HARKSING INVESTMENT LTD v. TOPLINK HOLDINGS LTD t/a MY PLACE AND OTHERS

CACV 137/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO.137 OF 2011

(ON APPEAL FROM HIGH COURT ACTION NO.219 OF 2008)

________________________

BETWEEN

________________________

________________________

REASONS FOR JUDGMENT
AND DECISION ON COSTS

________________________

Hon Yuen JA:

1.  This is an appeal from a judgment of Deputy Judge Carlson given on 27 June 2011 ordering the 2^nd Defendant to pay a sum of $2,518,400 to the Plaintiff with interest and 90% of the Plaintiff’s costs.  At the conclusion of the hearing we dismissed the appeal with costs.  The Plaintiff asked for an order that costs be given on an indemnity basis.  We reserved our decision on the basis of costs. 

Background

2.  1     The Plaintiff is the landlord of premises on the Ground and 1^st floors of a building in Tai Kok Tsui, Kowloon (“the premises”). 

2.2     The 1^st Defendant was a former tenant of the premises.  Under a written Tenancy Agreement dated 5 January 2007, the 1^st Defendant was granted a fixed term tenancy of 3 years commencing on 1 October 2006.  The 1^st Defendant vacated the premises at the end of 2007, before the expiration of its term, leaving the premises to be occupied by the 3^rd Defendant.  On 11 March 2009 the Plaintiff obtained default judgment against the 1^st and 3^rd Defendants for non-payment of rent and mesne profits, but it has not received any payment. 

2.3     The Plaintiff sued the 2^nd Defendant as guarantor of the 1^st Defendant’s liabilities under a document in Chinese entitled (in translation) “Guarantee Agreement” which she had signed on 18 October 2006.

VE’s tenancy - 1^st term

3.  The dealings between the Plaintiff and the 2^nd Defendant can in fact be traced back to 2003 when the Plaintiff let the premises to a company called Victory Express Ltd (“VE”) for a period of 3 years commencing on 1 May 2003 and expiring on 30 April 2006.  VE operated a restaurant at the premises.  The 2^nd Defendant’s husband had interests in VE and she was a director.  On 26 March 2003 she signed a document in Chinese entitled (in translation) “Guarantee Agreement” in favour of the Plaintiff.  However as this is not the guarantee on which the 2^nd Defendant was sued, it is not necessary to dwell on it. 

VE’s tenancy - 2^nd term

4.  Upon the expiry of VE’s 1^st term of tenancy in 2006, the Plaintiff and VE agreed to a 2^nd term of 4 years commencing on 1 May 2006 and expiring on 30 April 2010.  It is noteworthy that a written Tenancy Agreement for this term dated 28 June 2006 was signed by the 2^nd Defendant as a director of VE so she had notice of its terms. 

5.  Soon after VE entered its 2^nd term however, its business deteriorated and it wished to terminate the tenancy prematurely.  VE asked the Plaintiff to permit the tenancy to be taken over by the 1^st Defendant which was a company in which the 2^nd Defendant’s husband again had interests through various corporate holdings. 

6.  According to the 2^nd Defendant’s Witness Statement dated 3 September 2009,

6.1     the Plaintiff demanded certain “pre-conditions” before it would accept VE’s request for an early termination of the tenancy; 

6.2     one pre-condition was that the 1^st Defendant “must accept terms and conditions identical or similar to the Special Conditions” (this refers to certain terms particular to the tenancy such as the requirement to use condiments produced by the Plaintiff’s associated company);

6.3     another pre-condition was that the 2^nd Defendant would provide a personal guarantee to secure the 1^st Defendant’s liability “for payment of rents”;

6.4     these pre-conditions were agreeable to VE as the outgoing tenant, the 1^st Defendant as the incoming tenant and the 2^nd Defendant as guarantor;

6.5     subsequently in or about late September 2006, a “preliminary agreement” was concluded whereby the Plaintiff would let the premises to the 1^st Defendant for a term of 3 years commencing on 1 October 2006 at the same rent previously paid by VE.

