DYNAMIC WISE TRADING LTD v. CHUNG CHI KWONG

DCCJ167/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 167 OF 2004

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J U D G M E N T

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1. This is a claim for damages arising from a breach of a sub-tenancy agreement. 

Background

2. The Plaintiff was the tenant of the premises known as Shop No. 1 on the 1st Floor, No. 22 Russell Street, Causeway Bay (“the Premises”).  By a sub-tenancy agreement dated 30 November 2002 (“the Sub-Tenancy Agreement”), the Plaintiff sublet the Premises to a business entity known as “PAL” (“PAL”) for a period of 2 years commencing on 1 December 2002 at a monthly rent of $34,000. 

3. The Plaintiff claims that the PAL had failed to pay the arrears of rent since April 2003 and thereby repudiated the Sub-Tenancy Agreement.  By an order made by the Lands Tribunal dated 8 July 2003 (“the LT Order”), the Plaintiff obtained judgment against PAL for possession of the Premises, as well as arrears of rent from 1 April to 28 August 2003, mesne profit from 29 August to 4 September 2003, and costs in the total sum of $175,334.24.  On 4 September 2003, PAL delivered vacant possession of the Premises to the Plaintiff.  On 29 September 2003, PAL paid the Plaintiff a sum of $73,334.34.

4. The Plaintiff managed to re-let the Premises for a period of 1 year and 10 months, i.e. from 5 November 2003 to 13 September 2005, with a rent-free period from 5 November to 4 December 2003.  After taking into account the payment of the sum of $73,334.35 by PAL, the aforesaid sub-letting and the set-off against the deposit of $102,000, the Plaintiff claims that it has suffered loss and damages in a total sum of $175,869.50, being:

(a)   outstanding balance of the rent and mesne profit under the LT order;

(b)   loss of rental income for the unexpired portion of the Sub-Tenancy Agreement from 5 September 2003 to 30 November 2004;

(c)    government rates paid and payable for the period from 1 October to 4 November 2003; and

(d)   stamp duty paid by the Plaintiff for re-letting the Premises.

5. The Plaintiff claims that by the guarantee made between the Plaintiff and the Defendant dated 30 November 2002 (“the Guarantee”), the Defendant irrevocably and unconditionally guaranteed to the Plaintiff the due and punctual payment by PAL of the rent or any part thereof and the performance and observance by PAL of all the other terms and conditions of the Sub-Tenancy Agreement, so the Defendant is liable to the Plaintiff for all the arrears of rent with interest and all loss and damages as a result of the breach of the Sub-Tenancy Agreement. 

6. There is no dispute between the parties about the facts of the present case, and the contents of the affirmations made by the witnesses in the earlier Order 14 proceedings are admitted as evidence without the need of cross-examining these witnesses.  The parties are also able to agree the quantum of the Plaintiff’s claim in the sum of $175,869.50. 

7. Mr Yip, counsel for the Defendant, has helpfully summarised the defence of the Defendant as follows.  Firstly, the document with the title “Guarantee” dated 30 November 2002 is in law a contract of guarantee and not a contract of indemnity.  In other words, the Defendant only owes a secondary liability and can only be sued after the default by the principal debtor, PAL, who owes the primary duty.  Further, the Defendant is only liable to the same extent as PAL, and therefore the Defendant’s obligation is enforceable only where and to the extent that PAL’s obligation is enforceable.  Secondly, the remedy sought by the Plaintiff herein could have been but had not been sought by the Plaintiff in the earlier Lands Tribunal proceedings, which were based on the cause of action of the breach of the Sub-Tenancy Agreement by PAL.  As between the Plaintiff and PAL, and due to the finality of the said LT Order, the Defendant says that the Plaintiff is no longer entitled to pursue against PAL for the remedy it now seeks herein against the Defendant.  Therefore, the Defendant, as the guarantor, cannot be held liable for any further sum which the Plaintiff is barred to recover from PAL. 

8. I will deal with these two grounds of defence in turn. In opposing the Plaintiff’s claim, the Defendant must succeed on both grounds.

Contract of guarantee versus contract of indemnity

9. For the defence to succeed, the Defendant must be able to show that his liability is only collateral in nature.  In other words, his obligation as the guarantor is only enforceable where and to the extent that the obligation of PAL is enforceable.

10. In this regard, I have no doubt in my mind that the liability of the Defendant is only secondary in nature. 

11. Clause (d) of the Guarantee provides that the liability of the Defendant shall not be discharged by any indulgence on liability given to PAL or any variation of the Sub-Tenancy Agreement.  Clause (e) also provides that the Plaintiff can enforce a guarantee against the Defendant without first having any recourse against PAL. 

