ROBERT JOHN FRANCIS BROTHERS AND ANOTHER v. NEW RUI INTERNATIONAL CO LTD

HCA 654/2023

[2023] HKCFI 3062

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 654 OF 2023

____________________

BETWEEN

____________________

____________________

D E C I S I O N

____________________

1.  This summons dated 19 May 2023 (“the Summons”) was taken out by Robert John Francis Brothers (“P1”) and Mabel Valerie Brothers (“P2”) (collectively, “the Plaintiffs”) for summary judgment against New Rui International Co., Limited (“the Defendant”) in respect of an escrow agreement dated 23 June 2021 (“the Escrow Agreement”) pursuant to Order 86, rule 1, alternatively, Order 14, rule 1.

Background facts

2.  Prior to 23 June 2021, the Plaintiffs were the only shareholders of Fung Sau Property Co Ltd (“the Company”) whose sole asset was the property known as House B, 8 Fung Sau Road, Sai Kung, New Territories together with a short-term tenancy (“STT”) of another 12,000 sq ft of adjacent land granted for gardening purposes (“the Property”).

3.  P1 had purchased the whole of Lot 285 in 1973 and had erected House A on it. By a Deed Poll dated 10 March 2006, Lot 285 was subdivided into Section A and the Remaining Portion (respectively “Lot 285 SA” and “Lot 285 RP”). In 2011, P1 erected House B on Lot 285 RP and sold House A and its surrounding land.

4.  The STT was situated in front of House B which by then was owned by the Company. In 2018, P1 decided it would be logical for the ownership of the STT to be transferred to the name of the Company and an application was made to the DLO for that purpose. While the proposal was acceptable to the DLO, the procedure required was first to cancel the original STT and for a new STT in the Company’s name to be processed.

5.  After this process was initiated, the officer in charge was transferred and his replacement took some time to take the matter up. Negotiations were still ongoing when the Company was sold to the Defendant.

6.  The Defendant entered into a sale and purchase agreement on 23 June 2021 (“the SPA”) to acquire the Plaintiffs’ shares in the Company at the consideration of $300 million[1]. Completion took place on 23 July 2021.

7.  Since P1 had been handling the STT negotiations for many years, the parties agreed to incorporate a clause[2] into the SPA to the effect that P1 would continue to handle the negotiations until their conclusion.

8.  Pursuant to the SPA, the Plaintiffs, the Defendant and the　Plaintiffs’ then solicitors, Messrs Wong Poon Chan Law & Co (“Wong Poon”) entered into the Escrow Agreement which provided for 10% of the consideration, i.e. $30 million (“the Retention Money”) to be held in escrow as follows:

(a) a sum of $10 million (the “Tax and Warranty Claim Retention Money”) to be released upon a joint instruction given by the Defendant and the Plaintiffs to Wong Poon if the Defendant does not issue/serve any proceedings regarding the warranties/undertakings/indemnity on tax given by the Plaintiffs under the SPA[3] within 18 months from the completion date of the SPA; and

(b) a sum of $20 million (the “STT Retention Money”) together with all interests accrued thereon, (if any) to be released to the Plaintiffs upon receipt by Wong Poon of a joint written instruction signed by both the Plaintiffs and the Defendant if the revised STT (in form and substance to the reasonable satisfaction of the Defendant) is granted within 3 years after the completion date.

9.  Approximately 10 months after the completion date, on 26 April 2022, when P1’s negotiations with the DLO were still continuing, to everyone’s surprise, the DLO/SK sent a letter (“the enforcement letter”) to the Company which alleged that the building on the Property exceeded the built over area stipulated under the special conditions of the Government Lease. The letter also contained the standard demand that the building be demolished.

10.  By mid-May 2022, the enforcement letter came to the parties’ knowledge and a meeting was held on 17 May 2022 attended by P1, LN Shun (“Mr Shun”) an authorized person/qualified engineer of SNL & Associates Ltd (“SNL”[4]), the Defendant’s solicitors, Mayer Brown (“MB”) and Henry Lam of Knight Frank (“HL”), estate agents representing the Defendant to discuss the matter.

11.  A further meeting was held on 24 June 2022 at the offices of DLO/SK attended by P1, HL and the DLO officer who issued the enforcement letter, Mr Peter Tam (“PT”).

