PAKWELL INVESTMENT LTD. v. CRC DEPARTMENT STORE LTD.

HCA 13181/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13181 OF 1999

____________

____________

_______________

J U D G M E N T

_______________

1. In these proceedings the plaintiff seeks an order for specific performance of a tenancy agreement they claim was made with the defendant in 1999 in respect of premises in Nan Fung Centre, Tsuen Wan, and damages in lieu or in addition. At the commencement of this hearing, Mr Chow for the plaintiff, conceded that specific performance was no longer a practical proposition, the premises now having been relet to others, and said that the plaintiff now only sought damages. Having granted leave to the defendant to put in, hopelessly out of time, a surveyors' report, served shortly before the hearing date, I ordered that the trial should proceed as to liability only, with damages if any to be dealt with at a later stage.

2. The premises concerned are a small part of the 1st floor, and a much larger part of the 2nd floor, of Nan Fung Centre, owned by the defendant who, at the commencement of the events leading to this action, operated a department store there. It was then their intention to reduce the size of the department store and let the space thereby made free, amounting to some 17,500 square feet. In about February 1999, the availability of the premises came to the attention of Mr Philip Wong, a director of the plaintiff, through an estate agency called Highwin International Property Consultants (Highwin), a company managed by a Miss Kitty Wu, but owned and operated by Highwin Development Company Limited. The two shareholders and directors of the latter are Mr Wong himself and his younger brother, a fact not revealed by Mr Wong in his witness statements, where he appears to seek to distance himself from the estate agency. However, on his instructions, and on behalf then of another of his companies, Guangjian (Holdings) Limited (Guangjian), Miss Wu, by a letter dated 25 February 1999, made an offer to China Resources Retail (Group) Limited, the defendant's holding company and agent, to rent the premises for a term of four years, with option for two further terms of the same length, at a rent of $500,000.00 a month for the first four years, with 10% increases for each of the optional renewals, a rent free period of 6 months and a right to sublet. Mr Wong then intended to convert the premises into a shopping mall or arcade, with a large number of small shops separately let. The project was also intended to be a joint venture with others in the name of another company which would be nominated to take up the lease, and negotiations commenced through a Mr Wang Chun of the defendant.

3. Mr Wong put forward proposals for the premises in letters to Mr Wang in March 1999, including an offer to undertake the renovation of the defendant's own portion to be retained by them. These were accompanied by plans prepared by Mr Wong's own architect. A meeting took place on 23 March, attended by Mr Wong, his architect Mr Christopher Leung, and Mr Wilson Nei Kin Hung, another associate of Mr Wong, although incorrectly described in correspondence as a director of Guangjian, when their proposals for the premises and for the terms of a lease were discussed. Following that meeting, a further offer was made by Mr Wong in a letter dated 30 March, and this in turn was followed by a third offer on 15 April 1999 of which, after further upwards revision of the proposed rent, the defendant, by their Mr Chen Zhen Yu, indicated their approval by countersigning the letter on 22 April 1999. However, this letter, as well as those preceding it, included a term which I am told translates as: "The above terms shall be subject to the final contract to be mutually signed", and which Mr Wong in evidence conceded was equivalent to the well known phrase, "subject to contract". A preliminary deposit equivalent to one month's rent was then paid to the defendant, a payment which Mr Wang Chun said, and I accept, was to show Mr Wong's sincerity, and following which they ceased any negotiations with any other interested parties. On 26 April the parties agreed to substitute as proposed tenant a company called Fartech Investment Limited, and the defendant further agreed to pay Highwin an agency fee of $316,000.00 upon their signing of the formal lease. This, as we shall see, never in fact happened, but the fee payable to his own company may well be the reason Mr Wong was so reluctant to reveal his connection with it.

