HONGVILLE LTD v. TONG ZE INTERNATIONAL INVESTMENT CO LTD AND ANOTHER

HCA 53/2017

[2019] HKCFI 3143

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 53 OF 2017

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BETWEEN

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ASSESSMENT OF DAMAGES

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Introduction

1.  This action concerns a tenancy agreement dated 11 December 2015 (“the Tenancy Agreement”) entered into between the Plaintiff and the 1^st Defendant and a Deed of Guarantee given by the 2^nd Defendant in favour of the Plaintiff to secure the 1^st Defendant’s performance of the Tenancy Agreement.  Under the Tenancy Agreement, Rooms 1114 to 1117 on the 11^th Floor of Hutchison House (“the Premises”) were rented by the Plaintiff to the 1^st Defendant from 23 November 2015 to 22 November 2018 at the monthly rental of $208,512.

2.  On 22 March 2017, final and interlocutory judgment (“the Judgment”) was entered in favour of the Plaintiff against the Defendants, pursuant to which the 1^st Defendant had delivered vacant possession of the Premises to the Plaintiff on 13 April 2017.

3.  This is a Decision on assessment of damages which has been heard pursuant to the Judgment.

The issues to be resolved

4.  The Defendants resist the Plaintiff’s claims of damages on three grounds:

(1) Since the Plaintiff has elected to forfeit the deposit under the Tenancy Agreement, on a proper construction of Clause 1 of Section IX of the Tenancy Agreement, it is not entitled to recover any further loss and damage (“the Election Argument”);

(2) The Plaintiff has failed to mitigate its loss in that it could have rented the Premises out again to another tenant no later than 3 months after the 1^st Defendant had delivered vacant possession (ie by 13 July 2017) but for such failure (“the Mitigation Argument”); and

(3) The Plaintiff should not only give full credit for the rental income which it received between 1 December 2017 and 22 November 2018 but also for the period between 23 November 2018 and 31 January 2019 from its new tenant, because it would not have received rental for those 2 months or so but for the 1^st Defendant’s breach of the Tenancy Agreement (“the Credit Argument”).

5.  I will rule on the issues arising from these lines of defence below in turn.

6.  However, before I do so, I ought to decide on what should be regarded as the permissible heads of claim of the Plaintiff.

7.  This matter arises in this way. In the Statement of Damages, it was pleaded by the Plaintiff in paragraph 23 thereof that:

“The damages after mitigation is as follows:

Description		Amount (HKD)
Loss of rent from 14.04.2017 to 22.11.2018 at the rate of HKD208,512 per month		4,599,521
LESS
Rental income received from new tenant from 01.12.2017 to 22.11.2018		2,999,966
TOTAL		1,599,555	”

8.  However, the total amount of rent for 19 months and 9 days (from 14 April 2017 to 22 November 2018) is only $4,024,281.60 rather than 4,599,521.  When Mr Yim for the Plaintiff was enquired on this during his opening submissions, he could not give any answer at all, and accepted that the calculation in the Statement of Damages was probably wrong.  Given such a stance, and since the miscalculation in the Statement of Damages has overstated rather than understated the amount of claim, this court considered that nothing would turn on this miscalculation, and as a result Mr Yim was just asked to correct his calculation in his closing submissions.

9.  However, when Mr Yim lodged his closing submissions, instead of correcting the figure of 4,599,521, he tried to justify it by providing this court and the Defendants an Excel table. According to this table, apart from loss of rent, the Plaintiff also claimed for loss of service charges and rates for the period from 14 April 2017 to 22 November 2018.  Mr Yim submitted that the Plaintiff is entitled to payment of these items under the Tenancy Agreement.  As far as the payment of rates is concerned, he also cited Clause 2 of Section 2 of the Tenancy Agreement in support.

