ADCO ENTERPRISES LTD v. PETS CENTRAL (HK) LTD

DCCJ 4322/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4322 OF 2010

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DECISION

1.  There are three applications before the Court:

(a)  An application of the Plaintiff, ADCO Enterprises Limited,by Original Action (“ADCO”) for summary judgment against PC (the Defendant by Original Action);

(b)  An application on the part of five Defendants by Counterclaim, namely, the 2^nd Defendant (“ADP”), the 3^rd Defendant (“ULL”), the 5^th Defendant (“Alex”), the 6^th Defendant (“Paul”) and 7^th Defendant (“Wong”) to strike out the counterclaim against them by Pets Central (HK) Limited, the Defendant by the original action and the Plaintiff by Counterclaim (“PC”);

(c)  An application on the part of ADCO (1^st Defendant by Counterclaim) and the 4^th Defendant by Counterclaim to strike out PC’s counterclaim against them.

Background

2.  ADCO is and was the landlord of a business premises at Wing Fai Building, Nos. 189, 191, 193 and 195 Tung Choi Street Shop B on the ground floor and Flats A, B, C and D on the 3^rd Floor.  It was further a lawful tenant of Shop A on the ground floor and Flats B and C on the 2^nd Floor of the same building (“the Premises”).

3.  ADP is a retailer and wholesaler of pets and related products and services through “Red Carrot” and in “Q-Pets” shops.  Alex Yip and Paul Yip, the 5^th and 6^th Defendants are the managing director/shareholder and General Manager respectively of ADP.

4.  PC is a company incorporated in Hong Kong involved in providing emergency animal hospital services, veterinary care, pet retail products, pet grooming services and pet adoption services in Hong Kong.

5.  Under a lease dated 20^th September 2005, ADCO let the Premises to ADP for a term of four years from 29^th September 2005 to 28^th September 2009 at a monthly rent of $167,900 (“the Lease”).  Pursuant to clause 13.1 of the ADP Lease, ADP had an option to renew the lease for another four years at the monthly rate of $193,085 upon giving ADCO a written notice of not less than three months before the expiration of the ADP Lease.

6.  By a licence agreement dated 16^th October 2006, executed with the consent of ADCO, ADP allowed PC to share part of the Premises for the purpose of carrying out PC’s business at the monthly fee of $81,522 (“the Licence Agreement”).  Clause 4 of the Licence Agreement provided that ADP shall exercise the option to renew the lease pursuant to clause 13.1 of the ADP Lease if PC gives ADP not less than 15 days prior notice in writing.

7.  ADP and PC entered into a Joint Venture Agreement on 9^th July 2006 where ADP Pentagon Asia Limited (“the ADP group company”) would receive 10% shareholding in the PC group companies by 8^th August 2006 in consideration for payment in kind for PC’s use of ADP’s rented premises up to the credit amount of US$350,000.  As a result, ADP entered into a number of licence agreements with PC including the Licence Agreement dated 16^th October 2006 for the use of a portion of the Premises in Tung Choi Street, Mongkok (“the licensed portion).

8.  As ADCO failed to receive any written notice to exercise the option to renew the lease for a further four years under Clause 13.1 of the ADP Lease, it let the Premises to ULL, the 3^rd Defendant, for a term of four years from 29^th September 2009 to 28^th September 2013 at a monthly rental of HK$184,690 under a tenancy agreement dated 26^th August 2009 (“the ULL Lease”).

The Plaintiff’s Claim

9.  It is the Plaintiff’s case that ADP had failed to deliver vacant possession of the Premises to ADCO when the ADP Lease expired on 28^th September 2009 because PC had refused to vacate and continued to occupy a substantial part of the Premises consisting of the entrance and the staircase on the ground floor leading to the 1^st floor, half of the 1^st floor and the whole of the 2^nd floor (“the licensed portion”).

