CHUNG TO CHINESE PRODUCTS CO LTD v. PACIFIC WELL REALTY LTD

HCA 9756/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9756 OF 1998

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J U D G M E N T

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1.  The parties entered into an agreement for the sale and purchase of the suit premises on 3 June 1997.  The Plaintiff was the vendor and the purchaser was the Defendant.

2.  The suit premises is a large commercial building in Yuen Long from which the Plaintiff operated and still operates a retail business of amongst other things the sale of Chinese artifacts.  The purchase price was $200,000,000 and completion of the sale was to take place on 31 March 1998.  A deposit of $20 million was paid by the Defendant.  The Defendant also paid $20 million each on 31 July 1997 and 30 September 1997 as part payment of the purchase price.

3.  A supplemental Agreement was entered into by the parties on 31 March 1998.  By this Agreement the completion date was put back to 31 July 1998 and the Defendant agreed to pay $5 million on the 1^st day of each month until completion being part payment of the purchase price. 

4.  It is common ground that the Defendant was in breach of the terms of the Supplemental Agreement in that it failed to pay to the Plaintiff $5 million on 1 May 1998.  It also failed to pay the outgoings and interest which was payable.  It did however pay $5 million on 1 April 1998.

5.  Pursuant to the Clause 11 of the Agreement the Plaintiff rescinded the Agreement on 8 May 1998.

6.  On 28 September 1998 the parties submitted to a Consent Order before Master Jones the relevant parts of which read:

“BY CONSENT IT IS ORDERED that:

1.             Summary judgment be entered for the Plaintiff against the Defendant that a declaration be granted to rescind and set aside the Agreement for Sale and Purchase dated 3^rd June 1997 made between the Plaintiff as the Vendor and the Defendant as the Purchaser;

2.             All other reliefs claimed by the Plaintiff in this application under Order 86 of the Rules of High Court be adjourned to a date to be fixed with 3 hours reserved; and”

7.  It is the implementation of the terms of this Consent Order that this trial is concerned with.

8.  It was originally the contention of Mr Philip Wong for the Plaintiff that the assessment of damages which have been suffered by his clients should be calculated on the basis of the sale which took place on 26 June 2003 when the suit premises were sold to Eternal Investment Development lnc a BVI Company for $100 million.  During the course of the hearing he abandoned this contention.

9.  He also wished to place reliance upon various valuations prepared by Ms Cheung of Knight Frank Surveyors and Valuers.  She valued the suit premises at $120 million on 8 May 1998 being the date when the Plaintiff rescinded the Agreement.

10.  The position taken by Mr Tong SC for the Defendants was very different.  It was his contention that clause 11 of the Agreement provided that the deposit of $20 million which had been paid by the Defendants should be treated as liquidated damages to reflect the damage suffered by the Plaintiff.

11.  This being the case the damages payable to the Defendant were satisfied by the payment of the deposit and the Defendants counterclaimed for the return of the $45 million being part payment of the purchase price. 

12.  As a fall back position he placed reliance upon the expert evidence of Mr Charles Chan of Chesterton Petty Surveyors and Valuers who valued the premises at 8 May 1998 at HK$189 million.  In a similar manner he argued that credit would have to be given for the said payments which had been made by the Defendants.  He argued that interest should, be payable on this amount.

13.  The main reason for the huge disparity in the valuations of the respective valuers is that Mr Chan included in his valuation a “Hope Value” which was based upon his opinion that the optimal use of the premises would be achieved if they were to be developed as a shopping mall and a number of small shop units were to be sold separately.

14.  Ms Cheung did not accept the validity of this approach.  It was her contention that having regard to the depressed state of the property market in May 1998 it would not have been feasible to develop the premises in the manner suggested by Mr Chan.

15.  At an early stage in the trial the 2 expert witnesses met together in an attempt to agree whatever common ground they could.  They were unable to agree the question of the “Hope Value”.

16.  Besides the expert witnesses for the parties the only witnesses to give evidence at the trial were Mr Lam Kam Tei a Director of the Plaintiff and Mr Thomas Tse the General Manager of the Holding Company of the Defendant.

