THE WORLD FOOD FAIR LTD AND ANOTHER v. HONG KONG ISLAND DEVELOPMENT LTD

HCA 4602/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4602 OF 2000

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J U D G M E N T

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Introduction

1. In this matter, the Defendants, who are part of the New World Group, are the owners of the Palace Mall, an underground shopping centre in Tsim Sha Tsui which lies between the New World Shopping Centre and the Hong Kong Cultural Centre. It was built in the mid 1990s and became ready for occupation in 1997. The 2nd Plaintiff is a well-established trading company with diverse interests including its core business which is an optical retail company which operates from a number of shops in Hong Kong that go under the name of "The World". These are to be found in the leading retail locations usually in the better known shopping malls.

2. The 2nd Plaintiff's founder and Chief Executive Mr Steve Siu had built up a good relationship with the Defendants having previously rented retail units from them at other premises which they own. As a result, he formed a good rapport with a Mr Lawrence Mak who was the Defendant's General Manager and who therefore had overall charge of the Defendant's Letting Department, subject to his reporting to Mr Henry Cheng, their Managing Director. Mr Siu had agreed with Mr Mak in the course of discussions between the two of them in late 1996 to take some retail units at the Palace Mall. Mr Mak also encouraged Mr Siu to consider a venture which the 2nd Plaintiff had never tried before which was to operate a food and beverage outlet from substantial premises measuring over 7,000 square feet in the basement of the mall. Given that this was outside Mr Siu's range of expertise and having regard to the substantial investment that this would entail he was at first reluctant to stray outside what his The World Group had been accustomed to doing. Nevertheless, Mr Mak appears to have been persuasive and suggested that this particular outlet might lend itself to being run as a "theme" restaurant/bar similar to a very successful one called "Shanghai Shanghai" in the basement of the Ritz-Carlton Hotel which traded on a nostalgic re-creation of the style and elegance of 1920s and 1930s Shanghai. The two men visited "Shanghai Shanghai" and Mr Siu appears to have been sold on the idea. He consulted a number of business associates and in particular one or two who had working experience of the food and beverage business. He was able to get together sufficient investors and agreed (I don't use this expression in any contractual sense) with Mr Mak to operate a combined theme restaurant and bar with a full restaurant service and an adjoining food court from where customers could visit a variety of counters and purchase food from different countries including, amongst others, Japan, Hong Kong and Vietnam. This was to be a much more informal operation where customers having purchased their food could go and eat it at nearby tables and counters provided for them.

3. For the purpose of this introductory narrative, I need only set out in broad outline the most unfortunate series of events which have given rise to this action. Ironically, much of this misfortune has been caused by the fact that Mr Siu and Mr Mak had worked well together in the past and trusted each other. I am satisfied having heard from both of them that they held each other in high regard and expected that any differences in their negotiations on the lease of the premises would be resolved. In the event the 2nd Plaintiffs were let into possession by the Defendants in order that they might carry out extensive fitting out work which was both time-consuming and costly. A deposit of $200,000 was paid to the Defendants on 27 January 1997 as the works were put in train and negotiations on the lease proceeded. The 2nd Plaintiffs say that they also ordered cutlery, crockery, staff uniforms and set about training staff in preparation for the opening. By the middle of 1997, differences on the lease remained unresolved whilst fitting out proceeded to an advanced stage. Unexpectedly, Mr Mak left the Defendants' employment and was replaced by Mr Kays Wong. The unthinkable then occurred. Mr Wong took a different approach to the way that the premises should be used. He did not care for the food court concept and he was not disposed to allow the Plaintiffs to sub-let any part of the premises. This was of fundamental importance for the Plaintiffs because they had expected to sub-let some of the counters at the food court to individual caterers in order to make that part of the venture profitable. Mr Kays Wong also required that the entire area be used as a high end to medium class full service restaurant. By the end of July an impasse had been reached. Works were ordered to be stopped. The site was closed down. Negotiations then restarted with a view to arriving at an acceptable resolution but this came to nothing. Mutual recriminations were plentiful with each side blaming the other for the failure to bring the matter to a successful conclusion. Eventually the Plaintiffs' workmen were allowed back into the site to remove their tools and after a considerable lapse of time and after Mr Kays Wong had left the Defendants' employment this part of the Mall was turned into a children's amusement area which its new operators called the "Teddy Bear Kingdom". The Plaintiffs have, on their account, spent and/or lost over $4,000,0000 which they now sue the Defendants for. Their case is that by 27 January 1997 when they paid the deposit of $200,000 the parties had reached a legally binding agreement. The Defendants say that when one examines the evidence properly, it is clear that none of the necessary elements of a contract was present. The parties were still in negotiation and it was therefore open to Mr Kays Wong to require the change that he was insisting on, leaving aside other important terms which also remained to be agreed on. In circumstances where there was no legally binding agreement, the Plaintiffs can have no recourse against the Defendants for their expenditure at the premises which had been in anticipation of a concluded lease which eventually came to nothing. They must bear those losses themselves which have been caused by their refusal to fall in with Mr Kays Wong's requirements for the type of outlet that was to be operated. To add insult to injury, it is also said that the $200,000 deposit must be forfeited and there is also a counterclaim for the Plaintiffs' occupation of the premises following the breakdown of the talks between Mr Siu and Mr Kays Wong initially in July 1997 and thereafter during the remainder of that year.

4. I am required to attend to the evidence in some detail to determine whether the parties had got to the point of a binding agreement. Whichever side of the line the evidence falls, this has, not to use a stronger expression been an unmitigated failure for both parties. For the Plaintiffs they have wasted and lost millions on a restaurant outlet which never opened. For the Defendants the area remained fallow and unproductive until they found another tenant to run a Teddy Bear gallery.

5. This therefore, stripped of its detail, is what the case is all about. I now need to set out the issues that I am required to resolve and the evidence which bears on them.

The issues

6. The vital aspect of this case which will determine its outcome on liability is whether the parties came to a legally binding agreement as to the letting of these premises. This can only be resolved by an analysis of the evidence which includes very extensive correspondence on the terms of the proposed lease.

