JOY CONCEPT LTD v. DOUBLE STAR LTD

HCA 831/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 831 OF 2005

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J U D G M E N T

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1. The present dispute between the parties arose as a result of a Franchise Agreement between them. 

2. The defendant Double Star Limited operated (and still operates) a cafeteria franchise known as Double Star Café.

3. Sometime around September/October 2003, Mr. Alfred Yuen was interested in taking up the franchise and he met Ms. Gady Cheung, the Assistant Development Manager of the defendant, in October 2003. Ms. Cheung gave him information regarding the franchise programme.

4. At the end of October 2003, Mr. Yuen joined the franchise programme by paying the $30,000 joining fee. For the next few months, Mr. Yuen was shown over ten locations and given information in relation to several potential shops for his consideration.

5. In the meantime, Mr. Yuen and his wife, Mrs. Helena S.Y. Yuen (a solicitor of over 20 years experience) incorporated the plaintiff, Joy Concept Limited.

6. Around mid-January 2004, Mr. Yuen learnt from the defendant of the availability of a Double Star Café situated at the Luk Yeung Galleria in Tsuen Wan (“the said café”). Discussions ensued and Mr. Yuen was sent various documents, including a plan of the said café prepared by Kinney Chan & Associates showing the seating capacity as 67 seats; a “Transfer Breakdown” of the said café prepared by the defendant; and the sales figures of the said café for the 12 month in year 2003.

7. There is no dispute that at all material times the said café, as shown on the plan by Kinney Chan & Associates, consisted of two sections: one section was inside a “shop area” (leased from the MTR by way of a tenancy agreement) and the other was an “open area” (licensed to use from the MTR by way of a licence). The 67 seating capacity covered both the shop and the open area.

8. There is also no dispute that all along the said café operated as one having the service of waiters, and not as a self-serviced café.

9. Ms. Gady Cheung expressly admitted, when giving evidence in court, that when the defendant prepared the said Transfer Breakdown, it was done on the basis that the business of the café consisted of the running of a waiter service at both the shop and the open area, even though only the shop area covered by the tenancy agreement (i.e. 927 square feet) was mentioned on the said Transfer Breakdown. The projected turnover on the said Transfer Breakdown was $400,000.

10. The original franchisee of the said café was apparently a company known as Smart Connection Limited (“Smart Connection”), with a Mr. Pang running it. Smart Connection withdrew from the franchise and a transfer was effected sometime in December 2003 to Profit Dragon Limited (“Profit Dragon”). Profit Dragon entered into a new 3-year lease (i.e. from 22.12.2003 to 21.12.2006) with the landlord MTR for the shop area. MTR continued to allow the open area to be used as part of the said café under a licence.

11. On 30.1.2004 the Plaintiff entered into a Franchise Agreement with the defendant in relation to the said café.

12. After the signing of the said Franchise Agreement, Profit Dragon and the plaintiff entered into a Transfer Agreement whereby the plaintiff took over the said café, including its stock and equipment. Profit Dragon remains as the tenant of MTR, with the plaintiff company undertaking to perform terms and conditions of the tenancy agreement – which includes the payment of rental.

13. The plaintiff effectively took over the said café from Profit Dragon on 1.3.2004.

14. Since the franchise involved the running of a café, a proper restaurant licence from the Food, Environment and Hygiene Department (“FEHD”) was required. There is no dispute that the plaintiff, as a franchisee, was never required to be the licensee of the restaurant licence. The defendant was the licensee of the restaurant licence both before and after the plaintiff took over the said café. A restaurant licence was on display inside the said café at all times.

15. On 28.4.2004, less than 2 months since the plaintiff took over the said café, an inspection was conducted by the FEHD and Mr. Yuen learnt that the restaurant licence did not cover the open area. FEHD also notified the plaintiff to cease operation of the café at the open area, indicating that the licence holder would be prosecuted. There is no dispute that the defendant company was later prosecuted and fined for the contravention.

16. Ms. June Wong, the manager of the defendant company, admitted the defendant was not aware of the fact that the relevant restaurant licence did not cover the open area of the said café. She said the original company policy was for the franchisee to apply for and hold the restaurant licence, with the assistance/advice of a consultant recommended by the defendant. Such policy was changed sometime in 2002 and the defendant became the licensee of restaurant licences, still with the assistance/advice of the consultant. In relation to the said café, the defendant became the licensee when the original franchisee withdrew from the franchise.

17. Ms. Cheung also admitted that she did tell Mr. Yuen the defendant would continue to hold the restaurant licence in respect of the said café, and that she did not know the relevant restaurant licence did not cover the open area.

