WHARF REALTY LTD v. ABEBI LIMITED t/a "ARMANI JUNIOR"

HCA 954/2020
& HCA 955/2020

[2022] HKCFI 2036

HCA 954/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 954 OF 2020

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HCA 955/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 955 OF 2020

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D E C I S I O N

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INTRODUCTION

1.  This is the hearing of the plaintiff’s summons filed on 5 January 2021 in each of the two actions.  In each case, the plaintiff applies for summary judgment and an order for striking out the defendant’s counterclaim. 

2.  These actions are for the recovery of arrears of rent and other charges for, and vacant possession of, two shop premises in Ocean Terminal, Harbour City, a well-known shopping mall in Tsim Sha Tsui.

3.  Wharf Realty Limited is the landlord of the shopping mall.  It is the plaintiff in both actions.

4.  The action in HCA 954/2020 concerns Shop OT G54 on the ground floor.  Abebi Limited trading as “Armani Junior” (“Abebi”) was the tenant under a tenancy agreement dated 21 November 2017.  It was for a three-year term from 14 November 2017 to 13 November 2020.  Abebi is the defendant in this action.

5.  The action in HCA 955/2020 concerns Shop OT G10 also on the ground floor.  AGB Legend Limited trading as “Abebi” (“AGB”) was the tenant under a tenancy agreement dated 10 January 2018.  It was for a three-year term from 1 March 2018 to 28 February 2021.  AGB is the defendant in this action.

6.  The two tenancy agreements contain essentially the same terms, save for the amounts for rental and other charges.  I shall refer to them collectively below as “the Tenancy Agreements”.  Abebi and AGB are referred to as “the defendants” and the two shop premises “the Premises” or “the Shops”.

7.  The plaintiff’s case is straightforward.  Since December 2019, the defendants started defaulting on the payment of rental and other charges under the Tenancy Agreements.  In June 2020, it commenced the two actions to recover the arrears.  In each statement of claim, the plaintiff contends that the defendant has wrongfully repudiated the Tenancy Agreement and by the issue of the writ, the plaintiff accepts the repudiation.  It therefore also seeks vacant possession of the Premises.

8.  After the commencement of the actions, the defendants made some payments.  The amounts are not in dispute.  The plaintiff accepted the payments without prejudice to its rights to recover the full balance.  Furthermore, the defendants delivered vacant possession of the Premises on the scheduled end dates under the Tenancy Agreements, namely 13 November 2020 and 28 February 2021 respectively. 

9.  In the circumstances, the plaintiff seeks final judgment for the sum of $2,447,319.82 (in HCA 954/2020) and the sum of $6,794,343,38 (in HCA 955/2020).  The sums represent the amounts of indebtedness due as at the date when the plaintiff took out the summary judgment applications.  In each action, the plaintiff also seeks interests and costs in accordance with the terms of the Tenancy Agreements.

10.  The defendants contend that this is not a suitable case for summary judgment.  They raise two defences. 

11.  First, the frustration defence.  It is contended that the Tenancy Agreements have been frustrated at some point between July 2019 and July 2020 when Hong Kong experienced, first, widespread social unrest triggered by the government’s attempt to pass the Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation (Amendment) Bill 2019 and, subsequently, serious disruptions to travel and business activities brought on by the outbreak of the COVID-19 pandemic.  As tenants of Ocean Terminal, the defendants depended heavily on mainland Chinese tourists and overseas tourists.  They were deeply affected by the drastic drop in the number of these tourists.  Hence the defendants should be relieved from the Tenancy Agreements.

12.  Second, the abatement of rent defence.  The defendants contend that the contractual clauses providing for abatement of rent in the Tenancy Agreements have been triggered on the same facts.  The Premises were so destroyed or damaged by the social unrest and the pandemic that they were rendered wholly unfit for use and occupation.  The defendants say that they are entitled to at least 50% in rent abatement. 

13.  On the strength of the two defences, the defendants say that they should be given unconditional leave to defend.

14.  In addition, the defendants raise two counterclaims, relying on the quiet enjoyment clause in the Tenancy Agreements and the landlord’s obligation not to derogate from its grant.  (The amended defence and counterclaim contains a third counterclaim of unjust enrichment. Mr Bernard Man, SC, appearing with Mr John Cheung for the defendants, confirmed in the skeleton submissions that the defendants would no longer pursue this counterclaim.)

15.  The defendants contend that their two counterclaims are plausible and bona fide counterclaims which may extinguish (and possibly exceed) the plaintiff’s claim.  They should not be struck out.  Further, they give rise to an arguable defence of set-off.  For these reasons, the defendants should be given unconditional leave to defend.

THE PLAINTIFF’S CASE

16.  The plaintiff’s case is simple and straightforward.  It is supported by the affirmation evidence of Ms Veronica Chan and Mr Cheng Wai Ki.  They are staff members of a group company of the plaintiff, having the responsibility over the leasing and management of Ocean Terminal.

17.  The Tenancy Agreement for Abebi was dated 21 November 2017 and provided for the following:

(1)  The duration of the tenancy was for three years from 14 November 2017 to 13 November 2020.

(2)  The monthly rent was $227,472 (for the period from 14 November 2019 to 13 November 2020).  An additional sum, which was calculated by reference to the gross receipts of the tenant for the month if they exceeded a certain threshold, was also payable as rent (“the additional rent”).

(3)  In addition to the monthly rent, the tenant covenanted to pay air-conditioning charge, service charge and promotional charge without deduction or set off in advance on the first day of each calendar month.

(4)  The tenant was to pay government rent and rates in the month immediately preceding any quarter.  The plaintiff shall be entitled to treat non-payment of any amount as non-payment of rent.

(5)  The tenant paid a deposit of $784,827.60.

(6)  The Premises were to be used for “the exclusive retail sale and display of high quality imported children’s wear and related accessories using and bearing only the name, logo, design and style of “Armani Junior” but no others”.

