WILLY FINE LTD. v. JANYET INVESTMENT LTD.

HCA4430/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4430 OF 2001

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REASONS FOR DECISION

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1. By summons filed on 4 November 2002, the defendant applies to strike out part of the Amended Reply and for an order for possession. By another summons filed on 3 January 2003, the plaintiff applies to amend the Statement of Claim. The two applications were heard together. At the conclusion of the submissions, I allowed the defendant's application and dismissed the plaintiff's application with costs to the defendant. My reasons appear below.

Background

2. By a lease dated 17 November 1994 ("the Lease"), the plaintiff rents from the defendant shop A on the Ground Floor and the whole of the 1st to 3rd Floor of Lok Sing Building, No.271 Kan Yuk Road, Yuen Long, New Territories ("the Premises") for a term of 81/2 years expiring on 10 August 2003. As from 11 August 1999, the monthly rental is HK$325,000 exclusive of rates. Under clause 2(k) of the Lease, the plaintiff convenants with the defendant not to use the Premises for any purpose other than that of a restaurant under the trade name of "Dragon Ball Restaurant Karaoke Box (東方龍珠餐廳卡拉OK) " under Business Registration No.18667537. Further under clause 2(r), the plaintiff convenants not to assign, underlet or part with the possession of the Premises or any part thereof.

3. It is common ground that since September 2001, the plaintiff has ceased paying the rent, rates and management fees. As at the date of the defendant's summons, the arrears of rent exceeded the sum of HK$4.4 million and will exceed HK$7.7 million when the Lease expires in August 2003.

The action

4. On 10 October 2001, the plaintiff issued the writ herein claiming for damages and rescission of the Lease on account of fraudulent misrepresentation. The misrepresentation, as pleaded in paragraph 3 of the Statement of Claim ("SOC") is said to be made in October 1994 by a director of the defendant, Mr Lee Kwok Ching, and concerns the four food lifts on the premises. It is pleaded that Mr Lee represented to the plaintiff that the four food lifts were legal structures and the plaintiff could continue to use them for conveying food to the different floors of the Premises. It is further pleaded that the plaintiff became aware of the misrepresentation in September 1998 as a result of warnings from the Building Authority. The damages claimed in the SOC, excluding loss of goodwill to be assessed, is no less than HK$34 million.

5. The defendant denies the allegations of misrepresentation and counterclaims for possession of the Premises and for arrears of rent, rates and management fees and mesne profits at the monthly rate of HK$325,000. In the Amended Reply and Defence to Counterclaim, the plaintiff seeks to set-off the amount counterclaimed against its claim of damages.

6. On 19 December 2002, pursuant to the defendant's summons filed on 29 October 2002, Master Raymond Ho ordered that certain parts of the SOC be struck out. Consequential upon the order, the quantum of the plaintiff's claim for damages, as pleaded, has been reduced to some HK$28 million, excluding the claim for loss of goodwill.

7. Witness statements and expert report had been served and the action is set down for trial in July 2003.

The defendant's application

8. The defendant's summons seeks two relief. The first part is for the striking out of part of paragraph 8 of the Amended Reply which is worded as follows :

"and until the court grants an order for rescission of the same and award damages in favour of the Plaintiff, the Lease is subsisting and the Plaintiff is entitled to continue to occupy the said Premises and operate its restaurant and karaoke business thereat,"

The application is made pursuant to Order 18, rule 19 Rules of High Court.

9. The second part of the defendant's summons seeks an order for possession of the Premises pursuant to Order 29, rule 1(1) of the Rules of High Court.