10.  On 15^th October 2009, ADCO commenced recovery proceedings under HCMP No. 2077 of 2009 against PC to recover vacant possession of the Premises (“the Recovery Proceedings”).  At the hearing on 29^th October 2009, Master Ng accepted and held that PC had no right to stay in the Premises.  She made an order in favour of ADCO to recover possession of the Premises from PC on or after 12^th November 2009.  (See pages 441 to 442 of Bundle 2).

11.  PC failed to comply with Master Ng’s order and continued to occupy the licensed portion until 16^th December 2009.  When ADCO finally recovered vacant possession of the Premises, it discovered that the licensed portion had been extensively damaged.

12.  On 29^th January 2010, ULL requested ADCO to refund rental paid by ULL for the period 29^th September 2009 to 16^th December 2009; it further reserved the right to claim against ADCO for damages caused by the delay in handing over the Premises. ADCO offered to compensate ULL by waiving the rental for the months of September 2010, September 2011 and September 2012 and offered to pay for the costs of repairing damages to the Premises caused by PC in a letter dated 26^th February 2010.  ADCO further offered a three months rent free period to ULL which was accepted by ULL in March 2010.

13.  ADCO commenced the Original Action in the present proceedings against PC for the loss and damages suffered in the sum of HK$554,070 being three months’ rental under the ULL Lease on 13^th December 2010.  It is under this Original Action that ADCO is applying for O.14 Summary Judgment against PC.

Pet Central’s Claim

14.  PC counterclaimed against ADCO and 6 other Defendants including ADP (“2^nd Defendant”), ULL (“3^rd Defendant”), Chan Chi Deun (“4^th Defendant”), Alexander Yip (“5^th Defendant”), Paul Yip (“6^th Defendant”) and Wong Oi Chun (7^th Defendant) for damages for breach of contract and nuisance.  The 4^th Defendant was named as a director of the Plaintiff, the 5^th Defendant as the director of the 2^nd Defendant and the 3^rd Defendant, the 6^th Defendant as the director of the 2^nd Defendant and the 7^th Defendant as the director and shareholder of the 3rd Defendant.

15.  In the Defendant’s defence, PC claimed it was entitled to renew the licence after having served notice on ADP in accordance with the Licence Agreement.  It claimed it had also notified ADCO of its intention to remain in the Premises.  Furthermore, it claimed it only occupied a portion of the Premises between 29^th September and 16^th December 2009.  It counterclaimed against the Plaintiff and the other Defendants alleging and accusing the Plaintiff of wrongful eviction and failure to renew the Lease.  It further alleged that the Plaintiff and the 2^nd to 7^th Defendants to have conspired together to deprive PC of its contractual right to renew the Lease causing loss to PC by damaging or destroying its business.  It sought to set off against any liability to the Plaintiff against the damages it claimed against the Plaintiff by counterclaim.

16.  PC claimed that the original intention was for PC and the ADP group companies to go into joint venture by establishing a company which would merge and acquire ADP, but the joint venture had fallen through in March 2007 and their relationship became strained.  It deteriorated further in mid 2009 due to the civil litigation between ADP and PC in the High Court. In spite of that, PC claimed it expected the licence at the Premises to be renewed when the Licence Agreement expired in September 2009.  Consequently, on 6^th April 2009 PC wrote to the 5^th Defendant, the director of ADP, informing him of PC’s intention to renew the Licence Agreement. As PC did not receive a reply to its request to renew the Licence Agreement, it attempted to contact the 5^th and 6^th Defendants by telephone with the intention to renew the Licence Agreement.  PC also tried to contact ADCO directly on 9^th April 2009 in an attempt to sign a lease directly with ADCO, but PC was informed by ADCO in a letter on 5^th May 2009 that it should contact ADP directly.  On 6^th May 2009, PC’s CEO with two of PC’s staff went to the Shatin office of ADCO to meet with Miss Chan Kit Chau, the assistant manager of ADCO, to inform her that PC wanted to remain at the Premises, again they were told to contact ADP.  On 17^th August 2009, PC sent a second letter to the 5^th Defendant informing him of its intention to renew the licence under paragraph 4 of the Licence Agreement.

