ORIENT BRIGHT INTERNATIONAL LTD v. HIANG KIE HONG KONG LTD

cacv 220/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 220 of 2004

(on appeal from HCA NO. 10411 OF 2000)

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J U D G M E N T

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Hon Le Pichon JA:

1.  This is an appeal by the defendant from the order of Suffiad J dated 10 June 2004 whereby the plaintiff landlord obtained judgment in the sum of $1,171,801.42 in respect of the defendant’s breach of a tenancy agreement.  There is also a cross appeal by the plaintiff from the judge’s decision that in arriving at the sum due to the plaintiff, the deposit paid by the defendant should be set off against the plaintiff’s claim for damages.

2.  The defendant was the tenant of the ground and mezzanine floors of a building at 28 Wellington Street under a tenancy agreement dated 12 November 1997 for a term of four years commencing 1 November 1997 at a monthly rent, exclusive of rates and management fees, of $280,000 for the first two years and $322,000 for the remaining two years of the term.  On 8 February 1999, the parties entered into a supplemental agreement varying the monthly rent payable under the tenancy agreement, effectively reducing the rent payable from 1 February 1999 to 31 October 2002 to $196,000 per month. 

3.  After the rental reduction period, the defendant failed to pay rent despite a written demand made on 2 December 2000.  On 11 December 2000, the plaintiff issued a writ claiming damages of $1,767,310.42, being the difference between the $2.2 million paid by the defendant and the contractual rent for the period from 1 November 2000 to 16 October 2001 when the defendant vacated the premises.

4.  The issue before the judge was whether, on 23 January 2001, the parties, through their then respective solicitors, arrived at a binding agreement to settle the plaintiff’s claim.

5.  Between 6 January and 23 January 2001, Messrs Angela Wang & Co. (“AW”), the solicitors for the defendant and Messrs Siao, Wen & Leung (“SWL”), the solicitors for the plaintiff conducted ‘without prejudice’ negotiations by way of correspondence.  The letters are summarised in paragraph 17 of the judgment below.  Suffice it to say that the points of disagreement consisted of the following:

(1)	the manner in which the existing proceedings would be disposed of, whether, as was the defendant’s position, it was to be by way of a consent order discontinuing the action or, as was the plaintiff’s position, by way of a consent judgment with a stay of execution upon terms i.e. payment of rental/mesne profits on agreed dates;
(2)	the date for payment of rental arrears, whether this was to be payable forthwith upon the disposal of the proceedings or only 14 days thereafter; and
(3)	costs.

6.  Three telephone conversations then took place on 23 January 2001 which happened to be the day before Chinese New Year between Eliza Kung of SWL and Adrian Taylor of AW, followed by an e-mail sent by Mr Taylor to Ms Kung the same evening to SWL’s e-mail address marked for Ms Kung in the following terms:

“	1.	That our client will remain in possession of the premises paying rent from the 1st November 2000 to the end of the term on 31st October 2001 of HK$220,000 per calendar month.
	2.	Our client will pay your client’s costs to be taxed if not agreed.”

7.  The judge made the following factual findings:

“	46.	From all the evidence given, I am able to make the finding that the only matters agreed between Ms Kung and Mr Taylor was that the defendant would pay rent from 1 November 2000 to 31 October 2001 at $220,000.00 per calendar month and that the legal costs were to be borne by the defendant when the e-mail of 23 January was sent by Mr Taylor at about 9.10 p.m. that day.
	47.	I further make the finding that there was no specific agreement between them as to the method by which the proceedings are to be settled, whether by way of a consent judgment or by the withdrawal of the proceedings.  The only agreement made between them in this respect was to further discuss the documentation for the settlement when they returned to their offices the following Monday (29 January 2001).  This was the evidence of Ms Kung and also reflected in the last paragraph of the e-mail from Mr Taylor.”

8.  The issue below was whether the form of the settlement was to be a condition or term of the agreement itself.  The judge concluded (at paragraph 51) that:

“… given that the parties’ negotiations for settlement and the settlement itself, if it was achieved, involved the defendant remaining in possession of the Premises and paying rent until 31 October 2001, the manner in which the settlement is to be enforced should it become necessary, must, in my view be in material terms of the settlement agreement.”

