SIMPLY POWER LTD v. BILLY CHUA AND OTHERS

HCA 2452/2013

[2023] HKCFI 944

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2452 OF 2013

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(by Original Action)

(by Counterclaim)

_________________

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JUDGMENT

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(A Table of Contents is annexed to this Judgment)

Introduction

1.  This is the trial of the Action.

2.  This Action arose out of the aborted sale and purchase of a property situated in Aberdeen Inland Lot No. 414 (“Lot”) and known as Hing Wai Ice and Cold Storage Building, No. 9 Tin Wan Praya Road, Hong Kong (“Property”) in 2013 at the price of HK$603 million.[1]

3.  The Plaintiff [2] was the purchaser while the 3^rd Defendant was the registered owner and vendor under (i) a provisional agreement for sale and purchase (“PASP”) and (ii) a formal agreement for sale and purchase (“FASP”). A draft of the PASP was first signed by the Plaintiff on 20 February 2013 with the purchase price stated as HK$580 million. A revised final version of the PASP with inter alia the agreed purchase price of HK$603 million was signed by the Plaintiff and the 3^rd Defendant on 22 February 2013[3]. The FASP was executed by the parties on 26 March 2013.

4.  The 1^st Defendant (“Chua”), the 4^th Defendant (“Midland”) and the 5^th Defendant (“Metro”) are collectively known as the “Midland Parties”. Midland acted as estate agent in the transaction. Chua was acting as agent for Midland when dealing with Ms Li Yanan (“Ms Li”) of the Plaintiff. Chua was a licensed estate agent and was an employee of Metro at the time.

5.  It was declared in Clause 18 of the PASP that Midland was the agent of both the Plaintiff as purchaser and the 3^rd Defendant as vendor. Having said that, the Midland Parties deny inter alia Chua and Midland were agents for the 3^rd Defendant in advertising the Property or in issuing the Proposal and Revised Proposal as defined below to the Plaintiff.

6.  The 3^rd Defendant also denies it (i) has appointed Chua or Midland as its agent in advertising, promoting marketing or selling the Property, (ii) has authorized any persons to make any representations regarding the permitted or suitable users of the Property as alleged by the Plaintiff, (iii) has instructed Chua or Midland to prepare the Proposal and the Revised Proposal or has been shown the same at the material time.

7.  The Property was at all material times an ice-making factory and cold storage facility. Its user was at all material times subject to the restrictions contained in the Conditions of Exchange dated 21 January 1989 (“Conditions of Exchange”) and the Occupation Permit No. H95/77 dated 4 May 1977 (“OP”) [4]. Without going into the details of the relevant terms set out in the documents, it is not disputed that the Property was only suitable for ice-making and cold storage (“Restriction”).

8.  Ms Li, the Plaintiff’s sole director and shareholder, mainly carried on a business specialising in GPS satellite navigation and related electronic system development and services, both in Mainland China and in Hong Kong. Ms Li also had another business in selling leisure yachts (collectively “Business”). In 2013, Ms Li said she wished to purchase an industrial building for use by the Business because her then office on 25/F and 26/F of Millennium City 3, Kwun Tong (“Millennium City Property”) of about 16,280 square feet in size was insufficient for her purpose. Hence, Ms Li instructed Chua, whom she had dealt with before, to look for an entire building for her to consider.

9.  It is the Plaintiff’s case that Ms Li had made it clear to Chua that she required the Property for purposes relating to the Business. It is also the Plaintiff’s case that it was induced to purchase the Property by certain false representations, both oral and in writing, about the permitted user of the Property made by Chua, and hence Midland, and, via Midland as agent, by the 3^rd Defendant. The representations were defined in the Re-Re-amended Statement of Claim (“RRASOC”) as the “Written Representation”, “Oral Representation” and “Further Representation” (collectively “Representations”). Putting it simply, the Representations were that the Property was suitable for (i) Ms Li’s business self-use and (ii) general industrial purpose. In fact, the Property was not so suitable by reason of the Restriction.

10.  It is common ground that all relevant Defendants knew of the Restriction. The 3^rd Defendant as the registered owner obviously and admittedly knew. As far as the Midland Parties are concerned, it is not just Chua but his superior Chau Wing Kin Stanley (“Stanley”) also knew of the Restriction. The Plaintiff is thus pitching its case as one of fraudulent misrepresentation and not just reckless or negligent misrepresentation, albeit the latter are also pleaded. Since the Plaintiff is alleging fraud, while the standard of proof is still the civil standard, the evidential burden on it has to be commensurate with the seriousness of the allegation so that more compelling and stronger evidence is required to prove its case.

11.  The Plaintiff’s case is that relying on and induced by the Representations, it entered into the PASP and FASP but discovered months later that they were false. It refused to complete on the completion date of 31 October 2013 which was over 8 months from the execution of the PASP. The 3^rd Defendant then forfeited a total of HK$120.6 million ie 20% of the purchase price paid by the Plaintiff as deposits in 3 tranches (“Deposits”). Midland did not receive its commission as a result of the non-completion.

The Protagonists

12.  The following are the parties’ factual witnesses.

13.  From the Plaintiff:

a.  Ms Li. She is no doubt the main protagonist for the Plaintiff. She has filed 3 witness statements in this Action (respectively “Li 1”, “Li 2” and “Li 3”).

b.  Mr Leung Wing Kong (“Leung”), retired but at the material time, general manager and director of Eletek Technology Limited (“Eletek”), a company solely owned by Ms Li. He has filed 2 witness statements in this Action (respectively “Leung 1” and “Leung 2”).

c.  Ms Chan Shan Lai (“Ms Chan”), assistant general manager and chief financial officer of Eletek at the material time. Her duties involved managing the Business’ finance and office administration. She left Eletek in about 2017.

14.  From the Midland Parties:

a.  Chua. He is also no doubt the main protagonist for the Midland Parties as he was the one who allegedly made the false Representations to Ms Li. He was also the one who followed up on the subject transaction with Ms Li all the way up to around completion date.

b.  Stanley, Chua’s superior.

15.  From the 3^rd Defendant:

a.  Mr Tang Kui Ming (“Tang”), the 3^rd Defendant’s sole shareholder at the material time and a longtime investor in Hong Kong properties.[5] The 3^rd Defendant was one of his investment vehicles through which Tang purchased the Property in 2007.

b.  Mr Lau Moon Chi (“Lau”), a representative of the 3^rd Defendant and assisted Tang in the sale and purchase of the Property. He is also an experienced investor in Hong Kong properties and had assisted Tang in managing his investment in properties for years. He mainly liaised and negotiated with estate agents and potential buyers on Tang’s behalf. He was the one who liaised with Chua and took instructions from Tang in the subject transaction.

c.  Ms Pauline So Ka Po (“Ms So”), a director of the 3^rd Defendant at the material time. She reported directly to Tang and assisted Tang in buying and selling properties through the 3^rd Defendant. Ms So’s role in this case was mainly about dealing with the paperwork including in particular the PASP and liaising with a Mr Anver Ching (“Ching”) of the 3^rd Defendant’s solicitors.

16.  As far as the 3^rd Defendant’s witnesses are concerned, there is no attack by the Plaintiff on either Tang or Ms So. In fact, the Plaintiff describes Tang as a relatively forthcoming witness and Ms So as a relatively reasonable witness who gave direct answers. While the Plaintiff does accuse Lau of being evasive, dishonest etc, it can be seen from the Plaintiff’s Closing then the challenge to Lau’s testimony is on relatively minor matters eg how Clause 24 of the PASP[6] was added to the document when there is no dispute that the PASP as executed did contain the clause, or whether he agreed the 3^rd Defendant put the Property on the market as soon as it had purchased it in 2007, which is not an issue in this case. As between the Plaintiff and the 3^rd Defendant, credibility of their witnesses is not a hugely important issue.

17.  The same cannot be said as between the Plaintiff and the Midland Parties. As quite a number of the core issues are factual ones as between them and their witnesses have given competing versions of what happened and what was said at the material events, this court should explain at the outset that its approach, as always, is to consider the testimony of the witnesses and assess it against inter alia the contemporaneous documentary evidence and the known and undisputed circumstances of this case. This court would in particular consider the inherent probabilities or otherwise of the witnesses’ testimony and assess their credibility accordingly in order to come to its findings of fact. This court would also take note of the well-established general approach on fact-finding and assessment of credibility as summarised in, for instance, Hui Cheung Fai v Daiwa Development Limited unrep, HCA 1734 of 2009, 8 April 2014, DHCJ Eugene Fung SC at [77] - [83], a case cited by both the Plaintiff and the 3^rd Defendant. The approach is really all common sense but it is perhaps worth reminding oneself of the following:

a.  Contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility.

b.  In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events.

c.  In determining a witness’ credibility, it is also important to have regard to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence, which is to be tested by a comparison between the witness’ oral testimony and his witness statement.

18.  Given the credibility of the 2 main protagonists viz Ms Li and Chua will affect the outcome of a number of the core issues in this case, it is necessary for this court to give a short profile of and its preliminary observation on the two. Reasons as to why this court prefers the testimony of one to the other on a particular core issue will come when the issue itself is examined.

19.  Ms Li has a very impressive education, professional and business background. She graduated from Beijing Institute of Technology (北京理工大学) with a Bachelor Degree in Engineering in 1989. She first worked as an engineer in China Academy of Launch Vehicle Technology (航天部第一研究院) and then worked in Beijing UniStrong Science & Technology Co., Ltd. (北京合众思壮科技股份有限公司) (“UniStrong”) and was responsible for its technical support. In 2010, UniStrong became a listed company in Shenzhen in which she acted as its director and shareholder until 2013. In 2008, she acquired Eletek which later became her flagship company for the GPS satellite navigation and related electronic equipment and services business. Her other flagship company was Jet Set Marine Limited (“Jet Set”) for the yachts business. She has been in the Business for over 20 years which had grown rapidly with total number of staff worldwide at about 100. In 2013, Ms Li was only in her 40s[7].

20.  While in the box, Ms Li impressed this court as a sophisticated businessperson and a confident witness. Mr Tong SC describes her as “a calm, frank and straightforward witness” in his Closing. This court agrees Ms Li was indeed calm in court but not necessarily frank or straightforward. Two prominent examples of Ms Li being far from frank or straightforward are her testimony (i) on her dealings with Headland Developments Limited (“Headland”) in May 2013 and (ii) that after the subject transaction had fallen through, she had “no mood” to move her office out of the Millennium City Property, a place she said was most unsuitable for her business use.

21.  By contrast, Chua’s education level is only up to Form 2. He has been an estate agent since 1989, first dealing with residential properties and then in 2007, he started to deal in industrial and commercial properties.

22.  While in the box, Chua impressed this court as a straightforward witness. Despite rigorous cross-examination by Mr Tong SC, he remained unshaken and his answers on the main issues were consistent with his witness statement and contemporaneous documents. In Closing, the Plaintiff has launched a scathing attack on Chua accusing him of often giving convoluted answers to muddle the waters and lying blatantly under oath. As this court sees it, many of the questions put to Chua in court concerned minute details of events which were of marginal relevance to the main factual issues in this case. With respect to Chua, given his background and his job nature, this court is not surprised that he was unable to recall meticulously details of such events which happened over nine years ago or to testify in the same confident manner as Ms Li. Having observed the way Chua testified and his demeanour for more than 2 days, this court’s assessment is that the Plaintiff’s criticism of him as a blatant liar is wholly unjustified.

23.  This court does not find it necessary to examine in detail the testimony of Leung or Ms Chan whose testimony stand or fall with Ms Li as they are merely supportive of Ms Li’s testimony. Stanley’s participation in the present transaction is limited and his testimony is also merely supportive of Chua.

The expert witnesses

24.  Apart from factual witnesses, each of the parties has also called one expert witness to testify on the so-called “customary deposit issue”. By Order dated 4 March 2021, 3 questions were posed to the experts as follows.

25.  As at February 2013, being the date of the PASP, and referring to the Hong Kong property market relevant to the Property:

a.  Was there a customary deposit size, by reference to the total purchase price, for a sale and purchase transaction? If so, what was it? (“Q1”)

b.  Would the length of the completion period for a sale and purchase transaction affect the customary deposit size, and how? (“Q2”)

c.  Was there a customary deposit size for a sale and purchase transaction with a completion period of 8 months? If so, what was it? (“Q3”)

26.  One of the main issues in this case is whether the Deposits are legally forfeitable by the 3^rd Defendant. The expert evidence is intended to assist the Court in ascertaining what Mr Wong SC describes as the “starting yardstick” referred to in Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 at [89], i.e. the reasonableness of a deposit is to be tested against the customary and conventional level of deposits generally taken as an earnest of performance. As things turn out, the experts’ answers to the 3 questions as such is of limited assistance and do not feature prominently in the parties’ Closing. Having said that, some of their testimony is still relevant and will be dealt with in the section on forfeiture of the Deposits.

Material Facts

27.  The following is taken largely from the Statement of Agreed Facts, supplemented where necessary with some of the undisputed or indisputable facts together with the descriptions in the Agreed Dramatis Personae.

28.  For a term of 3 years from 1 September 2009 to 31 August 2012 at the rental of HK$1,200,000 per month, the 3^rd Defendant let the Property to Hing Wai Ice & Cold Storage (1998) Company Limited (興偉冰廠凍房(1998)有限公司) (“Hing Wai”).

29.  In February 2010, Chua and Ms Li first had a business relationship where Chua was engaged as the estate agent in Ms Li’s purchase of Units 901-904, 9^th Floor, Sunbeam Centre, No. 27 Shing Yip Street, Kwun Tong (“Sunbeam Property”). On 26 February 2010, Eletek as purchaser signed the provisional agreement for sale and purchase of the Sunbeam Property. On 25 June 2010, the sale and purchase of the Sunbeam Property was completed, with Ms Li nominating Sun Royal (HK) Limited (“Sun Royal”) as the purchaser to take up the assignment.

30.  On 10 September 2010, the 3^rd Defendant applied to the Town Planning Board (“TPB”) for permission for the wholesale conversion of the Property from an industrial building into office use (No. A/H15/240). TPB informed the 3^rd Defendant on 28 January 2011 that the application was rejected.

31.  By a Licence Agreement dated 30 November 2012, the 3^rd Defendant granted Hing Wai a licence to use and occupy the Property at a monthly licence fee of HK$950,000 (“Licence”).

32.  Sun Royal purchased the Millennium City Property at HK$72,039,000 pursuant to a provisional sale and purchase agreement dated 31 August 2012 and a sale and purchase agreement dated 14 September 2012. The purchase was completed on 8 January 2013, with the help of another estate agent.

33.  Sun Royal sold the Sunbeam Property to a third party at HK$126,000,000 pursuant to a sale and purchase agreement dated 8 August 2012. The sale was completed on 3 December 2012, with the help of another estate agent, namely, Centaline.

34.  At all material times, Chua acted as agent of Midland and Midland acted as estate agent for the Plaintiff as purchaser and the 3^rd Defendant as vendor in the sale and purchase of the Property by virtue of the execution of the PASP on 22 February 2013.

35.  On 10 February 2013 (the first day of Chinese New Year), Ms Li messaged Chua that she was interested in purchasing a whole building with a view “to hold” the same.

36.  On 14 February 2013, Chua met with Ms Li and her husband at Pacific Coffee café in the APM Shopping Centre in Kwun Tong to discuss Ms Li’s purchase intentions.

37.  On 18 February 2013, Chua introduced an industrial building known as Success Centre (成功中心) located at Nos. 26-38 Ta Chuen Ping Street, Kwai Chung (“Success Centre”) to Ms Li. They then attended Success Centre with Leung for a site inspection, after which Ms Li told Chua she was interested in buying. Chua later learned that the owner of Success Centre had already entered into an agreement prohibiting acceptance of any other offer for a certain period of time. Upon being so informed by Chua, Ms Li abandoned her plan to purchase Success Centre.

38.  On 19 February 2013, Chua introduced the Property to Ms Li. Chua, Ms Li and Leung attended the Property for a site inspection, which was joined by a Mr Kenneth Chan of Hing Wai. On that day, Chua gave Ms Li a copy of the written Proposal of Sale of the Property (“Proposal”). The Proposal contained the following information:

a.  Description: “The Property is a 12-storey godown building (G/F, Cockloft, 2/F to 11/F)”.

b.  Usage (Conditions of Sale): “Industrial / Godown purposes”.

c.  Outline Zoning Plan: “In accordance with the approved Aberdeen & Ap Lei Chau Outline Zoning Plan No. S/H15/27, the Property lies within the area zoned ‘Industrial’ use.”

d.  Basis of Sale: “Subject to the terms in the Conditions of Sale, the Property will be sold on an ‘as-is’ basis with the benefit of existing tenancies, subject to the terms in the Conditions of Sale.”

e.  Schedule of Uses: It contains the extracted pp.16-17 (in English) and pp.16-18 (in Chinese) of Aberdeen & Ap Lei Chau Outline Zoning Plan No.S/H15/27 showing the industrial “Uses always permitted” and industrial “Uses that may be permitted with or without conditions on application to the Town Planning Board”.