17.  Mr Lam gave evidence concerning the sale of the suit premises.  The main reason he gave for wanting to sell the property was that he and his wife who mainly ran the Chinese emporium business were advancing in years and wished to retire.

18.  After the sale fell through he had done the best he could to find an alternative purchaser.  He had experienced great difficulty with this due to the depressed market conditions.

19.  He had however succeeded in finding a purchaser in 2003.  This was Eternal Investment Development Inc.  The Plaintiff entered into a sale and purchase contract with Eternal Investment on 10 March 2003 and it had been a term of the Agreement that it should be subject to the existing tenancies of part of the premises and that there should be a rent guarantee for the remainder of the premises which would continue to be occupied by the Plaintiff which would conduct its business at the premises.  The sale was completed on 26 June 2003.

20.  Almost all of Mr Lam’s evidence in Chief was given in the form of a written statement which was adopted by him as his evidence.

21.  He was cross examined at some length by Mr Tong.  One of the first points made by Mr Tong was to question whether the sale to Eternal Investments was an arms length transaction.

22.  It transpired that it was nothing of the sort.  Mr Lam was asked if he knew who was the person behind the Company.  He said that it was his son Alvin Lam.  As External Investment was a BVI Company it would be extremely difficult for anyone to find out who were the Directors and Shareholders of the company.

23.  The fact that Mr Lam did not reveal in his examination in chief that the sale of the property had in effect been to his son leads me to a conclusion that Mr Lam was far from being a truthful and straightforward witness.  I am satisfied that he deliberately attempted to give the impression that the sale to Eternal Investment was an arms length transaction when it was nothing of the sort.

24.  I regret that there were other aspects of his evidence which I did not consider to be convincing.  I do not believe that the Plaintiff made any serious attempt to sell the property after the sale to the Defendant fell through.  He was cross examined by Mr Tong on the efforts he had made to achieve a sale.  He did not specifically give instructions to any Estate Agents.  Had he genuinely wished to effect a sale I believe he would have done so.  Certainly it cannot be said that he tried to mitigate the damage the Plaintiff had suffered in any timeous fashion. 

25.  What would seem to be clear from his evidence is that after the sale fell through a decision was made to continue running the Plaintiff’s business from the premises.  There are ramifications to this which will be considered in due course when an analysis is made of Clause 11 and Clause 6.

26.  What is very clear is that no reliance whatever can properly be placed upon the sale to Eternal Investment either as to the timing of the sale or to the consideration for the transaction.  Belatedly Mr Wong on behalf of the Plaintiff conceded that it no longer wished to place any reliance upon the sale.  The Plaintiff did however wish to continue to prosecute their claims but inevitably it would have to base its claims upon the date of the rescission of the Agreement namely 8 May 1998 and place reliance upon the evidence of their expert witness Ms Cheung to determine the value of the suit premises on that date.

27.  It also has to be borne in mind that one of the most important matters which will have to be considered in relation to Clause 11 is the amount of time which elapsed after the Plaintiff rescinded the Agreement and the absence of any satisfactory explanation to account for this.  I am left with no alternative but to conclude in the circumstances of this case that it was from the outset the intention of the Plaintiff to retain the premises.

28.  Mr Tse’s evidence was quite brief.  He said that the main business of the Defendant was property development.  Ms Lam of Centaline Estate Agency had informed him that the suit premises were on the market.  He had investigated the property and was satisfied that it had good potential as an investment if it could be developed as a Shopping Arcade.  He had received professional advice on this.

29.  The original asking price had been $250 million.  The Defendant had been able to negotiate the price down to $200 million.  He considered that the property reflected good value at this price and accordingly they had entered into the Sale and Purchase Agreement.

30.  Their plans to proceed with the purchase had been disrupted by the very heavy fall in the property market in October 1997.  One consequence of this had been that the Defendant had experienced great difficulty in obtaining financial support from their Bankers.

31.  They had attempted to get more time by virtue of the supplemental Agreement but even with this extra time they had been unable to fulfil their contractual obligations.

