FILA MARKETING (HONG KONG) LTD. v. FAITHFUL PROPERTIES LTD. AND ANOTHER

HCCL66/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO.66 OF 1997

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(BY COUNTERCLAIM)

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J U D G M E N T

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The Action

1. In this action the Plaintiff, Fila Marketing (Hong Kong) Limited ("Fila") claims against the Defendants, Faithful Properties Limited ("Faithful Properties") and Target Power Limited ("Target Power") for damages for breach of a contractual term in a Tenancy Agreement dated 16th September 1996 whereby, it is alleged, Fila was deprived of its right to purchase certain commercial premises in Hankow Centre, Kowloon, such premises being the subject of the Tenancy Agreement.

2. In turn the Defendants, together with Gold Nation Development Limited ("Gold Nation"), an owner of associated premises within Hankow Centre, counterclaim for damages for loss allegedly suffered by reason of what is said to be Fila's malicious abuse of the processes of the Court.

3. Described thus, the case falls within fairly narrow confines. Like many commercial disputes, however, it is larded in detail, and at the outset it may assist to set out the principal facts giving rise to this litigation.

The Background

4. The Plaintiff, Fila, is part of the Fila Group of companies which deal, inter alia, in the sale of fashion, recreation and sports wear. The Fila brand, I understand, is tolerably well-known in Hong Kong.

5. The Defendants, Faithful Properties and Target Power, are Hong Kong companies. It is common ground that they are both wholly-owned subsidiaries of Lai Sun Development Company Limited, which enjoys a reputation as a major property player in Hong Kong. The Defendants are also the registered owners of commercial premises at G5 to G8 on the Ground Floor of Hankow Centre, Hankow Road, Kowloon. Under the terms of a Tenancy Agreement dated 16th September 1996, these premises were let to Fila for a period of three years commencing from 23rd August 1996 at a rent of $650,000 per month payable in advance on the first day of each month.

6. Under this Tenancy Agreement, Fila, as tenant, was granted a right of pre-emption should the landlord wish to sell the leased premises. It is this right of pre-emption which lies at the heart of this case.

7. In its relevant aspects the story is relatively brief. On 22nd March 1997 Faithful Properties and Target Power, together with Gold Nation (a subsidiary of the Crocodile Garments group), signed a letter evidencing a preliminary agreement between Lai Sun and another Hong Kong company, Jumbo King Limited, setting out the terms of sale of Units G5 and G6 (owned by Faithful Properties), Units G7, G8, together with Units U3A and 302A on the 3rd Floor, the Flat Roofs on the 10th Floor and the Flat Roofs on the Main Floor (owned by Target Power), and Units G9/9A and G10 on the Ground Floor, Unit 213A on the 2nd Floor, and Unit 413A on the 4th Floor (owned by Gold Nation) of Hankow Centre at a price of $257 million with existing tenancies. Under the terms of this letter, formal agreement was to be executed by 28th April 1997, with completion anticipated to take place by 28th July 1997.

8. This purported sale attracted publicity in the press and within the property agent community, and consequent upon being apprised of the situation via the offices of one such agent (whose identity was revealed only in the course of this trial), Fila contacted its solicitors, Messrs Richards Butler, who issued the Writ in the proceedings herein on 24th April 1997. This Writ, endorsed with the Statement of Claim, was served on Fila's landlords, Faithful Properties and Target Power, the following day under cover of a letter dated 25th April 1997 from Fila's solicitors, which read, in part :

"As you know, our clients are the tenants of the premises at units G-5, G-6, G-7, and G-8 on the ground floor of Hankow Centre, 5-15 Hankow Road, Kowloon, Hong Kong under a tenancy agreement with you dated 16th September 1996.

Clause 4.13(ii) of the tenancy agreement requires you to notify our clients in writing as soon as practicable if you wish to sell the tenanted premises and to grant them the right to purchase the premises.

We understand that you agreed, on or about 22nd March 1997, to sell the tenanted premises (together with other premises in the same building) to Jumbo King Ltd. That sale was agreed without prior notice of any kind to our clients pursuant to clause 4.13(ii) of the tenancy agreement or otherwise. In the circumstances, you are liable for breach of the tenancy agreement, and our clients are entitled to seek specific performance or an injunction to prevent the sale from proceeding, or to claim damages.

We have issued a writ to protect our clients' position and enclose a sealed copy together with three forms of acknowledgment of service by way of service.

In the circumstances, please confirm by return and in any event by close of business on 25th April 1997 whether you are prepared to comply with your obligations under the tenancy agreement and to give notice to our clients in accordance with clause 4.13(ii). Alternatively, and without prejudice to our clients' other rights, kindly confirm whether you are prepared to compensate our clients for the breach of the tenancy agreement, in an amount to be agreed or assessed by the Court in default of agreement regarding quantum."

9. The Statement of Claim so served was endorsed with a claim for specific performance of the right of pre-emption contained in Clause 4.13(ii) of the Tenancy Agreement, and also for an injunction restraining the Defendants "from completing and/or proceeding with the sale and/or from selling or offering for sale or causing or permitting the sale or offer for sale of the tenanted premises" save in accordance with Clause 4.13(ii).