7. There is also an issue as to whether there was a novation of the agreement whereby the 2nd Plaintiff and the Defendant had agreed to the 1st Plaintiff being the tenant under the lease. Put shortly, the 2nd Plaintiff's case is that Mr Siu had informed Mr Mak early on in their discussions that the 2nd Plaintiff would nominate another company to step in its place and be the tenant. The Defendant asserts that there simply was no such agreement and that this is borne out by the uncertain state of the evidence on this aspect. It is submitted on the Defendant's behalf that on this matter as well, any such proposal remained very much at the negotiation stage between the parties - that it never got stronger than that and that this too fell apart in the impasse that had been reached by the end of July 1997 following the arrival on the scene of Mr Kays Wong. In respect of this matter whilst it is, strictly speaking, separate from the main disagreement as to whether a concluded agreement had been arrived at for the lease of the premises, the evidence in support of it forms part of the larger picture under the general umbrella of the negotiations which the 2nd Plaintiff says bore fruit in terms of a legally binding contract and which the Defendants submit never got past the negotiation phase. I must first decide whether an agreement had been reached. If it had, then I need to go on and decide whether there had been a novation of that agreement with the 1st Plaintiff stepping in for the 2nd Plaintiff. If the 2nd Plaintiff falls at the first hurdle, the question of a novation must become purely academic.

8. The next heading, as it were, under liability, assuming that the Plaintiffs can show a binding agreement, is whether the Defendants repudiated the agreement by insisting that the Plaintiffs could only use the premises to operate a high to medium class full service restaurant and stop fitting out the premises for use as a food court, prohibiting sub-letting and refusing to provide the necessary and agreed kitchen facilities. This in turn would require an enquiry, if repudiation by this series of alleged breaches can be shown, into whether such breaches had been waived by the Plaintiffs'.

9. The final matter, again assuming proof of a binding agreement, is whether such an agreement must fail for want of formality under section 3 of the Conveyancing and Property Ordinance (Cap. 219) which requires a note or memorandum in writing of the agreement. This issue had caused a debate between counsel as to whether this agreement was one of the type which came within the purview of section 3.

10. Provided the Plaintiffs' survive all of these obstacles I would then be required to consider the matter of quantum which has itself caused problems with discovery which resulted in the trial being adjourned half-way through its course in January to be concluded over a further 9 days in August.

11. Having identified what is required of me I must now turn to the evidence in respect of these matters which will require separate consideration of the evidence on each of these issues.

Did the parties arrive at a concluded and legally binding agreement?

12. It is helpful to start by examining the way the argument has been put, on behalf of the Plaintiffs, by Miss Lau, who despite having taken over the conduct of their case half-way through the trial has read herself into the evidence and detail in such a way that the change of counsel has been seamless. She starts with the law and submits, quite rightly, that an agreement for a lease will bind one party to create and the other to accept a lease in the future. This she says is the character of the agreement that had been reached between the parties here. To create such an agreement, four essential terms must be shown to be present:

(a) the identities of the parties;

(b) the premises to be leased;

(c) the commencement and duration of the term, and

(d) the rent or other consideration to be paid.

She seeks to make this good from the helpful discussion in Halsbury's Law of England 4th Ed., Vol. 27(1) at para. 52 which bears repetition here:

"An instrument which only binds one party to create and the other to accept a lease in the future is an agreement for a lease. Moreover, an instrument is construed as an agreement for a lease and not as a lease, notwithstanding that it contains words of present demise, if the provisions to be inserted in the lease are not finally ascertained; or if from other indications it appears that it was not intended to take effect as a lease, as, for example, where it is expressly provided that it is not to operate as a lease; or where it is in the form of an agreement to grant a lease, and there are none of such indications that it is to operate as a lease; or where the landlord is not yet in a position to demise; or where certain things have to be done by the landlord before the lease is granted, such as the completion or repair or improvement of the premises, or by the tenant, such as the obtaining of sureties, or where possession, or the commencement of the rent, is postponed until a future date to allow the preparation of the lease. In all cases the question whether an agreement operates as a present demise, or only as an agreement for a lease depends upon the intention of the parties, and, even though it is only an agreement for a lease, if the tenant occupies under it he is liable under the agreed covenants in respect of the time of his occupation."

The essential terms of the agreement are considered at paragraph 60 (ibid.) from which Miss Lau has extracted the four matters which I have referred to. It is also helpful to have regard to the following part of the paragraph:

"... If these matters are ascertained to be offered and accepted, it is sufficient. If any other terms are mentioned by one party, these must also be unconditionally accepted by the other party in order that there may be a concluded contract. As long as such necessary terms have not been agreed to, or any additional term has been mentioned on one side and not unconditionally accepted on the other, the matter rests in negotiation and there is no concluded contract. New terms may be added to an offer, or the offer may be withdrawn at any time, as long as it has not been accepted. As long as an offer remains open, the other party may however, withdraw any term which he has sought to introduce and accept the offer unconditionally."

13. Equally, it is helpful, when I trace the course of negotiations, to bear in mind the words of Lord Blackburn in Rossiter v. Miller (1878) 3 App. Cases 1124 at 1151 H. L. where he said:

"Though the parties may have agreed on all the cardinal points of the intended contract, yet, if some particulars essential to the agreement still remain to be settled afterwards there is no contract. The parties, in such a case, are still only in negotiation."

14. The leading case of Winn v. Bull (1877) 7 Ch. D 29 emphasizes the importance, particularly in agreements relating to the disposal of land either by sale or lease that all the essential terms have been agreed. The judgment of Lord Jessel M.R. points to the dangers of that being so, and the different conclusions that might be reached in individual cases. The following passages are of assistance:

"If in the case of a proposed sale or lease of an estate, two persons agree to all the terms and say, "We will have the terms put into form," then all the terms being put into writing and agreed to, there is a contract. If two persons agree in writing that up to a certain point the terms shall be the terms of the contract, but that the minor terms shall be submitted to a solicitor, and shall be such as are approved of by him, then there is no contract, because all the terms have not been settled."