12.  In a contemporaneous email to the relevant parties written after that meeting, P1 stated as follows:

“I asked what I could do to remedy the issues. PT said that [DLO] would not ask that the house be demolished but it would be necessary to secure a lease modification to take into account the electrical rooms on the carport floor. They suggested that this could be handle (sic) by Knight Frank town planning department but certainly an engineer/architect will also be required to prepare the drawings. He suggested a further meeting with these professionals. He confirmed that a lease premium would be required.”

13.  Later the same day, P1, Mr Shun and HL met with MB at their offices for a debriefing of the DLO meeting that morning. Mr Shun brought with him SNL’s file relating to the construction of the Property and correspondence with the Lands Department both before and after the issuance of the Occupation Permit of the Property on 23 March 2010. The issues raised by the DLO were discussed and explained.

14.  On 27 June 2022, prior to a meeting scheduled for the following day, P1 provided HL and MB with email exchanges with the DLO in 2009, 2010 and 2011. Those emails together with the files mentioned in §13 above are collectively referred to as “the historical files”.

15.  The last piece of correspondence in the historical files relating to the issues now resurrected was in March 2011. After that date there was no correspondence from either the DLO or any other government department until April 2022, more 10 years later and shortly after the parties entered into the SPA. The Plaintiff considered those issues (as to whether there was a breach of the special conditions by exceeding the 15% coverage permitted under the land grant) to be minor technical issues. They were not brought to a formal conclusion through the process of granting a waiver but was not pursued and the Plaintiff was allowed to continue its occupation of the Property.

16.  On 28 June 2022, DLO/SK issued a clarification letter[5] stating that the application for a revised STT “would not be held up amid the forthcoming lease enforcement action”.

17.  Thus reassured, P1 continued his efforts to obtain the revised STT requesting updates from DLO from time to time.

18.  The 18-month period after the completion date lapsed on 23 December 2022. No tax proceedings and/or claims for breach of the warranties/undertakings/indemnity on tax have been made against the Plaintiffs.

19.  In those circumstances, on 19 May 2023, the Plaintiffs took out the Summons for summary judgment in respect of the Tax and Warranty Claim Retention Money (“the tax retention sum”).

20.  The Defendant filed its Defence and Counterclaim on 6 July 2023 (“D & CC”) alleging that the Plaintiffs breached the disclosure obligations in the SPA and/or were guilty of misrepresentation in failing to alert the Defendant to certain alleged breaches of the special conditions in the Government lease which justified the Defendant’s rescission of the SPA.

21.  The Plaintiffs accept that those pleas of misrepresentation may raise triable issues. However, it maintained that, even if the Defendant was originally entitled to rescind the SPA on those grounds, it had lost the right to do so when it sought to rescind on 6 July 2023 by serving its D & CC, claiming in §47 that the Defendant had rescinded the same.

22.  The key issue for determination is whether the evidence is so clear that the Defendant has unequivocally affirmed the SPA by words and conduct such that rescission is not a triable issue, leaving the Defendant with its alternative claim for damages.

Applicable principles

(a) Summary judgment

23.  The Plaintiffs’ application is brought under Order 86 and, in the alternative, Order 14. The legal principles applicable in either case are the same: see Super Town Investments Limited v Ives Developments Ltd & Others, HCA 86/2006, unreported, 22 May 2007 at §5.

24.  The applicable principles are well established and are set out in Hong Kong Civil Procedure (2023) §§14/4/9-14/4/9B. It is common ground that the defendant has the burden of establishing an arguable defence or triable issue.

(b) Affirmation barring rescission

25.  Chitty on Contracts (34^th edition) states:

“Affirmation of the contract. If the representatee, having discovered the misrepresentation, either expressly declares his intention to proceed with the contract, or does some act inconsistent with an intention to rescind the contract, he is bound by his affirmation …” (see §9-141)

“Once the innocent party has elected to affirm the contract, and this has been communicated to the other party, then the choice becomes irrevocable. There is no need to establish reliance or detriment by the party in default. Thus the innocent party, having affirmed, cannot subsequently change his mind and rely on the breach to justify treating himself as discharged.” (see §27-057”)

26.  The type of affirmation in issue involved an informed choice (to treat the contract as continuing) made with knowledge of the facts giving rise to the right to avoid it: see in ICCI v Royal Hotel Limited [1998] Lloyds Reports IR 151. Mance J (as he then was) stated (at 161) that

“provided that the party knows sufficient of the facts to know that he has that right, it is unnecessary that he should know all aspects or incidents of those facts… The making of his choice must be communicated unequivocally to the other party before there can be a binding affirmation.”

