CROWN HONOR LOGISTICS (HOLDINGS) LTD AND ANOTHER v. SHING KEE WAREHOUSE & DISTRIBUTION (HK) CO LTD AND ANOTHER

HCA 26/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 26 OF 2010

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BETWEEN

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JUDGMENT

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1.  This is an appeal against the learned Registrar’s decision ordering the defendant to make interim payment of one month’s license fees.

THE FACT

2.  By a written agreement, the plaintiffs licensed the defendants to occupy the suit premises for storage purposes from 30 May 2008 to 29 May 2009 (“the agreement”).  The monthly license fees were $320,000.   The defendants paid a deposit equivalent to 2 months’ license fees.

3.  Clause 5 of the agreement provided as follows:

“協議期限到期日為2009年5月9日（到期日），在到期日後雙方可以無需另定新協議，而將此協議自動延續。此項延續不設期限，在協議期内及延續期内任何一方可以書面形式提前三個月通知解除協議。” (emphasis added)

4.  The agreement also provided that if the defendants were in breach, the deposit would be forfeited without prejudice to the right of the plaintiffs to seek further damages against the defendants.

5.  On 29 January 2009, the defendants gave notice (“the January notice”) to the plaintiffs confirming that the agreement shall be terminated on 29 March 2009 and that the defendants would move out.

6.  Since February 2009, the defendants have failed to pay license fees.  The 2 demands for payment which the plaintiffs issued met with no response from the defendants.

7.  On 29 March 2009, the 1^st defendant purportedly served on the 1^st plaintiff a note (“the March notice”) informing the latter that the defendants had moved out and would deliver to the 1^st plaintiff 6 keys to the suit premises.  The keys were returned on 29 March.   

8.  The plaintiffs say that the March notice could not effectively terminate the agreement in that it was given by one of the defendants to one of the plaintiffs only.  It did not unequivocally mention that the agreement was to be terminated and did not give the 3 months’ notice.  The suit premises were not returned in a clean and vacant condition.

9.  The plaintiffs purportedly accepted the defendants’ wrongful termination in June 2009.  On 4 July 2009, the plaintiffs entered into a new license agreement with another company in respect of the suit premises.  The plaintiffs sue for license fees and damages, including reinstatement expenses.

THE PARTIES’ CASE

10.  The plaintiffs’ case is that the defendants breached the agreement by vacating the suit premises at the end of March 2009 without giving valid notice.  Alternatively, even if the January notice was valid, the defendants notice would only take effect by the end of April.  Even after deducting the rental deposit, the defendants were still liable to pay at least the license fees for April 2009. They thus applied for and the learned Registrar granted interim payment of one month’s license fees.

11.  The defendants aver that the plaintiffs had made the following representations to them, in reliance of which they entered into the agreement:

(i)   That the 1^st plaintiff was the rightful owner of the suit premises as a result of its successful tender with the government.

(ii)   That the 1^st plaintiff could legally allow the 1^st defendant to use the suit premises for storage at $320,000 per month

12.  The defendants discovered after termination of the agreement that it was one Joy Power Transportation Limited (“Joy Power”) who was the successful tenderer of the suit premises under a short term tenancy (“the tenancy”).  A condition of the tenancy was that Joy Power should occupy the land for its own use and no assignment, underletting or parting with the possession would be permitted.  Accordingly entering into the agreement was a breach of the tenancy that would entitle the government to re-enter upon and recover possession of the suit premises.  Joy Power and the plaintiffs had thus jointly and/or severally derogated from their grant.  After the defendants’ solicitors had made enquiries with the Lands Department, in April and June 2010, the Lands Department replied stating that it would not allow subletting of any tenancy and the Lands Department would take action.  The defendants seek a declaration that the agreement was void at its commencement.

13.  Further, the defendants aver that the plaintiffs had failed to make the land available and/or fit for storing of goods.

14.  Alternatively, if the agreement was enforceable, the defendant’s case is that they had given valid notice of termination.  Accordingly, the agreement had been terminated on 29 March 2009 by notice, alternatively on 20 May 2009 automatically.

15.  The defendants counterclaim for return of the deposit.

THE APPLICATION

16.  The plaintiffs sought one month’s license fees as interim payment under Order 29, rules 11(1) and 12(c) of the Rules of the High Court.

“Rules 11 and 12 of the Order should be read together to permit the court to make an order for interim payment where it is satisfied that, if the action proceeded to trial, the plaintiff would obtain judgment either for substantial damages under r.11(1)(c) or for substantial sum of money apart from damages within r.12, even though thought not to be certain which (Shearson Lehman Brothers Inc. v. Maclaine Watson & Co. Ltd [1987] 1 W.L.R. 480; [1987] 2 All E.R. 181, CA).

An application for an interim payment under O.29, r.12(c) should be considered by the court in two stages.  The court must first be satisfied that, if the action proceeds to trial, the plaintiff will obtain judgment for a substantial sum, and, if so, the court should then consider whether, in its discretion, it should order an interim payment.  At the first stage the plaintiff must satisfy the court on the balance of probabilities, but to a high standard, that he will obtain judgment for a substantial sum; the likelihood of a set-off or any other defence succeeding must be considered by the court.  At the second stage the rules also require the court to take into account any set-off claimed by the defendant, and also any counterclaim arising out of some other transaction and not available as a defence (Shanning International Ltd v. George Wimpey International Ltd [1988] 3 All E.R. 475, CA)”

17.  The core issues are whether or not (i) the agreement was void and (ii) the defendants’ notice of termination was valid. 

WHETHER THE AGREEMNT WAS VOID

18.  Mr Leung, counsel for the defendants submits that the formation of the agreement was in breach of the tenancy and against public policy and hence void.   He relies on the case of Leung Wai Chi v. Leung Lai Ching [2010] 2 HKLRD 818, at 26-28.

