GE LI v. SUN MEI INDUSTRIAL LTD AND OTHERS

HCA 1009/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1009 OF 2010

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J U D G M E N T

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Background

1. In this action, the plaintiff claims damages for the defendants’ failure to complete the sale of a village house.  At the conclusion of the trial, the defendants conceded their only defence of frustration.  The remaining issue is quantum.

2. On 4 September 2009, the plaintiff entered into three provisional sale and purchase agreements (collectively the “PSA”) with the defendants for the purchase of the ground floor, first floor and second floor of a property in Chai Kek Tsuen in Tai Po (“Property”) owned by the defendants for a total consideration of $3,800,000.  The plaintiff paid a total deposit of $1,910,000.  The sale and purchase of the Property was to complete on 6 October 2009, which was by agreement postponed to 20 October 2009.

3. A dispute broke out among the partners of the developer of the Property and other village houses.  One of the partners, Irene Luk, commenced proceedings in High Court Action No HCA 2079 of 2009 (“HCA 2079/2009”) and obtained an interlocutory injunction on 12 October 2009 restraining the defendants and the plaintiff, who was named as the 7^th defendant in that action, from assigning, transferring, dissipating, or otherwise dealing with the Property or its proceeds of sale.  HCA 2079/2009 was not seriously prosecuted and was withdrawn on 5 July 2011 with costs to the plaintiff.

4. On 21 January 2010, while HCA 2079/2009 was still pending and the injunction order still in force, the plaintiff sold her then residence in Sorento at No 1 Austin Road West for $154,400,000 with completion date on 22 April 2010.  As the sale and purchase of the Property could not be completed, she moved into rented accommodation in Harbourside at No 1 Austin Road on 28 April 2010.

5. On 27 January 2010, the plaintiff’s then solicitors, Wong & Yip Solicitors (“W&Y”) wrote to the defendants’ then solicitors, Yap & Lam Solicitors (“Y&L”) accepting the defendants’ repudiation of the PSA and demanded return of the deposit.  Y&L declined quoting the injunction order.  But, on 14 July 2010, the defendants’ present solicitors, Hui & Lam (“H&L”) made full repayment of the deposit to the plaintiff through the plaintiff’s then solicitors, Rowdget W Young & Co (“RY”).

The plaintiff’s claim and issues

6. In her Amended Statement of Claim, the plaintiff sought the following remedy:

(a)   the difference in market value of the Property on the original completion date of 6 October 2009 or date of repudiation of 26 January 2010 and the purchase price of $3,800,000;

(b)   stamp duty;

(c)   agency commission of $38,000;

(d)   conveyancing costs;

(e)   mortgage payment of her flat in Sorrento from 26 October 2009 to 23 April 2010;

(f)   removal expenses to Harbourside;

(g)   rental payment for her Harbourside flat from 28 April 2010 onwards;

(h)   interest on the deposit of $1,910,000 accrued since 27 January 2010 up to 13 July 2010 at judgment rate in the sum of $70,329.86 and interest from 14 July 2010; and

(i)   an indemnity of her costs in HCA 2079/2009.

Items (c), (e), (f), (g) and (i) were rightly abandoned by counsel before trial.  With respect to RY who drafted the Amended Statement of Claim, except for item (i), those claims are ridiculous.  Presumably, item (i) was abandoned upon payment of the costs by Irene Luk.  The claim for interest on the deposit for an indefinite period after the same had been returned is ridiculous.

7. The remaining issues are the date of repudiation and the market value of the Property on that date.

Date of repudiation

8. Mr Kwong tried vigorously to discredit the plaintiff’s assertion that she liked the Property very much because it was in a convenient location; that she bought the Property with a view to live there so that her daughter could keep a dog and that she had no financial means to buy a similar property after the defendants’ repudiation of the PSA.  The purpose of that attack was to show that the plaintiff had no intention to live in the Property and that her assertion was made for the purpose of seeking a more advantageous valuation date of 27 January 2010 instead of the contractual completion date of 20 October 2009 and that she should only be awarded nominal damages for failing to take proper steps to mitigate her loss.

