LORD ENERGY LTD. v. PAUL CHEN AND ANOTHER

CACV 128/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 128 OF 2000

(ON APPEAL FROM HCA NO. 7124 OF 1991)

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J U D G M E N T

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Keith JA (giving the judgment of the Court):

Introduction

1. The litigation to which this appeal relates has been going on for many years. When it eventually reached the Court of Final Appeal (see [1999] 1 HKC 1), trenchant comments were made about how the dispute could have been avoided "with the exercise of a little common sense" (Litton PJ at p. 10H) and "without too much difficulty" (Bokhary PJ at p. 10I). The litigation is now before the Court of Appeal again, this time on an appeal by the Plaintiff from the order made on an inquiry as to damages.

The history of the litigation

2. In August 1991, the Plaintiff ("the purchaser") agreed to buy a flat in Baguio Villas from the Defendants ("the vendors") for $2.5m. Completion of the purchase was fixed for 15 September 1991. The purchaser's solicitors raised requisitions on the vendors' title. Disputes arose as to whether the requisitions were valid, and if they were whether they had been properly answered. The purchaser did not complete the purchase on the date fixed for completion, and on the following day the vendors terminated the agreement and forfeited the purchaser's deposits. On the day after that, i.e. on 17 September 1991, the purchaser decided to proceed with the purchase despite the vendors' failure to answer its requisitions, and it issued a writ of summons seeking specific performance of the agreement.

3. The action was tried by Le Pichon J (as she then was). She found for the purchaser (see [1997] 3 HKC 270), and ordered specific performance of the agreement by the vendors. However, on 31 October 1997, the vendors' obligation to convey the flat to the purchaser was stayed by Le Pichon J pending an appeal to the Court of Appeal. In due course, the Court of Appeal dismissed the vendors' appeal (see [1998] 2 HKLRD 751), but on 7 April 1998 the vendors obtained from Liu JA a further stay of their obligation to convey the flat to the purchaser pending their application for leave to appeal to the Court of Final Appeal. On 5 May 1998, the Court of Appeal granted the vendors leave to appeal to the Court of Final Appeal, and a further stay of their obligation to convey the flat to the purchaser was granted pending the hearing of that appeal.

4. In due course, the Court of Final Appeal agreed with the lower courts and dismissed the appeal. On the issue of the purchaser's change of mind, Li CJ said at p. 9A-C:

".... by the completion date, the vendor, in breach of contract, had failed to show good title. As the guilty party in breach, it was not entitled to performance from the purchaser on the completion date on 15 September and to terminate the contract on 16 September. The vendor's purported termination on that day was unlawful. The contract remained in existence. By commencing the action for its specific performance on 17 September, the purchaser accepted the vendor's title 'as is' without any further answers. In my view, this was a position the purchaser was entitled to take."

The inquiry as to damages which the Court of Final Appeal ordered was 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."

No inquiry was ordered as to any loss sustained by the purchaser by reason of the earlier stay ordered by Le Pichon J on 31 October 1997.

The inquiry as to damages

5. The inquiry as to damages to which the current appeal relates is the inquiry ordered by the Court of Final Appeal. That inquiry was conducted by Master Barnes. The only issue which she had to decide was how the purchaser's loss should be determined. The purchaser contended that its loss was the difference between the market value of the flat on 7 April 1998 (when the Court of Appeal first ordered the stay) and its market value on 18 January 1999 (which was the date on which the vendors ultimately conveyed the flat to the purchaser). The property market had been in significant decline during that period, and it was agreed that if the loss was to be calculated by reference to the difference in market value between those dates, the loss amounted to $1,360,000.00.

6. For their part, the vendors contended that the purchaser's loss should be determined by reference to the fact that it had not been able to use the flat during that period. It was agreed that if that was the appropriate measure of the purchaser's loss, the purchaser had not suffered any loss at all. That was because the rent which the purchaser could have received if it had been able to let the flat during that period had been cancelled out by the interest which it had earned on the balance of the purchase price during that period which, but for the stay of the enforcement of the order for specific performance, it would have had to pay to the vendors. Master Barnes agreed with the stance adopted by the vendors. Accordingly, she held that the purchaser had not suffered any loss as a result of the stay ordered by the Court of Appeal.

The previous views of the Court of Appeal

7. The Court of Final Appeal did not give any indication as to how the purchaser's loss should be determined. It left that question for the master to decide. It has to be said, however, that when the Court of Appeal stayed the vendors' obligation to convey the flat to the purchaser, the conditions which it attached to that stay suggest that it wanted to protect the purchaser from any decline in the market value of the flat. Thus, to protect the purchaser from any loss which it might sustain as a result of the interim stay which he ordered on 7 April 1998, Liu JA required the vendors to pay the sum of $750,000.00 into court (or to lodge a bank guarantee for that amount in the Registry) as a condition of the stay. And when the question of a stay until the hearing of the appeal by the Court of Final Appeal was raised in the Court of Appeal on 5 May 1998, the Court of Appeal ordered that the sum of $750,000.00 (which the vendors had by then paid into court) should remain in court. All this against the background of submissions and affirmations relating to the market value of the flat.

