YING HO CO LTD AND OTHERS v. THE SECRETARY FOR JUSTICE

FACV No. 17 of 2003

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

 FINAL APPEAL NO. 17 OF 2003 (CIVIL)

(ON APPEAL FROM CACV No. 291 of 2002)

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Dates of Hearing: 5 – 8 July 2004

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J U D G M E N T

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Mr Justice Bokhary PJ:

1.  During the run-up to the 1997 handover the appellant developers conceived and pursued the idea of making a striking demonstration of confidence in Hong Kong’s future by erecting here what would be the tallest building in the world.  But there was a problem which ultimately proved insuperable.  Hong Kong’s airport was then at Kai Tak.  Its replacement was under construction at Chek Lap Kok.  The proposed building would be in Tsuen Wan and some 18 kilometres from the new airport.  Even so its height would be so great as to jeopardize the proper operation of the instrument landing system to be installed there.  A lot of time was used up by, among other things, unsuccessful efforts to overcome this problem.  The developers missed the deadline for fulfilling the building covenant forming one of the lease conditions on which they held the site in question from the Government.  Threatened by the Government with re-entry for breach of that lease condition, the developers avoided that by paying over $½ billion in waiver premia and liquidated damages.  They paid under protest.  And they then commenced proceedings for reimbursement and damages.  Having failed in the courts below, they have come finally to this Court.

2.  Mr Jonathan Sumption QC for the developers has presented arguments as able as any I have ever heard.  But such are the circumstances of this case that I feel unable to accede to those arguments beyond keeping alive that part of the developers’ claim which has yet to be tried.  To this limited extent Mr Sumption’s efforts are rewarded with success.

3.  The story of the case is told in detail by Mr Justice Ribeiro PJ and Sir Ivor Richardson NPJ whose judgments I have had the advantage of reading in draft.  Gratefully adopting their accounts, I turn at once to the questions formulated by Mr Sumption.  These read:

“1. Was the Government entitled to withhold approval for [a Master Layout Plan (‘MLP’)] complying with all the Special Conditions of the grant, on the ground that the height of the proposed building exceeded [the height above principal datum] which the Government expected to fix under [the Hong Kong Airport (Control of Obstructions) Ordinance, Cap. 301 (‘the Ordinance’)]?

2. What obligations did the Government owe as to the processing of MLPs?  In particular, did they (as the Appellants contend) owe obligations (i) not unnecessarily to act in a way which deprived the grantee of part of the time allowed by the Special Conditions for completing the works; and/or (ii) in the event that they were entitled to and did reject an MLP on account of an aspect of the design, disposition or height not regulated by the Special Conditions, to inform the grantee precisely what criteria it was applying?

3. Was the Government responsible for any substantial (as opposed to de minimis) part of the delay occurring up to April 1996, (i) by purporting to reject MLPs on account of a prospective height limit under the Ordinance; and/or (ii) by taking longer than was necessary to decide what to do about the absence of any statutory controls over height or of any definitive maximum height; and/or (iii) by taking longer than was necessary to reject an MLP which was too high?

4. If some part of the delay occurring up to April 1996 was the responsibility of the Government, what is the legal effect of that state of affairs on its right (i) to demand liquidated damages for the delay, and/or (ii) to re-enter on the expiry of the contractual period for carrying out the works; and/or (iii) to demand waiver premia for not re-entering?

5. If the Government was not entitled to act as in paras. 4(i), (ii) or (iii) above, is it nevertheless entitled to retain the liquidated damages and waiver premia paid to it under the threat of re-entry?”

4.  I answer the first four questions against the developers.  But I answer the fifth question in such a way as to accord the developers the limited success of which I spoke.  I agree with and do not propose to add anything to the reasons given by Mr Justice Ribeiro PJ for answering the second, third and fourth questions against the developers.  But I will state in my own words why I answer the first and fifth questions as I do, which I see as consistent with Mr Justice Ribeiro PJ’s reasoning on those questions. 

Use of a DDH clause to restrict building height in the interest of safe and efficient aviation

5.  The premise of Mr Sumption’s first question is that the rejected master layout plans comply with all the special conditions of the grant.  But the building shown in those plans exceeds the height restriction imposed by the Government under a special condition.  This special condition makes the design, disposition and height of any building to be erected on the land subject to the Government’s prior approval in writing.  Such clauses (commonly called “DDH clauses”) have often been used by the Government to achieve its town planning objectives.  A building height restriction having been thus imposed, the premise of Mr Sumption’s first question has to be read subject to the issue between the parties as to whether the restriction was validly imposed. 

6.  In Crozet Ltd v. AG [1973-76] HKC 97 at p.101G Briggs CJ, sitting at first instance and dealing with a DDH clause, saw no reason why a lease condition cannot be used to enforce Government policy, provided that the policy was within the law.  This should not have come as a surprise to anybody.  As noted in Roger Bristow: Land-use and Planning in Hong Kong (1984) at pp 26, 154, 161 and 195, the beginnings of our system of town planning through lease conditions as well as statute can be traced back to the middle of the 19^th century.  Within limits the Government isentitled to use a DDH clause to achieve its lawful town planning objectives including the restriction of building height in the interest of safe and efficient aviation.  One such limit is the purely private law one that there must be no derogation from grant. 

7.  Mr Sumption cited the decision of the House of Lords in Equitable Life Assurance Society v. Hyman [2002] 1 AC 408.  Like a DDH clause, the provision concerned in thatcase involved a contractual discretion.  The facts may be taken from the headnote where they are set out thus at p.408 C-F:

“The defendant was a representative of the interests of approximately 90,000 policyholders who held retirement with-profits policies containing a guaranteed annuity rate with the plaintiff life assurance society.  Under the defendant’s sample policy, which was effected in 1979 and matured in 1998, the society agreed to pay, on maturity, the annuity increased by related bonuses, if any, or alternatively he could take an annuity at the society’s current rate or from another provider.  Under article 65 of the society’s articles of association the amount of any bonus was within the absolute discretion of the directors of the society and their decision was to be final and conclusive.  From 1994, when the current annuity rate started to fall below the guaranteed annuity rate, the society adopted a policy of declaring in relation to such policies a lower final bonus to policyholders who chose to take an annuity at the guaranteed rate than to those who elected to take one of the alternative options.”

The House of Lords held that the Society was not entitled to adopt that course. 

8.  At p.459 G-H Lord Steyn said:

“The supposition of the parties must be presumed to have been that the directors would not exercise their discretion in conflict with contractual rights.  These are the circumstances in which the directors of the Society resolved upon a differential policy which was designed to deprive the relevant guarantees of any substantial value.  In my judgment an implication precluding the use of the directors’ discretion in this way is strictly necessary.  The implication is essential to give effect to the reasonable expectations of the parties.”

Lord Cooke of Thorndon agreed with Lord Steyn’s way of viewing the case but said (at p.460 F-G) that the same conclusion could be reached by starting from the principle that no legal discretion, however widely stated, can be exercised for purposes contrary to those of the instrument by which it is conferred.  And at p.461A he said that in exercising their powers of allotment of bonuses the directors were not entitled to exercise the same “for a purpose subverting the basis of the policy, fairly interpreted”.  The other members of the House of Lords agreed with both Lord Steyn and Lord Cooke. 

9.  Where a grant of land is concerned, I think that principles such as those identified by Lord Steyn and Lord Cooke in the Equitable Life Assurance case can and should be given effect by preventing, or awarding a remedy for, any derogation from grant. 

10.  The highrise complex for which the developers eventually obtained approval will utilize the full plot ratio and gross floor area available under the grant.  And the evidence is that this complex is no less valuable than what they had planned as the tallest building in the world.  I make no attempt to provide a general indication of what would or would not amount to a derogation from grant through the misuse of a DDH clause.  Suffice it to say that in the present circumstances there is no derogation from grant.

11.  Article 105 of the Basic Law provides that “[t]he Hong Kong Special Administrative Region shall, in accordance with law, protect the right of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property”.  This constitutional guaranteeis not confined to instances in which the deprivation suffered by the owner is accompanied by a corresponding acquisition by the state.  In addition to being entrenched, art.105 is in that sense, too, more protective of property rights than the common law as spoken of by Wright J in France Fenwick & Co. v. The King [1927] 1 KB 458 at p.467 where he said that “[a] mere negative prohibition, though it involves interference with an owner’s enjoyment of property, does not … merely because it is obeyed, carry with it at common law any right to compensation”. Public law considerations would arise if the Government were ever to resort to a DDH clause in order to avoid paying compensation under the Hong Kong Airport (Control of Obstructions) Ordinance.  But there is nothing to suggest that the Government’s conduct in this case was dictated, or even influenced, by a desire to avoid paying compensation.  Moreover the approved complex is no less valuable than what the developers had planned as the tallest building in the world.  So no compensation, apart possibly from nominal compensation, would have been payable even if the building height restriction in question had been imposed under the Ordinance rather than the clause. 

12.  It is for the foregoing reasons that I answer Mr Sumption’s first question against the developers.  I now turn to Mr Sumption’s fifth question.

Reimbursement if the delay was caused by the Government itself

13.  The Government’s stance is that what happened in the present case amounted to a settlement so that the developers would not be entitled to reimbursement even if the delay in respect of which they had paid under protest in order to avoid re-entry was caused by the Government itself.  If that be right it would preclude even that part of the developers’ claim which has yet to be tried.  This is the part of their claim which is pleaded in paragraph 29 of the Re-Amended Statement of Claim.  There the developers plead that the Government witheld overall approval of their master layout plans submitted after mid-April 1996 when it should have approved the same subject to conditions.  Thus, the developers plead, the Government wrongfully delayed approval of those plans for a total of 16 months between July 1996 and November 1997 without a corresponding free extension of the building covenant period.

14.  For his reimbursement argument Mr Sumption relies on two cases in particular.  These are Woolwich Equitable Building Society v. IRC [1993] AC 70 decided by the House of Lords and Maskell v. Horner [1915] 3 KB 106 decided by the Court of Appeal in England.  The Woolwich Equitable case involved reimbursement of tax paid under ultra vires regulations.  And the effect of the decision is stated as follows in the headnote (at p.71 C-D):

“… although the common law had previously only admitted recovery of money exacted under an unlawful demand by a public authority where the payment had been made under a mistake of fact or under limited categories of compulsion, … the nature of a demand for tax or similar impost on the citizen by the state, with the perceived economic and social consequences of non-payment stemming from the inequality of the parties’ respective positions, and the unjust enrichment falling on the state where the citizen paid an unlawful demand to avoid those consequences, warranted a reformulation of the law of restitution so as to recognise a prima facie right of recovery based solely on payment of money pursuant to an ultra vires demand by a public authority”.

But Mr Sumption submits that there is support in the majority speeches for a wider proposition.  This is, he submits, that the law has already been, or should now be, developed to the stage where want of consideration for a payment provides of itself a basis for reimbursement whether or not the payee is the state.  I can see the force in this submission.

15.  Moreover I do not understand Mr Sumption to have abandoned reliance on the fact that the payee in the present case is the Government.  If he has to do so in order to bring the developers within the Woolwich Equitable case, then Mr Sumption does not shrink from relying on that fact.  He does not feel deterred from doing so by the decision of the Privy Council in Hang Wah Chong Investment Co. Ltd v. AG [1981] HKLR 336.  The effect of that decision was summarised by this Court in Raider Ltd v. Secretary for Justice (2000) 3 HKCFAR 309 at pp 313J-314A and Director of Lands v. Yin Shuen Enterprises Ltd (2003) 6 HKCFAR 1 at p.14D-F.  Shortly stated it is that qua landlord the Government is as free as a private landlord to refuse to modify a lease condition or to name its price for such modification.  Perhaps ¾ and I put it no higher than that ¾ waiver premia and, in circumstances like the present, even liquidated damages can be equated with an impost.  That could bring the same within the ambit of the Woolwich Equitable case without departing from the Hang Wah Chong case.

16.  Be all of that as it may, the most obvious course is, I think, to approach the issue of reimbursement on the basis for which Mr Sumption relies principally on Maskell v. Horner.  There Lord Reading CJ said this at p.118:

“If a person pays money, which he is not bound to pay, under the compulsion of urgent and pressing necessity or of seizure, actual or threatened, of his goods he can recover it as money had and received.  The money is paid not under duress in the strict sense of the term, as that implies duress of person, but under the pressure of seizure or detention of goods which is analogous to that of duress.  Payment under such pressure establishes that the payment is not made voluntarily to close the transaction …”

In my view the principle underlying that statement applies just as much to re-entry of land as it does to seizure or detention of goods.

17.  The fact that payment had been made under protest was considered relevant by each member of the court in Maskell v. Horner.  The Lord Chief Justice said (at p.120) that it “affords some evidence, when accompanied by other circumstances, that the payment was not voluntarily made to end the matter.”  Buckley LJ said (at p.124) that it is “a further factor…which goes to show that the payment was not voluntary.”  And Pickford LJ said (at p.126) that it is “some indication” of involuntariness.  The mere fact that a payment was made under protest does not of itself leave the way open for the payer to bring an action for reimbursement.  But such a protest can combine with other matters to prove the involuntariness that would leave the way open for him to do that.

18.  On the evidence led at the trial, the position is that the developers disputed the Government’s right to re-enter, paid in order to avoid re-entry, did so under protest and signalled their intention to sue for reimbursement.  This does not point to a settlement that precludes a claim for reimbursement.  It points instead to an involuntary payment that leaves the way open for such a claim at least on the Maskell v. Horner basis and perhaps on some other basis or bases as well.  If the disposal of the present appeal required an answer to Mr Sumption’s fifth question, I would answer it in favour of the developers.  But the disposal of the present appeal does not require an answer to this question.  And I decline to answer it now.  Mr Anthony Neoh SC for the Government said that it would like an opportunity to explore the availability of evidence that the length of the extensions for which the developers paid exceeds the length of the delay of which they complain.  I would not deprive it of that opportunity.

Conclusion

19.  I would dismiss the present appeal, and deal with costs in the manner favoured by Mr Justice Ribeiro PJ and Sir Ivor Richardson NPJ.  As to that part of the developers’ claim which has yet to be tried, I would leave each side’s position intact.

Mr Justice Chan PJ:

20.  I agree with the judgment of Mr Justice Bokhary PJ and the judgment of Mr Justice Ribeiro PJ and would dismiss the appeal for the reasons given by them.  I would only add a few words on the first four issues raised by Mr Sumption QC for the appellants (the Developers).  The facts have been set out in detail in the judgment of Mr Justice Ribeiro and the judgment of Sir Ivor Richardson NPJ.  I would gratefully adopt their accounts of the facts.

Issue 1

21.  The Director of Lands (the Director) has adiscretion to approve or reject the Master Layout Plans (MLP) for the development of the lot submitted by the Developers under Special Condition (5)(a)(i) of the Conditions of Grant.  This is reinforced by Special Condition (63)(b).

22.  As required by Special Condition (5)(a)(i), the MLP submitted by the Developers must, in addition to containing plans showing the transport terminus to be built and various construction items in and around the lot, also contain details of design, standards and height of the buildings to be erected. Thus, the height of buildings is among the matters which are expressly required to be approved by the Director and which the Director has to consider in the proper exercise of his discretion. 

23.  Further, under Special Condition (9)(a)(i), any building or buildings to be erected must comply not only with the provisions of the Buildings Ordinance, Cap 123 and the regulations made thereunder, but also with the design, disposition and height approved under Special Condition (9)(e).  That Condition provides that the design, disposition and height of the buildings to be erected shall be subject to the prior written approval of the Director.  Again, it is clear that the Director has a discretion to approve or reject any height of buildings proposed by the Developers in the MLP.  Special Condition (9)(e), generally described as a DDH clause, has been in use in conditions of grant for quite some time and no doubt there are good reasons for having this condition.  See Hang Wah Chong Investment Co. Ltd v. Attorney General of Hong Kong [1981] 1 WLR 1141 where it was held that the Government as a landlord could exercise its discretion under a similar provision in the conditions of grant in that case for the public benefit.   

24.  Hence, in my view, upon the true construction of the Conditions of Grant, both Special Conditions (5)(a)(i) and (9)(e) are intended to expressly reserve to the Director a power to control the height of the buildings to be erected.  Existing height restrictions imposed by other legislation or the absence of such restrictions are relevant considerations for the Director in exercising his discretion.  I am therefore unable to accept that Special Condition (9)(e) serves no useful or meaningful purpose except as a purely procedural provision. 

25.  Mr Sumption submits that the Director’s discretion must not be exercised in such a way as to defeat the reasonable or legitimate expectations of the Developers, that the Developers reasonably and legitimately expected that if there were to be a height restriction, that should have been set out expressly in the Conditions of Grant, and that since there was no such restriction provided in that document, the Director could not impose a height restriction and reject the MLP on this ground. 

26.  A contracting party not only can reasonably and legitimately expect, but is entitled, to enjoy the full benefits of his contractual rights, whether express or implied under the contract.  However, he cannot expect and is not entitled to have any right which is over and above those contractual rights.  The question in each case is: what, on the true construction of the contract, are the party’s contractual rights?

27.  Although there is no specific height restriction in the Conditions of Grant, I do not think it can be realistically argued that the Developers are entitled under the Conditions of Grant to construct buildings on the lot to any height as they want.  Nor can they, as experienced developers of properties in Hong Kong, reasonably or legitimately expect to do so.  If they could build to whatever height they wanted, there would have been no purpose in having Special Conditions (5)(a)(i), (9)(a)(i) and (9)(e).

28.  The Developers’ submission is tantamount to saying that height restrictions can only be imposed either by legislation or express provisions in the Conditions of Grant.  I do not agree.  This argument runs contrary to the existence and purpose of Special Conditions (5)(a)(i) and (9)(e).  It is clear from the evidence in the present case that the Developers ought to have been aware of the possibility of a height restriction being imposed on buildings to be erected on the lot.   

29.  The scope of a contractual discretion depends on a construction of the contract.  But such a discretion must not be exercised in bad faith or in such a way so as to deprive the parties of the rights to which they are entitled on the true construction of the contract.  As Lord Cooke of Thorndon said in Equitable Life Assurance Society v. Hyman [2002] 1 AC 408, 460 “no legal discretion however widely worded … can be exercised for purposes contrary to those of the instrument by which it is conferred.”  As accepted by Mr Neoh, the discretion in this case cannot be exercised in derogation of the grant. 

30.  In the present case, it cannot be said that when the Director (for public interest reasons including aviation safety) specified a height to which the Developers could erect their buildings on the lot, he was depriving the Developers of any right under the Conditions of Grant.  There was simply no right to build to whatever height they wanted and in the circumstances of this case, there cannot be any reasonable or legitimate expectation that no height restrictions would be imposed. 

31.  I should mention the Developers’ complaint that there was a delay on the part of the Government to make an order under s.3 of the Hong Kong Airport (Control of Obstructions) Ordinance, Cap 301 as amended in 1994 specifying the height restrictions required for the new airport.  I do not think this can be a valid criticism.  It should be pointed out that with a massive construction project like the new airport, it would be unrealistic to expect that an order under that Ordinance specifying height restrictions within the flight path of the new airport could be made piecemeal or in respect of individual lots.  It would be irresponsible for the Government to do so without regard to the whole strategic planning of the new airport and the works related thereto or without first conducting all relevant and necessary studies on the required safety standards.  An order made in respect of individual lots would hardly be sensible or meaningful.  It would not only be disruptive to the overall planning but might also compromise safety standards.

Issues 2, 3 and 4

32.  Mr Sumption submits that there was no need to show any culpable conduct or undue delay on the part of the Government, and that so long as it was responsible for part of the delay in having the necessary MLP approved, it was not entitled to rely on the liquidated damages clause or the power to re-enter.  As I understand him, fault is not relevant and causation is the deciding factor.  It is also submitted that on the evidence presented to the judge, the Government was responsible for part of the delay.

33.  I agree with Mr Justice Ribeiro that the authorities relied on by Mr Sumption do not fully support his proposition.  The cases of Holme v. Guppy (1838) 3 M & W 387, Dodd v. Churton [1897] 1 QB 562, and Trollope & Colls Ltd v. North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 were decided on the basis that an employer in a building contract was not entitled to liquidated damages as provided for in the contract if the contractor was prevented by the employer from completing the work according to the contract.  Peak Construction (Liverpool) Ltd v. Mckinney Foundations Ltd (1970) 1 BLR 111 was a case in which it was held that upon construing the contract, in particular, the liquidated damages clause and the extension of time clause, an employer could not recover liquidated damages for delay for which he was partly to blame, but was left to pursue unliquidated damages.  The rationale of a liquidated damages clause is twofold: first, it envisages that the contractor was at fault in causing the delay; and second, it enables the employer to recover a fixed sum for delay instead of suing for unliquidated damages. If the failure to complete the works within the stipulated time was due to the fault of both parties, the clause does not apply. (See Salmon LJ in Peak Construction (Liverpool) Ltd v. Mckinney Foundations Ltd at 121.)  It would not be workable where both employer and contractor are at fault in the absence of a contrary intention, as may be evident where there is a provision in the contract for an extension of time after the employer’s delay. (See Phillimore LJ at 127.)  Where it is necessary to apportion fault, it would otherwise be difficult to work out the date from which liquidated damages were to be calculated and payable. 

34.  For the reasons given by Mr Justice Ribeiro, I also think that these authorities are not applicable to the re-entry clause in the present case.

35.  It is not seriously disputed that the Government has an implied duty to process the Developers’ MLP with reasonable dispatch and to inform them of the reasons for its rejection.  The judge held, as submitted by the Government, that there is an implied term to the effect that the building covenant period would be extended if there is culpable conduct or undue delay on the part of the Government resulting in the Developers not being able to comply with the building covenants.

36.  But the Developers are faced with the concurrent findings of fact made by the judge and the Court of Appeal to the effect that the delay in this case was not caused by the Government.  In my view, these findings are quite justified on the evidence.  I do not think I can do any better than simply adopting the analysis by Mr Justice Ribeiro of the facts and findings in the courts below.  There is no basis for the Developers’ submissions on Issues 2, 3 and 4.

Mr Justice Ribeiro PJ:

37.  The Appellants are members of the Chinachem group of companies, controlled by Mrs Nina T H Wang.  I shall refer to them as “the Developers”.  In November 1991, they acquired by tender from the Hong Kong Government a lot with an area of about 19,500 sq m in the district of Tsuen Wan, known as Tsuen Wan Town Lot No 353 (“the Lot”).  For this acquisition, they paid a premium in the sum of $1,245,000,000.

38.  On 20 November 1992, the parties signed the Particulars and Conditions of Grant (“the Conditions”) containing the agreed terms upon which the Lot was acquired.  On 8 December 1992, the Developers were deemed to have taken possession of the Lot.  That date was important because the Conditions included a building covenant requiring the Developers to construct and to make fit for occupation a building or buildings complying with certain specifications on the Lot within 48 months of that date (“the main building covenant”).  The Developers were also required by another building covenant to complete construction of a transport terminus at ground level a year earlier, with such terminus then to be assigned to the Government for a stated consideration.  I shall refer to the two covenants together as the “building covenants”.  Failure to complete the transport terminus in time was to attract liquidated damages at the rate of $10,000 per day.  Moreover, failure to comply with any of the Conditions, including the building covenants, would entitle the Government to re-enter the Lot and to forfeit the premium. 

39.  The Conditions did not, however, permit the Developers to proceed immediately to construction of the structures in question.  They were first required, within 6 months of the date of the agreement, to submit for approval by the Director of Lands (“the Director”) the Master Layout Plans (referred to at the hearing and in this judgment as “the MLP” in the singular) comprising comprehensive plans, specifications and detailed design drawings for the development showing, among other things, the transport terminus and the building or buildings to be erected on the Lot.  Until the Director’s approval of the MLP was obtained, the Developers were confined to site formation works.  Construction of any buildings could only begin after approval.  Once the MLP was approved, the development could only proceed in accordance with its terms.  Any desired amendments or variations would require further prior approval by the Director.

