SHAM CHI KEUNG v. DIRECTOR OF LANDS

cacv 189/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 189 of 2006

(on appeal from LDLR NO. 3 of 2005)

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J U D G M E N T

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Hon Le Pichon JA:

1.  This is an appeal by the respondent from the order of the Lands Tribunal ordering the respondent to pay the applicant pre-resumption loss of $322,000 and relocation expenses of $24,000.  At the conclusion of the appeal hearing, judgment was reserved which we now give.

Background

2.  The applicant operated a retailing business supplying LPG gas in cylinders from a side shop comprising an area of about 40 ft on the ground floor of premises situated at 563 Shanghai Street.  The retailing business at that location started in 1983.  The shop fell within the scheme of resumption referred to as “K2” and the site has since been redeveloped into the Langham Hotel complex in Mongkok.

3.  The resumption began in 1993.  According to statistics supplied by the Urban Renewal Authority, 760 tenanted households were affected by the scheme.  They began to vacate K2 over a period of four years starting from January 1994.  The statistics converted into percentages by counsel for the applicant appears in the table below:

	12.1994	12.1995	12.1996	12.1997
Percentage of Households Vacated the K2 Area (Total: 760)	25.1% (74.9% remained)	47.8% (52.2% remained)	65.0% (35.0% remained)	100% (0.0% remained)

4.  The applicant continued operating his business until the final clearance day in December 1997.  He made a claim for compensation for pre-resumption loss and for permanent loss under sections 10(2)(d) and (e) of the Lands Resumption Ordinance (“the Ordinance”).  His contention before the tribunal was that he had not relocated his business.  He also claimed to have attempted to look for alternative premises for relocation but was unsuccessful and eventually had to make arrangements with his in-laws so that his brother-in-law would take over his liability for the cost of empty cylinders.

5.  The tribunal concluded that either the applicant had in fact successfully relocated his business or, alternatively, it was unreasonable for him not to have done so and rejected his claim for permanent loss.  That determination is not the subject matter of any appeal.

6.  On the claim for pre-resumption loss, the evidence was that the applicant’s annual sales figures remained stable at the $3 million level during the resumption period.  The annual profit made by the applicant was, in round terms, $460,000 per annum.  The tribunal also found that 35% of the applicant’s profits came from the K2 district before the resumption period.  The tribunal’s reasons for its award of pre-resumption loss appears at paragraph 19 of its judgment:

“We accept Mr. Lui’s able argument that the Applicant must have suffered losses because of the moving out of clients from K2 district.  The loss should be assessed from two figures, $460,000, the rounded off average annual net profit before resumption; and 35%. , the percentage of profit generated from K2 district.  In the circumstances we also have to make certain assumptions most favourable to the Applicant in assessing the loss before resumption.  Firstly clients of the Applicant moving out at a steady rate over the four years.  Secondly the Applicant did not need to incur expenses to retain his clients in K2 in a no-scheme world.  Thirdly profit rent, interest on capital and owner’s remuneration were not deducted.  The result would be $322,000 (460,000 X .35 X 2).”

This appeal

7.  Prior to the hearing of the appeal, the applicant conceded the appeal relating to relocation expenses and consented to the appeal being allowed to that extent.  The only matter before us relates to the award of pre-resumption loss.

8.  The questions of law appearing in the notice of appeal read as follows:

“	(1)	Whether the business of the Applicant/Respondent suffered any loss or damage as a result of the resumption, in light of the matters as described in paragraph (1) above, to entitle him to the sum of $322,000.00 or any sum as compensation for pre-resumption loss under section 10(2)(d) of the Lands Resumption Ordinance.
	(2)	Whether a reasonable person would have, in the circumstances of the Applicant/Respondent as described in paragraph (1) above, continued to trade normally as opposed to allowing his business to run down and then seeking to recover compensation for his losses.  If so, whether HH Judge Yung, in adopting the figures of $460,000.00 and 35% to reach the sum of $322,000.00 as compensation for the pre-resumption loss and assuming that first, there was a steady moving out of the clients of the Applicant/Respondent from the K2 district; and second, there was no need for the Applicant/Respondent to incur any expense in retaining his clients from the K2 district in a no-scheme world, failed to take into account the duty of the Applicant/Respondent to mitigate his pre-resumption loss and was right as a matter of law to do so.”

9.  At the commencement of the appeal hearing, this court indicated to Ms Wu who appeared for the respondent what appeared to the court to be the question of law arising in the present appeal.  A short adjournment was granted for Ms Wu to consider her position.  When the hearing resumed, Ms Wu applied to amend the notice of appeal by adding the following question of law for the court’s determination:

“Whether the loss found to have been suffered by the Applicant following the moving out of clients from the K2 district (at paragraph 19 of the judgment) is loss or damage due to the removal of Applicant’s business under section 10(2)(d) of the Lands Resumption Ordinance, under which the Applicant is entitled to compensation from the Government.”

10.  Mr Lui who appeared for the applicant indicated that he had no objection to the amendment in view of the adjournment given.  Leave to amend was therefore granted.