32.  Mr Tse was not cross examined by Mr Wong and I accept his evidence as being truthful.

33.  Before considering the evidence of the Expert witnesses it is convenient to have regard to the contention being advanced by Mr Tong that if the provisions of Clause 11 of the Sale and Purchase Agreement and Clause 6 of that Supplemental Agreement are correctly analysed it becomes manifest that it was the intention of the parties when they entered into the Sale and Purchase Agreement that the deposit of $20 million should be treated as liquidated damages in the event that the Plaintiff rescinded the Agreement and chose to retain the property.  Clause 11 of the Agreement is in this form:

“If the Purchaser shall fail to pay the purchase price or any part thereof or to complete the purchase of the said Premises in accordance with the terms of this Agreement the said deposit shall be absolutely forfeited as liquidated damages (and not as penalty) to the Vendor who shall be at liberty if the Vendor sees fit without being obliged to tender an assignment to the Purchaser to rescind this Agreement and to retain the said Premises or any part or parts thereof or to resell the same either as a whole or in lots and either by public auction or private contract or partly by the one and partly the other and subject to such conditions and stipulations as to title or otherwise as the Vendor may think fit.  Any deficiency in price arising from such resale and all expenses attending the same or any attempted resale shall be made good and paid by the Purchaser as liquidated damages and any increase in price realised by any such resale shall belong to the Vendor.  This Clause shall not preclude or be deemed to preclude the Vendor from taking other steps or remedies to enforce the Vendor’s rights hereunder or otherwise (including, but without limitation, the right to specific performance of this Agreement).  On the exercise of the Vendor’s right of rescission hereunder the Vendor shall have the right if this Agreement shall have been registered in the Yuen Long New Territories Land Registry to register at the Yuen Long New Territories Land Registry a Memorandum signed by the Vendor alone to rescind the sale of the said Premises and to vacate the registration of this Agreement.”

34.  Clause 6 of the Supplemental Agreement reads:

“Notwithstanding any provisions of the said Agreement and this Supplemental Agreement, the Vendor is entitled to, in the event of the Vendor’s exercise of the right to forfeit the said deposit (including the said initial and further deposits) pursuant to Clause 11 of the said Agreement, hold/retain all sums of money received or to be received from the Purchaser as part payment of the purchase price for the purpose of assessment of damages the Vendor shall suffer.”

35.  I accept the validity of Mr Tong’s submission that in construing these clauses it is necessary to discover what was the intention of the parties when the Agreement was concluded.

36.  I have no doubt that upon a fair construction of Clause 11 the Plaintiff had two choices open to it.

37.  The first was to retain the property.  In this event the deposit would be forfeited and the moneys would be treated as liquidated damages to compensate the Plaintiff for any damage it may suffer.

38.  The second choice was to resell the property and recover the deficiency in price together with all attendant expenses as liquidated damages.

39.  It is necessary also to have regard to Clause 14 of the Agreement which provides that time is of the essence of the Agreement.

40.  In my view there is nothing in the latter part of Clause 11 which is in any way inconsistent with Mr Tong’s construction.  Where reference is made to other remedies being available to enforce the Agreement it appears that reference is being made to the Plaintiff’s right to seek an order for specific performance of the Agreement.

41.  It has to be said that the provisions relating to the deposit being treated as liquidated damages provides a simple and convenient means of resolving any disputes which might otherwise arise in the event of the Defendant being in breach of its contractual obligations.

42.  What appears to be envisaged in Clause 6 is that in the event of the vendor choosing to resell the property it should be entitled to retain any part payments of the purchase price so that its interests could be secured in the event that the proceeds of any sale may fall short of the original contract price.  Again this would appear to make perfectly good commercial sense and to be in no way inconsistent with the construction of Clause 11 argued for by Mr Tong.

43.  Finally in this part of the judgment it is necessary to see how the courts have dealt with situations where parties have attempted to provide for liquidated damages to compensate the innocent party to a contract when there has been a breach of contract.

44.  The leading case on this subject is Polyset Ltd v. Panhanddt Ltd 2002 3HKLRD 319 Ribeiro PJ had this to say at p. 341.

