NEW CASTLE INVESTMENTS LTD v. WFC HOLDING LTD AND OTHERS

CAMP 52/2020
and CACV 399/2020

[2020] HKCA 755

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 52 OF 2020

 (ON AN INTENDED APPEAL FROM HCA 1632/2018)

AND

CIVIL APPEAL NO 399 OF 2020

(ON APPEAL FROM HCA 1632/2018)

____________________

____________________

_______________________________

REASONS FOR JUDGMENT

________________________________

Hon Lam VP (giving the Reasons for Judgment of the Court):

1.  The Plaintiff was the landlord of the property known as Houses A, B and C including the Garden and Flat Roof of Nos 22A, 22B and 22C Shouson Hill Road. By a tenancy agreement of 27 April 2018 (“Tenancy Agreement”), the property was let to the 1^st Defendant at a monthly rent of $2 million for a term of 3 years commencing on 2 March 2018. The 2^nd and 3^rd Defendants (who were the only directors of the 1^st Defendant) executed a guarantee in favour of the Plaintiff in respect of the due performance of 1^st Defendant under the Tenancy Agreement.

2.  The 1^st Defendant paid a sum of $8.5 million as deposit under the Tenancy Agreement.

3.  On 1 July 2018, the 1^st Defendant failed to pay the rent due under the Tenancy Agreement.  By a letter of 4 July 2018, solicitors for the Plaintiff demanded the 1^st Defendant to pay the arrears.

4.  On 13 July 2018, the Plaintiff issued the Writ in the present action in HCA 1632/2018.  After that, the 1^st Defendant made 3 partial payments: $100,000 on 10 August 2018; $300,000 on 14 August 2018 and $200,000 on 22 August 2018. 

5.  On 7 September 2018, the Plaintiff obtained default final and interlocutory judgment (“the Default Judgment”).  The monetary judgment was in the sum of $1,400,818.87 plus interest (for the arrears of rent in July after taking into account of the partial payments).  In addition, judgment was also entered for rent and mesne profits from 1 August 2018 at the rate of $2 million per month (plus repair and maintenance charges at $16,610 per month) up to delivery of possession.    

6.  On 14 September 2018, the Plaintiff issued statutory demands against the 2^nd and 3^rd Defendants based on the guarantee.  A bankruptcy petition was presented against the 3^rd Defendant in HCB 6077/2018 on 24 October 2018.  Another bankruptcy petition was presented against the 2^nd Defendant in HCB 7480/2018 on 28 December 2018.  A bankruptcy order was made against the 2^nd Defendant on 25 November 2019.  That order was set aside by Au-yeung J on 22 January 2020.  Au-yeung J also dismissed the petition against the 3^rd Defendant.  The Plaintiff appealed against the judgment of Au-yeung J.  Those appeals are pending. 

7.  Possession was recovered by the Plaintiff on 29 November 2018. 

8.  Long after the entry of the default judgment, the Defendants applied to set it aside by a summons of 20 June 2019.  The summons was heard by Master Queenie Lau (“the Master”) on 16 September 2019 who set aside the default judgment on condition that the Defendants paid half of the judgment sum of $1,400,818.87 into court. 

9.  The Defendants appealed against the order of the Master.  The appeal was listed before Linda Chan J.  Due to the General Adjournment Period arising from the COVID-19 pandemic, the appeal was processed on the papers with written submissions lodged by the parties. 

10.  By a decision dated 25 March 2020 (“the Decision”), Linda Chan J (“the Judge”) ordered (1) the time limit for the Defendants to appeal the Order of the Master be extended; (2) save for the last paragraph giving possession of the premises to the Plaintiff, the default judgment entered against the Defendants to be set aside unconditionally; and (3) the Defendants be at liberty to defend the action.   

11.  The Plaintiff’s application for leave to appeal against the Decision was refused by the Judge on 20 May 2020 (“the Leave Decision”). 

12.  The Plaintiff renewed the leave application before this Court by way of a summons dated 11 June 2020 (“the Summons”).  The Plaintiff sought an extension of time to make the renewed application as they were 8 days out of time.   

13.  After reading the documents and written submissions, the Court directed that a rolled-up hearing be held on 20 August 2020.  On that date, after hearing counsel, we granted leave to Plaintiff to appeal and allowed the substantive appeal with costs.   We restored the Default Judgment.  We now give reasons for our decisions.

