WILSON COMMUNICATIONS LTD v. FORDEASE LTD

CACV 143/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 143 OF 2003

(ON APPEAL FROM DCCJ 315 OF 2002)

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REASONS FOR JUDGMENT

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Hon Yuen JA:

1. This is the Plaintiff's appeal from a judgment of HC Wong D.J. handed down on 19 March 2003 ordering that the Defendant pay the Plaintiff a sum of $12,861 and that there be an order nisi that the Defendant be not liable to pay the Plaintiff's costs and that the Defendant be entitled to recover its costs of defending the action from 10 February 2002 to date of judgment.

2. Leave to appeal was given by a single judge of the Court of Appeal on 29 May 2003.

3. At the conclusion of the hearing, the appeal was dismissed with costs for reasons which appear below.

Background

4. The Plaintiff was the tenant and the Defendant was the landlord of shop premises in Kowloon (I shall refer to the Plaintiff as "the Tenant" and the Defendant as "the Landlord"). A written Tenancy Agreement was signed on 23 July 1999 for a term of 2 years commencing on 1 August 1999.

5. The Tenant paid the Landlord 2 months deposit, amounting to $86,000.

6. When the tenancy expired and the Tenant moved out, it sought the return of the deposit (deducting a small sum for outstanding rates and government rent).

7. The Landlord's response was that Tenant had been in breach of the Tenancy Agreement, and that consequently there should also be deducted from the deposit certain damages it (the Landlord) had suffered, leaving a net balance in favour of the Tenant in the sum of only $12,861. The Tenant refused to accept this sum and commenced an action in the District Court.

Case in the court below

8. It was not disputed that before the Tenant took over the premises in 1999, there were certain items affixed there ("the Pre-existing Items"). The Tenant removed them when it took over the premises.

9. The Tenant then caused certain items to be built in the premises ("the New Items"). When the Tenant left the premises in 2001, it removed most of these as well.

10. The Tenant's case was that it was entitled to take both the actions referred to in the above 2 paragraphs because there had been an oral agreement between the parties that the premises would be taken over from the Landlord, and would be returned to the Landlord, as a "bare-shell".

11. The Landlord denied that there was any "bare-shell" agreement. Its case was that by removing the Pre-existing Items as well as the New Items, the Tenant was in breach of Clauses 2 and 6 of the Tenancy Agreement which provided:

"2. The tenant shall not make any alteration and/or additions to the Premises without the prior written consent of the Landlord, which consent shall not be unreasonably withheld".

"6. The tenant shall during the Term keep the interior of the Premises in good and tenantable repair and condition (fair wear and tear and damage caused by inherent defects excepted) and shall deliver up vacant possession of the Premises in the same repair and condition on the expiration or sooner determination of this Agreement".

12. As the premises were returned to the Landlord as a "bare-shell", the Landlord incurred costs for reinstatement and lost rent during the period of reinstatement. The Landlord's case was that it was therefore entitled to deduct these damages (together with rates and government rent) from the deposit.

13. The judge, having taken into account the fact that there had been a written Tenancy Agreement between the parties which did not contain any "bare-shell" agreement, and having seen and heard the witnesses for both parties, rejected the Tenant's case of a "bare-shell" agreement.

14. No alternative case was advanced by the Tenant that, even if there had not been a "bare-shell" agreement, that nevertheless it was in law entitled to remove the Pre-existing Items and the New Items. Although there can be found in the Reply denials or non-admissions that the items were "owned" by the Landlord, they were only pleaded as particulars of the averment at paragraph 4(e) that

"(e) In the premises, the Plaintiff [Tenant] had at the material times and with the express oral agreement and authorization of the Defendant [Landlord] given to the Plaintiff as aforesaid demolished and removed all installations, fixtures and fittings of the said Premises to render the same to the condition of a bare shell".

15. Accordingly the judge, having rejected the "bare-shell" allegation, found the Landlord liable for the return of the sum of $12,861 only, which it had already offered to the Tenant.

Case on appeal - fixtures or furniture? Trade fixtures?

