ANGEL AND JAMES CO LTD v. TASTE FRESH CO. LTD AND ANOTHER

DCCJ4878/2016

[2018] HKDC 836

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.4878 OF 2016

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ASSESSMENT OF DAMAGES

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1.  On 5 Oct 2016, the plaintiff company commenced these proceedings against the 1^st defendant company (D1) for misrepresentation leading to a franchise agreement in Chinese dated 13 June 2015 (the agreement) [1] made between the two.

2.  On 7 Feb 2017, the plaintiff amended its claim to claim as well against the 2^nd defendant (D2), D1’s director at the material times,for the said misrepresentation.

3.  By its prayers in the Re-Amended Statement of Claim, (RASOC), the plaintiff seeks against D1 & D2: (1) a declaration that the agreement is null and void and/or liable to be set aside and/or in any event of no legal effect and unenforceable; (2) the sum of $818,405.36; (3) interest; and (4) costs.

4.  On 10 Apr 2017, in default of notice of intention to defend by either defendant and the plaintiff having abandoned its claim for a declaration as sought in prayer (1) of the RASOC, interlocutory judgment was entered in plaintiff’s favour against D1 & D2 for damages to be assessed and costs.

5.  On 30 Jun 2017, the plaintiff filed its list of documents.

6.  Upon plaintiff’s application by way of appointment for assessment of damages (AOD) filed on 13 Nov 2017, Register Ho on 9 Jan 2018 ordered the defendants to file their list of documents on quantum by 30 Jan 2018, failing which they shall be deemed to have elected not to adduce documentary evidence on quantum.

7.  By the same order, the parties were also ordered to file and serve witness statements as to quantum by 6 Mar 2018, failing which the defaulting party shall be deemed to have elected not to adduce evidence on quantum from factual witnesses.

8.  On 10 Jan 2018, the plaintiff filed the witness statement of Lam Pak To alias James Lam (James).

9.  The two defendants have, however, failed to file their list of documents or witness statement as to quantum by the above deadlines imposed by court.

10.  On 21 Mar 2018, the AOD was set down by Registrar Ho to be heard on 15 May 2018.

11.  At the AOD hearing before me, the plaintiff was represented by counsel Mr Kenwick Yam (Mr Yam). The two defendants were both absent before me.

12.  However, on reading the various affirmations of service filed on behalf of the plaintiff and on undertaking of plaintiff’s solicitors to arrange filing of an additional affirmation of service, I was satisfied that the two defendants have been properly notified of the date of the AOD hearing and served with the assessment bundle etc. I therefore acceded to Mr Yam’s request to proceed with the AOD in the absence of the two defendants.

13.  Mr Yam adopted his written opening submissions dated 10 May 2018 and proceeded to call James as his only witness as to quantum. James adopted as his evidence-in-chief the contents of his witness statement and, thereafter, answered a few questions of this court. Mr Yam made a short re-examination of James and, afterwards, made closing submissions on behalf of the plaintiff.

Discussion

14.  I have fully and carefully considered all evidence, submissions and authorities before me.

15.  Having so considered, I accept, and give full weight to the contents of, all documents in the assessment bundle before me. I find James honest and reliable and, subject to the documents, accept his evidence set out in the next section.

16.  On my assessment above, I find the facts as follows.

Finding of facts

17.  On 13 June 2015, James on behalf of plaintiff and D2 on behalf of D1 executed the agreement. James and D2 were respectively the directors of plaintiff and D1.

18.  By the agreement, in consideration of a joining fee of $280,000 payable by plaintiff[2] and monthly franchise fees payable by plaintiff[3] during the 3-year term[4] of the agreement, D1 agreed, among others, to supply franchised products[5] to plaintiff for sale at Shop E, G/F, No.2 Lung Sum Avenue, Shek Wu Hui, Sheung Shui, NT (the shop)[6] specified by D1[7] and to allow plaintiff to use trademarks and logo of the franchised products for such purpose during the term of the  agreement[8], which rights of plaintiff under the agreement cannot be transferred to third party without D1’s written consent[9].

19.  By the agreement, D1 has also the right to decide on the decoration of the shop[10] (including the choice of decoration team) and the manner of using logo and trademarks of the franchised products at the shop[11].

20.  As a result of the agreement, the plaintiff paid D1 the joining fee of $280,000 through D1’s agent on the 2 dates of 31 Mar 2015 and 5 June 2015.

21.  As a result of the agreement, the plaintiff rented the shop from its landlord[12] at a monthly rental of $62,000 for 3 years from 1 July 2015 to 30 June 2018 in order to sell the franchised products (the tenancy).

22.  The plaintiff paid the landlord a rental deposit of the tenancy equivalent to rental for 3 months i.e. $186,000.

23.  The plaintiff had to share, and had paid for, half of the stamp duty incurred in respect of the tenancy, which was stamped, and the amount it paid is $3,270.

