DE MONSA INVESTMENTS LTD v. RICHLY BRIGHT INTERNATIONAL LTD, 823 INVESTMENT LTD

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FACV No. 12 of 2014

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 12 OF 2014 (CIVIL)

(ON APPEAL FROM CACV NO. 247 OF 2012)

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J U D G M E N T
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Chief Justice Ma:

1. I agree with the joint judgment of Mr Justice Ribeiro PJ and Mr Justice Fok PJ.

Mr Justice Ribeiro PJ and Mr Justice Fok PJ:

2. Having contracted to purchase from the respondent (“Richly Bright”) a property on the 8^th Floor of Tower A, New Mandarin Plaza in Kowloon (“the property”), the appellant (“De Monsa”) failed to complete the purchase and summary judgment was entered against it after proceedings before Deputy High Court Judge Le Pichon.[1]  After De Monsa’s appeal to the Court of Appeal was dismissed,[2] it obtained leave to appeal from the Appeal Committee.[3]  The contract in question was the fourth in a chain of contracts for the sale and purchase of the property and leave to appeal was granted on the basis that the following question of law arises:

“Where, at the end of a chain of contracts for the sale and purchase of immovable property, the ultimate purchaser has, in breach of its contract of sale and purchase, failed to complete, what is the proper approach to determining the extent of the purchaser’s liability for such breach in relation to losses attributable to non-completion incurred up the chain of contracts?”

3. Leave was also granted on the “or otherwise” ground to enable De Monsa’s complaint that summary judgment had been granted on the basis of contested findings of fact to be addressed.

4. The issues arising necessitate an examination of the terms of the upstream contracts and the orders made in respect thereof.

A.  The chain of contracts

5. Under the first contract (“the Head Agreement”) dated 23 October 2007, Win Profit Corporation Limited (“Win Profit”) agreed to sell and World Orient Investment Limited (“World Orient”) to purchase the property for HK$107,200,000 with completion to occur on or before 17 September 2008, deposits totalling $10,720,000 (10%) being paid by World Orient.

6. By the second contract dated 5 November 2007 (“the 1st sub-sale”), World Orient agreed to sell and 823 Investment Ltd (“823”) to purchase the property for HK$123,746,130 with completion to take place on or before 17 September 2008, 3.00 pm, and with deposits totalling HK$18,561,919.50 (15%) being paid by 823.

7. The third contract was entered into on the following day, 6 November 2007 (“the 2nd sub-sale”).  823 thereby contracted to sell and the respondent Richly Bright to purchase the property for HK$133,266,600 with completion to occur on or before 17 September 2008, 1.00 pm, and with deposits totalling HK$19,989,990 (15%) being paid by Richly Bright.

8. The final contract, the subject-matter of the present appeal, was dated 8 May 2008 (“the 3rd sub-sale”) and Richly Bright thereby agreed to sell and De Monsa to purchase the property for HK$135,864,000 with completion to take place on or before 17 September 2008, 11.00 am, and with deposits totalling HK$13,586,400 (10%) being paid by De Monsa.

B.  The Orders made upon failure to complete

9. After De Monsa failed to complete the 3rd sub-sale, each of the other purchasers up the chain also failed to complete. Proceedings for breach of contract were brought by the respective vendors and judgments entered against the respective purchasers.

10. Win Profit instituted proceedings in HCA 1487/2009 against World Orient in respect of the Head Agreement.  It forfeited World Orient’s deposit of $10,720,000 but, since the Court found that on 17 September 2008 the property was worth HK$127,150,000 (considerably more than the contracted sale price), Win Profit suffered no loss and no award was made in its action.

11. World Orient brought proceedings against 823 in HCA 24/2009 in relation to the 1st sub-sale.  It forfeited 823’s deposit of HK$18,561,919.50 and obtained an award for damages in the additional sum of HK$8,704,210.50.  World Orient claimed such damages as representing (i) its loss of profit in the sum of HK$16,546,130 (being the difference between the price it was to pay Win Profit for the property and the price at which it was to on-sell the same to 823); and (ii) the loss of its deposit forfeited to Win Profit in the sum of HK$10,720,000; after giving credit for 823’s forfeited deposit.

12. 823 in turn forfeited Richly Bright’s deposit of HK$19,989,990 and its action for damages against Richly Bright in HCA 1452/2010 was settled with Richly Bright consenting to (a) an award of damages in the sum of HK$8,092,339.50 (representing (i) loss of 823’s profit in the sum of HK$9,520,470.00 being the difference between 823’s purchase and resale prices; and (ii) loss of 823’s deposit forfeited by World Orient; credit being given for forfeiture of Richly Bright’s deposit); (b) an order that it indemnify 823 in respect of the damages award of HK$8,704,210.50 made against 823 in favour of World Orient in HCA 24/2009; and (c) an order that it pay HK$1,399,298 to estate agents Centaline Property Agency Limited as liquidated damages payable under the 2nd sub-sale agreement.

C.  The orders made against De Monsa in the Courts below

13. In the first place, the Judge declared that Richly Bright was entitled to forfeit De Monsa’s deposit in the sum of HK$13,586,400.  Secondly, her Ladyship ordered De Monsa to pay Richly Bright damages in the sum of HK$9,000,990.  This represented damages to compensate Richly Bright for (i) loss of profit in the sum of HK$2,597,400 (being the difference between Richly Bright’s purchase and resale prices); and (ii) loss of the deposit paid by Richly Bright to 823 in the sum of HK$19,989,990.  Thirdly, the Judge ordered De Monsa to indemnify Richly Bright “against the sum of HK$8,704,210.50 and any further sums and legal costs due from [Richly Bright] to [823] under the Judgment [in HCA 1452/2010]”.  Apart from the said sum of HK$8,704,210.50, damages in the sum of HK$8,092,339.50 were also due from Richly Bright to 823 pursuant to the said Judgment and therefore come within the words of the Order (as the parties accept) although, oddly, the Judgment does not expressly refer to that amount.  Fourthly, the Judge ordered De Monsa to indemnify Richly Bright “against the sum of HK$1,399,298.00 ... due from [Richly Bright] to Centaline Property Agency Limited” referred to above.  These orders were upheld by the Court of Appeal in dismissing De Monsa’s appeal.

14. The effect of those orders is that De Monsa has been ordered to pay damages totalling HK$40,783,238 plus interest and costs.  Apart from the forfeiture of De Monsa’s deposit of $13,586,400, it was required to pay the additional amount of HK$27,196,838 by way of damages for failing to complete the purchase.  The award therefore imposes on De Monsa a liability which embraces the indemnities given by Richly Bright to 823, reflecting liabilities established as between parties to the upstream contracts.  The question in this appeal is whether such liability is correctly imposed.

D.   Damages for breach of contract

D.1  The basic principle

15. The object of an award of damages for breach of contract is compensatory.  It aims to place the innocent party, so far as a monetary award can do so, in the same position as if the contract had been performed in accordance with its terms.[4]  This basic principle could, however, if applied without any constraint, result in a defendant being made liable for all losses caused by a particular breach regardless of the improbability or remoteness of any item of loss.

16. Accordingly, in the mid-19^th Century landmark case of Hadley v Baxendale,[5]Alderson B formulated the test for remoteness of damage for breach of contract in the following well-known terms:[6]

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them.”

17. The limiting purpose of the rule in Hadley v Baxendaleis explained by Lord Pearce in Koufos v C Czarnikow Ltd (The Heron II)[7] as follows:

“The underlying rule of the common law is that ‘where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation with respect to damages, as if the contract had been performed’ (Parke B in Robinson v Harman (1848) 1 Exch 850, 855). But since so wide a principle might be too harsh on a contract-breaker in making him liable for a chain of unforeseen and fortuitous circumstances, the law limited the liability in ways which crystallised in the rule in Hadley v Baxendale.” [8]

And:

“The whole rule in Hadley v Baxendale limits damages to that which may be regarded as being within the contemplation of the parties.”[9]

18. The two limbs are “the practical expression of a single principle … that parties should only be liable for damages which were when they contracted within their contemplation in the event of a breach”[10] and both limbs turn on an objective assessment of what the contract-breaker knew or ought to have known.  As Lord Walker of Gestingthorpe observed in Jackson v Royal Bank of Scotland plc:[11]

“The common ground of the two limbs is what the contract-breaker knew or must be taken to have known, so as to bring the loss within the reasonable contemplation of the parties”.

