CHUN SUE KWAN v. SKY HARVEST LTD AND ANOTHER

DCCJ 6027/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 6027 OF 2004

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JUDGMENT

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1.  This case arises out of a tenancy dispute.  By a written tenancy agreement dated 10 May 2004 made between the Plaintiff as the landlord and the 1^st Defendant as the tenant (“the Agreement”), the Plaintiff agreed to let the premises known as Flat E, Ground Floor, On Lee Building, Nos. 41-53 Fung Tak Road and Nos. 9-15 Fei Fung Street, Kowloon (“the Premises”) to the 1^st Defendant for commercial purpose for a term of 3 years commencing from 13 June 2004 at the monthly rent of $17,000 payable in advance on the 13^th day of each month.  However, the 1^st Defendant did not pay the rent of the Premises starting from 13 September 2004 and later vacated the Premises in March 2005, and the Plaintiff therefore brings the present action against the 1^st Defendant to claim for rent in arrears and damages for early termination of the Agreement.

2.  The 1^st Defendant rented the Premises for the purpose of operating a clinic, and the 2^nd Defendant was a registered doctor practicing at such clinic at the material time.  It is the Plaintiff’s case that the 2^nd Defendant had continued to occupy the Premises after the wrongful repudiation of the Agreement on the part of the 1^st Defendant, and so the Plaintiff claims that the 2^nd Defendant is liable for the mesne profits for the use of the Premises before the Plaintiff repossessed the same in June 2005.

The issues

3.  By way of defence, the 1^st Defendant alleges that it was entitled to rescind the Agreement by reason of certain misrepresentation about the toilet facility made by one Madam Ching of Chun Fung Realty Agency.  As the purpose of the 1^st Defendant was to run a clinic in the Premises, the availability of toilet facility was essential.  During the inspection of the Premises prior to the signing of the Agreement, Madam Ching, which the 1^st Defendant says was acting as an agent of the Plaintiff at the material time, had told Madam Liu of the 1^st Defendant that the latter could use the toilet in the common part of On Lee Building (“the Building”).  However after the commencement of the tenancy under the Agreement, the Plaintiff informed the 1^st Defendant that such toilet was not available for use, as it had been out of service for a number of years and the management of the Building had no intention to repair such facility.  The 1^st Defendant contends that it made the Agreement in reliance on the said misrepresentation by Madam Ching, and so it was entitled to rescind the Agreement with notification given to the Plaintiff by way of a letter dated 6 November 2004.

4.  In the Amended Defence and Counterclaim, the Defendants also plead that the Plaintiff was in breach of the Agreement by failing to rectify the water seepage problem inside the Premises.   However at the commencement of the trial, Mr. Leung for the Defendant conceded that the Defendants would not rely on such ground of defence.

5.  By reason of the aforesaid, the issues of the present case can be listed out as follows:

(i)	whether Madam Ching had made the representation as alleged by the 1st Defendant?
(ii)	if the answer is yes, whether Madam Ching had the authority, whether actual or ostensible, to make such representation on behalf of the Plaintiff?
(iii)	depending on which party was in breach of the terms of the Agreement, what is the quantum of damages suffered by the innocent party?

Whether Madam Ching had made the representation?

6.  I start with the first issue.  In this regard, both the Plaintiff and Madam Liu testify at the trial.  As it is the burden of the 1^st Defendant to prove the alleged misrepresentation, I will deal with Madam Liu’s evidence first.

7.  According to her, she is nurse and is a partner of the 2^nd Defendant in setting up the clinic at the Premises.  She is also a director of the 1^st Defendant.  In May 2004, there was a dispute between the partners in her former clinic and Madam Liu started to look for a shop to set up a new clinic.  She then approached Madam Ching, who recommended the Premises and accompanied her for an inspection on 5 May 2004.  During the inspection, Madam Ching told her that part of the shop had already been rented out to another tenant, and so she could only rent the remaining part of the shop and a partition wall would be erected by the landlord in due course.  As the availability of toilet facility was crucial to the operation of the clinic, Madam Liu asked Madam Ching whether such facility was available.  Madam Ching then brought her to a room in the common part of the Building.  The room was locked by that time, but Madam Ching told her that the room was a toilet for use by the tenants in the Building, and the landlord would give her the key in the case that she decided to take up the tenancy.  Madam Liu was satisfied with the Premises and made an offer to rent the same.  Through Madam Ching, an agreement was made and the provisional agreement was signed on 6 May 2004.