10.  I am of the view that the Plaintiff should not be allowed to claim for service charges and rates as damages herein (despite the fact that the 1^st Defendant had indeed been paying for these items before its default and that the Defendants had been ordered by virtue of the Judgment referred to in paragraph 2 above to pay for these items up to the date of delivery of vacant possession) for the following reasons:

(a) the Plaintiff has never included such claims in its Statement of Damages (which covers the period after the delivery of vacant possession).  Mr Yim argued that the Plaintiff should be allowed to make those claims as the total figure of $4,599,521 as pleaded in paragraph 23 of the Statement of Damages is correct anyway.  I do not accept this argument.  As shown above, the Plaintiff has very clearly pleaded under the said paragraph 23 that it was only claiming for rent at the rate of HKD208,512 per month.  The Defendants should not be obliged to work out themselves how the Plaintiff’s figure of $4,599,521 could be arrived at.  With the clear plea, the Defendants must be entitled to assume that it was just a miscalculation but nothing else.

(b) As aforesaid, as far as rates are concerned, the Plaintiff relied on Clause 2 of the Tenancy Agreement in support of the claim.  However, this clause was not pleaded in the Statement of Damages at all.

(c) Even Mr Yim himself has explained in footnote 2 of his written opening submission that the claim for damages was arrived at by adopting the following formula: “(Loss of rent after the date of delivery of vacant possession by Ds 14.04.2017 to the termination date of the Tenancy Agreement 22.11.2018) minus (rental income received from new tenant from 01.12.2017 to 22.11.2018)”.  The Defendants were definitely caught by surprise at the end of the trial when they were told at the stage of closing submissions that the Plaintiff was claiming for service change and rates after the delivery of vacant possession.

11.  Apart from rent, the Plaintiff also claimed in the Statement of Damages for the costs incurred in obtaining the judgment on liability.  However, Mr Yim informed this court at the hearing that the Plaintiff would abandon this claim in the Assessment of Damages proceedings.  This must be a sensible decision on the part of the Plaintiff, because it had been expressly ordered under the Judgement that such costs were to be taxed.

12.  Hence, the only real issues which this court has to resolve are in relation to the lines of defence referred to in paragraph 4 above, to which I will now turn.

The Election Argument

13.  The Defendants run this argument by relying on Clause 1 of Section IX of the Tenancy Agreement (“Clause 1”) which provides as follows:

“The Tenant shall deposit and at all times hereafter during the said term maintain with the Landlord as security for the due payment of the rent...The said deposit shall be retained by the Landlord throughout the said term free of any interest to the Tenant and in the event of any breach or non-observance or non-performance by the Tenant of any of the said agreements, stipulations or conditions aforesaid, the Landlord shall be entitled to terminate this Agreement in which event the said deposit shall be absolutely forfeited to the Landlord or, at the option of the Landlord, shall be used to set off all loss and damages sustained by the Landlord…” (emphasis is mine)

14.  It was submitted by Mr Tai for the Defendants that the words “or, at the option of” make it clear that the Plaintiff may elect between (a) forfeiting the deposit, or (b) suing for loss and damages while giving credit for the deposit retained.  Since, as demonstrated by various letters sent by the Plaintiff’s solicitors at the material time, the Plaintiff has elected to forfeit the deposit, such sum of deposit shall be treated as liquidated damages, and the Plaintiff may not sue for further damages.

15.  I am afraid I cannot accept this submission.

16.  I do not agree the existence of the word “or” in Clause 1 means that the Plaintiff is only allowed to choose either (1) to forfeit the rental deposit or (2) to sue for damages.  In my view, this clause only means that in the event of termination of the Tenancy Agreement by reason of any breach on the part of the 1^st Defendant, the Plaintiff may sue the 1^st Defendant for damages, and in which case the rental deposit has to be set off against any such damages.  However, if the Plaintiff decides not to sue the 1^st Defendant, then it may simply forfeit the deposit absolutely.

