LIU SHING WAH ANNA v. LONGKIND PROPERTY LTD.

1998 HCA No.9266

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION No. 9266 of 1998

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ASSESSMENT OF DAMAGES

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1. This action relates to the aborted purchase of the plaintiff's flat, Flat F, 30/F, Block 5, Chestwood Court, Kingswood Villas, No.8 Tin Shui Road, Tin Shui Wai, Yuen Long, New Territories. When the defendant failed to complete, the plaintiff forfeited the deposit of $259,000, and commenced proceedings. The Writ of Summons was issued on 8.6.98. Final and interlocutory judgment was entered for the plaintiff against the defendant on 13.7.98. with damages to be assessed.

The background

2. According to the terms of the original sale and purchase agreement between the parties, (referred to as "the Principal Agreement") the defendant agreed to buy the plaintiff's flat in Tin Shui Wai with vacant possession for $2,590,000. By the terms of a subsequent agreement between the parties dated 26.6.97, (referred to as "the Supplemental Agreement") the flat was sold subject to the existing tenancy, and the purchase price was reduced by $280,000 to $2,310,000.

3. The agreed date for Completion was 26.3.98. The defendant failed to complete, and the plaintiff forfeited the deposit of $259,000. After many months the property was re-sold by the plaintiff on 6.12.98. for $1,450,000.

"The normal measure of damages is the contract price less the market price at the contractual time fixed for completion." paragraph 992 of McGregor on Damages 16th edition.

4. However, the plaintiff claimed that by virtue of clause 13 of the Principal Agreement, which incorporated Condition 10 of the 2nd Schedule of the Conveyancing and Property Ordinance, Cap 219 into the contract between the parties, clause 13 together with condition 10 amounted to liquidated damages, a genuine pre-estimate of damages for breach of contract, therefore the normal measure of damages did not apply. In those circumstances the plaintiff was entitled to claim for the amounts as stated in the Statement of Claim.

5. Mr Kwan for the plaintiff contended that clause 13 of the Principal Agreement together with condition 10 amounted to a provision for liquidated damages. Clause 13 of the Principal Agreement provides :-

(a) Should the Purchaser fail (other than due to the fault or default of the vendor) to complete the purchase in accordance with the terms and conditions contained herein or if the purchaser shall fail to make any of the payments provided in Part IV of the Schedule hereto on or before their respective due dates, then all moneys paid hereunder shall be absolutely forfeited (notwithstanding any law or equity prohibiting the forfeiture of deposit) to the vendor who may thereupon, by notice given to the purchaser but without tendering an assignment to the purchaser rescind the sale; and the purchaser shall be liable to pay all the stamp duties payable under Clause 18 hereof and shall fully indemnify the vendor in respect thereof.

(b) Upon the vendor exercising his right to rescind the sale under the provisions of Sub-clause (a) of this clause, the purchaser shall have no further claim to the property and the vendor may but is not obliged to register a Memorandum of Rescission signed by the Vendor alone at the Land Registry or (as the case may be) at the appropriate New Territories Land Registry and to vacate the registration of this agreement.

(c) Upon the vendor exercising his right of determination under the provisions of sub-clause (a) of this clause and without prejudice to the vendor's right to recover the actual loss which may flow from the purchaser's breach of this Agreement, he may but is not obliged to resell, let or otherwise deal with the said premises or any part or parts thereof either by public auction or private contract or in such other manner as the vendor may in its absolute discretion think fit and on such terms and conditions as the vendor shall deem fit. Furthermore, in the event that the vendor elects to and does sell the property, any deficiency in price and all reasonable expenses attending such resale shall be borne and made good by the purchaser. Any surplus or gain or profit made by the vendor from such resale shall belong to the vendor.

6. Clause 33 of the Principal Agreement incorporated the conditions of Part A of the 2nd Schedule of the Conveyancing and Property Ordinance, Cap 219 into the contract between the parties, and condition 10 states :-

"10. Failure of the Purchaser

If the purchaser shall fail to comply with any of the terms and conditions of the agreement the deposit money shall be absolutely forfeited as and for liquidated damages (and not as a penalty) to the vendor who may (without being obliged to tender an assignment to the purchaser) rescind the agreement and either retain the property the subject of the agreement or any part or parts thereof or resell the same, either as a whole or in lots, and either by public auction or by private contract, or partly by the one and partly by the other, and subject to such conditions and stipulations as to title or otherwise as the vendor may think fit. Any deficiency arising from such resale and all expenses attending the same or any attempted resale shall be made good and paid by the purchaser as and for liquidated damages, and any increase in price realized by any such resale shall belong to the vendor. This clause shall not preclude or be deemed to preclude the vendor from taking other steps or remedies to enforce the vendor's rights under the agreement or otherwise. On the exercise of the vendor's right of rescission under the agreement the vendor shall have the right, if the agreement shall have been registered in the Land Registry, to register at the Land Registry an instrument to rescind the sale of the property. This clause shall not prevent the vendor recovering, in addition to liquidated damages, damages representing interest paid or lost by him by reason of the purchaser's failure."