10. On the same day, that is 25th April 1997, Messrs Richards Butler wrote to the solicitors acting for Jumbo King, Messrs Kok & Ha, notifying them of the alleged breach of Clause 4.13(ii) and continuing thus :

"Our clients have commenced proceedings for specific performance of this provision in the agreement, together with an injunction restraining the landlord from selling and/or completing the sale of the premises and are in the course of registering notice of these proceedings in the Land Registry. We attach a copy of our letter sent to the landlord in this regard with a copy of the writ for your information.

Without prejudice to our clients' rights, and for the avoidance of doubt, you will also no doubt have advised your clients that pursuant to clause 4.13(ii) of the agreement the landlord's right to determine the tenancy does not arise until after the first twelve months of the term of the tenancy has elapsed, whereupon the landlord must give the tenant no less than six months' notice in writing of termination."

11. This latter reference to the necessity for six months' notice in writing of termination was, perhaps, in relation to a letter to Fila from Messrs Kok and Ha of 23rd April 1997, wherein Jumbo King's solicitors informed Fila that upon completion of the purchase by Jumbo King of Shops G5-G8 in the Hankow Centre, Jumbo King would exercise its right under the Tenancy Agreement to terminate that Tenancy Agreement, and would require that vacant possession of the premises should be delivered up.

12. On the same day as the service of Fila's Writ - albeit it is unclear whether this was in direct response thereto - Fila received a letter from the Defendants under the name of Mr Julius Lau, a director and also, I understand, at that time a senior executive within Lai Sun. This letter informed Fila of the entry by Faithful Properties and Target Power into the provisional sale agreement and concluded thus :-

"In preparing the documentation for the sale our lawyers have drawn our attention to clause 4.13(ii) of the tenancy agreement we have with you dated 16th September, 1996 - which we had overlooked. If it should transpire (we do not say that it will) that the provisional agreement is unenforceable as a result of that clause, would your company wish to purchase the properties referred to in paragraph 1 above for HK$257.5 million?"

13. To this letter, Fila's solicitors responded on 28th April 1997 that Fila was interested in purchasing Units G5-G8, requesting information as to the asking price, and further indicated that Fila was also interested in purchasing Units G5-G10, together with the other areas referred to in the letter of provisional agreement with Jumbo King.

14. Also on 28th April Messrs Deacons, purportedly acting for the intending purchaser of the entire property, one Mr Chow Nam, made an offer to Messrs Richards Butler of HK$277,500,000.00 on the basis that Fila would be purchasing the property they were presently tenanting, together with the neighbouring properties the subject of the provisional agreement for sale. Whilst on the same day Messrs Kok and Ha on behalf of Jumbo King wrote to the solicitors for Faithful Properties and Target Power, Messrs Vincent T.K. Cheung & Yap, noting that a land search had revealed the registration of the Writ in these proceedings against Units G5-G8 of the property, which letter was met with the response that the registration of the Writ did not affect the parties' obligations to sign the formal Agreement for Sale and Purchase.

15. On 16th May 1997 Fila wrote to the Defendants under the name of one Andrew Brodey, a director of the Plaintiff herein, reiterating Fila's interest to purchase and intimating that if the property was not to be sold to Fila that it "seems probable that our losses and the compensation we shall need from you will be in the region of HK$36 million". Also on 16th May the Defendants' solicitors wrote to Fila's solicitors regretting the registration of the Writ in the Land Registry and further stating :

"We do not accept that Clause 4.13(ii) creates an option to purchase and we consider the case put forward in your Statement of Claim to be misconceived."

16. Interestingly, this letter was in different vein from the same solicitors' letter of the same date to Jumbo King's solicitors, which said, in part :

"We take the view that the preliminary agreement was entered into by the parties under the mutual mistake that our clients had an unfettered right or ability to sell all the properties. If the allegations set forth in Fila's Writ are correct then it would appear that the preliminary agreement is void..."

17. Also on 16th May 1997 Messrs Kok and Ha returned the formal Sale and Purchase Agreement signed by Jumbo King, together with a cheque for HK$15,750,000 representing the further deposit payable thereunder; four days later, however, on 20th May 1997, Messrs Vincent T.K. Cheung & Yap returned unsigned the Sale and Purchase Agreement, and purported to refund this further deposit.

18. On 20th May 1997 the Defendants' solicitors wrote to Fila's solicitors asserting, inter alia, that "the provisional agreement is void" and continued :

"In light of the hostile litigation launched without prior notice by your clients, our clients have no present intention of selling the shops occupied by your clients and that there is no asking price to identify. Our client's letter of 25th April 1997 is now irrelevant and should be ignored.

... We would also be grateful if you would confirm that you shall arrange for the discharge of the lis pendens registered on behalf of your clients (we believe wrongfully because your clients have never had an interest in the land) with the Land Registry."

19. In this connection it appears that the reference therein to "our client's letter of 15th April 1997" was to the letter from Julius Lau, part of which has been quoted above.

