WIN GREAT DEVELOPMENT LTD. v. CLOUDID CO. LTD. AND OTHERS

HCA 14792/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 14792 OF 1999

____________

____________

______________

J U D G M E N T

______________

1. In these proceedings the plaintiff is seeking, against the 1st defendant, specific performance, or damages for breach, of an agreement for sale and purchase of a property known as Shop M, ground floor, Kiu Cheong Mansion, 12-16 Hong Ning Road, Kowloon, and against the 2nd defendants, similar relief in respect of a tenancy agreement relating to the same property. The 1st defendant is the registered owner of the property, and is a company wholly owned and controlled by the 1st named 2nd defendant, Madam Yip Sau Yung. The 2nd defendants carry on a business there of a beauty salon called Haty Cosmetic House ("Haty") as partners.

2. The provisional sale and purchase agreement was signed on 8 June 1999 by Mr Chan Wai Lun on behalf of Royal Good Ltd or its nominee, and by Madam Yip Sau Yung on behalf of the 1st defendant. That agreement also contains a provision that the sale is on a "sale and lease back" basis, and terms relating to the proposed tenancy, which, it is alleged, were agreed to and signed by Madam Yip on behalf of the 2nd defendant. The terms as set out in that agreement are, inter alia, that the property will be sold for a price of $4,500,000.00, with a formal agreement to be signed on 23 June 1999 (in fact signed on 24 June), and the property to be leased to the 2nd defendant from the date of completion at a monthly rent of $35,000.00 for two years. Madam Yip's husband, Mr Wong Hung Shek, and younger sister, Madam Yip Lai Yung, the 2nd named 2nd defendant, are also directors in the 1st defendant. However, it is not suggested that they have any control over its operation, and its sole function appears to be to hold the property for Madam Yip Sau Yung and to receive rent from the 2nd defendant.

3. The formal sale and purchase agreement was signed, as I have said, on 24 June 1999, by Mr Chan for the plaintiff, and Madam Yip Sau Yung for the 1st defendant. This agreement contains the usual provisions, including a "complete contract" clause superseding previous agreements, and providing that it contains the full agreement between the parties excluding any express or implied warranties or representations. It also contains, in clause 31, after reciting that Madam Yip Sau Yung and her sister are directors of the 1st defendant and partners in the 2nd defendant, the following provision:-

"The parties hereto agree that it is a condition precedent to this sale and purchase that the Vendor shall procure the Partnership Business to take up the tenancy of the Property from the Purchaser on completion for the term of two years commencing from the 12th August 1999 (i.e. the Completion Date) and expiring on the 11th August 2001 at the monthly rent of HK$35,000.00 (inclusive of rates, Government rent but exclusive of management fees and other outgoings) and the Vendor shall procure the Partnership Business to sign a Tenancy Agreement of the Property in the form to be agreed by the Purchaser and the Partnership Business each party bearing their own costs and to pay to the Purchaser a total sum of HK$105,000.00 (i.e. two months rental deposit plus payment of the first month's rent) on or before the Date of Completion."

4. It also provided for the start of the tenancy to be postponed in the event that the completion was delayed and that the sum of $105,000.00 may be deducted from the purchase price.

5. Further, by clause 32, the 1st defendant agreed to procure Madam Yip Sau Yung to execute a personal guarantee in respect of payment of the rent and performance of the tenancy agreement.

6. These provisions of the agreement mirror almost exactly the terms written into the provisional sale and purchase agreement and signed by Madam Yip Sau Yung.

7. The title deeds were supplied to the plaintiff' solicitors on 28 June and a number of requisitions raised in July. All these except one were adequately answered, and the 1st defendant's solicitors, by a letter of 3 August 1999, stated that they were unable to answer that remaining, and gave notice, as they were entitled to do under clause 7 of the agreement, to annul the sale. They also sent a cheque to repay the deposits so far received. The plaintiff's solicitors thereupon replied on 6 August withdrawing the requisition, returning the cheque, and indicating that the sale was to proceed.

8. On 9 August 1999, the 1st defendant's solicitors gave notice that the 1st defendant vendor was unable to procure the partnership business of Haty Cosmetic House to take up the tenancy, nor to procure Madam Yip Sau Yung to execute a personal guarantee. The plaintiff's solicitors rejected this and again said that their client wished to proceed on the terms agreed. However, the 1st defendant failed to complete and these proceedings were commenced on 14 September 1999.