15. The Master of the Rolls then went on to point to the dangers of holding that there has been a binding agreement when terms still remain unresolved. These passages in the judgment illustrate the point:

"Now with regard to the construction of letters which are relied upon as constituting a contract, I have always thought that the authorities are too favourable to specific performance. When a man agrees to buy an estate, there are a great many more stipulations wanted than a mere agreement to buy the estate and the amount of purchase money that is to be paid. What is called an open contract was formerly a most perilous thing, and even now, notwithstanding the provisions of a recent Act of Parliament - No prudent man who has an estate to sell would sign a contract of that kind but would stipulate that certain conditions should be inserted for his protection. ...

When we come to a contract for a lease the case is still stronger. When you bargain for a lease simply, it is for an ordinary lease and nothing more; that is, a lease containing the usual covenants and nothing more; but when the bargain is for a lease which is to be formally prepared, in general no solicitor would, unless actually bound by the contract, prepare a lease not containing other covenants besides, that is, covenants which are not comprised in or understood by the term "usual covenants". It is then only rational to suppose that when a man says there shall be a formal contract approved for a lease, he means that more shall be put into the lease than the law generally allows. ...

The distinction between an agreement which is final in its terms, and therefore binding, and an agreement which is dependent upon a stipulation for a formal contract, is pointed out in the authorities. ...

It comes, therefore, to this, that where you have a proposal or agreement made in writing expressed to be subject to a formal contract being prepared, it means what it says; it is subject to and dependent upon a formal contract being prepared. When it is not expressly stated to be subject to a formal contract it becomes a question of construction, whether the parties intended that the terms agreed on should merely be put into form, or whether they should be subject to a new agreement the terms of which are not expressed in detail."

16. More recently, the dangers of an "open contract" referred to by Lord Jessel in Winn v. Bull supra. were highlighted by the Court of Final Appeal in Kwan v. Ozer (1999) HKC 150. Lord Litton at page 164E - F observed that:

"Whilst in theory it is possible for parties to conclude their bargain for the sale of a flat with nothing more concrete agreed than the property itself and the price, it does not mean that, in the course of negotiations, once the price has been agreed, the other party can walk away and say: "Snap, we have an open contract". If that were the law, no one can safely enter into negotiations step by step - and they can never retreat from an agreed position in the course of negotiations, however, those negotiations might turn out later to be."

17. In a case such as the present one where the court's task is to attend to the evidence and decide whether a binding agreement had been reached it is helpful to describe the approach which is to be adopted. A similar situation was before the Court of Appeal in Calimpex International Co. v. ENZ Information Systems Ltd & Anr. (1994) 1 HKC 191. The headnote to the report, which comes from the judgment of Godfrey J.A. sufficiently describes what is to be done.

"(1) The court should look at the documents as a whole and the conduct of the parties and see therefrom whether the parties have come to an agreement on anything that was material. This broadbrush approach is necessary to analyze common place cases; i.e. by reference to the familiar concepts of offer and acceptance ..."

18. It is to these latter cases that Mr Lin, who appears for the Defendants, has relied on in seeking to contend for a conclusion that this evidence, on its proper analysis, comes nowhere near to showing that a concluded agreement had been entered into. I may need to make some further reference to these and similar authorities after I have rehearsed the salient parts of the evidence, which I must now do.

What is the evidence?

19. As will emerge presently, the contemporaneous correspondence between the parties is of prime importance in the decision as to whether an agreement had been reached as contended for by Miss Lau. Whilst the decision is one to be arrived at on the whole of the evidence, particularly that of Mr Siu and Mr Mak, as to what they say had been agreed, the correspondence provides the truest reflection of what was actually going on at the time. It shows in "real time" as it were, the process of negotiation which I need to attend to.

20. Inevitably, it will be necessary to recite a number of passages from this correspondence and its accompanying documents. Clearly such selective recitation can be no substitute for a consideration of the entire document which is being referred to. Nevertheless, in the interests of keeping this judgment to a manageable length, I only propose to set out the essential parts of the relevant correspondence and documents whilst endeavouring to put each document into its proper perspective in order to indicate its overall effect in the decision as to whether agreement had been reached.

21. It needs to be remembered that what is being suggested here is that Mr Siu and Mr Mak had arrived at an oral agreement for the granting of the lease over the course of several conversations from September 1996 to 27 January 1997, with the crucial binding agreement coming about once the deposit of $200,000 had been paid by the 2nd Plaintiff on 27 January. The discussions that continued through until July 1997 between the two men are said to merely confirm what have been agreed between them and amounts to no more than the inevitable fine- tuning which one would expect to see taking place after agreement had been reached. This, as will be seen, must be judged from the nature of that correspondence. Whilst both men cannot point to any particular moment in their conversations as to when "the deal was done" nor can they say what words were used, the correspondence and documents undoubtedly serve as an echo of those discussions.

22. Following the payment of the cheque the Defendant sent the 2nd Plaintiff a letter of intent dated 1 February 1997. [C22-24]. It purports to be an offer open for 7 days. The particular terms are these:

"...
(4)	In the event that the tenancy agreement of the said premises comes to effect under terms and conditions mutually agreed thereafter, the intended lessee shall pay to the lessor a rental of HK$236,790.00 per month (excluding rates) plus HK$40,122.50 per month being Management Fees and HK$32,827.50 per month being air-conditioning charges making a total of HK$309,740.00 per month. The monthly rental is to be paid in advance without deduction whatsoever on the 1st day of each calendar month and the Government rates (estimated HK$39,070.35) which is payable quarterly in advance.
(5)	The lessor agrees to grant and the intended lessee agrees to take the said premises for a term of 3 years commencing 8th March 1997 tentatively (subject to issuance of occupation permit) and a prior 7 days' written notice will be served by the lessor to the intended lessee for the actual date of the commencement of lease. With the 6 months' notice prior to the expiration of the lease granted hereof the lessee shall have the right to renew for a further term of 2 years at the then prevailing market rental.
(6)	Rent-free period equivalent to 30 days' rental commencing from the date of handover of the said premises will be granted to the intended lessee. However, the intended lessee shall be responsible for the payment of Government rates, management fees, air-conditioning charges and other charges within the rent-free period.
(7)	All the abovementioned conditions are subject to the formal Lease Agreement and Conditions of Exchange being granted by the Government where applicable.
..."

