KONG COLIN CHUNG PING AND ANOTHER v. KONG WING ON AND OHTERS

CACV 72/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 72 OF 2014

(ON APPEAL FROM HCMP NO. 2045 OF 2012)

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REASONS FOR JUDGMENT

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Hon Kwan JA (giving the reasons for judgment of the court):

1. This is an appeal against the judgment of Deputy High Court Judge Le Pichon on 10 March 2014 ([2014] 2 HKLRD 517) brought by the 1^st and 3^rd defendants. The 1^st and 2^nd plaintiffs are two of the beneficiaries under a will dated 11 March 1996 and a codicil dated 24 June 1997 of Kong Wing Hong, deceased (“the testator”). By her judgment, the judge granted a declaration to the plaintiffs that the two tenancy agreements exhibited as “KWO-7” to the 1^st affidavit of the 1^st defendant filed on 5 December 2012 are void and unenforceable.

2. At the conclusion of the hearing, we dismissed the appeal with costs and these are our reasons.

The background

3. For the purpose of this appeal, the relevant background matters may be stated as follows.

4. The testator died on 9 June 2003. Probate was granted to the 1^st defendant as the sole executor on 6 March 2006.  The plaintiffs are the grandchildren of the testator and two of the beneficiaries of his estate.  The other two beneficiaries are Madam Tam Wai Fong and the 1^st defendant, who is the younger brother of the testator.  The 1^st defendant was removed as the executor of the testator and replaced by the 2^nd defendant, a professional accountant, by an order of the judge on 13 November 2013.  The 1^st defendant is over 90 years old and in poor health.  On 30 January 2015, an order was made by a master appointing the 1^st defendant’s wife his guardian ad litem in these proceedings.  The 3^rd defendant is a company wholly owned and controlled by the 1^st defendant.

5. Since about 1950, the testator and the 1^st defendant had operated in partnership a pharmaceutical and related business under the trade name of On Hong Ning Drug Company (“the Business”) from two premises (collectively “the Premises”): (1) the basement, ground floor, 1^st, 2^nd, 14^th floors and roof of 792 Nathan Road (“the Nathan Road premises”), being part of a building that comprises 16 floors in total (“the Prince Edward Building”); and (2) the basement, ground floor and 1^st floor of 313 Nathan Road (“the Jordan premises”).

6. The brothers were also equal shareholders and permanent directors for life of two companies (collectively “the Companies”) – On Hong Ning Drug Company Ltd (the 3^rd defendant herein) and On Hong Ning Drug Company (Mongkok) Ltd.  The former has never been in operation and the latter has been dormant since 1993.

7. The brothers were tenants in common of the Prince Edward Building and the Jordan premises.  During the testator’s life time and while the Business occupied the Premises, there was no lease and no payment was made in respect of the occupation.

8. The plaintiffs issued the originating summons in these proceedings in September 2012, seeking the removal of the 1^st defendant as the executor and consequential relief, including an account by him of his dealings with the estate and any assets therein.  One of their complaints was that by occupying the Premises and not accounting for rental income, the 1^st defendant put himself in a conflict of interest situation and was in breach of his fiduciary duties.

9. It was in opposing the originating summons that the 1^st defendant made his 1^st affidavit in December 2012 exhibiting as “KWO-7” the two tenancy agreements, one for the Nathan Road premises and the other for the Jordan premises.  In each instance, the testator and the 1^st defendant were the landlord and the 3^rd defendant was the tenant.  The 1^st defendant deposed that there had always been consensus between him and the testator that the Business should continue to be operated with least interruptions upon the death of either of them and for this reason, they entered into those tenancy agreements on 10 January 1996 with the intention that they could live on the earnings of the Business “for at least 20 years” in the event that either one died.

10. The tenancy agreements were drafted by the brothers’ long standing solicitors, Philip K H Wong, Kennedy Y H Wong & Co (“PWKWC”).  PWKWC prepared other documents which were executed by the brothers in March 1996.  There was a deed dated 11 March 1996 (“the Deed”), by which they agreed to execute mutual wills under which each bequeathed to the other his share and interest in the Business and the Companies conditional on the other surviving him, failing which such gift would lapse and fall into his residuary estate.  Mutual wills dated 11 March 1996 were executed by the brothers.  Each also executed a codicil to his own will that dealt with bequests of other assets.  In the testator’s case, the codicil he executed on 11 March 1996 was revoked by the codicil in 1997.

11. Significantly, unlike his share in the Business and the Companies, the testator did not bequeath his half share in the Premises to the 1^st defendant.  He had other testamentary provisions in mind.  By the 1997 codicil, the testator’s share of the Jordan premises and the Prince Edward Building was to form part of his residuary estate.