14.  In accordance with well-established practice, we considered the following matters in deciding if an extension of time should be granted to the Plaintiff: (a) the length of the delay; (b) the reason for the delay; (c) the chance of success of the intended appeal; and (d) the prejudice to the other party.

15.  Since the Decision involved an exercise of discretion on the part of the Judge, the appellate constraint with regard to an appeal against exercise of discretion applied: generally speaking, this Court will not interfere with a judge’s exercise of discretion unless the judge has misunderstood the law or the evidence or the exercise of discretion was so plainly wrong that it was outside the generous ambit within which reasonable disagreement is possible.

Length of Delay and Reasons for Delay

16.  The leasing manager of the Plaintiff, Mr Wong On Kei, explained the delay in his affirmation dated 11 June 2020.  After the Decision, there were without prejudice negotiations between the parties.  To save costs, parties entered into a consent summons seeking an extension of time up to 17 June 2020 for the Plaintiff to make the renewed application.  The consent summons was filed on 2 June 2020 before the expiration of the prescribed time limit under Order 59 Rule 2B(3) of the Rules of the High Court (Cap 4A).   

17.  However, on 5 June 2020, by way of letter from the Court, the Judge declined to make an order as per the consent summons, stating that “no good reason has been shown to justify an extension of time sought”.   

18.  On 9 June 2020, the solicitors for the Plaintiff (“W&G”) wrote to the solicitors for the Defendants (“MCA”), inviting them to enter into a further consent summons for the Plaintiff to file a renewed application to this Court.   MCA wrote back on 10 June 2020, refusing to do so.

19.  In our view, the length of the delay was insubstantial and excusable.  The Plaintiff had been mindful that the deadline for applying to this Court fell on 3 June 2020.  According to the evidence, W&G had received instructions to issue a summons to seek leave to appeal and was prepared to file the intended application on 2 June 2020 if MCA did not consent to extension of time.  As it happened, the consent summons was signed and filed instead of the Summons.   

20.  Whilst ultimately it was up to the Court to determine whether an extension of time should be granted, we did not see any basis for not accepting the Plaintiff’s explanation which in the circumstances seems to be a reasonable one.  There is nothing to suggest that the consent summons was put forward to achieve some tactical advantage for the Plaintiff. 

The Chance of Success of the Appeal

21.  The Plaintiff put forward several intended grounds of appeal in the renewed application.  As is apparent from the written statement of the Plaintiff of 11 June 2020, the most substantial ground is Ground 1: the Judge was not justified in holding that the Default Judgment “was entered for incorrect amounts and, as such, was irregular”.  This depended on the construction of the Tenancy Agreement.

22.  After hearing submissions, we came to the view that the ground has a reasonable prospect of success.  We shall elaborate on our reasoning in this regard in dealing with the merits in the substantive appeal. 

Prejudice to the Defendants

23.  Mr Wong (who appeared for the Defendants) did not pinpoint any prejudice to the Defendants if extension of time were granted. Instead counsel focused on arguments on the merit of the intended grounds of appeal. 

24.  In the circumstances, we granted leave to appeal (including permitting the application being made out of time) as we were satisfied that there was reasonable excuse for the delay and the intended appeal had reasonable prospect of success. 

Merits of the appeal: the construction of the Tenancy Agreement

25.  The Judge held that the Defendants had a good defence based on the application of the deposit towards the reduction of rent. This is an argument based on Clause 5.03 of the Tenancy Agreement.   

26.  Mr Chan SC (leading counsel for the Plaintiff) submitted that the Judge erred in the construction of Clause 5.03.  Counsel said that the clause did not give rise to any automatic payment of rent from the deposit in case of default.  Clause 5.03 only give rise to a notional reduction of the deposit to facilitate the Plaintiff’s option to demand the topping-up of the same so as to provide sufficient security for due performance of all the 1^st Defendant’s obligations during the full term of the tenancy.

27.  For present purposes, the relevant clauses are Clauses 4, 5, 6 and 8 of the Tenancy Agreement.  Clauses 4 and 6.01 (a) provided for the payment of rent.  Apart from stipulating the amount and mode of payment, it is expressly stated in Clause 4 that the 1^st Defendant shall have no right to make any deduction from the rent by reason of any claim which it may have against the Plaintiff. 