(7)  The plaintiff shall have the right to charge interest at 3% per annum over the best lending rate from time to time of The Hongkong and Shanghai Banking Corporation Limited on any payments to be made if they were in arrears for more than 14 days.

(8)  The plaintiff shall be entitled to recover from the tenant as a debt all solicitors’ and/or counsel’s fees (on a solicitor and own client basis) and court fees incurred for the purpose of recovering any rent in arrears and other unpaid fees.

(9)  The deposit paid by the tenant shall be retained by the plaintiff throughout the term free of any interest, and in the event of any breach or non-observance or non-performance by the tenant of any of the agreements, conditions or stipulations, the plaintiff shall be entitled to terminate the Tenancy Agreement and forfeit the deposit.

18.  The Tenancy Agreement for AGB was dated 10 January 2018 and provided for the following:

(1)  The duration of the tenancy was for three years from 1 March 2018 to 28 February 2021.

(2)  The monthly rent was $464,000 (for the period from 1 March 2019 to 28 February 2020) and $480,000 (for the period from 1 March 2020 to 28 February 2021).  The additional rent, if any, was also payable.

(3)  The tenant paid a deposit of $1,654,080.

(4)  The Premises were to be used for “the retail sale and display of high quality imported children’s wear and related accessories under the shop name and style of “Abebi””.

(5)  The Tenancy Agreement also contained the terms set out in sub-paras (3), (4), (7) to (9) of the preceding paragraph.

19.  Since December 2019, the defendants started defaulting on the payment of rent and other charges due under the Tenancy Agreements.  As at 12 June 2020, the date of the writ, Abebi was indebted to the plaintiff in excess of $1.6 million and AGB in excess of $3.4 million.

20.  After the issue of the writ, the defendants made some partial payments.

21.  Abebi paid the following sums:

(1)  rental payment (but not the ancillary charges) for January 2020, by wire transfer dated 6 August 2020;

(2)  $166,177.59 by cheque dated 19 June 2020; and

(3)  $293,843.15 by cheque dated 1 July 2020.

22.  AGB paid the following sums:

(1)  rental payment (but not the ancillary charges) for January 2020, by wire transfer dated 6 August 2020;

(2)  $111,472.07 by cheque dated 19 June 2020; and

(3)  $620,520 by cheque dated 1 July 2020.

23.  In correspondence, the plaintiff stated that these sums were made purportedly in accordance with the defendants’ own supposed calculations, and were accepted by the plaintiff entirely without prejudice to its rights to recover the full balance of the outstanding rent, charges and interest, and without acceptance of the defendants’ alleged right to abatement of rent or any other defences.

24.  The plaintiff now asks for final judgment to be entered for the arrears in rent and charges against each of the defendants due as at 5 January 2021, ie the date of the summonses and, further, interest accruing from that date until judgment at the contractual rate, together with costs assessed on the basis provided for in the Tenancy Agreements.  In exercise of its contractual right, the plaintiff forfeits the deposits upon the defendants’ breach.  Hence the deposits shall not be applied to set off part of the indebtedness.

THE DEFENDANTS’ CASE

25.  The defendants contend that they should be given unconditional leave to defend, and the application to strike out the counterclaims should be dismissed. 

26.  First, there is plainly an arguable case that the very foundation of the Tenancy Agreements has been so radically and fundamentally altered by the supervening events of the social unrest and the COVID-19 pandemic, happening consecutively from 2019 to 2021, that it would be unjust to hold the parties to their obligations.  That is the defence of frustration. 

27.  If the Tenancy Agreements were not frustrated, as an alternative defence, on the same factual premise, the abatement of rent clauses in the Tenancy Agreements have been engaged.  It is therefore arguable that the defendants are not liable for the sums now claimed. 

28.  Equally arguable, the defendants contend, are their counterclaims for the plaintiff’s breach of its obligation to give quiet enjoyment of the Premises and its breach of the implied term that it would not derogate from the grant and would not frustrate the rights granted by the Tenancy Agreements.

The defendants’ factual premise

29.  The factual premise running through the defendants’ case is the extreme impact caused by the social unrest and the COVID-19 pandemic on the businesses which they carried on at the Premises.  The defendants have filed opposing affirmations made by Mr Gordon Butt, their founder and chief executive officer.  In addition to making observations on how the two events had seriously disrupted business activities in Hong Kong in general, Mr Butt made a number of specific allegations against the plaintiff in its management of Harbour City.  He complained that the plaintiff had mishandled the protests which took place in the vicinity.  I set out his observations and allegations below.

30.  Mr Butt highlighted that in the months of social unrest, protests took place in the vicinity of Ocean Terminal, including Canton Road.  Flights to Hong Kong were cancelled after protestors occupied the airport terminal for days.  This caused a direct loss of tourists and shoppers frequenting the shopping mall, and hence a drastic loss of sale revenues to the defendants.  Mr Butt emphasised that the defendants sold high-end children fashion at the Premises.  Parents were reluctant to shop there with their children given the danger involved.

31.  Amidst the protests that took place at Canton Road in early August 2019, the plaintiff erected a notice at the entrance of the mall saying, among other things, “除非有罪案發生，警察請勿進入” (“the Notice”). 

32.  Mr Butt alleged that the Notice attracted scores of rioters to the mall seeking refuge from the police.  So instead of protecting tenants and shoppers against the threat posed by the protests and riots taking place outside the mall, the Notice, said Mr Butt, further served to frighten and dissuade locals and visitors from visiting due to safety concerns. 