39.  The Proposal also contained the following “Important Notes”:

“While care has been taken in preparing the above description information (inter alia, the information in relation to the description of the Property and its area and the information in any plan), no warranty or representation (expressed or implied) whether in writing, orally or otherwise has been given or is given by Midland Realty (Comm. & Ind.) Limited (“Midland”), the Vendor, its agents, and/or the Vendor’s Solicitors, as to the completeness and accuracy of the contents and/or the information herein contained. Midland, the Vendor, its agents and the Vendor’s Solicitors expressly disclaim any liability whatsoever in respect of any loss or damage arising from or due to the reliance upon the whole or any part of the contents and/or information contained herein. The contents, information and property particulars contained herein are for reference only. They do not constitute an offer for sale and are not intended to nor will they form part of the contract of sale and purchase or any part thereof. All intending purchasers are hereby expressly requested and required by the Vendor, its agents and the Vendor’s solicitors to conduct their own independent inspections and examinations and to seek independent legal and other professional advice to satisfy themselves in all aspects in connection with this Tender and the Property.”(emphasis added)

40.  Lastly, the Proposal contained the following caveat (“Caveat”) at the bottom of each page:

“Whilst care has been taking in preparation of this document, no warranty or representation is made to its accuracy and completeness. It shall not constitute a valid and legally binding agreement and is subject to errors, omissions or other change of conditions without prior notice. Interested parties should satisfy themselves in all aspect in case of doubt, interested parties understand and agree that the above information will be used or relied on at their own discretion and risk and that should verify the above information from other independent sources and should seek independent advice prior to making a decision on any transaction(s).”

41.  After the site inspection, Ms Li offered to buy the Property at HK$580,000,000.

42.  On 20 February 2013, Chua and Stanley attended a meeting with Ms Li, Leung and allegedly Ms Chan at Ms Li’s office at the Millennium City Property to go through the terms of the draft PASP. Ms Chan signed the PASP on behalf of the Plaintiff, provided Chua with a cheque of HK$5,000,000 for the 1^st deposit payment, and offered to purchase the Property. Importantly, the draft PASP already contained a handwritten Clause 24 providing that “賣⽅不保證該物業可作任何⽤途及不作出任何可轉變⽤途之承諾。買⽅不得因此⽽拒絕成交”.

(Translation: “The Vendor gives no warranty that the Property may be used for any purpose, and gives no undertaking that the purpose may be changed. The Purchaser shall not refuse to complete for this reason.”)

43.  On 22 February 2013:

a.  The Government announced cooling measures in the property market including doubling the rate of ad valorem stamp duty payable on most property sales.

b.  After negotiation by telephone through Chua, the 3^rd Defendant and the Plaintiff agreed on the purchase price of HK$603,000,000.

c.  The 3^rd Defendant made other revisions to the draft PASP which the Plaintiff had signed on 20 February 2013. The revisions included a 2-page undated Riders concerning inter alia the permitted user of the Property and the Licence.

d.  Chua took the revised PASP to Ms Chan’s residence where Ms Chan appended her signatures against the revisions to signify the Plaintiff’s agreement.

e.  Chua then brought this revised PASP with Ms Chan’s signatures back to Ms So who signed the same on behalf of the 3^rd Defendant before midnight.

44.  The executed PASP contained the following clauses:

a.  Clause 2: The purchase price shall be HK$603m.

b.  Clause 2(a): Initial deposit in the sum of HK$5m (“1^st Deposit”) shall be paid upon signing of the PASP.

c.  Clause 2(b): Further deposit in the sum of HK$55.3m (“2^nd Deposit”) shall be paid on or before 26 March 2013.

d.  Clause 2(c): Further deposit in the sum of HK$60.3m (“3^rd Deposit”) shall be paid on or before 30 April 2013.

(collectively, “Deposits”)

e.  Clause 2(d): The balance of the purchase price in the sum of HK$482.4m shall be paid upon completion on or before 31 October 2013.

f.  Clause 15: This Agreement supersedes all prior negotiations, representation, understanding and agreements of the parties hereto.

g.  Clause 24: “賣⽅不保證該物業可作任何⽤途及不作出任何可轉變⽤途之承諾。買⽅不得因此⽽拒絕成交”.

h.  Paragraph 1 of the Riders:

“The Purchaser declares that he has been advised to seek independent legal and other professional advice and to engage a qualified person to… satisfy itself with the permitted user of the Property as prescribed by the Government… prior to the signing of this Agreement. The Vendor gives no warranty as to… whether or not the permitted user of the Property as prescribed by the Government fits with the current use of the Property or the Purchaser’s intended use of the Property… Upon signing of this Agreement, the Purchaser acknowledges that the Purchaser has been independently advised and is fully aware of the legal consequences of… any of the matters aforesaid…” (emphasis added)

45.  On 25 February 2013, Chua gave Ms Chan an executed copy of the PASP.

46.  On 26 February 2013, Midland faxed a signed copy of the PASP to Messrs Hoosenally & Neo (“H&N”), the Plaintiff’s solicitors in the transaction.

47.  On 27 February 2013, H&N requested Messrs Simon Reid-Kay & Associates (“SRK”), the 3^rd Defendant’s solicitors in the transaction, to provide the title deeds and documents in respect of the Property together with the draft FASP.

48.  On 8 March 2013, SRK sent to H&N a draft FASP on “subject to contract” basis.

49.  On a certain date between 22 February 2013 and 26 March 2013, Chua gave the Plaintiff through Ms Chan a copy of the Revised Proposal of Sale of the Property (“Revised Proposal”). Apart from the revised asking price of HK$603m, the Revised Proposal also contained the revised usage of the Property as “Industrial or Godown purposes or both, including ice-making and processing of marine life and such other business allied to fishing industry”. Similar to the Proposal, the Revised Proposal also contained the Important Notes.

50.  On 25 March 2013, H&N sent to SRK a revised draft FASP with some proposed amendments.

51.  On 26 March 2013, the parties executed the FASP and the Plaintiff paid HK$55,300,000 as the 2^nd Deposit to the 3^rd Defendant.

52.  The FASP contained the following clauses:

a.  Clause 3.3: The Plaintiff shall pay the 3^rd Deposit on or before 30 April 2013.

b.  Part 1 of Schedule 2: Completion shall be on 31 October 2013 between 9 am and 5 pm.

c.  Clause 17.1: If the Plaintiff fails to complete the purchase, the 3^rd Defendant shall be entitled to forfeit the Deposits.

d.  Clause 26(d):

“The Purchaser declares that he has been advised to seek independent legal and other professional advice and to engage a qualified person to… satisfy itself with the permitted user of the Property as prescribed by the Government… prior to the signing of Agreement. The Vendor gives no warranty as to… whether or not the permitted user of the Property as prescribed by the Government fits with the current use of the Property or the Purchaser’s intended use of the Property… Upon signing of this Agreement, the Purchaser acknowledges that the Purchaser has been independently advised and is fully aware of the legal consequences of… any of the matters aforesaid…” (emphasis added)

53.  On 5 April 2013, SRK sent to H&N the counterpart of the FASP executed by Ms So on behalf of the 3^rd Defendant and title deeds and documents including but not limited to the certified copies of the Conditions of Exchange and the OP.

54.  On 12 April 2013, the FASP was registered at the Land Registry.

55.  On 15 April 2013, H&N raised requisitions in relation to the Property with SRK. No requisition as regards the user restrictions relating to the Property was raised. On 22 April 2013, SRK answered the requisitions raised by H&N.

56.  On 30 April 2013, H&N sent to SRK three cheques totalling HK$60,300,000 as the 3^rd Deposit.

57.  On 2 May 2013, Headland wrote to the Plaintiff and H&N and proposed a meeting to discuss possible future development of the Property.

58.  On or about 15 May 2013, Ms Li and Leung attended a meeting with Headland.

59.  On 16 May 2013, Ms Li and Leung had a meeting with Chua and Mr George Wong Chi Fung (“George Wong”) (surveyor of Midland) to discuss matters relating to the Property.

60.  On 23 May 2013, Ms Li had a meeting with Headland to discuss lease modification and conversion of the Property. Ms Li appointed Headland to (i) apply for a waiver/no-objection letter to remove the user restrictions of the Property; (ii) conduct an outline building conditions study and review; and (iii) to prepare an investment memorandum covering project feasibility, cash flow forecast and cost plan.

61.  On 23 October 2013, SRK reminded H&N of the exact amounts to be paid by the Plaintiff on completion and asked for copies of draft assignment and undertaking letter for approval.

62.  On 29 October 2013, H&N informed SRK that the Plaintiff would not complete the sale and purchase of the Property on the scheduled completion date of 31 October 2013.

63.  On 31 October 2013, the 3^rd Defendant forfeited the Deposits.

64.  On 31 October 2013, H&N wrote to Midland on behalf of the Plaintiff and Ms Li. In the letter, H&N stated that from the title deeds received on 8 April 2013 including the Conditions of Exchange and the OP, “it is clear that the usage of the Property as provided in the Proposal is incomplete and misleading.”

65.  On 16 December 2013, the Plaintiff commenced the present Action.

66.  As at 28 February 2022, the agreed value of the Property was HK$1,046,000,000.

Further material background - 2010 to 2013

67.  Between 2010 and 2013, the Hong Kong industrial property market was experiencing an upsurge in price as a result of the Government’s industrial revitalisation policy announced in October 2009. According to a CBRE[8] report dated 15 March 2018:

a.  From 2009 to 2013, the prices for flatted factories experienced a continuous upsurge with total accumulated growth for the period reaching 203% while the compound annual growth rate was similarly strong at 31.9% per year over the same period.

b.  Overall, the revitalization scheme attracted a wide range of investors who were keen to unlock the value of the old and surplus industrial buildings and took the opportunity to acquire suitable industrial assets before the close of application period under the policy, which was originally[9] proposed to end on 31 March 2013.

68.  Some of the more relevant details of the revitalisation policy for industrial buildings can be found in the Chief Executive’s (“CE”) Policy addresses.

69.  In the 2009-10 Policy Address, the then CE proposed a package of measures to encourage the redevelopment or conversion of industrial buildings by owners. These measures proposed to (i) lower the threshold from 90% to 80% for compulsory sale for redevelopment for industrial buildings in non-industrial areas to facilitate consolidation of ownership and (ii) exempt owners who opted for the wholesale conversion of a building instead of redevelopment from paying the waiver fee for change of land use, provided that the requirement on the age of property was met and planning permission was obtained. These proposed measures were put in place since April 2010.

70.  Presenting his 2011-12 Policy Address in October 2011, the then CE reported that encouraging progress had been made and explained that the measures would be extended for another three years:

“51. In 2009, I announced initiatives to better utilise vacant or under-utilised industrial buildings through redevelopment or wholesale conversion. These measures have been in place since April 2020 and were due to last for three years. We have made encouraging progress. By the end of last month, the Lands Department had approved 35 applications, involving the demolition and redevelopment of 9 industrial buildings and the wholesale conversation of 26 others, providing a total gross floor area of 380 000 square metres for non-industrial uses. Another 23 applications are being processed.

52. In light of the mid-term review completed last month, we will extend these measures for a further three years…”

71.  In January 2013, presenting his 2013 Policy Address, the then CE reported on the policy in revitalising industrial buildings as follows:

“87. Our policy to revitalise industrial buildings has been put in place for almost three years. In total, 13 applications for redevelopment and 49 for wholesale conversion had been approved, which could provide a total gross floor area of about 680 000 square metres for non-industrial uses. The Government is prepared to further relax certain restrictions on wholesale conversion, including allowing owners to recover the amount of gross floor area loss due to alteration of building structure by making minor changes on the outside of the existing building frames under specific conditions. Such arrangements will further facilitate revitalisation of industrial buildings, hence increasing commercial and residential land supply.”

72.  Ms Li accepted she had known about the said Government policy in early 2013 when she contacted Chua and said she found it very encouraging to her. Leung also admitted knowledge of such policy.

73.  Further, during the short period of 2010 to 2012, Ms Li completed the purchase of the Sunbeam Property in June 2010 at HK$69,669,400 and completed its sale in December 2012 at HK$126m - handsome profit of over HK$56 million after only 2 ½ years.

74.  After signing the agreement for the sale of Sunbeam Property on 8 August 2012 but before completion, Ms Li, via Sun Royal, entered into a provisional sale and purchase agreement on 31 August 2012 to purchase the Millennium City Property at HK$72.039 million. Completion of the purchase of Millennium City Property took place on 8 January 2013.

75.  The relevance of these 2 transactions will be further explained later in this Judgment. The point to note is that against the backdrop of Ms Li’s success in property investment and the said government policy, on 10 February 2013, Ms Li contacted Chua for the acquisition of an entire industrial building, shortly after the completion of the sale of the Sunbeam Property in December 2012 and completion of the purchase of the Millennium City Property in January 2013.

Summary of the parties’ case

76.  It all started with a Whatsapp message on 10 February 2013 from Ms Li to Chua enquiring “最近還有沒有整幢物業有機會 hold 嗎?”.

77.  The Plaintiff alleges that Ms Li had told Chua at the meeting on 14 February 2013 at Pacific Coffee café in the APM Shopping Centre (“14 February Meeting”) that she was interested in buying an entire industrial building for the following purpose (“Purpose”):

a.  Primarily to be used as a showcase for the Business.

b.  To house an office and warehouse and to use part of the building as a showroom for the Business.

c.  The remaining area to be leased to third parties.

78.  Chua and hence the 3^rd Defendant and Midland were aware of the nature of Ms Li’s Business and the Purpose was a fundamental requirement of any property to be considered and purchased by the Plaintiff.

79.  In reliance of and induced by the Representations, the Plaintiff entered into the PASP and the FASP. The Representations pleaded by the Plaintiff were contained in or made by Chua orally as follow:

a.  the Proposal given to Ms Li during an inspection of the Property on 19 February 2013 when Leung was also present (“19 February Visit”);

b.  an oral representation made by Chua to Ms Li on the same day when the Proposal was given to her; and

c.  the Revised Proposal given to the Plaintiff on or about 22 March 2013.

80.  The Proposal contained the following information on user:

a.  Usage (Conditions of Sale): “Industrial / Godown purposes”.

b.  Schedule of Uses - INDUSTRIAL: The Schedule contained 2 columns showing “Uses always permitted” and “Uses that may be permitted with or without conditions on application to the Town Planning Board”.

81.  It is pleaded by the Plaintiff that under the column “Uses always permitted”, various industrial uses were set out including Information Technology and Telecommunications Industries; Radar, Telecommunications Electronic Microwave Repeater, Television and/or Radio Transmitter Installation; Warehouse, etc. without mentioning any restrictions as to the user of the Property.[10]

82.  The oral representation made during the 19 February Visit was to the effect that the Property was suitable and ideal for the Purpose[11]. More specifically, it is pleaded by the Plaintiff at para 5 of the RRASOC that:

“(1) When the parties arrived at the rooftop of the Property, Ms. Li and Mr Leung enquired of the 1^st Defendant as to whether they could install its sizable radar and satellite equipment on the rooftop, the 1^st Defendant said that there was no problem in this regard;

(2) Ms. Li had, in the course of viewing the Property, enquired of the 1^st Defendant as to whether the Property could be physically adapted/converted to meet the Purpose. The 1^st Defendant replied and stated, inter alia, that there would be no problem as long as they did not convert the whole building into a commercial office block or a residential block and that a few years ago the owner of the building had applied to convert the whole building into a commercial office block but was refused. The 1^st Defendant said that the Property was suitable and ideal for their purpose;

(3) In response to Ms. Li’s enquiry about refurbishing the whole building, the 1^st Defendant said that if they refurbished it for self-use as an industrial building there would be no problem…

…

(5) There was no mention by the 1^st Defendant as to any restrictions on the user of the Property at any time.”

83.  As for the Revised Proposal given to the Plaintiff on or about 22 March 2013, what is pleaded by the Plaintiff at para 8 of the RRASOC is that:

“…the asking price had been revised to HK$603,000,000.00 and that the usage was revised to ‘Industrial or Godown or both, including ice-making and processing of marine life and such other business allied to fishing industry’, with other information basically unchanged”[12].

84.  It is pleaded that the said Representations were false in that the Property could not be used for general industrial use and could not be used for the Purpose.

85.  It is also pleaded that the said Representations were made (i) by Chua on behalf and with the authority of Midland and (ii) by Chua and Midland on behalf and with the authority of the 3^rd Defendant. In the absence of authority from the 3^rd Defendant to make the Representations, Chua and Midland were in breach of warranty of authority. Lastly, it is pleaded that Midland and Metro were vicariously liable for the Representations made by Chua.

86.  In addition to the claim in misrepresentation, it is pleaded that, by reason of the misrepresentations made by Chua and Midland, they were in breach of their contractual or fiduciary duties owed to the Plaintiff as the latter’s agents. The agency in question is pleaded at para 1(7A) of the RRASOC as thus: Chua and Midland were acting as the agents of the Plaintiff in identifying a property suitable for the Purpose and in advising and assisting the Plaintiff in purchasing such a property (“Agency”).

87.  One point to note about the RRASOC is para 16 in which it was originally pleaded the Plaintiff found out about the Restriction after the title deeds had been obtained by its solicitors H&N, which was in April 2013. That particular plea was only deleted by amendment allowed on 16 May 2022 ie Day 1 of the trial. The original plea was consistent with H&N’s letter to Midland dated 31 October 2013 and inconsistent with the Plaintiff’s current case that Ms Li discovered about the Restriction only in August 2013.

88.  The Midland Parties deny and the 3^rd Defendant does not admit any misrepresentation had been made to the Plaintiff.

