WAYGOOD INVESTMENT DEVELOPMENT LIMITERD v. BEST PARAMOUNT INDUSTRIAL LTD

LDPE 678/2018

[2018] HKLdT 85

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO. LDPE 678 OF 2018

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J U D G M E N T

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1.  This is the applicant’s application for recovery of possession of the premises known as 九龍尖沙咀東科學館道14號新文華中心A座地庫（UB層）2號鋪 (“Shop 2”) which is also known as “All those portion of the Upper Basement, Shop 2, Block A, New Mandarin Plaza, No 14 Science Museum Road, Tsim Sha Tsui East, Kowloon”.

Background

2.  Portion of the Ground Floor of the Commercial Podium of New Mandarin Plaza and the Upper Basement of the Commercial Podium of New Mandarin Plaza (“the New Mandarin Plaza Premises”) are owned by Excellence Property Development Limited (“Excellence Property”). By way of a Deed of Lease dated 9 July 2012, the New Mandarin Plaza Premises were let to Hong Kong Investment Holdings Limited (“Hong Kong Investment”) for a term expiring on 31 August 2021. By way of a Deed of Sub-tenancy dated 29 November 2012, Hong Kong Investment sub-let the New Mandarin Plaza Premises to the applicant, Waygood Investment Development Limited, also for a term expiring on 31 August 2021 “at the same monthly rental payable by (Hong Kong Investment) to (Excellence Property) …”  

3.  Sub-dividing the Upper Basement of the Commercial Podium of New Mandarin Plaza into Shop 1, Shop 2 and Shop 3, by a Deed of Lease dated 8 July 2016, the applicant further sub-let Shop 2 to the respondent, Best Paramount Industrial Limited, for a term of slightly more than 5 years from 16 July 2016 to 31 August 2021(“the Lease”). The monthly rent payable by the respondent to the applicant is $498,538 from 16 July 2016 to 31 August 2018 and thereafter at $573,319. The respondent is also responsible for management fees and/or air conditioning charges, the government rent and rates and the electricity supply charges as determined according to the Fifth Schedule to the Lease.

4.  On 31 July 2018, the applicant filed its Notice of Application in the Lands Tribunal for vacant possession of Shop 2, arrears of rent and other charges. It is the case of the applicant that the respondent has since 1 May 2018 failed to pay the full amount of rent, management fees and/or air conditioning charges, the government rent and rates and the electricity supply charges and thereafter anything thereof.

5.  The respondent filed a Notice of Opposition dated 8 August 2018. But by way of an Interlocutory Application filed on 6 September 2018, the respondent sought leave to amend its Notice of Opposition. Whereas I granted the leave as sought on 14 September 2018, by the Amended Grounds and Particulars of Opposition dated 19 September 2018, Mr Paul Wong (“Mr Wong”), counsel on behalf of the respondent, submits that the applicant’s claim for the alleged rent in arrears had been discharged and extinguished prior to commencement of the present proceedings.

6.  The respondent contends that the Lease is part of a joint venture business amongst the applicant, a Mr Yuen Tak Yau Daniel (“Mr Yuen”), a Madam 蘇月如 (“Madam So”) and the respondent whereas the rental payment could be offset against Mr Yuen’s liabilities incurred under the joint venture business.

7.  So far as the whole joint venture business is concerned, the respondent avers that:

(a)   In around June 2016, Mr Yuen acting in his personal capacity and also for the applicant offered a joint venture business with the respondent to operate retail business at New Mandarin Plaza though Mr Yuen and the respondent were already having other business dealings before;

(b)   For the purpose of the present proceedings, there would be three main shops known as Shop 1, Shop 2 and Shop 3 in the Upper Basement of New Mandarin Plaza, a shopping mall designed for serving tourists from Mainland China;

(c)   Mr Yuen and the applicant would operate Shop 1 via their nominee or associated company known as Waykai Development Limited, whereas Madam So would operate Shop 3 via her nominee or associated company known as Top Prime Holdings Limited. As to their businesses, Shop 1 would sell watches and related products, and Shop 3 would sell jewellery and accessories;

(d)   The respondent was invited to run business at Shop 2 selling various items such as groceries, trendy goods, health care products, cosmetics and electronic goods etc, whilst Mr Yuen would procure the applicant as landlord to enter a tenancy agreement for Shop 2 with the respondent as tenant;

(e)   The respondent initially refused Mr Yuen’s invitation, because the number of potential customers (namely Mainland tourists) could be unstable and Shop 2 was situated at an inferior location inside New Mandarin Plaza which was not readily accessible by potential customers;

(f)   Therefore, the respondent would not take part in this proposed joint venture business or rent Shop 2 unless sufficient potential customers could be secured, so that the respondent’s obligation to pay rent could be likewise secured.