24.  As a result of the agreement, the plaintiff engaged a decoration contractor specified by D1 to decorate the shop in such ways specified by D1 and to use the trademarks and logo of the franchised products in such manners specified by D1 in order to sell the franchised products at the shop.

25.  Due to para 19 & 24 above, the plaintiff had paid $150,000 to decoration contractor on 25 June 2015 for installation of signboard at the shop, paid $13,000 on 15 June 2015 for interior design of the shop, and paid $17,100 on 18 June 2015for a tent erected at the shop.

26.  The plaintiff opened the shop for business selling the franchised products supplied from D1 pursuant to the agreement as from about July 2015.

27.  Before the entry of, and at the time of, the agreement, D1, D2 and D1’s agent had represented to the plaintiff (through James) that plaintiff’s business of selling the franchised products at the shop would be profitable for various reasons particularized in the RASOC (the representation) and the plaintiff had relied on the representation to enter into the agreement.

28.  The representation turned out to be untrue and false.

29.  Save for the first month of business which generated a profit of about $20,000, the plaintiff suffered from persistent and considerable losses at the shop starting from its 2^nd month of business until it ceased the said business in about March 2016.

30.  Due to such losses incurred by the plaintiff, the plaintiff encountered difficulty paying monthly franchise fees to D1 for the period from July 2015 to March 2016. It sought reduction of the amount to be paid[13] and late payment of the same. Ultimately, the plaintiff managed to pay D1, though late, the monthly franchise fees in the total sum of $169,035.36 for the said 9 months as particularized in para 12(a)-(i) of the witness statement of James.

31.  In about March 2016, D1, on its part, declined to continue supplying the franchised products to plaintiff for sale at the shop and demanded the plaintiff to stop using the trademarks and logo of the franchised products at the shop. The plaintiff had no choice but to surrender the tenancy to the landlord earlier than its expiry date and the entire rental deposit thereof was forfeited by way of agreed compensation to the landlord.

Applicable principles

32.  On the day of the AOD hearing, this court has twice stood down to give time to Mr Yam to go to District Court library to carry out research on the measure of damages applicable in this case and has also drawn to his attention the authority of Doyle v Olby (Ironmongers) Ltd. & Others [1969] 2 QB 158, CA.

33.  Save referring to, and relying on, s.3 of Misrepresentation Ordinance, Cap.284 (MO), Mr Yam cannot address or assist this court on the measure of damages under s.3(1) of MO and on the issue whether Doyle v Olby, supra, is applicable to this case.

34.  After the AOD hearing, it has now come to the attention of this court, and I would hold, that the tortious measure of damages for deceit in Doyle v Olby, supra, is applicable to s.3(1) of MO and this case: Long Year Development Ltd v Tse Fuk Man Norman [1991] 2 HKC 393, 407D-408B, Deputy Judge Andrew Li QC (as he then was), where the case of Doyle v Olby, supra, was expressly relied on.

35.  Citing Doyle v Olby, supra, it was stressed in Long Year Development Ltd, supra, 408C-D, that the two measures of damages in the tort of deceit (and in s.3(1) of MO) and in contract do differ. The former is not the contractual measure of putting the innocent party in the same position he would have been in if the representation had been true. Damages are rather awarded in the tort of deceit on the basis the innocent party is to be put in the position he would have been in had the representation not been made.

36.  Lord Denning MR so explained the distinction of the two measures in Doyle v Olby, supra, 167A-D:

“On principle the distinction seems to be this: in contract, the defendant has made a promise and broken it. The object of damages is to put the plaintiff in as good a position, as far as money can do it, as if the promise had been performed. In fraud, the defendant has been guilty of a deliberate wrong by inducing the plaintiff to act to his detriment. The object of damages is to compensate the plaintiff for all loss he has suffered, so far, again, as money can do it. In contract, the damages are limited to what may reasonably be supposed to have been in the contemplation of the parties. In fraud, they are not so limited. The defendant is bound to make reparation for all actual damages directly flowing from the fraudulent inducement. The person who has been defrauded is entitled to say: ‘I would not have entered into this bargain at all but for your representation. Owing to your fraud, I have not only lost all the money I paid you, but, what is more, I have been put to a large amount of extra expenses as well and suffered this or that extra damages.’ All such damages can be recovered, and it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen.”

37.  Winn LJ so explained at 168F-H of Doyle v Olby, supra:

“… the proper starting point for any court called upon to consider what damages are recoverable by the defrauded person is to compare his position before the representation was made to him with his positon after it, brought about by that representation, always bearing in mind that no element in the consequential position can be regarded as attributable loss and damage if it be too remote a consequence: it will be too remote not necessarily because it was not contemplated by the representor, but in any case where the person deceived has not himself behaved with reasonable prudence, reasonably common sense, or can in any true sense be said to have been author of his own misfortune. The damage that he seeks to recover must have flowed directly from the fraud perpetrated upon him.”

