VIGERS HONG KONG LTD v. JUNSA DEVELOPMENT LTD

cacv 33/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 33 of 2006

(on appeal from HCA NO. 9036 OF 1998)

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HCA 5173/1998

in the high court of the

hong kong special administrative region

court of FIRST INSTANCE

ACTION NO. 5173 OF 1998

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BETWEEN

HCA 9036/1998

in the high court of the

hong kong special administrative region

court of FIRST INSTANCE

ACTION NO. 9036 OF 1998

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(Consolidated by order of Master Lung dated the 21^st day of September 1999)

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J U D G M E N T

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Hon Le Pichon JA:

1.  This is the first defendant’s appeal from the judgment of Sakhrani J dated 22 December 2005 whereby judgment was entered in favour of the plaintiff in HCA 9036 of 1998.  The judge held that the plaintiff had rescinded the formal lease signed by the plaintiff and the first defendant on or about 14 May 1997 in respect of certain premises owned by the first defendant in Mongkok (“the premises”).  The first defendant was ordered to repay the plaintiff the sum of $1,353,750 with interest and its counterclaim was dismissed.  Judgment was reserved which we now give.

Background

2.  The plaintiff was a shelf company acquired by Ng King Kiu (“Mr Ng”) and other investors for the purpose of holding the tenancy of the premises.  The first defendant was a company in which Shum Ngar On (“Shum Sr”) and his son Shum Wai Sing (“Shum Jr”) were the only shareholders and directors.

3.  The plaintiff and the first defendant entered into a provisional tenancy agreement for a six-year lease of the premises on 15 April 1997.  At all material times, Mr Fong, the third defendant who worked for the second defendant (“Vigers”) was the estate agent acting for both the plaintiff and the first defendant in the letting of the premises.  The plaintiff intended to operate a sauna at the premises and the provisional tenancy agreement contained the following provisions:

“Business carried on: High-class sauna spa”

4.  The plaintiff and the first defendant agreed to jointly instruct Messrs K B Chau (“KBC”) to prepare the lease.  A meeting was arranged for the execution of the lease on 14 May 1997 at the offices of KBC.  Mr C H Lau of KBC was in attendance.  Notwithstanding what was stated in the provisional tenancy agreement, the user provision in the lease prohibited the use of the premises for any purpose:

“other than for the Tenant’s lawful business office purpose which shall not be changed without the prior written consent of the Landlord.”

5.  Vigers commenced HCA 5173 of 1998 by writ against the plaintiff for its commission in April 1998.  The plaintiff commenced HCA 9036 of 1998 in June 1998 against the first defendant, Vigers and Fong claiming as against the first defendant rescission of the lease, alternatively, damages and as against Vigers and Fong, damages for breach of duty and for negligence.  Vigers counterclaimed against the plaintiff for its commission.  Those two actions (“the consolidated action”) were consolidated in 1999.

6.  In October 2001 the plaintiff commenced HCA 4486 of 2001 (“the KBC action”) against KBC for damages for breach of duty in contract and for negligence.  By a third-party notice filed in 2002 in the consolidated action, Vigers and Fong brought third-party proceedings against KBC for an indemnity or contribution against the plaintiff’s claim.  It was subsequently ordered that the consolidated action and the KBC action be tried together.

7.  In 2004, the plaintiff settled with Vigers and Fong.  Vigers, Fong and KBC also settled the third-party proceedings.  The trial then commenced on 1 December 2004 for six days but, regrettably, due to a gross underestimation of the length of the trial by those representing the parties, it went part-heard and could not be resumed until 28 November 2005, almost a year later.  On that day, the plaintiff and KBC settled their differences.  That left the disputes between the plaintiff and the first defendant to be determined by the court.

The judgment below

8.  In paragraph 23 of his judgment, the judge set out the agreed issues between the parties:

“The Plaintiff’s Claim

1. Did the Shums or either of them prior to the signing of the Tenancy Agreement represent to [Ng] and warranted that the premises could be used as a sauna bathhouse?

2. Was it a term of the Tenancy Agreement that the premises could be used for operating a sauna bathhouse thereat?

3. Did [the plaintiff] execute the formal Lease under a mistake of fact that the lease incorporated the same term as to user as in the Tenancy Agreement?