8.  In or around early July 2016, Mr Yuen, the respondent, the applicant and Madam So entered into the following material terms of a joint venture agreement (“the Joint Venture Agreement”):

(a)   The respondent would rent Shop 2 as per the Lease;

(b)   In consideration of the respondent’s entering into the Lease, Mr Yuen, the applicant and Madam So agreed to procure and arrange Mainland tourists to Shop 2, so that the main business of Shop 2 would rely upon the tourists being so introduced;

(c)   Further, Mr Yuen guaranteed that the turnover of Shop 2 should be at least HK$12 million per month. Otherwise, Mr Yuen undertook to pay the respondent 10% of any shortfall below HK$12 million per month. On the contrary, Mr Yuen and Madam So are respectively entitled to 4% and 6% commission out of the turnover on top of HK$12 million per month;

(d)   Therefore, if the respondent’s business at Shop 2 for whatever reason declines below HK$12 million in a particular month, Mr Yuen’s obligation to reimburse the respondent as aforesaid is an indirect way to subsidize the rental payment under the Lease;

(e)   The Lease is an indispensable and inseparable part of the joint venture business and so should remain in force or come to an end together with the whole joint venture business;

(f)   Mr Yuen, being the landlord of the New Mandarin Plaza Premises and having the full control thereof, agreed to prohibit any competitive business against Shop 2 to be conducted in the same mall. In other words, Mr Yuen, the applicant, Madam So agreed not to carry on any business in direct or indirect competition with the respondent’s business at Shop 2 inside the mall;

(g)   There shall be mutual set-off against outstanding rents due from the tenancy from the respondent to the applicant on the one hand, against the outstanding sums due under the said loss sharing agreement from Mr Yuen to the respondent whenever necessary or applicable;

(h)   Similarly, Mr Yuen’s entitlements under the said profit sharing agreement in a particular month can be offset against his own obligations to share the shortfall of turnover below HK$12 million in another month whenever necessary or applicable.

9.  Pursuant to the Joint Venture Agreement:

(a)   The respondent entered into the Lease with the applicant;

(b)   Mr Yuen, the respondent and Madam So entered into a written Chinese agreement dated also 8 July 2016 which mainly evidences the agreed sharing of profits and losses when the turnover of respondent’s business at Shop 2 would exceed, or fail to, attain HK$12 million per month (“the Tri-Partite Agreement”);

(c)   The respondent executed the Lease and the Tri-Partite Agreement on the same date, in the same place and the same occasion;

(d)   The sharing of profit and loss of Shop 2 on top of, or below, HK$12 million per month was duly divided amongst Mr Yuen and Madam So, or offset the rents under the Lease, as the case may be, at all material times save and except early 2018 and afterwards, as will be particularized below;

(e)   The rental payment obligations under the Lease for the period between January 2017 and February 2017 were entirely offset and extinguished against Mr Yuen’s obligations to pay under the Tri-Partite Agreement, when the turnover of Shop 2 were below HK$12 million during these two months.

10.  Mr Yuen and the applicant themselves prepared, drafted and settled the Lease being put forward to the respondent for endorsements. Thus, the respondent will refer to and rely upon the contra proferentem rule at trial.

11.  The respondent avers that there were actual contemplations and mutual understandings amongst Mr Yuen acting for himself and the applicant, the respondent, Madam So, when the Joint Venture Agreement was being entered into:

(a)   The Lease and the Tri-Partite Agreement are partly written records of the Joint Venture Agreement;

(b)   As all the visitors and customers to the New Mandarin Plaza Premises were coming from Mainland China, very few visitors would visit during the Chinese New Year season. Thus, the turnover of Shop 2 should be dramatically low. Mr Yuen was well prepared to suspend his entitlements under the said profit sharing agreement some months ahead so as to facilitate to set-off exercise against his obligations to pay during the Chinese New Year seasons;

(c)   Time is not of essence in respect of all payment obligation so as to facilitate set-off amongst Mr Yuen, the respondent and/or the applicant.

(d)   the above mentioned terms shall become part of the Joint Venture Agreement as well, as intended and agreed by all parties concerned. For avoidance of doubts, the respondent would, inter alia, refer to and rely upon the Lease and the Tri-Partite Agreement to prove the Joint Venture Agreement.

12.  Accordingly, Mr Yuen is liable to pay his contribution whenever the turnover of Shop 2 is below HK$12 million in a particular month. The turnover did go down below HK$12 million from February 2018, and so Mr Yuen is obliged to contribute his respective sums according to clause 8 of the Tri-Partite Agreement.

13.  According to the respondent’s calculation, Mr Yuen owes a net balance from September 2017 to July 2018 in the sum of HK$2,091,238.85 calculated as follows:

Month	Entitlement (Obligation)
September 2017	$122,379.83
October 2017	$167,992.05
November 2017	$337,410.11
December 2017	$32,532.72
January 2018	$8,606.09
February 2018	($1,045,608.29)
March 2018	($453,817.66)
April 2018	(98,792.04)
May 2018	($369,920.04)
June 2018	(347,275.43)
July 2018	(444,745.99)
Net Balance:	($2,091,238.85)

14.  Pursuant to the set-off mechanism under the Joint Venture Agreement, the net balance and Mr Yune’s obligations from August 2018 onwards shall be offset against the rental payments under the Lease from May 2018. Therefore, the respondent’s rental payment from May 2018 and following months were all discharged and extinguished as long as Mr Yuen’s obligations are available for this set-off purpose of the rental payments.