19.  In my view, Leung Wai Chi’s case is distinguishable.  There the tenancy of a flat was in contravention of the terms pertaining to the purchase of flats under the Home Ownership Scheme and the persons involved in the tenancy committed an offence under the Housing Ordinance.  The tenancy was void.  No one could derive a benefit from an illegal contract, including the tenancy.  The Court of Appeal refused to turn a blind eye to the express and clear provisions of the Housing Ordinance and the policy of the government in subsidizing eligible people to buy homes for self residence.  Accordingly, the landlord could not recover rent and the tenant had to vacate the premises immediately.

20.  Here, there is no plea of what legislation or public policy had been violated.  The defence of illegality, breach of public policy and the agreement being void had been struck out by Master Kwang.  There is thus issue estoppel.

21.  In any event, like any landlord, the government may impose restrictions against alienation.  Not every breach would have made an agreement void.  Breach of the head tenancy may only entitle the head landlord to re-enter.  There was no evidence that the government had threatened to re-enter whilst the defendants were in possession.  The defendant had not complained of risk of re-entry until the defence and counterclaim was re-amended in November 2010.  Any assertion that the plaintiffs or Joy Power (who had no contractual relationship with the defendants) had derogated from grant was unsustainable.

22.  The defendants are unable to show that the agreement was void.

WHETHER THE NOTICES OF TERMINATION WERE VALID

23.  The January notice was exhibited but not the March notice so I am unable to comment on the validity of the latter.

24.  The January notice was issued by the defendants to the plaintiffs.  It clearly stated the intended termination date and that the defendants would move out.  The fact that it only gave 2 months instead of 3 months’ notice would not invalidate the notice.  It would entitle the plaintiffs to claim one month’s license fees in lieu after deduction of the deposit.

25.  If the March notice was valid, the plaintiffs would be entitled to substantial debt/damages in terms of unpaid license fees (being those from February to June, less 2 months’ deposit).

26.  Of course if no valid notice had been given, the plaintiffs would be entitled to substantial debt/damages in terms of unpaid license fees since February 2009 up to at least May 2009.

27.  On any view, the plaintiffs would be able to recover at least one month’s license fees from the defendants.

28.  The defendants’ contention is that clause 5 merely required notice of termination to be given 3 months before 29 May 2009 but it did not say that the notice period should be 3 months or that there should be payment in lieu of notice.  In May 2008, the parties had discussions about terms including early termination of the agreement. The 2^nd plaintiff indicated that it would not be a problem to work out sometime later.  The parties’ intention was for the agreement to be “drafted by the plaintiffs in a loosely (sic) and flexible manner without any provisions for claiming damages and/or compensation in money resulting from the breach of either party”.  These contentions are, to my mind, untenable for the following reasons.

29.  Firstly, as a matter of construction, if the “3 months” in clause 5 meant “3 months before 29 May 2009”, the January notice would have been pre-mature and hence invalid because it was issued 4 months before.  The defendants’ construction is flawed because if a party wanted to terminate in the extended term after 29 May 2009, from when should the 3 months be counted?

30.  Secondly, as a matter of commercial sense, clause 5 plainly existed for the protection of both parties.  Either party might “at any time” during the term and “the extended term” give notice.  That clearly showed that the 3 months had nothing to do with when the notice could be given but the period of the notice.

31.  It could not be the intention of the parties that the defendants could leave instantly without giving the plaintiffs the opportunity to look for an alternative licensee. Conversely, the plaintiffs could not evict the defendants without giving the opportunity for the defendants to relocate themselves.

32.  Thirdly, as a matter of law, although the interpretation of a contract clause is the ascertainment of the meaning to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, negotiations of the parties before contract and their declarations of subjective intent are not admissible as evidence: Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] WLR 896, Lord Hoffmann at page 912H.  Clause 5 was clear in its terms and needed no aid to interpretation in terms of evidence.

33.  Fourthly, as a matter of fact, notwithstanding the agreement was drafted in loose and flexible terms, there was no other subsequent agreement on early termination which overrode it.  The defendants clearly knew that they had to pay license fees for the notice period, as could be seen from the fact that they proposed that the plaintiffs do set off the license fees for February and March against the deposit.  The plaintiffs gave no consent.

34.  Whether the January or March Notice was valid, the plaintiffs will recover substantial damages of at least one month’s license fees.

THE COUNTERCLAIM

35.  The Court needs to consider any defence or counterclaim to see if the plaintiffs will recover substantial damages after trial.

36.  After the strike out order, the only substantive defence is that the termination notice was valid and that there be set off of the deposit against any sum found due to the plaintiffs.  Even if the termination notice was valid, the 2 months’ deposit had to be applied to set off the license fees from February to March.  The defendant would still need to pay at least the license fees for April.   The averment that the suit premises were not fit for storage does not assist in any way.  The defence and counterclaim cannot in any way reduce the damages which the plaintiffs can and will recover.

CONCLUSION

37.  I am satisfied that if the action proceeds to trial, the plaintiffs will recover substantial damages.  The learned Registrar’s decision cannot be faulted and the appeal is dismissed.

38.  Costs should follow the event and be to the plaintiffs.  The appeal is simple and the papers are limited.  It is virtually a re-run of the arguments before the learned Registrar by the same counsel on both sides.  Looking at the plaintiffs’ statement of costs, the time spent on communications and perusal of documents are plainly excessive. The hearing time is adjusted to 1 ½ hours.  I summarily assess the costs at $50,000 to be paid by the defendants to the plaintiffs.

39.  I thank counsel for their assistance.