23. Mr Lin observes that this letter contradicts the notion that any sort of binding agreement had been arrived at. Firstly, as can be seen from (7) the conditions referred to in the letter of intent were to be subject to the formal Lease Agreement. Additionally, the oral agreement which Mr Siu says that he arrived at with Mr Mak included a term that the lease was one for 3 years with an option to renew for a further period of 2 or 3 years. (5) only provides for an option for a further 2 years. The other terms that Mr Siu says that he agreed were that:-

(i)	the 2nd Plaintiff would operate a restaurant as well as a food court;
(ii)	that a rent-free period of 3 months would be allowed by the Defendant;
(iii)	that at the food court sub-letting of all or some of the counters would be permitted;
(iv)	that the Defendant would provide all standard kitchen facilities necessary to meet the standards required in order to obtain a food and beverage licence for the premises and;
(v)	that the Defendant agreed with the 2nd Plaintiff that the 2nd Plaintiff would be allowed to nominate another company to be the tenant under the lease.

24. One only needs to briefly examine the letter of intent to see that material differences are apparent. The option to renew as I have already observed is only for 2 years - there is no mention of a renewal for 3 years. The rent-free period is down to 30 days and that the terms in the letter of intent are, as Mr Lin has asked me to note, expressly said to be subject to the formal Lease Agreement.

25. It is obvious these discrepancies did not put off the 2nd Plaintiff and the fact that the letter of intent was not signed within 7 days, or indeed at all, did not prevent forward movement. On 11 February [C 27] the Defendant sent the scale plan of the premises so that the preparation works might be put in hand by the 2nd Plaintiff.

26. The 2nd Plaintiff engaged an associated company, The World Franck Siu Contracting Ltd ("Franck Siu") to act as their main contractor in designing the layout of the restaurant which was to be called Shanghai Café as well as the Food Court. There is correspondence in May starting at C6 which passes between the 2nd Plaintiff and the Defendant and also the Defendant and Franck Siu relating to the drawings of the layout of the premises and as to what is allowed and what is not in terms of design and construction. It is not necessary to consider these letters save to observe that by this time the parties were clearly of the joint view that everything was working towards the signature of a formal lease. On 23 May [C9], the Defendant had written to inform the 2nd Plaintiff that the "soft opening" of the Mall was to take place on 23 June 1997. It ends with the sentence: "Will all tenants please make necessary preparation to cope with the event.". By June, the matter appeared to be progressing in earnest. On 4 June [C17] the 2nd Plaintiff sent the Defendant a letter enclosing 5 copies of the finalised drawings of the premises for approval. In June [C19-21] there were perfectly normal exchanges between Franck Siu and the Defendant on matters relating to the plans and what should be provided by the landlord and so forth.

27. In July the first signs of disagreement emerged. On 4 July [D23] the Defendant sent the 2nd Plaintiff the proposed tenancy agreement. The substantive parts of this letter merit repetition here:

"Further to our letter of intent ... we are pleased to enclose herewith the Tenancy Agreement ... in respect of the captioned premises in duplicate for your attention.

Kindly acknowledge the conditions by signing ... and return the duplicate of the document to us together the bank guarantee in the sum of HK$322,763.45 and a cheque for the following amount ...

Balance of Deposit	HK$445,526.90
Attendance Fee	43,770.00
Decoration Deposit	35,000.00
Total:	HK$524,296.90

We hereby formally notify you that the date of commencement of lease shall be 1 August 1997 ..."

That letter was signed by Mr Neil Chan the Defendant's Leasing Manager. The passages in D24-26 relate to minor matters of detail based on the premise that all is moving on to a satisfactory conclusion. The first sign of polite dissent appears at D27 which is a letter dated 9 July from the 2nd Plaintiff to the Defendant. By now the 2nd Plaintiff had read the proposed lease which had come with the letter of 4 July. Its full terms start at D235. The tenant is the 2nd Plaintiff. Mr Steve Siu, under whose signature the letter of 9 July was sent, had identified 8 matters which required resolution and which did not accord with what he understood had been agreed between him and Mr Lawrence Mak. Mr Lin submits on the basis of what was now happening, was that far from having agreed on the lease these parties were still negotiating hard with each other on the terms and that the points on which they had still failed to agree were so fundamental so as to completely detract from many notion that agreement had been reached on 27 January 1997 when a deposit of $200,000 had been paid. Given the importance of this aspect, the 8 points raised by Mr Siu need to be set out here:-

"	1.	Business Hours
		We understand that the current business hours of the Mall is from 10 am to 8 pm. The business hours of our food and beverage outlet in Palace Mall is from 8 am to 3 am ...
		Therefore, we would like to request your favour to arrange the supply of conditioned air during our business hours (Clause 3.04) ...
	2.	Signage
		Under Clause 2.44, we are not supposed to erect signage ... However, in our letter ... is applying for some display of signage in the arcade.
	3.	Preparation of Food
		Under Clause 2.58, it is expressly stated that cooking, preparation and delivery of food is not allowed in the premises, but given that the captioned premises is for the user of food and beverage, therefore this Clause should be waived.
	4.	Reinstatement of the Captioned Premises
		Under Clause 2.65, as the premises is handed over to us in a condition of no shopfront no party wall ... Therefore, at the expiration ... of the lease, we would hand over the premises in a bare-shell condition.
	5.	Tenant
		The tenant should be Wealth State Investments Ltd ...
	6.	Security Deposit
		Security deposit of this premises would be wholly in cash.
	7.	Right of Subletting and Licensing Out
		As we are running a kind of international food court in the captioned premises, we do need to have approval from landlord to sublet or license out which to some extent is contrary to Clause 2.52.
	8.	Term of Lease
		As for our security of tenure and investment return, we want to seek a lease for 3 years fixed with an option to renew for a further term of 3 years.
	We hope that the above would not bother you much ..."