33.  The plaintiff also instructed retailers to close their shops earlier and/or to shorten their business hours.  

34.  The Chinese national flag was twice removed from a flagpole erected at the Tsim Sha Tsui Ferry Pier and thrown into the sea.  This prompted the Global Times, a state-run media outlet, to condemn Harbour City for “twice [failing] to effectively protect the national flag” in an article dated 8 August 2019.  The incident led to a public outcry from mainland tourists.  There was a comment on the Chinese social media that they would collectively boycott Harbour City and never return. 

35.  The shuttle bus service between the High Speed Railway Station and Harbour City was suspended on seven occasions between July 2019 and December 2019 due to blockage of Canton Road and “public activity in Tsimshatsui”. 

36.  On a number of occasions between August 2019 and December 2019, the plaintiff closed various access points to Harbour City due to public order events. 

37.  The plaintiff called for emergency evacuation of Harbour City on 24 December 2019 due to the occurrence of public order events and entrance of riot police in the mall. 

38.  The intense civil unrest was succeeded by the COVID-19 pandemic. 

39.  Since around February 2020, the mainland government implemented travel restrictions on their nationals, whilst the Hong Kong government likewise imposed similar restrictions and requirements against all visitors, including those from the mainland.  International travel was essentially paralysed, resulting in a 93.6% drop in total visitors to Hong Kong in 2020 as compared to 2019. 

40.  The operations of Ocean Terminal at Harbour City have completely halted.  The loss of cruise passengers was especially damaging to the defendants, since these passengers were typically upscale spenders who represented a key target demographic of the Shops. 

41.  Tourists aside, locals were actively discouraged from leaving their home unless strictly necessary. The authorities ordered schools to be closed for prolonged periods, limiting outings for children. This had an adverse impact on the defendants’ children’s wear businesses. 

42.  The civil unrest and the COVID-19 outbreak caused a drastic reduction in the number of foot traffic and the number of mainland visitors to Hong Kong.  This resulted in a dramatic plummet of 91.8% in the number of foot traffic from February 2020 to November 2020, and a similar plunge of 90.4% in the number of overnight visitors from the mainland.

43.  Tourists from the mainland constituted around 80 to 90% of spending in the Shops.  There was a drastic drop in sales in the defendants’ business:

(1)  From August 2019 to January 2020, the business suffered a drop of 61.6% as compared to the equivalent period in the previous year.

(2)  This worsened to a staggering 90.7% drop in sales in the period from February 2020 to November 2020 as compared to the equivalent period in 2018. 

44.  The defendants contend that the impact of the social unrest and the pandemic on the commercial retail activities in Hong Kong were wholly unforeseeable, unprecedented, and devastating.

Frustration

45.  At the hearing, counsel referred me to a number of well-known authorities on frustration, including Krell v Henry [1903] 2 KB 740, Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, and, more recently, Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] 2 Lloyd’s Rep 517. 

46.  Further, the plaintiff relied on a number of recent Hong Kong decisions, including The Centre (76) Ltd v Victory Serviced Office (HK) Ltd [2020] HKCFI 2881 and Sunbroad Holdings Ltd v A80 Paris HK Ltd [2021] HKCFI 1422.  It was held in these two decisions that neither the social unrest nor the COVID-19 pandemic constituted valid grounds for frustration of the tenancy agreements in question.

47.  On the other hand, the defendants relied on the decision in UMNV 205-207 Newbury, LLC v Caffé Nero Americas Inc (Massachusetts Superior Court, 8 February 2021, 2084CV01493-BLS2).  It was held there that the obligation of the tenant, Caffé Nero, to pay rent was discharged during a period when it temporarily closed its café after the government banned restaurants from offering on-premise consumption of food and beverages in light of the COVID-19 situation.

48.  I shall discuss the legal principles on frustration in the “Discussion” section below.

49.  On the basis of the defendants’ factual premise, it is submitted that the Tenancy Agreements have been frustrated at some point between July 2019 and July 2020, with reasoning as follows. 

50.  The widespread social unrest in 2019 which was immediately succeeded by the COVID-19 outbreak in 2020 were extraordinary events.  They were completely unprecedented in Hong Kong’s recent history. Neither event was contemplated by the parties when they entered into the Tenancy Agreements.  Even the most prescient of commercial parties would not have predicted these events.

51.  The common commercial purpose of the Tenancy Agreements was that the Premises would be operated as retail stores selling high quality children’s clothing and accessories.  The purpose is apparent from the express terms and the surrounding circumstances.  The Tenancy Agreements contained clauses stipulating the user restrictions and requiring the plaintiff to maintain Harbour City as a first-class complex.  Furthermore, Harbour City is located in one of the busiest shopping and business districts in Hong Kong and houses one of the two international cruise terminals in the city. 

52.  In light of the express contractual terms and the location of the Premises, it was plainly envisaged by both parties that a major source of the defendants’ customers would be tourists, particularly those from the mainland.  The purpose would be thwarted if the Premises were no longer frequented by these high-spending customers.  Their continued presence formed the fulcrum of the Tenancy Agreements.

53.  Owing to the social unrest and the pandemic, the defendants’ businesses had suffered a drastic drop in its major customer base and sales revenue.

54.  In the circumstances, the defendants contend that the events in 2019 and 2020 have rendered it commercially impossible to fulfil the Tenancy Agreements, and transformed the obligation to perform into a radically different obligation from that undertaken at the moment when they were entered into.  More particularly, it is arguable that the stringent travel restrictions and quarantine requirements introduced by the government as well as the closure of the Ocean Terminal defeated the purpose of the Tenancy Agreements.

Abatement of rent

55.  Further or alternatively, the defendants argue that the abatement of rent clause has been triggered: see Section VII, clause 1(1) of the Tenancy Agreements.  They rely on the same factual premise as under the defence of frustration.

56.  The clause read:

“If… the said building or the said premises or any part thereof shall be destroyed or so damaged by fire typhoon Act of God Force Majeure or other cause so as to be rendered unfit for use and occupation… then provided the insurance on the said building shall not be vitiated by the act neglect default or omission of the Tenant the rent or a part thereof proportionate to the damage sustained shall cease to be payable until the said premises shall have been restored or reinstated.”