16. On appeal, it was submitted by Miss Pauline Leung counsel for the Tenant (who did not appear below) that the judge had erred in failing to distinguish whether the items were fixtures or furniture, and if they were fixtures, whether they were trade fixtures which the Tenant would at law be entitled to take with it when it vacated the premises at the expiry of the term.

17. However, that was not the case advanced at trial. The Tenant's case below was simply that there had been a "bare-shell" agreement and that by virtue of that "bare-shell" agreement, the Landlord was estopped or prevented from relying on Clauses 2 and 6 of the Tenancy Agreement.

18. The allegation of the "bare-shell" agreement was however rejected by the trial judge. In the absence of a "bare-shell" agreement, the removal of the pre-existing fixtures as well as the new fixtures would clearly be an alteration of the premises in breach of Clause 2.

19. The issue, now raised on appeal, of whether the items (or some of them) were fixtures or furniture, and if fixtures, were landlord's fixtures or trade fixtures, is fact-sensitive. It required evidence to be called and examined by the parties and determined by the trial judge, taking into account matters such as the degree of annexation and the purpose of annexation of each item.

20. Although Miss Leung sought to argue that some evidence had been given on these matters at trial, the point remains that this issue had not been advanced by the Tenant below, and so any evidence given would not have been comprehensively tested by way of cross-examination properly directed to the issue.

21. At this appellate stage, the only observation that may be made is that it would appear from the list of items that by their very nature, they had been affixed or attached to the premises (as even the cabinets were said to be "built-in"). The burden was thus on the Tenant to show that the items (or some of them) were not fixtures, or if they were fixtures, that they were trade fixtures. That burden had not been assumed or discharged by way of evidence called and properly tested at trial.

22. Therefore, the grounds of appeal based on this new argument of a distinction between fixtures and furniture, and between landlord's fixtures and tenant's fixtures, must fail.

- Acquiescence?

23. By the same token, as the only pleading of "estoppel" had been based on the "bare-shell" agreement, it was not open to the Tenant to argue on appeal that the Landlord had otherwise waived the breach, or that there had been any estoppel or acquiescence by reason of the Landlord's knowledge of some of the changes made in the premises. Although the trial judge did refer in paragraph 30 of her judgment to the Landlord's having "accepted and acquiesced" in the replacement of the pre-existing fixtures, it is clear from the context that she was not considering a case of true acquiescence as none had been pleaded or advanced.

24. If a case of waiver, estoppel or acquiescence based simply on the Landlord's knowledge and inactivity had been pleaded or advanced at trial, there would have had to be examination of the question whether the inactivity might have been due, for instance, to its assumption that the Tenant would not, at the end of the term, remove the New Items which had been installed in replacement of the Pre-existing Items, the judge having accepted the Landlord's evidence that it had reminded the Tenant not to remove items soon after the Tenancy Agreement was signed and also a few days before the expiry of the tenancy.

- Trial judge's acceptance of Landlord's evidence

25. Finally, the Landlord sought to argue that the trial judge should not have accepted the evidence of Madam Yip Siu Ying, a director of the Landlord, in preference to that of Mr So Kam Lun, a director of the Tenant, on the issue of the "bare-shell" agreement.

26. It is extremely difficult for an appellant to successfully challenge on appeal a trial judge's primary findings of fact when the findings were based on the credibility of a witness e.g. on the issue of whether there had (or had not) been an oral agreement. As held by Godfrey JA in Tang Kwok Ming v Daxprofit Scaffolding Ltd [1999] 1 HKC 663 F,

"This court will not usurp the function of the trial judge, i.e. to find the facts. It will certainly not disturb his findings of primary fact where these are based on the credibility of the witnesses or the preference of one witness for that of another. ... It is important for counsel and solicitors ... to remember the very limited extent to which this court will interfere in a case in which the appellant seeks to dispute the judge's findings of fact. If it is necessary to disturb an adverse finding of primary fact, the appellant has to demonstrate either (1) that there is no evidence to support it; or (2) that it is contrary to documentary or other incontrovertible evidence which the judge overlooked. It is not enough to show that there is little evidence to support the judge's finding, or that it was 'contrary to the weight of the evidence'. The weight of the evidence is a matter for the trial judge. It does not matter how many witnesses say one thing, and how few say the contrary. The judge is perfectly entitled to prefer the evidence of the few to that of the many".