17.  I take the view that the word “or” does not bring in the doctrine of election at all, because this doctrine would only be applicable if two sets of legal rights are inconsistent and mutually exclusive (see Handley, Estoppel by Conduct and Election (2^nd edition, 2016), at paragraph 14-002).  However, it has been held in Polyset Ltd v. Panhandat Ltd. (2002) 5 HKCFAR 234 by Ribeiro PJ that:

“…a clause permitting forfeiture of a deposit upon the purchaser’s breach does not preclude the vendor from claiming damages in respect of any loss suffered over and above the value of the forfeited deposit. In contrast, where a breach is covered by a liquidated damages clause, the amount prescribed by that clause represents the agreed sum of damage payable, regardless of the quantum of actual loss.” (at paragraph 77)

18.  It is thus not necessarily inconsistent for the Plaintiff to forfeit the rental deposit and then sue the 1^st Defendant for the balance of the damages after the set off.

19.  Mr Tai suggested that, once the deposit is forfeited, it will be treated as liquidated damages.  He cited numerous case authorities (including HSBC Trustee (Hong Kong) Limited v Chiu Koon Shou & Others (HCA 1858/2006, unreported, 15 February 2007), Power Plus Ltd v Fruit Design & Build Ltd. [2016] 5 HKLRD 707 and Orient Bright International Ltd v Hiang Kie Hong Kong Ltd [2005] 2 HKC 663) in support, but with respect, these cases do not have the effect which Mr Tai contended that they have.  They are only cases on the interpretation of contractual provisions of similar (but not identical) nature.  Mr Tai’s suggestion is also contrary to what Ribeiro PJ held in Polyset as quoted above.

20.  Going back to Clause 1 itself, if the intention of the parties (as at the time when they entered into the Tenancy Agreement) was that the rental deposit would be forfeited as liquidated damages, they would have expressly provided as such.  Not only were the words “liquidated damages” not used, the inclusion of “or, at the option of the Landlord, shall be used to set off all loss and damages sustained by the Landlord” is in fact contrary to any suggestion that the parties have agreed that the amount of the rental deposit would be used as pre-estimation of damages.

21.  The Election Argument is therefore rejected.

The Mitigation Argument

22.  The Defendants’ next argument is that the Plaintiff has failed to mitigate its loss.

23.  It is undisputed that, after the 1^st Defendant had delivered vacant possession of the Premises to the Plaintiff on 13 April 2017, the Plaintiff had leased out the Premises again from 1 December 2017 onwards.  However, the Defendants argued that the Plaintiff should have taken no more than 3 months (instead of 7.5 months) to find a new tenant if it had used genuine effort to do so, and as a result, it is submitted that the Plaintiff should not be entitled to any alleged loss of rent for 4.5 months.

24.  The applicable legal principles in this regard are not in dispute.  Mr Yim for the Plaintiff has referred this court to the case of Park Avenue Toys Ltd v Candy Novelty Works Ltd (HCA 11135/1997, unreported, 23 August 2004) in which the learned Judge had set out those principles which may be summarized as follows:

(1) The law does not allow a plaintiff to recover damages to compensate him for loss which he would not have been suffered if he had taken reasonable steps to mitigate his loss.

(2) It is wrong to express this rule by stating that the plaintiff is under a duty to mitigate his loss.

(3) In taking steps to mitigate, a claimant is not under any obligation to do anything other than in the ordinary course of business.  He is not required to go to extreme steps and is not bound to nurse the interests of the defendant.

(4) In mitigating his loss, the claimant victim of a wrong is only required to act reasonably, and the standard of reasonableness is not high in view of the fact that the defendant is an admitted wrongdoer.

(5) Whether the claimant has acted reasonably is in every case a question of fact, not of law.

(6) A plaintiff will not be treated as behaving unreasonably when he chooses one of the possible reasonable alternatives only to find out later that the other one would have been cheaper.

(7) The onus of proof on the issue of mitigation is on the defendant.  If he fails to show that the claimant ought reasonably to have taken certain mitigating steps, then the normal measure of damages will apply.