DCCJ 3097/2018

15.  Meanwhile, on 17 July 2018, Mr Yuen issued a claim in the District Court against the respondent for the profit sharing under the Tri-Partite Agreement for the months from September 2017 to November 2017. Based on the Defence and Courterclaim similar to the Amended Grounds and Particulars of Opposition dated 19 September 2018 as stated above, the respondent did on 6 September 2018 take out an interlocutory application to transfer the present proceedings to the District Court. In support of this application, the respondent alleged that Mr Yuen was one of the beneficial owners of the applicant which was effectively controlled by him to carry out the Joint Venture Agreement.

16.  On 14 September 2018, after the hearing the submissions of the parties on both sides, I refused the 6 September 2018 interlocutory application for transfer with costs reserved.

Issue

17.  In view of the above, the issue raised in the present case is whether there is a Joint Venture Agreement between Mr Yuen and the respondent whereby the obligations of Mr Yuen are available for set-off against the monthly rental payable by the respondent to the applicant.

Witness Statement of Mr Yuen

18.  Mr Yuen is a director of the applicant and prepared a witness statement dated 28 September 2018.

19.  Whereas there was an allegation that Mr Yuen was one of the beneficial owners of the applicant, Mr Yuen provides a copy of the latest annual return of the applicant company dated 20 November 2017 which showed that the 1,000,000 issued shareholding of the applicant company was owned by Modern Tech Limited and Vicpro Limited in equal shares. Mr Yuen explains that he used to hold some 15% shares in the applicant company but was subsequently sold in 2015[1]. As a result, although Mr Yuen remains as a director of the applicant, he does not hold any shares whether directly or indirectly of the applicant company.

20.  Apart from Mr Yuen, the company record also shows that Mr Tsoi Kee Kwong Ricky (“Mr Tsoi”) who is the beneficial owner of the respondent is also a director of the applicant company. Mr Tsoi also holds beneficial interest in the applicant company via Vicpro Limited[2] as well as the respondent company. Another director of the applicant is Cheung Hoi Tak who is also a director of Vicpro Limited[3] and should be somehow related to Madam So.

21.  Mr Yuen acknowledges the Tri-Partite Agreement which was signed only among himself, Madam So and the respondent which was represented by Mr Tsoi. Mr Yuen denies he is a beneficial owner of the applicant but it is the respondent which is related to the applicant.

22.  Notwithstanding the Tri-partite Agreement, Mr Yuen re-iterates that he never agreed on behalf of the applicant company that the respondent could deduct any rental payments payable to the applicant.

23.  Mr Yuen said that he was only told by Mr Raymond Watt (“Mr Watt”) who is responsible for the operation of the applicant company that there was once a set-off done in about March or April 2017 for the rental payments of January and February 2017 without his consent or knowledge. But at that time, the applicant was owing him some payments for goods (more particularly watches supplied to the applicant for sale as revealed during cross-examination by Mr Wong). Mr Yuen suggests that it was the respondent who proposed to the applicant that he also owed money to it pursuant to the profit and loss sharing mechanism provided for in the Tri-partite Agreement. After some calculations and agreements made in Mr Yuen’s absence, the applicant and respondent agreed to have a set-off for the rental payments for January and February 2017. According to Mr Yuen, it became a fait accompli when he found this out. As a result, despite his unwillingness, he did not chase the applicant for payment of what was due and owing to him.

24.  Mr Yuen says that the applicant no longer owes him money and there is simply no justification for the applicant to agree to another set-off exercise.

25.  On the other hand, the respondent fails to distribute Mr Yuen’s entitlement under the profit and loss sharing mechanism of the Tri-Partite Agreement and that explains why he commences the District Court Action No DCCJ 3097/2018. By reason of the same, Mr Yuen submits that he had already accepted the repudiation of the Tri-Partite Agreement since about November 2017.

Witness Statement of Mr Watt

26.  Mr Watt also prepared a witness statement dated 28 September 2018.

27.  Mr Watt is currently employed by one HMS Limited which is controlled by Mr Yuen. Since about 2013, an agreement was reached between HMS Limited and the applicant whereby HMS Limited would provide a consultancy services to the applicant. Because of this agreement, Mr Watt was seconded to the applicant to oversee and supervise the operation of the applicant also since 2013. Mr Watt was supposed to handle the rental matters in relation to the Lease.

28.  Mr Watt said it was the practice of the applicant to issue a debit note which includes the monthly rental as well as the management fees and/or air-conditioning charges to the respondent each month. As regards other charges for maintenance etc, the applicant would issue some other debit notes for the month for the respondent to settle.

29.  Throughout the term, Mr Watt states that it has been the practice of the respondent to issue cheque(s) to settle all items of payments including the monthly rentals, the management fee, the air-conditioning charges and other miscellaneous items. Upon receipt of the same, the applicant would not issue a rental receipt. Instead, if the cheques were accepted as payments of the rentals etc, the applicant would bank in the cheques and make photocopies of the cheques together with the bank-in slips on the same page (which is hereinafter referred to as “Payment Records”).

30.  Mr Watt suggests that the respondent has not been on time in effecting payments of the rental etc. In such events, the applicant would write the debit note numbers on the Payment Records so as to identify which cheque payment(s) were for rental and other payments for which month(s). Such practice has been agreed by the respondent all along as the latter has never demanded any rental receipts to be issued by the applicant.