4. In early May 1999 Mr Wong appointed a Mr Hung of Messrs Gallant Y T Ho & Co as his solicitor and Mr Wang told him that the defendant's solicitor would be from the same firm but in their Mongkok office. A draft tenancy agreement was sent to Mr Hung who passed it to Mr Wong. A number of amendments were made to this, principally by Mr Wilson Nei, for Mr Wong, and many of these were incorporated into the final version of the agreement in July 1999, and the commencement date, originally agreed orally between Mr Wong and Mr Wang as 1 July 1999, was changed to 16 August 1999, with a rent-free period of three months. In June 1999, the parties agreed to substitute the plaintiff as tenant, the project having become a joint venture between Mr Wong, Mr Nei and a company called Kee Shing (Holdings) Limited, with whom Mr Wong was also associated and which became the major shareholder, and Messrs Sit, Fung, Kwong & Shum were appointed the plaintiff's solicitors. A further draft tenancy agreement was sent to the plaintiff's solicitors for approval, and they returned this with amendments on 5 July 1999. Another draft was sent to the plaintiff's solicitors on 9 July, and, the terms of this being accepted, the defendant's solicitors sent an engrossed formal agreement to the plaintiff's solicitors on 13 July. This was returned duly executed by the plaintiff on 14 July but has never been executed by the defendant.

5. Meanwhile, in the course of June 1999, in anticipation of the tenancy, and to seek the approval of the defendant of their renovation plans for the portion to be retained by them, the plaintiff had proceeded to draw up plans for the premises and consulted with their architect and contractors. On 19 June they accepted a quotation from Hang Foong M & E Consulting Co. Ltd in respect of electrical, air-conditioning and fire services installation, and received an invoice for $56,000.00 as first stage payment, and on 2 July a further invoice for the next $168,000.00. Neither of these has been paid. They appointed a Mr Lung Tze Ming as a consultant for the shopping centre project for the period from 2 July to 31 October at a fee of $150,000.00, and a Mr David Wong as property manager also from 2 July at a salary of $30,000.00 per month. However, it was only revealed in cross-examination of Mr Philip Wong that Mr Lung was already his employee, and had been for eight years, and Mr David Wong is his brother, and both were fellow directors in Guangjian. There is no evidence that anything has been paid to them in respect of their appointments. The plaintiff also confirmed Mr Christopher Leung as architect for the project and paid him a first stage payment of $50,000.00, and the defendant signed the requisite form giving notice to the Building Authority of his appointment as authorised person for the proposed building works.

6. On 29 June 1999 the defendant notified the plaintiff that they intended to cease business at the department store on 30 June and requested them to erect hoardings at the escalators from 1st to 3rd floors to allow access and a fire escape route during the alterations for those using the 3rd floor, and on 30 June approved the plaintiff's plans for the renovation work. The hoardings were erected by the plaintiff's contractor on 5th July, and another contractor attended on 7 July to turn off a water control switch for the air-conditioning so that the defendant could proceed with demolition of their store facilities. There is no evidence that the plaintiff paid anything for either of these matters. It appears that the intention of the parties was that the plaintiff would be allowed into possession of the defendant's retained part of the premises to commence the renovations on 15 July. The plaintiff continued to make preparations in arranging banking facilities with Kwong On Bank, and on 10 July entered into a contract with Hope Seng Construction Ltd both for the renovation for the defendant and their own shopping arcade project, and on 11 July received an invoice for the first stage payment of $3,353,800.00. This too has not been paid. A number of other matters were dealt with by both parties, clearly anticipating that a formal tenancy would be entered into and the work would proceed.

7. However, changes had meanwhile been taking place in the management of the defendant's holding company, as a result of which the person hitherto in charge, Mr Chen Zhen Yu, was replaced by a Mr Lau Pak Shing, whose brief seems to have been to review the profitability of the defendant and its properties. As a result of this, the defendant decided not to proceed with the proposed tenancy, and to develop the premises themselves into a shopping arcade, which has since been done. The plaintiff's solicitors were notified of this decision by a letter dated 14 August 1999 from the defendant's solicitors who also returned the sums paid by the plaintiff by way of deposit, charges, rates and stamp duty.

