THE HONG KONG POLYTECHNIC UNIVERSITY v. REHABAID SOCIETY

CACV 402/2022, [2023] HKCA 956

On Appeal From [2022] HKCFI 2830

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 402 OF 2022

(ON APPEAL FROM HCA NO 1789 OF 2017)

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J U D G M E N T

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Hon Anthony Chan J (giving the Judgment of the Court) :

1.  This is the Plaintiff’s appeal against a Judgment given after trial dated 9 September 2022 by which its claim to recover possession of various spaces within its campus (“Spaces”) from the Defendant was dismissed. In favour of the Defendant’s Counterclaim, the Court granted an order for specific performance of a Memorandum of Agreement made between the parties dated 10 May 1988 (“MoA”). Further, the Defendant was awarded 85% of the costs of the action, with a certificate for two counsel.

Issues

2.  There are 7 Grounds of Appeal advanced in the Plaintiff’s Amended Notice of Appeal. Essentially, the issues before this Court concern: (1) the correctness of the approach taken by the learned trial Judge, DHCJ Khaw SC, to the construction of the MoA which gave rise to a contractual licence granted by the Plaintiff to the Defendant for the occupation of the Spaces (“Licence”); (2) the Judge’s rejection of the Plaintiff’s case of an implied term over the termination of the Licence; and (3) whether the order for specific performance of the MoA was justified.

Background

3.  There was no real controversy over the material facts. The Judge held that: “[g]iven the nature of this case, little really turns on the quality or credibility of the evidence given by the parties’ witnesses. … I find all the witnesses … truthful and honest and have tried their best to assist the Court by providing their knowledge and understanding of the relevant matters.[1]”

4.  The material facts can be succinctly stated as follows. The Defendant is a charitable body well-known for its services to the disabled and persons with special needs. Around late 1985, the Hong Kong Society of Rehabilitation (“HKSR”), which was operating an outpatient centre providing services to persons with disabilities and chronic illness called Rehabaid Centre (“RC”), reached an understanding with the Plaintiff to relocate the RC to premises within the Plaintiff’s campus (“Campus”)[2].

5.  In March 1986, an application was made by the Plaintiff to the Hong Kong Jockey Club (“HKJC”) for funding to build a Rehabilitation Engineering Centre (“REC”) on Campus. As the Judge found, the application document (“HKJC Application”) provided a “first glimpse of the intended purposes behind the creation of the REC”. The REC would not be concerned with the medical aspects of disability, but with the design and technology of aids and devices to assist the rehabilitation process[3].

6.  On the relationship between the REC and RC, the HKJC Application referred to the co-location of the two Centres on Campus. The RC was then occupying short-term accommodation and was anxious to secure a “permanent base”. The functions of the two Centres were “directly complementary”, and the RC would “derive considerable benefit through its proximity to the technological support of the [REC]”[4].

7.  The HKJC Application was duly approved under which funding of HK$41.9m would be provided, with HK$2.2m earmarked for the RC which would be accommodated in the same New Annex (to be built with the funding) as the REC[5].

8.  There were other contemporaneous documents from 1986 recording the anticipated “close co-operation” between the RC and the REC. In particular, the therapists and engineers would work together to design the requisite aid[6].

9.  One of the contemporaneous documents[7], which was not specifically referred to in the Judgment but was drawn to the attention of this Court by Mr Yu SC, who appeared with Mr Lam for the Plaintiff, referred to the discussions between the two sides on, inter alia, management arrangements under which some degree of integration of the staff and management between the Plaintiff and the RC was recorded. Although there was no finding by the Judge as to whether the discussions were put into effect, Mr Yu is right to maintain that the document reflected the intention of close cooperation between the parties at the material times.

