MILLION ADD DEVELOPMENT LTD v. NOK WAH LOGISTIC (HONG KONG) CO LTD

HCA 2873/2015
[2018] HKCFI 78

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2873 OF 2015

_________________________

_________________________

_______________

J U D G M E N T

_______________

INTRODUCTION

1.  This is the assessment of damages in a tenancy dispute conducted pursuant to the Judgment of Chung J entered herein on 9 September 2016.  That judgment was entered after a contested application for summary judgment made by the plaintiff on 6 May 2016.

2.  The defendant was unrepresented and absent from the hearing on 28 December 2017.  Mr Dominic Lau, of the plaintiff’s solicitors, confirmed with the court that all the relevant papers had been served on the defendant[1]. Accordingly I was satisfied that the defendant had been given sufficient notice of the assessment hearing and it was appropriate to proceed with the hearing notwithstanding the defendant’s absence.

FACTUAL BACKGROUND

3.  The plaintiff is and was at the material times the registered owner of a unit in an industrial development known as 3/F., Block B, Tai Ping Industrial Park, No. 51 Ting Kok Road, Tai Po, N.T., Hong Kong (“Premises”).

4.  On or about 23 November 2010, the plaintiff and the defendant entered into a written tenancy agreement (“Tenancy Agreement”) under which the plaintiff agreed to let the Premises to the defendant for a fixed term of 6 years from 1 December 2010 to 30 November 2016 (“Term”).

5.  The monthly rent payable for the first year of the Term was HK$98,402.80, and that for the second and third years was HK$110,279.00.  As for the fourth to the sixth years, the rent payable was to be adjusted with reference to the open market rent to be agreed, but shall in no event exceed ±10% margin of the rent in the third year.

6.  Under Clause 4 of the Tenancy Agreement, the defendant was prohibited from assigning, transferring, subletting or parting with the possession of the Premises to any other person, and the tenancy was provided to be personal to the defendant alone.

7.  In early June 2013, the plaintiff began to suspect that the defendant was in breach of the sub-let prohibition under Clause 4 of the Tenancy Agreement.  On 14 June 2013, the plaintiff served a notice pursuant to section 58 of the Conveyancing and Property Ordinance (Cap 219) specifying its complaint about the defendant’s breach and requesting the defendant to take remedial action.  However, the plaintiff did not pursue the matter further then because of the lack of solid evidence.

8.  On 30 November 2013, the plaintiff and the defendant entered into a written supplemental tenancy agreement, under which the monthly rent for the fourth to sixth years of the Term was adjusted to HK$121,307.00.

9.  In late October 2015, the plaintiff discovered that the defendant and a Manfred Transportation Company Limited (“Manfred”) had entered into a service agreement dated 6 May 2013 (“Service Agreement”).  Thereunder, the defendant agreed to provide and make available the Premises for use by Manfred for a term from 22 May 2013 to 21 October 2016, and Manfred agreed to pay monthly service fees to the defendant at HK$173,888.00 from 22 May 2013 to 21 May 2015 and at HK$183,888.00 from 22 May 2015 to 21 October 2016.  It was also discovered that Manfred had paid such service fees to the defendant.

10.  On 29 October 2015, the plaintiff’s solicitors wrote to the defendant accepting the latter’s repudiatory breach of Clause 4 of the Tenancy Agreement and giving the defendant notice of termination of the same with immediate effect.

11.  On 4 December 2015, the plaintiff commenced the present proceedings seeking, inter alia, recovery of possession of the Premises, together with an award of damages or alternatively an account of profits.

12.  On 6 May 2016, the plaintiff applied for summary judgment to be entered.  By a Decision handed down on 9 September 2016, Chung J entered final judgment ordering the defendant to deliver up vacant possession of the Premises, and to pay damages or account for profits to the plaintiff to be determined by a Master.

13.  On 4 October 2016, the keys to the Premises were returned to the plaintiff, which the plaintiff accepted as delivery of possession.

THE EVIDENCE

14.  In support of this assessment, the plaintiff has adduced a valuation report of Mr Charles C K Chan (“Mr Chan”), Managing Director of Savills Valuation and Professional Services Limited (“Valuation Report”).  The plaintiff has been given leave to adduce the Valuation Report into evidence without calling the maker thereof.

15.  Mr Chan is a registered professional surveyor. He has accumulated 32 years of experience in valuing properties in Hong Kong, 29 years of which being post-qualification experience.  He is a Fellow of the Royal Institute of Chartered Surveyors in the General Practice Division and a Fellow of the Hong Kong Institute of Surveyors.  On the face of his credentials and in the absence of any challenge, I accept that Mr Chan does have the relevant expertise to give valuation evidence in this action.

16.  As stated in the Valuation Report, Mr Chan was asked to assess the market rent of the Premises, based on a normal tenure of 2 years, as at 22 May 2013 (“1^st Valuation Date”) and 22 May 2015 (“2^nd Valuation Date”).  The 1^st Valuation Date was the commencement of the term under the Service Agreement.  The 2^nd Valuation Date was the day when the monthly fee payable by Manfred increased from HK$173,888.00 to HK$183,888.00.  As will become apparent below, these dates were chosen because of the way in which the plaintiff initially decided to quantify the loss suffered as a result of the defendant’s breach.

