HOLLY KEY INVESTMENT LTD v. JIN & CHUN CORPORATION LTD

DCDT 1303/2017

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

DISTRAINT NO 1303 OF 2017

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DECISION

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INTRODUCTION

The Application

1.  This is an application by the defendant for an order that the warrant of distress granted on 11 May 2017 against the defendant in respect of the goods and chattels, situated at Shop Nos 15 and 16 of Retail Portions on the Ground Floor of Commercial Podium, Mandarin Plaza, No 14 Science Museum Road, Kowloon, Hong Kong (“the Premises”) be discharged or, alternatively, be suspended (“the Application”).

2.  The Application is made pursuant to s 93 of the Landlord and Tenant (Consolidation) Ordinance, Cap 7 which provides:-

“The debtor, or any other person alleging himself to be the owner of any property seized under this Part, may, at any time within 5 days from such seizure, apply to the court to discharge or suspend the warrant or to release a restrained article; and the court may discharge or suspend the warrant or release the article, on such terms as it may think just.”

3.  The tenancy agreement which gave rise to the Application was entered into by the parties on 27 May 2016 where the defendant agreed to lease the Premises from the plaintiff with the intention to operate a Korean restaurant. The plaintiff was and is the owner and landlord of the Premises.  Both parties were represented by solicitors during the preparation and negotiation of the tenancy agreement.  The rent was agreed at HK$118,000 per month with a term of 3 years commencing on 1 June 2016 (“the Tenancy Agreement”).

4.  It is not in dispute that as of the date of issue of the distress warrant on 11 May 2017, the defendant owed to the plaintiff 5 months of rent and 3 quarters of rates in the total sum of HK$648,160.  

5.  The distress warrant was suspended by this court at the hearing on 31 May 2017 pending the resolution of the defendant’s application.  The parties were given the opportunity to file further evidence and submissions on that occasion.  The matter was adjourned to 13 July 2017 for full arguments.

Grounds for the Application

6.  The defendant relies on the following 2 grounds in support of the proposed discharge:-

(a) First, there is a serious dispute between the parties as to the defendant’s right to an equitable set-off against rent in arrears on the basis of 2 pre-contract misrepresentations made by the plaintiff through Ms Lau Mei Sze Doris (“Ms Lau”) to Mr Li Ka Wai, Alex (“Alex”), namely that:-

(i) the Premises would have capacity for increasing electricity supply to 60A, being required for the defendant’s commercial purpose, and

(ii) the Premises would have immediate temporary supply of water for use of construction work in June 2016 (“the Representations”); and

(b) Second, there was a material non-disclosure in the plaintiff’s ex parte application as to the existence of this dispute.

7.  Mr Vincent Chen, the defendant’s counsel, submits that the dispute between the parties is not apt to be summarily disposed of in the present distress proceedings and should instead be properly resolved by way of civil proceedings.  In this regard, the defendant relies on a comment made by Acting Chief District Judge ST Poon’s (as he then was) in Suneasy Ltd T/A Taipan Management Co v Hirohito Hayashi, unreported, DCDT 4162/2011, 31 January 2012 where it was held that:-

“… The purpose of distress proceedings was for a situation where there is little dispute as to outstanding rent.

If there is serious dispute, the proper course is to issue a writ for the issue to be resolved at trial and not summarily in the proceedings of distress, and in my view, the application for distress should never have been taken out and there is no reason why upon failure, the plaintiff should not account for the costs of the other side, and therefore, I order that the costs of the defendant in these proceedings be borne by the plaintiff.” (§§19-20)

8.  I note however that the above case involved with a very unique situation where there was a serious dispute between the parties as to whether there had been any outstanding rent and the amount of outstanding rent, if any.  It also involved an unfortunate situation where both parties were not at fault and the rent was absconded by an estate agent.  It did not involve a situation where rent was owed and the amount of outstanding rent was not in dispute and the parties’ respective positon to pay them was well defined under a tenancy agreement like our present case.  Thus, I consider what ACDJ Poon has stated in Suneasy can be easily distinguished from the facts in our present case.    

The plaintiff’s position

9.  The plaintiff submits that the Application should be dismissed with costs on the following grounds:-

(1) There is no arguable defence of set-off by reason of the so-called loss of profits suffered as a result of the misrepresentations;

(2) as there is no genuine dispute regarding plaintiff’s entitlement to the rent in arrears, there was no material non-disclosure.

DISCUSSION

(1) Misrepresentations giving rise to equitable set-off?

