YESLAND LTD AND OTHERS v. CHINA FURNITURE CITY LTD

CACV 39/2006 & CACV 229/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 39 OF 2006

(ON APPEAL FROM HCA NO. 2091 OF 2004)

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BETWEEN

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CIVIL APPEAL NO. 229 OF 2006

(ON APPEAL FROM HCA NO. 2091 OF 2004)

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(Consolidated by the Order of Hon Yeung JA dated 13 October 2006)

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J U D G M E N T

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Hon Tang VP (giving the judgment of the Court):

Introduction

1.  The parties entered into two tenancy agreements (“TA”), one sub-license agreement in respect of some parking spaces, and one license agreement for the external wall, all dated 23 September 2003.  The dispute between the parties concerned, principally, the tenancy agreement (“TA1”) made between the plaintiffs and the defendant in respect of certain shops on the ground floor, mezzanine floors and the whole of 1^st  and 2^nd floors of the Kwun Tong Harbour Plaza (“the 1^st premises”), at the monthly rent of $379,899.

2.  The 2^nd tenancy agreement (“TA2”) was made between the 3^rd plaintiff and the defendant in respect of some other shops on the ground floor of the same building (“the 2^nd premises”) at the monthly rent of $10,098.

3.  At the heart of the defence is the allegation that the plaintiffs had failed to comply with clause 13(a)(i) and (ii) in the Third Schedule to TA1, in particular, in relation to the 1^st and 2^nd floor premises and that since the plaintiffs had failed to comply with clause 13(a)(i) and (ii), the defendant had not yet become liable to pay any rent in respect of the premises, because the commencement date of the tenancy had been postponed.  It is also the defendant’s case that it was entitled to vacant possession of the premises.  TA1 and TA2 so provided and this point is not controversial.  The defendant’s compliant is that the conditions of the premises, especially, the 1^st and 2^nd floors, were such that vacant possession had not been given.  Both of these complaints depend on the defendant’s allegation that defects had not been rectified or that rubbish had been left on the premises.

4.  The plaintiff’s claim was issued on 9 September 2004 and it claimed inter alia, for arrears of rent, possession of the premises following forfeiture of the lease from on or about 1 September 2004 as well as mesne profits.  The arrears were said to have amounted to $2,411,336.09.

5.  On 15 October 2004, the plaintiffs applied for summary judgment as well as for interim payment under O. 29 r. 10 and r. 12.

6.  Both applications were heard before Master J Wong.  The parties were represented by counsel.

7.  By judgment dated 7 February 2005, Master J Wong gave judgment in favour of the plaintiffs in respect of the 1^st premises, as well as for possession in favour of the 3^rd plaintiff in respect of the 2^nd premises.  The master also gave monetary judgment in favour of the plaintiffs which included in relation to the 1^st premises, mesne profits at the rate of HK$379,877.00 per month from the 1 September 2004 until delivery of vacant possession of the 1^st premises by the defendant to the 1^st, 2^nd and the 3^rd plaintiffs.  In respect of the 2^nd premises, mesne profits at the rate of $10,098 per month was ordered, from 1 September 2004 until vacant possession of the 2^nd premises were delivered up by the defendant to the 3^rd plaintiff.  We will not refer to the order in full.

8.  Since Master J Wong had given final judgment in favour of the plaintiffs, naturally, he did not deal with or make any order in relation to interim payment.

9.  The defendant appealed and the appeal was heard by Recorder B Yu.

10.  Pending the hearing of the appeal on 19 May 2005, Master Ho ordered an interim stay of execution in relation of the 1^st and 2^nd premises pending the determination of the appeal or until further order:

“… on the basis that the defendant would deliver up vacant possession of the whole of the 1st and 2nd floors of the premises on a voluntary basis on or before 21 May 2005, and on condition that the defendant shall pay into Court a sum of HK$150,000 on account of the use and occupation of the premises on or before 25 May 2005.”