17.  In the valuation, Mr Chan proceeded on the following basis or assumptions:-

(a) The Premises is vacant and to let, free from encumbrances, and can freely be leased in the market;

(b) The landlord is responsible for structural and external repairs, payment of Government rent, property tax, Government rates and management fee, whilst the tenant is responsible for utility charges and internal repairs;

(c) Market rent means “the estimated amount for which a property would be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm’s-length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently, and without compulsion”; and

(d) Cold storage facilities situated within the Premises were disregarded in assessing the market rent of the Premises.

18.  Mr Chan adopted a direct comparison approach in assessing the market rent of the Premises, which has a saleable area of approximately 15,151 sq ft.  As he explained:-

“The direct comparison approach is a method of valuation whereby comparable rental transactions around the respective Valuation Dates are assembled and analyzed in terms of rent per square foot. The analyzed unit rents of the comparables are then adjusted to take account of the discrepancies between the [Premises] and comparables in terms of time, location, size, age and condition, accessibility, floor loading, storey height and the like.”

19.  Applying that approach, and by reference to data obtained from rental transactions in respect of nearby industrial premises, Mr Chan opined that the market rent of the Premises on saleable area was in the region of:-

(a) HK$11.00 per sq ft as at the 1^st Valuation Date (22 May 2013) (which was equivalent to a total monthly rent of HK$167,000.00 after rounding up); and

(b) HK$13.70 per sq ft as at the 2^nd Valuation Date (22 May 2015) (which was equivalent to a total monthly rent of HK$208,000.00 after rounding up).

20.  Apart from the Valuation Report, the plaintiff has also called a factual witness Mr Yiu Yan Che (“Mr Yiu”) who adopted his witness statement filed on 18 April 2017 as his evidence in chief at the hearing.

21.  Mr Yiu is and was at the material times the plaintiff’s director.  In his witness statement, he provided the court with the background of the parties’ dispute and a brief procedural history of the case. He also set out his calculation of the plaintiff’s recoverable loss.

22.  In §§14 and 15 of his witness statement, Mr Yiu explained his belief that the plaintiff should be entitled to “damages and/or an account of profits” in respect of the defendant’s breach by subletting the Premises from 22 May 2013 to 4 October 2016. 

23.  As the monthly rent under the Service Agreement would be adjusted after the first two years, Mr Yiu believed that it was reasonable to assess the market rent of the Premises on a similar bi-annual basis for the purpose of calculating the mesne profits.

24.  Adopting Mr Chan’s assessment of market rent as set out above, Mr Yiu calculated the loss and damage the plaintiff has suffered in the following way:-

“18. In the premises, the rental income the Plaintiff could have made from the Premises in the Relevant Period [i.e. 22 May 2013 to 4 October 2016] based on the market rate as assessed above is as follows:

Particulars of the Loss of Rental Income

(a) From 22 May 2013 to 21 May 2015 (i.e. first two years)	HK$4,008,000.00 (HK$167,000.00/month x 24 months)
(b) From 22 May 2015 to 21 September 2016 (i.e. 16 months)	HK$3,328,000.00 (HK$208,000.00/month x 16 months)
(c) From 22 September 2016 [to] 4 October 2016 (13 days out of a 30-days month)	HK$89,440.00 (HK$208,000.00 per month x 0.43 month)
	Total HK$7,425,440.00”

25.  After giving credit to the rental deposit held by the plaintiff under the Tenancy Agreement (HK$242,614.00) and the defendant’s payments made since 22 May 2013 (HK$4,821,686.00), Mr Yiu contended that the plaintiff was entitled to damages in the sum of HK$2,361,140.00 (i.e. HK$7,425,440.00 – HK$242,614.00 – HK$4,821,686.00).

26.  On the other hand, the defendant has not filed any list of documents, witness statement or expert report to challenge the plaintiff’s evidence.  By the operation of the Unless Order of Master K. Lo dated 11 April 2017, the defendant is debarred from relying on any factual or expert evidence in this assessment of damages.

ASSESSMENT OF DAMAGES

Mesne Profits

27.  In its opening, the plaintiff submitted that it is entitled to damages in the form of mesne profits for the period 22 May 2013 to 4 October 2016 (“Relevant Period”)[2].

28.  Citing Attorney General v Chiu Kwok Chun Stephen [1985] 1 HKC 199 (Court of Appeal), the plaintiff submitted that mesne profits payable by a person who had been using another’s land for his own purposes without consent is, in the absence of special circumstances, the ordinary letting value of the land.