8.  The formal agreement was signed later on 10 May 2004.  On that occasion, a male who identified himself to be the representative of the landlord was also present.  That male handed two keys of the main entrance of the Premises to Madam Liu.  The latter then asked the male about the key of the toilet, and she was told that the key would be handed to her later.  After the erection of the partition wall in the Premises, Madam Liu finally met the Plaintiff personally on 13 May 2004 at the Premises.  On that occasion, Madam Liu again asked the Plaintiff for the key of the toilet.  The Plaintiff then accompanied Madam Liu to get the key from the management office of the Building.  However, the staff there told them that as he had received no such instruction from his superior, he asked them to come back later for the key.

9.  After that, Madam Liu continued to chase for the key of the toilet.  In the meantime, the patients and the staffs of the clinic would have to use the toilet facilities in the nearby restaurant and public market which was extremely inconvenient.  Later, she was informed by the Plaintiff that the toilet of the Building had been out of operation for a long time.  As the management of the Building had no plan to repair such toilet, the same could not be used by the 1^st Defendant and its customers.  The Plaintiff also asked the patients and the staffs of the clinic to use the toilets in the vicinity of the Premises.  As the availability of toilet facility was a matter of grave concern, the 1^st Defendant decided to rescind the Agreement because of the misrepresentation by Madam Ching, and a letter to that effect was sent by the 1^st Defendant’s solicitors to the Plaintiff on 6 November 2004.

10.  The Plaintiff also testifies at the trial.  According to her, she engaged an estate agent, one Mr. Fung of a company translated as “Luen Yip Estate Agency”, to assist her in letting out the Premises.  To facilitate the viewing by prospective tenants, the Plaintiff gave the key of the Premises to Mr. Fung.  On 5 May 2004, the said Madam Ching contacted her by phone and informed her that the 1^st Defendant was interested in renting the Premises.  However, the 1^st Defendant could not take up the whole shop and only offered to rent part of it.  The Plaintiff agreed and then engaged her contractor to erect a partition wall inside the shop.  The provisional tenancy agreement was signed by her later on 6 May 2004.  Subsequently on 10 May 2004, she went to the Premises and signed the formal tenancy agreement, and she met Madam Liu on that particular occasion.  According to the Plaintiff, she was not aware of the alleged misrepresentation, and neither had she authorized Madam Ching to make any representation about the toilet facility of the Premises.

11.  Having carefully considered the evidence, I find Madam Liu to be a honest and truthful witness.  Without any sign of evasiveness, she is always able to give straight and quick answers to the questions, and her evidence has remained unshaken after cross-examination.  Further, I can easily understand why the availability of toilet facility was crucial for the operation of the clinic.  Apart from the use by the patients, the clinic might require the toilet facility to conduct various medical tests including pregnancy tests.  It would be extremely inconvenient to ask patients to use the toilets in the nearby restaurants and public markets, and so it would only have been reasonable for Madam Liu to ask about the toilet facility during the first viewing of the Premises.  In fact, I would be most surprised if Madam Liu did not do so.  Hence, I accept her account of the events and find that Madam Ching did make the alleged representation about the availability of toilet facility.

12.  On the other hand, I have some reservation about the creditability of the Plaintiff’s evidence.  As the Plaintiff is not aware of the conversations between Madam Ching and Madam Liu, her evidence is in fact not that crucial.  However in some areas where there are conflicts between her evidence and that of Madam Liu, I would prefer to accept the evidence of the latter, and my reasons are as follows.

13.  Firstly, according to the Plaintiff, she erected the partition wall in the shop upon the request of the 1^st Defendant, and her contractor erected the wall after her first contact with Madam Ching on 5 May 2004 and before the signing of the provisional tenancy agreement on the following day.  With such a short period of time, I doubt whether her contractor could have performed such a task.  Further, according to the terms in the provisional tenancy agreement, the partition wall had not been erected when that agreement was made on 6 May 2004.  Indeed, in order to protect her own interest, it would only have been sensible for the Plaintiff to erect the wall after the making of the provisional agreement, as there was always a possibility that the 1^st Defendant did not agree to take up the tenancy in the end.  Hence, I do not accept the Plaintiff’s evidence in this regard.

14.  Secondly, in her affirmation to support the joining of the 2^nd Defendant as an additional defendant, she claimed that she was only aware of the fact that the 2^nd Defendant worked in the clinic when her solicitors served the writ of summons on the 1^st Defendant.  However, this is contrary to her own testimony in the trial, in which she admitted that she had had such knowledge at the time of the making of the Agreement.

