SHIAMAS LTD v. CONCORD WAY LTD

HCA 1271/2014

[2019] HKCFI 1418

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1271 OF 2014

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D E C I S I O N

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1.  The principal matter for consideration by the court was the plaintiff’s summons dated 5 September 2018 for leave to amend its statement of claim (“the plaintiff’s summons”). If the amendments are allowed, the need for the defendant’s summons dated 21 August 2018 to amend its defence and counterclaim (“the defendant’s summons”) will have been overtaken by events. At the conclusion of the hearing the decision was reserved which I now give.

Background

2.  The action arises out of a lease for a high end retail shop occupying part of the ground floor of Crowne Plaza, Causeway Bay (“the hotel”).

3.  The plaintiff is a retailer of crystal and luxurious glassware.  The defendant is one of the owners of the building which is a hotel and is authorised to act for all the owners and the developer.  Both the plaintiff and the defendant are Hong Kong companies.

4.  On 7 September 2011 the parties entered into a 6-year lease (“the Lease”) of part of the ground floor of the hotel (“the premises”) which was used by the plaintiff as its flagship “Exclusivites” store.

5.  Three major problems arose during the term as a result of which the plaintiff rescinded and/or terminated the Lease on 4 July 2014: (a) an issue arising from the disabled toilet; (b) termites; and (c) water leakage.

6.  The plaintiff issued a generally endorsed writ on 7 July 2014 and filed its statement of claim (“SOC”) on 5 August 2014.  Its case is that various misrepresentations were made by the defendant and/or its agent Savills (HK) Limited (“Savills”) that induced the plaintiff to take up the Lease and that the plaintiff took up the Lease in reliance on those representations.

7.  The representations were that:

(i)  The premises comprised an area of around 2,943 square feet, with 75% efficiency.

(ii)  The premises in its entirety could be used as an enclosed shop, as was required by the plaintiff.

(iii)  The premises would provide a gross area of 2,943 square feet for the plaintiff’s shop area.

(iv)  The plaintiff could lawfully use the premises as an enclosed shop if shutters (or similar devices) were installed at the entrance of the shop.

(v)  The plaintiff could lawfully demolish both the male toilet and the disabled toilet on the premises, in order to obtain more usable area for the plaintiff’s enclosed shop.

(vi)  There were no outstanding orders which would require compliance from the relevant governmental authorities (including but not limited to the Buildings Department (“BD”) and Fire Services Department).

(vii)  The premises would be suitable for the plaintiff’s business of operating an enclosed retail shop selling luxurious lifestyle products.

8.  Those representations proved to be false.  In §21 of the SOC, the falsity was described in the following terms:

“ The Defendant made the said representations negligently, or was reckless as to whether they were true or false.”

9.  The falsity was discovered by mid-2014.  On 18 September 2013, the plaintiff was informed of an impending inspection by the Office of the Licensing Authority and in the morning of 24 September 2013, the sliding panels installed and used by the plaintiff to enclose the premises were taped over to conceal their presence by hotel staff and hotel management requested the plaintiff to clear the passage so as to allow public access to the disabled toilet on the ground floor.

10.  In April 2014, when it responded to the plaintiff’s enquiries made in January 2014, BD stated that the sliding panels constituted an obstruction or hindrance to the approved disabled facilities which is actionable. BD considered the sliding panels constituted unauthorised works and required their removal.  The hotel manager requested the plaintiff to remove the panels.

The proposed amendments

11.  Mr Abraham Chan SC who appeared for the defendant interjected during the plaintiff’s opening submissions that the defendant’s position is that the plaintiff has the burden of establishing each and every one of the proposed amendments on the basis of their necessity and proportionality.  Pausing there, the substance of much of the original pleading was recast or re-arranged but retaining the essence of old pleading.  What was completely new related to the allegation of fraud is to be found in a separate section (Section E) of the draft amended statement of claim (“the draft ASOC”).  Viewing the matter sensibly, many of the amendments were clearly innocuous.  The defendant’s wholesale opposition was singularly unhelpful and offered little assistance to the court.

12.  Be that as it may, the proposed amendments under Section A explains the dramatis personae (including their respective roles/positions of individuals mentioned involved in the transaction concerning the Lease.)  Where relevant, the corporate structure was explained.