10.  In 1987, pending the completion of the New Annex, the REC and RC were allocated some temporary spaces on Campus[8].

11.  As stated under the Introduction of the MoA dated May 1988, its purpose was to “set out the arrangements associated with [RC] being established on [Campus] in adjacent accommodation to the [REC]”. It went on to state in the second paragraph under Introduction :

“It is necessary to define the arrangements which will apply to the operation of [RC] on [Campus]. This Agreement may be changed in the future if both parties … so decide and sign a new memorandum of agreement.” (“New MoA Clause”)

12.  Under the terms of the MoA, RC’s occupation was rent-free (Clause 2.1) and the Plaintiff would provide the RC with utilities, cleaning, maintenance, security, etc, in return for a “token charge” of HK$10,000 annually, subject to annual review to keep it in line with cost inflation (Clause 2.2). During the entire period of occupation by the RC, the Plaintiff had received HK$583,245 in token charges. On the other hand, from 1987 to 30 June 2017, the Plaintiff had paid about HK$12m in providing water, electricity and cleaning services to the RC[9].

13.  It was common ground that the MoA gave rise to a contractual licence[10]. However, the document was silent on the duration of the Licence.

14.  The New Annex was completed in July 1990. On 5 September 1990, the RC moved into the New Annex in areas adjacent to the REC. The areas occupied by the RC had grown over the years from 476 sq m in 1990 (when it first moved into the New Annex) to 576 sq m at the time of the trial[11].

15.  In 1992, the Defendant was incorporated as a separate entity from HKSR to take over the operation of the RC. By a Novation Agreement dated 1 November 1992 made between the Plaintiff, HKSR and the Defendant, the Defendant took over HKSR’s rights and obligations under the MoA[12].

16.  The collaboration between the RC and the REC had substantially decreased in 1991 after the Hospital Authority took over the management of the former[13]. Since about 1994, there had no longer been any collaboration or meaningful collaboration between the RC and the REC, primarily due to the lack of referrals by the former to the latter[14].

17.  In 1998, the Plaintiff started exploring with the management of the RC about its relocation due to space shortage at the Campus. In March 2007, the Plaintiff had to lease an area of 20,000 sq ft in commercial premises to accommodate its research staff. By October 2018, the shortage of space was in excess of 42,000 sq m[15].

18.  By a letter dated 19 November 2015, the Plaintiff’s solicitors served a Notice to Quit on the Defendant and demanded the vacation and delivery up of the Spaces to the Plaintiff on 1 June 2016.

Parties’ contentions

19.  The Plaintiff’s pleaded case was that, as a matter of proper interpretation of the MoA or, alternatively, based on a term implied by reason of business efficacy or obvious intention of the parties, “[it] would be entitled to terminate HKSR’s occupation at [its] Campus upon the cessation of collaboration or cooperation between [RC] and [REC] and upon giving reasonable notice”[16].

20.  The Defendant’s pleaded case was that, as a matter of proper interpretation of the MoA or, alternatively, based on a term implied by reason of business efficacy or the common intention of the parties, “HKSR would be allowed to occupy the [Spaces] as agreed from time to time on [the Campus] indefinitely for the operation of [RC]” and “the Licence is a perpetual licence”[17]. By way of Counterclaim, the Defendant sought an order for specific performance of the MoA against the Plaintiff[18].

The Judgment

21.  It can be readily seen from the foregoing that this case turned on the proper construction (that word is often used interchangeably with “interpretation”) of the MoA, alternatively the implication of a term, in relation to the termination of the Licence.

22.  On the approach to the construction exercise, the Judge rejected the Plaintiff’s contention that, for contracts which were silent on duration or manner of determination, the proper approach was to ascertain the common intention of the parties. Drawing a distinction between the interpretation of the MoA and the implication of a term into the same, the Judge accepted the Defendant’s submission that the approach should be one of implication of terms, and applied the test for implication of terms laid down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283[19]. The Judge held that the burden fell on the Plaintiff “to establish that the Licence was terminable upon the alleged conditions”[20]. The consequence was that if the Plaintiff failed to establish the implied term, its claim would fail[21].

23.  The Judge considered the background, purpose of the arrangement between the Plaintiff and Defendant as well as common intention in detail by reference to primarily the pre-contractual documents and the MoA[22]. The key documents were the HKJC Application and the MoA.

