KEEP POINT DEVELOPMENT LTD v. CHAN CHI YIM AND OTHERS

HCMP6550/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

NO. 6550 OF 1998

_________________

______________________

___________

R U L I N G

___________

1. his ruling follows a preliminary ruling of 25 May 2005 and should be read in conjunction with that, for both go towards my ultimate determination, which is to assess damages due by the 2nd Third Party, Yuen Sung & Co., to those of the defendants, being former property owners, who have not yet settled their claims.

2. The Court of Final Appeal has already determined that the defendants are entitled to the worth of the units they disposed of, together with such enhanced value, if any, as at the date they should, and could, have gone into the market to mitigate their loss once it became apparent that Full Country could not complete the project.

3. By my ruling of 25 May, I established the formula which, when applied to any particular date, will provide for that enhanced value.  That has given rise to a few more defendants settling their claims.  But for the remainder, a sticking point is just when that duty to mitigate actually came to pass.

4. As the CFA stated from paragraph 19 of its judgment of 15 June 2004:

“	19.	...Upon first learning that Full Country had assigned the property and was no longer in a position to redevelop the property, the unit holders should have, if they could have, mitigated their loss by purchasing new permanent premises.  This item of damages is intended to be an additional award to compensate those unit holders who, when they could and should have acquired new permanent premises of the same standard as the old premises, were faced with a market in which the dollar value of such new premises exceeded the dollar value of the old premises assessed in accordance with the judgment.  The time when a unit holder could and should have acquired new premises occurred when that unit holder should have discovered that there was no longer any realistic hope that Full Country was in a position to redevelop the property, or at such later time as the unit holder became able financially to acquire new permanent premises of the same standard as the old premises.  Financial ability, in this context, must be determined by reference not only to a unit holder’s available assets but also the holder’s ability to borrow money on reasonable terms...
	20.	Whether any additional sum is payable depends on a number of factors, including when the unit holders first came to know, or ought to have had knowledge, that Full Country had sold the property and was not in a position to redevelop the property; what would have been the reasonable time for them to acquire new permanent premises; whether at that or some subsequent time the unit holder was reasonably able, financially, to acquire a similar new unit and the change, if any, in the property market during the relevant period.  These are matters of evidence for the consideration of the judge in the assessment exercise.”

5. It is the defendants’ case that the date they should have mitigated their loss, that is by buying a unit of like worth to the one disposed of, was in or about August 1997.  Yuen Sung counters that the correct date was in or about October 1998 or, alternatively, in or about March 2000.  The reasons these dates have been put forward will become apparent.

6. The somewhat unusual stance taken by the parties whereby the defendants, as claimants, are opting for an early date on which they should have mitigated and the firm, Yuen Sung, as payer, is pursuing one of two later dates, derives from the massive market correction experienced in the Hong Kong property market at the time.  History reveals that the market climbed to dizzy, unsustainable heights around the Summer of 1997.  Then the bubble burst and there was a dramatic fall which continued into about 2002/ 2003 before recovery.

7. So it is that the date or dates I determine as being appropriate will impact significantly on the payout that has to be made, at least for those who, independent of any interim payment received, are found to have had the means to purchase alternative flats to replace the ones lost.

8. The questions I am required to resolve are twofold, namely, when was it that each defendant knew or ought to have known that Full Country had sold the subject property and was no longer in a position to redevelop the property, and when was it, then or thereafter, that he or she or they had the wherewithal to fund the purchase of another place.

9. In order to assist the process, I acceded to a request to deal with the circumstances of just one of the remaining defendants, in fact, a man and his wife designated D49, as a test case to enable thereafter the remaining parties to consider their positions.  Mr Watt Kin-shing and his wife, Kwan Suk-ching, are D49.

10.  For the purpose of properly dealing with the questions posed, it is necessary to recount the history, and I do so with the benefit of evidence adduced by Mr Watt and from the findings of fact garnered from the various judgments in this case, at First Instance and on appeal, that have gone before.