4. What is the legal effect of cl. 5(k) of the formal Lease?

5. Was [the plaintiff] entitled to rescind the formal Lease by reason of :-

1)    Misrepresentation

2)    Mistake

6. Was [the plaintiff] thereby entitled to return of deposits and reimbursement of wasted expenditure?

7. Was there an agreement to vary the formal Lease in the manner as pleaded in paragraph 24A of the Amended Statement of Claim?

The Counterclaim

8. Was [the plaintiff] in repudiation of the formal Lease?

9. If so, what is the quantum of damages suffered by the Landlord?”

9.  The judge found against the plaintiff on the first and second issues.  He found that prior to the signing of the provisional tenancy agreement neither of the Shums represented to Mr Ng or warranted that the premises could be used as a sauna bathhouse.  He held that the provision concerning the business carried on i.e. “high-class sauna spa” was not a term of the provisional tenancy agreement that the premises could be used for operating a sauna bathhouse.

10.  The judge found that at the meeting on 14 May 1997 when the lease was signed, Mr Lau misrepresented to the plaintiff that “in the formal Lease it was provided that the plaintiff was permitted to operate a sauna bathhouse at the premises when in fact the user provided in the formal Lease did not permit this” and that Mr Ng was induced by that misrepresentation to sign the lease.  He therefore held that the plaintiff was entitled to rescind the lease as a result of misrepresentation.  He also ruled that the first defendant could not avail itself of clause 5(k) of the lease because of the misrepresentation and that the plaintiff had effectively rescinded the lease when it issued its writ in June 1998 and was entitled to the return of the deposit paid of $1,353,750.

This appeal

11.  Mr Horace Wong SC who appeared for the first defendant raised four issues which are dealt with below.

The finding of misrepresentation

12.  A major point taken by the first defendant was that the judge’s finding of misrepresentation was inherently implausible.  It was said that it was a “late invention” by Mr Ng in that the allegation was made without any pleadings, that it was never mentioned in Mr Ng witness statements, that it never featured in the plaintiff’s pre-trial amendments made shortly before trial, that it was not raised in Mr Ng’s evidence-in-chief and was only raised for the first time during his cross-examination.

13.  Mr Wong SC referred to the pleadings of the consolidated action where it was pleaded that the plaintiff had entered into the lease under a mistake of fact that the user provided in the lease was the same as that provided in the provisional tenancy agreement.  He stressed that it was never the plaintiff’s case that the mistake of fact was a result of any misrepresentation made by anyone.  It was also submitted that even the pleadings filed in the KBC action contained no allegation that the plaintiff signed the lease as the result of any misrepresentation and that the plaintiff’s case against KBC was one in negligence only.  As will become apparent, that was not the case.

14.  Paragraph 11 of the statement of claim in the KBC action pleaded misrepresentation i.e. that KBC through Mr Lau represented to the plaintiff that the premises could be used as a sauna.  But Mr Wong SCcontended that it was made clear by amendment in the re-amended statement of claim in the KBC action that the representation complained of related to “lawful user” rather than “permitted user”.  As I understand it, the point being made was that a distinction had to be drawn between a representation as to “lawful user” in the sense of being legally suitable and a representation as to “permitted user” in the sense of being permissible under the lease.  It was said that what had been pleaded was directed at the former only and not the latter.  The submission was that the judge’s finding at paragraphs 68 and 72 of the judgment which was a finding of representation as to permitted user should not have been made because that had never been the plaintiff’s case until Mr Ng’s cross-examination.  The distinction appears to me to be a fine one and I am far from convinced that it is valid.  For present purposes, however, I will assume that in the first defendant’s favour that it is a valid distinction.

15.  It is to be observed that in Mr Ng’s witness statement dated 30 August 2001, it was stated (at paragraph 8) as follows:

“ … I asked Mr Lau if he knew that we would use the premises for sauna.  He replied yes and told us to relax and there should not be any problem.”

Then at paragraph 8 of his later witness statement dated 4 March 2002, he said this:

“ … In so far as the user is concerned, I can say with certainty that Mr Lau assured us that it would be used as a sauna house.”

