XCHRX MAY'S INVESTMENT CO. LTD. v. WAI SHING GARMENT LTD. and Another

1997, No.A648

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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D E C I S I O N

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1. This is an appeal from the Order dated 1 August 1997 of Master Cannon granting the Plaintiff summary judgment and striking out the Defence and Counterclaim under O.14, r.3 of the Rules of the Supreme Court.

2. The Plaintiff is the landlord of business premises known as Shop 113, Mayfair Gardens, Tsing Yi, New Territories. The 1st Defendant was the tenant under a two year lease commencing on 14 December 1994 and the 2nd Defendant is a director of the 1st Defendant. The Plaintiff's claim is for vacant possession, mesne profits, management fees and rates. The claim against the 2nd Defendant is as surety under the Tenancy Agreement.

3. The 2nd Defendant filed an affirmation dated 20 October 1997 in support of this appeal. In essence, the defence is that there was a promise that the lease would be renewed for a further term of two years and that the increase in rent would not exceed 20% and due to either a common mistake of the parties or alternatively a unilateral mistake on the part of the 2nd Defendant, the renewal provision was omitted from the Tenancy Agreement. It is alleged that no one other than a Mr Tsoi Chi Wing, dealt with the 2nd Defendant on behalf of the Plaintiff as its agent, that Mr Tsoi knew of the 2nd Defendant's mistake and that it is unconscionable for the Plaintiff, given the circumstances in which the Tenancy Agreement came to be executed by the Defendants, to rely on the Tenancy Agreement which did not contain the renewal provision.

4. The 2nd Defendant's account of how the Tenancy Agreement came about is set out in her recent affirmation. It is asserted that sometime in early November 1994, the 2nd Defendant was looking to rent suitable shop premises for the 1st Defendant's fashion retailing business. She was considering taking over an existing tenancy of a shop in the arcade of Mayfair Gardens. She approached Sun Hung Kai Real Estate Agency Limited ("SHK"), the landlord's agent, about the proposed transfer of the tenancy agreement and dealt with Mr Tsoi. SHK's office was also the management office of the arcade. Mr Tsoi said that Shop 113 was vacant and available for letting which might be preferable to the 1st Defendant taking over any existing tenancy. The 2nd Defendant expressed concern over the cost of refurbishing the shop when, as she had been given to understand by Mr Tsoi, the lease would only be for a term of two years. It is alleged that Mr Tsoi told the 2nd Defendant that she need not worry about not recouping the decorating costs as "the landlord would certainly renew the tenancy with [the 1st Defendant] and [the] increase of rent would not exceed 20%". When the 2nd Defendant saw Mr Tsoi again on 15 November 1994 he repeated the assurance given earlier and on that basis, the 2nd Defendant signed a Confirmation of Tenancy and paid the deposit amounting to three months' rent on behalf of the 1st Defendant. It was understood by the parties that a formal Tenancy Agreement would be prepared for execution and the 2nd Defendant agreed to Mr Tsoi's suggestion that the 1st Defendant should use the same lawyers as the Plaintiff landlord. About a month later, Mr Tsoi handed over the keys of the shop to the 2nd Defendant.

5. On 20 January 1995, the 2nd Defendant was told by Mr Tsoi that the Tenancy Agreement was ready for signature. When the 2nd Defendant arrived at the management office, Mr Tsoi took out two thick documents and the 2nd Defendant was told that she only had to check the name of the tenant, the number of the shop and the amount of rent. The terms of the Tenancy Agreement were not explained to the 2nd Defendant who only had a limited knowledge of English. Mr Tsoi refused the 2nd Defendant's request to take the document away to have it explained and insisted on both sets being signed there and then and returned to the head office for stamping purposes. The 2nd Defendant appended her signature at the places indicated by Mr Tsoi. No mention was made of her being a surety for the 1st Defendant. Neither the Confirmation of Tenancy nor the Tenancy Agreement contained any renewal provision.

6. There is an affirmation from Mr Tsoi filed on behalf of the Plaintiff specifically denying the 2nd Defendant's account of what was said at their first meeting as set out in para.9 of the 2nd Defendant's affirmation but there is no denial of the Defendants' assertion that the assurance was repeated on 15 November 1994 : Mr Tsoi did not address that assertion at all. On the question of suretyship, Mr Tsoi maintains that he drew this to the 2nd Defendant's attention at the time the Tenancy Agreement was signed.

Is the defence credible?

The promise to renew

7. There is nothing inherently implausible in the 2nd Defendant's account of events. Prima facie, it does raise a triable issue, namely, whether there was any common mistake and/or a unilateral mistake on the part of the 2nd Defendant in circumstances as would entitle the 1st Defendant to have the Tenancy Agreement rectified to include a renewal provision. Whilst the denial of one of the parties' that the Tenancy Agreement as it stands is contrary to its intention ought to have considerable weight, that is not conclusive. Plainly the possibility that the other party can convince the court that the Tenancy Agreement does not represent the parties' intention at the time of execution is not eliminated simply by one party's denial. See Chitty on Contracts, 27th Ed., at 5-045.

