Alderson B. remarked in Hadley v. Baxendale at 151:

"It is said, that other cases such as breaches of contract in the non-payment of money, or in the not making a good title to land, are to be treated as exceptions from this, and as governed by a conventional rule. But as, in such cases, both parties must be supposed to be cognisant of that well-known rule, these cases may, we think, be more properly classed under the rule above enunciated as to cases under known special circumstances, because there both parties may reasonably be presumed to contemplate the estimation of the amount of damages according to the conventional rule."

28. This was also the view of the House of Lords in Heron II which stated that the rule regarding the measure of damages applied to any kind of breach of any kind of contract.

29. I do not accept the submission that the material time to consider whether the purchaser had the intention to resell the property after completion and whether the vendors had actual knowledge of such intention should be the time when the sale and purchase agreement was made or the time when the trial judge stayed the order for specific performance. First, the loss to be assessed was loss arising from the stay of the order for specific performance and not damages arising from the vendors' breach of the agreement for sale and purchase. Secondly, the parties had actually agreed that any inquiry was in relation to the purchaser's loss as a result of the stay from 7 April 1998 until 18 January 1999. Thirdly, prior to 7 April 1998, the vendors were not required to provide any security for such loss. The material time must, in my view, be the time when the Court of Appeal granted the stay, i.e. 7 April 1998. The time of the sale and purchase agreement is irrelevant. So is the time when Le Pichon J granted the initial stay.

30. As regards the submission that Keith JA had applied the wrong test, it is clear that the references which he made to "not unlikely" were made in the context of considering what was within the reasonable contemplation of the parties in the present case, that is, what was the kind of loss which the vendors ought to have realised was not unlikely to result from the stay. The phrase "not unlikely" was used by Lord Reid and Lord Morris in Heron II. As Lord Reid explained, this phrase as well as other phrases such as "serious possibility" or "real danger" or "liable to result" used by the other Law Lords in the same case are used to denote "a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable" (Heron II at p.383 A-B). They are no more than different expressions which are used to describe the same concept in the application of the reasonable contemplation approach. A reference to "not unlikely" in ascertaining what was within the reasonable contemplation of the parties is not applying a new test. I do not think that the Court of Appeal had departed from the correct approach.

What was within the parties' reasonable contemplation

31. There was ample evidence before the court to justify the conclusion that it was within the reasonable contemplation of the parties at the time the stay orders were made by the Court of Appeal that the purchaser might resell the property after assignment and that by being prevented from doing so, it might suffer a loss due to a drop in the market value of the property. The following facts are relevant:

(1) The parties were aware at the time of the stay applications that the property market was volatile and that the market price of the property in fact had been falling.

(2) At the hearing before Liu JA, there was a discussion of a possible further decline in the property market. Hence a security for such loss in the sum of $750,000 was provided for.

(3) In the affirmation of Ms Alice To made on 29 September 1997 in support of the vendors' stay application, she stated that if no stay was granted, the appeal would be rendered nugatory. This was based at least in part on the recognition of the possibility of a re-sale by the purchaser after assignment.

(4) In the second affirmation of Mr Choi Shui Hung made on 1 May 1998 and filed by the purchaser for use before the Court of Appeal on 5 May 1998, he exhibited a valuation report of the property "for the purpose of assessing a good and sufficient security". The vendors were given this report.

(5) At the hearing before the Court of Appeal on 5 May 1998, the parties also discussed the possibility of loss to the purchaser due to a decline in the market value of the property. The vendors asked the Court of Appeal to take the sum of $750,000 as security under both s.25 and s.26(3) of the Ordinance. However, the Court of Appeal asked for a further $400,000 security under s.25 and directed the sum of $750,000 to remain as security under s.26(3).

(6) The trial judge also required the vendors to give an undertaking to pay into court all rentals collected from the property and made an order for an inquiry as to damages regarding the rental income. The possible loss in rental income due to deprivation of use of the property had already been taken into account.

32. When these facts are considered cumulatively, the vendors must be taken to have been alerted at the time of their stay applications that it was not unlikely that the purchaser would resell the property. If the parties and the court were making provision for a drop in the market value of the property, it must follow that a re-sale by the purchaser was within their reasonable contemplation.

33. It may also be said that from these facts, the knowledge that the purchaser might resell the property after assignment could be imputed to the vendors.

34. The Master clearly placed too much emphasis on the fact that the purchaser had indicated at the trial before Le Pichon J that its intention was to use the property as residence for its directors. The purchaser's intention at the time of the sale and purchase agreement is clearly not relevant. There was clear evidence of a change of intention on the part of the purchaser. At the hearing before the Master, the vendors did not seriously challenge such evidence and did not apply to cross-examine the purchaser's director on this matter. The main complaint was that this had not been communicated to the vendors (and this was also not disputed by the purchaser). As discussed above, it is not necessary to show that the vendors had actual knowledge of the purchaser's intention to resell the property. The Master was wrong to have regard to the purchaser's failure to communicate its change of intention to the vendors.