24.  In respect of the HKJC Application, the Judge: (a) rejected the Plaintiff’s case that the arrangement thereunder was to facilitate collaboration or close cooperation between the REC and the RC; (b) held that the reference to their functions being directly complementary “[could not] be regarded as any condition regarding the collaboration between the two centres, the continuity or cessation of which would govern the RC’s right to occupy the Spaces”; and (c) held that whilst the parties contemplated there could be potential mutual benefits from collaboration, such collaboration would boil down to a question of need, and “[could not] be taken as a condition or prerequisite which would govern the Defendant’s right to occupy the Spaces”[23].

25.  As regards the MoA, the Judge: (a) noted that Clause 1 provided that the purpose of the document was to set out the arrangements governing the establishment of the RC on Campus in adjacent accommodation to the REC; (b) held that it was significant that “there [was] nothing in the MoA which even remotely [referred] to collaboration between the RC and the REC”; and (c) noted that it was silent on the duration of the Licence or how and when the Licence could be terminated[24].

26.  The Judge summarized his findings in paras 117-123 of the Judgment. In particular, it was found that “the relevant documents and the factual matrix of this case [did] not support any intention of the parties that the Licence should be conditional or contingent upon the collaboration between the RC and the REC”.

27.  The Judge did not find it necessary to rule on the Defendant’s case that the Licence was perpetual because it was not seeking any relief or declaration premised upon a perpetual licence. However, observations were made in the Judgment indicating that the Judge did not find favour with the Defendant’s case[25].

28.  The Judge held that there was “no reason why the Defendant [should] not be entitled to specific performance of the MoA” since the Plaintiff’s notice of termination was invalid[26].

Proper approach to the construction of the MoA

29.  The correctness of the Judge’s approach to the construction exercise was one of the main focuses of Mr Yu’s submissions. The Judge started off with a quotation from Chitty on Contracts, which can be traced to the dicta of Buckley J in Re Spenborough Urban District Council’s Agreement [1968] 1 Ch 139 at 146G-147C, the current (and identical) version of which is to be found in the 34^th edn, vol 1, [16-032] :

“A contract which contains no express provision for its determination may yet be determined by reasonable notice on the part of one or both of the parties. The question whether a contract can be determined in this way is often said to depend upon the implication of a term, although it is probably better to regard it as depending upon the true construction of the agreement. Nevertheless, since ex hypothesi the agreement contains no provisions expressly dealing with determination, the question is not one of construction in the narrow sense of putting a meaning on language which the parties have used, but in the wider sense of ascertaining, in the light of all the admissible evidence and in the light of what the parties have said or omitted to say in the agreement, what the common intention of the parties was in the relevant respect when they entered into the agreement.”

30.  The Judge then referred to the decisions of the Privy Council in Attorney General for Belize v Belize Telecom Ltd [2009] 1 WLR 1988 and the House of Lords in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd & Anr [2016] AC 742. In the latter, Lord Neuberger expressed disagreement ([27]-[29]) with the view express by Lord Hoffmann in the former ([19]) that “the implication of a term is an exercise in the construction of the instrument as a whole”. Lord Neuberger held in [28] :

“… it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term.”

31.  It appears that the Judge took the view that the dicta in Marks & Spencer prescribed that the process referred to in the passage from Chitty (cited in para 29 above) should properly be understood as one of implication of terms. Hence, the Judge focused on implication of term in the MoA in considering the Plaintiff’s case on termination of the Licence. With respect, we are unable to agree with the Judge. Three points should first be made.

32.  First, Spenborough was a case, like the present, where the agreement contained no express provision for termination, and it was decided on the basis of construction of the agreement that it was terminable on reasonable notice. There are a number of similar cases amongst those cited before this Court, for example, Winter Garden Theatre (London) Ltd v Millennium Production Ltd [1948] AC 173 (where there was a termination clause in the licence in favour of the licensee but none for the licensor who tried to terminate the licence) and Staffordshire Area Health Authority v South Staffordshire Waterworks Co [1978] 1 WLR 1387.