89.  As far as the Midland Parties are concerned, their case is as follows.

90.  First, they deny Ms Li had the Purpose or had informed Chua at the 14 February Meeting (or at any time) that she intended to use the Property for the Purpose. Instead, at the 14 February Meeting, Ms Li told Chua that she wanted to acquire an en bloc industrial building for investment purpose with or without tenancy.

91.  Second, Chua had not orally represented to Ms Li that the Property was suitable for the Purpose. Rather, Chua had on more than 1 occasion told Ms Li that the permitted user of the Property was limited to ice-making and cold-storage.

92.  As for the Proposal and the Revised Proposal which were admittedly given to the Plaintiff, while they did not mention the specific ice-making and cold storage user restrictions, they did not contain any false or misleading statements.

93.  Third, the Plaintiff had not relied on and had not been induced by any of the Representations to enter into the PASP and the FASP.

94.  Fourth, the Plaintiff is estopped from contending that it had entered into the PASP or the FASP in reliance on the Representations by reason of various terms therein including Clauses 15 and 24 and para 1 of the Riders to the PASP as well as clause 26(d) of the FASP.

95.  Fifth, if any alleged misrepresentation had been made out, the Plaintiff has affirmed the PASP and the FASP with knowledge of the Restriction and is precluded from rescinding them.

96.  Sixth, if any alleged misrepresentation had been made out against Chua, Midland and Metro deny the misrepresentation was made with their authority, consent etc.

97.  On the other hand, Midland counterclaims against the Plaintiff for liquidated damages in the sum of HK$6,030,000 on the basis that it had wrongly failed to complete the purchase of the Property pursuant to Clause 13a of the PASP which provided:

“If either the Vendor or the Purchaser fails to complete the sale or purchase … the defaulting party shall compensate immediately the Agent HK$6,030,000 as liquidated damages. This clause shall survive the termination of this Agreement.”

98.  As for the 3^rd Defendant, its case is that the Plaintiff is not entitled to any relief against it for the following reasons.

99.  First, it had no knowledge of the Purpose.

100.  Second, it had not appointed Chua or Midland to be its agent in advertising, promoting, marketing or selling the Property, preparing the Proposal or Revised Proposal, or making any representation regarding the permitted user of the Property. Hence, Chua or Midland had not made the Representations on its behalf.

101.  Third, the Representations contained in the Proposal and Revised Proposal were not false.

102.  Fourth, the Plaintiff did not rely and was precluded from relying on the Representations by reason of (i) the Important Notes in the Proposal and Revised Proposal, (ii) the Caveat in the Proposal and Revised Proposal, (iii) Clause 24 of the PSAP, para 1 of the Riders to the PSAP and Clause 26(d) of the FASP.

103.  Fifth, the 3^rd Defendant is entitled to forfeit the Deposits upon the Plaintiff’s failure to complete.

104.  On the other hand, the 3^rd Defendant counterclaims against the Plaintiff for loss and damage for breach of the FASP as a result of the non-completion of the sale and purchase while giving credit for the amount of Deposits forfeited.

105.  Alternatively, the 3^rd Defendant counterclaims against (i) Chua for breaches of duty and/or negligence as its agent and (ii) Midland and Metro for damages for Chua’s breaches of duty and negligence as its agent. These counterclaims are made if this court finds for the Plaintiff on its claim against the 3^rd Defendant on the basis that the misrepresentation was made with its authority.

106.  At the invitation from the bench on the last day of trial, all parties have submitted a note of submission of their “definitive” claims for relief against each other, taking into account the evidence which has emerged at the trial. Since their submissions vary depending on this court’s findings on inter alia the Plaintiff’s misrepresentation claim, the same will be dealt with towards the end of this Judgment.

Core Issues

107.  While the parties have prepared a lengthy Agreed list of issues, none of them have strictly followed it in their Closing submissions. Instead, they have set out what they no doubt perceive as the important issues which will be dispositive of the Action. In light of the parties’ treatment in their Closing submissions, the core issues can be condensed as follows:

a.  What was the purpose of the Plaintiff’s purchase of the Property and whether it was made know by Ms Li to Chua? (“Purpose and Communication Issue”)

b.  Did Chua/Midland make the Representations to Ms Li? If Chua/Midland did make the Representations, were any of them false and made fraudulently? (“Representation and Fraud Issue”)

c.  Did Ms Li rely on any misrepresentations and was she induced by them to enter into the PASP and FASP? (“Inducement and Reliance Issue”)

d.  If the Representations, or any of them, were made and were found to be false and made fraudulently, was the Plaintiff disentitled from relying on them by reason of (i) the Important Notes in the Proposal and Revised Proposal, (ii) the Caveat in the Proposal and Revised Proposal, (iii) Clauses 15 and 24 of the PSAP, (iv) para 1 of the Riders to the PSAP and (v) Clause 26(d) of the FASP? (“Exclusion of Liability Issue”)

e.  If the Representations, or any of them, were made and found to be false and made fraudulently, did the Plaintiff nonetheless affirm the FASP with knowledge of the user restrictions of the Property and hence the falsity of the Representations and thereby become disentitled to the right to proceed with its claim of misrepresentation? (“Affirmation Issue”)

f.  If the Representations, or any of them, were made and found to be false and made fraudulently, whether they were made with the authority of Midland and/or the 3^rd Defendant? Whether any of the Midland Parties have warranted to the Plaintiff they had the necessary authority from the 3^rd Defendant and whether they are liable for breach of warranty of authority? (“Authority Issue”)

g.  Generally, what relief is available to which party? (“Relief Issue”)

h.  In particular,

i.  Was the 3^rd Defendant entitled to forfeit the Deposits and to claim damages for the Plaintiff’s failure to complete the purchase? (“Forfeiture Issue”)

ii.  Was Midland entitled to claim from the Plaintiff the sum of HK$6,030,000 pursuant to Clause 13a of the PASP by reason of the Plaintiff’s failure to complete? (“Liquidated Damages Issue”)

Deliberation

Purpose and Communication Issue

108.  This is the first and foremost core issue for a number of reasons.

109.  While the Plaintiff has pleaded in para 2 of the RRASOC that Ms Li was interested in buying a whole industrial building for “business and investment purposes”, what is pleaded later in that paragraph is that only the Purpose (ie primarily for business self-use with the unused areas to be leased out) was specifically mentioned to Chua. It is also clear from Li 1 and her oral testimony that she wanted a whole industrial building primarily for her business needs - essentially she needed more space for the Business. It is also emphasised in para 3 of the RRASOC that Chua well knew the nature of Ms Li’s Business and that the Purpose was a “fundamental requirement” of any property to be purchased by the Plaintiff. Further, at para 5 of the RRASOC, the pleaded Oral Representation said to have been made by Chua during the 19 February Visit was to the effect that the Property was suitable and ideal for the Purpose. Lastly, it was pleaded in para 11 of the RRASOC that the reason[13] why the Representations were false is because the Property could not be used for that Purpose.

110.  Once this core issue is decided one way or another, it would have an enormous impact on the rest of the issues.

111.  As this court sees it, this is a factual issue between the 2 principal and competing witnesses, Ms Li and Chua, albeit their testimony is corroborated by the other witnesses within their camps.

112.  The Plaintiff’s case is supported by Ms Li’s testimony directly as to what she told Chua at the 14 February Meeting and indirectly by what she was told by Chua during the 19 February Visit ie the Oral Representation. On the other hand, the gist of Chua’s testimony is that Ms Li expressed to him her intention to purchase a whole building at a price range of about HK$300 to HK$500 million for investment purpose, with or without tenancy, and not for self-use or for her business. Further, on 19 February 2013, Chua said he had specifically told Ms Li (i) the Property could only be used for ice-making and cold-storage and (ii) since the Property was occupying the Lot with the adjacent Hing Wai Centre, it could not be redeveloped on its own.

113.  In Closing, the Plaintiff submits that Chua knew about the nature of Ms Li’s Business in 2013 by reference to Chua’s pleaded averment that in early 2010 he knew Ms Li was engaged at that time in a business relating to electronic navigation but not the focus of which area of electronic navigation.

114.  The Plaintiff then submits at considerable length that Ms Li intended to purchase the Property for the Purpose and Chua knew about this. On the other hand, the Midland Parties submit that the Plaintiff has wholly failed to prove the existence of the Purpose or its communication to Chua (or the other Midland Parties).

115.  Since the bulk of the Plaintiff’s Closing submissions in this respect are there to rebut the submissions of the Midland parties, this Judgment would be more comprehensible if this court refers to the Midland Parties’ submissions first before setting out the Plaintiff’s reply.

116.  First, the Midland Parties submit that the Purpose is founded on the bare assertion of Ms Li. Nothing about the Purpose was mentioned in the WhatsApp messages between Ms Li and Chua from February to October 2013 or in any other contemporaneous record. This is inconceivable if the Purpose was of such fundamental importance in this transaction that Ms Li actually refused to complete the deal, having paid the hefty Deposits.

117.  In reply, the Plaintiff submits that such an argument cuts both ways in that the Plaintiff can also argue Chua never mentioned the Restriction in his WhatsApp conversations with Ms Li, and that the argument is more damaging to the Midland Parties’ case since they are the ones who emphasise that Chua had told Ms Li about the Restriction right from the beginning.

118.  The Plaintiff is entirely correct that the argument may cut both ways. But given the burden is on the Plaintiff to prove its case on the Purpose and Communication Issue, this court does not agree the argument is more damaging to the Midland Parties. Other things being equal, the Plaintiff suffers from not being able to adduce corroborative documentary evidence. But this court is of course aware the argument is only a factor to be taken into account.

119.  Second, the Midland Parties submit that Ms Li’s alleged business needs are unbelievable, when objectively assessed against the circumstances of her purchase of the Sunbeam Property, the Millennium City Property and the Property.

120.  In particular, the objective evidence shows that Ms Li and Leung are not truthful in asserting that the Sunbeam Property and the Millennium City Property were acquired for Ms Li’s self-use and not for investment. As for the purchase of the Property in 2013, it took place at a time when the industrial property market in Hong Kong was experiencing an upsurge in price owing to the Government’s industrial revitalisation policy. The incentive to purchase the Property for investment was clearly there.

Purchase of Sunbeam Property and the Millennium City Property

121.  The reference to Sunbeam Property and the Millennium City Property can be found in Li 1[14] where Ms Li said this:

“2010 : Meeting the 1^st Defendant through the Sunbeam Property Transaction

9. I first came to know Billy Chua (“1^st Defendant”) in or around February 2010…

…

12. At the time, I was looking to purchase a property where I could house the office of the Business. The 1^st Defendant introduced me to the property known as Units 901-904, 9^th Floor, Sunbeam Centre, No.27 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong, which is about 40,982 square feet in size (the “Sunbeam Property”).

13. In 2010, I used a limited company, Sun Royal (HK) Limited, to acquire the Sunbeam Property for the price of HK$69,669,400.00. I purchased the Sunbeam Property for self-use and not for investment purposes. The 1^st Defendant was fully aware of the Business throughout the course of the Sunbeam Property transaction, especially considering that he acted as an agent in said transaction…

2012 : Move from the Sunbeam Property to the Millennium City Property

14. By 2012, due to the need of the Business, I, through Sun Royal (HK) Limited, sold the Sunbeam Property for the price of HK$126,000,000.00 and purchased another property at Millennium City 3, comprising of 25^th and 26^th Floors, 370 Kwun Tong Road, Kwun Tong, Kowloon, Hong Kong, an office space of about 16,280 square feet in size (the “Millennium City Property”). The 1^st Defendant was also involved in finding interested buyers for the Sunbeam Property…

15. Eventually, even more space was needed for the Business, mainly due to the need to install a sizeable radar and satellite equipment as well as the establishment of the yacht business. Also, more space was required because I desired to put the office administration, storage/warehouse and the repair and maintenance departments (which were and remain located in different buildings) in the same building. Doing so would allow for better management and smoother operation. With this purpose in mind, I began looking for a “whole building” industrial property to purchase.” (emphasis added)

122.  The Midland Parties point out that the evidence shows Sun Royal was actually a joint venture company - it was owned by Ms Li only as to 60%[15] and by Leung and 3 others as to the remaining 40%. While in the box, Leung admitted that Sun Royal was a joint venture company and its shareholders were co-investors. This is far from the picture painted in Li 1. The fact that Sun Royal was a joint venture investment company is obviously relevant to the questions (i) why Ms Li used it, instead of Eletek, to purchase the Sunbeam Property and (ii) whether the Sunbeam Property was really for her business self-use. Eletek was the flagship company of the Business for the marine related electronic equipment and services side. One would think it makes more sense to use a business company to purchase a property for business self-use, rather than an investment company with multiple investors.

123.  According to the provisional agreement for sale and purchase dated 26 February 2010, Sun Royal bought the Sunbeam Property subject to a number of tenancies covering the entire 40,982 sq ft except for 556 sq ft which was vacant. The tenancy of 1 of the units only expired in November 2011 while that of another 2 units expired only in January 2012. It is plain that the Sunbeam Property could not be used for Ms Li’s business operations right after completion. On 8 August 2012, Sun Royal entered into an agreement for the sale of the Sunbeam Property at HK$126 million. At that time, the Sunbeam Property was still subject to two unexpired tenancies which were entered into on 21 February 2011 and 6 July 2012 respectively ie well after Sun Royal had become its owner. In these circumstances, how could it be said that Ms Li bought the Sunbeam Property solely for self-use?

124.  The Plaintiff’s reply is that Ms Li had explained during cross-examination that the Sunbeam Property was primarily for self-use because after the tenancies of different parts of the Sunbeam Property had expired, she could repossess those units one by one for self-use. In addition, after purchasing the Sunbeam Property which was on the 9/F of the building, Ms Li continued to rent the 12/F (about 15,000 sq ft) for her Business use and she was not be in a hurry to take back the units which had been leased out. Ms Li’s evidence was supported by Leung in that the Business did not urgently need some areas in the Sunbeam Property so it would not take possession of such areas if the tenancy thereof was or could be renewed.

125.  Another reply by the Plaintiff is that the Midland Parties are bound by their pleadings where they averred that Ms Li acquired the Sunbeam Property “as an office for her business”.

126.  Lastly, the Plaintiff suggests the evidence that Ms Li entered into 2 tenancies with increases in rent after having acquired the Sunbeam Property and that she did not recover the entire Sunbeam Property for her own use before selling it at most indicates that she had a change of mind in terms of how she wanted to use the Sunbeam Property after purchasing it e.g. because it sufficed for Ms Li to run her office on the 12/F of the building while slowly recovering units in the Sunbeam Property on 9/F.

127.  On the last point, it is to be noted that Ms Li never quite said she had a change of mind for such reasons in the box.

128.  This court does not accept the Plaintiff’s replies are an adequate answer to the points made by the Midland Parties. It seems to this court that while Ms Li may be able to offer in the box some qualifications to what she said in Li 1, the more immediate concern here is the assessment of her credibility as a witness. As The Midland Parties submit in Reply, the true factual position relating to the Sunbeam Property (as well as the Millennium City Property) goes to undermine her credibility. Further, her credibility is not salvaged simply because she had to and did accept in the box, when presented with the records, that those two properties had been purchased subject to tenancies, or she caused further tenancies to be signed after the purchase, or some parts were in fact never used for the Business. With regard to the last point, even Leung had to accept in Leung 2[16] that, after gradually recovering the units whose tenancies had expired, the Business had only occupied about 30,716 sq ft of the Sunbeam Property prior to its sale in August 2012. This court is entitled to take on board the above submissions of the Midland Parties in making its own assessment on her credibility.

129.  After the sale of the Sunbeam Property, Sun Royal purchased the Millennium City Property (comprising 25/F and 26/F) which was about 16,280 sq ft. In Li 1, she claimed that moving to the Millennium City Property was “due to the need of the Business”.

130.  The Midland Parties submit that if the need was basically for more space, it is strange that the Millennium City Property was so much smaller than the Sunbeam Property. Regarding 25/F of the Millennium City Property, it transpired at trial that Ms Li had never moved into that floor for her Business - that floor was either rented out or left vacant. Leaving the whole floor vacant is telling - when a tenant could not be found, Ms Li and her co-investors behind Sun Royal simply left it vacant instead of putting it to some use by the Business. The evidence about the 25/F contradicts Ms Li’s unqualified claim in Li 1 that the Millennium City Property was bought for her business needs. In the end, Ms Li had to and did concede that the 25/F had always been an investment property.

131.  The Midland Parties further submit that Ms Li’s allegation that it was after moving into the Millennium City Property that she found out it was not unsuitable for her business needs defies common sense. In this regard, Ms Li claims the Millennium City Property was unsuitable when she realised (i) she could not put all her businesses into one set of premises and the separation of different departments had led to internal management issues, and (ii) she also could not install such equipment as radar and satellite at the building.

132.  Lastly, the Midland Parties point out that notwithstanding Ms Li had found the Millennium City Property most unsuitable as early as February 2013, she continued to use 26/F as her office for 4 more years until 2017. They also criticize Ms Li’s explanation as not coherent and absurd when invited to explain why she had not left Millennium City Property sooner.

