THE WORLD FOOD FAIR LTD AND ANOTHER v. HONG KONG ISLAND DEVELOPMENT LTD

CACV 398/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 398 OF 2003

(ON APPEAL FROM HCA 4602 OF 2000)

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J U D G M E N T

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Hon Ma CJHC :

1. The main question for the Court is a common and often difficult one in commercial disputes : over a long course of negotiations, when, if at all, has a contract been concluded?  In dealing with this question in the present case, I gratefully adopt the summary of the facts contained in the judgment of Cheung JA which I have read in draft.

2. It therefore suffices for me only to set out some of the more salient facts : -

(1)	The Defendant was at all material times the owner of an underground shopping centre in Tsimshatsui known as The Palace Mall which is located between the New World Shopping Centre and the Hong Kong Space Museum.  Built in the 1990s, The Palace Mall was anticipated to be ready for occupation sometime in 1997.
(2)	With a view to securing tenants, the Defendant (who, as the Judge observed, was part of the New World group of companies) began marketing the Mall in early 1996.  It was hoped by the Defendant that there could be a soft opening in June/July 1997 to coincide with the resumption of sovereignty over Hong Kong and the number of overseas visitors who would be present in Hong Kong for that event.
(3)	This case is about the negotiations between the 2nd Plaintiff and the Defendant in relation to certain premises within The Palace Mall.  The negotiations were carried out at the crucial stages by a Mr Steve Siu (“Mr Siu”) for the 2nd Plaintiff and Mr Lawrence Mak (“Mr Mak”) for the Defendant.  They were the only witnesses called at trial in relation to the question of liability.  The relevant premises (being identified as Shops P215 and P216 within the Mall) were to be used for the purposes of carrying out a food and beverage business, a business into which the 2nd Plaintiff had at that time not hitherto ventured but which was pushed by Mr Mak.  Mr Siu was eventually sold on this concept and it was on this basis that the negotiations proceeded.
(4)	For reasons that will presently become apparent, there are three important periods in this case.  The first period was between September 1996 and January 1997, the second between January 1997 and July 1997, and the third period from July 1997 to about February 1998.
(5)	Negotiations between Mr Siu and Mr Mak began in earnest from September 1996 onwards.  As submitted by the Plaintiffs (represented in this appeal by Ms Audrey Eu SC), over the course of negotiations between September 1996 and January 1997, agreement was reached orally as to the identity of the relevant premises (Shops P215 and P216), user (restaurant and food court), rent, rent-free period, deposit, duration of tenancy, commencement date and the identity of the tenant (the 2nd Plaintiff would nominate the 1st Plaintiff to be the tenant of the premises).  Mr Siu and Mr Mak also reached broad agreement over the provision of kitchen equipment for the premises.  This latter aspect is a topic to which I shall have to return.  The relevant passages in the transcript of the trial below support the above submissions.  Indeed the Judge was of the view that Mr Siu and Mr Mak did reach what he called a “broad consensus as to what was to be let and for what purposes as well as the rent and a hope for starting date for the tenancy”, although he concluded that this consensus was always subject to a formal lease being agreed.
(6)	On 27 January 1997, enclosed together with a compliments slip from the 2nd Plaintiff on which were written the words “initial deposit”, a cheque for $200,000 was sent by the 2nd Plaintiff to the Defendant.  The drawer of the cheque was The World Jewellery Company but this is of no consequence.  The cheque was cashed by the Defendant, kept by it and at no stage returned.  This payment was, according to the Plaintiffs, a deposit that at least evidenced, if not demonstrated a part performance of, a concluded contract.  According to the Defendant, the payment was only a demonstration of sincerity in the negotiations between the parties (what it termed “earnest money”).  The significance of this payment is an important part of the present appeal.  For the time being, it is sufficient perhaps just to refer to the evidence of Mr Mak on this payment.  He was of the view that it was made and accepted to enable the Defendant to “keep” this customer [the 2nd Plaintiff]” and that once it was made, he had “secured this tenant”.
(7)	Subsequent to this payment (which marked the end of the first period), the parties continued their negotiations.  In the course of counsel’s submissions, we were taken through the relevant correspondence.  On the whole, they demonstrate the following : -
	(a)	Both parties got down to the task of trying to agree the finer points of detail in relation to the premises.  Thus, we have seen correspondence regarding layout plans, signage, business hours, partitioning and the supply of electricity, water and grease traps (among other items).  I take as an example the letter dated 5 June 1997 from the 2nd Plaintiff to the Defendant in which there were references to even the rate of flow of the chilled water supply for the air-conditioning of the premises.  I would just add here by way of context that during this second period (January – July 1997), the Plaintiffs engaged a contractor, the World Franck Siu Contracting Ltd (“World Franck”), to design and construct the restaurant that was intended for the premises.  It is fair to say that both the Plaintiffs and the Defendant were at this stage expending significant amounts of time and money on the details in relation to the subject premises.
	(b)	At the same time as dealing with the details of the actual occupation of the premises, the parties corresponded over the formalities of the tenancy.  In his judgment, the Judge laid particular emphasis on this type of correspondence, pointing out, quite accurately, that there was considerable posturing on both sides regarding exactly what terms would appear in the formal tenancy agreement.  I use the term “posturing” because in correspondence the parties even began suggesting terms to one another that went contrary to what had previously been agreed.  I know not the reason for this; perhaps those persons responsible for this aspect within the 2nd Plaintiff and the Defendant thought that this was the most advantageous way to secure the best possible bargain.  A document in point was the draft letter of intent that was sent by the Defendant to the 2nd Plaintiff following the payment of the $200,000 on 27 January 1997.  That draft contained a number of terms that contradicted the previous understanding reached between the parties.  When Mr Siu confronted Mr Mak with this, the latter acknowledged that a mistake had been made by his subordinates.  As I said earlier, the Judge was sufficiently impressed with this type of correspondence to consider ultimately that the parties had not reached sufficient consensus to establish an intention to enter into a contract with one another.
(8)	By early July 1997, matters progressed to such a stage that the 2nd Plaintiff’s contractor (World Franck) were permitted actually to enter into possession of Shops P215 and P216.  This event I regarded as being of considerable significance.
(9)	Unfortunately, soon thereafter, the parties fell apart.  The judge described the situation in paragraph 3 of his judgment : -
		“Unexpectedly, Mr Mak left the Defendants’ employment and was replaced by Mr Kays Wong.  The unthinkable then occurred.  Mr Wong took a different approach to the way that the premises should be used.  He did not care for the food court concept and he was not disposed to allow the Plaintiffs to sub-let any part of the premises.  This was of fundamental importance for the Plaintiffs because they had expected to sub-let some of the counters at the food court to individual caterers in order to make that part of the venture profitable.  Mr Kays Wong also required that the entire area be used as a high end to medium class full service restaurant.  By the end of July an impasse had been reached.”
(10)	This impasse is documented in a letter dated 31 July 1997 from the 2nd Plaintiff to the Defendant in which mention was also made of the fact that certain kitchen facilities, which the 2nd Plaintiff assumed the Defendant had agreed to provide, were no longer to be provided.  These matters were not contradicted by the Defendant.  The letter dated 2 August 1997 in reply merely acknowledged receipt of the 31 July 1997 letter, noting its contents.
(11)	This change in approach by the Defendant had serious consequences.  Later in July, the 2nd Plaintiff had to vacate the premises, cease all fitting out works and hand back the keys.  Although Mr Kenny Lin (who appeared with Mr John Griffiths SC for the Defendant) submitted it was important to note that the workmen were permitted to leave their tools in the premises and that the Defendant did not hand over the premises to anyone else (instead keeping the keys ready to hand back to the 2nd Plaintiff), all this was in reality only in furtherance of a new set of negotiations between the parties.  The stark reality was that by the end of July, the 2nd Plaintiff had been ordered off the premises.  Even security guards were installed to guard the site.
(12)	This marked the end of the so-called second period.  Thereafter, the parties entered into negotiations to try to salvage the proposed tenancy and we were taken to much of the ensuing correspondence, many marked without prejudice.  However, no agreement could be reached.  By late January/early February 1998, the negotiations broke down and the tools that had been left by the 2nd Plaintiff’s workmen were taken away.  This marked the end of the third period with which we are concerned.
(13)	On 8 May 2000, the Plaintiffs instituted proceedings against the Defendant for breach of contract.  It was claimed that a legally binding agreement had been made by the parties and that the Defendant had breached it.