10.  The defendant submits the fact that the Representations were made (or that there is a serious dispute on this issue) is shown by:-

(a) The first-hand evidence of Mr Oh Hyeongjin (“Oh”), a director of the defendant, that the defendant only entered into the Tenancy Agreement with the plaintiff for the leasing of the Premises upon the plaintiff’s Representations (through Ms Lau and Alex);

(b) The written confirmation of Alex that the Representations were indeed made; and

(c) The sworn affidavit evidence from a Mr Yu Woo Suk (also known as “Wataru”) that:-

“On 3 July 2016, this is the first time I accompanied Oh to meet the representative from the plaintiff, Mr Cheng. Apart from the brief description of this meeting as stated in Oh’s 2^nd Affirmation, I also recall that Mr Cheng said that the plaintiff could not give the defendant the electricity capacity needed. Mr Cheng further suggested that the defendant could use town gas rather than electricity. Mr Cheng also promised that that the plaintiff would pay for the installment of town gas at the Property, if Oh agreed to use town gas.”

11.  I agree with the plaintiff’s counsel Ms Connie Lee that there is no room for argument for an equitable set-off under the very clear terms of the Tenancy Agreement in this case for the following reasons.

(a) The right of set-off is expressly excluded

12.  Clause 2(a) and Part II of the 3^rd Schedule of the Tenancy Agreement expressly provide that defendant is “to pay unto the Landlord the Rent at the time and in manner aforesaid without deduction or set off”. [emphasis added]

13.  Taking the defendant’s case to the highest, ie even if there was actionable misrepresentation (for which I agree with the plaintiff that it lacks any solid factual foundation), by virtue of clause 2(a), the defendant’s right of set off has been specifically excluded. 

14.  It is trite that a defendant cannot rely on any cross-claims it may have against plaintiff’s claim for rent in arrears: Star Rider v Inntrepreneur Pub Co [1998] 1 EGLR 53 at 55; Woodfall: Landlord & Tenant (Oct 2016) at §7.115.

15.  It has also been held that a clause “without any deduction or set-off” omitting the word “whatsoever” is likewise clear and sufficient to exclude any right of deduction or set off: Altonwood Limited v Crystal Palace FC (2000) Limited [2005] EWHC 292 (Ch) 7.3.2005 at §32.

16.  I agree with Ms Lee that, in this case, the only 2 available exceptions to withhold payment of rent as provided under the Tenancy Agreement are: (i) the one-month rent free period from 1.6.2016 to 30.6.2016 under Part VI of the Third Schedule; and (ii) when the Premises becomes damaged or inaccessible by reason of inter alia calamity beyond the control of the parties under Clause 7.  I agree that neither of which can assist the defendant in this case.

17.  Mr Chen for the defendant relies on the following passage in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 where Lord Diplock held that there is a presumption that the set-off defence is not excluded and that clear words are required to rebut the presumption:- 

“… It is, of course, open to parties to a contract for sale of goods or for work and labour or for both to exclude by express agreement a remedy for its breach which would otherwise arise by operation of law or such remedy may be excluded by usage binding upon the parties (cf. Sale of Goods Act 1893, section 55). But in construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption.” [emphasis added]

18.  Mr Chen submits whether the term “without deduction or set off” has the effect of excluding all set-off defences is a question of contractual interpretation.  He further submits in this case that clause 2(a) is expressly qualified by the pre-condition found at the beginning of clause 2 that “The Tenant to the intent that the obligations may continue through the term hereby created hereby agrees with the Landlord as follows”.  The defendant submits that the “obligations” therein refers to the contractual obligations expressly stated in the Tenancy Agreement.

19.  With respect, I do not agree with the above submissions of the defendant at all.  First, I consider the presumption that the set-off defence is not excluded only applies in situations where no clearly expressed words have been used in the contract.  In this case, the tenant’s obligation to pay rent “without deduction or set off” has been clearly stated in clause 2 (a) and I do not see any other interpretation could be attached to those plain words.  Second, I do not agree that clause 2(a) is qualified by the “pre-condition” as alleged.  Those words merely spell out the tenant’s intent that the obligations stated in the Tenancy Agreement may continue throughout the term of the tenancy.  In my view, the defendant’s duty to pay rent “without deduction or set off” is not subjected to or qualified by the contractual obligations stated on the Tenancy Agreement as alleged by the defendant.