10. On the striking out application, I agree that the part of paragraph 8 of the Amended Reply as set out above is bad in law. In paragraph 1 of the Prayer of the SOC, the plaintiff claims specifically for the rescission of the Lease, presumably on the basis that the Lease was procured by fraudulent misrepresentation on the defendant's part. In Hosler v. Zorro [1975] Ch 302, 310A-F, Megarry J (as he then was) pointed out that the process of rescission is essentially the act of the party rescinding, and not of the court. Rescission therefore does not have to be an act of the court. It is said that :

" ... the process of rescission is essentially the act of the party rescinding, and not of the court. Of course, if matters are disputed, the dispute may have to be determined by the court, and until the decision is given it will not be known whether or not there has been a proper and effectual rescission: but that does not mean that there is no rescission until the court speaks. I think that this appears plainly from the speech of Lord Hatherley L.C. in Reese River Silver Mining Co. Ltd. v. Smith (1869) L.R. 4 H.L. 64, 73, where he says that the agreement -

'subsists until rescinded; that is to say, in this sense - until rescinded by the declaration of him whom you have sought to bind by it, that he no longer accepts the agreement, but entirely rejects and repudiates it.' Lord Hatherley added that the expression 'until rescinded' did not mean that 'the rescission must be an act of some court of competent authority, and that, until the rescission by that court of competent authority takes place, the agreement is subsisting in its full rigour.'

As Lord Atkinson observed in Abram Steamship Co. Ltd. v. Westville Shipping Co. Ltd. [1923] A.C. 773, 784, Lord Westbury and Lord Cairns seem to have approved Lord Hatherley's statement; and Lord Atkinson's view, in the Abram case at pp.781-783, is to the same effect. Lord Hatherley's use of the word 'repudiate' is unlikely to confuse : the word must obviously be read in its context. In Lee v. Soames (1888) 36 W.R. 884, it was held in terms that a contract for the sale of land was rescinded on November 8, 1887, the date of a letter whereby one of the parties purported to rescind the contract. Of course, applications to the court are often made because consequential relief is sought, whether as part of the restitutio in intergrum or otherwise; and although the older forms of order were sometimes expressed as being an order that the contract 'be rescinded' (see Seton's Judgments and Orders, 7th ed. (1912), pp.347, 2218) I think the more modern, and preferable, practice is to make a declaration that the contract 'ought to be rescinded'; see Atkin's Court Forms, 2nd ed. (1972), vol.18, pp.301, 302. Indeed, I would have thought that at least in some cases a declaration that the contract had been rescinded on such-and-such a date might be better still."

11. Accordingly, it is not open to the plaintiff to plead in paragraph 8 of the Amended Reply that the Lease is subsisting and the plaintiff is entitled to continue occupying the Premises until the court grants an order rescinding the Lease and awards damages to the plaintiff as claimed : see also Chitty on Contract (28th edition), Vol.1 On the basis of the plaintiff's claim, the Lease was rescinded upon the plaintiff giving notice thereof through the service of the specially indorsed writ.

12. Further insofar as this part of paragraph 8 of the Amended Reply is repeated in the Defence to the Amended Counterclaim and being adopted as a defence to the counterclaim, it discloses no reasonable defence and ought therefore to be struck out.

13. In addition, this averment that the Lease remains subsisting and the plaintiff is entitled to continue occupying the Premises is plainly incompatible and inconsistent with the claim for rescission in the Statement of Claim. It ought therefore to be struck out for being scandalous, frivolous or vexatious and/or being embarrassing.

14. In coming to the view that this part of paragraph 8 of the Amended Reply should be struck out, it has not been necessary to refer to any part of the affirmations or witness statements filed in these proceedings. The conclusion is premised on a consideration of the law and the pleadings. Mr Au's argument that it is inappropriate to refer to evidence and affidavits on an Order 18, rule 19 application does not therefore assist the plaintiff.

15. As to the application for possession, it is, as explained by Mr Yu, an application under Order 29, rule 1(1) for an interlocutory mandatory injunction. In order to succeed, the applying party must establish a strong prima facie case in that the court must feel a high degree of assurance that at the trial it will appear that the injunction was rightly granted : see TKI & Anor v. New Happy Ltd & Anor [1995] 1 HKC 551, 554B-E.