12. The tenancy agreements were in identical terms save for the description of the leased property.  The term was for five years but the commencement date was left blank. The rent was $3 per month exclusive of rates.  The tenant (i.e. the 3^rd defendant) was given the right to “sub-let or to authorise use of the Premises by way of Licence to [the testator and the 1^st defendant] or any one of them trading as ON HONG NING DRUG COMPANY (安康寧大藥房)”.  There was an option for the tenant to renew the tenancy four times, each time for a term of five years on the same terms but without the option clause.  The tenancy agreements were executed by the testator and the 1^st defendant as the landlord.  But even at the date of the testator’s death on 9 June 2003, the agreements were undated and had not been executed by the 3^rd defendant as the tenant.

13. The 1^st defendant said this in §48 of his 1^st affidavit:

“In order to facilitate our consensus that the Business should continue to be operated with least interruptions upon the death of either the [testator] or myself, the [testator] and I, as landlords, and [the Company], as tenant, entered into two tenancy agreements in 1996 whereby [the Company] is entitled to occupy the [Premises] at a rent of HK$3 per month (exclusive of Rates) and with the right to sub-let or to authorize use of the [Premises] by way of licence to the [testator] and myself and any one of us trading as On Hong Ning Drug Co (安康寧藥房) (“the Tenancy Agreements”) (see KWO-7). Furthermore, there was a mutual agreement between the [testator] and I that the term of the tenancies under the Tenancy Agreements were to be left blank and were to be filled in by the [testator] or myself upon the death [of] either one of us. Both of the Tenancy Agreements provide for an option to renew for 4 times, each time for a term of 5 years. The intention was that either of us could carry on the Business with least interruption for at least 20 years, so that we can live on the earnings of the Business, upon the death of either of us”.

14. The plaintiffs amended their originating summons on 20 May 2013 by adding §1A seeking an order in these terms: “A declaratory order that the Tenancy Agreements as exhibited as KWO-7 under the 1^st Affidavit of Kong Wing On are invalid, void and/or not enforceable”.

15. On 13 July 2013, the 1^st defendant filed his 2^nd affidavit in these proceedings and exhibited copies of the tenancy agreements as “KWO-11”, from which it can be seen that (1) the commencement date of the five-year term of the tenancy was filled in as “09-06-2003”, being the date of death of the testator; (2) the rubber stamp of the 3^rd defendant was affixed in the space for signature of the tenant and the 1^st defendant signed on its behalf as “Chairman”; (3) the date of “18-04-2013” was written next to the signature on behalf of the tenant; and (4) the tenancy agreements were stamped and stamp duty was paid on 19 April 2013.

The directions hearing on 26 November 2013

16. The originating summons as amended came before the judge for hearing on 13 November 2013 with three days reserved.  The 1^st defendant sought and obtained an adjournment, it is not necessary to go into the reasons.  The judge made an order removing him as the executor and appointed the 2^nd defendant to replace him.  The originating summons was then adjourned to 26 November 2013 for further directions.

17. At the directions hearing on 26 November, the judge observed that having dealt with the removal of the 1^st defendant as the executor, the major issue was the validity of the tenancy agreements being the relief sought in §1A of the originating summons.  There was discussion with counsel if the court would need to hear oral evidence in determining this issue.  The position of the plaintiffs’ counsel Mr Lynn was that there were “no serious factual disputes” and it was the plaintiffs’ understanding that “it was primarily a legal issue”.  He said the following:

“The tenancy agreement point is primarily a legal point. It’s really a question of what happens when there’s an undated, unexecuted agreement, and it’s subsequently signed and dated, and was that valid from – ab initio, was it made valid from the date of signing.”[1]

18. Mr Chain, who appeared for the 1^st defendant in the court below, confirmed that “as the evidence now stands the position of the parties, including the plaintiffs, is that there will be no live evidence”, subject to his seeking leave to file a further affirmation[2].  He explained the “basic point” was covered in the two affidavits of the 1^st defendant already filed, that “it is the wish of the two brothers for the business to continue and hence some arrangement have been come into” and the further affirmation to be filed was to put more flesh on the bones[3].

19. The judge had asked the parties more than once if the procedure proposed to be adopted – that there would be no live evidence – was appropriate to determine the issue of the validity of the tenancy agreements[4].  Throughout the exchanges of counsel with the court, Mr Chain had not suggested there would be any need for oral evidence and cross-examination for this issue to be resolved or that Mr Lynn’s understanding that “it was primarily a legal issue” was incorrect.

20. That had to be borne in mind when the judge returned to the 1^st defendant’s application to file a further affirmation.  She made clear to the parties that if leave were to be given, she would not allow any disputed fact raised in the further affirmation to affect the milestone date of the adjourned hearing of the originating summons[5].  She then acceded to Mr Lynn’s submission if the further affirmation should raise disputed issues of fact, the further evidence would not be admitted[6].