20. At this juncture, further litigation commenced. On 28th May 1997 Jumbo King issued a Writ in High Court action No.A5698/97 wherein Jumbo King sued not only Faithful Properties, Target Power and Gold Nation as owners of the property the subject of the letter of agreement dated 22nd March 1997, but also Fila, as 4th Defendant therein, for "an order that the registration of the Writ of Summons issued under High Court action No.CL66/97 as a lis pendens against the Tenanted Premises in the Land Registry be forthwith vacated."

21. At this stage, therefore, it seems that Jumbo King was eager to proceed with the sale. As will be seen, this view was to change some six months later. But that is to get a little ahead of the story.

22. On 5th August 1997 Messrs Richards Butler wrote to the Land Registry in the following terms :

"We enclose memorial 7034371 and a sealed copy of the writ of summons and should be grateful if you could withdraw and cancel the registration of the writ from the Land Registry",

and on the same day informed Messrs Vincent T.K. Cheung and Kok & Ha that they had done so.

23. On 14th October 1997 Faithful Properties, Target Power and Gold Nation signed a formal Agreement for Sale and Purchase, and on 23rd October 1997 the title deeds were sent to Kok & Ha. However, this transaction did not go through. On 3rd November 1997, requisitions were raised by the purchaser, Jumbo King, and on 14th November 1997 Messrs Kok & Ha on behalf of Jumbo King give notice to rescind, citing cocklofts as unauthorised structures, and questioning the ability to validly assign Units U3A, 302A, 213A, 413A, the Flat Roof on the 10th Floor and Flat Roofs on the main roof on the basis that no undivided shares thereof had been allotted.

24. On 13th January 1998, Jumbo King issued a Vendor and Purchaser Summons, which resulted in judgment against the Defendants on 9th July 1998, the Court of First Instance holding that the vendors could not validly assign the utility rooms together with the flat roofs, and declaring that Jumbo King was entitled to terminate the Agreement.

25. This First Instance judgment of Mr Recorder Kwok was reversed in February 1999 by the Court of Appeal, and I am told that the matter now stands adjourned pending the hearing of the Defendants' claim against Jumbo King for failure to complete the sale, such completion having been agreed to take place on 6th February 1998.

26. The foregoing, therefore, represent the principal landmarks against which this action has been brought. I turn now to the pleadings and to the specific issues presently for decision, it having been agreed by Counsel that primary questions of liability should be determined prior to any consideration of quantum.

The Pleadings

27. The face of the pleadings has changed somewhat since the inception of this case. By its Re-Amended Writ the Plaintiff, Fila, no longer pursues the original equitable remedies of specific performance and injunction, but now moves solely for damages, its case being that had it been served with the relevant notice under Clause 4.13(ii), Fila would have purchased the premises, and that as a consequence Fila has suffered loss and damage. The extent of such damage is agreed to be a matter for another day, but at present Fila hangs its hat on the figure of HK$22.522 million, which it is said represents the open market value on 22nd April 1997 for the premises subject to tenancy, less acquisition costs.

28. By the Re-Re-Amended Defence and Counterclaim, a number of defences are raised, the Defendants together with Gold Nation by Counterclaim mounting their own case for damages for abuse of process, an aspect of the case which will be considered later in this judgment. There is, however, one significant change which has occurred in the Defendants' stance during the course of this trial, namely the abandonment of the claim for rectification of Clause 4.13 of the Tenancy Agreement (as originally pleaded at paragraph 15 of the Re-Re-Amended Defence and Counterclaim). This plea was originally mounted in the alternative by the Defendants in the event of the failure of the Defendants' argument as to the true construction of Clause 4.13. However, whilst this element of the case was ultimately abandoned, the presence of this claim has had a signal bearing upon the course of this case, and upon the nature and extent of the evidence as led, in particular as to the provenance of Clause 4.13 of this Tenancy Agreement, including the negotiations that took place prior to its execution.

The Issues Presently for Decision

29. In the event, both Counsel are in agreement that the case now has resolved into an examination of three issues which are relied upon by the Defendants in their defence to the Plaintiff's claim, which for shorthand purposes I will describe thus :

(1) the construction issue;

(2) the performance issue;

(3) the apportionment issue.

30. Of these three areas of debate, it has been agreed to defer to the hearing on quantum the issue of apportionment, namely the argument that the sale was a global sale, and that no apportionment is possible of the kind upon which the Plaintiff's claim for damages is based. For purposes of the present judgment, therefore, the focus remains upon (1) and (2) above, together with consideration of the Counterclaim put up by the Defendants together with Gold Nation.

Construction

31. The construction of Clause 4.13(ii) of the Tenancy Agreement represents the fundamental issue in this case, and for ease of reference I set out hereunder Clause 4.13 in its entirety.

"4.13 (i) If the Landlord shall enter into a contract for the sale of the said premises at any time during the term hereof the Landlord shall be entitled to terminate this Agreement by giving to the Tenant not less than six months' notice in writing and immediately upon the expiration of such notice this Agreement shall terminate but without prejudice to the rights and remedies of either party in respect of any antecedent claim or breach of any of the covenants, terms or agreement herein contained Provided that :-

(a) such notice shall not be served within the first twelve months of the term; and

(b) should such notice be served by the Landlord after the first 12 months of the term, the Landlord shall subject to delivery of vacant possession of the said premises by the Tenant to the Landlord in accordance with the provisions hereof pay to the Tenant the agreed compensation calculated in accordance with the following formula :-

	unexpired term
monthly rent x 6 x	(number of months)
	18

such compensation shall be paid within 21 days after the Tenant shall have delivered up vacant possession of the said premises to the Landlord and if there shall be no breach of any of the covenants, restrictions, stipulations and conditions of the Agreement on the part of the Tenant to be observed or performed.