35. For these reasons, Mr Griffiths SC's contention must therefore fail.

Two other arguments

36. There are two other points raised in the vendors' written case. At the hearing before this Court, Mr Griffiths SC did not make any further submission on these points, but said that he did not withdraw them from the consideration of this Court. These two points can be disposed of very briefly.

37. First, in the vendors' written case, it is alleged that the Court of Appeal had, on its own initiative, taken a new point by referring to the cases of Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd and Koufos v. C. Czarnikow Ltd and deprived the vendors of the opportunity for proper argument. The transcript of the proceedings before the Court of Appeal shows that when the rule in Hadley v. Baxendale was discussed, the court did also refer to these other cases and counsel for the vendors indicated to the court that he accepted those principles. In any event, I do not believe that any argument on the measure of damages for breach of contract (as what this case is all about) could have been based only on Hadley v. Baxendale without regard to the other two authorities. I am more than satisfied that this was not a new point which had or could have taken counsel for the vendors by surprise.

38. The second point relates to the scope of s.26(3) of the Court of Final Appeal Ordinance. As I understand it, the submission put forward in the vendors' written case is that this subsection empowers the Court of Appeal (or this Court) to require the provision of good and sufficient security to the satisfaction of the court and that since the Court of Appeal was satisfied with a security in the sum of $750,000, there is no legal basis to hold the vendors liable for any sum in excess of that amount.

39. This argument cannot be right. What the Court of Appeal did was to order security to be given. That is not the same as ordering that the potential liability of the vendors be limited. There is nothing to suggest that the Court of Appeal might have wished to limit such liability. Nor do I think it had the jurisdiction to do so. The security which the Court of Appeal was empowered to order was to be provided "for the due performance of such order as the Court [of Final Appeal] shall make in respect of the appeal". The Court of Final Appeal had ordered an inquiry into the loss sustained by the purchaser and the security was provided to secure the due performance of that order. Not knowing what orders this Court might eventually make, the Court of Appeal could not have been in a position to limit the scope of such orders or the liability under such orders. In any event, the amount of the security ordered to be provided could only have been fixed tentatively with the limited information available to the court at that time. Furthermore, the parties had obviously envisaged possible liability exceeding $750,000 as they had agreed that the loss would come to $1,360,000 if the purchaser's contention was held to be correct. It would make little sense to have such agreement if the vendors' liability were to be limited to $750,000.

Conclusion

40. For the above reasons, I am of the opinion that the Court of Appeal was right. I would therefore dismiss the appeal with costs to the purchaser. The vendors' own costs would be taxed according to the Legal Aid Regulations.

Mr Justice Ribeiro PJ:

41. I agree with the judgments of Mr Justice Chan PJ and Lord Hoffmann NPJ.

Lord Hoffmann NPJ:

42. I have read in draft the judgment of Chan PJ and agree with it. Mr Griffiths SC did not challenge the general principle that for damages to be recoverable, the kind of damage must have been within the reasonable contemplation of the parties. He submitted, without undue enthusiasm, that the correct date for deciding what the parties would reasonably have contemplated was the date of the contract or the date on which a stay was ordered. But it seems to me plain that if the damages are claimed pursuant to an undertaking, the correct date is the date of the undertaking. So the question is whether on that date the parties should reasonably have contemplated that the purchaser would suffer loss by a fall in the market while he was unable to sell the flat.

43. Mr Griffiths SC submitted - and this was his real complaint - that a resale of land by the purchaser during a period of delayed completion is not ordinarily within the contemplation of the parties. It may be so in the case of commodities like oil or sugar, which are frequently bought for resale rather than consumption. But land, he said, was different. Unless the vendors have actual knowledge that the purchaser has bought with the intention of immediate resale, they are entitled to assume that it is intended for occupation. In support of this proposition, he cited a number of English cases.

44. I do not think that there can be any difference in principle between land and chattels or commodities. The authorities show that in each case the question is what was in the reasonable contemplation of the parties. And in a society in which the value of land is relatively stable, purchases are almost always for occupation and the contemplated period of delay is relatively short, it will usually be the case that a resale is not within the reasonable contemplation of the parties. But that was not the position which prevailed in Hong Kong in 1998. The market was volatile, purchase for resale was common and the period of delay contemplated when a stay was granted pending appeal was relatively lengthy. In addition, as Chan PJ points out, there were specific indications in the correspondence and the discussions before the Court of Appeal which, if falling short of express notice that the buyer wished to resell, must have been sufficient to bring such a resale within the vendors' reasonable contemplation. For these reasons as well as those of Chan PJ, I would dismiss the appeal.

Chief Justice Li:

45. The Court unanimously dismisses the appeal with costs to the purchaser. The vendors' own costs would be taxed according to the Legal Aid Regulations.