11.  The relevant statutory provision is to be found in section 10 of the Ordinance:

“	(1)	The Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it under section 6(3) or 8(2) on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim.
	(2)	The Tribunal shall determine the compensation (if any) payable under subsection (1) on the basis of-
		…
		(d)	the amount of loss or damage to a business conducted by a claimant at the date of resumption on the land resumed or in any building erected thereon, due to the removal of the business from that land or building as a result of the resumption;”

12.  It is clear from subsection (1) that compensation is only awarded on the basis of “loss or damage suffered by the claimant due to the resumption of the land specified in the claim”.  That subsection delimits the loss recoverable: it has to be causally connected to the resumption of the applicant’s land.  Subsection (2) sets out the different situations that could form the basis of compensation.  For present purposes, it is paragraph (d) that is relevant.  That paragraph emphasises that the loss recoverable must be “due to the removal of the business from that land or building as a result of the resumption”.

13.  The tribunal appeared to have awarded compensation for loss suffered “because of the moving out of clients from K2 district”.  Prima facie there is no causal link between the resumption of the applicant’s land and loss sustained.  The reason why the applicant’s clients moved out of K2 was because their own land or building was being resumed.  The ensuing loss from the clients moving away therefore had nothing to do with the applicant’s land being resumed.  It is a loss that does not fall with section 10(2)(d) of the Ordinance.  

14.  Suppose the applicant’s own premises fell outside the land to be resumed but that the clients whom he supplies live in an adjacent area that is subject to a resumption order.  The fact that he suffers loss because his clients have to leave the area would not entitle him to any compensation.  Take another example: if only the applicant’s premises were subject to a resumption order but his clients who live in the adjacent area that is not affected by the resumption order move away for whatever reason thereby affecting his business, the loss suffered would also not be compensatable under the Ordinance because it would not be a loss suffered “as a result of the resumption” of the applicant’s land.  When the tribunal’s reason for the award of compensation is analyzed, it is clear that it is unsustainable because the loss was due to the moving out of clients from K2 and not, as required by the Ordinance, due to the removal of the business from the applicant’s land as a result of the resumption.

15.  Mr Lui sought to uphold the tribunal’s award.  He referred to the decision of the Privy Council in Shun Fung Ironworks Ltd v Director of Buildings and Lands [1995] 2 AC 111.  In the case, Shun Fung was informed by the government in late 1981 that it intended to develop the area within which Shun Fung’s site was located into a new town.  The resumption order was not made until October 1985 fixing 30 July 1986 as the date of resumption.  Shun Fung was unable to obtain another suitable site and closed its business in January 1987.  In the period between late 1981 and January 1987, Shun Fung suffered financially because news of the government’s intention of resuming the site at some indefinite date which became generally known in 1982 had a paralysing effect on Shun Fung’s operations.  The tribunal found that the removal of the business from the land was in the nature of a slow asphyxiation for Shun Fung.  Customers were unwilling to enter into long-term forward contracts and Shun Fung reasonably and properly decided not to enter into contracts of more that 6 months’ duration.  The majority decided that a loss occurring in the shadow period before resumption could be regarded for compensation purposes as a loss caused by the resumption.  The statement of principle is to be found in the speech of Lord Nicholls (at page 137H – 138B):

“… there is no sensible stopping place short of recognising that losses incurred in anticipation of resumption and because of the threat which resumption presented are to be regarded as losses caused by the resumption as much as losses arising after resumption.  This involves giving the concept of causal connection an extended meaning, wide enough to embrace all such losses.  To qualify for compensation a loss suffered post-resumption must satisfy the three conditions of being causally connected, not too remote, and not a loss which a reasonable person would have avoided.  A loss sustained post-scheme and pre-resumption will not fail for lack of causal connection by reason only that the loss arose before resumption, provided it arose in anticipation of resumption and because of the threat which resumption presented.  In the terms of the Resumption Ordinance, a pre-resumption loss which satisfies these criteria is as much “due to” the resumption of the land as a post-resumption loss.”

But the principle as expounded by Lord Nicholls whilst giving an extended meaning to “causal connection” does not dispense with the need to establish it.  In my view, Shun Fung does not assist the applicant’s case.

16.  Mr Lui then referred this court to the discussion on injurious affection compensation in Cruden on Land Compensation and Valuation Law in Hong Kong, 2^nd edn, 118 where it is explained as representing a different and more generalised loss of value to the unresumed land caused by the use of the resumed land.  As I understand it, Mr Lui was inviting this court to award compensation by adopting a principle analogous to the injurious affection principle bearing in mind that the land of the applicant was part of the resumed land rather than unresumed land.  Mr Lui frankly acknowledged that there is no statutory right under our Ordinance to award compensation for injurious affection.  For my part, I do not see how, on a proper construction of section 10 (2) (d), compensation can be awarded on the suggested basis.

17.  Mr Lui also submitted the applicant’s business was not limited to the physical premises.  Rather, the purpose of the statutory provision was to compensate for loss to the business operated on the particular land and as an asset of this business was its goodwill which would include its customers, the applicant should be compensated for the loss of those customers.  This, however, does not get over the hurdle Mr Lui must surmount of establishing the requisite causal connection.  It is the absence of this causal connection that renders the award of compensation by the tribunal unsustainable.

18.  For these reasons, I would allow the appeal.  I would add that the questions of law raised in the original notice of appeal were not the appropriate questions and but for the amendment, I would not have allowed the appeal.

19.  So far as the costs below are concerned, the respondent having succeeded in this appeal should be entitled to those costs.  So far as the costs of this appeal are concerned, before rising this court had invited counsel to make submissions on costs in the event of the appeal being allowed on the basis of the amendment.  In view of the fact that the appeal would not have been successful but for the amendment, as regards the costs of the appeal, I would order that there be no order as to costs.

Hon Yuen JA:

20.  I agree.

Hon A Cheung J:

21.  I agree.