13.  Section B relating to the parties’ discussions and the defendant’s representations was expanded: §7 particularises the authority of Savills and one Mr Leung to act and make representations on behalf of the defendant; §12B pleads a pre-contract letter confirming the usage of the premises as a retail shop, including a right for the tenant to install shutters for its own security; §12D pleads a representation made orally on 6 July 2011 reconfirming that the disabled and male toilets could be dismantled (“the lawful demolition representation”); §12E pleads the plaintiff’s concerns (notwithstanding the signing of the pre-contract letter) about compliance with governmental regulations and operating the premises as an enclosed shop leading to its request for a technical meeting; §14 recasts the wording concerning the representation made at the 26 July 2011 meeting regarding the plaintiff’s obligation to install shutters at the entrance to its shop area as a representation that the plaintiff could lawfully use the entirety of the premises as an enclosed shop; §14A pleads the defendant’s repetition and adoption of Savills representations and the lawful demolition representation; §14C pleads email exchanges between the plaintiff and the defendant confirming the defendant’s agreement to the plaintiff’s preliminary fitting layout plans provided on 27 July 2011 by the plaintiff to the defendant and included (i) the installation of full height glass wall and glass sliding panels at the entrance to the shop (ii) retention of the disabled toilet and (iii) demolition of the male;  §14D pleads that by virtue of the email exchanges, the defendant adopted and confirmed the Savills representations, the 26 July 2011 representations and the lawful demolition representation (collectively “the representations”).

14.  Section C concerns the Lease.  §16 pleads its terms and the only change is inserting the entire agreement clause;  §17 deals with the implied term of the Lease, breaking down the original plea into four components; §19A pleads the seeking of approval from the defendant in September 2011 in respect of the layout plans; learning for the first time from Mr Kwan of the defendant that sufficient passage spacing was required outside the disabled toilet for customers in wheelchairs (“the spacing requirement”) on 15 September 2011; submitting revised layout plans to Mr Kwan on 16 September 2011 showing that the spacing requirement was satisfied, that the sliding panels would enclose the premises as an enclosed shop; and receiving an approval letter dated 23 September 2011 from hotel management reminding the plaintiff to ensure that the premises are in compliance with relevant regulations with special attention to disabilityaccess and drawing attention to the fact that “special requirements for disabled toilet access need to be implemented at all times” without any explanation as to what measures of disability access would be required; §20 pleads the carrying out of relevant works in accordance with the finalised plans following receipt of the approval letter.

15.  Section D deals with the falsity of the defendant’s representations.  §20A pleads how it was first discovered (see §§9 – 10 above); §20B pleads that the 24-hour accessibility requirement was known only to the defendant; §20C pleads that although it was known to the defendant at the time of and after the execution of the Lease, it was not made known to the plaintiff; §21 provides particulars of falsity: (1) the defendant never obtained government approval for the premises to be used in its entirety as an enclosed shop and the premises were not suitable for the plaintiff; (2) the occupation permit for the hotel prescribed that the premises were to be used as “lobby lounge” only; the defendant knew that no government approval had been obtained in relation to the premises or was reckless as to whether such government approval had been obtained; (3) the BD letter shows that contrary to the representations, no government approval had been obtained for the premises to be used in its entirety as an enclosed shop; (4) the Savills representations and/or the lawful demolition representation were at all material times false with particulars pleaded; (5) the 26 July 2011 representations and/or the lawful demolition representation were at all material times false with particulars pleaded.

16.  Section E raises the fraud issue and bears the heading “The false representations were made fraudulently in the sense that they were made recklessly”. §21B sets out the plaintiff’s proposed case against the defendantthat the false representations made by the defendant to the plaintiff were made fraudulently in the sense that they were made recklessly[1].

17.  Digressing for a moment, it is relevant to state that it is this proposed amendment that was particularly controversial and the focus of the hearing.

18.  The fraud plea has practical implications for the parties.  If only negligent misrepresentations are made out, the “entire agreement” clause in the Lease is likely to defeat the plaintiff’s claim.  If, however, the misrepresentations are fraudulent, that clause would not be sufficient to answer the plaintiff’s claim.

19.  §21B pleads particulars of recklessness that, inter alia, show that upon receiving its licensing consultant’s advice on 7 September 2011, the defendant knew that the finalised plans would not work because of the Home Affairs Department’s 24-hour public accessibility requirement and thus the falsity of the representations; the defendant failing to inform the plaintiff of the same; and couching the approval letter subsequently issued in ambiguous language.