19. The first limb encompasses damages that are “such as may fairly and reasonably be considered [as] … arising naturally, i.e. according to the usual course of things, from such breach of contract”.  Since every reasonable person is taken to know of the damage which flows “naturally” from a breach of the contract to which he is a party, this knowledge is imputed to a contract-breaker.  In the second limb, actual knowledge is required in respect of special circumstances giving rise to damage which cannot be said to result naturally from such a breach of contract.  Where the first limb is relied upon, the horizon of contemplation is confined to loss which arises naturally in the usual course of things and which is therefore presumed to have been within the parties’ contemplation.  Under the second limb, the horizon of contemplation is extended to loss that does not arise in the usual course of things but which flows from the circumstances of which the contract breaker had actual knowledge.

20. As Lord Reid said in The Heron II at p 385:

“The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.” (Emphasis added)

21. As explained below, later authority built upon this statement by Lord Reid to mitigate some of the uncertainties left by The Heron II.  While the House of Lords’ decision in that case clarified aspects of the rule in Hadley v Baxendale, it also generated controversial questions.  In particular, questions arose as to the degree of likelihood required for the loss to come within the first limb.  Thus, on the one hand, Lord Reid used the words “‘not unlikely’ as denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.” [12] On the other hand, as we have seen, his Lordship put the requirement in terms of “loss ... sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally”, emphasising that Alderson B in Hadley v Baxendale was “not distinguishing between results which were foreseeable or unforeseeable, but between results which were likely because they would happen in the great majority of cases, and results which were unlikely because they would only happen in a small minority of cases”.[13]  Questions naturally arise as to whether the two formulations are mutually consistent. 

22. Various linguistic formulae were suggested in an attempt to capture the desired nuance regarding the likelihood required.  For instance, Lord Upjohn stated:

“It is clear that on the one hand the test of foreseeability as laid down in the case of tort is not the test for breach of contract; nor on the other hand must the loser establish that the loss was a near certainty or an odds-on probability. I am content to adopt as the test a ‘real danger’ or a ‘serious possibility.’ There may be a shade of difference between these two phrases but the assessment of damages is not an exact science and what to one judge or jury will appear a real danger may appear to another judge or jury to be a serious possibility.”[14]

23. The meaning and application of such verbal formulae will necessarily be subject to debate.  They will sometimes fail to provide clear criteria for determining what losses are or are not too remote.

D.2  Remoteness in contract and in tort

24. As Lord Upjohn noted in the passage just cited, the rules of remoteness in contract differ from those governing remoteness in tort.  The latter rules impose a much wider liability for “any type of damage which is reasonably foreseeable as liable to happen even in the most unusual case, unless the risk is so small that a reasonable man would in the whole circumstances feel justified in neglecting it”[15] or “any damage which [the tortfeasor] can reasonably foresee may happen as a result of the breach however unlikely it may be, unless it can be brushed aside as far fetched”.[16]

25. The reason for this difference is explained by Lord Reid in The Heron II as follows:

“In contract, if one party wishes to protect himself against a risk which to the other party would appear unusual, he can direct the other party’s attention to it before the contract is made, and I need not stop to consider in what circumstances the other party will then be held to have accepted responsibility in that event. But in tort there is no opportunity for the injured party to protect himself in that way, and the tortfeasor cannot reasonably complain if he has to pay for some very unusual but nevertheless foreseeable damage which results from his wrongdoing.”[17]

26. For his part, Lord Upjohn explained the reason for the difference in the following terms:

“Once an examination of the facts establishes a breach of duty on the part of the tortfeasor, the acts and omissions of the innocent party are irrelevant until the question of contributory negligence comes to be considered. A tortfeasor may and frequently is a complete stranger to the innocent party but he is, however fleetingly in many cases, his neighbour for the purposes of the law and bound to act with due regard to his neighbour's rights whomever he may be. If he fails in such duty the law has rightly laid down a more stringent test for the assessment of damages. But in contract the parties have only to consider the consequences of a breach to the other; it is fair that the assessment of damages should depend on their assumed common knowledge and contemplation and not on a foreseeable but most unlikely consequence. The parties may moreover agree to limit or exclude liability for damage, or agree on a liquidated sum, or one party can disclose to the other special circumstances which will render a breach especially serious to him. So the rules as to the assessment of damages have diverged in the two cases, and nowadays the concept of ‘foreseeability’ and ‘contemplation of the parties’ are different concepts in the law. It is true that as a matter of language there will in many cases be no great difference between foreseeing the possibility of an event happening and contemplating the possibility of that event happening and in some of the cases, from Blackburn J in Cory v Thames Ironworks Co onwards the word foresee or foreseeable is used in connection with contract but it is clear that it has really been used in the sense of reasonable contemplation and in my view it is better to use contemplate or contemplation in the case of contract, leaving foresee or foreseeability to the realm of torts.”[18]

27. The rule in Hadley v Baxendale has been applied by this Court in the context of a sale and purchase agreement in Chen v Lord Energy Ltd.[19]  We shall address below the question of whether the losses claimed by Richly Bright against De Monsa are recoverable on Hadley v Baxendale principles.  But it is first necessary to consider the effect of the decision of the House of Lords in Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas). [20]

D.3  The Achilleas

28. In The Achilleas,a vessel under time-charter was delayed during a legitimate final voyage and, in breach of the charterers’ contract, was re-delivered to the owners nine days late.  As a result, the owners were unable to deliver the vessel in time for a follow-on charter lasting four to six months which had been fixed at a particularly lucrative charter rate they had managed to negotiate in an unusually volatile market.  Because of the late re-delivery, the owners had to renegotiate the follow-on charter and to agree to a substantially reduced rate of hire.  The owners claimed the difference between the original and renegotiated rates of hire for the entire period of the follow-on charter. That claim was allowed by a majority of arbitrators and was upheld at first instance and on appeal to the Court of Appeal.  However, the charterers’ appeal to the House of Lords was unanimously allowed and the owners’ award was restricted to the difference in the charter hire for the nine-day overrun.

29. In allowing the appeal, Baroness Hale of Richmond confined herself to the orthodox Hadley v Baxendale approach. Lord Hoffmann and Lord Hope of Craighead, however, took the view that, as Lord Hoffmann put it, the orthodox approach is only:

“... a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses”.[21]

30. Their Lordships focussed on the contractual underpinnings of the rule in Hadley v Baxendale and emphasised the need for recoverable loss to be loss flowing from the breach which is not only within the parties’ reasonable contemplation under either limb of the rule, but also loss of a type for which the contract breaker could reasonably be regarded as having assumed contractual responsibility.

31. Lord Hoffmann put this as follows:

“It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken.”[22]

32. This approach is aimed at reflecting the parties’ overall bargain, as His Lordship explains:

“The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing.”[23]

33. Lord Hope endorsed the requirement of an assumption of responsibility as a limiting principle.  He considered it insufficient to hold the charterers liable for loss constituted by the lower charter rates during the entire subsequent fixture simply on the basis that such loss was foreseeable.  His Lordship stated at §30:

“Both parties were experienced in the market within which they were operating. Late delivery under a time charter is a relatively common situation, and it is not difficult to conclude that the parties must have had in contemplation when they entered into the contract that this might occur. Nor it is difficult to conclude — indeed this was conceded by counsel for the charterers — that in a market where owners expect to keep their assets in continuous employment late delivery will result in missing the date for a subsequent fixture. The critical question however is whether the parties must be assumed to have contracted with each other on the basis that the charterers were assuming responsibility for the consequences of that event.”

