A.V.C. PROPERTY DEVELOPMENT CO LTD v. JOYFUL GRACE TRADING LTD AND ANOTHER

HCA 529/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 529 OF 2013

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JUDGMENT

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INTRODUCTION

1. On 2 April 2013, the plaintiff, A. V. C. Property Development Company Limited, issued the writ against:

(1)   the 1^st defendant, Joyful Grace Trading Limited, as the tenant under a tenancy agreement dated 12 September 2012 (“Tenancy Agreement”) of Shops A, B, C and D on the Ground Floor of Paul Yee Mansion, Nos 340, 342, 344 and 348 Jaffe Road and Nos 1, 3 and 5 Marsh Road; and

(2)   the 2^nd defendant, Lion Legend Holdings Limited, as guarantor under a guarantee dated 20 August 2012 (“the Guarantee”).

2. Judgment in default of notice of intention to defend was given against the 2^nd defendant on 14 May 2013. ‌By an Order dated 25 October 2013, Master S Kwang ordered that the default judgment against the 2^nd defendant dated 14 May 2013 be set aside.

3. Judgment dated 3 September 2013 was entered by Master S Kwang against the 1^st defendant for:

“(1) The 1^st Defendant do pay the Plaintiff:–

(a) thesumofHK$590,322.58beingoutstandingrentandmesne profits together with the sum of HK$43,791.78 beinginterestaccruedontheoutstandingrentfrom1^st February 2013 to 29 May 2013; and

(b) interestonthesumofHK$590,332.58attherateof3%permonthfrom30May2013uptotodayandthereafterat judgment rate until full payment.

(2)  Interlocutory Judgment for damages for breach of tenancy agreementarisingoutofthenon‑paymentofrentandtheforfeiture of lease against the 1^st Defendant to be assessed.  ” 

4. By an Order dated 21 February 2014, Deputy Judge Marlene Ng dismissed the appeal by the 1^st defendant against the Master’s Order and Judgment.

MR PATRICK CHONG’S STRIKING OUT APPLICATION

5. The 2^nd defendant was originally legally represented, but subsequently became unrepresented and was absent from the trial.

6. On the first day of trial, Mr Patrick Chong, counsel for the plaintiff, applied to strike out the 2^nd defendant’s defence under the abuse of process ground contending that the 2^nd defendant’s absence at the trial constituted abuse of process.  No authority had been cited in support of the abuse of process assertion. I was not satisfied that mere non‑attendance amounted to abuse of process. ‌I had no hesitation to reject, and did reject, Mr Patrick Chong’s application.

PLAINTIFF’S PLEADINGS

7. Messrs Robertsons drafted the Amended Statement of Claim dated 21 April 2015.  The pleading:

(1)   Did not plead the precise terms or clause numbers of the relevant clauses in the Tenancy Agreement relied on. What the learned pleader did was to plead in §8 that:

“The Plaintiff will refer to [the Tenancy Agreement] for its full text, true meaning and effect at the trial of this Action.”

Such formula has been criticised by the Court of Appeal decades ago in Citibank N.A. (Nominees) Limited v Deacon Te Ken Chiu, CACV 32/1979, 18 January 1980, which stated that:

“… this formula has no place in our modern system of pleading. In the days when pleadings were highly technical and prolix and were required to follow set patterns it may have been necessary and permissible to use such a long stop to avoid the necessity of setting out in full a document the interpretation of which might not be in Issue. Today the formula is inconsistent with O.18 r.7. If the precise words of the document are material, they must be stated. Otherwise the effect of the document must be briefly stated. It is not necessary, as has been submitted, to use this formula in order to reserve a right to the party pleading to refer to the entire document for the purpose of interpretation. Not only is the formula unnecessary but it tends to be misleading, for it suggests to the other side that the pleader intends to rely in addition upon an effect other than that stated and that he will argue that it entitles him so to do.”

(2)   Did not plead the precise terms or clause numbers of the relevant clauses in the Guarantee relied on. ‌What the learned pleader did was to repeat the use of the following formula in §10 that: 

“The Plaintiff will refer to the Guarantee for its full text, true meaning and effect at the trial of this Action.”

(3)   Did not identify the person by whom or the date when the Guarantee was signed by the 2^nd defendant.

(4)   Contended in §11A that:

“… if the Guarantee had not been executed and/or delivered by the 2nd Defendant, which is categorically denied, the 2nd Defendant is nonetheless estopped from denying that the Guarantee or a guarantee substantially similar or identical to the Guarantee is enforceable against it.”