20.  §21C pleads the occupation permit issued to the defendant for the building on 8 April 2009 (prescribing that the premises were to be used as “lobby lounge” only) and the approved building plans (prescribing that the premises were a lobby lounge with a male toilet and a disabled toilet).

21.  §22 pleads that had the plaintiff known about the falsity of the representations, it would not have entered into the Lease.  §23 concerns relief,adding the word “recklessly” to what had been pleaded.  §24 is unchanged other than adding “recklessly” to the making of the representations.  §24A concerns the legal effect of the entire agreement clause.  §24B updates particulars of loss and damage.

22.  §26A deals with the doctrine of equitable mistake.  The court was informed that recent developments in English law cast doubt on whether such a doctrine of equitable mistake exists.

23.  Section F deals with the plaintiff’s alternative claim on breach of lease. If after trial it were held that the plaintiff is not entitled to rescind the Lease altogether, at §28, the plaintiff pleads reliance on the same facts but as a breach of the implied terms of the Lease.  §29A pleads a repudiation and breach of the implied terms with particulars.  §30 adds a reference to the implied terms for the claim relating to termites. §31 inserts a reference to the implied terms and adds a negligence claim in relation to the water leakage problems adding particulars of negligence in that respect.  §32 pleads the plaintiff’s entitlement to terminate the Lease by accepting the defendant’s repudiation.  §34 pleads the defendant’s wrongful call on the bank guarantee.  §35 adds a reference to §24B in respect of particulars of loss and damage.

The approach to amendments

24.  It is common ground and well-settled that amendments should in general be allowed if they are necessary to enable real questions and controversy between the parties to be decided, provided they will not prejudice the other party.  There is no injustice to the other party if he can be compensated by appropriate orders as to costs: see per Lord Brandon in Ketteman v Hansel Properties Ltd [1987] AC 189 at 212G–H applied by Kwan JA in Bruce James Stinson v Gu Ming Gao [2018] HKCA 10 at §35.

25.  The court now also takes into account the underlying objectives in Order 1A of the Rules of the High Court and would “balance all relevant factors to decide how its discretion should be exercised, if the application is made in circumstances offending the underlying objectives…” see Topwell Corporation Limited v Kwan Kam Kee [2014] 5 HKLRD 1 per Kwan JA (as she then was) at §39.

26.  The parties differed as to the approach to applying this general rule where the proposed amendment involves a new plea of fraud.

27.  The defendant submitted that in such cases, the universal rule of practice is that the court will not permit such an amendment, especially outside the early stages of the proceedings, save “in the most exceptional circumstances”, citing Marquis Trading Co v Associated Bankers Insurance Co Ltd [1982] HKLR 434 at 438G–H in support.

28.  It was submitted that in such cases the weighing exercise involving various competing factors that a court invariably has to undertake does not proceed on the basis of a level initial scale.  The universal or general rule is applied differently where a new plea of fraud is involved.  It is for the party seeking the amendment to show “exceptional circumstances” and in the present case there are none.

29.  Mr Maurellet SC who appeared for the plaintiff referred to the English Court of Appeal’s decision in Atkinson v Fitzwalter & others [1987] 1 All ER 483 which was decided several years after the Marquis Trading case.  In Atkinson, the court reviewed all relevant case law underpinning the practice stated in The Supreme Court Practice 1985 (being the English equivalent to the Hong Kong practice referred to in Marquis Trading).  May LJ, after noting (at p 490a) his difficulty in reconciling Lord Esher MR’sdictum in Bentley & Co Ltd v Black (1893) 9 TLR 580 with the ‘all embracing principle’ of Bowen LJ in Cropper v Smith (1884) 26 Ch D 700, observed (at p 490b):

“ … I can see no logical reason why just because an amendment seeks to raise an allegation of fraud for the first time this should in most cases take the case outside the general principle that all amendments should be allowed so as to ensure that the real matters in controversy are before the court, provided that can be done without injustice to the other side.”

30.  Stocker LJ (at p 497g) drew attention to the fact that the general proposition stated (viz that the universal practice that except in the most exceptional circumstances, not to allow an amendment for the purpose of adding a plea of fraud where fraud has not been pleaded in the first instance) derives from the judgment in the Court of Appeal of Lord Esher MR in the Bentley case.  But upon reviewing its history (both at first instance and on appeal), it appeared to Stocker LJ that no amendment to allege fraud had ever been made either before the action commenced or during the trial and it is not clear whether such an application was even made before the Court of Appeal.   

