YUN KEE KITCHEN LTD v. LUK KWAN AND ANOTHER

DCCJ 4904/2006 & 90/2007

(Consolidated)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NOS. 4904 OF 2006 & 90 OF 2007 (Consolidated)

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J U D G M E N T

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1.  This is a water leakage case.

Background of case

2.  The Defendants are the owners of the whole building known as No. 122 Fuk Wa Street, Kowloon (“the Building”).  By tenancy agreement dated 28 September 2005 (“the Tenancy Agreement”), the Defendants leased the ground floor of the Building, which was a shop of about 850 square feet in size (“the Premises”), to the Plaintiff at a monthly rent of $24,000 for a term of 3 years commencing on 1 November 2005.  By that time, it was made known to the Defendants that the Plaintiff had leased the Premises for use as “an annex” to its restaurant which was just adjacent to the Building.

3.  When the decoration work of the Premises commenced in November 2005, the Plaintiff found that there was water leaking from the ceiling of the Premises.  By that time, the problem was not so serious.  However, the leakage worsened with the passage of time, and the Plaintiff had to cease the operation of the restaurant in the Premises starting from April 2006.  As the Defendants allegedly failed to repair the defects in the Building causing the leakage of water, the Plaintiff finally engaged its own contractor to carry out the repair work which was completed at the end of January 2007.  Hence, the Plaintiff claims against the Defendants for, inter alia, the costs of the repair work in the sum of $31,000, and the loss of profit of the operation of the restaurant in the Premises from January 2006 to January 2007 in the total sum of $1,330,965.  The Plaintiff is prepared to waive the excess beyond the monetary jurisdiction of the District Court.

4.  The Plaintiff has not paid the rent of the Premises starting from 1 June 2005, and the claim for rent in arrears is now the subject matter of the Defendants’ counterclaim.

The alleged exemption clauses in the Tenancy Agreement

5.  This case first came before me for trial on 29 July 2008.  Before the Plaintiff opened its case, the Defendants made an application to amend the Defence and Counterclaim seeking to rely on new and separate grounds of defences based on the exemption clauses in Clauses 7(c) and 7(e) of the Tenancy Agreement.  On that day, I was led to believe that the main claim of the Plaintiff was one based on breach of implied obligations under the Tenancy Agreement on the part of the Defendants as the landlords.  After lengthy submission, I refused the proposed amendments relating to these new defences.  I then intended to start the trial on that day.  However, based on the reasons set out in some details in my decision refusing the amendments handed down on 7 August 2008, the Defendants applied for a short adjournment of the trial to enable them to seek independent legal advice as to whether they should continue to engage Messrs Yung, Yu, Yuen & Co. to represent them in these proceedings.  After that, the Defendants lodged an appeal against my decision relating to the proposed amendments.  Later on 10 September 2008, the Defendants made an application to stay the present proceedings until the determination of the appeal, but I refused the application (see my decision given on 10 September 2008) and proceeded with the trial.

6.  When the trial resumed before me on 18 September 2008, Mr Cheung, counsel for the Plaintiff who did not appear before me on 29 July 2008, told me that the water leakage was actually caused by the defect in the Podium immediately above the Premises (“the Podium”).  Hence, instead of suing the Defendants as the landlords of the leased Premises, the Plaintiff is actually suing the Defendants as the owners of the Podium for the negligence and nuisance caused by the leakage of water.  As the claim is not based on the breach of the Tenancy Agreement, the Defendants cannot benefit from the exemption clauses in the Tenancy Agreement.  The appeal therefore now becomes an academic issue.

7.  After perusing the expert report of the Plaintiff, it is quite clear that the water leakage was caused by the absence of proper waterproofing layer on the Podium on top of the Premises.  The Podium was accessible through a door connecting the Podium with a residential unit on the 1st floor of the Building.  In other words, the Podium was a private property owned by the Defendants which did not form part of the leased Premises.

