NEXT CHAMPION LTD v. NGAN IN LENG AND OTHERS

HCA 2194/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2194 OF 2005

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J U D G M E N T

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Introduction

1.    These are Order 14 proceedings.  I have before me an appeal by the Defendants against an order by Master Yu dated 14 June 2007 entering judgment against the Defendants with damages to be assessed.  There is also a summons by the Defendants under O.14A r.2 taken out after judgment was entered against them, dated 5 November 2007, requiring me to determine certain questions of law which, if I answer them as the Defendants would wish me to, are said to be dispositive of the whole action in their favour.

2.    The background to this matter concerns the sale by the Defendants to the Plaintiff of the Casa Real Hotel at Macau for $1.25 billion.  The hotel’s considerable worth is really based on the fact that it operates a no doubt highly profitable casino. 

3.    The point raised on the appeal is a very short one but before I can usefully come to it, I need to traverse some of the important documents which put the point into context in the overall scheme of things.

The Documents

4.    Mr Scott QC, SC, who appears for the plaintiff, has very helpfully shown me, in diagrammatic form, the ownership structure before the sale of the hotel and after its sale.  The elements before sale were that the Defendants, save for the 4^th Defendant, owned 99% of a BVI company called Hang Huo (BVI) Limited which in turn owned 99% of a company called Hang Huo Hotel Company Limited (Macau) which is now known as GR Casa Real Company Limited, and which I will from now on refer to as “the company”, which owned the hotel.  The 4^th Defendant owned the remaining 1% of the company thereby completing the 100% ownership structure.  As a result of the sale, the Plaintiff succeeded to that ownership structure thereby replacing itself, in terms of shareholding, in place of all four Defendants.  Each Defendant sold his shareholding as each had held it before the sale.  As a matter of convenience, I have annexed the “before” and “after” charts to this judgment.

5.    The agreement for sale which is dated 19 February 2005 starts at page 1 of bundle C1 and continues to page 74.  As a result of this agreement, the Plaintiff agreed to purchase from the Defendants their shareholdings in the companies that ultimately owned the hotel.  Clause 4.01 of the agreement refers to existing leases at the hotel of a sauna bath, a money exchange facility and a jewellery shop.  These leases were between the Hang Huo Hotel Company Limited and the respective lessees of the premises within the hotel building.  Under the agreement for the sale of the hotel, the Defendants agreed with the Plaintiff that these three leases would be terminated and replaced by new leases; this to take place before the contractual completion date which was on 6 April 2005. 

6.    This date was postponed by agreement to 31 May 2005, having initially been put back to 6 May.  The crucial document is a Deed of Undertaking dated 31 May 2005.  The Plaintiff was in a position to pay what was due from it for the sale of the hotel notwithstanding which the three leases had yet to be terminated by the Defendants and also that some of their other obligations remained outstanding. 

7.    The Deed was entered into to enable the sale to go through subject to the Defendants’ obligations contained in the Deed.  The only matter that I am concerned with is the Defendants’ undertaking to put an end to the lease of the sauna bath by 31 August 2005. 

8.    It is helpful to set out here the precise terms of the Defendants’ Undertaking as it relates to the leases.  Clause 1(ii) is the relevant obligation:

“	1.	In consideration of the Purchaser agreeing to waive performance/fulfilment of the matters under Recital (C)(i) of this Deed in relation to the Outstanding SJM Agreements in the manner set out hereinafter and not to require performance/fulfilment of the Outstanding Conditions prior to Completion and, subject as set out hereinbelow, agreeing to waive any claims for breach of the Warranties to the extent and only to the extent that the Outstanding Conditions have not been performed/fulfilled prior to Completion, the Vendors hereby, unconditionally and irrevocably, jointly and severally undertake with the Purchaser that the Vendors shall, at their own costs and expenses, procure performance/fulfilment of the Outstanding Conditions in the following manner (‘Remedying Actions’):
		…
		(ii)	procure the termination of the existing lease agreements in relation to the sauna, the money exchange and the jewelry shop situated in the Casa Real Hotel and the relevant tenants to vacate the relevant premises in each case, with effect from no later than 31 August 2005 (For the avoidance of doubt, (1) the Vendors, jointly and severally, shall be responsible for the payment of any and all damages, claims and compensation to the relevant tenants in connection therewith, whether pursuant to the existing lease agreements or otherwise; and (2) during the period from Completion until vacant possession of the premises are delivered to Hang Huo (Macau), Hang Huo (Macau) shall be entitled to payment of rental and other payments in accordance with the provisions of such existing lease agreements), in each case, in compliance with all applicable laws and regulations.”

