SHAHDAN LTD v. RICH LIFE INTERNATIONAL LTD

CACV 163/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 163 OF 2008

(ON APPEAL FROM DCCJ NO. 5614 OF 2006)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgement of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from an order of HH Judge Mimmie Chan of 11 April 2008 allowing the defendant’s appeal from an order of the master granting summary judgment in the sum of $514,383.29 to the plaintiff.  At the conclusion of the hearing judgment was reserved which we now give.

Background

3.  The plaintiff is a subsidiary of the Henderson Group.  It promoted a development in Kowloon known as Knutsford Terrace and Knutsford Steps.

4.  On the 29th of October 2004, the defendant signed an Offer Letter (drafted by the plaintiff) addressed to the plaintiff for (1) a lease of Shop D of the development for three years at a monthly rent of $100,000 for use as a deluxe ice cream shop and (2) a licence at a fee of $50,000 a month (in addition to management fees and a promotion contribution) to use 2 kiosks immediately beside Shop D (“the kiosks”) as an outdoor seating area in connection with the ice cream business.  The plaintiff accepted the offer by countersigning the Offer Letter on 12 November 2004.

5.  The ice cream shop opened for business on 5 January 2005 although the formal tenancy agreement was not signed until 8 June 2005.  The three-year term was expressed to commence on 8 December 2004.

6.  It is not entirely clear whether the kiosks which occupied part of the steps behind Shop D had already been constructed at the time of the Offer Letter.  At any rate, it seems that the roofs were only erected sometime in March 2005.

7.  The kiosks were handed over to the defendant on 31 March 2005.  The licence agreement was signed at the same time as the tenancy agreement, on 8 June 2005.  The licence period was from 1 April 2005 to expire at the same time as the tenancy agreement but “subject to the early termination as provided in Clause 18”.

8.  According to a draft defence and counterclaim exhibited to the supplemental affirmation of Tong Hong Wah Harold dated 23 July 2007, the defendant paid the amounts due under both the tenancy agreement and the licence agreement up to and including July 2006.  Then with a view to exerting pressure on the plaintiff for production of documentary proof of approval for the building works, the defendant stopped paying the rental under the lease and the fees under the licence agreement.  However, the plaintiff issued distraint proceedings in October 2006 in the face of which the defendant had no option but to pay the rental due under the lease.  A section 89 notice dated the 11 October 2006 served pursuant to the Landlord and Tenant Ordinance was exhibited in support.

9.  In the defence and counterclaim filed on 18 June 2008 which was after the date of the decision which is the subject matter of the present appeal, the defendant put forward a different version.  It alleged that payment for the two kiosks was suspended in March 2006 but that the plaintiff applied the rental payment for the shop to the kiosks and initiated distraint proceedings for rental for the shop based on a false complaint of default.  The defendant alleged that it was forced to pay rent again to dispose of the distraint proceedings.

10.  Be that as it may, the plaintiff issued a writ on 14 November 2006 claiming unpaid licence fees, management fees and promotion contributions for the four months from 1 August 2006 to 30 November 2006.  This was followed by an Order 14 summons a month later.

11.  In December 2006, the defendant made enquiries of the Building Department as to whether the construction of the kiosks had violated any of the building regulations.  The defendant received an oral response to the effect that the kiosks were illegal structures.  In January 2007, the defendant applied for a Light Refreshment Licence from the Food and Environmental Health Department.  On 16 and 17 January 2007, the FEHD and the Buildings Department carried out inspections.  The FEHD could not process the defendant’s application, having been advised by the Buildings Department on 29 January 2007 that the structures (i.e. the kiosks) were unauthorised building works.

12.  By letter dated 27 March 2007, the Buildings Department informed the plaintiff that the kiosks were unauthorised building works and advised the plaintiff to take the initiative in arranging for the removal of those works as soon as possible.

13.  The plaintiff obtained leave to amend the Order 14 summons in April 2007 to include a claim for outstanding arrears since 1 December 2006 and continuing losses.