3. The following issues arise for determination in this appeal : -

(1)	Was there an agreement between the parties? (Issue 1 : The Existence Of An Agreement).
(2)	If so, was it unenforceable by reason of the lack of a written memorandum as required by the Conveyancing and Property Ordinance, Cap.219 (“the CPO”)?  (Issue 2 : The CPO Issue).
(3)	If an enforceable agreement existed, did the Defendant breach the agreement and was any repudiation accepted by the Plaintiffs?  (Issue 3 :  Breach And Acceptance Of Repudiation).
(4)	Were any breaches of contract waived?  (Issue 4 : Waiver).
(5)	Damages.  (Issue 5 : Damages).
(6)	If no agreement existed, was the Defendant entitled to forfeit the sum of $200,000?  (Issue 6 : Forfeiture Of Deposit).
(7)	In any event, were the Plaintiffs liable to pay mesne profits or occupation rent for their occupation of the subject premises?  (Issue 7 : Mesne Profits/Occupation Rent).

I shall deal with these issues in turn.  Some can be disposed of relatively quickly.

Issue 1 : Was There An Agreement Between The Parties?

4. This was the main issue on appeal, taking up by far the most time in submissions.  As I am differing in my conclusions on this issue from the trial judge, I would like to set out my reasons for doing so.  I should first say something about one of the submissions urged on us by Mr Griffiths SC for the Defendant, namely, that this Court should be extremely carefully before reversing the trial judge on questions of fact.  This is an accurate statement of the approach of the Court of Appeal if one is dealing with findings of primary fact.  Where, as in the present case, there are really no disputes on primary facts, merely on the conclusions or inferences deriving therefrom, the position is quite different.  Ms Eu SC referred us to the following passage from the judgment of Godfrey JA in Tang Kwok Ming v Daxprofit Scaffolding Ltd [1999] 1 HKC 657, at 663, where he said : -

“But that does not mean that this court will re-try the case.  The re-hearing is a re-hearing on the papers.  This court will not usurp the function of the trial judge, ie to find the facts.  It will certainly not disturb his findings of primary fact where these are based on the credibility of the witnesses or the preference of the evidence of one witness for that of another (although of course it may be willing to disturb inferences of fact drawn from the primary facts, because an appellate court is in as good a position as the trial judge to draw such inferences).”

This approach was echoed in the judgment of Bokhary PJ in Ting Kwok Keung v Tam Dick Yuen & Others (2002) HKCFAR 336, at 347 (paragraph 34), where he said : -

“In discussing these guiding principles, the first thing to be noted is that appeals against findings of primary fact are approached very differently from appeals against findings of fact made by a process of inference.”

5. I have at the outset of this judgment already identified the particular situation that faces the Court in this case : to ascertain whether or not an agreement has been made where there has been a long course of negotiations.  Lawyers are used to classifying into neat pigeonholes the requisite components of a contract : offer, acceptance, consideration, the terms.  Businessmen too, but not all the time.  Very often, negotiations proceed without any formal or readily identifiable offers and acceptances.  Instead, bargaining takes place where concessions are made or understandings reached on some issues, with other issues left for further discussion or negotiations.  In such a situation, it may become very difficult for a court to determine whether a legally binding agreement has come into existence along the way.  Where lengthy negotiations take place, two features stand out to be considered in this type of situation : - first, whether an intention to contract exists; secondly, even if such an intention exists, whether there is sufficient certainty of terms.

6. On the first aspect, it is for the Court to look at the whole of the evidence with a view to determine whether the parties have evinced an intention to create legal relations with one another.  This will of course vary from case to case, but the following factors may offer some guidance : -

(1)	Agreement on essential terms may indicate that a legally binding contract was intended.  In the context of a lease, it may generally be said that such terms include the identity of the parties, the identity of the premises, the commencement and duration of the lease and the rent payable : - see here Hill v Redman’s Law of Landlord and Tenant (Vol.1) at paragraphs 910-920.  However, it is important to bear in mind that just because there may be agreement on these matters, it does not necessarily follow that a legally binding contract has been created.  The law of contract is not quite so mechanical.  The Judge below referred to Kwan Siu Man v Yaacov Ozer (1997-98) 1 HKCFAR 343, in particular the judgment of Litton PJ, to illustrate this.  The exercise for the court is to ascertain whether the parties truly intended to create legal relations with one another.
(2)	Another indication that the parties intended to contract with one another is if there has been some performance, even partially, of the contract or in furtherance of it.  In many ways, this is often the clearest indication of an intention to contract.  And, in the present case, this factor is in my view decisive.

7. I now move on to the aspect of certainty of terms.  Where the Court is satisfied that an agreement has been made at any point, the fact that the parties have continued to negotiate thereafter is no bar to the existence of a binding agreement, even where no agreement is reached on the matters further negotiated.  Regarding the aspect of certainty, as the editors of Chitty on Contracts (28th edition) Vol.1 state at paragraph 2-119 referring to Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Report 601 : -

“Thus an agreement is not incomplete merely because it calls for some further agreement between the parties.  Even the parties’ later failure to agree on the matters left outstanding will vitiate the contract only if it makes it ‘unworkable or void for uncertainty’”.

Of course, once essential terms have been agreed, there will not be any lack of certainty.  And where there has been part performance, the Court “will strain to the utmost to supply the want of certainty even to the extent of providing a substitute machinery : - see Sudbrook Trading Estate Ltd v Eggleton and Others [1983] 1 AC 444, at 460C-D per Templeman LJ (in a passage approved by the House of Lords in that case : - see 484F-G per Lord Fraser of Tullybelton.)  Thus, the Court may imply terms, adopt usual covenants or even determine terms by reference to concepts of reasonableness.

8. So much then for the law.  On the facts of the present case, I am firmly of the view that the parties did enter into a binding legal relationship with one another most likely during the first period culminating in the payment of $200,000 on 27 January 1997 : -

(1)	As pointed out above, during the first period, the parties reached agreement on the identity of the premises, the user, the rent, rent-free period, deposit, duration and commencement date of the tenancy and the identity of the tenant.  The parties also reached agreement in relation to kitchen facilities.
(2)	The payment of $200,000 was of great significance.  It was Mr Mak’s view that this payment was required by the Defendant in order to commit the 2nd Plaintiff to a tenancy of the premises.  In short, it was a deposit.  The subsequent correspondence between the parties actually refers to this payment as a “deposit”.  The Defendant’s suggestion (upheld by the Judge) that this was some sort of “earnest money” which would be forfeited should negotiations break down, finds no basis in fact, whether on the correspondence or based on the testimony of the witnesses.  It is to be borne in mind that the Defendant was keen to persuade the 2nd Plaintiff in particular to take up the tenancy and to do so as soon as possible so as to be ready for the anticipated soft opening in June/July 1997.  It simply cannot be said that the Defendant had such bargaining power that the 2nd Plaintiff would be commercially driven to accept the “earnest money” obligation alleged by it.  I note that in one of the witness statements supplied by the Defendant to the Plaintiffs before trial, it was asserted that the $200,000 was merely “an initial deposit which sum would be forfeited by the Defendant should [the 2nd Plaintiff] failed to enter into a formal tenancy agreement with the Defendant”.  However, the person who made this statement was not called at trial.
(3)	After the deposit was paid, both parties began incurring substantial expenses and going into quite fine detail in relation to the tenancy of the premises.  I find it difficult to imagine that experienced and hard-nosed businessmen would have done so unless they believed a concluded agreement had been reached.  The fact that the parties were also posturing during this time regarding the formal document to be signed does not, on the facts of the present case, detract from this.
(4)	Even if the above facts were somehow not indicative of a binding agreement having been concluded, the fact that the 2nd Plaintiff and its workmen were permitted to enter into possession of the premises in early July 1997 is conclusive.  No plausible explanation has been given to us to indicate otherwise that the parties regarded themselves as being contractually bound to each other.

