XCHRX AU SIU FUN AMY AND OTHERS v. LENVIN LTD. AND ANOTHER

HCA 3481/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL JURISDICTION

ACTION NO. 3481 OF 1998

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D E C I S I O N

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Facts:

1. The plaintiffs were joint owners of a house in Royal Palms (hereinafter called the "Property"), which they agreed to sell to the 1st Defendant at a price of $13,800,000. A formal sales and purchase agreement dated 10.6.1997 was signed by the parties (hereinafter called the "Agreement") with a total deposit of $1,380,000 paid to the plaintiffs. The scheduled completion date was 30.8.1997.

2. On 16.8.1997, the 1st defendant negotiated for a reduction of the purchase price by $300,000 and a deferment of the completion date to 30.11.1997. The 1st defendant also offered a further part payment of 10% of the purchase price. The plaintiffs agreed on the condition that the 2nd defendant, who is a director of the 1st defendant, provided a personal deed of guarantee that should the 1st defendant fail to complete the sale and purchase of the Property the plaintiffs would have the absolute right to enforce the terms of the Agreement against the 2nd defendant.

3. The 1st defendant failed to complete on 30.11.1997. The plaintiffs resold the Property on 9.2.1998 for $7,418,000. The plaintiffs now seek summary judgment in the form of a declaration that the Agreement has been rescinded and the plaintiffs are relieved of all liability for the further performance of their obligations under the Agreement, and for damages in accordance with Clause 16 of the Agreement, interest and costs.

Liability:

4. At the hearing, Mr. Reyes, in his sensible brevity, abandoned the defence that the deed of guarantee was not a deed and was not supported by consideration. He submitted that as the plaintiffs have forfeited the deposits of $2,760,000 as liquidated damages in accordance with Clause 16 of the Agreement, the defendants are not subject to any further liability, even though their loss may be greater than the sum forfeited. He drew support for his proposition from MacGregor on Damages (16th ed.), para. 486 which reads:

"In most cases where the plaintiff has recovered his liquidated damages the stipulated sum has been greater than the actual, or at least the provable, damage. However, just as this cannot diminish his damages, so he cannot increase them by ignoring the liquidated damages clause in the rare case where the actual damage is demonstrably greater than the stipulated sum, a situation most likely to arise where one sum is stipulated to be paid on a number of varying, yet uncertain, breaches and the most serious breach is the one which occurs........... These cases show that the plaintiff can neither claim unliquidated damages in addition to the liquidated damages which are designed to deal with the loss that has occurred nor elect to ignore the liquidated damages provision and sue only for unliquidated damages."

5. I have no doubt about the correctness of the principle of law as stated in MacGregor on Damages. However, the forfeiture clause relied upon by Mr. Reyes only forms part of Clause 16, which provides for other liquidated damages. Clause 16 of the Agreement provides:

"If the Purchaser other than due to the default of the Vendor shall fail to comply with any of the terms and conditions of this agreement the deposit money and any part payment of purchase price so paid shall be absolutely forfeited as and for liquidated damages (and not a penalty) to the Vendor and who may (without being obliged to tender an assignment to the Purchaser) rescind the agreement and either retain the Property ...... or resell the same, .......... 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 realized by any such resale shall belong to the Vendor................ This clause shall not prevent the Vendor recovering, in addition to liquidated damages, damages representing interest paid or lost by him by reason of the Purchaser's failure."

6. The first sentence of that clause gives the vendor the usual remedy of forfeiture of deposit and rescission with the right to retain or resell the property. The second sentence then provides for any deficiency in the event of resale to be paid also by the purchaser as and for liquidated damages. Lastly, it provides for recovery of interest in addition to liquidated damages.

7. In my judgment, the clause has to be read as a whole as providing for three heads of liquidated damages for three different situations, namely (1) forfeiture of deposit without a resale or with a resale at a profit; (2) forfeiture of deposit and recovery of deficiency upon a resale at a loss; and (3) loss of interest. Thus recovery of deficiency and interest is not the same as claiming unliquidated damages where liquidated damages prove to be inadequate, because the right to these damages have been expressly provided for in the event of resale under Clause 16. I do not think recovery of deficiency can be regarded as a penalty. The common law duty to mitigate damages will safeguard the purchaser from capricious conduct of the vendor in selling at below market value or beyond a reasonable time. I therefore find the 1st Defendant liable under Clause 16 for the deficiency upon resale and interest. There is no dispute as to the 2nd Defendant's liability under the deed of guarantee. Accordingly, I also find the 2nd Defendant liable under the deed of guarantee.

