LEAD TRADERS LTD v. HONG KONG WO MEI TONG CATERING CO LTD

DCCJ 6039/2018

[2019] HKDC 1280

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 6039 OF 2018

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JUDGMENT

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A. INTRODUCTION

1.  The plaintiff brings this action to claim against the defendant for a sum of HK$450,000 pursuant to a provisional tenancy agreement (the “PTA”) entered into by the parties.  The plaintiff’s case is that the defendant failed and/or refused to sign the formal tenancy agreement such that the plaintiff is entitled to forfeit the preliminary deposit of HK$450,000.

2.  By Summons filed herein on 14 May 2019, the plaintiff applies for summary judgment under Order 14 rule 1 of the Rules of District Court (the “Application”). 

3.  Parties have filed their respective evidence in support and in opposition of the Application.  On or about 17 September 2019, the defendant’s solicitors, Messrs C T Chan & Co ceased to act for the defendant.

B.  BACKGROUND AND PARTIES’ RESPECTIVE CASE

4.  The plaintiff is the registered owner of a property known as (i) all that portion of the Ground Floor and Cockloft (excluding the Roof thereof) of No 170 Portland Street, Mongkok, Kowloon, erected and standing on ALL THAT piece or parcel of ground registered in the Land Registry as Sub-Section 1 of Section B of Kowloon Inland Lot No 1152 and (ii) all that portion of the Ground Floor and Cockloft (excluding the Roof thereof) of No 172 Portland Street, Mongkok, Kowloon erected and standing on ALL THAT piece or parcel of ground registered in the Land Registry as the Remaining Portion of Section B of Kowloon Inland Lot No 1152 (the “Property”).

5.  On 19 October 2018, the plaintiff and the defendant entered into the PTA by which the plaintiff agreed to lease and the defendant agreed to rent the Property at the monthly rent of HK$450,000 for a term of 3 years.

6.  There is no dispute that pursuant to the PTA, the defendant was required to pay a preliminary deposit of HK$450,000.  The defendant therefore issued a cheque of HK$450,000 in favour of the plaintiff’s solicitors (the “Cheque”) on the same date.

7.  According to Clause 6.1 of the PTA, the formal tenancy agreement must be signed on or before 1 November 2018.  Clause 8 of the PTA further provided that:-

(1) “If the Tenant [the defendant] fails to sign the formal tenancy agreement within the said date, the deposit will be forfeited and the Landlord [the plaintiff] shall the right to lease the Property to other parties”: Clause 8.2;

(2) “If the Landlord [the plaintiff] fails to sign the formal tenancy agreement within the said date, he should pay double of the deposit to the Tenant [the defendant], ie HK$900,000, as compensation”: Clause 8.3.

8.  The plaintiff via its solicitors had provided two drafts of the formal tenancy agreement (ie a draft formal tenancy agreement and a revised draft formal tenancy agreement) to the defendant’s then solicitors, Messrs Simon Ho & Co.  On 1 November 2018, the plaintiff’s solicitors enclosed a formal tenancy agreement based on the revised draft for the defendant to execute.  The plaintiff had already signed and sealed the same.

9.  The parties had apparently agreed to extend the deadline to execute the formal tenancy agreement from the original deadline of 1 November 2018 to 7 November 2018 and then to 14 November 2018.

10.  On 15 November 2018, the plaintiff’s solicitors put on record that as the defendant had failed to sign the formal tenancy agreement before the extended deadline ie 14 November 2018, the plaintiff would forfeit the preliminary deposit of HK$450,000.  On 26 November 2018, the plaintiff’s solicitors presented the Cheque for payment but the same was dishonoured and returned.

11.  On 31 December 2018, the plaintiff issued the writ of summons with a statement of claim.  The same was amended on 16 January 2019.