(at paragraphs 43 to 46 thereof)

25.  It is argued on behalf of the Defendants that the following factors/conduct on the part of the Plaintiff show that it had failed to mitigate its loss:

(1) The Plaintiff’s estate agents were asking for a monthly rental of $246,160 on around 10 July 2017.  It is unreasonable because this asking rental was higher than the rent under the Tenancy Agreement.

(2) If the Plaintiff failed to lease out the Premises again 3 months after the Defendants had vacated the Premises, it should have lowered rather than increased the asking rental.

(3) The asking rental of $246,160 was much higher than the market rental which was around $170,000.

(4) The Plaintiff maintained an unreasonable policy under which a new tenant must either (a) pay 3 months’ rent and management fee as rental deposit and find a personal guarantor who could guarantee the tenant’s performance of his obligation; or (b) pay 6 months’ rents and management fees as deposit which is contrary to the market practice (of charging a deposit equivalent to the sum of 3 months’ rent and management fees).

(5) While there is evidence that the Plaintiff had followed up with its estate agents while the Premises were still left vacant, the Plaintiff did not ask what the estate agents were doing to try to lease out the Premises, nor did the Plaintiff ask about the asking rental.

(6) The Plaintiff must be regarded as having failed the test of reasonableness, taking into account the fact that the Plaintiff is not a typical landlord but a member of the CK Hutchison Group which is a leading multinational property developer.

26.  Having carefully considered the reasons put forward by Mr Tai as to why it is said that the Plaintiff has failed to mitigate its loss, and the submissions made by counsel, I have come to the view that the Defendants’ argument should be rejected.

27.  My reasons are as follows:

(1) It is the unchallenged evidence of Mr Cheung Kam Wing Angus (a Senior Marketing Manager of Hutchison Property Group Limited – an associated company of the Plaintiff) that his department had added the Premises to the list of available / vacant premises which was sent to various estate agents around 2 weeks after the 1^st Defendant’s delivery of vacant possession.  It is not suggested by the Defendants that there was any delay in this process, nor did they assert that the Plaintiff did not send the list to an adequate number of estate agents.

(2) The Defendants’ argument that the Plaintiff was unreasonable in asking for a monthly rental which was higher than the rental payable in the Tenancy Agreement and the market rental at the material time is a non-starter because it is the evidence of Mr Cheung (which was unchallenged in court) that as far as the Premises were concerned, the Plaintiff had never instructed its estate agents to put down an asking rental as such.  Indeed, it can be seen that in the list referred to in the preceding sub-paragraph, the Plaintiff had put down “negotiable” at the asking rental column rather than a definite figure.

(3) The Defendant’s suggestion that the Plaintiff should have lowered the asking rental must fail, given Mr Cheung’s unchallenged evidence that all along he did not know that the Plaintiff’s estate agents (such as Midland Realty) had put down an asking rental in the agents’ advertising materials.

(4) The Defendant’s argument that the Plaintiff’s policy on the requirement of deposit is unreasonable is also rejected:

(i) First of all, as the Defendants’ expert pointed out, the term of agreement on rental deposit would depend on a number of factors including, among other things, the credibility of the tenant, type of business of the tenant, etc.  Hence, the so-called market practice must be subject to these factors which have to be considered on a case to case basis.  

(ii) It is the evidence of Mr Cheung that the Plaintiff’s policy is not inflexible, in that in an appropriate case (considering the background of the tenant and whether the other terms of the tenancy agreement are very favourable to the Plaintiff), subject to the approval of any of the Plaintiff’s directors, the Plaintiff would not insist on following the policy.  This, in effect, is consistent with the approach described by the Defendants’ expert.

(iii) Insofar as it is the Defendants’ argument that any practice which is different from the so-called market practice must be regarded as unreasonable automatically, this cannot be right and is rejected.

(iv) There is no evidence that the inability on the part of the Plaintiff to rent out the Premises earlier had anything to do with the Plaintiff’s policy on rental deposit.  The Defendants could not even prove that any estate agents who were responsible for marketing the Premises had knowledge of the Plaintiff’s said policy and had conveyed such policy to any potential tenant.