11.  In Madam Kwan’s name, they owned a flat with access to a rooftop in Block D, Sheung Fung Building.  They had bought the flat in 1989 with the help of mortgage finance.  This was a principal and interest mortgage and they were still paying it off when they sold to Full Country in 1994.  Mr Watt was a garment factory worker and the primary breadwinner.  Madam Kwan earned enough to meet personal expenditure on a part-time basis.  They had then, they have still, two school age children.

12.  During their tenure in Sheung Fung Building, the owners of the units in Blocks C and D incorporated themselves as owners.  Up to the date they all sold to Full Country, Mr Watt was the elected chairman. 

13.  The approach to sell their unit in 1994 came from Full Country’s representative, Cheng Kwok-tung.  They came to know that Full Country’s alter ego was another Cheng, possibly a brother, Cheng Kwok-fai, in those days, a prominent and respected member of the community.

14.  Concerning the unit that the family was to take in exchange, the option agreement Mr Watt produced revealed that by its terms he and his wife, upon exercising it, had the choice of drawing lots for a unit in the building to be constructed on the Sheung Fung site which, when complete, came to be known as The Vista, or of selecting a flat in Profit Mansion, which was a development of Full Country in the neighbourhood currently then under construction.

15.  The option agreement is a little obscure in the drafting.  One reading of it suggests that the option was to be exercisable shortly following Full Country giving notice that it was in a position to pre-sell the units in The Vista or, when the occupation permit issued, whether the Watts decided on a Vista or Profit Mansion apartment.

16.  Under the agreement, Full Country undertook that it would not assign the property as a whole during the term of the agreement, except by way of a legal charge and/or building mortgage of the property.

17.  As with all the owners who were subsequently to become defendants, Winston Yuen, the principal of Yuen Sung, was hired to represent them in the conveyancing.

18.  In October 1994, the Watt family moved out of their former unit, renting another in the neighbourhood.  Part of the deal was that Full Country would meet that rental, and so it did, although from time to time it was late in making payments and had to be chased.

19.  The project proceeded uneventfully.  The blocks making up Sheung Fung Building and the building next door at 84 Sheung Fung Road were knocked down and construction of what was to become The Vista began.

20.  Then it was that in early 1997, Mr Watt and others of his former neighbours, read from newspaper reports that Full Country had sold the property to China Merchants, a company prominent in property development on the Mainland.

21.  This set off immediate alarm bells for, if true, it put Full Country in breach of the option agreements Mr and Mrs Watt and the other former unit holders had with Full Country and amounted to a clear and obvious threat to their getting title and use of the flats they had been promised.

22.  Two significant meetings were held which Mr Watt and the majority of his neighbours attended.  Both were recorded on tape and the tapes have been transcribed and translated and were produced in evidence.  The first was with Yuen at his office on 3 February; the second was two weeks’ later at Full Country with K T Cheng.  Neither was aware the meeting was being taped.

23.  The meeting at Yuen’s office was somewhat hostile, not surprisingly so.  Some of the unit holders were heard to complain that they had not been properly advised of the risks associated with not being able to register their options and there was talk of holding Yuen negligent.  Of course there was, in the fullness of time, to be the finding that Yuen Sung & Co. was negligent and liable to them all in damages.  But the main purpose of the meeting was to elicit from Yuen what was happening and to seek his advice on what they should do.

24.  Yuen confirmed that Full Country, by agreement signed in December 1996, sold the property to Keep Point Development Limited, a wholly owned subsidiary of China Merchants.  He told them that he understood that it was because it was in default to a mortgagee which had been threatening to foreclose so its hand was forced.  But he went on to state that contemporaneously another deal was struck in which Full Country was given 14 months, thus until February 1998, to buy the single share of the company which wholly owned Keep Point.  This was, in effect, an option to buy back the project.

25.  Yuen set out various scenarios and remedies which included suing Full Country for being in breach of its agreements with the former owners.  He did not, however, make any reference to a duty to mitigate.