40.  The project ran into difficulties which will have to be examined in some detail later.  The problems emerged with the Developers’ proposal, reflected in the fourth version of the MLP submitted in May 1994, to erect the tallest building in the world on the site.  Since the Lot lay beneath the intended flight path of aircraft which would use the airport then being constructed at Chek Lap Kok, several editions of the MLP were rejected by the Government on the grounds that the building proposed was too high and compromised aviation safety and the new airport’s operation.  It is convenient to refer to each version of the MLP, from the 1^st to the 14^th, as “MLP 1” to “MLP 14” respectively.

41.  Without an approved MLP, construction did not proceed and the completion dates stipulated by the building covenants were not met.  This resulted in the Government issuing demands for liquidated damages and threats of re-entry.  The Developers disputed the Government’s right to either remedy – a dispute which has led to the present proceedings. 

42.  Pending resolution of the dispute, the Developers made a series of payments to the Government representing the liquidated damages demanded (totalling $12.75 million) and additional premium for extensions to the building covenant period (totalling $543.242 million).  All such payments were made under protest and expressly without prejudice to the Developers’ rights. 

43.  The Developers contend that the Government was itself responsible for a substantial part of the delay by purporting to reject without legal basis successive submissions of the MLP and also by causing unnecessary delays in the processing of such submissions.  In consequence, they argue, the Government was wrong to treat them as having breached the covenants in question and was not entitled to threaten re-entry or to extract either liquidated damages or additional premium.  By the present proceedings, commenced on 2 July 1998, the Developers seek to recover back the sums paid.  Damages are also claimed in the Writ, but this aspect of the dispute does not arise for consideration on this appeal.

A.      The decisions below

44.  The trial took place before His Honour Judge Muttrie sitting as a Deputy Judge of the Court of First Instance (4 March 2002, HCA 10834/1998).  Two contentions advanced by the Developers which loomed large at that stage are no longer pursued.  The first was that as a result of conversations between Mr Bowen Leung, then Secretary for Planning, Environment and Lands (“SPEL”), and Mr C Y Leung, a chartered surveyor engaged as consultant by the Developers, the parties had orally agreed that the building covenant period would be extended without payment of additional premium pending resolution of outstanding aviation safety issues.  The second was that the Government was estopped by its conduct from demanding liquidated damages or additional premium.  After a detailed and careful survey of the evidence, the Judge rejected both of those arguments as did, subsequently, the Court of Appeal.  In the light of those concurrent findings, Mr Jonathan Sumption QC, leading for the Appellants, acknowledged that the Developers necessarily accepted that their view of the Government’s conduct and their belief that such an agreement had come into existence, had been erroneous.  Additionally, the argument advanced at the trial that the additional premium paid constituted a penalty, was not pursued before this Court.

45.  The Judge held that on their true construction, the Conditions entitled the Director to refuse approval of the relevant MLPs on the ground of the proposed building’s height, taking into account anticipated aviation safety requirements.  His Lordship also rejected a number of implied terms contended for by the Developers and found that the only relevant implied term was that which the Government had conceded to exist, namely, “that the building covenant period would be extended if there was culpable conduct or undue delay on the part of the Government resulting in the plaintiffs’ not being able to complete building within that period.”  That implied term, he found, had not been breached by the Government since it had not caused any relevant delay.  Accordingly, he dismissed the Developers’ claim and held the Government entitled to retain the sums in question.

46.  This did not, however, mean that the entire action was dismissed.  On the parties’ joint application, a split trial had previously been ordered.  All issues arising out of certain matters pleaded in paragraph 29 of the Re-Amended Statement of Claim had been stood over for a separate trial.  Those issues have therefore not yet been addressed or resolved.

47.  The Court of Appeal (31 July 2003, CACV 291/2002), dismissed the Developers’ appeal.  Rogers VP, with whom Le Pichon JA and Sakhrani J agreed, held that the Government had power under the Conditions to disapprove an MLP on the basis of height and was not persuaded that the implied terms contended for by the Developers had been made out.  As previously noted, the Court of Appeal also upheld the Judge’s findings that there had been no oral agreement for a free building covenant extension and that the Government’s conduct did not support the Developers’ case of estoppel by “lulling” them into a false sense of security in respect of their building completion deadlines.

B.      The facts

Phase 1: Commencement until 18 May 1994

48.  As Mr Sumption suggested, the material facts may conveniently be considered in four phases.  The first phase runs from the transaction’s inception until just before submission of MLP 4.  The Developers make no criticism of the Government’s conduct during this phase and no part of the claim is based upon it.  It is however important to appreciate what happened during this period when considering the allegations of delay overall.

49.  It was in 1991 that the Government invited tenders for the Lot and on 7 November of that year that the Developers’ bid was successful.  This took place against the background of the Government’s announcement in 1989 that Hong Kong was to have a new international airport at Chek Lap Kok.  In March 1992, some eight months before the Conditions of Grant were signed, the Government published a Master Plan which showed, among other things, the alignment of the two major runways and the fact that the flight paths for aircraft landing and taking off at the new airport would pass over Tsuen Wan.

50.  However, when the Developers made their tender and when they signed the Conditions of Grant, there were as yet no statutory height restrictions applicable to the Lot.  The then height limits, imposed by plans gazetted pursuant to the Hong Kong Airport (Control of Obstructions) Ordinance, Cap 301 (“the Ordinance”), applied only to areas affected by aircraft using the old Kai Tak airport.  Tsuen Wan was not an affected area.  And while the Conditions of Grant contained provisions referring to building height which will require detailed consideration below, they did not lay down any specific height limit for buildings to be erected on the Lot.  They did stipulate that the building or buildings should have a gross floor area (“GFA”) of not less than 75,000 sq m and not more than 185,250 sq m.  Maximum plot ratios of 5.0 and 9.5 were also laid down for domestic and non-domestic buildings respectively.

51.  Having secured the Lot, the Developers lost no time in putting forward MLP 1 for approval, proposing a development comprising five residential tower blocks 172 metres high.  Indeed, they did so on 5 November 1992, even before signing the Conditions of Grant and before gaining possession of the Lot.  The Developers were told on 11 November 1992 that the MLP 1 plans were on the wrong scale but that they would be circulated within government departments whose comments would in due course be conveyed to them. 

52.  Thus began a process with which all Hong Kong property developers are familiar.  It involves the submission for approval of development plans – not just MLPs but also building, landscaping and other plans – for comment by interested government departments and eventual approval or rejection by the relevant authority (in the present case, the Director).  It is an iterative process whereby the developer takes into account the concerns expressed and amends the plans, often after discussion with the authority concerned, with the aim of securing their approval.  This was the process adopted in relation to each MLP submitted by the Developers in the present case.

53.  MLP 1 and MLP 2 which replaced it, were both rejected on grounds which are not material.  The Conditions of Grant had of course been signed in the meantime and, as mentioned earlier, the Developers were deemed to have taken possession on 8 December 1992, when time starting running for the purpose of the building covenants. 

54.  MLP 3, which, like its two predecessors, was concerned with a five-tower residential development, was submitted on 10 December 1993.  However, while this was being circulated, the Developers decided upon a radical change to the project.  On 24 February 1994, they withdrew MLP 3, informing the Government that they would build a commercial building instead.  A month later, on 24 March 1994, Mrs Wang publicly announced that it was intended to build the world’s tallest building on the site. 

55.  By this time, over 15 months of the building covenant period had gone by.  The Government wrote to the Developers on 17 May 1994, pointing out that no construction work had yet started on the site and reminding them of the deadlines for completing the transport terminus and the building and of the consequences of not meeting them. 

Phase 2: 19 May 1994 to 9 June 1995

56.  The events in Phases 2 and 3 form the basis of the Developers’ claim in these proceedings.  Phase 2 commences when, over 17 months into the building covenant period, on 19 May 1994, the Developers submitted MLP 4.  This phase runs until rejection of MLP 8 on 9 June 1995. 

57.  MLP 4 proposed an office building 468 metres high, topped by a bell-shaped structure and spire 50 metres high, giving a total height of 518 metres.  It would be called “Nina Tower” and would have 108 storeys, a GFA of 220,000 sq m and a plot ratio of 11.4.  As the covering letter indicated, the Developers did not submit this MLP for formal approval, but merely to elicit the Government’s preliminary comments.  This is not surprising since the Conditions of Grant had fixed the maximum GFA at 185,250 sq m and the maximum non-domestic plot ratio at 9.5, which had obviously been exceeded in MLP 4. 

58.  Some three weeks later, on 10 June 1994, the Government rejected MLP 4, pointing out that it exhibited “fundamental breaches of the Lease Conditions” involving excessive GFA and also impermissible vehicular access arrangements.  The Developers were therefore told that MLP 4 had not been subjected to detailed examination.  They were again reminded of the 36 month deadline for completing the transport terminus and asked urgently to provide a development schedule.  That warning was repeated on 29 June 1994 and acknowledged by the Developers on 15 July 1994. 

59.  The Developers obviously knew that MLP 4 went beyond what the Conditions permitted.  Their object was to persuade the Government to permit them such additional plot ratio – without payment of additional premium but in exchange for their dedicating parts of the building to public use.  To this end, lobbying activities were undertaken, directed both at SPEL, who was in charge of land policy, and at the Director, who was in charge of Lands Department operations.  Thus, on 7 September 1994, Mrs Wang arranged a meeting with SPEL (then Mr A G Eason) to present the proposal to him.  This was followed by a written proposal on 16 September 1994.  On 7 October, the proposal was discussed at a meeting with Lands Department officers. 

60.  Having had MLP 4 rejected on 10 June 1994, it was not until 28 October 1994 that the Developers submitted MLP 5.  This showed an office tower 388 metres tall with a plot ratio of 9.5.  However, this was evidently intended as an interim submission as it remained the Developers’ intention to persuade the Government to accept a plot ratio of 11.4 and to build to the full proposed height.  Thus, at an internal “progress meeting” on 14 December 1994, the Developers :

“...... reminded all parties that the height of the tower should not in any event be lowered.  While the possibility of erecting a tower with a PR of 9.5 is being envisaged, OAP [the project’s engineer] was instructed that the foundation design should cater for sustaining the loading of a tower with a PR of 11.4.” 

61.  In the meantime, responding to Mrs Wang’s letter of 16 September 1994, the Secretary wrote on 31 October 1994 stating :

“Our preliminary view is that there are a number of issues that will need further clarification and detailed consideration before we can reach firm decisions on the project.  These issues include the question of additional plot ratio, land premium for lease modification, compatibility of the project with surrounding developments, impact on traffic, fire safety and aviation safety.”

62.  Thus, the possible relevance of aviation safety was raised for the first time.  In their reply dated 10 November 1994, the Developers pointed to the absence of any statutory height restriction and suggested that height would therefore “not pose any problem as far as aviation safety is concerned.”

63.  While the Developers were right in pointing to the absence of statutory regulation – an absence which worried some of the government officers concerned – they were wrong to think that aviation safety was not a problem.  In December 1994, the Civil Aviation Department (“CAD”) advised that a height restriction of 324 metres above Principal Datum (“mPD”)  was required at the Lot.  This prompted a minute dated 7 January 1995 from the Assistant Secretary (Lands) stating :

“CAD’s advice of the need to impose a height restriction on the site (not more than 324 mPD) has killed the idea of building a tower of 468 mPD.” 

64.  At a meeting held on 12 January 1995, the CAD informed the Developers that a height restriction of “320 m” would be imposed on the development.  At meetings held on that and the following day, the CAD explained that two height limits were relevant.  The first was the “obstacle clearance limit”, meaning the height to which objects, including buildings, had to be restricted in order to allow aircraft a sufficient margin of clearance from being physically obstructed when using the airport.  That limit was said to be about 470 mPD at the Lot.  The second was a height limit dictated by the requirements of the electronic Instrument Landing System (“ILS”)  which would be used to guide inbound aircraft landing at the airport.  For the ILS to operate properly it was necessary to ensure that the signals it emitted towards incoming aircraft were not obstructed or distorted by obstacles, such as buildings, in the path of those signals.  The maximum tolerable height of buildings and other obstacles was determined by projecting from a point on the runway a notional upward slope at a prescribed angle.  The slope angle used by the CAD was 1:62.5 and resulted in a height limit of 324 mPD for ILS purposes at the Lot.  Being the lower, this would be the effective height limit for the Lot.

65.  Notwithstanding the warning that there would have to be such a height restriction, the Developers withdrew MLP 5 and replaced it with MLP 6 on 13 January 1995, itself quickly replaced by MLP 7 on 17 January 1995.  Both MLP 6 and MLP 7 proposed an even taller office building of 468 metres surmounted by a 70 metre spire, giving a total height of 538 metres.

66.  In her letter to SPEL dated 19 January 1995, Mrs Wang made it clear that she was still pursuing a plot ratio of 11.4.  She explained that while the current MLPs were submitted on the basis of a plot ratio of 9.5, a design using a plot ratio of 11.4 was also being prepared.

67.  SPEL’s reply of 27 January 1995 referred to the need for a height restriction :

“The Director of Civil Aviation has advised that the imposition of a maximum building height limit of 324 mPD is required for any building to be erected on this site in order to protect the Instrument Landing System and safeguard the operations of the Chek Lap Kok Airport.  I believe the [DCA] has explained this to you.” 

68.  He also made it clear that additional plot ratio without payment was not on and indicated that it might well be refused even with payment of additional premium :

“It will not be possible to consider granting bonus plot ratio free of charge in exchange for the dedication of certain areas for public use under the lease.  The maximum permitted gross floor area is clearly stipulated in the lease.  Any change to the gross floor area permitted would therefore need to be effected by a formal lease modification at full premium.  However, as a matter of consistent policy, Government does not accept applications to substantially modify lease conditions in respect of lots recently granted by competitive tender.  As the proposal to increase the plot ratio from 9.5 to 11.4 in this case would mean increasing the permitted gross floor area by approximately 20% and would constitute a substantial modification, it would be very difficult to justify.”

69.  The 324 mPD height limit was again explained to the Developers at the operational level, first by the Director of Civil Aviation (“DCA”) to Mr C Y Leung by telephone on 17 February 1995 and in a letter dated 17 February 1995 from the District Lands Officer/Tsuen Wan (“DLO/TW”) to the Developers’ architects.

70.  The Developers were, however, not content to accept this position.  In a minute dated 28 February 1995, the DCA recorded that the Developers were questioning whether the building height restriction was in fact necessary.  This was followed by a meeting on 7 March 1995 between Mr C Y Leung and members of Lands Department where he indicated that while the Developers were prepared to drop their demands for additional plot ratio, they still wished to build a tower 500 metres high and had asked the DCA to review the position. 

71.  The CAD did indeed look into the possibility of relaxing the 324 mPD limit and, to advocate the Developers’ cause, on 13 March 1995, Mr C Y Leung sent them an expert report prepared by their consultants, Aeroports de Paris.  Many internal memoranda passed among the relevant government officers discussing the question.  This process culminated in the decision of the Lands Department’s Building Committee III (“BC III”), at its meeting on 18 May 1995, that on the available information no relaxation of the limit was possible.  It noted that if an inadequate height limit was adopted, this might impair the ILS and deprive the airport of the ability to function in all-weather conditions, possibly reducing its operational capacity by as much as 40%. 

72.  In the meantime, on 13 April 1995, MLP 8 was submitted.  This continued to show a tower at 468 mPD with a 70 metre spire on top.  The Developers noted that the DCA had previously commented adversely on height grounds but retorted :

“We strongly object to the remarks given by the [DCA] in respect of the proposed height of the development, an area which we consider, with due respect, that the [DCA] has no statutory jurisdiction whatsoever, as the plans are prepared based on current statutory guidelines.”

73.  Now that the fundamental basis for objecting to the MLP was the building’s height, viewed in the light of anticipated aviation safety and the operational needs of the new airport, the question which officers faced was whether, in the absence of a statutory height restriction, it would be open to the Government to refuse approval on such grounds.  In particular, the question was whether the Government could rely on provisions in the Conditions and especially on sc 9(e), known as the “design, distribution and height clause” or the “DDH clause” which provides as follows :

“The design, disposition and height of any building or buildings erected or to be erected on the lot shall be subject to the prior written approval of the Director and no building works (other than site formation works) shall be commenced on the lot until such approval shall have been obtained.”

74.  Certain officers expressed doubts as to the adequacy of relying on this clause but, given the perceived importance of protecting aviation safety and the operation of the new airport, it was considered that the Government had little choice but to rely on it.  As the Government Land Agent/Kowloon (Mr N P Burley) put it in a minute dated 25 May 1995:

“Until such time as the new limits are gazetted, and are thus enforceable through building plan controls, Government needs to rely on whatever measures and powers that are to hand, and one of these is the DDH clause.  I personally hold the view that this is not the correct way to enforce, but failing any other means, we are, I believe, duty bound to use this, and as advised earlier, for Nina Tower ......”

75.  Accordingly, on 1 June 1995, MLP 6 and MLP 7 were rejected as “not acceptable under the lease conditions because the proposed building height of 542.62m would have an adverse effect on the operation of Chek Lap Kok Airport.”  MLP 8 was rejected on the same ground on 9 June 1995.

76.  The events in this Phase (with their effects carrying through to Phase 3) therefore pose one of the key questions in this appeal, namely, whether the Government could lawfully rely on the contractual powers given to it by the Conditions to refuse approval of the relevant MLPs on such grounds.  This is the question raised in Issue 1 formulated below.

Phase 3:  10 June 1995 to 9 April 1996

77.  The most striking feature of the period covered by Phase 3 is that, having had MLP 8 rejected on 9 June 1995, no further MLP was submitted by the Developers for approval until MLP 9 on 2 July 1996, more than a year later.  Logically, it might be thought best to cast Phase 3 as bracketing that period, that is, from rejection of MLP 8 to submission of MLP 9.  However, Phase 3 ends in April 1996 because the split trial direction has meant that events occurring after mid-April 1996 are to be dealt with separately.  Those events relate to paragraph 29 of the Re-Amended Statement of Claim which alleges breaches of certain implied terms, particularised as follows :

“Government delayed the approval of the Plaintiffs’ MLPs submitted after mid-April 1996 by not approving the MLP subject to conditions, instead of delaying the entire process by withholding overall approval whilst minor or irrelevant matters were questioned or prohibited.  Government delayed the approval of the Plaintiffs’ MLP between July 1996 and November 1997, a total of 16 months, without any corresponding free extension of the building covenant for that period.”

78.  On 8 June 1995, just before the start of Phase 3, a meeting took place involving, among others, Mr Bowen Leung (then in the post of SPEL) and Mr C Y Leung.  It was at that meeting that the Developers alleged that an oral agreement was reached to extend the building covenant without payment of additional premium until outstanding aviation safety issues were resolved.  As noted above, this is now acknowledged to have been based on an erroneous belief.  In his submissions, Mr Sumption suggested that this error may account for the long hiatus prior to submission of MLP 9.  There may well be force in that suggestion.  However, as discussed below, any such belief would have been dispelled by the Government’s attitude well before the end of Phase 3.

79.  As we have seen, the Developers had been unwilling to accept the CAD’s advice in January 1995 that there had to be a 324 mPD height restriction on the Lot.  They had lobbied SPEL and the Director to change the CAD’s mind.  Even after the CAD’s decision had been confirmed by BC III’s decision on 18 May 1995 and by rejection of MLP 6/7 and MLP 8 in the following month, the Developers persisted during Phase 3 in pressing for the height limit to be raised to accommodate what they wanted to be the world’s tallest building.  As the Secretary for Economic Services put it in a memo dated 16 June 1995, the Developers were still seeking to “appeal” against the height restriction imposed in respect of Nina Tower. 

80.  Part of this continued lobbying activity involved enlisting the assistance of Mr Ma Xiaowen of the Civil Aviation Administration of China to query the necessity for the height restriction.  This led to the DCA offering on 22 July 1995 to send two experts from his department to Beijing to explain why it was needed.  That offer was declined.

81.  At an internal “consultant meeting” held on 23 August 1995, the Developers instructed their architects to write to SPEL “to reiterate [Chinachem Group’s] intention to build a tower of 538m in height.” 

82.  An earlier aspect of this lobbying effort had involved reliance on the Aeroports de Paris report.  After studying it, experts at the CAD advised that it had recommended higher height limits based on assumptions which were inapplicable to Chek Lap Kok because they failed to take into account various local features, such as the terrain (and particularly Tai Mo Shan) affecting operation of the ILS and influencing the setting of height restrictions.  This was conveyed to the Developers in a letter from SPEL dated 24 August 1995.

83.  That letter also informed the Developers (as had various other government officers) that no relaxation of the 324 mPD height limit could be considered unless a higher limit could be shown to be workable after subjecting the ILS to extensive computer modelling and flight tests.  The letter added that even if the limit could be relaxed, the building’s height could not in any case exceed 480 mPD (the obstacle clearance limit) and that “due to the complexity of the tests and the need for in-depth analysis and re-validation ......, the modelling  work would unlikely be completed before January 1996.”  It concluded that “the proposed 542 mPD for Nina Tower does not appear to be practicable on aviation safety [grounds].”

84.  The Developers nevertheless persisted.  The Government was asked to consider using a different type of aircraft guidance system and, on 25 August 1995, Mr C Y Leung offered to pay for further computer modelling to see if such other systems would permit construction of Nina Tower at its full proposed height. 

85.  These overtures were unsuccessful and, on 11 October 1995, repeated on 23 October 1995, DLO/TW wrote to the Developers reminding them of the deadline for completing the transport terminus and pointing to their liability for liquidated damages.  The Developers must therefore have realised at this stage that their belief that an agreement had been reached to extend the terminus and building covenants for free was not shared by the Government.  On 23 October 1995, Mr C Y Leung wrote contending that the building covenant period had been extended “in view of the fact that the CAD is still in the process of conducting computer simulation tests”.  As he put it, the Developers’ view was that :

“Because of the ...... unresolved height issue, our client has, through no fault of its own, been unable to proceed with the said works, despite every intention to do so.  In the circumstances, we cannot see how our client can, or for that matter, should be held liable for the alleged delay in the completion of the transport terminus or be liable to pay any purported liquidated damages, as stated in your letter.”

86.  This exchange set the tone of the correspondence between the Government and the Developers for the rest of Phase 3.  Whether the Government should resort to a claim for liquidated damages was discussed internally and Mr Bowen Leung expressed considerable sympathy for the Developers position, suggesting that indeed, the delay was not their fault.  However, the Director and his officers who had had charge of the matter at the operational level, disagreed.  Questions of this nature lay within the Director’s and not the Secretary’s responsibility, and the latter view prevailed.  This was reflected in the decision taken at the Land Administration Meeting held on 28 February 1996.  The Meeting noted :

“...... there is still no sign of construction on site, and no approvals of [MLP], building plans, site formation plans or even Green Area formation plan[s] up to this moment, ie 39 months since the land grant in November 1992.  In fact there has been no submission of any plans for approval since April 1995 after the last submitted MLP was rejected by BC III on the grounds that the proposed building height would have an adverse effect on the operation of the Chek Lap Kok Airport based on CAD’s advice.  The owner is clearly determined to construct the ‘tallest building in the world’ at 542 metres regardless of objections.” 

87.  The Meeting therefore decided that the Government should assert the right to re-enter for breach of the condition requiring completion of the transport terminus before 8 December 1995 and to seek recovery of unpaid liquidated damages. 

88.  The exchanges thereafter became contentious as litigation loomed.  Two examples suffice to illustrate the positions taken respectively by the Developers and the Government. 

(a) On 19 March 1996, Mr C Y Leung wrote, setting out a chronology and arguing:

“Even today, the actual height requirement of the CAD is not certain, as appears from SPEL’s letter dated 24.8.95.” 

In response to the suggestion that the Developers should have completed the transport terminus by 8 December 1995, he argued:

“The MLP could not have been prepared to Government’s satisfaction without clients, at the very least, knowing the existence of the purported height restriction of 324 metres.  This information was only conveyed to clients in January 1995 at a meeting which CAD arranged on clients’ initiative, and this assumes that Government has the right to impose any height restriction.”