21. So an order was made that §1A of the originating summons be set down for trial on 25 February 2014 with one day reserved.  Leave was given to the 1^st defendant to file a further affirmation and the plaintiffs to file affirmation in reply and if the further affidavits raise issues of disputed fact, they shall not be admitted into evidence.

22. The 1^st defendant then filed a further affirmation from a legal executive of PWKWC on 24 December 2013, but this was later ruled inadmissible by the judge for the reasons given in the judgment and they are not relevant to this appeal.

The judgment on 10 March 2014

23. This judgment is the subject of the present appeal.  It is apparent from §1 of the judgment that the issue for determination at the trial before the judge on 25 February 2014 was the validity of the tenancy agreements in writing, first exhibited as “KWO-7” and the parts left blank were later completed, dated and stamped in April 2013 and exhibited as “KWO-11”.

24. It would appear from the judgment that the focus of the parties’ submissions was on various legal issues, namely: (1) the admissibility of certain parts of the 1^st defendant’s evidence – whether this was relevant background and context to be prayed in aid in construing the written agreements, or whether they constituted evidence of prior negotiations and declarations of his subjective intent and hence within the exclusionary rules; (2) whether there was an implied term that the agreements were to commence on the date of either the death of the testator or the 1^st defendant, whichever should first occur; and (3) whether a sufficient memorandum of the terms of the tenancy agreements existed for the purpose of section 3 of the Conveyancing and Property Ordinance, Cap 219 (“CPO”).

25. The judge held in favour of the plaintiffs on all these issues.  She also found there was no ambiguity as to what the parties meant by the language used[7]. Even if it were permissible to take into account the objective of the tenancy agreements as stated in the 1^st defendant’s affidavits, the term of the agreements did not sit comfortably with the objective, and importantly the tenant was not the surviving brother but the 3^rd defendant[8]. And if the agreements as at the date of the testator’s death were void because of the failure to specify an ascertainable commencement date, they were not and could not have been remedied by what the 1^st defendant had done on 18 April 2013[9].

The judgment on 24 February 2015

26. This judgment was given after a two-day hearing in February this year when the judge dealt with the remaining issues in the amended originating summons.  The issues that arose were whether the plaintiffs are entitled to an account from the 1^st defendant of his dealings with the estate of the testator when he was executor and to an order for payment by him to the estate of all sums found due on taking of the account.

27. Amongst other matters, the plaintiffs advanced the case that the 1^st defendant acted in breach of fiduciary duty or duty of care by occupying the Premises (the testator had an undivided half share in them) for the purpose of his own business paying only nominal rather than market rent and that he should account to the estate for the difference or make equitable compensation.

28. The 1^st defendant raised a number of defences, including estoppel by convention (that the brothers shared a common assumption that upon the death of either, the survivor would be able to continue to operate the business at the Premises as before with the least disruption as possible); proprietary estoppel (that there was mutual agreement between the brothers that upon the death of either, the survivor could continue to operate the business at the Premises with the least interruptions, the brothers signed the tenancy agreements and later executed the Deed and mutual wills, and that constituted a representation that the survivor would be entitled to occupy the Premises rent-free); and promissory estoppel (on the same basis as proprietary estoppel).

29. The judge rejected the defences raised by the 1^st defendant and declined to relieve him from personal liability under section 60 of the Trustee Ordinance, Cap 29.

30. The 1^st defendant filed a notice of appeal in respect of the second judgment.  This appeal has yet to come before the appeal court.

This appeal

31. The 1^st and 3^rd defendants advanced five grounds of appeal in their notice of appeal filed in April 2014, which was amended extensively just three weeks before the hearing.  At the hearing, Mr Chan, SC[10], who did not appear below, informed us that he would abandon all except one of the main contentions in his amended notice of appeal and skeleton argument, having considered the skeleton submissions of Mr Lynn and Mr Siu.

32. The only main point taken by Mr Chan on appeal was as follows.

33. He submitted that the judge was in error in refusing to admit the 1^st defendant’s evidence on the objective of the tenancy agreements and holding that this constituted evidence of prior negotiations and declarations of the 1^st defendant’s intention.  The 1^st defendant’s evidence did not come within the purview of the exclusionary rules.  The judge failed to recognize this evidence showed that the tenancy agreements were partly oral and/or partly by conduct and partly in writing.  She failed to find there was a pre-existing mutual agreement made orally between the brothers that the Business should continue to be operated with the least interruption on the death of either of them, and the tenancy agreements, the Deed and mutual wills had been concluded pursuant to this mutual agreement.  On the basis of this concluded and complete agreement which was partly oral, partly in writing and partly by conduct, the judge should have held that the term of the tenancy agreements was to commence on the date of the testator’s death.  The tenancy agreements should not be held void for want of certainty.

