CHU KENG MING AND ANOTHER v. SATCHI ITALY LTD. AND OTHERS

HCA 15656 of 1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15656 OF 1998

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Assessment of Damages

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1. This assessment of damages arises out of Interlocutory Judgment entered against the defendants dated 22nd March 1999, which provides that the defendants do pay to the plaintiffs an amount to be assessed by the court. The Notice of Appointment issued on 12th July 1999.

2. When the parties appeared before me on 21st October 1999, D1 and D3 were represented, but by virtue of a Bankruptcy Order against D3 all proceedings were automatically stayed as against him. I was told that the figure found on this assessment would be lodged as proof of debt in the Bankruptcy proceedings. D2 was unrepresented. The Ps bundle was before me at the hearing.

3. The appropriate figure to take into account in mitigation of the damages is the only issue in this assessment. The plaintiffs submitted that this should be $300,000 per month rental and the defendants submitted that this should be $342,000.

4. As to the facts - under a sale and purchase agreement dated 20th December 1994, the Plaintiffs (Ps) agreed to sell to the 1st Defendant (D1) two properties. Disputes arose between the Ps and D1. By a cancellation agreement dated 16th January 1998, the Ps and D1 agreed to cancel the sale and purchase agreement on the following terms - (1) D1 and the second defendant (D2), the tenant, would pay to the Ps a sum of $7,200,000 as agreed compensation in terms of the arrangement set out in Schedule B of the cancellation agreement; (2) according to Schedule B, the D2 would rent the properties for a term of 3 years from 1st April 1997 (the tenancy) at a monthly rental of $700,000 exclusive of rates and other charges and outgoings, (3) Should D2 be able to complete the tenancy for 3 years paying all the rent and necessary expenses, the agreed compensation in the sum of $7,200,000 would be deemed to have been paid and both D1 and D2 would be discharged from their liabilities to pay the sum of $7,200,000, (4) Should D1 fail to complete the tenancy, D1 and D2 would be jointly and severally liable to forthwith pay to the Ps the balance of the sum of $7,200,000 calculated in the manner as set forth in Clause 3 of Schedule B, (that is, by multiplying (i) the number of months or rents and other charges which the tenant shall have fully paid with (ii) $200,000 (the balance of the agreed compensation), (5) D1 and D2 would be discharged from all liabilities and obligations under the cancellation agreement and the tenancy agreement only upon receipt of the balance of the agreed compensation. D3's liability as guarantor is set out in clause 5 of the Cancellation Agreement.

5. Also, on the 16th January 1998, the Ps and D2 entered into a tenancy agreement (the Tenancy Agreement) for the purposes of the cancellation agreement.

6. D2 duly paid the agreed rental under the Tenancy Agreement up to April l998. For the month of April 1998, D2 only paid $50,000 towards the rent. D2 failed to pay any rent from May l998, failed to pay any management fees between 1st August 1998 and 5th August 1998, and failed to pay any rates between 1st July 1998 and 5th August 1998.

7. On 4th August 1998, D1 and D2's solicitors wrote to the Ps surrendering the properties and returned the keys to the Ps. On 5th August 1998, the Ps through their solicitors accepted D2's repudiation of the Tenancy Agreement. It was subsequently discovered that D2, in breach of the Tenancy Agreement, had removed the toilet of one of the properties.

8. On 4th September 1998, the Ps' solicitors wrote to D1, D2 and D3, requesting the payment forthwith of the balance of the agreed compensation according to the Cancellation Agreement. No payment was made by any of the three defendants.

9. I accept the submission of Counsel for the Ps that, in accordance with Schedule B to the Cancellation Agreement, if D2 was in breach of the Tenancy Agreement, both D1 and D2 would be under joint and several liability to pay the balance of the agreed compensation forthwith. Their liabilities under the Cancellation Agreement and the Tenancy Agreement would be discharged only if such a sum was paid by them forthwith. The payment of such a sum is a condition precedent for discharge of their liabilities under the two agreements. If not fulfilled, the Ps would revive their right to hold D1 and D2 liable under the Cancellation Agreement and the Tenancy Agreement.

10. D1 and D2 having failed to make any payment of the balance of the agreed compensation pursuant to Schedule B of the Cancellation Agreement after termination of the Tenancy Agreement, the Ps now exercise their right under both the agreements.

11. Counsel further submitted that, in assessing the damages, the fundamental principle is that damages are to be calculated on the basis that the injured party is to be put in a position as if the contract had been performed. According to the Cancellation Agreement, the liability of D1 and D3 should be limited to the balance of the agreed compensation under the Cancellation Agreement. Had the two Agreements been performed, the Ps would have received a monthly rental of $700,000 and management fees and rates until the termination of the tenancy on 31st March 2000. It was agreed that $200,000 out of the monthly rental of $700,000 was intended for the payment of the agreed compensation.