11.  That order was continued by an order by consent dated 1 June 2005 made by Deputy High Court Judge Muttrie where he ordered that:

“2.     The Order for interim stay of execution granted by Master A. Ho on 19^th May, 2005 of the suit premises be extended unconditionally until the adjourned hearing for the appeal;”

12.  On 24 and 30 November 2005, the appeal was heard by Recorder B Yu.  At that time the parties were represented by counsel.  Recorder B Yu gave his judgment on 16 December 2005.  The order which was filed on 13 January 2006 reads as follows:

“1.     the said appeal be allowed;

2.      the Defendant be granted leave to defend subject to the following conditions:-

(a)     the Defendant shall pay into Court the sum of HK$1,400,000.00 within 14 days from the date of this Order

(b)     thereafter, the Defendant shall pay into Court the sum of HK$200,000.00 per month, the first of which shall be paid on or before 1st January 2006 until judgment or further order;

3.      an order nisi that the costs of this appeal in the cause.”

13.  It is noted that the order made by Recorder B Yu is silent on what should happen in the event that the defendant should fail to satisfy the conditions laid down in para. 2(a) and (b) of the order.

14.  Recorder B Yu’s judgment of 16 December 2005 is the subject of CACV 39/2006.

15.  The defendant failed to comply with any of the conditions imposed by Recorder B Yu.  By summons dated 8 March 2006, the plaintiffs applied for final judgment and costs before Mr Registrar C Chan.  That summons was adjourned to be heard by Recorder K Kwok on 6 June 2006.  The order which was made by Recorder K Kwok was sealed on 20 June 2006 and reads as follows:

“IT IS THIS DAY ADJUDGED that:-

1.  the Defendant do deliver vacant possession of Shop Nos. 3-15, 17-36, 38-54, 57-67, 72-105, 108, 110 and 118-124 on the Ground Floor and Shop Nos. 1-2, 4-56, 61, 67-119 on the Mezzanine Floor of Kwun Tong Harbour Plaza, No. 182 Wai Yip Street, Kwun Tong, Kowloon, Hong Kong to the 1^st, 2^nd and 3^rd Plaintiffs; and

2.  the Defendant do pay the 1^st, 2^nd and 3^rd Plaintiffs a sum of HK$1,729,606.54, and mesne profits at the rate of HK$379,877.00 per month from the 1^st day of September 2004 to 21^st May 2005 and at the rate of HK$200,000.00 per month from 22^nd May 2005 until delivery of vacant possession of the aforesaid shops on the Ground Floor and the Mezzanine Floor to the 1^st, 2^nd and 3^rd Plaintiffs.

AND IT IS THIS DAY FURTHER ADJUDGED that:-

1.  the Defendant do deliver vacant possession of Shop Nos. 37, 55-56, 106-107, 109, 112-117 on the Ground Floor of the Kwun Tong Harbour Plaza, No. 182 Wai Yip Street, Kwun Tong, Kowloon, Hong Kong to the 3^rd Plaintiff; and

2.  the Defendant do pay the 3^rd Plaintiff a sum of HK$13,316.18 and Mesne profits at the rate of HK$10,098.00 per month from the 1^st day of September 2004 to 21^st May 2005.”

16.  This order of Recorder K Kwok is the subject of the appeal in CACV 229/2006.

17.  The two appeals were ordered to be consolidated by Yeung JA on 13 October 2006.

CACV 39 of 2006

18.  We will deal with the appeal from the judgment of Recorder B Yu first.

19.  It is the defendant’s case that it should have been given unconditional leave to defend.

20.  We add that since 3 April 2006, the defendant ceased to have legal representation.  Instead, the defendant was given leave to be represented by Mr Wong Pak-sum, a director of the defendant.  So at the hearing before Recorder K Kwok on 6 June 2006, Mr Wong appeared on behalf of the defendant.  Mr Wong was at one time a successful businessman.  He was made bankrupt in 2000 but was discharged as such in October 2004.  However, at all times which was material to the action he was first an advisor to and then a director (he described himself as the president) of the defendant.