29.  The award of mesne profits in the landlord and tenant context is indeed well accepted.  As explained in Woodfall’s Law of Landlord and Tenant (2017) Vol 1 at §19.012:-

“If the tenant holds over after the termination of his tenancy, he is liable to pay mesne profits.  The expression mesne profits is the name given to damages for trespass where the trespasser is a former tenant of the landowner.  The liability to pay mesne profits arises even where the landlord has in fact suffered no loss (e.g. because he would not have relet or occupied the property during the period of the trespass). “The principle is that a trespasser shall not be allowed to make use of another person’s land without in some way compensating that other person for that user.” The liability of a former tenant for mesne profits will cease when he gives up possession, rather than the time (if later) when he notifies the former landlord that he has done so.”

30.  The basic premise underlying an award of mesne profits is to reflect the use of another’s land in the absence of consent.  In cases where the trespasser is a former tenant of the land owner, it is fundamental that the relevant lease must have come to an end before the liability of the former tenant to pay mesne profits arises.

31.  The plaintiff’s basis for claiming mesne profits over the Relevant Period is that the defendant became a trespasser as soon as it breached Clause 4 of the Tenancy Agreement by subletting the Premises to Manfred on 22 May 2013.  This is made clear in §21 of its opening submissions which reads:-

“[The plaintiff] was entitled to recover possession of the Premises from 22 May 2013, when [the defendant] began to sublet the Premises to Manfred in breach of the Sub-let Prohibition Clause. From then on, [the defendant], or [the defendant] through Manfred, became a trespasser to the Premises.” (emphasis original)

32.  This is also in line with Mr Yiu’s evidence which proceeded on the sole basis that the plaintiff is entitled to mesne profits for the entirety of the Relevant Period.

33.  Despite the plaintiff’s submissions, there is in my view no valid basis for claiming mesne profits over the period before the Tenancy Agreement was terminated.  Indeed, the plaintiff’s solicitors has not cited any authority in support of that proposition. 

34.  With respect, it is wrong in law to suggest that the defendant became a trespasser as soon as it breached Clause 4.  While the defendant might be held liable to pay damages as a result of the breach, it remained entitled to possess the Premises as a tenant under the Tenancy Agreement which was still valid and subsisting prior to its termination. 

35.  I therefore reject the plaintiff’s claim for mesne profits in respect of the period 22 May 2013 to 29 October 2015 without hesitation.

36.  On the other hand, once the plaintiff validly terminated the Tenancy Agreement on 29 October 2015, the defendant indeed became a trespasser and was liable to pay mesne profits up to the delivery of vacant possession, which took place on 4 October 2016.

37.  Perhaps as a result of the plaintiff’s initially mistaken formulation of its claim for mesne profits covering the entirety of the Relevant Period, Mr Chan did not opine on the market rent of the Premises for the period 30 October 2015 to 4 October 2016.  In its supplemental submissions lodged after the hearing, the plaintiff made no submission on how the market rent for that shorter period should be assessed either.

38.  That having been said, among the comparables adopted by Mr Chan in the Valuation Report is a rental transaction in respect of a nearby industrial unit at No. 57 Ting Kok Road the commencement date of which was 1 December 2015 (“Tai Ping 14A Unit”)[3].  That date was just over 1 month after the termination of the Tenancy Agreement.

39.  After carrying out adjustments in respect of time, location, size, age and condition, accessibility, floor loading and storey height, Mr Chan was of the opinion that the adjusted unit rent in respect of the Tai Ping 14A Unit was HK$15.10 per sq ft.

40.  According to the Private Flatted Factories Rental Indices published by the Rating and Valuation Department, there was in my view no appreciable difference between the index for October 2015 (178.3), November 2015 (177.2) and December 2015 (177.6)[4].

41.  Thus, even though the commencement date of the rental transaction in respect of the Tai Ping 14A Unit was just over 1 month from 30 October 2015, I do not think that, in the absence of contrary evidence, there would be appreciable difference between the adjusted unit rent between 30 October 2015 and 1 December 2015.

42.  It is of course less than ideal that the plaintiff had not adduced direct valuation evidence on the market rent of the Premises as of 30 October 2015.  But doing the best I can based on the available evidence, I find that the market rent of the Premises in respect of the period 30 October 2015 to 4 October 2016 was HK$15.10 per sq ft.

43.  For these reasons, I hold that the defendant is liable to pay the plaintiff mesne profits in the sum of HK$2,600,467.14 (i.e. HK$15.10 per sq ft per month x 15,151 sq ft x (341/30) months) for its wrongful occupation of the Premises from 30 October 2015 to 4 October 2016.

Wrotham Park Damages

44.  After the assessment hearing, the parties were given leave to lodge further submissions to address the court’s concerns over the plaintiff’s questionable basis for claiming mesne profits in respect of the pre-termination period 22 May 2013 to 29 October 2015[5]. 

45.  In response, the plaintiff argued that, as the sub-let prohibition under Clause 4 was a restrictive covenant affecting land[6], it was entitled to “damages as a quid pro quo for permitting the continuation of the breach of [Clause 4] or the relaxation [thereof]”[7].

46.  The plaintiff’s solicitors also cited Wing Ming Garment Factory Ltd v Wing Ming Industrial Centre (IO) [2014] 4 HKLRD 52 (G Lam J) and Crestfort Ltd v Tesco Stores Ltd [2005] EWHC 805 (Ch); [2005] L&TR 20 (Lightman J) as examples where damages were awarded by the Hong Kong and English courts on such basis.

