GLORY GOLD LTD v. STAR PLAY DEVELOPMENT LTD

CACV 246/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 246 OF 2007

(ON APPEAL FROM HCA 1078 OF 2005)

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JUDGMENT

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Hon Cheung JA:

1. The defendant applied to strike out the plaintiff’s statement of claim on the ground that it disclosed no reasonable cause of action.  It succeeded before the Master.  On appeal by the plaintiff, Deputy High Court Judge Muttrie reversed the decision.  The defendant now appeals to this Court. 

Background

2. On 19 November 2003 the plaintiff entered into a lease with the defendant to rent the 2nd floor of the Shopping Arcade of Hollywood Plaza at No. 610, Nathan Road, Kowloon, Hong Kong.  The lease were entered into by the plaintiff and Hang Lung Real Estate Agency Limited (‘Hang Lung’) as an agent for the defendant.  The term of the lease was for six years from 1 July 2003 to 30 June 2009.  The rent was $550,000.00 per month from 1 July 2003 to 30 June 2006 and thereafter at $600,000.00 per month.  The plaintiff operated a restaurant at the premises from 6 August 2003.

3. The plaintiff’s case is that the 2nd and 3rd floors of the building was formerly occupied by another tenant of the defendant.  The former tenant operated a Chinese restaurant known as Hon Po Restaurant on these two floors. 

4. Sometime before 2003 due to insufficient number of customers the former tenant stopped using the 3rd floor as a Chinese restaurant and only used the 2nd floor as a Chinese restaurant.  The 3rd floor of the building was subsequently let by the defendant to a tenant who operated a karaoke business there. 

5. The business of the Hon Po Restaurant and the karaoke were both unsuccessful.  In about 2003 both the 2nd and 3rd floors became vacant.  

6. The plaintiff was interested in leasing the 2nd floor and to use it as a Chinese restaurant.  In May 2003, through the introduction of an estate consultant, the plaintiff had a meeting with representatives of Hang Lung on the intended use of the 2nd floor.  As the 2nd and 3rd floors of the building shared the same entrance and lifts on the ground floor, the plaintiff was particularly concerned about the intended use of the 3rd floor.

7. The plaintiff claimed that the representatives of Hang Lung made the representation that the landlord would not let the 3rd floor to a tenant who ran the same business of a Chinese restaurant as that of the 2nd floor.  This was to ensure there would be a good combination of tenants at the Shopping Arcade and all of them could make profits.  The representatives claimed that if the tenants could not pay rent ‘it would be meaningless’. 

8. The representatives further showed to the plaintiff the design plans for the 3rd floor which revealed that the 3rd floor would be occupied by four small food stalls selling special cuisine and the name of the building would also be changed to Hollywood Food Court. 

9. Relying on the representation that the plaintiff would be the only Chinese restaurant operating in the building, it decided to lease the 2nd floor and offered $550,000.00 as rent.  The plaintiff claimed that if not for the representation and the design plans it would not have had entered into the lease.  Alternatively it would not have had entered the lease at the rent of $550,000.00.  The plaintiff had previously offered to lease the premises at $500,000.00.  After the negotiation and the representation made by the defendant the plaintiff was asked by the defendant to consider and come back with a higher offer.  The plaintiff then offered to lease the 2nd floor at $550,000.00.

10. Contrary to the representation made to the plaintiff, the defendant in early March 2004 offered the 3rd floor of the building for lease to another Chinese restaurant. 

11. On enquiries made by the plaintiff, Hang Lung claimed that it had no obligation to avoid competition of the plaintiff’s tenancy.  Later on Hang Lung told the plaintiff that competition might be a good thing as it would attract more people to the building. 

The Statement of Claim

12. The plaintiff claimed misrepresentation and sought to rescind the lease. 

13. Paragraph 19 of the statement of claim pleaded that

‘	By reasons of the matters aforesaid, the Representation and the Design Plans were false, and they were fraudulently made by Hang Lung on the Defendant’s behalf, which the Defendant was and is vicariously liable.
	Particulars of Falsity
	(a)	the Defendant had no intention to divide the areas of the 3/F of the Building into 4 food stalls as alleged.
	(b)	the Defendant had not divided the areas of the 3/F of the Building into 4 food stalls as alleged.
	(c)	the Defendant all along intended to let the 3/F of the Building to for any businesses including Chinese restaurant business.
	(d)	the Defendant had no intention to prevent direct competition of business resulting from the same businesses on 2/F and 3/F of the Building.’