12. Despite these provisions, clause (a) and (b) of the Guarantee provide that the Defendant’s liability would only be activated when PAL was in default of its obligation under the Sub-Tenancy Agreement, and clause (a) further provides that the Defendant shall pay the rent “as if he was the tenant”.  In addition, clause (c) says that the Defendant’s liability would be terminated when PAL’s obligation under the Sub-Tenancy Agreement, and all liabilities incurred by PAL as a result of any breach, shall have been fully performed and/or discharged. 

13. In my judgment, the Guarantee, reading as a whole, does support the Defendant’s contention that the liability of the Defendant is only collateral in nature.  According to the terms of the Guarantee, the liability of the Defendant would only arise if there was any default on the part of PAL in the performance of the obligation under the Sub-Tenancy Agreement.  If the liability of PAL was discharged, the liability of the Defendant would also terminate.  Hence, I accept the Defendant’s argument that his liability under the Guarantee is only collateral in nature, and the Defendant can only enforce the Guarantee against the Defendant where and only to the extent that the liability against PAL is enforceable.

The defence of res judicata

14. The next issue I have to consider is whether by commencing the proceedings in the Lands Tribunal by obtaining the LT Order, the liability of PAL or the Defendant in respect of the claim for damages for repudiation of the Sub-Tenancy Agreement has been extinguished by reason of the doctrine of res judicata, both in the narrow and wider sense. 

15. It is clear that the Plaintiff had not included a claim for damages for repudiation of the Sub-Tenancy Agreement in the Lands Tribunal proceedings.  As such claim was not an issue in the Lands Tribunal proceedings, it is clear that the doctrine of res judicata in the narrow sense is not applicable in the present case. 

16. The real contention here is, therefore, whether the Defendant can rely on the doctrine of res judicata in the wider sense, the principle of which was formulated by Wigram WC in Henderson v Henderson (1843) 3 Hare 100, 115 to 116 as follows:

“...when a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under the special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contests, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case... The plea of res judicata applies, except in special cases... to every point where properly belonged to the subject litigation and which the parties, exercising reasonable diligence, might have brought forward at the time ...”

17. The Defendant submits that the Plaintiff should have included the claim for damages for repudiation of the Sub-Tenancy Agreement in the Lands Tribunal proceedings.  By failing to do so, it is an abuse of the process of the court to litigate the matter again in the present proceedings. 

18. In my judgment, such argument cannot succeed for one simple reason, that is the Lands Tribunal had no jurisdiction to entertain the claim for damages for repudiation of the Sub-Tenancy Agreement prior to the amendment of section 8 of the Lands Tribunal Ordinance, Cap. 17 (“LTO”), in 2008.  The jurisdiction of the Lands Tribunal is specified in section 8 of the LTO.  In short, the Tribunal shall have jurisdiction as may be vested in it under any ordinance, including any ordinance specified in the Schedule which includes the Landlord and Tenant (Consolidation) Ordinance, Cap. 7 (“LTCO”).  However if one looks through the LTCO, there is no provision to deal with the claim for damages arising from repudiation of a tenancy agreement.

19. According to the case of Well Century Holdings Limited v Leung Kam Yu [2003] HKLRD 653, common law remedies are different from forfeiture remedy.  A landlord can forfeit a tenancy, if the lease allows it for a breach, however serious or trivial, and where the breach is repudiatory, the landlord can also invoke common law remedies such as seeking damages for the “unexpired term”. 

20.Under the LTCO, a landlord can therefore rely on the forfeiture clause in a tenancy agreement to recover possession of the leased property.  However, the LTCO contains no provision to deal with a claim for common law remedy.  Hence, I understand that the Lands Tribunal did not entertain a claim for common law remedy prior to 2008. 

21. The situation was certainly undesirable as the landlord might have to claim for the remedies under the LTCO in the Lands Tribunal (although the High Court and the District Court also had concurrent jurisdiction) and to claim for common law remedies in a separate ordinary civil claim.  Section 8 of the LTO was therefore amended in 2008.  Under the new section 8(8)(d), the Lands Tribunal now has power to make an order for the payment of damages in respect of any breach of a condition of the tenancy or sub-tenancy. 