Clause 1 also contains an indemnity provision given by the Defendant vendors to the Plaintiff purchaser.  This provision should also be set out in full:

“

The Vendors hereby, unconditionally and irrevocably, jointly and severally undertake with the Purchaser that the Vendors shall, indemnify and at all times keep the Purchaser indemnified and hold it harmless from and against any and all claims, demands, actions, damages, losses, costs, obligations, penalties, liabilities, fines and expenses sustained by the Purchaser (including any diminution in the value of the assets of Hang Huo (BVI), Hang Huo (Macau) and/or the HK Co.) and any payment made or required to be made by the Purchaser or any of Hang Huo (BVI), Hang Huo (Macau) and/or the HK Co. as a result of or arising therefrom) directly or indirectly in consequence of the Outstanding Works or any of them not being performed or fulfilled prior to Completion or any related legal proceedings by or against the Purchaser and its subsidiaries (as the case may be) and, subject to any rights against the relevant contractors being pursued by the Purchaser and its subsidiaries (as the case may be), if requested by the Vendors in writing and at the costs of the Vendors and amounts so recovered by the Purchaser and its subsidiaries (as the case may be) being refunded to the Vendors, of the Remedying Actions or any of them not being performed or fulfilled in accordance with this Clause 1.

In consideration of the Vendors entering into this Deed and providing the indemnities herein, the Purchaser acknowledges and hereby agrees and confirms that it shall proceed with Completion in accordance with Clause 5 of the S&P Agreement.”

9.    In relation to these provisions both counsel are agreed that the nature of the obligation assumed by the Defendants in agreeing to “procure the termination of the existing lease agreements [for the purposes of this judgment, the sauna bath] …” was to “see to it” that the lease was terminated by 31 August 2005.  The case of Royal Victoria Pavilion, Ramsgate, Whelan v FTS (Great Britain) Ltd (1961) 1 Ch. 581 pp 587-588 is sufficient authority for that proposition.

10.    The Plaintiff’s case is a perfectly straightforward one which found favour with the Master below that in circumstances where the Defendants here failed “to see to it that the sauna lease had been terminated by 31 August 2005” the Defendants must be held liable under the Deed, more particularly under their obligation to indemnify the Plaintiff as purchaser [see the indemnity provisions supra.] with the consequence that judgment ought to be entered against them with damages to be assessed.

The Defendants’ Arguments

11.    Mr Barlow SC, for the Defendants, has adopted a more elaborate analysis of the facts and the applicable resolution of those facts, as a matter of legal consequence, than has been advanced by Mr Scott.  What I propose to do is to put down here, in summary form, what Mr Barlow is proposing as the correct outcome to his appeal and to the O.14A summons and then consider Mr Scott’s response before providing my own conclusions as to how these two matters should be resolved.

12.    The central factual aspect to this dispute concerns the manner in which the lease of the sauna premises can be terminated.  Mr Barlow submits that such early termination, as it would have to be, could not take place under Macanese law without the consent of the tenant, who had been upset by the Plaintiff’s conduct following its coming into the ownership of the hotel and was therefore unwilling to give its necessary consent.  Further, as the Deed provides, this termination of the lease and the vacation of the sauna premises had to take place by 31 August 2005.  Mr Barlow’s analysis of the situation, which is the way the matter is pleaded in the Defence, is that after 31 May 2005, which is the date of completion of the sale whereby the Defendants transferred all their shares in the company to the Plaintiff, the Defendants could no longer bring about the termination of the lease without the full co-operation of the company, now under the control of the Plaintiff.  After 31 May, the Defendants therefore had no locus to serve a notice and therefore no means by which to “see to it” that the lease was terminated.  Mr Barlow submits that only the Plaintiff could have served such a notice as the landlord, which it has failed to do and which, in any event, it could not lawfully do having regard to the fact that early termination is not possible without the consent of the tenant.

