YUN KEE KITCHEN LTD v. LUK KWAN AND ANOTHER

DCCJ 4904/2006 & DCCJ 90/2007
(Consolidated)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NOS. 4904 OF 2006 & DCCJ 90 of 2007

(Consolidated)

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REASONS FOR DECISION

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1.  This case was fixed for trial before me on 29 July 2008 with 2 days reserved.  On the first day of the trial, the Defendants made an application to amend the Defence and Counterclaim.  After hearing the submissions from the parties, I disallowed part of the proposed amendments.  I now give my reasons in writing.

Background of the application

2.  The Defendants are the registered owners of the building situated at No. 122 Fuk Wa Street, Kowloon (“the Building’).  By a tenancy agreement dated 20 September 2005 (“the Tenancy Agreement”), the Defendants let the ground floor of the Building (“the Premises”) to the Plaintiff for business purposes for a term of 3 years commencing on 1 November 2005.  The Plaintiff actually operated a restaurant at the adjacent building, and it planned to use the Premises an annex to the original restaurant.

3.  It is the Plaintiff’s case that there was serious water leakage in the ceiling of the Premises, and as a result the Plaintiff has suffered damages, including loss of revenue of the restaurant, exceeding $1,000,000.  The Plaintiff claims that such damages were caused by the breach of the implied term under the Tenancy Agreement and breach of common law duty on the part of the Defendants, and, by agreeing to waive the excess, it brought the present proceedings against the Defendants in the District Court to claim for such damages.  The Plaintiff also withheld the payment of rent for the lease of the Premises, and the Defendants’ claim for rent in arrears now becomes the counterclaim in this consolidated action.

4.  According to the original pleadings filed before the commencement of the trial, the main issues between the parties can be summarised as follows:

(i)    whether the water leakage in the Premsies was serious to the extent as alleged by the Plaintiff?

(ii)  whether the Defendants did carry out repair work in the ceiling of the Premises in July 2006?

(iii)    whether the quantum claimed by the Plaintiff was reasonable?

5.  The parties therefore prepared their respective cases based on these issues.  Expert reports by surveyors had been produced by the parties to show the possible causes for the water leakage and the extent of the problem.  Further, the Plaintiff adduced a report by a professional accountant with a view to prove the quantum of the loss of revenue of the restaurant.

6.  At the commencement of the trial, Mr. Wong, counsel for the Defendants, made an application to amend the Defence and Counterclaim.  In short, the Defendants are seeking to rely on new and separate defences based on the following provisions of the Tenancy Agreement:

“5.   The Tenant hereby agrees with the Landlord as follows:

………

(n)    Not without the previous consent in writing of the Landlord to make or permit any alternations in the said premises ………

7. PROVIDED ALWAYS AND IT IS HEREBY AGREED as follows:

    ………

(c)    It is hereby agreed that no warranty is given by the Landlord as to the said premises being suitable for the Tenant’s use. ………

    ………

(e)    The Landlord shall not be under any liability whatsoever to the Tenant or any other person whomsoever in respect of any damage or injury sustained by the Tenant or such other person as aforesaid caused by or through or in any way owing to the overflow of water or arising from any defect in or from the use operation of any facilities in the said premises or the said Building or by any cause whatsoever. ………”

7.  Mr. Lam, counsel for the Plaintiff, had no objection to the amendment relating to clause 5(n), provided that the Defendants were not seeking to adduce new evidence to support such defence.  Hence, I allowed this amendment together with other cosmetic amendments of the pleading.

8.  The main battlefield is about clauses 7(c) and 7(e).  The Defendants contend that the latter clause does provide a complete defence to the Plaintiff’s claim, as the same exempts the Defendants from any liability arising from the leakage of water in the Premises.  On the other hand, clause 7(c) is about the use of the Premises.  Whilst the Defendants admit that the Plaintiff had, prior to the making of the provisional agreement for the lease of the Premises, informed them that the latter had intended to use the Premises as “an annex to the restaurant”, the Defendants took that to mean the storage place or office of the restaurant.  They did not know that the Plaintiff would actually operate a restaurant with the serving of food inside the Premises.  As clause 7(c) specifies that the Defendants were not giving any warranty that the Premises were suitable for the Plaintiff’s use as a restaurant, the Defendants argue that the Plaintiff is not entitled to claim for any loss arising from such use.  Obviously, these are new and separate grounds of defence raised for the first time in the proceedings.