14. Apart from fraudulent misrepresentation, the plaintiff also pleaded negligent and innocent misrepresentation by the defendant.

Entire Agreement Clause and misrepresentation

15. The lease contained an “entire agreement clause”, namely

‘

This Agreement sets out the full agreement between the parties hereto and supersedes all written or verbal agreements that the parties hereto may have reached with respect to the subject matters of this Agreement and no other representations, commitments, warranties or understandings, written or verbal, have been made or given relating to the Premises or the Building or the letting of any part thereof or the appurtenances thereof.’

16. The clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clauses and not elsewhere and that any promises or assurances made in the course of negotiation (which in the absence of such a clause may have effect as a collateral warranty) shall have no contractual force, save, insofar as they are reflected and given effect in that document.  The clause is not merely to render evidence of the collateral warranty inadmissible in evidence but to deny what would, otherwise, constitute a collateral warranty of legal effect, see : Inntrepreneur v. East Crown [2000] Vol. 2 Lloyd’s Rep 611. 

17. It is important to bear in mind that the purpose of the entire agreement clause like the present one is to ensure that the full contractual terms to which the parties agreed to bind themselves are to be found in the agreement itself and nowhere else such as in a side agreement or a collateral warranty.  The term ‘collateral warranty’ means, in the context, a warranty in the nature of a contractual term.  This clause does not preclude a claim in misrepresentation.

18. Mr. Lam, counsel for the defendant, accepted that the entire agreement clause would not prevent the plaintiff from lodging a claim based on misrepresentation.  However, he argued that the only type of misrepresentation that was available to the plaintiff was fraudulent misrepresentation.  Otherwise, Mr. Lam argued, an entire agreement clause can be evaded simply by pleading a claim in misrepresentation based on, in essence, a promise. 

19. Mr. Lam cited no authority for this wide proposition.  I am not prepared to accept that this is plainly and obviously the state of the law.  The starting point is that a claim based on misrepresentation is not excluded by the wording by the clause.  I do not accept there can be a generalisation that fraudulent misrepresentation is the only form of misrepresentation that the plaintiff can rely upon in the light of the entire agreement clause.  In my view the only real distinction is between a contractual warranty on the one hand and a misrepresentation, be it fraudulent, negligent or innocent on the other hand. 

Representation of facts

20. It is well established that in order to ground a case on misrepresentation, the plaintiff must rely on misrepresentation of facts and not promises.  However, what a man promises to do in the future can be a representation of his present intention for his future conduct.  This comes within the ambit of an existing fact.  In the often quoted words of Bowen L. J. in Edgington v. Fitzmaurice (1885) 29 Ch. D. 459,

‘	The state of a man’s mind is as much a fact as the state of his digestion.  It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else.’

21. That case was based on deceit.  A statement was  made in a prospectus that the investor’s money was wanted for further investment in the business when in fact it was needed to pay off existing debts.

Fraudulent misrepresentation and others

22. Mr. Lam while accepting that the representation made in the present case was a representation of fact, argued that a misrepresentation based on such facts can only be in the nature of fraudulent misrepresentation and on this basis the strict requirement on pleading fraud must be observed.  He argued that in the present case fraud was not properly pleaded.

23. Again I have to point out that this is a striking out application and it can only succeed in a plain and obvious case.  If the application involves difficult questions of law which cannot be readily resolved then the Court should not take the drastic step of striking out a claim and preclude the plaintiff from having his day in court. 

24. In my view there is room for argument that fraudulent misrepresentation is not the only cause of action available to the plaintiff when the fact he is relying upon is the present intention of the defendant as to his future action.

