YU TAI HING LAND AGENCY LIMITED v. LEUNG WING YIN

1986, No. A393

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This case started as an action on a dishonoured cheque for $142,200 drawn by the Defendant.

2. A defence and counterclaim were filed, and the Plaintiff filed a reply and a defence to the counterclaim. However, the facts on which these subsequent pleadings arise are a little complicated. So I think it is convenient to give an outline of the facts before coming back to the pleadings in greater detail.

The Facts

3. The Plaintiffs are a firm of estate agents. Amongst their "clients" is a Mr. Law who owns a building at 93-97 Hennessy Road, Wanchai. He owns a number of properties and he uses another agency called Collective Nominees Limited as his rent collectors,

4. The Defendant is a single lady and is a partner with three men in the running of a restaurant in Hennessy Road next door to the landlord's premises. Towards the end of 1985, they discovered that the furniture shop in Mr. Law's building was going to be vacated and they began to think that they would like to rent the premises themselves in order to use them as staff quarters and for other purposes connected with their restaurant. The Defendant had had some previous business with the firm of Collective Nominees so she rang up the firm and as a result arranged to go round and discuss the matter with their Assistant Manager, Mr. Wu. She and her three partners - Mr. LEE Siu-kwan, and two others - went round on the 4th November and saw Mr. Wu to discuss the renting of the premises. Mr. Wu took them down to see the landlord, Mr. Law, and after discussion with him he agreed to rent the premises to them, to operate as a restaurant. There were discussions about the amount of the rent and in the end a sum of $90,000 was mentioned. But Mr. Law insisted that this did not include management fees and rates. So the Defendant and her partners went home to consider the matter

5. Two days later on 6th November, they returned and indicated that they would Like to take up the landlord's offer. They saw Mr. Wu again and he took them to Mr. Dominic Sham, who is the Assistant Manager of the Plaintiff estate agency. The idea was that he should put in writing what they had discussed and agreed on. In order to do this, he took out one of his company's forms in which to set out all the main terms of the lease. But as it happens, the form itself was not appropriate, for it was supposed to be used when enquiries were made about renting premises, in order to confirm terms provisionally agreed upon before the landlord had been consulted. But in this case, the landlord had already agreed to grant a lease of the premises to the Defendant. So the form was not really appropriate. I shall be coming back to this later, but it is sufficient at the present moment to indicate that the 1st paragraph begins by saying that the land agency was writing to confirm that their client was prepared -

"to consider an application from you for a tenancy, subject to formal contract,' in accordance with the following terms and conditions. "

6. Mr. Sham considered that this letter was not binding till it had been confirmed. As for the Defendant, she does not speak English, nor do her partners. So they had no clear idea what was the effect of the letter apart from the explanation given to them by Mr. Sham. It was dated 6th November 1985.

7. The terms and conditions in the letter set out twenty different items. They described the premises and the parties. As for the tenant, the Defendant and her partners wanted the lease to be put in the name of a limited company and it was arranged with Mr. Sham that he would refer the whole matter to their solicitor, Amelia Cheung, in order that she could provide a shelf company for the partners. So the name of tenant was left open. As for the other terms, it was stated that the lease would be for five years initially with a further extension; that the commencement date would be the 1st December 1985; that the rent would be $90,000 to start with; and that the tenant would have to pay the rates and the management fees. It was also stated that there should be deposits equivalent to two months' rent and two months' management fees. It was also provided that the premises were to be used for commercial purposes only, and that there would be a one month rent free period starting from the 1st December, Provision was also made for a temporary electricity supply and for the removal of debris and the fitting out of the premises for the use intended by the Defendant.

8. The significant term in the letter was Item 18 dealing with the payment of an interim deposit.

9. This arose because, although the Defendant was supposed to make a two months' deposit, she had not got the money available, viz. $187,200, and she only had $45,000 i.e. half of one month rent. She had already made out a cheque in favour of Collective Nominees. So she inserted the figures $45,000 and handed the cheque to Mr. Sham who duly accepted it. It was agreed between them that the balance of $142,200 should be paid by the 15th November.