Approach of the court in dealing with late application for amendment of pleading

9.  No one would dispute that the present application is made at a very late stage of the proceedings.  As such clauses may provide a complete defence to the Plaintiff’s claim and the terms of the Tenancy Agreement were well known to the parties, I wonder why those instructing Mr. Wong did not raise such defences when the Defendants first filed the Defence and Counterclaim, in particular they were the ones who prepared the Tenancy Agreement.

10.  The general principles for the granting of leave to amend pleadings are well established.  The object of the court is to decide the rights of the parties, and not to punish them for mistakes they make in the conduct of their cases.   If the proposed amendments are not causing any prejudice to the other side which cannot be compensated by an appropriate award of costs, leave to amend should generally be granted (see: Hong Kong Civil Procedure, vol. 1, at para. 20/8/6).  However, the court is also drawing a distinction between allowing amendments to clarify the issues in dispute on the one hand, and those that provide a distinct defence or claim to be raised for the first time on the other.  Prejudice is more likely to be caused to the non-defaulting party in the latter case, in particular when the application is made late in the proceedings (see: per Lord Griffiths in Ketteman v Hansel Properties Ltd. [1987] AC 189 at 220).

11.  However, recent local decisions suggest a modern approach for considering late applications for amendment of pleadings, and it is now not necessary for the non-defaulting party to demonstrate serious prejudice which cannot be compensated by an appropriate award of costs before he can successfully resist an amendment application.  There are quite a number of authorities on the issue but I would first start with the judgment of Deputy High Court Judge Lam, as he then was, in Man Fong Hang v Man Ping Nam & Ors., unreported, HCA 7935 of 1998 (decision on 15 July 2003).  In that case, the learned judge had to deal with a late application for filing of additional evidence, and the following observations were made in the judgment:

“ 12.    As Sir Thomas Bingham MR [in Mortgage Corporation v Sandoes [1997] PNLR 263] reminded us, the resolution of these sorts of problems cannot be governed by a single rule and a rigid and mechanistic approach is inappropriate.  Ultimately, it is a balancing exercise and the court has to consider all relevant factors on the facts and circumstances of the particular case before it.  No single factor can be regarded as decisive or conclusive.  At the risk of repeating the obvious, perhaps I could be forgiven for repeating a dicta of Simon Brown LJ in Willis v Royal Doulton (UK) Ltd., 4 November 1996, also cited by Millett LJ in Mortgage corporation,

‘At the end of the day it must be for the court, upon the individual facts of the case and having regard to all the circumstances, to weigh the competing considerations and decide where the justice of the case lies.  Crucially it will ask how serious was the breach, how explicable, and how far it has affected the proceedings or disrupted the administration of justice generally.’

13.   The actual decision in Mortgage Corporation also served to remind us that the lack of acceptable reason for the delay, though of some importance, might not be fatal ……… I agreed that the change of lawyers cannot by itself constitute a good excuse with regard to the delay in the filing of witness statements.  Nor could a litigant expect the court to exercise discretion in his favour just because the evidence is very important to  his case.  Neither is the non-defaulting party obliged to demonstrate serious prejudice before he could successfully resist an application by the defaulting party for extension of time. … … …

14.   As also observed by Millett LJ in Mortgage Corporation at p. 273C, in the context of a later application for extension of time which might affect the trial dates, logically the first question to ask is whether the trial date should be vacated.  Of course, one must bear in mind that the court should strive to keep the trial date if possible and every effort should be made to ensure that there would be a fair trial on the fixed date (see p. 278G to 279A).”

