XCHRX ENTORES CO. LTD. v. POSTWELL LTD.

1994, No: A8375.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

_____________

--------------------

JUDGMENT

--------------------

1. The Matter

2. I have a summons before me by which the plaintiff seeks judgment under Order 86 for the relief claimed in the statement of claim. In another summons, the plaintiff asks me to order the vacation of the registration of an agreement against certain properties.

3. The Evidence

4. Mr So Bing, of the plaintiff company, says that in or about January 1994, he was approached by Mr Paul Lee of an estate agent company called Pacific Hawk International Limited who asked him if he was interested in selling certain commercial premises in Parkes Road, Kowloon, and, if so, at what price he would sell. Mr So said that the plaintiff would sell at a price of $32 million.

5. Soon afterwards, Mr Lee told Mr So that he had a purchaser. Negotiations then followed, and a price of $31.68 million was agreed.

6. Mr So says he made it clear to Mr Lee that the plaintiff would not be paying any agency fee, and did not do so.

7. On 4 February 1994, the plaintiff, the defendant and Pacific Hawk entered into an agreement. This agreement recited that the plaintiff had appointed Pacific Hawk as its agent for the sale of the properties, and the defendant had appointed Pacific Hawk as its agent for the purchase of the properties, although the agreement was signed by Mr So for the plaintiff and Mr Chan Ying Wah for the defendant. Mr Chan Ying Wah and another Mr Chan - Chan Kwok Hing - feature prominently in this case. To avoid confusion, I will refer to them, without disrespect, as, respectively, YW Chan and KH Chan.

8. The agreement said that the plaintiff shall sell and the defendant shall purchase the properties at a purchase price of $31.68 million, with $1 million to be paid on signature, $3.752 million on signing of a formal agreement on or before 28 February 1994 and the balance of $26.928 million to be paid on completion on or before 31 May 1994. The defendant agreed to purchase subject to the existing tenancy. In this regard, the agreement said that both parties "have been informed that the properties have been leased to 'Kong Yuen Game Machine' at a monthly rental of $208,000 for a term up to January 1995". The agreement, which was a pro forma, said that "the Agent shall after this agreement be entitled to receive [blank] from the Vendor and HK$218,000.00 from the purchaser as commission". It was recorded that the plaintiff and the defendant would be represented by their named solicitors, who are their solicitors in these proceedings.

9. The deposit of $1 million was duly paid.

10. On 8 February 1994, the defendant's solicitors wrote to the plaintiff's solicitors setting out the broad terms of the agreement, and saying "The captioned premises is sold subject to its existing tenancies and lettings".

11. On 18 February 1994, the plaintiff's solicitors wrote to the defendant's solicitors enclosing a draft agreement of sale and purchase "for your approval" and a copy of the tenancy agreement dated 16 January 1992 "for your perusal".

12. This tenancy agreement disclosed that it was between Cotton Century Limited as landlord (KH Chan signing for that company) and Mr Tong Wai Sum as tenant.

13. On 22 February 1994, the defendant's solicitors returned the draft agreement duly approved as amended. The agreement recited in clause 4 -

"The Property is sold subject to and with the benefit of the existing tenancy brief particulars of which appear in the Second Schedule hereto. Copy of the Tenancy Agreement relating to the said Tenancy ('the Tenancy Agreement') has been supplied to the Purchaser who is deemed to be fully aware of the contents thereof."

14. The Second Schedule disclosed that the tenant was Mr Tong Wai Sum.

15. On 26 February 1994, the defendant's solicitors wrote to the plaintiff's solicitors saying that they had noted from the tenancy agreement sent on 18 February 1994 that the tenant of the premises was Mr Tong and not 'Kong Yuen Game Machine', and that there was no restriction in the tenancy agreement as to the kind of trade and trade name permitted under that agreement. They said that this "material difference" was unacceptable to their client. They demanded return of the $1 million deposit, whereupon their client would sign a cancellation agreement.

16. On 28 February 1994, the defendant's solicitors wrote again to the plaintiff's solicitors complaining that one shop had been closed down and a "to let" notice had been put up.