15.  Thirdly, the Plaintiff testifies that she had no contact with the 1^st Defendant after the making of the Agreement and until some time in September 2004.  I find this to be increditable as the 1^st Defendant had all along been chasing her for the key of the toilet in the Building.  Further, the payment of rent on 30 July 2004 was made subject to the deduction of  the reimbursement of electricity charges of an odd amount.  If there had been no contact between the parties by that time, how would the Plaintiff have known that it was the proper amount for the reimbursement of the electricity charges?  All these observations undermine the creditability of the Plaintiff’s evidence.  Hence on the first issue, I find that Madam Ching did make the representation to Madam Liu about the availability of toilet facility.

Whether Madam Ching did have the authority to make such representation on behalf of the Plaintiff?

16.  Having made the aforesaid finding, the next question then is to consider whether Madam Ching did have the authority, whether actual or ostensible, to make such representation on behalf of the Plaintiff.

17.  So far as actual authority is concerned, the Plaintiff clearly says that she has given no such authority to Madam Ching.  Although I have some reservation about the creditability of her evidence, due to the lack of rebutting evidence from perhaps Madam Ching, I have to accept the Plaintiff’s evidence in this regard.  I therefore find that Madam Ching had no actual authority to make the representation.

18.  The question about ostensible authority is a more difficult one.  Unlike the position in England, estate agents in Hong Kong usually act as dual agents for both vendors and purchasers in sale of property transactions or for landlords and tenants in tenancy transactions.  They usually receive commissions from both sides, and whether they have the authority to make a binding representation on behalf of either party is a matter which has been litigated quite frequently in recent years.  In Cheng Kwok-fai v. Mok Yiu-wah Peter & Anr. [1990] 2 HKLR 440, Jopard Holdings Ltd. v. Ladefaith Ltd. & Anr. [2005] HKLRD 317, Mok Wai-lun, Alan v. Yeung Tony Ming Kwong, unreported, DCCJ No. 7255 of 2002 (decision of Deputy Judge Hui on 18 December 2003), it was held that the representations made by the estate agents were not binding on the vendors.  On the other hand, in Welltech Investment Ltd. v. Easy Fair Industries Ltd. [1996] 4 HKC 711, Green Park Properties Ltd. v. Dorku Ltd. [2000] 2 HKLRD 400, and Hong Kong Shui Fung (Holdings) Ltd. v. Top Talent Development Ltd. [2004] HKEC 1296, the representations made by the estate agents were held to be binding.

19.  It is not easy to reconcile these cases.  However after studying them in some detail, I can perhaps try to summarise some of the established principles as follows:

(i)	whether an estate agent did have the authority, whether actual or ostensible, to make a binding representation on behalf of his or her client is a question of fact (Green Park Properties Ltd. v. Dorku Ltd., ibid. at p. 417J, Cheng Kwok-fai v. Mok Yiu-wah Peter, ibid. at p. 445F, and Jopard Holdings Ltd. v. Ladefaith Ltd., ibid. at p. 325F);
(ii)	in considering the aforesaid question, one must bear in mind that, unlike the position in England, estate agents in Hong Kong are usually dual agents acting for both sides, and the English authorities are therefore of limited assistance only;
(iii)	the fact that a vendor or landlord allowed an estate agent to show the property to prospective purchaser or tenant is not sufficient to clothe the agent with ostensible authority to make a binding representation (Jopard Holdings Ltd. v. Ladefaith Ltd., ibid, at p. 325I); and
(iv)	in considering the capacity of the estate agent, one has to consider its role at different stages of the negotiation leading to the signing of the agreement, the fact that the estate agent was making an offer on behalf of the purchaser or tenant would not preclude the estate agent to be the agent of the vendor or landlord before that event (Green Park Properties Ltd. v. Dorku Ltd., ibid, at p. 418B-D, see also Yili Concept (HKG) Ltd. v. Lee Wai-chuen & Anr., unreported, HCA No. 12911/97, decision of Deputy High Court Judge S. Kwan, as she then was, on 29 September 2000, at para. 47).

20.  As the question of ostensible authority is a question of fact, I see no point in reciting the facts of all the individual cases mentioned above.  However in my judgment, the facts of the present case clearly support that Madam Ching was acting as an agent of the Plaintiff at the time of the inspection of the Premises on 5 May 2004 and in the subsequent negotiation.  It is true that the Plaintiff only gave the key of the Premises to an estate agent Mr. Fung and not Madam Ching, and that the Plaintiff, prior to the first contact with Madam Ching, was not aware of the viewing of the Premises on 5 May 2004.  However, the scope of the agent’s authority is determined by the nature of the duty entrusted to that agent.  After the first contact with Madam Ching, the Plaintiff knew full well that Madam Ching was an estate agent who had contact with Mr. Fung, and that Madam Ching had been asked by Mr. Fung to assist the Plaintiff in renting out the Premises.  After learning about the viewing, the Plaintiff then allowed Madam Ching to conduct the negotiation of the tenancy agreement on her behalf.  She gave full authority to Madam Ching to pass whatever information to the 1^st Defendant about the terms of the tenancy agreement, and she did not even try to meet Madam Liu personally for the negotiation.  She simply allowed Madam Ching to represent herself, and in my judgment, such conduct on the part of the Plaintiff is sufficient to clothe Madam Ching with ostensible authority to make binding representations on her behalf, both in the negotiation and in the earlier viewing of the Premises.

