XCHRX AMBRIDGE INVESTMENTS LTD. v. LEXCON INVESTMENT LTD. AND ANOTHER

HCA9743/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9743 OF 2000

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J U D G M E N T

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Background

1. By a tenancy agreement dated 6 January 2001 ("the Tenancy Agreement"), the plaintiff let to the 1st defendant Shop No.3 on the Ground Floor, Commercial Podium of Site 7, Whampoa Garden, Kowloon ("the Premises") for use as a Chinese Medical Centre at a monthly rent of $197,196.00 for a term of three years and six months. The Tenancy Agreement contained provision for the payment by the 1st defendant of other monthly charges, rates and Government rent. From 1 September 2000, the 1st defendant ceased to pay rent, the other monthly charges and the assessed rates and Government rent. The plaintiff therefore commenced proceedings on 30 October 2000 for forfeiture, claiming possession of the Premises and two months' arrears of rent and other charges and mesne profits until delivery of possession. At the issue of the writ, the 1st defendant was the only defendant.

2. The 1st defendant filed an acknowledgment of service on 13 November 2000 stating an address for service other than that of its registered office. On 29 November 2000, no defence having been filed, the plaintiff posted to the defendants at the address for service stated in the 1st defendant's acknowledgment of service a notice under Order 19 rule 8A that the plaintiff intended to enter judgment after the expiration of two clear days.

3. On 2 February 2001, judgment was entered against the 1st defendant in default of defence. The 1st defendant was ordered to give possession of the Premises to the plaintiff and to pay the sum of $792,070.60 with interest as ordered, a collection charge of $1500.00 and mesne profits, service charges, promotional charges and rates with effect from 1 November 2000.

4. By summons dated 28 March 2001, the 1st defendant applied to set aside the judgment for irregularity on the ground that the plaintiff had entered judgment against the defendant without serving notice in writing of its intention to enter judgment.

5. On 4 July 2001, Mr Registrar C. Chan ordered that the judgment be set aside and that the 1st defendant be at liberty to defend the action by serving its Defence and Counterclaim within 14 days.

6. The plaintiff had applied by summons issued under Order 29 rules 10 and 12 for interim payment of the sum of $4,085,243.80 on account of the 1st defendant's liability in respect of use and occupation of the Premises during the period during the period from 1 September 2000 to 31 July 2001 and for interim payment of $371,385.80 on the 1st day of each month starting on 1 August until further order. On this summons, Mr Registrar C. Chan ordered that the 1st defendant pay the sum of $4,085,243.80 to the plaintiff within 14 days on account of its liability in respect of the use and occupation of the Premises from 1 September 2001 to 31 July 2001 but made no order for continuing monthly payments.

7. The plaintiff now appeals against the setting aside of the judgment in default of defence entered against the 1st defendant on 2 February 2001. In the event that the appeal is dismissed, the plaintiff seeks an order under Order 29 rules 10 and 12 for interim payment of $375,726.00 on the 1st day of each month commencing the 1st day of October 2001 and thereafter on the 1st day of each month until further order.

8. The 1st defendant subsequently sought leave to appeal out of time against the Order for interim payment but was refused leave to appeal by Mr Justice Chung on the basis that there was no merit in its appeal. In refusing leave to appeal, Mr Justice Chung had to consider the 1st defendant's case as pleaded in the Defence and Counterclaim which had been filed pursuant to the Order of Mr Registrar C. Chan setting aside the judgment.

9. The 1st defendant has not paid anything under the Order for interim payment and the plaintiff has now commenced winding-up proceedings against the 1st defendant.

Parties' submissions

10. The plaintiff's case on this appeal is that the judgment in default was a regular judgment and that the 1st defendant therefore had to show a defence with a real prospect of success in order to have the judgment set aside. The plaintiff argues that the 1st defendant essentially had to show a set-off which would have exceeded the plaintiff's claim for unpaid rent in order to resist the plaintiff's claim for possession based upon forfeiture of the tenancy for non-payment of rent. Since the 1st defendant has clearly failed to show a defence with real prospects of success, judgment in default should not have been set aside.

11. The plaintiff further submits that the Registrar made orders which are inconsistent and wrong in that while setting aside the judgment, he also ordered interim payment of the full amount of rent and other charges due under the Tenancy Agreement from 1 September 2000 until 31 July 2001. The latter order could only be made if the Court was satisfied that if the action proceeded to trial, the plaintiff would obtain judgment against the 1st defendant for a substantial sum of money and after taking into account any set-off, cross-claim or counterclaim on which the 1st defendant may be entitled to rely. As he ordered the full amount to be paid by way of interim payment, the Registrar must have considered that the 1st defendant had no set-off, cross-claim or counterclaim on which it was entitled to rely. Therefore, he should not have set aside the default judgment.

12. The plaintiff also relies upon the judgment and order of Mr Justice Chung who clearly took the view that there was no merit in the Defence and Counterclaim.