31.  It was in that context that Stocker LJ went on to state (at p 499f) that he was “unable … to conclude from those authorities that there is any general rule that allegations of fraud must be pleaded at the outset and cannot be added by amendment.”

32.  As to amendments relating to fraud, in my view, the current position in Hong Kong is accurately reflected in Hong Kong Civil Procedure 2019 at §20/8/23:

“ Although it has been stated that it is ‘the universal practice, except in most exceptional circumstances, not to allow an amendment for the purpose of adding a plea of fraud where fraud has not been pleaded in the first instance’ … yet such an amendment may be allowed at an early stage. There is, no rule of practice that allegations of fraud have to be pleaded at the outset and could not be added by amendment, and amendments alleging fraud are no different from other amendments which are allowed on the general principle that all amendments are allowed so that the real matters in controversy between the parties are before the court…. Indeed, when it appears that there has been no ‘over reaching’ on the part of the plaintiff in the sense of taking advantage in an improper way, nor any unreasonable delay on his part, the court may in its discretion, if the circumstances justify it, allow allegations of fraud to be added by amendment to the writ and statement of claim at a late stage in the action.”

33.  Leave is readily granted to amend before trial unless it can be shown that the new claim based on the proposed amendment is bound to fail:Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at §25.

34.  It is not the defendant’s case that the proposed amended claim is unsustainable in the sense that had it been made in the first place, the defendant would have been able to strike it out.

35.  It follows from the above that, in my view, the approach to be followed in the present case is to apply the general rule stated in §24 above, taking into account the matters mentioned in §25 above.

36.  I turn to consider the defendant’s other objections to the application, namely, inordinate delay and prejudice.

Delay

37.  The defendant submitted that the plaintiff could have made the amendment much earlier and the delay in so doing is inordinate and inexcusable. §26 of the 4^th affirmation dated 30 November 2018 of Kwan Kwok Tong Philip (“Mr Kwan”), the senior sales and leasing manager of S E A Real Estate Agency Ltd, a wholly owned subsidiary of S E A Holdings Limited, the owner of the hotel, put forward no fewer than five earlier dates when the plaintiff could and should have put forward its fraud allegation.

38.  The defendant relied on §25 of the 5^th affirmation of Lee Wai Hsing Olivia (“Ms Lee”), a director of the plaintiff where it was stated that fraud “became obvious” upon considering “the exchange of emails between the defendant’s team members in relation to the plaintiff’s design plans, and the defendant’s witness statements”.  That would have been in September 2016, the second of the five suggested dates.  There is simply no support for the earliest of the five suggested dates.

39.  While the witness statements reinforced the plaintiff’s view of the existence of fraud, some of the documents referenced in those statements had not been discovered by the defendants.  Accordingly, in November 2016, the plaintiff requested certain documents referred to in those witness statements.

40.  As the defendant only made partial discovery, the plaintiff was compelled to issue two discovery summonses (on 27 January 2017 and 5 May 2017 respectively) as well as third-party summonses (against the Home Affairs Department and Hotel and Guesthouse Accommodation Authority (“the Authority”)) filed on 21 September 2017. 

41.  As Ms Lee explained in her 6^th affirmation dated 10 January 2019 (at §7), the previous hotel licence was one of the documents sought since it was highly relevant on the question whether the defendant and/or hotel (as agent for the defendant) was aware of the requirements that there was to be a disabled toilet in the shop with a clear passage leading to the disabled toilet and thus it was fraudulent for the defendant and/or its agent to misrepresent to the plaintiff that the premises, with those restricted requirements, could still be operated as an enclosed shop for the purpose of the plaintiff and with the stipulated area of 2,943 square feet.

42.  Having perused the detailed chronology of court hearings, it is obvious that they were necessitated by the defendant’s repeated resistance[2] to discovery.  However, when it was ordered to produce such documents at the end of the day, the defendant’s response was that it did not possess them.  Had it done so at the outset, much of the delay would have been avoided.  Accordingly, I agree that the defendant has contributed in no small part to the delay.

43.  27 March 2018 was the date that the order of Lok J dated 27 February 2018 requiring the defendant and InterContinental Hotels Group (Greater China) Ltd (a third party against whom a discovery summons had to be issued in September 2017) had to be complied with.  It should not be overlooked that the third party discovery summons against the Authority which was also before Lok J was adjourned sine die with liberty to restore[3].