(b) The Director replied on 9 April 1996, pointing out that before the Developers radically changed their plans, height had not been an issue and that, if they had adhered to the earlier MLPs:

“The height proposed of 170m was acceptable, and with minor amendments to the submission, approval would undoubtedly have been forthcoming.”

He asserted that when they introduced the concept of the world’s tallest building, the Developers were advised of the height limit problem at meetings held on 6 and 12 January 1995 and that they had unequivocally been told in writing on 27 January 1995 and 21 February 1995 that their concept was unacceptable as to height and that a limit of 324 mPD would be imposed.  He commented:

“Your Clients were not prepared to accept this ruling and continued to both write and approach various Government Departments on the height issue, to no avail.” 

Phase 4:  April 1996 onwards

89.  The conduct of the parties in this phase was not examined in consequence of the split trial direction.  The only relevant matters to note during this period for present purposes are as follows.

90.  On 2 July 1996, MLP 9 was submitted.  This showed a tower within the 324 mPD limit and with a plot ratio of 6.998, but with provision made for the contingency that further plot ratio of 2.502 could be achieved either by building to the full proposed height or by additions to the podium.  This was rejected for inadequacy of the plans.  Further MLPs were submitted in which the Developers’ concept changed once more to encompass a proposal for two towers comprising office and hotel accommodation.  A proposal along these lines as shown in MLP 12 was eventually approved on 2 January 1998.  Two other MLPs were submitted with amendments and on 21 September 2001 a full occupation permit was issued at a point when the minimum GFA was achieved, with construction thereafter continuing to take the building to the full design height of 324 mPD, thus terminating any non-compliance with the building covenant.

91.  In the meantime :

(a) On 8 December 1996 the main building covenant period had expired (although a four-month extension was subsequently granted by the Government, acknowledging that it was responsible for a corresponding period of delay in the processing of MLP 11 which was submitted on 27 January 1997).

(b) On 20 June 1997, the Hong Kong Airport (Control of Obstructions) (No 2) Order, issued pursuant to 1994 amendments to the Ordinance which extended its scope to cover aircraft “using or which will be using” the airport at Chek Lap Kok came into force.  This Order gazetted plans imposing height restrictions on various affected districts, including a height restriction of 324mPD for Tsuen Wan.

(c) The transport terminus was certified completed and fit for occupation on 14 June 1999, terminating any liability for liquidated damages. 

(d) The Government’s demands for liquidated damages (totalling $12.75 million) and for additional premium in respect of extensions to the building covenant period (totalling $543.242 million) were met by the Developers under protest and without prejudice to their contention that such demands were unlawful.

C.      The issues

92.  Mr Sumption helpfully identified five issues for consideration on this appeal.  Mr Anthony Neoh SC, leading for the Government, was content to approach the case under these five headings although he disputed the precise manner in which some of these had been formulated.  One readily sees that some aspects of Mr Sumption’s formulation implicitly reflect his substantive arguments which are controversial between the parties.  Nevertheless, bearing that in mind, the five issues provide a useful framework for analysis.

93.  The issues were stated as follows :

(1) Was the Government entitled to withhold approval for an MLP complying with all the Special Conditions of the grant, on the ground that the height of the proposed building exceeded the minimum height which the Government expected to fix under the Ordinance?

(2) What obligations did the Government owe as to the processing of MLPs? In particular, did they (as the Appellants contend) owe obligations (i) not unnecessarily to act in a way which deprived the grantee of part of the time allowed by the Special Conditions for completing the works; and/or (ii) in the event that they were entitled to and did reject an MLP on account of an aspect of the design, disposition or height not regulated by the Special Conditions, to inform the grantee precisely what criteria it was applying?

(3) Was the Government responsible for any substantial (as opposed to de minimis) part of the delay occurring up to April 1996, (i) by purporting to reject MLPs on account of a prospective height limit under the Ordinance; and/or (ii) by taking longer than was necessary to decide what to do about the absence of any statutory controls over height or of any definitive maximum height; and/or (iii) by taking longer than was necessary to reject an MLP which was too high?

(4) If some part of the delay occurring up to April 1996 was the responsibility of the Government, what is the legal effect of that state of affairs on its right (i) to demand liquidated damages for the delay, and/or (ii) to re-enter on the expiry of the contractual period for carrying out the works; and/or (iii) to demand waiver premia for not re-entering.

(5) If the Government was not entitled to act as in paras. 4(i), (ii) or (iii) above, is it nevertheless entitled to retain the liquidated damages and waiver premia paid to it under the threat of re-entry?

D.      Issue 1: Refusal of approval under the Conditions

94.  Although, as formulated above, this issue postulates that the MLP complies with all the special conditions of the grant, it must not be read in such a way as to beg the very question at hand.  The issue, as argued, was as to whether, on their true construction, the Government was entitled to rely on any provisions of the Conditions (in particular sc 9(e), the DDH clause) to refuse approval of an MLP on the ground of the proposed building’s height, taking into account anticipated aviation safety and airport operation requirements and in the absence of any statutory height restriction applicable to the Lot.

(a)     The material provisions of the Conditions of Grant

95.  The material provisions of the Conditions are as follows :

Special conditions

sc 5(a)(i)

(5)(a)   The Grantee shall within 6 months from the date of this Agreement and prior to the submission of building plans to the Building Authority submit or cause to be submitted by his authorized person (as defined in the Buildings Ordinance) to the Director for his approval: -

(i)         comprehensive plans, specifications and detailed design drawings (at a scale of 1:500) (hereinafter together referred to as ‘the Master Layout Plans’) for the development of the lot in accordance with these Conditions containing, inter alia, plans showing the Transport Terminus as defined in Special Condition No. (8)(a) hereof, roads, pedestrian ways, footbridges, open spaces, parking, loading and unloading areas, service areas, ingress and egress points, refuse collection and disposal, air-conditioning, heating, lighting, humidification and ventilation plant and recreational facilities which the Grantee proposes to erect, construct or install pursuant to these Conditions; details of roof, podium and floor layout, external finishes, materials, colours, design, standards, height, levels, gross floor areas, positions, elevations of the building or buildings to be erected on the lot; details of all signs (including any traffic signs and road markings) to be erected or provided by the Grantee within the lot;

sc 5(b)

5(b)      No building, landscaping or any other works (other than site formation works) shall be commenced on the lot or any part thereof until the Master Layout Plans and the Landscaping Proposals shall have been approved in writing by the Director and once so approved the Master Layout Plans and the Landscaping Proposals shall be signed by the Director and the Grantee and a signed copy thereof shall be deposited at the District Land Office, Tsuen Wan and shall not be amended, varied, altered, modified or substituted for without the prior written approval of the Director .....

sc 6(a)

6(a)      The Grantee shall develop the lot by the erection thereon of a building or buildings, ancillary works and facilities complying in all respects with these Condition, and the provisions of all Ordinances, bye-laws and regulations relating to building, sanitation and planning which are or may at any time be in force in the New Territories, other than New Kowloon, such building or buildings, ancillary works and facilities to be completed and made fit for occupation on or before the expiration of 48 calendar months from the date on which possession of the lot is deemed to have been given to the Grantee pursuant to Special Condition No (4) hereof.

sc 6(b)

6(b)      Notwithstanding sub-clause (a) of this Special Condition the Grantee shall complete and make fit for occupation and operation the Transport Terminus as defined in Special Condition No. (8)(a) hereof within 36 calendar months from the date on which possession of the lot is deemed to have been given to the Grantee pursuant to Special Condition No. (4) hereof.

sc 9(a)

(9)(a)   Subject to these Conditions, upon development or redevelopment of the lot or any part thereof:-

(i)         any building or buildings erected or to be erected on the lot shall in all respects comply with the Buildings Ordinance, any regulations made thereunder and any amending legislation and with the design disposition and height approved under sub-clause (e) of this Special Condition;

(ii)        the total gross floor area of any building or buildings erected or to be erected on the lot shall not be less than 75 000 square metres nor more than 185 250 square metres.

sc 9(b)

(b)       Notwithstanding any other provisions in this Agreement and subject to sub-clause (d) of this Special Condition, site coverage and plot ratio of any building or buildings erected or to be erected on the lot shall be calculated with reference to and restricted by the following schedule:-

	Domestic Building		Non-domestic Building
Height of Building in metres	Percentage Site Coverage	Plot Ratio	Percentage Site Coverage	Plot Ratio
Not exceeding 15	66.6	3.3	100	5.0
Over 15 but not exceeding 18	60	3.6	97.5	5.8
Over 18 but not exceeding 21	56	3.9	95	6.7
Over 21 but not exceeding 24	52	4.2	92	7.4
Over 24 but not exceeding 27	49	4.4	89	8.0
Over 27 but not exceeding 30	46	4.6	85	8.5
Over 30 but not exceeding 33	42	4.8	80	9.5
Over 33 but not exceeding 36	42	5.0	80	9.5
Over 36 but not exceeding 43	36	5.0	75	9.5
Over 43 but not exceeding 49	32	5.0	69	9.5
Over 49 but not exceeding 55	28	5.0	64	9.5
Over 55 but not exceeding 61	25	5.0	60	9.5
Over 61	20	5.0	60	9.5

sc 9(e)

9(e)      The design, disposition and height of any building or buildings erected or to be erected on the lot shall be subject to the prior written approval of the Director and no building works (other than site formation works) shall be commenced on the lot until such approval shall have been obtained.

sc 19

19 In addition to any other payments which may be demanded by the Government and without prejudice to the Government’s rights under these Conditions, in the event of the Grantee failing to complete the Transport Terminus and make fit the same for occupation in accordance with these Conditions, the Grantee shall pay to the Government on demand as agreed by way of liquidated damages and not as a penalty the sum of $10,000.00 per day for the period from the day immediately after the expiration of the time limit stipulated in Special Condition No 6(b) hereof up to and including such date as specified in a letter from the Director indicating that the Transport Terminus has been completed and made fit for occupation and operation entirely to his satisfaction......

sc 63(b)

63(b)   Wherever in these Conditions it is provided that the prior approval or consent in writing of the Government or its duly authorized officers is required, they may give the approval or consent on such terms and conditions as they see fit or refuse it at their absolute discretion.

General conditions

gc 11(a)

11(a)    Upon any failure or neglect by the Grantee to perform, observe or comply with any of these Conditions the Government shall be entitled to re-enter upon and take back possession of the lot or any part thereof and all or any buildings, erections and works thereon or on such part, and thereupon this Agreement and the rights of the Grantee hereunder shall absolutely cease and determine (in respect of such part if the re-entry is upon a part only) but without prejudice nevertheless to the rights, remedies and claims of the Government in respect of any breach, non-observance or non-performance of the terms and conditions hereof.

gc 11(b)

11(b)   In the event of re-entry by the Government for or in respect of or arising out of the breach, non-observance or non-performance by the Grantee of the provisions of these Conditions, the Grantee shall not be entitled to any refund of the premium paid by him or any part thereof or to any payment or compensation whatsoever whether in respect of the value of the land or any buildings thereon or any amount expended by the Grantee in the preparation, formation or development of the lot or otherwise.

(b)     The Developers’ arguments on Issue 1

96.  Mr Sumption’s argument in favour of a negative answer to the question posed in Issue 1 proceeded as follows :

(a) Notwithstanding the apparently unlimited language used,  the DDH clause, even when read in conjunction with sc 63(b), could not, without commercial absurdity, be construed as giving the Director an absolute discretion as to the conditions he could impose for approving or disapproving MLPs.  It would be absurd, for instance, to read the clause as authorizing him to require the Developers to pay additional premium for approving a compliant MLP.

(b) The discretion conferred by the DDH clause therefore had to be subject to certain limits and guidance as to what those limits are is to be found in the decision of the House of Lords in Equitable Life Assurance Society v. Hyman [2002] 1 AC 408.  That decision shows that such a contractual discretion may not be exercised in such a way as to defeat the reasonable or legitimate expectations of the parties.

(c) In the present case, given that :

(i) in 1991 when the Developers tendered for the Lot and in 1992 when they signed the Conditions, there was no statutory height restriction affecting the Lot (the Ordinance being where developers would expect to find any such restriction); and,

(ii) any developer considering acquisition of the Lot would expect the Conditions of Grant to set out all commercially material terms and would see that the Conditions themselves did not stipulate a height limit;

the Developers could legitimately and reasonably expect that there was no height restriction applicable to the Lot.

(d) It follows, applying Equitable Life, that the DDH clause cannot be employed to subvert those legitimate expectations by importing a height restriction. 

(e) Moreover, whether or not the Equitable Life approach is adopted, the DDH clause was, on its true construction,  intended to be “procedural” only.  Its language and structure show that the right to refuse approval under sc 9(e) is only exercisable for ensuring that MLP proposals comply with the contract.  The clause enables the Government to monitor and enforce the other provisions which provide a comprehensive scheme for what is and is not required or permitted under the Conditions. 

(f) Accordingly, so the argument runs, the Government was not lawfully entitled to reject any MLP solely on the grounds of height, no height restriction having been imposed by statute or by any other provision in the Conditions.  In rejecting the relevant MLPs the Government made itself responsible for the delays which ensued as the height issue was debated and no construction could proceed.  This applied to the period from the submission of MLP 5 in October 1994 onwards. 

97.  Despite the consummate skill with which Mr Sumption developed this argument, I am unable to agree with it and do not accept the conclusion it reaches.

(c)      The scope of the discretion under the DDH clause

98.  I would accept that despite the absolute language employed in the DDH clause, read together with sc 63(b), the discretion is necessarily subject to some limitation.  However, I do not accept the limitation contended for by Mr Sumption.  I do not consider, the Equitable Life case helpful in this context firstly, because I do not accept that it is authority for any general proposition that contractual discretions must be limited by some notion of the parties’ “reasonable or legitimate expectations”; and secondly, because the nature of the discretion which the House of Lords was concerned with in that case was materially different from the discretion conferred by the Conditions on the Government.

99.  It was pointed out that the approach which we were invited to adopt is not new, but can be found, for instance, in equitable rules preventing trustees from exercising powers in a manner constituting a fraud on such powers.  In such cases, trustees are bound to exercise the power bona fide and for the end designed (see Snell’s Equity, 13^th Ed, pp 624 to to 629).  The approach was also likened to the well-known rule of administrative law that a public authority may only use statutory powers conferred upon it for the purposes of the statute in question. 

100.  That approach in the types of cases mentioned is of course well-established.  Equitable Life is a case that involved analogous powers, namely, powers exercised by the directors of a mutual life assurance society for determining annuity rates and bonus levels for the benefit of policyholders who were members of that society.  As Lord Woolf  (at §§10, 17-21) and Morritt LJ (dissenting, at §103) both pointed out in the Court of Appeal, such a power is a fiduciary power.  In the House of Lords, Lord Steyn too noted (at p 459) that the directors’ discretions in that case were conferred for the benefit of policy holders.  And while Lord Cooke did not make express reference to this fact, he noted (at p 460) that the principle relied on “is common to administrative law ...... and sundry fields of private law”, citing in relation to the latter, Howard Smith Ltd v. Ampol Petroleum Limited [1974] AC 821, which was a case concerned with the limits of a fiduciary discretion exercisable by a company’s directors.

101.  Like powers exercisable by trustees and public authorities, a discretion such as that arising in the Equitable Life case is not conferred for the benefit of the donee of the discretion, but for the benefit of the persons who are the objects of its exercise.  One can well understand why, in such cases, equity and the law enable the exercise of such a power to be scrutinised against the express and underlying purposes of the instrument conferring the power.

102.  However, the Government is not a fiduciary vis-à-vis the Developers in respect of the exercise of any discretion reserved to itself under the Conditions of Grant.  In that context, as was authoritatively decided in Hang Wah Chong Investment Co Ltd v. Attorney General [1981] 1 WLR 1141, it acts in the capacity of landlord, entitled to exercise its powers for its own, that is, for the public’s benefit. 

103.  Secondly, it seems to me very doubtful whether the House of Lords was actually seeking to lay down any principle of the breadth suggested.  Indeed, I find it difficult to envisage how a court is to ascertain, in the context of a commercial contract, the parties’ legitimate expectations as opposed to ascertaining what they must be taken to have intended by construing that contract on orthodox principles.  The Equitable Life case appears perfectly explicable on the basis that the contractual discretion in question had to be construed so as not to undermine the express and implied contractual rights conferred on policyholders by the policy. 

104.  In the Court of Appeal (whose majority decision was upheld in the House of Lords), Lord Woolf MR, clearly considered the exercise of the discretion to be confined by a need to protect implied contractual rights given by the policy.  His Lordship described the issue as follows :

“...... if Mr. Sumption's client is to succeed, it must be on the basis that, while to declare a differential bonus may not be contrary to the letter of the policy, it involves an impermissible exercise of discretion. This is because it amounts to exercising the Board's discretion in a manner which is contrary to what the policy by implication requires; the implication being drawn from the structure and terms of the policy as a whole. This is the argument which I regard as going to the heart of the appeal.” (at §51)

105.  Waller LJ, the other member of the majority, likewise saw the critical question as one of contractual construction, ie, whether the discretion could be said to be unlimited by the contractual terms properly construed (at §§114, 123 and 134).

106.  In the House of Lords, Lord Steyn noted that the language of the relevant article did not preclude the director’s action but considered the critical question to be whether a relevant restriction could be implied into that article (at p 458).  He continued:

“The inquiry is entirely constructional in nature: proceeding from the express terms of article 65, viewed against its objective setting, the question is whether the implication is strictly necessary. My Lords, as counsel for the G.A.R.  [Guaranteed Annuity Rate] policyholders observed, final bonuses are not bounty. They are a significant part of the consideration for the premiums paid. And the directors' discretions as to the amount and distribution of bonuses are conferred for the benefit of policyholders. In this context the self-evident commercial object of the inclusion of guaranteed rates in the policy is to protect the policyholder against a fall in market annuity rates by ensuring that if the fall occurs he will be better off than he would have been with market rates. The choice is given to the G.A.R. policyholder and not to the Society. It cannot be seriously doubted that the provision for guaranteed annuity rates was a good selling point in the marketing by the Society of the G.A.R. policies. It is also obvious that it would have been a significant attraction for purchasers of G.A.R. policies. The Society points out that no special charge was made for the inclusion in the policy of G.A.R. provisions. So be it. This factor does not alter the reasonable expectations of the parties. The supposition of the parties must be presumed to have been that the directors would not exercise their discretion in conflict with contractual rights. These are the circumstances in which the directors of the Society resolved upon a differential policy which was designed to deprive the relevant guarantees of any substantial value. In my judgment an implication precluding the use of the directors' discretion in this way is strictly necessary. The implication is essential to give effect to the reasonable expectations of the parties. The stringent test applicable to the implication of terms is satisfied.”

107.  Lord Steyn was therefore stressing that on its true construction, the directors’ power was a fiduciary one which could not be exercised in such a manner as to deprive the policyholders’ contractual right to the benefit of guaranteed annuity rates of any substantial value.  While his Lordship spoke of “the reasonable expectations of the parties”, it is important to note that he equated such expectations with the parties’ presumed supposition “that the directors would not exercise their discretion in conflict with contractual rights”. 

108.  I do not read Lord Cooke’s speech as justifying any wider principle.  Thus, (at p 461), his Lordship stressed the need to construe the power in the context of the other terms of the policy so that its exercise did not conflict with those other terms:

“When policies such as the one now under consideration have been issued, the wide powers of allotment of bonuses conferred on the directors by article 65(1) have to be exercised in the light of those policies. The powers and the policies have to be read in conjunction. The directors will not be entitled to exercise the powers for a purpose subverting the basis of the policies, fairly interpreted.”

109.  Lord Cooke also expressly agreed with Lord Woolf’s approach to the policy and concluded (at p 462) that the discretion conferred “is inadequate to justify such an adjustment of policy benefits.”  It follows that the effect of the purported exercise of discretion was to override, not some extra-contractual expectations of the parties, but what, on its true construction were the benefits bestowed on them by the policy.  The other members of the House of Lords agreed with both Lord Steyn and Lord Cooke.

110.  Subject to the argument dealt with below as to the “procedural” character of the DDH clause, it is my view, that as a matter of construction, the discretion conferred on the Government by the DDH clause is limited only to the extent that its exercise must not undermine express or implied contractual rights conferred by the Conditions on the Developers.  In other words, as Mr Neoh put it in the course of argument, the Government must not, by use of the DDH clause, derogate from its grant to the Developers.  Whether any particular exercise of the discretion would undermine an accrued contractual right depends on the construction of the contract in each case, an orthodox exercise involving the objective ascertainment of the parties’ intention rather than reference to any extra-contractual “reasonable or legitimate expectations” of the parties.  In the present context, if the Conditions properly construed conferred an unrestricted right on the Developers to build to any height they pleased, imposition of the 324 mPD height limit would have amounted to a derogation and a breach of the implied term, but not otherwise.

(d)     The parties’ reasonable or legitimate expectations

111.  In the light of my foregoing decision, it is not necessary to decide whether the matters relied on in paragraph 96(c) above provided the Developers with any requisite legitimate expectations.  I will, however, briefly indicate why I would have been inclined against such a conclusion.

112.  It is true that a search of the legislative record in 1991 or 1992 would have revealed that no order had been made under the Ordinance imposing a height restriction on buildings in Tsuen Wan.  However, a reading of the Ordinance and an inspection of the plans then gazetted would have made it clear that all existing regulations were at that stage tailored only for aircraft using Kai Tak airport.  This could not possibly have justified any expectation that there would be no height restrictions at Tsuen Wan or anywhere else, in relation to the airport being built at Chek Lap Kok.  It obviously only meant that steps to promulgate statutory height limits in relation to the new airport had not yet been taken.

113.  Indeed, someone reading the Ordinance as it then stood could properly have been in doubt as to whether it would have been possible, without the amendments to the Ordinance which were effected in 1994, to make an order in relation to the anticipated use of Chek Lap Kok.  Before amendment, section 3 gave power to prescribe a height restriction only where the Governor in Council was of the opinion that “the safety of aircraft so requires”.  Section 2(2) defined “the safety of aircraft” to mean “the safety of aircraft using Hong Kong Airport.”  It would have been at least highly questionable whether that power extended to imposing height limits in areas such as Tsuen Wan which were not at that stage on the flight path of any aircraft using any airport. 

114.  In any event, the fact that no statutory height restrictions had yet been imposed could not justify any expectation on the part of the Developers that height restrictions could not be imposed by virtue of one or more provisions in the Conditions.  Whether or not such a power existed had to depend on construing those provisions, not merely on the absence of statutory regulation.  And indeed, on its face, the DDH clause did provide that the height of any proposed building was subject to the Director’s approval.

115.  This last comment is also relevant to the argument that any developer could legitimately expect that the Conditions of Grant would disclose all commercially material terms.  Since the DDH clause did on its face disclose that height was subject to the Director’s approval, unless somehow displaced or materially limited by construction, it prima facie satisfied any relevant expectation that all material restrictions should be disclosed. 

116.  One might add that, on the evidence, a height restriction at a level of 324 mPD did not obviously involve any commercially adverse effects so as to justify any expectation of being permitted to exceed that limit.  The evidence was that a 324 mPD limit did not make the Lot less valuable.  It was not in doubt that the maximum permissible GFA and plot ratio could be achieved within that limit, although such a building or buildings might have been less prestigious than one claiming to be the tallest building in the world.

(e)      The DDH clause as “purely procedural”

117.  Mr Sumption’s argument that the DDH clause should be construed as “purely procedural” proceeds independently of the arguments just considered.  Even if the discretion is not to be limited by reference to extra-contractual legitimate expectations, it is the Developers’ contention that sc 9(e) must be construed as adding nothing substantive, but merely confirming the Government’s right to refuse approval by way of enforcing other limitations provided for in the Conditions bearing on design, disposition or height.  In other words, the DDH clause gives no distinct and independent discretion to refuse approval.  In the absence of any specific height restriction in the Conditions, it is argued that the Director could not reject any MLP on grounds of height and that the DDH clause was incapable of supplying a contractual basis for such a decision.

118.  I cannot accept that argument.  While, as indicated above, I would accept that the DDH clause is subject to an implied limitation preventing it from being used to derogate from the contractual grant, I do not agree that sc 9(e) should be construed in a manner which renders it otiose.