18. There is no dispute that soon after the plaintiff took over the said café on 1.3.2004, and before the FEHD inspection, Mr. Yuen showed interest in extending the said café to cover a dead-end area adjacent to the open area (“remaining area”). Mr. Yuen was also keen to renovate the open area so as to increase the number of “window seats”. Mr. Yuen made his intention known to Ms. Cheung. Ms. Cheung later informed Mr. Yuen that the landlord MTR agreed, in principle, for the remaining area to be used, subject to proper decoration and furnishing.

19. There is no dispute that a contractor Sino Queen Limited (“Sino Queen”) gave a quotation dated 27.3.2004 for renovation/decoration work to be done in the open and remaining area. Mr. Yuen’s evidence that he made payment of $16,000 to Sino Queen on 28.4.2004 was not challenged.

20. After the FEHD inspection resulting in the rather unexpected revelation, a meeting concerning the licence matter was arranged between Mr. Yuen and Ms. Wong to take place on 5.5.2004. There is some dispute as to when and where the meeting took place and what was actually discussed.

21. It is the plaintiff’s case that during this meeting between Mr. Yuen and Ms. Wong, the defendant gave an undertaking to obtain the appropriate licence to cover both the open area and the remaining area. Ms. Wong, however, said the defendant only promised to get their consultant to look into the matter, to see if the defendant could get such a licence. I will deal with this matter more fully at a later stage.

22. Sometime in June 2004, while the application for licence in relation to the open area and the remaining area was underway, Mr. Yuen said he was advised by a Ms. Hilda Chan of the defendant to commence the renovation/decoration work, otherwise MTR might withdrew its consent. Sino Queen thus started the renovation/decoration work in July 2004 and completed the same within a few days. Mr. Yuen’s version of the event was not challenged by the defendant and Ms. Chan was not called by the defendant to give evidence (despite a written statement from her having been filed).

23. Although there is a dispute as to whether Sino Queen was the contractor employed by the plaintiff or the defendant, it is clear from the email correspondence exchanged between Mr. Yuen and a Ms. Rachel Wong, Business Development Manager of the defendant company, that Sino Queen was described as a contractor of the defendant. Not much turns on whether Sino Queen was the contractor employed by the plaintiff or the defendant.

24. On 2.11.2004, the plaintiff issued its first letter via a firm of solicitors, C. T. Chan & Co, to the defendant. Mr. Yuen’s wife is listed as a consultant of the firm.

25. In that letter C. T. Chan & Co referred to the “misrepresentation” made by the defendant to the plaintiff to the effect that the open area constituted part of the dining area to which the restaurant licence applied. After claiming significant loss of business due to the loss of over 30% of the seating capacity, solicitors for the plaintiff has this to say:

“……..unless appropriate steps have been taken by you effectively to rectify the above situation within the next 30 days, our client shall have no option but to take legal action against you, including but not limited to revoke the Franchise Agreement, to protect their interests and to recover their damages and losses without further notice. In that event, you will further be held liable for the costs to be incurred thereon.”

26. In its reply dated 16.11.2004, Huen & Partners, acting on behalf of the defendant, denied the allegation and made a claim that the defendant held a “valid licence for self-service at the open area”. The plaintiff was accused of running a food and restaurant service at the open area in contravention of the licence held by the defendant. It was also claimed that the defendant had never made any representation that the open area could be operated as food restaurant; and that the business projection was not made on the basis of a food restaurant at the open area.

27. In its reply dated 31.12.2004 C.T. Chan refuted the defendant’s claims.

28. There was of course never any evidence before me that the defendant held a valid licence for self-service at the open area as claimed. In fact it is common ground that the said café was never run as a self-service café. The assertion on the projection was also in direct conflict with the evidence of Ms. Cheung in court (para 9 above). I will refer more fully to the contents of this letter.

29. There followed a series of correspondence, with more from the plaintiff’s solicitors than the defendant’s. Apart from the allegation of misrepresentation, parties also corresponded on the issue of non-payment of royalty fees and the food supply.

30. According to Mr. Yuen, he was informed on 17.1.2005 by the defendant that FEHD would not grant a food licence for the remaining area due to the location of the fire-exit. Further, in relation to the open area, only a strip immediately adjacent to the shop area (not on the window side) was obtained. Mr. Yuen’s assertion was not challenged. Ms. Wong in effect agreed with what Mr. Yuen has said save that she did not mention when she or Mr. Yuen learnt of the same.

31. By a Notice of Termination/Rescission dated 6.5.2005 the plaintiff terminated/rescinded the Franchise Agreement with immediate effect. The defendant was informed that the plaintiff would carry on the operation of the said café for seven days on a without prejudice basis so as to enable the defendant to take over the business. The defendant took over the running of the café on 14.5.2005.

The Claims of the Plaintiff company

32. The plaintiff’s main claim is for rescission/termination of the Franchise Agreement, with a claimed sum of $1,707,608. The plaintiff has an alternative claim for damages and liquidated damages in the same amount of $1,707,608 for breach of contract/negligence. There is the usual claim for interests and costs.

