MASTER NATION LTD v. CHUN FAT PROPERTY MANAGEMENT LTD AND ANOTHER

DCCJ 914/2018

[2018] HKDC 1064

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 914 OF 2018

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REASONS FOR DECISION

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1.  On 24 August 2018, I made the following orders in respect of the plaintiff’s Summons dated 4 July 2018:-

(1) a declaration that the plaintiff is entitled to rescind and has validly rescinded the Purported Tenancy Agreement (as defined below) and is absolved from its further performance;

(2) the 1^st defendant shall indemnify the plaintiff in the sum of HK$300,005.00, if necessary, being the stamp duty payable to the Inland Revenue Department in respect of the Purported Tenancy Agreement;

(3) Costs of these proceedings be paid by the 1^st defendant to the plaintiff, to be taxed if not agreed, save that the costs of preparing the affirmation of Go Yan Yan dated 28 June 2018 be disallowed.

2.  These are the reasons for making the said orders.

Background[1]

3.  At all material times, the plaintiff was and still is the registered owner of the Land situated at Lot No 588 in Demarcation District No 98 (“the Land”).

4.  To rid of the squatters occupying the Land, the plaintiff retained the services of the 1^st defendant in 2014 to procure the delivery of vacant possession from the squatters (“the Scope of the Retainer”).

5.  For this purpose, the plaintiff signed a power of attorney in favour of the 1^st defendant on 20 April 2014 (“the Power of Attorney”) authorising the 1^st defendant to handle the said matter on its behalf for 2 years (from 20 April 2014 to 19 April 2016).

6.  On 17 January 2018, the plaintiff received a letter from the Inland Revenue Department demanding payment of stamp duty in the sum of HK$300,005 in respect of a tenancy agreement concerning the Land dated 18 April 2016 purportedly entered into between the 1^st defendant for and on behalf of the plaintiff on the one part, and the 2^nd defendant on the other (“the Purported Tenancy Agreement”).

7.  The material terms of the Purported Tenancy Agreement are as follows:-

(1) The plaintiff let the Land to the 2^nd defendant at the yearly rent of HK$1 for 99 years from 18 April 2016 to 17 April 2115 following which the 2^nd defendant had the option to rent the Land for another 99 years at the yearly rent of HK$2;

(2) The scope rented includes the entire (sic) of the Land and the buildings thereon;

(3) The Land’s property tax, Rates, the Government tax and Government Rent are to be paid for by the plaintiff, while the water, electricity, telephone bills and other outgoings are to be paid for by the 2^nd defendant;

(4) This tenancy agreement contains two copies, one being the original and the other being the duplicate, the plaintiff and the 2^nd defendant each holds one copy as proof and payment of the stamp duty of the tenancy agreement is to be shared by the plaintiff and the 2^nd defendant equally.

8.  The Purported Tenancy Agreement was entered into one day before the end of the 2-year period during which the Power of Attorney was effective but without the knowledge and approval of the plaintiff.

9.  It is also relevant to note that the 2^nd defendant had never entered or sought to enter into possession of the Land after entering into the Purported Tenancy Agreement.

10.  In view of the above, the plaintiff commenced the present action against the defendants and filed the Statement of Claim.

11.  The 1^st defendant did not acknowledge service of the Statement of Claim, and did not file a defence.

12.  The 2^nd defendant filed a defence dated 23 April 2018.

13.  By a consent summons dated 12 June 2018, the 2^nd defendant agreed to withdraw the defence and undertake not to oppose the plaintiff’s application for default judgment against the 1^st and 2^nd defendants.

14.  On 24 August 2018, final judgment was entered in favour of the plaintiff against the 2^nd defendant for, inter alia, a declaration that the Purported Tenancy Agreement be set aside.

The Plaintiff’s Application

15.  By summons dated 4 July 2018, the plaintiff applied under O 19 r 7 for final judgment to be entered in favour of the plaintiff against the 1^st defendant for, inter alia:-

(a) a declaration that the Purported Tenancy Agreement is null and void and shall be set aside; or

(b) alternatively, a declaration that the plaintiff is entitled to rescind the Purported Tenancy Agreement and is absolved from further performance of it; and

(c) alternatively, the 1^st defendant do pay damages to the plaintiff in the sum of HK$300,005.00 together with interest at judgment rate from the date of judgment until full payment.

The Legal Principles

16.  Order 19 r 7(1) provides,

“Where the plaintiff makes against a defendant or defendants a claim of a description not mentioned in rules 2 to 5, then, if the defendant or all the defendants (where there is more than one) fails or fail to serve a defence on the plaintiff, the plaintiff may, after the expiration of the period fixed by or under these rules for service of the defence, apply to the Court for judgment, and on the hearing of the application the Court shall give such judgment as the plaintiff appears entitled to on his statement of claim.”

17.  It is trite that the court cannot receive any evidence when adjudicating an application under O 19 r 7, but must give judgment according to the pleadings alone (HKCP 2018, 19/7/11).  The statement of claim must show a case for the order the applicant seeks to obtain (HKCP 2018, 19/7/14).