21.  Mr Wong appeared before us on behalf of the defendant and he has represented the defendant with ability and courtesy.  He has put before us well-prepared bundles of documents, including a core bundle, and clear and concise skeleton submissions.  We are grateful to Mr Wong for his help.

22.  Recorder B Yu gave the defendant conditional leave to defend.  The law on the Court of Appeal’s approach to an appeal from an order giving conditional leave to defend is well-settled and can be found in the Hong Kong Civil Procedure 2007 at 14/4/44, where the following passage appears:

“… where the conditional leave is given, however, the Court of Appeal would not interfere with the discretion of the judge unless there has been some error of principle or misapprehension of facts or unless undue weight has been given to particular aspect of the facts (Gordon v Cradork [1964] 1 QB 503) …”

23.  Mr Wong referred us to the evidence which was filed for the hearing before Recorder B Yu, in an attempt to show that Recorder B Yu had failed to consider or sufficiently consider all the evidence and / or the counterclaim (see paras. 2 and 3 of the Notice of Appeal).  But as the recorder has made clear in para. 16 of his judgment, when dealing with the submission of Mr Marshall SC, who appears for the plaintiffs below as well as before us, it would be inappropriate and wrong to seek to resolve factual issues on an application for summary judgment.  Recorder B Yu was fully aware of the defects relied on by the defendants and referred to the “February defect list” as well as the “April defect list” in paras. 9 and 10 of his judgment.

24.  Recorder B Yu then went on to say in para. 17 of the judgment:

“17.   Although the defendant may have raised a triable issue of whether the defects on the February and April lists have been rectified, this does not necessarily entitle the defendant to unconditional leave to defend.  There is powerful evidence that the defendant was, at the time, satisfied that the defects have all been remedied and may well have been prepared to waive any minor problem that might have remained.  The defendant has commenced to pay rent which it would otherwise not be obliged to do had it not been satisfied with the rectification works.  No mention was made of these defects until the matter was raised in the 5th affirmation of Mr Wong filed in May 2005.  There is also the evidence of the Work Requisition Forms which contained the chop and signature of a staff of the defendant (Michelle Chan) certifying that the work has been satisfactorily completed.  I do not overlook the fact that the defendant has sought to disclaim the authority of Michelle Chan.  However, bearing in mind that this is an Order 14 appeal, it is neither necessary nor appropriate for me to go beyond saying that having regard to the mode of presenting its case, the defendant should be ordered to pay into Court a sum of money as condition for leave to defend.  I take into account the fact that the defendant has voluntarily giving up possession of the 1st and 2nd floor but that between now and the trial the defendant would have the benefit of the use and occupation of the ground and mezzanine floors.  Mr Marshall suggested that a figure of $200,000 per month would be fair for the use and occupation of the ground and mezzanine floor.  Mr Swaine did not demur.”

25.  With respect, we are of the view that Recorder B Yu is plainly right.  The evidence which we have perused amply supports Recorder B Yu’s conclusion.

26.  Mr Wong has referred us to Hong Kong Civil Procedure 2007, para. 14/4/9 but we have no doubt that the Recorder had the principles well in mind.

27.  Mr Wong also submitted that the defendant must have a bona fide defence because of the time (in recess of 6 months) which the plaintiffs had taken to answer Mr Wong’s 5^th affirmation.  Mr Wong submitted that that showed that there was a triable issue or question or that the defendant had a bona fide cause of complaint against the plaintiffs.  The delay, of course, in dealing with the evidence, can be due to a multiplicity of reasons.  It is not an irrelevant consideration to whether or not summary judgment is appropriate in the circumstances, but that is not a sufficient reason to overrule the exercise of discretion by Recorder B Yu.