16. In this connection, it is important to note that not only does the defendant counterclaim for possession on the basis that the Lease was forfeited for non-payment of rent, the plaintiff also, as mentioned above, claims rescission of the Lease, albeit for misrepresentation. Therefore, no matter it is the plaintiff or the defendant who succeeds at the trial, the Lease has already come to an end and the defendant will almost certain to recover possession of the Premises. Although it is possible for the plaintiff to seek a relief against forfeiture in the event the defendant succeeds on the counterclaim, presently the possibility does not arise because no application has been made and no evidence in support has been filed, quite apart from the fact that on the plaintiff's own case, the Lease has been terminated. On this point alone, there is clearly a strong prima facie case for making the order for possession sought by the defendant.

17. Mr Yu however goes further and submits that there is a high probability that the plaintiff's claim will fail and that the defendant's counterclaim will succeed at the trial. Normally, it will not be appropriate for the court, at an interlocutory injunction, to embark upon a detailed examination and analysis of the evidence and to form a firm view on the merits of the case. In the present case, however, Mr Yu has identified some salient facts which the plaintiff has not sought to controvert. Given that they are not contentious, I am of the view that it is permissible to have regard to them when considering the application. These matters include :

(1) Mr Lee Kwok Ching, who was said to have made the misrepresentation complained of, was not in Hong Kong at the time the misrepresentation was allegedly made.

(2) Insofar as the plaintiff says that it had received warnings from various government authorities against the use of the four food lifts, the only relevant document is a letter dated 22 January 1999 from Regional Services Department, but it contains no express prohibition against the use of the food lifts. As to verbal warnings, the Buildings Department had indicated that they had no record of verbal warnings being issued by their officers.

(3) Most importantly, a recent search of the business registration record conducted by the defendant's solicitors reveals that the plaintiff has since 15 September 1999 ceased to be involved in the operation of Dragon Ball Restaurant Karaoke Box, and that on 21 August 1999, a company called Sino Shine Investments Limited had commenced operation of a restaurant and karaoke business bearing the same name on the Premises. The immediate effect of this state of affairs on the plaintiff's claim is that any loss it suffered as a result of the misrepresentation will be crystallized on 15 September 1999. This will substantially reduce the quantum of damages that the plaintiff may claim, and, in turn, the extent of set-off that may be available to the plaintiff. Indeed, the results of the business registration search were not made known to the Master when the application to strike out parts of the SOC was heard. Had it been otherwise, there is no doubt that the Master would have further reduced the quantum of the plaintiff's claim in the SOC.

The plaintiff's withdrawal from the operation also suggests prima facie that the plaintiff is no longer in actual possession of the Premises. Given the restriction under clause 2(k) of the Lease on the use of the Premises, the plaintiff is not in a position to occupy the Premises for other business once it ceases to operate Dragon Ball Restaurant Karaoke Box.

The results of the business registration record search were disclosed in affidavits filed on behalf of the defendant in as early as November 2002, the plaintiff has thus far not filed any evidence disputing the defendant's contention that it has ceased carrying on business at the Premises under the name of Dragon Ball Restaurant Karaoke Box.

(4) Recent visits to the Premises made by Mr Lee Kwok Ching reveal that part of the Premises was used for selling garments, a use not permitted by the Lease. Mr Au in his submissions accept that the ground floor of the Premises was used as a fashion shop, but explains that this is an attempt by the plaintiff to mitigate its loss. On the evidence filed, the identity of the operator of the fashion shop is not known. If it were other than the plaintiff, it would constitute a breach of clause 2(r) of the Lease which restricts assignment, subletting or parting with possession of the Premises. In any event, the operation of a fashion shop is a breach of clause 2(k) of the Lease.