119.  In the first place, there is no necessity for there to be any separate “procedural” clause relating to approvals or disapprovals of the Developers’ proposals.  Special condition 5(a)(i) already provides that the MLP must be “in accordance with these Conditions”.  Accordingly, if the Developers were to submit a non-compliant MLP, as they did, for example, in the case of MLP 5 (which, inter alia, exceeded the maximum permitted GFA), the Government could obviously reject it on the basis of the relevant feature of non-compliance.  The parties did not need a separate clause to tell them that approval could be refused. 

120.  Secondly, sc 9(a)(i) imposes on the Developers a duty, when developing the Lot to ensure that all buildings erected and to be erected thereon comply in all respects, inter alia, with “the design disposition and height approved” under sc 9(e).  This plainly suggests that the DDH clause may be used for stipulating substantive requirements which are given contractual force and runs counter to the  Developers’ “procedural” construction.

121.  Thirdly, the Developers’ argument proceeds on the premise that the express terms of the Conditions provide a comprehensive code for what is and what is not permitted or required in respect of the development.  It was argued in particular that since sc 9(b) sets out exhaustively what the parties intended by way of regulation of the building’s height without prescribing any maximum, height is contractually unrestricted, making it a derogation from the Government’s grant to impose a 324 mPD height limit for aviation safety reasons which are quite foreign to the contract. 

122.  I do not accept the premise of that argument.  Special condition 9(b) is concerned with defining various permutations involving the reciprocal relationship between height, site coverage and plot ratio, with a view to regulating permitted density at the Lot.  It shows how certain variations in height and/or of site coverage result in different permissible plot ratios.  It stipulates that the permissible plot ratio does not increase any further by virtue of extra height in respect of buildings which reach or exceed the height of 61 metres.  Special condition 9(b) is not concerned with, and has nothing to say about, absolute height limits.  It is therefore not correct to say that sc 9(b) leaves the DDH clause with no role to play since sc 9(b) permits building to unrestricted heights.  On the contrary, the height limit issue is not addressed except by sc 9(e) which, on its face, provides that the building’s proposed height is subject to the Director’s approval. 

123.  Thus, the Government’s grant to the Developers did not carry a right to build to any height without restriction and imposing a height limit of 324 mPD involved no derogation from such grant.  The Government was lawfully entitled to exercise its discretion under the DDH clause to impose such a limit and there can be no objection on the basis that it did so to meet anticipated aviation safety and airport operational needs.  The Developers’ argument on Issue 1 therefore fails.

124.  I would expressly leave open all questions concerning the nature and scope of the Director’s discretion in respect of the “design” and “disposition” aspects of sc 9(e) since such questions may or may not give rise to different considerations and do not call for discussion on this appeal. 

E. Issues 2, 3 and 4: Implied terms, breach and the resultant delays

125.  The other major plank of the Developers’ claim concerns the allegation that the Government was guilty of delays in the processing of their MLP submissions.  The Developers argue that even if, as I have held, the Government was entitled on the basis of the DDH clause to reject the MLPs on height grounds, it nevertheless had a duty to process the MLP submissions expeditiously and that, having failed to do so, it was not entitled to extract liquidated damages or additional premium.

126.  Issue 2 involves identifying the implied obligations concerned.  Issue 3 poses the question whether any relevant delay was in fact caused by the Government.  And Issue 4 raises an argument as to the nature and effect of the delay which must be shown in order to entitle the Developers to relief.  These issues are inter-related and it is convenient to deal with them together, although I propose to address Issue 4 before coming to Issue 3.

(a) The applicable implied terms (Issue 2)

127.  Not much separates the parties regarding the nature of the applicable implied terms.  The Developers are required by the Conditions to submit a compliant MLP for approval by the Director and to complete specified stages of construction within the defined periods while being prevented from proceeding beyond site formation works until approval of the MLP has been obtained.  In such circumstances, performance of the obligations imposed on the parties obviously requires each to cooperate in good faith with the other. 

128.  As is pointed out in Chitty on Contracts (29^th Ed) at §13-011, the court is often willing to imply a term that the parties shall co-operate to ensure the performance of their bargain.  Mackay v. Dick (1881) 6 App Cas 251 is often cited in this context for Lord Blackburn’s statement as follows :

“I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances.” (at p 263)

129.  To give the Conditions business efficacy, Mr Sumption submitted that it is necessary to imply a two-fold duty on the Government, namely :

(a) to deal with the MLP and to give or refuse approval with reasonable dispatch; and,

(b) if rejecting any submitted MLP, to inform the Developers of the respects in which the MLP is deficient.

130.  I agree with this submission and did not understand Mr Neoh to be submitting anything to the contrary.

(b)     The nature and effect of the delay which must be shown (Issue 4)

131.  In relation to Issue 4, the Government submitted that the correct approach is that which was adopted by this Court in Kensland Realty Ltd v. Whale View Investment Ltd (2001) 4 HKCFAR 381, which involved applying the “prevention principle”.  The Government argued that for the Developers to be entitled to relief, they had to show (i) that the Government had, by some culpable conduct or undue delay, placed itself in breach of a relevant implied term; and (ii) that such breach had, as a matter of causation, prevented the Developers from completing the requisite stages of construction during the building covenant periods.  If these matters could be established, the Government would not be permitted to profit from its own wrong by triggering the liquidated damages clause or seeking additional premium.

132.  As recorded in Deputy Judge Muttrie’s judgment (at §108), this was essentially how the matter was argued (by Mr Robert Tang SC) for the Government at the trial and it was the argument which the Judge accepted (at §116).  I might add that the position adopted by Mr Denis Chang SC, leading for the Developers at the trial, does not appear to have been materially different.  The Judge notes (at §107) that in his final submissions Mr Chang argued in favour of a term :

“...... that the grantor shall not derogate from the building covenant periods by preventing or hindering the grantee's compliance with the time limits whether by unreasonable usurpation of time or otherwise.”

133.  The Government argued that the evidence established and the Judge found that it had processed the MLP submissions without undue delay and that the Developers had duly been informed of each MLP’s deficiencies, especially in relation to the 324 mPD height limit.

134.  Mr Sumption acknowledged that the prevention principle discussed in the Kensland Realty case may be relevant.  However, based upon a line of authorities commencing with Holme v. Guppy (1838) 3 M & W 387, he argued for the application of a different principle which, based on the Developers’ Supplemental Case, may be formulated as follows :  If the Government was responsible (whether “culpably” or not) for a substantial part of the delay within the time allowed for the development, it can no longer insist upon strict adherence to the time stated and cannot claim either liquidated damages or exercise a right to re-enter for non-completion in time.  I shall call this the “partial responsibility argument”.

135.  The Supplemental Case further explains the argument in the following terms :

“The juridical basis of this principle is that the time limited in the contract for carrying out the works is agreed on the shared assumption that the party charged with carrying them out has the whole of that time available to him.  Therefore, any conduct of the other party which deprives him of the use of part of it removes the basis on which the penal consequences of missing the time limit were agreed. This is so, even if the conduct in question is entirely lawful.” 

136.  The partial responsibility argument therefore has two important features.  Firstly, unlike the prevention principle, it does not require that the Government’s conduct should be a breach of contract or otherwise wrongful.  Secondly, the argument is that any delay in processing the MLPs attributable to the Government – perhaps even a delay of a day or two, provided such delay is not de minimis – automatically deprives the Government of any right to seek liquidated damages or to exercise its right to re-enter.  Referring to several pieces of evidence mentioned below, Mr Sumption submitted that it was clear that the Government had been responsible for at least some relevant delay which was not de minimis and accordingly, since no quantification or distribution of delay was necessary, that it had lost its entitlement to the remedies it had extracted under protest from the Developers.

137.  To assess this argument, it is first necessary to identify the principles which the cases relied on are capable of supporting.  The authorities relied on by the Developers commence with Holme v. Guppy (1838) 3 M & W 387.  There, the plaintiffs had agreed to complete carpentry work for the defendants within 4 ½ months from the date of the agreement, with liquidated damages payable beyond that period.  The period was exceeded but it was found that some 8 weeks of the 9 weeks’ delay was due to the defendants’ own delay in giving the plaintiffs possession of the site or to its other contractors holding up the works.  Parke, B held that the defendants were not entitled to liquidated damages, stating :

“It is clear, from the terms of the agreement, that the plaintiffs undertake that they will complete the work in a given four months and a half; and the particular time is extremely material, because they probably would not have entered into the contract unless they had had those four months and a half, within which they could work a greater number of hours a day.  Then it appears that they were disabled by the act of the defendants from the performance of that contract; and there are clear authorities, that if the party be prevented, by the refusal of the other contracting party, from completing the contract within the time limited, he is not liable in law for the default ......”

138.  It might well be thought that this was no more than another case advocating the prevention principle since the decision appears to have turned on the finding that the employer’s delays prevented completion within the time agreed.  However, some later cases have tended to highlight Parke, B’s  emphasis on the importance to the contractor of having the benefit of the entire period permitted for the works.

139.  Mr Sumption relied next on Dodd v. Churton [1897] 1 QB 562, where a building contract contained both a liquidated damages clause and a clause entitling the employer to order additional work.  When, as a consequence of extra work being ordered, the work had to extend beyond the originally stipulated period, the employer was held not entitled to liquidated damages.  This case therefore indicates that such a result may be reached even where there has been no breach of contract – ordering additional work being perfectly lawful.  However, the judgments were again all heavily inclined towards the prevention principle.  Lord Esher MR stated that the principle was that:

“...... where one  party to a contract is prevented from performing it by the act of the other, he is not liable in law for that default.” (p 566)

Lopes LJ thought it a well-ascertained rule of law that:

“...... where the failure of a contractor to complete the work by the specified day has been brought about by the act of the other party to the contract, he is exonerated from the performance of the contract by that date, which has been thus rendered impossible.” (p 567)

And Chitty LJ stated :

“...... where performance of a condition has been rendered impossible by the act of the grantee himself, the grantor is exonerated from performance of it.” (p 568)

140.  Trollope & Colls Ltd v. North West Metropolitan Regional Hospital Board [1973] 1 WLR 601 was cited to show Lord Pearson’s approval (at p 607) of part of Lord Denning MR’s rendering in the Court of Appeal of the rule derived from Dodd v. Churton as follows :

“It is well settled that in building contracts - and in other contracts too - when there is a stipulation for work to be done in a limited time, if one party by his conduct - it may be quite legitimate conduct, such as ordering extra work - renders it impossible or impracticable for the other party to do his work within the stipulated time, then the one whose conduct caused the trouble can no longer insist upon strict adherence to the time stated. He cannot claim any penalties or liquidated damages for non-completion in that time.”

141.  This does not take the doctrine any further except perhaps to lend support to the proposition that the rule is not confined to building contracts.  Pausing here, it is fair to say that none of the three authorities mentioned, standing alone, could be thought to support the partial responsibility argument.

142.  However, two other cases, each decided on similar lines, do take the matter further.  The first is the decision of the English Court of Appeal in Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd (1970) 1 BLR 111. 

(a) Piling contractors were engaged by Liverpool Council and did their work over a period of 6 weeks beginning in May 1964.  They then left the site.  Construction continued and on 6 October 1964, work had to be suspended because defects were seen in some of the piling work that they had done.  That suspension lasted for 58 weeks during which time the defects were remedied. 

(b) The piling contract had a liquidated damages clause covering the time “which may elapse between the time appointed for completion and the actual time of completion.”  The Council was awarded liquidated damages for the full 58 week period of suspension by a deputy official referee who found that the entire delay had been caused by the contractor’s default. 

(c) The Court of Appeal reversed that finding, holding that it was unsupported by evidence.  It substituted the finding that a part of the delay during the 58 week period was attributable to the Council. 

(d) In the light of this finding, the court held that, based upon a contra proferentem construction of the contract, there could be no right to liquidated damages.  Salmon LJ explained the reasoning as follows (at p 121):

“The liquidated damages clause contemplates a failure to complete on time due to the fault of the contractor.  It is inserted by the employer for his own protection; for it enables him to recover a fixed sum as compensation for delay instead of facing the difficulty and expense of proving the actual damage which the delay may have caused him.  If the failure to complete on time is due to the fault of both the employer and the contractor, in my view, the clause does not bite.  I cannot see how, in the ordinary course, the employer can insist on compliance with a condition if it is partly his own fault that it cannot be fulfilled [citing authority including Holme v. Guppy].  I consider that unless the contract expresses a contrary intention, the employer, in the circumstances postulated, is left to his ordinary remedy; that is to say, to recover such damages as he can prove flow from the contractors’ breach.  No doubt if the extension of time clause provided for a postponement of the completion date on account of delay caused by some breach or fault on the part of the employer, the position would be different.  This would mean that the parties had intended that the employer could recover liquidated damages notwithstanding that he was partly to blame for the failure to achieve the completion date.  In such a case the architect would extend the date for completion, and the contractor would then be liable to pay liquidated damages for delay as from the extended completion date.”

(e) Phillimore LJ put it as follows :

“...... a clause providing for liquidated damages ...... is closely linked with a clause which provides for an extension of time ......  The reason for that is that when the parties agree that if there is delay the contractor is to be liable, they envisage that that delay shall be the fault of the contractor and, of course, the agreement is designed to save the employer from having to prove the actual damage which he has suffered.  It follows, once the clause is understood in that way, that if part of the delay is due to the fault of the employer, then the clause becomes unworkable if only because there is no fixed date from which to calculate that for which the contractor is responsible and for which he must pay liquidated damages.  However, the problem can be cured if allowance can be made for that part of the delay caused by the actions of the employer; and it is for this purpose that recourse is had to the clause dealing with extension of time.  If there is a clause which provides for extension of the contractor’s time in the circumstances which happen, and if the appropriate extension is certified by the architect, then the delay due to the fault of the contractor is disentangled from that due to the fault of the employer and a date is fixed from which the liquidated damages can be calculated.” (p 127)

(f) The case was remitted to the official referee for an inquiry into the extent to which the delays were attributable to the piling contractors for the purposes of considering a claim for unliquidated damages.

143.  This decision was applied by Staughton J in The “Cape Hatteras” [1982] 1 Lloyd’s LR 518.  Summarising the authorities in question, his Lordship stated :

“Those cases show that, if completion by the specified date is prevented by the fault of the employer, he can recover no liquidated damages unless there is a clause providing for an extension of time in the event of delay caused by him.  The contractor has been prevented by the employer from doing that which he (the contractor) had undertaken to do; and the Courts will not make another and different contract for the parties, providing for an extension of time, if the parties have not chosen to do so for themselves.” (p 526)

He then proceeded to make findings that the shipowners, who were seeking liquidated damages from ship repairers, had given instructions which had interrupted the engine repair works and so were themselves responsible for part of the delay, disentitling them from liquidated damages.

144.  In my view, the propositions supported by this line of cases are significantly narrower than those advanced in the Developers’ partial responsibility argument.  These are all cases which involve construction of a contract with a liquidated damages clause where there has been a finding that part of the delay which founds the employer’s claim for such damages has been caused by the employer himself.  They establish that where the contract does not have a mechanism for certified extensions of time, the contract, construed contra proferentem against the employer, cannot, in the absence of clear words, be taken to mean that the employer is entitled to charge the contractor with liquidated damages accruing on a daily or periodic basis when it is the employer’s own conduct which has resulted in part of the relevant delay.  The cases also establish that the consequence of disentitling the employer to liquidated damages is not that he is left without remedy for the delay which the contractor did cause, but that he can sue for unliquidated damages although, of course, that carries the burden of proving loss suffered in consequence of those delays.

145.  These principles may be applicable to the debate on the Government’s entitlement to liquidated damages.  However, no case outside the field of liquidated damages was cited and it is not at all clear that the principles can be transposed to apply to the Government’s asserted right of re-entry.

146.  Mr Sumption submitted that there is no logical difference between the two remedies and that such transposition ought to be made.  I am not persuaded of the correctness of that submission.  The cases considered proceed on the factual premise that a building covenant period has been exceeded and that the employer and contractor have each been found responsible for some part of the resultant period of delay.  It would obviously be untenable to construe the contract as permitting the employer to charge the contractor for liquidated damages in respect of that part of the delay which it, and not the contractor, had caused since the quantum of the contractor’s liability depends on the exact number of days (or weeks, etc) of delay attributable to him.  In such circumstances, liquidated damages clauses are unworkable unless the employer’s delays can be segregated by certified time extensions.

147.  The Government’s right to re-enter rests on a different basis.  It arises under gc 11(a) on “any failure or neglect by the Grantee to perform, observe or comply with any of these Conditions”.  This is not a remedy which involves liability in a quantum which varies according to the length of delay attributable to the Developers, as opposed to the Government.  Liability to a re-entry is triggered, in the present case, by breach of the building covenant if it can be shown that the Developers failed to complete within the time stipulated by that covenant.  The fact that the Government may (hypothetically) be found to have contributed to part of the period of delay which has run beyond the stipulated completion date does not affect the incidence, nature or extent of that liability.  If the Government was partly responsible, that fact might of course be highly relevant on a petition to the Chief Executive or on an application to the court for relief against forfeiture brought under the Government Rights (Re-Entry and Vesting Remedies) Ordinance (Cap 126).  However, this merely serves to underline the important differences between the remedies of liquidated damages and forfeiture of a lease.  It is therefore my view that the principles which animate the line of cases on liquidated damages do not extend to the Government’s assertion of an entitlement to re-enter.  The matter would stand on a different footing if it could be shown, applying the prevention principle, that the Government had culpably prevented timely completion by the Developers.  However, they did not attempt to bring their case within that principle.

(c) The facts relevant to the partial responsibility argument

148.  Is the Government disentitled from claiming liquidated damages and left with only a claim for unliquidated damages?  In the absence of a mechanism in the Conditions for certifying extensions of time, the authorities relied on appear to be applicable as a matter of principle.  However, in my view, the Developers face insuperable difficulties given the findings of the Judge and the absence of findings which it needs to support application of that line of cases.

149.  As indicated above, the implied term which the Judge found to exist involved inquiring into whether “there was culpable conduct or undue delay on the part of the Government resulting in the plaintiffs’ not being able to complete building within that period.”  In that context, the Judge’s principal finding at trial was that there had been no culpable conduct or undue delay on the part of the Government preventing timely completion (at §§123 to 127). 

150.  That main finding, while of course adverse to the Developers and providing no support for the partial responsibility argument, is not specifically in point in respect of that argument.  The partial responsibility argument does not require inquiry into whether Government had acted “culpably” (as Dodd v. Churton [1897] 1 QB 562, shows); nor does it require inquiry into whether Government’s delays prevented completion within the building covenant periods. 

151.  However, the Judge did not confine himself to his principal finding.  He also made findings relating to particular aspects of the Government’s processing of the MLP submissions which are more directly adverse to the partial responsibility argument.  Thus, he considered an argument based on certain building contract cases which he distinguished (at §120) on the ground that this was not such a case but nevertheless found that if he was wrong and such authorities were applicable, the Government was not at fault.  He stated :

“If I am wrong ...... and the building covenant was indeed a building contract to build a non-industrial building of between 75,000 and 186,000 square feet, and such terms would be implied, they were not breached; the Government never hindered them or failed to co-operate with them in the performance of that contract, which they could have performed by building below 324mPD.” (at §121)

152.  At §125, he made a finding that :

“The DLO did not delay in advising the plaintiffs of the requirement of the CAD which would have to be met if the MLP was to be approved.”

153.  And at §126, in relation to the processing of MLP 4, he held :

“I do not see that any delay in relation to MLP 4 can be laid at the door of the Government. That was held up because of the plaintiffs' attempt to obtain bonus plot ratio which was ultimately abandoned.”

154.  In relation to alleged delays in relation to the ILS computer modelling studies his Lordship stated :

“As to Issue No.9 [as formulated at the trial] as to whether the time actually taken for the computer modelling studies resulted in a ‘state of affairs’ in which time ceased to be of the essence, I do not see how this could apply in circumstances where Government did not cause the delay.”

155.  There has been no attempt to overturn any of these findings.  However, in submissions, Mr Sumption sought to persuade the Court that there was ample evidence to justify a finding that there was at least enough delay, which was not de minimis, to justify application of the principles contended for.  He pointed, for instance, to internal memoranda from Mr Bowen Leung expressing his view that periods of delay were not the fault of the Developers.  He referred to the Director having said at a meeting on 26 March 1996 that he was willing to consider a grace period of 18 months (although he said that this was subject to consulting lawyers).  He also referred to evidence as to how long particular steps might in general take and to Practice Notes indicating usual processing times.

156.  It is not necessary to discuss each of the items of evidence referred to.  Deployment of the partial responsibility argument requires relevant findings to have been made at the trial.  Such findings as there are undermine rather than support that argument.  The expedient of selecting particular items of evidence said to support the argument is impermissible.  Major dangers obviously arise, particularly at an appellate hearing, in trying to address individual pieces of evidence – an internal memo here, an answer given in cross-examination there – taken in isolation.  Thus, a policy Secretary may have expressed a view which might or might not be fully informed.  It may have been advanced as part of an internal dialogue in the process of forming government policy.  He might subsequently have modified his view in the light of other views received.  Such statements can hardly be treated as “an admission” as was suggested.  General departmental guidelines are exactly that, ie, guidelines of a general nature.  They do not establish that the time taken on the facts of a particular case involves undue or any delay.  It is also unclear what standards are to be used to judge whether there was “avoidable delay” in relation to any particular step in the processing of an MLP.  As we have seen there is an iterative process of seeking the views of interested government agencies by circulation and ensuing dialogue with the developer.  Objections elicited may be fundamental or trivial and may take more or less time to raise and resolve.  Does “avoidable delay” depend on the reasonableness or otherwise of each comment made or requisition raised?  How is that to be judged? 

157.  It is plain that if the partial responsibility argument had been fully investigated at the trial, the Government may well have wished to call further witnesses or to adduce further documentary evidence with a view to refuting the suggestion that there had been “avoidable delay” in relation to particular aspects of the MLP submission process. 

158.  In Flywin Co Ltd v. Strong & Associates Ltd (2002) 5 HKCFAR 356, this Court made it clear that it will decline any invitation to deal with the facts of a case on a basis which may cause unfairness to the other party.  Mr Justice Bokhary PJ stated at p 369 B-C:

“Where a point is taken at the trial, the facts pertaining to it are open to full investigation at the evidence-taking stage of the litigation. That is as it should be. Therefore where a party has omitted to take a point at the trial and then seeks to raise that point on appeal, the position is as follows. He will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial.”

159.  I would in any event add that the evidence and the Judge’s findings strongly support the conclusion that the Developers’ inability to complete the transport terminus and the building in time was overwhelmingly the result of choices which they deliberately made and of their erroneous belief that they would be given a free building covenant extension.  It was their choice, after 15 months of the building covenant period had gone by, to change their project radically by espousing the intention to build the world’s tallest building on the Lot.  This required them to go back to square one in terms of getting approval for their MLP.  They submitted MLP 4 merely to test the waters without expecting it to be approved.  Nor was MLP 5, which was an interim submission, intended as the true basis for their project.  It was replaced by MLP 6 which was in turn immediately replaced by MLP 7 on 17 January 1995.  By this time, more than 2 years of the building covenant period had passed.  They still chose at that stage to continue pressing for a plot ratio of 11.4.  They were made aware in January 1995 that because of the known future needs of the new airport, there would have to be a height restriction of 324 mPD at the Lot. 