57.  The abatement clause was designed to relieve the tenant of the duty to pay rent where the premises are unfit for use and occupation by reason of a supervening or unexpected event which is beyond either party’s control. 

58.  The rent payable by the defendants was fundamentally premised on there being a constant influx of tourists.  Because of the catastrophic drop in the number of mainland and overseas tourists frequenting Harbour City, the Premises were no longer “fit for use and occupation” because the defendants were no longer able to operate commercially viable retail stores for high quality children’s wear and accessories there. 

59.  Applying a purposive approach, the words “destroyed or so damaged” need not be confined to physical destruction or damaged.  One must take into account the broader intent and purpose behind the clause.  Here, the Premises were “destroyed” or “damaged” “so as to be rendered unfit for use and occupation” by reason of the two consecutive supervening events. They were no less “damaged” than a case where, eg, a typhoon had caused severe flooding to the Premises.  The defendants say that they were as good as destroyed (or at least severely damaged) by the extreme events.

60.  The defendants’ stance is that they are entitled to at least 50% of rent abatement.  Since there is no mechanism for the calculation of the abatement, to the extent that the plaintiff disputes the appropriate amount, the issue will have to be tried, with the assistance of expert evidence of surveyors.

Quiet enjoyment

61.  Independent of the defences of frustration and abatement of rent, the defendants raise two counterclaims, which they say are plausible and may extinguish (and possibly exceed) the plaintiff’s claim.

62.  The defendants first rely on the plaintiff’s covenant to give quiet enjoyment of the Premises under Clause IV, clause 1 of the Tenancy Agreements, and say that there has been a breach.

63.  The clause read:

“The Landlord hereby agrees with the Tenant as follows: … upon the Tenant paying the rent on the days and in the manner herein provided for payment of the same and observing and performing the agreements stipulations and conditions herein contained and on the Tenant’s part to be observed and performed shall peaceably hold and enjoy the said premises during the said term without any interruption by the Landlord or any person lawfully claiming under or in trust for the Landlord.”

64.  The defendants rely on essentially the same factual matters in support of the frustration defence, including the posting of the Notice, the suspension of the shuttle bus service, the closure of various access points to Harbour City and the emergency evacuation of Harbour City on 24 December 2019.  They contend that the plaintiff’s actions constituted a blatant breach of the quiet enjoyment covenant.  This is because they had the effect of encouraging the presence of violent protestors in or around the shopping mall (by the posting of the Notice), and cutting off access to the Premises.  All these seriously interrupted the defendants’ enjoyment of the Premises qua shop owners targeting mainland customers.

65.  The defendants say that there had been substantial interference with their ability to use the Premises.  In any event, whether an interference is sufficiently “substantial” or not is a matter of degree and is fact-specific.   Any dispute in this regard must be a matter which ought to go to trial and ought not to be resolved in a summary manner.

66.  It is therefore arguable that the defendants are entitled to claim damages for loss of profits caused by the plaintiff’s breach of the quiet enjoyment covenant.  Given the substantial decline in sales suffered by the defendants over 2019 and 2020, it is possible that the plaintiff’s entire claim would be extinguished by the defendants’ counterclaim.

67.  In the premises, the counterclaim ought not to be struck out and if it stays, the defendants should be granted unconditional leave to defend.

Derogation from grant

68.  The defendants make a further counterclaim alleging that the plaintiff was in breach of the implied obligation not to derogate from its grant.  The same factual premise and argument in support of the first counterclaim is relied upon.  In his submissions, Mr Man stated that there is little, if any, difference between the scope of the two covenants.  In essence, a man may not give with one hand and take away with the other: Southwark London Borough Council v Mills (No 2) [2001] 1 AC 1 at 23E-F; Rank Profit Industries Ltd v Secretary for Justice [2009] 1 HKLRD 194 at para 21.

69.  There is therefore no need to further elaborate the defendants’ case on this counterclaim.

LEGAL PRINCIPLES

70.  The principles governing applications for summary judgment and striking out are well-known.  They are not in dispute here. 

Summary judgment

71.  The plaintiff has to show that his case comes within Order 14 by affidavit verifying the facts on which the claim is based and stating that in the deponent’s belief there is no defence to that claim: Order 14, rule 2(1).

72.  Under Order 14, rule 3(1), the court may give judgment to the plaintiff unless the defendant satisfies the court that (1)there is an issue or question in dispute which ought to be tried, or (2) there ought for some other reason to be a trial of that claim or part. 

73.  Summary judgment should only be given in clear and obvious cases in which there are no serious material factual disputes, and if there is a legal issue, then no more than a crisp legal question.

74.  The defendant may show cause by raising technical objections or on the merits, eg that he has a good defence to the claim, that a difficult point of law is involved, or a dispute as to the facts which ought to be tried, or any other circumstances showing reasonable grounds for a bona fide defence.  See, eg, recently, The Centre (76) at para 9; Hong Kong Civil Procedure 2022 at paras 14/4/1, 14/4/8 and 14/4/9. 

75.  As to set-off or counterclaim:

(1)  Where the defendant sets up a bona fide counterclaim arising out of the same subject-matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim. 

(2)  Where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim: Order 14, rule 3(2); Fu Tai Industrial Ltd v Decapio International Industrial Ltd [2000] 3 HKC 259.

Striking out

76.  It is only in plain and obvious cases that the court should exercise its summary power to strike out.  There should be no trial upon affidavit, and disputed facts should be taken in favour of the party sought to be struck out.  Where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made.  Nor should the court decide difficult points of law in striking out proceedings. 

77.  The claim must be obviously unsustainable, and it must be impossible (not just improbable) for the claim to succeed.  If on a careful reading of the statement of claim or counterclaim, it can be seen that there is no cause of action, a court can, and probably will, order it to be struck out.  See Hong Kong Civil Procedure 2022 at para 18/19/4. 