17.  On 28^th August 2009, PC received a letter from ADP informing PC that ADP would not be renewing the Lease and would be vacating the Premises on 28^th September 2009.  On 18^th September 2009, ADP’s solicitors wrote to PC’s solicitors informing PC that ADCO had signed a lease for the Premises with the 3^rd Defendant ULL.  PC’s solicitors wrote to ADP’s solicitors on the same day requesting for an extension of the Licence Agreement until alternative premises could be located.  On 21^st September 2009, ADP’s solicitors notified PC that ADP was not able to grant an extension.

18.  PC claimed that on 16^th September 2009, ADP erected partitions between the areas occupied by PC and ADP.  That from that day on, strange smell of turpentine and paint thinner mixed with smell of faeces was detected emanating from behind the partition occupied by ADP.  At the end of September 2009, ADP erected signs outside the Premises stating that business at the Premises would cease on 28^th September 2009 requesting customers to collect their pets.  According to PC, the signs could only be referring to the business of PC because ADP was mainly running a pet retail service and PC was running the veterinary side of the business.  PC therefore claimed that ADP, the 5^th and 6^th Defendants were disrupting the business of PC in late September 2009.  PC further claimed that on 28^th September, Miss Chan Kit Chau, the daughter of the 4^th Defendant, together with Alex Yip (the 5^th Defendant) and Paul Yip (the 6^th Defendant) stormed the Premises and demanded PC to vacate the Premises.  They shouted at the directors of PC, its staff and customers.  PC further alleged that Miss Chan entered the Premises shouted and used violence against the security company officer Mr. Philip Curlewis engaged by PC.  PC further alleged that there were miscellaneous attempts by the Defendants to disrupt PC’s business by covering PC’s signage with tarpaulin and scaffoldings on 29^th September 2009.  There were further allegations of blockages at PC’s entrance at the Premises by the staff of Q-Pets, a pet shop operated by ADP in the same area.

19.  PC further alleged that in October 2009, a loud speaker was erected next door to PC with repeated messages claiming PC had no right to occupy the Premises.  In mid to late October 2009, toxic fumes continued to come from behind the partitioned area into the area occupied by PC at the Premises.  PC discovered upon investigation behind the partition, two fans blowing over a few boxes containing substances resembling faecal matters soaked in liquid and two plastic buckets filled with chemical substance.  The aforesaid are PC’s allegations of nuisance, threat and harassment from the Defendants in its counterclaim. 

20.  PC further alleged that ADCO had conspired with ADP, Alex Yip and the others to deprive PC of its right to have ADP’s Lease renewed.  That ULL was incorporated in order to take over the Lease renewal by ADP.  PC further alleged that Miss Chan, the daughter of the director of ADCO Chan Chi Deun, the 4^th Defendant, to have conspired together with ADP, ULL, Alex Yip, Paul Yip and Wong Oi Chun in refusing to renew ADP’s Lease.  PC further alleged that Miss Chan had assaulted Mr. Curlewis and taken part in the conspiracy and harassment of PC.

The 2^nd, 3^rd, 5^th to 7^th Defendants’ Case

21.  ADP admitted it had entered into a joint venture agreement with PC and its group of companies on 9^th July 2006. Under the agreement, ADP Pentagon Asia Limited (“ADP Pentagon”) would receive 10% shareholdings in the PC group of companies by 8^th August 2006 in consideration for payment in kind for PC’s use of ADP’s rented premises up to the credit amount of US$350,000.  In return, ADP would enter a number of licence agreements with PC including the subject Licence Agreement of 16^th October 2006 at the Premises.  ADP claimed that by 8^th August 2006, the PC group of companies failed to allot the 10% shareholdings to ADP Pentagon as agreed, as a result, ADP terminated the joint venture agreement and all licence agreements in September 2008.  ADP further issued proceedings against PC and the PC group of companies for the breach of the joint venture agreement and other agreements under HCA 1941 of 2008 and HCA 1381 of 2009.  The two High Court actions are consolidated and awaiting trial.