33. The claim for rescission/termination of the Franchise Agreement is based on misrepresentation, i.e. two closely-related representations made to Mr. Yuen by the defendant:

A.   A representation that the turnover was “up to $400,000” (alleged to be made either fraudulently or negligently); and

B.    A representation that the said café (consisting of both the shop and open area) was covered by a valid restaurant licence when the open area was not so covered (alleged to be made negligently).

34. In relation to the turnover, it is the plaintiff’s case that the defendant owed it a duty to express an opinion on the turnover which the defendant honestly held, or a reasonable man having knowledge of the facts, honestly would have held.

35. It is claimed that Mr. Yuen, in reliance of both representations, was induced to enter into the Franchise Agreement with the defendant and a corresponding transfer agreement with Profit Dragon. Had Mr. Yuen known that the open area was not licensed, or that the projected turnover was an opinion not honestly or reasonably held, the plaintiff would not have entered into any Franchise Agreement in respect of the said café.

36. In relation to the claim on breach of contract, the plaintiff claimed the defendant was in breach of, inter alia, the following implied terms of the Franchise Agreement:

(a)   that the defendant shall cause to be issued and/or maintained restaurant licence(s) in relation to the whole of the premises, i.e. both the shop area and the open area here; and

(b)  that the defendant owed the plaintiff company a duty of care on all aspects of the operation of the franchise, including all licensing matters.

37. There are also claims based on an alleged “undertaking” given by the defendant in relation to the application of licence for both the open and remaining area; an alleged “advice” given by the defendant to commence renovation work while the application for licence for both the open and remaining area was underway; and an alleged breach of implied term on “disclosure”, i.e. that the defendant failed to disclose agreements with the MTR to the plaintiff despite requests.

38. The amount of $1,707,608 claimed includes various capital outlays and the operational loss in the sum of $552,374.51.

39. It should be noted that the above-mentioned operational loss covers the period from 1.3.2004 to 13.5.2005 and was certified by Mr. Lo Chi Shun. Mr. Lo is a Certified Public Accountant and a partner of Messrs. Chan & Lo, Certified Public Accountants. Mr. Lo’s expertise was accepted and his report was admitted into evidence without challenge.

Defence and counterclaim

40. The defendant denies the claim of the plaintiff. It counterclaims against the plaintiff for the sum of $61,949.86, being outstanding royalty fees and the prices for goods sold. There was also a miscellaneous fee of $10. The defendant, in arriving at the said figure, has already given credit to the plaintiff for the $50,000 Inventory Deposit it held.

41. The defendant also claims against the plaintiff the sum of $47,035.69, being the rental payable to MTR for the period from 1.5.2005 to 13.5.2005. The defendant claimed it had to make such payment in order to stay to operate the café business.

Reply and Defence to Counterclaim

42. The plaintiff admits it owed the defendant company $61,939.86, i.e. $10 less than the amount claimed by the defendant company. The Plaintiff makes no admission to the $10 miscellaneous fee.

43. As to the claim for rental payment, the plaintiff denies responsibility, saying that neither the plaintiff nor the defendant is the tenant of MTR.

Evaluation of Evidence and findings of facts

44. Most of the evidence are not really in dispute. It is obvious that Mr. Yuen was keen to become a franchisee of the defendant and the defendant was also keen to recruit one more franchisee.

45. Ms. Wong was quite frank in admitting that after the defendant, in accordance with company policy, opted to become licensee of the restaurant licences, the defendant was all along under the impression that the relevant restaurant licence covered the open area as well as the shop area. Her evidence was to the effect that though she could have done so, she did not check the contents of the said licence.

46. Ms. Cheung admitted that she told Mr. Yuen the defendant was the restaurant licence holder in respect of the said café and that the defendant would continue to hold the licence.

47. Since there is no dispute that the said café was all along operated in both the shop and open area - in particular during the negotiation stage between parties prior to the signing of the Franchise Agreement; that Mr. Yuen was told there was a valid licence covering the café and that the defendant was indeed the licence holder/licensee of the relevant restaurant licence at the time; and that even the defendant did not realise the said restaurant licence did not cover the open area, clearly the representation made by the defendant to Mr. Yuen of the Plaintiff was that the defendant held a valid restaurant licence covering the whole of café premises, i.e. both the shop and the open area.

48. Ms. Cheung said in her evidence that she did not separate the shop area from the open area. That is hardly surprising as the said café has all along been operated in both the shop and open area. There is simply no reason for Ms. Cheung to separate the two.

49. Ms. Cheung also said she did not make representation to Mr. Yuen that the restaurant licence covered both the shop and the open area. I accept that Ms. Cheung did not literally say the restaurant licence covered both the shop and open area. However, since she herself believed the said café covered both the shop and open area and she did not know the open area was not so-covered until after the FEHD inspection, the only reasonable and irresistible inference to be drawn from her representation that the defendant held a valid restaurant licence in respect of the Double Star Café situated at the Luk Yeung Galleria is that such a licence covered both the shop and the open area.