DISCUSSION

78.  Generally speaking, at the interlocutory stage, the court is not in a position to resolve serious factual disputes between the parties.  For the purpose of the present application, I shall proceed on the assumption that the factual allegations made by the defendants are true. 

79.  That would include the general observations made by Mr Butt on the impact which the social unrest and the pandemic had had on Hong Kong in general, including the disruption to business activities and the onerous travel restrictions imposed by the government, resulting in a drastic decline in the number of tourists visiting Hong Kong. 

80.  The main theme running through the defendants’ submissions is that these two events, whether viewed alone or cumulatively, are extraordinary and unprecedented events, and they were totally beyond the contemplation of the parties when they entered into the Tenancy Agreements. 

81.  For present purposes, I do not take issue with that description of the events.  In fact, in his oral submissions, Mr Victor Dawes, SC, appearing with Ms Sheena Wong for the plaintiff, indicated that he would also accept that those events were unprecedented and beyond the contemplation of the parties.

82.  Separately, in respect of the specific allegations which the defendants made in relation to the extent of the decline in the number of tourists visiting Hong Kong, the drop in the sales revenues at the Shops, and the specific actions taken by the plaintiff in the management of Harbour City and the purported effect, similarly, for present purposes, I shall proceed on the assumption that they are true.

83.  On these factual bases, I now turn to address each of the defences and counterclaims.

Frustration

84.  The general principles governing frustration are well-established and are not in dispute between the parties.  They have been authoritatively laid down and explained by the House of Lords in Davis Contractors and National Carrier and, more recently, explained in The Sea Angel.  As is often the case, the difficulty lies with the application of the general principles to the specific facts of the case in hand.

85.  In National Carriers, Lord Simon stated the principle, at 700F-G:

“Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

86.  It was confirmed in the same case that the doctrine of frustration is, in principle, applicable to leases.

87.  It is important to bear in mind the rationale underlying the doctrine.  In Davis Contractors, Lord Radcliffe explained, at 729:

“… frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”

88.  Lord Radcliffe’s way of explaining the doctrine – “It was not this that I promised to do” – was preferred and endorsed by Lord Hailsham in National Carrier (at 688B-C).  In the same case, Lord Roskill considered that as “the most satisfactory explanation of the doctrine”.  His lordship further explained: there must have been by reason of some supervening event some such fundamental change of circumstances as to enable the court to say: “this was not the bargain which these parties made and their bargain must be treated as at an end” (717D-F).

89.  Where the doctrine is successfully invoked, the contract is brought to an end by operation of law.  This is because when the fundamental nature of the outstanding rights and obligations have become radically different from what was contemplated under the contract by reason of the supervening event, the law takes the view that the contract simply does not apply to the new situation.

90.  In Davis Contractors, Lord Reid said, at 721:

“In British Movietonews Ltd. v. London and District Cinemas Ltd. [[1952] AC 166, 185] Viscount Simon said: “If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point – not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.” … On this view there is no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with the new situation if they had foreseen it.  The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.” (underline added)

91.  In this situation, the law releases the parties from their contract as it would be unjust to hold them to its literal terms after a significant change in circumstances: National Carriers, at 701C, per Lord Simon.

92.  It has been emphatically recognised in the case law that the doctrine of frustration has long been, and must be, kept within very narrow limits.  It is not to be lightly invoked as the dissolvent of a contract: Davis Contractors at 715, 727; Tsakiroglou at 115. 

93.  In The Sea Angel, Rix LJ explained, at para 111:

“In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked.”

94.  It has therefore been consistently stressed in the case law that hardship, inconvenience or material loss suffered by a party, of itself, is not sufficient to call into play the doctrine of frustration.  There needs to be something more.  There must be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for: Davis Contractors at 729, per Lord Radcliffe.

95.  This point is illustrated in Davis Contractors.  In that case, the contractors agreed to build 78 houses for a local authority for a fixed sum within a period of eight months.  Without fault of either party, adequate supplies of labour were not available and the work took 22 months to complete.  Viscount Simonds said, at 714 to 715:

“The contract was for completion of certain work in eight months: the contractors made their tender in the expectation that they would be able to do the work in the time and made a price accordingly. It may then be said that they made the contract on the “basis” or on the “footing” that their expectations would be fulfilled. Nor presumably were the expectations, or at least the hopes, of the respondents in any way different. Let it be said, then, of them, too, that they contracted upon the same basis or footing. But it by no means follows that disappointed expectations lead to frustrated contracts.” (underline added)

96.  And, later, his lordship said, at 716:

“But I do emphatically say that it cannot, in the light of later authority, be used to support the proposition that where, without the default of either party, there has been an unexpected turn of events, which renders the contract more onerous than the parties had contemplated, that is by itself a ground for relieving a party of the obligation he has undertaken.”

97.  The fundamental question to ask remains to be that whether by reason of the supervening event, the contract has become a totally different one in character from anything contemplated in the contract such that the contract does not apply to the new situation.   In Davis Contractors, the House of Lords held that that was not what happened in that case. The builders’ job became more onerous but it did not become a job of a different kind from that contemplated in the contract (at 724, 729, 734).

98.  The importance of identifying that “something more” which goes beyond mere onerousness was reiterated in The Sea Angel, at para 111:

“that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”

99.  Having in mind the juridical basis of the doctrine, as explained in Davis Contractors and National Carriers, it is clear that the court’s task is not to ascertain how the parties or any reasonable persons in their shoes would have dealt with the supervening event in the contract if they had foreseen it when they entered into the contract. The task is instead to apply the well-known rules of construction and ascertain the true nature and scope of the contract (or, in Lord Roskill’s words, what bargain the parties had made), and then ask whether the contract applies to or covers the new situation brought about by the supervening event, applying the “radically different” test.  And if it does not, the court steps in and declares that the contract is frustrated and the parties are from that point onwards relieved from its terms.