160.  The Developers’ argument in correspondence and in court has been that notwithstanding their having being told repeatedly, including by SPEL in his letter of 27 January 1995, that, on CAD’s advice, this height restriction had to be imposed, there had been no formal determination to that effect.  That is an unrealistic and untenable view.  The Developers fully appreciated that MLP submissions are dealt with through the iterative process mentioned earlier, with the Director circulating their proposals among government departments and incorporating their comments, including those of the CAD, in his response to the proposals.  The reality is that the Developers well knew that their MLPs, from MLP 5 to MLP 8 inclusive, would not be approved while they proposed a building exceeding 324 mPD because of aviation safety and airport operation requirements unless their lobbying efforts succeeded in persuading the Government to change its mind about the height limit.  They were repeatedly reminded about their obligations under the building covenants and the legal consequences of their breach.  Yet, they did not submit any MLP for approval after rejection of MLP 8 in June 1995 for more than a year.  If any part of this hiatus was due to an unjustified erroneous belief that they would be given a free building covenant extension, they can hardly blame the Government for the resultant delays.  Moreover, it must have been clear by mid-October 1995, some nine months before MLP 9 was to surface, that the Government was continuing to assert its right to liquidated damages. 

161.  It is therefore my view that the partial responsibility argument fails partially on the law and wholly on the facts.  It is inapplicable to the Government’s claim to be entitled to re-enter the Lot.  And in relation to the claim for liquidated damages, it is not only unsupported by necessary findings but is undermined by findings adverse to the argument.  It is not open to the Developers to seek to sustain the argument by reference to individual items of evidence since such a process falls foul of the Flywin principle.  It follows, in my view, that the appeal must be dismissed. 

F.      Issue 5:  The building covenant extensions

162.  Issue 5 involves a point taken by the Government in relation to the sums of additional premium received from the Developers.  It concerns the argument that even if it were to be held to have had no right of re-entry, the Government was nevertheless entitled to retain the sums paid because they were voluntary payments made pursuant to agreements freely entered into for good consideration.  In the light of my decision that the Government was entitled to re-enter, the premise of Issue 5 is inapplicable.  However, it was suggested that this might still be a live issue in relation to the questions left for separate trial and the Court was invited to deal with it in this judgment. 

163.  On 10 January 1997, the Director wrote to the Developers threatening to forfeit the lease on the grounds that the building covenant periods had expired while the Developers had not even obtained approval to their MLP.

164.  In his letter to the Developers dated 21 February 1997, after noting relevant failures to complete various aspects of the development within stipulated periods, the Director made an offer to extend the building covenant period for one year, up to 7 December 1997, in the following terms :

“On payment of a premium of HK$72,000,000.00, Government will not enforce its rights under the said Conditions in respect of such non-completion provided that development of the above lot is completed and fit for occupation and formation of the said Green Areas completed to my satisfaction not later than 7 December 1997.  Subject to the foregoing condition, Government reserves all its rights under the said Conditions, including its right of re-entry.  I must point out that until a final Occupation Permit is issued, Special Condition No. 6(a) is not considered to have been fulfilled and should any further extension be approved a further premium will be payable.”

165.  When this offer was accepted, Mr C Y Leung’s covering letter dated 18 March 1997 sent on the Developers’ behalf stated the basis of this acceptance as follows :

“...... on an entirely ‘Without prejudice’ basis and ‘under protest’, our clients have today settled the demand note ...... in the sum of HK$72 million. ...... Our clients wish to make clear that the fact that they have, under protest, settled the said demand note is without prejudice to their contentions that Government has no right, legal, equitable or otherwise, to demand, and receive payment of the sum of HK$72 million (or indeed any sum for that matter) to extend the Building Covenant to 7 December 1997.”

166.  This pattern was repeated with each of the payments made for further building covenant extensions.

167.  Mr Sumption submits that two principles from the law of restitution are relevant and applicable, namely :

(a) That a payment made in respect of a liability which does not exist, is made without consideration and recoverable, citing Woolwich Equitable Building Society  v. IRC [1993] AC 70 at 166, 197, 201; and

(b) That a payment made under duress, including a threat of forfeiture of the lease, if the threat is unjustified, is also recoverable, citing Maskell v. Horner [1915] 3 KB 106 at 118 and 123; and Goff & Jones, The Law of Restitution, 6^th Ed, §10-011.

168.  The only relevant limit to these principles, he submits, is that such payments are not recoverable if they were voluntarily made, intending to settle some issue between the parties: see Goff & Jones, (op cit), §1-069 to §1-071.

169.  Mr Sumption argued that the consideration for the payments of additional premium passing from the Government was its forbearance to exercise its purported right of re-entry and forfeiture; and that since, on the premise of this argument, no such right of re-entry existed, there was in fact and in law no consideration, which, it was submitted, constituted a sufficient ground for a restitutionary claim.  Alternatively, the threat to forfeit the lease, having been made without basis, founded a restitutionary claim based on duress.  It was submitted that the express terms upon which the payments were made and the prompt institution of proceedings to challenge the basis of the Government’s claimed entitlements made it clear that this was not a case of voluntary payments.

170.  This is, on its face, a cogent argument.  However, since the issue does not arise on the present appeal and is only potentially relevant to how questions at the separate trial may fall to be resolved, for the reasons which follow, it is my view that it is inappropriate to attempt to decide Issue 5 at the present stage. 

171.  The premise of Issue 5, as potentially applicable at the split trial, will of course remain that the Government was not entitled to re-enter.  Whether that premise can be established will not be known until relevant issues of fact and law are explored and relevant findings made at that trial.  Mr Neoh contends that the precise basis upon which any finding of a lack of entitlement to re-enter will be of importance.

172.  As I understand his argument, it is contended that even if the court were to hold at the split trial that, due to some culpability on its part, the Government was not entitled to re-enter the Lot, the premium payments might nevertheless remain irrecoverable if the Government could show that they had been made by the Developers to buy the peace and certainty of an extension to the building covenant which provided them with good consideration for those payments extending beyond the consequences of any wrongs underlying Government’s original claim to re-enter (the sufficiency of such consideration not being a matter for the court).  This, it was argued, would be sufficient to render the payments voluntary and irrecoverable.

173.  If this is a feasible argument − as to which I express no view − it depends on the resolution of factual and legal questions which have not yet been defined and which are obviously highly controversial.  It is accordingly, in my view, inappropriate to try to deal with Issue 5 at the present stage.

Conclusion

174.  For the foregoing reasons, I would dismiss this appeal and make an order nisi for the Appellants to pay the Respondent’s costs, certified fit for three counsel.  I would direct that any representations which the parties may wish to make on the costs order nisi should be made in writing, filed and served on the other side within 21 days from the date of the handing down of this judgment, with any written representations in reply filed and served within 21 days thereafter; and that, in the event that no representations are filed within 21 days from the date that this judgment is handed down, the order for costs should become absolute without further order.

Sir Derek Cons NPJ:

175.  I have read in draft the judgments of Mr Justice Bokhary PJ, Mr Justice Ribeiro PJ and Sir Ivor Richardson NPJ.  Having regard to the diversity of approaches therein it is appropriate that I too set down the approach that has led me for my part to the same conclusions on the questions that Mr Sumption QC posed for our consideration.  It is sufficient, in view of the detail already and to be given, to set out only the basic essentials.

Question 1

176.  On this question I understand the argument to be put in two ways.  First it is contended that having regard to the Grant as a whole and to the matrix in which it was conceived Special Condition (“SC”) (9)(e) must be construed as no more than a “policing” power, to be used to monitor the other conditions of the Grant, in particular these mentioned in SC 5(a)(i).

177.  I am unable to accept this contention.  Not only do I find nothing in the words of the condition itself, in the other Special Conditions or in the Grant as a whole to support such a restrictive interpretation, but to accept the contention would deprive SC (9)(e) of any independent or realistic effect.  And that it is independent is confirmed by the reference to it in SC (9)(a)(i); and that it is in general unfettered is confirmed by SC (63)(b).  I add the caveat because it is common ground that the condition may not be applied to derogate from any substantive right conferred by the Grant.

178.  That leads to the second argument and the case of Equitable Life Assurance Society v. Hyman from which the appellants seek to draw assistance.  However it seems to me that to be able to do so the appellants must first establish that the Grant gave them an unqualified right, subject to the other conditions of the Grant, to build to an unlimited height, in like manner that Mr Hyman had an unqualified right to his guaranteed annuity rate.  For the reasons I have just discussed I am not persuaded that the appellants had that right.  Nor am I persuaded that by the use of the phrase “the reasonable expectations of the parties” in the context in which he did, Lord Steyn intended to widen the basis of his decision beyond conflict with actual contractual rights.  There was much discussion before us as to effect of SC (9)(b).  I take that however to be no more than a method of calculating density.  It refers to height, but gives no right to it.  By its own language it is restrictive, not enabling.

Questions 2, 3 and 4

179.  I have found it convenient to group these three conditions together and then deal with the points they raise under the three heads of implied terms, liquidated damages and the right of re-entry.

Implied Terms

180.  Two such terms are suggested by the appellants :-

(1) that government would not act unnecessarily in a way which would deprive the appellants of any part of the time given to them for the completion of the building covenants; and

(2) that upon rejection of an MLP Government would inform the appellants of the precise criteria which Government had applied.

181.  As to the first, Government contends that “any part of the time” must be qualified by the words “and causes the grantee to overrun the covenanted time”; and that the only sanction for any breach of the implied term should be an automatic extension of the covenanted time.

182.  The judge at first instance accepted the Government’s formulation, but for my part I prefer that of the appellants.  I do not see the suggested qualification as to time “strictly necessary” for the business efficacy of the contract, although it may well be a matter relevant to the assessment of damages if a breach be proved.  Nor do I see any “strict necessity” to replace the normal remedy of damages.  To do so would involve the court in rewriting the contract.

183.  No objection appears to be taken by Government to the second suggested implied term, but it is strongly disputed that Government was in breach.  The judge at first instance found that the Government was not, and I respectfully agree with him.  By the letter of 27 January 1995 the Government made quite clear to the appellants that the maximum height that would be allowed was 324 mPD.  The appellants were reluctant to accept that figure and did their best to make Government change its mind.  But it cannot be accepted that thereafter the appellants did not know the current limit.

Liquidated Damages

184.  The rule on which the appellants rely here is succinctly expressed by Salmon LJ in Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd, conveniently set out by Mr Justice Ribeiro PJ at para.142(d) of his judgment.  The earlier cases indicate that the act of the complainant need not necessarily be in breach of the contract, but it seems to me implicit in the principle itself and from the words used in the authorities that the act in question must have actually caused or at least contributed to the overrun.

185.  But on the facts the rule does not assist the appellants.  The long delay in Phase III was not caused by the Government.  It stemmed from the act, or lack of action, of the appellants who chose, as the judge also found, and perhaps understandably from their point of view at the time, to wait in hope.

186.  Another difficulty that faces the appellants in this respect is that the point was taken for the first time in this court.  There was therefore no enquiry at first instance as to whether the suggested delays on the part of Government did in fact cause or contribute to the eventual failure to complete in time or consideration of whether those delays, if any, were set at naught by the offer and acceptance of a four-month extension.

Right of Re-entry

187.  As at present advised I am inclined to take the view that as a matter of principle the rule applied to liquidated damages should also apply to a claim to re-enter.  But as it may become relevant in the split trial and would in any event fail in the case so far for the reasons just given, I prefer to express no decided opinion.

Question 5

188.  In the circumstances it is not necessary to answer this question.

189.  For the above reasons I too would dismiss the appeal and make the consequential orders suggested in para. 174 of the judgment of Mr Justice Ribeiro PJ.

Sir Ivor Richardson NPJ:

Introduction

190.  This is an appeal from the judgment of the Court of Appeal (Rogers VP, Le Pichon JA and Sakhrani J) of 31 July 2003 which dismissed an appeal from a judgment of Deputy High Court Judge Muttrie in the Court of First Instance given on 4 March 2002.  By that judgment the judge dismissed the plaintiffs’ claims in their action save for those arising out of para. 29 of the Re-Amended Statement of Claim which were adjourned for subsequent resolution and are not in issue in this appeal.  It is convenient to refer to the Court of First Instance as “the High Court”, and to Deputy High Court Judge Muttrie as “Judge Muttrie” and to the plaintiffs as, depending on the context, “the plaintiffs”, “Chinachem” or “the appellants”. 

191.  The plaintiffs are companies in the Chinachem Group which is a property developer in Hong Kong.  The defendant, The Secretary for Justice, is sued as representative of the Hong Kong Government and, it is convenient to give the abbreviated references to particular officers and officials of the Government, namely, Secretary of Planning, Environment and Lands (“SPEL”), the Director of Lands (“DL”) and the Civil Aviation Department (“CAD”). 

192.  Much of the complexity and difficulty of the case arises from the fact that Kai Tak Airport was the only operational airport in Hong Kong but the Government had in October 1989 publicly announced the proposal to construct a new airport in its place, which clearly was going to be an immense undertaking.  During that transitional period Chinachem as developer wanted to proceed with a development to meet its obligations to submit Master Layout Plans (“MLPs”) and then to obtain building approvals and the Government was faced with a degree of uncertainty, which would necessarily take time to resolve, to assess the implications for the potential impact on the operations of the new airport as and when all those implications were worked through.  The airport was planned and built and then opened on 6 July 1998.  The process was complicated further when Chinachem changed its mind and decided to develop the tallest building in the world and over a considerable part of the time in question sought to persuade the Government through discussions and advancing propositions concerning what the Government should commit to in relation to the Chek Lap Kok Airport to allow it to go ahead and subsequently challenged the Government for its ultimate failure to give the go ahead.  Not surprisingly, the contract documents were not entirely suited to the transitional times, and an immediate question for consideration concerns the applicability of the Hong Kong Airport (Control of Obstructions) Ordinance, Cap. 301 (1986 ed.) (“the Ordinance”).

193.  The long title to the Ordinance provides:

“To provide for the restriction and, where necessary, the reduction of heights of buildings in the interest of the safety of aircraft, for the control of lighting, for the erection or provision and the maintenance of aids to air navigation, for the assessment and payment of compensation in respect of damage suffered on account thereof, and for purposes connected with the matters aforesaid.”

194.  By s.2(1) unless the context otherwise requires:

“‘building’ includes the whole, or any part, of any building, arch, bridge, chimney, cookhouse, cowshed, dock, factory, garage, hangar, hoarding, latrine, lift, matshed, office, out-house, pier, shelter, shop, stable, stairs, wall, warehouse, wharf, or workshop, and any mast or pole or any pile driver, scaffolding, hoist or crane or other structure projecting skywards;”

195.  And s.2(2) continues:

“(2) Any reference in this Ordinance to the safety of aircraft means the safety of aircraft using Hong Kong Airport.”

196.  Section 3, Orders by the Governor in Council relating to heights of buildings and s.4 provide:

“3.(1) Where in the opinion of the Governor in Council the safety of aircraft so requires, he may by order –

(a) prescribe areas within which all buildings are prohibited;

(b) prescribe areas within which no building shall exceed the height specified in or by such order;

(c) require to be demolished any building erected within an area in which all buildings have been prohibited by an order under paragraph (a), or require to be reduced in height, or, where reduction in height is not feasible, to be demolished, any building which does not conform with an order under paragraph (b).

(1A) An order under subsection (1)(a) or (b) may provide that, subject to such conditions as may be prescribed therein, it shall not apply to any particular area, or any particular building, within any area prescribed by the order.

(2) Where an order is made under subsection (1)(a) or (b), it shall be published in the Gazette, and a copy thereof together with a plan of the prescribed area, signed by the Clerk of Councils, shall be deposited at the Land Office.

(3) An order under subsection (1)(c) shall be served upon the owner of the premises affected, and may be registered at the Land Office against the land affected by delivering to the said office a memorial thereof signed by the Clerk of Councils and containing the full terms of such order.

 4. No building shall be erected in any area in which buildings are prohibited, and, subject to section 3(4), no building shall be erected above the prescribed height, contrary to any order under section 3(1)(a) or (b).”

197.  And ss 23 and 24 relating to compensation provide:

“23.(1) A claim for compensation under this Ordinance shall be made in writing to the Director of Buildings and Lands -

(a) in the case of a diminution in value of an interest in land in consequence of an order made under section 3(1)(a) or (b), within 1 year of the date of such order; and

(b) in any other case, not later than the expiry of 3 months from -

(i) the completion of any building works carried out in consequence of an order under section 3(1)(c) or of an order under section 9; or

(ii) the completion of the provision or erection of any marks, lights or beacons under section 6 or 7; or

(iii) the completion of any building works required to comply with a notice given under section 10(1):

Provided that the Governor in Council may, in any particular case, extend the period for the making of claims.

(2) Upon a claim being received the Director of Buildings and Lands shall forthwith assess, in accordance with the rules under section 24, the amount of any compensation which in his opinion is recoverable by the claimant, and shall thereupon notify the claimant of the amount of compensation, if any, so assessed.

(3) If the claimant agrees in writing that he accepts such amount in full settlement of his claim, that amount may be paid to the claimant:

 Provided that in the case of diminution in value of an interest in land, he shall first satisfy the Land Officer of his title to the compensation payable.

24. In assessing compensation the Director of Buildings and Lands and, in the case of any dispute, the Lands Tribunal, shall act in accordance with the following rules-

(a) The value of any interest in land shall, subject as hereinafter provided, be taken to be the amount which the interest if sold in the open market by a willing seller might be expected to realize:

 Provided always that the Director of Buildings and Lands or the Lands Tribunal, as the case may be, shall be entitled to consider all returns and assessments for taxation or rating made or acquiesced in by the claimant.

(b) No allowance shall be made in respect of the compulsory nature of any prohibition or restriction imposed, or building works required, by or under this Ordinance.”

198.  The Ordinance was amended by L.N. 88 of 1994, which came into force on 12 December 1994, to add to s.2:

“2. Interpretation

 Section 2 of the Hong Kong Airport (Control of Obstructions) Ordinance (Cap.301) is amended –

(a) in subsection (1), by adding –

‘Hong Kong Airport’ means the Hong Kong International Airport at Kowloon peninsula and the airport built or to be built at and in the vicinity of Chek Lap Kok, Lantau, New Territories; …

(b) in subsection (2), by adding ‘or which will be using’ after ‘using’.”

199.  And s.3, Orders relating to heights of buildings, added a new subsection (1AA):

“(1AA) Where in his opinion the safety of aircraft so requires, the Secretary may, on the advice of the Director of Civil Aviation, by order prescribe areas within which no building shall exceed the height specified in the order.”

200.  In a pre-trial ruling upheld on appeal to the Court of Appeal Yam J ruled as the proper issues for trial on the pleadings in this regard

“(a) Whether as a matter of law it is an implied term of the Agreement that the Hong Kong Government should not refuse or withhold the Plaintiffs’ applications for approval of MLPs and other building and planning plans save on reasonable grounds. 

 (b) If so, whether the Hong Kong Government in deciding whether or not to approve the Plaintiffs’ application for construction of Nina Tower on the Lot, the Hong Kong Government is entitled to have regard to height restriction which would be imposed by legislation under Section 3(1AA) of the Hong Kong Airport (Control of Obstructions) Ordinance, Cap. 301;”

201.  The immediate question is when could an order have first been made in relation to the proposed airport at Chek Lap Kok.  It seems obvious from the respective flight path requirements, as well as other capacity considerations, that the framers of the Ordinance incorporating the 1994 amendments could never have intended, given airport safety needs and those other considerations, that the old international airport at Kai Tak and the new airport proposed for Chek Lap Kok could co-exist.  The amendments came into force on 12 December 1994 and the framers of the Ordinance must have intended that those responsible for making orders under its provisions should make their own judgment as to when and where aircraft safety needs would warrant prescribing “areas within which no building shall exceed the height specified in the order” (s.3(1AA)).  And the pointers to both existing and future uses of the airport in both the pre-December 1994 Ordinance and the Ordinance incorporating those amendments make that clear.  In short, it was not until that power was conferred that such an order could have been made. 

202.  The contract provided for the lease for a term of years and the utilisation of the land in the context of an expanding society and economy where the land stock was limited.  The extent, manner and timing of the development could only be determined by a close scrutiny of the contract and what it provided each party.  What comes through the documentation is that the Government determined from the outset that the express terms of the contract could never be the subject of negotiation and that what little obligations it had should never be the subject of bargaining.  It is only to the extent that limitations are implicit in the terms of the grant that it is arguable that the legal principles governing the implication of terms as to co-operation between the parties and prevention of performance are applicable.

203.  The plaintiffs’ tender of 3 October 1991 for the grant of Tsuen Wan Town Lot No. 353 was accepted on 7 November 1991 and they took possession on about 8 December 1992.  In consideration of the grant they paid a premium of $122,625,997.57 and surrendered other land exchange entitlements.  In effect they gave value to a total of about $1,245,000,000.00 for the Lot including the value of the development provisions in the contract documents.  By the terms of their grant they were required to complete their building on the Lot, to the stage of obtaining an occupation permit, within four years, i.e. by 8 December 1996.  They were also required to complete a transport terminus on the Lot within three years, i.e. by 8 December 1995.  If they did not comply with these building covenant periods, the Government could forfeit the Lot without repayment of the premiums paid for it or other compensation. 

204.  The case raises important questions as to the interpretation of contract documents of this kind and specificity and, in particular, as to what, if any, room there is for implying any further terms into the contract between the parties.  As well, it raises various questions of the applicability of estoppel, waiver and economic duress arising from the conduct of the parties in the performance of the contract.  Mr Sumption QC, who had not appeared in the courts below, signed a supplemental case for the appellants which substantially recast their case.  In view of the way the case has developed, I will need to traverse the course of events and the way the case was put in the High Court and this Court at some length before turning to the Five Questions which Mr Sumption QC posed and then developed in oral argument and to Mr Neoh SC’s response.

The Contract Documents

205.  I turn now to a more extensive consideration of the contract documents.

206.  By notice of 6 September 1991 the Buildings and Lands Department invited application from the owners of land exchange entitlements to surrender entitlements for the grant of the particularised lots of Government land it was making available one of which was Tsuen Wan No. 353 and not simply separately receive cash compensation and retain other lands.  The location was Area 35, Tsuen Wan, New Territories, the area in square metres (about) 19,500 for a lease term of years commencing from the date of agreement and expiring on 30 June 2047 at an annual rental of $2,400.00 up to 30 June 1997 and thereafter an amount equal to 3% of the rateable value for the time being of the Lot.  The specified user was non-industrial (excluding godown) purposes with building covenant, “Gross floor area not less than 75,000 square metres to be completed within 48 months from the date of possession of the Lot.”  Applications were required to be made on the Application Form and placed in the Public Works Tender Box at the Queensway Government Offices before noon on 4 October 1991.  Application Forms, Application Notices and Conditions of Grant were obtainable from and Sales Plans could be inspected at offices of the Buildings and Lands Department. 

207.  The Application Form signed by the plaintiffs dated 3 October 1991 and lodged as specified recorded that if their application was accepted then, until the Memorandum of Agreement referred to in para. 11 of the annexed Application Notice was signed, the application together with the written acceptance “shall constitute a binding agreement” between the applicants and the Government.  The Application Notice likewise excluded any possibility of negotiation over the terms of a grant and para. 11 required timely execution by the successful applicant of the Memorandum of Agreement on the form attached to the Conditions of Grant.  New Grant No. 6890 issued in respect of Lot 353 and the annexed Memorandum of Agreement in standard terms was executed on 20 November 1992.  The Memorandum recorded that the applicants named:

“….. have this day agreed to carry out the terms and conditions of the foregoing Conditions and the Grantee/s hereby agree/s fully to observe and perform the said Conditions and to be bound thereby and the District Lands Officer, Tsuen Wan on behalf of the Governor of Hong Kong hereby ratifies and confirms the said Grant on the above Conditions.” 

