AFH HONG KONG STORES, LTD v. FULTON CORPORATION LTD

CACV 201/2021

[2023] HKCA 78

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 201 OF 2021

(ON APPEAL FROM HCA NO 2103 OF 2017)

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

Introduction

1.  On 25 August 2022, we gave judgment (“CA Judgment”)¹ on an appeal from a Decision of K Yeung J (“the judge”)  given on 31 March 2021 (“the CFI Decision”)² on a summons taken out under Order 14A of the Rules of the High Court by the Tenant and the Guarantor³ for the determination of 3 Questions⁴ arising from the construction of a lease of premises comprising “the Whole of the Lower Ground Floor, Mezzanine Floor, First Floor, Second Floor and Portion of the Ground Floor” of Pedder Building (“the Premises”).

The CFI Decision

2.1.  As noted in §15 of the CFI Decision, the “crux of their dispute is the meaning of the phrase ‘bare shell’ state” in SC(13)  (“Reinstatement and Hand Back Condition of the Premise”)⁵ and in particular, whether it obliges the Tenant to reinstate the demolished floors (the entire Mezzanine Floor, as well as part of the Ground, 1^st and 2^nd floors)  which was the Landlord’s main concern.

2.2.  The judge decided, on the construction of SC(13)  and Clause 3.27 (“Yield up premises and handover”)⁶, that the 1^st and 2^nd Questions should be answered in favour of the Tenant, and indicated that if it had been necessary to consider the 3^rd Question, he would have accepted the Landlord’s submissions.  The judge gave judgment in favour of the Tenant and made a number of consequential orders.

3.  The Landlord filed an appeal, and the Tenant and the Guarantor filed a Respondent’s Notice regarding the 3^rd Question only.

The CA Judgment

4.1.  For reasons set out in our Judgment⁷, we held⁸ that “the natural and ordinary meaning of the words ‘bare shell’, when applied to a building such as this, is the structural concrete frame of the building and that only, free of non-structural partition walls and (as both parties agree)  unfurnished and undecorated.  Where a building is divided into different floors, the obligation to return it in a ‘bare shell ... condition on each floor’ means that the Tenant must return the structural walls and floors on each of the floors demised”.

4.2.  However, the 1^st Question was framed with references to “Original Layout” and “Building Plans”.  As explained in our Judgment⁹, the reference to “Original Layout” should be read in the context of the Landlord’s 1^st letter (§41), and the reference to “Building Plans” should not have affected the Tenant’s decision as to what to reinstate (§42)  and added nothing to the construction of SC(13).  Accordingly, although the 1^st Question as framed should be answered in the negative, there was no question of the Tenant being entitled to enter final judgment which the judge had decided, and the orders made should be set aside.

5.  As for the 2^nd Question, we agreed with the judge, and indicated that if the 3^rd Question had been engaged, we would also have agreed with him.

6.1.  In light of our construction of Clause 3.27 and SC(13), we allowed the appeal, set aside the judge’s orders (including an order for judgment)  and remitted the action to the CFI for trial.

6.2.  As for costs, we made an order nisi that:

(i)  the Tenant¹⁰ pay to the Landlord its costs of the appeal, to be taxed if not agreed (it being agreed that there would be certificate for two counsel), and

(ii)  there be no order as to costs before the judge, as it was apparent from the CFI Decision that the Landlord’s arguments on construction before the judge were different from those advanced before us.

Subsequent applications

7.1.  Since then, the following applications have been filed by the Tenant and the Guarantor:

(1)  a summons (7 September 2022)  for variation of the costs order nisi so as to provide that there be no order as to costs of the appeal as well;

(2)  a Notice of Motion (22 September 2022)  for leave to appeal to the Court of Final Appeal (“CFA”);

(3)  a summons (6 October 2022)  for leave to adduce new evidence for the Notice of Motion.

7.2.  We have read the written submissions provided and consider it appropriate to deal with all three matters together on paper.

(1)  Summons for variation of the costs order nisi

8.  We would first point out that in the Notice of Appeal, the Landlord only sought costs of the appeal¹¹ against the Tenant, not the Guarantor.  Thus, in our Judgment as well as the sealed order, the order as to costs of the appeal was only made against the Tenant.  It is therefore not necessary for the Guarantor to make this application, and we shall treat it as having been made by the Tenant only.

9.  The Tenant submits that there should be no order as to the costs of the appeal because:

(a)  the Landlord succeeded in the appeal only because of a point raised by the court, which was “never advanced” by the Landlord, and

(b)  the Landlord failed on the 2^nd Question, on which “substantial” time and costs had been incurred.

10.1.  Regarding (a), the Tenant relied on the way the 1^st Question had been framed, with references to the Original Layout and Building Plans, to support its argument that the Landlord had required the Tenant to carry out reinstatement works “going far beyond the mere reinstatement of the demolished floors”, although it accepts that the Landlord advanced an alternative argument at the appeal that the Tenant was “required to at the very least ... reinstate the Demolished Floors”.

