CHUNG YUK KWAI AND ANOTHER v. CHAN MAN YEE

HCA 6913/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6913 OF 1999

____________

____________

_______________

J U D G M E N T

_______________

1. The plaintiffs in this action Chung Yuk Kwai and Shing Wai Luen entered into an agreement with the defendant Chan Man Yee on 16 October 1997 by which the plaintiffs, as vendors, agreed to sell to the defendant, as purchaser, the property known as Shop No.5 on the Ground Floor of Yuen Tat House at Nos. 81, 83, 85, 85A, 85B and 85C Kau Yuk Road, Yuen Long, New Territories at the price of $4,128,000.00. That agreement was in fact the formal sale and purchase agreement entered into by the parties pursuant to a provisional sale and purchase agreement dated 28 September 1997. A sum of $200,000.00 was paid by the defendant on 28 September 1997 as deposit and a further sum of $212,800.00 was paid upon the signing of the formal sale and purchase agreement. Hence the total amount of the deposit paid was $412,800.00. Clause 4 of the formal agreement provided that completion of the transaction should take place on or before 13 February 1998 and clause 6 provided that time would in every respect be of the essence. Relevant parts of Clause 16 reads as follows:

"(b) If the purchaser shall fail to comply with any of the terms and conditions of this agreement, the deposit money shall be absolutely forfeited to the vendor who may sue for liquidated damages in addition or may (without being obliged to tender an assignment to the purchaser) rescind this agreement and either retain the property the subject of this agreement or any part or parts thereof or resell the same, either as a whole or in lots, and either by public auction or by private contract, or partly by the one and partly by the other, and subject to such conditions and stipulations as to title or otherwise as the vendor may think fit.

(c) Any deficiency arising from such resale and all expenses attending the same or any attempted resale shall be made good and paid by the purchaser as and for liquidated damages, and any increase in price realised by any such resale shall belong to the vendor.

(d) This clause shall not preclude or be deemed to preclude the vendor from taking other steps or remedies to enforce the vendor's rights under this agreement or otherwise. On the exercise of the vendor's right of rescission under this agreement the vendor shall have the right, if this agreement shall have been registered in the Land Registry, to register at the Land Registry as instrument to rescind the sale of the property.

(e) This clause shall not prevent the vendor from recovering, in addition to liquidated damages, damages representing interest paid or lost by him by reason of the purchaser's failure."

2. The defendant did not complete on 13 February 1998. Instead the parties entered into a supplemental agreement on that date. Under that supplemental agreement, a sum of $300,000.00 was paid by the defendant to the plaintiffs as further deposit and in part payment of the purchase money. The completion date was extended to 13 July 1998. Clause 5 of the supplemental agreement reads,

"If the purchaser shall fail to complete the sale and purchase of the property on or before 13 July 1998, the said sum of $300,000.00 together with the said deposit shall be absolutely forfeited by the vendor without prejudice to the rights under the agreement for sale and purchase."

3. Clause 6 of the supplemental agreement provided that subject to the variations contained in the supplemental agreement all the terms in the formal agreement shall remain in full force and effect.

4. The total amount of deposit paid by the defendant was therefore $712,800.00. The defendant again did not complete on 13 July 1998. In fact, what happened was that the defendant, shortly after the formal agreement, entered into an agreement for sub-sale and purchase on 24 October 1997 with one Lee Sau Tai. Under the agreement for sub-sale and purchase the defendant agreed to sell to Lee Sau Tai the property at the price of $4,300,000.00. Completion was on the same date as the main sale, i.e. on or before 13 February 1998. Apparently Madam Lee Sau Tai failed to complete and requested for an extension of time around February 1998, hence the supplemental sale and purchase agreement referred to herein above. On 13 July 1998, as Madam Lee Sau Tai was still unable to complete with the defendant, this rendered the defendant unable to complete her transaction with the plaintiffs.