12.  On 8 March 2019, the defendant filed their Amended Defence and Counterclaim.  Essentially, the defendant’s case is that they did not execute the formal tenancy agreement because the plaintiff unreasonably insisted on terms which were inconsistent with or more onerous than those contained in the PTA.  Accordingly, it was the plaintiff who was in breach of the PTA and the defendant is entitled to the compensation of HK$900,000.

13.  The defendant further alleges that:-

(1) The description of the Property in the PTA is different from that of the Amended Statement of Claim in that the former does not refer to “No. 171 Portland Street” and “qualifies the Cockloft with “excluding the Roof thereof””[1] ;

(2) There is an implied term of the PTA that, if, without acting in breach of Clause 8.2 or 8.3 thereof, and the parties do not sign a formal tenancy agreement before the deadline, they will not be obliged to lease and rent the Property[2] ;

(3) There was an oral collateral agreement and/or common understanding that the plaintiff would not present the Cheque unless and until the parties have duly executed the formal tenancy agreement (the “Alleged Oral Collateral Agreement”)[3] ;

(4) Accordingly, the delivery of the Cheque was conditional upon the plaintiff leasing the Property to the defendant.  Alternatively, there is an implied term of the PTA that the plaintiff shall repay the preliminary deposit to the defendant if they do not sign a formal tenancy agreement by the deadline.[4] As the same did not take place, there was no consideration for the Cheque[5] .

(5) The parties only signed the PTA and the defendant only presented the Cheque based on the common assumption of the Alleged Oral Collateral Agreement.  As such, the plaintiff is estopped by convention to assert a right in presenting the Cheque[6] .

(6) In any case, the defendant’s liability (if any) is to be set-off by their counterclaim.[7] 

C.    RELEVANT LEGAL PRINCIPLES

14.  A concise statement of the standard approach in an application for summary judgment is to be found in the dicta of Ma J (as he then was) in Schindler Lifts (Hong Kong) Ltd v Ocean Joy Investments Ltd[8]:-

“The court has to determine two questions: firstly, whether what the defendant says is believable as opposed to whether its version of events is to be believed; and secondly, if it is, whether what the defendant says amounts to an arguable defence in law.”

15.  In considering whether there are triable issues, the court will of course not take the alleged defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier.  The court will also consider the inherent probability of the defence: Paul Y Management Ltd v Eternal Unity Development Ltd[9] .

16.  The mere fact that a defendant has a counterclaim does not necessarily entitle him to leave to defend.  If, the counterclaim arises out of quite a separate and distinct transaction or it is wholly foreign to the claim or there is no connection between the claim and the counterclaim, the proper order should be for judgment for the plaintiff with costs without a stay pending the trial of the counterclaim.  Further, if the counterclaim is frivolous or untenable, it will be disregarded: Time Rich 08 Limited v DBE (HK) Limited & Ors[10] .

D.   WHETHER THE DEFENDANT HAS RAISED A CREDIBLE DEFENCE

Different description of the Property

17.  Although the defendant has pleaded that the description of the Property in the PTA is slightly different from that as pleaded in the Amended Statement of Claim, the same is no longer pursued in Mr Hung Wai Keung’s Affidavit filed on behalf of the defendant.

18.  In any event, there being no dispute regarding the Property is the subject matter of the lease as identified in the PTA, the same simply cannot assist the defendant.

The defendant’s reliance on the alleged implied terms of the PTA

19.  As mentioned, the defendant is relying on the alleged implied terms that if the parties do not sign a formal tenancy agreement before the deadline, the defendant will not be obliged to lease the Property and that the preliminary deposit of HK$450,000 shall be repaid to the defendant.  The reliance on the so-called implied terms is misconceived.

20.  The law relating to provisional sale and purchase agreement may be summarized as follows: See To Keung v Sunny Way Ltd[11] :-

(1) A provisional sale and purchase agreement is immediately binding on the parties.  Although it provides for a formal sale and purchase agreement to be signed, such formal agreement would only be to incorporate the express terms of the provisional agreement, to express any implied terms, and to add any new terms that may subsequently be agreed.