It is plain that these were rather basic requirements so far as Mr Siu and the 2nd Plaintiff were concerned. What is also clear is that the Leasing Department of the Defendants had not even tried to tailor, what is clearly their standard form of lease which is designed for retail shop premises, to the particular needs of a lease of premises which were to be used as a restaurant and food court. Two concerns in the letter of 9 July serve to confirm this. Firstly, point 3 in the letter which refers to the prohibition on cooking, preparation and delivery of food - which, if I may say so, was a particularly unintelligent oversight on the part of the Leasing Department who were hoping to let the premises as a restaurant. And also, perhaps on this occasion more venial, No. 7 which restricts sub-letting. According to Mr Siu, the whole basis of the agreement with Mr Mak was that some of the food court counters could be sub-let to outside caterers and that it was Mr Mak who had even suggested the Golden Bull Vietnamese restaurant to him as a likely sub-lessee in view of the fact that its owner already operated the Golden Bull restaurant at the Defendants' New World Shopping Centre next door. The length of the lease is also a matter that was picked up by Mr Siu where he considered that he had agreed with Mr Mak a three-year term to be followed by an option to renew for a further 3 years. Other matters which should also be noted at this stage is that the name of the tenant is stated to be the 2nd Plaintiff in the proposed lease whilst in the letter Mr Siu had indicated the name of the 1st Plaintiff as the tenant. The 1st Plaintiff was a new off the shelf company specially formed to operate the venture which had been brought into existence, according to Mr Siu, to give effect to the interests of the various investors that he had brought together for this purpose. Given the interests of these investors, some of whom had been specially invited because of their previous experience in the food and beverage business, it would have been inappropriate to reflect their shareholding in this project through The World Group of companies, hence the need to form a new company for this purpose. Mr Mak's evidence about these discrepancies is that whilst he had agreed all of this in principle with Mr Siu he had left the Leasing Department to work out the details with the result that these mistakes had been made.

28. Mr Lin observes that these differences only serve to highlight the Defendants point that far from having agreed anything beyond the hope and expectation that the 2nd Plaintiff would like a lease of these premises, no agreement had been reached and indeed could not have been reached in July, let alone January, given the fundamental differences which remained to be resolved.

29. Notwithstanding this the matter appeared to proceed with, at this stage, little hint of the trouble that lay ahead. On 15 July [D30] Mr Yiu of the 2nd Plaintiff sent a letter to Mr Neil Chan of the Defendants' Leasing Department, significantly says Mr Lin, marked "subject to contract" which set out the state of play in respect of the 4 separate premises that the 2nd Plaintiff was expecting to rent from the Defendant. By now the starting date the lease had gone back to 1st August. The rent-free period had been altered to 61 days and then - this being something of a movable feast from the 2nd Plaintiff's wish to have 90 days, which had gone down to 30 days, as proposed by the Defendants, and now out again to 61 days?

30. On 18 July Mr Yiu wrote to Mr Lawrence Mak [D33] apologizing for some changes as to the way the prospective tenants of all of the premises that were to be rented at the Palace Mall were to pay the security deposit. He ended by saying: "We hope this would not cause any additional inconvenience for you to prepare the respective Tenancy Agreements.". Plainly, it was still within the 2nd Plaintiff's contemplation that the leases would be signed. On 23 July the 2nd Plaintiff informed the Defendant that Franck Siu would carry out the works and they had authority to collect the fan coil units and the relevant technical information on behalf of the 2nd Plaintiff.

31. Then at the very end of July things started to go wrong. The new man Mr Kays Wong decided that as a matter of image for an upmarket mall such as this, a food hall would not be right. He called a halt to the work until agreement could be reached on the precise nature of the operation of these premises. It seems perfectly plain that as far as the Defendants were concerned they felt that the parties had not gone beyond the negotiation stage. No lease had been signed and therefore they could still press for their own terms. That was the Defendant's view of the matter. Whether this was a correct view is what this case is all about. From this point forward the negotiations and the correspondence and documents take on a different complexion and urgency.

32. On 31 July in order, I presume, to put pressure on the Defendants to come to terms on these outstanding matter a letter marked "without prejudice" was sent by the 2nd Plaintiff [D173] to say that the prospective tenancies of all of the units at the Palace Mall were being viewed by them as an overall package - if there was no agreement on everything there could be no agreement at all. This in my view was a significant remark to make, demonstrating that after all, the 2nd Plaintiff did not feel bound to enter into any of the tenancies and that all these matters remained very much at the negotiation stage. A reply was sent to that letter by the Defendant on 2 August [D36] to the effect that they were reviewing the situation of the restaurant [Shops 215-216] and that they would revert to the 2nd Plaintiffs as soon as a decision had been reached whilst in no way accepting the notion of a package deal. Their view was that the other shops stood apart and were being dealt with under separate correspondence.

33. At D37, 38 and 39, there are three further letters from the 2nd Plaintiff to the Defendants pressing for a substantive reply to their letter of 31 July. These letters are dated 5, 6 and 14 August. The concept that all the prospective tenancies were part of one package deal was maintained, together with a threat that a claim may be on its way for the losses that would have been incurred by the 2nd Plaintiff.

34. This line of correspondence produced some movement from the Defendants in the form of a letter dated 15 August [D40] marked "subject to contract and availability" - the parties were by now getting a bit more legalistic - from Mr Neil Chan referring to a telephone conversation between Mr Kays Wong and Mr Steve Siu. This letter came in the form of an offer of a lease. On this occasion the option to renew was to be for a further 3 years. The rent free period remained at 61 days as did the prohibition on sub-letting. That was met with silence and so a further, more severe, letter was sent by the Defendants on 26 August by fax and by post marked "Final Reminder" [D45]. The 2nd Plaintiff was required to sign the letter within 7 days or the property would be released to other tenants on the basis that the 2nd Plaintiff would be considered as no longer interested in the premises.