12.  In Guangzhou Green-Enhan Bio-Engineering Co. Ltd. & anr. v Green Power Health Products International Co. Limited & Ors., unreported, HCA 4651 of 2002 (decision on 22 July 2004), Lam J. this time had to deal with a late application for leave to amend the Defence and to adduce additional evidence.  Whilst allowing some of the applications but not the other, the learned judge said the following in his judgment:

“7.   For reasons set out below, several aspects of these applications, if allowed, will bring in new dimensions to the action which the Plaintiffs had not been given any opportunity to deal with so far.  The applications were made at a very late stage, so late such that the length and progress of the trial will be seriously prolonged and disrupted.  I have set out the approach that the court should adopt in dealing with late applications of similar nature in Hong Lok School Ltd. v Chow Sai Yiu HCA 17139 of 1999, 7 July 2003 and Man Fong Hang v Ma/n Ping Nam HCA 7935 of 1998, 21 July 2003.  Ultimately, it is a balancing exercise.

    ………

14.   The next question is whether amendments should be allowed.  Whilst generally the court could allow an amendment to enable the real issue in dispute to be canvassed no matter how late it is applied for, the modern approach is that lateness and explanation for the delay in making the application are relevant factors to be taken into account in the exercise of discretion by the court.  Other factors include the importance of the amendments to the party applying for leave and the prejudice the amendments would cause to the other side and whether that could be remedied by costs or adjournment.  There could be other relevant factors depending on the facts of the case.  It is a balancing exercise and the ultimate consideration is fairness (procedural as well as substantive) to the parties in all the circumstances. ………”

13.  Hence, the modern approach involves a balancing exercise and the ultimate question is one of fairness.   In considering a late amendment application, the court is required to look at all the circumstances of the case, and it is no longer necessary for the non-defaulting to show serious prejudice before he can successfully resist such an application.

14.  I can perhaps end my review of the authorities with the following passage in Hong Kong Civil Procedure 2008, vol. 1 at para. 20/9/12 (at p. 383):

“It is not the practice today, as it was in the past, invariably to allow a defence which is different from that pleaded to be raised by amendment at the end of the trial even on terms that an adjournment is granted and that the defendant pays all the costs thrown away: the grant of an amendment by the trial judge is a matter for his discretion to assess where justice lies, having regard to many factors such as the strain of litigation particularly on personal litigants the anxieties occasioned by facing new issues, the raising of false hopes, and the disappointment of legitimate expectations since justice cannot always be measured by money (Ketteman v Hansel Properties Ltd. [1987] 2 WLR 312, HL leave to amend to add a plea of limitation during closing stages of the trial refused).  The trial judge must also weigh in the balance ‘the pressure on the Courts caused by the great increase in litigation’ (per Lord Griffith, ibid. sed quaere, since this is an indeterminate factor for which neither of the parties can be responsible)(see also Wong Hing Faat v Hong Kong and Yaumati Ferry Co. Ltd. [1992] 1 HKC 497 and Chan Wing Cheung Allan v Ho Shu Yee Susanne, HCA 1941/2000, [2005] HKEC 58, unreported, Waung J., January 13, 2005, CFI).”

15.  This passage has clearly set out some of the considerations that the court would take into account in the balancing exercise.  Although this passage refers to applications for amendment at the end of the trial, Lam J. in Man Fong Hang and Guangzhou Green-Enhan Bio-Engineering had made it clear that the same considerations apply to applications made shortly before or on the first day of the trial.

16.  I must say that the considerations mentioned in the Hong Kong White Book above are of particular relevance to the proceedings in the District Court.  As the amounts claimed in this Court are relatively small, I find that most legal practitioners, for some reasons, had not devoted much effort in the preparation of their clients’ cases, and as a result it was usual to have a lot of late applications for amendment of pleadings on the first day of the trial.  Inevitably, if these applications were granted, it would result in the adjournment of the trials and the waste of legal costs, which can be substantial when compared with the amounts of the claims.  One must also not forget the anxiety and the pressure caused to the litigants by the delay in the adjudication of the claims, and for them, it is certainly a legitimate grievance why it takes so long and so much costs to resolve a dispute involving a relatively small amount of money.  I am quite sure that when the civil justice reform is implemented next year, the court will be more reluctant to allow late applications for amendment of pleadings.  But before its implementation, the authorities above can perhaps serve as a reminder to legal practitioners that they may not readily obtain leave for late amendments of pleadings.