34. Because Lord Walker of Gestingthorpe agreed with Lord Hoffmann and Lord Hope as well as with Lord Rodger of Earlsferry (who did not consider it necessary to enter into the discussion of assumption of responsibility[24]), some academic commentators[25] have queried whether Lord Walker accepted the concept of assumption of responsibility as relevant to remoteness of damage in contract.  However, in our view, Lord Walker’s reasoning makes it amply clear that he shared the approach of Lord Hoffmann and Lord Hope, emphasising the contractual underpinnings of the rule in Hadley v Baxendale and posing the question whether the contracting parties ought to be taken to have accepted responsibility for the type of loss in question.  Thus, referring to the concept of assumption of responsibility, his Lordship stated:

“...the underlying idea – what was the common basis on which the parties were contracting? – seems to me essential to the rule in Hadley v Baxendale as a whole. Businessmen who are entering into a commercial contract generally know a fair amount about each other's business. They have a shared understanding (differing in precision from case to case) as to what each can expect from the contract, whether or not it is duly performed without breach on either side. No doubt they usually expect the contract to be performed without breach, but they are conscious of the possibility of breach.”[26]

35. Referring to the speeches in The Heron II, Lord Walker stated:

“...their Lordships had well in mind (but did not, perhaps, spell out at length) that it is not simply a question of probability. It is also a question of what the contracting parties must be taken to have had in mind, having regard to the nature and object of their business transaction.”[27]

36. Relating the concept of assumption of responsibility to what Lord Reid had stated in The Heron II, Lord Walker continued:

“[The majority of the arbitrators] accepted and applied the owners' submission that ‘what mattered was that the type of loss claimed was foreseeable’ (para 18 of the majority reasons). That was in my opinion too crude a test, and it was an error of law to adopt it. What mattered was whether the common intention of reasonable parties to a charterparty of this sort would have been that in the event of a relatively short delay in re-delivery an extraordinary loss, measured over the whole term of renewed fixture, was, in Lord Reid's words,

‘sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within [the defaulting party's] contemplation.’”[28]

37. The assumption of responsibility therefore provides a criterion in appropriate cases for deciding when it is or is not proper to hold a contract breaker liable for loss of a particular type.  As Lord Hoffmann pointed out in The Achilleas,[29] it provides the only rational basis for the distinction drawn by the Court of Appeal between losses from “particularly lucrative dyeing contracts” and general loss of profits by the laundry in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd.[30]

38. Whether a contract breaker has assumed responsibility for a particular type of loss is decided by viewing the nature and object of the contract against its commercial background.  Adopting an approach similar to that for deciding whether a contractual term should be implied,[31] one ascertains by reference to objective indicia, whether the parties should be taken to have intended that the relevant type of loss flowing from breach of the contract falls within the scope of the contract breaker’s assumption of responsibility.  As Lord Walker put it:

“...what is most important is the common expectation, objectively assessed, on the basis of which the parties are entering into their contract.”[32]

39. In The Achilleas, objective indicia leading to the conclusion of non-assumption of responsibility by the charterers included the general expectations in the relevant market;[33] the fact that at the time of entering into the contract, the risk was unquantifiable by the charterers;[34] that the terms of the follow-on charter agreed between the owners and the subsequent charterers was something over which the defendant charterers had no control and could not predict;[35] and thus, that the terms of the next charter were, in relation to the charterers, res inter alios acta.[36]

40. As Toulson LJ pointed out in Supershield Ltd v Siemens Building Technologies FE Ltd, the assumption of responsibility, whilst usually a limiting principle, can also operate to include certain heads of loss.  Thus, in The Achilleas, the effect was exclusionary since:

“...the contract breaker was held not to be liable for loss which resulted from its breach although some loss of the kind was not unlikely. But logically the same principle may have an inclusionary effect. If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances.” [37]

41. With respect, the analysis in The Achilleas regarding the concept of assumption of responsibility is compelling.  It represents a logical extension of the rule in Hadley v Baxendale, building upon Lord Reid’s formulation mentioned above.[38]  Being firmly grounded in the contractual principles governing the relationship between the parties, the assumption of responsibility concept provides a principled basis for distinguishing between losses which are or are not too remote.  We unhesitatingly adopt it as representing the law in Hong Kong.

E.   Damages for breaches of sale and purchase agreements

42. As noted in Section D.1 above, the objective of an award of damages for breach of contract is to place the innocent party in the same position as if the contract had been performed in accordance with its terms.  In the case of a contract for the sale and purchase of property, where the purchaser breaches the contract by failing to complete, it is often said that the vendor will, in the ordinary case, be entitled to an award of damages equal to the difference between the contract price and the market value of the property at the completion date.[39] 

43. Thus, if the contract price is HK$10 million but the market value of the property on the date of completion is only HK$9 million, non-completion by the purchaser causes the vendor a loss of HK$1 million, entitling him to damages in that amount.  Since the vendor retains the property after the purchaser’s default, he could if he chooses, sell the property on the market for HK$9 million.  His HK$1 million award of damages therefore places him in the same position in monetary terms as if the contract had been duly performed.[40]

44. If, on the other hand, the market value of the property has risen above the contract price, the vendor suffers no loss.  On the purchaser’s default, he retains a property worth more than the amount he would have received if the contract had been performed and is able to sell the retained property for more than the contract price.

45. Where it is the vendor who fails to complete, the purchaser is similarly entitled to the difference between the contract price and the market value of the property at the completion date.  If the market value has gone up, he will be entitled to damages to compensate him for the loss of his good bargain.  If, on the other hand, the market value has fallen, he will not recover any damages since he will have suffered no loss since he could purchase an equivalent alternative property on the market for less than the contract price.

46. The foregoing discussion relates to sales between the owner of the property and his direct purchaser.  The position is different where the vendor and purchaser are confirmor and sub-purchaser who are parties to a sub-sale agreement.  The present case involves, of course, a string of such sub-sales.

47. A party selling as confirmor does not, if his sub-purchaser fails to complete, stand in the same position as the vendor under the head agreement unless he completes his own contract with his vendor upstream and acquires the property.  If he does not complete his purchase, he will not be left holding the property by virtue of his sub-purchaser’s default.  His loss in such cases therefore cannot be measured by comparing the contract price with the market value of the property since he does not hold a property which he can sell on the market.  Instead, the measure of the confirmor’s loss is the difference between the price at which he had contracted to purchase the property and the on-sale price agreed with his sub-purchaser.

48. Thus, if the confirmor contracts to purchase the property for HK$10 million and to sell to his sub-purchaser for HK$12 million, his loss is HK$2 million on the sub-purchaser’s non-completion.  That is the position whether the market value of the property happens to be HK$9 million or HK$13 million at that date.  Since the confirmor (who has not completed his own purchase) does not have the property to sell, evidence of the market value of the property is irrelevant in computing his loss.

49. The position outlined above applies to confirmors in a chain of sub-sale agreements.  Each confirmor’s loss, upon his sub-purchaser defaulting, is his loss of bargain, being the difference between the price that the sub-purchaser agreed to pay him and the price at which he contracted to purchase the property from his vendor.  Only a confirmor who has acquired and is left holding the property due to non-completion by the purchaser, measures his loss in terms of the difference between contract price and market value.

F.  Deposits in sale and purchase agreements

F.1  The legal nature of deposits

50. It is almost universally the practice in Hong Kong for vendors to require purchasers to pay a deposit if there is any appreciable gap in time between contract and completion.  The legal nature of a deposit was considered by this Court in Polyset Ltd v Panhandat Ltd.[41]  It is a sum representing a percentage of the purchase price provided by the purchaser as an earnest to guarantee his performance of the contract and consideration for the vendor’s withdrawal of his property from the market.  Provided the amount paid as a deposit is reasonable, the deposit amount stands to be forfeited to the payee in the event of non-performance by the payer.[42]

51. The vendor’s ability to forfeit a defaulting purchaser’s deposit is thus a highly significant factor in the parties’ contractual relationship.  It provides a secure commercial basis for a vendor to enter into a binding contract with a counterparty which may, for instance, be a company with a merely nominal paid up capital.  This is well-illustrated in the present case where both 823 and Richly Bright are HK$2 companies but which were nevertheless able to put up deposits in the respective sums of HK$18,561,919.50 and HK$19,989,990.

52. In Polyset, the Court set out the test for determining the reasonableness of a deposit amount in the following terms:[43]

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

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

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

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

53. In the present case, two of the deposits paid were for 15% of the purchase price.  They therefore exceeded the conventional 10% amount, but the Court of Appeal held that 15% deposits were justified in the prevailing circumstances involving rapid sub-sales in a volatile market.[44]  We see no reason to disagree and will treat the deposits in the present case as forfeitable in principle.