208.  The General Conditions of Grant are very specific and detailed but it is the relevant parts of Special Conditions (5), (6), (8), (9) and (10) which are of particular importance in the appeal.  They provide:

“(5)(a)  The Grantee shall within 6 months from the date of this Agreement and prior to the submission of building plans to the Building Authority submit or cause to be submitted by his authorized person (as defined in the Buildings Ordinance ) to the Director for his approval: -

(i) comprehensive plans, specifications and detailed design drawings (at a scale of 1:500) (hereinafter together referred to as ‘the Master Layout Plans’) for the development of the lot in accordance with these Conditions containing, inter alia, plans showing the Transport Terminus as defined in Special Condition No. (8)(a) hereof, roads, pedestrian ways, footbridges, open spaces, parking, loading and unloading areas, service areas, ingress and egress points, refuse collection and disposal, air-conditioning, heating, lighting, humidification and ventilation plant and recreational facilities which the Grantee proposes to erect, construct or install pursuant to theses Conditions; details of roof, podium and floor layout, external finishes, materials, colours, design, standards, height, levels, gross floor areas, positions, elevations of the building or buildings to be erected on the lot; details of all signs (including any traffic signs and road markings) to be erected or provided by the Grantee within the lot; and

(ii) detailed proposals (hereinafter referred to as ‘the Landscaping Proposals’) prepared by a qualified landscape architect and including illustrations, sketch drawings (both at a scale of 1:500 or greater) and such other information as the Director may require for the landscaping of the podium to be constructed on the lot and for landscaping of the Transport Terminus as defined in Special Condition No. (8)(a) hereof, the Non-industrial Development as defined in Special Condition No. (8)(b) hereof, the non-building areas referred to in Special Condition No. (11) hereof and any areas within the lot on which any of these Conditions may prohibit the erection of any structures and for landscaping of the roof areas.  The Landscaping Proposals shall include (inter alia) details of Schemes for the planting of trees, flowers, bushes, shrubs, grass and other vegetation and their subsequent proper maintenance a design layout and details of the proposed maintenance of a watering and fertilization system for the landscaped areas and in particular for any planter comprised in such proposals, details of a scheme for the protection, lighting and maintenance of all open spaces within the lot whether or not intended for use by the general public and details of the proposed phasing or staging (if any) of such proposals.

(b) No building, landscaping or any other works (other than site formation works) shall be commenced on the lot or any part thereof until the Master Layout Plans and the Landscaping Proposals shall have been approved in writing by the Director and once so approved the Master Layout Plans and the Landscaping Proposals shall be signed by the Director and the Grantee and a signed copy thereof shall be deposited at the District Land Office, Tsuen Wan and shall not be amended, varied, altered, modified or substituted for without the prior written approval of the Director and a note of the Director’s approval for such amendment, variation, alteration, modification or substitution shall be deposited at the District Land Office, Tsuen Wan. 

(c) The Lot or any part thereof shall not be developed or redeveloped except in accordance with the Master Layout Plans and the Landscaping Proposals and no building or structure which is not shown on the Master Layout Plans and the Landscaping Proposals shall be erected, constructed or maintained on or within the lot.

(6)(a)   The Grantee shall develop the lot by the erection thereon of a building or buildings, ancillary works and facilities complying in all respects with these Conditions, and the provisions of all Ordinances, bye-laws and regulations relating to building, sanitation and planning which are or may at any time be in force in the New Territories, other than New Kowloon, such building or buildings, ancillary works and facilities to be completed and made fit for occupation on or before the expiration of 48 calendar months from the date on which possession of the lot is deemed to have been given to the Grantee pursuant to Special Condition No. (4) hereof.

(b) Notwithstanding sub-clause (a) of this Special Condition the Grantee shall complete and make fit for occupation and operation the Transport Terminus as defined in Special Condition No. (8)(a) hereof within 36 calendar months from the date on which possession of the lot is deemed to have been given to the Grantee pursuant to Special Condition No. (4) hereof.

(8) Subject to these Conditions, the Grantee shall erect, construct and maintain within the area shown coloured pink on the plan annexed hereto:-

(a) a ground floor transport terminus including such transport regulator office, staff canteen, toilet and other structures as may be required by the Director (all hereinafter referred to as ‘the Transport Terminus’) in accordance with Special Condition No. (15) hereof; and

(b) a non-industrial building or buildings (hereinafter referred to as ‘the Non-industrial Development’.)

(9)(a)   Subject to these Conditions, upon development or redevelopment of the lot or any part thereof: -

(i) any building or buildings erected or to be erected on the lot shall in all respects comply with the Buildings Ordinance, any regulations made thereunder and any amending legislation and with the design disposition and height approved under sub-clause (e) of this Special Condition;

(ii) the total gross floor area of any building or buildings erected or to be erected on the lot shall not be less than 75 000 square metres nor more than 185 250 square metres. 

(b) Notwithstanding any other provisions in this Agreement and subject to sub-clause (d) of this Special Condition, site coverage and plot ratio of any building or buildings erected or to be erected on the lot shall be calculated with reference to and restricted by the following schedule:-

Height of Building In metres	Domestic Building		Non-domestic Building
	Percentage Site Coverage	Plot Ratio	Percentage Site Coverage	Plot Ratio
Not exceeding 15	66.6	3.3	100	5.0
Over 15 but not exceeding 18	60	3.6	97.5	5.8
Over 18 but not exceeding 21	56	3.9	95	6.7
Over 21 but not exceeding 24	52	4.2	92	7.4
Over 24 but not exceeding 27	49	4.4	89	8.0
Over 27 but not exceeding 30	46	4.6	85	8.5
Over 30 but not exceeding 33	42	4.8	80	9.5
Over 33 but not exceeding 36	42	5.0	80	9.5
Over 36 but not exceeding 43	36	5.0	75	9.5
Over 43 but not exceeding 49	32	5.0	69	9.5
Over 49 but not exceeding 55	28	5.0	64	9.5
Over 55 but not exceeding 61	25	5.0	60	9.5
Over 61	20	5.0	60	9.5

(c) For the purpose of calculating site coverage and plot ratio under this Agreement the expression ‘composite building’ means a building that is partly domestic and partly non-domestic and:-

(i) the site coverage for a non-domestic building or the non-domestic part of a composite building may, whatever the height of the building, exceed the permitted percentage site coverage to a height not exceeding 15 metres above ground level:

(ii) the plot ratio for the domestic part of a composite building shall not exceed the product of the difference between the permitted plot ratio for the building if it were a non-domestic building and the actual plot ratio of the non-domestic part of the building and the permitted plot ratio for the building if it were a domestic building divided by the permitted plot ratio for the building if it were a non-domestic building. 

(d) For the purposes of these conditions and in particular for the purpose of the calculation at sub-clause (c)(ii) of this Special Condition the maximum permitted non-domestic plot ratio shall be 9.5 for buildings in excess of 33 metres in height.

(e) The design, disposition and height of any building or buildings erected or to be erected on the lot shall be subject to the prior written approval of the Director and no building works (other than site formation works) shall be commenced on the lot until such approval shall have been obtained.

(f) No building shall be erected on the lot of a type which by virtue of the Buildings Ordinance (Application to the New Territories) Ordinance and any regulations made thereunder is exempted from the provision of the Buildings Ordinance and any regulations made thereunder.

(g) The lot or any part thereof, upon being developed in accordance with these Conditions, shall not be redeveloped except in accordance with such redevelopment plans as may be approved by the Director.

(10) Any building or buildings erected or to be erected on the lot or part thereof shall in all respects comply with the requirements of the Town Planning Ordinance and any amending legislation.” 

209.  Special Condition (15)(a) relating to the Transport Terminus provides:

“(15)(a)    Subject to Special Condition No. (17)(a) hereof, the Grantee shall at his own expense in good workmanlike manner, with such materials and to such standards and design as the Director shall approve and in all respects to the satisfaction of the Director erect, construct and provide on the lot the Transport Terminus at ground level in accordance with the specifications set out in the Technical Schedule annexed hereto.  The Grantee shall at his own expense and to the satisfaction of the Director maintain the Transport Terminus until the completion of the assignment of the Transport Terminus to The Financial Secretary Incorporated referred to in Special Condition No. (16) hereof.”

210.  Special Condition (19) relating to liquidated damages and Special Condition (63)(b) relating to approval or consent of the Government provide:

“(19)    In addition to any other payments which may be demanded by the Government and without prejudice to the Government’s rights under these Conditions, in the event of the Grantee failing to complete the Transport Terminus and make fit the same for occupation in accordance with these Conditions, the Grantee shall pay to the Government on demand as agreed by way of liquidated damages and not as a penalty the sum of $10,000.00 per day for the period from the day immediately after the expiration of the time limit stipulated in Special Condition No. (6)(b) hereof up to and including such date as specified in a letter from the Director indicating that the Transport Terminus has been completed and made fit for occupation and operation entirely to his satisfaction.  The decision of the Director as to whether the Transport Terminus has been completed and made fit for occupation shall be final and binding on the Grantee.”

And by para. (63)(b), whenever in the Conditions it is provided

“that the prior approval or consent in writing of the Government or its duly authorized officers is required, they may give the approval or consent on such terms and conditions as they see fit or refuse it at their absolute discretion.”

211.  For completeness I should add that Special Conditions (20) to (32) and the Technical Schedules, referred to by Mr Sumption QC in argument, relate to such matters as pedestrian access, construction of footbridges and walkways, podium roof, landscaping, air conditioning, refuse collection and the like. 

Interpretation Principles

212.  Against that background I return to consider the question posed in para. 204 above as to the interpretation of contract documents of this kind and specificity and, in particular, as to what, if any, room there is for implying any further terms into the contract between the parties. 

213.  The applicable principles of interpretation of contractual documents of this kind and specificity are essentially common ground.  The now classic statement is that of Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896, which was the linchpin of Judge Muttrie’s approach.  At pp 912-913 in the passage cited by the judge, Lord Hoffmann said: 

“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237 at 240-242, [1971] 1 WLR 1381 at 1384-1386 and Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570, [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:

‘... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’”

214.  In Bank of Credit and Commerce International SA v. Ali and others [2002] 1 AC 251 at p.269 para. 39 Lord Hoffmann added:

“The background is however very important.  I should in passing say that when, in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913, I said that the admissible background included ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’, I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant.  I was merely saying that there is no conceptual limit to what can be regarded as background.  It is not, for example, confined to the factual background but can include the state of the law (as in cases in which one takes into account that the parties are unlikely to have intended to agree to something unlawful or legally ineffective) or proved common assumptions which were in fact quite mistaken.  But the primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage: ‘we do not easily accept that people have made linguistic mistakes, particularly in formal documents’.  I was certainly not encouraging a trawl through ‘background’ which could not have made a reasonable person think that the parties must have departed from conventional usage.” 

See also Lord Bingham of Cornhill at p.259 para. 8 and Lord Clyde at pp 281-282 para. 78.

215.  However, given the way the argument developed in this Court, we do not need to go into the question of inadmissibility of previous negotiations of the parties and their declarations of subjective intent or of evidence of the subsequent conduct of the parties in that regard.  Indeed, it is clear from examination of the contract documents in this case that they were not even in part the product of any negotiation before or after the contract was created.  The Government set the terms of any grant that would issue and distanced itself from any tenderer.  Similar analysis would preclude allowing evidence of such subsequent conduct of the parties except when relating to the establishment of a collateral agreement.  Further, to allow evidence of the subsequent statements of the parties as to their intentions would seem inconsistent with Lord Hoffmann’s first principle in two respects: (1) The concern is as to the meaning that the contract document would convey to a reasonable person having all the background which would reasonably have been available to the parties – the subject of the inquiry is the objective third person, not the actual parties; (2) the inquiry is directed to the background knowledge reasonably available to the parties “in the situation in which they were at the time of the contract”. 

216.  It is apparent from the context in which Judge Muttrie referred to Lord Hoffmann’s statement of principles and the immediately following paragraphs in Judge Muttrie’s judgment that he considered the objective third person was required to determine what background knowledge would have been reasonably available to the parties at the time the plaintiffs entered into the commitments which became binding on them, which was 7 November 1991 (or at the latest 20 November 1992).  But it is unnecessary to go further into that point because it was common ground between counsel in this Court that the matter had to be judged at the time the contract was created. 

Pleadings and Issues

217.  Judge Muttrie noted that the plaintiffs’ case had changed somewhat since its inception.  The then current Re-Amended Statement of Claim pleads the implied terms contended for in this way:

“8. The following are implied terms of the Agreement which are implied by law and/or are necessary to give business efficacy to the same:-

(1) that the Government shall process the Plaintiffs’ applications for approval of MLPs and other building and planning applications without delay;

(2) that the Government shall not refuse or withhold approval of such applications save upon reasonable grounds;

(3) that the Government shall not directly or indirectly do any act or refrain from doing any act which would prevent or make it impracticable for the Plaintiffs from fulfilling or to fulfil their obligations under any condition or conditions of the Agreement;

(4) that Special Conditions 6(a) and (b) shall not be enforced and/or the time for completion of the development of the Lot and Transport Terminus shall be extended where the Government itself is responsible in whole or part for delaying the approval of the Plaintiffs’ MLPs and other building and planning applications;

(5) that if it became necessary for a maximum height to be imposed on the Lot then it was, at all times, the Government’s duty and/or obligation to determine the maximum permissible height in relation to the Lot and to inform the Plaintiffs of the same within a reasonable time or alternatively within such time as would enable the Plaintiffs to adhere to the time limits stipulated in the Agreement;

(6) that if the time taken by the Government to determine and inform the Plaintiffs of any such maximum permissible height of the Lot was too long and/or unreasonable, then the time limits as set out in the Agreement would not be applicable and time would be at large alternatively replaced and/or extended by such time as is/was attributable in whole or in part to the Government’s delay;

(7) that the Government would process the Plaintiffs’ applications for approval of MLPs, when submitted, within a reasonable time;

(8) that the Government was, at all times, under a duty or obligation to cooperate with the Plaintiffs so as to enable the Plaintiffs to comply with the terms of the Agreement, in particular, those terms relating to time.

9. Further or alternatively, it is an implied term of the Agreement which is implied by law and/or is necessary to give business efficacy to the same that if the non-completion of development of the Lot and Transport Terminus within the time or times specified under the Agreement was or is due to delay wholly or in part, directly or indirectly on the part of or attributable to the Government, then:-

(1) the Government shall extend the Building Covenant periods;

(2) the Government shall refrain from exercising or threatening to exercise its power of re-entry under General Condition 11;

(3) the Government shall not be entitled to demand or exact and the Plaintiffs shall not be liable to pay any charges premiums penalties or liquidated damages pursuant to the Agreement or otherwise by reason of such delay, or as the result of any extension of the Building Covenant periods rendered necessary by reason of such delay.” 

218.  The Re-Amended Statement of Claim goes on to record (para. 10) that:

“10. On 24 March 1994 the Plaintiffs publicly announced their intentions to construct on the Lot what would be, on completion, the tallest building in the world comprising a single office tower of 468 metres with an attached mast of 50 metres, the total height being 518 metres or 522 metres Principal Datum (“mPD”) to be named Nina Tower.”;

that on 19 May 1994 the plaintiffs submitted a MLP for a single office tower of 468 metres with a 50 metres mast and thereafter submitted a number of other MLPs for the development each of the same height of 468 metres plus mast (para. 12); that by letter of 10 June 1994 the District Land Office replied that the 19 May MLP exceeded the plot ratio specification and suggested that the MLP should be substantially changed so as to comply with the terms of the Agreement (Particular (1)); that on 13 and 17 January 1995 a revised MLP was submitted [in fact, there were two, - the 6th MLP of 13 January was superseded by the 7th of 17 January] for a building height of 468 metres and mast increased to 70 metres, a total height of the Tower of 538 metres (542 mPD) (Particular (3)); that on 21 February 1995 the District Land Office commented on the 7th MLP including the comment that the Director of Civil Aviation had advised that the imposition of a building height of 324 mPD might be required in order to protect the Instrument Landing System (“ILS”) and “safeguard the operations of the new airport” (Particular (4)) – the proposal to build a new airport had been publicly announced in October 1989 and it was planned and built and then opened on 6 July 1998; that by letter of 1 June 1995 the District Land Office advised in relation to the 6th and 7th MLPs that they were not considered acceptable under the lease conditions because the height of the building would have “adverse effects on the operation of the Chek Lap Kok Airport” (Particular (6) of para. 12); that (para. 13):

“13. Wrongfully and in breach of the implied terms pleaded in paragraphs 8 and 9 above, - the Government did not determine the maximum permissible height of Lot 353 within a reasonable time.  A height restriction of 324 mPD was imposed by Government on Lot 353 as particularised herein below.”;

that the imposition of that height restriction was advised by letter of 27 January 1995 as connected with Aviation Safety “in order to protect the Instrument Landing System and safeguard the operations of Chek Lap Kok Airport” (Particular (2)); and that (para. 14):

“14. By reason of the Government’s breach of duty to determine the maximum permissible height of Lot 353 within a reasonable time, the Plaintiffs aver that the time limits in the Agreement are no longer binding on the Plaintiffs and time is at large or alternatively the time limits have been replaced and/or extended by such time as is/was attributable in whole or in part to the Government’s delay.  Further, the Plaintiffs have suffered loss and damage, as a result of such breach.” 

219.  The remaining paragraphs which are self-explanatory read:

“15. Between the time when the said Mr Ongley first raised the possibility of a height restriction for Lot 353 on 6 January 1995 and the Government’s final decision to impose a height restriction of 324 mPD on Lot 353 on or about 9 April 1996, there were numerous meetings, telephone conversations between the Plaintiffs’ representatives and various Government officials during which the Plaintiffs were repeatedly told or encouraged to believe or given to understand that there were good prospects of permission being given by the Government to the Plaintiffs to construct Nina Tower at a height of 468 mPD which would have made it the tallest building in the world.

16. Additionally and alternatively, on 8 June 1995, the Government through Mr Bowen Leung SPEL orally agreed with the Plaintiffs’ representatives that in consideration of the Plaintiffs agreeing to wait for the Government’s final determination on the maximum permissible height for Nina Tower, which the Government could not then determine pending the results of certain tests and/or studies to be conducted, the Government would extend the Building Covenant periods at a nil premium (“the 8 June 1995 agreement”). 

17. The following are express and/or implied terms of the 8 June 1995 agreement:-

(1) the Government would extend the Building Covenant periods upon the final determination of the maximum permissible height of Nina Tower to cover the entire period that the Government took in coming to that final determination;

(2) alternatively, the Government would extend the Building Covenant periods by a reasonable time to cover the time that the Government took in coming to its final determination of the maximum permissible height of the Nina Tower;

(3) the extension of the Building Covenant periods would be a nil premium;

(4) the Government would not enforce and/or was no longer entitled to enforce the liquidated damages provision under Special Condition 19 for the period the Government took to make the final determination of the maximum permissible height of Nina Tower; and

(5) the Government would not seek to re-enter upon the Lot as a result of the Plaintiffs’ liability to complete the development and/or the Transport Terminus within the Building Covenant periods. 

18. Further and alternatively, between 11 August 1996 and about the middle of September 1996, the Government through Mr Bowen Leung SPEL orally agreed with the Plaintiffs’ representative Mr C Y Leung that in consideration of the Plaintiffs’ acceptance of the height restriction of 324 mPD on Nina Tower and their forbearance to take legal proceedings against the Government over its imposition of the said height restriction, the Government would extend the Building Covenant periods at a nil premium (“the Beijing Agreement”). 

19.       The following are express and/or implied terms of the Beijing Agreement:-

(1) the Government would extend the Building Covenant periods to cover the entire period of construction of the development except for the period or periods of delay attributable to the default of the Plaintiffs or their agents;

(2) the extension of the Building Covenant periods would be at a nil premium;

(3) the Government would not enforce and/or was no longer entitled to enforce the liquidated damages provision under Special Condition 19;

(4) the Government would not seek to re-enter upon the Lot as a result of the Plaintiffs’ inability to complete the development and/or the Transport Terminus within the Building Covenant periods.

20. Alternatively, the Plaintiffs were, as a result of Mr Bowen Leung’s representations, as particularised above, lulled into the belief that the Government would approve the extension of the Building Covenant periods at a nil premium to cover the completion of the whole development, except for any future delay attributable to the Plaintiffs, if the Plaintiffs were to change the focus of the Nina Tower development from one of height to that of quality. 

21. Wrongfully and in breach of the implied terms of the Agreement pleaded in paragraphs 8 to 9 above, and/or the 8 June 1995 agreement pleaded in paragraphs 16 and 17 above, and/or the Beijing agreement pleaded in paragraphs 18 and 19 above and/or the matters pleaded in paragraph 20 above, the Government has demanded under threat of re-entry, and the Plaintiffs have paid under protest, the following sums as liquidated damages and as premiums for the extension of the Building Covenant periods.  The Building Covenant extension premiums are based upon the principles contained in the Lands Department’s Information Note for Authorised Persons, Chartered Surveyors and Solicitors Issue No.1/1985 which was published within those professions and generally in about June 1985. 

22. Alternatively, the said course of conduct by the Government and/or the statements by the Government officials pleaded in paragraph 15 above and the said statements of Mr Bowen Leung SPEL pleaded in paragraphs 16 and 18 above constituted representations by and on behalf of the Government with the intention that they be acted upon by the Plaintiffs. 

23. In reliance on the said representations and induced thereby and not otherwise, the Plaintiffs acted to their detriment.

24. In the premises, the Government is now estopped from demanding liquidated damages and/or premiums from the Plaintiffs for failure to complete the Transport Terminus and the development of the Lot within the Building Covenant periods and from threatening to re-enter upon the Lot by reason of such alleged failure.

25. In spite of the matters pleaded in paragraphs 21 to 23 above and wrongfully, the Government has demanded the Plaintiffs to pay both liquidated damages and premiums for the Plaintiffs’ inability to complete the Transport Terminus and the development of the Lot within the Building Covenant periods under threat of re-entry; and the Plaintiffs had no option but to pay and did pay the same under protest.

26. In the premises, the Government is not entitled to the liquidated damages and/or the premiums wrongfully extracted from the Plaintiffs and is liable to repay the same to the Plaintiffs. 

27. Alternatively, the Plaintiffs are entitled to damages, represented by and equal to the liquidated damages and premiums extracted by the Government from the Plaintiffs who paid them under protest as particularized under paragraph 21 above. 

28. On or about 2 May 1997 the Government imposed a general height restriction on the Tsuen Wan district of Hong Kong pursuant to section 3(1)(b) of the Hong Kong Airport (Control of Obstructions) Ordinance Cap. 301 (“the said Ordinance”) affecting (inter alia) the Lot.

29. Further and alternatively, in breach of the implied terms pleaded in paragraphs 8(1), 8(2), 8(3), 8(4), 8(7) and 8(8) above, the Government was guilty of delay in processing the Plaintiffs’ applications for approval of MLPs. 

30. Further and in so far as necessary, the Plaintiffs aver that each of the large premiums extracted by the Government in such circumstances amounts to and is a penalty in law and is void and unenforceable. 

31. In the premises it was unconscionable and inequitable for the Government to demand and to extract by threat of re-entry the liquidated damages and/or the premiums paid for the building covenant extensions without legal entitlement thereto and it is unconscionable and inequitable for the Government to retain the moneys had and received thereby – which should be returned to the Plaintiffs with interest thereon.”

220.  I should note, first, that Judge Muttrie, for the reasons he gave, rejected the pleaded 8 June agreement (paras 16 and 17), the August-September Beijing Agreement (paras 18 and 19) and the lulling plea (para. 20); and, second, as also explicit in para. 15, that the plaintiffs pleaded numerous particulars of meetings and discussions supporting various paragraph pleadings.  It will be necessary to go into those points when considering the course of events before the High Court and before this Court.  Judge Muttrie carefully summarised the respective cases of the plaintiffs and the defendant and then set out in full the issues as formulated by the plaintiffs:

“1. What is the true construction of Special Condition 9(e) of the Agreement (‘the DDH Clause’) in its context and in particular does it reserve to the Director of Lands a power which is unlimited such that he is entitled to impose ‘any’ height as pleaded in para. 26(4) of the Amended Defence and as denied in the Amended Reply?  Or is it subject to all or any of the following limitations:- (i) that it cannot be invoked to take away in whole or part any substantive development rights granted to the purchaser of the Lot under the Agreement and/or (ii) that it cannot be invoked for purposes irrelevant to the vendors’ private law residual interests in the Lot (i.e. the reversion) and/or (iii) if the Director of Lands seeks to introduce any new development limitation subsequent to the sale & purchase he must unequivocally invoke the Clause as well as identify precisely the new limitation sought to be introduced.

2. Does the Agreement include all or any of the implied terms pleaded by the Plaintiffs in paras. 8 and 9 of the Amended Statement of Claim/Re-amended Statement of Claim (‘the SOC’) and denied by the Defendant in para. 12 of the Amended Defence?