8. We accept that both Liu JA on 7 April 1998 and the Court of Appeal on 5 May 1998 assumed that a decline in the market value of the flat during the period of the stay would result in the purchaser sustaining a loss as a result of the stay. But it has not been suggested that submissions were made to the Court of Appeal that the assumption upon which it was being asked to proceed was incorrect. If the skeleton argument of leading counsel for the vendors for the hearing on 5 May 1998 is anything to go by, the closest he came to the point was to argue that the relevant statutory provision - namely section 26(3) of the Court of Final Appeal Ordinance (Cap. 484) - only permitted the court to order security "for the due performance of such order as the Court [of Final Appeal] shall make in respect of the appeal", rather than to protect the purchaser from any loss which it might sustain as a result of the stay. But the skeleton argument does not record him as arguing that, if security could be ordered to protect the purchaser from such loss, a decline in the market value of the flat during the period of the stay was not the proper yardstick by which to measure the purchaser's loss as a result of the stay. Thus, the assumption which the Court of Appeal made was just that - an assumption as to what the purchaser's loss would be as a result of the stay, rather than a considered view that that was the only valid way in which the purchaser's loss could be determined. The issue was therefore completely at large when the inquiry came to be conducted.

The correct measure of damages

9. The method of assessing damages for breach of contract is not necessarily a reliable guide as to how the purchaser's loss should be determined in the present case. The loss which has to be determined in the present case arose as a result of a stay of the enforcement of the order for specific performance, rather than as a result of a breach of contract. But an inquiry to determine losses which arise as a result of a stay of the enforcement of an order for specific performance is analogous to an inquiry to determine what losses arise as a result of a cross-undertaking as to damages given in order to obtain an interlocutory injunction which was subsequently discharged. The prevailing view is that such losses are to be assessed on the same basis as damages for breach of contract are to be assessed: see the cases cited in the Supreme Court Practice 1999, Vol. I, para. 29/L/35.

10. The loss which has to be determined in the present case is the loss which the purchaser suffered as a result of the flat not being conveyed to it on 7 April 1998, but only being conveyed to it on 18 January 1999. When looked at in that way, we confess that we do not see what the legal difficulties are. The loss which the purchaser suffered would have depended on what it would have done with the flat if it had been conveyed to the purchaser on 7 April 1998. If the purchaser would have allowed the flat to be occupied by one of its directors, what it would have lost would have been the opportunity for that director to occupy it. If the purchaser would have let the flat to tenants, what it would have lost would have been the rent which the tenants would have had to pay. And if the purchaser would have sold the flat, what it would have lost would have been the difference between the value of the flat on 7 April 1998 and its lower value on 18 January 1999 as a result of the slump in the property market. In each of these examples, the purchaser would have had to give credit for the interest which it earned on the balance of the purchase price during the period of the stay.

11. To what extent is what the vendors thought the purchaser would do with the flat relevant? Again, we confess that we have not found the answer to that question difficult. In our view, the answer is: it is only relevant if what the purchaser would actually have done with the flat would have been beyond what the vendors could reasonably have contemplated the purchaser would do with it. That is simply the application of the thinking which informs the rules relating to the remoteness of damages for breach of contract: see the rule in Hadley v. Baxendale (1854) 9 Ex 341, as re-stated in Victory Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 KB 528 and as qualified in C. Czarnikow Ltd. v. Koufos [1969] 1 AC 350. In other words, the question which had to be asked was whether the vendors ought to have realised in April 1998 that it was not unlikely that the purchaser would have sold the flat then if the stay of the enforcement of the order for specific performance had not been granted.

12. Accordingly, the correct measure of damages, in our opinion, depended upon the answers to two factual questions:

(i) What would the purchaser in fact have done with the flat if the flat had been conveyed to it on 7 April 1998?

(ii) If the purchaser would have sold the flat immediately if the flat had been conveyed to it on 7 April 1998, ought the vendors to have realised at the time that it was not unlikely that that was what the purchaser would have done?

13. On the first of these questions, Mr Simon Siu, one of the purchaser's directors, made an affirmation for the purpose of the inquiry as to damages. He affirmed that when the purchaser agreed to buy the flat in 1991, the intention was that he would be living in the flat himself. However, when the vendors refused to complete the sale, and the legal proceedings dragged on, he made arrangements to live elsewhere. Eventually, it was decided that if the purchaser obtained an order for specific performance of the agreement, the flat would be sold. Thus, the effect of his evidence was that if the flat had been conveyed to the purchaser on 7 April 1998, it would then have been sold at its current market value. That that was the purchaser's intention in April 1998 is borne out, to some extent, by two additional facts. First, in October 1996, Mr Siu had, through another limited company controlled by him and his wife, bought another flat for them to live in, moving there from a flat which had been purchased for them by his mother in 1992. Secondly, in May 1999 the purchaser did indeed sell the flat which the vendors had by then conveyed to it.