47.  On quantum, the plaintiff submitted that such damages should be assessed as being no less than the market rent of the Premises.  Since the defendant did pay contractual rent at all material times, I understand the plaintiff’s submission to mean that damages should be assessed as the difference between the relevant contractual rent and the market rent.

48.  In this regard, it is worth quoting the plaintiff’s analysis in full[8]:-

“6.1 The Sub-let Prohibition Clause is an absolute prohibition against subletting.

6.2 On 14 June 2013, shortly after [the defendant] began to sublet the subject Premises, [the plaintiff] already served on [the defendant] a notice pursuant to section 58 of the Conveyancing and Property Ordinance (Cap 219) specifying its complaints about [the defendant’s] breach of the Sub-let Prohibition Clause and requiring [the defendant] to take remedial action (the “Section 58 Notice”) …

6.3 [The plaintiff] was quick to respond to a potential breach of the Sub-let Prohibition Clause with the Section 58 Notice. The Section 58 Notice is a prerequisite to the exercise of right of forfeiture. Evidently, [the plaintiff] was ready and willing to exercise its right of forfeiture and terminate the Tenancy Agreement if subletting persisted.

6.4 Thereafter, [the defendant’s] various conducts caused [the plaintiff] to doubt if there was a breach (alternatively, whether there was sufficient evidence of such breach) … Such notwithstanding, when [the plaintiff] became aware of the full circumstances of the subletting in October 2015, [the plaintiff] immediately gave [the defendant] a notice of termination …

6.5 If [the defendant] had approached [the plaintiff] for a relaxation of the Sub-let Prohibition Clause in the first place, [the plaintiff] would have taken into consideration the fact that a breach of the Sub-let Prohibition Clause would otherwise allow [the plaintiff] to terminate the existing tenancy.

6.6 In the circumstances, it would have been reasonable for [the plaintiff] to negotiate on the basis that a new tenancy was to be granted, and the rent payable by [the defendant] to [the plaintiff] should accordingly be adjusted according to the market rent at the time.

6.7 It was thus reasonable for [the plaintiff] to demand no less than the ordinary letting value or market rent of the subject Premises from 22 May 2013 until the Termination Date [i.e. 29 October 2015].” (emphasis original)

49.  Before examining the plaintiff’s analysis, I shall first review the relevant law.

(a)   Principles on Wrotham Park Damages

50.  The type of damages sought by the plaintiff is what has often been described as “Wrotham Park damages”, following the leading English authority of Wrotham Park Estate Company Ltd v Parkside Homes Ltd & Ors [1974] 1 WLR 798 (Brightman J). 

51.  While the award of Wrotham Park damages has been followed in a number of subsequent English authorities, the case law in Hong Kong are relatively few and far between.  Even in England, the law on the award of Wrotham Park damages is still developing.

52.  Also known as “hypothetical bargain”, “reasonable licence fee” or “user” damages, Wrotham Park damages are awarded not on the ordinary compensatory basis but on a restitutionary basis by reference to what the defendant has gained (per G Lam J in Wing Ming Garment Factory Ltd (supra) at §216).  In cases of this sort, the plaintiff is typically unable to prove any actual loss despite the defendant’s breach.

53.  In Wrotham Park itself, the defendant property developer acted in breach of a restrictive covenant by building a road and 14 houses on land not in accordance with an approved layout plan.  The plaintiffs sought a mandatory injunction to demolish the houses, but it was refused due to the social and economic value that would be wasted. 

54.  By drawing an analogy to reasonable licence fees awarded in property tort and intellectual property cases, Brightman J instead awarded damages being “a sum of money as might reasonably have been demanded by the plaintiffs from Parkside as a quid pro quo for relaxing the covenant”.  This is despite the fact that the plaintiffs’ property suffered no diminution in value a result of the building of the development and that they would not have agreed to grant the relaxation.  On the facts of that case, the judge assessed the damages as 5% of the defendant’s anticipated profits. 

55.  In Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd & Ors [2011] 1 WLR 2370, the Privy Council had the opportunity to review the relevant authorities on Wrotham Park damages and provided the following guidance (at 2385D-2387H):-

(a) Such damages (often termed ‘user damage’) are readily awarded at common law for the invasion of rights to tangible moveable or immoveable property (by detinue, conversion or trespass).

(b) Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights of a proprietary character, though they are also available in non-proprietary breach of contract.

(c) Damages under Lord Cairns’s Act are intended to provide compensation for the court’s decision not to grant equitable relief in the form of an order for specific performance or an injunction in cases where the court has jurisdiction to entertain an application for such relief.  Most of the recent cases are concerned with the invasion of property rights such as excessive user of a right of way.  The breach of a restrictive covenant is also generally regarded as the invasion of a property right since a restrictive covenant is akin to a negative easement.