7. Mr Kwan relied on the case of Woomera Co & Anor v Provident Centre Development Ltd [1985] HKLR 263 in support of that contention.

8. I have considered all the points made in submission by counsel for the plaintiff. I did not think that the case of Woomera can be relied upon in support of the plaintiff's contentions. First, Mr Kwan conceded that the remarks of the judges in the Court of Appeal were obiter.

9. Second, the appellate court had to decide whether the judge was correct in allowing the defendant in that case to further amend its counterclaim. If one looks carefully at the judgment, none of the members of the appellate court said what Mr Kwan contends. Mr Justice Kempster said at page 266 letter "J" "As I construe the clause with its references to what "may" be done and to "entitlement" it is permissive rather than restrictive or comprehensive....." and Sir Alan Huggins said at page 269 letter "D-E" "I am not persuaded that there is anything which prevents us from holding that the common law remedy has not been excluded" and Mr Justice Fuad agreed with his brethren.

10. Thirdly, even if a clause similar to the one discussed in Woomera can construed to provide for liquidated damages, each case must be decided on its own facts. The clause in question must still be construed. The clause in question is fundamentally different to the clause discussed in Woomera because it is not limited in time. A clause effective for 6 months only (such as the one in Woomera) cannot be equated with one that purports to remain effective ad infinitum.

11. Fourthly, liquidated damages, by definition must be a definite sum. The parties must be able to agree to the sum representing liquidated damages, or, at the very least be able to calculate the sum for liquidated damages at the time of the making of the contract, otherwise there cannot be a genuine pre-estimate of the damage that will be suffered upon a breach of contract.

12. Finally, the essence of liquidated damages is a genuine pre-estimate of damage. Since it is a pre-estimate, the court must look at what was discussed by the parties at the time of the making of the contract. Since we must consider the clause in question, it can do no harm to remind oneself of the relevant law. Chitty on Contracts, 27th Edition Vol 1, para 26-061 states "Where the parties to a contract agree that, in the event of a breach, the contract-breaker shall pay to the other a specified sum of money, the sum fixed may be specified by the courts either as a penalty (which is irrecoverable) or as liquidated damages (which are recoverable). The clause is enforceable if it does not exceed a genuine attempt to estimate in advance the loss which the plaintiff would be likely to suffer from a breach of the obligation in question : it is enforceable irrespective of the loss actually suffered. The purpose of the parties fixing a sum is to facilitate recovery of damages without the difficulty and expense of proving actual damage; or to avoid the risk of under-compensation, where the rules on remoteness of damage might not cover consequential, indirect, or idiosyncratic loss; or to give the promisee an assurance that he may safely rely on the fulfilment of the promise."

13. I considered the evidence adduced by the plaintiff carefully. The plaintiff said that she had not discussed with a representative of the defendant about what would happen in the event of a breach. When questioned by counsel for the defendant on the Sale and Purchase agreements, the plaintiff conceded that she had not negotiated directly with the defendant at all; that the negotiations were conducted through the same agent, who was acting for her and also for the defendant. She said that the negotiations with the defendant were related to the purchase price, the completion date, and the sitting tenant. She said that that from her"impression" no subject other than the ones mentioned had been discussed. She said that she "did not think" that the clause providing for forfeiture of 10% of the purchase price had been discussed. Finally she said that nothing had been said about what the defendant would be obliged to pay to her if the defendant defaulted. The plaintiff was represented by Messrs SH Chan & Co at that time. If she had wished to make provision for the event of a breach by the purchaser, it would have been a simple matter to give appropriate instructions to her solicitors. If the plaintiff had addressed her mind to such a contingency, I believe that she would have some recollection of it, and would have mentioned the topic it in her witness statement or in viva voce evidence. The evidence indicates that at the time of the making of the sale and purchase agreement with the defendant, the plaintiff had not even addressed her mind to the consequences of a breach by the defendant.