(5)   Made numerous allegations in respect of the corporate entities, ie the plaintiff, the 1^st defendant and the 2^nd defendant without alleging the date when, the natural person by whom, the natural person to whom, and how any act or omission was done or omitted. 

(6)   Made an assertion in §14 which plainly did not make arithmetical sense by alleging that:

“ In breach of the terms of the Agreement, the 1st Defendant failed to pay the rent and management fees since 1st February 2013.

Particulars of Loss of the Plaintiff up to the issuance of this Writ

	Particulars	Outstanding Amount (HKD)
(A)	Outstanding rental
	1 Feb 2013 to 31 Mar 2013 at the rate of HK$150,000 per month	$450,000.00
(B)	Outstanding Management Fees
	1 Feb 2013 to 31 Mar 2013 at the rate of HK2,860 per month	$8,580.00
(C)	Overdue interest (calculation sheet attached as Schedule)	$14,674.56
	Grand Total (A) + (B) + (C)	HK$473,254.56	”

8. As for point (4), what is a guarantee “substantially similar”?  What are the differences and why?

9. Crucial allegations were made by way of bare assertions, without pleading the dates when, the persons by whom and the persons to whom the acts were done or how, etc.  Thus, the pleading did not tell the defendants the case they had to meet. ‌The defendants had not been given crucial information to decide on the witnesses to call to dispute the plaintiff’s case. ‌Mr Patrick Chong repeatedly argued that the defendants did not ask for particulars. His approach evidenced some confusion in thought. ‌The query on lack of crucial information came from the court, not the defendants.  The court had no duty on its own motion to order particulars before trial.  Moreover, blaming others was hardly helpful to the court. ‌It is frustrating for the court to read pleadings which are not properly done.

10. As for point (6), there were only two months, not three, between 1 February 2013 and 31 March 2013.  Less importantly, sincethe last column in the table was for the outstanding amount in “HKD”, there was no need to put the “$” sign before the figures in that column.

11. The “Reply to Defence of 2^nd Defendant” was drafted by Mr Patrick Chong.  It is alleged in §4 that:

“The Plaintiff avers that the 2^nd Defendant has consented to the slight amendment to the Tenancy Agreement.”

12. This is a conclusion without any factual foundation having been pleaded in support. ‌I asked Mr Patrick Chong to tell me the date when, the person by whom, the person to whom consent was given and how. ‌He failed to give a direct answer.  It would have been easy for him to have done so if he had a case to support the pleaded conclusion.  It was not until the following day that he sought to file a two‑page “Voluntary Particulars under paragraph 4 of the Reply to Defence of the 2^nd Defendant”.  To start with, there was no statement of truth. Secondly, Mr Patrick Chong felt able to ask me to dispense with service on the 2^nd defendant.  ‌There was no explanation why the “Particulars” were not put forward until the middle of trial. ‌There was also no reason for not serving it on the 2^nd defendant.  It would have been procedurally unfair to dispense with service. ‌There was no reason why the 2^nd defendant should not be afforded an opportunity to consider and deal with the “Particulars”.  I rejected Mr Patrick Chong’s application.

THE TRIAL BUNDLES

13. By §§7 and 8 of his Order dated 16 June 2016, Chow J ordered that:

“7. Save as otherwise provided for in this order or previous orders of the court, Practice Directions 5.6 (Documents for Use at Trial) shall be strictly complied with. ‌Any failure to comply withthepracticedirectionsmayresultinadversecostsorderbeing made against the party responsible for the failure and/or his or her solicitors. In particular:–

(1) only documents which are relevant and necessary for the purpose of the trial shall be included in the trial bundles;

(2) there shall be no duplication of documents; and

(3) it is not necessary to produce a separate bundle of the annexures (if any) to the witness statements, or reproduce them in the bundle of witness statements .

8.   Whereanydocumentismentionedorreferredtointhepleadings or witness statements, a bundle reference should be given on the margin of the relevant page of the pleadings or witness statements.”

14. The following is a catalogue of non‑compliance:

(1)   Duplication is obvious.

(2)   Irrelevant or unnecessary documents are included.

(3)   Contrary to §4(4) of the Practice Directions 5.6 (Documents for Use at Trial), many pages, particularly the manuscript amendments on some documents, are not fully legible.