9. On the objective evidence, the Property was located in a valley by Lam Tsuen River off Lam Kam Road in Tai Po, which was by no means convenient for the plaintiff’s daughter who was studying in Diocesan Girls’ School in Jordan area.  Since the repudiation until trial, the plaintiff continued to live in Harbourside, which indicated that she had no intention to live in the Property or in Tai Po.  Mr Kwong argues that the plaintiff’s assertion that she would drive her daughter to school and herself to work was not credible as admittedly she had not driven for sixteen years.  He argues that it was unlikely that the plaintiff who had all along been living in luxurious accommodation in prime city location worth over $15 million would downgrade her lifestyle to live in a village house in rural area worth $3.8 million.  He also argues that the plaintiff’s assertion that she had no means to purchase another village house at around the time of the repudiation was incredible because being a senior executive earning $60,000 per month she could have obtained bank financing and besides she had just sold her Sorento flat for $15.4 million.  Hence, Mr Kwong submits that the plaintiff should and could have purchased another village house at around the extended completion date of 20 October 2009 to mitigate her loss and would only be entitled to nominal damages.

10. I do not find it necessary to engage in any detail analysis of the evidence relating to such a very marginal issue.  The plaintiff explained in tears that she had a change in family circumstances because at the time her husband commenced divorce petition against her.  That caused strain on her financial and emotional conditions.  Mr Kwong vigorously criticises the plaintiff’s failure to explain why she could not have bought another village house with the sale proceeds from the sale of her flat in Sorento.  However, I note that while the outstanding mortgage loan on her Sorento flat was about $5.5 million, it was not until the completion date of 22 April 2010 that she and her then husband could receive the net proceeds of sale.  Besides, at the time, the defendants were still withholding her deposit, for which the defendants only had themselves to blame.  They cannot, on the one hand, withhold the plaintiff’s deposit which prevented her from buying another property to mitigate her loss and, on the other hand, criticise her for not buying.  The plaintiff might not have been entirely truthful about her intention of living in the Property.  But I am satisfied that she rightly feel uncomfortable to buy another village house at the time in view of her matrimonial and financial condition.

11. Furthermore, on the evidence, there were continuing negotiations between the plaintiff and the defendants since 20 October 2009 to keep the PSA alive pending resolution of the defendants’ partnership dispute.  In early December 2009, Hon Chi Shun, the director of the 1^st defendant and husband of the 3^rd defendant, assured the plaintiff that the defendants would win the action in HCA 2079/2009 and asked her to wait till the end of December 2009.  He also offered to let the plaintiff live in a neighbouring village house belonging to him free of rent.  This evidence was not disputed by the defendants.  If the defendants kept the PSA alive, they cannot complain the plaintiff for waiting for the outcome of that litigation and not buying another village house to mitigate her loss.  Then eventually, no progress having been made by mid January 2010, it was reasonable for the plaintiff to accept the defendants’ repudiation of the PSA on 27 January 2010.  The plaintiff’s loss should be assessed using the market value of the Property on that day.

Credibility of the parties’ valuation experts

12. The plaintiff’s expert witness was Mr Lucas Lau, an assistant director of Vigers Appraisal and Consulting Limited.  He was well qualified to give evidence as an expert.  He quickly impressed me as an unreliable expert witness.  I give little weight to his evidence.