10. In view of this, Item 18 was worded in order to reflect the initial payment of the $45,000 by the Defendant. It provided that the sum of $45,000 was paid as an interim deposit and that it should be deducted from the rental deposit, and that the Defendant should pay a further interim deposit of $142,200 by the 15th November. The clause went on to provide that the Tenancy Agreement itself should be executed by the 30th November, failing which both interim deposits would be forfeited and the letter treated as null and void.

11. The letter ended with a paragraph addressed to the Defendant asking her to confirm her acceptance of t above terms by signing a copy of the letter and giving her cheque for "the booking fee". The Defendant signed this under the subscription "Confirmed and accepted by the tenant". David Sham also signed the letter for and on behalf of the Plaintiff company.

12. The balance of the deposit was payable on the 15th November. But a few days before that date, the Defendant phoned Mr. Sham and asked amongst other things that the rent free period should be extended and that the payment of the $142,200 due on the 15th should be postponed to the 20th November. Mr. Sham consulted Mr. Law and then asked the Defendant to come back on the 15th to discuss the matter further.

13. On the 15th November, the Defendant returned. But whereas Mr. Sham says she came alone, her partner, Mr. S.K. Lee, says that he and the other two partners came with the Defendant.

14. Mr. Sham agreed with the Defendant's proposals and gave effect to them in a further letter which he asked the Defendant to sign.

15. This letter was dated 15th November. It was addressed to the Defendant and purported to confirm their verbal agreement -

"that the following amendments shall be made for the tenancy agreement of the captioned premises".

16. The amendments included clauses to the effect that while the takeover date was to remain 15th November, the commencement date of the lease was to be 15th February and that there should be a three-month rent free period in the meantime. A further clause provided that the balance of the deposit, $142,200, "must be paid" by the 20th November; that the Defendant should go to Amelia Cheung on the 18th November to take out the shelf company; and that the tenancy agreement itself should be executed at the solicitor's by the 30th November, failing which he two interim deposits of $45,000 and $142,200 would be forfeited.

17. The letter ended with a paragraph providing that all the other items as stated in the confirmation letter should remain the same. (This of course refers to the earlier letter of the 6th November. )

18. This letter (of 15th November) was then signed by Mr. Sham. There was also a subscription "Confirmed and accepted by" which the Defendant signed.

19. She also gave Mr. Sham a postdated cheque for $142,200 dated the 20th November.

20. A few days before the 20th November, the Defendant phoned Mr. Sham and said that the money would not be ready by the 20th and she asked him to present the cheque two days later. Mr. Sham said that he had to present it according to the agreed date i.e. the 20th. The Defendant said she would try her best to get the funds. But on the 20th when Mr. Sham presented the cheque, it was dishonoured.

21. When Mr. Sham phoned the Defendant to say that it had been dishonoured, she admitted she had not yet got the money but said she would try her best to handle the matter as quickly as possible. A week or so later, towards the end of November, the Defendant rang up to say that she was going to instruct Hampton, Winter & Glynn to appear on her behalf and they immediately wrote on 28th November to Amelia Cheung, the Plaintiff's solicitor. They asked for details of the proposed shelf company and also asked to see the tenancy agreement, and they added that the interim deposit of $142,200 would be paid on execution of that agreement.

22. In effect, they asked for an extension of the period for signing the agreement.

23. On 3rd December Amelia Cheung wrote a letter in reply marked "Subject to contract". She sent the draft tenancy agreement and extended the date for execution to the 7th December. The letter concluded with a statement that their client was not bound to rent the premises until a formal tenancy agreement had been signed by the Defendant.

24. A series of further letters were exchanged between 6th and 20th December in which Hamptons sent proposed amendments to the agreement, which Amelia Cheung included in an engrossed document for execution and sent back to Hamtpons under the heading "Subject to contract". But the tenancy agreement was not signed nor was any cheque sent in payment of the $142,200. On the 18th December Amelia Cheung sent a letter to Hamtpons insisting that the agreement should be signed by the 20th December failing which they would forfeit the deposit already paid. Hamtpons replied with fresh proposals and asked for a further extension of the deadline.

25. This was followed by two letters from Amelia Cheung of the 20th and 24th. These letters were no longer marked "Subject to contract". In the first Amelia Cheung agreed to an extension till 23rd December. In the second letter of 24th December she wrote that the Plaintiffs had exercised their right to forfeit "the booking fee" of $45,000 as well as the deposit of $142,200, and she threatened to institute legal proceedings if the latter sum was not paid. Eventually after a final warning letter from Amelia Cheung of 15th January, a writ was taken out on the dishonoured cheque on the 21st January 1986.