1^st Defendant’s tenancy 

7.  On 30 September 2006, a Deed of Surrender was signed whereby VE surrendered the premises to the Plaintiff, and on 1 October 2006, the Plaintiff let the 1^st Defendant into possession.

8.  On 18 October 2006, the 2^nd Defendant signed a second Guarantee Agreement in Chinese in favour of the Plaintiff.  It was on the same terms as the guarantee she had signed in 2003 except for the substitution of the 1^st Defendant’s name for VE.  I will refer to the terms of this guarantee later.   

9.  A written Tenancy Agreement between the Plaintiff and the 1^st Defendant was signed on 5 January 2007.  Save for the substitution of the 1^st Defendant for VE and terms agreed in what the 2^nd Defendant called the “preliminary agreement”, it has not been suggested by counsel for the 2^nd Defendant that there were any material differences between this Tenancy Agreement and that which she had signed as director of VE a few months earlier.

10.  Unfortunately the 1^st Defendant’s business also proved to be unsuccessful.  As VE had done the year before, in December 2007 the 1^st Defendant sought the Plaintiff’s agreement to terminate its tenancy prematurely and to have the tenancy taken over, this time by the 3^rd Defendant. 

11.  There were then negotiations between the Plaintiff and the 1^st and 3^rd Defendants which the learned judge found to be subject to contract, from which finding there is no appeal.  The upshot was that the 1^st Defendant’s tenancy had not terminated when on 31 December 2007 it parted with possession of the premises and allowed the 3^rd Defendant to occupy them.

12.  On 16 January 2008 the Plaintiff through its solicitors accepted the 1^st Defendant’s repudiatory breach in parting with possession of the premises and permitting the 3^rd Defendant to occupy them.  As mentioned earlier, the Plaintiff has obtained judgment against the 1^st and 3^rd Defendants but the judgments have not been satisfied. 

Guarantee

13.  The Plaintiff proceeded against the 2^nd Defendant on the guarantee she signed on 18 October 2006 which was in these terms (translated into English):

“Guarantee Agreement
Regarding the tenancy of Ground Floor and 1^st Floor of
Nos. 2-4 Fuk Tsun Street, Kowloon

I (“Guarantor”) Chan Ching Mui [Identity Card number provided] of [address provided] guarantee and undertake to perform the terms and obligations contained in the relevant tenancy agreement of the above property signed by the Tenant [Toplink Holdings Limited] : In case of default on rent by the Tenant and other violations of the tenancy agreement during the term of the tenancy, I am willing to indemnify the Landlord for all the losses.

Under any circumstances, the obligations undertaken by me herein shall not be released even if the Landlord has not taken any action against the Tenant for breach of contract due to the Landlord’s neglect or bearing.

This Agreement was made on the 18^th day of October 2006".

Pleaded Defence

14.  The 2^nd Defendant was legally represented throughout the proceedings. Her Amended Defence filed on 16 October 2009 contained a number of defences, the principal one being that there had been a surrender of the 1^st Defendant’s tenancy so that it was not liable to the Plaintiff.  There were also the following additional defences relating to her own liability as guarantor:

14.1   she had never been informed of the contents of the Tenancy Agreement by the Plaintiff [para. 7];

14.2   she denied she had made the Guarantee Agreement [para. 8];

14.3   alternatively, if she had signed the Guarantee Agreement,

- there was no consideration or past consideration, and therefore the guarantee was not binding;

- she had done so in reliance on false and/or fraudulent representations made to her by the Plaintiff’s representative Ng Oi Ying that “it was a guarantee limited to secure the 1^st Defendant’s liability for payment of rent for the said premises only and in the belief that it was such a guarantee and not otherwise, without knowing or realizing that it was in effect a guarantee of unlimited amount or unlimited scope of liability.  In the premises, the 2^nd Defendant never intended to sign the alleged Guarantee Agreement as an unlimited guarantee” [paras. 9 and 11(r)].