20.  Mr Chen also submits that, reading clause 2(a) as a whole, the tenant agrees to pay rent to the plaintiff and waives the right to claim deduction or set-off but only insofar as such a right arises out of a breach of the obligation which is continuing throughout the term of the tenancy.  He contends that the defendant has not waived the right to claim set-off, arising out of a claim of misrepresentation, which is based on representations made, rather than contractual terms under the Tenancy Agreement.  Therefore, as the defendant submits, the parties never intended to exclude the tenant’s claim for damages arising outside the Tenancy Agreement, including damages under the Misrepresentation Ordinance, Cap 284 giving rise to an equitable set-off as held in Eller v Grovecrest Investment Ltd [1995] QB 272, per Hoffmann LJ.    

21.  Again, with respect, in view of the very clear wordings used in clause 2(a) of the Tenancy Agreement and the defendant’s obligation to rent “without deduction or set off” during the term of the tenancy, I do not see there is any room for the defendant’s argument that the parties never intended to exclude the tenant’s claim for damages arising outside of the Tenancy Agreement, including damages under the Misrepresentation Ordinance, Cap 284.  It follows that I do not consider s 4 of the Misrepresentation Ordinance, Cap 284 and s 3 of the Control of Exemption Clauses Ordinance, Cap 71 (and the cases relied on by the defendant relating to those provisions) will have any application in this case as submitted by the defendant. 

22.  In my judgment, if the defendant has a legitimate claim based on misrepresentation, it can always commence separate proceedings against the plaintiff for breach of the Tenancy Agreement.  It will be wrong as a matter of principle to allow the defendant to try to use that as an excuse for not paying rent or to deduct or set off the rent owed under the Tenancy Agreement in a distraint action.    

(b) The alleged representations are flatly contradicted by the terms of Tenancy Agreement

23.  I agree with Ms Lee that the defendant’s case of reliance on the alleged Representations lacks a solid factual foundation.  The fact that Alex had raised the issue of upgrading the electricity supply and the water connection at the Premises with plaintiff’s representatives prior to the execution of the provisional tenancy agreement is neither here nor there.  The most crucial point is that they had never found their way into the Tenancy Agreement and became part of the agreement.   

24.  I agree with the plaintiff’s submission that if indeed the issue of electricity supply and water connection were so important to the defendant that they featured prominently in its consideration as to whether or not to lease the Premises, it is only logical that the same would have been explicitly set out in the “Remarks” which is a separate typewritten page of additional terms attached to the provisional tenancy agreement.  Quite the contrary, Clause 10.4 of the provisional tenancy agreement made it clear that the Premises “shall be delivered in bare shell state”.

25.  More importantly, the defendant and Oh were both legally represented in the preparation of the Tenancy Agreement.  Since at least 19 May 2016, Katherine Or & Co had been instructed to act for the defendant.  Prior to the execution of the Tenancy Agreement, there were discussions and negotiations between the respective legal representatives regarding the proposed terms of the Tenancy Agreement and the personal guarantee to be executed by Oh.

26.  In my judgment, it is only reasonable to assume that the defendant’s then solicitors had duly considered the proposed terms of the draft Tenancy Agreement before the finalized version was signed and executed by the defendant on 27 May 2016. 

27.  In my view, if the Representations were so important and but for which the defendant would not have entered into the Tenancy Agreement:-

(1) the Representations would or should have found their way in the executed Tenancy Agreement;

(2) at the very least, Katherine Or & Co would have raised the same with plaintiff’s solicitors prior to finalizing the draft Tenancy Agreement.

28.  However, as Ms Lee has submitted, not a word about the Representations was ever raised by Katherine Or & Co to the plaintiff’s solicitors prior to finalizing the draft Tenancy Agreement.  To the contrary, the Representations are flatly contradicted by the express terms of the Tenancy Agreement:-

(1) Clause 11 provides that there is no warranty that the Premises are lawful and suitable for the use or purpose specified in Part III of the Third Schedule;

(2) Part VII of the Third Schedule requires the defendant to make its own arrangement with the utility companies and the Manager for the supply of electricity and water to the Premises;

(3) Part VII of the Third Schedule also provides that vacant possession of the Premises shall be delivered in a “bare shell” condition.

29.  Last but not the least, in my view, it was most odd that the defendant was willing to pay rent from 1 July 2016 (ie after the expiration of the rent free period) and for a period of 5 months and had only ceased to pay them from 1 December 2016 onwards. It begs the question of why, if the defendant was aware that there were misrepresentations made, it would bother to pay rent during those first few months at all.

(c) The alleged damages claimed has no proper basis and particulars

30.  I agree with the plaintiff’s submission that the defendant has no basis to claim for loss of profits by reason of the alleged misrepresentations even if there was any merit.  The correct measure of damages for misrepresentation (be it fraudulent or otherwise) is not for breach of contract in that it was not designed to place the victim in a position he would have been if the representation had been true.  Rather, it is to put him in the position he would have been in if the representation had not been made: Chitty on Contract (32^nd Ed) Vol 1 at §§7-055 & 7-077.

