UNION LASER ALARM CO LTD v. ASIAN CYBER LTD

HCA4366/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4366 OF 2002

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J U D G M E N T

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1. The plaintiff appeals against the order of Master Au-Yeung that the defendant have unconditional leave to defend the action and make interim payments to the plaintiff of $68,000.00 monthly from 8 April 2003, and consequent directions.

2. The plaintiff is the landlord and the defendant the tenant of a workshop in an industrial building in Hung Hom. The tenancy commenced in April 2002. The monthly rent is $68,000.00 payable in advance on the 8th of each month. There was an agreed rent-free period from 8 April to 7 June 2002.

3. The plaintiff, on 18 November 2002, issued proceedings for possession and arrears of rent/mesne profits from August 2002, amounting to $140,800.00. This represented the four months' rent from August to November minus payments of $63,200.00 made on 14 August and $68,000.00 made on 21 October 2002. The plaintiff sought summary judgment.

4. The defendant's evidence is that the premises were rented for use as a factory for making video compact discs and digital video discs. The process needed a steady water supply. But the supply was not steady. The defendant complained about this and as a result there was an oral agreement by the plaintiff to waive six months' rent from August 2002. The defendant also counterclaims for breach of an implied term to take steps to rectify the defective water pipes which are the cause of the faulty supply. It says that the plaintiff and other owners are bound by the terms of the Deed of Mutual Covenant to rectify the defects.

5. There is a further claim by the defendant that the plaintiff, in breach of a collateral agreement, failed to repair the windows in the premises. Therefore the defendant repaired them, or at any rate covered them over, at a cost of $4,800.00 and deducted that sum from the rent for August 2002.

6. The Master granted unconditional leave to defend, and further ordered the defendant to pay interim payments of rent from April 2003 at $68,000.00 per month. The defendant has so far made one payment into court, in respect of rent for April 2003.

7. Order 14 places the threshold onus on the defendant to show that there is a triable issue. The court will test the credibility of an affidavit asserting a triable issue against the conduct of the defendant and contemporary documents. See Murjani v. Bank of India [1990] 1 HKLR 586.

8. In Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155 Godfrey JA said :

"... I would sound a note of caution about Murjani which has come to be cited in almost every case under O 14 or O 86 to justify the plaintiff in asking the court to embark on a mini trial of the action on affidavit evidence. That is not a proper course for the court to take. It will in future be sufficient for the court to ask itself the simple question: 'Is what the defendant says credible?' If so, he must have leave to defend, if not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed, it is whether those assertions are believable."

Godfrey JA further put the matter in a nutshell in Man Earn Limited v. Wing Ting Fong [1996] 1 HKC 225 :

"Unless it is obvious that the defence put forward by the defendant is 'frivolous and practically moonshine', Order 14 ought not to be applied." (see Codd v. Delap (1905) 92 LT 510 per Lord Lindley at 511)

9. However, this does not mean that the court must disregard the background. As Bokhary JA put it in Re Safe Rich Industries Limited, Civil Appeal No.81 of 1994 (unreported), 3 November 1994 :

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognised because failure to recognise it would create a debt-dodgers' charter that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute."

10. Correspondence exhibited by the defendant's witness shows that the defendant was on 24 May 2002 complaining to the plaintiff about a worn-out water supply pipe. On 26 August 2002, the plaintiff wrote to the defendant complaining about the payment received of $63,200.00 for the rent for August and the fact that the defendant had blocked the windows and deducted the cost thereof from the rent, and demanding payment of $4,800.00. The defendant replied on 5 September 2002 saying that the windows were damaged before it moved in; that it had informed the plaintiff as landlord about the matter and had told the estate agent to make a prompt repair. However no repair had been done, so the defendant had engaged a decorator to do the job. It was the landlord's responsibility to repair, and therefore the defendant had deducted the cost from the rent.

11. In the same letter the defendant also referred to a problem with toilet flushing water, and went on to say that the fresh water supply pipes were frequently burst, causing failure of supply and that since moving in, the total time for fresh water supply had only amounted to one month. The defendant had informed the management office but had been told that the repair work was a matter for the landlord.