28.  Mr Wong also relied on the fact that the application for interim payment had been adjourned by Master J Wong and that the stay of execution pending the appeal to Recorder B Yu was made unconditionally after the payment-in of $150,000.  We do not believe either of this is relevant to what order the Recorder was entitled to make.

29.  Mr Wong also complained that Recorder B Yu ordered payment-in of $200,000 per month but as the Recorder said in para. 17 of the judgment, counsel then appearing for the defendant did not dispute that figure.  The figure was fixed at an amount lower than the monthly rent of $379,899 because the defendant had given up vacant possession of the 1^st and 2^nd floors.

30.  As for the lump sum of $1,400,000, that only represented part of the plaintiff’s claim.  As noted, the plaintiffs claimed arrears (inclusive of interest) amounting to $2,411,336.09 by the date of the writ, since then further mesne profits would have accrued.  So we see no reason to interfere.

31.  Mr Wong then made the point, relying on Hong Kong Civil Procedure 2006, para. 14/4/16, that the court was required to consider the financial circumstances of the defendant and:

“… for practical purposes should not impose a condition, e.g. the payment into court of such a sum of money as would make fulfilment of the condition impossible and that impossibility was known or should have been known to the court by reason of the evidence placed before it; and therefore it would be a wrong exercise of discretion to grant the defendant leave to defend on condition that he should pay into court a sum which he would never be able to pay for that would be tantamount to giving judgment for the plaintiff.”

32.  Mr Wong accepted that before Recorder B Yu, there was no evidence from the defendant to show that would be unable to satisfy those conditions.  In fact, even to date, apart from the Mr Wong’s assertion, there is no clear evidence that that is so.  We also note that this was not a point taken on behalf of the defendant in the Notice of Appeal.

33.  The burden is on the defendant to satisfy the court that it is unable to satisfy the condition imposed such that it would be tantamount to giving judgment in favour of the plaintiffs.  Further, if the defendant wishes to rely on its own impecuniosity as a ground for arguing that an order for payment in  should not be made, that should be done as part of the summary judgment application and not on appeal: Hong Kong Civil Procedure 2007 para. 14/4/16 at page 184.

34.  In this respect, the court’s approach when considering whether or not to order a plaintiff to provide security for costs, which might have the effect of stifling a claim is of interest.

35.  There the court has to conduct a balancing exercise and ask whether the plaintiff’s claim would in fact be stifled by considering whether the plaintiff can raise funds outside his own resources to conduct the litigation, the onus being upon the plaintiff to satisfy the court that no such resources are available:

“This includes considering the possibility of the plaintiff raising funds from directors, shareholders or other backers.  If these backers are unwilling to pay, but not unable to pay, the alleged stifling effect may not be made out;  Hin fai Limited v Longrace Development Limited & anor, [2003] HKC 1788, 18 July 2003, [2003] HKEC 1367;” see Hong Kong Civil Procedure 2006, para. 23/3/14.

36.  We note that the defendant is a company with a paid-up capital of $2,000.  However, as Mr Wong has reminded us, the defendant had spent many million of dollars on the premises.  We note that security of the costs of the appeal was ordered in the sum of $170,000 by Woo VP on 8 March 2006, and the amount was paid into court on 27 March 2006.  On the evidence before us, we are not satisfied that the defendant has shown that it was unable to comply with the conditions imposed by Recorder B Yu.

37.  The other point which is raised by the defendant relates to the construction of clause 13(c), the defendant making the point that the Recorder erred in interpreting that clause 13(c) of the Third Schedule as only covering clause 13(a)(i).  Clause 13 provides:

“13.   Save and except the following items, the said premises shall be handed over to the Tenant ‘AS-IS’ condition on the 23^rd day of June 2003:

(a)   Prior to hand-over of vacant possessing of the said premises to the Tenant, the Landlord undertakes to:

(i)    check clean repair (if necessary) all the fan coil units within the said premises.

(ii)    rectify any structural defects detected within the said premises upon the inspection by the Tenant on 18^th February 2003, details of which are listed in the list annexed hereto.