(d) Damages under this head represent “such a sum of money as might reasonably have been demanded by the claimant from the defendant as a quid pro quo for permitting the continuation of the breach of covenant or other invasion of right”.

(e) Although damages under Lord Cairns’s Act are awarded in lieu of an injunction it is not necessary that an injunction should actually have been claimed, or that there should have been any prospect, on the facts, of it being granted.

(f) The nature of the hypothetical negotiation adopted in assessing Wrotham Park damages is one between a willing buyer (the contract-breaker) and a willing seller (the party claiming damages) in which the subject-matter of the negotiation is the release of the relevant contractual obligation.  Both parties are to be assumed to act reasonably.  The fact that one or both parties would in practice have refused to make a deal is therefore to be ignored.

(g) Given that such negotiating damages are meant to be compensatory, and are normally to be assessed or valued at the date of the breach, principle and consistency indicate that post-valuation events are normally irrelevant.  However, given the quasi-equitable nature of such damages, the judge may, where there are good reasons, direct a departure from the norm, either by selecting a different valuation date or by directing that a specific post-valuation-date event be taken into account.

(h) In a case where there has been nothing like an actual negotiation between the parties it is no doubt reasonable for the court to look at the eventual outcome and to consider whether or not that is a useful guide to what the parties would have thought at the time of their hypothetical bargain.

56.  More recently, in One Step (Support) Ltd v Morris-Garner & Anr [2017] QB 1, the English Court of Appeal provided further guidance on the circumstances where an award of Wrotham Park damages may be available (per Christopher Clarke LJ at 30A-32C)[9]:-

(a) It is not an absolute requirement that Wrotham Park damages can only be awarded where it is impossible for the plaintiff to identify any financial loss.  Given that the award of Wrotham Park damages is a flexible response to the need to compensate the claimant for the wrong that has been done to him, such an award may be justified where it would be very difficult for the claimant to establish ordinary compensatory damages.

(b) Demonstration of manifest injustice is not required.  What is required is that an award of Wrotham Park damages constitutes a just response.  What is the just response is, quintessentially, a matter for the judge to decide.

(c) Wrotham Park damages is not a remedy limited to exceptional circumstances (cf. an award of an account of profits in breach of contract cases).  The test, as mentioned above, is what justice requires.

57.  As to the assessment of quantum, given that Wrotham Park damages is a gain-based remedy, a natural starting point would often be the profit that the defendant had anticipated to make as at the date of the hypothetical bargain.  As Adam Kramer explained in The Law of Contract Damages (2^nd ed; 2017) (at §22-06), “the hypothetical bargain often has one eye on the anticipated profits the defendant seeks to make—pursuant to which paying off the claimant is one cost on the way.”

58.  In Amec Developments Ltd v Jury’s Hotel Management (UK) Ltd [2000] EWHC 454 (Ch) (2001) 82 P & CR 286, a case involving a breach of restrictive covenant affecting land, Anthony Mann QC then sitting as a Deputy Judge of the English High Court highlighted the various factors that are relevant to the evaluation of the hypothetical bargain (at §§12-13):-

“12. It is also common ground that the way of ascertaining what that sum is to consider the sum that would have been arrived at in negotiations between the parties had each been making reasonable use of their respective bargaining positions without holding out for unreasonable amounts. This requires, in turn, that the parties have regard to the cost or detriment to the claimant and the benefits to the defendant of the latter’s being allowed to build over the building line. Since, as I have observed above, Amec’s case was not based on any quantifiable damage to its land, the case has essentially turned on the latter. In other words, the principal issue in the case was the amount of the benefit that Jury acquired in being allowed to build over the A-B line, and the discount from that sum that would have been applied in negotiations.

13. The negotiation analysis is not pursued rigorously to its logical end. I do not have to imagine a negotiation in which the parties have to guess at something which events have in fact made certain. In carrying out my exercise I can take into account the actual events that have happened, and the actual benefits accrued, as at the date of the trial. In Wrotham Park Brightman J held that the starting point for the calculation would have been the plaintiff asking “the developer what profit he expected to make from his operations. With the benefit of foresight [sic] the developer would, in the present case, have said about £50,000, for that is the profit which Parkside concedes it made from the development” (at p 815H). What Brightman J seems to have been doing there is to imagine a negotiation before the infringement, but using actual profits as evidence of what the parties would have contemplated at the time (before they actually accrued). In A-G v Blake Lord Nicholls expressed himself a little differently when he said (at p 637H): “In a suitable case damages for breach of contract may be measured by the benefit gained by the wrongdoer from the breach. The defendant must make a reasonable payment in respect of the benefit he has gained.” He seems to have treated Wrotham Park as an example of that; indeed, he described it as “a solitary beacon”. While he does not use the concept of a hypothetical negotiation, I think that Lord Nicholls is in effect saying the same thing as Brightman J. While an imaginary negotiation is not necessarily the appropriate supposition in all cases (and not in Blake itself) I think that it is helpful. I therefore propose to consider this case on the basis of what the evidence shows about the level of gain to Jury and what a reasonable negotiation would have produced based on that evidence.” (emphasis added)