27.  The electing party’s knowledge of the legal rights among which he may elect may be inferred from the fact that he had legal advice: see Moore Large & Company Limited v Hermes Credit and Guarantee PLC [2003] EWHC 26 at §99.

28.  A useful statement of the general principles relevant to the finding of affirmation of the contract may be found in Castle Global Limited v Ip Tai Hoi Paul [2021] HKCA 1540 where Au JA (giving the judgment of the Court) stated in §19 as follows:

“(1) Whether there was an election is a fact-sensitive issue depending on the proper and objective construction of the relevant correspondence and conduct of the contracting parties.

(2) The innocent party is not bound to accept a repudiation once a breach is committed by the other side. He is entitled to consider his position and keep his options open. Hence, the fact that the innocent party complains about the breach of the defaulting party and urges the rectification of such breach, without more, generally would not be regarded as conduct amounting to an election to affirm.

(3) The significance of an express reservation of right or without prejudice statement varies depending on the facts of the case. If the objective conduct of the innocent party amounts to an outright exercise of a right which is inconsistent with another right, such conduct constitutes an election not to exercise the other, whatever reservation might have been made by that party when exercising that right. On the other hand, where there is less clear conduct to show an outright exercise of that right, reservations by a party of its right may assist in depriving its conduct of the necessary unequivocal character. All must be dependent on the particular facts and circumstances of the case.”

29.  In SK Shipping Europe Limited v Capital VLCC 3 Corp & Anor (C Challenger) [2022] 1 CLC 552 at §211, Foxton J analysed the effect of the reservation of rights:

(i) while a reservation of rights will often have the effect of preventing subsequent conduct constituting an election, it is not an invariable rule;

(ii) whether there has been an election requires the court to have regard to all the material, including any reservations which have been communicated;

(iii) where conduct is consistent with the reservation of a right to rescind, but also consistent with the continuation of the contract, then an express reservation will preclude the making of an election;

(iv) determining whether particular conduct gives rise to an election is ultimately a matter of legal characterisation rather than a question of what label a party has attached to its own conduct[6].

The correspondence from 8 November 2022 onwards

(a) 8 November 2022

30.  On 8 November 2022, several events occurred:

(1) A DLO officer (Rebecca Cheng) informed P1 on the telephone that morning that all hurdles have been cleared and the new offer letter was being drafted.

(2) MB advised DLO by letter dated 8 November 2022 (“the 8 November letter”), that the Defendant is the owner/applicant of the STT effective 23 July 2021; and in view of the enforcement letter, requested DLO to deal with MB for all future correspondence and dealings in respect of the STT.

(3) Upon receipt of an email from MB advising him of the 8 November letter (a copy of which was attached to the email) regarding the STT sent to the DLO, P1 immediately replied[7] requesting MB to withdraw the 8 November letter.

(b) 16 December 2022

31.  MB did not withdraw the 8 November letter. They stated in their letter of 16 December 2022 that (i) clause 8.2 (d) the SPA did not confer exclusive jurisdiction on P1 to deal with the STT; and (ii) as the STT over the garden was ancillary to the use and enjoyment of the Property, it was reasonable and justifiable for the Defendant to instruct its solicitors to deal with the DLO.

32.  The 16 December letter referred to the Defendant having had to incur substantial time, costs and expenses because of the enforcement to investigate into the alleged breaches. It then mentioned the Defendant’s plan to find ways to address the alleged breaches of the land grant, and that the Defendant was considering different options in consultation with professional advisers but that no concrete plan had been determined yet.

