XCHRX ALUCASE CO. LTD. v. KEEN LLOYD (HOLDINGS) LTD.

HCMP3577/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3577 OF 1998

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J U D G M E N T

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Facts

1. The 1st Plaintiff was the registered owner of the property known as Flat B, 33/F Tower 5, Dynasty Court, No.23 Old Peak Road, Hong Kong ("the flat"). The 2nd Plaintiff was the registered owner of car parking space No.5 on Level LG2 ("the carpark") of Dynasty Court.

2. By two agreements both dated 21st August 1997, the 1st and 2nd Plaintiffs agreed to sell the flat and the carpark to the Defendant at a total sum of $40 million. The Defendant paid a deposit in the total sum of $6 million. The Defendant failed to complete the agreements on 25th July 1998. The two agreements were terminated by the Plaintiffs who re-sold the flat and the carpark on 24th September 1998 in the sum of $16 million. The sale was completed on 10th December 1998.

3. The parties agreed that interlocutory judgment be entered for the Plaintiffs with damages to be assessed. I will grant the judgment and will now assess the damages sustained by the Plaintiffs as a result of the breach of contract by the Defendant.

The Plaintiffs' claim

4. The Plaintiffs claim the following head of damages :

Deficiency in price

5. The Plaintiffs rely on Clause 14(b) of the Agreement which provides that :

6. Under Clause 14(b), the Plaintiffs are entitled to recover the deficiency in price on the resale of the flat and carpark and also the interest paid or lost by reason of the Defendant's failure to complete the sale.

Is the clause a penalty?

7. Mr Law, Counsel for the Defendant, argued that Clause 14(b) is unenforceable because it is a penalty. The clause does not specify when the resale is to take place. It cannot be a genuine pre-estimate of the loss because the recovery of the deficiency in price by the Plaintiffs is without prejudice to their right to recover the actual loss from the Defendant's breach. Mr Law referred to the well-known decision of Worker Trust Bank Limited v. Dojap Ltd [1993] AC 573 at p.578d and also Chitty on Contract Vol.1, 27th Ed. para.26-061.

8. Mr Warren Chan SC, Counsel for the Plaintiffs, accepted that this clause must be read subject to the implied term that the Plaintiffs have to act in good faith in effecting the resale. Read in this light, the Plaintiffs just could not sit on the property and only carry out the resale at a time of their convenience.

9. I agree. The Plaintiffs, in order to act in good faith, must necessarily carry out the resale within a reasonable time. I do not find that the clause is in the nature of a penalty. The part which states that the Plaintiffs' right to recover the actual loss is without prejudice to the right to recover the deficiency in price is not fatal. Where the resale would result in a deficiency in price, then this amount would be recoverable. The emphasis is on the deficiency in price. This will dispense with calling evidence on the value of the property as of the date of the breach or at some subsequent date. If there are losses other than those specified in Clause 14(b), then the Plaintiffs clearly have to prove them. I really cannot see how the provision for recovery of actual loss would render the clause from being a penalty. Findlay J. inTeng Fuh Company Limited v. Keen Lloyd Holdings Limited HCMP 2438 of 1998 construed an identical clause, (Mr Warren Chan SC also appeared in that case) and came to the same conclusion that the clause was not a penalty.

Immediate sale not required

10. Mr Law further argued that Clause 14(b) does not apply in the present case because it will only apply where there is a sale "upon the determination of this Agreement". The agreement was terminated on 25th July 1998, but the sale was only made on 24th September 1998. The short answer to this is that one must regard the reality of the situation. One just cannot expect a vendor to conduct a sale of the property on the same date as the termination of the agreement.

Justice of the case

11. Furthermore, while the common law principle is that damages of breach of contract are assessed at the date of the breach, it has been recognised that this is not an absolute rule if to follow it would give rise to injustice. The Court has power to fix such other date as may be appropriate in the circumstances: Johnson v. Agnew [1980] AC 367, and Barnsleys Conveyancing Law and Practice, 4th Ed. p.657. It is a well-known fact that the property market in Hong Kong collapsed after September/October 1997. In a falling market, to use the date of the breach as the yardstick for measuring damages would prejudice the vendor who might only be able to sell the property at some time after the breach.

Damages calculated at time of actual sale

12. I will accordingly hold that the Plaintiffs are entitled to rely on Clause 14(b) and the measure of damages is to be considered at the time of the actual resale of the property. This being the case, it is not necessary for me to deal with the expert evidence on the value of the property on 25th July 1998 or 24th September 1998. The Plaintiffs had clearly demonstrated that they had made reasonable efforts to sell the property. The offers they had received were in fact lower than the actual resale price of the property. The Plaintiffs are entitled to the deficiency in price as claimed.

Additional mortgage interests

13. The 1st Plaintiff seeks additional mortgage interests it had to pay between the date of the breach and the date of completion of the resale. The Defendant clearly had knowledge of the existence of a mortgage created by the Plaintiffs. The obligation of the Plaintiffs to pay further interests on the mortgage must be within the reasonable contemplation of the Defendant if the agreement was not completed. In my view this amount (the quantum of which is not challenged) is recoverable.

14. The Defendant made a further submission which also applies to the Plaintiffs' claim for management fees and government rates as follows. It was argued that the property was occupied by the Plaintiffs as a residence. The Plaintiffs continued to reside at the property until the completion of the resale. The interests on mortgage, the management fees and rates were payable by the Plaintiffs in any event because of their occupation. Hence these items are not recoverable.

15. The answer to this is that but for the failure to complete the sale, these additional items would not have to be paid by the Plaintiffs. These items flow naturally from the breach and are recoverable. Under Clause 14(b), the 1st Plaintiff is further entitled to recover the mortgage interests.

Loss of interest income

16. As a result of the breach by the Defendant to complete the sale, the Plaintiffs lost the interest they would otherwise have if they received the balance of the purchase price within time. The rate and method of calculation of the interest is not disputed by the Defendant. The rate to be applied is 6.25% p.a. and the basis of calculation is set out as follows :

Additional management fee and government rates

17. I had already dealt with these two items and they are recoverable.

Bank guarantee charges

18. The Defendant had registered a lis pendens against the property. In order to discharge the lis, the Plaintiffs provided a bank guarantee as security. The expenses in providing the guarantee is recoverable against the Defendant.

Conclusion

19. Accordingly, the Plaintiffs are entitled to the damages I have indicated. The Plaintiffs are entitled to interest at judgment rate on the damages from the date of the judgment to payment. Costs nisi of the proceedings are to be paid by the Defendant to the Plaintiffs.