13.    The conclusion that Mr Barlow contends for therefore is that the Defendants cannot be held to be in breach of their undertaking to secure the termination of the lease by 31 August “in compliance with all applicable laws and regulations”.  Firstly, no locus, no longer being the landlord and secondly, no requisite consent forthcoming from the tenant.

14.    Before coming to Mr Scott’s reply to these two aspects of the matter, it is helpful to provide some factual texture to the background relating to the creation of the sauna lease, the individuals concerned and the allegation that the Plaintiff has upset the sauna tenant, which as a result, is not willing to consent to the termination of its lease.

15.    The sauna lease is one for 10 years expiring on 25 August 2013, it having been created on 26 August 2003 (the lease is at C/92).  The tenant was Hansko Investment Company Limited, a Macau company which began operation in October 2002.  At the time that it was granted the lease it had two shareholders being the 3^rd Defendant and a person called Siew Pek Tso, who is the 4^th Defendant’s husband.  Since then Hansko’s shares have been transferred to Easy Gain International Limited and to Mr Felix Wong Sheng, who is the former husband of the 5^th Defendant.  All of Easy Gain’s capital is held by the 3^rd Defendant.  At the time that the lease was granted to Hansko, the 3^rd Defendant had control of Hansko (see affirmation of the 3^rd Defendant, para.7, B/21).

16.    This being the case, Mr Scott submits that given the close connection between the Defendants and Hansko, the Defendants would have had the ability to reach a consensual termination of the lease with Hansko.  Additionally, Mr Scott draws attention to the 3^rd Defendant’s evidence at paras 34-35 of his affirmation [B/28-29] that the Defendants have deliberately decided not to seek a termination of the lease.  Reference is also made to the fact that there is no plea in the Defence of any attempt to terminate the lease nor any evidence to show that such attempt has been made.

17.    In regard to the assertion that it would be a requirement that the Plaintiff, as the owner of the landlord company, should serve a notice of termination on Hansko, Mr Scott submits that this is irrelevant and/or unnecessary given the fact that it is the Defendants’ contractual obligation to bring about the end of the lease by consent.  In such circumstances, there would be no need for the landlord to serve a notice of termination.  Consensual termination would have taken effect upon the Defendants procuring the tenant’s early vacation of the premises and the landlord accepting such termination as a matter of course.

18.    In relation to the tenant being upset by the landlord’s behaviour and thereby being unwilling to consent to an early termination, the facts are that the landlord removed the advertising and signage for the sauna thereby allegedly harming its business.  As to this Mr Scott’s response is that because this advertising hoarding was located outside the premises demised to the sauna’s operator, the landlord was perfectly entitled to take that course, there being no provision in the lease entitling the tenant to display such signage at the locations from which they were removed, although the previous landlord may well have been content to allow this.

19.    In relation to the suggestion that the Defendants’ had it within their power to procure the sauna tenant’s agreement to an early termination of its lease, Mr Barlow has correctly referred to the fact that in January 2004 , Hansko’s shares were sold to Mr Wong Tong Ieung, who was an acquaintance of the 3^rd Defendant, so that it is wrong to suggest that the Defendants, taken collectively, have a particularly cosy or close relationship with the sauna’s present tenant, as perhaps had previously been the case when there had been direct family connections or, at least, connections through marriage.

20.    In respect of these matters, Mr Barlow submits that it simply is not possible to resolve issues such as these on disputed affirmation evidence.  These are fundamental disputes that can only be resolved following a conventional trial.

21.    Additionally, he has drawn attention to how the Plaintiff’s claim is framed, which is for damages to be assessed under the Indemnity provisions in the Deed.  The indemnity is one payable to the Plaintiff whereby the Defendants are liable to indemnify the Plaintiff:

“	… from and against any and all … losses … sustained by the [Plaintiff] … including any diminution of the value of the assets of [the company] … directly or indirectly in consequence of the Remedying Actions or any of them not being performed or fulfilled in accordance with Clause 1.”