35. There was a reply from the 2nd Plaintiff [D46] dated 1 September. Whilst the line that these shops were part of a package deal was still adhered to there was a more conciliatory tone and a cheque was enclosed towards the deposit in respect of one of the other shops. Hope was expressed that agreement would be reached on the outstanding issues for the other shops very soon.

36. This was then followed with yet another proposed tenancy agreement for the restaurant in a letter dated 11 September from the Defendant to the 2nd Plaintiff [D47]. It was also marked "Subject to Contract and Availability". The only points of difference from the offer on 15 August [D40] was that the rent free period had now gone out to 91 days. Nevertheless, that was enough to produce further discussion which is clear from the 2nd Plaintiff's letter of 25 September [D56] which was marked "subject to contract". I do not need to recite it - it is sufficient to relate that it raises 6 matters which require resolution, some of which were new and important such as No. 6 which required an insertion in the lease of the clause that Shops 215-216 would be the only Food and Beverage outlet in the Mall. The letter ended with the 2nd Plaintiff looking forward to taking over the premises in October 1997. The reply from the Defendant is dated 8 October [D59]. Some of the requests were agreed and others were not. This letter is also marked "subject to contract".

37. It should be remembered that whilst these negotiations were going on Franck Siu were busying themselves with the design plans and appointing the building contractor to carry out the works, to which I will need to make further reference presently.

38. I am satisfied that with hindsight the 2nd Plaintiff's letter of 5 November 1997 marked "without prejudice" must be seen as the real turning point in the ultimate breakdown between the parties. See D64A. It introduces an entirely new element into the whole process and there was a hint that the 2nd Plaintiff was getting cold feet so far as the whole arrangement was concerned. I ought to set out the material parts of this letter here:

"Further to our negotiation on the tenancy of the captioned shop, as we are running the food and beverage business at these premises, guarantee of customers and pedestrian flow would be of prime importance of success. As we indicated too many times, the current situation of the Mall is that the Mall is so quiet, just like "a pool of stagnant water". Up to now, we see no improvement of the customers' traffic and we see no trace of any kind of promotion, activities that would be helped for the Mall. It is so difficult for us to ascertain the current situation of the Mall can support a food and beverage outlet.

We are given to understand that your existing tenancy in the Palace Mall has shown that there is pressure inappropriate arrangement of promotion activities for the Mall as a whole. As the Mall opened for a few months, we have not traced any improvement on the above. We therefore decide to hang up the takeover of the captioned premises until a later date.

We would be most obliged if you could look into this matter carefully and revert to us with a detailed proposal for any improvement for the Mall and the promotion campaign for the Mall. We would discuss with you on this then and we would proceed to take over the premises."

Apart from its contents, it is relevant to observe that the use by the 2nd Plaintiff's Development Manager Mr Yiu of the opening phrase: "Further to our negotiation on the tenancy of the captioned shop ...". Presumably, this reflected the 2nd Plaintiff's view as to the status of what had now been going on for over 11 months?

39. The Defendant's reply to this came on 5 December (a month later) addressing the concerns on promotion activities and the number of visitors, but denying that this aspect was ever any part of the parties' negotiations.

40. The death throes came in January 1998 when the 2nd Plaintiff asked for access to the site for the removal by its contractor of their remaining tools and equipment. Undeterred by this, the Defendants made one final effort to resolve the impasse by offering a smaller area based on the original premises. These measured 6,080 square feet compared to the 7,200 square feet that had originally been considered. The rent free period had now been extended to 126 days, a considerable improvement on the 30 days that had appeared in the first draft tenancy agreement. Sub-letting was still prohibited. This came by letter dated 16 January 1998 which was marked "subject to contract and availability". Nothing came of this.

41. The correspondence which I have referred to provides the most reliable means by which to judge what had passed between the parties. It speaks for itself and does not come with the gloss or emphasis that a witness may wish to put on his evidence when describing events in the past. There is also other correspondence which I have not provided the same detail about which specifically relates to the provision of kitchen equipment. Given that the venture concerned a catering establishment the subject of a kitchen was of critical importance, particularly for the 2nd Plaintiff who had to operate it. This correspondence shows that whilst the parties were well on the way to resolving their differences over what the Defendants were to supply and pay for, that all changed once Mr Kays Wong came on the scene and pulled back from what had been on offer. What had been proposed was that much of the kitchen work would need to be done by the 2nd Plaintiff's contractors and the 2nd Plaintiffs would be reimbursed by the Defendants through deductions of future payments of rent. The final effect of this was that the parties had got close to agreement but then moved away from each other when Mr Kays Wong was not willing to be as generous as his predecessor had been.

The Answer

42. I have had to stand back from all of this evidence, have regard to it in a realistic way, as I also have with the evidence of Mr Siu and Mr Mak. Ultimately, I am convinced that this evidence can only admit of one answer which is that the parties had never got beyond the stage of negotiation. Whilst Mr Mak and Mr Siu had come to a broad consensus as to what was to be let and for what purposes as well as the rent and a hoped for starting date for the tenancy these matters were always going to be subject to a formal lease being agreed between the parties. As to the deposit of $200,000 this was "earnest money" which Mr Mak persuaded Mr Siu to pay in order to show himself as being serious in their discussions. Presently I will return to the question of whether this money is now recoverable. The fact that the parties were unable to agree on so many fundamental or, at the very least, important matters demonstrates that it simply could not have been in their contemplation that they had entered into an agreement for a lease at the moment that the "deposit" was paid. Far too much was it stake on both sides for them to have said to each other at the time - "Well here we are now the deposit has been paid we have a legally binding agreement!" This is precisely the situation that had been contemplated by Lord Jessell in Winn v. Bull supra. at page 31 of the report where he observed:

"Now in the present case the plaintiff says in effect, "I agree to grant you a lease on certain terms, but subject to something else being approved." He does not say, "Nothing more shall be required beyond what I have already mentioned," but "something else is required which is not expressed." That being so the agreement is uncertain in its term and consequently cannot be sustained."