34. Mr Chan took us in some detail to those parts of the 1^st defendant’s affidavits he relied on[11]. He submitted that this evidence was unchallenged and not disputed by the other parties other than on the ground it is within the exclusionary rules.  At no time did the plaintiffs apply for leave to cross-examine the 1^st defendant.  The existence of an oral pre-existing agreement deposed to by the 1^st defendant should not be doubted.  That there was a concluded agreement is a fact the judge should have found in favour of the 1^st defendant, given that his evidence was not challenged.

35. Further, Mr Chan submitted that the judge failed to hold there was sufficient part performance for the operation of section 3(2) of the CPO such that the tenancy agreements are enforceable with the intervention of equity.  The 1^st defendant’s conduct was referable to the existence of the tenancy agreements.  There was continuous occupation of the Premises at a nominal rent after the testator’s death for the purpose of carrying on the Business, and he subsequently filled in the commencement date of the term of the tenancy agreements as the date of death of the testator.

36. Both Mr Lynn and Mr Siu, who appeared for the 2^nd defendant, opposed Mr Chan’s argument on the ground that the case of a concluded agreement made partly orally, partly by conduct and partly in writing was not advanced below, and that also applies to the new case of part performance.  The appeal court should not allow a new point to be taken on appeal unless it comes within the principle in Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356 at 369B to C, namely, that “where a party has omitted to take a point at the trial and then seeks to raise that point on appeal, … [he] will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial”.

37. Mr Chan took us to the skeleton submission and supplemental submission served by Mr Chain at the hearing before the judge on 25 February 2014.  Despite the mention of “express agreement” and “express term that the tenancy agreements are to commence from death (of either brother)” in Mr Chain’s submissions[12], we are satisfied that the case of a concluded agreement made partly orally, partly by conduct and partly in writing was not advanced before the judge.  It is patently clear from the judgment that that was not the focus of the submissions made to the judge.  The matter was argued before the judge as a matter of construction of the written agreements, whether there should be implied terms to the written agreements, and the sufficiency of the memorandum in writing of the agreements.  We have no reason to think that the judge would not deal with it in the judgment if this case had indeed been advanced before her.  It was apparent from the questions raised repeatedly by the judge at the directions hearing on 26 November 2013 that from the start she was alive to the difficulties of determining the validity of the agreements with no live evidence if this should involve disputed issues of fact.

38. What is more, it is clear from §1A of the amended originating summons the issue that the court was asked to resolve was the validity of the tenancy agreements in writing, not the validity of any tenancy agreement made partly orally, partly by conduct and partly in writing.  That plainly was not what the judge had set out to analyse and discuss in the judgment.

39. In his written submission, Mr Lynn referred us to those parts of the 1^st plaintiff’s affirmations[13] to make the point that it is not correct for Mr Chan to say that the 1^st defendant’s evidence was unchallenged.  Mr Lynn had also made his position clear at the last directions hearing before trial on 13 February 2014 that whilst oral evidence was not required at the hearing, this did not mean that submissions would not be made disputing the 1^st defendant’s evidence[14].  It is understandable that the plaintiffs and the 2^nd defendant might be content to rely on the exclusionary rules to submit that the court should not admit or attach weight to the 1^st defendant’s evidence in construing the written agreements and in considering whether any term should be implied.  Had the 1^st defendant been asking the court at the hearing on 25 February to find on his evidence there was a pre-existing oral agreement which formed a material part of the concluded agreement, the plaintiffs and the 2^nd defendant would undoubtedly have wished to contest that evidence with cross-examination of the 1^st defendant, irrespective of whether they could or would adduce any further evidence to meet this new case.

40. The 1^st defendant is clearly unable to bring himself within the principle in Flywin.  He cannot advance a new case on appeal not raised in the court below.

41. Mr Chan asked us to consider remitting the case back to the judge to investigate further whether there was any tenancy agreement made partly orally, partly by conduct and partly in writing, as this is a vital issue to the 1^st defendant and there is no reason to ignore the 1^st defendant’s evidence on affidavit.  We declined to take this course.  The case of an agreement made partly orally, partly by conduct and partly in writing was not advanced before the judge at any time, not just in respect of the hearing on 25 February 2014, but also for the hearing in February this year which resulted in the second judgment also under appeal.  It is quite clear that the plaintiffs and the 2^nd defendant would invoke res judicata to seek to preclude the 1^st defendant from advancing this new case.  The arguments on estoppel would need to be resolved, perhaps in the next appeal, before we could decide whether it would be appropriate to remit any issue to the court below for further investigation.

42. For the above reasons, we have dismissed the 1^st defendant’s appeal with costs to the plaintiffs and the 2^nd defendant.