13. He did not appear to be objective or forthright as an expert.  He assumed the role of a bargainer of his client.  In his evidence in court, he maintained his adjustment factors for security and management at minus 2‑3% and location at minus 2% from the value of Lily Villa respectively, contrary to his previous opinion of minus 7.5% and minus 10% which he invited the defendants’ expert to accept by an email on 2 December 2011.  Under cross‑examination, he firmly maintained his view that the adjustment factors should be minus 2‑3% and minus 2% respectively and even asserted that that was his position all along.  He explained that the figures given to the defendants’ expert in his email was for “bargaining purpose”. He said that if those figures were accepted, he would yet quote lower figures and hopefully he could bargain down to minus 2‑3%.  His evidence revealed a fundamental fraud in his approach as an expert.  An expert should fairly present his opinion supported by reasons to his opponent and listen to the opponent’s opinion and be prepared to be convinced if he agrees with it.  He should not adopt a figure and bargain with his opponent for the interest of his client.  Not only that Mr Lau’s approach worried me, I was all the more worried if in fact he was changing his evidence and doing so as a hire‑gun.

14. In his report dated 17 August 2010, Mr Lau did not include the adjustment factor for security and management.  Under cross- examination, he explained that he had actually considered that factor but did not bother writing it down as it was too insignificant.  I respectfully differ.  Making no adjustment and allowing minus 2% adjustment is a big difference.  His evidence casts doubt on his sincerity.  It appeared as though he overlooked this factor at the beginning and when it became apparent that the factor was material, he gave a token adjustment for the interest of his client.

15. Mr Lau admitted making only one inspection before writing his report, that he did not inspect all the comparables and that he did not even pay detail attention to the localities and surroundings of some of the comparables, such as whether there were street lights.  Unlike comparing different units in a building or in an estate in which the surrounding and other conditions are basically similar, these matters have important bearing in valuing individual houses in scattered rural areas.  Without paying attention to these matters, he quoted a flat figure of minus 2‑3% adjustment for location for all comparables.  Such an approach demonstrated a lack of due diligence and sense of responsibility in the formulation of his opinion.  This apart, his evidence on the whole was vague. His opinion is unreliable.

16. The defendant called Mr Jack Chan, a director of Landscope Surveyors Ltd.  He is less highly qualified than Mr Lau.  But his evidence is solid and down to earth.  He had an answer for every question asked, except in respect of a highly artificial proposition posed by Mr Yip.  Mr Yip could have little to criticise of Mr Chan’s evidence.  Unlike Mr Lau, Mr Chan conducted three site visits and inspected every comparable.  He was able to give an account of the location, surroundings, physical conditions, accessibility, road conditions and facilities in Lily Villa, the houses of which were used as comparables.  He gave a clear and vivid description of the Property, the steep access track, its surroundings, including the Lam Tsuen River nearby and the flood warning sign.  He impressed me as a very thorough and responsible surveyor who knew what he was doing.  I find him credible and accept his evidence.

Market value of the Property

17. The experts had a meeting on 25 November 2011.  A summary of the meeting was prepared and signed by Mr Lau.  Though Mr Chan did not sign the summary, he did not dispute that the summary was an accurate record of what was agreed at the meeting.  I am not going to recite what was agreed, except four items.  Firstly, the experts agreed to a list of comparables to be used.  Secondly, they agree that in assessing the market value of the Property, adjustments have to be made from the value of comparables for area, time, building age, security and management, and location.  Thirdly, they agreed on the method for calculating the adjustments for area and time as well as the value of those adjustment factors.  Fourthly, they agreed to disagree on the adjustment factors for (1) security and management and (2) location.  In assessing the market value of the Property, I shall focus on these two adjustment factors.

18. The comparables included transactions of some houses in Lily Villa and some individual village houses in Chai Kek Tsuen where the Property is located.  Lily Villa is an estate development with property management and a management committee.  It consists of a number of houses enclosed by an estate wall.  The estate is gated, fitted with close circuit television and kept watched by security guards.  There are roads and street lights inside the estate.  The estate is well maintained, clean and tidy.  It is readily accessible from Lam Kam Road.  The access road up to the estate is reasonably wide and provided with street lighting.  Past Lily Villa, the road narrows into a local track which passes through various private lots leading downhill to the Property by Lam Tsuen River.  The track is not well paved.  Part of the track is barely wide enough for one small motor car to pass through.  The gradient of last portion of the track is 1:5 and is inaccessible by motor car.  It takes about 3 minutes to drive or 15 minutes to walk from Lam Kam Road to the Property.

