TSUI TAN FAI and Another v. DIRECTOR OF LANDS

1996, No.122
(Civil)

IN THE COURT OF APPEAL

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J U D G M E N T

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Le Pichon, J. :

1. These are appeals against assessments made by the Lands Tribunal of the amount of compensation payable under section 10(2)(d) of the Crown Lands Resumption Ordinance, Cap.124. The Appellant in Civ.App.122/96 was awarded the sum of $4,650,000 including compensation for business loss of $3,900,000 and the Appellants in Civ.App.124/96, the sum of $2,850,000 including $1,900,000 for business loss.

Background to the present appeals

2. The compensation awards were made on 23 May 1996. The Appellants' applications for review were dismissed by the Tribunal on 26 June 1996.

3. Notices of appeal filed by the Appellants in July 1996 were found by another division of this Court (presided over by Litton V-P) to be defective in that they did not disclose any point of law. As the Appellants were unrepresented, the Court assisted them in identifying one point of law from the written submissions in Civ.App.122/96 and two in Civ.App.124/96. The Court then granted leave to amend the notices of appeal to include the points of law which the Court helpfully drafted, dismissing the Respondent's application to strike out the notices of appeal. These are the points of law which now require determination.

4. To complete the narrative, five months later, the Respondent obtained unless orders from Liu JA requiring the notices to be amended by 12 March 1997 or struck out. As no amended notices were lodged, the notices of appeal were struck out and the appeals dismissed. On the Appellants' application on 8 July 1997 to set aside those orders, they were allowed to pursue the grounds for which they had obtained leave despite their dilatoriness, since it appeared to the Court that the Appellants failed to file amended notices because being litigants in person they had misunderstood the position. With the agreement of the Appellants the notices originally filed stood amended. There are thus two points of law before us : the first is common to both appeals; the second concerns only Civ.App.124/96.

Civil Appeal No.122 of 1996

5. Before the Tribunal, the Appellant contended that the appropriate compensation for business loss is $112,740,979.80. The main item in this computation was for the loss of goodwill or business loss which the Appellant put at $110 million. The Tribunal assessed that loss at HK$3.9 million.

6. The Tribunal approached the assessment of the loss of goodwill on a total extinguishment basis rather than on a relocation basis and that remains unchallenged. The methodology used to reach its assessment appears at para.14 of the Tribunal's judgment :

"First, we endeavour to establish the normal profit trends of the business before resumption. Conceivably, the reported profits of the business, the rental value of the premises at which the business is conducted or the wages and salary costs of the business may be used as basis for this purpose because each of them may somewhat relate to the profitability of the business. Once the annual profit trend of the business has been arrived at, it must be related by multiplication to the anticipated future life of the business, had the business premises not been resumed. Then the product is discounted to take into account the fact that the business operator will have the sum representing capitalized profits immediately available for investment or other use."

The discount rate

7. The only issue in this appeal relates to the discount rate of 9% which the Tribunal applied to the lump sum payment. Neither the annual profit trend nor the profit period as found by the Tribunal forms the subject matter of the present appeal although the Appellant sought to introduce into his submissions arguments that pertain to the profit period. The issue for determination is confined to the discount rate applied by the Tribunal which is to be distinguished from the discount factor, the latter being ascertained from well-accepted valuation tables such as Parry's Valuation & Investment Tables based on the discount rate and the profit period.

8. The issue as stated in the Amended Notice of Appeal is :

"In arriving at the lump sum payment for loss of goodwill the Tribunal applied a discount rate of 9%. In so doing, the Tribunal erred in law and contradicted itself because the multiplier was 'selected on personal injuries basis' and on that basis the discount rate should only have been 4 to 5%."

9. The Appellant was unrepresented. His submissions which at times were difficult to follow appear to be as follows. The discount rate should be no greater than 4% to 5% as determined by this Court in Chan Pui Ki v. Leung On [1996] 2 HKLR 401. The Tribunal had misunderstood the discount factor : it applied a 9% discount rate because it perceived that there were "future business risks". The Tribunal regarded the life of the business as a risk factor, having erroneously concluded that the business would not exist beyond five years.