12. The plaintiff argues that the allegation of an oral agreement for the plaintiff to repair the windows is inconsistent with Clause 3(b) of the tenancy agreement which provides for the landlord to keep the external parts of the premises in good condition and proper repair, except for the doors and windows. It is also argued that the defendant's letter of 5 September 2002 not only does not mention any such agreement but is even inconsistent with its existence, in that it refers to the defendant's having called on the estate agent to do the repairs. Reference is also made to the fact that the document advanced as a receipt for payment of $4,800.00 for the repairs is actually an invoice.

13. It seems to me that the fact that the landlord is not required, during the currency of the lease, to repair windows (and therefore this is a matter for the tenant) does not rule out the landlord's having agreed at the beginning to put the windows into good repair. Such an agreement would make good commercial sense. Nor am I persuaded that the reference to the estate agent is inconsistent with the existence of such an agreement. However I take the point that there is no mention in the letter of any actual agreement on the plaintiff's part to make good the windows.

14. So far as the alleged oral compromise for waiver of rent for six months is concerned, the plaintiff's argument is that there is no credible evidence to support the defendant's alleged loss of business worth $2,000,000.00. Further the compromise is incredible, because default in payment of rent took place in August, long before the compromise which is said to have been made in October; there is a vast difference between the alleged loss and the value of the rent waived, i.e. $408,000.00; there is a lack of documentation of the compromise; there was an unreasonable denial of the defendant concerning the receipt of correspondence (particularly demands for payment in the period after October) and there is inconsistency between such compromise and the terms of the tenancy.

15. The August default was, of course, in the sum of $4,800.00 which was deducted from the rent. The September rent was paid on 21 October 2002; the defendant's witness says that that was following on the compromise, but the plaintiff's witness says it was following a demand from the plaintiff's solicitor. There was some evidence from the defendant of non-receipt of this and other demands, and evidence from the plaintiff's solicitor of an address to which the demands were sent, which was an address of companies of which the defendant's witness, and manager, is a shareholder. Not much was made of these matters in argument.

16. It is certainly true that there is no evidence in support of the defendant's statement that it has lost production worth $2,000,000.00. Counsel for the defendant says that this is because the defendant's contention relies on the compromise itself so there was no need for such evidence at the Order 14 stage. As to the amount of the rent waived, he says that this would be a matter for a commercial decision on the defendant's part. I think this must be right. I do not see that the defendant's defence relies, as counsel for the plaintiff says, on the magnitude of the loss of production. Really what it relies on is the existence of the compromise. The question for me is as it was for the Master, whether this is something which is believable, not whether it is to be believed.

17. That there were problems with the water supply is not a matter of afterthought; this matter was raised as early as 24 May 2002. Against this background it is not inherently impossible that discussion of these problems resulted in an oral compromise. I can see that, at the end of the day, the defendant may have difficulty in convincing a judge at trial that there was an oral compromise. However, although the defendant's story may not ultimately be believed I cannot say that it is unbelievable.

18. It follows that the Master's order was the correct one and it should not be interfered with. Accordingly the plaintiff's appeal is dismissed with costs (nisi) to the defendant in any event.

19. The parties now agree that the interim payments should be made directly by the defendant to the plaintiff rather than paid into court. There will be an order that the defendant do hereafter pay the interim payments ordered by the Master directly to the plaintiff, and that the sum paid into court on 8 April 2003 be paid out to the plaintiff through its solicitors forthwith.

20. The plaintiff also asks for an order that in the event of default the plaintiff be at liberty to enter judgment; in effect an "unless" order. This would be appropriate if there had already been a proven default, but here the question whether the defendant defaulted on payment of rent, or did not pay because of the oral compromise, is one which has yet to be resolved. So far the defendant has made one payment in accordance with the Master's order and there is no particular reason to expect future default. In the circumstances I do not think that such an order would be appropriate.