“76.   Clauses prescribing liquidated damages therefore spring from entirely different intentions and pursue different objectives compares with deposit clauses.  Stipulations for liquidated damages focus on the loss considered likely to result from foreseeable breaches and aim to quantify in advance the damages payable.  In Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6, for example, liquidated damages at a weekly rate were stipulated to cover the event of delay in the delivery of torpedo boats ordered by the Spanish government.  In Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, the clause required such damages to be paid at a stated rate for each tyre re-sold by a distributor in breach of certain agreed terms, including a price-maintenance clause.  Such provisions are obviously not concerned with providing an earnest or guarantee of performance to cater for a period intervening between contract and completion.  Nor are they concerned with a vendor extracting a commercial quid pro quo for withdrawing his asset from the market during that period.  They establish an agreed measure of damages payable after breach.

77.    Quite apart from the differences in the aims of the two devices, the legal consequences which attach to a liquidated damages clause differ in one important respect.  As noted above, a clause permitting forfeiture of a deposit upon the purchaser’s breach does not preclude the vendor from claiming damages in respect of any loss suffered over and above the value of the forfeited deposit.  In contrast, where a breach is covered by a liquidated damages clause, the amount prescribed by that clause represents the agreed sum of damages payable, regardless of the quantum of actual loss.

78.    This applies where the actual loss is in fact less than the liquidated damages amount (provided of course the clause represents a genuine pre-estimate of loss and has not been invalidated as a penalty).  Thus, in Philips Hong Kong Ltd v A-G of Hong Kong [1993] 1 HKLR 269, Lord Woolf, giving the advice of the Privy Council, stated:

Except possibly in the case of situations where one of the parties to the contract is able to dominate the other as to the choice of the terms of a contract, it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss.  Even in such situations so long as the sum payable in the event of non-compliance with the contract is not extravagant, having regard to the range of losses that it could reasonably be anticipated it would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered and so a perfectly valid liquidated damage provision.  (pp. 279-280)

79.     The proposition that a liquidated damages clause is definitive of the damages recoverable also holds good where the actual loss exceeds the amount payable under the clause.  For example, in Diestal v Stevenson [1906] 2 KB 345, a contract for the sale of coal prescribed payment of one shilling for every ton of coal not delivered.  The buyer was held to this and not allowed to claim damages for the greater loss actually caused by the seller’s non-delivery.  Similarly, in Talley v Wolsey-Neech (1978) 38 P & CR 45, the vendor under a sale and purchase agreement sought to recover lost interest but failed as he was held entitled only to recover the liquidated damages as defined by the relevant clause.  Even where the parties contract for liquidated damages in sums which they know are likely to be insufficient to cover actual loss if the foreseen breach occurs – so that the clause could be said not to be a genuine pre-estimate of likely loss – the clause is likely to be upheld as a valid agreement to limit liability rather than a penalty: Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd [1933] AC 20.  Such a clause does not inflict a penalty by exceeding the compensatory function of damages.”

45.  I have no doubt that this is an accurate statement of the law and is applicable to the present case.

46.  Mr Wong endeavoured to seek an alternative interpretation of Clauses 11 and 6 by reference to Goldspeed Investment Ltd v Easy Success Enterprises Ltd 2000 2 HKC 183.  It is apparent that the clause which Deputy Judge Susan Kwan (as she then was) considered is significantly different to the clauses which are relevant to this case.

47.  As indicated earlier in this judgment I find as a fact that the Plaintiff did intend to retain the suit premises and that the relevant provisions contained in Clause 11 are operative.

48.  This being the case the Plaintiffs were entitled to forfeit the deposit of $20 million.  However this sum had to be treated as liquidated damages which would compensate the Plaintiffs in full for any loss they may suffer.  The Plaintiffs were not entitled to retain the $45 million part payment of the purchase price and these moneys must be repaid to the Defendants.

