WEALTH GOLDMAN LTD v. TIN SHING STONE LTD

DCCJ 335/2021

[2022] HKDC 302

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 335 OF 2021

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DECISION

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Introduction

1.  This is the appeal of the plaintiff (P) against the decision of Master W Y Ho setting aside an Interlocutory Judgment dated 8 April 2021 (“Judgment”). By this decision the learned Master set aside the Judgment on the ground of irregular service with costs.

2.  P and the defendant (D) were respectively the landlord and tenant of premises at Ground Floor, 284 Portland Street, Mongkok, Kowloon (the “Property”). On 8 November 2019 P and D entered into a tenancy agreement (the “TA”) for a term commencing on 1 December 2019 and ending on 30 November 2020 at a monthly rent of $246,000, payable on the first day of each calendar month.

3.  On 1 May 2020, D defaulted in payment of rent. On 18 May 2020 P applied to the Lands Tribunal for relief including delivery of possession of the Property. Thereafter D made belated rental payments for May and June 2020.

4.  On 21 July 2020, the Lands Tribunal ordered, subject to the usual relief from forfeiture, inter alia, that vacant possession be delivered and that D do pay arrears of rent / mesne profits at the rate of $246,000 per month from 1 June 2020 until delivery up. The last day for obtaining such relief (called “Relief Expiration Date”) was 4 August 2020. The judgment, as amended (to correct a typo), will be referred to as the LT Judgment.

5.  According to the Statement of Claim in the present proceedings, D further defaulted in the payment of rent between 1 July and 30 November 2020 totalling $1,230,000, and rates for October and November 2020 despite P’s repeated demands.

6.  On 24 August 2020, Messrs Marie Tsang, Dustin Chan & Co (“MTDC”), solicitors acting for D delivered up possession of the premises by handing over the keys to P. In their letter, they also demanded a partial refund of the deposit, calculated as the balance after deducting rent for the period from 1 July to 24 August 2020. P claims that this act amounted to abandonment of possession and evincing an intention not to be bound by the TA.

7.  In a letter dated 25 August 2020, Ng & Co, solicitors for P, referred to MTDC’s letter and replied:-

“Notwithstanding the relief from forfeiture under the Order dated 21 July 2020 and our client’s offer to settle as stated in our previous letter dated 6 August 2020, by the above said letter enclosing keys to the premises, your client had repudiated the tenancy agreement and our client confirms its acceptance of such repudiation.”

8.  P’s alternative case is that D’s substantial breach of its obligations to pay rent and other charges under the TA between 1 July and 30 November 2020 and its failure to remedy such breach constituted a repudiatory breach of the TA.

9.  On 21 January 2021, P commenced the present action. Particulars of loss and damage are given in the Statement of Claim as follows, before giving credit to the retained amount of deposit of $738,000:-

(1)  Loss of rental income for the period between 25 August and 30 November 2020 in the aggregate sum of $793,548.39.

(2)  Rates for the months of October and November 2020 in the aggregate sum of $20,266.67.

10.  No acknowledgment of service having been filed, P signed Judgment for damages to be assessed and costs on 8 April 2021. On 14 May 2021, D applied to set aside the judgment. As mentioned above, D succeeded before the Master.

Issues on appeal

11.  I need not rehearse the well-known principles governing applications to set aside default judgments. As the appeal is a de novo hearing, I would apply the same principles to the determination of this appeal. In short, I need to decide:-

(1)  Whether the Judgment was regularly obtained;

(2)  If so, whether D has shown a defence with a real prospect of success.

Regularity of Judgment

12.  On the facts of this case, this issue boils down to whether the Writ of Summons was properly served by P. There is no dispute that on 22 January 2021, P sent a sealed copy of the Writ by registered post duly pre-paid and properly addressed to D at its registered office (“RO”). The RO was located at 1^st Floor, 341 Portland Street, i.e. immediately above the Property.

13.  Eventually the Writ came to D’s attention but not until Judgment had been entered in default. As explained in the affirmation of Yeung Tat Chong filed on behalf of D in support of the setting aside application, what happened was this. D operated a shop at the Property, i.e. on the ground floor. The letter box for the RO was located inside the main gate of the building which was sometimes closed making the letter box inaccessible to the postman. Therefore, sometimes for mail addressed to the RO, the postman would deliver it to the ground floor shop instead. That this was indeed what happened is supported by a receipt obtained from the Hongkong Post by Mr Yeung. The receipt was chopped with the name of the shop and dated 25 January 2021.

14.  Next, Mr Yeung surmised that after receiving the Writ, the salesmen working at the shop took the envelope to the office upstairs but just left it there, without bringing it to the attention of the office staff. The Writ was thus overlooked by D until it was too late. For the purpose of this appeal I am content to proceed on the basis that Mr Yeung’s explanation is correct.

15.  On the appeal, P’s argument is entirely straightforward. As submitted by Mr Ernest Ng, counsel for P, service was effected and effective under section 827 of the Companies Ordinance, Cap 622. This provides materially that “a document may be served on a company by leaving it at, or sending it by post to, the company’s registered office.”