38.  For the purchase of a business, Sachs LJ said at 171E-H of Doyle v Olby, supra:

“If the purchase is one of a business, which the plaintiff but for the fraud would not have acquired at all, the objective of the court is to put the plaintiff, so far as it is possible, into the same position financially as if he had not entered into the contract at all; in other words, one must look at the end result of his having entered into the transaction and find out what was his loss over all… The acquiring of a business normally entails the expenses of moving into fresh premises, keeping the business going, and at any rate continuing to keep it going until such time as it can be disposed of; and then one looks also at the expenses of selling… the court must obviously take care not to include sums for consequences which may be due to the plaintiff’s own unreasonable actions, and also not to include results which are too remote…”.

39.  The word “remote” used in our context means remoteness for a reason apart from unforeseeability, for example, because the chain of causation was broken by a novus actus interveniens: Long Year Development Ltd, supra, 409B.

40.  Hence, thought a case of deceit was not specifically pleaded in the RASOC, the measure of damages applicable to the tort of deceit so stated above remains applicable to this case by virtue of s.3(1) of MO and I so hold.

Joining fee under the agreement

41.  Applying the above principles, I have no hesitation to allow the plaintiff to recover the joining fee of $280,000. Had the plaintiff not entered into the agreement in reliance of the representation, it would not have paid out the same.

Stamp duty of the tenancy

42.  I allow this head in full in the sum of $3,270. Had the plaintiff not entered into the agreement in reliance of the representation, it would not have rented the shop and shared half of the stamp duty incurred on the same.

Decoration & design of the shop

43.  I also allow recovery of these sums incurred by the plaintiff in the total of $180,100 i.e. $150,000 + $13,000 + 17,100. Had the plaintiff not entered into the agreement in reliance of the representation, it would not have incurred these expenses in order to sell the franchised products at the shop.

Monthly franchise fees under the agreement

44.  I further award the total sum of $169,035.36 the plaintiff had paid D1 by way of monthly franchise fees for the period from July 2015 to March 2016. Had the plaintiff not entered into the agreement in reliance of the representation, it would not have paid out these sums in order to keep the business of selling franchised products at the shop going on during these 9 months.

Forfeiture of rental deposit of the tenancy

45.  Furthermore, I award the plaintiff the sum of $186,000, being the amount of rental deposit of the tenancy forfeited by the landlord of the shop by way of agreed compensation. Had the plaintiff not entered into the agreement in reliance of the representation, it would not have entered into the tenancy, opened the shop for business of selling the franchised products and incurred its losses such that it had to cease the said business in about March 2016, surrender the tenancy earlier than its otherwise expiry date of June 2018 and became liable at law to pay compensation to the landlord.

46.  Applying the above principles, it does not, I think, matter whether such compensation paid by the plaintiff to the landlord of the shop was within the reasonable contemplation of D1 and D2 at the time of the agreement or not. Neither does it matter that they could not have foreseen the same before or at the time of the agreement. It flows directly from the representation made by D1 and D2, and the plaintiff is, I think, entitled to recover the same.

47.  In so far as may be necessary[14], I hold that such compensation paid by the plaintiff is not too “remote” to be recoverable. It is, I think, reasonable for the plaintiff to keep running the said business of selling franchised products at the shop for months in the hope of turning it over into a profitable one. But, by about March 2016, considering the persistent and considerable losses incurred and, importantly, D1’s refusal to continue supplying the said products to plaintiff, it had no choice but to cease the said business and surrender the tenancy of the shop to its landlord. And, having regard to the long unexpired period of the tenancy, it was, I think, reasonable for the plaintiff to agree to the forfeiture of the entire rental deposit by way of compensation to the landlord.

Credit for benefit derived from business

48.  To be fair, I think the plaintiff ought to give credit for the profit of about $20,000 it managed to achieve in its first month of business as admitted by James in the box and I so decide.

Summary

49.  Hence, on my assessment, the damages that D1 and D2 are liable to pay the plaintiff is in the total sum of $798,405.36 i.e. $280,000 + $3,270 + $180,100 + $169,035.36 + $186,000 - $20,000.

Disposition

50.  Accordingly, I enter judgment against D1 and D2 in the sum of $798,405.36 in favour of the plaintiff.

Interest

51.  I also award interest at judgment rate on the said sum of $798,405.36 as from the date of the writ i.e. 5 Oct 2016 until payment.

Costs

52.  Finally, I make an order nisi that the costs of AOD, including the hearing before me, be paid by D1 and D2 to the plaintiff to be taxed if not agreed. I certify the attendance of counsel for the said hearing before me as the plaintiff recovers more than $150,000 by way of damages in this assessment. It shall become absolute if none applies in writing within 14 days hereof to vary the same.