10.2.  The references to the Original Layout and the Building Plans in the framing of the 1^st Question have been discussed in §§40 - 43 of our Judgment and we will not repeat the discussion here.  It appeared from the CFI Decision that the then leading counsel for the Landlord had put greater emphasis on these aspects in the 1^st Question.  For that reason, we made no order as to costs in the CFI (§53.3(ii)  of our Judgment).  But that should not detract from the fact that the crucial issue between the parties before the judge, as well as before this court, was whether Clause 3.27 and SC(13)  require the Tenant to return each floor (including the demolished floors)  of the Premises to the Landlord.

10.3.  As noted at §41.3 of our Judgment, the Tenant acknowledged that the dispute before the judge surrounded the meaning of the words “bare shell”, and its argument before this court remained that a bare shell condition on each floor did not entail reinstatement of the demolished floors.

10.4.  On this issue, the Landlord had submitted the following before the judge (§29):

“Fulton [the Landlord] submits that the relevant clauses, properly construed, require AFH [the Tenant] to return the Premises in a ‘pre-lease’ bare shell state. [SC(13)] specifically requires [the Tenant] to yield up the Premises in a ‘bare shell’ state on each floor of the Premises. ‘Premises’ is defined in Part II of the First Schedule as ‘All Those the Whole of the LOWER GROUND FLOOR, MEZZANINE FLOOR, FIRST FLOOR, SECOND FLOOR and PORTION OF THE GROUND FLOOR’, and is further identified in the floor plans attached to the Lease. Therefore, [the Tenant’s] obligation is to yield up each of these floors which constitute the Premises in a ‘bare shell’ condition. Where parts of the floors have been demolished entirely and floor slabs removed, as has been the case here, [the Tenant] is required to restore them before returning possession. Otherwise [the Tenant] would not be returning the ‘Premises’ as defined in the Lease and as shown in the floor plans”.

10.5.  Submissions to like effect were contained in §8 of the Landlord’s skeleton submissions before this court.

10.6.  It is thus clear that both in the CFI and in this court, the Landlord had in fact advanced the argument that the return of the Premises to a “bare shell” state requires reinstatement of the demolished floors, contrary to the Tenant’s argument.

11.  Regarding (b), it is correct that the Landlord had failed on the 2^nd Question, but we do not agree that “substantial” time and costs had been incurred on it.  The general rule is that costs follow the event, and the court should not too readily depart from the general rule simply because a successful party raised an issue on which it did not succeed¹².

12.  As we see no reason to exercise our discretion to deprive the Landlord of all or any part of its costs on appeal, the summons filed on 7 September 2022 is dismissed with an order that the Tenant do pay the Landlord’s costs, which we summarily assess at $70,558.00.

(2)  Notice of Motion for leave to appeal to the CFA

13.  The Tenant submits that the following are questions of great general or public importance for which it should have leave to appeal to the CFA.

Proposed question 1 

“In an O14A application or appeal, under what circumstances (if any)  can the Court (including in particular the Court of Appeal)  of its own motion depart from a question agreed by the parties to be submitted for the Court’s determination by reformulating the question and finally determining the reformulated question without first given [sic] the parties an opportunity to address the reformulated question by adducing appropriate evidence and/or by submission?”

14.1.  We decline to grant leave on this proposed question.  First, by way of preface, it is incorrect to say that the Questions had been agreed by the parties.  There was no order to that effect.  Further, in the Submissions for Fulton on Leave to Appeal to the CFA¹³, the Landlord asserted that “the O.14A Summons was in fact AFH’s application, not a joint application of the parties by consent.  AFH had primary responsibility for framing the 3 questions”.  This was not challenged in the Reply Skeleton Submissions of the Tenant and Guarantor.

14.2.  Second, for the reasons set out in §10 above, there is no question of this court having reformulated the 1^st Question (irrespective of its jurisdiction to do so).  What this court sought to do at §53.1 was to address the issue which both parties acknowledged, both before the judge and before this court, was at the core of their dispute i.e. whether Clause 3.27 and SC(13)  require the Tenant to reinstate the demolished floors, which was the subject matter of extensive submissions.  The references in the 1^st Question to the Original Layout and Building Plans were distractions, because the Tenant had never accepted that it would reinstate the demolished floors if those references were omitted.

14.3.  Third, in any event, this court at the outset of the hearing invited submissions on its preliminary view, which was subsequently set out in §26.1 of our Judgment.  The Tenant did not at any stage indicate that it wished to adduce additional evidence.

14.4.  Fourth, in any event, we do not consider this to be a question of great general or public importance.

Proposed question 2

“When construing a contract with an inconsistency clause (ie a clause which provides that in the event of any conflict or inconsistency between the general/standard conditions and the special conditions, the latter shall prevail), to what extent must a conflict or inconsistency exist between two clauses before a Court can find that one clause completely prevails over the other clause so as to render the latter totally ineffective”

15.1.  By way of background, the Tenant had referred to Clause 3.4 in §9 of its skeleton submissions on appeal, and this was discussed in our Judgment at §§31 - 32 where we held (among other things)  that SC(13)  prevailed over clause 3.4, because Clause 12.13 stipulated that in the event of any conflicting provisions in the Special Conditions and the Agreement, the Special Conditions shall prevail.