16.  Further, the meaning of “sending” is governed by section 8 of the Interpretation and General Clauses Ordinance, Cap 1. The section reads as follows:-

“Where any Ordinance authorizes or requires any documents to be served or any notice to be given by post or by registered post, whether the expression ‘serve’ or ‘give’ or ‘send’ or any other expression is used, the service or notice shall be deemed to be effected by properly addressing, pre-paying the postage thereon and dispatching it by post or by registered post, as the case may be, to the last known postal address of the person to be served or given notice, and, unless the contrary is proved, such service or notice shall be deemed to have been effected at the time at which the document or notice would be delivered in the ordinary course of post.”

17.  The combined effect of these two provisions has been settled and clear beyond doubt since at least 1972. In A/S Cathrineholm v Norequipment Trading Ltd [1972] 2 QB 314, Lord Denning MR, after citing the English legislation which is materially the same as ours, stated, at 322E:-

“Accordingly when the plaintiff sends a copy of the writ by prepaid post to the registered office of the company, and it is not returned – and he has no intimation that it has not been delivered – it is deemed to have been served on the company – and to have been served on the day on which it would ordinarily be delivered. If no appearance is entered in due time, the plaintiff is acting quite regularly in signing judgment. If the defendant should seek to set it aside, he ought to explain the circumstances and go on to show that he has merits, that is, that there is a triable issue.”

18.  In Hong Kong, it has been consistently held that service of process on limited companies under section 827 of the Companies Ordinance is distinct from other modes of service required by O 10 r 1 of the Rules of the (District/ High) Court. It does not require the writ to come to the actual notice of the defendant, which, of course, is not a natural person: Stevenson, Wong & Co v Goldsense Technology Ltd [2007] 1 HKLRD 217, at [7]-[8], per Saunders J.

19.  In Chan Chun Chuen v Commissioner of Inland Revenue [2012] 2 HKLRD 379, Johnson Lam J (as he then was) pointed out that section 8 of Interpretation and General Clauses Ordinance consists of two parts. The first part provides for the deeming effect as to service by post. The second part provides for the deemed timing of service. Citing A/S Cathrineholm, sup cit, at 332A-B, the learned Judge observed, at [41], that section 8 permits proof to the contrary when it comes to the deemed timing of service, but not in respect of the deemed service.

20.  On behalf of D, Mr Kelvin KH Liu accepted that postal service on limited companies under section 827 of the Companies Ordinance was an alternative mode of service to that mandated by RDC O 10 r 1. However he maintained that for postal service under the Ordinance to be effective it was necessary for the document to be physically delivered to the registered office. Since this was not done in this case, he submitted that the Writ was served irregularly.

21.  Mr Liu’s argument is premised on the meaning of the words “sending … by post” in section 827, which also appear in RDC O 10 r 1(2)(a). Under the latter provision, proof that a letter has been properly addressed, pre-paid and posted to the proper address and not returned through the Post office undelivered affords prima facie evidence that it has been duly delivered to the addressee. However such a presumption can be rebutted by showing that the letter was not brought to the attention of the addressee: see Hong Kong Civil Procedure 2022, Vol 1, at para 10/1/12; Austin Rover v Crouch Butler[1986] 1 WLR 1102, at 1111C and 1116C, 1118B-F.

22.  I regret that I am unable to accept the argument. To do so would undermine well settled authority and the need for certainty in commercial litigation. In any event, it is clear that O 10 r 1 is subject to provisions of any Ordinance, including those of the Companies Ordinance and the Interpretation and General Clauses Ordinance discussed above: see O 10 r 1(7); United Smart Development Ltd v Treasure Land Property Consultants [1995] 2 HKLR 176, at 180, lines 14-19.

23.  For these reasons I hold that service in this case was regular. That being so, I must turn to examine the merits of the proposed defence.

Merits of the Defence

24.  In the present action P claims damages for the unexpired term of the TA. In other words, it claims that D’s failure to pay rent on time or at all from May to August 2020 amounted to a repudiatory breach, and that such a breach entitled P to terminate the TA.

25.  According to the Statement of Claim, P accepted the termination by a letter dated 25 August 2020 (see paragraph 7 above). The damages claimed mainly represent the loss of rental income incurred over the period of the unexpired term from 25 August (when D delivered up possession) until 30 November 2020 (the end of the lease term). During that period P was unable to lease out the premises on the market despite its reasonable efforts to do so.

26.  If matters had stood there the claim would be rather straightforward. However the matter is complicated by the fact that P had applied for and obtained the LT Judgment in the meantime (see paragraphs 3 and 4 above). P accepts that the LT Judgment gave effect to P’s forfeiture of the lease and allowed it to recover possession. Despite this, P maintains that the tenant's late payment of rental for May and June, coupled with the non-payment for July and August, evinced an intention not to be bound by the TA.