Mr Barlow points out that under Clause 1, the Defendants have undertaken to carry out the “Remedying Actions” to the benefit of the Plaintiff, no other parties being named in the Deed, and yet the terms of the indemnity supra. also provide for an indemnity for any diminution in the value of the company’s losses.  Insofar as this results in an ambiguity in the nature of the indemnity as between the Plaintiff and the company, the indemnity’s scope falls to be construed contra proferentum the Plaintiff as the party putting forward the document and as the party to be indemnified.  For this he relies on the Opinion of Lord Mustill, page 702C-E in Tam Wing Chuen v BCCHK (In Liquidation) [1996] 1 HKLR 692, a Hong Kong appeal to the Privy Council.

22.    Mr Barlow submits that the Defendants’ liability to the Plaintiff arises out of their contractual relationship.  The indemnity is one which obliges the Defendants to indemnify the Plaintiff against its losses, and that proof of loss forms part of the ingredients of liability.  These losses are the Plaintiff’s losses and not those of any other party, such as the company, although he accepts, as I believe he must, that those losses can include losses sustained by the Plaintiff from any diminution in the value of the company’s assets caused by the Defendants not performing the Remedying Actions.  By virtue of not having performed the Remedying Actions by obtaining the early termination of the sauna lease, the company is said to have incurred losses, which are pleaded as not being able to obtain a higher rent from the sauna premises from the date of termination (no later than 31 August 2005) until the expiry of the present tenant’s lease in August 2013.  These losses by the company are said to elide with the Plaintiff.  Mr Barlow submits that when one takes the company’s losses alone, these can only be temporary and finite, until the early termination of the lease or, at the latest, until its expiry in August 2013.

23.    From that position, Mr Barlow contends that there is no suggestion, nor evidence, that the value of the assets of the company such as the hotel, and the casino within it, has diminished between completion in May 2005 and the present, if anything, given Macau’s extraordinary growth as a tourist and gambling centre, the opposite is true.  In such circumstances, the Plaintiff as the owner of the company could not have sustained any losses for which an indemnity needs to be provided by the Defendants.  This part of the argument is based therefore on no proof of loss by the Plaintiff, proof of loss being in this case a necessary constituent of liability.  At the very least that analysis by Mr Barlow is said to give rise to another basis for saying that the matter should proceed to trial, this giving rise to a highly contentious issue which can only be resolved following a trial.

24.    Briefly therefore, summarising the argument so far, which reduces itself to three issues, the Defendants having transferred ownership to the Plaintiff on 31 May 2005 were unable to lawfully put an end to the lease.  They lacked the locus to do so, no longer being the landlord.  Secondly, in circumstances where early termination can only take place with the tenant’s consent and the Plaintiff, through the company (the new landlord) had upset the tenant by removing advertising signage for the sauna, the tenant now refuses to consent to give up the lease before its expiry in August 2013.  Lastly, the Plaintiff has failed to prove that it has suffered any loss by the failure of the Defendants to bring about the early termination of the lease.  On the present state of the evidence, all of these matters are said to raise a triable issue with the consequence that the Master’s judgment ought to be set aside and the action allowed to proceed to trial.

The Defendants’ O.14A R.2 Summons

25.    This summons of course covers the same evidential material and poses questions on that evidence.  It seems to me that the ground covered by Mr Barlow, in seeking to demonstrate that triable issues exist which require the action to go to trial with the result that the judgment should be set aside, has included the raising of these very same questions as a means of demonstrating that the Master was wrong to have entered judgment.  If I decide that there are no triable issues then the appeal will fail and because, of necessity, I will have had to answer all of the questions posed in this summons in a way that cannot favour the Defendants, this  summons would either be dismissed or be one upon which no order should be made save as to its costs.

26.    Nevertheless, if the appeal were to succeed, I would propose to answer the questions posed and see what further conclusions can properly be derived from those answers beyond having given the Defendants’ leave to defend which I would already have done in the event of the appeal having been successful.

27.    It seems to me that this is the way to proceed with this summons — by leaving it to one side for the moment but addressing the questions and issues that it raises in deciding whether the Master’s judgment can properly stand.

The Plaintiff’s Response to the Appeal

28.    At the heart of the Plaintiff’s case is that the Defendants freely entered into the Deed to bring about the sale of the hotel and casino which included the clear obligation to “see to it” that the current sauna lease would be terminated by 31 August 2005.  Given the on-going side dispute with Madam Chu, which is the subject of a separate action, the Defendants have deliberately refused to perform this part of their bargain.