50. As admitted by Ms Cheung in court, when she prepared the Transfer Breakdown, it was done on the basis of a café operated in both the shop and open area (with the usage of the store room as well). There was never any question of the open area not being part of the café or not being taken into account.

51. This admission is at odds with what Ms. Cheung has said in her written statement (and the letter from Huen & Partners dated 16.11.2004). Ms. Cheung put emphasis on the fact that the area of 927 square feet was mentioned in the said breakdown. The purpose was clearly to show that the Transfer Breakdown only covered the business operated within such 927 square feet. In other words, the Transfer Breakdown did not include business operated in the open area. Indeed Mr. Yuen was cross-examined along that line!

52. There was never any explanation by Ms. Cheung why there was such a discrepancy in her evidence. I have no doubt what she said in court is the truth and I reject what was implied in the written statement.

53. Regarding the projected turnover figure of $400,000, Mr. Yuen said he only received the sales figure of the said café for the 12 months in year 2003 via an email from Ms. Cheung. He said he received assurance from Ms. Hilda Chan and Mr. Stany Yim of the defendant in relation to the viability of the sales projection and the seating capacity of 67. Mr. Yuen frankly admitted the defendant did not give any guarantee that the sales would be $400,000, but that the representatives from the defendant had only assured him that “there should be no problem to have a turnover of $400,000”.

54. Mr. Yuen admitted he has also made his own estimation as to the viability, but as “an outsider, not someone in the trade”. Mr. Yuen has been a businessman in the field of electronic goods production for over 20 years, having run a factory and operated his own design company.

55. Neither Ms. Chan nor Mr. Yim was called to give evidence. Ms. Cheung said the figure of $400,000 was an optimistic projection which was achievable based on past experience. She testified that she made the calculation based on information on a document named “Accumulated Sales Report Luk Yeung Galleria – Double Star Café”. When she was cross-examined on the fact that the document listed sales figures for 2005, indicating that that document could not have been in existence in early 2004, she then said she was not certain whether that particular sales report was the one she viewed at the time.

56. Ms. Cheung maintained that she did view a sales report. However, she later agreed under cross-examination that the only figures she viewed were those sales figures for the year 2003 which she had emailed to Mr. Yuen.

57. In relation to this projected turnover figure of $400,000, I accept the evidence of Mr. Yuen. I find as a fact that the defendant did make the assurance as alleged. The projection was clearly made on the basis that the said café covered both the shop and open area and that the defendant held a valid restaurant licence covering the said café, i.e. both the shop and the open area.

58. I find that while Ms. Cheung might have viewed some other documents, the one entitled “Accumulated Sales Report Luk Yeung Galleria – Double Star Café” could not have been one of them. I am satisfied that Ms. Cheung based primarily on those 2003 sales figures when she prepared the Transfer Breakdown.

59. I now turn to the evidence in relation to the licence matter after the FEHD inspection.

60. Mr. Yuen admitted that the relevant licence was all along on display in the said café. He said he did not pay attention to the contents, relying on what he was told by Ms. Cheung. He said he was shocked and angry when he found out the valid restaurant licence did not cover the open area.

61. Mr. Yuen testified that a meeting was arranged between him and Ms. Wong, to take place on 5.5.2004. During that meeting Ms. Wong admitted to him that she did not know the restaurant licence did not cover the open area and apologized profusely by saying she was very sorry.  Ms. Wong said she would apply for a licence to cover both the open and remaining area. Ms. Wong also suggested to him to operate the said café after office hours to avoid detection by the FEHD.

62. In his written statement Mr. Yuen said initially he did not adhere to Ms. Wong’s advice. However, the cessation of business at the open area represented over 30% loss of seating capacity and resulted in a substantial loss of business. He then complained to Ms. Cheung and a Mr. Raymi Chow of the defendant company, whereupon both advised him to use the open area and remaining area for business after office hours to avoid FEHD inspections. Mr. Yuen said he then followed the defendant’s advice and occasionally operate his business at both the open and remaining area.

63. When Mr. Yuen was giving evidence in court, in exercise of his legal rights not to incriminate himself, he declined to answer any questions in relation to the plaintiff operating business outside the licence-permitted areas.

64. Mr. Chow was not called as a defence witness.

65. Ms. Cheung categorically denied ever giving such advice to Mr. Yuen.

66. Ms. Wong said she normally would not join meetings on operational matters but since there was a staff problem in the said café resulting in a lowering of standard, she was invited to attend. She claimed the licence matter was only one of the matters to be discussed.

67. In her written statement she claimed that those other matters were more important to her than the licence matter at the time. She made particular reference to the so-called Point of Sale (POS) system, saying the staff of the plaintiff failed to enter sales in the Point Of Sale machine.