133.  The relevant parts of Ms Li’s testimony in relation to the Millennium City Property are as follows:

a.  Within a year of purchasing the Millennium City Property, she looked for another building again because despite the very good outer appearance, the warehouse and engineering department of the Business could not fit into the Millennium City Property and had to be severed from her finance and management departments.

b.  The reason why part of the Business could not be located in the Millennium City Property was because of noise and loading problems. That separated part of the Business was located in a relatively older building in Kwun Tong.

c.  By the time of the trial, Ms Li[17] was still holding the Millennium City Property but has leased them out in April and May 2020.

d.  Prior to these 2 tenancies, she used only the 26/F as the office of her Business between 2013 and 2017 and had either let out the 25/F or kept it vacant between 2013 to 2020 as an investment property all along.

e.  Between 2017 and 2020, she left the 26/F.

f.  Although the Millennium City Property was most unsuitable for the Business, she stayed put between 2013 and 2017 because her loss of HK$120 million arising from the purchase of the Property was quite a blow to her such that she did not have the mood to look at other properties which might be more suitable. In re-examination, she explained that she was not in the mood to look for new properties because she felt that she been conned.

134.  In relation to the purpose of the 25/F, the Plaintiff submits that Leung, who would be the most familiar with the detailed operations of the Business, disagreed with Ms Li’s testimony that it had always been an investment property and invites this court to prefer his testimony to Ms Li’s because she was mistaken.

135.  Again, this court does not accept the Plaintiff’s replies are in any way an adequate answer to the points made by the Midland Parties.

136.  First, this court agrees Ms Li’s testimony that it was after moving into the Millennium City Property that she found out it was unsuitable for her business needs defies common sense. It seems to this court any seasoned businesswoman purchasing a property at the price tag of HK$72 million in order to meet her expanding business needs would, more probably than not, have done some basic research before, rather than after, the purchase. Such research would involve steps to ascertain how the business needs could be met and how her existing business operations would be conducted or adjusted upon the property being available. If for instance there was a desire to house all the departments of the Business under one roof, it is rather incredible that Ms Li would have committed to the purchase the Millennium City Property without knowing whether this desire could or could not be met and the extent to which it could be met. The same can be said of the need to install a sizeable radar or satellite equipment on the rooftop.

137.  Second, whether or not the same can be described as incoherent or absurd, this court finds Ms Li’s explanation for not moving out of the 26/F of the Millennium City Property after realizing that it was wholly unsuitable for the Business rather improbable. After refusing to complete the purchase of the Property, Ms Li still had to run her Business on some other premises. If the Millennium City Property was clearly unsuitable and given funding was not a problem according to her, the natural thing to do was to find somewhere more suitable instead of staying on part of it for another 4 years. Even if Ms Li was not in the mood to look for other premises immediately, that is hardly a logical explanation for not looking for them for 4 years.

138.  Third, the Plaintiff clearly has no answer to Ms Li’s admission that the 25/F had always been an investment property. The invitation to this court to reject her testimony but to accept Leung’s is a rather desperate attempt to salvage the unsalvageable. For how can one claim Leung was in a better position than Ms Li to know her real purpose in purchasing the Millennium City Property? The evidence clearly shows it was Ms Li who decided where to buy, whether it was the Sunbeam Property, the Millennium City Property or the Property.

139.  Lastly, as this court has stated earlier, the more immediate concern here is the assessment of Ms Li’s credibility as a witness and this court agrees that the true factual position relating to the Millennium City does go to undermine her credibility and is something this court is entitled to take into account.

140.  For these reasons, it seems to this court Mr Wong SC is correct when he submits the objective evidence shows Ms Li is not truthful in asserting that the Sunbeam Property and the Millennium City Property were acquired for her business self-use and not for investment.

Intended Purchase of Success Centre and Purchase of the Property

141.  The purchase of the Property was preceded by Ms Li’s inspection and intended purchase of Success Centre on 18 February 2013.

142.  Success Centre is situated in Kwai Chung. It is a 29-storey industrial building with a total gross floor area of 240,483.08 sq ft which is much larger than the Sunbeam Property and much much larger than the Millennium City Property. Compared with the floor area of the Property at just under 190,000 sq ft, Success Centre was still larger. According to Chua, at that time, Success Centre was without tenants.

143.  In Li 1 at paras 28 and 29, Ms Li said:

“28. After visiting the Kwai Chung Building [ie Success Centre], I informed the 1^st Defendant that I was interested in purchasing the building. I wanted to purchase the Kwai Chung Building because the whole building was vacant at the time. Since I primarily intended to purchase a whole building for the self-use of the Business and not merely to look for a steady return from rentals, I considered the vacant state of the premises ideal for the Purpose. Because the premises were vacant, I could immediately commence renovation/decoration and move in quickly thereafter.

29. To my disappointment, however, the deal did not proceed because the owner of the Kwai Chung Building, at the time, had signed an agreement with a third party prohibiting the owner from accepting offers from other buyers, including myself, until after a certain period of time (I was told for several months) had lapsed. Since I could not afford to wait, I gave up in my attempt to purchase the Kwai Chung Building and asked the 1^st Defendant to look for other suitable whole buildings that had been put up for sale on Hong Kong Island, including, inter alia, the Aberdeen and the Wong Chuk Hang areas. I asked to look at potential properties in Aberdeen and Wong Chuk Hang as the areas were both near and had good access to the harbour, which made it more suitable for the yacht business as well as for the transmission and operation of radar and satellite equipment.” (emphasis added)

144.  Arising out of what happened to Success Centre, the Midland Parties make a couple of submissions against the alleged purpose of self-use: (i) Ms Li’s alleged requirement for installing radar and satellite equipment on the rooftop as part of her business needs was inconsistent with her answer in cross-examination that she had not asked Chua whether the rooftop of Success Centre could be used for the installation of the equipment and (ii) Ms Li’s admission in cross-examination that, in light of the enormous space offered by Success Centre, if she had bought it, she definitely would lease out the portion that she did not use, in which case leasing, rather than the Business, would become the primary business of Ms Li.

145.  The Plaintiff’s first submission in reply is that even though Ms Li did not know whether she could install the equipment on the rooftop of Success Centre, this issue, according to her, could be easily resolved if she owned the entire building. That is a fair enough response from Ms Li, whether she was right or wrong in so thinking.

146.  The Plaintiff’s next submission in reply is that even if Ms Li were to lease out the majority of Success Centre and use only the remaining space for the Business, this only means her intention was both to invest and conduct the Business in it - it does not mean that leasing would become her primary business. This may be true as far as it goes but that reply misses the point. The point is if Ms Li knew she would have to lease out the majority of Success Centre after acquiring it but intended to purchase it, this tends to suggest that her stated primary purpose of business self-use is not as definite as she has portrayed in Li 1.

147.  In this court’s view, several indisputable points arise out of Success Centre.

148.  First, the fact that it was vacant and Ms Li could move in quickly to start renovation/decoration was seen by her as a distinct advantage to her purpose of business self-use. The relevance of this point will become apparent when it comes to the terms of her purchase of the Property which will be discussed next. Second, it is not in dispute that the inspection of Success Centre took a very short time and, as a fact, Ms Li and Leung who accompanied her on that day had not inspected the rooftop on that day. Third, Ms Li expressed her interest in buying Success Centre on the same day after she had been given a copy of the proposal for sale of Success Centre and after what can only be described as a very brief inspection. People buying a mid-size residential flat of several hundred square feet for self-use may be content with such a brief inspection. In the present case, Ms Li was buying a whole building of 29 floors primarily for her business self-use. One may reasonably query: did she and Leung not have to come up with some idea first as to which floor(s) were suitable for use by which department(s) of the Business and in order to do so, did she and Leung not to have to take a closer look at the layout of the floors?

149.  What is important about the whole event about Success Centre is the objective fact that with such limited information offered by the proposal for sale and a casual inspection, Ms Li was happy to pursue Success Centre without further deliberation as to whether the building was really suitable for her. In addition, Ms Li was happy to pursue Success Centre even though she knew she would lease out the majority of its space after acquiring it. These objective facts must be evidence against Ms Li’s testimony that she was looking for a building primarily for her business self-use. If business self-use was not her primary purpose on 18 February 2013 in relation to Success Centre, that must also be the case on 19 February 2013 in relation to the Property. Again, this is a point which goes to her credibility.

150.  The Midland Parties’ next submission turns on the terms of the PASP and FASP.

151.  Clause 21 of the PASP which was signed by Ms Chan for the Plaintiff on 20 February 2013 read:

“買賣雙方同意簽署正式買賣合約後，賣方同意現買方與現租客洽談租務事宜。賣方須依據買方指示與現租客簽署新租約。於成交當日交吉或不交吉，買方必須接受。完成交易時，賣方須將全部租約按金轉交買方，並於樓價尾數扣除。”

152.  According to Chua, the first part which is underlined was inserted at the request of Ms Li, the reason being Ms Li had told him she wanted to keep the existing tenant. The second part was added by him in view of the first part.

153.  That version of Clause 21 was revised on 22 February 2013, after receiving comments from the 3^rd Defendant. The revised Clause 21 of the PASP as signed by both the Plaintiff and the 3^rd Defendant read:

“買賣雙方同意簽署正式買賣合約後，賣方同意現買方與現Licensee洽談租務事宜。新租約租期需在成交日後一天生效，租約並由買方及Licensee自行簽署，賣方承諾成交前不行使取消License權利。於成交當日交吉或不交吉，買方必須接受。完成交易時，賣方須將全部License按金轉交買方，並於樓價尾數扣除。”

154.  The revised Clause 21 was substantially repeated in Chinese in Clauses 26(a) and (b) of the FSPA.

155.  Further, the Licence Agreement with Hing Wai was specifically dealt with in Clause 6 of the FASP. Under Clause 6.1, the Property was sold subject to and with the benefit of the Licence Agreement. Under Clause 6.5(a), the 3^rd Defendant and the Plaintiff should both use reasonable endeavours to obtain Hing Wai’s consent to the transfer by the 3^rd Defendant to the Plaintiff on completion of the deposit held by the former pursuant to the Licence Agreement and Hing Wai’s signature to the Novation Agreement in the form at Schedule 4 should be evidence of its consent to the same. Under the Licence Agreement annexed to the FASP, Hing Wai would occupy the entire building and that at least 3-month notice was required before it could be terminated.

156.  The perception of Ms Li’s ability to immediately obtain vacant possession as a distinct advantage for her primary purpose of business self-use has been referred to earlier in relation to Success Centre. In relation to the Property, she said in Li 1 at para 50:

“The 1^st Defendant also told me during the site visit that the existing tenancy on the Property was terminable at any time. Because I intended to purchase the Property for the immediate use of the Business, I considered the information that the existing tenancy could be terminated at any time to be attractive and a positive one as it was consistent with the Purpose and my overall plans for the Business.”

157.  The Midland Parties submit that the insertion of Clause 21 in the PASP and the corresponding inclusion in the FASP plainly contradict the Plaintiff’s claim about the Purpose and point emphatically to Ms Li’s intention to acquire the Property for investment purpose instead of business self-use.

158.  First, there can be no dispute that Ms Li wished to continue what she thought was a tenancy (later corrected to licence) of the Property. Given the way in which Clause 21 was inserted by hand into the standard form PASP, it is clear she wanted to engage in the negotiation of the terms with Hing Wai for the purpose of continuing the existing arrangement with it.

159.  Second, Clause 21 in the original draft of the PASP imposed a rather unusual obligation on the 3^rd Defendant to enter into a new tenancy with Hing Wai in accordance with the Plaintiff’s instructions. This was resisted by the 3^rd Defendant which led to the revised Clause 21 - the Plaintiff should directly negotiate with Hing Wai on the arrangement.

160.  Third, Ms Li’s inclination to continue the existing arrangement with Hing Wai is consistent with what Kenneth Chan had told her during the site inspection on 19 February 2013 - if the existing tenant ie Hing Wai moved out because of an increase in rent, it would be difficult for the Plaintiff to find a new tenant because of (i) the requirement to operate ice-making facilities and cold storage in the building, (ii) the necessity to do so with a licence and (iii) the small pool of such licence-holders.

161.  Fourth and most importantly, if Hing Wai were to continue its occupation of the Property after completion, the entire building would not be available for Ms Li’s business self-use. This demonstrates that none of Ms Li, or Leung and Ms Chan who corroborated her are truthful on this core issue of Purpose.

162.  The Plaintiff’s reply can be found in para 28 of its Closing.

“28…. Ds contended that Ms. Li’s agreement to purchase the Property along with a tenancy or licence of the entire building subject to 3 months’ notice for termination and agreement to Clause 21 of the PASP regarding the tenancy or licence instead of insisting on vacant possession shows that her purpose to purchase the Property was not for self-use but for investment (see Midland Parties’ closing at p.8 §18, p.52 §181 and p.65-71 Part C6; and D3’s closing at p.12-13 §29). It is submitted that such agreement by Ms. Li does not defeat her Purpose of primarily self-use and secondarily investment because:

(a) The fact that Mr. Tang agreed that the licence on the Property was terminable at any time as aforesaid is consistent with P’s case that D1 told Ms. Li during the site inspection that the existing tenancy was terminable at any time and that she deemed such factor to be attractive and suitable for her purposes;

(b) Mr. Tang’s logic can apply in P’s case as well. It is common sense that most purchasers cannot use an en bloc industrial building entirely for their self-use immediately after purchase. It is reasonable to expect them to first engage contractors and make plans and arrangements for renovation to render the building suitable for their specific needs before actually conducting such renovation on the building. Some renovation works may even need government approval and take some time in the process. It would therefore be prudent for P, a new purchaser of the Property, to keep the licence of the Property alive while earning some licence fees when renovation plans were being made. Then, when most preparatory works for renovation had been done, P could serve notice on the Licensee to terminate the licence and then take possession of the Property 3 months later for renovation works to begin. Indeed, Ms. Li gave evidence that her Purpose included both the need of her Business and investment purpose because she would not be able to use the entire Property within a very short time and would like to rent out the parts of the Property which were not used by her Business in the meantime. As she was purchasing an entire building, it was reasonable for her to believe that she would need a certain time to get the building ready, but she did admit that it would be better if there was no tenant and she could deal with the preparation immediately; and

(c) Although Ms. Li found the vacancy of Success Centre attractive because it would allow her to immediately commence renovation and move in quickly thereafter and she found the Property attractive with the existing tenancy terminable at any time as told by D1 because it would allow her Business to use the Property immediately, such evidence does not contradict her testimony that whether the tenancy of the Property could be terminated at any time was not much of her concern. The entirety of her evidence reflects that immediate vacancy was merely a feature which Ms. Li preferred. She was free to reconsider her plans for self-use of the Property upon finding out that the Property was subject to an existing licence terminable on 3 months’ notice. The fact that immediate vacancy was a big advantage does not mean temporary occupation by a tenant or licensee at the time would be a deal breaker for Ms. Li. It follows that her acceptance of purchasing the Property with a licence does not automatically mean that she was only purchasing the Property for investment purposes.”

163.  The simple point of the Midland Parties is that it is difficult to reconcile (i) Ms Li’s evidence on the Purpose and, for that Purpose, the distinct advantage of being able to immediately obtain vacant possession of the building with (ii) her clear intention to maintain Hing Wai’s occupation of the Property as evinced by Clause 21 of the PASP.

164.  The Plaintiff suggests that it would be prudent for it, as a new purchaser, to keep the licence of the Property alive while earning some licence fees when renovation plans were being made. This is hardly believable given (i) the meagre licence fees of only HK$950,000 a month, in comparison with the purchase price of the Property and (ii) the rather long completion date of 31 October 2013, which was more than 8 months from the date the PASP was signed. Whatever renovation plans Ms Li might have in mind, complicated or otherwise, when she suggested the inclusion of the first part of Clause 21 into the PASP, she had not explained in evidence why 8 months would not be enough for the plan to come to fruition.

165.  What is telling is Ms Li’s testimony that whether the tenancy with Hing Wai could be terminated at any time was not much of her concern. Mr Tong SC, with his usual sharpness of mind, was keenly aware of the damage this answer could do to the Plaintiff’s case. During re-examination on Day 6, he managed to obtain an answer from Ms Li that “In fact, it does concern me.” But the damage has been done.

166.  Third, the Midland Parties submit the evidence shows Ms Li’s purpose in purchasing the Property was for investment at a time when she knew there had been a continuing upsurge in the value of industrial buildings driven by the Government’s industrial revitalization policy. The Government’s said policy and Ms Li’s knowledge of it has already been set out above. What follows deals with the evidence of Ms Li’s conduct as relied upon by the Midland Parties.

167.  On 20 February 2013, Chua sent to Ms Li at her request information on the sale and letting transactions of the units in Hing Wai Centre by Whatsapp. Ms Li said in re-examination she had asked for it to do a comparison since the two buildings were on the same Lot. However, there is no suggestion that the entire building of Hing Wai Centre (as opposed to individual units) was up for sale so it is difficult to see what comparison there was for Ms Li to do, the purpose of the comparison or how meaning this comparison could be for that purpose.

168.  On the same day, Chua and Stanley had a meeting with Ms Li and Leung at her office in the Millennium City Property. At the meeting, the 3^rd Defendant’s previous unsuccessful application to the TPB to convert the Property from industrial to commerce use was discussed and the 7-page application form was shown to her. In re-examination on Day 6, apart from the unsuccessful application, Ms Li also confirmed what she was told by Chua and Stanley: “because these two buildings were on the same lot, so if anything is to be done, it needed the consent of the people in the other building”.

