SHAHDAN LTD v. RICH LIFE INTERNATIONAL LTD

  DCCJ 5614/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5614 OF 2006

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DECISION

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Background

1.    The Plaintiff ("Shahdan"), a subsidiary in the Henderson Group of companies, promoted a development in Kowloon known as Knutsford Terrace and Knutsford Steps ("Development").  It was promoted as a unique dining and entertainment hub in Tsimshatsui, with specialty restaurants and verandah and terrace space for open air dining. 

2.  By an Offer Letter signed by the Defendant ("Rich Life") on 29 October 2004, and countersigned for and on behalf of Shahdan on 12 November 2004, Shahdan agreed to lease Shop D of the development to Rich Life, for use as a deluxe ice cream shop.  Under the Offer Letter, Shahdan also agreed to grant a licence to Rich Life for Rich Life to use 2 kiosks immediately beside Shop D as an outdoor seating area in connection with Rich Life's business conducted in Shop D.  Pursuant to the Offer Letter, the parties entered into a Tenancy Agreement on 8 June 2005 in respect of Shop D at the agreed rental of $100,000 per month.  They also entered into a Licence Agreement on the same day in respect of the 2 kiosks, at the monthly licence fee of $50,000. 

3.  These proceedings were commenced by Shahdan for recovery of licence fees due from Rich Life under the Licence Agreement, which were outstanding from August 2006 to March 2007.  By a summons issued on 28 December 2006 and amended on 18 April 2007 ("Summons"), Shahdan applied for summary judgment to be entered in the sum of $464,292.90, and for further damages to be assessed. 

4.   In opposition to Shahdan's application for summary judgment, Rich Life originally claimed that prior to its signing of the Tenancy Agreement for Shop D and its signing of the Licence Agreement for the kiosks, Shahdan had made fraudulent misrepresentations to Rich Life, to the effect that Shahdan had made an application to the Buildings Department for approval of alteration and addition works to the Development, and that such application was being processed. 

5.  Rich Life claimed that it was only in December 2006 that it was discovered that no plans had been submitted by Shahdan for "the change of use" of the kiosks as seating areas, and that the kiosks were not shown in the approved building plans submitted for the Development.  According to Rich Life, it was informed by the Buildings Department by notice dated 27 March 2007 that the staircase located behind Shop D and on which the kiosks were erected was an illegal structure and had to be removed.  Rich Life claimed that as the Tenancy Agreement and the Licence Agreement were entered into in reliance on Shahdan's misrepresentations, it was entitled to rescind the Licence Agreement which it did when it ceased use of the kiosks in August 2006.  A draft defence along these lines was exhibited to an affirmation of Mr. Tong which was filed in opposition to the application for summary judgment.  A counterclaim was included to seek damages sustained by Rich Life as a result of the alleged misrepresentations.

6.  After a hearing before the Master, summary judgment was entered against Rich Life in the sum of $514,383.29.  Rich Life appeals against such an order giving summary judgment.

7.  Since an appeal from the Master is by way of an actual rehearing of the application which led to the order under appeal, the issue for determination is whether Rich Life has an arguable defence so as to resist summary judgment under Order 14 of the Rules of the District Court, or whether there are other reasons for trial.

Legal principles for Order 14

8.    The principles applicable to applications for summary judgment are clear and not in dispute.  To resist an Order 14 application, the defendant must show that there are triable issues.  A concise statement of the standard approach in an application for summary judgment is to be found in the dicta of Ma J, as he then was, in Schindler Lifts (Hong Kong) Ltd. v. Ocean Joy Investments Ltd. [2003] 1 HKC 438.  The court has to determine two questions: firstly, whether what the defendant says is believable as opposed to whether its version of events is to be believed; and secondly, if it is, whether what the defendant says amounts to an arguable defence in law. In determining the first question, the court should not embark on a mini trial of the action on affidavit evidence.  The burden of proof is not a heavy one.  It is not the function of the court at this stage to assess if a defence will succeed at trial.  The court should not rule out a defence simply because it thinks the defence would not be believed by the trial judge because of some inherent weaknesses, save where what the defendant says is practical moonshine.  Insofar as the second question is concerned, summary judgment will not be granted if there are arguable defences or serious disputes of law.