The Pleadings

26. On behalf of the Defendant, a defence and counterclaim were filed.

27. The dishonoured cheque was admitted. It was pleaded that the letters of 6th November and 15th November were not legally binding upon the Defendant, as they were expressly "Subject to formal contract" and no formal contract had ever been entered into. Accordingly it was alleged that there was a complete failure of consideration and that the Defendant was not liable on her dishonoured cheque.

28. By way of counterclaim, it was alleged that there was no consideration for the payment of the initial $45,000 paid on 6th November, and the Defendant claimed the return of that amount.

29. The Plaintiffs filed a detailed reply and defence to the counterclaim.

30. In their reply, they claimed that there had been an oral agreement between the Plaintiffs and the Defendant on the 15th November for the letting of the premises and that the agreement was contained in the letters of the 6th November, 15th November and the postdated cheque of the 20th November. Alternatively, they alleged that, even if there was no written agreement, there was a sufficient "memorandum" for the purposes of section 5 of the Law Amendment and Reform (Consolidation) Ordinance, Cap. 23. Under the express terms of the letter of 15th November they claimed that they were entitled to forfeit both interim deposits, viz. $45,000 and the $142,200, as the Defendant had failed to execute the tenancy agreement.

31. They also denied the Defendant's counterclaim, and asserted that the Plaintiffs were not liable to return the $45,000 to the Defendant.

32. In explanation of this, Mr. Ho for the Plaintiffs claimed that they had no duty to account for monies paid to another agency, viz. Collective Nominees, to whom the $45,000 cheque had been made out.

33. As for the letter of 6th November, Mr. Ho admitted that that was not a binding contract, and only an invitation to treat. As for the letter of 15th, Mr. Ho claimed that Mr. Sham specifically excluded the opening paragraph of the earlier letter in which the terms and conditions were stated to be "Subject to formal contract''. It is claimed that the letter of 15th November incorporated the terms of the letter of 6th November apart from the opening paragraph and that it amounted to a binding contract.

34. Mr. Ho in his closing address also claimed that there was a further oral contract that the payment of the interim deposits gave the Defendant a period up to the 30th November in which to decide whether to accept the proposed tenancy. However, as Mr. Sarony pointed out, this alleged further agreement was never pleaded and I cannot accept such a claim at such late stage in the trial.

The Dishonoured Cheque

35. As for the dishonoured cheque for $142,200 Mr. Ho claimed that, whether or not there was a binding agreement, the Plaintiff had a good cause of action provided there was not a total failure of consideration. He relied on a dictum of Lord Denning to this effect in Fielding & Platt Ltd v. Selim Najjar [1969] 1 WLR 357 which is quoted in the Supreme Court Practice 1985 at Order 14 rr.14/3-4/14.

36. Mr. Sarony agrees that there is no defence to a dishonoured cheque unless there is failure of consideration and no contract to support it. That, of course, is what is pleaded in the defence. Mr. Ho meets this by saying that there was consideration. Not only was there an advantage to the Defendant - viz. that she had the opportunity to conclude the bargain during the whole of November, up to the last day on which the tenancy should have been signed. He also says that the Plaintiffs suffered detriment, because they were holding the premises for the Defendant throughout this period.

37. Both these points are established in the evidence.

38. As for the Plaintiffs' detriment, Mr. Sham testified that, after getting the Defendant's initial deposit on the 6th November, they held the premises for her and did not advertise them any further until the writ was issued in January. When he was asked in cross-examination what the prospective tenant got out of her deposit, Mr. Sham replied that the premises were reserved for her until she signed the tenancy agreement. In cross-examination it was suggested that this was never said to her and Mr. Sham agreed that he did not remember if it was said. But he said that he was aware that the landlord, Mr. Law, had promised to let the premises to the Defendant and of course she had paid the initial $45,000 to show her sincerity. Further, the signing of the tenancy agreement was extended at the Defendant's request from the 30th November through to the 23rd December, and the landlord took no action on the dishonoured cheque during this period. So I see no reason for doubting Mr. Sham's claim that the premises were reserved for her throughout this period, and they were not even looking for another tenant.