(ii) In the event that the Landlord is desirous of selling the said premises or any part thereof, the Landlord shall inform the Tenant of such desire in writing as soon as practicable and the Tenant shall be granted the right to purchase such premises at the Landlord's asking price within 7 days of such notification." (Emphasis added)

32. As drawn, the broad framework of Clause 4.13 is tolerably clear. Clause 4.13(i) provides for the landlord's right to terminate a tenancy by service of a notice outside the first 12 months of the contractual term, and sets out a formula for the compensation payable after the delivery up of vacant possession, whilst Clause 4.13(ii) provides the right of pre-emption which, as I have said, represents the crux of this case.

33. So far, so good. What the Defendants argue, however, is that upon the true construction of Clause 4.13, the provisions of Clause 4.13(ii) are inapplicable to the provisional agreement for sale and purchase as entered into by Faithful Properties, Target Power, Gold Nation and Jumbo King, namely, a sale subject to tenancy. To the contrary. The Defendants say that Clause 4.13 confers on the landlord the option of early termination of the Tenancy Agreement after 23rd August 1997 only in the event of a sale conferring vacant possession, which is the situation envisaged by Clause 4.13(i). So that (the argument goes), the opening line of Clause 4.13(ii) should, in effect, be read as "In the event that the Landlord is desirous of [so] selling the said premises or any part thereof ...", the word 'so' thereby eliding what is said to be the true intent behind the two clauses which make up Clause 4.13.

34. In a wide-ranging and persuasive address, Mr Barlow for the Defendants has drawn my attention to the principles of construction which have developed within our system. In addition to the well-known speech of Lord Wilberforce in Prenn v. Simmonds [1971] 1 WLR 1381 (HL), he reminded me of the later observations of Lord Bridge in the Privy Council in the Hong Kong case of Mitsui v. The Attorney General of Hong Kong (1986) 33 BLR 1 (PC), wherein Lord Bridge noted (at page 14) :

"It is obvious that this is a badly drafted contract. This, of course, affords no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language they have used interpreted in the light of the relevant factual situation in which the contract was made. But the poorer the quality of the drafting, the less willing any court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis."

35. Mr Barlow says that if the ambiguity concerning the ambit of Clause 4.13(ii) is resolved otherwise than on "purely linguistic considerations" (per Lord Wilberforce in Prenn v. Simmonds,op.cit., at 1383H), the principles enunciated in Mitsui, op.cit., and other cases render it necessary to look at the evidence which will enable the Court to identify the commercial purpose of the relevant part of the transaction, and which will place the Court in the same position as the parties when Clause 4.13 evolved (from three sub-clauses), evidence which will indicate objectively whether the one or other construction would produce an unbusinesslike agreement and, therefore, an agreement which the parties objectively cannot have intended.

36. The Plaintiff's approach from the outset, asserted Mr Barlow, had been to rely upon a "nakedly literal construction" of Clause 4.13(ii) divorced from its context, and in particular from Clause 4.13(i). This was plainly inappropriate; Clause 4.13(ii) should be construed so as to have effect in a manner consistent with Clause 4.13(i). Objectively, the commercial purpose of Clause 4.13(ii) was to mitigate the effect of the inclusion of Clause 4.13(i) in the lease, in order to assuage the tenant's concern that it should have possession of the premises for the full three years of the lease. Similarly, the commercial purpose of Clause 4.13(ii) was not to confer an option to purchase independently of that threat to quiet enjoyment, nor was it to permit Fila to become "at the fortuitous instigation of the landlord", a speculator in commercial property in Hong Kong. If construed as one unified clause dealing with the landlord's option of early termination, and the contractual consequences of the exercise of that option, the clause was businesslike and commercially comprehensible, he asserted. On the other hand, if Clause 4.13(ii) were to be divorced from its context, and construed purely literally, so as to create an option unrelated to early termination, then equally the clause was not businesslike nor commercially comprehensible. Whilst in summary I may not have done it full justice, that, at any rate, was the essence of the argument.

37. To the contrary, Mr Yu S.C. submitted that there was no ambiguity, and that Clause 4.13 on its face was and is perfectly clear. He pointed out that Clause 4.13(ii), unlike 4.13(i), also applied when there is a sale of part of the premises, which indicated that it could not have been intended that Clause 4.13(ii) applied only to a sale under Clause 4.13(i), and further that the sale contemplated in Clause 4.13(ii) must include a sale subject to tenancy, for the landlord could not invoke Clause 4.13(i) if selling part only of the premises.

38. Evidence of negotiation was inadmissible, said Mr Yu, in particular evidence of the type described by Mr Barlow as "the history of the evolution of the clause". If rectification as an issue had not been raised, he suggested, the Court would not have received any such evidence.