Whether there are triable issues

9.  At the hearing of the appeal, Rich Life sought by its counsel to raise additional points of defence which were not argued at the hearing before the Master.  It is claimed that the Licence Agreement and the Offer Letter which led to the Licence Agreement as well as the Tenancy Agreement are void and unenforceable on the ground of illegality.  It is also claimed that the Licence Agreement is liable to be set aside as an unconscionable bargain.

10.    Counsel for Rich Life argued that there was no legal subject matter which can be licensed by Shahdan to Rich Life.  Whilst it was originally claimed by Rich Life at the hearing before the Master that the 2 kiosks were illegal or unauthorized structures under the Buildings Ordinance, my understanding of the argument made at the appeal is that, according to Rich Life, the kiosks did not exist at all at the time of the Offer Letter and hence cannot be made the subject matter of any grant under the Licence Agreement, or any licence contemplated by the Offer Letter.

11.  Whilst I accept that illegality is a legal argument, which need not be dealt with in the affirmations, it is nevertheless clear that in none of the 3 affirmations filed on behalf of Rich Life in opposition to the application for summary judgment did Rich Life ever raise the fact that the 2 kiosks did not exist when the Offer Letter was negotiated, or was signed on 29 October 2005.

12.  The Offer Letter referred to the premises to be leased to Rich Life as "No. D, Knutsford Steps (more particularly shown on the floor plan attached … and … colored pink for identification purpose) of the Miramar Shopping Center registered at the Land Registry as Kowloon Inland Lot No. 6454 at Nathan Road, Tsimshatsui, Kowloon".  It also referred separately to an outdoor seating area of 172 sq. ft. known as kiosk No. 1, and an outdoor seating area of 107 sq. ft. known as kiosk No. 2, and Shahdan agreed to grant and Rich Life agreed to take up a licence of these kiosks, which were colored orange on an attached floor plan.  The term of the licence for the kiosks was to commence one month after the date of issuance of either a Frozen Confection Factory Licence or Frozen Confections/Milk Permit for Shop D.

13.  It is not in dispute that Rich Life's ice cream shop opened for business at Shop D on 5 January 2005, after a Frozen Confections Permit was obtained in December 2004.  It is also not disputed that Rich Life took possession of the 2 kiosks in March 2005, and that pursuant to the Offer Letter, the Tenancy Agreement for Shop D and Licence Agreement for the kiosks were signed by the parties on 8 June 2005.

14.  Even if the kiosks were somehow not completed and delivered to Rich Life until March 2005, I cannot see how the Offer Letter or the Licence Agreement in respect of the kiosks can, on that ground, be rendered void or unenforceable by reason of illegality.  The term of the Licence Agreement is expressed only to commence one month after the date of issuance of the Frozen Confection Factory Licence or the Frozen Confections Permit for Shop D, and such term in fact only commenced on 1 April 2005, after physical possession of the 2 kiosks had been delivered to Rich Life in March 2005.   In the draft Defence exhibited to the affirmation of Mr. Tong, Rich Life itself pleads that possession of the kiosks were handed over to Rich Life "in or about end of March 2005". The claim made in these proceedings is for licence fees outstanding and unpaid from August 2006.  Rich Life does not dispute that it was in occupation of the kiosks until August 2006 when it claimed to have ceased use of the kiosks.  The claim that the Offer Letter and/or the Licence Agreement is illegal on the ground of there being no subject matter cannot be established even on Rich Life's own evidence.