14. Also, if the plaintiff is to recover damages pursuant to clause 13, she has to prove that it was the culmination of a genuine pre-estimate of her loss as a result of a breach. It is clear from the plaintiff's evidence that she and the purchaser had never agreed any terms providing for the contingency of a breach of contract. The parties could not have reached any agreement because the parties had never even discussed what would happen in the event of a breach. Therefore on the evidence before me, the parties had never attempted to estimate in advance the loss which the plaintiff would suffer in the event of a breach by the defendant. The clauses relied upon were inserted into the Sale and Purchase agreements by the solicitors acting for the parties. In these circumstances the clauses relied upon by counsel for the plaintiff can have no application at all. It is clear from the plaintiff's evidence that Clause 13 of the Principal Agreement and Condition 10 of Cap 219 were merely inserted into the contract by the lawyers without reference to the lay client, so as to make the defendant less likely to default on its obligations. In the circumstances I hold that the plaintiff cannot rely on Clause 13 and must prove her loss as a result of the breach in the normal way.

15. For all the reasons given above, the plaintiff is under a duty to mitigate her loss.

The Duty to Mitigate Loss

16. The relevant law is succinctly expressed in para 1193 of Vol 12 of Halsbury's Laws of England 4th Edition, which states, "....he [the plaintiff] must take all reasonable steps to mitigate the loss which he has sustained consequent upon the defendant's wrong, and, if he fails to do so, he cannot claim damages for any such loss which he ought reasonably to have avoided."

17. The plaintiff said that she was unable to sell the flat because of the falling property market, despite her best efforts.

18. The law requires the plaintiff to take all reasonable steps to mitigate the loss which she has sustained consequent upon the defendant's wrong. If she fails to do so, she cannot claim damages for any such loss which she ought reasonably to have avoided. What is a "reasonable step" is a question of fact in each case, see Payzu v Saunders [1919] 2 KB 581.

19. There was very little evidence adduced by the plaintiff to show that she had taken steps taken in mitigation of loss.

20. The paragraphs from her statement (quoted below) is her evidence on mitigation of loss. I could see nothing further adduced by way of viva voce evidence. In her statement the plaintiff said :-

"8. Since the defendant's breach of contract, I had all along been attempting to mitigate my loss by selling the property but had been unable to do so until 6th December 1998. My attempts of mitigation are elaborated hereunder.

9. [ Paragraphs 9 & 10 dealt with the defendant's new offer to purchase the flat, which again ended in failure.] .

10......

11. In addition to the attempt in paragraphs 9 and 10 hereof, I had also tried to mitigate my loss by offering the property for sale in the open market as early as in April 1998.

12. Since the 4th April 1998, I had instructed Ricacorp Properties Limited, an estate agent company to offer the property for sale in the market. The price then offered was $2,000,000. But no acceptance was made thereto.

13. In view of the further decline of the property market afterwards and the financial hardship mounting on me, I reduced the sale price to HK$1,700,000 on 20th May 1998. No acceptance was made thereto.

14. In the circumstances, I further reduced the sale price to HK$1,300,000 on 29th September 1998. Again no acceptance was made thereto.

15. I was able to secure a letter issued by the said Ricacorp Properties Limited on 20th October 1998, which confirmed that the aforesaid prices offered by me were fair and in accordance with the then market trend.

16. Despite the aforesaid efforts put by me to mitigate the loss throughout the year of 1998, I was only able to find two new purchasers of the property who were willing to purchase the property at HK$1,450,000 ("the Eventual Sale Price"). A preliminary Agreement for Sale and Purchase of the Property was signed by me with the said purchasers on 6th December 1998. The sale and purchase was duly completed on 26th February 1999."

21. The evidence showed that the plaintiff had put the flat on the market on 4.4.98. (subject to existing tenant) for $2,000,000. It was agreed by Counsel for the parties that with vacant possession the open market value of the flat at that time was $1,865,000. The plaintiff was unable to sell the flat in April. The defence submits that the plaintiff was acting unreasonably then because her asking price subject to the existing tenant was $135,000 more than the open market value with vacant possession. I noted that the plaintiff had admitted in evidence that a flat sold subject to an existing tenancy agreement should fetch a lower price than one sold with vacant possession.

22. The plaintiff put the flat on the market on 20.5.98. (subject to existing tenant) for $1,700,000. It was agreed by counsel for the parties that at that time, with vacant possession the open market value of the flat was $1,795,000. The plaintiff was unable to sell the flat.