28.  Clause 5 contains provisions regarding the Deposit which was paid to secure due performance by the 1^st Defendant of its obligations.  Clause 5.01 further provided that the Deposit was to be used and enjoyed by the Plaintiff as its own money free of any trust to the exclusion of and free of any interest to the 1^st Defendant.  Most importantly for present purposes, Clauses 5.03 and 5.04 provide:

“ 5.03 Without prejudice to any other rights or remedies of the Landlord hereunder, in the event of the amount of any Rent or other charges payable hereunder being in arrear or any loss or damage being incurred or sustained by the Landlord as the result of any non-observance or non-performance by the Tenant of any agreements stipulations or conditions contained in this Agreement, the amount of the Deposit paid to the Landlord by the Tenant shall be deemed to have been reduced by the amount of Rent or other charges in arrear or the loss or damage suffered by the Landlord and the Tenant shall on demand by the Landlord forthwith further deposit the amount by which the Deposit is deemed to have been reduced and failure by the Tenant so to do shall entitle the Landlord forthwith to re-enter the Premises and to determine this Agreement as herein provided. (Our emphasis)

5.04  Subject as aforesaid, a sum equivalent to the Deposit (reduced by the amount of Rent or other charges in arrear or the loss or damage suffered by the Landlord, if applicable) shall be paid to the Tenant by the Landlord without interest within thirty days after the expiration or sooner determination of this Agreement and the delivery of vacant possession of the Premises and the Furniture to the Landlord in such repair and condition  in accordance with Clause 6.08 hereof or within thirty days of the settlement of the last outstanding claim by the Landlord against the Tenant in respect of any breach, non-observance or non-performance of any of them agreements stipulations or conditions herein contained and on the part of the Tenants to be observed and performed, whichever is the later.”

29.  Clause 8 addressed default by the 1^st Defendant as tenant.  It reads:

“ 8.01 If the Rent or any part thereof shall be unpaid for ten (10) days after the same shall have become payable (whether formally demanded or not) or if the Tenant shall fail or neglect to perform or observe any of agreements stipulations and conditions herein contained and on his part to be performed or observed or if the Tenant shall become bankrupt or being a corporation shall go into liquidation or if any petition shall be filed for the bankruptcy or winding up of the Tenant or if the Tenant shall otherwise become insolvent or enter into any composition or arrangement with his creditors or shall suffer his goods or chattels to be levied in execution then and in any of the said cases it shall be lawful for the Landlord at any time thereafter to re-enter upon the Premises or any part thereof in the name of the whole and thereupon this Agreement shall absolutely determine and the right of the Tenant to the payment of a sum equivalent to the Deposit or any part thereof shall be forfeited and the Landlord shall be absolutely discharged from his obligation to make such payment notwithstanding Clause 5 but without prejudice to any right of action of the Landlord in respect of any breach of the Tenant’s agreements stipulations and conditions herein contained and a written notice served by the Landlord on the Tenant or left at the Premises to the effect that the Landlord thereby exercises the power of re-entry hereinbefore contained shall be a full and sufficient exercise of such power notwithstanding any statutory or common law provisions to the contrary. All costs and expenses incurred by the Landlord in demanding the Rent and other charges and in enforcing the Landlord’s rights and/or remedies or in attempting to do so shall be repaid by the Tenant on a full indemnity basis and all legal costs and expenses incurred by the Landlord in taking any legal action or proceeding against the Tenant as a result of the Tenant failing to pay the Rent or other charges hereby reserved or failing to perform or observe any of the agreements stipulations and conditions herein contained and on the Tenant’s part to be performed or observed shall be repaid by the Tenant on a full indemnity basis and shall be recoverable from him as a debt.

8.02 Without prejudice to any other right or remedy of the Landlord hereunder or at law (including the right of re-entry), if the Rent or any part thereof or any other sum payable by the Tenant to the Landlord pursuant to the provisions of this Agreement shall not have been paid on the due date then the Landlord shall be entitled to recover from the Tenant as a debt and the tenant shall pay to the Landlord forthwith upon demand the following expenses incurred by the Landlord in the course of recovering the Rent and/or other sums unpaid or any part thereof:-

(i) an administration charge of HK$1,000.00 or such higher sum for the additional work incurred by the Landlord’s staff in collecting the Rent and/or other sums in arrears or any part thereof from the Tenant;

(ii) all Solicitors’ costs (on a full indemnity basis) and/or Counsel’s fees and court fees incurred by the Landlord for the purpose of recovering the Rent and/or other sums unpaid or any part thereof from the Tenant;

(iii) any other fees paid to debt-collectors appointed by the Landlord for the purpose of collecting the Rent and/or other sums unpaid or any part thereof from the Tenant; and

(iv) interest on the Rent and other sums in arrears at the daily compound interest rate of 12% per annum calculated from the date on which the same becomes due for payment until the date of actual payment (both inclusive) as liquidated damages and not as penalty.