(b)   If rectification work to the said premises as mentioned in the above Sub-clause (a)(ii) cannot be finished and completed upon the date of hand-over of vacant possession of the said premises, i.e. the 23^rd day of June 2003, the Landlord and the Tenant agree to postpone the commencement date to a date on or before 30^th June 2003 and all the Rent Free Period and the Expiry Date shall be postponed simultaneously.

(c)   In the event that the aforesaid rectification work cannot be completed on or before 30^th June 2003, the Landlord agrees and undertakes to grant further and special Rent Free Period to the Tenant equivalent to the exact number of days of such delay.  The said further and special Rent Free Period shall be effected after the expiry of the first 4 months Rent Free Period from the commencement of the term of this tenancy.

(d)   The Landlord shall use its best endeavours to rectify any structural defect detected within the said premises during the fitting-out of the said premises by the Tenant.”

38.  In our view, reading clause 13(b) and (c) in context, we agree with Recorder B Yu that the postponement of the:

“… all the Rent Free Period and the Expiry Date, only applied to sub-clause(a)(ii).”

39.  In any event, this adds little to the defendant’s case since the Recorder proceeded on the basis that there was an arguable case on defects.  The defendant’s case on defects clause 13(a)(i) is even weaker.

40.  The defendant referred us to a recent decision of the Court of Final Appeal, namely, Mariner International Hotels Ltd & Anor v Atlas Ltd & Anor, FACV 3/2006, unreported, dated 5 February 2007, and submitted that he could gather from that judgment eight points which support the defendant’s case.

41.  It is unnecessary for us to consider that judgment in any detail.  We do not believe that judgment helps the defendant in any way.  Here we are not concerned with whether the defendant might have an arguable case that there were defects which had not been rectified.  Recorder B Yu has made it quite clear that that was arguable.  We are concerned rather with the question whether or not Recorder B Yu’s exercise of discretion in imposing conditions was wrong such that we can overturn it on appeal.

42.  Mr Wong compared the requirement of practical completion in Mariner International Hotels Ltd with the requirement for vacant possession in the present case.  But this argument is also based on the allegation of defects or rubbish in relation to which the Recorder found that there was a triable issue.

43.  He also made the point that since inMariner International Hotels Ltd, the certification by the architects as to practical completion was not conclusive, so here any document which might have been signed on behalf of the defendant tending to show that the defects had been rectified is not conclusive either.  But as Recorder B Yu said in the 1^st sentence in para. 17 of his judgment which we have cited above, the fact that the defendant might have raised a triable issue would not necessarily entitle the defendant to unconditional leave to defend.  He was entitled to consider the quality of the defendant’s case.

CACV 229 of 2006

44.  I turn to consider the appeal from Recorder K Kwok.

45.  Unfortunately, the formal order drawn up pursuant to Recorder B Yu’s judgment did not deal with the eventuality of the defendant not satisfying the conditions.  But we agree with Recorder K Kwok when he said in para. 13 of his decision that when the defendant failed to comply with the conditions:

“It follows that judgment should be entered in favour of the plaintiffs against the defendant.”

46.  We have set out the order of Recorder B Yu in full above.  Mr Wong submitted that the effect of para. 1 of Recorder B Yu’s order is that the defendant was entitled to proceed to trial even though the defendant had failed to comply with the conditions under para. 2 of the order.  That cannot be so.  The conditions are conditions which have to be satisfied so that the defendant may continue to defend the proceedings.  Failing compliance with the conditions, and there being no extension of time sought or granted for compliance, the plaintiffs were entitled to judgment.

47.  In our view, Recorder B Yu’s formal order should have made clear that the judgment may be entered in the event of the defendant’s failure to comply with the conditions within the time specified: see Practice Form No. 6 at Hong Kong Civil Procedure 2007 at page 1774.  It would be nonsensical to read or understand the order of Recorder B Yu as somehow enabling the defendant to continue to defend notwithstanding the non-compliance with the condition.