22.  Due to the dispute over the joint venture agreement, PC refused to hand over vacant possession of the licensed portion to ADP on 28 September 2009.  ADP denied it had ever received a letter of request to renew the licence under paragraph 4 of the Licence Agreement from PC prior to the deadline provided in Clause 13.1 of the ADP Lease on or before 28 June 2009.  One month before the expiry of the licence and the Lease, ADP issued a letter on 28 August 2009 to PC’s solicitors requesting PC to deliver vacant possession of the licensed portion on 28 September 2009.

23.  On 26^th August 2009, ULL entered into a tenancy agreement with ADCO for a term of four years commencing on 29^th September 2009.  ULL was not able to take vacant possession of the Premises until 16^th December 2009 because PC was occupying the licensed portion of the Premises.

24.  Because ULL was not able to commence its business operation until early 2010, ADCO agreed by letter dated 5^th March 2010 to ULL to waive three months’ rental in the total sum of HK$554,070.  This is the sum ADCO is claiming against PC in the original action of these proceedings.

The 4^th Defendant’s Case

25.  Miss Chan admitted the person named as the 4^th Defendant is her father.  He had been quite ill at the time of PC’s alleged incidents in September 2009.  He has now passed away.  She further admitted she had attended the Premises on 29^th September 2009 in order to take delivery of vacant possession on behalf of the Plaintiff.  However, she denied she had in any way conspired with the other Defendants, harassed PC or its staff or assaulted Mr. Curlewis.

The Law

26.  Notes on Order 14 Rule 4 at page 239 of the Hong Kong Civil Procedure 2011 stated:

“14/4/9 Leave to defend – unconditional leave - “It is appropriate to be reminded of the principles applicable to an O.14 application. They are well-known and in fact not disputed by the parties. The plaintiff (a defendant to the second defendant’s counterclaim) must show that there are triable issues. He has to satisfy the court that he has a ‘real or bona fide defence’ or “a fair probability or reasonable grounds that a bona fide defence exists”. If he makes an allegation, it must be credible or believable in the light of the evidence placed before the court. As Bokhary J.A. said in Re Safe Industries Ltd [1994] H.K.L.Y. 183):

“The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognized – because failure to recognize it would create a debt-dodger’s charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as [is] either undisputed or beyond reasonable dispute.”

On the other hand, it must also be borne in mind that for an application like the present, the court must not embark on a mini trial on affidavit”: per P. Chan J. in Mass International Ltd v Hillis Industries Ltd & Another [1996] 1 H.K.C. 434 at 439.”

27.  Order 14 applications are suitable in clear cases where there are no serious material factual disputes.  In Crown House Engineering v. Amec Projects Ltd (1990) 6 Const. L.J. 141 at 154, Bingham L.J. held:

‘… Order 14 is for clear cases; that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise …. The procedure is entirely inappropriate where the plaintiff’s entitlement to recover any sum is the subject of any serious dispute, whether of law or fact. That is not to say … that a defendant with no or no more than a partial defence can cheat a plaintiff of his just desserts by producing hefty affidavits and voluminous exhibits to create an illusion of complexity where none exists. Where the point at issue is at heart a short one the court will recognize the fact and act accordingly no matter how bulky its outer garments. But it does mean that where there are substantial issues of genuine complexity the parties should prepare for trial … rather than dissipate their energy and resources on deceptively attractive short-cuts.”

28.  The Plaintiff ADCO’s case against PC falls exactly into the category where the facts are clear.  There was an order by Master Ng in the High Court recovery proceedings ordering PC to deliver vacant possession to ADCO on 29^th October 2009, PC failed to comply with the order to deliver vacant possession to ADCO until 16^th December 2009 knowing full well ADCO had signed a lease with a new tenant ULL commencing on 29^th September 2009.

ADCO’s claim against PC

29.  PC’s counterclaim is based on a theory of conspiracy that ADCO for some reason should be involved with ADP’s and PC’s joint venture agreement dispute.  It is evident that ADCO would receive a higher rent if the option under the ADP lease was exercised.  I am not satisfied that PC had successfully shown ADCO as the landlord was in any way connected to the dispute between ADP and PC nor would it benefit ADCO to take part in a conspiracy.