100.  When undertaking this task, what should be the court’s approach?

101.  In David Contractors, Lord Radcliffe appeared to treat it as a matter of general impression, while bearing in mind the general principles:

“In the nature of things there is often no room for any elaborate inquiry. The court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things.” (at 729)

102.  In The Sea Angel, Rix LJ advocated for a multi-factorial approach, at para 111:

“In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”

103.  Lastly, the matter may also be tested in terms of risk allocation. 

104.  In National Carriers, Lord Roskill said, at 712E-G:

“The doctrine is principally concerned with the incidence of risk – who must take the risk of the happening of a particular event especially when the parties have not made any or any sufficient provision for the happening of that event? When the doctrine is successfully invoked it is because in the event which has happened the law imposes a solution, casting the incidence of that risk on one party or the other as the circumstances of the particular case may require, having regard to the express provisions of the contract into which the parties have entered.”

105.  In The Sea Angel, Rix LJ explained that contracts are about the allocation of risk.  The court should consider the consequence of its decision and test it against the demands of justice.  It involves recognising that the frustration of a contract may well mean that the contractual allocation of risk is reversed: paras 111 to 112.

106.  In this judgment, I do not consider it necessary to go through all the authorities cited by parties on how the doctrine of frustration has been applied in the past.  It is ultimately a fact-sensitive exercise and the conclusion turns on the construction of the contract in question, the effect of the supervening event and a host of varying factors in each case. 

107.  With that in mind, I now turn to the defence of frustration as formulated by the defendants in this case.

108.  Here, it is indisputable that the widespread social unrest and protests happening in Hong Kong in 2019 and the outbreak of the COVID-19 pandemic were extraordinary events.  They were plainly beyond the contemplation of the parties when they entered into the Tenancy Agreements. There were as a result serious disruptions to business activities of an unprecedented level felt by every sector in Hong Kong. 

109.  I am prepared to accept that the defendants’ businesses at the Shops were hard hit.  As to the extent of the impact, I will proceed on the assumed facts that there was a drastic drop in the sales revenues at the Shops, namely a drop of about 60% caused by the social unrest and a drop of about 90% caused by the pandemic, in each case when compared with the normal times.  On this assumed basis, there is no doubt that the two events had an extreme negative impact on the defendants’ businesses.

110.  I am also prepared to accept the defendants’ contention that the objective commercial purpose of the Tenancy Agreements was that the Premises were let to the defendants to run retail stores selling high-end children’s clothing.  Furthermore, because of the location of Harbour City and its general image, it was the commercial expectation of both parties that a major source of the defendants’ customers would be tourists, particularly those from the mainland.  I would also proceed on the basis, as suggested by the defendants, that the rents were pitched at the level agreed in the Tenancy Agreements because, among other things, the parties were expecting that there would be a regular influx of tourists. 

111.  In the circumstances, it can be said that the expectation shared by both sides did not materialise when the two events struck consecutively from mid-2019 onwards.  The vast majority of the expected mainland (and overseas) customers were no longer coming to shop at the Premises.

112.  Here, the crux of the matter is whether the “radically different” test is met.  In my view, it is not.  I do not agree with the contention that the events had rendered it impossible for the parties to fulfil the Tenancy Agreements, or that their obligations had been transformed into something radically different. 

113.  As explained above, my task is, first, to ascertain the true nature and scope of the Tenancy Agreements, or, putting it slightly differently, the bargain which the parties had reached in those agreements.  This is a matter of contractual construction. 

114.  Under the Tenancy Agreements, the primary obligation of the plaintiff was to let the Premises and the primary obligation of the defendants was to operate high-end children clothing shops there and pay rent and other charges. 

115.  On the (accepted and assumed) factual bases outlined above, it is true that the parties were both expecting that there would be a regular inflow of mainland (and overseas) tourists visiting the Shops during the terms of the tenancies. 

116.  However, generally speaking, in a retail tenancy agreement, I think it can be said that, as between the landlord and the tenant, the risk of an economic downturn or the retail market condition turning bad during the tenancy would generally be borne by the tenant.  This is because the rent had been fixed in the tenancy agreement (unless there is any special clause providing for adjustment of the rent in that event).  Whether the tenant’s business is suffering by reason of any economic downturn or not, he is still obliged to pay the contractual rent in full.  It is in this sense that the landlord is protected from the risk of a worsening retail market which occurs during the tenancy.

117.  In my view, this risk analysis applies to the Tenancy Agreements.  This incidence of risk was an implicit part of the bargain made between the plaintiff as landlord and the defendants as tenants.

118.  It is true that the parties shared common expectations that mainland and overseas tourists would be visiting the Shops in numbers which would be commensurate with the rents charged to and payable by the defendants.  But they were merely expectations, which the parties as businessmen held.  Clearly, the objective intention of the parties must be that whether these commercial expectations were met or not, both parties should be bound to the terms of the contract, and that it would be the defendants who would generally bear the risk of any economic downturn adversely affecting the businesses at the Shops.

119.  This is, in my view, the bargain which the parties had made under the Tenancy Agreements. 

120.  The next question is whether this bargain applies to the new situation caused by the two supervening events.  Did the two events radically change the nature of the rights and obligations of the parties?

121.  The new situation was that the businesses were much hard hit, and the defendants suffered grave hardship and losses in continuing to operate the Shops.  From the defendants’ perspective, they were obliged to pay the full contractual rent while there were only very few, and at times hardly any, customers coming to the Shops, contrary to the parties’ expectations.    It became extremely onerous for the defendants to continue the businesses.