(v) In any event, it seems that the Plaintiff had adopted its policy on rental deposit for years, as the companies of the 1^st Defendant’s witness (Mr Zhuo Zefan) had been subject to that policy since 2006.  The Plaintiff had been doing this in the ordinary course of business.  I do not think the reasonable steps in mitigating its loss should include a change of the Plaintiff’s long-standing policy on rental deposit.

(5) The Plaintiff had engaged various estate agents for the purpose of renting out the Premises again.  It is not reasonable, as suggested by the Defendants, to require the Plaintiffs to ask the professional estate agents what they had done in promoting the Premises, even taking into account the fact that the Plaintiff is within a group of multinational property developer.  To put it in another way, it is reasonable for the Plaintiff to rely on the professionalism of its estate agents.

The Credit Argument

28.  Lastly, it was submitted by Mr Tai that the Plaintiff should give full credit for the rental which it received under the tenancy agreement with the new tenant for the period between 23 November 2018 and 31 January 2019 (ie the period after the date when the Tenancy Agreement would have been terminated by reason of expiry of its term but for the 1^st Defendant’s breach).

29.  The Defendants argued that the Plaintiff should give such credit because of the following facts:

(a) In around July 2018, the parent company of the Plaintiff announced that Hutchison House would be redeveloped in 2019.

(b) At around the same time, the Plaintiff gave 6 months’ notice to its tenants and asked them to vacate their respective leased properties by the end of such a 6-month period.

(c) The latest date of delivery of vacant possession by the Plaintiff’s tenants was 1 April 2019, which was when Hutchison House was completely closed.  As far as the Premises are concerned, the new tenant moved out on 31 January 2019, and paid rent up to that date.

(d) Had the 1^st Defendant not breached the Tenancy Agreement, the tenancy would be expired on 22 November 2018.  Given the redevelopment plan, the Plaintiff would not have leased out the Premises to any other tenant thereafter.

(e) In other words, but for the 1^st Defendant’s breach, the Plaintiff would not have earned the rental from the new tenant for the period between 23 November 2018 and 31 January 2019.

30.  In support of their argument that the benefit accrued as a result of the breach should be taken into account in assessing damages, the Defendants cited the case of The Fanis [1994] 1 Lloyd’s Rep 633, in which Mance J (as he then was) had this to say:

“The general issue is in my view appropriately stated as being whether any profit or loss arose out of or was sufficiently closely connected with the breach to require to be brought into account in assessing damages. Resolution of that issue involves taking into account all the circumstances, including the nature and effects of the breach and the nature of the profit or loss, the manner in which it occurred and any intervening or collateral factors which played a part in its occurrence, in order to form a commonsense overall judgment on the sufficiency of the causal nexus between breach and profit or loss.

Here, if the profit was an element or consequence of the substitute charter (which itself arose naturally out of the situation in which the charterers were placed by the breach), it was appropriate to speak of the profit itself as arising out of, or as a consequence of, the breach. If on the other hand the profit was not an element or consequence of the substitute charter, then the profit did not arise out of or as a consequence of the breach…….” (at pages 636 to 637)

31.  In McGregor on Damages (20^th edition, 2018), the author stated in paragraph 9-120 that:

“In any event, it is suggested that the basic rule is that the benefit to the claimant, if it is to be taken into account in mitigation of damage, must arise out of the act of the mitigation itself; this approach has been adopted by the courts in quite a number of cases. It may be regarded as simply another way of expressing Viscount Haldane’s requirement [as set out in British Westinghouse Electric and Manufacturing Company, Limited v Underground Electric Railways Company of London, Limited [1912] AC 673] that the transaction giving rise to the benefit ‘must be one arising out of the consequences of the breach’. As we have seen, a matter which ‘arises out of’ the consequences of the breach has been described as one arising from the ‘ordinary course of business’ although a better expression would be whether the claimant’s action is reasonably necessary.”