68. In court, Ms. Wong said the licence matter was certainly more important than the POS system. She explained that at the time of the meeting she was not aware of the seriousness of the licence matter.

69. Ms. Wong was referred to emails sent by Ms. Cheung to Mr. Yuen, with copies to her. At first a meeting was scheduled for 5.5.2004 to discuss both the operational matters and the licence matter. However, a re-scheduling separating the meeting into two took place. The discussion of the licence matter was to take place first on 5.5.2004, with Ms. Wong representing the defendant. The meeting for operational matters was re-scheduled for 7.5.2004, with other staff members of the defendant.

70. Despite these contemporaneously sent emails, Ms. Wong insisted there was no meeting between her and Mr. Yuen on 5.5.2004 solely to discuss the licence matter. She said she recalled having a brief discussion with Mr. Yuen on that day and she left when Mr. Yuen became angry after her other colleagues joined the meeting to discuss operational matters. Ms. Wong could not explain why her colleagues would have come in to that meeting when the meeting was scheduled between her and Mr. Yuen for the purpose of discussing the licence matter.

71. Ms. Wong said she has a vivid recollection of discussing the licence matter with Mr. Yuen at a café inside the building in which the office of the defendant was situated, but said it was definitely not on 5.5.2004.

72. Ms. Wong said she admitted to Mr. Yuen, during that meeting at the café, that the defendant had failed to notice that the restaurant licence did not in fact cover the open area. However, Ms. Wong was adamant that she did not apologize to Mr. Yuen, whether profusely or otherwise. She said after the discovery of the lack of licence to cover the open area, the defendant company contacted a consultant to have a meeting with Mr. Yuen, to see if the defendant company could get the licence extended.

73. In her written statement Ms. Wong said she did not instruct either Ms. Cheung or Mr. Chow to “urge” Mr. Yuen to operate the said café at the open area “intermittently and stealthily”.

74. As to when the issue of POS system was raised, Ms. Wong said in her statement that it was during the meeting on 7.5.2004. In court she changed that to the meeting on 5.5.2004. She disagreed with the suggestion that the POS system matter was only discussed sometime in July 2004 and not raised in May at all.

75. Ms. Wong was also asked whether Mr. Chow of the defendant was “seconded” to the plaintiff as a “stand-in manager” in July 2004. Ms. Wong confirmed that Mr. Chow had indeed gone over to work for Mr. Yuen and that Mr. Yuen was billed by the defendant for Mr. Chow’s salary. Ms. Wong also said that Mr. Chow stayed for less than one month. Ms. Wong agreed that the arrangement came about as the supervision from Mr. Chow was required to ensure the  smooth running of the business of the said café. Ms. Wong could not say for certain whether it was in July when Mr. Chow went over.

76. Bearing in mind that prior to the surprise inspection by the FEHD, both the plaintiff and the defendant were under the impression that the relevant valid licence covered both the shop and open area, it is simply incredible that the so-called POS system matter, or any other operational matter, could have been more important than the licence matter “at the time” as claimed by Ms. Wong.

77. The emails issued by the defendant clearly showed that a special meeting was arranged between Mr. Yuen and Ms. Wong to discuss the licence matter, with another meeting for the operational matters. There is no cogent reason why, having set aside another date for the operational meeting, staff members of the defendant company would appear to discuss operational matters with Mr. Yuen, leaving Ms. Wong hardly anytime to discuss the matter on the agenda!

78. I have no doubt in my mind that Ms. Wong did apologize to Mr. Yuen by saying she was “very sorry”. I simply do not believe Ms. Wong would have failed to apologize for the oversight!

79. Ms. Wong admitted in court that the operational matters, including the POS system, were not more important than the licence matter at the time. Bearing in mind that she is conversant in English and has confirmed that the contents of her statement are true, she has not really offered any good explanation why there are such glaring discrepancies between her evidence as shown in the statement and in court.

80. I have already referred to the contents of the first two letters between solicitors representing both parties. The first response by the defendant was along the line that the defendant held a valid “self-service” licence in relation to the open area, and the plaintiff was accused of running a food and restaurant service at the open area in contravention of the licence held by the defendant. It was also claimed that the defendant had never made any representation that the open area could be operated as food restaurant, and that the business projection was not made on the basis of a food restaurant at the open area.

81. No such self-service licence was adduced in evidence. The said café was never run as a self-service café in any part of the premises. The said café has all along been operated in both the shop and open area. The projection was made on the basis of the café covering both the shop and open area. The allegations by Huen & Partners on behalf of the defendant in the said letter are simply untrue!

82. Judging from the way the defendant responded to the solicitor of the plaintiff, it is my view that the statement of Ms Wong was drafted and presented in such a way, in particular with the reference to the POS system, in an attempt to play down the importance of the licence matter.