8. Mr Chow puts the case for the plaintiff on two bases: the first is that there was a concluded contract between the parties, notwithstanding the cover of the "subject to contract" nature of the correspondence prior to 14 July 1999, and evidenced, for the purposes of section 3 of the Conveyancing and Property Ordinance, Cap. 219 by the tenancy agreement itself executed by the plaintiff; the second is proprietary estoppel, in that the plaintiff incurred expense, and otherwise acted to its detriment, on the assurances of the defendant that the tenancy would be granted, and it is now unconscionable for the defendant not to grant the tenancy. I will look at these separately.

Contract

9. As I have already observed, until 14 July 1999, all correspondence, from the original offer of 15 April, was marked "subject to contract" or qualified by similar wording. Indeed, this was further reinforced by the defendant's solicitors in their letter of 17 June 1999, sending the draft tenancy agreement to the plaintiff solicitors, where they added:

"Without prejudice to any agreements reached between our respective clients, nothing herein or in our draft tenancy agreement shall be binding on our client unless and until the said formal tenancy agreement shall have been signed by our client."

10. Mr Chow accepts that, up to and including 13 July 1999, the "subject to contract" nature of the correspondence prevents any concluded contract being in place. It is the events of the next day, and those following which, he says, show that a final contract was entered into, and, either the "subject to contract" qualification was intentionally removed, or the fact of a concluded contract rendered it meaningless.

11. The sequence of events the plaintiff relies on commences on 13 July 1999. On that day the defendant's solicitors, having been advised that the plaintiff agreed all their amendments to the draft tenancy agreement, sent an engrossed copy of the agreement to the plaintiff's solicitors for their client's execution, with a covering letter, marked "subject to contract", requesting a copy of a board resolution authorising the execution, a bank guarantee in respect of the security deposit, and a cheque for management and air-conditioning charges and rates for the first month of the tenancy, and their share of the stamp duty and registration fee. This letter also referred to the last paragraph of their letter of 17 June set out above. The plaintiff's solicitors replied by letter the next day, sending the agreement executed by their client, and the board resolution and cheque requested, and including the following statement:

"The above documents and cheque are sent to you subject to your firm's personal undertaking to:-

(1) let us have a copy of the said Tenancy Agreement duly executed by your client and attested by you together with the plans attached thereto duly signed by your client within the next two working days from the date hereof;

(2) stamp and register the said Tenancy Agreement within the prescribed time period; and

(3) return to us one original counterpart of the said Tenancy Agreement duly stamped and registered within 5 days from the date of your receipt of the same from the relevant Land Registry and in any event, within 60 days from the date hereof."

The defendant's solicitors sent two letters after that to the other side; the first sending a copy bank guarantee in terms acceptable to them, again marked "subject to contract", and the second, clearly referring to the letter accompanying the agreement, and in response to the request for an undertaking, but not marked "subject to contract", stating, inter alia:

"As regards Points No. (1) and (3) of the 2nd paragraph of the said letter, please be informed that we are only prepared to:-

1. let you have a copy of the Tenancy Agreement duly executed by our client and attested by us as soon as possible (and not within the next two working days from the date of your letter);

2. return to you one original counterpart of the said Tenancy Agreement duly stamped and registered within 5 days from the date of receipt of the same from the relevant Land Registry (and not within 60 days from the date of your said letter)."

12. Mr Chow submits that the letter from the plaintiff's solicitors was intended to be an open offer which was accepted by the defendant's solicitors by replying by letter also not marked "subject to contract", by stating that they would return the executed agreement as soon as possible, and by clearing the cheque for charges, rates and stamp duty. He also adds the silence on the part of the defendant from then until 14 August, but I cannot see that the circumstances here provide any exception to the principle that a contract cannot be accepted by silence.

13. I regret that I find no merit in Mr Chow's submissions. It is clear to me that the dealings between the parties were still subject to contract on 14 July 1999, and would continue to be until the agreement had been signed by the defendant. It is a basic and well known principle in cases such as this that negotiations which begin under the umbrella of "subject to contract" continue to be so qualified even if subsequent letters do not expressly use the phrase, until the formula is expunged either expressly or by necessary implication. As Cumming-Bruce LJ said in Cohen v. Nessdale [1982] 2 All ER 97, at page 103:

"The starting point, as counsel for the tenant recognises, is really the statement of the law recited in this court in Sherbrooke v Dipple (1980) 41 P & CR 173 and in particular the judgments in this court. Lord Denning MR said (at 176):