19. Mr Chan considered Lily Villa far superior to the Property for reasons which are obvious from reading the preceding paragraph.  He arrived at an adjustment factor for security and management of minus 15% from the value of the houses in Lily Villa. Mr Lau did not consider the differences so significant.  He only gave an adjustment factor of minus 2%.  The experts had no disagreement in respect of the adjustment factor for the individual houses in Chai Kek Tsuen.

20. It cannot be doubted even from a layman’s point of view that Lily Villa is more superior to the individual houses in the village.  Security is a serious concern living in the rural area.  Property management, management committee and security facilities address that concern. They make one feel safer in an estate than in an individual house.  Property management also helps to maintain the houses in good condition and improves the aesthetic outlook and value of the estate.  It enhances the value of the property.  Mr Yip argues that security and management has to be paid for and that cancels out the enhancement in value it brings.  I do not agree. It is the existence or provision of the system that enhances the intrinsic value of the property.  The service fee is insignificant when compared with the enhancement it brings.

21. As for the amount of adjustment, it is like beauty in the eye of the beholder.  It is very intuitive and largely a matter of experience.  But not only that, Mr Chan gave good reasons for his assessment.  He was able to compare the transaction price of No 74 Chai Kek Tsuen with that of Unit 6 of Lily Villa.  The two properties are quite near to one another.  The former property was six years older.  The unadjusted unit price of the latter was 24.2% higher than that of the former.  The adjustment for time as agreed between the experts was only 1% per year.  Thus, houses in Lily Villa command a price 18.2% higher than those immediately outside.  This demonstrates that buyers would happily pay 18% more to be inside the walls of Lily Villa than outside.  The reason must be because of the security and management factor.  Mr Chan’s assessment could not be faulted.

22. On the other hand, Mr Lau did not even seem to have appreciated the significance of this factor until after the joint experts’ meeting.  He gave no adjustment for this factor in his report but vaguely explained that he had in mind a minus 2% figure but it was so insignificant that he did not bother to writ it down.  I think that was a mere excuse.  On the other hand, he gave a minus 2% adjustment for location and did not consider it too insignificant to mention.  If a factor existed, it existed and it is the expert’s duty to point it out.  He also changed his stance as I have mentioned above which he explained was his bargaining technique.  I think that reflected his unprincipled and perhaps hire‑gun approach.  I accept Mr Chan’s adjustment factor for security and management.

23. I now turn to the adjustment factor for location.  From the description given of the access to Lily Villa and the Property, one can readily appreciate that Lily Villa is situated in a location which is far superior than that of the Property.  Lily Villa is much nearer to Lam Kam Road.  It is more or less at level with Lam Kam Road. It is readily accessible by vehicle.  The Property is more than twice as far away from Lam Kam Road.  It is situated 44 metres down the valley below the level Lily Villa.  The access road narrowed from Lily Villa into a local track.  The track is not well surfaced and is narrow at locations which only permit a small car to pass through.  There are no street lights.  Worst of all is that the track leading immediately to the Property is very steep with a gradient of 1:5.  According to Mr Chan, it is very difficult to drive a vehicle down a track that steep and once down there one cannot turn the vehicle around and has to reverse up the slope to drive away.  The Property is by Lam Tsuen River.  It is damp, not to mention the noise of the water when raining. There is a flash flood warning sign which suggests that flood during the raining season is a possibility.  The walk from the Property to Lam Kam Road is about 15 minutes.  It is not likely to be a pleasant walk during the hot summer months or raining season.  I think all in all, the location of the Property is nothing to compare with that of Lily Villa.  Mr Chan assessed the adjustment factor to be between minus 10% to minus 20%.  Even from a layman’s point of view, I would not argue with that.