39. Rather surprisingly, the Defendant herself did not give evidence. Instead her partner, Mr. Lee gave evidence. In comparison with Mr. Sham, he was not a good witness and he kept on making claims and putting forward ideas that could have only occurred to him after talking to his lawyers. In cross-examination, he was asked about the payment of the $142,000 and whether it was to show his "sincerity". He replied "yes", and later that "we were sincere to rent the premises from the landlord". But immediately afterwards, in reply to a question from me, he said that he knew the Defendant had not got enough money to meet the cheque. This shows that, whatever they claimed, the partners could not have been sincere when giving this postdated cheque!

40. The following questions were then asked by Mr. Ho in crossexamination:

Then a little later:

41. It was quite clear from the first passage that Mr. Lee really believed that the landlord was not entitled to let the premises during the period up to the date by which the tenancy agreement was supposed to be signed. When he realised the significance of what he had said, he tried to back-pedal. But he still seemed to suggest that there might be circumstances in which the landlord could not be entitled to let the premises.

42. I regard this exchange as very significant and it is quite obvious to me that the Defendant and her partners reckoned that, having paid their deposits, the premises were reserved for them up to the time that the tenancy agreement was supposed to be signed, and that they had an option to rent the premises throughout the period. This was an obvious benefit to the Defendant.

43. Moreover, it was reflected in the detriment which the landlord suffered during this same period. For having accepted the $45,000 and the dishonoured cheque, he could expect that the Defendant meant business and intended to rent the premises from him. So during this period he had good reason to reserve the premises for the Defendant even if he was not bound to do so.

44. By reserving the premises till 23rd December, and not advertising them, there clearly was consideration for the dishonoured cheque of the 20th November.

45. Mr. Sarony suggests that one cannot have consideration in limbo without a promise. But if that were the case there would always have to be a contract, and the dishonoured cheque would have to be given in exchange for a definite promise. But that cannot be the case because a bill of exchange, unlike any other form of simple contract, is presumed to stand on its own upon the basis of valuable consideration and it is invalid only if there is a failure of consideration, or the consideration is patently and grossly inadequate - Halsbury's Laws of England (4th Edn. ) Vol.4, p.165. The consideration in question only has to be sufficient to support a simple contract. But instead of corresponding to a promise as in an ordinary contract, it seems to me that in the case of a dishonoured cheque, the consideration only has to be connected with or attributable to the giving of the cheque.

46. It is quite obvious that, if the first cheque had not been paid, the landlord would never have reserved the premises for the Defendant in the first place; and if he had not been given the second, postdated cheque, he would not have continued to keep the premises for her after 15th November. As it is he reserved them first up to the 30th November and then for a further three weeks in December. On the 20th December the Defendant's solicitors were still writing to the Plaintiff's solicitor for an extension of the deadline, and the landlord was still prepared to give them a further 3 days.

47. So, I am quite satisfied that there was consideration for this dishonoured cheque.

48. Quite apart from his initial claim on the dishonoured cheque, Mr. Ho relied on the case of Lowe v. Fry [1935] Law Times 585. That was an action on a dishonoured cheque in part payment of the purchase price of a house under an oral agreement for the sale of the house which the purchaser subsequently repudiated. Instead of seeking to prove that there was no consideration for the cheque (as here), the purchaser argued that the contract was unenforceable as there was no memorandum in writing. But he was unsuccessful, and it was held that the vendor was entitled to recover on the cheque, as there was a valid subsisting agreement.

49. But that is not the case here, as the defence do not contend that there was an oral agreement which was unenforceable, but that there was no firm agreement at all. So I do not think that that case is directly relevant.

50. As far as I am concerned, it is quite sufficient that there was consideration for this cheque. It was dishonoured and I therefore give judgment to the Plaintiff as claimed for $142,200, together with costs and interest - calculated at 1% over the base rate from 20th November 1985 until judgment and thereafter at judgment rate.

The $45,000

51. As for the Defendant's counterclaim for the return of the $45,000, the Plaintiffs claim that they are not liable to return the money because it was paid to the landlord's other agent, Collective Nominees Limited, and not to themselves.