15.2.  Clause 12.13 had been explicitly relied on by the Landlord in the Notice of Appeal¹⁴, and the skeleton submissions on appeal¹⁵:

“Pursuant to §12.13, in the event of conflict between the provisions in the body of the Lease and the Special Conditions in the 3^rd Schedule, the latter shall prevail. Hence, these submissions will primarily refer to SC 13 rather than clause 3.27".

15.3.  Thus the Tenant was clearly made aware of the Landlord’s point that clause 12.13 applied.  However, the Tenant proffered no submissions to the contrary, whether written or oral. No arguments were advanced to this court based on the UK cases it has now referred to in the skeleton submissions in support of the Notice of Motion. The proposed question 2 is clearly a new point which the Tenant is seeking to advance for the first time at the CFA, and thus it has to surmount the “not considered on intermediate appeal” hurdle discussed below.

15.4.  If, as the Tenant submits, those UK cases “establish”¹⁶ a principle on which there are no authorities in Hong Kong¹⁷, then the point should have been brought to the forefront of the arguments before us, but it was not.  In Flywin Co Ltd v Strong & Associates Ltd¹⁸, after citing authorities to the effect that it must only be under very exceptional circumstances that an issue dropped in the intermediate Court of Appeal, and for that reason not dealt with or referred to by that court, can be revived before the final court, the CFA held¹⁹:

“This is especially so when entertaining the new point and accepting it would constitute a major development of the law. In such an exercise, it is to be expected that having the intermediate appellate court’s view on the point of law involved would be of assistance to the final appellate court. Therefore where the question of a major development of the law is involved, the foundational consideration underlying the ‘not considered on intermediate appeal’ hurdle ... is that when the courts develop the law, it is best that they do so with all their intellectual resources fully deployed”.

15.5.  We would therefore adopt this court’s usual approach in such a situation, which is to leave it to the Appeal Committee of the CFA to consider if there are very exceptional circumstances here to warrant the granting of leave, despite the hurdle of ‘not considered on intermediate appeal’²⁰.

Proposed question 3   

“Whether the natural and ordinary meaning of the words ‘bare shell ... condition’ in a lease (a)  merely connotes ‘unfurnished and undecorated’ as an adjective to describe the state of the premises to be delivered up by the tenant to the landlord, or (b)  additionally connotes ‘the structural concrete frame of the building and that only, free of non-structural partition walls’ as a noun to define the subject-matter to be delivered up”.

16.  In connection with this proposed question, the Tenant issued a summons on 6 October 2022 for leave to file new evidence, and it would be convenient to discuss them together.

(3)  Summons for leave to adduce new evidence for the Notice of Motion

17.1.  The new evidence which the Tenant wishes to adduce are:

(1)  an affirmation of its solicitor exhibiting documents containing the words “bare shell”, being:

(a)  7 leases, registered in the Land Office over an undisclosed period of time;

(b)  the result of his search for the words on the judiciary website; and

(c)  3 basic guides to lay persons found online;

(2)  an affirmation of a surveyor and valuer, in which he exhibited 2 leases handled by his company with the words and said he believed and understood that the phrase is “generally and prevalently used in commercial and retail leases in Hong Kong”.

17.2.  The Tenant submits that the purpose of the new evidence is to show that this court’s ruling on the natural and ordinary meaning of the phrase will “have a significant impact on many other leases in Hong Kong which use the same phrase to define the tenant’s reinstatement obligations”.

18.1.  We do not see how the new evidence would be an aid to construction, which the proposed question 3 is concerned with.  Insofar as the new evidence seeks to support the contention that the question of construction is one of great general or public importance, the 9 leases spanning an undisclosed period of time does not bear out that contention.  This is far from the evidence of 1,600 registered features across Hong Kong referred to in Building Authority v Appeal Tribunal (Buildings)  (229/2016)  (No.2)²¹. We do not find the new evidence to be of much relevance, and dismiss the summons accordingly.

18.2.  In any event, even if the proposed question 3 is considered with the new evidence, that does not make it a question of great general or public importance.  Even if the words “bare shell” can be found in other leases, their meaning must be resolved in the context of the individual lease.  As held in Eminent Investments (Asia Pacific)  Ltd v DIO Corp²², which we cited in §24 of our Judgment, the starting point in the construction of a contract is the ordinary and natural meaning of the words, but if there is debate over that, the surer guide is context.  Account should be taken of the purpose of the contract and the provision, other relevant provisions, the facts and circumstances known or assumed by the parties at the time the contract was executed, the quality of the drafting, and commercial common sense.

“Or otherwise” ground

19.  Finally, on the issue whether leave to appeal should be given on the “or otherwise” ground, we would adopt the usual practice which is to leave it to the Appeal Committee of the CFA.

20.  For the reasons set out above, we would dismiss the Notice of Motion.

Costs of the Notice of Motion and the Summons to adduce new evidence

21.  Having considered the collective statement of costs for these two applications, and given that we had ordered certificate for only two counsel for the hearing of the appeal, we would summarily assess the Landlord’s costs at $324,426.00.