83. Furthermore, Ms. Wong was evasive when questioned about her assertion in her statement that she first learnt of the intention of the plaintiff to terminate the Franchise Agreement in February 2005, and that she has never received any complaint of misrepresentation prior to the plaintiff “abandoning the Café”. These assertions are clearly incorrect in view of the contents of the very first letter dated 2.11.2004 from the solicitors representing the plaintiff, to which the defendant’s solicitors have made response.

84. Ms. Wong at first said in court she simply passed the first letter from the plaintiff’s solicitors to the defendant’s solicitors to deal with, without even reading the contents herself. She later chose not to answer any further questions on this issue.

85. I accept Mr. Yuen’s evidence when his evidence is at variance with the evidence of Ms. Cheung and/or Ms. Wong. I find Mr. Yuen an honest and reliable witness. He gave his evidence in a matter-of-fact fashion without embellishment or exaggeration.

86. When I make this finding, I bore in mind the fact that Mr. Yuen has over 20 years experience as a businessman. I accept that he is a “novice” as far as running a café is concerned, and that he relied on the expertise and advice of the defendant in relation to the franchise business. I also bore in mind the fact that Mrs. Yuen is a solicitor with over 20 years experience. I accept that the café business was basically run by Mr. Yuen. I accept that Mr. Yuen did not read the contents of the restaurant licence on display inside the said café but simply relied on what he was told by the defendant.

87. I have no doubt that the defendant did make the two representations.

88. The representation that the defendant held a valid restaurant licence covering both the shop and open area is a misrepresentation of fact which was negligently made.

89. It is my finding that the relationship between the plaintiff and the defendant was such that the latter owed a duty of care to correctly represent the position of the restaurant licence to the former. The defendant was in breach of such a duty in that it failed to ascertain the true and correct position of the restaurant licence before making the representation to Mr. Yuen that the said café (consisting of both the shop and open area) was covered by a valid restaurant licence.

90. The representation of the projected turnover figure is a misrepresentation of opinion/advice which was also made negligently. There is no evidence to support the latter misrepresentation being made fraudulently. The opinion was ‘carelessly made’ which causes economic loss to Mr. Yuen (the representee) as a result of his reliance on the representation (on the authority of Hedley Bryne v Heller [1964] AC465).

91. Mr. Robert Pang, counsel for the defendant, referred me to the judgment of Lord Oliver in the case of Caparo v Dickman [1990] 2 AC 605, in which the learned judge stated the general statement of principles drawn from Hedley Byrne. In essence, the key elements in establishing a duty of care are that the defendant should have known the purposes for which his statement might be used; that the claimant was a person whom he should have realized might use it for that purpose, and that the claimant would rely on it without taking independent advice.

92. The case of Caprao v Dickman concerns the question of whether the auditors of the company owed a duty of care to a purchaser of shares in the company who claimed to have relied on the auditors’ audit and certification of the company’s accounts.

93. In my view, the relationship between the plaintiff and the defendant here is quite different from that between the auditor of the company and a purchaser of shares. I am dealing with a franchisee who has relied on the expertise and advice of the company selling the franchise when he entered into the Franchise Agreement.

94. Adopting the key elements mentioned, on the evidence before me, the defendant should have known the purpose for which its statement might be used, i.e. to enable Mr. Yuen to decide if it is viable and profitable to run the franchise café at that particular location; that the plaintiff (in the form of Mr. Yuen) was a person whom the defendant should have realized might use it for that purpose, and that the plaintiff would rely on it without taking independent advice.

95. Clearly the open area was an integral and important part of the whole café business. I accept Mr. Yuen’s evidence that the ‘window seats’ have more appeal to customers. I also accept Mr. Yuen’s evidence that the “projected sales by the [defendant] on 16^th January 2004 could no longer be achievable” when he could not make use of the open area “in full force”. The failure to properly utilize the open area would have a significant effect as far as the business turnover and profits are concerned.

96. It is not unknown in Hong Kong that persons in restaurant and cafés business tend to operate their business without valid restaurant licences. In most cases these people run their business while the applications for licences are in progress. The payment of fine is treated as part of the operational costs! I accept Mr. Yuen’s evidence that he was advised by various persons from the defendant to operate at the open area and remaining area after office hours. I have no doubt that he has done so at times to try to reduce the loss.

97. I have already dealt briefly with the POS system and found that the defendant used the POS system to play down the importance of the licence matter.

98. There was evidence before me that for reasons unknown, there was a constant change of employees at senior level at the said café. There is no dispute that Mr. Chow was “seconded” to the plaintiff to take up the role of supervising the smooth running of the café business. I find that while the staff problem might have contributed to the loss suffered by the plaintiff, it was not the main reason. The lack of a valid licence to cover the open area and the prohibition issued by the FEHD – i.e. not to operate at the open area – is the main reason for the loss suffered.