24. Mr Lau assessed the adjustment factor at minus 2% from the value of Lily Villa.  He gave no reason for his assessment.  In fact, he assessed all other comparables at a flat figure of minus 2%.  This is manifestly absurd.  There is no reason why, for example, No 74 Chai Kek Tsuen which is adjacent to Lily Villa and 5 minutes from Lam Kam Road should have the same adjustment factor as the Property another 10 minutes away down the valley.  On his own admission, Mr Lau had not even inspected all of those comparables.  His assessment was just a paper exercise.  It reflected his lack of bona fides and responsibility as an expert and perhaps his hire‑gun approach.  He had been inconsistent.  He first assessed the factor at minus 3%, then “bargained” for a figure of minus 10% in his email to Mr Chan on 2 December 2011 and then reverted to minus 2% to minus 3% in court.  I reject his opinion. I accept Mr Chan’s valuation.

25. On the basis of Mr Chan’s adjustment factors of minus 15% for security and management and minus 10% to minus 20% for location, the market value of the Property on 20 October 2009 was $3,770,000 and on 27 January 2010 after adjustment for time was $3,880,000.  By way of comparison, Mr Lau’s valuations were $4,660,000 and $5,220,000 respectively.

26. By way of countercheck, I refer to the price indices published by the Hong Kong Property Review.  According to the index, property price increased by 1.1% on a territory wide basis from September to October 2009 and by 5.9% from September 2009 to January 2010.  These figures were on a territory wide basis and do not accurately reflect the change in the New Territories, particularly for village houses.  According to Mr Chan, property price for village houses lag behind the territory wide figures.  Nevertheless, the index only provides a general reference.

27. On the basis of Mr Chan’s valuation, the market value of the Property dropped by $30,000 between September and October 2009, ie 0.789% instead of rising 1.1%; and increased by 2.1% between September 2009 and January 2010 instead of 5.9%.  Mr Chan’s valuation is slightly out of line with the price index by 2 to 3%.

28. On the basis of Mr Lau’s valuation, the market value of the Property increased by $860,000 in the one month between September and October 2009 or 22.63% instead of 1.1%; and increased by $1,420,000 or 37.36% during the four months between September 2009 and January 2010 instead of 5.9%.  Mr Lau’s valuation is grossly out of line with the price index by 21 to 31%.

29. Though Mr Chan’s valuation is slightly out of line with the price index, it is not likely to be incorrect because the index is for property price territory wide, whereas Mr Chan was valuing a specific property in the New Territories.  Given the location of the Property, its price may not ride with the market.  The plaintiff might have made a bad investment.  But Mr Lau’s valuation is so grossly out of line that it must be incorrect.  It is frenetic to suggest that the price of the Property jumped almost by one‑quarter in a month and by more than one‑third in four months.  The above comparison suggests that Mr Chan’s assessment is closer to the market than Mr Lau’s.  I accept Mr Chan’s assessment of the market value of the Property.  On the basis of the assessed market value of the Property on 27 January 2010, the plaintiff is entitled to the price difference of $80,000. 

Interest

30. The deposit of $1,910,000 was returned to the plaintiff on 14 July 2010.  The plaintiff claims interest accrued on the deposit during the period from 27 January 2010 to 13 July 2010 at judgment rate.  Mr Kwong submits that the plaintiff has adduced no evidence that interest at 8% could have been earned on the deposit and hence any award of interest should be at saving rate of about 0.5% and in any event should not exceed the best lending rate of 5% of The Hongkong and Shanghai Banking Corporation Limited.

31. The deposit was retained by the defendants because their former solicitors Y&L took the view that it constituted proceeds of sale which might not be disposed of under the injunction order.  However, their current solicitors H&L took the view that the transaction had fallen through long ago and the deposit should be returned to the plaintiff.  I doubt if that was their real reason.  I believe the defendants returned the deposit because its retention would be inconsistent with the defence of frustration which they wanted to run.  On 6 July 2010, H&L wrote to the plaintiff’s current solicitors stating its intention to return the deposit.  Then, for reasons best known to RY, on the very next day, it commenced the proceedings on behalf of the plaintiff, making this specific claim for interest from 27 January 2010 to 14 July 2010 at judgment rate and further interest from 14 July 2010 for the same deposit which had already been returned.