59.  In CF Partners (UK) LLP v Barclays Bank Plc & Anr [2014] EWHC 3049 (Ch), a breach of confidence action, Hildyard J also provided a detailed exposition of how the hypothetical bargain may be approached in assessing Wrotham Park damages:-

“Wrotham Park approach

Nature of the exercise

1196. Under this approach the objective is to establish what sum of money might, in a hypothetical negotiation between them, reasonably have been demanded by the claimant from the defendant as a quid pro quo for “the release of the relevant contractual obligation”; or, as Sales J put it in Vercoe at [292], “the fair price for release or relaxation of the relevant negative condition” …

1198. So the purpose of the hypothetical negotiation posited by the Wrotham Park approach is to seek to fix what consideration might reasonably have been demanded by the claimant (CFP) from the defendant (Barclays) as a quid pro quo for permitting the use (past and future) of the confidential information for some other purpose than the evaluation and implementation of Project Arctic Fox/Carbonara.

1199. The exercise is artificial; and, despite the apparent precision of the figures and calculations deployed typically (and necessarily) on each side, it necessarily involves a question of impression …

1203. In Vercoe, Sales J described the exercise as follows (see [292]):

“On my reading of the authorities, where damages are to be awarded on a Wrotham Park type basis, what is required from the court is an assessment of a fair price for release or relaxation of the relevant negative covenant having regard to (i) the likely parameters given by ordinary commercial considerations bearing on each of the parties (it would not usually be fair for the court to make an award of damages on this basis by reference to a hypothetical agreement outside the bounds of realistic commercial acceptability assessed on an objective basis with reference to the position in which each party is placed, and see Pell Frischmann Engineering Ltd at [53]); (ii) any additional factors particularly affecting the just balance to be struck between the competing interests of the parties (see Brightman J’s reference to the conduct of the beneficiary of the restrictive covenant in Wrotham Park at 815H-816B as a factor tending to moderate the award of damages in its favour and the reference of the Privy Council in Pell Frischmann Engineering Ltd at [54] to the relevance of extraordinary and unexplained delay by the claimant); and (iii) the court's overriding obligation to ensure that an award of damages for breach of contract – which falls to be assessed in light of events which have now moved beyond the time the breach of contract occurred and which may have worked themselves out in a way which affects the balance of justice between the parties – does not provide relief out of proportion to the real extent of the claimant's interest in proper performance judged on an objective basis by reference to the situation which presents itself to the court (see the discussion in Experience Hendrix at [27]-[30] of the special nature of the interest of the claimant which justified the award of damage in Blake equivalent to the profits which Blake had made in publishing his book about his treachery; the general discussion by Lord Nicholls in Blake at 282A-285H; and also compare Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344).”

1204. This statement by Arnold J in Force India at first instance at [386] of the established principles for the assessment of such damages also seems to me to be helpful in adumbrating the various principles:

(1) The overriding principle is that the damages are compensatory: see Attorney-General v Blake at 298 (Lord Hobhouse of Woodborough, dissenting but not on this point), Hendrix v PPX at [26] (Mance LJ, as he then was) and WWF v World Wrestling at [56] (Chadwick LJ).

(2) The primary basis for the assessment is to consider what sum would have been arrived at in negotiations between the parties, had each been making reasonable use of their respective bargaining positions, bearing in mind the information available to the parties and the commercial context at the time that notional negotiation should have taken place: see PPX v Hendrix at [45], WWF v World Wrestling at [55], Lunn v Liverpool at [25] and Pell Frischmann v Bow at [48]-[49], [51] (Lord Walker of Gestingthorpe).

(3) The fact that one or both parties would not in practice have agreed to make a deal is irrelevant: see Pell Frischmann v Bow at [49].

(4) As a general rule, the assessment is to be made as at the date of the breach: see Lunn Poly at [29] and Pell Frischmann v Bow at [50].

(5) Where there has been nothing like an actual negotiation between the parties, it is reasonable for the court to look at the eventual outcome, and to consider whether or not that is a useful guide to what the parties would have thought at the time of their hypothetical bargain: see Pell Frischmann v Bow at [51].

(6) The court can take into account other relevant factors, and in particular delay on the part of the claimant in asserting its rights: see Pell Frischmann v Bow at [54].

1205. The assessment is ultimately an objective one, albeit that the hypothetical negotiation may be informed by evidence as to what factors and negotiating arguments the parties say (subjectively) they would have advanced.” (emphasis added)

60.  As can be seen, the process of quantifying the outcome of a hypothetical negotiation means that it cannot be precise, and is often done on a rough and ready basis.  Hildyard J in CF Partners (supra) described the exercise as “artificial” and “a question of impression” (at §1199).  In Hong Kong, Deputy District Judge Bernard Mak in Choy Nga Wai Nancy v Gentle Smart Ltd [2009] 4 HKLRD 75 described Wrotham Park damages as being awarded “on a discretionary basis and to be arbitrary in amount” (at §37).  Anthony Mann QC in Amec (supra) even described the assessment process as involving “matters of judgment which are incapable of strict national and logical exposition from beginning to end” (at §36).