31.  Mr Watt confirms that for the month of April 2018, the respondent did pay for the rental and management fee/air-conditioning charges in the sum of $571,507.32 by two cheques, one dated 21 May 2018 in the sum of $461,507.32 and another dated 20 July 2018 in the sum of $110,000; for the month of May 2018, the respondent only made two partial payments of $64,345.16 and $126,761.33 dated 20 July 2018 and 9 August 2018 respectively. The total of these 2 partial payments is $191,106.49 which leaves an outstanding balance of $380,400.83. The respondent has failed to make further payments for the months of June, July, August and September 2018 etc.

32.  Mr Watt further states that although Mr Yuen is a director of the applicant company, the business dealings between Mr Yuen and the respondent are never agreed to be part of the terms of the Lease. Mr Watt also emphasized that the applicant was not made a party to the Tri-Partite Agreement.

33.  Mr Watt also agrees that for the months of January and February 2017, there was indeed a set-off done by the applicant and the respondent. The respondent at that time alleges that Mr Yuen owed it a total sum of $1,336,855.85 according to the Tri-Partite Agreement. The reason why the applicant agreed to that particular set-off was that the applicant which was also doing business with Mr Yuen at that time, was also owing him sums for goods payment in the region of $1.3 million. As a result, after some calculations done by the respondent which is reflected in the table prepared by it with the letter head of “MP Mall” (which, according to the Tri-Partite Agreement, is referred to the business operation done by the respondent at Shop 2), it arrived at the figure of $115,018.58 being the balance of the indebtedness due and owing by the respondent to the applicant.  This figure was reached after deducting the amounts of rentals together with various items of charges the respondent was liable to pay to the applicant during the said 2 months of January and February 2017[4].

34.  The respondent thereafter issued a cheque of $115,018.58 in March 2017 which was accepted and banked in by the applicant. Mr Watt again emphasizes that this set-off only took place once as at that time the applicant was owing money to Mr Yuen. After that particular set-off, the applicant did not and does not owe any money to Mr Yuen. Therefore, there is no point for the applicant to agree to any set-off of rental payments due and owing to the applicant.

35.  Finally, Mr Watt states he understands from Mr Yuen that he did not agree to that set-off exercise. As for the alleged indebtedness by Mr Yuen to the respondent under the Tri-Partite Agreement, Mr Watt understands that Mr Yuen denies owing any money to the respondent. In any event, Mr Watt emphasizes that the applicant never agreed to deduct any rental payment due and owing by the respondent apart from the single incident aforesaid.

Witness Statement of Mr Tsoi

36.  Mr Tsoi prepared a witness statement dated 4 October 2018.

37.  Mr Tsoi said in 2016, Shop 2 is situated at a relatively newly renovated mall where only three shops were designated to operate their respective businesses targeting at Mainland visitors. The current settings of the shopping mall are confined to the original design of the erstwhile nightclub. As a result, Shop 2 is not accessible to outsiders unless passing through the main entry and other shops of the mall[5]. In other words, Shop 2 is situated somewhere at the very dead end of the mall. Moreover, the mall was and still is not known to local people generally. The only customers should be Mainland visitors deliberately arranged to pay visits at Shop 2. There was an additional reason why Shop 2 is located in such way. The applicant was once operating and managing all shops in the mall, and would arrange all visitors to pass through all shops one by one. So, the applicant saw fit to just rely upon one gate as both the egress and ingress.

38.  Owing to the inherent limitations and drawbacks of Shop 2, the applicant was not able to easily let it out. Indeed, the applicant and related persons still directly or indirectly owns and operates all other shops at the mall in 2016. As Shop 2 was vacant, the applicant and related persons were very eager to look for a tenant to occupy Shop 2 in 2016. According to Mr Tsoi, the applicant then contacted him and discussed about the possible business co-operation in mid-2016[6].

39.  The key persons on the applicant’s side consists of Mr Yuen and Madam So. Mr Tsoi suggests that Mr Yuen is a merchant having beneficial interests in the applicant (which turns out to be wrong according to evidence) which was represented by him at all material times. According to Mr Tsoi again, Mr Yuen therefore acted in his personal capacity as well as the representative of the applicant. Mr Tsoi said he has known Mr Yuen since around 2011. On the other hand, Madam So is engaged in tour business mainly serving Mainland visitors coming to Hong Kong. Mr Tsoi began to know her around 2008. Over the years, Mr Tsoi maintained business relationship with them.

40.  Therefore, Mr Yuen and Madam So are indispensable people on the applicant’s side in the present proceedings. On the other hand, Mr Tsoi acted for the respondent to negotiate with Mr Yuen and Madam So. Mr Tsoi states he had the direct knowledge in how and why the Lease was discussed, agreed and executed.

41.  Mr Tsoi suggests he has three main concerns before the respondent would consider to rent Shop 2. First, the respondent does not have any business connection with travel agents. Unless Mainland visitors are procured and arranged to visit Shop 2 on purpose, the business of Shop 2 may be very poor. Secondly, the business nature of Shop 2 should not be competitive with that of other shops in the same mall. Otherwise, unnecessary and unfair competitions will damage Shop 2’s business. Thirdly, the turnover of Shop 2 is not secured or stable in any event because of the restrained sources of customers from Mainland.

