CHEUNG TAK MING v. FUNG YIN WAH

1996, No. A 3526

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. These proceedings arise out of an agreement of transfer of business dated 21st November 1994.

2. The business in question was a small video and laser disc rental shop called Grand Video Club in Eastway Towers, Main Street East, Shaukeiwan owned and run by the Defendant, Madam Fung Yin Wah. By the written agreement, she was to transfer it to the Plaintiff for the sum of $268000, payable by a first instalment of $138000 on signing the agreement and a further $130000 (wrongly written in the translation of the agreement as $138000) on or before 20th February 1995. Under the agreement the transfer of the business included the assets of the business, namely 109 laser discs, 1727 video tapes, one television set, one video cassette player, an air-conditioner, the fittings and fixtures, and the $20000 deposit in the hands of the landlord.

3. It is claimed by the Plaintiff that in order to induce him to enter into this agreement the Defendant represented and warranted: (1) that the turnover of the business at the material time was in the region of $40000 to $50000 per month; (2) that there would be no problem with continuing the tenancy in the Defendant's name until its expiry; and (3) that the laser discs and video tapes in stock were of new and popular movies.

4. The Plaintiff accordingly began running the business but immediately had problems in making a success of it. Although he carried on, with increased success later, in June or July 1995 the landlord discovered that the Defendant had parted with the premises in breach of her tenancy agreement, and commenced proceedings in the District Court to recover possession. The Plaintiff surrendered possession to the landlord in August 1995 and gave up the business.

5. He now claims return of the purchase price, having paid a further $110000 in December 1994, and damages, on the basis that the representations and warranties were false and were made fraudulently or recklessly.

6. The background to this matter is that the Defendant has been in the video rental business for about 10 years. In November 1994 she had two shops, the business in question and another in Shaukeiwan Centre. The Plaintiff had been a customer of this shop since at least early 1992, according to the Defendant's evidence, or 1989, according to the Plaintiff. In any event he was a long-standing customer and had rented tapes on a fairly regular basis.

7. The evidence of the Defendant is that the Plaintiff approached her and asked if she was interested in selling the business to her. Indeed, she said that he came almost every other day to persuade her to sell and was very keen to buy the business. The Plaintiff did not deny being the prime mover in the negotiations, merely saying that these had started about a week before the agreement was signed, but he was clearly impressed with it as a success, and was aware that the Defendant had done well out of it. The Defendant was clearly receptive to the idea as she said that she did not want to work so hard with two shops, and considered the price they arrived at after negotiation reasonable. This was calculated on the basis of the value of the assets, being $100 for each tape, $300 for each disc, in addition to the other equipment and the number of members registered.

8. In the course of negotiations, the Defendant told the Plaintiff that the turnover at the shop was about $30000 to $40000 a month, and this was confirmed by the Plaintiff's own evidence in Court, although his witness statement and the statement of claim put it higher. The Plaintiff claimed in evidence that this amounted to a guarantee that it could bring a turnover of a like amount in the future, but nothing, it appears was said about the level of profit. In the event, he claims that the turnover in the first three months after he took over was between $10000 and $20000.

9. This is the first alleged misrepresentation or breach of warranty claimed and I think I can deal with it fairly briefly.

10. The case pleaded by the Plaintiff in the statement of claim is as to the level of turnover at the material time. This can only mean at the time of the agreement, and there is no evidence that this was not the case. Indeed, the only evidence as to the turnover then is from the Defendant, which I accept, and, the Plaintiff says nothing to contradict this. He gave no evidence of checking the books, the receipts or bills of the business, or of even asking to do so, although the Defendant's evidence was that these and the stock were discussed. There is no claim pleaded as to a guarantee of turnover in the future. Such a claim in any event would be difficult to establish, relying as it would have to on the contention that the Defendant had given a guarantee as to the future turnover of a small, in effect one-man, business, being handed over by an experienced operator to someone who, on his own admission had no business experience apart from three months in a partnership buying and selling fish. Such a proposition is in my view absurd and could not here be supported by any cogent evidence.