29.    The Defendants, having taken on the obligation to obtain early termination, must be taken to have considered and weighed up all the circumstances attending such an obligation including, the relevant provisions of the laws of Macau which permit an early but only consensual termination of a lease such as this upon proper compensation being payable to the tenant.  In the event, the Defendants have deliberately refrained from seeking termination of the lease.  This is the evidence of D3 at paras.34-35 [B/28-29].  In such circumstances, it is not surprising that there is no plea in the Defence that they have made any attempt to terminate the lease.

30.    As to the submission by Mr Barlow that since ownership has now passed from the Defendants, they lack the status to serve the requisite notice and to seek early termination, Mr Scott submits that the production and service of such a notice by the Plaintiff or the company is irrelevant in the face of the Defendants’ contractual obligation to end the lease by consent — there would be no need for service of such a notice by the Plaintiff.

31.    As to the Plaintiff having angered the tenant into a refusal to agree to an early surrender by removing the signage and advertising for the sauna, Mr Scott points out that the company as the landlord was perfectly entitled to act as it did.  This did not breach any of the terms of the lease.  The signage was not part of the demised premises and there is no provision in the lease requiring the landlord to allow such advertising to be kept in the hotel.

32.    The Plaintiff’s case is that the Defendants knew very well what they were letting themselves into in agreeing to this provision.  They must be taken to have considered that they had it within their capacity to obtain the tenant’s consent and lawfully bring about a consensual termination and arrange for the tenant’s compensation, as Macau law requires.  The fact is that they have not even attempted to perform that obligation and have admitted as much.  Even if the tenant has decided, much against the Defendants’ expectation that consent would be forthcoming, not to consent this is something for which they must nevertheless be held liable.  That is what they have signed up to and must be held to account for.

33.    As I have indicated, it is necessary to address the questions in the Defendants’ O.14A r.2 summons as part of the argument on the appeal, but they need to be addressed not in a vacuum, particularly as Question 1(a) and (b) has been posed, but by reference to the dispute on the ground as it has been presented in the affirmations and the pleadings.

34.    As to 1(a) the fact is that the Defendants have not even attempted to terminate the lease lawfully or otherwise.  In such circumstances, any answer to that part of Question 1 must be unnecessary and theoretical as well as being one which fails to address and confront the fact that this is the obligation that the Defendants have agreed to fulfil.  If having asked the tenant to terminate early and been met with a refusal, consent being the only way in which lawful termination could be obtained, it seems to me that as a matter of contract between the parties to this action, the Defendant would still be in breach of it, having bound itself to produce a lawful termination.  And this outcome, very much on the presently pleaded defence and in the face of an admission that the Defendants have not even attempted an early termination.  As to part (b), this question, if not in a vacuum, does rather pre-suppose that the Plaintiff has hindered the Defendants who of course have not even attempted to perform their obligation.  Given the state of the affirmations, I am prepared to hold that the evidence is all one way, which is that the Plaintiff and the company have done nothing which could be interpreted, as a matter of law, to have hindered or prevented compliance by the Defendants.  The removal of the signage was a perfectly lawful act as between landlord and tenant based on the terms of the sauna lease.

35.    I propose to answer questions 2 and 3 of the Schedule to the Defendants’ summons after I have considered the Plaintiff’s response to the issue as to whether there is a triable issue on whether the Plaintiff has shown that, in the way that it has presented its case, it has suffered losses for which it should be indemnified by the Defendants.  Questions 2 and 3 relate to this aspect.

36.    In respect of this, Mr Scott has sought to deal with the three aspects of Mr Barlow’s argument under this head.  Firstly, that the company and not the Plaintiff, has suffered the loss but that the Plaintiff elides the company’s losses with those of itself.  In this respect, Mr Scott’s response is that this is not correct.  He refers to para.17 of the amended-statement of claim [A/20] which pleads that the Defendants are:

“	jointly and severally liable to compensate and indemnify the Plaintiff for all losses and damage sustained by the Plaintiff (including any diminution in the value of the hotel) arising from the Defendants’ breach of the Agreement and/or the Deed.”

Mr Scott submits that the diminution in the value of the hotel, the company’s major asset, is a loss which the Plaintiff, as the owner of the company, will suffer.  Mr Scott submits that as a matter of logic and causation this must be the only correct analysis.