42.  Mr Tsoi said renting Shop 2 is very risky. The respondent may run the risk of having insufficient turnover to pay the monthly rents. Therefore, Mr Yuen, Madam So and Mr Tsoi himself discussed how to resolve his apparent concerns. Unless these concerns are properly dealt with, the respondent would not rent Shop 2, which is not an ordinary retail shop, but an enclosed shop in a not well-known mall exclusively for Mainland visitors.

43.  Also, in mid-2016, Mr Tsoi had a dispute with Madam So over certain commission payments which were alleged to be owed by him or his company. Madam So said Mr Tsoi owed her a sum around HK$3.26 million for commissions in respect of visitors to another shop he operated. Mr Tsoi all along denied this alleged outstanding sum.

44.  In order to induce the respondent to rent Shop 2, Mr Yuen, acting for himself, for the applicant and also for Madam So, had a discussion with Mr Tsoi in the ICON hotel in around mid-2016. Madam So did not turn up because his relationship with her was not good owing to the said commissions dispute. After discussion, Mr Yuen orally agreed or mutually understood with him that:

(a)   Mr Yuen would guarantee that the monthly turnover of Shop 2 should be HK$12 million or above. Otherwise, Mr Yuen would compensate 10% of any shortfall below HK$12 million. (In the worst case that Shop 2 generate nil turnover in a particular month, Mr Yuen shall pay HK1.2 million to the respondent as compensation and that this sum can cover all monthly rent and expenses. However, Mr Yuen urged and implored Mr Tsoi to settle the commission dispute with Madam So, so that Mr Tsoi should pay the alleged sum of HK$3.26 million to her[7]. Mr Tsoi followed Mr Yuen’s advice, as his personal guarantee to secure the turnover of Shop 2 is attractive and reasonable.)

(b)   Madam So shall arrange Mainland visitors to Shop 2. Indeed, Madam So would not incur extra costs in doing so, as she was already arranging Mainland visitors to the mall for other shops, namely Shop 1 and Shop 3, in which Mr Yuen and Madam So respectively run certain businesses[8];

(c)   Mr Yuen and Madam So are entitled to share 4% and 6% respectively on the monthly turnover of Shop 2 exceeding HK$12 million;

(d)   Out of mutual contemplation, Mr Yuen and Madam So would not allow any business to be carried out in the mall in direct competition with Shop 2, which was intended to sell groceries, trendy products, cosmetics, electronic goods and health care products. Shop 1 would sell watches and related products, whereas Shop 3 would sell jewelry and accessories;

(e)   The monthly rent of Shop 2 can be automatically discharged and set off wholly or partly against Mr Yuen’s obligation to pay whenever Shop 2’s turnover is below HK$12 million;

(f)   Time is not of essence. The respondent’s obligation to pay monthly rent in a particular month can be set off against Mr Yuen’s obligation in another month;

(g)   Subject to above conditions, the respondent would rent Shop 2 from the applicant.

45.  The above are essentially the agreed terms amongst Mr Yuen acting for himself, for the applicant and Madam So, and Mr Tsoi acting for the respondent. This came the Joint Venture Agreement. Therefore, Mr Yuen and Madam So also have personal obligation to compensate the respondent if Shop 2’s turnover falls below HK$12 million in a particular month[9]. Moreover, the respondent’s obligation to pay rent can be directly set off against Mr Yuen’s obligation. The respondent welcomed this accounting practices and business arrangement, for the sake of convenience.

46.  Mr Tsoi purports to provide evidence about the said discussion with Mr Yuen concerning the set-off agreement. Mr Tsoi said he once suggested to Mr Yuen that Mr Yuen and the respondent should each pay a security or deposit in the sum of HK$2 million to secure the due performance of the profit and loss sharing of Shop 2’s turnover. However, Mr Yuen rejected this idea on the ground that his obligation to pay compensation can be directly set off against the respondent’s obligation to pay rent. This is itself a sufficient form of security. Mr Tsoi then agreed and accepted. This explain why the set-off mechanism exists as well.

47.  Pursuant to the Joint Venture Agreement, Mr Tsoi, with the assistance of his staff, then prepared a Chinese agreement dated 8 July 2016, ie the Tri-Partite Agreement essentially incorporating all major agreed terms. The profit and loss sharing mechanism are recorded and explained in clauses 7 and 8. On the other hand, the applicant prepared the Lease, which was signed on the same day with the Agreement at the same time and place[10]. Mr Tsoi did not seek legal advice when preparing and signing the Tri-Partite Agreement and the Lease. With the benefits of hindsight, the said set-off regime was missing expressly in the Tri-Partite Agreement and the Lease. Notwithstanding this omission, Mr Tsoi once did not regard it as a major defects because Mr Tsoi himself has beneficial interests in the applicant via intermediaries. Mr Tsoi believed he should have a say in the applicant. Also, Mr Tsoi did trust Mr Yuen and did not think that he may breach his words easily.

48.  Moreover, all parties concerned contemplated that Shop 2 should generate a turnover above HK$12 million, as Madam So would introduce many visitors to the mall and Shop 2. Unfortunately, this missing is now an excuse for the applicant to deny the set-off regime.