Pausing there, in my view, in the context as a matter of grammar, the word “would” should read “could”.  Be that as it may, given those statements, I do not accept that the allegation of a representation of permitted user was a “late invention” on the part of Mr Ng.

16.  As regards the further submission that the witness statements were not freestanding but had to be read in the context of the pleadings, it is to be noted that these witness statements were filed for the purposes of the consolidated action and not the KBC action.  In fact, the earlier of the statements actually predated the commencement of the KBC action.  So, even on the hypothesis (which is debatable) that the re-amended statement of claim in the KBC action dated 16 November 2005 had the effect of confining the representation allegation to an allegation of a representation of “lawful user” only, I do not think it advances Mr Wong’s case.

17.  Again, assuming in Mr Wong’s favour that the distinction he seeks to draw between a representation relating to “lawful user” and one relating to “permitted user” is valid, that distinction was never a point taken below.  That is apparent from the first defendant’s closing submissions which I have read.  It was also never put to Mr Ng in cross-examination as the transcript shows.  More importantly, when the plaintiff applied to re-amended its reply in HCA 9036 on 30 November 2005, counsel representing the first defendant below who had initially sought to oppose the amendment dropped his opposition when faced with the fact that misrepresentation entitling the plaintiff to rescind the lease was one of the agreed issues between the parties at the outset of the trial.  For these reasons, I see no basis for interfering with the judges finding of misrepresentation.

Liability for the misrepresentation

18.  Mr Wong SC submitted that the judge was wrong in any event in holding the first defendant liable for the misrepresentation made by Mr Lau.  It was said that as Mr Lau was a clerk employed by KBC who was jointly instructed and acted for both parties, the plaintiff’s recourse lies against KBC rather than the first defendant and that the plaintiff did sue KBC but chose to settle the action.  It was further said that there was no evidence that the first defendant was aware of the contents of the draft lease before attending the meeting and the judge had not made any finding that the first defendant had any knowledge that the representation by Mr Lau was untrue.  Mere silence on the part of Shum Jr who had attended the meeting on behalf of the first defendant therefore could not amount to tacit affirmation that what Mr Lau said was true.

19.  But it was the first defendant’s pleaded case that at the meeting when the provisional tenancy agreement was signed, one or both of the Shums had told Mr Ng that “the user of the Premises in the future formal lease had to be described as office …”.  That remained the first defendant’s case as the same allegation was put to Mr Ng in cross-examination.  There must have been a reason for the reference to “office” user.  No explanation was proffered.

20.  Further, it was Shum Jr’s evidence in chief that at the meeting on 14 May 1997, Mr Lau mentioned that “the user was commercial office or business office”.  Although the judge disbelieved Shum Jr on this aspect and found that Mr Lau never said that, Shum Jr’s evidence is nevertheless of some significance.  Shum Jr knew from the provisional tenancy agreement that the operation of a sauna was the permitted user.  If therefore Mr Lau had mentioned (as was Shum Jr’s evidence) that the user was commercial office or business office, why did he keep silent and not question Mr Lau there and then about the discrepancy?

21.  The inescapable inference is that Shum Jr must have known that Mr Lau’s representation was false.  I agree with counsel for the plaintiff that his silence amounted to tacit affirmation of the misrepresentation.

Imputed knowledge of the falsity of the representation

22.  As the lease had been prepared by KBC, KBC clearly knew that the user provision was restricted to office use.  It was also acting as common solicitor to the parties.  It was submitted by the first defendant that because an agent’s knowledge is to be imputed to his principal, the plaintiff which was one of KBC’s principals had not, and could not have been induced by the misrepresentation to enter into the lease.