33.  Second, there is no tension between Spenborough (and similar cases) and Marks & Spencer. The latter was concerned with the implication of term in a commercial lease drafted by specialist solicitors. There is no warrant to suggest that the interpretation exercise referred to in that case as the precursor of implication is confined to only interpreting the express words of the agreement. The interpretation of a contractual document often involves, in the words of Buckley J in Spenborough, “ascertaining, in the light of all the admissible evidence and in the light of what the parties have said or omitted to say in the agreement, what the common intention of the parties was in the relevant aspect when they entered into the agreement” (pg 147C) [emphasis added].

34.  Third, Marks & Spencer was followed by this Court in Lo Yuk Sui v Fubon Bank (Hong Kong) Ltd [2019] HKCA 261, [25]-[29]. However, the Court referred to the dicta of: (a) Lord Carnwath JSC in Marks & Spencer that it was not necessary to draw a sharp distinction between interpretation and implication, emphasizing that the exercise of contractual interpretation is an iterative rather than sequential process (Lo Yuk Sui, [26]); and (b) Lord Mance JSC in Trump International Golf Club v Scottish Ministers [2016] 1 WLR 85 which cautioned against adopting a too rigid or sequential approach to the processes of consideration of the express terms and of the consideration of the possibility of an implication ([28]).

35.  The Court went on to hold that ([29]) :

“In light of these authorities, it must be recognized that construction of express terms and implication of terms involve different techniques. Though the overall exercise is an iterative one, in most (if not all) cases it would be appropriate to start from the construction of the express terms by reference to the context and surrounding circumstances known to the parties.”

36.  Further, in Ward Equipment Ltd & Anr v Markus Johannes Preston & Ors [2017] NZCA 444, [31]-[45], the issue whether a licence agreement was terminable on reasonable notice was considered by the New Zealand Court of Appeal. French and Winkelmann JJ reviewed the relevant authorities and considered that they were “consistent in treating the question of whether a contract is terminable on reasonable notice, in substance, as one of construction” [44], whilst acknowledging that “if a court reads into a contract with existing detailed provision for termination, a term that the contract is terminable on reasonable notice, the court has in fact implied a term” [45]. In addition to agreeing with his learned colleagues, Kós P set out his view that interpretation, implication and rectification are all techniques of construction [84]-[95].

37.  We believe that the Plaintiff’s case (see para 19 above) involved two questions: (1) whether the Licence could be terminated unilaterally; and (2) if the Licence was so terminable, the terms on which it could be terminated. Mr Chan SC, who appeared with Mr Ho for the Defendant, did not quarrel with this proposition.

38.  Construction of an agreement is a unitary exercise. We are of the view that the Judge had erred in not determining the basic question whether the Licence could be terminated by the Plaintiff (or the Defendant) unilaterally or it was a permanent Licence (as contended by the Defendant). It appears that the error sprang from the Judge’s rejection of the Plaintiff’s contention that the proper approach to the construction exercise was to ascertain the common intention of the parties in the relevant respect when they entered into the MoA. Instead, the Judge focused on the issue of implication of term, and by applying the BP Refinery test in a strict way the Judge held that the Plaintiff had failed to establish the implied term it advanced as a matter of business efficacy and/or necessity[27].

39.  There is much force in Mr Yu’s submission that there must always be one single true interpretation of the agreement[28], which the Court must ascertain based on the evidence and the parties’ submissions before it. In carrying out the unitary exercise, it is wrong for the Court to reject a party’s interpretation of an agreement without ruling upon its true interpretation. The consequence of the approach adopted by the Judge was the absence of any finding on the common intention of the parties on the terminability of the Licence or of the true interpretation of the Licence in this respect.

Terminability

40.  The task is to ascertain the common intention of the parties in respect of the duration of the Licence at the time they entered into the MoA. The evidence in this case clearly showed that there was a purpose of mutual benefit between the Plaintiff and HKSR which underpinned the co-location of REC and RC on Campus.