122.  Nevertheless, notwithstanding this new situation, the hard fact remains that at all times the Premises were still there for the defendants to continue to operate the Shops.  As a matter of fact, the Shops remained open and the defendants remained in occupation until the end of the contractual terms of the tenancies.  In my view, the primary obligations of the parties had remained unaltered in nature or character, notwithstanding the occurrence of the social unrest and the pandemic and the resulting drastic drop in customers.  There was no significant change to the nature of those obligations as a result.   

123.  The unfulfilled expectation of there being a regular inflow of mainland customers did not by itself transform the fundamental nature of the contractual landlord and tenant relationship into something radically different from what the contract contemplated.  The objective fact is that the defendants remained capable of operating the retail shops at the Premises.  That was the purpose of the Tenancy Agreements.  I reject the contention that the purpose was unfulfilled by reason of the supervening events.

124.  The crux of the defendants’ argument, as I understand it, is that what they were facing was no ordinary drop in sales revenue.  The drop was catastrophic and was due to two truly unprecedented events.  However, the grave hardship suffered by the defendants did not lead to the frustration of the Tenancy Agreements.  As is made abundantly clear in the case law, that in itself is not sufficient.  Something more is needed before the court would conclude that there was a radical change in the nature of the thing undertaken.  That is lacking in the present case.  In my view, the Tenancy Agreements continued to cover the new situation and govern the relationship between the parties.

125.  Lastly, the matter should also be tested in terms of allocation of risks.   

126.  If the Tenancy Agreements are held to have been frustrated, it means that the plaintiff would not be entitled to receive rent under the Tenancy Agreements (from the time of the frustration) whereas the defendants could simply yield up possession and cut their losses.  The risk of adverse market conditions occurring during the tenor of the tenancy, including a drastic decline in customers, would therefore be shifted from the defendants to the plaintiff.  It does not seem to me that the law of frustration operates in this case to bring about such a reversal of the incidence of risk.   

127.  The present case can in fact be contrasted with the US decision in Caffé Nero, on which Mr Man placed some reliance in his submissions.  In that case, a lease was held to be frustrated in the midst of the COVID-19 pandemic.

128.  The landlord leased retail space to Caffé Nero on the condition that the latter could use the leased premises “solely” for “[t]he operation of a Caffé Nero themed café” and for no other purpose.  Caffé Nero was required under the lease to serve coffee and food “of first class quality” that customers could enjoy comfortably in indoor space.  In March 2020, the Governor barred Massachusetts restaurants from allowing “on-premises consumption of food or beverages”.  Caffé Nero could only offer take-out or delivery services.  As a result, it temporarily closed its Newbury Street café and stopped paying rent.  The landlord sought partial summary judgment for the unpaid rent. 

129.  The court held that the entire purpose of the lease was for Caffé Nero to use the leased space to serve coffee and food to customers who could sit and consume them on the premises.  This purpose was destroyed or frustrated when the Governor barred Caffé Nero from allowing customers to consume food or drink inside the leased premises.  It would be different if the lease had provided that Caffé Nero could use the leased premises for other purposes not barred by government order. 

130.  It followed that Caffé Nero’s continuing obligation to pay rent was discharged for the relevant period. 

131.  Mr Dawes argued that the case is of limited assistance to resolving the issue in the present case.  I agree.  First, it is not clear whether the doctrine of frustration in American jurisprudence shares the same juridical basis and applies in the same way as in Hong Kong. Secondly, as pointed out by Mr Dawes, a notable fact in that case was that the Governor made an order which barred Caffé Nero (and others) from offering on-premise consumption of food or drink.  This is clearly distinguishable from the present case where there was no government regulation or order barring the defendants from operating their businesses at the Premises.  For these reasons, I do not think I can derive much assistance from the US decision in adjudicating the present dispute. 

132.  If anything, the case highlights the prominent feature in the present case, which is that, unlike Caffé Nero, the defendants were capable of continuing to operate the Shops at the Premises even during the occurrence of the two supervening events.  While the expectations that there would be many customers frequenting the Shops failed, the purpose of the Tenancy Agreements remained fulfilled on the whole.

133.  To conclude, in my view, the defence of frustration is not an arguable defence. 

Abatement of rent

134.  I reject the defendants’ argument on the abatement of rent clause, as set out in paras 55 to 60 above.

135.  It is plain that on a proper construction, the words “destroyed” and “damaged” refer to destruction and damage in a physical sense.  This can be gathered from the use of the words “restored” and “reinstated” appearing in the later part of the same clause. 

136.  Mr Man argued that the broader intention behind the clause must be taken into account, namely that the rent payable was premised on there being a constant influx of tourists.  Hence the words “destroyed” or “damaged” must be construed to include the situation where such premise failed to materialise.

137.  In my view, there is nothing in the Tenancy Agreements or any surrounding circumstances which justify such a far-fetched interpretation. 

138.  The intention behind any tenancy agreement must be, first and foremost, that the premise is let to the tenant in such a physical state that it is fit for use and occupation by him.  That must apply to the Tenancy Agreements too.  The words used in the present abatement of rent clause are plain.  The purpose of the clause is clearly to give effect to that fundamental intention – if there is any adverse change to the physical state of the Premises rendering them unfit for use and occupation, then the tenant is to be relieved from paying rent in a way proportionate to the extent of the damage.

139.  To describe the Premises as “destroyed” or “damaged” when what was happening was that the customers were not coming in in the numbers which the defendants had been expecting is simply untenable.  I reject that contention entirely.

140.  In the present case, there is no suggestion by the defendants that the physical state of the Premises was such as to be unfit for use and occupation.  The abatement of rent clause is not triggered at all. The defence is not arguable.

