LUCK SKY ASIA PACIFIC LTD v. LUO SHU FAN

HCA 842/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 842 OF 2010

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BETWEEN

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DECISION

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1.  There are 2 matters before me:

(1) An application for leave to file the 4^th Affirmation of Yu King Tin which is not opposed and I grant leave accordingly; and

(2) An appeal against a Master’s decision giving summary judgment to the Plaintiff with damages.

BACKGROUND

2.  The Plaintiff confirmor and Defendant purchaser entered into an agreement for the sale and purchase of the subject property (“the Formal Agreement”) at a consideration of $19,000,000.  The Defendant failed to complete on the due date, i.e. 12 December 2008.  The Plaintiff gave notice (“the notice to complete”) to the Defendant that the Plaintiff would suspend enforcement of its rights and waive any claim if the Defendant tendered the balance of the purchase price on or before 3:00 pm on 16 December 2008 for completion.  The Plaintiff’s director was also informed over the phone by the estate agent in around mid-December that the Defendant contacted the agency saying that she would not honour the Formal Agreement.   The Defendant still failed to complete.  The Plaintiff accepted the repudiation on 16 December 2008 and resold the subject property to a new purchaser at a price of $12,850,000 on the same date.  Completion with the new purchaser took place on 21 January 2009.

3.  Clause 18 of the Formal Agreement provided as follows:

“Should the Purchaser (other than due to the default of the Vendor) fail to complete the purchase in accordance with the terms and conditions herein contained, the Vendor may (without tendering an Assignment to the purchaser) forthwith determine this Agreement by giving notice of termination in writing to the Purchaser or his Solicitors to such effect and the Vendor shall thereupon be entitled to re-enter upon the said premises and repossess the same if possession shall have been given to the Purchaser free from any right or interest of the Purchaser therein and the Vendor shall be entitled to forfeit all or any part of the purchase money paid hereunder. Upon determination of this Agreement, the Vendor may resell the said premises either by public auction or by private contract or partly by one and partly by the other subject to such stipulations as the Vendor may think fit and any increase in price on resale shall belong to the Vendor. Without prejudice to the Vendor’s right to recover the actual loss which may flow from the Purchaser’s breach of this Agreement, on such resale any deficiency in price shall be made good and all reasonable expenses attending such resale shall be borne by the Purchaser and such deficiency and expenses shall be recoverable by the Vendor as and for liquidated damages …”

4.  Pursuant to Clause 18, the Plaintiff claimed damages, being the difference in the original sale price and the resale price, agency fees and solicitors’ costs for the resale, less the deposit and part payment received from the Defendant.

5.  The Defendant disputed liability and quantum.

6.  The learned master gave judgment to the Plaintiff with damages assessed at $2,390,000.   

GROUNDS OF APPEAL

7.  In this appeal, the Defendant conceded that it was in repudiatory breach and did not contest liability.  The only defences were as to mitigation and quantum:

A. That the resale was not (or at least, might not be) a bona fide transaction at arms length; and

B. Even if it was bona fide at arms length, that it was at a gross undervalue;

so that the Plaintiff was not entitled to rely on Clause 18. The resale was a sham. The Defendant asks for unconditional leave to defend.

A. Resale Might Not Be a Bona Fide Transaction at Arms Length

8.  It was not in dispute that notwithstanding Clause 18, the Plaintiff was under a duty to mitigate its loss.  Accordingly, the Plaintiff has to show that the resale was bona fide at arms length and it acted reasonably in agreeing to the resale at $12,850,000.

9.  The Plaintiff’s case was that it had taken reasonable steps to mitigate.  At the material time, the global financial market was in a panic-stricken state because of the downfall of the Lehman Brothers Holdings Inc and it was difficult to get a purchaser.  The Plaintiff was clearly concerned to reduce its exposure to damages.  The resale was a forced sale that had to be effected urgently in view of the deadline set by the developer.  To reduce risk to the new purchaser, payment of the purchase price for the resale was to the solicitors as stakeholder instead of to the Plaintiff.

10.  Mr Lee, counsel for the Defendant, pointed to some circumstances said to warrant investigation.

11.  Firstly, the resale took place at an usual speed within hours after the repudiation was accepted.   Mr Lee queried whether the Plaintiff had put the subject property on the market between 12 and 16 December.

12.  Secondly, whilst the Formal Agreement was registered on 16 December 2008 as an encumbrance against the subject property, the memorandum of rescission prepared by the Plaintiff to rescind it was only prepared on the 18^th.  The resale took place at a time when the Formal Agreement was not even registered at the Land Registry.  It was strange that a prudent estate agent would have procured the resale when title was still to be cleared.

13.  Thirdly, the Defendant queried when exactly the Plaintiff first instructed estate agents to find a new purchaser.  What was the initial asking price and how did the negotiations come about?  Why was the agency agreement for the resale signed on 16 December 2008 valid for only one day and the asking price was the same as the resale price?