11. I accept that the Defendant told the Plaintiff what the turnover was, that what she told him was the truth, and no representation or warranty was given as to the future save as to the ability of the business to continue, properly run, in the same way. As will be seen below, such a turnover was in any event achieved by the Plaintiff after a less successful start.

12. It is apparent from he evidence that the Plaintiff was extremely keen to acquire this business. He had from his own observations concluded that it was a successful and profitable venture, and I have no doubt that at the time it was. I accept the evidence of the Defendant as to the way the negotiations proceeded, and the speed at which the deal was concluded is confirmed by the Plaintiff's own evidence that he only started negotiating about a week before the agreement was signed. He says nothing about wanting to look at the accounts, or inspecting the stock. Equally, there is no evidence that he was prevented from doing either. He admitted in evidence that he had also relied on his own judgment, and this is clearly the case. The viability of the business was apparent from his own observation and the Defendant's statement as to the level of turnover, and he was clearly satisfied to the extent that he seems to have made no enquiry as to the actual profit. As to the stock, as a customer he would have had ample opportunity of knowing what was there and, as I shall come to later, the condition it was in.

13. The business was not for the Plaintiff a success. He claims that this was because half the tapes in the shop were out of date, and some were "moulded" by which I understand him to mean there was mould on them. Apart from this statement there was no other evidence of the condition of the tapes. I have to say I do not fully understand what the Plaintiff means by "out of date". A business such as this would have a wide range of tapes to suit many tastes, recently released films as well older ones which are still of interest to customers. In any event, as I have said above, the Plaintiff well knew as a customer what stock was available in the shop; he makes no mention of discovering any "mouldy" tapes when looking through the stock to take tapes out, and there is no evidence that he did not have a full opportunity of inspecting the stock before entering into the agreement.

14. Again, the case as pleaded in the statement of claim is as to a representation or warranty that the tapes and discs were "of new and popular movies". I do not accept on the evidence that the Defendant made any such representation as to the stock being new. Firstly it would be unrealistic to expect a business such as this to have all new stock, and secondly the Plaintiff could see for himself what was there. What amounts to "popular" was never properly clarified by the Plaintiff, but from his own and the Defendant's evidence of the success of the business before he took over, it would, in my view, be difficult to claim that the tapes on offer were anything else. There is no pleaded claim and no evidence of any specific warranty as to the condition of the tapes, and while some of the lesser used tapes may have developed mould, it being unlikely in those regularly rented, I do not consider the evidence to show that this was a problem affecting the overall profitability of the business, or that there was any misrepresentation or breach of warranty arising therefrom.

15. It is clear what has happened here. The Plaintiff, believing he had found a business simple to run and with proven success, had entered enthusiastically into negotiations with view to putting his savings into what he believed was a safe investment. In his eagerness, and with his lack of business experience, he failed to take the most simple precautions of finding out what was required to run such a business, he did not check on the accounts to see what the outgoings were, and just as importantly, did not, it seems, make arrangements for the regular purchase or hire of fresh tapes and discs of recently released films, which must be essential to keep the interest of regular customers.

16. The Plaintiff blames the age and condition of the tapes on his poor business when he took over. The evidence does not support this. Apart from the unlikelihood of a sudden loss of customers almost overnight from such a cause, for the reasons above I am not satisfied that there was any problem with the stock. Whatever the reason, after a short time he approached the Defendant and they came to a separate agreement for her to supply him with up to date tapes and discs from her supplies, and I accept her evidence that for a fee of $6000 a month she would let him have on loan up to 50 new films. This lasted for two months when the Plaintiff says that he made his own arrangements to rent new tapes and discs, and he says that the turnover then increased to between $35000 and $40000 a month. But for the problem with the tenancy there is no reason to suppose that this would not have continued.

17. There are a number of representations and warranties alleged in respect of the tenancy. It is not in dispute that there was a tenancy agreement between the Defendant and the landlord which had two years or thereabouts to run. The Plaintiff claims that he was assured by the Defendant that the landlord would consent to his running the business at the premises, that he should defer transferring the tenancy to his own name as the rental would probably be increased, and that on the expiry of the tenancy he could renew it in his own name. He says further that he has never seen the tenancy agreement.