15. The worst default was to completelyignore §8 of the Order of Chow J.

16. There were further problems with the trial bundle. ‌For emails, what were included in the bundle were not the relevant emails themselves, but were emails from one member of Messrs Robertsons to another member of the firm. ‌If somebody in Messrs Robertsons did locate the relevant email, the relevant email itself should have been included in the hearing bundle. ‌To forward it to another person and then include the forwarding email is simply incorrect. ‌Further, nearly 100 pages of documents were included under one single item of “emails” without any index or description of the emails. ‌The combined effect of (a) using an email forwarding another email, instead of the forwarded email itself, (b) the absence of any list of emails and (c) the liberal inclusion of documents which were not fully legible made it frustrating and confusing for the court in pre‑reading the papers.

SOME PROVISIONS IN THE TENANCY AGREEMENT

17. Clause 5 of the Special Conditions provided:

“The Tenant shall cause Lion Legend Holdings Limited to execute a Guarantee undertaking the Tenant’s full payment of Rent, rates, management fees and other monies payable under this Agreement and the due performance and observance of the terms and conditions herein contained.”

I do not understand the reason for inclusion of this clause since it is the plaintiff’s case that it had already received the 2^nd defendant’s written guarantee.  To provide that “the tenant shall cause” execution when the Guarantee had already been executed was puzzling.

18. Clause 7 of the Special Conditions provided:

“The Tenant is fully aware that the Landlord is presently carrying out repair works in the Premises. If for whatever reason the Landlord fails to deliver up vacant possession of the Premises on or before 1st September 2012 (‘the Lease Commencement Date’), the Landlord shall be entitled to postpone the delivery of possession to a later date to be designated by the Landlord in a 7 days’ prior written notice to the Tenant provided that such later date shall not be later than 30th September 2012. Upon such postponement, the Lease Commencement Date and all relevant dates of the Term shall automatically be postponed accordingly.”

19. The Third Schedule provided:

“Term: For the term of TWO (2) YEARS fixed lease commencing on the 1st day of September 2012 and terminating on the 31st day of August 2014 (both days inclusive).

Rent: …

Rent Free Period: The Tenant will be granted a rent rent of One (1) month starting from 1st September 2012 to 30th September 2012 (both days inclusive).

During the rent free period, the Tenant shall nevertheless be responsible for payment of Management Fee, Government Rates and other outgoing utilities payable in advance on the 1st day of each calendar month.”

JUDGMENT AGAINST 1^ST DEFENDANT AS EVIDENCE AGAINST 2^ND DEFENDANT

20. Mr Patrick Chong sought on a number of occasions to rely on the judgment against the 1^st defendant as evidence against the 2^nd defendant.  There is no contractual provision that the judgment shall be evidence against 2^nd defendant. No such provision has been pleaded. The 2^nd defendant did not have a chance to be heard in the application for judgment against the 1^st defendant, nor in the 1^st defendant’s appeal.  There is no basis for Mr Patrick Chong’s reliance.

PLAINTIFF’S DENIAL OF FORGERY OF THE GUARANTEE

21. By §5 of the Reply to Defence of 2^nd Defendant, the plaintiff denied that “the Guarantee referred to in the Statement of Claim was a forged document as alleged or at all.”

WITNESS STATEMENTS AS EVIDENCE IN CHIEF

22. Mr Patrick Chong contended that the witness statements of the plaintiff’s witnesses should stand as evidence in chief but cited no authority in support. ‌I did not agree with such contention and ruled that the plaintiff should adduce oral evidence in chief.  ‌This is a case in which much turns on the credibility and reliability of the witnesses and witnesses should give oral evidence in chief.  InHanwa Kozai (HK) Co Ltd v Hangyiu Ltd and another [1995] 1 HKLR 333 at p 334, Keith J (as he then was) said:

“… Mr. Bell … based his resistance to the witness statements standing as the witness’ evidence in chief on the fact that the case turned so much on the credibility and reliability as witnesses of Mr. Lee and Miss Wat relating to their discussions in September and October 1993.

I agree with that argument for two reasons. First, I know from my own experience at the Bar how frequently witnesses fail to come up to proof even in evidence in chief. It does not follow that their witness statements necessarily reflect at the date of trial their recollection of the events to which the statements relate. When witness statements reveal a significant conflict of evidence between two or more witnesses, it would be unwise to assume that the witness statements represent the witness’ last word on the topic. If a witness gives evidence in chief orally, the risk that the witness’ statement may not truly represent the witness’ recollection at the time of trial can more easily be eliminated.