'But there is this overwhelming point: Everything in the opening letter was "subject to contract". All the subsequent negotiations were subject to that overriding initial condition. We were referred by counsel for the plaintiffs to a decision of Brightman J. in 1972. It is Tevanan v Norman Brett (Builders) Ltd (223 EG 1945 at 1947). Brightman J. said that "parties could get rid of the qualification of 'subject to contract' only if they both expressly agreed that it should be expunged or if such an agreement was to be necessarily implied"

Lord Denning MR went on to deal with the application of that principle to the facts of the case before him.

Templeman LJ quoted (41 P & CR 173 at 176) the whole of the passage to which Lord Denning MR had referred from the judgment of Brightman J, and I quote it:

'.....when parties started their negotiations under the umbrella of the "subject to contract" formula, or some similar expression of intention, it was really hopeless for one side or the other to say that a contract came into existence because the parties became of one mind notwithstanding that no formal contracts had been exchanged. Where formal contracts were exchanged, it was true that the parties were inevitably of one mind at the moment before the exchange was made. But they were only of one mind on the footing that all the terms and conditions of the sale and purchase had been settled between them, and even then the original intention still remained intact that there should be no formal contract in existence until the written contracts had been exchanged.

Templeman LJ went on to say (41 P & CR 173 at 176):

'Mr Justice Brightman thought parties could get rid of the qualification of "subject to contract" only if they both expressly agreed that it should be expunged or if such an agreement was to be necessarily implied.'"

14. I can see no reason why the situation is any different here. The negotiations had been subject to contract throughout, with the necessary consequence of that, that either party could walk away from those negotiations at any time before both parties had signed a formal agreement, and the position at least of the defendant had been made clear by their solicitors by stipulating in their letter of 17 June 1999, and repeating in their letter accompanying the engrossed formal agreement on 13 July 1999, that nothing would be binding on their client until they had signed the agreement. The fact that their letter of 14 July was not marked "subject to contract", in the absence of clear agreement to the contrary, could not expunge the qualification. Their statement that they were "prepared to" let the plaintiffs' solicitors have the executed document as soon as possible, and to return it duly stamped within 5 days after so doing, does not, in my view, amount to an agreement that matters are no longer subject to contract, or to their requirement that the tenancy agreement be signed by their client to be binding, nor can it give rise to an implication to that effect. It is true that by 14 July 1999 the parties were of one mind in that the terms of the tenancy had been settled between them. But this does not remove the requirement of execution and exchange of the formal agreement for those terms to become binding on them, unless it is clear that they agree otherwise. There is no such agreement here.

15. Mr Chow has further sought to equate the events on 14 July with a conveyancing transaction by undertakings. I again have no difficulty in distinguishing that situation. For conveyancing transactions to be by undertaking there must be an agreement to do so, it cannot be assumed, nor implied. There is no such agreement here. Secondly, the wording of the defendant's solicitors' letter falls far short of an undertaking that the document will be signed by their client, being at most an undertaking as to when a copy of the executed agreement will be given to the plaintiff, which was stated to be "as soon as possible". If the agreement is not executed, it would not be possible at all and no agreement exists. Neither do I find the presenting of the plaintiff's cheque for charges and rates to assist the plaintiff. This is equally consistent with the defendant's solicitors protecting their client's interests in ensuring that money due under the agreement is paid before the agreement is executed by them.

16. Having found that no contract came into existence between the parties, it is unnecessary for me to deal with the matter of the requirement of the Conveyancing and Property Ordinance, although there is no doubt in my mind that, had there been a concluded contract, the correspondence between the solicitors and the documents sent therewith would have satisfied those requirements.

Proprietary Estoppel

17. This second limb of the plaintiff's case relies on the course of negotiations between the parties, and what the plaintiff claims were assurances given to them that the tenancy would be granted to them, as a result of which they incurred expense, entered into contracts thereby making themselves liable under them, and otherwise acted to their detriment.