41.  This underpinning purpose was mutually beneficial because the Plaintiff was able to “leverage on the established reputation of the RC to boost its HKJC Application for funding for the REC”[29]. At the same time, HKSR was able to have the RC re-located to a “permanent base”[30]. However, those were not the entirety of the mutual benefit. The co-location between the two Centres was also beneficial in that the RC would have easy access to the specialist engineering service provided by the REC should its clients require, eg, bespoke rehabilitation aids. On the other hand, the REC would require referrals to activate its service. As noted in the cotemporaneous documents (see para 8 above), it was anticipated that the therapists of the RC would work together with the engineers of the REC to design the requisite aids.

42.  This underpinning purpose may be regarded as the substratum of the relationship between the Plaintiff and the Defendant.

43.  There are two features which may support the Defendant’s case of a perpetual Licence, namely, (a) that HKSR was looking for a permanent base for the RC[31] and (b) the New MoA Clause.

44.  The Judge dealt with both points. In respect of (a), the Judge observed at [125(3)] :

“… the word ‘permanent’ still possesses an element of relativity and it does not necessarily connote any concept of ‘perpetuality’ or ‘eternity’. Moreover, the term ‘permanent base’ could be understood to relate more to the nature of the structure built rather than the duration or sustainability of the Defendant’s right to occupy such structure.”

45.  As regards the New MoA Clause, the Judge said at [125(4)] :

“Whilst the Defendant seeks to rely on this provision in support of its allegation of perpetuity, it could also demonstrate the parties’ contemplation and acknowledgment of the possible need for changes in the arrangement which, however, could only be effected by way of a new agreement.”

46.  The two features are relevant and possibly weighty considerations but they are not conclusive because of the existence of other pointers on whether the Licence was unilaterally terminable. A powerful feature for consideration is the highly subsidised use of the Spaces. The fact that the Plaintiff was willing to shoulder the heavy financial burden for the co-location of the RC demonstrates that it was doing so for a purpose from which it would derive benefit. Clearly, the benefit was the development of the new REC which would require referrals to enable its engineers to deploy their expertise.

47.  It should also be borne in mind that the RC would be located on the Plaintiff’s Campus and its staff would be allowed to enjoy much of the Campus facilities just as those of the Plaintiff.

48.  With such factual matrix in mind, it makes neither common sense nor commercial common sense for the Plaintiff to have intended to continue to shoulder the heavy financial burden in favour of the RC regardless of any change in circumstances, in particular, where the co-location of the RC no longer gives rise to any benefit to the REC or the substratum of its relationship with the Defendant no longer exists.

49.  On the other hand, it is not reasonable to infer that the Defendant intended that the Plaintiff would continue to heavily subsidize its use of the Spaces if the substratum no longer exists. There would be no reasonable basis for such belief on the part of the Defendant.

50.  There is every reason to believe that the parties were acting reasonably in entering into their relationship. There is nothing unfair in construing the Licence as one terminable where the substratum no longer exists. To construe the Licence as a perpetual one means that the Plaintiff would have to indefinitely finance the occupation of the Spaces by the Defendant without getting any benefit in return. That is not a reasonable construction.

51.  We are unable to accept Mr Chan’s submission that the factual findings made by the Judge would defeat any case that the Licence is terminable upon the cessation of cooperation between the RC and the REC. The true interpretation of an agreement is an issue of law. This Court has a duty to correct any error of law made by the Judge.

52.  Further, we are unable to agree with Mr Chan’s submission that if the Licence is terminable the RC would be subject to the whim of the Plaintiff because, without in any way acting in bad faith, it may decide not to continue with the REC. The same may be said in respect of the position of the RC. For genuine reasons, it may decide not to continue with the rehabilitation service and terminate the Licence.

53.  For these reasons, we hold that as a matter of proper construction of the MoA the Licence is terminable unilaterally.

54.  We do not believe that the Defendant should be aggrieved by the Plaintiff getting the benefit of the space built with the funds earmarked for the RC. It ought not to be overlooked that as a matter of fact the Defendant had enjoyed that space since 1990, as well as the temporary accommodation it occupied from 1987 to 1990 and the additional spaces allocated to it over the years. To date, the RC’s had enjoyed some 33 years of heavily subsidized occupation. That situation would have continued had the substratum continued to exist.

