BANK OF CHINA (HONG KONG) LTD v. CREATIVE FAR EAST LTD

CACV 277/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 277 OF 2004

(ON APPEAL FROM DCCJ NO. 6556 OF 2003)

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J U D G M E N T

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Hon Woo VP (giving the judgment of the Court):

Introduction

1. This is an appeal from a judgment given by His Honour Judge Wesley Wong on 19 August 2004 in the District Court, by which the judge gave summary judgment for the plaintiff in the sum of $377,958.80 with interest and struck out the defendant’s counterclaim. 

2. The defendant’s counterclaim comprises two parts, namely, first the deposit for rental and service charges (“the service charges”) consisting of management fee and lift charges, totalling $555,021, and secondly, overpayments of the services charges allegedly made either by mistake of fact or as a result of misrepresentation, totalling $496,544.50.

3. The defendant also raised the deposit and overpayments as a defence by way of set off.  

4. The defendant’s appeal, according to the Notice of Appeal, was restricted to challenging the judge’s decision in ruling that the overpayments did not amount to a valid set off or counterclaim.

Background

5. Sheen Crown Limited (“SCL”) was the registered owner of Unit 309 in the Galleria at Nine Queen’s Road Central (“the property”) and in October 1993 it mortgaged the property to Sin Hua Bank to secure banking facilities.  Sin Hua Bank subsequently merged with the plaintiff and as a result the plaintiff became the mortgagee of the property.

6. On 7 April 2001, SCL entered into a tenancy agreement in respect of the property with the defendant for a year at a monthly rental of $227,500.  The defendant paid a deposit of $660,021 that comprised the rental and service charges for a period of two months.

7. On 27 March 2002, SCL entered into another tenancy agreement with the defendant for a further term of two years at a monthly rental of $175,000.  The deposit, calculated by way of the new rental and service charges for two months, was accordingly reduced to $555,021. 

8. On 18 June 2002, SCL issued an “Assignment of Rentals Notice” to the defendant to direct the defendant to pay rentals excluding service charges into SCL’s bank account with the plaintiff.  

9. On 30 April 2003, the plaintiff exercised its right under the mortgage and entered into possession and gave notice to the defendant by a notice dated 16 May 2003.  The defendant had already been in default in payment of rental and service charges as from the month of February 2003.  After the said notice, the defendant paid the arrears of rental for February 2003 and arrears of service charges for March 2003 to the plaintiff.

10. After some negotiations between the parties, in about the end of July 2003 the defendant paid the rental for March 2003.  The defendant also issued five post-dated cheques to the plaintiff for payment of rental and service charges.  The first two cheques for $150,000 each were cashed, and the remaining three cheques were dishonoured upon presentation on their due dates by reason of countermanding:

Cheque for $200,000	dishonoured on 8 October 2003
Cheque for $200,000	dishonoured on 11 November 2003
Cheque for 95,856	dishonoured on 9 December 2003

11. On 21 August 2003, the plaintiff assigned the property to Happy Dare Limited.

12. The plaintiff’s claim was for the amount of the three dishonoured cheques, as reduced by deductions totalling $247,505.70 regarding overpayments of services charges by the defendant for the period between March and July 2003, plus the rental and service charges for the period between 1 and 20 August 2003 just before it assigned the property to Happy Dare Ltd on 21 August 2003.  There is no dispute that the defendant is liable to pay the rental and service charges to the plaintiff for those 20 days, nor is there any dispute as to the amount thereof.

13. The set off and counterclaim raised by the defendant regarding the overpayments totalling $496,544.50 was in respect of overpayments it had allegedly made to SCL for the period between 1 April 2001 and 28 February 2003.

The judge’s reasoning

14. In his Decision, the judge dealt with the overpayments in the following terms:

“	14.	It is agreed that the Plaintiff did not receive any amount in excess of the service charge.  The Defendant’s allegation is only for genuine mistake made by the Defendant in respect of the amount of management fees and lift charges paid to SCL and that it would have been recoverable by the Defendant against SCL for restitution.  Because there was an assignment of choses in action by SCL to the Plaintiff, the assignment satisfied the statutory requirements of S.9 of the Law Amendment and Reform (Consolidation) Ord. Cap. 23 and that assignment takes effect subject to equities including rights of setoff.  The Defendant also relied on Green and another v. Rheinberg [1911] 104 LT 149.
	15.	There is no evidence that the Plaintiff was aware of the alleged misrepresentation nor that the Plaintiff had conspired with SCL to mislead the Defendant, the Plaintiff was not a party to the misrepresentation.  Action if any for misrepresentation could only be against the one who misrepresented the facts to the Defendant.
	16.	The overpayment or misrepresentation was before the assignment of choses in action.  The Plaintiff was not a party to the misrepresentation, nor was it an interest in land.  This argument is also not sustainable.
	17.	In Reeves v. Pope [1914] 2 KB 284 it was held that inasmuch as the right attempted to be setoff was not an interest in land but merely a claim for damages for breach of a personal covenant, the claim to setoff could not be allowed.”