8.  It is regrettable that the parties have not referred me to the exact location of the defect causing the leakage at an earlier stage.  I do not want to say who should be blamed for this, but if such matter was made known to the court earlier, all the arguments about the purported exemption clauses in the Tenancy Agreement could have been avoided.

Issue of liability

9.  It is common ground that the Defendants were the owners of the Building including the Podium on top of the Premises, and so the Defendants would be liable for negligence and nuisance in the case that the problem of water leakage was caused by the lack of provision of proper waterproofing layer in the Podium.

10.  In this regard, I have no reservation in accepting the expert evidence of the Plaintiff’s surveyor, Mr Hui Wai-chun, about the cause of the water leakage and his observation about the extent of damage caused by such problem.  I also accept entirely all the evidence given by the director of the Plaintiff, Mr Yik Wai-yung, about the extent of the damage caused to the Premises by the water leakage problem.  In fact, the photographs taken by the Plaintiff’s surveyor during his site inspection in July 2006 show that the problem was serious.  Part of the concrete slab in the ceiling of the Premises had been damaged and there was actually water dripping down from the ceiling of the Premises.

11.  Mr Leung Chi-shing, the son of the first-named Defendant, testified at the trial.  According to him, he was told by the first-named Defendant that, after being informed of the complaint of water leakage by the Plaintiff, the first-named Defendant had engaged contractors to repair the Podium on 3 occasions: the first two in April or May 2006 and the last one in June 2006.  As the first-named Defendant is now suffering from dementia and other health-related problems, she cannot attend the trial to give evidence herself.  In such circumstances, I allow Mr Leung to give hearsay evidence in this regard.  It is all a matter of weight rather than admissibility of the hearsay evidence.

12.  Despite that, I do not accept any of the information provided by the first-named Defendant to her son is reliable.  Firstly, the first-named Defendant’s contractors had carried out repair work on 3 occasions but only one such occasion was mentioned in Mr Leung’s witness statements.  Even for that particular instance, the date was not absolutely correct.  Obviously, whether the contractors of the first-named Defendant had repaired the Podium in 2006 is a crucial issue in the present case, and I cannot understand why Mr Leung had not mentioned the first two occasions in his witness statements.  Secondly, the Defendants cannot provide any invoice or payment record to prove that repair work had actually been carried out by the contractors.  Based on these reasons, I reject Mr Leung’s evidence altogether.

13.  Even if the Defendants did carry out the repair work on 3 occasions, it is clear from the photographs taken by the Plaintiff’s surveyor in July 2006 that the water leakage problem was still very serious by then.  Further, the Food and Environmental Hygiene Department issued various letters to Mr Yik in the period from September 2006 to January 2007 stating that the Department would take action against the owner of the Podium about the water leakage problem.  These facts show that the problem remained unsolved by that time.  As the Defendants, being the occupiers of the Podium, failed to provide proper waterproofing layer in the Podium which, in turn, caused water to leak to the ceiling of the Premises, the Defendants are liable for negligence and nuisance for the loss suffered by the Plaintiff in this regard.

Issue of quantum

14.  The Plaintiff’s surveyor estimated the costs of the repair work in the sum of $50,000, not to mention the additional $20,000 supervision fees charged by professional building surveyor.  As the Plaintiff’s claim for repair costs in the sum of $31,000 is very much below this figure, I allow the Plaintiff’s claim in full.

15.  The Defendants do not seek to argue that the Plaintiff’s claim for loss of profit is too remote, hence the only issue here is to assess the reasonable quantum for such loss.

16.  According to Mr Yik, the Plaintiff used the Premises as an annex to the restaurant.  The Premises were partitioned into 2 main parts: the larger front portion used as an exclusive dining area for VIP guests and the smaller back portion used as a karaoke room for such guests.  It is the Plaintiff’s case that unless these facilities were provided, such VIP guests would not come to the Plaintiff’s restaurant for dinner.