17. On the same date, the plaintiff's solicitors wrote saying that the tenant was Mr Tong and not 'Kong Yuen Game Machine' made no material difference to what the defendant had contracted to buy. The letter also pointed out that the fact that there was no restriction in the tenancy agreement as to the kind of trade and trade name permitted was irrelevant.

18. On 1 March 1994, the defendant's solicitor wrote saying that it was of "critical importance" to the defendant that there should be a valid and subsisting tenancy with the tenant by the name of 'Kong Yuen Game Machine'.

19. On 2 March 1994, the plaintiff's solicitor wrote saying that they were ascertaining the relationship between Mr Tong and 'Kong Yuen Game Machine'. Assuming that Mr Tong was not the sole proprietor of this business, such misdescription was made innocently by Pacific Hawk, the "agent of our client" after the agent visited the premises displaying this trade name with "our client". They said that they were of the view that the misdescription was not substantial and did not entitle the defendant to rescind the agreement.

20. On 4 March 1994, the plaintiff's solicitors explained that, from the beginning of the tenancy, Mr Tong has sublet the premises to his company, Jibsoon Limited which had operated the amusement machines. This had been with the consent of Cotton Century, the plaintiff's predecessor in title.

21. On 7 March 1994, the plaintiff's solicitors said that the plaintiff was prepared to arrange the execution of a new tenancy agreement with the existing sub-tenant trading as 'Kong Yuen Game Machine' "in order that the tenancy will entirely conform with the description in the Provisional Agreement for Sale and Purchase".

22. On 9 March 1994, the defendant's solicitors wrote saying, for the first time, that the defendant "was given to understand by your client's agent that ['Kong Yuen Game Machine'] was run and operated by 'Chan Kwok Hing' and that Chan Kwok Hing was either the Tenant or the owner or the licensee of ['Kong Yuen Game Machine']" and that KH Chan was well known for his expertise in running this type of business, running more than twenty game centres in Hong Kong. It was this, it was said, that led the defendant into entering into the agreement.

23. On 11 March 1994, the plaintiff's solicitors said that the plaintiff had no knowledge of the defendant's reasons for purchasing the properties, and that no authority was given to the estate agents to make any representation on the plaintiff's behalf.

24. On the same day, the defendant's solicitors wrote saying that the agent had at least ostensible authority, and, if it were not for the "irregularities about the tenancy", the defendant was willing to enter into the formal agreement.

25. On 17 March 1994, the defendant's solicitors wrote to say that, "despite the discrepancies in the existing tenancy and our client's entitlement to rescind" the defendant was prepared to purchase the properties for $30.5 million. This offer was refused by the plaintiff.

26. YW Chan, of the defendant company, says in his affirmation that, on or about 27 January 1994, Mr Au of Pacific Hawk phoned him and told him that the properties were for sale. Mr Au said the asking price was cheap and the return was high. On 1 February, he with his other director met Mr Au at the premises. "There was apparently one "Kong Yuen Game Centre" operating at the properties." He says that Mr Au made a number of "representations", all designed, it is obvious, to persuade the defendant to purchase the properties. One of these "representations" was that the operator of the game centre operated other game centres and was well known in the trade. He asked Mr Au if the operator he was talking about was KH Chan. "Mr Au gave affirmative indication". YW Chan says he relied, in particular, on this representation as the identity of the operator. He says he believed that Mr Au was acting as the owner's agent. He points to the fact that the provisional agreement referred to the properties being leased to "Kong Yuen Game Centre". It was important to the defendant's investment that the purchase should have the benefit of such a tenancy and that "the tenant or the operator of this centre be Mr Chan Kwok Hing. The reliability of the tenant and the personality involved were major considerations in the Defendant's decision to purchase." As to why the defendant's solicitors did not query the identity of the tenant when sent the copy of the tenancy agreement, he says "I am informed by the Defendant's solicitor and verily believed that at that time they did not pay particular attention to the identity of the tenant ...". No further explanation is given, either by Mr Chan or the solicitor concerned.

27. Mr So Bing says that Kong Yuen Game Centre has been operating the games centre up to the date he made his affirmation (12 September 1994) and the rental has been paid each month.

28. In fact, Mr So says that KH Chan is a shareholder and director of "Jibsoon Limited running the Kong Yuen Game Centre". That KH Chan is a shareholder and director of Jibsoon is confirmed by the company's returns.