8.03 For the purpose of Part III of the Landlord and Tenant (Consolidation) Ordinance … and or this Agreement and for the purpose of these presents the Rent shall be deemed in arrears if not paid at the time stipulated as aforesaid.  All costs and expenses for and incidental to distraint shall be paid by the Tenant on a full indemnity basis and is recoverable from the Tenant as a debt.”

30.  At [59] of the Decision, the Judge agreed with the analysis of Clause 5.03 by Au-yeung J in the judgment of 22 January 2020 in HCB 7480/2018 when she set aside the bankruptcy order against the 2^nd Defendant and dismissed the bankruptcy petition against the 3^rd Defendant in HCB 6077/2018.  In short, Au-yeung J held that the effect of Clause 5.03 was the automatic set-off of the arrears of rent or other charges by the Deposit instead of providing an option to call for an increase in the Deposit which was open to the Plaintiff to adopt.  Thus, by operation of the deeming provision under Clause 5.03, the arrears of rent were automatically paid out of the Deposit.  There was therefore no debt at the time of the statutory demands. 

31.  Mr Chan submitted that the Judge (and Au-yeung J) erred in the construction and/or application of Clause 5.03 of the Tenancy Agreement:

(a)  Clause 5.03 does not deal with any issue of set-off, let alone providing for any “automatic” or “mandatory” set off, as Au-Yeung J found; 

(b)  Clause 5.03 specifically provides that it is “without prejudice” to other rights or remedies of the Landlord.   

(i)  If one reads Clause 5.03 with Clause 5.04 (which addresses the refund of the deposit after the end of the tenancy and the handing over of possession), the Plaintiff (as Landlord) has an option to either refund an amount reduced by the amount of the unpaid rent or other charges in arrears or other damages to the tenant (i.e.  the 1^st Defendant) at the time when the obligation to repay the deposit arises, or alternatively, with the operation of other provisions in Clause 8, to demand from the Tenant an immediate payment of the default sums (or such part thereof) while the tenancy is still ongoing, and if the Tenant should fail to make payment demanded, the right to forfeit the tenancy. 

(ii)  There is no justification to read and construe Clause 8.01 as being subject to the deemed reduction of deposit provision in Clause 5.03, the construction of which was clearly inconsistent with the phrase “without prejudice” in Clause 5.03, and bearing in mind that the tenant is not entitled to claim set off under Clause 4.   Likewise, Clause 8.02 and 8.03 gives the Landlord various rights in the event that rent is not duly paid by the tenant.

(c)  The Deposit was a security for the due performance of the liability or potential liability of the tenant for the full term of the tenancy, such that it ought not be automatically reduced upon the unilateral default of the tenant.

(d)  The Plaintiff had elected to issue the demand letter for recovery of the arrears of rent, hence the Judge erred in applying Clause 5.03 as automatically reducing the arrears and treating the Default Judgment without such reduction as an irregular one. 

32.  In his oral submissions, Mr Chan further elaborated that Clause 5.03 would not affect the liability of the 1^st Defendant to pay rent and its arrears.  It only operates notionally for the purpose of calculating the amount to be returned to the 1^st Defendant pursuant to Clause 5.04.  Although the Plaintiff can also demand the topping up of Deposit under Clause 5.03, it is open to the 1^st Defendant as tenant to pay the arrears instead of topping up.  Counsel said this was how the parties understood the mechanism in the present case when the Plaintiff demanded for payment of arrears and the 1^st Defendant made the partial payments in August 2018.

33.  On the other hand, Mr Wong submitted that Clause 5.03 contained three different stipulations:

(a)  The automatic deduction of arrears of rent or other charges from the Deposit;

(b)  The right of the Plaintiff to demand for a topping up of the Deposit upon such deduction;

(c)  The right of re-entry upon the 1^st Defendant’s failure to meet such demand.