(c) 16 January 2023

33.  MB’s letter of 16 January 2023 (“the 16 January letter”) was structured under 4 sections: (A) Background, (B) Issues, (C) Breaches of the SPA and/or misrepresentation and (D) Losses and damages. In pertinent part, the 16 January letter made the following points:

(i) At (B) §5 stated as follows:

“Seeing the devastating effects of the Enforcement Notice, our client then commissioned a land consultancy firm to carry out an investigation into the alleged breaches of the New Grant by DLO/SK … and our client’s land consultancy firm confirms that the complaints made by DLO/SK are substantiated and there might not be other solution other than demolishing the existing building and re-build a new one with a smaller coverage …;”

(ii) the Defendant’s plan to occupy and/or renovate the Property had to be suspended until such time as the Defendant “can sort out the remedial plan” with DLO/SK: ((D) §1);

(iii) remedying the breaches will most likely involve demolition and rebuilding, the costs and expenses and the time involved (including the loss of use and enjoyment of the Property) “will far exceed the [Retention Money]”: ((D) §2);

(iv) unequivocal rejection of the Plaintiff’s request for the release of the tax retention sum as the Defendant’s claim “will far exceed” the sum of $10 million and such amount escrowed will be used as partial set-off of the Defendant’s claims: ((D) §3);

(v) MB was instructed to make a claim against the Plaintiff for the losses and damages suffered by the Defendant arising from

“the [Plaintiffs]’ breaches of the SPA and/or misrepresentation as stated in (C) above. We are further instructed by the [Defendant] that unless a satisfactory proposal settlement of their loss and damage can be provided by [the Plaintiffs], the [Defendant], within the next 7 days from the date of your receipt of this letter, we have standing instructions to take out legal proceedings against your clients without further notice.” ((D) §5).

(vi) Section (C) issues are allegations of breaches of warranties concerning site coverage and a representation made by producing the 2017 AP certificate to the Defendant confirming that site coverage did not exceed the permitted 15%. Notably, there was no allegation of fraud.

(d) 1 February 2023

34.  The final paragraph of MB’s letter of 1 February 2023 (“the 1 February letter”) to Wong Poon again referred to the Defendant’s claim, namely, “the expected colossal loss and damages” that the Defendant will suffer because of the Plaintiffs’ breach of the SPA as set out in the 16 January 2023 letter. That was the reason given for refusing to agree to the release of the tax retention sum. The letter ended with an express reservation of rights and remedies.

(e) 16 February 2023

35.  MB’s letter of 16 February 2023 (“the 16 February letter”) mentioned that the enforcement letter caused the Defendant to incur substantial time, costs and expenses in investigating the alleged breaches. It then stated that had the Defendant known about the breaches of the special conditions it would not have entered into the SPA and certainly not at the price paid[8].

36.  The final paragraph reiterated the Defendant’s refusal to agree to the release of the tax retention sum and that it would look to the Plaintiff for “the expected colossal loss and damages” that the Defendant would suffer because of the Plaintiff’s breach of the SPA. It expressly reserved all rights and remedies.

(f) 7 March 2023

37.  The main part of MB’s letter of 7 March 2023 (“the 7 March letter”) to Wong Poon made 7 specific points in reply to the latter’s allegations made in their letter of 21 February 2023. MB’s letter then concluded in these terms mentioning rescission for the first time:

“… If your clients, with full knowledge of such serious title issues had fully and frankly disclosed such serious title issues to our client, our client would definitely not have entered into the SPA with your clients. In view of the colossal damages involved, our client would have no alternative but to consider taking out legal proceedings against your client and possibly, SLN & Associates and Mr Shun with a view to obtaining damages and/or rescission of the contract … All our client’s rights and remedies are hereby expressly reserved.”

38.  Mr Simon Westbrook SC leading Mr Alan Kwong, counsel for the Plaintiffs, submitted that there are no contested issues of fact to resolve in respect of the issue of affirmation: apart from the background matrix (which is common ground), the evidence is all contained in the solicitors’ correspondence from MB.

39.  The only affirmation filed on behalf of the Defendant is that of Mr Xu Hang (“Mr Xu”) dated 13 July 2023. Mr Xu’s affirmation dealt with questions of misrepresentations but nothing was said at all about what happened after the representations came to his attention, in particular by the end of June 2022. He is silent as to discussions he had with the DLO or even with his own advisers as to the options open to him.