44.  As the affirmations filed (taken as conclusive) by the defendant and the third party stated that they did not have the requested documents (namely, the previous hotel license or the hotel licensing and Building Authority requirement),the plaintiff continued its efforts to seek discovery from the Authority which culminated in the consent order dated 27 November 2018. 

45.  The process the plaintiff went through before formulating its fraud allegations in the form of the amended pleading was both comprehensive and cautious.  It entailed consideration of the explanations as to conduct contained in the defendant’s witness statements relating to allegations of misrepresentations having been made, assessed in the context of all available documentary evidence. That necessarily included what emerged from its specific discovery applications.

46.  Given the serious implications of advancing fraud allegations, the plaintiff’s adoption of a thorough and cautious approach before advancing fraud allegations is to be commended rather than criticised.  So also the plaintiff’s decision that another more experienced and Senior Counsel be instructed to settle the draft ASOC that, in part, contributed to the six-month delay.

47.  For my part, viewed in the context of the plethora of facts and documentation involved in this litigation, I do not consider the six-month delaythat has occurred in the present case to be either inordinate or inexcusable.

Prejudice

48.  The defendant’s evidence concerning the real and substantial prejudice it would suffer if the amendments alleging fraudulent misrepresentation, equitable with mistake and negligence are allowed is to be found in the 4^th affirmation of Mr Kwan §§28 – 31:

(1)  evidence to refute the allegation of fraud may no longer be available or retrievable;

(2)  of the 11 witnesses who gave statements for the defendant, 7 of them have already left the hotel’s employ; and

(3)  there are other practical difficulties that are very likely to arise.

49.  As regards (1), the defendant has not identified the specific allegation(s) of the draft ASOC which, had it/they been made earlier (providing the timeframe), the defendant would have been able to get such and such evidence.

50.  As to (2), there is no information as to when the seven witnesses ceased to be employed and whether they are still witnesses in this action.  If they remain witnesses, they are clearly accessible for instructions on the newlypleaded issue.  Further, the defendant has not identified which witness(es) who would have to testify on the new issues would no longer be available and why.

51.  As to (3), Mr Kwan opined that “substantial supplemental witness statements would have to be prepared with considerable difficulty.”  Pausing there, it is not apparent why the supplemental witness statements would be “substantial”.  Also, the “difficulty” mentioned by Mr Kwan is not explained.

52.  In the SOC, the allegation was that the representations made by the defendant and/or its agents were made without the maker caring if they were true or false.  The new claim is based on the same representations made at the meeting on 26 July 2011 and that they are false.

53.  In his witness statement, Mr Kwan was adamant that no representations were made as to the enclosure of the retail shop or the suitability of the premises for the operation of the plaintiff’s business as a retailer and that at a subsequent meeting in early August 2011 he informed Ms Lee that the disabled toilet could not be demolished.  That being the line ofthe defence, the notion that there will be a need for “substantial” supplemental witness statements appears to be somewhat far-fetched.

54.  The essence of the plaintiff’s claim remains the same but a different legal analysis is applied to the facts.  Whether “recklessness” in the making of the representations renders them fraudulent as a matter of law is the legal issue for determination at trial.

Conclusion

55.  I have little doubt that in this case, with due regard to the underlying objectives in Order 1A of the Rules of the High Court, the court should exercise its discretion to allow the proposed amendments.  The defendant has not shown that it will suffer any real prejudice as a result that cannot be compensated by an appropriate costs order. The proposed amendments unquestionably enable the real issues in controversy between the parties to be decided.

56.  For all the reasons set out above, I make the following orders:

(1)  leave be granted to the plaintiff to file and serve its amended statement of claim within 7 days of this decision;

(2)  leave be granted to the defendant to file and serve its amended defence and counterclaim within 6 weeks after being served with the amended statement of claim;

(3)  leave be granted to the plaintiff to file and serve its amended reply and defence to counterclaim within 3 weeks after being served with the amended defence and counterclaim;

(4)  no order be made in respect of the defendant’s summonses dated 2 February 2017 and 21 August 2018 respectively; and

(5)  there be an order nisi that the costs of the hearing of the amendment application be to the plaintiff and the costs of and occasioned by the amendment be to the defendant.