34.  Mr Wong submitted that though the Plaintiff could choose if it would make a demand for topping up the Deposit, there was no choice in the automatic deduction of arrears.  The deeming effect operated without the need for the Plaintiff to do anything.  Counsel cited Starmark Enterprises Ltd v CPL Distribution Ltd [2002] Ch 306 at [77] to support his contention on the effect of the deeming provision.  Thus, Au-yeung J and the Judge were correct in holding that the arrears had been set-off.

35.  Mr Wong also relied on the contra proferentem rule to contend that if Clause 5.03 is capable of bearing two different meanings, the court should adopt the meaning less favourable to the Plaintiff since the Tenancy Agreement was drafted by its lawyers.

36.  With respect, we came to the clear conclusion that on proper construction Clause 5.03 does not bear the meaning Au-yeung J and the Judge adopted.  We agreed with the submission of Mr Chan that the deeming effect of Clause 5.03 was only for the limited purpose of enabling the Plaintiff to make a demand for topping up under that clause and the reduction of the amount of Deposit repayable back to the 1^st Defendant under Clause 5.04.  It did not give rise to an automatic extinguishment of the liability of the 1^st Defendant to pay for arrears of rent or other charges.     

37.  Construction of the terms of an agreement should be approached by reference to its context and purpose.  All the terms of the agreement should be read together and construed with the overall context in mind.  It is a unitary exercise involving an iterative process.  See Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351; Achieve Goal Holdings v Zhong Xin Ore-Material Holding [2020] HKCA 51; Sino Channel Holdings v Vast Faith Investment [2020] HKCA 311.

38.  Further, the court could and should have regard to implications of each competing construction, at least by way of cross-check. Business common sense should be engaged in the iterative process: see Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 per Lord Clarke at [20] to [30].  In particular, His Lordship said at [21]:

“ The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. if there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”

39.  Lord Clarke also cited with approval the judgment of Mance LJ (as he then was) in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299.  For the present purposes, we only need to refer to [16] of that judgment:

“ … In my opinion, a court when construing any document should always have an eye to the consequences of a particular construction, even if they often only serve as a check on an obvious meaning or a restraint upon adoption of a conceivable but unbusinesslike meaning…”

40.  It is perhaps worth emphasizing that attaching too much weight to the natural meaning of words could lead experienced lawyers and judges to adopt a wrong construction of the document.  Thus, in In re Sigma Finance Corporation [2009] UKSC 2, the majority of the Supreme Court overturned the construction adopted in the courts below[1].  Lord Mance (with whom Lord Hope, Lord Scott and Lord Collins agreed) had this to say at [12]:

“ 12.  In my opinion, the conclusion reached below attaches too much weight to what the courts perceived as the natural meaning of the words of the third sentence of clause 7.6, and too little weight to the context in which that sentence appears and to the scheme of the Security Trust Deed as a whole.  Lord Neuberger was right to observe that the resolution of an issue of interpretation in a case like the present is an iterative process, involving “checking each of the rival meanings against other provisions of the document and investigating its commercial consequences” …Like him, I also think that caution is appropriate about the weight capable of being placed on the consideration that this was a long and carefully drafted document, containing sentences or phrases which it can, with hindsight, be seen could have been made clearer, had the meaning now sought to be attached to them been specifically in mind … Of much greater importance in my view, in the ascertainment of the meaning that the Deed would convey to a reasonable person with the relevant background knowledge, is an understanding of its overall scheme and a reading of its individual sentences and phrases which places them in the context of that overall scheme …”

41.  Ma CJ’s salutary reminder in Fully Profit v Secretary for Justice, supra at [15] is also apposite:

“ … It is in my view not particularly helpful in most cases to refer to the ‘ordinary and natural meaning’ of words because, as very often experience tells us, there can be much debate over exactly what is the ordinary or natural meaning of words. The surer guide to interpretation is context…”

42.  Hence, we started by examining the context and purpose of Clause 5.03.  As discussed above, Clause 5.03 is one of the provisions in the Tenancy Agreement dealing with the Deposit.   The Deposit was paid to the Plaintiff prior to the commencement of the tenancy.  Such payment served the purpose of securing the due observance and performance by the 1^st Defendant of its obligations throughout the duration of the tenancy.  But it is important to note that the security is not to be achieved by earmarking the Deposit as being held by the Plaintiff for a purpose trust.  It is clear from Clause 5.01 that the Plaintiff would be at liberty to use the Deposit as its money free of any trust during the tenancy. 