21.  Further, as I accept the evidence of Madam Liu, it was the Plaintiff’s idea to partition the shop into two parts and only one part would be rented out to the 1^st Defendant.  That was the information that Madam Ching was entrusted, or at least expected, to pass to the prospective tenants.  In such circumstances, how could a prospective tenant like the 1^st Defendant differentiate what information did originate from the Plaintiff and what other information from Madam Ching personally?  In my judgment, as the Plaintiff did not take part in the negotiation and she authorized Mr. Fung and Madam Ching to pass certain information about the Premises to the 1^st Defendant on her behalf, I find that Madam Ching did have ostensible authority to make the representation about the toilet facility.

Lost of the right of recission and the pleading issue

22.  Based on the aforesaid findings, the 1^st Defendant was entitled to rescind the Agreement and to claim for damages for misrepresentation under s. 3 of the Misrepresentation Ordinance, Cap. 284.  Purportedly to exercise the right of recission, the 1^st Defendant gave notice to that effect by a letter from its solicitors dated 6 November 2004.  In the same letter, it also informed the Plaintiff that it would continue to occupy the Premises in order to mitigate its loss.  Obviously, there is an issue as to whether the 1^st Defendant had lost the right of rescission by continuing to occupy the Premises after the notice of rescission.  However, this argument has never been raised in pleading, and it is trite law that such matter needs to be expressly pleaded.

23.  In the trial, the Plaintiff sought to amend the pleading to include such an averment, but in case that leave was to be granted, an adjournment of the trial would be necessary to enable the 1^st Defendant to provide further evidence on the claim for misrepresentation on the basis that it had lost the right of rescission.  I was therefore prepared to allow the amendment on the condition that there be an adjournment of the trial.  However, as the Plaintiff wanted to avoid the costs occasioned by the adjournment, she withdrew such application to amend the pleading.  Apparently, the lost of the right of recission is an arguable issue, and it is regrettable that the Plaintiff is not allowed to pursue such argument by reason of the inadequate preparation on the part of her legal advisers.

24.  There is one more observation I would like to make about the Plaintiff’s case.  In the Re-Amended Statement of Claim, the Plaintiff claims that the 1^st Defendant has sublet the Premises or has assigned the interest under the Agreement to the 2^nd Defendant, and that the 1^st Defendant has allowed the 2^nd Defendant to occupy the Premises without the Plaintiff’s consent.  However, these allegations are contrary to the Plaintiff’s own evidence, as she knew at the time of the making of the Agreement that the 1^st Defendant rented the Premises for the 2^nd Defendant to operate a medical practice.  Hence, there is simply no basis for the Plaintiff to join the 2^nd Defendant as an additional defendant in the present case.

Quantum of the counterclaim

25.  As I have mentioned above, the 1^st Defendant is entitled to claim for damages for misrepresentation.  In the Amended Defence and Counterclaim, the 1^st Defendant claims the following damages:

(i)	costs of decorating the Premises	:	$120,500
(ii)	costs of installing the signage of the clinic	:	$6,800
(iii)	costs of purchasing and installing the air-conditioning units in the Premises	:	$7,500
(iv)	costs of printing the removal notices	:	$4,500
(v)	costs of sending out the removal notices (including labour costs of $15,000 and purchasing stamps and envelopes in the sum of $22,500)	:	$37,500
(vi)	costs of removing the items in the clinic	:	$4,000
(vii)	estate agent’s fee	:	$6,000
(viii)	stamp duty payment	:	$767.5
(ix)	loss of business due to unavailability of toilet facility and inconvenience caused to the users of the clinic at $2,000 per month for 9 months	:	$18,000
(x)	loss of business caused by the closure and removal of the clinic at $5,000 per day for 4 days	:	$20,000
(xi)	costs of installing the telephone lines at the clinic	:	$600
	Total	:	$226,167.5

26.  There is no documentary evidence to substantiate the claim for loss of business, and neither is there any evidence to show that how such loss is to be computed, I therefore refuse the 1^st Defendant’s claim for loss of business mentioned in items (ix) and (x) above.