26.  At the meeting held with Cheng, that is the one on 17 February, Cheng stressed the existence of the buyback arrangement and that, in effect, the transactions amounted to a loan; that the building would be completed; that Full Country would exercise its right to buy back the project, whereupon those with option agreements would have their units assigned to them.  They were told, in effect, to sit back and wait for completion.

27.  Meantime, in March 1997, Profit Mansion was completed.  Mr Watt and several others of his former neighbours were given keys to units therein and they moved in.  Mr Watt said from the witness-box that he believed this was because earlier he had opted for a unit in Profit Mansion rather than in the as yet incomplete Vista and was a prelude to he and his wife being assigned title pursuant to the option agreement.  They spent about $80,000 on decorating the unit, consistent with the belief that in due course it would be theirs.  He chased for the assignment, but it was not to be forthcoming.

28.  Meanwhile, during the course of 1997, construction of The Vista proceeded, apparently satisfactorily.  Some of the unit holders were given personal guarantees by K F Cheng guaranteeing Full Country’s performance of its obligations under the option agreements.  Mr Watt knew of this, but saw no need for this protection for himself and his wife.  After all, his family was, by this time, settled in their unit in Profit Mansion.

29.  The date by which Full Country had to exercise its buyback by means of taking full control of Keep Point came and went without it doing so.  But there was ongoing activity indicating Full Country’s management was continuing to do its best to recover control.  In August 1997, it sued Keep Point for a declaration that the arrangement of December 1996 was, in fact, a mortgage.  That action persisted until July 1998 when it was dismissed by consent.

30.  Then in August 1998, the parties agreed that Full Country be given a part in the sale of the development upon payment of the sum of $30 million to Keep Point by 16 August 1998.  However, no payment was made.

31.  There was one further attempt by Full Country to gain control by a repurchase in September 1998.  K T Cheng kept Mr Watt and the others informed of this latest and, as it turned out, last attempt.  It fell through when some registered agreements for sale of some of the units were found to be forged.  By October 1998, Mr Watt and his fellow former unit holders learnt that K F Cheng had absconded.  In November 1998, Full Country was wound up.

32.  Meanwhile, he and the others who were by now living in Profit Mansion, had been receiving letters of demand from various finance companies and banks, calling for payment of moneys overdue and, after that, calling for possession of their units.  They were not directed at Mr and Mrs Watt and the others personally for they had entered into no such commitments.  But, as occupiers, clearly, their right of quiet enjoyment was under threat.  Despite his best endeavours, Mr Watt had not been able to get an assignment.  Cheng’s disappearance and Full Country’s liquidation put paid to all hope of that.  He and his wife began to look for another place to buy.  In June 1999, they signed up to purchase a flat under the Home Ownership Scheme at a discounted price of $1.24 million, of which $1.11 million was to be borrowed on bank mortgage.  Completion took place in October 2000.  Then it was that the family vacated Profit Mansion and moved in.

33.  But meanwhile, in December 1998, on advice, Mr and Mrs Watt and 62 others of the former unit holders registered their option agreements against the title to what was, by then, the emerging Vista.

34.  They were, of course, out of time.  That same month, that is December 1998, Keep Point sued to have the registrations voided.  And so it was that these proceedings came into existence.  The defendants fought the action on the grounds that the agreement between Full Country and Keep Point was a sham, designed to defraud them of their interests in the project.  Deputy Judge Woolley found against them in a judgment dated March 2000.

35.  And so thus to the claim by third party proceedings against Yuen Sung and the finding, this time in their favour, of damages to be assessed.

36.  From the witness-box, Mr Watt answered questions on his financial circumstances to assist me on the issue of whether, in or about August 1997 or thereafter, he had the ability to fund the purchase of an alternative flat.  By that date, his old flat and rooftop, had they still existed, would have been worth a bit over $1.5 million.  It was his understanding that a bank would have lent him 70 per cent of the unit’s value, or about $1.05 million.  The family had savings of over $800,000 and thus more than enough to meet the prospective down payment.  He was then earning $15,000 but could, and would, have taken his employer’s offer of a 70 per cent enhancement if he agreed to work in a relocated factory on the Mainland.  He expressed confidence that the purchase of a flat at or about $1.5 million in August 1997 was well within his means.  That is, of course, a matter for me.  But first I must deal with the all-important question as to when it was that the defendants should have purchased if they could.