39. Moreover, if there was any ambiguity in Clause 4.13(ii), so that it was permissible to look at the business purpose behind the clause, there was nothing in the construction contended for by the Plaintiff that could be said to be "unbusinesslike", much less absurd. It could not be inferred from the lease that the sole purpose of Clause 4.13(ii) was to provide protection to the tenant when the landlord wish to sell with vacant possession. Looked at from the tenant's point of view, there was no reason why the tenant's purpose in obtaining a right of first refusal should not have been the opportunity to become an owner-occupier, and this would apply whether the landlord was prepared to sell with tenancy or with vacant possession; alternatively, from the landlord's viewpoint, what was unbusinesslike in the landlord being prepared to give a right of first refusal to the tenant, whether the property was going to be sold with tenancy or with vacant possession? In this connection there was, Mr Yu asserted, no magic about the identity of any buyer with the relevant funds.

40. I agree with Mr Yu. I find nothing 'uncommercial' or 'unbusinesslike' inherent within the Plaintiff's construction of Clause 4.13(ii); indeed, it is an integral element within the terms of Clause 4.13(i) that the tenant is afforded contractual compensation, via the proviso to that sub-clause. So that so far as the 'business purpose' element of this argument is concerned, I am against the Defendants.

41. For my part, however, I am disinclined even to reach this second stage. This is because, notwithstanding Mr Barlow's arguments to the contrary, I have difficulty in isolating any ambiguity on the face of Clause 4.13(ii) the presence of which would afford the Court the necessity to have regard to the commercial purpose. Admittedly the evidential progress of this case has been somewhat unusual in that the effect of the plea of rectification - which was not specifically abandoned by the Defendants until the morning of the fifth day of the trial - permitted evidence to be led as to the negotiations behind, and the genesis of, Clause 4.13(ii), evidence which otherwise would clearly have been inadmissible as an aid to construction. And there is no doubt that such evidence, and argument based thereon, tends at least to colour one's perception as to the existence of ambiguities.

42. However, if and in so far as such evidence can successfully be banished from the judicial mind (and the convention has it that it can), for my part I am bound to say that I find it difficult to imbue Clause 4.13(ii) with the ambiguities of which complaint now is made. In my view, Clause 4.13(ii) is clear on its face, and I can see no justification for rewriting the clause in its present form to limit "selling" as, in effect, "selling with vacant possession". Nor, to follow the same logic, can I see any reason for suggesting that the sale contemplated in Clause 4.13(ii) must be a sale which takes place after the first 12 months of the tenant's term (which is the qualification written into Clause 4.13(i)); this absence of the like restriction is possibly because of the landlord's ability to sell "the premises or any part thereof" within the terms of Clause 4.13(ii).

43. Looked at as a matter of construction, therefore, I can see no warrant for not according the words 'sale' in Clause 4.13(i) and 'selling' in Clause 4.13(ii) their normal and ordinary meaning; indeed, the limitations existing within Clause 4.13(i) are expressly spelt out in the body of that clause.

44. Further, I tend to agree with Mr Yu when he says that if the intention of the parties was to confer the right of first refusal only in the context of a sale with vacant possession, it is not clear on its face why Clause 4.13(ii) was thought to merit treatment as an independent sub-clause. Whilst as the result of the evidence as led I may understand why this came to be so, in my view for present purposes this is nothing to the point, and I decline to permit consideration of this clause to be subjected to the colouring of evidence which, absent the rectification plea, would not have been placed before the Court in the first place.

45. It follows from the foregoing, therefore, that I decline to construe Clause 4.13(ii) in the way in which the Defendants would wish. Nor do I consider that any problem arises in terms of an implied term. In my view, as a matter of construction, the landlord must specify the asking price when it informs a tenant of the intention to sell. Should I be wrong in this view, I would in any event have held that such must be implied to give business efficacy to the agreement, although, as I have said, I do not consider it necessary in these circumstances to go this far.

46. I turn now to the other matters which it is agreed arise for consideration at this stage of the case.

Performance

47. The point here is short, and in my view it can be dealt with equally shortly.

48. This aspect of the case is predicated upon the rejection of the Defendants' construction argument. In a nutshell, it is submitted that the requirements of the contractual stipulation in Clause 4.13(ii) - "...the Landlord shall inform the Tenant of such desire in writing as soon as practicable..." - has been performed by the Defendants through their agent Vigers Hong Kong Ltd. The pleading, at paragraph 6(2) expresses the issue thus :

"(2) Additionally and alternatively, if (which is denied) clause 4.13(ii) was applicable to the preliminary agreement, then the 1st and 2nd Defendants' obligations thereunder were discharged through its agent, Vigers Hong Kong Limited who, on behalf of its principals, informed the Plaintiff, in writing, on or about the 16th December, 1996, of the desire of its principals to sell the Tenanted Premises and units G9/9A and G10 for a total asking price, subject to existing tenancies, of HK$240 million. The Plaintiff did not seek to exercise any rights under clause 4.13(ii) within 7 days of that notification, or otherwise, until after the preliminary agreement was signed."