13. The 1st defendant, while not admitting the non-payment of rent, has put forward no positive case that payment of rent was made to the plaintiff for the months of September and October 2000 prior to the issue of the writ. I have proceeded on the basis that there is no dispute as to the non-payment of rental by the 1st defendant for those two months.

14. The 1st defendant argues that the judgment obtained was bad for a number of reasons relating to the amount and form of the judgment and that any defects in the judgment cannot be cured by amendment; the judgment stands or falls as a whole. Mr Lam submits that the plaintiff must be able to obtain all that they sought by way of judgment and that the Court has no power to make an order for possession leaving the balance of the plaintiff's claims to be determined at trial, this being a default judgment and not proceedings under Order 14.

15. The 1st defendant also maintains that the judgment is irregular on the grounds that the 1st defendant did not receive the notice of intention to enter judgment which had been posted by the plaintiff to the address given by the 1st defendant as its address for service.

16. As for the merits of the Defence and Counterclaim, Mr Lam submits that all that it is necessary for the 1st defendant to show in order to be able to have any default judgment set aside without condition is that the 1st defendant has a claim for damages which may exceed the plaintiff's claim for two month's rent. The 1st defendant's claim for damages arises out of two matters; damage to the Premises from water leakage and seepage caused by the plaintiff's failure to maintain the air-conditioning system properly resulting in damage to sub-tenants' property and loss of rental from subletting and loss of rental from subletting arising from the plaintiff's failure to promote the Chinese medicine centre in breach of the Tenancy Agreement.

Regular or irregular judgment

17. Mr Lam for the 1st defendant refers me to paragraph 13/9/3 of Hong Kong Civil Procedure 2001 to the following effect :

"Where a defendant deposes that he has not received the writ through the post the Court has little option but to believe this save when there is sufficient material to cast doubt upon the defendant's credibility to enable the court to disbelieve him. As to circumstances when this is permissible see para.14/4/9. Unless this happens judgment must be set aside without regard to the merits and the Plaintiff, having elected to serve by post, must pay the costs."

18. This passage is identical to paragraph 13/9/4 of the Supreme Court Practice. No authority is cited. The propositions stated would appear to run contrary to those stated at paragraph 65/5/4 of Hong Kong Civil Procedure 2001 and more importantly, the case of A/S Cathrineholm v. Norequipment [1972] 2 Q.B.314. It can scarcely ever be appropriate for a plaintiff to apply to cross-examine a defendant on his application to set aside a default judgment on the ground that he has not received the writ through the post yet that is the practical implication if the proposition stated at paragraph 13/9/3 be right.

19. Here, the 1st defendant acknowledged service of the writ, stating an intention to defend and giving an address for service. The plaintiff complied fully with the requirements of Order 19 rule 8A. There is no suggestion that the notice served by post was returned undelivered.

20. Two directors of the 1st defendant made affirmations. Mr Chu Wing deposes that the 1st defendant informed the plaintiff of its address for service in the acknowledgment of service, that thereafter it heard nothing further from the plaintiff and that he is informed by Madam Sun Ting Tina that the notice to enter judgment had never been served on the 1st defendant at that address. Madam Sun Ting Tina deposes that after the filing and serving of the acknowledgment of service, she had heard nothing further from Messrs Masons, the plaintiff's solicitors, let alone the alleged notice to enter judgment until in mid-February 2001 when she was informed by Mr Chu that he had found a letter dated 16 February 2001 from them together with a Final Judgment dated 2 February 2001 at Suite 3014, Universal Trade Centre, 3-5A Arbuthnot Road, Central [the registered office of the 1st defendant].

21. The address for service stated on the acknowledgment of service was in fact the registered office of the 2nd defendant and Madam Sun's office. Although she says that she heard nothing further from the plaintiff's solicitors, she does not say in terms that the letter was not received at this address. In any event, her evidence contradicts that of Mr Chu; she deposes that as soon as the writ was issued, there were negotiations conducted between the plaintiff and the defendants for an out of court settlement and she therefore withheld from retaining solicitors to act for the 1st defendant after the acknowledgment of service pending the negotiation. It must have been obvious that once the negotiations failed and in the absence of any defence, the plaintiff would seek to enter judgment.

22. The plaintiff having complied with the requirements of Order 19 rule 8A, the judgment is regular, the 1st defendant was not and is not entitled to have the judgment set aside as of right. The 1st defendant therefore had to show that the defence had reasonable prospects of success in order to set aside the judgment.

The claimed set-off

23. The plaintiff does not dispute that there was an occasion in September 2000 when water leakage and seepage occurred from the air-conditioning system but says that it was promptly dealt with by the management installing water trays and canvas underneath the dripping pipes which were then replaced in October 2000. Although the 1st defendant had pleaded in the Defence that damage had been done to Chinese medicine and herbs and other property to the tune of $300,000.00, there is no claim for loss and damage for this amount said to flow from the alleged failure properly to maintain the air-conditioning system. The 1st defendant did not mention damage to property in its evidence and not a single document is produced to support the claim by way of letters of complaint from the 1st defendant's subtenants.