37.  Mr Lee, Senior Counsel, and Mr Chan, whom he leads, submitted for the defendants that a crucial date in the timetable was February 1997 because it was then that Mr Watt and the others learnt that the subject site had been sold by Full Country thus, as they put it, permanently depriving them of their expectation to acquire new permanent premises.  That being a marker thus laid down, the defendants should, after having grappled with that unpalatable truth, have gone into the market by, say, August 1997 and bought alternative homes or shops, as the case may have been.  That is how they arrived at the date - August 1997.

38.  Mr Chang, Senior Counsel, and Mr Liu for Yuen Sung countered with the proposition that the date would have been within a reasonable time, not just of the sale, but also when the defendants came to the realisation that there was no reasonable prospect of Full Country being able to provide them with new units and, given events as they unfolded, that was not until in or about October 1998.  That is their primary stance.  As a secondary proposition, they advocated the date upon which Deputy Judge Woolley found against the defendants in their defence of the action brought by Keep Point when he ruled the sale was a bona fide one. 

39.  So, which of these three dates, or indeed any other date, should I fix?  In answering this question, I propose as my first step one which goes backwards into the law - and it is settled law - from which the CFA would have determined how that date should be arrived at.  I can do no better than read from McGregor on Damages, 17th Edition, an excerpt in Ch. 7 which is headed “Mitigation of Damages” being paragraph 7.014 under the sub-heading “The rule as to avoidable loss:  no recovery for loss which the claimant ought to have avoided” and it reads as follows:

“The extent of the damage resulting from a wrongful act, whether tort or breach of contract, can often be considerably lessened by well-advised action on the part of the person wronged.  In such circumstances, the law requires him to take all reasonable steps to mitigate the loss consequent on the defendant’s wrong and refuses to allow him damages in respect of any part of the loss which is due to his neglect to take such steps.  Even persons against whom wrongs have been committed are not entitled to sit back and suffer loss which could be avoided by reasonable efforts, or to continue an activity unreasonably so as to increase the loss.  This well-established rule finds its most authoritative expression in the speech of Viscount Haldane in the leading case of British Westinghouse Co. v Underground Electric Railways [1912] AC 673, a case concerning avoidable loss.  At page 689, he said:

‘The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach.  But this first principle is qualified by a second which imposes on a claimant the duty of taking all reasonable steps to mitigate the loss consequent upon the breach and debars him from claiming any part of the damage which is due to his neglect to take such steps’.”

40.  Thus it follows that the date in question must be the date by which the defendants, in this particular instance the defendants designated D49 - Mr Watt and his wife - came to be in breach of this duty, or, as Viscount Haldane put it, neglected to take the reasonable step of mitigating their loss by buying an alternative residence for themselves.  In my view, the correct approach is to establish when, by complying with the CFA’s direction reproduced at the outset, that neglect arose.  Messrs Lee and Chan submitted that there is but one clear-cut answer and that is the date upon which the defendants knew of the sale because it was that which put Full Country in breach and no longer in a position to redevelop the subject property so that effectively, by this conduct, the defendants’ rights were extinguished.  In effect, Mr Lee invited me to impose the word “thus” into the direction so that it becomes the following:

“Whether any additional sum is payable depends on a number of factors, including when the unit-holders first came to know that Full Country had sold the property and thus was not in a position to develop the property.”

My concern about that is that there is no such word in the direction.  Further, if the meaning were as Mr Lee propounded, there would be no point in incorporating the words “and was not in a position to develop”.