10. Counsel for the Respondent submitted that there is no basis for the view that, because multipliers in personal injuries cases were determined on the assumption that the discount rate was in the region of 4% to 5%, the same discount rate must be used in the assessment of goodwill. There are fundamental differences between the two types of assessments. In particular, the assessment objectives are different : for compensation for loss of earnings, it is the provision of a lump sum for future use, to be depleted by the anticipated retirement date. For the assessment of goodwill, it is the price a potential purchaser would pay for the right or prospect of receiving a stream of profits at future dates. The conventional discount rate of 4% to 5% in personal injuries cases is the assumed real investment return rate, after allowing for inflation. But in determining the discount rate in the assessment of goodwill, a further matter has to be taken into account and that is the risk factor. On this basis, the 9% is not demonstrably wrong and the appeal should be dismissed.

The applicable principles

11. The principles to be applied in arriving at a discount rate in the assessment of goodwill are to be found in the Privy Council's decision in Director of Buildings and Lands v. Shun Fung Ironworks Ltd. [1995] 2 AC 111. It was held (at 132B-E) that :

" [t]he present value of a stream of profits expected over a period of years depends essentially on three factors: the amount of the profits, the dates when they are expected to materialise, and the discount rate applied. There was no issue before the Board on the first two of these items. ... The dispute concerned the third item: the discount rate.

In this calculation the discount rate, or capitalisation rate, comprises the rate at which an amount of money payable at a future date should be reduced to arrive at its present value. Its present value is the price a person would pay now for the right or prospect of receiving the amount of money in question at the future date. Three ingredients can be identified in the discount rate. One is the rate of return the potential purchaser would expect on his money, assuming that the payment to him at the future date is free of risk. A second ingredient is the allowance the potential purchaser would make because of the likely impact of inflation. He is buying today, in today's currency, the right to be paid at a future date an amount of money which, when paid, will be paid in tomorrow's depreciated currency. The third ingredient is the risk factor. The greater the risk that the purchaser may not receive in due course the future payments he is buying, the higher the rate of return he will require. It is around this third factor that the dispute before the Board centred."

12. In that case, the parties were agreed on the formula for converting the nominal rate of return to a real rate based on an agreed inflation rate. The claimant contended for a real discount rate of 12-13% when calculating the value of future profits on an extinguishment basis. The Government on the other hand, contended for a real discount rate of 28%. The Tribunal fixed the discount rate at 25% real. It "did not consider the claimant was well managed, nor would it have been perceived by the market as one of the brighter jewels in New World's Crown." (at 133A-B). There were issues of fact before the Tribunal amongst which was "the degree of importance to be attached to the fact that the claimant's business was buttressed by the advantage of having, through New World, ready access to cheap finance and assured customers for much of its output." (at 132H-133A). There was nothing before the Judicial Committee to cause it to disturb the Tribunal's conclusions on those issues.

13. It is apparent from the judgment of the Tribunal that its rationale for adopting 9% was nothing more and nothing less than that the rate of discount used by the Tribunal in calculating deferred reversionary interest should also apply to discount advanced interest.

" We generally apply an interest rate of 9% to calculate deferred reversionary interest, so we adopt the same rate to discount advanced interest." (para.18 of the Tribunal's judgment)

In arriving at the discount rate of 9%, the Tribunal did not, it seems, consider, much less apply, the principles adumbrated by Lord Nicholls in Shun Fung.

14. In Hung Yee Shu trading as Tung Hing Decoration Company v. Director of Lands, unreported, Crown Lands Resumption Reference No.19 of 1995, the Tribunal consisting of the same members had expressed the view that -

"Deferred reversionary interest is the converse of capitalised future profits. If we use one rate for deferred reversionary interest and another for capitalised future profits, we would be applying double standards. For consistency and in line with professional valuation, we think the same rate should apply."