8. Mr. Reyes then referred me to Dawson Enterprises Limited v. Talistream Limited, [1995] 1 HKLR 93. At page 105, Barnett J made the following criticism of Condition 10 contained in Part A of the Second Schedule of Conveyancing and Property Ordinance, Cap. 219 which was similar to Clause 16 of the Agreement in the present case:

"By Condition 10 the parties have, in my view, agreed to treat the deposit as a provision for liquidated damages. Or, at least, there has been an attempt, deprecated by Lord Bvrowne-Wilkinson, to avoid problems which were apprehended might arise in relation to a mere deposit by "labelling" it as liquidated damages. That being so, the sum paid must represent a genuine pre-estimate of loss. There is understandably no evidence whatsoever on this point. The parties simply adopted the conventional 10% of the purchase price, neither they nor their legal advisors (again understandably) having given any thought to the distinction between a deposit and a provision for liquidated damages, and the need in the latter case to try and pre-estimate the loss consequent upon breach of contract.

Condition 10 constitutes a trap for the unwary. It should as soon as possible, be amended so as to provide for the forfeiture of a genuine deposit and separately for liquidated damages. In the meantime, it seems to me to be necessary for conveyancers to avoid incorporating this condition into any contract for the sale of land."

9. Dawson Enterprises Limited was decided at a time when property price was ever escalating by the day. Vendors and confirmors were content to rely on forfeiture of deposit as deficiency on resale never arose. The issue before Barnett J was whether there was failure on the part of the purchaser to complete the sale and purchase and if yes whether the deposit could be forfeited as a genuine pre-estimate of loss. He found in favour of the vendor on the first issue and then gave further directions for deciding the second issue. Despite his criticism of Condition 10, he did not have to deal with the interpretation of Condition 10 as a whole. I therefore do not consider that decision of assistance in the matter now before me.

10. In any event, Dawson Enterprises Limited was distinguished in a number of later decisions. See for example, Union Eagle Limited v. Golden Achievement Limited, HCA7497 of 1991 and Cheer King Investments Limited v. Rich glory Investment Limited, HCA 9497 of 1994. In these two decisions, Cheung J held that the conventional 10% deposits are forfeitable under the forfeiture clause even if there is no evidence to show that they are genuine pre-estimates of loss. This view was approved by the Court of Appeal in Union Eagle Limited v. Golden Achievement Limited, [1996] 1 HKC 349. Thus forfeiture of the conventional sum has always been recognised as lawful and not a penalty. Indeed, Mr. Reyes was not seeking to argue that Clause 16 is void as being a penalty clause.

Quantum:

11. The Property was resold at a substantially reduced price on 9.2.1998. Mr. Reyes submitted that the plaintiffs failed to mitigate their loss by not selling soon after the re-scheduled completion date. In the alternative, he submitted that the damages should be assessed by taking the difference between the contract price as reduced by subsequent agreement, i.e. $13,500,000, and the market price as at the date of completion, i.e. 30.11.1997. He also referred me to the open market value of the Property of $10,610,000 as assessed by Midland Surveyors Limited for the month of November 1997.

12. I do not think the common law rule that damages for breach of contract are to be assessed as at the date of breach is an inflexible rule which is applicable to sale and purchase of real property. In Johnson v. Agnew, [1979] A.C. 367 at 401, Lord Wilberforce held:

"In cases where a breach of a contract for sale has occurred, and the innocent party reasonably continues to try to have the contract completed, it would to me appear more logical and just rather than tie him to the date of the original breach, to assess damages as at the date when (otherwise than by his default) the contract is lost. Support for this approach is to be found in the cases. In Ogle v. Earl Vane (1867) LR 2 QB 275; L.R. 3 Q,B. 272, the date was fixed by reference to the time when the innocent party, acting reasonably, went into the market; in Hickman v. Haynes (1875) LR 10 CP598, at a reasonable time after the last request of the defendants (the buyers) to withhold delivery. In Radford v. De Froberville [1977] 1 W.L.R. 1262, where the defendant had covenanted to build a wall, damages were held measurable as at the date of the hearing rather than at the date of the defendant's breach, unless the plaintiff ought reasonably to have mitigated the breach at an earlier date."