49.  In order to prove the existence of the set-off regime, Mr Tsoi refers to the actual payment in the sum of HK$115,018.58 in March 2017 to the applicant for the rents due in January and February 2017, after taking into accounts Mr Yuen’s obligations under the Tri-Partite agreement. This was the first time to invoke the set-off regime, because Mainland visitors would not come to Hong Kong but stayed at their home villages during the Chinese New Year. Thus, the number of visitors to the mall and Shop 2 was decreasing dramatically in January and February 2017. As a result, Mr Yuen’s obligation under the Tri-Partite Agreement was activated but subsequently set off against the rental payment. Mr Li Tze Keung (“Mr Li”), the respondent’s another witness, would explain how his set-off was calculated in his witness statement.

50.  Around October 2017, Madam So again requested for more commission payments in respect of the Mainland visitors arranged to Shop 2. In gist, Madam So and Mr Tsoi had another round of commission dispute. Around November 2017, Mr Yuen and Madam So, without Mr Tsoi’s consent, set up a new business in the mall selling goods in direct competition with Shop 2. Around January 2018, Mr Tsoi met again with Mr Yuen and Madam So in ICON hotel to discuss the pending dispute about the commission and also their new rival business. No meaningful settlement or solution was concluded. Mr Tsoi’s relationship with them turned sour.

51.  Shortly afterwards in early 2018, Mr Yuen and Madam So formally set up a new shop in the mall[11] and keep on selling cosmetics and health care products without Mr Tsoi’s consent[12]. This new shop is operated by a limited company called Health and Life International Limited, where Mr Yuen and a Mr Chiu Yui Eugene (allegedly husband of Madam So) are the directors. Its only shareholder is HMS Limited, which is solely owned by Mr Yuen. Mr Tsoi accused Mr Yuen and Madam So of acting in concert to damage Shop 2’s business in the mall.

52.  The number of Mainland visitors to Shop 2 was declining since the Chinese New Year in early 2018. However, the situation was not getting improved. As a result, Shop’s turnover failed to meet HK$12 million since February 2018 and so Mr Yuen’s obligation for compensation was invoked. His entitlement and obligations are as calculated and stated in the Amended Grounds and Particulars of Opposition dated 19 September 2018 in the sum of HK$2,091,238.85. See §13 above.

53.  Mr Tsoi suggests that Mr Yuen’s obligations are sufficient to wholly set off the rental payment from May 2018.

54.  Finally, Mr Tsoi states that he has been engaged in similar retailing business over 30 years via various companies but the present proceedings are the first legal claim he ever encountered. Mr Tsoi further suggests that the respondent is an honest and responsible business vehicle which had donated substantial money to charities over the past years.

Witness Statement of Mr Li

55.  Mr Li prepared a witness statement dated 4 October 2018. He is the accounts clerk in charge of keeping books and accounts of the respondent.

56.  Particularly, Mr Li explains the set-off arrangement in January and February 2017 where Mr Yuen was obliged to pay $724,748.75 and $709,884.14 respectively as compensation for the shortfall of turnover during the period but he is also entitled to profit sharing in the sum of $97,777.04 for December 2016. His net position as at February 2017 was therefore a negative sum of $1,336,855.85. On the other hand, the total rent and miscellaneous expenses for the period from December 2016 to February 2017 was $1,451,874.43. Instead of paying directly the said sum of $1,336,855.85 to the respondent, this sum was set-off against the outstanding rental payment in the sum of $1,451,874.43. As a result, the respondent was ultimately required to pay only $115,018.58 to the applicant.

Analysis

57.  As submitted by Mr Wong for the respondent, the alleged set-off mechanism cannot be found in the Lease or in the Tri-Partite Agreement, notwithstanding the latter was prepared by the respondent[13]. The parties who signed the Tri-Partite Agreement were the respondent, Madam So and Mr Yuen without mentioning or including the applicant. While Mr Tsoi did take the care to include settlement of the commission dispute with Madam So regarding the alleged sum of HK$3.26 million owed to her[14], he failed to include the set-off mechanism he alleged.

58.  As regards the Lease, it is not disputed that it was prepared by the applicant adopting the so-called standard format of the applicant in leasing. During cross-examination by Mr Roland Lau (“Mr Lau”) for the applicant, Mr Tsoi admitted that he did not pay much attention to the details of the Lease. For instance, clause 2(a) of the Lease states that:

“The Tenant agrees with the Landlord as follows:-

(a) to pay the said rent at the time and in manner aforesaid without deduction or set-off whatsoever;” (underlined added)

59.  Whereas the above citation contradicts any suggestion of set-off, the general rule is that a literate adult is bound by a document he signs whether he chooses to read and/or understands the document or not: See paragraph 3-049 of Chitty on Contracts, Vol.1, 32^nd edition. This is particularly the case when Mr Tsoi suggests that he is a businessman of over 30 years’ experience in this subject.

60.  There is also the parol evidence rule which is succinctly set out in paragraph 13-099 of Chitty on Contracts, supra:

“It is often said to be a rule of law that:

‘ If there be a contract which has been reduced to writing, verbal evidence is not allowed to be given … so as to add to or subtract from, or in any manner to vary or qualify the written contract.’”