22. As prior to 2008 the Lands Tribunal had no jurisdiction to entertain a claim for common law damages for repudiation of the Sub-Tenancy Agreement, it was quite proper for the Plaintiff not to include such a claim in the Lands Tribunal proceedings.  It is not an abuse of the process of the court for the Plaintiff to commence subsequent proceedings against PAL or the Defendant to claim for the damages arising from the repudiation of the Sub-Tenancy Agreement.

23. Mr Yip submits that, assuming that the Lands Tribunal had no jurisdiction to entertain a claim for common law remedies prior to 2008, the Plaintiff should have made all the claims in one single action in an ordinary civil court, and not to separate two separate claims with one commencing in the Lands Tribunal and the other one in the ordinary civil court. 

24. However, I do not accept such argument.  It is clear that the procedures in the Lands Tribunal and in the District Court are different.  The procedures in the Lands Tribunal are informal in nature with the aim of a speedy resolution of the dispute.  In such circumstances, there was nothing wrong for the Plaintiff to make use of the simple procedures in the Lands Tribunal to have a speedy resolution of the claim for forfeiture and possession of the Premises, and to leave the more complicated claim for common law remedies in a subsequent civil claim.  There are also many examples for a landlord to invoke the procedures under the LCTO in one set of proceedings, for example distraint for rent, and to make another claim in a subsequent civil action for damages for repudiation of the tenancy agreement by reason of the non-payment of rent. 

25. Mr Yip is also relying on section 127A of the LTCO and argues that that provision conferred jurisdiction on the court to hear a claim for common law remedy even prior to 2008 for Part V premises, which mainly include commercial premises as the subject property in the present case.  However, the section clearly specifies that the Lands Tribunal can only determine any dispute which arises under Part V of the LTCO.   Part V contains no provision relating to a claim for common law damages, and so I do not accept that such provision can assist the Defendant’s case. 

26. I also do not accept Mr Yip’s argument that simply by separating the claims for forfeiture and common law remedy, the Plaintiff has the burden of proving that there is no abuse of process.  As the Lands Tribunal had no jurisdiction to entertain a claim for common law remedy prior to 2008 and the procedures in the Lands Tribunal and in the ordinary civil courts are different, there is simply no prima facie case of abuse of process in the present case.

27.  Assuming that I am wrong on the jurisdiction issue, I also do not find that there was any abuse of process in the present case as I consider it that it was reasonable for the Plaintiff not to include a claim for common law damages in the Lands Tribunal proceedings.  As confirmed by the case of Well Century, only a breach serious enough to evince an intention to repudiate the Sub-Tenancy Agreement would have allowed the Plaintiff to invoke the common law procedures.  When the Plaintiff sought vacant possession of the Premises by applying to the Lands Tribunal, PAL defaulted on rent for two months only, and the Sub-Tenancy Agreement still had a term of 17 months to go.  There was no other evidence showing PAL’s intention to repudiate the Sub-Tenancy Agreement.  Furthermore, a default of two months’ rent might or might not have constituted repudiation by PAL (see: MTR Corporation Limited v Ka Mong Management Limited, unreported, HCA904/2009, decision of Bharwaney J on 30 April 2010), and the court usually requires a longer period of default to show sufficient intention to repudiate a tenancy agreement.  Without the Defendant’s repudiation of the Sub-Tenancy Agreement, the Plaintiff did not have any cause of action asking for common law remedies.  In the light of the fact that repudiation was not a foregone conclusion at the time when the Plaintiff made the Lands Tribunal’s application, the Plaintiff’s decision not to include the claim for common law remedies cannot be faulted. 

28. Based on the aforesaid, the second ground of defence must fail.  As the Defendant does not seek to dispute the facts in support of the Plaintiff’s claim, I grant judgment in favour of the Plaintiff for the quantum agreed by the parties.

29. It is certainly regrettable that it took so long for the resolution of the dispute in the present case.  The case was commenced in 2004.  The parties have no serious dispute about the facts, and the main issue is whether the doctrine of res judicata is applicable in the present case.  In my judgment, the case should have been disposed of much earlier, either in the earlier Order 14 proceedings or in an appropriate application for striking out, and it is certainly regrettable that the issues facing the court in this trial are no different from those facing a judge dealing with an application to strike out a claim on the ground of abuse of process in interlocutory proceedings.  It is arguable whether the Plaintiff had presented all the arguments to the court, in particular those relating to the limited jurisdiction of the Lands Tribunal, in the earlier Order 14 proceedings.  I imagine that if such argument had been presented earlier, it might not have been necessary for this case to reach the stage of the trial which resulted in extra costs and delay.