37.    Secondly, he deals with the next point taken by Mr Barlow that the Plaintiff cannot sustain any loss before it sells any of its shares in the company.  In this regard, Mr Scott responds that this is to confuse sustaining a loss with the realisation of that loss which would occur on a sale of the shares.  The loss is sustained immediately upon proof of the breach by the Defendants by the diminution in the value of its shares in the hotel.  He submits that there would be no business sense in an indemnity which only protected the Plaintiff if and when it sold its shares in the company.

38.    Thirdly and lastly, it is said that the Plaintiff cannot sustain losses which amount to the future rentals up to the expiry of the present lease in August 2013.  Mr Scott submits that the answer to this is provided by the terms of the Deed whereby the Defendants have undertaken to:

“	indemnify and at all times keep [the Plaintiff] indemnified from and against any and all … losses, obligations … sustained by the Plaintiff (including any diminution in the value of the assets of [the company]).”

By virtue of the Defendants’ failure to terminate the lease, this has reduced and will reduce the hotel’s income in a substantial way until its expiry in 2013.  The indemnity is wide enough on its face to cover the Plaintiff’s right to recover damages for the reduction in the company’s rental income caused by the failure to terminate the current lease.  Additionally, this current lease at a rental which is said to be well below market value must adversely impact on the value of the hotel which would be realised on a sale.  In these circumstances, the loss of “future” rental has therefore caused a diminution in the present value of the company’s assets which transmits itself to the Plaintiff by virtue of its ownership of the company.

39.     In analysing the way that the Plaintiff is said to have sustained losses by the Defendants’ breach, Mr Scott has also provided answers to Questions 2 and 3 of the Schedule to the Defendants’ summons.

40.    Question 2 relies on the fact that it is highly likely that the value of the hotel, as a whole, has risen very substantially since May 2005 as a result of which the Defendants would be able to set-off such appreciation in value against any losses caused by their failure to determine the current lease.  The analysis is that even if the loss caused by the breach is x, there has now been an appreciation to 2x resulting in no loss.  Mr Scott’s response is that this is illogical because, but for the breach, the assets would in fact be 3x resulting in an element of loss for which the Plaintiff would be entitled to an indemnity.

41.    As to Question 3, the issue is whether the Plaintiff is able to prove a loss for which it is entitled to an indemnity before it sells its shares in the company.  Mr Scott says yes it can, because it is able to show a loss in the current value of its shares by virtue of the Defendants’ breach and it does not have to sell its shares before it is able to make a claim for its losses. 

42.    All of this discussion falls under that part of Mr Barlow’s argument on the appeal that the Plaintiff has not been able to prove a loss, which is an ingredient of liability, and therefore that its claim must fail and as a result of which the Master’s judgment cannot stand.

Conclusion on the appeal

43.    In my judgment, Mr Scott’s analysis is the correct one for the reasons that he has advanced.  This is a case where the Defendants, having been shown latitude by the Plaintiff through its agreement to postpone completion of the sale, ultimately on the terms contained in the Deed, have simply failed to deliver what they promised viz. the early, lawful termination of the sauna lease by 31 August 2005.  They must be taken to have judged that they would have been able to, for whatever reasons, be it friendly relations with the existing tenant or otherwise, “see to it” that the lease would be surrendered by the tenant.  This they have not even attempted to do for which they are now liable to indemnify the Plaintiff.  Notwithstanding the obstacles that Mr Barlow has so persuasively sought to place in the way of such a conclusion, the Defendants’ position is irredeemable.  This, of course, extends to proof of existing loss to the Plaintiff suffered as a result of the Defendants’ breach, which must now await assessment.  In this regard, Mr Scott’s analysis has also been faultless.  Consequently, I propose to uphold the Master’s judgment, there simply being no triable issues raised by the Defendants, and the appeal must therefore stand dismissed with an order nisi of costs to the Plaintiff.

The Defendants’ Summons

44.    Having covered the matters raised in this summons in the course of deciding the appeal and having answered the questions in the Schedule to the summons in a way that cannot assist the Defendants in staving-off judgment, I propose to make no order on the summons (which seems to me to be more appropriate than dismissing it) save to order that the Defendants should pay the Plaintiff the costs of this summons as well, this also being an order nisi.