27.  In my judgment P cannot have it both ways. At common law, it is a well-established principle that forfeiture relates back to the date of service of the writ for possession. Further, it is equally well established that the final election of a landlord to forfeit a tenancy is irrevocably made upon service of the proceedings on the tenant: Colgan Co Ltd v Ethitrade Ltd [1983-85] CPR 87. Upon forfeiture, no contract subsists that could be repudiated: Po Wai Ching v Pfeifer [1983] 1 HKC 204, at 205G.

28.  At the hearing Mr Liu accepted, correctly in my view, that as a matter of law, the remedy of forfeiture and damages can co-exist, but such damages must arise from a repudiatory breach occurring before the termination of the tenancy by forfeiture: Well Century v Leung Kam Yu [2003] HKLRD 653, at [47]. He also correctly pointed out that whether any breach (such as failure to pay rent) amounts to repudiation depends on the seriousness of the breach, in particular, (a) whether it shows a clear intention not to be bound by the agreement, alternatively, (b) although wishing to perform the contract, the tenant proves itself unable to do so, and the breach goes to the root of the contract that makes further commercial performance impossible: Super Century Investments Ltd v Advance Ltd & anor [2005] 1 HKC 480, at [33(d)].

29.  It has been held in decided cases that failure to pay rent for two months in a three-year lease may not be sufficiently serious to justify termination of the tenancy: Hop Woo Cheung Enterprises v Intergroup Industries Ltd [1982] HKC 436, at 441G-442C.

30.  On the facts of this case, at the date of forfeiture of the TA on 18 May 2020, D was only 17 days late in payment of the rental for May. Therefore, I find that it is reasonably arguable that D did not commit any repudiatory breach by 18 May. Moreover, P is not entitled to rely on any default or delay in payment that occurred after 18 May since the TA no longer subsisted thereafter.

31.  For completeness I would add that whilst the LT Judgment (in paragraph 4) allowed for usual relief against forfeiture, D failed to avail itself of the opportunity to save the tenancy. It is therefore unnecessary to consider what the legal position would have been if it had taken advantage of the last chance given to it.

32.  It follows that, in my judgment, D has a reasonably arguable defence in respect of the claim for damages for the unexpired term. What is left of P’s claim is mesne profits up to the date of delivery up of the premises, but it is not in dispute that the rental deposit retained by P is in excess of whatever mesne profits and other charges that may be due to it.

33.  Finally I note that D also argued that the damages claim could have been, but was not, brought in the Lands Tribunal. Thus, it was an abuse of process to bring the present proceedings. The argument is interesting but I do not find it necessary to come to a firm view on it. Suffice it to say that there is force in Mr Ng’s riposte that on the facts it would have been premature for P to claim such damages in May when it was not yet known how the tenant would behave in the months after the LT Judgment.

34.  In short, I hold that the defence has a reasonable prospect of success. For this reason the Judgment should be set aside albeit that it was regularly obtained.

Costs and disposition

35.  At the hearing I intimated to the parties the reasons for my provisional decision and invited them to address me on the issue of costs.

36.  In respect of the costs below, Mr Ng submitted that I should reverse the costs order made by the Master because, contrary to her view, the Judgment was entered regularly. Mr Liu fairly accepted that responsibility for the “misdelivery” lay with D’s own staff rather than P or the Post Office. He did not suggest the outcome should be otherwise. I agree.

37.  In respect of the costs of the appeal, Mr Ng submitted that D should pay its costs for two reasons. First, he said that since the appeal was a de novo hearing, the costs order here should replicate that which should have been granted below. Secondly, although P failed to have the Judgment restored, it succeeded in altering the costs order below in its favour. On behalf of D, Mr Liu argued that P had failed substantively to vary the outcome of the Master's decision and so should bear the costs of the appeal.

38.  In my view, while this appeal was conducted as a fresh hearing, it was nonetheless an appellate event. As D is the overall winner in the appeal the starting point is that it should have the costs of the appeal. The real question is whether there is any good reason to deprive D of all or part of its costs.

39.  In the event, even though P has failed to change the substantive outcome of the application, it has achieved a reversal of the costs order below. In order to do so, it had to come to this Court to vindicate the regularity of the Judgment and succeeded in so doing. I find that the time and effort taken for it to do so took up roughly 40% of the space and time devoted to written and oral submissions in this Court.

40.  In my opinion, a fair costs order would be as follows, namely, that: (i) D do pay to P the costs of the application below with certificate for counsel to be summarily assessed if not agreed; (ii) Save as aforesaid, the appeal is dismissed; (iii) P do pay to D 60% of the costs of the appeal with certificate for counsel to be summarily assessed if not agreed.

41.  For the purpose of assessment, I give the following further directions:-

(1)  P do lodge and serve a statement of costs in respect of (i) above within 7 days of this order;

(2)  D do lodge and serve a statement of costs in respect of (iii) above within 7 days of this order;

(3)  Thereafter P and D do lodge their respective comments on the other side’s statement within 7 days of receiving the same.

(4)  The summary assessment will be conducted on paper without any further hearing.