In the present case, it plainly adopted the same approach without regard to the principles set out in Shun Fung. Further, implicit in the Tribunal's holding is that such a rate would be of universal application. That cannot be right. As appears from Shun Fung, one of the essential components of the discount rate is the risk factor and that varies from case to case depending on the circumstances peculiar to each case. In Shun Fung itself, that factor was very high for the reasons referred to above.

15. In my judgment, the Tribunal's methodology can plainly be faulted in that it failed to apply the Shun Fung principles in determining the discount rate. However, it does not necessarily follow that the appeal must be allowed. The burden is on the Appellant to show that a 9% discount rate was plainly wrong. The Appellant made a conscious choice in not engaging legal representatives or valuers to help him prepare his case despite invitations from the Tribunal to do so at various stages. No evidence pertinent to the ingredients that make up the discount rate or as to risk premium to rebut the evidence of the Respondent's experts on this issue has thus been adduced to assist the Tribunal in this regard.

16. In personal injuries cases, the conventional assumption is that a lump sum award would provide a "real" return, (i.e. after allowing for inflation) of 4% to 5% from investments. But as appears from the judgment of Litton V-P in Chan Pui Ki v. Leung On (supra) at 416 D-F, upon the evidence before the court in that case, the average return from a lump sum invested in the average pension fund covered by the surveys conducted by Wyatt Co (HK) Ltd of retirement fund portfolios from 1983 to 1984 was 15.9%. Inflation between 1982 and 1994 as measured by the consumer price index averaged 8.1% per annum. Thus the "real" return for the period 1982-1994 was 7.8%. In the absence of contrary evidence from the Appellant, regard may properly be had to the conclusions reached in Chan Pui Ki's case. In my judgment, 7.8% represents a realistic and statistically supported return and for that reason is to be preferred to "assumed" real returns of 4% to 5%.

17. It is clear from Shun Fung that to arrive at the discount rate, the real return has to be adjusted to take into account the risk factor. As noted above, in Shun Fung itself, the debate concerning the real discount rate ranged from 12% to 28% based on an agreed historic average inflation rate of 7.1%. The risk factor thus fell within the range of say 5% to 21%. In the present case, whilst the Tribunal did not accept the evidence of the Respondent's expert that the risk factor should be of the order of 15% to 20%, it does not follow that no allowance should be made for it. The risk factor has nothing to do with the perceived life of the Appellant's business as was the Appellant's submission. Rather, by adopting a discount factor of 9%, the risk factor was nothing more than notional, having regard to a "real" return of 7.8%. In other words, virtually no risk was attributed to the expected stream of profits which on any view is highly favourable to the Appellant. Looking at the matter in the round, the 9% discount rate adopted by the Tribunal is not demonstrably wrong.

18. I would therefore dismiss this appeal with costs.

Civil Appeal No.124 of 1996

19. In this appeal, there are two Appellants one of whom (Tsui Tan-fai) appeared in person. He is authorized to represent the other Appellant, Wan Yiu-ling.

The first ground

20. There are two grounds of appeal. As the first ground is identical to that in Civ.App.No.122/96, it fails and must be dismissed for the reasons already given.

The second ground

21. The additional ground of appeal is as follows :

"The Tribunal misconstrued the effect of Exhibit A3, erroneously concluding that Exhibit A3 made provisions for the installation of town gas and associated piping works in the sum of $300,000.00 when upon a proper construction thereof it made no such provision. In consequence of this misconstruction of exhibit A3 the Tribunal erroneously did not allow a further $300,000.00 as claimed by the appellants."

22. The Appellants were the proprietors of a restaurant called Lucky Money formerly situated on the Ground Floor of No.15 Ma Tau Kok Road, Kowloon. They commenced business as a noodle shop in February 1992. Business was good but the proprietors saw even better prospects with a general restaurant. So in May 1992, the premises were redecorated for use as a general restaurant. The redecoration work took place at the end of May and were completed towards the end of June. At that time, the Appellants used LP Gas as a temporary measure. The installation of Town Gas which required significant piping works had not yet commenced. The Resumption Notice was served on 3 July 1992, at about the time the general restaurant commenced business. As the Appellants realised that no compensation would be payable for work done after the notice of resumption, they did not proceed with work required for the supply and installation of Town Gas. The LP Gas arrangement did not meet the relevant safety laws. The Appellants were prosecuted by the Urban Council and eventually ceased business in October 1992.