24. Instead the basis of the 1st defendant's set-off in its evidence is that potential subtenants were put off by the canvas as a result of which the plaintiff suffered loss of rental income. In the Defence and Counterclaim, the loss and damage is put differently. The defendants' case is that existing subtenants of the 1st defendant have refused to pay rent, the loss amounting to $1,916,224.59 up to the 1 July 2001. This is said to be due to a number of reasons including the water leakage and seepage caused by the failure to maintain the air-conditioning system, the failure to promote the Premises as a Chinese medicine centre in breach of the tenancy agreement and the posting of notices on the Premises giving notice of the judgment and the forfeiture of all subtenancies. It is also pleaded that for these reasons, potential subtenants refused to rent the remaining units. No evidence of any kind is put forward in support of these pleaded losses.

25. The plaintiff relies upon various clauses of the Tenancy Agreement in answer to the 1st defendant's claims based upon breach of the Tenancy Agreement. Section XI gives the Landlord absolute discretion in the manner in which it uses the promotional fund consisting of tenants' monthly non-refundable payments for promoting, advertising and publicizing the whole of the commercial complex of which the Premises form part. The plaintiff further relies on clause 6 of Section IV and clause 1(a) and (b) of Section VI which exonerate the Landlord from liability to tenants, subtenants, licensees and others for any loss or damage arising from breakdown or any defect of the air-conditioning system and overflow or leakage of water not caused by the neglect or default of the Landlord.

26. It is not appropriate to go into the question of whether these arguments have merit. In particular, it seems to me that since the Landlord relies on these clauses to exonerate itself for any liability for loss or damage caused by the admitted leaking and seeping of water, the burden of bringing itself within these clauses may possibly lie on the Landlord.

27. The plaintiff also relies upon the fact that the 1st defendant can institute proceedings against its subtenants for unpaid rental. Since the terms of the subtenancies mirror those in the Tenancy Agreement, it is said, the subtenants cannot use these grounds to withhold rent from the 1st defendant any more than the 1st defendant can against the plaintiff.

28. Although Mr Chain, for the plaintiff submitted that I could take into account the fact that the 1st defendant had paid nothing under the Order for interim payment, it seems to me that on the issue of whether the 1st defendant has a real prospect of success, I am confined to considering whether the 1st defendant has shown that it has a real prospect of success in its claim to an equitable set-off which exceeds the plaintiff's claim for two months' rent and other charges which were not paid and which led the plaintiff to exercise its rights under the Tenancy Agreement to re-enter by issuing the writ. This effectively means considering whether the 1st defendant has shown it has real prospects of succeeding on its claim for loss and damages up to a value of $792,070.60.

29. The 1st defendant has patently failed to show that it has a claim with real prospects of success up to this value. Indeed, before me, Mr Lam for the 1st defendant did not even seriously attempt to argue that it had. Not one document has been produced in evidence to substantiate the quantum of its claim.

The plaintiff's appeal

30. In the course of argument, Mr Lam for the 1st defendant said that there were other reasons for not reinstating the judgment. The plaintiff was proceeding with a petition to wind up the 1st defendant for non-payment of the Order for interim payment and if that petition was successful, the lease would automatically determine and the 1st defendant's resistance to the claim for possession would become academic. Whether or not that is so ( and I doubt whether this represents the legal position ), it seems to me to be no answer to the merits of the plaintiff's appeal which I am bound to consider.

31. He also said that the 1st defendant would wish to apply for relief against forfeiture. The fact is that the 1st defendant, despite not having paid anything under the Order for interim payments, has since August 2001 resumed paying monthly amounts which it attributes to amounts currently due to the plaintiff whether by way of mesne profits or rent. The 1st defendant has not asked that such payments be attributed to the rent and other charges due on the 1st day of September and October 2000 and has taken no step to amend its Defence and Counterclaim to claim relief against forfeiture despite this step having been taken by the 2nd defendant. Whether relief against forfeiture may later be claimed, I consider the plaintiff's appeal on the basis of matters as they stand today.

32. As I am exercising the discretion afresh, I see no merit in the argument that the judgment stands or falls as a whole. On the 1st defendant's application to set aside the judgment, the Registrar could have allowed the judgment to stand in its entirety or could have amended or varied it if it were shown that judgment had been entered for the wrong amount.

33. The 1st defendant further makes the point in relation to paragraph 4 of the judgment that the market rental has now fallen and the order which should have been made is for assessment of the mesne profits. However, the plaintiff is clearly entitled to claim mesne profits from the date of service of the writ up to the date of delivery up of possession at the rate in the Tenancy Agreement - paragraphs 13/4/5 and 13/4/6 of Hong Kong Civil Procedure 2001.

34. The plaintiff's appeal is therefore allowed and the Registrar's Order is set aside. Since I have not heard the parties on the precise form of the judgment which should now be entered for the plaintiff, I will hear the parties on the order, any consequential matters and on costs.