61.  However, it is trite that extrinsic evidence is admissible as to the validity rather than the contents of a written contract:

“ Validity. The rule prevents a party from relying on extrinsic evidence only as to the contents of the contract, and not as to its validity. Such evidence can therefore be used to establish the presence or absence of consideration or of contractual intention ‌…”[15]

“ No contract. Extrinsic evidence is admissible to show that what appears to be a valid and binding contract is in fact no contract at all …”[16]

“ Extrinsic evidence will always be admitted to defeat a deed or written contract on the ground of fraud, illegality, misrepresentation, mistake or duress.”[17]

62.  Thus, the only possible ground for defeating or varying the Lease is perhaps the mistake or omission on the set-off as alleged by Mr Tsoi or the respondent.

63.  Firstly, contrary to Mr Tsoi’s suggestion[18], Mr Yuen denies during his cross-examination by Mr Wong that he was the one who invited Mr Tsoi or the respondent to rent Shop 2 in 2016. Mr Yuen explained that by 2016, he had no beneficial interest in the applicant company; this evidence is not challenged by Mr Wong or the respondent. Mr Yuen said he remained as a director of the applicant company only because he had to make sure that the applicant company pays rent punctually to Hong Kong Investment which had committed to paying rent to Excellence Property for the New Mandarin Plaza Premises; Mr Yuen himself has made a personal guarantee to Excellence Property as well.  

64.  Mr Yuen said he needed not do the introduction or invitation because Mr Tsoi has been a director having beneficiary interest in the applicant company ever since 2012 when the applicant company was formed. This evidence is also not challenged.

65.  Instead, Mr Yuen said that it was Mr Tsoi who came up with the proposal to rent Shop 2 and take up the business which had been there since 2012. That led to the Tri-Partite Agreement and then the Lease pursuant to the Tri-Partite Agreement. By reference to also the evidence that by July 2016, Mr Tsoi was facing a removal of a similar tourist retailer business in Kowloon Bay, it appears that Mr Tsoi or the respondent was eager to set up his business at Shop 2. Otherwise, Mr Tsoi would not have to settle with Madam So the $3,274,140 that he said he was disputing.

66.  Mr Yuen also denies that he was in the position to propose or guarantee a turnover of $12 million per month because he was not in the tour business. Mr Yuen said he was not particularly concerned about the profit (4% if turnover above $12 million) or loss (10% if turnover below $12 million) sharing ratio in the Tri-Partite because at that time, his only concern was to facilitate the respondent to take up Shop 2 and pay the rent when the business operation there was not so good[19]; Mr Yuen however did not contemplate that the turnover would fall below $12 million anyway. This latter evidence is consistent with Mr Yuen’s evidence that he was not one to suggest the threshold of $12 million.

67.  Obviously, there are conflicting evidences between Mr Yuen and Mr Tsoi.

68.  The resolution of the factual disputes primarily turns on the credibility of the witnesses, who have given conflicting accounts of the same events relevant to both the Tri-Partite Agreement and the Lease.  My task is to evaluate the competing evidence against the backdrop of undisputed and indisputable facts.  I shall consider the totality of the evidence and inherent probabilities aided by contemporaneous documents/records, circumstantial evidence tending to support one account rather than the other, and overall impression of the character/motivation of the witnesses.

69.  As opposed to the criticism by Mr Wong of Mr Yuen’s evidence on the Tri-Partite Agreement being evasive, I am satisfied by the latter’s answer that the Tri-Partite Agreement was not linked to the Lease on the face of it. On the other hand, I am also concerned that Mr Yuen failed to find out who gave the instruction to have the set-off in March 2017. In assessing witnesses’ credibility, however, I bear in mind not only the demeanour of the witnesses in court, but also the intrinsic value of their evidence upon considering the totality of their evidence against the chronology of events, the available documentary evidence and the inferences based on inherent probabilities and/or undisputed facts[20]. A lie does not necessarily prove the opposite of the lie even though, depending on the subject matter and its significance in the case, it may indicate a consciousness on the part of the witness that the truth would not have assisted his case, or may amount to evidence that is corroborative of other evidence[21].

70.  As admitted by Mr Wong, the set-off incidence in March 2017 is the only evidence that may lead to inference of the existence of the set-off mechanism under the Joint Venture Agreement. But this incidence only occurred once. According to the evidence of Mr Tsoi during cross-examination by Mr Lau, he was persuaded by Madam So in March 2018 to pay the rent for the purpose of maintaining cash flow of the applicant. Madam So has not been called by either side though she appears to be an important person instrumental to the Joint Venture Agreement and the events that took place afterwards.

71.  Earlier in the examination-in-chief, Mr Tsoi had indeed rebutted Mr Yuen’s evidence that the existence of set-off, if any, would have a timing mismatch with the rental payment to the superior landlord because it takes time[22] to work out how much Mr Yuen might be owing to the respondent. Mr Tsoi argued that the 6-month deposit in the sum of $2,991,228 should be adequate to work as a buffer. In my opinion, this contradicts his willingness to assist the cash flow of the applicant company as afore-mentioned.