23. Before the Tribunal, the Appellants claimed the sum of $1,194,040 in respect of loss of fixtures, fittings and decoration. They relied on a "Decoration Works Contract for Lucky Money Restaurant" ("the contract") dated 20 May 1992 which the Appellants entered into with Lee's Decoration Company. The contract itself is Exhibit A9 and indeed the amount claimed is the contract sum. Exhibit A3 is a detailed quotation for the works to be undertaken under the contract and that is dated 16 May 1992. It is apparent from the contract as well as the detailed quotation that the installation of Town Gas and associated piping works did not constitute part of the work to be undertaken by Lee's Decoration Company. In fact, the only reference to the installation of gas pipes is in the context of the provision of hot and cold water taps and amounted to no more than $12,500.

24. The notes of proceedings reveal that on the first day of the hearing before the Tribunal, the Appellants were asked for receipts to substantiate their claim for redecoration expenses. Both the contract and receipts were produced by the Appellants the following day. As noted above, the receipts from the contractor that were produced substantiated only $0.9 million of the claim. There is nothing in the notes of proceedings to indicate that any explanation was proffered at the time as to why receipts relating to the remaining $294,040 could not be produced.

25. In awarding $0.9 million in respect of this claim for approximately $1.2 million, the Tribunal said this :

"20. The receipts in exhibit A10 show payments of $900,000 only. We believe the full contract sum was not paid because part of the work, the connection of town gas and associated piping work, did not have to be done. We think it is fair to take the decoration expenses as $900,000."

26. The Appellants' case is that the Tribunal did not award the balance of the claim of just under $300,000 because of the Tribunal's erroneous belief that it represented the cost of gas installation work to be carried out under the contract but which was never done. The Respondent submits that the Tribunal's belief was irrelevant : a fair reading of paragraph 20 of the judgment shows that the basis of the award was in respect of substantiated expenditure.

27. When asked by this Court about the missing receipts, Mr Tsui said that he did not have them. He said that he told the Tribunal that he would belatedly submit receipts because as at the date of the hearing the balance had not yet been paid. Mr Tsui then said that he could not pay the balance until he received compensation and that this was what he had told the Tribunal. None of this is borne out by the record of proceedings.

28. Mr Tsui appeared to shift his ground when his explanation met with a degree of scepticism. He elaborated that he did pay the balance after obtaining compensation because he was contractually liable and could be sued for it. When asked whether there was a receipt for this payment, he said lamely that he did not bother to get a receipt as he trusted the contractor. This is hardly reconcilable with the fact that receipts were in fact obtained in respect of the $900,000 or with the professed desire to forestall any possible lawsuit.

29. In my judgment, the Tribunal did not err. It is for the Appellants to prove to the satisfaction of the Tribunal as a fact that payment of $1.194 million had been made. All they were able to establish before the Tribunal were payments totalling $900,000 and it was on that basis that the award was made. It is perhaps unfortunate that the Tribunal entertained and expressed a belief that would not appear to be correct but that belief did not impinge on the basis of the award which was against substantiated expenditure. It is to be noted that even now the Appellants are not in a position to substantiate payment of the balance. There is no merit in this ground of appeal.

30. This appeal should also be dismissed with costs.

Mayo, J.A. :

31. I agree.

Nazareth, V.-P. :

32. I also agree in respect of both appeals and have nothing that I could usefully add to the very clear reasons given by Le Pichon J.

33. The appeals are accordingly dismissed in each case with a costs order nisi that the respondent is to have his costs of the appeal, each order to become absolute upon the expiration of fourteen days from the handing down of this judgment unless written application is made before then for the matter of costs to be listed for submissions.