48.  We are in full agreement with Recorder K Kwok who said:

“12.   Where a judge gives leave to defend on terms, the defendant does not have unconditional leave to defend.  The defendant must satisfy the terms before he has leave to defend.  This is to state the obvious.  If leave to defend is effective without complying with terms, this becomes unconditional leave to defend.”

49.  Mr Wong also complained about the hearing before Recorder K Kwok.  Basically his complaint is that Mr Marshall who appeared for the plaintiffs produced to the recorder a draft order at the hearing, which the recorder found unsatisfactory and following a couple of adjournments, Mr Marshall was then allowed to return late in the afternoon with a new draft.

50.  The order which was eventually made by Recorder K Kwok was based on the later draft.  We do not need to compare the two drafts.  The main difference between them is one of form rather than substance.  The one difference of note is that in the original draft the plaintiffs asked for the full mesne profits in respect of the 1^st premises which disregarded the fact that possession of the 1^st and 2^nd floors had already been surrendered.  The other difference relates to the arrears payable in respect of the 1^st premises.

51.  Mr Wong complained that he had been given no opportunity to deal with the two drafts, and because of his inadequate knowledge of the English language, he was unable to present the defendant’s case properly.

52.  But we are of the view that the hearing before Recorder K Kwok should not be an occasion for the defendant to raise arguments which should have been raised before Master J Wong.  That applied to the amount of rent or other fees in arrears, the subject of Master J Wong’s judgment.

53.  As for the amount of mesne profits, because the defendant had voluntarily surrendered the 1^st and 2^nd floors, that was a matter which should be and was dealt with by Recorder K Kwok who, no doubt, spotted the fact that the plaintiffs were claiming too much.  It would be for the defendant to place before Recorder K Kwok what it considered to be the correct calculation of the mesne profits.

54.  The amount of monthly mesne profits ordered by Recorder K Kwok, namely the sum of $200,000, reflected the fact that the 1^st and 2^nd floors had been given up by the defendant to the plaintiffs.

55.  As to the quantum of $200,000, that came from the figure adopted by Recorder B Yu as the fair amount for the use and occupation of the ground and mezzanine floor, to which counsel, who then appeared for the defendant, had not taken any objection.

56.  There was no evidence before Recorder K Kwok on the proper amount of mesne profits by the defendant.  As Recorder K Kwok said in para. 8 of his judgment:

“8.     The defendant complained about the summons’ imprecise wording, but made no submission about the contents of the revised draft judgment, apart from a mere assertion that the figures were controversial.”

57.  At the hearing before us, the defendant produced to us a table which according to him, show the correct amount of arrears and mesne profits payable.  This evidence should have been put before Master J Wong, so far as the arrears of rent and fees were concerned, and so far as the mesne profits after the surrender of the 1^st and 2^nd floors were concerned before Recorder K Kwok.

58.  Mr Wong also complained that Recorder K Kwok’s order had not allowed for the Rent Free Period under TA1 or TA2.  But no question of any Rent Free Period can arise after 1 September 2004 since the plaintiffs’ claim for possession and mesne profits were based on forfeiture as from that date.

59.  Having observed Mr Wong and noted his careful and meticulous presentation of his arguments before us, we believe Mr Wong has a substantial knowledge of the English language, notwithstanding his level of formal education.

60.  In any event, he would have had the help of an interpretator at the hearing before Recorder K Kwok.

61.  So we are not satisfied that he had been denied an opportunity to comment on the draft order, or to present the defendant’s case.

62.  In any event, the order of Recorder K Kwok was correctly made.  The plaintiffs were entitled to final judgment.  The only outstanding issue was the amount of the mesne profits.  On the evidence before the Recorder we cannot say that the monthly figure of $200,000 was wrong.

Disposition

63.  For the above reasons, we dismiss both of the appeals with costs against the defendant, to be taxed if not agreed.