The appeal

15. The only ground of appeal raised on behalf of the defendant in the Notice of Appeal is that the judge erred in holding that the set off and counterclaim is unsustainable despite the fact that the plaintiff was the assignee of SCL in respect of the rental payable by the defendant to SCL.

16. It is common ground that the plaintiff entered into possession of the property as mortgagee on 30 April 2003.  It is also undisputed that the five cheques, including the two honoured and three dishonoured ones, were given by the defendant to the plaintiff in and after July 2003, in payment of the rentals and services charges for the period between March and July 2003.  In its claim on the three dishonoured cheques totalling $495,856.50, the plaintiff had already taken into account the overpayments of the service charges made by the defendant to it for the same period between March and July 2003. 

17. The set off, with which this appeal is concerned, relates to overpayments of service charges for the period between 1 April 2001 and 28 February 2003.  There is no evidence that these overpayments were made to the plaintiff; quite to the contrary, these payments were allegedly made to SCL, either on the basis of the defendant’s mistake of fact and/or oral misrepresentation made by SCL to the defendant.

18. The judge was correct in pointing out that there is no evidence that the plaintiff was aware of the misrepresentation allegedly made by SCL or that the plaintiff was a party to the misrepresentation.  The judge was also correct in his view that the overpayments could not give rise to a right accorded to the defendant as an interest in land binding upon the plaintiff. 

19. However, on behalf of the defendant, Mr Simon Yip argued that the plaintiff was an assignee of a debt owed by the defendant to SCL and as such, the plaintiff’s right to recover the debt from the defendant is subject to the equities that have priority over the plaintiff’s right, and that the defendant’s claim for the repayment of the overpayments amount to such an equity.  Reliance is placed on s 9 of the Law Amendment and Reform (Consolidation) Ordinance, Cap 23, which reads:

“

Any absolute assignment, by writing under the hand of the assignor (not purporting to be by way of charge only), of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this section, section 11 of this Ordinance and sections 25 and 49 of the Conveyancing and Property Ordinance (Cap. 219) had not been enacted) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor: …”

20. Mr Yip also referred us to Young v Kitchin (1878) 3 Ex D 127, where a builder of houses assigned to the plaintiff a debt due from the defendant, the owner of the houses, on a building contract.  Cleasby B held that the defendant was entitled to set off his claim for damages for delay in the building works and for defects in the works, as an equity which would have been entitled to priority over the right of the plaintiff as the assignee, in the following terms:

“	… the defendant has no claim to recover anything against the plaintiff; he only meets the plaintiff’s claim by a counter-claim of damages arising out of the same contract, and this ought to appear from his defence and counter-claim.”

21. Young v Kitchen was explained by Liu J (as he then was) in Honour Finance Co Ltd v Chan Yan Pak [1988] HKC 864, at 866D-F:

“

Thus, the ratio in Young v Kitchen (above) is that the defendant’s counterclaim should not be pleaded and prosecuted as an independent cross-claim over-topping the assigned debt but as one merely for meeting the assignee’s claim against him under the assignment.  Evidently, same as any assignee, the plaintiff derived his title from the assignment, and he has no right or obligation beyond the four corners of the assignment under which he now sues.  If he should fail in his claim under the assignment, naturally, he cannot be made liable to any cross-claim, independent of the assignment, against the assignor.  The equities of the defendant as debtor are tied to the claim against him under the assignment.”

22. In our opinion, the statutory provision as well as Young v Kitchen does not help the defendant in the case before us.  According to the facts, after the arrears of rent and service charges for February and March 2003 having already been paid, the first two of the five cheques were for rent and service charges for the month of April 2003 and part of May 2003, and the three dishonoured cheques were to cover the rent and service charges for part of May to end of July 2003.  Factually speaking, the rent and service charges paid by way of the three dishonoured cheques were paid to the plaintiff as mortgagee in possession, and as such the claim of the plaintiff based on the dishonoured cheques as well as the underlying entitlement to the rent and service charge after April 2003 did not arise out of and were independent of any assignment by SCL.  Thus, the facts of the present case do not admit of an assignment of debt that Mr Yip sought to argue. 