23.  In Strover v Harrington and others [1988] 1 Ch 390, estate agents preparing sale particulars for the vendors’ property incorrectly described property as having main drainage.  The purchasers agreed, subject to contract, to purchase the property.  The agents thereafter corrected the error by notifying the purchasers’ solicitors who failed to inform their clients of the correction.  Thereafter, the vendors made two other misrepresentations: one to the purchaser’s surveyor and the other in pre-contract inquiries.  In his judgment, the Vice Chancellor had this to say in relation to the effect of the later misrepresentations (at p.410 of the judgment):

“After the disaster of the failure to communicate the correction on the one side, we have the mirror disaster on the other, namely, the repetition of exactly the same misrepresentation by the vendors.  What is the effect of that?  It seems to me there are two possible views.  Mr. Douglas contends that all that the purchasers are to be taken as knowing is that the vendors were making conflicting representations, at one time saying there was not main drainage, at another time saying that there was.  That, says Mr. Douglas, does not amount to knowledge of the full truth which is necessary if you are to defend a claim for misrepresentation.  He says—and to my mind rightly—that if it is once shown that a misrepresentation has been made, it is no answer for the representor to say that the representee has been negligent and could have found out the true facts if he had acted otherwise.  The representee is under no duty of care to the representor to check on the accuracy of the representation.  The representor is bound by his representations, however careless the representee may have been.  That is one view which has considerable force.”

24.  Counsel for the plaintiff relied on that passage in support of his analysis that whilst KBC’s knowledge of the user provision in the lease could be imputed to the plaintiff, the later representations made by Mr Lau meant that there were conflicting representations and the plaintiff cannot be taken to have knowledge of the full truth which the first defendant must establish if it is to succeed in its defence of misrepresentation.  I agree with that analysis.  In my view, the fact that the Strover case concerned a claim for damages against the vendors for misrepresentation and the basis of the decision turned on causation for recovery of damages under the Misrepresentation Act 1967 does not undermine the validity of the reasoning in the passage cited.

Whether rescission should have been ordered

25.  Under section 3(2) of the Misrepresentation Ordinance, the judge has a discretion, in the absence of any finding of fraud, to refuse to order rescission where it would be equitable to do so.  Mr Wong SC submitted that the judge never considered whether, and if so how, that discretion ought to be exercised.  He pointed out that the plaintiff had already bound itself by entering into the provisional tenancy agreement to take up the lease even if it were not able to obtain the relevant licence and given the industrial zoning, in all probability it would not have been able to do so.  The first defendant had actively assisted the plaintiff in its efforts to obtain the necessary licence after the signing of the lease.  The fact that the plaintiff was unsuccessful in its rezoning application was therefore not the fault of the first defendant’s.  It was submitted that the reason why the plaintiff did not take up possession was because its attempt to obtain rezoning failed with the necessary consequence that the necessary licence could not be issued and that it would be unfair, as it were, to let the plaintiff off the hook.

26.  The judge found that the plaintiff had entered into the lease as a result of the misrepresentation.  Indeed, it was his view that it was inconceivable that Mr Ng would have agreed to enter into the lease if he had been told by Mr Lau that the user provided was office use.  Substantial sums were to be invested by the plaintiff in taking up the six-year tenancy and to convert the premises for use as a sauna bathhouse.  Whilst the plaintiff had entered into the provisional tenancy agreement, that had been superseded by the lease. 

27.  What there are the equities in the case?  It is to be noted that there had been no offer by the first defendant to alter the user provision in the lease.  It did not counterclaim for rectification because of a common mistake.  In those circumstances, it could not be said that the judge was acting unreasonably in not exercising the discretion to refuse to order rescission.  I see no basis for disturbing the order made.

Order

28.  For the reasons stated, I would dismiss the appeal and make an order nisi for costs in favour of the plaintiff.

Hon Cheung JA:

29.  I agree.

Hon Yam J:

30.  I agree with the judgment of Hon. Le Pichon JA.  I would just like to add my observation on the issue of “lawful user” and “permitted user”.

31.  What would one mean by “lawful user” and in particular what would Mr Ng of the plaintiff in the action against the 1^st defendant landlord in HCA9036/1998 mean when this phrase was turned into the pleading language used by his lawyer?

32.  At the time of the Provisional Tenancy Agreement Mr Ng had been an “experienced sauna operator” as found by the trial Judge.  He understood all along that a licence to operate a sauna bathhouse would only be granted upon his application when the premises were in a commercial building.  That means the Occupation Permit of the premises would provide that the same could be used for commercial purposes.  The permitted usage of the premises for “non-domestic office” would not be good enough for him. 