18. It is clear that, from the signing by the defendant of the amended letter of 15 April 1999, it was their firm intention to grant a tenancy of the premises to the plaintiff. As Mr Wang Chun conceded, once the plaintiff had shown sincerity by paying a deposit of the equivalent of one month's rent, they negotiated with no other parties except the plaintiff. Those negotiations involved the renovation of the retained part of the premises, which was going to be part of the agreement, and as to which the defendant clearly had to be satisfied that their requirements were met, and the other terms to be included in the final agreement. Mr Wong described such other terms as minor. While they were secondary to the rent payable and the term of the lease, and to the renovations planned, I do not consider that they can be dismissed as unimportant in a commercial environment. It is also clear that these negotiations were with Mr Wong, and later Mr Nei, rather than with a particular company. There is no evidence that Mr Wang Chun took any steps to investigate Guangjian, to find out who were the directors and shareholders, and from where the funds were to come to finance the project. It was Mr Wong he dealt with, and satisfied himself that he was able to carry out the project. For this reason there was no objection when the name of the proposed tenant was changed, not once, but twice, as the defendant was still negotiating with the same person, and did not seem concerned with his other partners in the project. It is for this reason I find that the defendant's witnesses' evidence, as to the doubts they harboured about his ability and sincerity in carrying the matter to fruition, unconvincing. The decision not to continue with the intended tenancy was, in my view, a commercial decision taken when a change in management brought a review of the profitability of the defendant's properties. The only question now is whether it was unconscionable for them to do so.

19. Given that the defendant was negotiating with no other party between April 1999 and the final decision not to proceed with this tenancy, it is apparent that both sides were conducting themselves on the basis that the plaintiff would become the tenant of the premises, and assumed that their negotiations would lead to a final agreement, subject to the right I have dealt with above of either party to withdraw. It is inevitable in those circumstances that the dealings between them should be coloured by that assumption and expectation, and encouragement should be given to proceed to that end. To that extent, I have no doubt that Mr Wong took Mr Wang Chun's encouragement as an assurance that the tenancy would be granted. At the same time, on such assumption, it was essential for other preliminary steps to be taken to expedite matters once the tenancy came into being. These included appointing the plaintiff's architect as authorised person for the works, asking the plaintiff to erect hoardings and turn off the air conditioning water supply, and pressing the plaintiff for the preparation of plans, which were essential to the tenancy, as they had to be approved before the defendant could agree to the plaintiff carrying out the renovation as part of that tenancy agreement.

20. The plaintiff relies further on a meeting which took place on 13 July 1999, shortly after Mr Lau took over his role of reviewing the properties, and was clearly for the purpose of introducing Mr Wong, Mr Nei and others in his team to Mr Lau. There is some dispute about what happened at that meeting and what, if any, assurances were given that the tenancy would go ahead. What is not disputed is that there was mention by Mr Lau of the possibility of the defendant themselves developing a shopping arcade in their retained portion of the property. Whether or not this started alarm bells ringing for the plaintiff is not clear, but it was with remarkable alacrity that they informed the defendant's solicitors that afternoon that the remaining terms of the tenancy agreement were approved by them, and signed the agreement the next day, despite having had it since 9 July. Mr Lau denied that the meeting was about the terms of the agreement, or that he had been briefed by Mr Wang Chun about the negotiations so far, but was just for the purpose of understanding the plaintiff's plans for the premises if a tenancy was granted. I have to say I find it unlikely that he had not been brought up to date on negotiations which had reached such an advanced stage, although I can accept that he wanted to be introduced to the plaintiff's representatives and ask about their plans. Neither is it in dispute that he said words at that meeting to the effect that they would honour legal commitments to the plaintiff "in accordance with the spirit of the contract" and would work by the book. It is probable that there was no direct suggestion at that meeting that there was any change in the attitude of the defendant to the still intended tenancy, and, in so far as that could be taken as an assurance that it would be granted, I am satisfied that such an assurance was given. Indeed, throughout the negotiations, bearing in mind that between Mr Wang Chun, Mr Wong and Mr Nei, there was clearly an firm understanding that they progress to execution of the tenancy agreement, I have no doubt that any communication between them would be positive and helpful to that end. To that extent, assurances from either side in a spirit of commercial cooperation would be inevitable. But given my finding above, and the concession of Mr Chow that there was no contract before 13 July 1999 as a result of the "subject to contract" provision, such assurances and encouragement do not commit the defendant in any way unless they caused the plaintiff to act to their detriment.