17.  This annex would usually serve 1 or 2 tables each night, and the revenue generated from such annex was smaller than that from the main part of the restaurant.  The Plaintiff has not kept a separate record of the revenue generated from the business in the annex, but according to Mr Yik’s calculation, the net profit from the operation of the annex was about $3,000 a month after the payment of the rent of the Premises and other outgoing expenses.

18.  The Plaintiff seeks to produce an accountant’s report to substantiate the Plaintiff’s claim for loss of profit in the sum of $1,330,965.  This calculation is based on the total revenue of the whole restaurant divided by the number of seats both in the main part of the restaurant and the annex.  However, it is clear from the testimony of Mr Yik that the nature of the business in the annex was very much different from that in the main part of the restaurant.  The calculation made by the Plaintiff’s accountant therefore does not reflect the true loss of the loss of profit associated with the operation of the annex.  Mr Cheung agreed with such an observation and he did not seek to call the accountant to testify at the trial.

19.  According to the photographs taken by the Plaintiff’s expert in July 2006, the water leakage in the Premises was very serious.  Although the water leakage mainly occurred in the karaoke room, I accept Mr Yik’s evidence that the water leakage problem had seriously affected the operation of the restaurant in the annex.  From the layout of the Premises, I have reason to believe that the Plaintiff had planned to use the Premises as an exclusive dining area for VIP guests, and so the non-availability of separate karaoke room might deter these guests from patronising the Plaintiff’s restaurant.

20.  As there was no guarantee that the Plaintiff would be able to recover any damages from the Defendants, a sensible businessman should have tried his very best to make some use of the front part of the Premises to generate income for the restaurant during the time of the water leakage, and yet the Plaintiff had to close down its operation in the Premises altogether starting from April 2006.  As I have no reservation in accepting Mr Yik’s evidence as the truth, the Plaintiff should be able to claim for the loss of the net profit associated with the business in the Premises starting from April 2006.

21.  Prior to this period, Mr Yik claims that the business of the restaurant in the annex had been reduced by 50% in January 2006 and 80% in February and March 2006.  Although I accept Mr Yik as an honest witness, there is no simply no material to substantiate Mr Yik’s estimation in this regard.  It is clear that the Plaintiff was able to operate the restaurant in the Premises to a certain extent from January to March 2006, and the water leakage problem should not have been very serious by that time as that period was not the rainy season.  In such circumstances, there is simply not enough evidence to substantiate the Plaintiff’s claim in that regard and so I disallow any claim for loss of profit before April 2006.

22.  The last question is whether the Plaintiff is entitled to claim for the loss of profit covering the whole period from April 2006 to January 2007.  The Defendants argue that the Plaintiff should have engaged its contractor to carry out the repair work at a much earlier time.  As the Plaintiff has failed to mitigate its loss, the Plaintiff should not be allowed to recover the loss of profit for the whole period.

23.  However, in order to carry out the repair work, the Plaintiff’s contractor had to commit an act of trespass by entering the Podium to install the waterproofing layer.  Assuming that there is water leaking into your flat from the flat above, there does not mean that the law requires you to break into the flat above to carry out the repair work.  It is simply too unreasonable to demand the Plaintiff to commit such an unlawful act.  The fact that the Plaintiff eventually committed an act of trespass by carrying out the repair work itself does not mean that it should have committed such act earlier.  This was simply the last resort.  Obviously, the problem of water leakage was very serious in mid-2006.  Despite repeated requests made by the Plaintiff, the Defendants failed to carry out the necessary repair work.  In my judgment, the Defendants simply have themselves to blame for paying all the damages suffered by the Plaintiff during such period.

24.  The Plaintiff could have made an application to the court for a mandatory injunction to compel the Defendants to carry out the repair work earlier.  If the Defendants refused to comply with such order, it is arguable that the Plaintiff could have asked for an order permitting his contractor to enter the Podium to carry out the repair work.  However, requiring the Plaintiff to do so would mean that the Plaintiff had to incur substantial legal costs for applying for the appropriate order from the court.  After referring to the case of Jewelowski v Propp (1944) KB 510 cited by Mr Cheung, I am of the view that it is not reasonable to require the Plaintiff to expend money in legal proceedings in order to mitigate its loss.  Hence I allow the Plaintiff’s claim for the loss of net profit of $30,000 a month for the whole period when the Plaintiff ceased the operation of the restaurant at the Premises.