(2) Accordingly, it is perfectly possible for the parties to proceed to completion without a formal agreement being signed.  However, if no formal agreement is signed because one party has insisted on the inclusion of a clause that is unreasonable, that insistence may be regarded, depending on the individual circumstances, as conduct evincing an intention no longer to be bound by the terms of the provisional agreement.

(3) In most provisional agreements (like the PTA in the present case), there is an “escape clause” ie a clause allowing a party who wishes to resile from the transaction within a short period of time after the provisional agreement to “buy his way out”:-

(a) In the case of a vendor, he agrees to return the initial deposit to the purchaser, doubled by a sum of equal amount which he must pay the purchaser (double deposit).

(b) In the case of a purchaser, he forgoes the initial deposit.

This has also been referred to as “alternative performance” an alternative to specific performance of the sale and purchase. However, this is all subject to the true construction of the agreement made between the parties in the individual case.

21.  The aforesaid legal principles relating to provisional sale and purchase agreements apply to a provisional tenancy agreement: Best Business (Asia) Ltd v G O D (International) Ltd[12] .

22.  It is thus clear that the PTA is not subject to the execution of the formal tenancy agreement.  The terms of the PTA clearly provided that the parties were obliged to proceed to the execution of the formal tenancy agreement by the deadline ie 1 November 2018 save as otherwise extended.  Failing which, the parties were still obliged to proceed with the lease as contained in the PTA unless they chose to invoke the escape clauses ie Clauses 8.2 or 8.3 of the PTA.

23.  In fact, there is a further remark under the PTA in which the parties clearly acknowledged that “under any circumstances, the one who signed the above agreement will be legally liable to the content of it”.

24.  As the alleged implied terms contradict the express terms of the PTA, the same cannot be implied into the PTA^[13].

The Alleged Oral Collateral Agreement, common assumption & conditional delivery

25.  It follows that the defendant’s allegation relating to the Alleged Oral Collateral Agreement and/or common assumption is simply not believable.  The terms of which are completely inconsistent with the express terms and legal effect of the PTA.

26.  Likewise, the defendant’s allegation that the delivery of the Cheque was conditional upon the plaintiff’s leasing the Property to the defendant is not believable.  The Cheque paid and delivered as preliminary deposit was, in accordance with the general rule, intended by the parties to be available as security for the defendant’s performance of their obligations as the tenant under the PTA: Chu Wing Ning v Ngan Hing Cheung & Anor.[14] 

27.  The so-called condition as alleged by the defendant would essentially mean that there would be no obligation on the part of the defendant to pay even if they were the one who failed to perform their obligations under the PTA.  This was not a condition suspending the operation of the Cheque but in defeasance of the undertaking to pay.  Such a defence falls foul of the parol evidence rule: Value Capital Limited v Ke Junxiang.[15] 

28.  In any event, it is simply unbelievable that the plaintiff would be willing to agree to such an alleged condition.  In particular, it is clear that the Property was to be leased for commercial purposes.  The PTA did not make any reference to the so-called condition.  Had the alleged condition existed, the Cheque should be dated 1 November 2018 ie the original deadline for the execution of the formal tenancy agreement, as opposed to 19 October 2018 ie the date of the PTA.

29.  None of these assertions were raised by the defendant in reply to the letters from the plaintiff’s solicitors dated 5 November 2018 and 15 November 2018 when the plaintiff repeatedly put on record that the defendant had failed to execute the formal tenancy agreement and they were accordingly entitled to forfeit the preliminary deposit.

30.  Even after the plaintiff had made a final demand for the sum of HK$450,000 by letter dated 29 November 2018, the defendant did not raise the Alleged Oral Collateral Agreement and/or common assumption and/or the so-called condition.  Clearly, these defences are merely an afterthought when the plaintiff commenced the present proceedings.