33.  That was why at the outset of the negotiation Mr Ng was concerned with whether the building was a commercial one.  Operating a sauna bathhouse is only one of the commercial purposes.  When the building was commercial only in the sense that it was an office block would not enable him to simply apply for a licence to operate a bathhouse or say a restaurant.  In that case he got to apply for re-zoning of the site and change of user in the Occupation Permit of the building thereon.  

34.  That is the reason why the first thing Mr Ng asked from Mr Lau of KBC was the Occupation Permit and Deed of Mutual Covenant.  But they were not available there and then.

35.  As against this background of commercial reality and knowledge in this kind of business, the representation complained of related to “lawful user” in the sense of being legally suitable, in my view, means legally permissible or suitable for Mr Ng to apply for a bathhouse licence without further ado. The consequence would be that it would not be necessary for him to make an application to re-zone the site.  In this case he could not do so when the Occupation Permit only permitted the premises to be used for “non-domestic office” albeit it was already a relaxation from the zoning of the site originally for industrial purpose only.  In the event he inevitably would have to apply for re-zoning.  That would be a lengthy and difficult application and the chances of success would be very low.  Eventually he was forced to make such an application and, as he had expected, failed. 

36.  Accordingly, “lawful user” cannot mean that Mr Ng could lawfully apply to re-zone the building and change the permitted user in the Occupation Permit to a commercial one.  Otherwise in an extreme example, in respect of the restricted zone in Mai Po, it can still be said that Mr Ng can apply to re-zone an area therein for commercial purpose, build a low-rise villa therein as a sauna bathhouse and operate the same after he got a licence therefor.  The chance of getting an approval is virtually nil.

37.  On the other hand, “lawful user” to operate a bathhouse therein cannot mean Mr Ng could immediately operate a bathhouse even when the building was a commercial one, without having to apply for a licence.

38.  I am conscious that neither of the aforesaid meanings were advanced by the defence. They however would show the wide spectrum of meanings of this phrase. To my mind in this case, “lawful user” could only mean that Mr Ng could apply right away for a licence to lawfully operate a sauna bathhouse. He could only do so when the premises are for general commercial purposes. In that case, if his application for a licence was refused, he could not blame the landlord when the reason for such refusal was not the landlord’s responsibility.  

39.  Here, if the Shums had represented that the building is a commercial building in the general sense but in fact it is only an office building (which is only one of the commercial purposes) that would be a misrepresentation.  When Mr Lau represented to Mr Ng that the premises could be used or was suitable for sauna bathhouse (Transcript CD/251EF & T) it was understood by Mr Ng in the aforesaid sense.  Although approval by the Town Planning Board in the process of granting a licence cannot be said to be as surely as night follows day, Mr Ng believed the Board would “most likely” approve his application when the premises are for general commercial purposes (Transcript CD/248H & 249C-E).

40.  In light of the aforesaid understanding of Mr Ng and the licencing regulations and policy of the relevant authorities, there are ample evidence for the trial Judge to find that at the solicitors’ office, Mr Lau had misrepresented to Ng that it was provided in the formal lease the plaintiff was permitted to use the premises for the operation of a sauna bathhouse (when it was not) and it was, as a result thereof, that the plaintiff entered into the formal lease.  

41.  This is equivalent to the plaintiff’s pleaded case that Shum Sr warranted and represented to Mr Ng that the premises could be used for sauna.  The warranty that the building was zoned as commercial was only pleaded as an implied term.  (Amended Statement of Claim para.10 at B/114.)  There is no allegation of orally expressed warranty of zoning. The trial Judge found that neither party applied their mind to whether the site was zoned as industrial or not.

42.  This is also in line with the plaintiff’s pleaded case in the Re-amended Statement of Claim in HCA4486/2001 against KBC in para.9 (da) (B/167), that Mr Lau had orally informed Mr Ng that the said premises could be “lawfully used” to operate a sauna bathhouse thereat (though the pleader could be more precise). 

43.  Accordingly, I do not consider that Mr Wong SC’s distinction between the pleaded case of “lawful user” and the misrepresentation of “permitted user” is a valid one.

44.  This appeal should be dismissed.

Hon Le Pichon JA:

45.  Accordingly, there is to be an order in terms of paragraph 28.