32. The plaintiff is entitled to interest to compensate her for being kept out of her money from 27 January 2010 until 14 July 2010.  The question is at what rate.  Mr Yip did not advance any basis for the claim at judgment rate.  There was no judgment in respect of the deposit. Probably, RY thought by filing the claim before the defendants made the payment, the plaintiff would be entitled to interest at judgment rate. Given the circumstances, I do not consider this is a valid reason to award the plaintiff interest at judgment rate.

33. The plaintiff was innocently caught in a cross fire in the defendants’ partnership dispute.  The defendants knew the plaintiff was a bona fide purchaser not involved in their dispute.  Though they were restrained by my order from assigning, transferring, dissipating, or otherwise dealing with the Property or its proceeds of sale, they and their then legal team should have taken the initiative to negotiate with Irene Luk and her legal team to arrive at an arrangement which would least affect this third party bona fide purchaser for value.  In default of an agreement, the defendants could have applied for variation of the terms of the injunction order.  I cannot see why such application would not have succeeded.  Usually, the court would allow the sale to proceed, if the proceeds of sale are stakeheld by the vendor’s solicitor or otherwise secured pending resolution of the dispute which led to the issue of the injunction order or would allow the deposit to be returned with cancellation of the sale and purchase agreement.  No one would suffer any prejudice under such an arrangement.  However, the defendants and his then legal team simply sat on the deposit as if it was none of their concern at all and did nothing.  To show the court’s disapproval of the defendants’ conduct, I award the plaintiff interest at 4%, which is about half judgment rate.

34. The plaintiff’s claim for interest on the deposit after it has been returned is absolutely ridiculous and must be dismissed.

Conveyancing costs

35. I allow the plaintiff’s claim for conveyancing costs of $7,000.  The claim is supported by an invoice from her then solicitors W&Y.

Conclusion

36. Based on the above, the plaintiff is entitled to: (1) damages for breach of the provisional sale and purchase agreement assessed   in the amount of $80,000; (2) interest on the deposit for the period  from 27 January to 14 July 2010 in the amount of $35,164.93; and    (3) conveyancing costs in the amount of $7,000; totalling $122,164.93.

37. I am sympathetic towards the plaintiff who was innocently caught in the cross fire of the defendants’ partnership dispute.  For reasons as explained in paragraph 33, the defendants and their former legal teams are clearly to blame.  Likewise, the plaintiff could have taken steps to apply for variation of the terms of the injunction order.  Furthermore, she could have invoked Irene Luk’s undertaking in damages before consenting to the withdrawal of the action.  But she and her then legal team did not.  Her former legal teams are also to blame.  But worst is that the plaintiff unrealistically thought the Property had appreciated by 37.36% in the four months between September 2009 and January 2010.  She thought she had a multi‑million dollar claim and was fuelled in that belief by her hire-gun expert and a grossly exaggerated statement of claim drafted by her then legal team claiming mortgage payments, rental payment and interest for an indefinite period.  But what she had was only a claim in the lower end of the District Court jurisdiction.  The defendants raised the defence of frustration which their counsel sensibly abandoned at the last hour.  Likewise, the plaintiff made ridiculous claims which her counsel abandoned at the pre‑trial review.  But the trial had to proceed because of the plaintiff’s unreasonable claim for damages.  Though I have much sympathy for the plaintiff and think that the defendants are more to blame, having regard to the faults of the parties as well as their former legal teams, I am unable to make costs order in the plaintiff’s favour on any scale other than the District Court scale.  I understand that the costs awarded would not be sufficient to cover her own costs.  She may have to look to her former legal teams for contribution.

38. Accordingly, I enter judgment for the plaintiff against the defendants in the amount of $122,164.93 with interest at judgment rate until payment.  I also make a costs order nisi that the defendants shall pay the plaintiff’s costs to be taxed on the District Court scale, if not agreed.