12. Counsel summarised the Ps' loss and damage against each of the defendants.

13. As against D1 and D3, since D2 fully paid monthly rent to March 1998, the resulting payment of compensation is $2,400,000 (12 months x $200,000), so that the balance of the agreed compensation payable by both D1 and D3 is $4,800,000. This is in accordance with the mechanism set out in Clause 3 of Schedule B of the Cancellation Agreement ($7,200,000 - $2,400,000 (12 months x $200,000) = $4,800,000). Interest at judgment rate on the sum of $4,800,000 should accrue from the date when the Ps demanded payment from the Ds, being 4th September 1998.

14. As against D2, liability arises under both the Cancellation Agreement and the Tenancy Agreement. Under the Cancellation Agreement, D2 is liable to pay the sum of $4,800,000 pursuant to Clause 3 of Schedule B.

15. As to the arrears of rent under the Tenancy Agreement, D2 failed to pay rent as follows: -

16. As to interest on the arrears of rent, this can be summarised as follows

2% per month from the date of the respective breaches, that is, on $650,000 from 1/4/98, on $700,000 from 1/5/98, on $700,000 from 1/6/98, on $700,000 from 1/7/98 and on $112,903 from 1/8/98.

17. As to management fees, D2 failed to pay these for the period between 1st August l998 to 5th August 1998, being $2,473.

18. As to rates, D2 failed to pay these for the period between 1st July 1998 to 5th August 1998, being $28,288.

19. As to the construction of a new toilet at Shop No. G66, costs of $32,500 have been incurred. In support of this figure, there is the quotation for items 5, 6, 7, & 8 to be found at page 158 of the Bundle, with a translation at page 80.

20. As to the loss and damage arising from the early termination of the Tenancy Agreement, the Ps were unable to re-let the properties until 9th November l998 despite efforts being made to find a new tenant. Eventually, the Ps re-let the properties to Sing Kwong Jewellery at a monthly rental of $300,000. The Ps' valuation report is found at page 211 -222, which states that the open market rental value of the properties as at 5th August l998 was about $342,000.

21. On the basis of $300,000 per month, the loss amounts to $8,867,095. On the basis of $342,000 per month, the loss amounts to $8,164,295. I include the detailed calculations for these two figures as Annexure A, which shall form part of my Reasons. As I have said, this is the main issue.

22. Mr. Eric Chu gave evidence for the Ps. He is the son of the first named Plaintiff and the Manager of the second named Plaintiff. His father is a Director of the second named Plaintiff.

23. Mr. Chu confirmed under affirmation that the contents of his statement dated 21st July 1999 were true and accurate. In evidence he confirmed that he had full knowledge of the terms of the Cancellation Agreement and the Tenancy Agreement. He further confirmed the contents of paragraph 4 of his statement - that out of the $700,000 monthly rental it was intended that $200,000 was intended as compensation and that such compensation would be calculated in accordance with Clause 3 of Schedule B of the Cancellation Agreement. He confirmed his evidence at paragraph l8 as to the replacement of the toilet and the four items 5,6,7, and 8 of the quotation at page 158 in relation to the replacement, with translation at page 80. Sing Kwong Jewellery, a subsidiary of the Ps, had paid the sum of $32,500 on behalf of the Ps, for this work.

24. As to the rental of the premises, Mr. Chu confirmed paragraph 19 of his statement. Several agencies in Hong Kong were called and given the necessary information on the rental of the premises, but the market was very weak and there was no good news as to rental of the premises. In about mid September in order to minimize the loss, Sing Kwong Jewellery planned to take up the tenancy and in October confirmed the decision to use the property. The decision was made in early October. A contractor was engaged to renovate the premises and the quotation at page 156 of the Bundle lists the renovation work carried out. On 9th November 1998, Sing Kwong commenced business at the premises with payment of the rent commencing from that date.

25. Mr. Chu confirmed paragraph 14 of the statement of claim relating to the figure of $1,019,681, being the price of goods sold and delivered by D2 to the Ps, which is to be applied in part satisfaction of the arrears of rent. He was referred to a letter of 4th August 1998 where the figure is referred to as $480,000, but he confirmed that the figure of $1,019,681 is the figure to be applied in part satisfaction. Certain goods were delivered after the date of the letter, so that the figure in the statement of claim is the updated figure in accordance with the later delivery of goods to the Ps.

26. Mr. Tse wai leung gave evidence. He is a director of Francis Lau & Co. Surveyors. He confirmed that the contents of his valuation report at page 211 of the Bundle were true and accurate and he confirmed his signature at page 222. He was instructed to value the properties as at 5th August 1998. At that time the market was falling because of the economic conditions and the slow demand for shop premises. In normal circumstances, it would take 2-3 months to let a shop, including finding a tenant and negotiations between the parties. It is common practice for tenants to seek rent free periods of 1-2 months to decorate the premises and to arrange pre-opening promotions. A landlord would need to wait 2-3 months before receiving any rent. The time difference of about three months between August and October/November would result in a 3-10% reduction in the rental, depending on the location and supply of shop premises. In this particular case, Mr. Tse assessed the reduction at 10%. He stated that the rental of $300,000 in November 1998 was a reasonable figure for the premises. In reaching this conclusion, he said that a valuation such as this was only a reference point for the two parties and a 5-10% difference was considered to be reasonable in such cases. The valuation is an assessment of the best or reasonable price to seek, it is not an actual transaction price, there is some leverage for negotiations between the parties. The rental of $300,000 per month was reasonable in November 1998.