29. The Issue

30. The plaintiff claims declarations that it has effectively rescinded the agreement and that it is entitled to forfeit the deposit of $1 million. It also claims vacation of the registration of the agreement, damages, interest and costs.

31. In response to these claims, the defendant says it was induced to enter into the agreement by a material false representation.

32. The Law to be Applied

33. Counsel are agreed on the test I should apply in deciding whether I should give leave to defend. The defendant must satisfy me that it has a reasonable probability of showing a real or bona fide defence; i.e. that its evidence is capable of belief. If the evidence of the defendant is not reasonably capable of belief in any material respect, it cannot be said that there is a fair and reasonable probability that the defendant has a real or bona fide defence and judgment should be given for the plaintiff.

34. The Questions

35. In deciding whether or not the defendant has a reasonable probability of showing a real or bona fide defence, I have to answer the following questions -

1. Should I accept at this stage that the statement or statements forming the basis for the alleged representation were made?;

2. What representation should be construed from what was said?;

3. Should the plaintiff be held responsible for that representation?;

4. Was the representation materially false?; and

5. Was the representation a material inducement?

36. Were the Statements Made?

37. The first question is answered without difficulty. YW Chan says the statements were made, there is no evidence to contradict him, and there is nothing improbable in the statements being made by someone anxious to earn commission from introducing a sale. The defendant does not fail on this aspect of the matter.

38. What was the Representation?

39. What representation should be construed from what was said? The terms of this representation have been stated in various ways: Mr Warren Chan, who appears for the defendant, says that the representation was "that the tenant is 'Kong Yuen Game Centre' and that 'Kong Yuen Game Centre' is Chan Kwok Hing". YW Chan understood the representation to be that the tenant or the operator of this centre was KH Chan. The defendant's solicitors say that YW Chan "was given to understand by your client's agent that 'Kong Yuen Game Machine' was run and operated by 'Chan Kwok Hing' and that Chan Kwok Hing was either the Tenant or the owner or the licensee of 'Kong Yuen Game Machine'". It is convenient to leave further consideration of the terms of the representation until I consider whether or not it was false.

40. Authority for the Representation?

41. Was this representation made to the defendant by Mr Au on behalf of the plaintiff where Mr Au was the plaintiff's agent for the purposes of making it? The term "agent" is used loosely in commerce, and, in that context, may mean nothing more than someone who acts as an intermediary between one person and another; a mere conduit pipe. In law, it has a more precise meaning; that is a person who is authorised to bring about a legal relationship with another person on behalf of his principal. In that sense, I doubt that Pacific Hawk was the agent to anyone in this transaction. That company acted, as do most so-called estate agents in Hong Kong, only to bring the parties together; to introduce a willing seller to a willing purchaser. This they did. The parties themselves agreed the terms of the sale and signed the provisional agreement. Pacific Hawk signed the agreement on its own behalf. Largely, the provisional agreement seems to have be designed for the benefit of Pacific Hawk; to secure its right to commission. On the evidence before me, I cannot find that there is any case for saying that Mr Au of Pacific Hawk was authorised to bind the plaintiff to anything in this transaction. YW Chan does not even say that Mr Au said that he was authorised by the plaintiff to make any representations. In my view, the representation made Mr Au is not, in law, equivalent to a representation made by the plaintiff.

42. It is true that, on 2 March 1994, the plaintiff's solicitor wrote saying that assuming that Mr Tong was not the sole proprietor of this business, "such misdescription of the identity of the tenant in the agreement made between our respective clients dated 4th February 1994 was made innocently by Pacific Hawk International Ltd., agent of our client, after the said agent visited the premises displaying the aforesaid trade name together with your client". Even assuming that the solicitors were using the word "agent" in its legal sense, it is clear that this letter is not saying that the "agent" had any authority to make the "misdescription" mentioned. In any event, the letter is not speaking of the representation of which complaint is now made. This letter was, of course, written before it was revealed by the defendant that KH Chan was the important name to it. When this was done, the plaintiff's solicitor said immediately that the estate agents had no authority to make any representation or statement on the plaintiff's behalf.