9. In arriving at his conclusion that no binding agreement had been made, the Judge was much influenced by the correspondence passing between the parties, including those in the third period.  With respect, I think that the Judge has not attached sufficient importance to those matters referred to in paragraph 8 above, especially the payment of deposit and the entering into possession.  The correspondence had to be seen against the background of all the facts, not the other way round.  I entirely accept the general proposition that contemporaneous correspondence often provides the best indication of the facts at the relevant time but they must still be seen in context.  In any event, the correspondence is not without its ambiguities.  While it must be accepted that the language in some of the correspondence, when seen in isolation, would appear to indicate that the parties were still negotiating towards the conclusion of a contract, other correspondence refers to the 2nd Plaintiff as the tenant and references were also made to the $200,000 as a deposit.  The Judge stated in paragraph 42 of his judgment that the consensus reached between the parties on various matters was “always going to be subject to a formal lease being agreed between the parties”.  This was not a finding of primary fact since this very point was put to Mr Mak in examination-in-chief and denied by him.  Instead, Mr Mak went on to say that by the payment of $200,000 deposit, he believed that the Defendant had secured a tenancy agreement.  In my view, this conclusion of the Judge was not an inference that I would draw from the facts; in fact, as can be seen, quite the contrary.

10. For the above reasons, I am of the view that a binding agreement did exist between the parties.  This agreement was sufficiently certain as well given the agreement between the parties on essential terms.  Mr Lin spent much time trying to demonstrate that the parties had not agreed on the supply of kitchen equipment, an aspect pleaded by the Plaintiffs to be an essential term.  While there may not necessarily have been agreement between the parties on every minute detail, there was certainly agreement on the principal aspects.

11. Finally, I should just say something about the issue identified by the Judge as the novation issue.  This was the allegation made by the Plaintiffs that the parties agreed that it would be the 1st Plaintiff who would be the tenant of the premises.  There is clearly evidence to support this and indeed the Judge’s findings reinforce the Plaintiffs’ case here.  At paragraph 47 of the judgment, he said : -

“I am satisfied that Mr Mak and Mr Siu had agreed between themselves that the lease would be granted not to the 2nd Plaintiff, although the negotiations were to be conducted with them, but to a company that would be specially formed to operate the business from the premises.”

That company was the 1st Plaintiff.

Issue 2 : The CPO Issue

12. Reliance was here placed by the Defendant on sections 3 and 6 of the Ordinance.  Clearly, no written memorandum of the oral agreement existed.  This agreement was also for the disposal of land.  So, Mr Griffiths SC submitted, no action could be brought in relation to the agreement.  Section 6(2) of the Ordinance had no application either, he further submitted, since the lease created by the oral agreement was not one “taking effect in possession”.

13. It is not necessary to decide in the present case whether or not the lease took effect in possession, although it is to be noted that the 2nd Plaintiff did enter into possession in early July 1997.  In my view, section 3(2) of the CPO is decisive.  The requirement in section 3(1) that contracts for the disposition of land should be in writing is inapplicable where there has been part performance : - see section 3(2).  In the present case, the acts of part performance are clear :  the payment of the $200,000 deposit and the entry into possession by the 2nd Plaintiff.  Mr Griffiths SC sought to argue that the doctrine of part performance was applicable only to claims for specific performance and not where, as in the present case, the Plaintiffs were only claiming damages.  Reliance was placed on a passage in Williams on Title (4th edition) at 76-77.

14. The doctrine of part performance has as its basis the prevention of the use of the section 3(1) requirement as itself an engine of fraud and to prevent great injustice : - see Mundy v Jolliffe (1839) 5 My and Cr.167.  It is therefore difficult to see as a matter of principle why the doctrine should be restricted to claims for specific performance.  The passage in Williams on Title states that the doctrine is “generally confined” to actions for specific performance but this can only mean that this is perhaps the usual type of case in which the doctrine applies.  Where damages can be awarded in lieu of or in addition to an order of specific performance (see section 17 of the High Court Ordinance, Cap.4), there is no reason at all why the doctrine has no application where there is merely a claim for damages based on a contract for the disposition of land.  Nothing in the CPO so restricts the application of the doctrine and perhaps it is also somewhat facile to make the observation that if section 3(1) can apply to the present contract (as the Defendant asserts), then so would section 3(2).

Issue 3 : Breach And Acceptance Of Repudiation

15. It was submitted by Mr Lin that there was no sufficient evidence of breach.  As pleaded in the Re-re-amended Statement of Claim, the alleged breach took the form of the Defendant insisting that under the lease the 1st Plaintiff could only use the premises to operate a middle to high end full service restaurant, the insistence that the Plaintiffs should cease to fit out the premises as a fast food court, the refusal to provide kitchen facilities and the prohibition on subletting the premises.  Like the CPO point, the Judge did not find it necessary to deal with this aspect in view of his earlier decision on the issue of the existence of an agreement.

16. On the evidence, it is clear that the Defendant had breached the oral agreement in at least some if not all of the ways pleaded.  Underlying the breaches was of course the fact that in late July, the 2nd Plaintiff was actually told to vacate the premises and return the keys.

17. Mr Lin did not seek really to dispute the facts as such.  Rather, he submitted that when the parties were negotiating during the third period, the matters which formed the basis of the Plaintiffs’ allegations of breach, seemed no longer to be controversial.  Thus, he continued, this was evidence that the alleged breaches did not exist.  In my view, this does not follow at all.  As I have said, the evidence on breach is clear.  The explanation for the apparent lack of complaints about the breaches during the third period was probably that the parties were then negotiating.  It is by no means difficult to imagine a situation whereby parties would choose to negotiate without at the same time accusing each other of breaches of contract.  At one stage, I thought Mr Lin was contending that there had been a waiver of the breaches but this was no longer pursued and rightly so.

18. Mr Lin made a further point that even if the Defendant had been in breach of contract and had repudiated it, the evidence was insufficient to show that the repudiation was accepted by the Plaintiffs.  This submission was hard to follow.  The 2nd Plaintiff moved out of the premises and handed back the keys.  In early 1998, their workmen’s tools were removed from the premises.  I can think of no more unequivocal acts of acceptance of the repudiation.

Issue 4 : Waiver

19. This issue can be shortly disposed of.  This was no longer maintained by the Defendant.  In any event, it had no basis to support it.  By no means could it be said that the conduct of the Plaintiffs in the third period was so clear or unambiguous as to indicate that they had waived the Defendant’s breaches of contract.

Issue 5 : Damages

20. The Plaintiffs submitted that if the decision of the Judge was reversed on the issue of the existence of an agreement between the parties, it followed from the Defendant’s breaches and the acceptance of repudiation that the Plaintiffs should be entitled to damages.

21. Notwithstanding his dismissal of the Plaintiffs’ claim, the Judge assessed damages at $2,850,292.  We are grateful to the Judge for this exercise for it has saved us the task of doing so ourselves.  Ms Eu SC submitted that in his assessment of damages, the Judge has left out a sum of $64,200 and we were provided with documentation to support the claim.

22. The Defendant has not dealt with the issue of damages at all and has not disputed the figures.  It therefore follows from our decision that the Plaintiffs should be awarded the sum of $2,914,492.  This will of course be additional to the return of the deposit of $200,000 that was ordered by the Judge.  Although the Judge ordered the return of the deposit on the basis of the non-existence of an agreement between the parties, it must equally follow in view of the Defendant’s breaches, that this sum also constitutes part of the Plaintiffs’ wasted expenditure.

Issue 6 : Forfeiture Of Deposit

23. This issue is academic in view of my earlier conclusion that an agreement existed between the parties.  However, insofar as it may be necessary to deal with this aspect at all, if the Judge’s conclusion that there was no agreement was correct, then he was also right in ordering the repayment of the $200,000 to the Plaintiffs.

24. Nevertheless, for the reasons stated in paragraph 22 above, the sum of $200,000 must be repaid on top of the damages to be awarded to the Plaintiffs.

Issue 7 : Mesne Profits/Occupation Rent

25. The Defendant claims mesne profits or occupation rent from the 2nd Plaintiff for the time that it occupied the premises.  This claim is made notwithstanding any conclusion that there existed an agreement and that the Defendant was in breach.  The Judge dismissed the claim for mesne profits and I see no basis to fault his reasoning.  As for occupation rent, this claim, too, cannot be entertained.  The Defendant wanted the 2nd Plaintiff to enter into possession of the premises and the 2nd Plaintiff did so in early July 1997.  But for the Defendant’s breach, the 2nd Plaintiff (or the 1st Plaintiff) would have continued to do so.  On any basis, there was never any question of the 2nd Plaintiff having to pay for the time it occupied the premises.