43.  The obligation of the Plaintiff is, under Clause 5.04, to pay to the 1^st Defendant “a sum equivalent to the Deposit (reduced by the amount of Rent or other charges in arrears …)” after the termination of the tenancy and the delivery of vacant possession to the Plaintiff and settlement of all outstanding claims by the 1^st Defendant.     

44.  We agree with the submission of Mr Chan that during the tenancy the Deposit was not marked off for the discharge of any liabilities of the 1^st Defendant under the Tenancy Agreement.  The Plaintiff was free to spend the Deposit on whatever it wished and there was no obligation on the part of the Plaintiff to keep the Deposit in a separate account.  In other words, the 1^st Defendant has no proprietary interest in the Deposit.  All it had, under Clause 5.04, was a chose in action which can only be enforced against the Plaintiff according to its terms after the termination of the tenancy. 

45.  In short, during the term of the tenancy, the Deposit was the Plaintiff’s money in the legal as well as beneficial sense.  Whilst the tenancy continued, the 1^st Defendant had no claim to such money. Upon the termination of the tenancy, the right of the 1^st Defendant to be paid by the Plaintiff was subject to the conditions in Clause 5.04.   

46.  Further, under Clause 8.01, the right of the 1^st Defendant to the payment of a sum equivalent to the Deposit could be forfeited (with the Plaintiff’s obligation to pay under Clause 5.04 being absolutely discharged) if the 1^st Defendant failed to pay rent for more than 10 days.  Whilst it may be arguable that such right of forfeiture is subject to the statutory relief under Section 21F of the High Court Ordinance (Cap 4) and it may even be argued that given the quantum of the sum involved such forfeiture is a penalty, the scheme of the Tenancy Agreement itself is that the 1^st Defendant did not have an absolute entitlement to the payment under Clause 5.04. 

47.  Hence, as a matter of legal analysis, the security for due observance and performance took the form of curtailment of the 1^st Defendant’s right under Clause 5.04 to the payment by the Plaintiff of a sum equivalent to the Deposit in the event of any defaults by the 1^st Defendant under the Tenancy Agreement.

48.  Apart from the true nature of the Deposit and the rights of the parties in respect of the same, another important context for Clause 5.03 is the scheme for payment of rent and for dealing with default in payment of rent under the Tenancy Agreement. 

49.  Mr Chan laid emphasis on the prohibition against deduction from the rent and the exclusion of set-off.  He also highlighted the mode of payment stipulated in Clause 6.01(a) by auto-payment without demand to the Plaintiff’s bank account.  For default in payment lasting more than 10 days, the Plaintiff can rely on Clause 8.01 to determine the tenancy and forfeit the 1^st Defendant’s right to payment under Clause 5.04.  Other rights and remedies were also reserved.

50.  Thus, the overall effect of these clauses was that rent should be paid without any deduction and without the need of the Plaintiff making any demand.  Non-payment for over 10 days could trigger the right of the Plaintiff to determine the tenancy and the forfeiture of right to payment under Clause 5.04. 

51.  It is against such context that Clause 5.03 should be considered.  Mr Chan relied on the opening phrase in that clause: “without prejudice to any other rights or remedies of the Landlord hereunder” and submitted that one should not adopt a construction of Clause 5.03 which would prejudice the position of the Plaintiff under Clauses 4 and 8.01. 

52.  On the other rights and remedies of the Plaintiff as landlord under the Tenancy Agreement, we further note that under Clause 8.02 the Plaintiff was entitled to interest on the arrears of rent calculated from the due date to the date of actual payment.  Under Clause 8.03, rent is deemed to be in arrears if not paid at the time stipulated in the agreement. 

53.  The deeming provision in Clause 5.03 should be contrasted with the deeming provision in Clause 8.03.   Clause 5.03 refers first to an event: “in the event of the amount of any Rent...being in arrear”; and then to a consequence: “the amount of the Deposit…shall be deemed to have been reduced by the amount of Rent … in arrear”.   