169.  The point is that if Ms Li had not told Chua that the Property was for investment, even tentatively, but she was buying it primarily for self-use, it would have been rather unlikely that Chua would bother to mention to her about the unsuccessful application and to obtain the application documents in order to show to her. Further, why should Ms Li be concerned with the transaction record of individual units in Hing Wai Centre if re-development was not on her mind?

170.  Next, on 18 March 2013, Ms Li sought a meeting on the same day by Whatsapp to Chua in order to discuss the Hing Wai Centre and the unsuccessful application in these terms:

“Hello, Billy, good morning, do you have time today? I want to meet you for discuss following issue. “1. 冻仓旁建築的业权分布, 2.之前冻仓改建遭拒之理由, 3.如何计算收购业权超过80%”…”

171.  According to Chua, in response, he relayed the questions to George Wong and after receiving the answers, relayed them back to Ms Li.

172.  Ms Li admits there was a discussion with Chua about Hing Wai Centre but not the reason for the unsuccessful application to change the user of the Property. In Li 1 at para 76, this is what she said:

“On or about 18^th March 2013, I, on behalf of the Plaintiff, discussed with the 1^st Defendant about the ownership details of Hing Wai Industrial Centre and how the 80% compulsory sale application threshold for redevelopment was to be calculated because I wished to learn more about the procedure in the event I were to decide, after moving the Business into the Property to make a similar application (as the earlier Unsuccessful Application) to convert the Property into commercial/office building. Contrary to the allegations of the Defendants, the 1^st Defendant did not discuss with me the reasons for the failure of the other earlier application to change the user of the Property.” (emphasis added)

173.  Ms Li’s denial in this regard is rather odd since she was the one who had asked for a discussion specifically on the reasons why the unsuccessful application was rejected. Ms Li’s conduct in initiating such a discussion is also inconsistent with her answer in re-examination that she was not at all worried about the unsuccessful attempt to change the user of the building from industrial to commercial.

174.  Next, in May 2013, Ms Li engaged Headland in relation to the redevelopment of the Property, including in particular, the application to remove the user restrictions. The Midland Parties submit the Headland documents conclusively settle the issue of her purpose in acquiring the Property since they prove decisively she had commenced her redevelopment project on the Property in May 2013.

175.  On 2 May 2013, Mr Gunning, managing director of Headland, a development consultant representing an international client, wrote to H&N enclosing their letter addressed to Ms Li (“Headland’s May 2 Letter”) and asked for a meeting concerning the Property. Page 2 of Headland’s May 2 Letter set out their understanding of the user restrictions applicable to the Property:

“... However, we have also confirmed with the DLO that as the ice-making facility is a single standalone building, the DLO will allow the owner the right to apply for a lease modification without seeking the approval of owners of other undivided shares on the same Lot. The owner can therefore make a single premium payment at current market rates to remove the current lease restriction in regard to

1. Ice-making and

2. The industrial areas set aside for processing of marine life related to the fishing industry.” (emphasis added)

176.  There is no question Ms Li had got the letter. As stated in Li 3, Ms Li and Leung both attended meetings with Headland on 9 and 23 May 2013, whereas Ms Li herself had an additional meeting with Headland on 15 May 2013.

177.  The 3^rd Defendant submits and this court agrees that Ms Li’s testimony during cross-examination on her communications with Headland is particularly problematic. Just by way of an example for the purpose of illustration, the following is the transcript of Mr Wong SC’s cross-examination of Ms Li on Headland’s May 2 Letter on Day 4 at pp 40 to 43:

“Q. Very well. Now, Ms Li, the part that has been interpreted to you, obviously Headland in this letter had already spelled out the existence of the ice-making and cold storage user restrictions; correct?

A. Correct.

Q. And then they also spell out the need to apply for lease modification in order to remove those user restrictions; correct?

A. That's what they said in the letter.

Q. Yes. And by this time of course you knew very well the existence of these user restrictions if not earlier?

A. In this letter, it was the first time I saw it, but I was not too clear -- the meaning of it was not clearly known to me.

Q. Forget about first time or second time for the time being. Just on this question, the existence of the user restrictions, the ice-making and cold storage user restrictions, you knew of the existence upon reading the letter, yes or no?

A. The first time I saw it yes, but this is not the same as what my agent said to me.

Q. Sorry, who is your agent?

A. Billy.

Q. Just coming back to this letter first, I take it that your answer to my question is, "Yes, I knew"; right?

A. I saw it.

Q. You saw it and you knew of the existence of the user restrictions, "yes" or "no", Ms Li?

A. No, I saw it, but I did not understand it.

Q. What is it that you did not understand?

A. Okay. What I did not understand was -- well, I read these words, but as to the meaning of these words, I did not understand.

Q. Ms Li, I put it to you you're not telling the truth. You knew very well of the existence of the user restrictions clearly spelled out in this letter.

A. Disagree.

Q. Mr Leung would have no difficulty understanding it right? He's accompanying you all the way with the Headland letters; correct?

A. Correct. He had took part in the first meeting.

Q. He would have no difficulty understanding the existence of the user restrictions, yes or no?

A. If you ask me, I said no.

Q. This letter was sent to H&N first to be forwarded to you.

A. Correct.

Q. If you did not understand anything, you could always have H&N to advise you; is that right?

A. Not true.

Q. Ms Li, in this letter I put it to you apart from the existence of the restrictions, you knew very well that had you to apply to the Lands Department for the removal of the user restrictions; correct?

A. Not correct.

Q. Go to page 220, please, paragraph 4. In the light of your answers, I'm sorry, Mr Interpreter, I will have to trouble you to interpret paragraph 4. Ms Li, from reading this paragraph, you knew, the plaintiff knew, unless the user restrictions were removed by an application to the Lands Department, the property could only be leased to a tenant carrying on ice-making and cold storage business; correct?

A. Not true. At the time, my understanding was because Headland was introducing the clients, if they want to rent to the client, such changes were needed. That was my understanding.

Q. Ms Li, I suggest to you that if your alleged purpose were true, you knew that unless the user restrictions were removed, the property could not be used for your alleged purpose, yes or no?

A. I disagree. But I really -- when I read this letter, it was the first time that I saw that someone mentioned about such restrictions.

Q. Ms Li, earlier you said what was stated in this letter was different from what was said by Billy Chua.

A. Correct.

Q. Ms Li, can you tell us why we did not see any expression of surprise, why we did not see any word of complaint or grumbling against Billy Chua, at the time in May --

A. I would like to ask Mr Wong what point of time are you talking about?

Q. In May, after receipt of this letter.

A. Why I did not have any grumbling against Billy, well,I did not reckon that the matter mentioned by Headland had too much to do with me. Number one, they were talking about their client. Number two, I suppose I should believe Billy rather than directly said anything about Billy before clarifying this matter. And this matter to me was not clear to me.”(emphasis added)

178.  In this court’s view, Ms Li’s suggestion that both she and Leung did not understand the meaning of that letter is entirely disingenuous. So is her denial that if she did not understand anything, she could always ask H&N to advise her. The fact is that shortly after receiving the letter, Ms Li and Leung had a meeting with Headland on 9 May 2013 - the contents of that letter obviously interested her sufficiently to call for that meeting.

179.  Further, anyone in the position of Ms Li who was supposedly ignorant of the Restriction and intent on business self-use would have been alarmed after receiving that letter from Headland and would have immediately tried to enquire with Chua and ascertain the existence or otherwise of the said user restrictions. The enquiry did not have to be in the form of a complaint or in any way confrontational but enquiry it should be. This was the subject of cross-examination of Ms Li on Day 4. As shown in the transcript quoted above, Ms Li’s answer, surprisingly, was (i) she did not reckon the matter mentioned by Headland had too much to do with her and (ii) she should believe in Chua.

180.  Instead of enquiring with Chua about what Headland said in the letter, Ms Li sent a message to Chua on 14 May 2013 with the following question:

“Hello, billy,如果把冰场目前的你两条规定去掉，再将一个产证分拆成12个小业权，这个代理申请的佣金多少合适 ”[18]

181.  Ms Li admitted in the box that the “2 requirements” in her WhatsApp message referred to the 2 restrictions mentioned in Headland’s May 2 Letter.

182.  Importantly, on 23 May 2013, Ms Li and Leung had a meeting with Headland. Pursuant to the discussion at that meeting, Mr Gunning and Ms Li signed three documents whereby Headland was engaged to carry out a list of tasks under three topics for a total fee of HK$1,218,000:

a.  Application for a Waiver Application/ No-Objection Letter.

b.  Outline Building Conditions Study & Review.

c.  Preparation of Investment Memorandum: Project Feasibility, Cash Flow Forecast & Cost Plan.

183.  Those documents were appended to Headland’s letter dated 23 May 2013 to Ms Li (“Headland’s May 23 Letter”). On page 1 of that letter, there was a re-cap of what had been discussed earlier at the meeting and under the heading “Project Assumptions”, Headland stated:

“• The overall intention is to resell the Property into the open-market at the most opportune time at the desired exit price;

• The aim is to achieve a 100% return on equity investment;

• The Property is to be preferably sold in a strata- title format preferably on a floor-by-floor basis to individual buyers; the preference being to minimize the number of buyers;

• To successfully sell the property on a strata-title basis you will need to apply for a Waiver Application/No-Objection Letter to remove a minimum 3 clauses that occur in the existing lease, namely:-

1. Special Condition (7)(a)(i)-17,590 m2 of GFA shall be used for ice-making

2. Special Condition (7) (a) (ii) - 5,520 m2 of UFA for small factory units

3. Special Condition (20) (a) - unloading of ice onto boats along sea wall (TBC)

...

As previously stated, our aim is to:

• help you to procure finance;

• be fully aware of all material issues likely to have an impact on the project;

• maximize your return on equity investment (ROI), and

• exit this deal having successfully met your stated investment targets”.

184.  In its Closing, the Plaintiff refers to Ms Li’s testimony that at the meeting on 9 May 2013, Headland advised her to sell the Property on a strata-title basis as her exit plan when she decided to sell the Property in the future. It submits that it is common sense that most, if not all, property purchasers (whether commercial, industrial or even residential) would consider their future exit when acquiring a property if they do not intend to keep the property permanently. This is not something that only investors would consider. In any event, as Ms Li’s discussions with Headland occurred in May 2013 after entering into the PASP and the FASP, even if Ms Li demonstrated any intention to use the Property for pure investment purposes in such discussions, this would still be unrelated to and be unable to disprove the Purpose for which she first acquired the Property.

185.  After referring to Headland’s May 23 Letter, the Plaintiff then submits the fact that (i) Ms Li engaged Headland to provide the services of inter alia “Preparation of Investment Memorandum: Project Feasibility, Cash Flow Forecast & Cost Plan” and (ii) there was no mentioning of self-use, may at most show that she wanted to explore the development potential of the Property.

186.  This court rejects the Plaintiff’s explanation and justification of what happened with Headland.

187.  First, of course generally there is nothing out of the ordinary for purchasers of properties to have some sort of “exit plans” to cater for the exigencies of the unknown future, whenever that may come. However, in the present case, Ms Li was purchasing an entire building with the avowed primary purpose of her business self-use. In the absence of evidence on any concrete plan as to how she intended to make use of the Property for the Business or how long she intended to use it for, it is far-fetched for anyone to think in terms of an “exit plan” even before the completion date.

188.  Second, it is not the Plaintiff’s case that there had been a change of Ms Li’s intention. On the contrary, she insisted acquiring the Property for the Purpose was her intention all along. If so, Ms Li’s purpose of buying the Property is either what she alleges ie business self-use plus some ancillary rental income or what the objective evidence tends to suggest ie for investment with a view to re-sale plus some rental income from Hing Wai in the meantime.

189.  At this juncture, this court should also deal with a rather lengthy submission in the Plaintiff’s Closing about the investment value of the Property.

190.  The Plaintiff submits that in terms of the investment value of the Property, Tang, who is a very seasoned property investor, agreed in court that the rental return of the Property had never been very good. In particular, in 2013 when the 3^rd Defendant was trying to sell the Property at around HK$600 million, the licence fee was only HK$950,000 per month, representing a rate of rental return of less than 2% pa. Tang agreed that there were investment opportunities with far higher returns than that. Further, the Plaintiff submits that if Ms Li was purchasing the Property purely as an investment, she would not have said, which is denied, she could leave the Property vacant for a few years and then resell it simply because of an expected higher price upon resale since no reasonable investor would have such a mind set. The Plaintiff then follows up with a long list of reasons as to why Ms Li would not have chosen the Property as an investment.

191.  This court does not agree the submission assists the Plaintiff.

192.  In this court’s view, the Plaintiff’s submission may be valid if it is suggested that Ms Li was looking for a rental investment property with an eye primarily for its rental return. But as the Headland documents show, the overall intention was to resell the Property in the open market at the most opportune time and that the aim was to achieve a 100% return on equity investment. If so, Ms Li was akin to many property investors in Hong Kong, aiming not so much at the rental income of the property but at the profit upon its resale after “holding”[19] it for whatever period of time it takes to optimise the profit. It is not uncommon in Hong Kong that investors (at least those with no funding or cashflow issues) are willing to purchase a property and leave it vacant until it can be resold at a profit. In other words, the evidence is consistent with Ms Li looking for a re-sale investment property. The evidence shows she had made a handsome profit out of the Sunbeam Property. It is inherently probable that she aimed to repeat that success with the Property in 2013, in light of her knowledge of the Government’s policy about industrial buildings.

193.  To conclude, for the above reasons, this court rejects Ms Li’s testimony, as well as Leung’s and Ms Chan’s in so far as they are corroborative of Ms Li’s, as not credible and accepts that of Chua and Stanley on this issue. This court therefore finds the Plaintiff has failed to prove the existence of the Purpose or its communication to the Midland Parties.

194.  Given this court’s findings of fact on this issue, many of the other associated issues have been academic and can be disposed of much more quickly.

Representation and Fraud Issue

195.  For the present purpose, the Oral Representation said to have been made by Chua shall be dealt with first since it directly ties in with the Purpose and Communication Issue.

196.  The Plaintiff contends its case that Chua had made the Oral Representation is supported by the evidence of Ms Li and Leung and there is no evidence to disprove the same other than the Defendants’ denials. Further, if this court accepts Chua did make the Oral Representation, it should also find the Oral Representation to be false because the existence of the Restriction clearly rendered the Property unsuitable for the Purpose.

197.  The Midland Parties submit that if the existence and communication of the Purpose to Chua cannot be proven, the Plaintiff’s entire case will fail as it is impossible for Chua to have made any oral representation to Ms Li that the Property was suitable for the Purpose which ex hypothesis did not exist and was never communicated to him. Whether or not it is impossible, this court agrees that it is wholly improbable that Chua would have made the Oral Representation given this court’s findings on the previous core issue and shall so find.

198.  As this court does not find Ms Li a truthful witness and rejects as incredible her testimony[20] on the existence of the Purpose or its communication to Chua, whether or not there is positive evidence to disprove the Plaintiff’s case is neither here nor there - the denial by Chua, whom this court finds as a truthful witness, is sufficient. But there is actually more than a mere denial. Chua’s testimony is that he, as well as Kenneth Chan, had told Ms Li on 19 February 2013 inter alia about the existence of the Restriction. It is also Chua’s and Stanley’s testimony that on 20 February 2013, before the Plaintiff signed the draft PASP, the existence of the Restriction was reiterated to Ms Li.

199.  Further, the Midland Parties submit a number of additional reasons as to why this court should find against the Plaintiff on the issue of Oral Representation. The following are the more cogent ones.

200.  First, the Conditions of Exchange and the OP were public documents and the Restriction, as accepted by the Plaintiff in para 13(3) of the RRASOC, was readily ascertainable by inspection and reading the Conditions of Exchange. If so, the Restriction could have easily been found out by H&N in the course of examining the title documents. It is not in dispute that on or about 5 April 2013, the title deeds and other documents relating to the Property were provided to H&N and the Conditions for Exchange and the OP were included among them. However, in Li 1, Ms Li explained H&N did not take issue on the Restriction with SRK because it had not been informed by Ms Li of the Purpose.

201.  In this court’s view, whether or not there is a proper explanation as to why H&N did not take up the issue on the Restriction with SRK should be answered by H&N themselves. But it is hard to believe that H&N would not have found out about the Restriction from a perusal of the title documents. This point has an important bearing on the Affirmation Issue. For the present purpose, the more cogent point here is that it is incredible that Chua and Stanley, being experienced estate agents and actually knew of the Restriction, would have naively assumed that they could get away with concealing the Restriction from not just the Plaintiff ie Ms Li and Leung but also from its lawyers but nevertheless decided to run the risk of being found out.

202.  Second, the Plaintiff’s failure to raise any concern over Clause 24 of the draft PASP when it was presented at the meeting on 20 February 2013 and its acceptance of that clause[21] in the final version is telling. In para 63 of Li 1, Ms Li said:

“Instead, at the 20^th February 2013 meeting, the 1^st Defendant merely prepared and presented to Mr. Leung, Ms. Chan (who only joined the meeting for the purposes signing the Provisional S&P and presenting the cheque for the initial deposit), and I the unsigned provisional agreement for sale and purchase with all the details stated therein including, inter alia, the Chinese No Warranty Clause (“the Provisional S&P”). When I asked the 1^st Defendant about the Chinese No Warranty Clause, he replied that the vendor (i.e. the 3^rd Defendant) wanted to protect itself and the language of the clause was quite standard in Hong Kong Property transactions and there is nothing to be worried or alarmed about.” (emphasis added)

203.  Standard or not, Clause 24 was there at the suggestion of the 3^rd Defendant for its own protection. If it was for the 3^rd Defendant’s own protection, it must beg the question: protection against what? As to that, there was no clue in Li 1 - she simply said she relied entirely on Chua’s assurance that there was nothing to be worried about. But as the Midland Parties submit, this allegation of trust is plainly grossly exaggerated since by February 2013, all that Chua had done for Ms Li was to conclude one deal on the purchase of the Sunbeam Property in 2010 - in fact, Chua was not the agent who helped Ms Li sell it in 2012.