The conditions for termination

55.  It follows logically from the above analysis that the loss of the substratum would give rise to the right to terminate the Licence on the part of the Plaintiff. Given that the vacation of the Spaces occupied by the RC would require time, it is reasonable to infer a common intention of the parties that the termination of the Licence would require reasonable notice[32].

56.  There was no issue between the parties on the notice given by the Plaintiff. The Notice to Quit allowed more than 6 months for the vacation of the Spaces. Further, the writ in this action was issued on 1 August 2017, more than 20 months after the service of the Notice to Quit.

Implied term

57.  Strictly speaking, it is unnecessary to rule on this issue in light of the conclusion in favour of the Plaintiff on the proper interpretation of the MoA. Out of deference to the submissions made by counsel, we shall deal with this issue succinctly.

58.  The Judge gave essentially 3 reasons for rejecting the Plaintiff’s case of implied term based on business efficacy[33] :

(1)  The MoA was silent on the duration or termination of the Licence and on any obligation to maintain collaboration during the subsistence of the Licence;

(2)  There was nothing in the documents which specified the nature and substance of the collaboration required between the RC and the REC or any association between the need for collaboration and the Defendant’s right to occupy the Spaces;

(3)  It could not be said that in the absence of the implied term contended by the Plaintiff the Defendant’s occupation of the Spaces could not or should not be allowed to continue.

59.  With respect, we believe that the view taken by the Judge on business efficacy was unduly narrow. Although the Judge had referred to the 5 conditions for the implication of term adumbrated in BP Refinery, as well as the 6 comments of Lord Neuberger on those conditions in Marks & Spencer[34], the Judge had not given sufficient consideration to Lord Neuberger’s 6^th comment :

“necessity for business efficacy involves a value judgment. … the test is not one of “absolute necessity”, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon's second requirement is, … that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.”

60.  We agree with Mr Yu that logically the first question to ask here is: “what is the effect of the MoA without any implied term?” In the absence of any implied term, the Licence is on the face of the MoA unlimited in duration. Apart from the unfavourable views expressed by the Judge on the Defendant’s case on perpetual Licence, it would have the effect of alienating the Spaces in favour of the Defendant, and the occupation of Spaces would indefinitely be subsidised by the Plaintiff. This would be unreasonable, if not absurd, and the MoA would lack commercial or practical coherence without any implied term.

61.  Much of the discussions above on the factual matrix and the inference derived from the same in respect of the common intention of the parties on the duration of the Licence apply equally to the implication of term to the MoA to give it commercial and practical coherence[35].

62.  In the premises, we would also uphold the Plaintiff’s alternative case on implied term that the Licence is terminable upon the cessation of cooperation between the RC and the REC and upon reasonable notice.

Specific performance

63.  This is not an issue which calls for determination in light of this Court’s views on the proper construction of the MoA and on the implied term contended by the Plaintiff.

64.  However, it has to be said that the Judge ought to have made a finding on the proper construction of the MoA before considering whether the relief of specific performance should be granted. It was wrong in principle not to have done so, particularly as it would be difficult (if not impossible) to have specific performance of an agreement the terms of which were not fully ascertained.

Disposition

65.  For the reasons stated above, this appeal is allowed and the Judgment is set aside. We make an order that :

(1)  Judgment be entered against the Defendant on the Plaintiff’s claims;

(2)  the Defendant do deliver vacant possession of the Spaces to the Plaintiff;

(3)  mesne profits from 1 June 2016 until delivery of vacant possession be paid by the Defendant to the Plaintiff, to be assessed by a Master;

(4)  pre-judgment interest be paid on mesne profits up to the date of assessment at the rate of prime plus 1%;

(5)  post-judgment interest be paid on mesne profits from the date of assessment until full payment at judgment rate(s);

(6)  the Counterclaim be dismissed;

(7)  the costs of and occasioned by this appeal, the action and the Counterclaim be paid by the Defendant to the Plaintiff, to be taxed if not agreed, with a certificate for 2 counsel.

66.  Last but not least, we are grateful to counsel for their assistance.