27.  In respect of the other losses, the 1^st Defendant is entitled to be compensated for having been induced to enter into the Agreement which turned out to be disastrous.  Hence, all the reasonable expenses incurred by the 1^st Defendant in moving into the Premises are recoverable.  I also accept the evidence of Madam Liu that all the signage and furniture were made pursuant to the particular layout of the Premises, and the same could not be re-used when the clinic was moved to the new premises.

28.  There are still two matters that I need to resolve before quantifying the 1^st Defendant’s counterclaim.  Firstly, instead of claiming for the costs of sending out the removal notices when the 1^st Defendant moved into the Premises, the 1^st Defendant claims for such costs in notifying the patients when it moved out of the Premises into the new clinic.  However, I do not think that it matters when such costs were actually incurred.  As I accept the evidence of Madam Liu that the 1^st Defendant needed to send out removal notices to its patients every time of its removal, the 1^st Defendant would have had to incur similar costs both when it moved into and out of the Premises.  The costs should more or less be the same, and I therefore allow the 1^st Defendant to claim for the costs of printing the renewal notices and the costs of purchasing the envelopes and the stamps.  However, the 1^st Defendant only asked one of its patients to send out the removal notices, and I have no idea whether the costs paid to such patient in the sum of $15,000 is reasonable or not.  Hence, I only award a notional figure of $3,000 for such costs, and accordingly, the quantum under item (v) is discounted by a sum of $12,000.

29.  The second matter is whether the 1^st Defendant’s expenses in moving into the Premises should be discounted in order to reflect its productive use of the Premises from 13 June 2004 (the date of the commencement of the tenancy) to 14 March 2005 (the date when the 1^st Defendant vacated the Premises), a period of about 9 months.  Although I cannot find any direct authority on the point, I am of the view that the damages should be so discounted.  As I see it, had there been no misrepresentation, the 1^st Defendant would still have had to find another shop to run the clinic.  Expenses had to be incurred in any event, and so a proper discount of the damages should be made to avoid the 1^st Defendant from being compensated for more than its actual loss.  Further, the 1^st Defendant agrees to give credit for the mesne profits for the use of the Premises before its vacation of the Premises in March 2005.  If such credit is to be given, the damages for expenses should likewise be discounted to avoid over-compensation.  Hence, I would discount the damages for expenses by 25% to reflect the 1^st Defendant’s use of the Premises for 9 months out of the whole term of tenancy of 36 months.

30.  The 1^st Defendant agrees to give credit to the Plaintiff for the mesne profits for the use of the Premises before its vacation of the Premises in March 2005, and I would adopt the monthly rent in the Agreement, ie. $17,000, as the basis for such calculation.  The 1^st Defendant had not paid the rent of the Premises starting from 13 September 2004, and the 1^st Defendant occupied the Premises for a period of 6 months and 2 days before it vacated the Premises on 14 March 2005, hence the amount of the mesne profits can be calculated as follows:

$17,000 x 6 1/15 months = $ 103,133

However, as the Plaintiff has retained the rental deposit under the Agreement in the sum of $34,000 and the 1^st De Defendant has paid a sum of $15,000 to the Plaintiff on 26 November 2004, the proper amount of the mesne profits should be discounted as follows:

$103,133-$34,000-$15,000= $54,133

31.  By reason of the aforesaid, the quantum of the 1^st Defendant’s counterclaim can be assessed as follows:

The aggregate of the expenses claimed (see paragraph 25 above)		:	$226,167.5
Less
(i)	the amount disallowed under items (ix) and (x) (see paragraph 26 above)	:	$38,000
(ii)	the amount of labour costs disallowed under item (v) (see paragraph 28 above)	:	$12,000
	Sub-total	:	$176,167.5
Less
discount for the use of the Premises $176,167.5 x 25% (see paragraph 29 above) ;		:	$44,042
Less
mesne profits (see paragraph 30 above)		:	$54,133
Total		:	$77,992.5

32.  I therefore dismiss the Plaintiff’s claim and grant judgment in favour of the 1^st Defendant on the counterclaim in the sum of $77,992.5.  I also award interest on such sum at the rate of 10.934% per annum, which is the existing judgment rate, from 16 November 2004 (the date of the writ)   to the date hereof and thereafter at judgment rate.  The Defendants are also entitled to the costs of the action with certificate for counsel.  The order in respect of interest and costs is nisi order, and the same will be made absolute 14 days after the handing down of this judgment.