54. A deposit will be liable to forfeiture on breach of contract regardless of whether non-performance by the party in breach has caused the innocent party any, or as much, actual loss.[45]  Thus, a vendor who retains a property after his purchaser fails to complete will be entitled to forfeit the deposit even if the market price of the property has risen above the contract price.

55. However, if a vendor has suffered loss which exceeds the deposit amount, he is entitled, after forfeiting the deposit, to sue for damages, giving credit for the amount of the forfeited deposit.[46]  So if under a head agreement, the contract price is HK$10 million and the purchaser has paid a deposit of HK$1 million, if the market value of the property should be HK$8 million at the date of the purchaser’s failure to complete, the vendor will have a claim for HK$2 million damages and can recover an additional HK$1 million in damages, giving credit for the HK$1 million deposit forfeited.

56. A confirmor is similarly able to forfeit the deposit paid by his non-completing sub-purchaser, but he will not have a claim for additional damages unless his deposit fails to cover the whole of the profit he would have made on the sub-sale.  Thus, if the confirmor has contracted to purchase the property for HK$10 million and to on-sell it for HK$10.5 million, having taken a deposit of HK$1 million from the sub-purchaser, he will have no claim against his sub-purchaser for damages since the deposit he forfeits will exceed the amount of his loss of bargain (HK$500,000).  On the other hand, however, if the confirmor had contracted to purchase the property for HK$10 million and to on-sell for HK$13 million but had only taken a deposit of HK$1 million, he will have a claim against his sub-purchaser for damages of HK$3 million, against which he must give credit for the HK$1 million deposit forfeited.

F.2  Deletions of standard clauses in the present case

57. The 3rd sub-sale was entered into by the parties signing a “Provisional Agreement for sale and purchase” in a standard form provided by an estate agent.  Two clauses in that form were deleted by the parties. They provided as follows:

Clause 7: “Should the purchaser fail to complete the purchase in the manner herein contained, the initial deposit shall be forfeited to the Vendor and the Vendor shall then be entitled at his absolute discretion to sell the said premises to anyone he thinks fit and the Vendor shall not sue the Purchaser for any liabilities and/or damages or to enforce specific performance.

Clause 8: Should the Vendor after receiving the initial deposit paid hereunder fail to complete the sale in the manner herein contained, the Vendor shall immediately compensate the Purchaser with a refund of the initial deposit together with a sum equivalent to the amount of the initial deposit as liquidated damages and the reimbursement/payment (as the case may be) of stamp duty of the said premises and the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

58. At various stages, one or other of the parties has sought to rely on this deletion in aid of an argument favouring or countering the recoverability damages for all the heads of loss awarded below. In our opinion, these deletions are of no significance to the issues under discussion.

59. If they had not been deleted, the parties would have put in place an agreed regime for limiting liability in the event that either of them chose not to complete the sale and purchase.  If it was the purchaser who chose not to complete, the vendor would have agreed to confine its remedy to forfeiture of the deposit.  This would have modified the common law rule which would otherwise have entitled the vendor to pursue the purchaser for any additional loss, not covered by the deposit, incurred as a result of the purchaser’s non-completion.  Conversely, if it was the vendor who chose not to complete, the purchaser would have agreed to confine its remedy to a return of the deposit, any stamp duty paid and a sum equivalent to the deposit as liquidated damages, foregoing any potential common law claim for additional loss not covered by the liquidated damages amount.  Both parties would also have foresworn an action for specific performance.

60. The effect of deleting these two clauses is therefore simply to remove reliance on the regime for limiting liability in the event of non-completion provided under the standard form agreement.  It follows that the usual common law position regarding deposits and damages which has been described in Section F.1 above applies without modification. 

G.   Applying the principles in the present case

G.1  The correct measure

61. As set out above,[47] Richly Bright agreed to sell and De Monsa to purchase the property for HK$135,864,000 with deposits totalling HK$13,586,400 being paid by De Monsa.  Completion was due on or before 17 September 2008, 11.00 am, but De Monsa failed to complete.  De Monsa knew that Richly Bright was selling as a confirmor as was stated expressly in the contract.[48]  Richly Bright had itself in fact contracted to purchase the property from 823 for HK$133,266,600 and had paid to 823 deposits totalling HK$19,989,990.  Richly Bright did not complete its own agreement with 823 and had its deposit forfeited by 823.  Applying the principles discussed above, for what amount of damages should De Monsa properly be held liable?

62. Richly Bright and De Monsa must both be taken to have known that if De Monsa did not duly complete its purchase, Richly Bright stood to lose the anticipated profit on its re-sale as confirmor to De Monsa.  Such anticipated profit was in the sum of $2,597,400, which constitutes the applicable measure of Richly Bright’s loss since it did not complete its own contract to purchase the property from 823.  Such loss is plainly recoverable under the first limb of Hadley v Baxendale.  It may fairly and reasonably be considered as arising naturally, i.e., according to the usual course of things, from De Monsa’s failure to complete its purchase, placing such loss within the parties’ reasonable contemplation.  We might add in passing that there has been no suggestion that any communication of special circumstances relevant to engaging the second limb of the rule in Hadley v Baxendale ever passed between Richly Bright and De Monsa.

63. At this point in the analysis, the deposit assumes great importance.  As Lord Pearce pointed out in The Heron II,[49] in entering into contracts, parties often “have the opportunity to define clearly in respect of what they shall and shall not be liable”.

64. The parties in the present case have availed themselves of that opportunity.  In agreeing that De Monsa should provide Richly Bright with a 10% deposit, the parties were expressly making provision for possible non-completion by De Monsa.  They were experienced property traders and clearly can be taken to have known that if such breach should occur, Richly Bright would be entitled to forfeit the deposit and would have a claim in damages if there was any loss flowing from that breach not covered by the deposit.  They were making express provision in accordance with the usual practice of the Hong Kong property market, delineating the responsibility assumed by De Monsa in the event of its failure to complete.  In the present case, De Monsa assumed responsibility to compensate Richly Bright by agreeing to the forfeiture of its deposit in the sum of HK$13,586,400.  It transpires that this amounted to an assumption of responsibility to compensate Richly Bright for an amount considerably exceeding Richly Bright’s actual loss of bargain.  As further explained in Sections G.2 to G.4 below, Richly Bright has suffered no recoverable loss over-topping the deposit and thus has no claim for any additional damages.

65. The contract entered into by Richly Bright and De Monsa therefore has as its nature and object, the sale of property by a confirmor to a sub-purchaser who has provided a forfeitable 10% deposit as an earnest of the latter’s performance of the contract.  Whether expressed in terms of the parties’ reasonable contemplation or of responsibility assumed in the event of non-completion, De Monsa’s liability is limited to the forfeiture of its deposit. 

G.2  The additional damages erroneously awarded

66. As we have seen, the Courts below correctly declared that Richly Bright was entitled to forfeit the deposit.  However, with respect, they fell into error in:

(a) holding that De Monsa was additionally liable for HK$9,000,990, representing damages overtopping the forfeited deposit arrived at by adding together (i) Richly Bright’s abovementioned loss of profit in the sum of HK$2,597,400 and (ii) loss of the deposit paid by Richly Bright to 823 in the sum of HK$19,989,990; and,

(b) ordering De Monsa to indemnify Richly Bright against the sum of HK$8,704,210.50 plus HK$8,092,339.50 being sums payable under the Judgment consented to by Richly Bright in favour of 823; and

(c) ordering De Monsa to indemnify Richly Bright against the sum of HK$1,399,298.00 due from Richly Bright to Centaline Property Agency Limited arising under the 2nd sub-sale agreement.