14. The master was not prepared to accept Mr Siu's evidence on this topic. She regarded as very significant the fact that the purchaser "had never informed the [vendors] of its intention to sell [the flat] once the sale was completed when it [had] ample opportunity to do so (whether in the correspondence or the affidavit in opposition)". She concluded that the fact "that such allegation was made for the first time during the hearing of the inquiry casts serious doubt on the truth of such assertion". By "the affidavit in opposition", she was referring, we assume, to the evidence filed by the purchaser in opposition to the vendors' application for the stay of the enforcement of the order for specific performance.

15. There are a number of matters which trouble us about the master's approach. First, she was factually incorrect when she referred to the assertion having been made "for the first time during the hearing of the inquiry". The assertion had been made by Mr Siu in his affirmation a week or so before the inquiry was first due to be heard. Secondly, the master may have placed too much weight on the fact that before then the purchaser's intention to sell the flat had not been made known. Up to and during the trial, the question as to what the purchaser intended to do with the flat once the flat had been conveyed to it was not relevant. It only became relevant once the inquiry as to damages had been ordered. Nor was it right, in our view, for the master to draw an inference adverse to the purchaser from the absence of any reference to the intention to sell the flat in the evidence filed by the purchaser in connection with the application for a stay of the enforcement of the order for specific performance. If we had been advising the purchaser at the time, we rather doubt whether we would have thought it necessary to spell out that intention in the evidence.

16. But the principal problem with the master's approach was that the truthfulness of Mr Siu's assertion was never really challenged by the vendors in the course of the inquiry. Although the vendors' then counsel told the master that she had to decide what the purchaser had really intended to do with the flat, the vendors did not ask to cross-examine Mr Siu on his affirmation. The vendors' primary case was that since they had not been told that the purchaser had been intending to sell the flat if the stay of the enforcement of the order for specific performance had not been granted, they had known nothing about it, and that for that reason the decline in the market value of the flat over the period of the stay should not be the measure of the purchaser's loss.

17. For the reasons we have given, that is not the correct approach in law. Actual knowledge on the part of the vendors of what the purchaser proposed to do with the flat was not required to be proved. Provided that the vendors ought to have realised that it was not unlikely that the purchaser would sell the property, the vendors cannot complain if that is what the purchaser actually did. But the critical point is that the master's finding that the purchaser had not satisfied her, on the balance of probabilities, that it would have sold the flat if the stay of the enforcement of the order for specific performance had not been granted has to be set aside, as the truthfulness of Mr Siu's assertion to that effect had never really been challenged.

18. We turn to the second factual question: ought the vendors to have realised in April 1998 that it was not unlikely that the purchaser would have sold the flat if it had been free to do so? That issue was not a question which the master addressed, but on the evidence before her, the answer had to be yes. It is true that, when giving evidence at the trial of the action, Mr Siu had said that when the purchaser had agreed to buy the flat, the intention was that it would be his residence. But that was seven years before the stay of the enforcement of the order for specific performance was granted, and what the purchaser had intended to do with the flat in 1991 was rightly regarded by the master as no indication of what it had intended to do with the flat in 1998 if the stay of the enforcement of the order for specific performance had not been granted. There was simply no evidence that the purchaser had said or done anything to make the vendors think in April 1998 that it would not have sold the flat then if the flat had been conveyed to it then.

19. On the contrary. In our judgment, it is as plain as anything could be that the vendors ought to have realised that it was not unlikely that the purchaser would sell the property. First, there is the volatility of the property market in Hong Kong, and the possibility that in a falling market a vendor may well want to sell his property sooner rather than later to avoid a further decline in the market value of the property. Secondly, there were the submissions and affirmations relating to the market value of the flat in the Court of Appeal on the application for a stay of the enforcement of the order for specific performance. Even if the vendors did not know for sure that the purchaser would have sold the flat, it would be wholly unrealistic to suggest that there was no possibility that the purchaser might choose to sell the flat. Thirdly, the very fact that the purchaser was insisting that it be protected against a decline in the value of the flat over the period of the stay of the enforcement of the order for specific performance shows that the vendors should have realised that the sale of the flat would, but for the stay, have been at least a real possibility.

20. Finally, Mr Kenneth Chow for the vendors was instructed to argue that the purchaser's damages should be limited to the $750,000.00 which the Court of Appeal had ordered the vendors to pay into court to protect the purchaser from any loss it might sustain as a result of the stay. We cannot go along with that argument. It is inconsistent with the unfettered terms of the inquiry as to damages which the Court of Final Appeal ordered.

Conclusion

21. For these reasons, the only proper conclusion which the master could have reached on the unchallenged evidence was that the purchaser's loss had to be determined by reference to the decline in the market value of the flat between 7 April 1998 and 18 January 1999. It follows that the appeal must be allowed, the master's order must be set aside, and we certify that the loss which the purchaser suffered as a result of the stay of the enforcement of the order for specific performance was the sum of $1,360,000.00. We order the vendors to pay that sum to the purchaser. At present, we see no reason why costs should not follow the event, and the order nisi we make as to costs is that the vendors must pay to the purchaser its costs of the inquiry and of this appeal.