43. The Falsity of the Representation

44. Was the representation false? The evidence is that the Kong Yuen Game Centre was operated by Jibsoon Limited in which KH Chan is the holder of about one-third of the shares and is one of three directors. It could not have been expected by any reasonable person that KH Chan would have been directly and personally concerned in the day-to-day running of more than twenty game centres. The vagueness with which those acting for the defendant describe the terms of the representation - tenant, owner, operator or licensee - indicates that what was conveyed to the defendant by Mr Au was that KH Chan would be so involved in the business of the game centre concerned here that his expertise and advice would be available. On the evidence of Mr So Bing, and that of the company return produced by the defendant itself, that is just what the position was. It is inconceivable that a business in which KH Chan was involved in as a substantial shareholder and director would not have available to it his skills and advice. I find that there is no case for suggesting that the representation was false.

45. A Material Inducement?

46. Was the representation a material inducement? YW Chan says that the involvement of KH Chan as a personality in the game centre business was a major consideration in the defendant's decision to purchase. It is very hard to believe this on the evidence of the contemporary documents. There is no mention of the name of KH Chan in the provisional agreement, although there is specific reference to the lease. This says merely that the properties have been leased to "Kong Yuen Game Machine at a monthly rental of $208,000 for a term up to January 1995". The "Kwok Yuen Game Machine" is clearly not anybody: certainly not KH Chan, the person of most interest to the defendant. The defendant then gives instructions to his solicitors. It is not credible that, if it is true than the defendant placed so much importance on the involvement of KH Chan, that this would not be conveyed to the defendant's solicitors. If it was conveyed to the defendant's solicitors, it is not reasonably possible that they would not have ensured that their client's expectations in this regard were not assured. At the very least, one would have expected them to have perused the documents carefully, particularly the copy lease sent to them, to see if these revealed the involvement of KH Chan, a matter on which their client placed so much emphasis. If they did not, one would have expected that the formal agreement would be amended to secure their client's interests.

47. This must be particularly so when the draft formal agreement contained a clause, found acceptable by the defendant's solicitors, that acknowledged that their client was fully aware of the contents of the lease. The lease itself featured KH Chan signing on behalf of the landlord.

48. The only explanation that I have about this is the lamest of lame excuses from YW Chan that "I am informed by the Defendant's solicitor and verily believed that at that time they did not pay particular attention to the identity of the tenant ...". No further explanation is given, either by Mr Chan or the solicitor concerned. In the circumstances of this case, I would have expected, bearing in mind that the defendant says that the involvement of KH Chan was of crucial importance, an explanation of why "they did not pay particular attention", and I would have expected this explanation first hand from the solicitor concerned.

49. The defendant's solicitors saw the draft formal agreement and the copy lease sometime between 18 and 22 February. On 26 February 1994, the defendant's solicitors wrote to the plaintiff's solicitors saying that they had noted from the tenancy agreement sent on 18 February 1994 that the tenant of the premises was Mr Tong and not 'Kong Yuen Game Machine'; they made no mention of KH Chan at all. The parties' solicitors then corresponded about this point. The defendant's solicitors did not say that KH Chan was of any importance to their client until 9 March. It is not believable that the defendant's solicitors would not have mentioned KH Chan before this if they had been told that KH Chan was a figure of such importance in the transaction. It must be that the defendant did not mention this until a late stage, and the only explanation for that is that the crucial nature of the involvement of KH Chan was an afterthought.

50. There must be also considerable doubt that a lease that had less than a year to run would have assumed such importance in the mind of a purchaser of property over which the lease subsisted.

51. I should also say that I have not been impressed by the fact that the defendant has, from time to time, raised other difficulties about the implementation of the agreement. These points were, to use the words of Ackner, L. J. in Banque de Paris v de Naray [1984] Vol. 1 Lloyd's Law Reports 21, at 24, not worth the paper they were written on. This conduct leaves one with the impression that even the defendant did not have much confidence in its case.

52. Conclusion

53. It follows from what I have said that I find that the defendant does not have any fair or reasonable probability - nor even a reasonable possibility - of showing that it has a real or bona fide defence to the plaintiff's claims. It also follows that the defendant is not entitled to continue the registration of the provisional agreement against the properties. There will be judgment for the plaintiff in terms of the minutes of judgment annexed to the summons.