5. This time, the plaintiffs did not agree to a further extension and by a letter dated 13 July 1998 from Messrs K M Lai & Li, solicitors for the plaintiffs to Messrs Boris Lui & Co., solicitors for the defendant, the plaintiffs accepted the repudiation by the defendant and forfeited the deposit in the total sum of $712,000.00. On 20 July 1998, the plaintiffs executed a memorandum of rescission stating that the formal sale and purchase agreement had been cancelled and rescinded as a result of the wrongful repudiation by the defendant. The said memorandum of rescission was registered in the Yuen Long New Territories Land Registry by Memorial No. 822564 on 24 July 1998.

6. On 27 April 1999, the plaintiffs commenced the present action and claimed for a declaration that the deposit of $712,800.00 was forfeited to the plaintiffs and further claimed damages and interest and costs. At the trial before me, counsel for the plaintiffs Ms Jennifer Tsui indicated to me that the particulars of damages as claimed by the plaintiffs were as follows,

(a)	loss on resale by reason of the diminution of price	$2,018,000.00
(b)	commission paid to the estate agent on resale	$21,100.00
(c)	legal costs associated with the resale	$4,310.00
(d)	rates and government rent for the period from 14 July 1998 to 31 March 1999	$6,367.00
(e)	additional bank interest incurred and paid from 14 July 1998 to 31 March 1999	$84,039.18

She further indicated that credit would be given to the defendant for the following sums,

(a)	all deposits paid by the defendant	$712,800.00
(b)	deposit forfeited by the plaintiffs under a later agreement dated 29 November 1998	$50,000.00
(c)	rent received by the plaintiffs from 15 August 1998 to 31 March 1999	$81,000.00

7. Before coming to the defence, I should continue with the history of the matter since the repudiation of the agreement by the defendant. On 15 August 1998, the plaintiffs entered into a Chinese tenancy agreement with one Mak Tat Shing to lease out the property to Mr Mak for a term of 2 years at the rent of $12,000.00 per month. Under clause 6 of the said tenancy agreement, the rates and government rent of the property were payable by the tenant.

8. At the trial of this action commencing on 24 September 2001, the two plaintiffs gave evidence before me. Although the defendant was absent, I have tested the evidence of the plaintiffs as I would have done even if the defendant was present in the light of the fact that she was acting in person. I am satisfied that the two plaintiffs were truthful in their evidence and reliable. According to their testimonies, after the repudiation of the formal agreement by the defendant, the plaintiffs continuously tried to market the property through various property agents. It is commonly known that during that period of time, the property market was falling. According to the evidence of the plaintiffs, not many people came to inspect. On 29 November 1998, a Ms Chan Yuen Yee Colelte entered into a provisional sale and purchase agreement to purchase the property at $2,700,000.00. A sum of $50,000.00 was paid as deposit. In that provisional agreement, clause 6 provided that should the purchaser fail to complete the purchase in the manner therein contained the deposit shall be forfeited to the vendor and the vendor shall then be entitled at his absolute discretion to sell the premises to anyone if he thinks fit and the vendor shall not sue the purchaser for any liabilities and/or damages caused by the purchaser's default of this agreement. The parties were to sign the formal agreement on 14 December 1998. The said purchaser did not proceed to sign the formal sale and purchase agreement and the deposit in the sum of $50,000.00 was forfeited. Hence, the plaintiffs had to look for buyers for the property again.

9. At first, the plaintiffs still wished to sell the property at the price of $2,700,000.00. But they were told by the estate agents that at that price no one would be interested. Eventually, the bottom line of the plaintiffs came down to $2,300,000.00. According to the plaintiffs' evidence which I accepted, even at the price of $2,300,000.00 there were only a few prospective purchasers who showed interest. Between November 1998 and February 1999 there were not more than 5 people who came to view the property. Offers ranged from $1,900,000.00 to $2,000,000.00. On or about 5 February 1999 there was an offer from Chim Wai Ling and Kwok Chow Kit in the sum $2,000,000.00 for the property. After some negotiations, the plaintiffs managed to raise the price to $2,110,000.00. A provisional sale and purchase agreement was signed on 5 February 1999 by which Chim and Kwok agreed to purchase the property at $2,110,000.00. The sale was successful this time, formal sale and purchase agreement was signed on 24 February 1999 and the transaction was completed on 31 March 1999.