3. In particular, whether as a matter of law it is an implied term of the Agreement that the Hong Kong Government should not refuse or withhold the Plaintiffs’ applications for approval of MLPs and other building and plans save on reasonable grounds?

4. If so, whether the Hong Kong Government in deciding whether or not to approve the Plaintiffs’ application for construction of Nina Tower on the Lot was entitled to have regard to height restriction which would be imposed by legislation under Section 3(1AA) of the Hong Kong Airport (Control of Obstruction) Ordinance, Cap.301?

5. In any event was the Government entitled to use the DDH Clause in the circumstances of the case to determine a maximum height limit for the Lot prior to the completion of scheduled computerized modelling studies by the Civil Aviation Department referred to in paragraph 25 of the Amended Defence and which the Government, to the knowledge of the Plaintiffs, accepted as being necessary before it could arrive at any firm conclusion as to the maximum permitted height?

6. If yes, did the Government in fact invoke the DDH Clause in such manner and circumstances as would impose on the Lot a definitive height restriction that was binding on the Lot or on the Plaintiffs and if so when?

7. If all or any of the implied terms pleaded in paras. 8 and 9 of the SOC were or was part of the Agreement, was any of them breached by the Government and in particular was the Government in breach of implied obligation, where the corresponding power existed, to determine within a reasonable time the maximum permissible height?

8. If all or any of the implied terms pleaded in paras. 8 and 9 of the SOC were or was part of the Agreement, did the breach of those terms or any of them render the times set in the building covenants of the Special Conditions of the Agreement ‘at large’ or otherwise subject to the principle of reasonable time or did the time lost due to the Government’s delay add on to the building covenant periods?  In the first case what was a reasonable time and in the latter how many months should be added to the original time limits?

9. In any event, was the time actually taken by the Government in completing the necessary computerized modelling studies and/or in reaching a firm conclusion as to the maximum permitted height for the Lot result in state of affairs in which time ceased to be of the essence such that the time limits set in the building covenants were removed and substituted by the principle of reasonable time?  Further, having regard to the delay or time taken, what was a reasonable time?

10. Did Mr Bowen Leung, the SPEL, agree or represent to Mr C.Y. Leung and other agents of the Plaintiffs on or about the 8 June 1995 and was any understanding reached (i) that the Government would extend the building covenant period (ii) that such extension would be without premium and (iii) that such extension would cover the entire period that the Government took in coming to the final determination of the maximum permissible height?  Further was there consideration moving from the Plaintiffs for the said agreement?

11. If the Court finds that there was an agreement (whether or not supported by consideration) or a representation to the effect that the building covenant period would be extended pending resolution of the height issue, would time be ‘at large’ and would the Plaintiffs consequentially be relieved from the original stipulated time limits and be entitled to reasonable time without payment of premium regardless of whether there was any expressed agreement not to exact any premium or liquidated damages?

12. In the events which happened, and having regard in particular to the requirement insisted upon by the Government that the MLPs must first be approved before any works apart from site formation works could start (including works on the Transport Terminal), would any agreement expressed or implied to extend the building covenant period in relation to the development also result in an extension of the period for completion of the Transport Terminal?  Would such extension be without payment of liquidated damages?

13. In the events which happened, and having regard in particular to the contents of the letter dated 29 June 1995 from C.Y. Leung & Co. to Mr Bowen Leung (SPEL) referring to the meeting of 8 June 1995 and stating that an understanding was reached ‘that the building covenant period would be extended pending resolution of the height issue’ and the fact that there was no denial from the Government until a letter purporting to ‘clarify’ the matter five months later, is the Government estopped from denying that there was such an agreement and/or were the original time limits expressly or implicitly waived?  Did the Plaintiffs act to their detriment and in the belief that there was an understanding reached that the building covenant would be extended?

14. Was there an encounter between Mr C.Y. Leung and Mr Bowen Leung on or about 11 August 1996 in Beijing as alleged by the Plaintiffs or at all and if so was there any agreement reached?

15. In any event, were the Plaintiffs relieved from having to pay liquidated damages or premiums in respect of such period or periods as would cover the time taken by the Government to come to a firm determination of the maximum permissible height and/or in respect of delays for which the Government was responsible (i) by reason of the Government’s breach of any or more or all of the implied terms as referred to in Questions 7 & 8 above (ii) by reason of the state of affairs referred to in Question 9 above or (iii) by reason of estoppel or waiver referred to Question 13 above and/or Question 17 below?

16. Was the alleged agreement of the 8 June 1995 or the alleged agreement in August-mid September 1996 unenforceable for lack of writing or was there a sufficient act or acts of part performance? (NB: The plaintiffs no longer pursue this point)

17. In the events which have happened was the Government estopped or otherwise disentitled from demanding liquidated damages and/or premium from the Plaintiffs for failure to complete the development or parts thereof in accordance with the original time-limits and from threatening to re-enter upon the Lot by reason of such alleged failure?

18. Were the Plaintiffs entitled in principle in the events which had happened to an inquiry as to damages pleaded in paragraph 14 and/or alternatively under paragraph 27 of the SOC Claim (such inquiry to be stood however for damages to be assessed)?

19. Having regard to the answers to the questions above and below, was the Government in the events which happened acting wrongfully or otherwise unconscionably in exacting by threat or threats re-entry liquidated damages and/or premiums from the Plaintiffs as if the original time-limits were still applicable and as if time were not at large?

20. In particular, were the liquidated damages or premiums or any part or parts thereof which were exacted by the Government by threat or threats of re-entry and paid by the Plaintiffs under protests in the nature of a penalty? (NB: The plaintiffs no longer pursue the point that the liquidated damages were a penalty)

21. If the answer to Question 19 and/or Question 20 is yes (either in relation to liquidated damages or in relation to premiums), were the monies thus exacted from and paid under protests by the Plaintiffs or any part or parts thereof held by the Government as money had and received and recoverable by the Plaintiffs?

22. If recoverable only in part, how would the amounts be computed?  In particular would the recoverable proportion of premiums be computed by reference to the published rates contained in the Lands Department’s Information Note Issue No.1/1985 by reference to which the Government had actually purported to fix the amounts payable?

23. Independently of any of the above questions, whether the Government unduly delayed in considering and/or approving or otherwise acted in breach of duty in the processing of those MLP’s (showing height not in excess of 324 mPD) subsequent to MLP 9 as pleaded in paragraph 29 of SOC? (NB: Consideration of this issue is deferred by agreement, as noted above)

24. Having regard to the answers to the above Questions, what declaratory or other relief if any ought to be granted to the Plaintiffs?”

Judge Muttrie’s Findings and Conclusions

221.  The trial extended over 24 days and the judge necessarily reviewed the facts including the evidence relating to the alleged agreement of June 1995 and the alleged Beijing agreement of August-September 1996 at some length.  For the reasons he gave he was not satisfied that any agreement was made at the meeting in June 1995 or in Beijing in 1996.  Accordingly he concluded that there was no agreement, representation, or understanding as contended for in respect of Issues 10, 11 and 14 and therefore no question of time being at large as a result.  He went on to reject the claimed estoppel or waiver raised in Issue 13, on the ground that a clear and unequivocal representation had not been established. 

222.  Judge Muttrie then turned to the question of the interpretation of the agreement and whether it included all or any of the implied terms pleaded.  He adopted the statement of principles of interpretation set out by Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896.  In the course of the ensuing discussion Judge Muttrie said:

“103. Turning to the plaintiffs’ Issues Nos.1 and 3-5 which are all concerned with interpretation of the Agreement rather than with the implication of terms, it seems to me that the Government had the power under the Special Condition 5(a) generally to disapprove MLPs and under the DDH it had the power to disapprove them on the grounds of design, disposition and height. In Hang Wah Chong Investment Co. Ltd v. Attorney General [1981] 1 WLR 1141 it was held in the Privy Council that the Director of Lands’ refusal or withholding of approval under such a clause as is contained in Special Condition 9(e) need not be upon reasonable grounds.  Yam J followed that in an interlocutory hearing in this case and the Court of Appeal upheld him.  This would seem to favour an unlimited power.  For my own part I think it would be contrary to business common sense to say that the Director has a power which could be invoked to take away substantive development rights because no one would want to enter into a contract if his substantive rights under it might be subject to arbitrary reduction; but it is not necessary to decide that point, because on my finding no substantive development rights were taken away.”  

In the previous para. 102 the judge had concluded:

“They never had any unlimited right as to height.  Their right to build to an agreed maximum floor area and plot ratio has never been curtailed because they could always have obtained that within the 324mPD limit, or much less.”

“104. I consider that the DDH Clause can be invoked for purposes relevant both to the Government’s interests as Government and as head landlord …  It seems to me that to say that the Government could not have regard to height restriction which would later be imposed by statute is quite unrealistic.  Indeed in general the argument that the Government in its dealings as landlord could only deal as landlord and disregard its other duties and functions seem to me unrealistic.  It is one of those arguments which while it has a certain attraction as a proposition of law seems to fly in the face of reality.  In this connection it is also worth noting what Briggs CJ said in Crozet Ltd & Ors v. Attorney General [1973-76] HKC 97 at 101 :

‘But Mr Jackson-Lipkin ... asked the rhetorical question ‘Is a covenant in a lease between the Crown and a subject to be treated as an instrument to enforce Government policy?’  I must confess that I do not see why not, providing that the Government policy is within the law.’

105. I also do not accept that the Director must unequivocally invoke the DDH Clause as well as identify precisely the new limitation sought to be introduced.  There is nothing in the Agreement to that effect.  The clause does not give the Director the power to determine an airport height restriction and it does not impose on him any duty to determine a maximum permissible height.  What it does is to allow him to reject an MLP on the ground of height.  He may not need to give reasons for rejection but prudence would dictate that he should at least indicate a height which would not produce a rejection.  In fact SPEL’s letter of 27 January and the DLO/TW’s of 21 February 1995 did that. ”

223.  In short, the judge concluded that the Government had the power under Special Condition (5)(a) generally to disapprove MLPs and under Special Condition (9)(e) (the DDH Clause) it had the power to disapprove them on the grounds of design, disposition and height; that the DDH Clause could be invoked for purposes relevant both to the Government’s interests as Government and as head landlord; that the Director was not required unequivocally to invoke the DDH Clause and as well identify precisely the new limitation sought to be introduced, there being nothing in the agreement to that effect; and then added that the Government was entitled to use the DDH Clause to determine a maximum height before the completion of computer modelling tests.

224.  Mr Chang SC for the plaintiffs had at trial compressed the implied terms pleaded into two terms namely:

“1) that the grantor shall not derogate from the building covenant periods by preventing or hindering the grantee’s compliance with the time limits whether by unreasonable usurpation of time or otherwise; and

2) that if the grantor does so, the time limits are set at large or replaced by an extended time limit incorporating the period lost to the grantee.”

Mr Tang SC for the defendant had submitted

“….. the only term which could be implied would be that the building covenant period would be extended if there was culpable conduct or undue delay on the part of the Government resulting in the plaintiffs’ not being able to complete building within that period.”

The judge observed that the two positions were not far apart and that either way it seemed that fault on the part of the grantor would be required.  Following his discussion of various authorities on the implication of terms he concluded that the business of the court is not to re-write the contract and implication is a matter of strict necessity in the context of the facts which here involved an MLP to build an extraordinary building after the building covenant period had run a good fraction of its course.  Answering the hypothetical question, should there not be some term to regulate how long the grantor takes to consider the MLP so that building work can start, he concluded that the Government recognized the principle that, if delay was caused by the grantor’s fault, the period must be extended and had here allowed four months extension. 

225.  The judge’s ultimate:

“finding on the issue of implied terms is that the only term which could be implied is that the building covenant period would be extended if there was culpable conduct or undue delay on the part of the Government resulting in the plaintiffs’ not being able to complete building within that period.” 

There was, the judge found, no breach by the Government of the only term which could be implied into the agreement.  Those findings disposed of Issues 7, 8, 9, 12, 15, 17 and 18, the judge observing in relation to Issue 18 that, if there was no breach on the part of Government, there was no entitlement as to damages. 

226.  The penalties claim was that the sums were paid under protest and the plaintiffs were entitled to repayment of them as money had and received or by way of the equitable remedy of restitution even if the Government was not in breach of any implied terms and the delay came about solely through the fault of the plaintiffs themselves.  On the authority of Hang Wah Chong Investment Co Ltd v. AG [1981] 1 HKLR 336 and Lok On Co Ltd v. Attorney General [1986] HKLR 857, the judge concluded :

“the Government, once it was entitled to re-enter, could as an act of grace forbear to do so in consideration of a premium which it could impose as it thought fit, and whether the premium was reasonable or not; and that is what it did.”

227.  Finally, the judge concluded that in the light of those findings the question of economic duress (economic coercion in the form of illegitimate pressure calculated to force the plaintiffs either to pay the large premium unlawfully demanded or to lose to the Government their investment in Lot 353) did not arise and nor did unjust enrichment.

The Court of Appeal Judgment

228.  Having heard counsel for the appellants the Court did not find it necessary to hear argument from the respondent Government save for clarification as to the terms of the concession which had been made in the Court below.  Nevertheless the court appropriately delivered a careful reasoned decision canvassing each of the issue raised and in the result upholding the findings of fact and conclusion of law of the trial judge and for those reasons dismissed the appeal.  There being no new arguments raised in the Court of Appeal and no relevant differences of substance between the reasoning in the two judgments, it is not necessary to traverse the Court of Appeal judgment any further. 

The Argument in this Court

229.  The case of the appellants as first filed submitted that there were at least six sets of questions to be decided in the appeal:

“4.1.1   Whether, on the true construction of the Agreement and the Conditions of Grant and as a matter of law, the DL’s power to ‘approve’ height under the DDH Clause carries with it a corresponding duty for the purposes of the building covenant to determine qua Government Land Agent the maximum permissible height or at least a permissible height of the building to be erected and to convey such determination to the Grantee without undue delay for the purposes of the building covenant.

4.1.2    If the answer to §4.1.1 above is in the affirmative, whether the DL was in breach of that duty and the consequences of such breach.  In particular whether one such consequence was that the time for compliance with the building covenant was ‘at large’, replaced by reasonable time or alternatively by such time as was lost as a result of the DL’s breach of duty. 

4.1.3    Whether, on the facts as found by the trial judge and/or by the Court of Appeal and/or alternatively on the evidence before the Court, the DL was in breach of his duty (the existence of which is not in dispute) to process the relevant MLP’s submitted by the Appellants within a reasonable time and the consequences of such breach.  In particular whether one such consequence was that the time for compliance with the building covenant was ‘at large’, replaced by reasonable time or alternatively by such time as was lost as a result of the breach.

4.1.4    Whether, in the events which happened, the Government had lulled the Appellants into believing that time for completion of the development (including the Transport Terminus) would be extended pending the completion of the scheduled computerised studies and final determination of the height limitation such that it would be unconscionable for the Government to insist on the original time stipulations or to exact a penalty or premium.  In particular, whether, as a matter of law or of mixed law and fact, time would nevertheless be rendered at large notwithstanding the absence of express reference to or agreement concerning the question of penalty or premium. 

4.1.5    Whether the liquidated damages and/or the building covenant extension premia paid by the Appellants were extracted by the Government under economic duress or were otherwise unsupported by any lawful or valid consideration or were penal in nature or were otherwise unconscionable in the circumstances of the case.  If the answer is in the affirmative to any or all these questions, what the consequences thereof and the appropriate restitutionary remedies would be. 

4.1.6    Whether, without prejudice to other consequences of any breach of implied terms or to the Appellant’s case that this was not the only implied term, the implied term as found by the trial judge and upheld by the Court of Appeal should be more accurately formulated as: ‘The building covenant period would be extended free of penalty or premium to reflect the time lost if there was culpable conduct or undue delay on the part of the Government’ whether in the processing of MLP’s submitted by the Grantee or (if held by the Court) in determining the maximum or a permissible height for the building to be erected on the Lot for the purposes of the building covenant and the DDH Clause or otherwise. 

(NB: The correct formulation of implied terms is relevant also to Part II of the trial, i.e. the separate trial referred to above).” 

The reference in the last line of that citation is to an earlier para. 1.2 which read:

“At the request of and with the consent of both parties, the learned Judge tried the issues of liability in respect of the Appellants’ claims save for those which arose out of §29 of the Re-Amended Statement of Claim which, together with all issues of quantum, were stood over for separate trial.”

230.  The supplemental case for the appellants dealt with three questions:

“(1) Was the Government entitled to use its powers under the Special Conditions in the Grant for the purpose of introducing a height limit related to the safety requirements of the new airport?

(2) What was the legal effect of any delay for which the Government was responsible (whether ‘culpably’ or not) on the operation of the time limits for development in the Special Conditions and on the associated provisions for liquidated damages?

(3) If the Government was responsible for the time limits being missed, can they rely on Appellants’ conduct in paying liquidated damages under protest, and in agreeing under protest to take an extension at a premium?”

A second bundle of “Will Refer” materials with some 19 cases and other authorities was also provided.

231.  The “Five Questions” posed by Mr Sumption QC and developed in argument at the hearing read:

“1. Was the Government entitled to withhold approval for an MLP complying with all the Special Conditions of the grant, on the ground that the height of the proposed building exceeded the minimum height which the Government expected to fix under the Ordinance?

2. What obligations did the Government owe as to the processing of MLPs?  In particular, did they (as the Appellant contend) owe obligations (i) not unnecessarily to act in a way which deprived the grantee of part of the time allowed by the Special Conditions for completing the works; and/or (ii) in the event that they were entitled to and did reject an MLP on account of an aspect of the design, disposition or height not regulated by the Special Conditions, to inform the grantee precisely what criteria it was applying?

3. Was the Government responsible for any substantial (as opposed to de minimis) part of the delay occurring up to April 1996, (i) by purporting to reject MLPs on account of a prospective height limit under the Ordinance; and/or (ii) by taking longer than was necessary to decide what to do about the absence of any statutory controls over height or of any definitive maximum height; and/or (iii) by taking longer than was necessary to reject an MLP which was too high?

4. If some part of the delay occurring up to April 1996 was the responsibility of the Government, what is the legal effect of that state of affairs on its right (i) to demand liquidated damages for the delay, and/or (ii) to re-enter on the expiry of the contractual period for carrying out the works; and/or (iii) to demand waiver premia for not re-entering. 

5. If the Government was not entitled to act as in paras. 4(i), (ii) or (iii) above, is it nevertheless entitled to retain the liquidated damages and waiver premia paid to it under the threat of re-entry?”

232.  In turn, Mr Neoh SC, who also had not appeared in the courts below, filed a supplemental case and in argument presented and developed his “Propositions of Law of the Respondent” which read:

“1. SC 9(e) read in conjunction with SC 63(b) expressly confers on the Director of Lands (‘DL’) an absolute discretion to approve or withhold approval of the ‘design disposition and height’ of a building to be erected on the Lot.  This discretion may only be limited by an implied term which is necessary to give business efficacy to the Conditions of Grant.  It is not necessary to imply a limitation in SC 9(e) which disallows the DL from withholding approval of the ‘design disposition and height’ of a building to be erected on account of aviation safety or because it is a height restriction which the Government expected to fix under the Airport (Control of Obstruction) Ordinance.

2. In considering MLP’s submitted under SC 5, the only duty of the DL which may be implied into the Conditions of Grant, is the duty not to act in such a culpable manner or with such undue delay as to cause the grantee to fail to complete the transport terminus or a building or buildings within the respective times stated in SC 6.

3. Where it is determined that the DL had by culpable conduct or undue delay caused the grantee to fail to complete the transport terminus or a building or buildings within the respective times stated in SC 6, then the said times shall be extended by the amount of lost time that such culpable conduct or undue delay on the part of the DL had caused.

4. Upon the expiry of the time extended under point 3 above, liquidated damages under SC 19 will be chargeable under SC 19 and a right of re-entry will accrue under GC 11.

5. An agreement entered into between the DL and the grantee to extend time under SC 6 after a dispute has arisen as to performance of SC 6 and as to which the time extended by the agreement has been fully enjoyed by the grantee, should not be set aside.”

233.  Mr Neoh SC on behalf of the Government raised no objection to the scope of the issues being developed in this way.  Both sides very sensibly take the view that all issues should be finally resolved.  Where they differ is in determining what, if any, questions should be seen as involving concurrent findings of fact.  On certain matters Mr Neoh SC relies on the general principle expressed in Flywin Co. Ltd v. Strong & Associates Ltd (2002) 5 HKCFAR 356 at para. 38:

“Where a point is taken at the trial, the facts pertaining to it are open to full investigation at the evidence-taking stage of the litigation.  That is as it should be.  Therefore where a party has omitted to take a point at the trial and then seeks to raise that point on appeal, the position is as follows.  He will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial.” 

234.  For his part Mr Sumption QC submits that those matters should be characterised as involving primary facts found by Judge Muttrie, which were not disputed, and also inferences from primary facts drawn by the judge, which could be and were challenged.  He relies on the principles in the Edwards (Inspector of Taxes) v. Bairstow [1956] AC 14 line of cases, which are not confined to tax cases but are of general application in appellate courts.  Lord Radcliffe said (at p.36):

“I do not think that it much matters whether this state of affairs is described as one in which there is no evidence to support the determination or as one in which the evidence is inconsistent with and contradictory of the determination, or as one in which the true and only reasonable conclusion contradicts the determination.  Rightly understood, each phrase propounds the same test.  For my part, I prefer the last of the three, since I think that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves, and only to take their colour from the combination of circumstances in which they are found to occur.” 

Expressing a similar preference Viscount Simonds (p.29) spoke of supporting the determination “if it can reasonably be supported”; Lord Somervell of Harrow (p.39) concurred in Lord Radcliffe’s opinion; and Lord Tucker (p.39) agreed that the appeal be allowed, for the reasons stated by Viscount Simonds and Lord Radcliffe. 

The Development by Counsel of their Arguments

235.  The first of the five questions posed by Mr Sumption QC is whether or not the Government was entitled to withhold approval for an MLP complying with all the Special Conditions of the Grant, on the ground that the height of the proposed building exceeded the minimum height which the Government expected to fix under the Ordinance.  The underlying assumption developed in argument is that, although an MLP proposal otherwise complies with all Special Conditions of the Grant, the Government is not entitled to withhold approval if the height of the proposed building exceeds the minimum height which the Government expected to fix under the Ordinance.  That same assumption is at the heart of the three questions in the supplemental case: (1) Whether or not the Government was entitled to use its powers under the Special Conditions for the purpose of introducing a height limit related to the safety conditions of the new airport; (2) If the Government was responsible for delay on the operation of the time limits for development in the Special Conditions, and whether or not culpably so, what is the legal effect if any such delay on the part of the Government?; (3) If the Government was responsible in terms of (2) for the time limits being missed, can the Government rely on Chinachem’s conduct in paying liquidated damages under protest and in agreeing under protest to take an extension.  As well, the second and third of the five questions reflect Mr Sumption QC’s development of his argument supporting the assumption underlying the first of the five questions and the fourth and fifth of those questions link back to the second and third questions in the supplemental case. 

236.  As I see the issue, it is a matter of applying orthodox principles of construction to determine the ambit of the Government’s powers under Special Conditions (5) and (9) in approving MLP’s for the development of the Lot and, subsequently, in approving the design, development and height of any building to be erected on the Lot.  The question, then, is whether the Government is contending for a wider power on the true construction which those Special Conditions bear; and, if so, what is the extent of their ambit and the effect of the inherent constraints, which will then govern the answer to be given to the question whether the Government by its conduct derogated from its grant under the Special Conditions.  On that approach, the focus is on the conventional interpretation and application in context of well-established principles relating to the implication of terms as to co-operation between the parties and prevention of performance in the operation of a contract of this kind and specificity.  Mr Sumption QC developed an ingenious and elaborate argument and I trust I will not fail to do it justice in summarising his submissions as follows. 