9. The issues now before me are: in respect of the 1st defendant, whether it was entitled to refuse to complete as the condition precedent of the 2nd defendant entering into the tenancy agreement was not fulfilled, and whether, by failing to procure that agreement, it is in breach; and, in respect of the 2nd defendant, whether a concluded tenancy agreement had been entered into by Madam Yip Sau Yung on behalf of the partnership both orally, and in writing by signing the provisional sale and purchase agreement. There can be no doubt that, if there had been a signed tenancy agreement pursuant to the formal agreement, the 1st defendant would be in breach of clause 32, as it is nonsense to assert that Madam Yip Sau Yung, as the owner and person controlling the 1st defendant, could not procure herself to sign a guarantee, the corporate veil notwithstanding.

10. A number of facts surrounding the signing of the provisional agreement are in dispute and it is necessary to look at these first, and also at the history of the relationship between the 2nd defendants, who for ease of identification I shall refer to by their given names Heidi Yip (Yip Sau Yung) and Winter Yip (Yip Lai Yung).

11. The business of Haty commenced in these premises in 1976, and appears to have been named after Heidi Yip, who is the only one of them to have had any training in the beauty business. At that time she says that she and her younger sister "cooperated", although it seems that her sister worked elsewhere, and admits to having her own business trading in cosmetic products in which she has been engaged since the 1970's with a company and office in Nathan Road, Yaumatei. In 1982 the shop premises were purchased by Heidi Yip in the name of the 1st defendant, and in 1991 she left her sister in charge of the shop while she emigrated to Canada. It seems that the business was operated during this time by staff supervised by Winter Yip, who still ran her own business. Heidi Yip did not return permanently to Hong Kong until 1998 when she resumed full time work at Haty and her name was restored to the business registration as a partner. It is clear that from this time she worked there, supervised the staff, and generally had the day to day running of the business, Winter Yip just coming to the shop when she was in the area to check the accounts, but otherwise engaged full time in her own business. Indeed, it is the evidence of Heidi Yip that her sister did not do anything in respect of the shop between May and August 1999 while the events relating to the sale and purchase agreement were unfolding. This, she explained, was because of a degree of ill feeling between them following disagreements over the business, including a dispute about redecoration of the premises some time before. Winter Yip agreed that they were not that friendly, and often did not see or speak to her sister if she visited the shop, which seems unusual in comparatively small premises unless they were avoiding each other, and admitted that she had hung up on her during telephone calls. The evidence shows at the very least a frosty atmosphere and a lack of cooperation. However, I accept Winter Yip's evidence that there were conversations between them during this time on the telephone and that Heidi Yip, as Winter also admits, had told her many times that she intended to sell the property, although she claims that she could not recall being told of the sale and lease back arrangement, and would not have agreed to the rent of $35,000.00 which she said the business could not afford.

12. It has been Heidi Yip's case throughout that she had no authority to enter into a tenancy agreement on behalf of the partnership. Whether or not this is the position at law I will consider shortly, but as a matter of fact it is clear to me that this was not necessarily an equal partnership. Heidi was the "senior" partner, having started the business, and purchased the premises in which it operated, and, at the time under consideration, had the day to day running and management of it. It was her full time occupation, while her sister had her own, the partnership being little more than an interest, which she admitted produced no income for her in 1999. Heidi Yip also subsidised this business, in that it is not in dispute that the market rent for the property at the time was at least $30,000.00 a month, yet it only paid $15,000.00 a month to the 1st defendant, Heidi Yip's company, and had been paying the same for at least five years. Heidi does not agree that it was not profitable, going so far as to say that she thought it could still make a profit even with the proposed rent of $35,000.00.

13. I find Winter Yip's evidence not credible to the extent that she says that she was told her sister intended to sell, but no mention was made, and there was no discussion about, what would happen to the business. She claims to have been an active and equal partner in it, and it would be natural to enquire, when told that the business premises were being sold, to ask what was to happen to Haty. There were only two options, either the business closed down, or it took a lease of the same or other premises nearby. In the latter case, it was inevitable that a market rent would have to be paid. And in either case, it was a crucial question in relation to the partnership, and I find it unlikely that it was not asked, and that Heidi Yip did not tell her sister about the arrangements at least prior to the formal sale and purchase agreement, although it is possible, given the atmosphere between them, that she refused to discuss it or cooperate.