Trial

15.  The trial before the learned judge took 4 days.  Mr Maurice Chan appeared for the 2^nd Defendant.  It would appear from the learned judge’s judgment that it was not until closing submissions that Mr Chan argued for the first time that the 2^nd Defendant’s liability as guarantor had been discharged due to a variation of the principal agreement between the Plaintiff as creditor and the 1^st Defendant as principal debtor, the variation having been effected by the written Tenancy Agreement signed after the guarantee.

16.  In the learned judge’s words,

“For my part, and I have no doubt Mr Lam [counsel for the Plaintiff] has the same sense of it, this point has come as a complete surprise. It is not pleaded in terms or otherwise and unsurprisingly was never developed in the course of the evidence through the witnesses, either in-chief or in cross-examination”.

Consequently the learned judge refused to permit Mr Chan to raise the variation point. 

17.  As that was the main point of substance in Mr Chan’s closing submissions, the learned judge held that the 2^nd Defendant was liable to the Plaintiff on the guarantee for the rent and service charges payable by the 1^st Defendant until the date when the Plaintiff was able to re-let the premises.  However as for the Plaintiff’s claim for the cost of replacement of damaged parts and equipment on the premises, the judge found that the Plaintiff had failed to prove its loss and he dismissed that part of the claim.

Appeal

1^st ground

18.  The 1^st ground of appeal reads as follows:

“The learned Judge erred in law in disallowing the 2^nd Defendant’s submission of law that on the facts, that the Guarantee dated 18^th October 2006 guaranteed an oral periodic tenancy and/or tenancy at will, and could not have guaranteed any:

(1) tenancy which the parties agreed, by a subsequent Memorandum executed on 2^nd November 2006, to put the tenancy as still subject to contract; and

(2) terms of a subsequent formal Tenancy Agreement dated 5^th January 2007 between the Plaintiff and the 1^st Defendant, which materially varied the terms of the oral tenancy,

on the ground that the case has not been pleaded; the learned Judge’s ruling is contrary to the established principle of pleading that law need not be pleaded”.  (Emphasis added).

19.  At the hearing before us, when Mr Chan was asked to elucidate the 1^st ground of appeal, he made it clear that he was not arguing that the written Tenancy Agreement signed on 5 January 2007 had effected a variation of a prior “oral periodic tenancy and/or tenancy at will” between the Plaintiff as creditor and the 1^st Defendant as principal debtor, thereby discharging the guarantee by conduct.  His argument was that the guarantee could only have guaranteed an “oral periodic tenancy and/or tenancy at will” and not, as he calls it, the “futuristic” written Tenancy Agreement dated 5 January 2007 as it had not yet come into existence when the 2^nd Defendant signed the guarantee.  After that came into existence, the “oral periodic tenancy and/or tenancy at will” terminated and with that, the 2^nd Defendant’s liability under the guarantee.

-        Discussion

20.  In my view, it is simply not open to Mr Chan to take this argument on the pleadings, just as it was not open to him to take the variation argument.  It was clear from the Statement of Claim that the Plaintiff was suing the 2^nd Defendant as guarantor of the 1^st Defendant’s liabilities under the written Tenancy Agreement which was for a fixed term tenancy.  Order 18 rule 8(1) of the Rules of the High Court makes it clear that a party must in any pleading subsequent to a statement of claim plead specifically any matter which he alleges makes any claim of the opposite party not maintainable, or which, if not specifically pleaded, might take the opposite party by surprise.  He must “confess and avoid” (see the commentary in 18/8/1 and 18/8/2, Hong Kong Civil Procedure 2011 p.375).

21.  However nowhere in the Amended Defence was it ever alleged by the 2^nd Defendant that what she guaranteed was not a fixed term tenancy, but an “oral periodic tenancy and/or tenancy at will”.  It follows that she never pleaded:

- the facts supporting the allegation that the parties had agreed to the creation of such a tenancy (or tenancies);

- the terms of that alleged tenancy (or tenancies);

- at what date that alleged tenancy (or tenancies) commenced and when it (or they) terminated (in fact when Mr Chan was asked about the termination date at the hearing before us, two conflicting answers were given); and

- that the 1^st Defendant was not in breach when that alleged tenancy (or tenancies) terminated;

all of which were essential facts to be pleaded for a defence of discharge of guarantee by performance of the principal obligation. 