8. Further, the present case concerns not only common mistake but also unilateral mistake. Rectification is available in certain circumstances even where the mistake is unilateral. The principles applicable are those considered in Agip S.p.A. v. Navigazione Alta Italia S.p.A. [1964]1 Ll.L.R. 353 at 360-2 and 364-5 as further refined in Commission for the New Towns v. Cooper (Great Britain) Ltd. [1995] Ch 259 at 280B to 281E. Whilst accepting that the burden of proof is high, the Defendants ought not to be shut out from defending unless it is very clear that they cannot possibly discharge the burden because there are circumstances that make their account not credible.

9. The Plaintiff's case is that the 2nd Defendant's affirmation relating to the representation allegedly made by Mr Tsoi is nothing more than bare assertion, there being no contemporaneous document to support it. Moreover, such documents as exist though not contemporaneous are contrary to the alleged representation. The letters from the 1st Defendant to SHK dated 23 October, 2, 5, 11 and 14 December 1996 refer to the Plaintiff's promise to renew for a further term of two years "at market rent". That is at variance with the 2nd Defendant's affirmation which refers to a promise to renew for a further two years at a rent not exceeding 120% of the rent payable under the original term. Further, as to the letter of 23 October 1996 which was the earliest written reference to the alleged promise to renew, its existence was not disclosed until the 2nd Defendant's recent affirmation. It was suggested that if the letter of 23 October was indeed genuine, one would have expected it to have been adduced in evidence at the same time as the other letters referring to the promise to renew. It was also suggested that a further reason exists for doubting the genuineness of the 23 October letter. SHK wrote in virtually identical terms to the 1st Defendant on 16 October and 29 November. Having already expressed "surprise" in its 23 October letter at receiving the 16 October letter, the 1st Defendant proceeded to express "astonishment" in its 2 December letter. The Court was effectively invited to conclude that the 23 October letter was of but recent vintage, fabricated in time for the appeal. It was submitted that for those reasons, the defence is simply incredible.

10. I disagree.

11. First, there does not appear to be any authority for the proposition that the absence of contemporaneous documentary evidence is necessarily fatal to the defence of mistake, at least, where it concerns rectification for a unilateral mistake. Second, as regards the representation attributed to Mr Tsoi, there are two distinct aspects. There is the promise itself of at least a further two year term and there are the terms of such a renewal. The discrepancy affects the latter but not the former. It relates to the amount of rent payable - rent capped at 120% of the existing rent versus market rate. It is to be noted that the two standards are neither mutually exclusive nor necessarily inconsistent. An explanation may exist to account for the discrepancy : the former is the 2nd Defendant's recollection of what actually transpired; the latter is derived from letters emanating from the 1st Defendant but which were signed by someone other than the 2nd Defendant. For these reasons, I do not accept that the discrepancy wholly undermines the credibility of the defence raised or warrants the conclusion that the defence is not bona fide.

12. Third, it is to be noted that the Defendants were litigants in person up until and including the hearing of the summary judgment application. The Amended Defence and Counterclaim filed in June to which various documents were appended were prepared by the 2nd Defendant as litigant in person. Therefore little significance is to be attached to the fact that the letter of 23 October 1996 was not adduced in evidence at the same time as the other letters which refer to the promise to renew or that no evidence was adduced at the hearing before the Master. Further, the "surprise" and "astonishment" point taken by the Plaintiff is premised on the 2 December letter being written after receipt of and in response to the 29 November letter. In fact, the Defendants' unchallenged evidence is that they found the 29 November letter at their office on the morning of 5 December : see the 1st Defendant's letter of 5 December. Thus the "astonishment" expressed was not at SHK's letter of 29 November. Rather, it was provoked by a telephone call received on 2 December concerning the handover of the shop. Thus the Plaintiff's "reservations" concerning the authenticity of the letter of 23 October appear to be wholly unwarranted.

Suretyship

13. The 2nd Defendant's defence is based on past consideration. Put simply, when she signed as surety on 20 January 1995, the lease had already been granted or taken effect.

14. It is common ground that the Confirmation of Tenancy made no reference whatsoever to the 2nd Defendant becoming a surety. It contained a provision under which it was to cease to have effect if a tenancy agreement was not signed within 10 days which it was not. That being the case, all rights and obligations under the Confirmation of Tenancy came to an end on 25 November 1994. It was submitted that the past consideration point has no merit since there was no lease in existence when the 2nd Defendant signed the Tenancy Agreement as surety.

15. This submission overlooks the fact that the 1st Defendant was granted and entered into possession of the shop on 14 December 1994. Such authorised possession is only explicable as part performance pursuant to an antecedent agreement for a tenancy. Therefore, at the very least, it must be arguable that there was no consideration for the surety provision which is therefore not binding on the 2nd Defendant.

16. For these reasons, I am not satisfied that what the Defendants say is incredible or that there is no fair or reasonable probability of their having a real or bona fide defence.

Order

17. The appeal is allowed. The Defendants are granted leave to defend, such leave being conditional on the due payment of mesne profits, management fees and rates to the Plaintiff until trial or further order. I make an order nisi for costs in favour of the Defendants.

18. Fairness to the Plaintiff requires that the trial take place as soon as possible given that some ten and a half months have already elapsed since the expiration of the original term. I will therefore order a speedy trial. There is to be liberty to apply.

(Doreen Le Pichon)

Judge of the Court of First Instance
High Court