14.  I have considered these questions against the affirmation evidence.  In my view, a fair reading of the evidence was that a new purchaser was urgently sought and the price was agreed before the agency agreement was signed.  The agency agreement had to be signed because of legal requirements.  This reason advanced by Mr Lee carried little weight in my consideration of the Defendant’s case.

15.  Fourthly, the subject property was sold by the developer to the Plaintiff under the Consent Scheme: see recital clause (3) of the sale and purchase agreement between the developer and the Plaintiff.  In the event the Plaintiff failed to complete the purchase, clause 16(1) provided that:

“Should the Purchaser fail to observe or comply with any of the terms and conditions herein contained or to make the payments in accordance with Schedule 4 or any interest payable hereunder within 7 days of the due date, the Vendor may (subject to Clause 3(3)) give to the Purchaser notice in writing calling upon the Purchaser to make good his default. In the event of the Purchaser failing within 21 days from the date of service of such notice fully to make good his default the Vendor may by a further notice in writing forthwith determine this Agreement.”

In other words, for the first 7 days of default, the developer was not even entitled to give final notice of completion. After the expiry of the 7 days, the developer could give 21 days’ ultimatum. If so, how could the developer insist on completion within an extra 4 days alleged by the Plaintiff?

16.  Fifthly, whilst there was a notice to complete, the Plaintiff has never produced the developer’s notice extending the time for completion, be it for 4 days as alleged by the Plaintiff or otherwise.

17.  Sixthly, if the Plaintiff had been granted a 4-day extension, why did it allow the new purchaser to complete her purchase only a month later on 21 January 2009?

18.  Seventhly, the Defendant’s suspicion on the genuineness of the Plaintiff’s resale was strengthened by the fact that the resale price was substantially lower than any of the parties’ valuations.

19.  Having regard to the points addressed by Mr Lee (except the 3^rd one), I am satisfied that triable issues have been raised.  There are circumstances that ought to be investigated: Talent Wise Ltd v. Cheung Shui Ching [1998] 2 HKLRD 744.

20.  In Miles v. Bull [1969] 1 QB 258,the husband and the defendant wife were separated.  The husband sold the matrimonial home in which the defendant was still living to the plaintiff and completion took place on the day the contract was made.  In an action by the plaintiff against the defendant for possession of the property, summary judgment was sought.  The defendant contended that the sale was a sham with the object of depriving her of her right, as against the husband, to occupy the property.  She was given unconditional leave to defend although the defendant had failed to establish that she had an arguable defence. The Court, however, held that since the transaction was one which, in the interests of justice, ought to be carefully scrutinized, especially since the relevant facts were within the control of the plaintiff, there “ought for some other reason to be a trial” within the meaning of Order 14.   By parity of reason, I am satisfied that a triable issue has been raised under this line of defence. The Defendant should be given a chance, through discovery and cross-examination of witnesses to ventilate her defence.

B. Resale at Undervalue

21.  The Plaintiff’s valuation report showed the market value of the subject property as at 16 December 2008 to be $13,300,000, whereas the Defendant’s was $15,5000,000 and $15,520,000.  If the Defendant’s valuation is accepted, the Plaintiff might be found to have suffered no or minimal loss, having regard to the $3,800,000 deposit it had already received.

22.  Mr Cheung has demonstrated that the Defendant’s valuation report was unreliable in that the comparables used were properties that were greater than the subject property in floor area by 30% or 70%.  The Plaintiff’s valuation report demonstrated that in fact there were properties of similar sizes as the subject property which the Defendant’s valuer could have used as variables.  The Plaintiff’s variables did show a significant drop in market value by about $4,000,000 over the relevant months from August 2008 to February 2009.

23.  Whilst it is unusual for the Court to reject valuation evidence at an Order 14 stage, as the evidence stands, I am satisfied from Mr Lee’s analyses that the Defendant’s valuation report in itself could raise a triable issue on quantum.  Even so, there is a substantial difference between the resale price and the Plaintiff’s own valuation which may warrant investigation having regard to the first line of defence.

CONCLUSION

24.  Mr Lee has successfully raised triable issues based principally on the Plaintiff’s own evidence.  There is doubt as to the Plaintiff’s case: Billion Silver Development Ltd v All Wide Investments Ltd [2002] 2 HKC 262.  I am unable to say that the Defendant clearly has no defence to the Plaintiff’s claim.  In the premises, I allow the appeal and grant the Defendant unconditional leave to defend on quantum of damages.

25.  On costs, I do not think the circumstances showed that the Plaintiff was abusing the summary procedure.  Accordingly, I make an order nisi that costs here and below should be in the cause.

26.  Counsel indicated that the affirmations can stand as witness statements and it is not necessary to call for further valuation reports.  It is anticipated that some discovery or interrogatories might be necessary.  I direct the parties to agree a set of directions and seek leave of a Master to set down for assessment within 14 days.

27.  I thank counsel for their assistance.