15.  However, the allegation that the kiosks were unauthorized structures under the Buildings Ordinance is a separate matter and distinct from the allegation that the kiosks did not exist, in the context of whether the Offer Letter and/or the Licence Agreement are tainted with illegality.  Counsel for Rich Life has argued that the court should not as a matter of public policy enforce the Licence Agreement.

16.   Counsel for Shahdan points out that the Licence Agreement does not involve the commission of a legal wrong or any illegal transaction which is prohibited by the law.  Nor does the Licence Agreement involve the performance of any illegal conduct.  Thus, counsel for Shahdan argues that as there is no illegality as to the formation of the Licence Agreement and no illegality as to its performance, Rich Life has no defence to Shahdan's claim for the outstanding licence fees.

17.  In my judgment, cases on contracts for the sale and purchase of properties which involve or include unauthorized structures, i.e. building works for which the approval in writing of the Building Authority had not been obtained before such works were commenced or carried out under s. 14(1) of the Buildings Ordinance, are not strictly relevant to this case.  Contracts for the sale and purchase of interests in land involve dispositions of and dealings in title to land or the undivided shares in the land.  The fact that there may be extensions or alterations on the property sold and purchased, which were unauthorized building works within the meaning of the Buildings Ordinance, does not alter the fact that there is the interest in the undivided share in the property which can be validly assigned.  The question to be determined in cases of conveyancing of properties is whether there are encumbrances on the title as a result of there being a real risk of enforcement action by the Government authorities, by reason of the existence of the unauthorized building works.

18.  The dispute between the parties in these proceedings relates to the licence of the 2 kiosks.  According to the plan attached to the Offer Letter and the photographs exhibited by Rich Life, it would appear that the kiosks are simply and entirely open terraces.  It is not clear whether they are extensions from the property at Miramar Shopping Center, or are part of the said property itself.  Shahdan's lease of Shop D to Rich Life and the enforceability of the Tenancy Agreement in respect of Shop D is not in issue in the Summons before me.  In issue is the Licence Agreement, and Shahdan's right to claim licence fees under the Licence Agreement.

19.  A licence confers no interest in land on the grantee (Woodfall on Landlord and Tenant, paragraph 1.020).  The Licence Agreement only grants to Rich Life a personal right or privilege to use, occupy and possess the kiosks during the term of the Licence.  The key question to be determined is whether Shahdan has the right to license Rich Life to use and occupy the kiosks identified in the Offer Letter and the Licence Agreement, and whether the Court can and should enforce Shahdan's right of licence.

20.  According to Rich Life, the 2 kiosks were unauthorized building works.  It referred to the fact that Shahdan submitted an application to the Buildings Department for approval of the alteration and addition works for Shop D, but never submitted any application for approval of the kiosks.  Rich Life referred to a letter dated 7 March 2007 from Shahdan's solicitors, in which they produced a letter dated 24 December 2004 from the Buildings Department as evidence of the Buildings Department's approval of the alteration and addition works in respect of Shop D.  In my judgment, that itself cannot be evidence of the fact that Shahdan never submitted any application for approval of the works relating to the kiosks.  Shahdan had agreed under the Offer Letter to produce to Rich Life evidence of the Buildings Department's acknowledgment of approval of the alteration and additional works for Shop D, and it was pursuant to the express terms of the Offer Letter that such evidence was produced by Shahdan's solicitors.  As the Offer Letter made no mention of Rich Life's right to evidence of approval of the building works for the kiosks, no such evidence was produced by Shahdan to Rich Life.  Shahdan may have applied to the Buildings Department for approval of the works relating to the kiosks, although no such evidence has been adduced.

21.  Rich Life did produce in evidence letters from the Food and Environmental Hygiene Department and a Memo from the Buildings Department dated 29 January 2007.  According to the latter, Shop D and "its outside seating accommodations" (which I take to be a reference to the kiosks) were "totally located in and on unauthorized building works".  It was apparently on such basis that the application for the relevant light refreshment restaurant licence for the business to be conducted in Shop D was refused.  Rich Life also produced in evidence a copy of a letter dated 27 March 2007 from the Buildings Department to Shahdan, which states that unauthorized building works had been erected on the staircase behind Shop D, and advising that such structure should be removed.  According to Rich Life, the kiosks were erected on the staircase.