13. Unlike movable property, there may not be an available market for all forms of real property. Real property, particularly houses, has certain unique characteristics. It offers different attraction to different buyers who may have different needs and preferences. One has to allow for a reasonable time for a genuine buyer with a reasonable offer to come by. Furthermore, it is common knowledge that the property market collapsed very rapidly towards the end of 1997. In a falling market, one has no idea when the market will stabilise or when a rebound would be due. The vendor could not be blamed for not selling earlier when the market kept falling. To assess damages in a falling market based on the price of a successful sale, which is unlikely to be repeated, would cause injustice to the vendor. Justice would therefore require that the price of a genuine resale within a reasonable time obtained after using genuine and reasonable endeavour should be used as a basis for assessing damages.

14. According to the unchallenged affirmation of the 2nd Plaintiff, he instructed Midland Realty (Fairview) Limited to resell the Property on 21.12.1997 and even gave them the keys to the Property on 28.12.1997. He also approached an auctioneer firm in mid January 1998 and attended an auction to consider sale by auction. Eventually a resale was secured on 9.2.1998. That price was only 2.1% lower than the value assessed by the defendants' surveyors. There is nothing to suggest that it was otherwise than a genuine resale. I do not see any reason for not accepting that resale price for the purpose of assessing the deficiency under Clause 16.

15. Mr. Soo did not seek to forfeit the additional payment of $1,380,000 paid by the 1st Defendant as part of the deposit and fairly conceded that the deposit forfeited as well as this additional payment should be set off against the damages. That is the proper way the word "deficiency" should be interpreted. There is no dispute as to the legal expenses and commission incurred upon the resale. I therefore assess damages as follow:

(a)	Difference between contract price and resale price:	$6,082,000
	($13,500,000 - $7,418,000)
(b)	Commission to estate agent for resale:	$ 74,180
(c)	Legal expenses for resale:	$ 20,000
	Total:	$6,176,180
	Less deposit and additional payment:	$2,760,000
	Balance:	$3,416,180
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I adopted the figure of $13,500,000 as the contract price for that was the price based on which the guarantee of the 2nd Defendant was obtained.

16. The plaintiffs are also entitled to interest under Clause 16, but that clause does not provide for the rate of such interest. I therefore award interest after taking into account the various amounts received upon resale as follow:

(a) Interest on the amount of $10,740,000 (i.e. contract price less deposit and part payment, i.e. $13,500,000 - $2,760,000) at half judgment rate from 30.11.1997 until 9.2.1998;

(b) Interest on the amount of $10,440,000 (i.e. amount in (a) less initial deposit upon resale, i.e. $10,740,000 - $300,000) at half judgment rate from 10.2.1998 until 18.2.1998;

(c) Interest on the amount of $9,998,200 (i.e. amount in (b) less further deposit upon resale, i.e. $10,440,000 - $441,800) at half judgment rate from 19.2.1998 until 3.4.1998;

(d) Interest on the amount of $3,416,180 (i.e. amount in (c) less balance of resale price plus commission and legal expenses, i.e. $9,998,200 - $6,676,200 + $74,180 + $20,000) at half judgment rate from 4.4.1998 until judgment and thereafter at judgment rate until payment.

17. Accordingly, I enter judgment in favour of the plaintiffs in the following terms:

(a) A declaration that by reason of the rescission of the Agreement for Sale and Purchase by the plaintiffs as a result of the 1st Defendant's non-compliance of the same the plaintiffs are relieved of all liability for the further performance of their obligations thereunder;

(b) The 1st and 2nd defendants do jointly and severally pay the plaintiffs damages in the sum of $3,416,180;

(c) The 1st and 2nd defendants do jointly and severally pay the plaintiffs interest as set out in the preceding paragraph;

(d) The defendants' counterclaim be dismissed;

(e) The 1st and 2nd defendants do jointly and severally pay the plaintiffs their costs of this action, to be taxed, if not agreed. There be certificate for counsel.