40.  Mr Jonathan Chang SC leading Mr Louis Cheng, counsel for the Defendant, did not suggest that oral evidence was necessary for the determination of issue of affirmation. However, he maintained that the Plaintiffs never raised the argument that the Defendant had affirmed the SPA until the filing of P1’s 2^nd affirmation on 29 August 2023.

41.  This was shown to be factually incorrect: 2½ months earlier, when MB’s letter dated 8 June 2023 to the Plaintiffs’ present solicitors (“Gall”) canvassed the possibility of rescission, Gall replied to the effect “the time is long past for rescission”, the Defendant having already affirmed the SPA by conduct.

42.  The main issue for determination is whether the Defendant has demonstrated that there is a triable issue on rescission. Should it fail to do so, the remaining issues concern set-off and the counterclaim.

Whether there is a triable issue on rescission

43.  The applicable legal principles are not controversial. The dispute between the parties is to their application to the facts of the present case.

44.  Mr Westbrook relied on 3 matters to establish the Defendant’s unequivocal affirmation of the SPA. The 1^st matter is the 8 November letter, the 2^nd and 3^rd matters arise out of the 16 January letter.

45.  He submitted that the Defendant’s assumption of control over the process of negotiating/liaising with DLO/SK concerning the revised STT was only consistent with affirming the contract since, as is common ground, the garden in respect of which the revised STT was being sought, was ancillary[9] to the use and enjoyment of the building(s) standing on the lot[10]. If the Defendant was going to rescind the SPA, there would be absolutely no point for it to take over the process. The grant or otherwise of the revised STT would be of no relevance to the Defendant.

46.  In so far as MB’s letter of 16 December 2022 is concerned, by this time, the Defendant had been aware of the enforcement notice and the alleged breaches since June 2022 and was receiving legal advice when it decided to take over the STT process, which is consistent only with continuing with the SPA.

47.  Mr Jonathan Chang disagreed and submitted that the Defendant’s conduct in asking the DLO to deal with the Defendant directly, was consistent with the Defendant keeping all options open because for the Defendant to make an informed decision whether to sue for damages or rescission, the Defendant must first acquire all information relating breaches of the land grant.

48.  Given the history and background relating to the STT[11] and the reason for clause 8.2 (d) of the SPA, the STT is a self-contained issue and has nothing to do with options available to the Defendant. The parties agreed that the Defendant would be entitled to the $20 million retained in respect of the STT unless there was a grant of the revised STT within 3 years after the completion date. If the revised STT is granted within the three-year period, the Plaintiffs would automatically be entitled to the STT retention money. The Defendant has no choice in the matter.

49.  For that reason, I agree with the Plaintiff that since the STT is relevant only to the enjoyment of the Property, the Defendant’s conduct in taking over the STT negotiations is only consistent with an intention to affirm the contract.

50.  That said when the enforcement letter came to the Defendant’s knowledge, as the legal owner of the Property, it had every right to find out the facts giving rise to the alleged breaches and to ascertain what was involved in remedying them.

51.  The 16 December letter made clear that the Defendant was still considering the different options in consultation with its professional advisors. Relevantly, it made no reference to remedial work possibly involving demolition and rebuilding. In those circumstances (giving the Defendant the benefit of the doubt), I do not consider that the 8 November letter alone is insufficient to render the affirmation unequivocal.

52.  The 2^nd matter arises from the matters summarized in §33 (i) and (ii)[12] above. By this time, the Defendant’s land consultancy firm had found the alleged breaches substantiated and had advised the Defendant that there might be no other solution than demolishing and rebuilding.

53.  Notwithstanding the real possibility of having to demolish and rebuild[13], there was not a hint of rescission or even that it was a possibility under consideration. Rather, the Defendant went on to state that the costs, expenses, and time involved (including the loss of use and enjoyment of the Property in the interim) would exceed the Retention Money $30 million.

54.  In seeking to work out “a remedial plan” with DLO/SK involving the costs mentioned, the Defendant was making it ‘crystal clear’ that what was being considered was how to remedy the problems with the DLO rather than returning the Property to the Plaintiff by rescinding the SPA. That is only consistent with affirming the SPA. It is meaningless in the context of rescission.