61.  But however artificial or impressionistic the assessment might be, the exercise cannot be carried out in a vacuum.  The court would still need to be informed and guided by factual and/or expert evidence on the commercial and other parameters relevant to construing the hypothetical bargain between the parties in question.   On the role of expert evidence, in Vercoe & Ors v Rutland Fund Management Ltd & Ors [2010] EWHC 424 (Ch), Sales J had this to say (at §298):-

“298. In assessing the likely commercial parameters for an agreement in a Wrotham Park type case it may be relevant to take expert evidence into account: see Experience Hendrix at [46]. The relevance of expert evidence is likely to be greatest where the notional agreement on a fair price is closely analogous to normal commercial bargains in an established market; it may be much less helpful, or not relevant at all, in unusual one-off cases where there is nothing equivalent to a going rate for the type of notional transaction under consideration.”

62.  With these principles in mind, I now turn to the assessment.

(b)   Assessment of Wrotham Park Damages

63.  The present case involves a breach of a sub-let prohibition under a lease.  By its nature, I accept that it is ordinarily difficult for the landlord to assess any loss particularly where, as here, no direct damage (in the conventional sense) has been caused by the unlawful sub-letting.  This is indeed supported by the case of Crestfort (supra) where the court held that Wrotham Park damages are available to a landlord whose tenant underlet warehouse premises in breach of a tenant’s covenant, and ordered an inquiry as to damages.

64.  While such damages are available in principle, the plaintiff still bears the legal and evidential burden to prove the appropriate quantum.  This entails putting forth the necessary facts, supported by evidence, to enable the court to assess the reasonable sum that the plaintiff could have demanded for relaxing the sub-let prohibition in the hypothetical bargain.  As the above authorities show, this is to be assessed at the date of breach, on the basis that both sides are willing and are acting reasonably.

65.  The plaintiff’s contention, as spelt out in §§47-48 above, is that it could have been reasonable for it to demand no less than the market rent of the Premises had the defendant approached it to request a relaxation of the sub-let prohibition under Clause 4 of the Tenancy Agreement.  This is solely premised on the submission that the plaintiff was ready and willing to terminate and forfeit the lease if subletting persisted.

66.  With respect, I am unable to accept the plaintiff’s contention.

67.  In my view, the apparent basis for the plaintiff’s contention is the fact that, if there were any unlawful sub-letting, the plaintiff would have immediately terminated the lease and re-let at full market rent, and hence the defendant would have agreed to pay no less than the market rent as a quid pro quo in the hypothetical negotiation. 

68.  Although this may well be the plaintiff’s starting position in the negotiation, there is no evidence to suggest that the plaintiff and the defendant, both acting willingly and reasonably, would have concluded a bargain on the plaintiff’s terms.

69.  In particular, there is no evidence to enable the court to assess the parties’ respective bargaining positions, and how easy or difficult it would have been for the plaintiff to re-let the Premises as at the date of breach if it had to terminate the lease.  These factors are, in my view, highly relevant to assessing the sum the plaintiff could have demanded. 

70.  It is not hard to imagine that if the plaintiff had to terminate the lease it may not be able to re-let immediately.  It would therefore have been prudent for the plaintiff, acting willingly and reasonably, to apply a certain discount on its starting position in order to remove the risk of having to spend time and energy to evict the defendant after the termination (including by legal action) and to re-let the Premises on the open market.

71.  One other important factor in evaluating the hypothetical bargain is the profit that the defendant would expect to make from the relaxation of the covenant.  Although the anticipated profit is to be assessed at the date of the breach, it is nevertheless permissible, as the above authorities recognized, for the court to have regard to evidence on what the profit the defendant actually made from the breach.

72.  According to Mr Chan, the monthly market rent as at the date of the breach was HK$167,000.00.  While this was some HK$6,888.00 lower than the monthly fee payable by Manfred under the Service Agreement (HK$173,888.00), it should be noted that Mr Chan’s valuation was done without taking into account the cold storage facilities at the Premises, whereas the monthly fee payable by Manfred included the use of the Premises together with all ancillary warehouse facilities. 

73.  It is thus quite possible that the Premises could fetch more than the monthly rent of HK$167,000.00 on the market (and possibly approaching HK$173,888.00) if the tenant was able to benefit from the cold storage facilities.  This is indeed recognized by Mr Yiu himself in §6 of his 2^nd affirmation where he deposed “… Manfred as sub-tenant can enjoy the installed equipment [at the Premises].  In fact, the rent that Manfred paid to the Defendant may well cover such enjoyment …”

74.  Irrespective whether that is the case, one would in any event question whether it is commercial for the defendant to agree paying “no less than market rent” to the plaintiff, when all it could make is HK$6,888.00 per month (and quite possibly less) for taking the trouble and the associated risk of sub-letting the Premises to Manfred.  On the evidence before me, there is nothing to suggest that this would be likely.

75.  For all these reasons, I do not accept that the fee that the parties would have agreed in the hypothetical negotiation is the difference between the contractual rent and the market rent of the Premises as at the date of the breach (i.e. 22 May 2013).