Factors to be considered in the present case

17.  With these principles in mind, I turn to the facts of the present case.

18.  As the Defendants are only seeking to rely on the contractual provisions in the Tenancy Agreement as additional defences, bearing in mind that the object of legal procedures is not to penalise the parties for the mistakes they have made in the conduct of their cases, the court would normally allow such kind of amendments to be made even at this very late stage.  However, Mr. Lam, counsel for the Plaintiff, submits that this case deserves separate consideration.

19.  According to the affirmation of Mr. Yik Wai Yung, a director of the Plaintiff, dated 30 July 2008, he rented the Premises through one Ms. Chan of an estate agency, who conducted the negotiation on behalf of the Defendants.  After signing the provisional tenancy agreement dated 18 September 2005, Ms. Chan informed Mr. Yik that the Defendants would instruct a solicitors’ firm, Messrs. Yung, Yu, Yuen & Co. (“YYY”), who were the same solicitors acting for the Defendants in the present proceedings, to prepare a formal tenancy agreement (ie. the Tenancy Agreement) in accordance with the agreed terms and conditions set out in the provisional agreement.  When Mr. Yik attended the office of YYY to execute the Tenancy Agreement, he was told by the staff of YYY that the Tenancy Agreement only incorporated the basic terms and conditions of the provisional agreement and was in a standard form used by YYY.  The staff then read out the purported terms of the Tenancy Agreement and he and the 1^st named-Defendant then executed the same.  In fact, the staff of YYY did not read out nor explain the contents of clauses 7(c) and 7(e) to Mr. Yik and he personally was not aware of such clauses until the commencement of the trial.  Mr. Yik has very limited knowledge of written English, and he claims that, had he been told about the existence of such terms, he would not have executed the Tenancy Agreement.  He further claims that, if the court were to allow the proposed amendments, the Plaintiff would probably have to join YYY as an additional defendant in these proceedings, and the case would not then be ready for trial in another year’s time.   Further, as the Tenancy Agreement did not reflect the true intention of the parties, the Plaintiff would need to seek further discovery of the documents relevant to the preparation and the execution of the Tenancy Agreement.  The delay and the extra legal costs are therefore causing additional pressure to Mr. Yik and his wife who are the owners of the Plaintiff.

20.  As the Plaintiff and the Defendants shared the legal costs for instructing YYY to prepare the Tenancy Agreement, it is common ground that YYY was acting for both parties in the execution of such Agreement.  In such circumstances, I find it quite surprising that the Tenancy Agreement contained a term such as clause 7(e), which wholly protects the interest of the Defendants at the expense of the Plaintiff.  Under the common law, there is an implied obligation on the part of the landlord to repair any structural defect of the leased premises, and so clause 7(e) is very much an exemption clause which only takes care of the interest of landlord.  In such circumstances, one would certainly raise the following queries: Whether there was prior discussion between the parties about the inclusion of such clause? Did YYY explain fully the meaning and the implication of such clause to the Plaintiff?  Did YYY explain to the Plaintiff that it was not obliged to accept such term?

21.  Without giving YYY an opportunity to deal with these allegations, I have reminded myself that these are very much one-sided allegations.  However by reason of the aforesaid queries, I must say that there is some basis to support the Plaintiff’s allegations at this stage.

22.  Mr. Lam argues that if the court were to grant the amendments relating to clauses 7(c) and 7(e), the Plaintiff would have to join YYY as an additional defendant in these proceedings.  The Defendants suggest that the Plaintiff can sue against YYY later in a separate action, but Mr. Lam says that it is not desirable to do so.  In the case that the court in this claim holds that clause 7(e) provides a complete defence to the Plaintiff claim, there may be inconsistent findings if the court, in a separate claim by the Plaintiff against YYY, reaches a different conclusion about the meaning of the clause.  Mr. Lam also submits that it is highly undesirable to drag in a solicitors’ firm as an additional defendant at such a late stage.  The insurer of the professional indemnity scheme may have to be brought in and it is likely that the case will not be ready for trial in another year’s time.