14. The provisional agreement for sale and purchase was signed by Heidi Yip on 8 June1999. She said that she had been telephoned several times by a member of the staff of Uni-Pac Property Consultants (Retail) Ltd ("Uni-Pac"), Mr Gary Ip Cheuk Lun, in May 1999, asking if she was interested in selling as he had a client who wanted to buy such a property. At that time she declined as she thought the price offered was too low. In early June he telephoned again and said he had an offer of $4,500,000.00 with an agreement to lease back. Heidi contacted her bank to ask their opinion as to the value and was told $3,800,000.00. As far as the purchaser was concerned, Mr Chan Wai Lun said that it was a good investment for him, as he had an immediate tenant and income.

15. On 8 June 1999 things seem to have begun to move very rapidly, even taking into account the eagerness of the estate agents to close the deal, and, presumably, collect their commission. Mr Chan went to have a look at the property, and then met a Mr Tony Lo, with whom he was dealing at Uni-Pac, and he signed the provisional sale and purchase agreement, and initialled the alterations and the entries under "Remarks" giving the details of the proposed tenancy. He thought that he had initialled only part of these, the rest not yet being completed, and did the rest the next day, but in cross-examination he admitted that he was not sure when he had initialled or whether it had been all done at the same time. Heidi Yip, on the other hand gave evidence that she thought that Mr Chan's initials were already there when she signed, and I consider that it is likely that they were. The only part not initialled by him, was (f) under "Remarks" which provided for a guarantee to be given, and which was added after he had signed.

16. It is suggested by Mr Cheung for the 1st defendant and Heidi Yip, that she had been interested but undecided prior to 8 June, but it is clear that she had made up her mind by the time she met Gary Ip and Tony Lo with her husband that evening, as she admitted in evidence that she agreed to the terms and knew the provisional agreement was a binding document, although she claims that she told him that it was yet to be confirmed after discussion with her sister. She does not however explain why she signed what she knew was a binding agreement if she thought she was not authorised or permitted to do so. I accept that she may well have told Gary Ip that she needed to discuss the matter with her sister, but I do not accept that it was made clear to him that she did not have the authority to commit the partnership.

17. On a balance of probabilities I consider that the provisional agreement had been completed and signed by the purchaser prior to her meeting with the estate agents that evening, and that she also signed it with the intention of entering a binding agreement, believing she had the authority to do so. I have no doubt that she was concerned at her sister's reaction when she discovered the terms of the agreement, but I do not accept that she believed that she needed her consent. At this stage, therefore, there was a binding agreement, not only as to the sale of the property, but as to a tenancy, the essential terms of which, sufficient to create a tenancy, had been agreed by Heidi Yip. Whether this was sufficient to bind her sister and the partnership as well I will look at shortly.

18. This agreement was then carried forward and embodied in the formal agreement for sale and purchase. However, the procuring of a written tenancy agreement by the partnership was made a condition precedent of that agreement, without which the whole agreement falls away. I accept the evidence of Winter Yip that, by early August, she had told Heidi that she considered the proposed rent too high and not profitable, and would not agree to it. That being the case, would Heidi have been able herself to sign such a tenancy agreement binding the partnership?

19. In the absence of specific knowledge of the limits of the authority of a particular partner, under section 7 of the Partnership Ordinance, Cap 38, a third party is entitled to regard any partner as an agent for the partnership when doing anything in the course of its usual business. As I have found above, Gary Ip, and consequently the plaintiff, had no reason to believe that Heidi did not have the authority to enter into an agreement for the partnership. The question now is whether entering into a tenancy agreement for two years can be considered to be something in the usual course of business. It is certainly necessary, for the business to continue, that it has premises, whether under a lease or otherwise, to carry it out. But this is a business of a beauty parlour, whose usual business is doing facials and applying and selling cosmetics. Matters in the ordinary course of that business would be the ordering and paying for cosmetic supplies, arranging utility services and cleaning services for the premises, arranging insurance, and possibly hiring staff, although this latter Winter considered something she should be consulted on. In short, routine and regular matters necessary for the day to day running of such a business would be in the usual course of that business. Entering into a tenancy is however not normally a regular occurrence, and cannot be considered in the same light. It is a commitment by the partnership to pay a substantial amount by way of rent over a fixed period, and, as such, is not a regular occurrence in the usual course of business, but an irregular and large commitment which, however necessary for the business to continue, is sufficiently unusual for a partner not to have the authority to bind the other, unless it is the renewal of an existing tenancy with a modest increase in rent in line with market trends. Here, the proposed tenancy is a radical change from the existing arrangements which are an open ended tenancy at about half the market rate, and which will inevitably have a profound effect on the profitability of the business, whether it remains in profit at all or not. In the circumstances of this case, I am satisfied that one partner would not have the authority to bind the other without that other's agreement.