G.3  The reasoning in the Courts below

67. At first instance, the issues presently under discussion were little explored.  The Judge merely agreed with counsel for the plaintiff that since De Monsa knew that Richly Bright was selling as confirmor, “the heads of loss itemized would have been within the reasonable contemplation of the parties” at the relevant time.[50]

68. In the Court of Appeal, referring to this Court’s decision in Chen v Lord Energy Ltd,[51]Kwan JA (with whom the other members of the Court agreed) framed the issues in the following terms:

“The two questions framed in Chen v Lord Energy at para 25, as applied to the present situation, would be as follows: (1) whether, on the information available to the parties at the relevant time, the possibility of there being prior sub-sales, and the possibility of corresponding default in completion in the chain of transactions if the ultimate purchaser should fail to complete, was within the reasonable contemplation of Richly Bright and De Monsa; and (2) if it was not within the parties’ reasonable contemplation, whether in the circumstances of this case, knowledge of the possibility of prior sub-sales and corresponding default in completion in the chain of sub-sales if the ultimate purchaser should fail to complete, could be imputed to De Monsa. It is unnecessary for Richly Bright to show that De Monsa had actual knowledge of these matters.”[52]

69. After referring to the parties’ familiarity with investing in the property market; the heated state of the market and the common occurrence of confirmor sales,[53] her Ladyship held Richly Bright’s losses to be recoverable as falling within the rule’s first limb, concluding:

“Given the background, knowledge and understanding of the parties, and the market condition at the time, it is clear that the possibility of there being one or more prior sub-sales of the property was nothing unusual and would be easily foreseeable. It would also be easily foreseeable that in such a volatile market, if there should be default by the ultimate purchaser, there might well be a domino effect causing corresponding default in the chain of sub-sales, particularly for a substantial property transaction, as were the transactions in respect of the property, all of which were over $100 million.”[54] (Emphasis supplied)

70. Kwan JA also held that, if necessary she was prepared to “impute knowledge to De Monsa of the possibility of prior sub-sales and corresponding default in the chain of sub-sales in the event the ultimate purchaser should fail to complete”[55] on the basis that the terms of the upstream agreements could have been discovered by a Land Registry search which would have revealed that the respective contracts provided for completion on the same day with two hour gaps between each completion.  She held that it “must be easily foreseeable that if the ultimate purchaser should default, corresponding defaults in the chain of sub-sales would be entirely possible.”[56] (Emphasis supplied)

71. Her Ladyship held[57] that The Achilleas did not assist De Monsa because:

“... the available evidence plainly indicates that the losses attributable to the sub-sales were within the reasonable contemplation of the parties at the material time, so this is not a situation in which foreseeable losses were of a kind which was completely unpredictable and for which the parties cannot reasonably be presumed to have assumed responsibility, as in the case under discussion in The Achilleas...”

Adding that that was a case:

“where the court was dealing with a highly specialised area of commercial law”.

G.4  Errors in the approach below

(a)  The wrong test

72. With respect, in reaching the conclusion that all the losses claimed fell within the first limb of Hadley v Baxendale,both the Judge at first instance and the Court of Appeal applied the wrong test.  Contrary to the Judge’s conclusion, it was not enough to hold De Monsa liable for all the heads of loss enumerated simply because it “knew that Richly Bright was selling as confirmor”. 

73. Equally, it was not correct for the Court of Appeal to hold that such heads of loss were recoverable because the “possibility of there being one or more prior sub-sales of the property was nothing unusual and would be easily foreseeable”; and that “[it] would also be easily foreseeable that in such a volatile market, if there should be default by the ultimate purchaser, there might well be a domino effect causing corresponding default in the chain of sub-sales”.[58]  Nor was it correct to use as a basis for liability “imputation” of such knowledge to De Monsa based on “constructive knowledge” of the terms of the upstream agreements.[59] 

74. In purporting to adapt paragraph 25 of Chen v Lord Energy to the present case, the Court of Appeal actually misquoted and misapplied what Chan PJ had in fact said.  His Lordship stated:

“In the present case, it is necessary to decide two questions: (1) whether on the information available to the parties at the relevant time, the possibility of a re-sale by the purchaser with the resultant loss due to a drop in the market value of the property which is being claimed by the purchaser, was within the reasonable contemplation of the parties, that is, whether such loss was liable to result in the ordinary course of things from the stay; and (2) if it was not within the parties' reasonable contemplation, whether in the circumstances of this case, the knowledge that the purchaser was liable to resell the property after assignment can be imputed to the vendors.” (Italics supplied)

75. The Court of Appeal ignored the italicised words and so transposed the test from Chan PJ’s focus in orthodox fashion on the likelihood of the relevant loss[60] to a focus merely on the foreseeable possibility of there being prior sub-sales and corresponding defaults in completion.  It thereupon erroneously upheld the award of damages against De Monsa for all the upstream losses simply on the basis that such losses arose out of foreseeable prior sub-sales.

76. Even if the focus had properly been on the types of loss claimed rather than on the mere fact of prior sub-sales, for the reasons set out in Section D.2 above, reasonable foreseeability of such loss is not enough to bring it within the first limb of the rule.  As we have seen, the test of reasonable foreseeability applicable in tort cases is not the test for remoteness of damage in contract. In contract cases, recoverable loss is subject to the limiting principle that it must, as Lord Reid stated, be “sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally”.  And applying The Achilleas, it must be loss for which the contract breaker is taken to have assumed responsibility.

(b)  Wrong to allow Richly Bright to recover its forfeited deposit

77. As noted in Section G.2 above, in awarding damages against De Monsa in the sum of HK$9,000,990, the Courts below were holding De Monsa liable to compensate Richly Bright for the forfeiture by 823 of Richly Bright’s deposit in the sum of HK$19,989,990.

78. On the basis of the analysis set out in Section G.1 above, we consider that award to be incorrect, the proper measure being limited to the forfeiture of De Monsa’s deposit. 

79. That conclusion may further be supported as follows.  The assessment of damages must focus on the consequences of breach of the contract to which the defendant is a party, not on what flows from breach of someone else’s contract.  This was overlooked when the Court of Appeal treated De Monsa’s non-completion as having a “domino effect”, thus sweeping up the entire chain of sub-sales.[61] Its approach ignores the fact that each sub-sale is a separate contract under which each sub-purchaser has contracted to complete its purchase and given a substantial deposit as an earnest of its performance.  It plainly does not follow that the failure of each upstream purchaser to complete may “fairly and reasonably be considered as arising naturally, i.e. according to the usual course of things” from De Monsa’s failure to complete its purchase. 

80. Each purchaser plainly reaches its own decision whether to complete its sale and purchase agreement, a decision which may be determined by commercial considerations.  Thus in the present case, it was common ground between Win Profit and World Orient that the market value of the property at the completion date was $127,150,000. On that basis, it is hard to see any reason to assume that World Orient would fail (as it did) to complete.  Objectively, it might readily have been expected to complete so as to avoid forfeiture of its deposit and to acquire a property worth HK$19.95 million more than the contract price.  Thus, World Orient’s non-completion cannot be assumed to be part of any domino effect stemming from De Monsa’s non-completion.

81. Of course that valuation does not bind the parties to the other contracts.  But, for the sake of argument, if the correct valuation was indeed $127,150,000 at the completion date, 823 would also have had good, objective, commercial grounds – not forfeiting its deposit and acquiring for $123,746,130, a property worth $3.4 million more – for completing its own purchase.  On that hypothesis, it is not at all obviously to be assumed that 823’s failure to complete occurred like a falling domino caused by De Monsa’s non-completion.  The point is that the state of the market might well provide commercial reasons for independent decisions made by upstream buyers regarding completion or otherwise of their respective contracts.

82. Nor is it naturally to be assumed that the upstream purchasers would be unable to finance acquisition of the property from their upstream vendors unless funded by De Monsa’s completion monies.  The property was a commercial unit being purchased and re-sold by professional property traders.  As noted in Section A above, whatever the capitalisation of each of the purchaser companies might have been, they each had been able to put up substantial cash deposits ranging from HK$10,720,000 to HK$19,989,990.  Kwan JA described the persons behind Richly Bright and De Monsa as seasoned and sophisticated investors with a good understanding of the property market who had frequently traded in properties in a very substantial way.  Mr Lauw of De Monsa, for instance, entered into 151 transactions between March 2007 and September 2008 at a total cost of some $7 billion, the most active months peaking at 15 transactions.  There is accordingly no basis for assuming that if any of the upstream purchasers had decided to complete notwithstanding De Monsa’s failure to complete, they would have been prevented from doing so for lack of financial resources.