30.  For the aforesaid reason, I give summary judgment to the Plaintiff on the Original Action.

The Application to strike out the Defendants’ Counterclaim

31.  It is part of PC’s Defence to set-off ADCO’s claim by its Counterclaim.  Where there is a genuine counterclaim or claim of set-off raised in the defence for damages, a defendant is usually entitled to unconditional leave to defend up to the amount of the set-off claim.  PC’s defence and counterclaim is based on the allegation that ADP had failed to renew its lease with ADCO in spite of PC’s two letters informing ADP of its intention to renew the licence under the Licence Agreement.  ADCO was not a party to the Licence Agreement between ADP and PC.  Even though PC had written to ADCO requesting ADCO to lease the licensed portion to PC if ADP’s Lease with ADCO was not renewed, it was ADCO’s choice not to negotiate directly with PC because the licensed portion formed only a part of the Premises under the Lease.

32.  PC’s case against ADP is based on the breach of the Licence Agreement.  PC’s claim is supported by a letter requesting ADP to renew the licence on 6^th April 2009 followed by a second letter on 17^th August 2009 expressing an intention to stay at the Premises for a further four years.  PC claimed it had therefore exercised the option under paragraph 4 of the Licence Agreement.  Whether ADP received the two letters and whether those two letters constituted the exercise of the option to renew the licence for a further four years under the License Agreement are matters that required the adjudication by the Court at a full trial.

33.  As to PC’s claim against the 3^rd to 7^th Defendants, on the basis the 3^rd Defendant ULL is ADCO’s new tenant at the Premises, PC claimed ULL is in fact owned by the same shareholders of ADP, namely, Miss Wong, the 7^th Defendant who is a director of ULL, has the same registered address as Paul Yip, the 6^th Defendant, who is a shareholder of ADP.  There is also an allegation that the 4^th, 5^th, 6^th Defendants attended the Premises on the expiry of the Licence Agreement and harassed the staff of PC and Mr. Curlewis.  Based on the numerous accusations of conspiracy, inducement to breach of contract and nuisance raised by PC which are disputed by the 4^th to 7^th Defendants, it would require a full enquiry at the trial for the allegations to be resolved.

34.  I am satisfied PC’s counterclaim has raised triable issues and questions that should be resolved at trial.  I refer to the Hong Kong Civil Procedure 2011 at page 406, paragraph 18/19/6:

“A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered. So long as the statement of claim or the particulars disclose some cause of action or raised some question fit to be decided by the judge or jury, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out.”

35.  For the aforesaid reason, I dismiss the application to strike out PC’s counterclaim by the Defendants including the 1st Defendant (the Plaintiff in the Original Action).  I refer to paragraph 14/4/14 of the Hong Kong Civil Procedure 2011 at page 243:

“On the other hand, the mere fact that the Defendant has a counterclaim does not necessarily entitle him to leave to defend (Anglo-Italian Bank v. Wells & Davies (1878) 38 L.T. 197; Rotherham v. Priest (1879) 49 L.J.Q.B. 104; 41 L.T. 558). Where therefore there is clearly no defence to the plaintiff’s claim, so that the plaintiff should not be put to the trouble and expense of proving it, but the defendant sets up a plausible counterclaim for an amount not less than the plaintiff’s claim, the order should not be for leave to defend but should be for judgment for the plaintiff on the claim with costs, with a stay of execution until the trial of the counterclaim or pending further order.”

36.  I consider the proper order in the present proceedings should be judgment against the Defendant in the Original Action to the Plaintiff with a stay of execution until the trial of the counterclaim or pending further order.

Costs

37.  I grant an order nisi on the costs of the Plaintiff in the Original Action to be borne by the Defendant of the Original Action with Counsel’s certificate.  Costs of the Defendants’ application to strike out be costs in the cause.  Costs to be taxed if not agreed with certificate for Counsel.