49. Such evidence as there is in support of this averment came from Mr Albert Chan, the Managing Director for Agencies in Vigers at the material time, who told the Court that Vigers was one of the agents instructed in December, 1996 by Lai Sun to market the premises (together with the premises owned by the Crocodile Garments group subsidiary, Gold Nation Ltd.) on a "subject to existing tenancies" basis. Vigers had reprinted the sales particulars on its own letter-head (which contained, said Mr Barlow, all the information required by Clause 4.13(ii) for distribution to its target audience) and it was normal practice to include in the Vigers circulation audience the tenants of the commercial premises concerned. Mr Chan said that Vigers' contemporaneous report to Lai Sun of 17th December 1996 recorded that Vigers' particulars of sale were sent to the tenants of the premises being marketed on a date between 9th - 17th December 1996, and indeed that Fila was on the list of such clients. Although Mr Chan was not personally involved in sending out these particulars of sale, he had no reason to doubt Vigers' contemporaneous record and there was good reason for ensuring that such reports to owners were complete, because this identified potential purchasers introduced by Vigers, which would therefore be in a position to claim commission if a sale to one of these clients eventuated.

50. On the basis of this evidence Mr Barlow argued that there was no reason to doubt the accuracy of Vigers' contemporaneous record, and that it must be the case that Fila, the tenant of the marketed premises, had indeed been served with the particulars of sale. To the contrary, all that the Plaintiff had attempted to do was to adduce evidence that in the normal course of Fila's business, such communication should have been forwarded to Ms Doris Ng (Fila's retail director who had been involved in negotiations for the lease) and that she had never received it. There may be any number of reasons for that, said Mr Barlow, particularly if, as was more likely than not, the particulars from Vigers were sent to the tenanted premises. And under the terms of the lease, Clause 4.09 provided that "...any notice to the Tenant shall be sufficiently served if left addressed to the Tenant on the said premises or sent to the Tenant by post...". Accordingly, submitted Mr Barlow, if the particulars of sale were delivered or sent to Fila in December 1996, then the landlord's obligation under Clause 4.13(ii) had been performed and discharged.

51. In response, Mr Yu observed that the material sought to be relied upon as constituting 'performance' of the contractual obligation under Clause 4.13(ii) constituted simply a four-page advertising 'flyer' dated 16th December 1996 from Vigers, containing brief particulars of Units G5 - G10 on the Ground Floor, Hankow Centre, 5-15 Hankow Road, Tsimshatsui, together with a letter dated 17th December 1996 from Vigers to Kolot Real Estate Agency Ltd. (Lai Sun's 'in house' agency) expressing thanks for the instructions to act as one of the marketing agents, and advising that "we have already commenced marketing by introducing this prime investment property to some of our clients...", Fila's name appearing thereafter as fifth on the list of 12 such clients.

52. In light of this material, said Mr Yu, three points emerged which served to reveal this argument as specious :

53. First, the 'notice', assuming it to be such, was not a notice of the intended sale to Jumbo King, which did not come into existence until 27th March 1997, some three months later; second, that the notice the subject of the contractual stipulation could not be fulfilled by an advertising flyer of the type now relied on by the Defendants, which merely was a first and very general step by a vendor to invite offers; and third and in any event, that the flyer did not purport to come from the landlord.

54. I agree with Mr Yu. I find it difficult to understand how it can be suggested that an advertising flyer of the type circulated in the general market some three months prior to the events complained of (and quite possibly simply shoved under the door of Fila's shop premises together with other advertising material), can amount to compliance with the requirement of written notification within Clause 4.13(ii). In fact, I regard such a suggestion as ambitious, to say the least.

55. Given this conclusion I do not, therefore, need to consider in detail the evidence led on the point. Suffice to say, I did not find Mr Albert Chan's evidence of any great assistance or weight in the context of this allegation. Mr Chan had no personal knowledge of these matters, he was unable to say who amongst his staff was responsible for marketing the property, nor indeed whether the 'flyer' had actually been sent to the Plaintiff and, if so, whether such was to the shop or to the office. So that Vigers had no record of any contact with the Plaintiff on this, and both Mr Merlatti, the Chief Financial Officer and Managing Director of Operations of Fila, and Ms Doris Ng, the Retail Director of Fila Sport (Asia) Ltd., both gave evidence that they had not seen this advertising circular, testimony which I accept.

56. In my judgment, therefore, despite Mr Barlow's efforts on this point, in my view this part of the case quintessentially amounted to bricks without straw, and I reject the alternative argument as to performance put up by the Defendants.

The Counterclaim

57. I turn finally to the Counterclaim put forward by the Defendants and Gold Nation, the basis for which is the tort of abuse of the civil process of the Court.

58. In this regard, Mr Barlow did not mince his words. The foundation for the Counterclaim, he asserted, lay in the actions of the Plaintiff "relying on its erroneous construction of Clause 4.13, in sabotaging the sale to Jumbo King by manipulating the Court's processes and wrongly lodging and maintaining a lis pendens based upon a case that the Plaintiff never intended to bring to trial".

59. I observe at the outset that since I have held earlier in this judgment that the Plaintiff did not erroneously construe Clause 4.13, it would seem, pace all other considerations, that this aspect of the argument on behalf of the Plaintiffs by Counterclaim faces severe difficulties from the outset. But in deference to Mr Barlow's argument, and lest I be wrong on the primary construction point, I will press on.