25. There are two distinct issues : first, the representation of a fact based on the defendant’s present intention as to his future action and second, the nature of the representation, be it fraudulent, negligent or innocent.  When a defendant represents that his present intention is to do or not to do certain things in the future, this remains to be a fact and the plaintiff can rely on this fact as the basis of his claim for misrepresentation.   If the defendant does not have the stated intention at the time when he made the representation, the misrepresentation may well be fraudulent.  However, it may well be that at the time of the representation he did have the intention to do the things he represented he would do but due to, for example, change of circumstances, he could not carry out the intention into effect.  The representation is still a misrepresentation although not in the nature of a fraudulent one.  Why should such a claim be excluded?  To take another example, a corporation may agree on a decision and instruct an officer to make a representation of that decision.  However, it later changes its mind and before the new decision can be communicated to the officer, the officer has already made the representation as instructed.  Again in such a situation, I fail to see why a misrepresentation claim, other than that of fraudulent misrepresentation, cannot be raised.

26. The statement in Clerk & Lindsell on Torts (19th Ed. 2006), paragraph 18-10 that,

‘

“

Thus a promisor generally represents by implication that he has at the moment of making the promise the intention of fulfilling the obligations that he is undertaking; and if it can be shown that no such intention existed in his mind at that moment, he is guilty of a misrepresentation.”’

is correct when it refers to fraudulent misrepresentation but the crucial question still remains whether that is the only form of misrepresentation that the plaintiff may seek to rely.

27. As the matter now stands, I am not persuaded that the only cause of action available to the plaintiff is that of fraudulent misrepresentation.  Mr. Lam accepted that if that was the position then he could not succeed in his striking out application based on the insufficiency of the pleading on fraud.  On this basis the appeal must be dismissed.

Pleading on fraud

28. Further but without deciding, it may be arguable that on the facts of this case the plaintiff had sufficiently pleaded fraud.  A promisor generally represents by implication that he has at the moment the promise the intention of fulfilling the obligations that he is undertaking.  In the present case the plaintiff not only pleaded that the obligation was not fulfilled, it specifically pleaded that the defendant had no intention to divide the 3^rd floor into four food stalls, or to prevent direct competition by not letting both the 2^nd floor and 3^rd floor as Chinese restaurants and on the contrary it intended to let the 3^rd floor to be used as a Chinese restaurant. 

29. The plaintiff had pleaded a case that the defendant had no intention to fulfill the obligation when it made the representation.  If the defendant said that the plaintiff had not specified why the defendant did not have the necessary intention, then it is a matter for further and better particulars of the pleading and not striking out.

Conclusion

30. The appeal is accordingly dismissed.

Costs

31. This is a case where the defendant had filed defence, the parties had exchanged witness statements and the case was ready to be set down for trial when the defendant decided to take up the striking out application.  If a party resorts to such a drastic move at such a late stage of the proceedings, then it must ensure that it has a cast iron case and not merely relied on grounds that remain to be arguable only.  Any party who adopts such an approach will have to bear the consequence that the Court may readily impose indemnity costs in order to deter this type of satellite litigation.

32. In the present case, I will make a provisional order that the plaintiff is to have the costs of the appeal to be taxed on an indemnity basis.  If the defendant wishes to challenge this provisional order, the Court will consider the matter by way of written submissions.

Hon Lam J:

33. I agree for the reasons given by Cheung JA that the appeal should be dismissed.  Subject to the question of duty of care (which has not been relied upon by Mr Lam as a ground for the application to strike out) I do not see any reason in principle why a negligent misrepresentation, or negligent misstatement (as I put it in the course of the hearing) cannot arise from a statement as to the present intention of a party.  In addition to the example given by my lord above, I can envisage the possibility that at the time of the meeting, the representatives of the defendant negligently conveyed to the plaintiff the message that the defendant had a definite intention to implement the plan regarding the 3^rd floor when in truth the defendant had yet to come to a final decision on that plan.  If it was reasonable for the plaintiff to rely on such representation, I think it is at least arguable that the plaintiff can sustain a claim for misrepresentation.

34. On one view, it might even be arguable that the misrepresentation was made “fraudulently” even though there was no intention on the part of the defendant to cheat or injure the plaintiff, see Clerk & Lindsell on Torts 19th Edn. paras. 18­-18.

35. Thus, even assuming that there had been a change of intention on the part of the defendant, that would not be conclusive on the viability of the plaintiff’s claim based on misrepresentation.

36. I also agree with my lord that this sort of satellite litigation should be discouraged and in the circumstances of the present case, the provisional costs order proposed by my lord is appropriate.