99. It is clear from the correspondence between solicitors and the undisputed evidence in relation to the renovation/decoration of both the open and remaining area that the plaintiff was quite prepared to go on with the franchise arrangement provided valid licence is obtained by the defendant. Mr. Yuen was certainly ambitious enough to have wanted to extend the café to cover the remaining area. However, the fact of the matter was that only one strip of the open area immediately adjacent to the shop could have been properly licensed. Without the use of the window side - the preferred seats, the outlook of the whole café is dramatically different from that envisaged by both parties when they entered into the Franchise Agreement.

100. I rule that the plaintiff is entitled to rescind the Franchise Agreement in view of the misrepresentation. I find no substance in the “pleadings” point taken by Mr. Robert Pang. The misrepresentation in relation to the “Licensed Area” is clearly not just the transferring of a restaurant licence from the predecessor of Profit Dragon to the defendant company in December 2003, which would expire on 3 July 2004, but that the representation was that the licence so transferred and held by the defendant covered both the shop and open area.

101. While there is no direct evidence as to the monthly turnover since the plaintiff started to run the said café under the franchise, I have already accepted the evidence of Mr. Yuen that the figure of $400,000 was “not achievable” when the open area could not be used in full.

102. Mr. Pang submitted that “up to $400,000” as pleaded denotes a maximum figure so there is no evidence of any misrepresentation. I do not accept this submission. Mr. Yuen admitted no guarantee was made but that the defendant said there should be no problem to reach such a figure. Without the full usage of the open area, which forms a significant part of the whole café, and when the projection was made on the basis of business to be operated at both the shop and open area, clearly such a projected figure could not be achieved and amounted to a misrepresentation.

103. I now turn to the claim based on breach of contract. I find that due to the special relationship between the plaintiff and the defendant, there was indeed an implied term that the defendant shall cause to be issued and/or maintained restaurant licences(s) relating to the whole café (both the shop and the open area) for the duration of the franchise term.

104. There is no dispute that for a term to be implied, the following conditions must be fulfilled:

(a) it must be reasonable and equitable;

(b) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;

(c) it must be so obvious that it goes without saying;

(d) it must be capable of clear expression;

(e) it must not contradict any express term of the contract.

105. It is also not in dispute that the general presumption is against implying terms into written contracts. The more detailed and apparently complete the contract, the stronger the presumption.

106. There is no mention of the restaurant licence(s) in the Franchise Agreement.

107. The defendant chose to be the licensee of restaurant licences. A consultant was at the defendant’s disposal in relation to applications and renewal of licences. While I appreciate there might be difficulties encountered by the defendant when it does not physically run the business, i.e. with things or events not under its control, I must bear in mind that the defendant chose to be a licensee when it could have chosen, as before the change of its policy, not to be. It cannot now complain about the onerous nature of being a licensee! Should it be proved that it was the fault of the franchisee which caused or contributed to the failure to obtain and/or maintain a valid and relevant restaurant licence, such a franchisee could hardly complain about the lack of licence when it is its own fault!

108. While the franchisee of the café may have to co-operate to ensure compliance, the application for and renewal of the licence is nevertheless the responsibility of the defendant. Without a proper restaurant licence the franchisee simply cannot operate!

109. I find that the implied term in relation to the restaurant licences(s) satisfy all the requirements stated and there is nothing unreasonable or inequitable to imply such a term when there is no reference to it in the Franchise Agreement.

110. In relation to the implied term of duty of care, while I find that in tort, there is a duty of care on the part of the defendant in view of the close relationship, I do not accept that there is an implied term of duty of care in the Franchise Agreement. The above-mentioned requirements are not satisfied.

111. In view of the particular relationship between the parties I find that the defendant was indeed in breach of its duty of care to the plaintiff in failing to advise the plaintiff that the restaurant licence did not cover the open area, as a result of such breach the plaintiff suffered loss.

112. Does Mr. Yuen’s failure (or Mrs. Yuen’s, for that matter) to check the contents of the restaurant licence on display inside the said café amount to contributory negligence? I do not have to consider this question as it was not pleaded.

113. On the evidence before me, I am not satisfied that there is an implied term on duty of disclosure as claimed.

114. I have already accepted Mr. Yuen’s evidence that Ms. Wong said she would apply for a licence to cover both the open and remaining area. In relation to the open area, I find it was indeed a promise by the defendant to procure a valid restaurant licence. I am, however, not satisfied that the promise amounts to an undertaking. In any event, it is not an undertaking which is enforceable.

115. In relation to the remaining area, as that was never part of the original Franchise Agreement, I am not satisfied on the evidence that there was an undertaking by the defendant to procure a restaurant licence to cover that area, quite apart from the unenforceability aspect.

116. The so-called “advice” by the defendant, i.e. to proceed with the renovation/decoration work while the licence application was underway in case the landlord MTR withdraws its consent, does not amount to a negligent advice, in my view. The renovation/decoration was necessary because of the plaintiff’s ambition to expand the café. Both the plaintiff and defendant were taking a chance in the hope that the remaining area could also be covered by a valid restaurant licence.