31.  Accordingly, the contentions that (1) there was no consideration for the Cheque and (2) the plaintiff was estopped by convention to assert a right in presenting the Cheque must also be rejected.  As mentioned, the purpose of the preliminary deposit by way of the Cheque was to secure the defendant’s obligations as tenant under the PTA.  The consideration for paying the same was for the plaintiff to hold up the Property for the defendant as opposed to leasing it to others.

Wrongful insistence of inconsistent or unreasonable terms

32.  In my view, the only real issue before the court is whether the plaintiff had wrongfully insisted on including inconsistent or unreasonable terms in the formal tenancy agreement which would amount to repudiation of the PTA on the part of the plaintiff.

33.  The defendant takes issue with the following terms contained in the draft as well as the revised draft formal tenancy agreement:-

(1) The defendant should pay “all outgoings for the time being payable in respect of the Property”[16] ;

(2) The defendant should “replace at the [defendant’s] expense all broken or damaged windows doors and fixtures whether the same have been broken or damaged by the negligence of the [defendant] or owing to circumstances beyond the control of the [defendant]”[17] ;

(3) The defendant should “effect and maintain an insurance policy at the defendant’s own costs” and “to the reasonable satisfaction of the plaintiff from time to time and the amount should not be less than HK$50,000,000”[18] 

34.  It is however beyond dispute that a formal tenancy agreement based on the revised draft tenancy agreement containing the aforesaid terms executed by the plaintiff, was provided to the defendant’s then solicitors ie Messrs Simon Ho & Co on 1 November 2018.

35.  In the letter dated 5 November 2018, the plaintiff’s solicitors stated that the defendant had in fact agreed to the draft formal tenancy agreement (ie the agreed form).  Again, two originals of the formal tenancy agreement duly executed by the plaintiff in the agreed form were enclosed for the defendant to execute by 7 November 2018.

36.  In the letter dated 15 November 2018, the plaintiff’s solicitors put on record the aforesaid and that notwithstanding the deadline was further extended to 14 November 2018, the defendant still failed to execute the formal tenancy agreement (in the agreed form).

37.  However, the defendant never raised their allegation that they took issue with the so-called unreasonable or inconsistent terms in reply to the said letters.  It is striking that the defendant did not even attempt to rebut the plaintiff’s contention that they had already agreed to the formal tenancy agreement in the form of the revised draft as executed by the plaintiff.  In particular, there is no dispute that the defendant actually received the letters dated 5 November 2018 and 15 November 2018 as acknowledged by Mr Hung Wai Keung in his Affidavit filed on behalf of the defendant.  There is no explanation as to why the defendant never raised or mentioned in any correspondence with the plaintiff’s solicitors that they did not agree to the terms they now take issue with.

38.  The defendant’s assertion that they did not agree to the so-called unreasonable or inconsistent terms is therefore not believable.  I do not accept that they have raised a bona fide or credible defence that the plaintiff was the one who was acting in breach of the PTA such that they are entitled to the compensation of HK$900,000 in accordance with Clause 8.3 thereof.

39.  I have come to the conclusion that what the defendant now says is not believable.  As it is the defendant who had failed to execute the formal tenancy agreement by the agreed extended deadline ie 14 November 2018, the plaintiff is entitled to enforce the agreed term on compensation under Clause 8.2.  The defendant has not raised any bona fide or triable issue in respect of the plaintiff’s claim.

E.  THE COUNTERCLAIM IS FRIVOLOUS

40.  The defendant’s counterclaim for the sum of HK$900,000 basically stands or falls with their defence.  In view of the aforesaid, the counterclaim is frivolous and the defendant is not entitled to set off the plaintiff’s claim for HK$450,000.

F.  CONCLUSION

41.  For the above reasons, I grant an order in the terms of Paragraph 1 of the Summons filed herein on 14 May 2019 with interest.  I further order that the defendant do pay the plaintiff’s costs of this action including costs of and incidental to the Application.  Such costs are to be taxed if not agreed with certificate for Counsel.