Conclusion

26. For the above reasons, I would allow the appeal, dismiss the cross-appeal and order as follows : -

(1)	The judgment below be set aside.
(2)	There be judgment entered for the Plaintiffs in the sum of $3,114,492 ($2,914,492 + $200,000).

27. We have heard no submissions on interest and would therefore leave this to be dealt with at a later stage unless the parties agree on this in the meantime.  As for costs, I would make an order nisi that the Defendant should bear the costs of this appeal and of the action, such costs to be taxed if not agreed.

Hon Cheung JA :

Facts

The parties

28.  New World Development Limited (‘New World’) is a well-known property developer in Hong Kong.  One of its subsidiaries is the defendant, Hong Kong Island Development Limited.  Amongst the properties developed by the defendant is an underground shopping mall, formerly known as the Palace Mall (‘the Mall’) situated in Salisbury Road, Kowloon, between the New World Centre and the Hong Kong Space Museum.  Mr. Mak Chi Wing, Lawrence (‘Mr. Mak’) was the General Manager of the defendant, responsible for the development, management and renting of commercial buildings owned by the defendant.  He was also in charge of securing new tenants for the Mall.  In 1995 the Mall was then being built and the completion was scheduled for June/July 1997.

29.  In the course of his work Mr. Mak came to know Mr. Siu Chi Lim, Steve (‘Mr. Siu’), the Chief Executive of World Enterprises Holdings Limited (the 2^nd plaintiff).  Mr. Siu’s company operated a number of shops in the Regent Shopping Arcade at the New World Centre which was another property owned by the defendant.  Mr. Mak invited Mr. Siu to take up tenancies at the Mall.  

The negotiation

30.  The discussions took place from late 1995 onwards.  At first Mr. Siu was reluctant to take up any tenancy there because the Mall was in a rather inconvenient location with access only from Salisbury Road.  Mr. Mak, however, assured him that, among other things, there would be underground pedestrian walkways linking the basement level of the Mall to the various commercial buildings in the neighbourhood, namely the New World Centre, Sheraton Hotel and the Peninsula Hotel.  A tunnel would also be connected to the Mall from Middle Road.  Mr. Siu was persuaded and agreed to open four retail shops in the Mall.  

31.  While Mr. Siu was negotiating with Mr. Mak on the tenancies for two of the retail shops in the Mall, Mr. Mak also invited Mr. Siu to take up two other premises (‘the premises’) in the Mall.  The discussion on this topic began from September 1996.  Mr. Mak was keen to have a food and beverage outlet at the Mall and suggested to Mr. Siu to open a restaurant with old Shanghai as the theme and also use part of the premises as a food court divided into catering counters, serving food with an international flavour. 

32.  Mr. Siu was reluctant to take up the invitation because his company did not have any experience in operating food and beverage business.  Eventually, Mr. Siu agreed to do so upon Mr. Mak’s agreement that part of the premises was to be used for the food court and Mr. Siu’s company could sublet or license the catering counters to outside caterers.  The defendant would also provide all the kitchen facilities that would meet the standard requirement to obtain the necessary food and beverage licence.  This was necessary because the Mall was built without the provision for food and beverage outlets. 

The understanding

33.  By late January 1997 Mr. Siu and Mr. Mak reached an understanding on the terms of the tenancy on the restaurant and food court :

The payment of deposit

34.  As Mr. Mak was keen to set up the restaurant and food court as soon as possible, he pressed Mr. Siu to commit himself by putting down the initial deposit of $200,000.

35.  In order to take up the tenancy of the premises, Mr. Siu had invited partners to join in the operation of the food and beverage business.  Mr. Siu and his partners resolved to form a new company to take up the tenancy of the premises to operate a middle to high class full service theme restaurant to be called Shanghai Cafe and also a food court with eight catering counters.  The new company would operate the restaurant and two of the counters at the food court while the remaining six counters would be sublet or licensed to other caterers.  Mr. Siu informed Mr. Mak of his position and on 27 January 1997, a deposit of $200,000 was paid to the defendant which was received by it a few days later.  The 1^st plaintiff was then established in order to take up the tenancy.  It is the plaintiffs’ case that a binding agreement was then reached between the parties on the letting of the premises. 

The preparation

36.  Thereafter, the 2^nd plaintiff commissioned a firm of interior decorators to design the interior of the premises.  The drawing plans of the interior were submitted to the defendant for approval.  The 2^nd plaintiff also engaged the same firm to carry out the decoration work and also to provide kitchen equipment, lighting and audio visual equipment and other articles that were required for the restaurant such as table wear, cutlery, table linen and staff uniforms. 

Entering of possession

37.  On 5 July 1997 vacant possession of the premises was delivered by the defendant to the 2^nd plaintiff.  As a matter of fact a traditional ‘commencement of work’ ceremony was held in the premises the previous morning.  In the meantime the 2^nd plaintiff also instructed estate agents to secure sub-tenants for the counters in the food court.  It managed to secure one sub-tenant and was close to concluding an agreement for two other counters.  It also hired staff for the restaurant business and set up an office in the 2^nd plaintiff’s office for the purpose of the restaurant business.  The sub-tenant of the counters was in fact secured through the effort of Mr. Mak.

The letter of intent

38.  While this was going on, the parties had still not signed a written tenancy agreement.  In early February 1997 the defendant provided the 2^nd plaintiff with a letter of intent which set out the terms of the tenancy.  However this document did not deal with the use of the part of the premises as a food court, the sub-letting and licensing of the counters and the provision of the kitchen facilities by the defendant.  Mr. Siu asked Mr. Mak about the terms.  Mr. Mak told him that there was no need to sign and return the letter of intent and the parties would in due course sign a formal tenancy agreement including all the terms agreed upon with necessary amendments to the letter of intent. 

The draft tenancy agreement

39.  On 4 July 1997 the 2^nd plaintiff received a draft tenancy agreement (‘the draft agreement’) of the premises from the defendant.  There were discrepancies between the terms of this draft agreement and the terms that had been agreed upon between Mr. Siu and Mr. Mak.  More importantly the draft agreement contained a prohibition against subletting and it did not mention the defendant’s obligation to provide for the kitchen facilities.  Mr. Siu instructed his staff to respond to this draft agreement and set out the terms that had been agreed between the parties in a letter dated 9 July 1997. 

The change

40.  At this stage Mr. Mak who had been dealing with Mr. Siu decided to leave the employ of the defendant and he handed over his responsibilities to one Mr. Kays Wong (‘Mr. Wong’).  In the third week of July 1997 Mr. Siu was informed by Mr. Wong that he would replace Mr. Mak as the General Manager of the defendant.  At the end of July Mr. Wong suddenly asked for the building work in the premises to be suspended and asked for the return of the keys to the premises which was complied with by the plaintiffs.  Mr. Siu and Mr. Wong later met and in the ensuing discussion Mr. Siu learnt that Mr. Wong objected to letting the premises as a food court.  He also reneged on the promise to provide the kitchen facilities. 

Further negotiation

41.  Thereafter, the parties were in negotiation which turned out to be unsuccessful. 

The claim

42.  The plaintiffs commenced proceedings against the defendant for the return of the $200,000 deposit and damages for breach of contract.  The defendant denied the claim and made a counterclaim for occupation rent for the use and occupation of the premises.  It also asked for a declaration that the deposit be forfeited. 

The judgment

43.  After a 14 days trial (five of which on liability and nine on quantum) Deputy High Court Judge Carlson dismissed both the claim and the counterclaim.  The plaintiffs now appeal.  The defendant also cross appeals.

The issues

44.  There are four issues on liability:

(1)	Was there an agreement between the parties?
(2)	Was there a novation agreement for the 1st plaintiff to replace the 2nd plaintiff as the tenant of the premises?
(3)	If there was an agreement, was the agreement unenforceable because it was not in writing contrary to section 3 of the Conveyancing and Property Ordinance (Cap. 219)?
(4)	If there was an agreement, was there a breach of the agreement by the defendant and was the breach accepted by the plaintiffs?