25.  At some stage of the trial, both Mr Leung and the Defendants’ expert, Mr Albert Chan, testified that the Premises were actually used by the Defendants as an office or rest area for staffs.  I reject these observations.  Firstly, such information was conveyed to Mr Leung by his mother, the first-named Defendant, and there is simply no information before the court as to why the first-named Defendant came to such conclusion.  Secondly, there was a large television in the karaoke room with karaoke equipments and sofa.  The wall of the room was also covered with soundproof material.  This layout certainly did not appear to be an office.  In fact, the layout of the whole premises supports the Plaintiff’s evidence that the Premises were indeed used as an exclusive dining area for VIP guests with karaoke room.  If the Plaintiff had to cease the operation in the Premises at the time of the water leakage, the Premises could be used as a temporary rest area for staffs and storage area, but that does not disturb the Plaintiff’s intended use of the  premises had there been no water leakage.

Conclusion

26.  The Plaintiff’s loss of profit would be $30,000 a month.  However, if the Plaintiff had to pay for the rent of $24,000 during the time when the Plaintiff ceased the operation in the Premises, then the monthly loss would be $54,000 a month.  For the arrears in rent, it is common ground that the Plaintiff had not paid the rent of the Premises starting from 1 June 2006, and so the unpaid rent up to the date hereof amounts to $672,000 ($24,000 x 28 months).  Setting off from that sum the total loss of the Plaintiff’s profit in the sum of $540,000 ($45,000 x 10 months) and the repair costs in the sum of $31,000,  I dismiss the Plaintiff’s claim and grant judgment in favour of the Defendants’ counterclaim in the sum of $101,000 ($672,000 - $540,000 - $31,000).

27.  The parties are prepared to waive the claims for interest both in respect of the Plaintiff’s claim for loss of profit and the Defendants’ counterclaim for arrears of rent, and so I do not need to deal with the complicated issue about interest in the present case.

28.  The Plaintiff also claims as part of the damages the professional fees charged by the surveyor and the accountant.  In respect of the latter, the Plaintiff should not be allowed to claim for the expenses concerned as the accountant’s report cannot assist the court in assessing the true loss to the Plaintiff.  In respect of the surveyor’s fee, this should form part of the costs of the action and the same should be dealt with in taxation proceedings.

(Decision on Costs)

(1)  Although I dismissed the Plaintiff’s claim and granted judgment in favour of the Defendants for the counterclaim, I am of the view that the Plaintiff should be entitled to receive the full costs of this action.

(2)  The Defendants’ counterclaim is actually one for arrears of rent.  However, the Plaintiff had all along agreed to pay the rent to the Defendants subject to the Defendants’ undertaking to carry out the repair work.  In fact, the Plaintiff paid the rent into court every month after the Defendants commenced the action for rent in arrears in September 2007.  It is only because of the Defendants’ refusal to acknowledge the claim of the Plaintiff that the Plaintiff paid the rent into court.  In such circumstances, the Plaintiff needed to commence the present action to prove the claim for damages against the Defendants.  I am therefore of the view that the whole action was caused by the Defendants’ refusal to acknowledge the Plaintiff’s claim for the loss caused by the water leakage.  In this regard, the Defendants have lost on such issue and the Defendants should therefore pay for all the costs of the action.

(3)  The Defendants made a Calderbank offer to the Plaintiff agreeing to pay $150,000 as damages for the Plaintiff’s claim.  This offer was made on the basis that the Plaintiff had to pay for the arrears of rent for the whole period.  As the Plaintiff’s claim assessed by the court very much exceeds such figure, the Defendants simply cannot benefit from this Calderbank offer.  I make an order that the costs of the action be to the Plaintiff with certificate for counsel.