23. The plaintiff, as mortgagee in possession, was entitled to receive the rent and service charges after April 2003 and especially after 16 May 2003 when it served notice on the defendant.  This entitlement was independent of any assignment of rent and service charges made by SCL in favour of the plaintiff.

24. Mr Jeremy S K Chan, on behalf of the plaintiff, referred us to the summary of the law regarding the right of the mortgagee in possession in Fisher & Lightwood’s Law of Mortgage, 11^th Ed, 2002, para 19.59 and the Law of Set-Off, 3^rd Ed, para 17.63, where Reeves v Pope [1914] 2 KB 284 and Green v Rheinberg (1991) 104 LT 149 (the authorities referred to by the judge in his Decision) were discussed.  The relevant passages applicable to the present case are extracted:

“	The mortgagee in possession is entitled to the rents and profits of the mortgaged property, … The tenant cannot set off against the rent claimed by the mortgagee in possession a personal claim he had against the mortgagor.”
“	… a mortgagee in possession can sue for rent in his own name and in respect of his own legal title.  He is not a mere assignee from the mortgagor of the tenant’s indebtedness for rent, but rather has a legal entitlement to it as a result of his legal estate in possession.  … a claim by a mortgagee for rent is not impeached by a damages claim available to the tenant against the mortgagor.  Since the mortgagee’s claim is based on his own title, and not that of the mortgagor, the cross-demands could not be said to be inter-dependent.”

25. In our judgment, on the facts of this case, there is no arguable case that the plaintiff was the assignee of SCL in respect of the overpayments made by the defendant to SCL between April 2001 and February 2003, or in respect of the rental and services charges as from May 2003 that the defendant purportedly paid by way of the three dishonoured cheques.  There is no conceivable way to attach any liability to the plaintiff in respect of the defendant’s claim. 

New matters

26. At the commencement of the hearing before us, Mr Yip sought leave to amend the Notice of Appeal by including the rental deposit that it had paid to SCL as a subject matter of the appeal.  That amendment was allowed without objection from Mr Chan, subject to costs.

27. Mr Yip also raised a new proposition, which is that due to the fact that the plaintiff was the mortgagee of the property and that the “Assignment of Rentals Notice” dated 18 June 2002 had been given by SCL to the defendant, the defendant is entitled to claim against the plaintiff for the return of the rental deposit and the overpayments, irrespective of s 9 of the Law Amendment and Reform (Consolidation) Ordinance.  His arguments are that as the rental deposit had been assigned to the plaintiff, it had knowledge of the obligation on the part of SCL to return it to the defendant upon the expiration of the tenancy; thus such obligation was assumed by the plaintiff.  Regarding the overpayments, as they (forming the service charges) were also assigned to the plaintiff, the plaintiff should be liable to repay them to the defendant.  Mr Yip was, however, unable to cite any authority in support.

28. It has been settled in Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] 1 HKC 60 that the obligation to return the deposit is a personal obligation of the landlord and does not touch and concern land and that the landlord received the deposit qua payee rather than qua landlord. 

29. Mr Yip did not suggest that this authority does not apply to the present case.  Nor did he contend that liability can be assigned without the assignee’s consent.  What he stressed was that as the rental deposit and the overpayments had been assigned to the plaintiff, and the defendant knew the assignment, the plaintiff should be liable to repay to the defendant.  However he formulates his proposition, we come to the view that it could only be based on an assignment by SCL to the plaintiff of SCL’s liability towards the defendant.  The liability to return the rental deposit and to refund any overpayment, in the light of facts of this case, is a personal liability of SCL, and such liability cannot be assigned to the plaintiff except with the agreement of the plaintiff and of the defendant.  There is simply no evidence of either the plaintiff or the defendant so agreeing.

30. Moreover, according to the terms of the Assignment of Rentals Notice, the service charges were excluded from the monies assigned by SCL to the plaintiff as mortgagee.

31. What we have said above regarding the overpayments as an equity having priority over the plaintiff’s claim applies equally to the rental deposit.  As the plaintiff’s claim, based on the three dishonoured cheques for payment of the rentals and service charges between May and August 2003, does not relate to the rental deposit, no such equity exists.

Conclusion

32. In the circumstances, the appeal must be dismissed with an order nisi that the defendant pay the costs of this appeal, including the costs of the amendment to the Notice of Appeal, if any, to the plaintiff, to be taxed if not agreed.