32.  The profit in question is the rental earned out of the tenancy entered into by the Plaintiff with a new tenant of the Premises.

33.  The Plaintiff has no objection against the setting off of its damages by the rental received from its new tenant for the period between 1 December 2017 and 22 November 2018.  However, it did not agree that the rental earned after 22 November 2018 should be taken into account, since, it was argued, the 1^st Defendant’s Tenancy Agreement would have ended on 22 November 2018, and therefore, whatever happened after that date should not have any bearing on the amount of damages to be awarded herein.  The Plaintiff further relied on the principle that “no one should be allowed to benefit from his own wrong”.

34.  If the Plaintiff accepts that the rental earned for the period between 1 December 2017 and 22 November 2018 should be set off against the damages to be awarded, it is difficult to understand why it takes a different view in relation to the rental earned after 22 November 2018.  While it is true that the Tenancy Agreement would have ended on 22 November 2018, the fact remains that the rental received from the new tenant was payable out of the same tenancy agreement.   If the 1^st Defendant did not breach the Tenancy Agreement, the Plaintiff would not have entered into the new tenancy agreement at all.  Therefore, it is clear that the entering into the new tenancy agreement was sufficiently closely connected with the 1^st Defendant’s breach.  The rental received from the new tenant must arise out of the act of the mitigation itself and out of the consequence of the breach.

35.  The principle of “no one should be allowed to benefit from his own wrong” is obviously not applicable to the present situation.  The facts in Tsang Yau Ah v Chan Kit Ching [1958] HKLR 7 cited by Mr Yim are totally different and can offer no assistance to his argument.

36.  I would therefore hold in favour of the Defendants in their Credit Argument.

37.  As a result, the rental income earned by the Plaintiff under the entire tenancy agreement with its new tenant should be taken into account.

38.  In the Defendants’ submissions, the total amount of “income received” from the new tenant was stated to be $3,209,702.19.  This has taken into account the service charges payable by the new tenant in the sum of $20,272 per month.  In my view, this amount should not be deducted from the damages to be awarded, because it has been pleaded in paragraph 19A(5) of the Amended Answer to Statement of Damages that:

“In the circumstances, the Plaintiff is required to give full credit to the Defendants in respect of the rental income received from the new tenant for the period from 23 November 2018 to the date the new tenant delivered vacant possession of the Premises under the Replacement Tenancy.”

39.  All that the Defendants sought to set off under the said paragraph 19A(5) was the rental income.  Service charge was not mentioned at all.  It would be unfair to the Plaintiff if the Defendants are allowed to deduct the service charges from the damages payable without pleading this.  It is particularly so when the Plaintiff has been disallowed by this court to claim for such charges on the same ground.

40.  The amount which the Plaintiff should give credit is therefore $2,935,703.23.

Conclusion

41.  The total loss of rent suffered by the Plaintiff is in the sum of $4,024,281.60 ($208,512 (monthly rental under the Tenancy Agreement) x 19 months and 9 days).

42.  Such loss should be set off against the rental payment which the Plaintiff received from its new tenant which is in the total sum of $2,935,703.23 ($217,200 x 14 months MINUS $105,096.77 (the rent which was not charged during the 15 days’ rent-free period)).

43.  The amount of damages to be awarded should be further set off by the rental deposit of $686,352 forfeited by the Plaintiff.

44.  The amount of damages which the Defendants are liable to pay should therefore be $402,226.37 ($4,024,281.60 – $2,935,703.23 – $686,352.00).

45.  I order that the Defendants shall pay interest on the sum of $402,226.37 at judgment rate until full payment.

46.  Having taken into account the Defendants’ success in their Credit Argument, I also make an order nisi that the Defendants shall pay the Plaintiff’s 75% costs of the assessment of damages proceedings, including any costs reserved.  Such costs shall be taxed if not agreed.  For the avoidance of doubt, I certify the engagement of counsel.  In the absence of application to vary within 14 days, the costs order shall become absolute.