No concluded agreement

45.  The judge held that there was no concluded agreement between the parties.  He said at paragraph 42 of the judgment :

‘Whilst Mr Mak and Mr Siu had come to a broad consensus as to what was to be let and for what purposes as well as the rent and a hoped for starting date for the tenancy these matters were always going to be subject to a formal lease being agreed between the parties.  As to the deposit of $200,000 this was “earnest money” which Mr. Mak persuaded Mr Siu to pay in order to show himself as being serious in their discussion......  The fact that the parties were unable to agree on so many fundamental or, at the very least, important matters demonstrates that it simply could not have been in their contemplation that they had entered into an agreement for a lease at the moment that the “deposit” was paid.  Far too much was at stake on both sides for them to have said to each other at the time – “Well here we are now the deposit has been paid we have a legally binding agreement! ’

The approach of the judge

46.  The approach of the judge in reaching this conclusion can be seen at paragraph 19 of his judgment,

‘As will emerge presently, the contemporaneous correspondence between the parties is of prime importance in the decision as to whether an agreement had been reached as contended for by Miss Lau (i.e. counsel for the plaintiffs).  Whilst the decision is one to be arrived at on the whole of the evidence, particularly that of Mr Siu and Mr Mak, as to what they say had been agreed, the correspondence provides the truest reflection of what was actually going on at the time.  It shows in “real time” as it were, the process of negotiation which I need to attend to.’

47.  The judge also held at paragraph 41 of the judgment :

‘The correspondence provides the most reliable means by which to judge what had passed between the parties.  It speaks for itself and does not come with the gloss or emphasis that a witness may wish to put on his evidence when describing events in the past.’

The evidence

48.  In this case the evidence relating to the negotiation between the parties, the agreement reached in late January 1997 and the subsequent events all came from the plaintiffs.  Mr. Siu and Mr. Mak gave evidence for the plaintiffs on these issues.  The defendant chose not to call any evidence on these matters.  Two witnesses were called.  They touched on peripheral matters.  The judge had not made any adverse finding against either Mr. Siu or Mr. Mak that they were unreliable witnesses.  On the contrary, the judge obviously had accepted their evidence but he considered that in the light of the correspondence, their discussions had not continued beyond the negotiation stage.

Finding of fact

49.  It is a well known principle that an appellate court should be slow to interfere with finding of facts by a trial judge.  This principle was recently reaffirmed by the Court of Final Appeal in Ting Kwok Keung v. Tam Dick Yuen [2002] 1 HKC 601. 

50.  It is important, however, to bear in mind what actually is in issue when it is said that the appellate court should not disturb finding of facts by the trial judge.  This refers to the finding of primary facts based on the creditability of the witnesses or the preference of one witness for that of another by the judge.  But where the trial judge had drawn inferences of fact from the primary facts, the appellate court is in as good a position as the judge below to draw such inferences.  In such a situation there is no restriction on the appellate court to disturb the finding based on the inference of facts : see Tang Kwok Ming v. Daxprofit Scaffolding Ltd. [1999] 1 HKC 657.  The Court of Final Appeal in Ting Kwok Keung was concerned with finding of primary facts based on the creditability of the witnesses.

Decision based on inference of facts

51.  It is clear from a fair reading of the judgment that the judge’s finding is based on an inference of facts drawn on the primary facts : namely, his conclusion is based on the contemporaneous documents and not on an assessment of the creditability of the witnesses.

52.  With respect to the judge who obviously had handled the case with patience and care, I have to say at the outset that he had erred in the inference he drew from the primary facts that there was no concluded agreement.  The overall view one gathers from the judgment is that he had relied on the correspondence to the extent that he had ignored the oral testimony of the witnesses and other objective evidence.  To ensure that I am not treading on the territory of the judge who had the advantage of receiving the evidence at first hand, I took on the task of reading the transcript of the evidence.  The reading reinforced my view that the judge had indeed erred in his conclusion.

Agreement for a lease

53.  It is the plaintiffs’ case that by the time the deposit of $200,000 was paid to the defendant a firm agreement had been reached.  This agreement constituted an agreement for a lease.

The essential terms

54.  As the judge had correctly stated in the judgment the four essential terms for a letting of premises are :

(1)	the identities of the parties;
(2)	the premises to be leased;
(3)	the commencement and duration of the term; and
(4)	the rent or other consideration to be paid.

See : Halsbury’s Laws of England 4^th Ed. Vol. 27(1) at para. 52 and 60. 

55.  The terms set out in paragraph 6 of this judgment clearly indicated that all the four essential requirements are fulfilled. 

56.  That, however, was not sufficient for the plaintiffs to establish their case because they said some other terms were also agreed upon, namely the nature of the use of the premises, subletting and the provision of kitchen facilities.  But according to both Mr. Siu and Mr. Mak, those terms were agreed as well.

57.  At the trial, Mr. Lin, counsel for the defendant had questioned Mr. Mak whether the agreement he had reached with Mr. Siu was a gentleman’s agreement.  The answer from Mr. Mak was that it would be more than a gentleman’s agreement. 

Overview

58.  While the judge held that important terms of the agreement had not been agreed upon, he did not spell out what they were.  Before I deal with the evidence considered by the judge, it is necessary to have an overview of the case.  Mr. Mak held a very high position in the defendant.  He was its general manager.  His task was to secure tenants for the Mall.  The response was not enthusiastic because of the access problem.  It was planned that the Mall would be opened to meet the many visitors that would come to Hong Kong for the 1^st July 1997 ceremony.  It was Mr. Mak’s pet idea to have a food and beverage outlet at the Mall to meet the needs of the visitors.  Mr. Mak reported his negotiations regularly to Mr. Henry Cheng, the Chairman of the New World group of companies and Mr. Louis Chu, the manager of the group’s Leasing Department.  There was never a challenge by the defendant that Mr. Mak did not have the authority to reach a concluded agreement with Mr. Siu.

59.  When Mr. Wong took over Mr. Mak’s job, the position then taken by him was simply that the idea of a food court did not fit the image of a Mall, there was never any express denial from him or the defendant that a concluded agreement had been reached.  Mr. Wong in fact did not remain long with his new post and left the scene shortly.

60.  One has this unusual situation of the two protagonists to the negotiation agreeing that all the essential terms had been reached by the parties.  This evidence is so strong that one would have thought that this is the inevitable conclusion that any tribunal of fact would have reached.  While calling no evidence at all, the defendant attempted to salvage its position by relying on the so called omissions and discrepancies in the contemporaneous documents.  While the contemporaneous documents are clearly relevant insofar as they may shed light on what had actually been agreed or not agreed between the parties, one cannot simply ignore the oral evidence of the two protagonists, particularly in relation to what they had subsequently agreed to the matters arising from these correspondence.  The judge did not find their answers on these matters to be unreliable and therefore to be ignored.  The overall picture that emerged from their evidence when considered against the objective evidence of the plaintiffs paying the deposit and entering into possession of the premises and the preparatory works they had carried out for the opening of the restaurant, pointed to one conclusion only, namely, a concluded agreement on the essential terms of the tenancy had indeed been reached.  It is useful to refer to the following passage in Chitty on Contracts 29^th Ed. Vol. 1, para. 2-026 :

‘Continuing negotiations.  When parties carry on lengthy negotiations, it may be hard to say exactly when an offer has been made and accepted.  As negotiations progress, each party may make concessions or new demands and the parties may in the end disagree as to whether they had ever agreed at all.  The court must then look at the whole correspondence and decide whether, on its true construction, the parties had agreed to the same terms.  If so, there is a contract even though both parties, or one of them, had reservations not expressed in the correspondence.  The court will be particularly anxious to hold that continuing negotiations have resulted in a contract where the performance which was the subject-matter of the negotiations has actually been rendered.’

The letter of intent

61.  The judge laid great emphasis on, among other things, the letter of intent and the draft formal tenancy agreement.  In my view neither of these would assist the defendant.

62.  On 1^st February 1997, the defendant sent a letter of intent to the 2^nd plaintiff with a covering letter.  As can be seen from the date of letter of intent it was after the 2^nd plaintiff had paid the rental deposit as a result of which the 2^nd plaintiff contended that an agreement had been reached between the parties.  So whatever term the defendant might have imposed in the letter of intent would not have affected the agreement which the 2^nd plaintiff contended had already existed. 

63.  The letter of intent was a standard letter issued by the leasing department of the defendant and according to Mr. Mak he had no knowledge of it before it was issued.  The covering letter requested the 2^nd plaintiff to sign the letter of intent within seven days and paid the deposit of $200,000.  By then, the deposit had already been paid.  The letter of intent was never signed by the 2^nd plaintiff and from the evidence, neither parties seem to be overly concerned about the document not being signed. 