23.  Further, the Plaintiff may seek the rectification of the Tenancy Agreement on the ground that it did not reflect the true intention of the parties.  In such case, further discovery has to made and additional evidence will be adduced, which would certainly result in substantial delay of the trial.  In addition, if the amendments were allowed, the content of the Tenancy Agreement becomes an important issue in this case.  As YYY was the firm acting for both parties at the time of the execution of the Tenancy Agreement, the Plaintiff is uncomfortable if YYY continues to represent the Defendants in these proceedings.  In law, it is possible for the Plaintiff to seek an injunction order to restrain YYY from continuing to represent the Defendants, a recent example is the case of John Arthur Wright v Hampton Winter & Glynn & Anr., unreported, HCA No. 2522 of 2007 (decision of Chung J. on 7 December 2007).  Although the Plaintiff may not succeed in such application, all these matters would add further complications to the progress of the case.

24.  In my judgment, all these factors are valid considerations weighting against the granting of leave for the amendments relating to clauses 7(c) and 7(e).  Obviously, these are new defences raised for the first time in the proceedings, and there was substantial delay in the making of the application.  Further, the Plaintiff will suffer serious prejudice by the complications mentioned in the last few paragraphs.  There is certainly a legitimate expectation on the part of the Plaintiff to have an early adjudication of the case, and it would not be fair to ask the Plaintiff to bear with the additional pressure and uncertainty caused by the delay in the proceedings.  Even applying the more onerous traditional approach, the Plaintiff has managed to establish a good case resisting the application.  Hence, I disallowed the amendments relating to clauses 7(c) and 7(e) of the Tenancy Agreement.

Other related issues

25.  Although the hearing of the late application for amendments took us one-and-a-half day, I anticipated that the trial could still proceed when I made the ruling disallowing the late amendments relating to clauses 7(c) and 7 (e) of the Tenancy Agreement.  The trial was originally fixed for 2 days, but as the diary of the court was free on the following day, there was still a fair chance that an adjournment of the trial could be avoided.  However after the giving of my ruling, it is then arguable that YYY is liable in negligence for not raising the defences in respect of clauses 7(c) and 7(e) earlier.  After the explanation of the right by Mr. Wong to his lay clients, the latter would like to seek independent legal advice as to whether they should continue to retain YYY as their solicitors in these proceedings.  As I see it, this was a legitimate request and I therefore granted a short adjournment of the trial to enable the Defendants to obtain such advice.  Undoubtedly, there would be some delay but I see no reason to change the ruling I made earlier.  I firmly believe that the raising of the new grounds of defence will bring much more complication to this case other than a short adjournment of the trial.  In order not to defeat the object of my earlier ruling, I will ensure that the trial would resume as soon as possible.

26.  After giving my ruling, I also made an order that the costs of and occasioned by the application to amend the Defence and Counterclaim, including the costs of the hearing on 29 & 30 July 2008, be to the Plaintiff with certificate for counsel.  Mr. Wong did not dispute such order in light of my ruling.  However, there was disagreement between the parties as to the proper basis for the taxation of such costs.

27.  In this regard, Mr. Lam asked for the costs to be taxed on an indemnity basis, a request which was rejected by me in the hearing.  Although there was delay in the making of the application, I cannot say that the Defendants’ conduct of the defence was scandalous or vexatious, or the defence was conducted maliciously or for an ulterior motive or in an oppressive manner.  There was delay on the part of the Defendants in raising the new defences.  By disallowing them to do so, I do not think that the court should, apart from the normal costs order following the event, further penalise the Defendants for the delay.  I therefore refused the Plaintiff’s application for the costs to be taxed on an indemnity basis.

28.  Lastly, I would like to express my gratitude to both counsel for all the assistance that they have rendered to this court.