22.  Under s.14 (1) of the Buildings Ordinance, no person shall commence or carry out any building works without having first obtained from the Building Authority his approval in writing of documents submitted to him in accordance with the Buildings Regulations.  Under s. 40 of the Buildings Ordinance, any person who contravenes s. 14(1) of the Ordinance is guilty of an offence and is liable on conviction to a fine of $100,000 and to imprisonment for 2 years, and to a fine of $5,000 for each day during which the offence has continued.

23.  Shahdan has not put forward a case that the kiosks were not unauthorized loading works, as alleged by Rich Life. It has not produced any evidence as to whether consent of the Building Authority was in fact obtained for the commencement or carrying out of works relating to the kiosks, or that no such consent was required under s. 14 (1) of the Buildings Ordinance.  On the evidence before me at this stage, it does appear that the licence for the use of the kiosks, as contemplated by the Offer Letter and the Licence Agreement, relates solely to the outside seating area, and nothing more.  According to the Memo from the Buildings Department, that outside seating area is totally located in and on unauthorized building works.

24.  Although I accept the submissions of Counsel for Shahdan that the licence agreement between Shahdan and Rich Life is not expressly rendered unenforceable by the Buildings Ordinance, I cannot ignore the fact that on the facts of this case, it is necessary for Shahdan to rely on and plead the use of the unauthorized building works, i.e. the kiosks, to support its claim for licence fees (in contrast to the situation before the Court in the case of Loyal Luck Trading Ltd. v. Tam Chun Wah, unreported, CACV 217/2007, 1 April 2008).  It is arguable that the court should not, as a matter of public policy, enforce the Licence Agreement as it will otherwise be lending its aid to a party who founds his cause of action upon an act in contravention of s. 14 (1) of the Buildings Ordinance, and which is an offence under s. 40 of the Buildings Ordinance.

25.  It may be that when further evidence is available and produced at trial, it will become clear that Shahdan does not have to rely on any illegal act as the basis of its claim in these proceedings, or it may become clear that the kiosks were at all material times authorized building works for which consent of the Building Authority was obtained or does not have to be obtained, but these are questions for trial.  Where an issue of law is raised at the stage of Order 14 proceedings, the court may decide such question of law if the point is clear.  The Court may enter judgment if it is satisfied that the question of law is really unarguable.  However, in the present case, material facts are in dispute, and I consider that there is insufficient evidence before me on the facts in dispute (such as the state of the Development affecting Shop D and the kiosks, the alteration and additional building works concerned, and whether the kiosks form part of the works which were approved by the Buildings Department) to enable me to determine that Rich Life has no arguable defence on the ground of illegality, and that it is not against public policy for the Court to recognize and enforce the Licence Agreement.  The court should not determine the question of illegality raised in evidence, as in the case here, unless it is satisfied that the whole of the relevant circumstances are before it.

26.  In my judgment, the case of Imagine Motion Ltd. v. Kalex Ltd. [2003] HKEC 1537 referred to by Counsel for Shahdan does not assist.  The decision in that case is simply that there is no implied term in a tenancy agreement that the property leased is free of any unauthorized structure, and on the facts of the case, there is no misrepresentation by the landlord in relation to the unauthorized structures on the premises.