64.  The judge said that the letter of intent contained various matters which indicated that the parties had not reached a concluded agreement :

(1)	Clause 7 stated that Clauses 1 to 6 therein were subject to ‘the formal Lease Agreement and Conditions of Exchange being granted by the Government where applicable’.
(2)	Clause 5 provides for a term of three years plus an option of two years.
(3)	Clause 6 provides for a rent free period of 30 days.
(4)	The letter of intent did not record the following matters : the premises could be used as a restaurant/food court; the authority of the 2nd plaintiff to sublet some of the counters; the defendant would provide the kitchen facilities and the 2nd plaintiff would be entitled to nominate another company to take up the tenancy.

Subject to contract

65.  It is clear that the question of ‘subject to contract’ is a non issue.  The evidence of Mr. Siu and Mr. Mak showed that they had never proceeded on the basis that their agreement was ‘subject to contract’.  It was a unilateral addition imposed by the leasing department of the defendant in a standard document.  In fact Mr. Mak expressly disowned any notion that the agreement was subject to contract.

66.  As stated in Hong Kong Housing Authority v. Hung Pui & Another [1987] 3 HKC 495, the words ‘subject to contract’ are not to be lightly ignored; but where the court is satisfied on the evidence that they had no meaning, it was entitled to ignore them.  This would happen once all the terms of a contract are accepted, there is nothing remaining to be negotiated and there is no need or scope for a further formal contract.  See also Michael Richards Properties v. St Saviours [1975] 3 All ER 416.

67.  Mr. Mak’s evidence is also that the letter of intent did not contain all the terms that had already been agreed by the parties.  Hence its content is not a reflection of the true position between the parties.

Option to renew

68.  The option of two years was another non issue because Mr. Mak was of the view that the term of the lease and the option had already been agreed upon, although because of the lapse of time, he could not remember the exact length of these terms.

Rent-free period

69.  As to the rent free period, Mr. Mak said that the 30 days period stated in the letter of intent was a mistake.  However, due to the lapse of time, he could not remember very clearly about the exact figure but that the parties had basically agreed that the period was three months.  He agreed in cross-examination that before he accepted the rental deposit the parties had not reached an agreement on the rent free period which was acceptable to both of them.  But the range of the period, which was two months, was discussed between the parties.  Mr. Mak said that while Mr. Siu would prefer a longer rent free period, his base line was a period of three months; but as a negotiation tactic, he would not reveal the base line to Mr. Siu.  Mr. Mak said,

‘And there’s a possibility that it was one of the tactics played by the landlord because when we said that we would give a rent-free period of 61 days or two months, and when the time comes there might be a possibility that we could give one more month’s rent-free period to the tenant.  And on this aspect, we might make the tenants feel better psychologically.’

70.  This is not a case where the parties had not even agreed whether the tenant should be entitled to a rent free period at all.  Even if the parties had not agreed on the exact rent free period in February 1997, I would not regard it as being so fundamental as to vitiate the agreement that had by then been reached.  Mr. Mak was of the view that he could not envisage any difficulties in reaching an agreement on the rent free period with Mr. Siu.  Mr. Siu shared the same view.  I agree with the submission of Ms Eu S.C., counsel for the plaintiffs, that even assuming that was no agreement on the length of the rent free period, this was ultimately a matter of concession by the defendant and the plaintiffs would have to accept the maximum which the defendant was prepared to offer.  The evidence showed that later on the defendant was even prepared to offer a period as long as 126 days to induce the plaintiffs to sign the tenancy agreement.

The draft tenancy agreement

71.  The draft agreement was sent to the 2^nd plaintiff on 4 July 1997.  According to its terms the tenancy was to commence on 1^st August 1997.  After reviewing the draft agreement, the 2^nd plaintiff wrote to the defendant by letter of 9 July 1997 seeking to ‘clarify’ eight matters :

(1)	The business hours of the premises;
(2)	The restriction on the display of signpost;
(3)	The prohibition in the draft agreement on cooking, preparation and delivery of food;
(4)	The reinstatement of premises : as the premises was delivered to the 2nd plaintiff without a shop front and without a party wall, the 2nd plaintiff stated that it would deliver the premises in a bare shell condition upon the end of term;
(5)	The 2nd plaintiff informed the defendant that the tenant ‘should be [the 1st plaintiff]’;
(6)	The security deposit would be in cash;
(7)	The draft agreement prohibited subletting, the 2nd plaintiff wrote :
	‘As we are running a kind of international food court in the captioned premises, we do need to have approval from Landlord to sublet or licence out which to some extent contrary to Clause 2.52.’
(8)	The draft tenancy agreement further referred to a term of three years plus a two year option, the 2nd plaintiff wrote :
	‘As for our security of tenure and investment return, we want to seek a lease of 3 years fixed with an option to renew for a further term of 3 years.’

The non-essential terms

72.  The opening hours, the signposts, the reinstatement of the premises and the form of the security deposit are clearly not essential terms of the agreement. 

The kitchen facilities

73.  The draft tenancy agreement, of course, did not refer to the provision of kitchen facilities by the defendant.  But again the omission does not mean the term had not been agreed upon by the plaintiffs.  The agreement was that the 2^nd plaintiff would carry out the work first and the defendant would reimburse the expenses later by deducting them from the future rentals.  The agreement was for the provision of standard kitchen facilities because the Mall was not built to cater for the use of a restaurant.  This was to enable the plaintiffs to use the premises as a food and beverage outlet.  This included fire protected lobby, fire rated wall partitions, fire shutter, raised floorings, electricity supply, fresh water supply, inlets, outlets and piping, gas supply and piping, drainage points, exhaust air ducts and fan coils.  The parties were not talking about things like pots and pans.  What Mr. Siu said were not finally agreed were details such as ‘surfacing’ of the kitchen facilities.  The fact that these details or the costs of the kitchen facilities had not been agreed upon does not mean an essential term had not been agreed.  The following passage from Chitty, Para. 2-027 sums up the situations appropriately :

‘Negotiation after apparent agreement.  Businessmen do not, any more than the courts, find it easy to say precisely when they have reached agreement, and may sometimes continue to negotiate after they appear to have agreed to the same terms.  The court will then look at the entire course of negotiations to decide whether an apparently unqualified acceptance did in fact conclude the agreement.  If it did, the fact that the parties continued negotiations after this point does not affect the existence of the contract between them, unless the continued correspondence can be construed as an agreement to rescind the contract.  A fortiori, the binding force of an oral contract is not affected or altered merely by the fact that, after its conclusion, one party sends to the other a document containing terms significantly different from those which had been orally agreed.’

74.  The subsequent evidence actually showed that the parties had agreed on the costs of these expenses.

Rent free period

75.  The draft agreement also repeated that the rent free period was two months.  The 2^nd plaintiff did not comment on this in the letter of 9 July 1997.  Mr. Siu explained that he had not noticed the discrepancy in the draft agreement.

Who would take up the tenancy

76.  On the position of who would take up tenancy, there was again an agreement between the parties.  In any event for a nominee to take up the tenancy is a common occurrence in property transactions in Hong Kong.  There is nothing so unusual as to cast doubts on the plaintiffs’ case.

The oral evidence

77.  As to the questions of who would take up the tenancy, the right of the 2^nd plaintiff to sublet and the length of the option, they were all agreed upon between Mr. Siu and Mr. Mak.  Under cross examination Mr. Siu was asked why he did not state in the letter that the defendant had actually promised an option of three years instead of using words which suggested that he was at that stage still asking for an option of three years.

78.  On the face of it, the wording in the letter may seem to suggest that the parties had still not reached an agreement on the length of the option at that time but the answer given by Mr. Siu was that he had instructed his staff to respond to the defendant on the draft agreement.  The actual writing was done by the development manager.  Hence the terms of the letter could not be said to reflect the state of mind of Mr. Siu at that time.  What is more important is that Mr. Siu said he had actually asked Mr. Mak about the discrepancies in the draft agreement, which included the length of the option and Mr. Mak told him that he

‘... should be rest assured because sometimes it is inevitable that there might be mistakes made within the staff and internal documents, because the staff might have misheard.’