55.  The 3^rd matter arises from the fact that the Defendant made a formal claim for loss and damage under the SPA.

56.  By mid-January, the Defendant was well aware not only of the breaches concerned but also of the misrepresentations. It must have been well aware that it had the right to rescind yet it chose to pursue its remedies for breach of the SPA, which would involve ‘colossal damages’ and that was the course that was being taken.

57.  The Defendant repeated that stance in its letters of 1 February and 16 February. In refusing the Plaintiff’s request for the release of the tax retention sum, both letters referred to “the expected colossal damages”. If the Defendant was contemplating rescission, obtaining colossal damages at the same time would be entirely out of the question.

58.  In refusing the Plaintiffs’ request, the Defendant stated that its claims against the Plaintiff for loss and damage would far exceed the $10 million.

59.  In the D & CC, apart from rescission, the Defendant’s claims for damages relate to wasted legal costs of the SPA and the investigations into the alleged breaches carried out of $1.6 million. Having regard to the pleaded amount, the cost of remedying the breaches of the SPA as damages associated with rescission could not remotely come close to $10 million. In those circumstances that could only be a reference to the costs of demolition and rebuilding would involve.

60.  The Plaintiff submitted that invoking or asserting contractual rights or making a claim for damages is conduct that is affirmatory[14]. (D) §5 of the 16 January letter (set out in §33 (v) above) which made a claim for loss and damage arising from breaches of the SPA and/or misrepresentation is capable of constituting such conduct.

61.  Although the damages sought were for “breach of the SPA and/or misrepresentation”, the Defendant was seeking the same colossal damages. The Defendant could not be saying that it wanted colossal damages for breach of contract and that it was going to rescind for misrepresentation because those remedies would be inconsistent. The Plaintiff therefore submitted that damages flowing either from a breach of the SPA or for misrepresentation are the same.

62.  Rescission was not mentioned by the Defendant until 7 March letter. The Plaintiff submitted that by then it was far too late as the Defendant had already affirmed the contract.

63.  Mr Jonathan Chang SC took issue with the Plaintiff’s submission that the Defendant’s claim for loss and damages arising out of the breaches of the SPA and/or misrepresentation is the same.

64.  He submitted that the claim based on breach of contract is different from a claim based on misrepresentation. A misrepresentation claim is a tort claim based on deceit. The claim for breach of contract can be alternative to a claim for damages for misrepresentation, and a claim for damages for misrepresentation can be made in parallel with a claim for rescission. The Defendant submitted that (D) §5 of the 16 January letter is equally consistent with the Defendant keeping open the option of rescinding the SPA.

65.  Reference was made to Cartwright, Misrepresentation, Mistake and Non-Disclosure (6^th ed.) at §2-13 under the heading “Cumulation of remedies: possible combinations” which states:

“A claimant may at the same time obtain two remedies which are not logically inconsistent, and where the award of the two remedies does not involve double recovery of his loss. Most common, perhaps, is the award of damages on the tort measure with rescission of the contract.”

66.  I accept the principles of law advanced. However, the question remains whether they are applicable on the facts of the present case.

67.  Mr Westbrook submitted, and I accept, that the real question is whether the Defendant’s conduct and what the correspondence states is inconsistent with the reservation of the right to rescind.

68.  Objectively read, I do not consider the 16 January letter had the effect of keeping all options open. Its sole focus was the Defendant’s claim for losses and damages suffered, expected to be ‘colossal’. That would be on the basis that those costs involved the costs demolition and rebuilding.

69.  The 1 February letter reiterated the Defendant’s position. Then in the 16 February letter, despite stating that had the Defendant known about the alleged breaches it would not have entered into the SPA[15], when it would have been natural for some reference to be made to rescission, there was none. Again, its only focus was on the “expected colossal loss and damages” for breach.

70.  While damages may be awarded for breach of the SPA and rescission is available for fraudulent misrepresentation, the extract set out in §65 above makes it abundantly clear that the remedies sought cannot be logically inconsistent. The Defendant cannot seek rescission and be restored to the position it would have been in had the contract not been entered into and, at the same time, seek “colossal loss and damages” in respect of the costs of demolition and rebuilding. They are logically inconsistent remedies.