117. It is not in dispute that the amount of damages to be calculated, in terms of misrepresentation and breach of contract, is different.  The plaintiff opted for damages under rescission if it succeeds under both headings. I will assess the damages so-opted.

118. The damages claimed on rescission amounts to $1,707,680:

a. Recovery of $131,600 paid under the Franchise Agreement:

i. administrative fee of $15,000;

ii. Inventory deposit of $50,000; and

iii. Franchise fee of $66,660.

b. An indemnity of $968,408 made to Profit Dragon;

c. Cost of shop decoration $47,948;

d. Cost of Additional Equipment $7,290 and

e. Operational loss of $552,374;

119. There is no dispute as to the correctness of the sums claimed under heads (a) to (d) above, apart from the $50,000 Inventory deposit which I will deal with later.

120. In relation to the operational loss claimed, I have already mentioned the unchallenged evidence of Mr. Lo, the Chartered Accountant. I accept his evidence and find that the plaintiff company did suffer such operational loss.

121. The total sum the plaintiff is entitled under rescission amounts to $1,707,608.

122. The plaintiff admits the defendant is entitled to set off the amount of $61,939.86. There is no explanation regarding the so-called miscellaneous amount of $10 and I will not allow this amount. I do not accept Mr. Pang’s suggestion of splitting the $10 between parties.

123. As the defendant has already given credit for the $50,000 Inventory deposit when it arrived at the amount of the counterclaim, that sum needs to be deducted from the plaintiff’s entitled amount.

124. In relation to the rental in the sum of $47,035.69 payable to the Landlord MTR, there is no dispute that the plaintiff did not pay the rental for the period from 1.5.2005 to 13.3.2005. Neither the plaintiff nor the defendant is the tenant of MTR as Profit Dragon remains as its tenant. By a Deed of Payment of Rental Deposit, the plaintiff agreed with Profit Dragon that it would, inter alia, pay the rental to the landlord on behalf of Profit Dragon.

125. The defendant relied on para 8.2 (viii) and (ix) of the Franchise Agreement: i.e. that the plaintiff has agreed to pay for the “services provided” for the purposes of the business (viii); and that the plaintiff has agreed to pay and be responsible “for all costs and expenses” in relation to the operation of the business (ix) to support its contention that the rental payable to the landlord MTR amount to “services provided for” or “costs and expenses in relation to” as stipulated.

126. The defendant also prayed in aid para 19 of the said agreement, in which the plaintiff agreed, inter alia, to pay any outstanding sums to the landlord “in case of default and breach of any terms and conditions” of the agreement.

127. To construe an agreement to pay for the “services provided” to include payment of rental to the landlord is, in my view, stretching the meaning of these words too far. The services provided are in connection with goods supplied. Further, the fact that the plaintiff agreed that it shall pay and be responsible for all costs and expenses in relation to the operation of the business does not mean the plaintiff has to pay the defendant the rental.

128. Under para 19 of the Franchise Agreement, parties did contemplate and make provisions in case of default. The default was not restricted to either the plaintiff or the defendant’s fault. It is the clear intention that in case of default the plaintiff franchisee shall pay any outstanding sum to the landlord.

129. I have already found that the defendant was in breach of an implied term of the Franchise Agreement, there is a situation of “default” and the plaintiff is liable to pay any outstanding sum to the landlord.

130. There is no dispute that the defendant took over the said café on 14.5.2005. The plaintiff operated the said café for one more week after its notice of rescission/termination. The plaintiff is liable to pay the rental from 1.5.2005– 13.5.2005 to the landlord.

131. The defendant’s evidence that it has to pay the rental for the said period before it was allowed by the MTR to enter the premises to operate the café was not challenged. I am satisfied that the defendant did make the payment on behalf of the plaintiff and is entitled to set off the sum of $47,035.69.

132. The total sum to be set off is $158,975.55 ($61,939.86 +$50,000 +$47,035.69). The plaintiff is therefore entitled to the Judgement sum of $ $1,548,632.45 ($1,707,608 – $158,975.55).

133. The plaintiff is entitled to interest on the above judgment sum at judgment rate.

134. In respect of the costs of the action, I will make a nisi costs order that costs to follow the event on party to party basis; i.e. costs of the plaintiff’s claim be to the plaintiff and costs of the counterclaim be to the defendant. Costs to be taxed if not agreed. Liberty to apply within 21 days of the Handing down of this Judgment.

135. The hearing before me was mainly on the plaintiff’s claim as the plaintiff admits most of the counterclaim. The issue of rental payment occupies a very small part of the actual trial. I therefore rule and apportion 5 % of the trial for the issue of counterclaim so as to assist the Taxing Master should there be a need for a taxation hearing.  This forms part of the nisi costs order.