14.  On 17 January 2008, Master Lo found for the plaintiff, entering judgment in the sum of $514,383.29, being the amount due under the licence agreement calculated up to 30 May 2007.  The defendant appealed to the judge who allowed the appeal and granted the defendant leave to defend.  The present appeal is an appeal from that decision.

The licence agreement

15.  For present purposes, only the following provisions need be mentioned:

(1)  Clause 6, the user clause, provided that the kiosks were to be used as an outdoor seating area in connection with the business of the ice cream shop subject to the proviso that

“the Licensor shall not guarantee or warrant that Licence Area is fit for any particular purpose or use proposed by the Licensee and the Licensee shall satisfy itself on such condition and shall be solely responsible for applying all necessary license or approval required by Food and Environmental Hygiene Department or any other competent authorities for the use of the License Area as an outdoor seating accommodation …”

(2)  Clause 18.4 provided that in the event of the Government or public authorities requiring the kiosks to be removed or demolished, the licence would determine and neither party could claim against the other for loss, damage or compensation except for antecedent rights accrued prior to the date of termination.

(3)  Clause 22.4 was an entire agreement provision.

This appeal

16.  The appeal was brought to set aside the order granting leave to defend and to enter judgment, not in the sum ordered by Master Lo but a much greater amount on the basis that the licence did not expire until 7 January 2008. As noted above, Master Lo’s award was for fees payable under the licence agreement up to 30 May 2007.

17.  The substantive issue on the appeal was whether the judge was correct in granting leave to defend on the ground that it was arguable that the licence agreement was unenforceable because it was tainted with illegality.  The judge did not decide the matter because, in her view, it involved the factual issue of whether the kiosks were in fact unauthorised structures. For the purposes of this appeal, Mr Chan SC who appeared for the plaintiff was prepared to proceed on the basis that the kiosks were illegal structures.

18.  Mr Chan SC submitted that the judge having rejected defences based on misrepresentation and unconscionable bargain, absent any respondent’s notice to support the judge’s decision on those two defences, they can no longer be live issues.

19.  Mr Chan then submitted that whilst section 14 of the Buildings Ordinance made it an offence for anyone to carry out actual building work without prior approval and consent of the Building Authority, there is no provision that renders the letting or possession of unauthorised structures illegal.  He referred to everyday examples of unauthorised structures such as illegally enclosed balconies and illegal roof structures and submitted that the letting of premises which included an unauthorised structure did not render the lease itself illegal or unenforceable.

20.  In Loyal Luck Trading Ltd v Tam Chun Wah, CACV 217 of 2007, unreported, 1 April 2008, this court adopted the approach of the House of Lords in Tinsley v Milligan [1994] 1 AC 340, the relevant test being whether it would be necessary for the plaintiff to plead and rely on the illegality in order to found its cause of action.  Mr Chan submitted that he satisfied the test and public policy does not require the court to refuse to enforce the licence agreement.  Further, even if the Australian approach in Nelson and another vNelson and another [1995] 132 ALR 133 were applicable, such that the enforceability of the contract is due be tested by reference to the object of the relevant legislation, it would not make a difference because it was said that it is not the purpose of the Buildings Ordinance to affect private rights.  Mr Chan attached significance to the fact that there was no warranty of the legality of the structures.

21.  The thrust of Mr Lai’s case, clarified in the course of his submissions for the defendant, is that while the licence agreement was not illegal at formation, the illegality in the present case arose because, unknown to the defendant, the plaintiff intended to perform it illegally.  As earlier noted, section 14 of the Buildings Ordinance renders it illegal for any person to carry out building works without the prior approval and consent of the Building Authority.  If a person carries out building works in contravention of section 14, it commits an offence.  Section 40 renders contravention of section 14 a continuing offence; specifically, subsection (1AA)(b) imposes a fine of $20,000 each day on such person during which it is proved to the satisfaction of the court that the offence has continued.  In short, it was submitted that if the kiosks were unauthorised building works, performance by the plaintiff of its part of the agreement would necessarily involve the commission of a continuing offence.