71.  For those reasons, I do not consider that the Defendant has shown that there is a triable issue on rescission. Having affirmed the SPA by conduct and by the letters of 8 November and 16 January, reinforced by the letters of 1 and 16 February, it can no longer invoke rescission as a remedy.

Set-off and counterclaim

72.  §47 of the D & CC contains the plea of rescission. However, there is no plea for a set-off, whether legal or equitable.

73.  On the pleading point, Mr Chang accepted that the word “set-off” is not to be found in the D & CC. However, the annotation at §18/17/1 of Hong Kong Civil Procedure 2023 states that it is not the form of pleading, but the true nature of what is pleaded that determines whether what is pleaded is or is not a set-off. He submitted that, ultimately, it is a matter of avoiding surprise.

74.  In the present case, Mr Chang emphasized there is no surprise despite an absence of an express plea. While the connection between the claim for damages (if rescission is not available) and any damages that may be awarded under the counterclaim being used to set-off any liability owing to the Plaintiffs in the main claim is missing, the 16 January letter did refer to partial set-off being available.

75.  However, the annotation at§18/8/34 states that the defence of set-off and a counterclaim, of course, must always be specifically pleaded. As there is no plea of set-off, it is not a defence that is available to the Defendant.

76.  The Defendant’s counterclaim repeated the Defence. It gave particulars of its loss and damage amounting to approximately $1.6 million should rescission be granted.

77.  If rescission is not available, its alternative case is that it suffered loss and damage to be assessed. However, the Defendant did not make any attempt to quantify that loss and there is no evidence as to what the likely damages may or will be: in short, the sum is indeterminate.

78.  The tax retention sum forms part of the consideration. The Plaintiff submitted that unless the Defendant can persuade the Court that its loss and damage is likely to exceed the tax retention sum, that sum should be released to the Plaintiff.

79.  Mr Westbrook referred to Hong Kong Topkey Limited v Wintac (Hong Kong) Limited & Another [2023] HKCFI 1711 where the question was whether the applicant was to be allowed to file an affidavit with further information as to loss and damage. The judge held (at §14) that the defendant is not allowed to raise and rely upon a defence which has not been pleaded in his Defence, applying Kaefer AG v Winfield Marine Services Company Limited [2022] HKCA 807 (at §30).

80.  The judge concluded (at §16) that

“… in Kaefer, the Court of Appeal has laid down a general principle that while the defendant has already filed a defence to the plaintiffs claim, the defendant cannot rely upon an unpleaded defence to resist an application for summary judgment … following Kaefer, if the defendant intends to raise a matter which has not been pleaded in his defence to resist the plaintiff’s application for summary judgment, the defendant should seek leave from the Court to amend his own pleading … If leave is granted, the defendant may rely upon the new matter to resist the plaintiff’s application for summary judgment. If leave is refused, the new matter would remain as an unpleaded matter, and the defendant cannot rely upon the same to resist the plaintiff’s application.”

81.  As there is no application to amend[16] in the present case, it is unnecessary to consider that matter further.

82.  As regards the Court’s discretionary power under Order 14, rule 3 (2) to stay execution of the judgment until trial of the counterclaim, the Plaintiff submitted that a stay pending the hearing of the counterclaim would be tantamount to ordering security for a claim that has not yet been heard and not yet established and quantified. I agree.

Conclusion

83.  Having found that there is no triable issue on rescission, prima facie, the Plaintiffs are entitled to have the tax retention sum released to them.

84.  As earlier noted, set-off is not a matter to be taken into consideration. As regards the court’s discretion to stay execution pending trial of the counterclaim, I do not consider it either fair or reasonable to do so. I see no justification for keeping the Plaintiffs out of what forms part of the purchase price to which they are entitled, especially when the amount of damages is indeterminate and remains at large.

Order

85.  Accordingly, I make an order in terms of the Summons.

86.  As regards costs, I order that the Defendant pay the costs of this action, including the present application, to the Plaintiffs with certificate for 2 counsel, such costs to be summarily assessed and payable forthwith.

87.  It is further directed that (a) the Plaintiffs’ statement of costs be lodged and served within 14 days of this Decision; (b) the Defendant’s objections (limited to 3 pages) be lodged and served within 14 days thereafter; and (c) the Plaintiffs’ reply (limited to 3 pages) be lodged and served within 7 days thereafter;