204.  Clause 24 is actually a very simple clause in Chinese the gist of which is that the 3^rd Defendant did not guarantee the Property could be used for any purpose or that its user could be changed. There is no suggestion that Ms Li did not understand it. Ms Li was not a first-time buyer of expensive properties and the present transaction involved a commitment of hundreds of millions of dollars. Realistically, this clause would in all probabilities have rung a bell to anyone in her position (or Leung’s for that matter). Yet, on her case, Ms Li behaved as though she innocently and completely believed in Chua’s assurance and thought it need not cause any concern. This is beyond what this court can accept as believable.

205.  Third, the undisputed absence of complaint from the Plaintiff about any misrepresentation as to the user of the Property until 23 October 2013. According to Chua’s evidence, it was only at a meeting in Ms Li’s office on 23 October 2013 that representatives of H&N accused him of failure to explain to Ms Li about the Restriction. This is reflected in the WhatsApp message dated 23 October 2013 between Chua and Ms Li. The absence of complaint must be viewed in light of the evidence that (i) by May 2013 at the latest[22], Ms Li must have realised the existence of restrictions on user from her dealing with Headland and (ii) in early August 2013, she admittedly discovered that the Representations were all false in that the Property could not be used for general industrial use or the Purpose.

206.  It was in the letter dated 29 October 2013 from H&N to SRK that the Plaintiff put on record it would not complete the purchase of the Property on the ground of misrepresentation. The letter stated:

“… our client will not complete the sale and purchase of the Property on 31^st October 2013 on the ground that your client and/or the handling estate agent, namely Mr Billy Chua of Midland Industrial, had (1) misrepresented to our client on the permitted user of the Property and (2) deliberately withheld material information in respect of the type of the Property as prescribed in the Agreement and Condition of Exchange dated 21^st January 1989 which our client had relied upon such misrepresentations in entering into an agreement with your client to purchase the Property.”

207.  In fact, after the discovery of the falsity of the Representations in early August 2013[23], the following WhatsApp messages were exchanged between Ms Li and Chua:

a.  On 21 August 2013, Chua texted Ms Li and said his company’s surveyor would like to meet her next week and asked whether she was free. Ms Li replied she was on vacation in Europe and would return to Hong Kong on 31 August 2013. She also asked Chua to tell her the specifics as to which Chua said it was about the redevelopment plan of the Property discussed last time.

b.  On 22 October 2013, Chua texted Ms Li about the completion of the deal the following week and asked if the mortgage had been arranged - Ms Li replied the bank had agreed to a 40% mortgage and her shares had already been sold so there should be no problem with the funds.

208.  The Midland Parties submit that there was no complaint against Chua after the discovery in August 2013 and Ms Li was still in the mood for a vacation in Europe because she had been informed of the Restriction at the outset and she was not concerned because she was not buying the Property for the Purpose. Given Ms Li’s conduct aforesaid, this court accepts the validity of that submission.

209.  To conclude, for these additional reasons, this court is reinforced in its view that Plaintiff’s case on the Oral Representation must fail. For the record, this court accepts Chua’s testimony that he and Kenneth Chan had informed Ms Li on 19 February 2013 about the existence of the Restriction and that on 20 February 2013, the existence of the Restriction was reiterated to Ms Li by him and Stanley, and shall so find. The issue of the falsity of the Oral Representation does not arise and there is no question of Chua or any of the Midland Parties being fraudulent.

210.  As for the Written and Further Representations, the Plaintiff submits that the question is how the words in the 2 documents would be understood by a reasonable person in Ms Li’s shoes in the factual context in which the representations were made. It is trite that the court in construing a representation would adopt an objective approach.

211.  The Plaintiff then submits that instead of unambiguously stating the user of the Property was limited to ice-making and cold storage purposes only, the Proposal and Revised Proposal contained various false representations intended to mislead the Plaintiff including:

a.  Under “Description” on p3, the Property was described as a “godown building”.

b.  Under “Usage (Conditions of Sale)” on p4, the Property was described to be used for “Industrial / Godown purposes” in the Proposal and “Industrial or Godown purposes or both, including ice-making and processing of marine life and such other business allied to fishing industry” in the Revised Proposal.

c.  Under “Outline Zoning Plan” on p4, the Property was said to lie “within the area zoned ‘Industrial’ use”.

d.  Under “Schedule of Uses” on pp23-27, the general heading above Column 1 “Uses always permitted” and Column 2 “Uses that may be permitted with or without conditions on application to the Town Planning Board” was stated to be “INDUSTRIAL”.

e.  Under “Schedule of Uses” on pp23-27, Column 1 “Uses always permitted” included inter alia:

i.  “Industrial Use (not elsewhere specified)”;

ii.  “Information Technology and Telecommunications Industries”;

iii.  “Radar, Telecommunications Electronic Microwave Repeater, Television and/or Radio Transmitter Installation”; and

iv.  “Warehouse (excluding Dangerous Goods Godown)”.

f.  The “Market Transactions of Whole Block Industrial Buildings” in 2011 to 2012 on pp28-31 of the Proposal and the “Market Transactions of Whole Block Industrial Buildings” in 2012 to 2013 on pp28-31 of the Revised Proposal listed out en bloc industrial buildings which were purported comparables to the Property but in fact they were not comparables of the Property.

212.  It is self-evident, and accepted by both Chua and Stanley in court, that the Proposal or the Revised Proposal had not spelt out the Restriction. However, the effect of any particular statement should not be ascertained in isolation - it is necessary to have regard to the cumulative effect of all other statements and conduct involved. In the present case, this means whatever statements were or were not contained in the Proposal and the Revised Proposal cannot be considered in isolation. Rather, they must be viewed in light of this court’s finding of fact that Ms Li was told about the existence of the Restriction right from the outset.

213.  Looking at the 2 documents in this light, this court must reject the Plaintiff’s case that they would be understood by Ms Li herself or a reasonable person in her shoes to mean the Property was suitable for general industrial use. Instead, this court finds that the 2 documents would be understood to mean the Property was suitable only for the specific industrial use of ice-making and cold storage. There is nothing false about that.

214.  For completeness, since the Plaintiff fails to establish any misrepresentation on the part of the Midland Parties, its claim against them for breaches of duty, which is premised on there be a misrepresentation, must also fail.

The Inducement and Reliance Issue

215.  The relevance of this issue depends on this court finding in favour of the Plaintiff on the Purpose and Communication Issue as well as the Representation and Fraud Issue. Since this court has actually found against the Plaintiff on those issues, there is no question of the Plaintiff having been misled or induced by the Representations in entering into the PASP or the FASP.

The Exclusion of Liability Issue and Affirmation Issue

216.  In relation to the Exclusion of Liability issue, the Plaintiff submits at section A3.2 of its Closing as follows:

“129. It is submitted that, as a matter of law, the various exemption clauses relied on by the Ds are ineffective in excluding Ds’ liabilities, the first and foremost general reasons being:

(a) Nobody can contract out liability for fraud (see Chitty at §9-153 {1} and S. Pearson (supra) {4}); and

(b) The Purpose which required the Property to be primarily used for Ms. Li’s Business —indeed, the purpose for which any property is purchased—was no doubt a fundamental term in the sale and purchase transaction of the Property. Further or alternatively, one cannot sell an orange and pretend it is an apple. Thus, it is also a fundamental term that the Property was a general industrial building as opposed to a one-purpose-only building. As submitted above, D1’s knowledge about such fundamental term is imputed to its principals, D4 and D3. Therefore, D1, D4 and D3 cannot by reference to any contract term claim to be entitled to render a contractual performance substantially different from that which was reasonably expected of them, which was to recommend and sell to P a property suitable for Ms. Li’s Business respectively, except in so far as the contract term satisfies the requirement of proper construction and reasonableness (section 8(2)(b)(i) of the CECO {7})…” (emphasis added)

217.  It can be seen from the above that the gist of the Plaintiff’s submission against the Defendants’ reliance on the various disclaimer/exclusion clauses is premised on certain facts: the existence of the Purpose, Chua and hence the other Defendants’ knowledge of it and the establishment of fraud. None of these facts are established.

218.  As for the Affirmation issue, the Midland Parties’ position is that the Plaintiff cannot even substantiate a case of misrepresentation in the first place and it is not necessary to explore the question whether it is precluded from rescinding the FASP on that ground by reason of actions amounting to “affirmation”. This court agrees.

219.  In any event, on the Affirmation Issue, the 3^rd Defendant submits inter alia that upon inspection of the title documents by H&N on or around 9 April 2013, the Plaintiff must have known about the user restrictions and thus the falsity of the alleged Representations which gave rise to the right to rescind. The fact that it had failed to raise any complaints of misrepresentation to the 3^rd Defendant but instead proceeded to pay the 3^rd Deposit of HK$60.3m on 30 April 2013 constitutes an irrevocable affirmation of the FASP. This court agrees but would reiterate its finding of fact that the Plaintiff actually knew of the Restriction as early as 19 February 2013. Even assuming for the sake of argument that H&N, for reasons unknown, did not find out about the Restriction in early April 2013, the payment of the 3^rd Deposit on 30 April 2013 would still constitute an irrevocable affirmation of the FASP. The Plaintiff’s argument that it did not know its legal right to elect between affirmation and rescission of the FASP is wholly incredible. As submitted by the 3^rd Defendant, H&N had been advising the Plaintiff throughout the subject transaction and it is inconceivable that it would not know about its legal rights.

The Authority Issue

220.  Judging from the Plaintiff’s Closing at section A2, the crux of the issue is whether the misrepresentations were made by Chua/Midland with the authority (actual or apparent) of the 3^rd Defendant so that it is liable for them, and if not, whether Chua/ Midland are liable for breach of warranty of authority. As this court sees it, this core issue has also become academic in light of its findings on the earlier issues - since there was no misrepresentation by the Midland Parties, none of the Defendants including the 3^rd Defendant can be liable, whatever authority the Midland Parties might or might not have from the 3^rd Defendant.

221.  In these circumstances, the 3^rd Defendant’s counterclaim against the Midland Parties falls away.

The relief issue and other sub-issues

222.  The 2 principal issues are: (i) as between the Plaintiff and the 3^rd Defendant, the latter’s entitlement to forfeit the Deposits of HK$120.6 million and (ii) as between the Plaintiff and the Midland Parties, the latter’s claim for liquidated damages of HK$6,030,000.

Forfeiture of the Deposits of HK$120.6 million

223.  The law on the forfeiture of deposits has been authoritatively laid down by the Court of Final Appeal in Polyset.

224.  First, at [7] to [13], Bokhary PJ made the following observations the gist of which is that the law on forfeiture of deposits should not be confused with the law governing liquidated damages clauses and the doctrine of penalties:

“Deposits and liquidated damages serve different purposes

7. The law’s development in regard to deposits has followed a very different course from its development in regard to liquidated damages and penalties.

8. As far as liquidated damages and penalties are concerned, the law is fairly well settled in its fundamental aspects. Contracts often specify the sum payable in the event of breach. Even if the sum so specified is described as liquidated damages, it may be seen upon examination to have been fixed as a threat to be held over a party’s head with a view to compelling him to perform. If so, the specified sum will be regarded as a penalty and therefore not recoverable. And the innocent party will be awarded damages assessed according to his actual loss. In order for the specified sum to be recoverable as liquidated damages, one condition must be met. It is that such sum, judged by the position at the time when the contract was made, represents a genuine effort by the parties to pre-estimate the loss which the innocent party would suffer in the event of breach. Compensation according to a genuine pre-estimate of loss is the purpose which liquidated damages are meant to serve.

9. Deposits are meant to serve a wholly different purpose. Essentially a forfeitable deposit serves as an earnest of performance where there is an interval between the time when the contract is made and the time when payment in full becomes due. Such deposits are therefore standard in contracts for the sale of land. The property being off the market between contract and completion, it is only natural for the vendor to want an earnest of performance from the purchaser.

10. Provided that what the vendor takes as a deposit is within the bounds of an earnest of performance, it will constitute a true deposit. As such, it will be forfeited to the vendor if the purchaser wrongfully fails to perform his part of the bargain. This is so even if the vendor’s loss is less than the deposit. It is so even if the vendor suffers no loss at all. Indeed, it is so even if the vendor makes a profit by selling the property to someone else at a higher price. If the vendor’s loss exceeds the deposit, he is of course entitled to recover the full extent of his loss, giving credit for the deposit forfeited to him.

Convention deposits of 10 per cent

11. What is the test for determining whether a sum is within the bounds of an earnest of performance and is therefore a true deposit? The starting point is this. In Hong Kong as in many other parts of the world, a deposit representing 10 per cent of the purchase price of the land is conventional. If I were asked to account for the strict logic behind this percentage, I would have to answer that there is none that I know of and that there may be none that exists. I would augment or mitigate that answer by citing Mr Justice Holmes’s famous aphorism (in “The Common Law” (1881) at p.1) that: “The life of the law has not been logic: it has been experience”. Perhaps all that can really be said is that, for a long time and in many different places, 10 per cent has in practice enjoyed both legal and commercial acceptance as generally appropriate.

12. Contracts for the sale of land routinely provide that the purchaser shall pay a deposit of 10 per cent and that such deposit shall be forfeited to the vendor if the purchaser wrongfully fails to complete. Deposits of 10 per cent are routinely forfeited to vendors when purchasers wrongfully fail to complete. It is routinely accepted without question that a deposit of 10 per cent is a true deposit.

Special circumstances justifying a larger deposit

13. That does not mean that a larger deposit can never be regarded as a true deposit. Sometimes even a deposit in a sum exceeding 10 per cent of the purchase price can be regarded as a true and therefore forfeitable deposit. It will be so regarded if the vendor can show that at the time when the contract was made there existed special circumstances which rendered it reasonable to extract an earnest of performance in that larger sum. This is the view that I take, first of all, on principle: based on the purpose which the law and commerce alike assign to deposits; and importing a test of reasonableness, as the law so often does.” (emphasis added)

225.  Next, after reciting from Howe v Smith (1884) 27 Ch D 89 at [63]-[65] of his Lordship’s Judgment, Ribeiro PJ also laid down a number of the principles pertaining to the present discussion:

“66. It follows that if, on the true construction of the contract, the parties intend the advance payment as a deposit, they are taken to have agreed that it is to be forfeited in the event that the payer fails to complete…

67. Given their nature as a guarantee of performance, deposits have been regarded as subject to forfeiture regardless of whether non-performance by the party in breach has caused, or was thought likely to cause, the innocent party any, or as much, loss…

68. The object of a deposit is therefore not to provide compensation for loss resulting from the breach of a contract. The mechanism for such compensation is the claim for damages. Having forfeited the deposit for failure to complete, the vendor remains entitled at common law to sue for damages, giving credit for the forfeited deposit where such damages exceed its amount…

69. The focus of a deposit’s operation is on the period elapsing between its payment and completion of the contract’s performance. In entering into the contract, the vendor agrees to take his property off the market and to commit himself to the purchaser on the latter’s promise that the acquisition will duly be completed and the vendor duly paid at the completion date. The forfeitable deposit is tendered to encourage the vendor to make the necessary commercial act of faith. It is, as the authorities show, an “earnest”, that is, a thing of value given to signify serious intent on the purchaser’s part. It is also the quid pro quo for the vendor depriving himself of the ability to deal commercially with the property, and so of making any potentially greater profits, while awaiting completion... If, on the other hand, completion does not occur as promised, the deposit’s forfeiture follows, whether or not the vendor has suffered any loss in consequence.

…

Unreasonably excessive deposits

80. Bearing in mind the foregoing principles, the question of whether and under what circumstances a court will intervene to prevent forfeiture of a deposit on the grounds of excessiveness falls to be examined.

81. As indicated above, the central feature of a deposit is its susceptibility to forfeiture on the purchaser’s failure to complete without the vendor having to offer any additional justification. With loss being irrelevant, a windfall could obviously result where, for instance, the vendor re-sells at the same price or even at a profit. A vendor might therefore misuse the concept of “deposit” to secure the ability to forfeit amounts exceeding anything which may reasonably be required by way of an earnest or guarantee of performance or as compensation for the vendor’s removal of the property from the market pending completion.