20. It follows that, as far as Gary Ip, and consequently the plaintiff is concerned, who were not aware of the limitation of Heidi's authority, and in this respect I accept the evidence of Gary Ip, there was a binding agreement with Heidi on 8 June 1999, both in respect of the sale, and the tenancy, although the latter could not be binding on Winter. At that point, and after the formal sale and purchase agreement, which only superseded the agreement between the plaintiff and 1st defendant, the plaintiff could have insisted on specific performance of the tenancy against Heidi had it owned the property, as clearly a landlord cannot grant a tenancy of a property he has no ownership or other rights over.

21. However, the plaintiff did not own the property as the sale was not completed, and the reason for that was the failure of the 1st defendant to procure the signing of a tenancy agreement under clause 31. The next question, therefore, is whether the 1st defendant can be held liable for this.

22. The signing of the tenancy agreement by the partnership is a condition precedent of the sale, which must mean that if it does not take place then the agreement for sale falls away as well. However, it goes on to say that the 1st defendant shall procure the signing of the agreement, and Mr Yip for the plaintiff says that this is an express and imperative obligation on the 1st defendant, that due diligence in attempting to carry out the obligation is not enough, even if it is impossible to perform, and failure to do it for any reason makes the 1st defendant in breach of the agreement.

23. I have to say that I think this is putting the case too high. Were the performance of the requirement solely within the power and ability of the 1st defendant, as the giving of the guarantee would have been, then it may well be that there was a breach, but to give business efficacy to such a provision, it is necessary to look at the reality of the situation. This was not a provision put into the agreement for the protection only of the plaintiff, although it was the only basis on which Mr Chan said he wanted it, but also for the 1st defendant, or more particularly Heidi Yip, to ensure that, despite the sale of the property, the business could continue. It was a mutually beneficial provision without which neither side would wish to proceed. But more importantly, it was a requirement that the partnership business took up the tenancy, and for this, as I have found that Heidi did not have the authority to bind her partner, the agreement of Winter was essential. That, it is clear from her evidence, which I accept, was not forthcoming, and it is also clear that no amount of persuasion would change her views. Winter is a strong willed and hard headed businesswoman, who was not at that time particularly keen to cooperate fully with her sister. In those circumstances I do not find it unusual that an approach by Heidi was rejected, nor do I expect Heidi to persevere in what would have been a hopeless quest.

24. The procurement of the signing of the tenancy thus became impossible, and I am not prepared to hold that Heidi, and consequently the 1st defendant, should in any way be held liable for failure to comply with clause 31. There may well have been an assumption that the 1st defendant, through Heidi could procure her sister's agreement, but any contractual provision which relies for it's performance on the cooperation of a third party, will be extremely difficult, if not impossible, to enforce where that cooperation is not forthcoming.

25. It follows that I consider the 1st defendant was entitled to refuse to complete, as to do so, without the tenancy, would have meant surrendering vacant possession, which was not what was agreed, and I do not consider the partnership's failure to enter into a tenancy a breach for which the 1st defendant is liable.

26. It also follows that the 2nd defendant as a partnership is not liable for breach of the tenancy agreement entered into by Heidi on 8 June 1999. If completion had proceeded it is possible that the plaintiff would have had a claim against Heidi in her personal capacity, but as it did not, it became incapable of performance, as a term of it was that it would commence on the date of completion, and, in the absence of an assignment, the plaintiff had no title to it. There can accordingly be no claim in respect of this either.

27. For these reasons I find that the plaintiff's claims against both defendants must fail, and the 1st defendant is entitled to judgment on the counterclaim for the declarations sought, that there is no contract between the plaintiff and the 1st defendant, that the plaintiff has wrongfully refused to vacate the registration of the sale and purchase agreement from the Land Registry, and for an order that that registration be vacated.

28. There will also be an order nisi that the plaintiff pays the costs of both defendants to be taxed.