Secondly, I think that the judge is likely to be assisted in resolving the conflict in the evidence which the witness statements reveal if he hears the witnesses give their evidence in chief orally. He would be better able to assess for himself the reliability and credibility of the witness than if the witness’ oral evidence was limited to cross examination and re examination. As Donaldson, M.R. said in Mercer v. The Chief Constable of the Lancashire Constabulary [1991] 1 WLR 367 at p.371G, where ‘the evidence of a particular witness is likely to be controversial and his credibility is in issue … the way in which he responds to oral examination in chief may be of great importance’. Indeed, in Richardson Greenshields of Canada (Pacific) v. Tze Yim (HCA No. 6690/87), Kaplan, J. declined to permit a witness statement to stand as the witness’ evidence in chief where the statement was a short one and there was ‘a head on clash of evidence’. ”

CONTENTS OF WITNESS STATEMENTS

23. In addition to applying HanwaKozai, there was another reason why I did not permit the witness statements of the plaintiff’s witnesses to stand as their evidence‑in‑chief.  The witness statements contained much evidence which was clearly inadmissible. ‌Hearsay evidence is not by itself inadmissible but it must not, as is the case for the witness statements in this case, be disguised as evidence from the maker’s personal knowledge.  Statements of information or belief must disclose the sources and grounds thereof. ‌The court should have a chance to assess the weight, if any, to be attached to the hearsay evidence.

24. A related but different matter is the scope of the oral evidence.  It is alarming that despite the reported elucidation by Keith J (as he then was) over two decades ago, the witness statements in this case did not benefit from the elucidation. ‌In NgKam‑chun,Stephen(tradingasChunMouEstateAgency Company) v Chan Wai‑hing,Janet and others[1994] 2 HKLR 89 at pp 90 – 91, Keith J (as he then was) said:

“…The witness statement should contain the whole of the witness’ evidence in the detail in which the witness would have given it if his evidence had been elicited by oral questions at the trial. Anything less than that prevents the statements from serving the purposes which they are intended to achieve — saving time, eliminating any element of surprise in the witnesses’ evidence, enabling the parties to know the full strength of the case they have to meet, and enabling counsel to prepare a crisp and effective cross examination. I give notice to the profession that, unless there is a good explanation for a witness statement not properly covering the areas on which supplementary questions are sought to be asked, I shall be unlikely to give leave, pursuant to O. 38 r. 2A(5)(a), for evidence to be led from that witness on those topics .

  There was another problem with Mr. Ng’s witness statement. It contained a considerable amount of obviously inadmissible hearsay evidence. If there is a genuine doubt as to whether evidence is admissible, it is, I think, proper for the evidence to be included in the statement. The court can then rule on its admissibility at the appropriate stage in the trial knowing what the evidence is. However, evidence which is obviously inadmissible should never be included. I suspect that the reason for its inclusion in this case was because the person who drafted it did not understand the true status of the statement. The statement was actually described at one point as an affirmation. Since affirmations are usually made at the interlocutory stage at which hearsay evidence is rendered admissible by O. 41 r. 5(1), I fear that the person responsible for drafting it temporarily forgot what he or she was doing.”

THE GUARANTEE AND ALTERATION OF THE UNDERLYING TRANSACTION

25. I turn now to the issue of alteration of the Tenancy Agreement after the execution of the Guarantee. It is the plaintiff’s case that the Tenancy Agreement had been altered by the addition of clause 7 of the Special Conditions and alteration of clause 5 of the Special Conditions.

26. Under the original Tenancy Agreement, the tenant had a one‑month rent‑free period for a term lease of two years.  The maximum liability of the Guarantor on payment of rent was 11 months’ rent.

27. By the addition of Clause 7 of the Special Conditions, the two‑year term could start as late as 30 September 2012.  There was nochange of the rent‑free period in the rent‑free provision in the Third Schedule, see §19 above. ‌The rent‑free period of one month was defined by reference to two specific dates, “starting from 1^stSeptember2012 to 30^thSeptember2012 (both days inclusive)”, and not by reference to, eg the first month of the term. ‌Mr Patrick Chong relied on the word “dates” in plural in the last sentence of clause 7 of the Special Conditions. ‌I am not impressed by such argument.  The “dates” were “of the Term”, not of “the rent‑free period”.  The “term” of any lease necessarily has more than one date. ‌The “term” has a commencement date and an expiration date.  The Tenancy Agreement and the Guarantee were drafted by the plaintiff and the contraproferentem rule applies.

28. The maximum liability of the guarantor on payment of rent was increased by virtue of the subsequent addition of clause 7 in the Special Conditions.