54.  Two points should immediately be noted from the way in which Clause 5.03 is drafted:

(a)  Its operation was premised on the event of rent being in arrear;

(b)  On the explicit meaning of the clause, the deemed reduction effect is on the “amount of Deposit”, not the rent which is not paid. 

55.  Mr Wong’s construction, which Au-yeung J and the Judge adopted, was that the deemed reduction of the amount of Deposit was equivalent to a deemed payment of rent out of the Deposit.  In other words, it is the utilization of the deposit to discharge the obligation to pay rent.  Counsel said that the deeming effect was binding on both parties and it took effect automatically without further step to be taken by either party.   Thus, it was not an option to be exercised by the Plaintiff.  Au-yeung J regarded the net effect as an automatic set-off. 

56.  With respect, in our judgment it is not correct to analyze the operation of the deemed reduction of the amount of deposit as a set-off.  Set-off applies in a situation where existing mutual liabilities or obligations are owed at the same point in time.  However, at the time of deemed reduction under Clause 5.03, there is no immediate obligation on the part of the Plaintiff as landlord to repay any part of the deposit to the 1^st Defendant as tenant.  The obligation to pay an amount equal to the Deposit only arises under Clause 5.04 after the termination of the tenancy and delivery of vacant possession and settlement of all outstanding obligations by the 1^st Defendant.  Hence, it is a misconception to describe Clause 5.03 as a set-off.

57.  Further, as analysed above, during the currency of the tenancy, the Plaintiff did not hold the Deposit on trust for the purpose of Clause 5.04.  If the Deposit could be utilized for the purpose of payment of rent so as to reduce the 1^st Defendant’s liability for the same, it would mean that the 1^st Defendant can unilaterally accelerate its claim for repayment under Clause 5.04 by withholding payment of rent.  That would be inconsistent with the common intention on the nature of the Deposit as provided for under Clause 5.01. 

58.  Taking the construction of Mr Wong to its logical conclusion, it would mean that the 1^st Defendant needed not make any payment of rent at least for the first four months of the tenancy because there was sufficient amount of Deposit to cover the same.  Since rent was deemed to be paid upon the automatic reduction of the Deposit, the Plaintiff could not rely on Clause 8.01 to re-enter and determine the tenancy.  Nor could the Plaintiff rely on Clause 8.02 to charge interest on the arrears.  The only course the Plaintiff could take, according to such construction, is to exercise the power under Clause 5.03 to demand the topping up of the Deposit.  By comparison, Clauses 4, 6.01(a) and 8.01, 8.02(iv) and 8.03 clearly stipulated that rent is payable without any demand and the consequences for default would follow irrespective of the absence of any demand by the Plaintiff. 

59.  As Mr Chan submitted, all these matters highlighted the prejudice that could be occasioned to the other rights and remedies available to the Plaintiff under the Tenancy Agreement if Mr Wong’s construction were adopted.  It would therefore go against the opening phrase of Clause 5.03.       

60.  Bearing in mind the context as shown in the other provisions of the Tenancy Agreement and the true legal analysis as to the nature of the Deposit, the deemed reduction of the amount of the Deposit under Clause 5.03 is not necessarily the payment of rent as submitted by Mr Wong. 

61.  Though we agree that the deeming effect came into operation automatically without any option on the part of the Plaintiff to neglect the same, and the deemed provision created a conclusive state of affairs for certain purposes, the crucial issue in the present appeal was the scope of the deemed state of affairs: did it give rise to a deemed payment of the rent (as contended by Mr Wong) or did it only provide for the deemed reduction in the amount of the Deposit which the Plaintiff would need to pay back to the 1^st Defendant under Clause 5.04 and give rise to a right to demand a topping-up of the Deposit?

62.  Following the iterative approach of Lord Neuberger and Lord Mance, we examined the consequences of each contended construction against the context of the Tenancy Agreement as a whole.        

63.  We have already referred to some difficulties with Mr Wong’s construction.  In effect, the payment of the Deposit would be as good as advanced payment of rent.  So long as there was sufficient coverage for rent which was payable, rent would automatically be paid from the Deposit.  This in by itself is inconsistent with the nature of the Deposit being the Plaintiff’s money not subject to any restriction in using the same as provided under Clause 5.01. 