The appeal

9.  Mr Wong who appeared for the defendant submitted that the judge erred in concluding that the means whereby the settlement was to be achieved was a material term.  It was said that prior to 23 January, each party had insisted on a particular means of settlement: by 23 January the parties were prepared to talk about it, thus indicating a softening in stance.  Further, in correspondence subsequent to 23 January, in response to a counterproposal made by the defendant to dispose of the proceedings by way of a consent order withdrawing the action, far from protesting, SWL in fact made amendments to a draft consent order that had been submitted by AW.  Mr Wong submitted that the evidence was that the plaintiff had wanted to conclude the deal by Chinese New Year.  Apparently, Mr Taylor’s evidence was to that effect but Ms Kung disagreed with Mr Taylor and the judge made no findings in respect of the conflicting evidence.

10.  For my part, I do not see that the subsequent correspondence is of assistance in deciding the question whether the parties had reached a binding agreement on 23 January.  If anything, it indicated a lack of consensus on the issue.  It is clear from the correspondence up to and including AW’s letter of 23 January that there was serious disagreement as to the mechanism for disposing of the proceedings then on foot.  According to Mr Taylor, as of the morning of 23 January, the filing of a consent order discontinuing the action had to be part of the settlement as far as his client (the defendant) was concerned.  There was no evidence to the effect that by the time of his three conversations later that day, those instructions had changed.  That being so, I fail to see how it could be said that the method of settlement was not a material term.  It clearly remained so as far as his client was concerned.  I therefore agree with the judge that the parties did not reach any binding agreement to settle action on 23 January 2001

11.  In my view, there is a further reason why there was no concluded agreement.  As noted above, the date for payment of rental arrears was a point of disagreement between the parties during the negotiations between 6 and 23 January.  By this time, the defendant who was in possession had not paid any rent in respect of the period commencing 1 November 2000.  It is evident from clause 6 of the supplemental agreement that there had been a history of default: that clause referred to an earlier action by the plaintiff against the defendant in respect of the tenancy.  Given that background, it is inconceivable that the date of the payment of rental arrears was not a material term of the settlement agreement.  Indeed, not surprisingly, during the negotiations, the plaintiff was insisting that payment of the arrears should take place forthwith upon the disposal of the proceedings.  The payment of arrears was plainly something quite different from the payment of prospective rent which was not yet due.

12.  Mr Wong resorted to the device of an implied term to overcome the difficulty.  He submitted that where the parties fail to specify a date for payment, the court should uphold the agreement by implying a term to the effect that payment would be made within a reasonable time.  When asked what that reasonable time would be, Mr Wong somewhat disingenuously suggested that, in the circumstances, it would mean ‘forthwith’.  Mr Wong was implicitly accepting that the date for payment of the arrears was a material term.  In my view, given the factual background and the history of default, the date for payment of the arrears was plainly a material term as to which no agreement was ever reached on 23 January.

13.  For these reasons, I would dismiss the appeal.  I would also propose that there be an order nisi that the costs of the appeal be to the plaintiff.

The cross appeal

14.  In ascertaining the amount of damages to which the plaintiff was entitled as a result of the defendant’s breach of its obligations under the tenancy agreement, the judge set off the rental and management fee deposit amounting to $595,500 against the plaintiff’s claim for damages which it quantified at $1,767,310.42 and awarded the plaintiff a net sum of $1,171,801.42.  Whether or not the judge was correct in setting off the deposit is the subject matter of the cross appeal.

15.  Under clause 5(a) of the tenancy agreement, the rental and management fee deposit was:

“to secure the due observance and performance by the Tenant of the agreements, stipulations and conditions here in contained and on the Tenant’s part to be observed and performed.”

Clause 5(a) further provided as follows:

“….  The said deposit shall be retained by the Landlord throughout the said term free of any interest to the Tenant and in the event of any breach or non-observance or non-performance by the Tenant of any of the said agreements, stipulations or conditions aforesaid, the Landlord shall be entitled to terminate this Agreement and to forfeit the said deposit absolutely but without prejudice to the Landlord’s right to claim from the Tenant damages or monetary loss which the Landlord may incur as a result of such non-observance or non-performance by the Tenant ….”  (emphasis added)

Clause 5(c) provided that:

“In no event shall the Tenant be entitled to treat the deposit as payment of rent.”

The plaintiff submitted that upon the defendant’s breach of its obligations under the tenancy agreement by failing to pay rent when it became due, the plaintiff became entitled to forfeit the deposit without prejudice to its right to claim against the defendant for the outstanding rent.