23. In June 1998 the market had fallen rapidly, but the plaintiff had not reduced the selling price. The flat was still on the market (subject to existing tenant) for $1,700,000. It was agreed by counsel for the parties that the open market value of the flat with vacant possession as at 17.6.98. was $1,575,000. Therefore even though the open market value had come down, the plaintiff was still asking for amount she had been asking for since May. The plaintiff was unable to sell the flat for $1,700,000. The defence submits that the plaintiff was again acting unreasonably at this time because her asking price subject to the existing tenant was more than the open market value with vacant possession.

24. The plaintiff told the court that the tenant had stopped paying her rent from June 1998. Save for a letter dated 31.8.98. at page 136 of the Bundle, (warning the tenant of the consequences of non-payment of rent) the evidence was silent on what, or if any steps were taken to evict the tenant. If the plaintiff had been able to obtain possession, she would have been in a position to put the property on the market with vacant possession in the autumn of 1998. A property with vacant possession would arguably be more attractive to prospective buyers. When she gave evidence the plaintiff had conceded that a property with vacant possession would command a higher price than one subject to an existing tenant.

25. On 29.9.98. the plaintiff put the flat on the market on (still subject to the existing tenancy agreement) for $1,300,000. It was agreed by counsel for the parties that with vacant possession the open market value of the flat at that time was $1,360,000. The plaintiff was unable to sell the flat.

26. In December 1998, the plaintiff successfully sold the flat for $1,450,000 with vacant possession, which was lower than the then open market value which was agreed at $1,495,000. The sale was completed on 26.2.99.

27. Counsel for the defendant has submitted that the plaintiff had failed to mitigate her loss adequately and failed to resell at market value within a reasonable period after the date of the breach on 26.3.98.

28. Where a defendant alleges that the plaintiff has failed to take all reasonable steps to mitigate his or her loss the burden of proof is upon the defendant. The defence has submitted that there was evidence before the court to show that from 26.3.98 to 4.4.98. many flats were bought and sold in that Tin Shui Wai development, and that the valuers for the parties had identified 15 transactions taking place within that period. Counsel argued that on the evidence, there was a viable market in which the plaintiff could have sold the property at a reasonable market price.

29. It was clear that the plaintiff sought to rely on the document from Ricacorp. Even if the plaintiff can rely on that document which appears on page 138 of the Bundle, it adds little to her case. The author of the document, Mr Poon, was not tested in cross-examination. The court is unable to identify the basis for his contention that the selling prices set by the plaintiff on the various dates referred to were "fair and in accordance with the trend of the market."

30. The plaintiff has already conceded that a flat sold subject to an existing tenancy should fetch a lower price than one with vacant possession. Without any or any adequate explanation from the plaintiff as to why she had put the flat on the market at a price higher than the open market value of the flat with vacant possession, I can only conclude that the plaintiff had been acting unreasonably (at the very least on 2 occasions) in April and in June of 1998 when she purported to mitigate her loss.

31. Counsel for the defendant has referred to the evidence of 15 sale transactions of property located at the same Tin Shui Wai development during the relevant period. This information highlights the paucity of evidence from the plaintiff that she had taken all reasonable steps to mitigate her loss.

32. In these circumstances I accept the contention of counsel for the defendant that the plaintiff is only entitled to the normal measure of damages, that is, the difference between the contract price $2,310,000 and the market price at the date of completion, which has been agreed at $1,865,000. Since the plaintiff has already received a sum by way of interim payment, that sum of $150,000 paid to her pursuant to Master Cannon's order dated 16.1.99. must be taken into account.

33. The claim for the legal expenses incurred in relation to the aborted sale have now been abandoned by the plaintiff and need not be considered. The following sums are not contested, therefore the plaintiff is awarded $2000 for the costs of preparing and attesting the Memorandum of Rescission; and $14,5000 being the Estate Agent's Commission incurred under the re-sale Agreement; and $7060 for her legal costs and disbursements under the re-sale Agreement. These sums in total amount to $23,560.

34. The Selling price to defendant was $2,310,000. The difference between the selling price and the agreed open market value as at the date of completion is $445,000 ($2,310,000 less $1,865,000 = $445,000).

35. The plaintiff has to take into account the amount of the Deposit forfeited $259,000 and also the amount of the interim payment received $150,000.
($445,000 less $259,000 less $150,000 = $36,000).

Total $23,560 + $36,000 = $59,560.

There will be judgment for the plaintiff against the defendant in the sum of $59,560.

Interest will be paid on the damages at judgment rate from the date of judgment until payment.

Costs

36. The normal rule is that Costs follow the event. It is for that reason that I am making a costs order nisi to be made absolute within 14 days of the handing down of this decision that costs of the assessment be to the defendant, together with certificate for counsel, to be taxed if not agreed.