41.  But more significantly, this was no ordinary sale.  Full Country had reserved to itself the right to take back control of the project.  The sale put it in breach, but had not extinguished the prospect of it being able to satisfy its obligations to the defendants when they fell due.  When the defendants called on Yuen in February, he was at pains to explain the rationale behind the sale and the buyback.  They were cross with him but he was still their solicitor and they were there for his advice.  He told them provided Full Country exercised its option to buy back, it was still bound to perform, as far as the defendants’ options were concerned. 

42. Mr Cheng, at the second meeting, told them that the transaction was, in reality, a raising of capital to complete.  In effect, it was a mortgage.  Of course, it was not, the material difference being that the new owner was just that, an owner, and in charge and in control of the project.  But there was a significant similarity, namely, the right for the vendor to buy back not unlike a mortgagor’s equity of redemption. 

43. Mr Lee argued that the so-called buyback option was not relevant.  If it was the CFA would have marked it.  As it was, the sale by Full Country was a final disposition to the effect that it was thereafter no longer the developer.  The so-called buyback was the purchase of a share, not of title to the development.  The developer from the sale was Keep Point and would remain so.

44. As I see it, the CFA did not need to refer to those matters which, by evidence adduced, would result in findings of fact in my court.  Its function was to lay down, by direction, how I should rule once I had made findings of fact.  And, with respect, I find no mileage in the proposition that the buyback was not of title but of a share.  That share was the sole share of the company that owned Keep Point.  Had it exercised the option, Full Country would have had restored to it full control and that would have included the right to take title.  This is not an uncommon manner in which real estate is dealt.  Earlier judgments reveal findings that the manner by which the transaction would have proceeded, had it done so as agreed, was for tax and stamp-duty savings and I have no cause to doubt that was so. 

45. Further, I pay heed this was not, and is not, about the subtleties of title but whether Mr Watt and his other fellow former unit-holders had acted unreasonably in failing to mitigate when they came to learn about the sale.  Given that it was urged upon them by Full Country’s management to hold firm, wait for the repurchase, and the assignments of units to them, I do not see how it can be said they were being unreasonable by not treating all hope as lost and going out into the market and buying alternative premises at this time.  It is pertinent that although they went looking for and received advice on what steps were available to them, they were not told that they had a duty at this time to mitigate their loss.

46. Then it was that February 1998 came and went without Full Country exercising its right to buy back control.  That, as I find, was the time when there was no longer any realistic prospect that Full Country was in a position to redevelop the property.  By failing to buy back, it irreparably jeopardised or denied its ability to perform its contract by completing the construction of the defendants’ new units, phraseology I reproduce from the CFA judgment of 11 April 2003 at paragraph 27.  The action Full Country brought against Keep Point, the subsequent agreement and negotiations of August and September 1998, were increasingly desperate attempts to regain control when, realistically, that was not going to happen, culminating in Cheng’s ignominious disappearance and Full Country’s liquidation.

47. The defendants knew the date by which Full Country was bound to exercise the option if it was to recover control.  It was the passing of that date which triggered their duty to mitigate.  Allowing for a reasonable time to commit to an alternative purchase, I fix on April 1998 as the appropriate date by which they should have purchased alternative premises.

48. Were Mr Watt and his wife and those others who opted for a Profit Mansion unit, in a different position?  It would seem not.  The CFA considered their situation separately.  Save for the fact that their entitlement to a rental allowance must recognise that for some time they were living rent-free in Profit Mansion, it otherwise drew no distinction.  It would, of course, be wrong for me to do so now.

49. So it is that I find Watt Kin-shing and Kwan Suk-ching should have repurchased in April 1998.  As to whether they could have, I am satisfied on the evidence that they had the ability to repurchase the equivalent of their former home in August 1997.  With the prices down by the following year - and it is obvious that it would have been a more friendly environment for a buyer than the previous year - I hold that they would have been able to do so in April 1998 as well.  That then becomes the date upon which the defendants designated D49 should have mitigated their loss by repurchasing a unit similar to the one they had given up.

50. That is my ruling.  I shall reserve the matter of costs for argument.