79.  At the same time Mr. Mak himself was also adamant that the length of the option had been agreed upon by the parties.  Mr. Mak’s evidence is that upon receiving the letter, he asked the leasing department to handle it and he told the leasing department that he agreed to the terms set out in the letter but he did not know if the leasing department had sent any written reply.  The time frame of these events was when Mr. Wong was about to take over from Mr. Mak.  All this is important evidence which the judge had apparently excluded from his consideration when he chose to rely on the contents of the contemporaneous records and said that they speak for themselves. 

80.  There were some attempts to discredit Mr. Mak about whether he had received advantage from the 2^nd plaintiff.  There was some handwritten endorsement in a letter about allotting shares to Mr. Mak.  Mr. Mak denied he had any knowledge of this and refuted strongly that he had accepted advantage or had acted contrary to the interest of his employer.  The judge did not make any adverse findings against Mr. Mak.

The three stages

81.  The parties agreed that the events in this case can be divided into three stages.  First, the events between September 1996 when the parties began to negotiate and the end of January 1997 when the deposit was paid.  Second, from February to the beginning of July 1997 when possession to the plaintiffs was given.  Third, from the end of July 1997 when the defendant retook possession to the beginning of 1998 when negotiation finally broke down.

82.  In my view the events in the first and second stages pointed towards a concluded agreement.  Three important developments in this time frame need to be considered.

The deposit

83.  The first important evidence is the payment of deposits.  The payment of deposit by itself would not necessarily be evidence of an agreement but the payment in this case clearly reinforced the plaintiffs’ case that an agreement had been reached between the parties.  It was not a unilateral payment by the 2^nd plaintiff.  It was paid pursuant to the request of Mr. Mak who had agreed the terms with the plaintiffs and wanted them to commit to those terms.  

84.  One may ask what stronger evidence is there to show that the compliance with this request by the plaintiffs signalled the conclusion of an agreement.

85.  The pleaded case of the defendant was that the deposit was earnest money which was to be forfeited if the parties failed to enter into a lease.  The deposit may well be an earnest money but the contention that it was to be forfeited in the event a lease was not entered into was not supported by the evidence.  That certainly was not the basis upon which Mr. Mak requested for the deposit.

Possession

86.  The second important evidence is that plaintiffs were allowed into possession on the 4^th or 5^th July 1997.  This must be one of the strongest evidence that by then the essential terms of the agreement had been agreed upon.  The parties involved are well established developers and businessmen.  The defendant obviously knew what was at stake when a prospective tenant was allowed to take up possession of a premises. 

87.  The defendant, however, argued that it was not unusual for a tenant to be allowed into occupation of the premises while negotiations are proceeding for the grant of a lease.  In my view there is no rule of thumb or presumptions in situations like this.  Ultimately the question remains in each case whether by the time the prospective tenant took up possession an agreement has been reached or not.  By June 1997 there were further discussions of the details of the kitchen facilities and the design of the premises were then approved by the defendant.  It is not without significance that four days after the plaintiffs’ entered into possession on 5 July 1997, the defendant agreed on the costs of the kitchen facilities as well.  This is clearly not the case of a prospective tenant being allowed to enter into possession before essential terms of an agreement had been resolved by the parties.

Preparation by the plaintiffs

88.  The third important evidence is the preparation work undertaken by the plaintiffs in anticipation of taking up the premises.  The judge had assessed that the plaintiffs had incurred over $2.8 million.  This is a large sum.  For a businessman, far too much is at stake if he is prepared to go to such length even before an agreement has been reached on the terms of the letting.

Events in the third stage

89.  The judge also referred to the correspondence in the third stage when he said the parties had ‘never got beyond the stage of negotiation’.  Mr. Lin also relied heavily on this aspect of evidence to demonstrate the parties had not agreed on the kitchen facilities.

90.  I do not think this is the right approach.  Many of the correspondence in the third stage are headed ‘without prejudice’.  But even without this qualification, one has to pay heed to the significant milestones I have outlined in terms of the plaintiffs paying the deposit, entering into possession of the premises and also the preparation work they had undertaken for the opening of the premises.  To delve into the correspondence in the third stage without considering the significance of these other evidence will give a distorted view of the larger picture.

91.  Further, in the third stage two further significant events took place, namely the stoppage of work demanded by the defendant and the recovery of possession by the defendant.  These two events were connected with the issue of breach which I will deal with later on.  But again it is important to bear in mind the legal significance of these events when one examines the details contained in the correspondence.

92.  In my view, the correspondence in the third stage will not cast doubts on a concluded agreement reached by the parties by January 1997 having considered all the circumstances of the case.

Breach and acceptance

93.  The plaintiffs’ case is that Mr. Wong reneged on the agreement by Mr. Mak to provide kitchen facilities, allow the plaintiffs to use part of the premises as a food floor and permit the plaintiffs to sublet some of the food counters.  The defendant did not call Mr. Wong or any witness to refute these points.  Once it is established that there was indeed such an agreement, the stand taken by the defendant must necessarily constitute a repudiation of this agreement.  The plaintiffs’ acceptance of the breach was by vacating the premises and by handing back the keys of the premises to the defendant when they were told to stop work on the premises. 

Further reliance on the third stage

94.  The defendant argued that there was no breach by the defendant.  In the same vein, Mr. Lin sought to demonstrate this by reference to the correspondence between the parties and records of meetings in the third stage.

95.  These documents obviously contained details of negotiations between the parties.  The judge found

‘By the end of July an impasse had been reached.  Works were ordered to be stopped.  The site was closed down.  Negotiations then restarted with a view to arriving at an acceptable solution but this came to nothing.  Mutual recriminations were plentiful with each side blaming the other for the failure to bring the matter to a successful conclusion.’

96.  Mr. Lin argued the correspondence showed that the real reason why the plaintiffs eventually decided not to enter into the tenancy was because it was concerned with the number of customers who would visit the Mall and they wanted an assurance by the defendant that the plaintiffs would be the only food and beverage outlet in the Mall which was not even discussed before.  This new stand was to be contrasted with the pleaded case of the plaintiffs about the defendant being in breach.

97.  Again I do not think that is the correct way of looking at the events.  By the end of July the plaintiffs were unable to carry out further work at the premises because of the order of the defendant who further required the plaintiff to hand back the keys to the premises.  By these actions the defendant obviously had regained possession of the premises.  There was no contrary evidence to the plaintiffs’ case that Mr. Wong would only allow the plaintiff to operate a restaurant and not a food court at the premises.  There was no contrary evidence that Mr. Wong would not provide the kitchen facilities.  The breach by the defendant of the agreement was well established.  At best the defendant could only rely on the correspondence to show that the breach may be waived by the plaintiffs.  Because the judge had found that there was no agreement, he did not deal with the issues of breach and waiver of breach.  For my part, I do not find there was a waiver.  The parties carried out negotiations after Mr. Wong informed Mr. Siu the new position taken by the defendant.  The parties might have continued to negotiate to resolve the impasse but the defendant had simply not established that the plaintiff had proceeded with the negotiation on the basis that whatever had been agreed upon between the parties was to be discarded.  Mr. Siu had made clear that he had never proceeded on such a basis.

98.  What is more important in this case is that while waiver of breach was an issue at the trial, the defendant did not rely on waiver of breach in its cross appeal.  It staked its case solely on the absence of a breach.

99.  Once this defence fails the next question is whether the repudiation had been accepted.  The defendant argued the plaintiffs did not accept the breach.  In my view the matter must be looked at objectively.  Possession of the premises was regained by the defendant at the end of July and work had ceased since that time.  By surrendering the keys to the defendant, the plaintiffs must have accepted the repudiation as from that point onwards.  The subsequent negotiations would not have changed the legal consequence.  When the negotiation finally failed the plaintiffs took back the belongings of the workers which were kept in the premises since it was locked up.  This reinforced the point that the plaintiffs’ acceptance of the breach took place when they handed back the keys at the end of July 1997.

Formal requirement

100.  The defendant further argued that the agreement was unenforceable because it was not in writing contrary to the provision of section 3(1) of the Conveyancing and Property Ordinance (Cap. 219).  Section 3 provides that,

'	(1)	Subject to section 6(2), no action shall be brought upon any contract for the sale or other disposition of land unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged or by some other person lawfully authorized by him for that purpose.
	(2)	This section applies to contracts or other dispositions whenever made and does not affect the law relating to part performance or sales by the court.'