21. What then does the plaintiff say they did to their detriment, and was it in reliance on those assurances? In chronological order they say the first was on 19 June 1999 when they appointed Hang Foong M & E Consulting Co Ltd and committed themselves to pay a consultant fee of 7% of the contract sum. On 21 June they appointed Mr Lung Tze Ming and Mr David Wong as consultant and manager respectively, and on 26 June appointed Christopher Leung & Associates Ltd as architects at a fee of 5% of the total contract sum. On 5 July they applied for and were granted banking facilities, to cover the initial cost at least of the project and the security deposit guarantee, and the same day sent a contractor to erect the hoardings round the escalators. On 10 July they entered into a contract with Hope Seng Construction Ltd for the works at a total cost of $23,535,440, including about $3.7 million for the renovation of the defendant's portion, and on 13 July approved a quotation for installation of water inlets and drains on the part of the 1st floor. On 14 July they obtained the bank guarantee and on 19 July paid $11,200.00 to the Building Authority in connection with the submission of plans for approval of the building works.

22. I am told that the only sums paid out by the plaintiff in addition to the last were $200,000.00 to the architects, who had been providing plans throughout the negotiations from February 1999, and about $27,000.00 to the bank as charges and interest to the date the defendant finally withdrew. There is no evidence that anything was paid to Mr Lung and Mr David Wong, nor that serious attempts have been made to recover any of the sums contracted for as above.

23. I have to bear in mind that these were commercial negotiations being carried out by two companies, and, in the case of the plaintiff, it was inevitable that they would have to incur expense, initially to prepare their submissions to the defendant with plans to persuade the latter to continue to negotiate with them with a view to those plans being implemented. As those negotiations progressed and came near to a concluded deal, it was also both sensible and inevitable that they should make preparations so that they could move quickly into carrying out the work as soon as they were given possession, the sooner to realise the profit they expected to see from the investment, which here has been estimated by Mr Wong as in excess of $50 million over the period of the tenancy. Indeed, it would not make commercial sense for them to wait until the agreement was signed to start such preparatory work, thereby seriously delaying the project. In any such dealings with a view to a commercially large agreement, there will always be expenses to be incurred by way of architects fees, staff costs, and bank charges, and it can only be in the limited number of cases where something over and above that is incurred, to the knowledge of, and with the concurrence of, the other party, to the extent that it would be inequitable not to allow the party incurring the expense to complete the contract under which he will receive recompense for that expenditure. If I may borrow the words of Lord Templeman in Attorney General & anor v. Humphreys Estate (Queens Gardens) Ltd [1987] HKLR 427, I have no doubt that the plaintiff acted in the confident and not unreasonable hope that the agreement would come into effect, and as time passed, and more and more actions were undertaken in conformity with the proposals, their hopes were strengthened, and it became more unlikely that the defendant would have a change of heart and withdraw. But as in that case, as I have found above, there was never any indication either expressly or by implication that the defendant had surrendered their right to change their mind.

24. What was done here was no more than what one would expect of a commercial organisation properly managing its affairs in the belief that negotiations would prove fruitful, and it was done for their benefit in the sense that they hoped to make a profit out of it, and to accelerate the work towards that profit. All that was done solely for the defendant was the hoarding, and turning off the cold water supply to the air conditioning, for which there is no evidence of any payment being made. I would need very much more than this to show a detriment such as to make it inequitable or unconscionable for the defendant to withdraw from the proposed tenancy. The plaintiff must fail on this head as well.

25. For these reasons the plaintiff's claim will be dismissed and there will be judgment for the defendant and an order that the registration in the Land Registry of the letter of 15 April 1999 and the writ herein be vacated forthwith, being the only claim the defendant now seeks to make. There will also be an order nisi that the plaintiff pays the defendant's costs of these proceedings to be taxed.