16.  Mr Pao who appeared for the plaintiff relied on the decision of the Full Court in Wong Kam-kong v Intercontinent Mercantile Co. [1968] HKLR 331 at 339 and 344 for the proposition that at common law there is no bar to a landlord forfeiting the deposit if there is a stipulation as to the deposit and the forfeiture of it in the agreement.  In such a case, the deposit is not recoverable and therefore cannot be used as a set off against the claim for arrears of rent unless some equitable principle is applicable.  That authority has since been followed.  See, for example, McConnell v Bak Ling Enterprises Ltd., unrep., HCA 4246 of 1983, 23 December 1983, and Re Kwong Ngai Ping [2004] 3 HKC 258.

17.  In the present case, clause 5(a) of the tenancy agreement is clear: the deposit is to be forfeited in the event of any breach or non-observance or non-performance by the tenant of its obligations under the lease.  It was not pleaded or argued that the deposit was not reasonable in amount or the provision for its forfeiture was a penalty.  Clause 5(a) did not require the plaintiff to give credit for the deposit in respect of damages otherwise recoverable.  This is to be contrasted with the standard clauses in contracts for the sale and purchase of land (considered by Ribeiro PJ in Polyset Ltd v Panhandat Ltd [2002] 3 HKLRD 319 at paragraph 68) which limit the amount of the damages recoverable by a party forfeiting the deposit to the deficiency between the deposit forfeited and loss suffered on the sale of the property.  In such a case, credit has to be given for the forfeited deposit.  In any event, regardless of the position with common law damages, the plaintiff’s claim here is essentially for mesne profits, which is measured by the value of the accommodation to the trespasser, rather than the actual loss to the landlord.  There is no question of giving credit for the forfeited deposit.

18.  In the McConnell case, Mantell J observed that:

“… there may well be jurisdiction in equity to grant relief against forfeiture of the deposit if either the agreement providing for forfeiture or, possibly, the act of a forfeiture itself is unconscionable.”

See also Wong Kam-kong at 344.  It is therefore clear that the court has power to grant relief against forfeiture should the circumstances so warrant.

19.  It is to be noted that relief against forfeiture was not part of the defendant’s pleaded case.  That aside, in the present case, as in the Wong Kam-kong and McConnell cases, there was nothing unconscionable in the clause permitting forfeiture.  A deposit representing three months’ rental and management fees is not out of the ordinary, particularly having regard to the length of the term which, in the present case is 4 years.  The question which arises is whether there was anything unconscionable in the conduct of the plaintiff in forfeiting the deposit.  On behalf of the defendant it was submitted that the breaches were unintentional in as much as the defendant believed that there had been a binding settlement.  The plaintiff disagreed.  Mr Pao submitted that the defendant had been in breach of its obligations from 1 November 1999 to 16 October 2001, a period of almost two years. 

20.  From the pleadings, it would appear that the defendant made payments totalling $2.2 million as follows:

Date of Payment	Amount
12th March 2001	HK$	660,000.00
26th June 2001	HK$	440,000.00
16th August 2001	HK$	630,000.00
20th August 2001	HK$	100,000.00
21st August 2001	HK$	150,000.00
6th September 2001	HK$	100,000.00
7th September 2001	HK$	70,000.00
12th September 2001	HK$	50,000.00
	HK$	2,200,000.00

So the defendant remained in possession without paying the rent payable under the tenancy agreement as varied by the supplemental agreement for almost 12 months and not, as Mr Pao submitted, 2 years.  Even on its own case, far from the defendant having made payments pursuant to what was contended as a binding settlement, it failed to pay the arrears ‘forthwith’ or make any payment stipulated by the ‘binding’ settlement.  No payment at all was made until mid-March.  What was paid then ($660,000) fell short of the arrears accrued as at that date.  Further, payments made as from June 2001 onwards were not because of the alleged binding settlement but in purported compliance with orders made by the court.  For my part, I can see no circumstances that warrant any equitable relief.

21.  For these reasons, I would allow the cross appeal.  I would also make an order nisi that the costs here and below of the cross appeal be to the plaintiff.

Hon Yam J:

22.  I agree with the judgment delivered by Mrs Justice Le Pichon JA and I have nothing to add.

Hon A Cheung J:

23.  I agree.