101.  Section 6(1) further provides that,

'

(1)

All interests in land created by parol and not put in writing and signed by the persons creating the same, or by their agents thereunto lawfully authorized in writing, have, notwithstanding any consideration having been given for the same, the force and effect of interests at will only.'

102.  The restriction in section 3(1) is subject to section 6(2) which provides that,

‘Nothing in section 3 or 5 or in subsection (1) shall affect the creation by parol of leases taking effect in possession for a term not exceeding 3 years (whether or not the lessee is given power to extend the term) at the best rent which can be reasonably obtained without a premium.’

103.  In this case the parties agreed on a three year term.  This is within section 6(2).  The option of three years after the initial term of three years is clearly irrelevant because of the wording of section 6(2).

Tenant in possession?

104.  Mr. Griffiths S.C., counsel for the defendant, argued that the plaintiffs cannot avail themselves of section 6(2) because the plaintiffs were not ‘in possession’ of the lease and the case of Long v. Tower Hamlets London Borough Council [1996] 3 WLR 317 was relied upon.  That case is concerned with whether the landlord’s claim for possession is statute-barred by reason of the limitation period.  One of the issues is whether the lease in question was within section 54(2) of the Law of Property Act 1925 which is the equivalent of our section 6(2).  In that case the landlord on 4 September 1975 informed the tenant that he was ‘prepared to grant’ the tenant a tenancy to commence on 29 September 1975.  The tenant agreed to abide by the terms imposed by the landlord and moved into the premises on 29 September 1975.  It was held that a lease to commence at a future date was not a lease ‘taking effect in possession’ within section 54(2).  The judge referred to authorities which drew a distinction between two types of leases, namely,

‘(a) reversionary leases, that is leases to take effect in reversion at the time of the grant, possession being postponed to a future date (which are outside the section 54(2) exception); and (b) leases which take effect in possession at once but where the term is calculated from a future date (which are within the exception).’

105.  Neither parties addressed us about the distinction of these two types of leases or the case of Long in detail.  Ms Eu submitted that one should look at the wording of section 6(2) in its construction.  As it refers to the ‘creation’ of a lease, one is not concerned with the possession aspect of the lease. 

106.  On the other hand Malcolm Merry in his book ‘Hong Kong Tenancy Law 4^th Ed. page 33, suggested this,

‘By “take effect in possession” is meant that the tenant must have gone into occupation, or have the right to go into possession, immediately upon the grant: if the tenant goes into the premises for the first time promptly this shows that it is likely that an oral contract has been concluded.’

Part performance

107.  In view of the limited assistance we received on this topic, I am not prepared to go any further on it.  In my view, the plaintiffs’ case is not defeated even if the agreement does not meet the formal requirement.  This is because the doctrine of part performance clearly comes into play to prevent the defendant from taking advantage of the requirement of a written memorandum : see section 3(2) of the Ordinance.  There is ample evidence of part performance in this case by reason of the matters stated in paragraph 56-61.

108.  The defendant relied on a passage in Williams’ Title to Land (4^th Ed.) page 76-77 which stated that the doctrine of part performance is generally confined to actions for specific performance.  The defendant argued that since the plaintiffs were not seeking specific performance but damages, they cannot avail themselves of this doctrine.  The case cited by Williams in support of the above statement is McManus v. Cooke (1887) 35 Ch. D. 681 where Kay J at page 696stated that,

‘These authorities seem to me to establish the following propositions : (1.) The doctrine of part-performance of a parol agreement, which enables proof of it to be given notwithstanding the Statute of Frauds, though principally applied in the case of contracts for the sale or purchase of land, or for the acquisition of an interest in land, has not been confined to those cases.  (2.) Probably it would be more accurate to say it applies to all cases in which a Court of Equity would entertain a suit for specific performance if the alleged contract had been in writing.  (3.) The most obvious case of part-performance is where the defendant is in possession of land of the plaintiff under the parol agreement.  (4.) The reason for the rule is that where the defendant has stood by and allowed the plaintiff to fulfill his part of the contract, it would be fraudulent to set up the statute.  (5.) But this reason applies wherever the defendant has obtained and is in possession of some substantial advantage under a parol agreement which, if in writing, would be such as the Court would direct to be specifically performed.  (6.) The doctrine applies to a parol agreement for an easement, though no interest in land is intended to be acquired.’  (emphasis added)

109.  Proposition (2) clearly did not say the doctrine is confined only to specific performance and not damage claims.  Furthermore Williams’ also referred to Fry on Specific Performance (6^th Ed.) 283, 284 which stated that,

‘It may be questioned whether this statement of the extent of the doctrine would not be made more accurate by omitting the words “for specific performance”.  ’

110.  The equitable jurisdiction of the High Court of Hong Kong is well established : see sections 12 and 16 of the High Court Ordinance.  If the rationale of the doctrine is to prevent a statute which is enacted to prevent fraud from being used as an instrument of fraud, I see no reason why the plaintiffs cannot avail themselves of the doctrine in a claim for damages arising from a breach of contract.  After all section 17 of the High Court Ordinance provides that ‘where the Court of Appeal or the Court of First Instance has jurisdiction to entertain an application for an injunction or specific performance, it may award damages in addition to, or in substitution for, an injunction or specific performance’.

111.  I note in Lam Cheuk Fai and Another v. Lam Cheuk Kam (HCMP 3637/1995) Le Pichon J (as she then was) observed that the doctrine is available in a claim for damages in respect of a transaction which concerned land (see also Cityyork v. Limited v. Li Lin Kwo and Chan Chim Kao (H.C. Action No. A5269 of 1993) by the same judge).

Damages

112.  In my view the plaintiffs are entitled to judgment.  The judge had assessed the damages suffered by the plaintiff in the event that liability against the defendant is established.  He arrived at the sum of $2,850,292.  This is based on the total of the following items : costs incurred in the subletting of the food counters, fitting out and electrical and mechanical costs, equipment and accessories.  He dismissed the claim for staff wages and rent of a temporary office. 

113.  There is no challenge by the defendant to the quantum.  However, as Ms Eu pointed out, the judge had made an arithmetical mistake when he said the total claim for equipment and accessories was $850,980.  The sums when added up was $64,200 short.  In other words the total claim should be $915,180.  In my view the quantum as assessed by the judge should include an additional $64,200 making a total of $2,914,492.

Cross-appeal

114.  It remains for me to deal with the cross appeal.  The defendant in its counterclaim asked that the deposit of $200,000 to be forfeited and also asked for occupation rent by reason of the plaintiffs’ occupation of the premises from ‘3^rd or 5^th July 1997 until December, 1997 or alternatively the end of July, 1997 or alternatively until the possession was delivered up’.

Forfeiture of deposit

115.  The claim for forfeiture of the deposit can be shortly dealt with.  As pointed out earlier there was simply no evidence that the parties had agreed that the deposit was to be forfeited in the event that they were unable to reach an agreement on the tenancy.  The defendant cannot retain the deposit and has to return it to the plaintiff.

Occupation rent

116.  The plaintiff was allowed by the defendant to enter into possession on 4^th or 5^th July 1997 and remained there until the end of July 1997 when the defendant put a stop to the construction work and asked the plaintiffs to hand back the keys.  The plaintiffs entered into possession lawfully in anticipation of a tenancy being granted by the defendant.  There was no implied term that they were liable to pay anything for the use of the premises during this period.  The defendant relied on Lewisham London Borough Council v. Masterson [2000] 1 EGLR 134 in support of its claim.  In that case the owner of a property offered in a letter to grant a lease of a property to the appellant.  The appellant accepted the offer and went into occupation of the property without a lease.  He later gave up possession and the owner asked for compensation for the use of the land.  The issue before the court was on the valuation of the use and occupation of the land.  The facts showed that the appellant left the property on its own accord.  I do not see how this case would assist the defendant.

Conclusion

117.  I will allow the appeal and dismiss the cross appeal.  I agree with the orders to be made by Ma CJHC.

Hon Burrell J :

118.  91. I have read both the judgments of Ma CJHC and Cheung JA and agree with their conclusions in all aspects.

Hon Ma CJHC :

119.  In view of the above, this Court makes the following orders : -

(1)	The judgment below be set aside.
(2)	There be judgment entered for the Plaintiffs in the sum of $3,114,492.
(3)	There be an order nisi that the Defendant should bear the costs of this appeal and of the action, such costs to be taxed if not agreed.
(4)	Liberty to apply in relation to any outstanding matters.