49.  The operative date for the payment of these moneys was the date when the contract was rescinded namely 8 May 1998.  Interest must be paid to the Defendants in respect of these moneys from this date to the date of judgment at 1% above prime rate.  Thereafter interest will be paid at the usual rate for judgment debts.

50.  Offset against this will be the amount of interest and outgoings payable pursuant to clauses 3 & 4 of the Supplemental Agreement.

51.  If these amounts cannot be agreed between the parties there will be an assessment of the amount by a master.

52.  Although this issue is determinative of this litigation it is nonetheless desirable that I should make some adjudications upon the expert valuations which were before me as it is possible that this matter may be taken elsewhere and another view of the position may prevail.

53.  There was a large disparity in the valuations made by Ms Cheung for the Plaintiff and Mr Chan for the Defendant.

54.  Ms Cheung valued the suit premises at $120 million on 18 May 1998 and Mr Chan arrived at a valuation of $189 million.

55.  To a considerable extent the reason for this disparity was that whereas Mr Chan took cognisance of “Hope Value” Ms Cheung declined to do so.

56.  I gave most careful consideration to the various Valuation Reports and to the evidence given by these two experts.

57.  For a number of reasons I come to the conclusion that the evidence of Mr Chan is to be preferred to that of Ms Cheung.

58.  One my main reasons for this is that I definitely obtained the impression that Mr Chan was more independent than Ms Cheung.

59.  On several occasions during cross examination by Mr Tong Ms Cheung justified what she had done by saying that she had been acting on the instructions of the Plaintiff.

60.  A good example of this was when Mr Tong asked her why she had failed to identify comparables in the first Report she prepared.  She said that the Plaintiff had not asked her to do so.  I regret that it was my impression that she was more concerned to produce a report which would be favourable to the Plaintiff then she was to give dispassionate independent advice to the court.

61.  Another example of this tendency in Ms Cheung was the valuation she placed upon the suit premises in May 1997.  She valued the premises at $163 million.

62.  It is highly improbable that the premises were only worth this at that time bearing in mind that the original asking price of the Plaintiff was $250 million and the Defendants who are experts in this field concluded the deal at $200 million.

63.  In this connection what needs to be borne in mind is that while it is common ground that market values collapsed in October 1997 the collapse was no where near large enough to account for this.  On Mr Chan’s evidence the decline over this period was 15% while Ms Cheung assessed it at 18%.

64.  This would seem to me to indicate that Ms Cheung was prepared to place an unduly low figure on the value of the premises in May 1997 so as to justify the very conservative figure she adopted for May 1998.

65.  However much more important than all of this is the approach Ms Cheung adopted towards the question of ‘Hope value’.

66.  It was my impression that Ms Cheung was extremely reluctant to even countenance that such a value could exist at all after October 1997.  She insisted that in a falling market there was no way that any purchaser would consider developing the premises as a Shopping Arcade.

67.  Her attention was drawn to the fact that in 1998 there had been a number of land sales of undeveloped land.  It was put to her that the Purchasers of this land would be assuming a far greater risk of financial loss than a potential developer of the suit premises.

68.  Notwithstanding this she maintained her view that there was no market to justify a Hope Value being added to the value of the suit premises.

69.  It is perhaps significant to add that it was apparent from Mr Lam’s evidence that he had made no serious attempt to market the property and that accordingly it could not be said that an effort had been made to sell the property to a party which may be prepared to develop the premises in this way.

70.  When Ms Cheung was prevailed upon to adopt a Hope Value she valued the premises at 18 May 1998 at $151 million.

71.  In contrast to all of this I was most impressed by Mr Chan as a witness.  It appeared to me that he genuinely attempted to assist the court in an independent manner.

72.  I find as a fact that a ‘Hope Value’ should be added to the value of the property.  I am also satisfied that the valuation of the property of $189 million as at 18 May 1998 is a proper valuation of the premises.  In the event that an assessment of damages is to be undertaken in relation to the Plaintiffs loss this is the value which should be adopted.

73.  For the reasons given earlier I enter judgment for the Defendant on the counterclaim in the terms indicated and dismiss the Plaintiffs claim.  I also make an order nisi that the Defendant is to have its costs.