18. Having regard to these uncontroverted matters, it is clear that there is a high probability that the defendant will be granted possession of the Premises at the trial. It therefore matters not that the order for possession may have the effect of finally disposing of part of the disputes. Not only that, this is also a case where the balance of convenience comes down heavily in favour of granting the order for possession sought by the defendant. The materials before the court do not suggest that the plaintiff has been occupying the Premises or putting the Premises to any legitimate use. This being the case, and considering that there is also no contention between the parties that the Lease is rescinded and terminated, albeit on different grounds, there is, in my view, no reason why the defendant should be kept out of possession of the Premises until the trial of the action. The suggestion that the plaintiff will mitigate or is mitigating its loss by putting the Premises to use other than running a restaurant is unsustainable, having regard to the restrictions in clause 2(k) and (r). It seems to me that an order enabling the defendant to repossess the Premises is more in line with the spirit of mitigation of loss. Afterall, the court cannot overlook the fact that the plaintiff has only a paid-up capital of HK$10,000, which is very modest when compared to the millions of dollars of rent in arrears. The evidence does not show that the plaintiff has the means to meet the judgment in the event the defendant were to succeed on its counterclaim. In the circumstances, the court's discretion ought to be exercised in favour of the grant of an order for possession.

19. The defendant's application is therefore allowed with costs.

The plaintiff's application

20. The effect of the plaintiff's proposed amendment is to introduce a plea of implied term and also a new cause of action in breach of the implied term. There can be no doubt that as a matter of general principle, leave to amend is readily given before trial. Leave to amend will also be given even though the application is made late and is to add a new cause of action or defence, provided that it is not intended to overreach or that the prejudice occasioned is not irreparable : Hong Kong Civil Procedure 2002, Vol.1, para. 20/8/6.

21. The present proposed amendment is however objectionable in that it contains no particulars of or material facts upon which the implied term is said to rise. It is in fact unclear from the proposed amendment whether the term is implied by business efficacy or operation of law or otherwise. In Wharf Properties Limited & Anor v. Eric Cumine Associates Architects Engineers & Surveyors (a firm) [1989] 1 HKLR 556, 565E, the Court of Appeal, referring to Bruce v. Odham Press Limited [1936] 1 All ER 287, 294, pointed out that a complete cause of action is only pleaded where there is a statement in a summary form of the material facts upon which the party pleading relies for his claim. The proposed amendment is therefore incomplete. If leave to amend is granted, it will only serve to delay the proceedings because there is bound to be request for further and better particulars of the plea and probably application for striking out. Considering that the case has been set down for trial in July 2003, the proposed amendment, presently formulated, should be refused. The plaintiff's application to amend the Statement of Claim is therefore dismissed with costs.

Stay of execution

22. Mr Au has asked for a stay of the order for possession for a period of three months so as to enable the plaintiff to undertake the necessary steps to wind-up its business and to send off its staff. I am unable to see how the application can be made on those grounds when the business registration record before the court shows that the plaintiff has since September 1999 ceased to operate the restaurant or karaoke business on the Premises. Mr Au says that his instruction is to the contrary. With respect, that is not a submission that the court can entertain when there is just no evidence to support it, and when there is very cogent evidence to contradict it. At any rate, the three months' period cannot be justified.

Costs

23. There is no reason to depart from the general rule that costs should follow event such that the defendant ought to have costs of both applications. Mr Au has argued that the defendant's application does not warrant the appearance by counsel. Certificate for counsel for hearing before a judge in chambers is not required. That aside, I do not agree that the defendant's application does not justify the engagement of counsel.

Conclusion

24. For the reasons stated above, I make the following orders :

(1) The part of paragraph 8 of the Amended Reply as set out in paragraph 1 of the defendant's summons filed on 4 November 2002 is struck out.

(2) The plaintiff do deliver to the defendant vacant possession of the Premises.

(3) The plaintiff's summons filed on 3 January 2003 is dismissed.

(4) The costs of and incidental to the defendant's summons filed on 4 November 2002, including the costs of the defendant's summons filed on 2 January 2003 for leave to adduce further affidavits, be to the defendant, to be taxed and payable forthwith.

(5) The costs of the plaintiff's summons filed on 3 January 2003 be to the defendant in any event.