18. The Defendant's account is very different. She says that she told him that the agreement did not allow parting with possession of the premises and he should negotiate a new lease, and she showed him the agreement and let him have it for two days to look at. She said that he was the one who pointed out that it was likely there would be an increase in the present rent of $10000 a month if he did that, and said that he wanted to leave it in her name without informing the landlord of the change of ownership of the business until the end of the tenancy when he would negotiate for a new one.

19. Having seen both the parties give evidence I am bound to say that I prefer that of the Defendant where it conflicts with that of the Plaintiff, and I accept what she says in respect of the tenancy. She seems to me to be a sensible businesswoman who, unlike the Plaintiff, is able to recognize and anticipate problems which may affect a business. My impression of the Plaintiff is as a man rushing into a venture without properly assessing the risks and willingly taking an additional risk in relation to the tenancy.

20. I do not therefore accept that any representation was made by the Defendant other than she has given in evidence. I am of the view that the Plaintiff knew very well the terms of the tenancy, and in particular the provision regarding subletting or parting with possession. If, as he claims, he did not see, or understand the tenancy agreement because it was in English, he cannot deny seeing the contents of the rent receipts he received each month when he paid the rent, which repeated these provisions in Chinese.

21. Inevitably, the landlord discovered the change in occupation of the premises. The Plaintiff says that it was because he approached the landlord to regularise the situation as he was afraid the Defendant would forfeit the tenancy. This arose from a conversation about the telephone line and his apprehension that she would forfeit that, which I have to say I found difficult to comprehend. Although the telephone was still in her name, it would have been a matter only of a call to the telephone company and payment of a modest fee to change it to his. And why this should cause him to think that the tenancy was in danger is even more incomprehensible.

22. In any event, the land lord did find out. It appears that there were negotiations between the Plaintiff and the landlord for a new tenancy which did not come to fruition, and when proceedings were commenced the Plaintiff sold his stock extremely low prices, without, it seems making a lot of effort to find a buyer who might have given him a reasonable price for it all, closed down the business, and left. He did not explain why, having invested his savings into the business, he did not seek other premises nearby to carry it on.

23. Whatever the reason, I am satisfied that the failure of his venture was not as a result of any representations or warranties given by the Defendant, that she told him nothing but the truth as to the business, and no blame for its subsequent failure and his loss can be attributed to her.

24. The Plaintiff's claim is accordingly dismissed.

25. I now come to the Defendant's counterclaim. This is for the sum of $20000 which she says is still owing under the agreement.

26. As I have noted above, the sum of $138000 was paid on signing the agreement, and a further $130000 was payable on or before 20th February 1995. However, on 15th December 1994, less than four weeks after the agreement, and over two months before the balance was due, the Plaintiff paid another $110000.

27. His case as to this is that he wanted to give up the business after a short time but the Defendant encouraged him to carry on, offered a $20000 discount if he were to pay the balance earlier than it was due, and made the arrangement about loaning new tapes, to which he agreed.

28. The Defendant says that he asked for a reduction of $20000, but she agreed to only to deferring payment of the $20000 balance.

29. As to this, I take the view that the only reasonable explanation is that of the Plaintiff. While payment of a lesser sum earlier than it is due is not an unusual feature of business dealings, paying the bulk of the sum due early in return for deferment of a small part of it makes little sense. I accept that, at a time when the Plaintiff was having trouble running the business he had taken on in such haste and without a great deal of foresight, it is more likely that the Defendant would have offered a further discount to encourage him to carry on.

30. I am satisfied therefore that the counterclaim also fails.

31. Although the Plaintiff has succeeded on the counterclaim, I consider that it has involved a very small part of these proceedings, and the Defendant is clearly entitled to her costs on the main action. I think that the justice of the matter can be adequately met by making an order nisi that the Plaintiff pays 90% of the Defendant's costs to be taxed. There will also be an order that the Plaintiff's own costs be taxed in accordance with Legal Aid Regulations.