82. The courts have made it clear that they are willing to intervene to prevent forfeiture in such a case…

83. But how is unreasonable excessiveness to be tested? One may begin with a negative proposition. Given the differences between liquidated damages and deposits in terms of their underlying purpose, nature and legal incidents, it is clear in principle that the test used to invalidate a liquidated damages clause would not be the right test to apply in deciding whether forfeiture of a deposit is permissible. Since a deposit is not intended as a mechanism for quantifying damages flowing from a foreseen breach, it is inapt to apply a test which asks whether the deposit amount represents a genuine pre-estimate of loss…

…

89. The “reasonableness” of a deposit is therefore to be tested against the customary or conventional level of deposits generally taken as an earnest of performance. In Jamaica and in the United Kingdom, this was found to be 10% of the purchase price in contracts for the sale and purchase of land. As many cases show, 10% is also the conventional level for deposits in relation to such contracts in Hong Kong…” (emphasis added)

226.  In its Closing Submissions, the Plaintiff raises essentially 3 arguments against the forfeiture of the Deposits.

227.  First, it is said that, in its pleadings, the 3^rd Defendant relied on Clause 17.1 of the FASP to forfeit the Deposits. The clause purported to forfeit all payments which had previously been made to the 3^rd Defendant irrespective of how much, what kind of payments they were or when they were paid. It plainly and unarguably is a clause “held in terrorem” over any breach at any point of time and irrespective of what loss the 3^rd Defendant might or might not suffer. As such, Clause 17.1 is a penalty clause and the entire clause is void and unenforceable - there is no need for any discussion as to whether the Deposits were truly earnest money.

228.  Just to re-cap, Clause 17.1 of the FASP provided that:

“17.1 If the Purchaser shall (other than due to the default of the Vendor or as herein provided) failed to complete the purchase in accordance with the terms and conditions of this agreement, the Vendor shall be entitled to forfeit (absolutely, as liquidated damages and genuine pre-estimated loss of the Vendor and not as a penalty) the Deposit and any other sums paid under this agreement and (without being obliged to tender an assignment to the Purchaser) to determine this agreement by notice to the Purchaser.” (emphasis added)

229.  For completeness, this court shall also set out the terms of Clause 17.3 which provided that:

“17.3(a) Upon the exercise of the Vendor’s right of determination under clause 17.1, the Vendor shall be entitled but not obliged to resell, let or otherwise deal with the Property or any part or parts of it either by public auction or by private contract or in such other manner and upon such terms and conditions as he shall in his absolute discretion think fit.

(b) Without prejudice to any other right or remedy to which the Vendor may be entitled, the Vendor shall be entitled to be compensated by the Purchaser for any amount by which the price at which the Property is subsequently sold by the Vendor is less than the price under this agreement, and all reasonable expenses incurred by the Vendor in connection with that subsequent sale, after taking into account the Deposit already forfeited. If the price of resale is higher than the Purchase Price, the Vendor is entitled to keep all proceeds, including any increase in price, realised by any such re-sale.” (emphasis added)

230.  Second, as a matter of true and proper construction of the FASP, there is no legal basis to treat the Deposits as earnest money. In this regard, Clause 17.1 purported to suggest that the Deposits were liquidated damages and genuine pre-estimated loss instead of earnest money to complete the transaction. Hence, the term “Deposits” under the FASP is just a label and there was never any intention on the part of the parties to treat the 20% Deposits as earnest money.

231.  These two arguments are inter-related as they both centre on the term and effect of Clause 17.1 and can be dealt with together. For reasons given below, the arguments are devoid of merits.

232.  With regard to the first argument, as the passages in Polyset quoted above show, the law’s development in regard to the forfeiture of deposits has followed a very different course from its development in regard to liquidated damages and penalties. When it comes to whether deposits are forfeitable, the law on liquidated damages clauses and penalties is quite irrelevant. The Polyset approach has been followed by a number of authorities cited by the 3^rd Defendant as examples: Channel Green Ltd v Huge Grand Ltd [2015] 1 HKLRD 655; Gigabillion Asia Pacific Ltd v Sino Dynamic International Ltd [2014] 2 HKLRD 922.

233.  It is unnecessary and indeed unhelpful to analyse the issue in terms of the principles governing liquidated damages clause and the principle on penalties. That was the approach taken by the Court of Appeal in Polyset which was held to be not the correct test: see Polyset at [85]. This is so notwithstanding the vendor’s claim to forfeit the entire deposit in that case was based on Clauses 26(a) and 26(b) of the relevant agreement: see Polyset at [54]. Clauses 26(a) and 26(b) provided as follows:

“26(a) Should the Purchaser fail to observe or comply with any of the terms and conditions herein contained, the Vendor may (without tendering an Assignment to the Purchaser) forthwith determine this Agreement by giving notice of termination in writing to the Purchaser’s solicitors to such effect and the Vendor shall thereupon be entitled to re enter upon the Property and repossess the same if possession shall have been given to the Purchaser free from any right or interest of the Purchaser therein and the Vendor shall be entitled to forfeit the said deposit. Upon determination of this Agreement the Vendor may resell the Property... Without prejudice to the Vendor’s right to recover the actual loss which may flow from the Purchaser’s breach of this Agreement, on such resale any deficiency in price shall be made good and all expenses attending such resale shall be borne by the Purchaser and such deficiency and expenses shall be recoverable by the Vendor as and for liquidated damages....This Clause shall not preclude or be deemed to preclude the Vendor from recovering, in addition to the liquidated damages, damages representing interest paid or lost by him by reason of the Purchaser’s default and failure.

26(b) For the avoidance of doubt, as it is an important commercial term and condition to this Agreement, the Purchaser hereby expressly acknowledges, agrees accepts confirms that in the light of the unusual long duration for completion, the Vendor shall be entitled to, without prejudice to the Vendor’s other rights under this Agreement, forfeit the said deposit in full absolutely as agreed damages, i.e. HK$40,250,000.00 should the Purchaser fail to comply with Clause 26(a).”

234.  Hence, the 3^rd Defendant submit and this court accepts the issue of whether Clause 17.1 of the FASP is penal is irrelevant - forfeiture of the Deposits does not depend on an express forfeiture clause whether or not the 3^rd Defendant purports to rely on one - if the parties intend the advance payment as a deposit, they are taken to have agreed that it is to be forfeited in the event that a purchaser fails to complete: Polyset at [66].

235.  With regard to the second argument, even if Clause 17.1 purported to be a liquidated damages clause (but in substance a penalty clause as contended by the Plaintiff) and allowed the forfeiture of the Deposits, that cannot without more determine whether the Deposits should be characterized as true deposit. Nor should Clause 17.1 alone lead to the conclusion that there was no intention on the part of the parties to treat the Deposits as earnest money.

236.  As pointed out by the 3^rd Defendant, in Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 at 517C, clause 12 of the land contract in question provided that “[i]f the purchaser 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”. It was held by Lord Hoffmann, delivering the judgment of the Privy Council, at 518 F-G that the clause itself did not deprive the deposit of its character as a deposit and an earnest of performance, which was liable to forfeiture on rescission.

237.  To similar effect is Ribeiro PJ’s discussion of the effect of clause 26(b) at [101] of Polyset where his Lordship at [101(a)] referred to certain reported cases where words equating the deposit with liquidated damages have been held to transform what appears to be a deposit clause into a liquidated damages clause, making its validity dependent on the associated doctrine of penalties. In relation to those cases, His Lordship’s observation at [101(b)] is instructive.

“(b) Neither party has advanced this construction and, in my view, correctly so. As pointed out in paragraph 93 above, Lord Hoffmann in Union Eagle rejected such a construction. It is one which ignores the intention to treat the sum as a deposit made apparent by the matters expressly dealt with in the contract, including the vendor’s express entitlement to claim damages in relation to loss suffered exceeding the value of the deposit.”
(emphasis added)

238.  Similarly, in the present case, the 3^rd Defendant’s entitlement to claim damages in relation to loss suffered exceeding the value of the Deposits can be found in clause 17(3)(b) of the FASP quoted above.

239.  That brings this court to the Plaintiff’s 3^rd argument and the crux of the matter.

240.  Ultimately, whether the Deposits are true deposits in the sense used in Polyset and are thus forfeitable depends on the 3^rd Defendant establishing that at the time when the contract was made, there existed exceptional circumstances which rendered it reasonable to extract an earnest of performance in a sum larger than the conventional 10 per cent in conveyancing transactions in Hong Kong. That larger sum must be a reasonable amount and what is reasonable is to be judged objectively: Polyset at [41(2) and (3)] (Chan PJ) and at [165] (Lord Millett NPJ).

241.  The proper approach to unusually large deposits has been stated by Ribeiro PJ at [90] of Polyset as follows:

“90. In the light of the foregoing authorities, the proper approach to unusually large deposits may be stated as follows.

(a) Where (in the absence of fraud or vitiating factors other than excessiveness) the amount of an agreed deposit matches or is less than the conventional amount, its forfeiture will not attract judicial scrutiny, whether or not the innocent party has suffered any loss as a result of the other party’s breach.

(b) Where the deposit exceeds the conventional amount, that is, 10% in Hong Kong, forfeiture is only permitted if the party seeking to forfeit can show that exceptional circumstances justify the higher amount.

(c) Such exceptional circumstances must relate to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of his asset from the property market pending completion, providing an objective justification for the higher sum.

(d) If such justification is not forthcoming, the courts will not recognize the amount as a true deposit but will treat it as an advance payment towards what was payable under the contract and recoverable as such, subject to the innocent party’s entitlement to deduct damages for any actual loss suffered as a result of the other party’s breach.” (emphasis added)

242.  The circumstances in which the 20% Deposits were agreed upon are undisputed. It was Ms Li who specifically requested a completion period of 8 months to October 2013. According to Chua, Ms Li told her that she wanted to extend the completion date to October 2013 because she wanted to sell her UniStrong shares first. When this request was conveyed via Chua to Lau and eventually to Tang of the 3^rd Defendant on 19 February 2013, Tang asked for a 20% deposit in return for what he considered to be a long completion period of 8 months with the associated risk to the 3^rd Defendant. Eventually, the parties agreed on the 20%, as set out in the PASP.

243.  In its pleadings, the 3^rd Defendant relied on the following 2 exceptional circumstances to justify its forfeiture of the Deposits:

a.  the exceedingly long completion period of over 8 months under the FASP, as compared to the usual 45 to 60 days, for which a 10% deposit is customary; and

b.  the pressure for downward adjustments and uncertainty that was anticipated to pervade the property market following from the coming into effect of the demand-side management measures announced by the Government on 22 February 2013 immediately after the signing of the FASP.

244.  The 2 justifications are further explained in the 3^rd Defendant’s Opening:

a.  The completion period was exceedingly long, being more than 8 months (from 22 February until 31 October 2013), as compared to the usual 60 days, for which a 10% deposit is customary. It is well-established that a longer completion period could justify a higher deposit to compensate the 3^rd Defendant from keeping the Property off the market for a prolonged period.

b.  This is reinforced by the volatility of the property market following from the coming into effect of the demand-side management measures by the Government with effect from 23 February 2013 (one day after the completion period). The distinct risk of market correction and the possibility that the Plaintiff may seek to escape from their contractual obligations when property prices fell sharply before completion further justifies a higher amount of deposit as an earnest of performance.

245.  In relation to the first justification, the Plaintiff makes a preliminary point that there is no evidence, or rather, no reliable evidence which supports the 3^rd Defendant’s contention that there is a “usual” completion period of 45 to 60 days. In Tang’s witness statement at para 7, he only said as a result of the longer completion period, the 3^rd Defendant must ask for a deposit of 20%. This can be contrasted with para 6 of Lau’s witness statement where he mentioned a “usual completion period of 3 months” as told to him by Tang. This is to be further contrasted with Ms So’s witness statement at para 29 which referred to “the usual 45 to 60 days”.

246.  It seems to this court that what is a “usual” completion period really depends on what type of property one is talking about and there can be no hard and fast rule. For instance, if one is talking about the Property, the 3^rd Defendant’s expert Ms Lam of CBRE has identified 3 previous transactions in Section 5.1 of her expert report with completion periods of 3.4, 3.5 and 4 months which are much longer than the pleaded case of 45 to 60 days. Yet, the deposit for all 3 transactions was still 10%. However, since all parties are content to submit on the basis that 8 months are longer than usual, that is how this court shall consider the first justification.

247.  In its Closing, the 3^rd Defendant first submits that it is well-established in the cases that a longer completion period could justify the vendor’s demand for a larger deposit. That is true as far as it goes, but if the 3^rd Defendant intends to mean a longer completion period in itself could justify the vendor’s demand for a larger deposit, that proposition is not supported by authorities and is actually contrary to Polyset at [43] (per Chan PJ). There are of course cases where the Court has upheld deposits of more than 10%, such as Channel Green and Gigabillion, but they were decided only after taking into account the entire circumstances of the case, including but not limited to a longer completion period.

248.  The 3^rd Defendant next points out that in their Joint Expert Statement (“Joint Statement”), all three experts appointed by the parties agreed, based on market data, there would be a higher deposit for a longer completion period. On this basis, the 3^rd Defendant submits that it is reasonable to ask for more than 10% in the present case. Further, a deposit size of 20% was clearly reasonable since the completion period of 8 months in the present case was substantially longer than that in Channel Green (4.5 months) and Gigabillion (4 months), where the Court found that a 15% deposit was reasonable.

249.  This part of the submission is problematic. The first and simple reason is that every case is decided on its own facts. Comparing the deposit size in the present case with that in Channel Green or Gigabillion is not too meaningful since the facts of all 3 cases are vastly different.

250.  As far as market data is concerned, the 3^rd Defendant submits that based on the data compiled by the experts, in particular the “comparables” identified by Ms Lam of CBRE, it can be seen that a deposit size exceeding 10% is common for transactions of industrial buildings.

a.  For example, amongst the 124 transactions involving Hing Wai Centre, which were not en-bloc sales, between 2006-2012, 54 of those involved a deposit over 10%. Within those 54, a 20% deposit was recorded in 22 transactions.

b.  Deposits exceeding 10% of the purchase price (predominantly 15% and 20%) were also frequently seen in transactions of en-bloc industrial buildings.

c.  Transaction of en-bloc general industrial building with similar user restriction to that of the Property was rare. Examples include two transactions of Yu Xiu Cold Storage & Warehousing Limited in 1979 and 1992, which also involved deposit size of 20%.

251.  It seems to this court this sort of analysis provides only limited assistance to the 3^rd Defendant.

252.  This court will start with the 124 transactions involving Hing Wai Centre. While 54 of those involved a deposit over 10%, 70 of them involved a deposit of 10% or less: see Section 5.2.1 of Ms Lam’s expert report.

253.  For transactions of en-bloc general industrial buildings, a summary can be found at Section 5.3 of Ms Lam’s expert report. One can see that out of 14 transactions, 6 of them attracted a 15% deposit while another 6 attracted a 20% deposit. It is true that for all 6 transactions which attracted a deposit of 20%, the completion period was less than 8 months. However, out of the 6 of them which attracted a 15% deposit, there was one with a completion period of 8 months, while another one had a completion period of 10 months. Can the court rely on these 2 transactions and conclude without more that the length of the completion period in the present case can only justify a 15% deposit?

254.  In these circumstances, what conclusion can one draw from such data other than that in some cases, willing purchasers and willing vendors had agreed on larger than the conventional 10% deposits? This brings out another point made by the Plaintiff ie normally, no matter what deposit size the parties to a transaction agree on, reasonable or otherwise, they will proceed with it where there is no dispute. It is only if there is a dispute will the issue as to whether a deposit is reasonable and forfeitable become relevant. Hence, merely looking at what deposit size various parties in a no-dispute situation have agreed in the past is of little value to the Court. There is force in that submission.

255.  Any way, it should be obvious but in any event it is the oral testimony of the Plaintiff’s expert Mr Faulkner of Colliers, which this court accepts as entirely logical, that the size of the deposit will be determined by the market situation at the time of the transaction. If this court may add, the amount of the deposit also depends on the negotiation between the buyer and the seller, recognising their own circumstances at the time. Take for instance a vendor who, owing to his personal or financial circumstances, was determined to dispose of his property. He may well find the conventional 10% deposit acceptable even if the buyer asks for an unusually long completion period.

256.  The 3^rd Defendant submits that the 20% deposit can be objectively justified by the volatile property market at the material time. In Ms Lam’s expert report for the 3^rd Defendant, she has explained why a higher deposit may be requested by a vendor for a transaction with long completion period in a volatile market. By reference to Section 7.1 of Ms Lam’s expert report, the 3^rd Defendant submits that during 2009-2012, the average monthly and annual growth rate of the prices of private flatted factories on Hong Kong Island were around 2% and 23% respectively. Assuming the same deal of the Property could be completed in 2 to 3 months, a transaction with completion period of more than 8 months would mean that the completion was to be deferred by around 5 to 6 months. The projected price growth during the completion period would be around 10-12% i.e. 2% x 5-6 months).

257.  At this stage, this court would first make a preliminary observation: at Section 7, Ms Lam was actually trying to answer the question whether the 20% is reasonable in the present case. This is clear from the heading of Section 7 which is “Whether 20% Deposit for the Subject Transaction Reasonable”. This is made even clearer in Section 9 entitled “Conclusion” in which Ms Lam concluded by setting out her opinion that the 20% is reasonable. As correctly submitted by Mr Wong SC, that is the ultimate question for this court to answer, rather than for the experts.

258.  Back to Ms Lam’s expert report. If one examines Section 7.1 of her expert report, Ms Lam was referring to the continuous growth in price in the industrial sector between 2009 and 2013. In particular, at Section 7.1.2 entitled “Strong Price Growth”, Ms Lam observed that:

“Followed by the introduction of the industrial revitalization policy in April 2010 (which would be discussed in section 8.1.3.1 of this report), the industrial property experienced an upsurge in price of flatted factories between 2009 and 2013. However, the growth of which decelerated after 2013.”