Quiet enjoyment

141.  The law on the covenant to give quiet enjoyment is not in dispute. 

142.  Interference with quiet enjoyment requires some substantial interference with the ordinary and lawful enjoyment of the land by the tenant.  Temporary interference, temporary disturbance of enjoyment or temporary inconvenience that does not interfere with the title or possession of the tenant would generally not be a breach of the covenant: see, eg, The Wing On Properties and Securities Company Ltd v Create Wealth Development Ltd HCA 632/2004, 5 July 2005 at paras 12 to 13; Ridge Ltd v Golden Castle Ltd [2005] 3 HKC 592 at para 16; Chong Lap Fu George v Hydra Shipping Services Ltd [2009] 4 HKLRD 369 at para 16.

143.  I have set out in paras 31 to 37 above the actions of the plaintiff which the defendants have alleged to support the counterclaim.  I shall assume them to be true for present purposes. 

144.  It can readily be seen that those actions did not amount to any substantial interference with the defendants’ ability to use and enjoy the Premises in the way contemplated by the Tenancy Agreements.  For instance, the emergency evacuation of Harbour City only happened once for a short period in the evening of 24 December 2019.  The closure of some of the access points to Harbour City took place on 12 occasions but for a short period of time.  These closures were limited in scope and in time.

145.  Even assuming that the actions amounted to interference with the defendants’ use of the Premises, in the overall scheme of things and when the entirety of the lease terms is taken into account, they would hardly amount to anything substantial.  This is because the alleged interferences were all temporary or transient in nature.

146.  To conclude, the counterclaim based on quiet enjoyment is unsustainable and ought to be struck out.

Derogation from grant

147.  As stated by Mr Man in his submissions, there is not much difference between the covenant to give quiet enjoyment and the implied duty not to derogate from grant.  Furthermore, the counterclaim based on the latter duty arises from the same factual premise. 

148.  For the reasons stated above, I am of the view that the counterclaim based on derogation from grant is equally unsustainable. It ought to be struck out. 

Relief

149.  The defendants have failed to raise any arguable defence to the plaintiff’s claims or other triable issues.  Furthermore, as concluded above, both counterclaims should be struck out.  In the circumstances, the plaintiff should have judgment. 

150.  In each action, the plaintiff expressly stated in the statement of claim that by the issue of the writ, it accepted the defendant’s wrongful repudiation of the Tenancy Agreement.  Hence, in each case, the Tenancy Agreement came to an end on the date when the writ was issued.

151.  The rent and other charges which had become due under the Tenancy Agreements up to that date have accrued as a debt.  The plaintiff is plainly entitled to enter final judgment for those sums.

152.  By failing to deliver vacant possession after that date and continuing to remain in possession until 13 November 2020 and 28 February 2021 respectively, the defendants were in wrongful occupation of the Premises.  They are liable to pay mesne profits during the periods of wrongful occupation.  They are also liable to pay damages for their repudiatory breaches.  As a matter of principle, these sums are unliquidated in nature, and judgment should be entered on liability only, leaving damages to be assessed.

153.  In this regard, Mr Dawes submitted that the plaintiff should be entitled to recover any damages suffered as a result of the defendants’ breaches, including any rental and other charges for the remainder of the terms which the plaintiff would have received but for the breaches. Hence, in respect of the damages arising from after the Tenancy Agreements came to an end in June 2020, the plaintiff also asks for final judgment based on the contractual monthly rates.

154.  On the other hand, Mr Man submitted that the proper measure of the mesne profits would be the market rental value of the Premises for the periods of wrongful occupation.  He further submitted that, as a matter of common sense, such market rental value, ie from June 2020 to November 2020 and from June 2020 to February 2021 respectively, would likely be lower than the original contractual rates, which were agreed before the extraordinary events happened in 2019 and 2020.  Therefore, summary judgment cannot be granted for the sums claimed.

155.  In reply, Mr Dawes submitted that in most cases, the rent paid under any expired tenancy is strong evidence as to its open market value. 

156.  I agree with Mr Man that the mesne profits in this case should not be equated to the monthly rates provided for in the Tenancy Agreements, as they would not reflect the actual market rental for the relevant periods. 

157.  However, I am in agreement with Mr Dawes’ contention that final judgment should be granted by simply adopting the contractual rates when assessing the unliquidated damages in respect of the remainder of the tenancy terms.

158.  As a matter of analysis, the mesne profits form only part of the damages which the plaintiff is entitled to claim.  In addition to that, it should be remembered that it is entitled to seek compensation for losses caused by the defendants’ repudiatory breaches of the Tenancy Agreements in the first place.  It should be put back in the same position as if the breaches had not occurred. 

159.  In other words, in respect of the balance of the contractual terms after the termination of the Tenancy Agreements, the plaintiff should on the whole be entitled to claim the contractual sums as provided for in the agreements.   Analysed that way, there is no need to assess the mesne profits during that period.  This is because the defendants had stayed on at the Premises until the last day of the original tenancies and not beyond.  (If they had stayed on beyond the last day, they would be liable to pay the actual market rental as mesne profits for that further period of wrongful occupation, which would need to be assessed.)  Here, final judgment can be entered straightaway.  

160.  At the hearing, Mr Man confirmed that save for the issue of mesne profits, he took no other issue with the reliefs claimed by the plaintiff.  Accordingly, I allow them in full.

CONCLUSION

161.  In HCA 954/2020, I order that final judgment be entered for the sum of $2,447,319.82, with interest accruing on that sum at the rate of 3% above the best lending rate of The Hongkong and Shanghai Banking Corporation Limited from 5 January 2021 to the date of this judgment, and after that at judgment rate until payment.

162.  In HCA 955/2020, I order that final judgment be entered for the sum of $6,794,343.38, with interest accruing on that sum at the same rate and for the same period as above.

163.  I order that the counterclaim in each action be struck out.

164.  In each action, I make a costs order nisi that the plaintiff should have costs of the summons, the action and the counterclaim, including all reserved costs, to be taxed on a solicitor and own client basis if not agreed.  I grant a certificate for two counsel.