27.  It may be that there is no implied term in the Licence Agreement that the area to be used by Rich Life is free of any unauthorized structure, and on the evidence adduced, I consider that the claims of misrepresentation made by Rich Life are incredible and do not support any defence.  On the express terms of the Offer Letter, Shahdan does not warrant that the Premises are fit to be used for the purpose of a deluxe ice cream shop, or any particular purpose, or that the kiosks are fit for any particular purpose or use proposed by Shahdan.  Rich Life also agreed, under the terms of the Offer Letter, to be solely responsible for applying for all necessary licences or approval required by any competent authority for the use of the kiosks as an outdoor seating accommodation, and to comply with the regulations and ordinances for using the kiosks as an outdoor seating area.  If the parties' agreement regarding the licence of the kiosks is tainted by illegality, then the meaning and effect of the terms relied upon by Shahdan, and whether it would be contrary to public policy to allow the parties to contract out of the illegality, would be triable issues.

28.  For the reasons set out in paragraphs 17 to 27 above,  I consider that there is an arguable defence in law on the question of public policy or illegality as raised by Rich Life on the appeal.

29.  I will briefly deal with the other arguments raised by Rich Life. 

30.  On the question of the alleged misrepresentations, as raised in the affirmations made by Mr. Tong, I do not regard them to be credible for the following reasons.  First, although it is claimed that the representation made by Ms. Chung (on behalf of Shahdan) in about November 2004 was that an application had been made by Shahdan to the Buildings Department for approval in relation to the alteration and additional works to Knutsford Steps which would give rise to Shop D and the kiosks, the terms of the Rider inserted by Rich Life in the Offer Letter referred only to the requirement that Shahdan should obtain an acknowledgment letter from the Buildings Department with regard to the approval of alteration and additional works for Shop D only, and not the kiosks.  The Rider expressly provides for the remedies to Rich Life should such acknowledgment not be obtained by 31 January 2005, such remedies being Rich Life's right to terminate the Tenancy Agreement without compensation, and the right to a refund of the deposits paid under the Tenancy Agreement.  These terms expressly contradict the representations allegedly made by Shahdan.

31.   Second, the alleged representations were all made after the date of the Offer Letter, and could not have induced the Offer Letter as alleged by Rich Life.

32.  Third, by 4 February 2005, Rich Life already knew that the kiosks might be illegal structures because they were unable to obtain insurance on that ground, as its solicitors so advised Shahdan's solicitors.  Nevertheless,  under legal advice, Rich Life finally executed the Licence Agreement on 8 June 2005.  Even if there were any misrepresentations, as alleged, it is quite clear that Rich Life did not rely upon the representations allegedly made by Shahdan.

33.  As I have already observed in the course of the hearing, the parties to whom the alleged misrepresentations were made did not even make affirmations to verify the alleged representations made to them.  This casts doubts on the assertions made by Rich Life.

34.  In relation to Rich Life's claim that the Licence Agreement should be set aside as an unconscionable bargain, Rich Life relies upon the decision in Lo Wo v. Cheung Chan Ka [2000] 2 HKLR 370.  The facts of the present case are a far cry from the facts in Lo Wo which concern illiterate plaintiffs aged 84, 87 and 91 who were exploited into selling their flat in a building at the price of $870,000, when the average price of other flats in their building was $4.4 million.  The persons responsible for the business of Rich Life appear to be experienced businessmen who acted under legal advice at the material time.  I do not accept that Rich Life was "forced" to take the Offer Letter and the Licence Agreement, as counsel suggested, or that the terms of the agreement made between Rich Life and Shahdan are so oppressive as to constitute an unconscionable bargain.  On the contrary, Rich Life had the benefit of legal advice at the material time and was free to contract on such terms as were acceptable to it.  I do not accept that Rich Life was at any serious disadvantage. 

35.  Since I am satisfied that there are triable issues in relation to Rich Life's defence of illegality, the present appeal is allowed and Rich Life is given leave to defend Shahdan's claim.  I will make an order nisi, to be made absolute in 14 days, that the costs of the appeal are to be costs in the cause.  The costs of and occasioned by the adjournment of the hearing on 25 March 2008 by reason of the late service of the skeleton submissions of Counsel for Shahdan are to be borne by Shahdan.  Since Rich Life's appeal succeeds on a ground of defence which was not argued before the learned Master, the costs made by the Master should not be disturbed.