76.  With the rejection of the plaintiff’s only basis of assessment, what then should be the quantum of the Wrotham Park damages?

77.  It should be apparent from the above discussion that the plaintiff has failed to adduce the necessary factual or expert evidence on the relevant commercial parameters to assist the court in assessing the Wrotham Park damages in the present case.  There is also no expert evidence on the commercial value of lifting the sub-let prohibition clause.

78.  As alluded to above, this may have resulted from the plaintiff’s initially mistaken formulation of its claim for mesne profits covering the entire Relevant Period. 

79.  Notwithstanding an opportunity given to the plaintiff to lodge further submissions after the hearing, the plaintiff did not address the court on the abovementioned commercial parameters in conducting a Wrotham Park assessment, or request the filing of further evidence on such matters.

80.  Although the very nature of an assessment of Wrotham Park damages is somewhat arbitrary or impressionistic, it is inappropriate for the court to simply pick a figure based on its own subjective view in the absence of necessary evidence.  There is of course evidence showing the amount of profit the defendant has made under the Service Agreement, but it is impossible for this court to guess, let alone properly assess, at what discount of that anticipated profit would the hypothetical bargain be concluded as at the date of breach, if both sides were acting willingly and reasonably.

81.  In all the circumstances, I have come to the firm view that the plaintiff has failed to discharge its burden of proof on the quantum of Wrotham Park damages in respect of the period 22 May 2013 to 29 October 2015.  On this head, I am therefore only able to award nominal damages of HK$100.00 which I consider to be the appropriate figure.

CONCLUSION ON DAMAGES

82.  Accordingly, the total amount of damages that I award to the plaintiff is the sum of HK$1,015,749.88, being the net sum of:-

(a) HK$2,600,467.14 being mesne profits in respect of the defendant’s wrongful occupation of the Premises from 30 October 2015 to 4 October 2016, plus

(b) HK$100.00 being nominal damages in respect of the defendant’s breach of the sub-let prohibition in the period 22 May 2013 to 29 October 2015, minus

(c) HK$242,614.00 being rental deposit paid by the defendant and held by the plaintiff, minus

(d) HK$1,342,203.26 being contractual rent paid by the defendant to the plaintiff in respect of the period 30 October 2015 to 4 October 2016 (i.e. 2/31 month x HK$121,307.00 + 11 months x HK$121,307.00).

INTEREST

83.  As Mr Lau informed the court at the hearing, the plaintiff does not claim any pre-judgment interest on mesne profits. 

84.  This is in line with the court’s well-established approach, as an award of interest on mesne profits would overcompensate the plaintiff (see Whitwham v Westminster Brymbo Coal and Coke Company [1896] 1 Ch 894 per Chitty J at 899; Purton Investment Ltd v Hui Ping Kam (unreported) HCA 4174/1989; 8 December 1989 per Master Chan at §11).

85.  I do not award pre-judgment interest in respect of the award of nominal damages.

86.  In relation to judgment interest, Mr Lau accepted that it is appropriate for such interest to accrue from the date of handing down of judgment until payment.

COSTS

87.  On 3 January 2018, the plaintiff’s solicitors submitted an updated statement of costs for summary assessment under O 62 r 9A of the RHC.  In that statement, the plaintiff claims the sum of HK$225,830.00 for the assessment of damages.  The defendant did not lodge any grounds of objection although this court granted leave for it to do so.

88.  Having reviewed the plaintiff’s statement, I consider that the hourly rates of the fee earners as well as the amount of time incurred are, by and large, reasonable. 

89.  I would however in the exercise of my discretion disallow the costs incurred in preparing the plaintiff’s supplemental submissions as that was necessitated by the plaintiff’s initial mistaken formulation of its claim for mesne profits, and in any event, the court has rejected the plaintiff’s claim for substantive Wrotham Park damages notwithstanding its alternative arguments made in the supplemental submissions.

90.  Adopting a broad brush approach, I therefore summarily assess the amount of costs payable by the defendant to the plaintiff in the sum of HK$160,000.00. 

91.  Despite having carried out the above costs assessment, I would make this an order nisi purely to cater for the event that any Calderbank offers or sanctioned offers etc. may have been made, especially given the defendant’s absence from the hearing. 

92.  If there were no such matters capable of varying the parties’ liability on costs, the order nisi shall become absolute within 14 days from the day of handing down of this judgment.

DISPOSITION

93.  In conclusion, I order that judgment be entered in the following terms:-

(1)   The defendant do pay the plaintiff damages in the sum of HK$1,015,749.88 together with judgment interest thereon from today until the date of payment; and

(2)   There be a costs order nisi that the costs of the assessment of damages, summarily assessed in the sum of HK$160,000.00, be paid by the defendant to the plaintiff.  In the absence of any application to vary within 14 days from today, the order nisi shall become absolute and such assessed costs shall be paid within a further 14 days thereafter.

94.  It remains for me to thank Mr Lau for the assistance he rendered to the court.