I also consider that the facts here are similar to the situation which was before the English Court of Appeal in Raingold v. Bromley (1931) 2 Ch. 307 Lawrence L.J. (as he then was) at page 315-316 observed that:

"An agreement to grant a lease which is conditional on an agreement being reached as to the terms to be contained in it is not an enforceable agreement. The subject matter of the suggested agreement is a granting of a lease and if the terms of the lease are not agreed but are left to future negotiation on agreement, the original agreement amounts to nothing more than an agreement to enter into a contract at some future time."

In my judgment, this is precisely the nature of the arrangement that these two gentlemen came to. Mr Mak himself has said that he would agree matters in principle and then let the details to be sorted out by his subordinates in the Leasing Department.

43. The present case in my judgment also highlights the warning given by Litton PJ in Kwan v. Ozer supra. To accept Miss Lau's submission that a binding agreement was arrived at on 27 January when there were so much more to be negotiated about, would have been imposed on the parties an uncertain final contractual document where so much still needed to be discussed and agreed about. In any event the course of the correspondence amply demonstrates that neither party were considering themselves as bound to each other's proposals as their negotiations progressed ultimately, to a failure to agree.

44. It was only after the dust had settled that a lawyer's eye has been cast over what occurred and a brave attempt has been made to arrive at an ex-post facto construction of a binding agreement when I am convinced that at the time neither party held to such a view. The truth of the matter was that Mr Mak and Mr Siu, who in the past had always managed to iron out difficulties over leases and who trusted each other to be able to do so fully expected, once the principle had been agreed, that they would be able to conclude a mutually acceptable tenancy agreement. For the reasons that I hope I have demonstrated, by looking at the course of the correspondence, that this expectation was not realised.

45. This case, more than most I would have thought, highlights the dangers of a prospective tenant committing himself to the time, effort and expense of fitting out premises before the final agreement has been signed. The lesson is also there to be learned by the landlord in letting a prospective tenant into possession for that purpose only to have the tenant leave the premises in a state of advanced preparation and not going on to sign a tenancy agreement. All of this resulting in mutual recrimination and blame for the breakdown in negotiations.

46. For all these reasons the claim in respect of the tenancy must be dismissed and therefore there must be judgment to the Defendant on the claim against both Plaintiffs.

Novation

47. Having regard to the dismissal of the claim, this becomes an academic exercise but I ought, if only for the sake of completeness, to deal with it. It must follow from what I have said in dismissing the claim that this issue is to be viewed in the context of the unsuccessful negotiating process which the parties had engaged in. I am satisfied that Mr Mak and Mr Siu had agreed between themselves that the lease would be granted not to the 2nd Plaintiff, although the negotiations were to be conducted with them, but to a company that would be specially formed to operate the business from the premises. Nevertheless, once there has been a finding that there never was any binding agreement to grant a tenancy, one does not arrive at the question of novation or anything of that sort. The way that I view the evidence on this aspect is that the question of novation is strictly speaking just a part of the negotiating process. Once that failed, everything else that was dependent on it went with it and so that is how I would resolve this issue. It simply does not arise for consideration in the circumstances.

Waiver of Breaches?

48. An argument has been addressed to me as to whether, in circumstances that a binding agreement had been reached which the Defendant had broken by declining to grant the Plaintiffs tenancy, the Plaintiffs are to be taken as having waived those breaches by continuing to negotiate. Whilst counsel, in the course of their admirably comprehensive submissions, have sought to cover every conceivable permutation which the evidence might have thrown up, that is not something I need to engage in having found that there was never any binding agreement in the first place. The point simply does not arise on my view of the evidence nor is it really helpful for me to engage in any theoretical appraisal of the situation had I found in favour of the Plaintiffs on the main point. In the event of an appeal, if I am held to have been in error to have dismissed the claim on the basis of no binding agreement, then the Court of Appeal will have to decide how to dispose of this issue.

Was there a breach of the Agreement in relation to user, kitchen facilities and/or sub-letting?

49. This is a specific question posed and answered by Miss Lau in her final speech. It relates to the important matters concerning the partial use of the space as a food court, sub-letting of some of the counters and as to what was to be provided by the Defendant by way of kitchen facilities. These issues have now also fallen away having regard to my findings on the evidence. All of these vitally important issues went as part of the negotiations. No final consensus was reached with the resulting breakdown in the whole venture. They are part of the negotiations that went nowhere. Once I have found that there was no binding agreement, then that also provides the answer to this issue.

Section 3 of the Conveyancing and Property Ordinance (Cap. 219)

50. This is a specific point raised in the defence as something of a "long stop" that in any event the claim fails for want of requisite formality having regard to the absence of a written note or memorandum evidencing the agreement. I do not find it necessary to provide an answer to this issue having regard to the more fundamental way in which I have felt able to decide the claim. In the event of an appeal the Court of Appeal would be able to decide this issue should it consider it necessary to do so without any ruling from me. The issue raises a clean point of law which has not called for a decision by me and which the Court of Appeal would be able to decide without any finding of fact from me as the trial judge.

The return of the Deposit

51. This remains a live issue. Miss Lau submits that if all else fails her client should have the deposit returned to it. The response of the Defendants to this matter is that this deposit is not recoverable because it was paid on account of rent and to show that the 2nd Plaintiff was serious about entering into an agreement. Once the Plaintiff failed to enter into an agreement then the deposit becomes irrecoverable. Miss Lau's submission really amounts to this. This was money paid to demonstrate good faith. Once all bets were off then the status quo ante must be restored which includes the return of the deposit.

52. It seems to me that this issue must be resolved by resort to first principles. The payment of $200,000 was in anticipation that a lease would ultimately be signed and credit would be given for this amount in respect of the first "tranche" of rent. The Defendant really cannot have it both ways. Their whole case has been predicated, and successfully so, on the basis that there was never a binding agreement to grant a lease. In the event the negotiations came to nothing and as a matter of law both parties were entitled to and did walk away from each other. To put it more legalistically there has been a total failure of consideration. This must entail putting each party back into its pre-negotiation position including the return to the 2nd Plaintiff of the $200,000 deposit which I now order. To be a non-recoverable deposit there would have to have been clear evidence that the money would be liable to be forfeited if the prospective tenant did not enter into a tenancy. There is no such evidence here.