52. However, in the course of cross-examination, Mr. Sham explained that the Defendant came with only one cheque which was already made out to Collective Nominees Limited, so he could not ask her to make out another cheque for his own agency. He admits he received the cheque himself and accepted it. Of course, no receipt was given. But even so, I do not see how, after having accepted the cheque, he can turn round and say he is not liable on it because it was not made out in his favour.

53. There is the further point that he admits he accepted this money as a middle man, and he says he did this because at this stage he was also representing the Defendant, who had not then got a solicitor of her own. So he was purporting to act for her, as well as for the landlord, in instructing Amelia Cheung about the preparation of the tenancy agreement and the issue of a shelf company for the Defendant and her partners. He denies he was actually a stakeholder. But in spite of that, he was clearly acting as that stage as much on behalf of the Defendant as on behalf of the landlord. So if the Defendant is entitled to the return of that sum, she has a good claim against the Plaintiffs, who were at this stage also acting on her behalf.

54. Of course, the Defendant has claimed that there was no consideration for the payment of this $45,000, because the letter of the 6th November was not a binding contract, either on its own or when read in the light of the further letter of 15th November. Mr. Sarony relies in particular on the opening phrase in the first letter, that the terms were "Subject to formal contract".

55. The Plaintiffs claim that the letter of 15th November excluded that opening paragraph. But when one looks at the letter of 15th November, that cannot be right. For instead of excluding it, it provides that, apart from the variations set out in the letter of 15th, all the other terms of the original letter of the 6th November should remain the same! So the opening paragraph in the first letter continued in force, and the terms and conditions remained "Subject to formal contract".

56. Both these letters were therefore "Subject to formal contract", which clearly refers to the execution of the final tenancy agreement which was to be executed on or before the 30th November.

57. If confirmation of this were required, it is provided in that phrase "Subject to contract" which appears in the Plaintiffs' solicitor's letters of the 3rd December and 9th December. In both those letters Miss Amelia Cheung made it clear that the landlord was not bound to rent the premises to the Defendant unless the formal tenancy agreement was signed. Accordingly I find that the agreed terms contained in the letters of the 6th November and the 15th November were only conditional and did not constitute a firm binding contract.

58. Both sides in fact agree that the Defendant was required to pay the initial deposit to show her sincerity that she intended to rent the premises and execute the tenancy agreement, and the $45,000 would then be deducted from the rental deposit.

59. The case of Chillingworth v. Esche [1923] 1 Ch. p.97 shows that, where agreement has been reached "subject to a proper contract" and a deposit has been paid, the deposit must he repaid if no binding contract is executed. Mr. Ho tried to meet this by saying that that case was one of a sale of land whereas this is only an agreement for a tenancy. But I think the same principles apply. It is true that in that case there was no provision for the forfeiture of the deposit, whereas in this case the letters of the 6th and 15th November both specifically provide for forfeiture. But the letter of 6th November provided that all the terms and conditions of that letter were "Subject to formal contract", and that includes the provision for the forfeiture of deposits in Item 18.

60. If a receipt had been issued for the $45,000 and if it had been specifically written on the receipt that the $45,000 was a `booking fee", or that the premises would cease to be reserved if the tenancy agreement were not executed on or before 30th November, the position might have been different.

61. As it is, I think the landlord accepted the payment as an indication that the Defendant meant to lease the premises, rather than as a guarantee that she would complete the agreement.

62. Mr. Ho for the Plaintiffs relies on the case of Monnickendam v. Leanse [1923] 30 T.L.R.445. In that case a deposit was paid on the purchase of a house under an agreement which the purchaser subsequently repudiated. The purchaser sought to recover the deposit on the grounds that there was an insufficient memorandum in writing and that the agreement was therefore unenforceable. But it was held that he was not entitled to recover the deposit and that the vendor could forfeit it.

63. However, there was a completed agreement in that case just as there was in Lowe v. Fry, whereas the agreement in this case was only conditional. Moreover the question in that case was whether the vendor could retain the deposit under the agreement although it was unenforceable under the Statement of Frauds.

64. So I do not think that that case is directly relevant.

65. As in Chillingworth v. Esche, I think that the deposit in this case was paid in anticipation of a final agreement, and that until that agreement was executed the Defendant was entitled to recover.

66. Accordingly I give judgment for the Defendant on his counterclaim for $45,000 together with costs and interest calculated at judgment rate.

67. Liberty to apply.