83. Richly Bright plainly made its own decision not to complete its purchase, triggering forfeiture of the deposit that it had provided to 823. It obviously knew that forfeiture would be the consequence.  Loss of the deposit did not flow from De Monsa’s breach of the 3^rd sub-sale agreement, but from Richly Bright’s own decision not to complete the 2nd sub-sale.  Forfeiture of Richly Bright’s deposit was, so far as De Monsa was concerned, res inter alios acta.

(c)  Wrong to hold De Monsa liable for indemnities consented to by Richly Bright

84. We have also noted in Section G.2 above that the Courts below ordered De Monsa to indemnify Richly Bright against the respective sums of HK$8,704,210.50 and HK$8,092,339.50 payable under the Consent Judgment made against Richly Bright in favour of 823. 

85. There is no basis for concluding that at the time of entering into the 3^rd sub-sale agreement, it would have been in the parties’ reasonable contemplation that non-completion by De Monsa should result in losses voluntarily incurred by Richly Bright agreeing to indemnify parties further upstream in respect of their losses.  There is no basis for taking De Monsa to have assumed responsibility for such voluntarily assumed losses.

86. All the indicia point away from any such assumption of responsibility.  As explained in Section F above, the general expectation in the Hong Kong property market is that a purchaser who breaches his contract by failing to complete loses his deposit and, if loss exceeding the amount of the deposit is incurred by the vendor, finds himself liable to damages for the balance.  No one familiar with market practices would expect the defaulting purchaser to assume responsibility for more remote losses involving indemnities voluntarily given by the vendor in respect of losses incurred by parties to contracts further upstream.  Liabilities so incurred would have been wholly unquantifiable and unpredictable at the time De Monsa entered into the 3^rd sub-sale contract.  There happened to be three upstream contracts in the present case.  But if there is to be liability simply on the basis that prior sub-sales are foreseeable, such liability would in principle cover however many additional sub-sales there might be in the upstream chain.  That would make the ultimate purchaser arbitrarily liable for fortuitous matters over which it had no control.

(d)  Wrong to hold De Monsa liable to indemnify Richly Bright for its liability to the estate agent

87. As noted in Section G.2, De Monsa was also ordered to indemnify Richly Bright against the sum of HK$1,399,298.00 which had been due from Richly Bright to Centaline Property Agency Limited under Richly Bright’s contract with 823 and Centaline.

88. That sum was payable “as liquidated damages” on Richly Bright’s failure to complete.  We can see no basis for holding De Monsa responsible for that liability.  It was not in the parties’ reasonable contemplation.  Nor was it a responsibility that De Monsa should be taken to have assumed.  It was a matter agreed to in the tri-partite 2^nd sub-sale agreement to which De Monsa was a stranger.

H.  Disposal of this appeal

89. For the foregoing reasons, we would allow the appeal and set aside the Orders made by the Judge and the Court of Appeal save in so far as they declared Richly Bright entitled to forfeit De Monsa’s deposit.

90. Richly Bright forfeited the deposit at the outset. On the basis of the result we have reached, the entirety of this litigation has ultimately proved fruitless since we have held that it has no further entitlement. In the circumstances, subject to the paragraph which follows, we would make an order nisi that Richly Bright pay De Monsa’s costs here and in both courts below, with liberty to Richly Bright if so advised, to make written submissions as to costs, to be lodged within 14 days of the date of this judgment and liberty to De Monsa to file submissions in reply within 14 days thereafter. We would direct that the order nisi should stand as an order absolute in default of such submissions, without further directions.

91. 823 saw fit to intervene in these proceedings and actively supported Richly Bright in its pursuit of relief beyond forfeiture of De Monsa’s deposit, making and filing submissions of its own.  We would accordingly make an order nisi that, with effect from the date of 823’s joinder as an Interested Party, 823 be jointly and severally liable with Richly Bright for the costs payable to De Monsa here and below.  We would grant 823 liberty if so advised to make written submissions as to costs to be lodged within 14 days of the date of this judgment, with liberty to De Monsa to file submissions in reply within 14 days thereafter, the order nisi to stand as an order absolute in default of such submissions.

Mr Justice Tang PJ:

Introduction

92. By a provisional agreement for sale and purchase dated 8 May 2008 (“the De Monsa Agreement”), the plaintiff, Richly Bright International Ltd (“Richy Bright”), agreed to sell and the defendant De Monsa Investments Ltd (“De Monsa”), agreed to buy, the 8^th floor of Tower A, the Mandarin Plaza, No 14 Science Museum Road, Kowloon (“the property”), for $135,864,000.00, with completion at 11 am on 17 September 2008.  Time was of the essence.  Deposits totalling 10% of the purchase price were paid.

93. Two days before 17 September 2008, Lehman Brothers collapsed and completion did not take place.

94. Before this court, it is accepted that De Monsa was in breach of the De Monsa Agreement such that the deposits paid were liable to be forfeited and that it is liable to compensate Richly Bright the difference, if any, between the contract price and the market price at the time of breach.

95. The present proceedings were commenced by Richly Bright against De Monsa in 2012, in which, inter alia, it claimed a declaration that it was entitled to forfeit the deposits paid, which, as I have said, is not contested in this court.  However, there was no claim for damages based on the difference, if any, between the contract price and the market price.  Instead, Richly Bright claimed damages and indemnities, on the basis that, because Richly Bright was selling as a confirmor[62] in a chain of confirmor sales De Monsa was liable to compensate Richly Bright for all losses incurred by the parties in the chain.  That Richly Bright was selling as confirmor was expressly stated in clause 5 of the De Monsa Agreement.  Moreover, the rider to the De Monsa Agreement stated that the property was sold subject to the terms and conditions of the “Principal Agreement (‘Head Agreement’)”, insofar as they were consistent with the De Monsa Agreement.  It is these claims which led to this appeal.

96. Richly Bright applied for summary judgment and on 15 October 2012, Deputy Judge Le Pichon gave judgment in favour of Rightly Bright as claimed.  Her ladyship said these heads of claims were recoverable because they would have been:

“within the reasonable contemplation of the parties at the time of the provisional agreement … as the likely consequences of the breach …”[63]

Her judgment was affirmed by the Court of Appeal[64] on 22 November 2013.  

97. The Appeal Committee granted leave to appeal on 29 September 2014, and formulated the question of great general or public importance as follows:

“Where, at the end of a chain of contracts for the sale and purchase of immovable property, the ultimate purchaser has, in breach of its contract of sale and purchase, failed to complete, what is the proper approach to determining the extent of the purchaser’s liability for such breach in relation to losses attributable to non-completion incurred up the chain of contracts?”[65]

The Chain

98. Although the head agreement was not identified in the De Monsa Agreement, it was the formal sale and purchase agreement made on 23 October 2007 between Win Profit Corporation Ltd (“Win Profit”), the registered owner of the property, and World Orient investment Ltd (“World Orient”), for $107,200,000.00.  10% deposit was paid and it provided for completion to take place on or before 5 pm on 17 September 2008. Time was made expressly of the essence.

99. Between the Head Agreement and the De Monsa Agreement, there were two further Sub-Sale Agreements.[66]  The first Sub-Sale Agreement was the preliminary sale and purchase agreement made between World Orient, as confirmor, and 823 Investment Ltd (“823”)[67] as purchaser made on 5 November 2007 (“the 823 agreement”).  The price was $123,746,130.00.  A 15% deposit ($18,561,919.50) was paid and it was agreed that completion should take place on or before 3 pm on 17 September 2008.

100. The second Sub-Sale Agreement was the preliminary sale and purchase agreement dated 6 November 2007 made between 823 as confirmor and Richly Bright, as purchaser (“the Richly Bright agreement”).  The consideration was $133,266,600.00.  A 15% deposit ($19,989,990.00) was paid and completion was to take place at 1 pm on 17 September 2008. 

101. None of the earlier Sub-Sale Agreements was completed, which led to proceedings based on the respective agreements.

102. Win Profit took action to claim damages, after forfeiting the deposit[68], representing the difference between the contract price and the price of $80,019,900.00 which Win Profit realized on resale on 17 April 2009.[69]  It was agreed by the parties there that the market value of the property as at 17 September 2008 was $127,150,000.00.[70] Win Profit’s claim failed because it was held that it had failed to sell within a reasonable time.