27. The trial judge had the benefit of seeing and hearing the witnesses called for the respective parties, Madam Yip was cross-examined by counsel for the Tenant and Madam Yip was found by the trial judge to be a witness of truth.

28. Although it was suggested that there were inconsistencies between Madam Yip's witness statement and her oral testimony, those concerned peripheral matters. What is more important is that Madam Yip's evidence was consistent with the documentary evidence, viz the written Tenancy Agreement, on which the parties had added terms specific to this tenancy, but there was no mention of the "bare-shell" agreement. Further, the trial judge found as a fact that the Landlord had agreed to re-let the premises to a new tenant on the basis that the incoming tenant would have the benefit of the use of existing fixtures and fittings. It would have been illogical for a landlord to have assumed such an obligation to a third party if he had agreed to the premises being returned to it as a "bare-shell".

29. The trial judge was entitled, having considered all the evidence as a whole, to find that the Tenant had failed to discharge its burden of proving the "bare-shell" agreement. The ground of appeal based on the trial judge's findings of fact must therefore also fail.

30. For the above reasons, the appeal was dismissed with costs to the Landlord (Respondent).

Hon Woo V-P:

31. I have had the advantage of reading Yuen JA's reasons in draft with which I entirely agree.

32. I wish to add my own comments on the question of acquiescence.

33. Ms Leung, for the plaintiff, drew our attention to the following passages in the judge's judgment:

"29. ... On the other hand, it is undisputed that Madam Yip passed by the said shop on many occasions during the tenancy period and was aware of the changes made in the said shop by the Plaintiff.

30. This goes to show that Madam Yip had accepted and acquiesced to the replacement of the original fixtures and fittings."

34. Ms Leung contended that these passages showed that there was a finding of acquiescence by the judge. But it is also important to note that the judge went on to say:

"I, nevertheless, accept that she had made it a point to remind the Plaintiff's manager PW2 Mr. So that the fixtures, fittings and cabinets should not be removed soon after the tenancy agreement was signed and repeated it a few days before the expiry of the tenancy."

35. I am not at all certain that the judge had found acquiescence at all. Nor is it clear that she found acquiescence that would amount to a waiver so that the defendant was debarred from claiming against the plaintiff for the removal of the fixtures and furniture that were in the shop at the time when the tenancy agreement commenced. The words "accepted and acquiesced" could have been used by the judge as denoting Madam Yip's knowledge of the state of affairs, but it does not necessarily lead to Madam Yip's accepting and acquiescing in the plaintiff's removal of the pre-existing fixtures and furniture without any obligation to reinstate or without allowing the replacing items to remain in the shop at the expiry or determination of the tenancy. The term used by the judge was "replacement" and not "removal". Another point that could be made is that when Madam Yip saw the changes made in the shop she still reminded Mr So that the pre-existing fixtures and furniture should not be removed. That was not consistent with acquiescence and waiver, and that might well be what the judge meant, looking at para 30 of her judgment as a whole.

36. Secondly, from the parts of transcript of evidence to which Ms Leung had directed our attention, I am not at all satisfied that Madam Yip's visits to the shop and seeing some items of new installation could be said as satisfying all the requirements that need to be proved to establish waiver.

37. Last and most importantly, the issue of waiver and acquiescence was never raised in the pleadings before the judge. The only defence raised by the plaintiff (in its Reply) was that there was a "bare-shell" agreement between it and the defendant whereby the defendant was bound and was estopped from making claim for the plaintiff's removal of the pre-existing fixtures and furniture. The judge found as a fact that there was no such "bare-shell" agreement. That was sufficient to dispose of the only dispute between the parties on the pleadings. The absence of pleadings on the issue of waiver and acquiescence might have caused the parties, especially the defendant's legal representatives, not to focus on the issue by way of evidence, either in witnesses' statements or in examination of witnesses at the trial. It would be unfair to the defendant for this matter to be allowed to be raised now. The judge would have been similarly affected, and what she said in para 30 of her judgment as cited above could only have been a passing remark of little legal consequence without directing her mind to the issue of waiver.

Hon Cheung JA:

38. I agree with the reasons of Yuen JA and Woo V-P.