60. For present purposes, I will assume that the tort of abuse of the Court's civil process is indeed recognised and established, as Mr Barlow contended, although, as Mr Yu pointed out, the English Court of Appeal in Metal and Rohstoff v. Donaldson Lufkin & Jenrette Inc., [1990] 1 QB 391 (at 471) expressed "great doubt whether any general tort of maliciously instituting civil proceedings exists...". It is also fair comment by Mr Yu that the cases relied upon by Mr Barlow during the course of his argument - Grainger v. Hill (1838), 4 Bing (N.C.) 212, Speed Seal Products Ltd. v. Paddington [1985] 1 WLR 1327 (C.A.) and Lonrho v. Fayed (No.5) [1993] 1 WLR 1489 (C.A.) - were cases where the plaintiff was alleged to have used legal process wrongfully to achieve an end improper in itself, which was not an element of the case here, given that the Plaintiffs by Counterclaim had not pleaded the allegedly improper end nor that any such ulterior purpose was the predominant purpose of the action. However, as I have indicated, I will approach this issue on the basis that the tort exists. But how, precisely, is it said to be established on the facts of this case?

61. The key here is that which is asserted to be the Plaintiff's improper and malicious abuse of the civil process of the Court to obtain and maintain its lis pendens which, it will be recalled, was the registration of the writ in these proceedings, by Messrs Richards Butler on behalf of Fila, against Units G5-G8 of the property in the Land Registry. This registration (as Richards Butler's letter dated 25th April 1997 to Messrs Kok & Ha made clear) was effected on or shortly after 25th April 1997, and before 28th April 1997, when Messrs Kok & Ha wrote to the solicitors for Faithful Properties and Target Power noting that a land search against the Hankow Centre property had revealed registration of the writ as a lis pendens.

62. A key element within Mr Barlow's analysis involves the reamendment of the Plaintiff's claim (formally effected on the second day of this trial) to abandon the relief originally sought (namely the claim for specific performance and an injunction) and to substitute therefor the present claim for damages. Notwithstanding the permanent injunctive relief originally sought, said Mr Barlow, there had never been any application for interlocutory relief of this nature, so that when the Plaintiff lodged "this disingenuous Writ" in the Land Registry as a lis pendens, the implication to the world was that the relief sought in that Writ was the actual relief sought by the Plaintiff. In fact, he said, the contemporaneous correspondence showed that what Fila was engaged upon was an "extortion bid", and, as was clear from Mr Merlatti's evidence, what Fila was actually after was money. So that when the possibility of what amounted to a 'confirmor sale' went off, the Plaintiff "resorted to the abusive conduct of preventing the Jumbo King sale from being completed in order to try to extort money from the vendors in exchange for allowing the sale to be completed". And that, once the property market turned, and it was realised that if it obtained the relief originally sought (specific performance and a permanent injunction) that it would lose money, Fila amended its claim to abandon all relief except the claim for damages.

63. The consequence of the "Plaintiff's cynical abuse of the civil process", submitted Mr Barlow, was that the Plaintiffs by Counterclaim had lost the sale that they legitimately had entered into subject to existing tenancies. If Fila had honestly proclaimed the relief it was after all along, he submitted, instead of flagrantly misrepresenting the position on the face of its Writ, then the sale legitimately entered into by Faithful Properties, Target Power and Gold Nation could have been achieved, and any entitlement to the relief that the Plaintiff had always sought (money) could have been obtained from the sale proceeds of the property, part of which (if necessary) could have been paid into Court. As it was, by reason of Fila's conduct, his clients had incurred very large losses, for which judgment on liability was now sought, together with damages to be assessed during the quantum stage of this trial.

64. I have carefully considered this argument. In my judgment, it is wrong, both as a matter of law and upon the particular facts of this case. I say so for the following principal reasons.

65. First, I am minded to accept, as Mr Yu has submitted, that where the grantor of a right of pre-emption decides to sell, the grantee does have an interest in land which is registrable, and that it is incorrect that no interest in land arose in the circumstances pleaded in the Statement of Claim which was capable of being the subject of an order for specific performance. In the case of Pritchard v. Briggs [1980] 1 Ch 338, Templeman L.J. (as he then was) said (at 418H-419A) :

" Thus the relationship of vendor and purchaser could not be established unless the Lockwoods chose to offer the retained lands to the holder of the right of pre-emption or, in breach of covenant, contracted to sell the retained lands to a third party without first offering the lands to the option holder for ￡3,000. If and when these conditions were fulfilled, the holder of the right of pre-emption would be entitled to buy and therefore entitled to an equitable interest. The right of pre-emption was duly registered as an estate contract and became vested in the first and second defendants, Mr and Mrs Briggs...."

whilst Stephenson L.J. observed (at 423A-B) :

" The 1944 conveyance refers to giving the option of purchasing but as a future act, not as a present right; and Mr Scott has satisfied me that what is granted as a right of pre-emption, on the true construction of the grant, is only properly called an option when the will of the grantor turns it into an option by deciding to sell and thereby binding the grantor to offer it for sale to the grantee. That it thereby becomes an interest in land is a change in the nature of the right to which, unlike Goff L.J., I see no insuperable objection in logic or in principle. And, as I understand his opinion on this point, its consequence would be that a right of pre-emption could never be enforceable against a successor in title whether it is registered or not.