10. The plaintiffs have produced a receipt from the property agency, namely Centaline Property Agency Limited, dated 19 February 1999 to show that in respect of the successful resale, a commission of $21,100.00 was paid by the plaintiffs. With regard to the legal cost for the aborted transaction, that is the transaction between the plaintiffs and the defendant, a bill issued by Messrs K M Lai & Li, solicitors for the plaintiffs in the conveyancing transaction was produced to show that a sum of $4,310.00 was paid by the plaintiffs to the said solicitors. Regarding the rates and government rent, the relevant demand for the quarter from 1 January 1999 to 31 March 1999 was produced. Further a letter dated 9 April 2001 from the Rating and Valuation Department to Messrs Wong, Hui & Co., solicitors for the plaintiffs was also produced to show the amount paid regarding the period from 1 July 1998 to 31 December 1998. After due apportionment and crediting back to the plaintiffs the rebate for April to June 1998 (which was used up by the Government to satisfy the rates for October to December 1998), I am satisfied that the amount should be $6,367.00. However due to the fact that the rates and government rent should be paid by the tenant under the tenancy agreement, I do not think the rates and government rents after 15 August 1998 should be included as damages suffered by the plaintiffs.

11. On 27 September 2001, when I raised the concern with regard to government rent and rates with counsel for the plaintiffs, she properly accepted that the plaintiffs are only entitled to the apportioned government rent and rates for the period from 15 July to 14 August 1998. She worked out the figure to be $455.70 for rates and $303.80 for government rent. The total apportioned figure is therefore $759.50.

12. In respect of the claim for payment of additional interest, it stemmed from the fact that the plaintiffs had been holding the property subject to mortgage and therefore had to pay bank interest for the mortgage loan. By reason of the defendant's failure to complete, the plaintiffs had to pay bank interest up to 31 March 1999 when the property was successfully resold. In Hong Kong, most people hold property subject to mortgage and I am satisfied that such payment of additional bank interest should be within the reasonable contemplation of the defendant at the time of the formal agreement. I also regard such interest payment to be the natural and probable consequence of the breach of the formal agreement by the defendant. The plaintiffs produced a statement for their mortgage loan account to show the total amount of additional interest incurred by them during this period, i.e. from July 1998 to March 1999. The total amount is $84,039.18.

13. I now turn to the defence. In the Defence and Counterclaim filed on 22 September 1999, apart from some non admissions, the following points were put forwarded. In Paragraph 7 of the Defence, it is averred that the forfeiture of the deposit by the plaintiffs was a penalty and therefore not enforceable in law. The same plea was raised in respect of the additional deposit in the sum of $300,000.00 paid under the supplemental agreement (see Paragraph 11 of the Defence). Then in Paragraph 18 of the defence, it is alleged that the plaintiffs have failed to mitigate their loss in that the plaintiffs have failed to resell the property immediately after the failure to complete by the defendant, and that eventually the resale of the property was at the value substantially below the market price of the property. It is alleged that the open market value of the property on 5 February 1999 was $3,580,000.00. The defendant also counterclaimed for return of the deposits.

14. Dealing first with the point about penalty, it would indeed be academic if the damages suffered by the plaintiffs were greater than the total amount of the deposit which is $712,800.00. On the evidence before me, there is no doubt that the plaintiffs did suffer a damage far exceeds the amount of the deposits. I have already outlined the various heads of damages suffered by the plaintiffs in the paragraphs above and I would not repeat the same. As I have mentioned, the defendant was absent throughout the trial. No evidence was put forwarded on behalf of the defendant. Although a valuation report has been filed by the defendant on 6 July 2000, since the surveyor concerned was not called to give evidence before the Court, that report is not evidence that the Court should consider.