259.  And then under the heading “Growth of Price Indices”, Ms Lam said this:

“From 2012 to 2013, the market experienced a brisk growth again in which the price index rose by 33.8% from 489.8 to 655.4. This was attributed by loosening credit policies adopted. Furthermore, HKSAR government proposed a new policy which allowed owners of eligible industrial buildings to convert the buildings into “transitional residential supply” for leasing without paying land premiums. It further stimulated the market sentiment which fuelled the price growth of industrial buildings.”

260.  In other words, Ms Lam was talking about a rising market between 2009 and 2013. Even after 2013, while the growth in price had decelerated, there was still growth nonetheless, rather than a downturn in price. Since the material time for the present purpose is at the time of the contract ie February 2013, it is this period which is germane to the court’s consideration of the reasonableness and justification for the 20% Deposits.

261.  Indeed, it is not disputed by Tang, who was a seasoned property investor, that the market has been rising. In court, Tang agreed that the rising market for the Property was reflected in his consistent increase of the Property’s selling price over a long period of time. Tang also believed that the original purchase price of HK$580 million was not high enough because there was no competition or only little competition.

262.  The significance of the rising market is this.

263.  The first exceptional circumstances relied upon by the 3^rd Defendant is that a longer completion period could justify a higher deposit to compensate it from keeping the Property off the market for a prolonged period.

264.  In the present case, however, removing the Property from the market for a longer completion period would not add much risk to the 3^rd Defendant. In this regard, Mr Faulkner’s testimony is that in a rising market, the risk of the purchaser choosing not to complete is virtually and the vendor would be less at risk because a purchaser normally would not be stupid enough to default in a rising market. Similarly, the Midland Parties’ expert Mr Chan of Knight Frank also agreed that in a rising market, the vendor would be relatively less at risk because if the purchaser is stupid enough to back out, the vendor would stand a smaller chance of suffering a loss because it is likely he could sell at a higher price to someone else. This court finds the logic of that argument compelling.

265.  If so, as far as a vendor in the position of the 3^rd Defendant is concerned, objectively, there would be no compelling need to double the usual 10% deposit for removing the Property from the market even if the completion period is longer than usual.

266.  The second justification relied upon by the 3^rd Defendant is the volatility of the property market following the coming into effect of the demand-side management measures by the Government with effect from 23 February 2013, the distinct risk of market correction and the possibility that the Plaintiff might seek to escape from its contractual obligations when property prices fell sharply before completion.

267.  In this regard, the 3^rd Defendant submits that, despite the fact that the market was rising, there was a risk that market correction would occur as a result of the increasingly buoyant Hong Kong Island industrial property market, particularly when the completion period is as long as eight months. The realistic risk of market correction at that time was further heightened by the cooling measure introduced by the Government on 22 February 2013 which doubled the ad valorem stamp duty applicable to industrial property.

268.  The above is dealt with by Ms Lam in Section 7.2 of her expert report.

269.  At the beginning of Section 7.2 at p 44, Ms Lam stated this:

“The strong and continuous price growth of the industrial property market from 2009 to the date of entering into the P-ASP of the Property as revealed above engendered uncertainties in the market. On one hand, it is possible that the increasing trend would continue under the effect of the Scheme. On the other hand, a market correction might occur such that the price of industry buildings would plummet.

When the industrial property prices decline, together with a longer completion period, there is a risk that the Purchaser will default. In this case, if the decline in the Property’s price is larger, or likely to be larger, than the deposit amount, there is a high chance that Purchaser would reduce the loss by default. Therefore, it is reasonable for the Vendor to request a higher Deposit to ensure the completion of the transaction when removing the asset from the market for a long period, reduce the risk brought by the Purchaser’s default and compensate the Vendor for incurring extra opportunity cost in searching for another purchaser in case the Purchaser’s default.” (emphasis added)

270.  At the end of the Section at p 47, Ms Lam stated this:

“Given the end of the revitalisation scheme, market correction occurred where a plunge in industrial property prices can be observed. Without hindsight, this uncertainty represents a greater default risk of the Purchaser and thus, it is reasonable for the Vendor to demand a larger deposit.”

271.  Without any disrespect to Ms Lam, she was stating the hypothetically obvious. Her first point is that the rising market since 2009 could continue to go further up or it could plummet. Her second point is also obvious. If property prices declined, there would be a risk that a purchaser would default if it was to his advantage financially.

272.  The 3^rd Defendant then refers to Mr Faulkner’s testimony in cross-examination that the property market in Hong Kong could turn quite drastically in eight months.

273.  Dealing with Mr Faulkner’s testimony first, the Plaintiff submits that his testimony was taken out of context as the 3^rd Defendant has disregarded what he said in re-examination. This court agrees. On Day 14, Mr Faulkner said this in re-examination:

“It depends on what you mean by drastically. If you’re talking about a drop in the market, I don’t think that was on the horizon in 2013. But obviously the rate of growth of the market varied from year to year. But I wouldn’t see slowing growth as being a drastic change in the market.”only issue which conern

274.  The Plaintiff submits that the cooling measures, including the double stamp duty, introduced by the Government on 22 February 2013 was clearly not a reason why 20% Deposits were requested by the 3^rd Defendant on the evidence if one follows the sequence of what actually happened. Similarly, the Midland Parties submit that on the evidence, it is not open to the 3^rd Defendant to rely on the double stamp duty announced on 22 February 2013 and the possible downward price adjustment triggered thereby to justify the 20% Deposits. The reasons given by both of them are substantially the same and are clearly valid.

275.  In Tang’s witness statement, it was on 19 February 2013 that he instructed Lau to convey his request for a 20% deposit to the potential buyer “in view of the risks that Mega Profit might bear as a result of the longer completion period”. Lau’s witness statement is to the same effect. As for Chua, his evidence is that in the morning of 20 February 2013, Lau told him the 3^rd Defendant asked for a 20% deposit if the buyer asked for an extended completion period. The cooling measures were simply not mentioned by any of the relevant witnesses as a reason for the 20%, whether on 19 or 20 February 2013.

276.  Chronologically, the 3^rd Defendant’s request for a 20% deposit was agreed by the Plaintiff, inserted in the draft PASP and signed by Ms Chan on 20 February 2013 - Clause 2 of the draft provided for the payment of deposits totaling HK$116 million which was equal to 20% of the offer price of HK$580 million. In other words, the 3^rd Defendant and the Plaintiff had already reached a consensus on the 20% deposit prior to the announcement of the cooling measures and there is no evidence that the Plaintiff had ever sought to renege on that consensus. If so, the announcement of the cooling measures could not be a factor in Tang’s calculation when he demanded for the 20%.

277.  It is true that in his witness statement, Tang mentioned a meeting he had on 22 February 2013 with inter alia Chua in which he explained his reasons for asking for 20% which included the long completion period and the risk of uncertainty of the property market as a result of the cooling measures to be announced by the Government. The existence of the meeting is denied by the Midland Parties and Tang was cross-examined on it. The long and short of it is that Tang accepted in cross-examination by Mr Wong SC that (i) the intending purchaser ie the Plaintiff had already agreed to pay a 20% deposit before 21 February 2013, (ii) it was not necessary and there was no need to have the alleged meeting on 22 February 2013 to ask for the 20% deposit or to explain why he needed the 20%, and (iii) the only issue which concerned him was mainly one of increase of price. In these circumstances, this court is not prepared to find as a fact as to the existence of the meeting Tang said he had on 22 February 2013 with Chua and what was discussed there.

278.  In Reply, the 3^rd Defendant submits the Plaintiff and the Midland Parties are running a bad point for 2 reasons.

279.  First, the Court will adopt an objective approach in deciding whether the deposits are justified. Second, the question is to be decided as at the date when the PASP was executed, by which time the double stamp duty policy had already been announced. Such a factor can obviously be taken into account in determining the reasonableness of the size of deposit. In any event, it is artificial to suggest that 20% deposit had already been agreed on 20 February 2013 - given that the PASP was only signed by both parties on 22 February 2013, it was open for them to change the amount of the deposit.

280.  On the 1^st reason, it is correct that the reasonableness of a deposit is to be judged objectively: Polyset at [41(3)] per Chan PJ. But that only means the court will take into account all the objective factual circumstances of the case in front of it in deciding the question of reasonableness. There is nothing in Polyset, as far as this court can find, which says a vendor’s reason for demanding a higher than 10% deposit as conveyed to a purchaser (via an estate agent) should be ignored as part of the factual circumstances. On the contrary, the following passage, also from Chan PJ’s Judgment, indicates the opposite:

“43. …However, I agree, for the reasons given by Mr Justice Ribeiro PJ, that when the deposit in question is judged objectively in the light of all the circumstances, there are no special circumstances which justify the forfeiture of a deposit as high as 35% of the purchase price. That there was an unusually long period before completion is not sufficient. The fact that the parties (by express provision) stated that because of this long period, they required a deposit larger than the customary deposit clearly indicates that what they had in mind was to protect the vendor against its potential loss in a volatile property market.” (emphasis added)

281.  On the facts as found by this court, the announcement of the policy had no noticeable effect on either the Plaintiff or on the 3^rd Defendant. The parties had reached a consensus on the 20% Deposits before the announcement of the policy and there was no evidence of any further negotiation on it up till the execution of the PASP.

282.  On the 2^nd reason, it is also true that the question is to be decided as at the date when the PASP was executed, by which time the double stamp duty measure had already been announced. However, whether such a factor can justify the 20% Deposits as being reasonable depends on inter alia the anticipated effect of the measure, assuming it could be ascertained on the very day of its announcement. In the present case, there is no evidence on it. What Ms Lam can offer in her expert report is the hypothetically obvious - the market could go up or it could come down as a result of the measure announced by the Government.

283.  For all the above reasons, this court does not accept the alleged volatility of the property market provides a further exceptional circumstances so as to justify the 20% Deposits.

284.  Ultimately, as Bokhary PJ put it at [25] of Polyset, a view on such an issue does not readily lend itself to much elaboration. The correct test must of course be applied to the material facts. But once that has been done, the resolution, one way or the other, of an issue of this kind unavoidably becomes very largely a matter of impression on a question of fact and degree. This court totally agrees.

285.  Looking at all the circumstances of this case, this court is of the view that forfeiture of the 20% Deposits cannot reasonably be justified and shall so rule.

286.  The next question is whether it should be returned to the Plaintiff in full. The answer seems very obvious to this court.

287.  The Plaintiff submits that where the forfeiture of a deposit is held unlawful, there is no power in the Court to rewrite the parties’ contract to permit the retention of a lesser reasonable deposit. Rather, the deposit must be repaid in full, subject only to the retention of a sum representing the actual loss of the vendor. As a matter of principle, that must be right.

288.  The 3^rd Defendant, on the other hand, submits that as laid down in Polyset at [90], forfeiture of a conventional amount of 10% of an agreed deposit will not attract judicial scrutiny. Therefore, the 3^rd Defendant must be entitled to forfeit the 1^st and 2^nd Deposits amounting to HK$60,300,000 or 10% of the purchase price. The only question is whether the 3^rd Deposit of HK$60,300,000 can be forfeited. It then submits the law does not prohibit the parties agreeing to a deposit followed by additional part payments towards the purchase price: Polyset at [109]. Therefore, the proper approach should be to ascertain whether each of the deposits paid under the agreement should be regarded as a deposit or part payment: Wan Moon Ling Wandy v Sino Gain Investment Ltd [1997] HKLRD 606 at 611C-612C (Le Pichon J, as she then was).

289.  The problem with the 3^rd Defendant’s submission is two-fold. First, the Plaintiff and the 3^rd Defendant had not agreed to a 10% deposit followed by a part payment of another 10%. They had agreed on a 20% deposit, albeit the 20% was payable by 3 instalments. Second, Wan Moon Ling Wandy does not assist the 3^rd Defendant because the so-called proper approach was not what Le Pichon J had done in that case ie deciding one payment constituted a forfeitable deposit while another payment constituted a repayable part payment. What the learned Judge had decided was that both payments were intended by the parties to constitute a single deposit. Since taken together, they constituted 10% of the purchase price, both payments were forfeitable.

290.  In this court’s view, the answer to the question can again be found in Polyset. At [108], Ribeiro PJ explained the law in this way:

“108. It was suggested in submissions that a court’s refusal to permit forfeiture of an agreed deposit on the ground of excessiveness is objectionable in that it leads to commercial uncertainty. This criticism must be kept in perspective.

(a) If a vendor wishes to be certain of being permitted to forfeit a deposit (in the absence of fraud or other factors which vitiate the entire contract), he can achieve this by limiting its amount to the customary 10%.

(b) If he is concerned with certainty in relation to compensation for loss should the purchaser refuse to complete in circumstances where the property market has fallen, he may incorporate the standard clause permitting him to claim any deficiency on a re-sale, as well as the expenses of re-sale and any interest paid or lost, as liquidated damages.

(c) If, as in the present case, the vendor chooses to contract on the basis of a deposit which is several times larger than the conventional sum, he would be well-advised to consider it extremely likely, if not certain, that forfeiture of his deposit is impermissible.

(d) Uncertainty only arises where the vendor requires a deposit which exceeds the conventional 10% by a sum which may or may not be considered reasonable. It becomes a matter for the vendor to decide whether the stipulated additional amount is worth the risk of losing the right to forfeit the deposit. He may decide to accept the risk, ready to put forward grounds for justifying the higher amount. Or he may decide to eliminate the risk by remaining within conventional bounds.” (emphasis added)

291.  The implication of that passage is clear. A vendor can take his chances by obtaining a larger deposit than 10% but he runs the risk of losing the right to forfeit the deposit altogether. He cannot have the best of both worlds by obtaining a say 20% deposit and, when that cannot be justified, falls back on 10%.

292.  For these reasons, this court rules that the 3^rd Defendant must return the 20% Deposits to the Plaintiff in full.

293.  Looking at the matter in its proper perspective, financially, what this ruling means is this. There is no evidence that the 3^rd Defendant has suffered any loss arising from the Plaintiff’s breach of the FASP. The 20% Deposits or HK$120.6 million, being effectively a “windfall” to the 3^rd Defendant, will be returned to the Plaintiff. Meanwhile, the Property[24] has substantially risen in value from HK$603 million to HK$1.046 billion.

Liquidated Damages Issue

294.  This issue is open and shut.

295.  As a result of the Plaintiff’s failure to complete, Midland has not received any commission. Midland counterclaims against the Plaintiff in the sum of HK$6,030,000 as liquidated damages on the basis that the Plaintiff was the party who failed to complete the transaction.

296.  Just to recap, Clause 13a of the PASP provided:

“If either the Vendor or the Purchaser fails to complete the sale or purchase … the defaulting party shall compensate immediately the Agent HK$6,030,000 as liquidated damages. This clause shall survive the termination of this Agreement.”

297.  The Plaintiff’s pleaded defence to that counterclaim is Midland was in breach of the Agency and Clause 13a is a penalty clause.

298.  By the time of its Closing, the Plaintiff simply submits this at para 326:

“…if there is actionable misrepresentation sufficient to support a rescission of the FASP, a fortiori, the same misrepresentation will also support a rescission of the PASP such that D4 would not be able to claim any relief in reliance thereon. Alternatively, P will be entitled to such damages as will be sufficient to set off the commission due to D4.”

299.  Given this court’s ruling that there was no misrepresentation and no breach of the Agency, there can be no question of rescission of the PASP or any award of damages to the Plaintiff for misrepresentation or breach of duties on the part of Midland. Also, the defence of penalty is no longer pursued.

300.  In these circumstances, this court finds in favour of Midland in its counterclaim against the Plaintiff in the sum of HK$6,030,000.

301.  In conclusion, taking into account the above and all the parties’ submissions on relief, this court holds that (i) the Plaintiff is entitled to the return of the 20% Deposits from the 3^rd Defendant with interest as from the date of the Writ herein; (ii) all other claims by the Plaintiff against the 3^rd Defendant and the Midland Parties are dismissed; (iii) Midland is entitled to the sum of HK$6,030,000 from the Plaintiff with interest as from 31 October 2013; (iv) the 3^rd Defendant is entitled to nominal damages from the Plaintiff for breach of the FASP; (v) all counterclaims by the 3^rd Defendant against the Midland Parties are dismissed.

Disposition and costs

302.  There shall be Judgment in favour of the Plaintiff against the 3^rd Defendant in the sum of HK$120.6m with interest at the rate of prime plus 1% from the date of the Writ herein to Judgment and thereafter at judgment rate until payment.

303.  The Plaintiff’s all other claims against the Defendants are hereby dismissed.

304.  There shall be Judgment in favour of Midland against the Plaintiff in the sum of HK$6,030,000 with interest at the rate of prime plus 1% from 31 October 2013 to Judgment and thereafter at judgment rate until payment.

305.  There shall be Judgment in favour of the 3^rd Defendant for nominal damages against the Plaintiff for breach of the FASP.

306.  The 3^rd Defendant’s counterclaim against the Midland Parties is hereby dismissed.

307.  In the absence of agreement on costs within 14 days from the date hereof, the parties are directed to submit their written submissions on costs (not exceeding 15 pages) within 21 days from the date hereof and leave to them to submit reply submissions (not exceeding 5 pages) if so advised within 7 days thereafter. Unless otherwise directed by this court, costs will be dealt with on paper.

308.  Lastly, this court would like to thank the legal team on all sides for their helpful assistance.

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