64.  The Plaintiff would have to continuously demand for topping-up to maintain the Deposit to serve its purpose.  Since the Deposit was to cover the full term of the tenancy and the due performance of all obligations of the 1^st Defendant under the Tenancy Agreement, the security had to be adequate not only to cover payment of rent but also other tenant’s obligations during the tenancy as well as the obligations concerning delivery of vacant possession at the end of the same.  Under the Tenancy Agreement, the Plaintiff was entitled to the full Deposit sum of $8.5 million as such coverage.

65.  Whilst it is true that after the Deposit had been reduced by the amount of arrears the Plaintiff could make a demand under Clause 5.03 to 1^st Defendant to replenish the Deposit to its original amount, the Plaintiff would not be able to charge interest for the unpaid amount until after a demand had been made and non-complied with.   As observed above, it is a marked difference from the position stipulated under Clauses 4, 6.01(a) and 8.01, 8.02(iv) and 8.03.

66.  Also, according to Mr Wong’s construction, there would not be any arrears of rent when it is to be automatically deducted from the Deposit.  This does not sit well with the deeming operation under Clause 5.03 itself since it was premised on the occurrence of arrears of rent.  Mr Wong did not explain how arrears could exist when rent would be effectively paid by reduction from the Deposit.

67.  There is also a conceptual difference between the deemed reduction of the amount of Deposit and the payment of rent.  Payment of rent involved the 1^st Defendant paying money to the Plaintiff.  On the other hand, there was no actual payment in the deemed reduction of amount of Deposit.  In light of our analysis on the nature of the Deposit and the 1^st Defendant’s right under Clause 5.04, the payment of the Deposit cannot be regarded as payment of rent in advance since the sum was not paid by the 1^st Defendant as discharging its obligation to pay rent.  Nor could it constitute “actual payment” under Clause 8.02(iv) to stop interest on arrears from accruing. 

68.  We shall now turn to Mr Chan’s construction, viz Clause 5.03 only provided for the notional reduction of the amount of the Deposit and did not have the effect of discharging the 1^st Defendant from the consequences for default in payment of rent.  According to this construction, two practical consequences flowed from the deemed reduction: (a) the reduction of amount payable to the 1^st Defendant under Clause 5.04; and (b) giving rise to the right on the part of the Plaintiff to demand the topping-up of the Deposit. 

69.  It can be said that (a) in preceding paragraph was already provided for in Clause 5.04.  As for (b), it can be said that it did not confer much benefit to the Plaintiff since, if payment were to be made at all, the 1^st Defendant would clearly choose to make payment for arrears of rent instead of topping up the Deposit, not least to prevent interest from accruing on the outstanding rent in arrears. 

70.  We acknowledge these as valid observations on Mr Chan’s construction of Clause 5.03.  However, the lack of utility of the provision did not mean that such construction was internally inconsistent with the other provisions in the Tenancy Agreement.  Compared with Mr Wong’s construction, we found Mr Chan’s construction to be more in line with the context and the object of the Plaintiff requiring the 1^st Defendant to pay the Deposit under the Tenancy Agreement.         

71.  In light of this Court’s determination of the proper construction of Clause 5.03 in light of the context and purpose of the clause, there is no ambiguity for the contra proferentem rule to be applied.  In any event, as observed in Chitty on Contracts, Vol 1, paras 13-042 and 15-012, the rule has lost much of its utility in light of the modern approach to construction of contracts. 

72.  For these reasons, we came to the clear conclusion that the Judge erred in construing Clause 5.03 as giving rise to the reduction of the 1^st Defendants’ liabilities for the arrears in payment of rent and other charges and the 2^nd and 3^rd Defendant’s corresponding liabilities under the Guarantee.

73.  Given our conclusion on Ground 1, it is not necessary for us to address the other grounds of appeal.  We would however remark that even if our decision on Ground 1 had been the other way, we would have been inclined to allow the appeal on Ground 3.   Following the approach in Tian Yao (Xiamen) Property Development Co Ltd v Right Margin Ltd [2016] 2 HKLRD 175 at §§25-26, we agree with Mr Chan that it was illogical for the Judge to set aside the whole judgment instead of varying the same to a reduced amount when she dismissed the rest of the defence (other than the mandatory reduction of arrears based on Clause 5.03 of the Tenancy Agreement) as having no merit.   

74.  In view of our conclusion on the proper construction of Clause 5.03, there was no prospect of success in the defence.  Accordingly, we allowed the appeal and restored the Default Judgment.