18.  It is not the normal practice of the Court to make a declaration without a trial.  In Wallersteiner v Moir [1974] 1 WLR 991, Buckley LJ said, at p 1029:-

“It has always been my experience, and I believe it to be a practice of very long standing, that the court does not make declarations of right either on admissions or in default of pleading. A statement on this subject of respectable antiquity is to be found in Williams v Powell [1894] W.N. 141, where Kekewich J., whose views on the practice of the Chancery Division have always been regarded with much respect, said that a declaration by the court was a judicial act, and ought not to be made on admissions of the parties or on consent, but only if the court was satisfied by evidence. If declarations ought not to be made on admissions or by consent, a fortiori they should not be made in default of defence, and a fortissimo, if I may be allowed the expression, not where the declaration is that the defendant in default of defence has acted fraudulently. Where relief is to be granted without trial, whether on admission or by agreement or in default of pleading, and it is necessary to make clear upon what footing the relief is to be granted, the right course, in my opinion, is not to make a declaration but to state that the relief shall be upon such and such as footing without any declaration to the effect that that footing in fact reflects the legal situation.”

19.  In Patten v Burke Publishing Co. Ltd [1991] 1 WLR 541, Millett J observed, at p 544A, that in the absence of a judgment reached after hearing evidence, a declaration can be based only on unproved allegations and that the court ought not to declare as fact that which might not have proved to be such had facts been investigated.  Millett J, however, went on to point out that the rule referred to in Wallersteiner is only a rule of practice.  Although it should normally be followed, it should only be followed when the plaintiff can obtain the fullest justice to which he is entitled without the declaration he seeks. (see also Lam Shing Shou v Lam Hon Man (unrep, HCA 361/2001, 15 January 2002, at paragraphs 11 to 14).

20.  Where declaratory relief is sought, the court will scrutinize the application for default judgment carefully and does not hastily grant the relief sought.  The court expects maximum assistance to be provided in order for the relief to be granted.  However straightforward this kind of applications may seem, the court should not be expected to deal with the matter on a do-it-yourself basis and rubber-stamp the uncontested application without further ado.  The declaratory relief to be granted should not be in terms wider than what the plaintiff is entitled to and what is necessary to do justice to him (Chau Yan Chi Catherine v The Incorporated Owners of Fung Wah Factorial Building, unrep, DCCJ1459/2014, 22 July 2014, at paragraph 14, HKCP 2018, 19/7/20).

Analysis

21.  Based on the documents before me, I accept that the plaintiff has duly served the relevant documents, including the amended writ of summons and the Statement of Claim to the 1^st defendant.  

22.  It remains for me to consider whether the Statement of Claim supports the plaintiff’s claims.

23.  During the hearing, Mr Chiu, counsel for the plaintiff, confirmed that, for present purposes, he would rely, in particular, on the cause of action of breach of fiduciary duty on the part of the 1^st defendant.

24.  The plaintiff’s pleaded case is as follows.

25.  As the representative and agent of the plaintiff who was authorized to handle the squatter problem as stated above, the 1^st defendant owed the plaintiff, inter alia, the following fiduciary duties:-

(1) To only exercise his powers (pursuant to the Power of Attorney) for the purposes for which they were conferred, and to act in accordance with the Scope of the Retainer;

(2) To act in good faith and in the best interest of the plaintiff;

(3) Not to act in any way that his interest had or may directly or indirectly conflict with the interest of the plaintiff;

(4) To follow the plaintiff’s instructions; and

(5) Not to enter into any agreements (on unconscionable terms or otherwise) purportedly for and on behalf of the plaintiff without the plaintiff’s consent.[2]

26.  By entering into the Purported Tenancy Agreement with the 2^nd defendant, the 1^st defendant was in breach of his fiduciary duty[3].

27.  I am satisfied that, for one or more of the following reasons, the averments in the Statement of Claim supports the plaintiff’s claims.

28.  First, the Land was let at an extraordinarily low rent and for an exceptionally long period, namely, 99 years at $99 and for another 99 years at $198.  It is to be contrasted with the fact that the plaintiff purchased the Land in March 2014 at the consideration of HK$7,683,984.[4]

29.  In the absence of a reasonable explanation, a sale at a gross undervalue is some evidence on which lack of good faith or bad faith may be inferred (Menno Leedert Vos v Global Fair Industrial Ltd & ors, unrep, HCA 4200/1995, 1 December 2009).

30.  The present case is a classic case that, in the absence of a reasonable explanation, the Purported Tenancy Agreement must manifestly have been entered into in bad faith.

31.  Secondly, the fact that the 1^st defendant did not inform the plaintiff of the existence of the Purported Tenancy Agreement and that the 2^nd defendant had not obtained possession of the Land further show that both the 1^st and the 2^nd defendant had knowledge about the impropriety in respect of the Purported Tenancy Agreement.

32.  A principal may rescind a transaction which was entered into by his fiduciary in breach of the fiduciary conflict principle (Snell’s Equity, 33^rd Ed, at 7-053).

33.  I am satisfied that it is appropriate to allow the plaintiff to rescind the Purported Tenancy Agreement.  It is just and equitable to grant the relief by reason of the matters stated above, particularly when the 2^nd defendant is also supportive of the present application.

34.  It is plain that the plaintiff cannot obtain the fullest justice to which he is entitled without the declaration he seeks, as otherwise, he would have to bear the costs of the stamp duty.

35.  In respect of the damages sought, I am only minded to grant an indemnity, since in all likelihood the plaintiff will be relieved from paying the stamp duty pursuant to the declaration by this court.

Costs

36.  Costs should follow the event, save that the costs of preparing the supporting affirmation will be disallowed, as it is not necessary to prove the plaintiff’s case by evidence (HKCP 2018, 19/7/11).  I have notrelied on any of the evidence stated or exhibited in the supporting affirmation for the purpose of rendering my decision.

37.  I would like to thank Mr Chiu for his assistance given to the court.