237.  The Government’s right to refuse approval under the DDH Clause (Special Condition (9)(e)) is only exercisable for ensuring that proposals comply with the contract.  It cannot have been intended to give a wholly unfettered discretion, (notwithstanding Special Condition (63)(b) which is implicitly subject to the limits on the discretion), because

(i) it is in wholly general terms making it likely it was intended to be subject to limitations;

(ii) Chinachem paid full market value and would take into account limitations disclosed;

(iii) if the DDH Clause gave a truly unlimited discretion that would lead to the absurdity of Government being entitled to cut down on rights conferred by other provisions and even require fresh premium to be paid;

(iv) therefore, the DDH Clause must be limited either: (a) by construing it as a procedural provision to enable Government to monitor and enforce the other provisions; or (b) on objectively reasonable grounds;

(v) because there are no criteria for determining on objectively reasonable grounds the procedural characterisation is to be preferred;

(vi) as well, that preference is dictated by the language and structure of the MLP: (a) Special Condition (5)(b) obliges a developer to build in accordance with the MLP after approval unless amended by consent; (b) Special Condition (5)(a)(i) requires the MLP to be “in accordance with these Conditions”; and (c) all items listed in Special Condition (5)(a)(i) are the subject of specific regulation in some other provision of the Conditions of Grant, making it clear that Special Condition (5)(a)(i) was intended to be comprehensive in listing the positive requirements and restrictions binding on the developer and Special Condition (5)(a)(i)’s reference to height is a reference to Special Condition (9)(b) which regulates height in tandem with site coverage and plot ratio;

(vii) the real purpose of the DDH Clause is to reiterate the need for compliance with the terms of the Conditions of Grant in the context of the overriding status accorded to Special Condition (9)(b); and

(viii) the Special Conditions confer rights on the developer and should not be viewed narrowly, as simply imposing duties on each party: (a) Conditions of Grant limit time for building and it must follow that Government cannot process an MLP in such a way as to deprive a developer of a substantial part of the time allowed under the building covenant; (b) where a contract depends on the parties co-operation, the implication is that such co-operation will be forthcoming; and (c) there are two aspects to this implied duty: Government must deal with plans and give or refusal approval with reasonable dispatch and, if the Government is entitled to reject the MLP on grounds outside the contract itself, it must inform the developer of the respects in which the MLP fails, so as to enable the developer to put up a compliant MLP.

238.  Turning then to the timetable of events, Mr Sumption QC divided his chronology into four phases with different consequences attaching to each phase: Phase 1 running from December 1992 to May 1994; Phase 2 from 19 May 1994 to June 1995; Phase 3 from June 1995 to April 1996; and Phase 4 from April 1996 onwards: and

(i) His starting date for Phase 1 was when Chinachem entered into possession and the end date was when Chinachem first submitted an MLP for a very tall building.  During that period three MLPs were submitted relating to purely residential developments and, he said, Chinachem had not suggested that the Government was responsible for any part of the delay in that period;

(ii) Mr Sumption QC’s second phase started with the submission of MLP 4 on 19 May 1994 ending in June 1995 when an MLP was rejected because the proposed building was too high on aviation safety grounds.  He submitted that the rejection by the District Lands Office of MLP 4 on 10 June 1994 for the stated reason that the gross floor area proposed was excessive failed to inform Chinachem that the MLP would have been unacceptable in any event because of the new airport.  It must be obvious, he said, that if the Government has a policy of rejecting buildings which exceed a maximum height relating to airport operations and knows what that maximum height is, it is not going to take more than a few moments inspection of the elevation plans submitted for the examining surveyor to see whether the building in question exceeds it and pointed to some answers by Government witnesses in cross-examination to its ordinarily taking twelve weeks to decide that an MLP is compliant but it should not take more than two to three weeks to decide whether an MLP submitted for a building with a specified height limit breached a clear height limit specified in the lease.  If, he continued, height became the only fundamental issue and it was going to take longer than two to three weeks to reject an MLP on height grounds, that must, on the face of it, be for one or more of three reasons.  It may take longer than it should to get to the relevant Government office or reach the top of the examining surveyor’s in-tray than may be a purely bureaucratic delay or, secondly, it may be that the Lands Office does not yet have a policy about airport-related height restrictions or, thirdly, it may be that it does have a policy but it has not yet decided what the maximum height ought to be, and all three of those possibilities can fairly be regarded as internal problems of the Government and delay resulting from them as Government responsibilities.  Mr Sumption QC accepted that in January 1995 Chinachem was told of the existence of a particular problem with the Chinachem proposal but said it was not until early June 1995 that MLP 7 was rejected and for the first five months of Phase 2, that is from May to October 1994 there were two concurrent causes of delay: (a) Chinachem’s attempts to obtain additional plot ratio to enable MLP 4 to be accepted; (b) nobody in Government appreciated there might be a problem about airport safety because of the absence of joined-up communication between the departments; and from the next nine months to June 1995 there was a plan on the table with a compliant plot ratio and the sole major issue was airport height considerations, which were entirely due to four causes: (a) the Government’s failure to appreciate the potential problem and either gazette an order under the Ordinance or give a public warning; (b) the ignorance of the District Lands Office until December 1994 of the possibility that Chinachem’s Lot about 20 km from the proposed airport might be affected by its operations; (c) an internal debate within Government when they realised at the end of 1994 that 324 metres was really the appropriate height limit; and (d) a further debate within Government about how they could legally stop buildings exceeding the appropriate limit without having gazetted an order under the Ordinance; and that delay, wholly attributable to the Government’s internal muddle and followed by the June decision to reject an MLP on safety grounds, was not a permissible ground of refusal under the terms of this grant;

(iii) Phase 3 from June 1995 to April 1996 ended in April 1996 when Chinachem was told that 324 mPD was the maximum height and only after computer modelling had been completed and while no MLPs were on the table because Chinachem honestly believed, but erroneously as Judge Muttrie found, that there was an agreement with the Government (Mr Bowen Leung) to await the outcome of computer testing and with a building covenant extension agreed; and there was avoidable delay on the Government’s part stemming from its uncertainty about what the height restriction should be and in consequence ten months was lost because of that uncertainty and Government’s internally divided views; and

(iv) Phase 4 of the delay from April 1996 onwards was not considered by the High Court because of hived off issues on delays during that period reserved for a trial on para. 29 issues still to take place; and it was not now open for the Government to contend that Chinachem would have missed the deadlines for completing the transport terminus and the whole building development in that: (a) the time needed to build the minimum contractual gross floor area required by the Special Conditions was five weeks less than two years; (b) that determining the construction time necessary for completion was much more complicated than under the process suggested by Government; and (c) that contention was based on the assumption that completion of construction would have required an extension of time and the Court of Final Appeal should direct an inquiry by the High Court on the issue along with other para. 29 issues.

239.  As Mr Neoh SC’s propositions of law (para. 232 above) foreshadow, he submitted that the Flywin principle applying in relation to two sets of issues barred on evidential grounds raising the issues on this appeal.  The first related to the construction of (b) and (e) under which the Government does not claim that its approval powers are unconstrained.  Its implicit obligation is not to derogate from its grant to Chinachem and these conditions were at least in part substantive, not procedural.  The second was that the absence of any finding of fact relevant to the determination of Phase 4 issues at the further para. 29 inquiry was due to Chinachem’s failure to raise any such cross-over factual matters at the hearing before Judge Muttrie. 

Discussion: Mr Sumption QC’s Primary Arguments

240.  For reasons which I can state relatively shortly, I have concluded that Mr Sumption QC’s primary arguments must fail.  First, the arguments must be considered in light of the context against which the implication of terms relating to co-operation and prevention of performance is to be assessed (para. 236 above) and in light of other aspects of the case in respect of which there was common ground between counsel.  The classic statement of principles by Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society, which was the linchpin of Judge Muttrie’s approach, requires that the context be judged at the time the contract was created and it is the meaning which the contract document would convey at that time to the objectively reasonable person having all the background knowledge which would reasonably be available to the parties, and so excluding evidence of the subjective statements of the parties as to their intentions, which is assessed (see paras 213 to 215 above).  The only exceptional situation where evidence of subjective statements of the respective parties as to their intentions or views may become part of that context is where one is seeking to establish a collateral agreement.  However, Judge Muttrie found, and his findings were upheld by the Court of Appeal, that the plaintiffs had failed to establish the pleaded 8 June Agreement, the pleaded August-September Beijing Agreement and the “lulling” plea (see para. 220 above), and Mr Sumption QC accepted the concurrent findings in respect of those pleaded agreements and did not pursue any argument based on the lulling plea.  Further, as noted in para. 215 above following an extended review of the basic contract documents, it is clear from examination of those documents that they were not even in part the product of any negotiation between the Government and Chinachem before or after the contract was created.  The Government set the terms of any grant it issued and distanced itself from any grantee.  In my view the crucial question to be answered when considering Mr Sumption QC’s submissions is what room, if any, is there for implying the proposed further term into a grant of this kind and specificity. 

241.  Second, I do not read Equitable Life Assurance Society v. Hyman [2002] 1 AC 408, on which Mr Sumption QC placed considerable reliance as a modern statement of the principled approach required in this case, as supporting his submissions.  After citing Lord Hofmann’s statement in Banque Bruxelles Lambert SA v. Eagle Star Insurance Co. Ltd [1997] AC 191, 212 that the process “is one of construction of the agreement as a whole in its commercial setting”, Lord Steyn continued:

“This principle is sparingly and cautiously used and may never be employed to imply a term in conflict with the express terms of the text.  The legal test for the implication of such a term is a standard of strict necessity.  This is how I must approach the question whether a term is to be implied into article 65(1) which precludes the directors from adopting a principle which has the effect of overriding or undermining the GARs (that is, guaranteed annuity rates).”

On that inquiry he reasoned that final bonuses were a significant part of the consideration for bonuses paid and the self-evident commercial object of guaranteed rates in GAR policies was to protect the policy holder against a fall in market annuity rates by ensuring that if the fall occurs he will be better off than he would have been with market rates and the supposition of the parties must be presumed to have been that the directors would not exercise their discretion in conflict with contractual rights.  An implication precluding the use of the directors’ discretion to deprive the relevant guarantees of any substantial value was strictly necessary and essential to give effect to the reasonable expectations of the parties, which I read as referring to those presumed expectations at the times all policy holders opted for GAR policies, not at all on subjective statements by particular policy holders as to their intentions.  And I read Lord Cooke’s focus on not exercising discretion for purposes contrary to those of the instrument by which it is conferred as directed to the obverse question, has there been a derogation from the grant to all the GAR policy holders to be determined by reasonable readers in the shoes of the policy holders? 

242.  If the inquiry is approached in the way I favour, then the twin limitations governing any terms to be implied in this case are that the principle is sparingly and cautiously used and never to be employed in conflict with the express terms of the text of the contract and that the legal test for the implication of such a term is a standard of strict necessity; and applying those yardsticks much of the superstructure of Mr Sumption QC’s submissions falls away. 

243.  I return to the summary of Mr Sumption QC’s submissions in paras 237 and 238.  Mr Sumption QC submitted (para. 237) that the DDH Clause cannot have been intended to give a wholly unfettered discretion, for the reasons given in his sub-paras (i) to (iii), and it must be limited (sub-para. (iv)) either (a) by construing it as a procedural provision to enable Government to monitor and enforce the other provisions; or (b) on objectively reasonable grounds; and he preferred (a) for two reasons (para. 237(v) and (vi)): because there are no criteria for determining what are objectively reasonable grounds and because that preference was dictated by the language and structure of the MLP, again for the reasons given in his sub-para (vi); and then in para. 237(vii) and (viii) he submitted that the real purpose of the DDH Clause is to reiterate the need for compliance with the terms of the Conditions of Grant in the context of the overriding status accorded to Special Condition (9)(b) and that the Special Conditions confer rights on the developer and should not be viewed narrowly as simply imposing duties on each party. 

244.  But to move straight from the proposition that the DDH Clause cannot have been intended to give the Government a wholly unfettered discretion to the proposition that that clause (and Special Condition (9)(b)) must be construed in that way as procedural provisions covering the field does not reflect adequately the requirements emphasised by Lord Steyn that the starting point is that a term which is in conflict with the express terms of the text may never be implied and, if that requirement is met, the term to be implied is confined to what is strictly necessary, not what might seem reasonable.  The focus is on the minimum intrusion on what the contract states, which is required to give effect to the presumed intent of the parties, and does not allow rewriting of the contract. 

245.  Turning then to the factors Mr Sumption QC relied on in para. 237:

(i) its generality makes it likely it was intended to be subject to limitations – the strictly necessary test points in the other direction;

(ii) Chinachem paid full market value and would take into account limitations disclosed – the first part of the stated reason is a pre-supposition not reflecting the significance and impact of requiring applicants to surrender land exchange entitlements for the grant and not separately simply receive cash and retain other lands; and the second shifts the focus to what Chinachem claimed it did;

(iii) the absurdity of Government being entitled to cut down on rights – which presupposes that the grantee has rights which are not necessarily implicit in the duties of the parties;

(iv) that all items listed in Special Condition (5)(a)(i) are the subject of specific regulation in some other provision of the Conditions of Grant, making it clear that Special Condition (5)(a)(i) was intended as comprehensively covering the developer’s commitment and its reference to height refers to Special Condition (9)(b) which regulates height in tandem with site coverage and plot ratio – on the strictly necessary test both steps in the stated reasons require examination rather than assuming their correctness;

(v) the rights based approach contended for in the sub-para leads to propositions (a), (b) and (c) at the heart of Mr Sumption QC’s superstructure and are on their face far wider than required by the strictly necessary test as evident in the language used – “deprive a developer of a substantial part of the time allowed under the building covenant (and even if ‘substantial’ is replaced by ‘more than de minimis’)” and the two asserted duties on the Government to deal with plans and give or refuse approval with reasonable dispatch and, if the Government is entitled to reject the MLP on grounds outside the contract itself, to inform the developer of the respects in which the MLP fails, so as to enable the developer to put up a compliant MLP, and without determining on a strictly necessary test what grounds are within the contract and what room there is for imposing such a requirement on the Government. 

246.  Mr Sumption QC’s timetable of events along with the summary in paras 218 and 219 above of pleadings in the Re-Amended Statement of Claim bring home the extent of reliance by Chinachem on pleaded meetings and discussions between representatives of Chinachem and officers and staff members within Government to support the arguments advanced in this case and the basis on which Mr Sumption QC developed his Four Phase Chronology argument.  As to that latter point Mr Sumption QC takes no issue over inter-action between the parties in the first phase ending 19 May 1994 when Chinachem first submitted an MLP for a very tall building.  That was because Chinachem had not suggested that the Government was responsible for any part of the elapse of time between 7 November 1991 when Chinachem become bound to execute the Memorandum of Agreement in its standard terms (leading to the issue of the Grant and its particularised conditions) and 19 May 1994.  Mr Sumption QC’s second phase consideration runs from 19 May 1994 to June 1995 when an MLP was rejected by Government because the proposed building was too high on aviation safety grounds.  He then developed an argument that the rejection for the stated reason that the gross floor area proposed was excessive failed to inform Chinachem that the MLP would have been unacceptable in any event because of the new airport, went on to comment, on the basis of some answers by officials in cross-examination about times taken within Government to decide whether an MLP is compliant, that if it was going to take longer than two to three weeks on height grounds then any of the possible reasons for any delay beyond those which he postulated was an internal Government responsibility; and further that for the next nine months from October 1994 to June 1995 there was a plan on the table with a compliant plot ratio, the sole major issue was airport height and he characterised what he submitted as the Government’s failure to appreciate the problem about airport safety, on the four possibility hypothesis which he advanced, as delay wholly attributable to the Government’s internal muddle and accordingly the decision to reject an MLP on airport safety grounds was not a permissible ground of refusal under the terms of the grant.  Phase 3 ended in April 1996, when Chinachem was told after computer modelling had been completed that 324 mPD was the maximum height allowed and he attributed that to avoidable delay on the Government’s part stemming from its uncertainty about what the height restriction should be and in consequence ten months was lost because of that uncertainty and Government’s internally divided views.  With respect to Mr Sumption QC’s submissions in relation to the second and third phases his approach has two underlying difficulties.  The first is that it was not until power to make an order prescribing areas within which no building was to exceed the height specified in the order on aviation safety grounds was made and in force on 12 December 1994 that such an order could have been made under the Ordinance.  It was then for those responsible for making any orders under its provisions to exercise their own judgment as to when and where aircraft safety needs would warrant doing so.  The second is that it tends to assume that the superstructure facts apply in identifying the content of any term to be implied under the strictly necessary test.  Mr Sumption QC’s fourth phase considerations for the period from April 1996 proceed on the premise that, because of hived off issues on delays in completion of construction during the period reserved for a trial on para. 29 issues still to take place, it was not open to the Government to contend that completion of construction would have required an extension of time, and the Court of Final Appeal should direct an inquiry by the High Court on the issue along with other para. 29 issues.  Supporting that submission Mr Sumption QC also pointed to some evidence adduced by the plaintiffs that the time needed to build the minimum gross area required by the Special Conditions was five weeks short of two years and added that determining the construction time necessary for completion was much more complicated than under the process suggested by Government.  But those propositions suffer from two substantial difficulties.  The first is they reflect a view of the application of the legal principles governing the implication of terms as to co-operation between the parties and prevention of performance which I have already rejected (paras 236 and 244).  The second is that it was at the request of both parties that Judge Muttrie tried the issues of liability save for those arising out of para. 29 and they recognised that the correct formulation of implied terms before Judge Muttrie would be relevant to that separate trial (paras 242 and 243).  It would be inconsistent with the plaintiffs’ own stance before the High Court to allow them to reverse any onus otherwise arguably arising from the absence of any positive findings relating to meeting construction deadlines in the period covered by the fourth phase.  Otherwise, and with all respect to his argument, it allows Mr Sumption QC, by setting up a straw man and knocking it down as the warrant for starting from a wider premise than would otherwise be legally justified by the course of the trial, to invoke, as he did, the support of Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd (1970) 1 BLR 111 (also reported at (1970) 69 LGR 1), Astilleros Canarios SA v. Cape Hatteras Shipping Co Ltd [1982] 1 Lloyd’s Rep 518, and Maskell v. Horner [1915] 3 KB 106 for reasserting the liquidated damages claims at the para. 29 hearing.  Accordingly, I would uphold Mr Neoh SC’s submission that the absence of any finding of fact relevant to the determination of that issue at the future para. 29 trial was due to Chinachem’s failure to raise any such cross-over factual matters at the High Court hearing (para. 239). 

Discussion: Limiting the Government’s Approval Powers under the Special Conditions

247.  This brings me to the remaining issue as to the content of the term to be implied into the contract to constrain the generality of the Government’s approval powers under Special Conditions (9)(b) and (e).  I can be brief.  Mr Neoh SC submits the Government’s approval powers were not unconstrained and those conditions were at least in part substantive, not procedural.  I agree with both those propositions in his argument, but not with the further step where he formulated the particular constraint for which he contended.  As a matter of law and applying the strictly necessary test I would confine it to the minimum intrusion on the breadth of the expressed powers of approval in those two conditions.  On that basis I consider Judge Muttrie was entitled to reach the conclusions he did (para. 224). 

248.  First, particular considerations of background context are these.  As noted in para. 202, the contract provided for the lease for a term of years and the utilisation of the Lot in the context of an expanding society and economy where the land stock was limited.  From the outset the Government distanced itself from applicants seeking grants of Lot 353 and other lots it was making available.  What limited obligations it undertook could never be the subject of bargaining.  The extent, manner and timing of the development could only be determined by close scrutiny of the contract and what it provided each party.  Next, and again as previously noted (paras 206, 216 and 223 to 226), the Government required applicants for Lot 353 and those other lots it was making available to surrender land exchange entitlements for the grant and not simply separately receive cash compensation and retain other lands.  The lease was for a term of years which, when Chinachem became bound to the commitments under the Memorandum of Agreement on standard set terms on 7 November 1991, would not expire for over 55 years (on 30 June 2047), though in the event the three years for the completion of the transport terminus and four years for the whole building did not expire following the issue of the grant and entry into possession until 8 December 1995 and 8 December 1996 respectively.  That gave Chinachem windfall extra planning time to meet its obligations.  The annual rental payable by Chinachem was $2,400 up to June 1997 and thereafter an amount equal to 3% of the rateable value for the time being of the Lot.  The early low rental was obviously to allow ample time for the developer to complete building and be in a position to derive income from it or to use it as the developer chose.  And there is nothing in the contract and given the length of the lease to warrant an inference that the Government saw any obvious residual value in the buildings as accruing to it on expiry of the lease. 

249.  Second, inherent considerations implicit in the text of the Special Conditions do not warrant characterising (9)(e), the DDH Clause, and (9)(b) as procedural only or as being subject to any greater constraints on their exercise than they would otherwise bear applying the strictly necessary test.  As I read Special Conditions (5) and (9) the subject matter of each is different and calls for a different inquiry which is emphasised by the different times at which the particular inquiry is to be undertaken, (5) when an MLP is submitted and (9) when a building is to be erected on the Lot, which can only be commenced after the Master Layout Plans have been approved in writing by the Director.  The provisions applying to MLPs are much more general and preliminary, serving as steps along the way to the ultimate approval of the building.  I do not read Special Condition (9)(b) as depriving a developer, by a side-wind based on simply treating height as the reciprocal of site coverage and plot ratio, either Special Condition (9)(a) with its focus in Special Condition (9)(a)(ii) on the total gross area of the building to be erected or in Special Condition 9(a)(i) on the DDH Clause approval requirement, or the DDH Clause, (9)(e), itself, of a substantial part of the time allowed under the building covenant.  Constraints on design and disposition powers of approval might well implicitly exclude matters of taste and the like but I am not persuaded that any height constraints are to be necessarily trammelled by a flat prohibition against even considering the proposed height of the building however tall when reviewing the building plans unless the time taken by the DL in exercising the powers under Special Condition (9)(e) considered objectively is unnecessarily long, in which case the minimum intrusion on the DL’s exercise of those powers is for the DL to grant an extension of time for completing the building (and/or the transport terminus as the case may be).  In short, as Judge Muttrie concluded (para. 224) fault on the part of the grantor would be required before the constraint might bite. 

250.  In the result the only arguable derogation from the grant might be in respect of the time taken in exercising the powers under Special Condition (9)(e) and that responsibility was amply discharged by the offer and grant of an extension of an extra four months’ time for completion of the grantee’s building obligation (para. 237).  Another and perhaps more appropriate way to reflect Judge Muttrie’s conclusion is to view the position in the context of a contract with these features: (i) it specifies and links the commencement date (and the requirement to submit an MLP within 6 months) and the two ending dates; and (ii) it provides a long term lease under which the rental payable is stepped up from a low base for the initial period the length of which is obviously tailored to cover a generously calculated construction period to allow extension of the required end dates for the ultimate conclusion of the works.  Looked at in that context it is simply the adjustment of the set dates by the Government, whether on its own initiative or at the request of the grantee, which is implicitly allowed by the contract unless and to the extent that it compresses timely completion; and, at least until then, any notions of delay on the Government’s part do not come into play.  It follows on that view that there is no basis for rejecting the concurrent findings of fact in the lower courts on the implication of terms; and I cannot discern any basis for disturbing the concurrent conclusions of those courts on any of the remaining matters in Judge Muttrie’s summary of his findings in paras 221 and 225 to 227 above. 

Result

251.  In the result while I take a somewhat different approach on some aspects of the appeal from that of Mr Justice Ribeiro PJ, I, too, would dismiss the appeal with the consequential orders as to costs referred to in his para. 174.  In these circumstances I find it unnecessary to discuss any of the cases referred to by counsel which he has reviewed at some length. 

Mr Justice Bokhary PJ:

252.  As to the result, the Court is unanimous.  This appeal is dismissed with the order nisi as to costs set out in the final paragraph of Mr Justice Ribeiro PJ’s judgment, namely para. 174.  As to the reasons for this result, it may be of assistance to underline that what Mr Justice Chan PJ and I have added in our own words is, as he and I have expressly indicated, consistent with Mr Justice Ribeiro PJ’s reasoning.