31.  In this case, the defendant repeatedly alleges that had the Representations not been made, it would not have entered into the Tenancy Agreement.  I agree with Ms Lee that:-

(i) the defendant cannot claim the so-called “profits” it would have earned “if the two representations were true”;

(ii) the purported calculation for such alleged loss (ie the sum of HK$1,167,600 is but a bare assertion with no particulars and/or proper evidence to support; and

(iii) it is preposterous that the renovation which according to the defendant would only take around 1 month to complete would suffer a delay of more than 4 months simply because the defendant had to arrange temporary water supply.

(d)    Additional costs incurred also lacks of factual foundation

32.  The defendant further claims some so-called additional costs incurred as a result of the alleged misrepresentations.  The same is only belatedly raised in Oh’s 2^nd Affirmation at §13. It is unclear how the defendant could have claimed these costs.  In particular:-

(1) the plaintiff had delivered vacant possession of the Premises to defendant.  In view of the express terms of the Tenancy Agreement, there is no basis not to pay any rent as from July to November 2016;

(2) it appears that the rent and salary incurred for the 3 Korean cooks had no relevance with the making of the alleged Representations.  The tenancy agreement for the purpose of providing housing for the 3 Korean cooks was made on 13 April 2016 and commenced on 22 April 2016, ie before the Representations were allegedly made in early May 2016.  In other words, there is no causative link for this so-called loss.

(2) Material non-disclosure

33.  In my judgment, there is no dispute that the amount of rent in arrears was clearly due and remains payable such that the warrant of distress should have been issued.  The defendant however contends that the same should still be set aside solely on the basis that the parties’ correspondence in March 2017 was not exhibited to Stella Lai’s affirmation as this amounted to material non-disclosure. 

34.  In my view, there is no reason why the Application should be granted solely on the ground that the correspondence was not referred to by the plaintiff.

35.  First, the application for a warrant must be made ex parte as provided under Part III of the Landlord and Tenant (Consolidation) Ordinance Cap 7.  It in turns provides comprehensively for the law upon matters within its ambit.  Provided that plaintiff fulfils all the requirements set out in Form 1 in the 5^th Schedule ie the prescribed form of the affidavit containing all the prescribed particulars, the warrant of distress cannot be set aside on the ground of non-disclosure: The Annotated Ordinance of Hong Kong on the Landlord and Tenant (Consolidations) Ordinance Cap 7 at §82.02; Lo Siu Yin v Ha Sheung Ping [1994] 1 HKC 375 (CA) at 376G-377H.

36.  I do not accept Mr Chen’s submission that Nazareth JA in Lo Siu Yin, supra did not lay down a blanket principle that the duty of full and frank disclosure was not applicable in an ex parte application for a warrant of distress, nor that such an ex parte order could not be set aside on material non-disclosure.  I do not agree with the very narrow interpretation of the defendant of a passage found in p 377G of the reported judgment when Nazareth JA stated that he could not find anything in Part III of the Ordinance that requires the additional disclosure or right to be heard as contended by the appellant/tenant’s counsel in that case.  Reading the judgment as a whole, there is no doubt in my mind that the Court of Appeal had laid down the principle that, provided an applicant meets all the requirements of Form 1 in the 5^th Schedule, then a warrant of distress should and must be granted.  Thus, in my judgment, the case of The Hagen [1908] P 189 relied on by the defendant which states the general proposition that there is a duty to make full and frank disclosure in all ex parte applications will not apply in a warrant of distress situation which disclosure is governed by statute.

37.  In my judgment, Stella Lai’s affirmation has been made in accordance with the prescribed form containing the prescribed particulars.  The correct amount of arrears, the period and the Premises have all been specified.  It is also affirmed that defendant is justly and truly indebted to plaintiff for the specified sum in arrears. There was no material non-disclosure as contended by the defendant.

38.  Second, there being no genuine dispute or defence to the amount claimed to be in arrears, the defendant’s self-serving allegations set out in the said correspondence are in my view not material.  In any event, such allegations have been denied and addressed by plaintiff in the letter dated 27 March 2017.

CONCLUSION

39.  In the aforesaid premises, I find the defendant’s application devoid of merits and is hereby dismissed with costs. This will include the costs reserved for the hearing before me on 31 May 2017, such costs to be taxed if not agreed with certificate for counsel.