The Counterclaim

53. This too remains a live issue. The claim is brought on the basis that where the Plaintiffs have declined to enter into a tenancy agreement they are now liable to pay for their occupation of the premises in the course of which they set about fitting out the restaurant and food court and they must do so by way of mesne profits. This in my judgment is to be viewed as the other side of the coin to the claim. Where the Plaintiffs, having failed to show a binding agreement, are not entitled to be reimbursed for the considerable wasted expense that went in anticipation of an agreement being entered into the Defendants are also in similar straits in regard to the 2nd Plaintiff's occupation during the abortive fitting out period. It needs to be remembered that the Defendants let the Plaintiff in on the basis of a hoped for and expected tenancy agreement being signed. The entering into occupation by the 2nd Plaintiff was to both parties perceived advantage. For the Defendant that would have had the effect of committing the Plaintiffs to the premises. The fact that the Plaintiff was spending money on the fitting out would have diminished the risk of them backing out. It also meant that the sooner the premises were ready for occupation the sooner the rent would start coming in. For the Plaintiffs the obvious advantage was that the earliest possible completion of the fitting out works would result in the earlier opening of the restaurant and the income that would go with it.

54. In a situation where the parties eventually never came to terms, I am not able to see how the Defendants can look for payment of mesne profits from the Plaintiff for their occupation of these premises. This is not the ordinary sort of case where occupation would usually attract a payment from the occupier. The Defendants are really bound by their own case that there was no binding agreement. They consciously decided to let the 2nd Plaintiff into occupation before they had them tied down to a tenancy agreement. They must therefore carry the risk of what eventually happened, just as the Plaintiffs have in committing themselves to all of this work and expense without the certainty of a signed lease.

55. On this basis the counterclaim must fail and stand dismissed

Costs

56. Although, in a moment, I must briefly embark on an indication of what the Plaintiffs would have been awarded in damages had they succeeded it is convenient to now deal with the last substantive matter that is left in the action which is costs. I of course have not had the benefit of argument so this order will be an order nisi, but I would have thought that the Defendants must have their costs on the claim and the Plaintiffs their's on the counterclaim which follows the usual rule of costs following the event. I appreciate that overall the Defendants have been the successful party but they chose to bring a counterclaim which has failed. I also recognise that the Plaintiffs have had a partial success in that they have had their deposit back but this really is a tiny point in the action when it is measured against all the effort and time expended in bringing and defending the main aspect of the claim.

Quantum

57. This must come as no consolation to the Plaintiffs but in the event of an appeal it would be helpful if I gave a brief indication on the award that I would have made had the Plaintiffs succeeded in the action. This aspect has occupied much of the trial and been sharply contested.

58. Had the 2nd Plaintiff been able to demonstrate that a binding agreement came into existence I would have thought that it, rather than the 1st Plaintiff would have been entitled to damages or to a reimbursement for the fitting out expenses. I can see no basis for any award being made to the 1st Plaintiff although there may have had to be some internal accounting between the two Plaintiffs' in due course.

59. The proper basis of the claim would have been for expenses rendered futile by the breach. This is discussed in McGregor 16th Ed. at paras. 29 and 45-52. Miss Lau has helpfully set out the various elements of the claim in table form at pages 13 and 14 of the note to her final speech. I propose to consider this from that table.

Sub-letting Expenses

(i)

These relate to the costs of producing and printing the brochure for sub-letting and advertising. The evidence is there in the bundles and I have no difficulty in accepting it. I would have allowed the two payments of $14,777.00 and $2,322.00. Clearly these are items of wasted expenditure referable to the opening of the restaurant.

Fitting out and E&M Costs

(ii)	Next comes the very substantial fitting out and E&M works: these are 8 items totalling $1,982,213.00. All the evidence in support of this essential expenditure is before me in the trial bundles and proof of payment has been made out. I would have allowed reimbursement of all of these items.

Equipment and Accessories

(iii)

This relates to deposits on kitchen equipment, audiovisual equipment and for crockery and uniforms. The total claim under this head is $850,980.00. There has been much dispute in respect of this part of the claim. The evidence of Mr Poon for Franck Siu has been challenged hard by Mr Lin. There is of course the risk that with associated companies internal accounting procedures may cover up the reality of the situation. Some of these items are in fact internal accounting ledger set-off's so no money has actually changed hands. I have attended to what Mr Lin has had to say about the quality of the evidence and particularly with regard to the timing and the way that the invoices have been produced. Nevertheless I am satisfied that these claims have a proper basis and have been proved. These items have either attracted actual payments or credit has had to be given to Franck Siu by internal ledger transfers. Accordingly I would have awarded $850,980.00 under this head.

Staff Salaries

(iv)

This is for $1,241,286.00. It has come about by the existing staff of the 2nd Plaintiff being transferred and their salaries being charged to the project whilst they were being trained for work in various capacities in the restaurant. The evidence is in complete disarray. Some payments were made when staff were on leave - other payments are completely out of line with what one might expect for restaurant staff to receive by way of remuneration and I am left completely unconvinced by this element of the claim. In my judgment, it is contrived and I dismiss it in its entirety.

Rent of Temporary Office

(iv)

This relates to the 2nd Plaintiff charging the 1st Plaintiff for temporary office base. Other premises were said to have been rented for 3 months at a cost of $130,000.00. I am not satisfied, where this has been so incestuous between the Plaintiff's companies, whether this was either necessary or in fact a genuine rental for the purpose of its use by the 1st Plaintiff the would-be operator of the restaurant. I therefore would have dismissed this element of the claim.

Total

(vi)	I would therefore have awarded a total of $2,850,292.00 as wasted expenditure.

60. I have not provided an analysis of my reasoning for these awards but only a broad indication as to why I would have awarded or declined to order reimbursement in each individual case simply because in this case I have dismissed the claim. I have wished to provide the figures against which any appeal might be lodged so that the Court of Appeal would have an amount before it which it could adjudicate on and so avoid the necessity of having the matter sent back for assessment at first instance.

61. Lastly, I wish to express my gratitude to counsel for their very considerable assistance.