22.  On the contrary, the 2^nd Defendant pleaded that as she signed the guarantee after the commencement of the fixed term tenancy on 1 October 2006, there was no consideration or past consideration (para. 9 Amended Defence).  It was inherent in that defence that she accepted that the liabilities guaranteed were those under the written Tenancy Agreement.

23.  In these circumstances, it is simply not open to Mr Chan to take such an argument now, when it had not been raised in the pleadings or at the trial.  It cannot be said that this is only a matter of law which did not need to be pleaded.  If it had been pleaded in the Defence that the guarantee (signed as one of the pre-conditions for the 1^st Defendant to be allowed to take over VE’s tenancy) only covered a tenancy of less than 3 months, and not a fixed term tenancy of 3 years, the Plaintiff may well have pleaded a reply of estoppel (whether of convention or otherwise).  The judge would then consider the evidence focusing on these arguments.  Accordingly I take the view that it is not open to the 2^nd Defendant to argue the 1^st ground of appeal.

2^nd ground

24.  As for the 2^nd ground of appeal, I do not see any basis for the argument that the learned judge allowed the Plaintiff to run an unpleaded case.  The guarantee should not be construed in a vacuum and the Plaintiff was entitled to call evidence of the factual matrix against which the 2^nd Defendant signed it. 

3^rd ground

25.  The 3^rd ground of appeal is that the Plaintiff could not prove its case as Ms Ng’s evidence was that prior to the signing of the guarantee, “there was no discussion between them [Ms Ng and the 2^nd Defendant] that the 2^nd Defendant would be guaranteeing on terms materially similar to the tenancy agreement of the former tenant [VE]”.

- Discussion

26.1   This argument was not raised in Mr Chan’s closing submissions at trial and the learned judge did not deal with it in his judgment.

26.2   In any event it is not clear how the absence of a discussion itself renders the Plaintiff’s case unproved.  Presumably the argument is that there was no explicit agreement between the Plaintiff and the 2^nd Defendant that the terms of the 1^st Defendant’s Tenancy Agreement would be similar to VE’s.

26.3   In my view the absence of such an explicit agreement between Ms Ng and the 2^nd Defendant does not affect the Plaintiff’s case.  In the Guarantee Agreement, the 2^nd Defendant guaranteed and undertook to perform “the terms and obligations contained in the relevant tenancy agreement of the above property signed by the Tenant [the 1^st Defendant]”, in other words, the terms appearing in any Tenancy Agreement that the 1^st Defendant signed.

26.4   In any event, in actual fact such an explicit agreement would not have been necessary anyway.  VE’s proposal to the Plaintiff was that its tenancy should be taken over by the 1^st Defendant.  The 1^st Defendant agreed to this proposal including the peculiar features of the tenancy, i.e. the Special Conditions.  The 2^nd Defendant was also aware that the terms pertinent to the 1^st Defendant’s own tenancy were agreed in September 2006.  There were no other matters to be discussed.  The 1^st Defendant moved in on 1 October 2006.  In these circumstances, it was not surprising that no such explicit agreement took place before the 2^nd Defendant signed the guarantee on 18 October 2006. 

4^th ground

27.  As for the 4^th ground, which was that the terms of VE’s Tenancy Agreement and the 1^st Defendant’s Tenancy Agreement “were not sufficiently similar for there to be an implied understanding by conduct to arise”, no submissions were made in writing in support of this ground, and Mr Chan did not advance any arguments orally either.

Order

28.  For the reasons set out above, I dismissed the appeal with costs.  As for the basis of costs, I take the view that it would be appropriate to order costs on the same basis as that adopted at the trial, i.e. to be taxed on a common fund basis.

Hon. Hartmann JA:

29.  I agree.

Hon. Fok JA:

30.  I agree.