72.  According to the Payment Records, the respondent was still issuing cheques dated 21 May 2018 (in the sum of $461,507.32), 25 May 2018 (in the sum of $571,507.32), 31 May 2018 (in the sum of $571,507.32) and 20 July 2018 (in the sum of $110,000) ie a total of $571,507.32 x 3 = $1,714,521.96 for settlement of the rentals and management fee and air-conditioning charges of the preceding months. But according to the table in §13 above, the amount owed by Mr Yuen to the respondent had accumulated to a substantial sum since February 2018. Although Mr Tsoi explained that in consideration of paying rent to the applicant, Madam So agreed to pay him what she owed in the past years in the sum of $1.5 million odds[23], it does not make any sense both in logic and in timing. Mr Tsoi had already issued two cheques each in the sum of $571,507.32 on 1 March 2018 and 29 March 2018 respectively. Meanwhile, it is Mr Tsoi’s case that Madam So again requested for more commission payment in respect of the Mainland visitors. See §50 above. In my opinion, the incidence of set-off was just a one-off incidence for whatever reason instead of part of the set-off mechanism suggested by the respondent or Mr Tsoi.

73.  I agree with Mr Yuen that it was Mr Tsoi who approach him with the co-operation proposal in mid-2016 instead of vice versa. Not only Mr Tsoi is a director of the applicant holding beneficial interests in it, but he also admits he has over 30 years’ experience in the subject type of business and was indeed running a similar business in Kowloon Bay. More likely than not, the threshold of HK$12 million was proposed by Mr Tsoi rather than Mr Yuen.

74.  Mr Yuen said he had no longer had any beneficial interest in the applicant company by 2016. This evidence is not challenged and if it is true, it supports Mr Yuen’s evidence he had no right to allow his personal debts to be set-off by the rental receivable by the applicant company; otherwise, Mr Yuen would have breached his fiduciary duty to those who have beneficial interest in the applicant company.

75.  And if Mr Yuen had already sold his beneficial interest in the applicant, what Mr Tsoi keeps on alleging Mr Yuen having beneficial interest in the applicant company is wrong. This might explain why Mr Tsoi had a wrong conception in the Joint Venture Agreement that Mr Yuen was acting in his personal capacity as well as the representative of the applicant[24].

76.  In §44(a) above, I have recited Mr Tsoi’s witness statement that: “In the worst case that Shop 2 generate nil turnover in a particular month, Mr Yuen shall pay HK1.2 million to the respondent as compensation and that this sum can cover all monthly rent and expenses … his personal guarantee to secure the turnover of Shop 2 is attractive and reasonable.”[25] This is something short of the set-off mechanism alleged by the respondent or Mr Tsoi.  What Mr Tsoi contemplated a mutual understanding in §44 above that Mr Yuen’s personal guarantee of the loss sharing would be set-off against the rental payment directly might be Mr Tsoi’s own unilateral mistake.

77.  Indeed, according to Mr Tsoi, he always treats Mr Yuen and the applicant as just one party despite the corporate veil[26]. I believe what has been stated in the Tri-Partite Agreement was the true bargain procured by Mr Tsoi or the respondent instead of the set-off mechanism. Otherwise, I do not believe that Mr Tsoi could have missed this important element of set-off when drafting the Tri-Partite Agreement. Remember the Tri-Partite Agreement has in its appendix dealt with the settlement with Madam So. Mr Tsoi has been careful to make the respondent as a party to the Tri-Partite Agreement and it is unbelievable he had not made the applicant as a party as well instead of Mr Yuen himself only.

78.  I rule that there has been no set-off mechanism as alleged by Mr Tsoi.

Conclusion

79.  By reason of the matters set out above, I make the following orders:

(1)   Subject to paragraph (4) below, the respondent do deliver vacant possession of the suit premises to the applicant;

(2)   The respondent do pay the applicant arrears of rent/mesne profits and management fee and air-conditioning charges as follows:

(a)   Balance of arrears of rent and management fee and air-conditioning charges from 1 May 2018 to 31 May 2018 in the sum of $380,400.83;

(b)   Arrears of rent/mesne profits and management fee and air-conditioning charges at the rate of $571,507.32 per month from 1 June 2018 to 31 August 2018 ie in the sum of $1,714,521.96;

(c)   Arrears of rent/mesne/mesne profits and management fee and air-conditioning charges at the rate of $646,288.32 per month from 1 June 2018 until delivery up of vacant possession;

(3)   The respondent do pay the applicant the following sums under the Lease:

(a)   Arrears of government rent and rates, if any, as calculated under the Lease from 1 July 2018 until delivery up of vacant possession;

(b)   Arrears of electricity supply charges, if any, as calculated under the Lease from 1 July 2018 until delivery up of vacant possession;

(4)   If the respondent should on or before 17 November 2018 (“Relief Expiration Date”) pay into the Tribunal all the arrears of rent/mesne profits as stated in paragraph (2) above (including all arrears of rent/mesne profits and management fee and air-conditioning charges due on or before the date of payment), the respondent be relieved from the forfeiture incurred herein, and the Lease be reinstated;

(5)   Unless otherwise ordered, all sums ordered to be paid under this judgment shall be paid into the Tribunal in cash, by cashier orders issued by banks in Hong Kong or by cheques drawn by firms of solicitors in Hong Kong, and such sums received by the Tribunal shall be released to the applicant.

Costs

80.  I see no reason why the costs of the application dated 31 July 2018 and the costs of this action should not follow the event. I make a costs order nisi that the respondent shall pay the applicant’s costs of this action and the costs of the two Interlocutory Applications both dated 6 September 2018, to be taxed if not agreed on the District Court scale, with certificate for counsel.  If there is no application to vary the order nisi within 14 days hereof, the order shall become absolute.