22.  As Atkin LJ observed in Anderson Ltd v Daniel [1924] 1 KB 138, 149:

“The question of illegality in a contract generally arises in connection with its formation, but it may also arise, as it does here, in connection with its performance.  In the former case, where the parties have agreed to do something which is prohibited by Act of Parliament, it is indisputable that the contract is unenforceable by either party.  And I think that it is equally unenforceable by the offending party where the illegality arises from the fact that the mode of performance adopted by the party performing it is in violation of some statute, even though the contract as agreed upon between the parties was capable of being performed in a perfectly legal manner.”

Chitty on Contracts, Vol.1 at 16-009 states:

“Illegality as to performance.  The illegality may arise because both or one of the parties may intend to perform the contract in an illegal manner.  The court will deny its assistance where both or one of the parties intended to perform the contract in an illegal manner or to effect some illegal purpose.  In this situation it is customary to distinguish between the situation where the legally objectionable features were known to both parties and the situation where they are known only to one.”

23.  The plaintiff was the party responsible for constructing the kiosks.  The facts surrounding their construction are unclear: not only is it unclear when work first started on the kiosks, it is not known whether any application for consent and approval had been submitted prior to the commencement of the works and how the decision to proceed with the works came about.  Those are matters that will have to be investigated at trial.

24.  If it should transpire that section 14 had been contravened, I consider it arguable that the plaintiff would be precluded from suing upon it because performance of the agreement by the plaintiff would, to its knowledge, necessarily involve the commission of a continuing offence.  See Chitty at 16-011.  Unlike the illustrations given by Mr Chan, the kiosks that form the subject-matter of the licence are illegal structures in their entirety.  Accordingly, in my view, the judge was right to have granted leave to defend.

25.  I should add that although Mr Chan argued the appeal on the basis that the kiosks were illegal structures, I do not consider that this court has jurisdiction to rule on the issue of law arising, given that this is but an interlocutory appeal.

26.  There is a further reason why a trial is necessary.  At the outset of the hearing, Mr Chan corrected the amount sought by way of judgment to $825,778.10, to reflect the fact that the licence expired on 7 December 2007 rather than 7 January 2008 being the date stated in his revised skeleton.

27.  During the course of the hearing, this court was informed that as a result of the letter from the Buildings Department received at the end of March 2007, the plaintiff caused the kiosks to be cordoned off with tape but it was wholly unclear as to when that occurred and whether that effectively caused the defendant to vacate the kiosks.  There was no reference to this at all in the judgment of Master Lo when he made his award on the basis that the defendant had remained in possession until 30 May 2007.  See paragraphs 20 and 25 of the master’s judgment.  The parties were asked to take instructions during the mid-morning adjournment to clarify the matter.

28.  After the adjournment, the plaintiff abandoned any claim to licence and other fees after 30 May 2007.  If the court were to find that its favour, the plaintiff would be content with the reinstatement of Master Lo’s order.  That was perhaps not surprising in view of the developments and the terms of clause 18.4 of the licence agreement.

29.  But the question of quantum does not appear to be entirely straightforward even if (contrary to my view) the defendant has no arguable defence to the claim.  It would turn on the effect of clause 18.4 as to which there are a number of possibilities: (1) the licence was determined upon receipt by the plaintiff of the letter of 27 March 2007; (2) it was determined when the plaintiff cordoned off the kiosks; (3) it was determined when the defendant ceased to occupy the kiosks.  The facts will have to be gone into and findings made although as regards (1), according to the date stamp, it would appear to have been received on 30 March 2007.  While the construction of clause 18.4 involves a question of law, this court (comprising only two members) does not have jurisdiction to rule on that question, the present appeal being an interlocutory appeal.

Conclusion

30.  For the reasons stated, I would dismiss the appeal.  I would also proposed that there be an order nisi of costs in favour of the defendant.

Hon Rogers VP:

31.  There will accordingly be an order in terms of paragraph 30.