15. Although I do not have to decide on the question of penalty, I take note of the fact that the $300,000.00 additional deposit payable under the supplemental agreement was paid in consideration for an extension of time for completion. In other words, on 13 February 1998, the defendant was faced with two options, either she paid the price for an extension of time or she would suffer the consequence of her failure to complete under the original formal sale and purchase agreement with the result that her deposit in the sum of $412,800.00 would be forfeited. Similarly, the plaintiffs had two options on that date. They could have accepted the repudiation by the defendant of the formal agreement or granted an extension. That was February 1998 when the financial turmoil has caused a slump in the property market. The defendant asked for an extension of 5 months. In the wake of a falling market triggered by events like the 1997 financial turmoil, one could readily expect a further fall in the market in 5 months' time. It would not be unreasonable for the plaintiffs to ask for a further deposit to protect their interest in the light of all these. Of course, it is well settled that the burden of proof is on the defendant to show that the forfeiture provision is a penalty. The defendant has not adduced any evidence as she did not attend the trial. If necessary, I would hold that this defence cannot be established.

16. With regard to the defence of failure to mitigate, again the defendant has not adduced any evidence and as I have already said, the expert report filed on behalf of the defendant could not be regarded as evidence due to the fact that the surveyor was not called as a witness. Again the burden of proof is on the defendant to show that the plaintiffs have failed to mitigate. I have already outlined the plaintiffs' evidence which I accepted accounting for the steps they have taken since the repudiation of the formal agreement and supplemental agreement by the defendant on 13 July 1998. From those evidence, I am satisfied that the plaintiffs did take all reasonable steps to resell the property after the repudiation by the defendant. I should add that there is absolutely no merit at all in the allegation that the market value of the property on 5 February 1999 was $3,580,000.00. The defendant's expert report (even if it could be taken into account, which for reasons I have already given should not be taken into account) does not support this figure. Further had the market value on 5 February 1999 been $3,580,000.00, it is most unlikely that Chan Yuen Yee Colelte would back out from the transaction in November 1998 after she agreed to purchase the property at the price $2,700,000.00.

17. On the whole, I am satisfied that the defence cannot be sustained and that the various heads of damages claimed by the plaintiffs are either the natural and probable consequence of the breach of the defendant or within the reasonable contemplation of the defendant at the time of the formal agreement. I therefore hold that the plaintiffs are entitled to the following damages,

(a)	loss on the resale	$2,018,000.00
(b)	commission paid to estate agent on resale	$21,100.00
(c)	legal cost associated with the resale	$4,310.00
(d)	rates and government rent for the period from 14 July to 14 August 1998	$759.50
(e)	additional bank interest incurred by the plaintiffs from 14 July 1998 to 31 March 1999	$84,039.18

The total amount is $2,128,208.68. Against that the plaintiffs agree that they should give credit to the defendant for the following sums,

(a)	deposit paid by the defendant	$712,800.00
(b)	deposit forfeited by the plaintiffs under the provisional agreement dated 29 November 1998	$50,000.00
(c)	rent received by the plaintiffs from 15 August 1998 to 31 March 1999	$81,000.00

The total amount of damages recoverable by the plaintiffs from the defendant is therefore $1,284,408.68. The plaintiffs also asked for interest on damages from the date of writ at the current judgment rate. The current judgment rate is 9.82% per annum. Whilst I appreciate that such rate is higher than the commercial rate obtainable from the banks, I bear in mind that these damages were incurred in 1998 and interest has been higher during those times. I would allow interest at 8% per annum. So there will be judgment for the plaintiffs in the sum of $1,284,408.68 with interest thereon from 27 April 1999 at the rate of 8% per annum to date of judgment and thereafter at judgment rate. The plaintiffs are of course entitled to the costs of this action from the defendant, such costs to be taxed if not agreed. I would further grant the declaration as sought in Paragraph 1 of the prayer, that is a declaration that the said deposit of $712,800.00 was forfeited to the plaintiffs.