103. In HCA 24/2009, World Orient obtained judgment against 823 in the sum of $8,704,210.50.00 arrived at as follows:

Particulars	HK$
Loss of profit, being the difference between World Orient’s purchase price of $107,200,000.00 and the sale price to 823 of $123,746,130.00	16,546,130.00
Add forfeiture of deposits paid by World Orient	10,720,000.00
Less forfeiture of deposits paid by 823	(18,561,919.50)
	8,704,210.50
	===========

104. In HCA 1452/2010, a consent order was made that Richly Bright indemnifies 823 for the sum of HK$8,704,210.50 due to World Orient in HCA 24/2009 and pays 823 $8,092,339.50, which latter sum represented 823’s loss of profit on its sale to Richly Bright of $9,520,470.00 after netting off the forfeiture of the deposit paid by 823 to World Orient of $18,561,919.50 against the forfeiture by 823 of the deposit paid by Richly Bright of $19,989,990.00.

This Action

105. In the present action, Richly Bright claimed against De Monsa damages in the sum of $9,000,990.00 which represented Richly Bright’s profit on its sale to De Monsa of $2,597,400.00 and the difference between the 15% deposit it paid to 823 and the forfeiture of the 10% deposits paid by De Monsa.  In addition, Richly Bright sought indemnities against De Monsa in respect of any sum which Richly Bright was liable to pay to 823 as well as the costs payable to 823 in HCA 1452/2010.[71]  

Hadley v Baxendale

106. As noted, Richly Bright succeeded because the courts below were satisfied that these damages were recoverable because they would have been within the reasonable contemplation of Richly Bright and De Monsa at the time they entered into the De Monsa agreement.  For Kwan JA[72] the relevant question  was:

“… whether, on the information available to the parties at the relevant time, the possibility of there being prior sub-sales, and the possibility of corresponding default in completion in the chain of transactions if the ultimate purchaser should fail to complete, was within the reasonable contemplation of Richly Bright and De Monsa;”[73]

107. Kwan JA said that given that:

“40. … the property market was in a heated condition at the time …”

41.   … it is clear that the possibility of there being one or more prior sub-sales of the property was nothing unusual and would be easily foreseeable.  It would also be easily foreseeable that in such a volatile market, if there should be default by the ultimate purchaser, there might well be a domino effect causing corresponding default in the chain of sub sales, particularly for a substantial property transaction, [which these were] ...” 

108. Kwan JA held that losses resulting from the default in the chain of sub-sales were recoverable.

109. The normal measure of damages when a purchaser has failed to complete is “the contract price less the market price.”[74] In order to recover more a plaintiff “has to show that the loss in respect of which he claims damages was caused by the defendant’s wrong, and also that the damages are not too remote to be recoverable.  The principle of remoteness of damage is a limiting principle of policy …”[75]  The principle was famously expressed by Baron Alderson’s in Hadley v Baxendale (1854) 9 Exch 341 in these words: damages for breach of contract

“… should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the [claimants] to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them.”

110. Robert Goff J has explained that the principle is no longer stated in terms of two rules but rather in terms of a single principle and that one decides “each case on the basis of the relevant knowledge of the defendant”.[76]  I believe the principle is that only damages which would arise generally and in the great multitude of cases would be recoverable, and such damages may vary according to the defendant’s relevant knowledge including special circumstances known to the defendant at the time of the contract.  In other words there is not a different principle according to whether or not special circumstances were known to the defendant.

111. Clear support for this view can be found in the speech of Lord Hodson in the Heron II[77] where he said he found guidance from the use in more than one place in the judgment in Hadley v Baxendale of the expression “in the great multitude of cases” which indicated “the damages  recoverable for breach of contract are such as flow naturally in most cases from the breach, whether under ordinary circumstances or from special circumstances due to the knowledge either in the possession of or communicated to the defendants.  This expression throws light on the whole field of damages for breach of contract and points to a different approach from that taken in tort cases.”  This passage was cited by Lord Rodger of Earlsferry in The Achilleas[78], who also found guidance from the use of the expression “in the great multitude of cases”. 

112. Lord Walker of Gestingthorpe also recognised it as one principle and agreed with Robert Goff J.[79] 

113. I believe it is also supported by Lord Reid who said in Heron II at p 385 :

“In cases like Hadley v Baxendale or the present case it is not enough that in fact the plaintiff's loss was directly caused by the defendant’s breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.”[80] (Emphasis added)

114. The special circumstances relied on by Kwan JA were that it was a confirmor sale and the market was in a heated condition.  The latter added little to the former since it is only in an active market that there are likely to be confirmor sales.  More importantly, here, given the special circumstance of a confirmor sale, was it a reasonable and natural consequence of De Monsa’s default that Richly Bright would also default?  Is this a result that would flow naturally in the great majority of confirmor sales?  I think not.  They are not losses which would ordinarily follow from the breach of such a contract. 

115. Here, Kwan JA found in favour of Richly Bright because the chain default “would be easily foreseeable.”  And in ascertaining what was within the reasonable contemplation of the parties for this purpose, Kwan JA said the test was “a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable”.[81]  It may be that Richly Bright’s failure to complete and, indeed, the default up the chain, were not unforeseeable but, with respect, that is not the test[82].  As Lord Reid explained in The Heron II, Baron Alderson:

“was not distinguishing between results which were foreseeable or unforeseeable, but between results which were likely because they would happen in the great majority of cases, and results which were unlikely because they would only happen in a small minority of cases.”

and that

“… a result which will happen in the great majority of cases should fairly and reasonably be regarded as having been in the contemplation of the parties, but that a result which, though foreseeable as a substantial possibility, would only happen in a small minority of cases should not be regarded as having been in their contemplation...”

The Achilleas

116. The Achilleas provides a helpful illustration of the application of this approach.  It was concerned with late redelivery of a vessel by the charterers.  Under an addendum to the charter-party, redelivery was due on 2 May 2004.  In April, market rates having risen, the owners fixed a follow-on time charter with another company at the new market rate of $39,500.00 per day.  The company had the right to cancel if the vessel was not available on 8 May.  By 5 May the owner realised that the vessel would not be redelivered by 8 May, the market having fallen sharply in the meantime, in order to secure the company’s agreement to extend the cancellation date until 11 May, the revised expected redelivery date, a new daily rate of $31,500.00 was agreed.  The owner claimed against the charterer damages for breach of contract for $1,364,584.00, which represented the difference between the 2 rates for the duration of the new charter.  The arbitrators, by a majority, decided in favour of the claim.  The charterer’s appeal was dismissed by Christopher Clarke J and the Court of Appeal.  The appeal to the House of Lords[83] succeeded.  Their lordships[84] gave different reasons for allowing the appeal.  Baroness Hale of Richmond was doubtful whether the appeal should be allowed but that if it was to be allowed she preferred it to be allowed on:

“the narrower ground identified by Lord Rodger[85], leaving the wider ground[86] to be fully explored in another case and another context.”

I turn first to the narrower ground.

117. At the arbitration, Counsel for the charterer agreed that the “not unlikely” results arising from the late delivery of the vessel would include missing dates for a subsequent fixture.  And the arbitrators so found.  I think it was not so much a concession as a matter of common sense.  However, the significance of the fact that missing dates for a subsequent fixture was not unlikely is that, notwithstanding, the claim failed because, the loss of a lucrative contract in turbulent market was not the ordinary consequence of a breach of this kind.  

118. On the facts Lord Rodger held , at the time of the addendum which provided that redelivery should take place at the latest on 2 May 2004:

“60. … neither party would reasonably have contemplated that an overrun of nine days would ‘in the ordinary course of things’ cause the owners the kind of loss for which they claim damages. That loss was not the ‘ordinary consequence’ of a breach of that kind. It occurred in this case only because of the extremely volatile market conditions which produced both the owner’s initial (particularly lucrative) transaction, with a third party, and the subsequent pressure on the owners to accept a lower rate for that fixture.”