29. Mr Patrick Chong relied on the copying of emails to Mr Lee whom he alleged was the representative of the 2^nd defendant. ‌It is not part of the plaintiff’s pleaded case that Mr Lee was the representative of the 2^nd defendant and that is the end of Mr Patrick Chong’s contention of consent by the 2^nd defendant. ‌I note that on the plaintiff’s case, the Guarantee was signed by Mr Lee’s son, not Mr Lee, and Mr Lee was neither a director or shareholder of the 2nd defendant.

30. Further and in any event, the emails were merely copied to Mr Lee, not sent to him. ‌The consent of Mr Lee or the 2^nd defendant had not been asked for.  ‌To contend that Mr Lee was duty bound to respond if the 2^nd defendant did not agree was tenuous.  I reject Mr Patrick Chong’s contention.

31. The liability of the guarantor was increased by reason of the subsequent alteration of the underlying transaction.  The plaintiff has not begun to make out a case of consent by the 2^nd defendant of the variation.  It follows that the plaintiff’s claim against the 2^nd defendant falls to be dismissed.

QUANTUM

32. Having reached this conclusion, it is not necessary to deal with the amounts claimed. ‌Nevertheless, I shall deal briefly with it if I am wrong on liability.

Rent and management fees

33. The amount is for two months only since only two months of rent and management fees were alleged to be in default in §14 of the Amended Statement of Claim.

Contractual interest

34. Clause 2 in section VIII of the Tenancy Agreement provided that:

“Notwithstanding anything herein contained in the event of default in payment of Rent or rates or management fees or any monies payable by the Tenant for a period of 14 days from the date when payment is due (whether formally demanded or not) the Tenant shall pay to the Landlord on demand daily interest on all such sums outstanding at the monthly rate of $3% calculated from the date on which the same shall be due for payment (in accordance with the provisions contained in that behalf herein) until the date of payment as liquidated damages and not as penalty provided that the demand and/or receipt by the Landlord of interest pursuant to this Clause shall be without prejudice to and shall not affect the right of the Landlord to exercise any other right or remedy hereof (including but without prejudice to the generality of the foregoing the right of re entry) exercisable under the terms of this Agreement .”

35. Thus, daily interest at the “monthlyrateof$3%” is claimed as liquidated damages and not as penalty.

36. To claim interest under Clause 2 in section VIII:

(1)   the tenant has to be in default in payment for a period of 14 days; and

(2)   demand (for interest) is necessary.

37. The plaintiff forfeited the Tenancy Agreement by the issue of the Writ on 2 April 2013, see §16 of the Amended Statement of Claim.

38. There is an unparticularised allegation of demand in §15 of the Amended Statement of Claim. ‌Mr Patrick Chong accepted that the latest demand was made on 14 March 2013. ‌As rent was due on the first day of each month, rent for March 2013 had not been in default for 14 days at the time of demand by letter dated 14 March 2013. ‌Only the rent for February 2013 had been in default for 14 days or more at the time of demand.

39. But the primary question is whether it is liquidated damages or penalty. ‌Mr Patrick Chong made no submission and cited no authority in support.

40. Lord Dunedin set out various tests in DunlopPneumaticTyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79.  ‌These tests may prove “helpful, or even conclusive” in determining whether a provision is a valid liquidated damages clause or a penalty. ‌The relevant tests for present purposes are:

“ (a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury in Clydebank Case [1905] AC 6).

  (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid (Kemble v. Farren (1829) 6 Bing. 141). …”

(see Ip Ming Kin v Wong Siu Lan CACV 201/2012, 28 May 2013 at §41 per Kwan JA.)

41. Default in “payment of rent or rate or management fees or any monies” consists only in not paying stipulated sums.  The greatest loss is the stipulated sums plus interest at commercial rates which in the absence of evidence is taken as banks’ best lending rate plus 1%.

42. Daily interest at the “monthlyrateof$3%” on top of the stipulated sums is clearly extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. ‌In my judgment, it is clear and obvious that the clause is a penalty and is unenforceable as such.

Mesne profits

43. There is no basis for this claim.

Management fees from 1 May 2013

44. There is no basis for this claim.

Rates from 1 April 2013

45. There is no allegation in §14 of the Amended Statement of Claim of non‑payment.

Damages for breach of the Tenancy Agreement and interest

46. It seems to me to be triple counting to claim liquidated damages, plus damages to be assessed, plus interest for breach of an obligation to pay a stipulated sum.

CONCLUSION AND DISPOSITION

47. For reasons given above, I dismiss all the plaintiff’s claims against the 2^nd defendant.

48. I make an order nisi under Order 42, rule 5B(6) of the Rules of the High Court, Cap 4A, that the 2^nd defendant’s costs be taxed and paid by the plaintiff to the 2^nd defendant.