27. In cross examination, Mr. Tse said that the monthly rental today would be even lower. He could not predict how rentals would go within the next year. At that time - November 1998 - the market was still in a stage of correction, so rentals were lower. The monthly rental in mitigation is the main issue on this assessment.

28. Sing Kwong Jewellery is a related company to the Ps. Counsel for the Ps submitted that the Ps took steps to mitigate the loss by contacting agents to rent the properties, but without success. In October 1998 a decision was made to rent it to Sing Kwong, renovations were carried out, and the tenancy commenced on 9th November 1998. I should assess the damage by taking into account the loss between 6/8/98 and 8/11/98. The burden rests with the Ds to show that damage has not been mitigated - Annie Chan v. Lau Wai Kwong & Anor, HCA 5062 of 1982 (unrep). Reasonable steps were taken to mitigate the loss and there is the evidence of Mr. Tse as to the usual three month waiting period. Mr. Tse assessed the reasonable market rent as at 5/8/98 is $342,000, but he confirms that in a falling market it would take up to 2-3 months to rent such properties. By the time the tenancy commenced on 9th November 1998, $300,000 would be a reasonable rental at that time.

29. As to the waiting period of approximately three months before the properties were rented by Sing Kwong, I accept Mr. Tse's evidence on this point. I accept that it is reasonable for the date of 9th November 1998 be used in calculating the mitigation of damages, being the date when Sing Kwong took up the tenancy. I accept that the Ps made endeavours to find an independent and non-related tenant and that, even if they had, it would have been about three months before the tenancy commenced.

30. As to the rental of $300,000 per month which Sing Kwong decided was the reasonable rental as at November 1998. In a situation where the Ps rent the property to a related party, the only valuation which I am willing to accept is that of a registered valuer. That valuation shows a market value of $342,000 at 5th August 1998. In the absence of an up to date valuation as at 9th November 1998 when the property was rented to Sing Kwong, I do not accept that $300,000 is a reasonable market rental, on the basis of Mr. TSE's evidence before me today. I do not for one moment find other than that Mr. Tse is a truthful witness as to his usual experience, but I am strongly of the view that where a related party is concerned, the Ps should have exercised extreme caution in fixing the renal as against the Ds unilaterally without the foundation of an up dated valuation which would have been very easy to obtain. In my view the fact that Sing Kwong is a related party totally precludes any valuation other than that of a registered valuer as at the date of rental being accepted by me for the purposes of calculating mitigation of damages. It would have been a simple matter for the plaintiffs to arrange an up-dated valuation as at 9/11/98. I therefore find that the figure of $342,000 is the monthly rental which I should use in calculating damages in this case, resulting in the figure of $8,164,295.

31. Counsel submitted that in order to avoid double recovery, the amount of $4,800,000 should be deducted from the sum of $8,164,295. Further according to paragraph 14 of the Statement of Claim, the Ps and D2 have agreed to apply $1,019,681 towards part satisfaction of the rental arrears and the outstanding management fees and rates.

32. In summary I award damages as follows: -

33. I will leave it to the parties to make the final calculations with liberty to apply.

34. The costs of this assessment are to be to the Ps to be taxed if not agreed, with Certificate for Counsel.

35. Finally, I would like to thank Counsel for the Ps for his helpful skeleton argument in this case.

ANNEXURE A

Loss calculated on the basis of $300,000 per month market rental

$700,000 x 26/31 (period between 6th August 1998 and 31st August 1998), being $587,096.

$700,000 x 2 (period between 1st September 1998 and 31st October 1998), being $1.4 million.

$700,000 x 8/30 (period between 1st November and 8th November 1998), being $186,666.

($700,000 - $300,000) x 22/30 (being for the period between 9th November 1998 and 30th November 1998), being $293,333.

($700,000 - $300,000) x 16 months (being for the period between 1st December 1998 and 31st March 2000) being $6.4 million.

TOTAL = $8,867,095.

Loss calculated on the basis of $342,000 per month market rental

$700,000 x 26/31 (period between 6th August 1998 and 31st August 1998), being $587,096.

$700,000 x 2 (between 1st September 1998 and 31st October 1998) being $1.4 million

$700,000 x 8/30 (period between 1st November and 8th November 1998) being $186,666.

($700,000 - $342,000) x 22/30 (period between 9th November 1998 and 30th November 1998), being $262,533

($700,000 - $342,000) x 16 months (period between 1st December 1998 and 31st March 2000), being $5,728,000.

TOTAL = $8,164,295