I accordingly prefer the opinion of Templeman L.J. on this point."

66. Admittedly, Pritchard v. Briggs is not finally authoritative on the point, given that these observations appear to be obiter (since on the facts of that case the grantor had not chosen to fulfil the conditions on which the grantee could exercise his right of pre-emption), and also since there was a dissent on the point from Goff L.J. (as he then was). Nevertheless, I am inclined to hold, and so do, that when the grantor of a right to pre-emption decides to sell, the grantee does have a registrable interest in land.

67. If this be correct, therefore, it follows that the Plaintiff was entitled to issue the writ in the form in which it took and, given the reflection therein of a legal right, the contention that the writ was malicious or an abuse of process does not begin to get off the ground.

68. Second, as a matter of law, it is not clear why the mere fact of registration of thelis pendens rendered the preliminary agreement entered into between the Plaintiffs by Counterclaim and Jumbo King inoperable, or served to prevent the parties thereto from proceeding. In this connection Mr Yu is surely correct when he says that a lis pendens does not bar dealings in the property, but simply asserts notice of a claim and, since such assertion is made to the world, achieves the result of affecting priorities if that claim subsequently is upheld.

69. Third, as a matter of evidence it is in my view clearly incorrect to assert that the sale to Jumbo King went off by reason of the registration of the lis pendens. In fact, the chronology of events provides graphic illustration of the twists and turns of a property transaction in the context of a sharply fluctuating property market. Jumbo King's desire to complete in early 1997 is clear; the writ in HCA5698/97 for specific performance of the provisional agreement speaks volumes. At this stage, in May 1997, it was the Defendants herein who were not keen to go through with the sale, as the correspondence with Jumbo King's solicitors tends to indicate, given their assertion that the preliminary agreement was entered into under a mutual mistake, the refund of the initial deposit, and the further assertion (on 20th May 1997) that their client's position was that the provisional agreement was void.

70. The Plaintiff's solicitors requested the withdrawal of the lis pendens on 5th August 1997 and the evidence of Mr Lau Wai Ting of the Lands Office, which I accept, was that it was actually withdrawn on 15th August 1997. It was after this occurred, on 14th October 1997, that Faithful Properties, Target Power and Gold Nation entered into a formal Sale and Purchase Agreement to sell the properties at the same price, although shortly thereafter Jumbo King apparently took the view that it wanted out of the deal, giving notice to rescind on 14th November 1997, and issuing its own Vendor and Purchaser Summons on 13th January 1998, the First Instance decision on which summons going to the Court of Appeal in February 1999.

71. Looked at in the round, therefore, it is difficult not to conclude that the sharp movements of the Hong Kong property market, both upwards and downwards, were responsible for what occurred in the context of the progress of this sale, and not the registration of thelis pendens.

72. It follows from the foregoing, therefore, that I reject the Counterclaim put up by Faithful Properties, Target Power and Gold Nation. I do not consider that the issue of the Writ nor its registration as a lis pendens was malicious, nor that it constituted the abuse of process of which complaint is made. Given the contents of the correspondence accompanying the Writ when it was served, I attach little or no importance to the absence of a claim for damages on the face of the writ, nor do I attach any weight to the absence of an application for interlocutory injunctive relief.

73. Neither do I have sympathy with what has been described in this case, somewhat extravagantly, as "Fila's extortion bid". Avarice may remain one of the seven deadly sins, but perhaps fortunately for Hong Kong, and in particular the Hong Kong property market, it is not yet illegal. I accept the evidence of Mr Merlatti that in terms of the conduct of these proceedings he did what he did upon legal advice, and I can see no reason why Fila, having been deprived of what I have held to be a contractual right, should not seek monetary redress therefor. And although the extent of the claim of loss in Mr Brodey's letter of 16th May 1997 in my view bordered on the absurd, I fail to see how this can invalidate or impair legitimate claims for monetary redress for breach of a contractual right, the ambit of which, and Fila's evidence in support thereof, is to be the subject of consideration at the forthcoming quantum hearing.

Summary

74. As the result of the first stage of this trial, therefore, in my judgment the Defendants are in breach of the provisions of Clause 4.13(ii) of the Tenancy Agreement dated 16th December 1996, and I so hold.

75. The damages due from the Defendants to the Plaintiff consequent upon such breach are to be assessed at a hearing on quantum, the dates thereof to be fixed in consultation with Counsel's diaries (with an estimated length of hearing of four days).

76. The Counterclaim of the Plaintiffs by Counterclaim is dismissed.

77. I make a costs order nisi that the costs of the hearings to-date (namely, 8th-12th March (inclusive), 16th April and 14th June 1999) be to the Plaintiff, to be taxed if not agreed.

78. In so far as may be necessary, I will hear Counsel on costs, the form of the order, and as to any further directions (for example, as to the nature and extent of expert evidence) as may be necessary.

79. I thank Counsel for their assistance in what, through force of circumstance, has regrettably become a somewhat attenuated case.