119. Here, too, the extraordinary events which preceded the date of completion, including the collapse of Lehman Brothers, (and the attendant global meltdown), which preceded the confirmors’ failure to complete when it was most probably in their interest to do so, given the likely market price at the material time[87], would not reasonably have been in their contemplation at the time of the De Monsa agreement.  The loss arising from their failure to complete was not the ordinary consequence of a breach of this kind. In the great run of cases, the normal measure of damages, namely, the difference between the market and contract price, would suffice. Indeed, even on the facts of the present case, had the market price  taken a plunge, the normal measure should also supply a ready solution.

This Appeal

120. Before us, it was submitted that since completion of the De Monsa agreement was agreed to take place at 11 am whereas Richly Bright’s purchase was to be completed at 1 pm, there was insufficient time to arrange for alternative finance, so it would have been in the reasonable contemplation of the parties at the time of the contract, that the purchasers default would lead to the confirmor’s default.  Presumably, this submission is made on the basis that given more time, Richly Bright would have been able to complete.  However, as a monograph published by the Estate Agents Authority in 2006 made clear (if clarification be needed) if a purchaser fails to complete, the confirmor “is still obliged to complete under the agreement with the owner.” That is just plain common sense.  Thus, if there was little time between the 2 completions it behove the confirmor to make timely preparation.  The fact that this was a multi-million transaction in respect of which a substantial deposit had been paid reinforces the view that objectively, the reasonable contemplation was that such preparation would be made[88].  An alternative submission, which was predicated upon Richly Bright’s inability to complete in any event, was that as Richly Bright was a shell company (it had a paid up capital of $2), it must have been in the parties’ contemplation that it could not complete if De Monsa failed to complete.  But, this shell company had paid a deposit of $19,989,990 and entered into a binding contract to complete!  In the great majority of cases, one would expect Richly Bright to complete.  Just as, no doubt when Richly Bright and 823 (another shell company) entered into their respective agreements, it was within their reasonable contemplation that the purchase would complete. 

121. We were referred to Chen & Another v Lord Energy Ltd, a decision of this court[89], which was concerned with a claim for damages arising out of an undertaking given in the Court of Appeal in return for a stay of execution of an order of specific performance.  There, the Plaintiff might have sold the property but for the stay, and the market had fallen in the meantime.  Chan PJ held, with the agreement of the other members of the court that there was ample evidence to justify the Court of Appeal’s conclusion that it was within the reasonable contemplation of the parties at the time the stay was ordered by the Court of Appeal that the purchaser might sell the property and that it might suffer loss if prevented by the stay from doing so.  The facts enumerated by Chan PJ amply justified that conclusion. The fact that in Lord Energy it was said purchase for resale was common at the time[90] would not help Richly Bright.  In the present case, the fact that it was a confirmor sale was obvious and the decision does not depend on it.  What is critical is whether it was within the reasonable contemplation of the parties that De Monsa’s failure to complete would have led to the other default(s) complained of.  Lord Energy does not provide any answer. 

122. I note however, that, at para 59 in Achilleas, Lord Rodger said:

“… the position on damages might also be different, if, for example – when a charter party was entered into – the owners drew the charterers’ attention to the existence of a forward charter of many months’ duration for which the vessel had to be delivered on a particular date. The charterers would know that a failure to redeliver the vessel in time to allow the owners to deliver it under that charter would be liable to result in the loss of that fixture. Then the second rule or limb in Hadley v Baxendale might well come into play. But the point does not arise in this case.”

123. It was not Richly Bright’s case that it had told De Monsa that it would not be able to complete if De Monsa did not complete. Moreover, the effect of the communication of such knowledge is uncertain[91] and is academic in the present case.  But I wish to note that Robert Goff J said [92]:

“… the test appears to be: have the facts in question come to the defendants knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach.” [93]

124. For the above reasons, I believe Richly Bright’s application for summary judgment in respect of these damages was misconceived and should have been dismissed.  I would allow De Monsa’s appeal.

125. Although I am able to dispose of the appeal on what Baroness Hale called the narrower ground, we have had the benefit of substantial submissions on the wider ground upon which The Achilleas was decided.  I will take this opportunity to express my view on it.  

126. There is no inconsistency between the narrower ground and the wider ground.  Lord Walker agreed with both.  So do I. 

127. Lord Hoffmann said and I respectfully agree, since all contractual liability is voluntarily undertaken, liability for damages must be founded upon the intention of the parties, gathered upon the construction of the contract as a whole, construed in its commercial background[94]. And:

“12. … It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken.”

128. And that the only rational basis for deciding whether the loss is of the type or kind for which he can be treated as having assumed responsibility and those which he could not is reflected in:

“22. … what would reasonably have been regarded by the contracting party as significant for the purposes of the risk he was undertaking.”

129. That the rules in Hadley v Baxendale as explained in The Heron II:

“24. ... are intended to give effect to the presumed intentions of the parties and not to contradict them.”

130. Lord Hoffmann’s views are well supported by the authorities, one of which is the Eagle Star[95], where valuers in breach of an implied term to exercise reasonable care and skill had negligently advised their clients that the property which were offered as security for loans were worth a great deal more than their market value.  However, the valuers’ liability was confined to losses attributable to the deficient security but not for further losses attributable to a fall in the property market.  That is because:

“The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater then he could reasonably have thought he was undertaking.”[96]

131. Moreover as Lord Walker said[97] passages in the speeches in Re Heron II :

“78. … show that their Lordships had well in mind (but did not, perhaps, spell out at length) that it is not simply a question of probability. It is also a question of what the contracting parties must be taken to have had in mind, having regard to the nature and object of their business transaction. If a manufacturer of lightning conductors sells a defective conductor and the customer’s house burns down as a result, the manufacturer will not escape liability by proving that only one in a hundred of his customers’ buildings had actually been struck by lightning. The need to take account of the nature and object of the contract is recognised, I think, in the passage from Lord Reid’s speech, at p 385, which I have already quoted; in Lord Morris’s speech, at pp 398-399; in Lord Pearce’s speech, at pp 416-417 (with the example of the court ceiling collapsing during a sitting); and in Lord Upjohn’s speech, at pp 424-425. The need for the loss suffered to be within the horizon of the parties’ contemplation (Lord Pearce, at p 416) makes it less important to define its degree of probability with any precision. Arguably a vague expression (such as ‘real possibility’) is actually preferable, because it is more flexible, once it is understood that what is most important is the common expectation, objectively assessed, on the basis of which the parties are entering into their contract.”

132. I believe the nature and object of a contract can provide an important guide to ascertaining what the parties may be taken to have had in their contemplation as well as what contractual obligations the contracting parties could fairly be said to have undertaken.

133. In Siemens Building Technologies FE Ltd v Supershield Ltd [2010] 1 Lloyds Rep 349, a decision of the English Court of Appeal, Toulson LJ, whose judgment was agreed to by the other members of the court, said:

“40. The law on remoteness of damage in relation to claims for breach of contract is grounded on the policy that the loss recoverable by the victim should be limited to loss from which the party in breach may reasonably be taken to have assumed a responsibility to protect the victim. It follows that the question of remoteness cannot be isolated from consideration of the purpose of the contract and the scope of the contractual obligation.”

134. It is not necessary in this appeal to consider the full implication of this approach.  It is sufficient to say that on the facts of the present case, it could not fairly be said that De Monsa had undertaken responsibility for the chain default.  Neither the nature or object of the De Monsa agreement, nor its purpose or scope, support a contrary conclusion.  So, I would also allow the appeal on the wider ground.

Costs

135. I agree with Mr Justice Ribeiro PJ and Mr Justice Fok PJ.

Lord Walker of Gestingthorpe NPJ:

136. I agree with the joint judgment of Mr Justice Ribeiro PJ and Mr Justice Fok PJ.

Chief Justice Ma:

137. The Court unanimously allows the appeal and sets aside the Orders made by the Judge and the Court of Appeal save in so far as they declared Richly Bright entitled to forfeit De Monsa’s deposit.  The Court also makes the orders as to costs set out in the final two paragraphs in the joint judgment of Mr Justice Ribeiro PJ and Mr Justice Fok PJ.