KING FIELD SHIPYARD LTD v. TAI PAK SEA-FOOD RESTAURANT LTD AND ANOTHER

HCA 1494/2022

[2024] HKCFI 898

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1494 OF 2022

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D E C I S I O N

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Background History

1.  The Tai Pak Restaurant Boat, Tai Pak Kitchen Boat and Tai Pak Fire Separation Barge (the “Tai Pak Boats”) and the Jumbo Kitchen Boat (together, the “4 Boats”) were formerly part of the well-known Tai Pak Floating Restaurant and Jumbo Floating Restaurant respectively. The Tai Pak Boats are owned by the 1^st defendant (“D1”) and the Jumbo Kitchen Boat was owned by the 2^nd defendant (“D2”). At all material times the 4 Boats held licences issued by the Hong Kong Marine Department (“HKMD”) which allow them to be permanently moored at the Aberdeen South Typhoon Shelter (the “Shelter”). It is the plaintiff’s case that such licences to permanently station at the Shelter will no longer be issued.

2.  The plaintiff (“P”), D1 and D2 entered into an agreement dated 19 May 2022 entitled “船舶處理服務合同” (the “Agreement”). Under the Agreement:

(1)  D1 and D2 agreed to pay HK$5.4 million to P as the “handling fees” (處理費) for the 4 Boats.

(2)  D1 and D2 would pay P HK$600,000 as deposit for the “handling fee” (處理費) (the “Deposit”) within 7 working days of the execution of the Agreement.

(3)  P would pay HK$1 as consideration for each of the 4 Boats.

(4)  D1 and D2 need to assist P in applying for a certificate of ownership of the 4 Boats and an application for the name transfer for the food licence.

(5)  On the day after the transfer of each of the 4 Boats, P would need to provide the relevant proof to D1 and D2. D1 and D2 would need to pay P HK$1.2 million as an instalment of the handling fee (the “Instalment”) within 7 working days of receipt of such proof of transfer.

(6)  If any of the 4 Boats is not transferred within the respective deadline stipulated (31 May 2022 and 31 July 2022), the Agreement would be terminated and D1 and D2 would have no further obligation to pay the Instalment.

3.  Between 20 May 2022 to 26 May 2022, P and D1 and D2 had paid the HK$1 consideration for the Jumbo Kitchen Boat and the Deposit respectively, and further attended the HKMD’s offices to lodge the documents required for transferring the Jumbo Kitchen Boat to P.

4.  On 31 May 2022 (the deadline stipulated for the transfer of the Jumbo Kitchen Boat), P was informed by D2’s representative (a Mr Chan) that the HKMD had approved the documentation for the transfer. Whilst it is agreed by parties that eventually the transfer of the Jumbo Kitchen Boat was not completed, it is not clear what step was missing or which party was at fault. P alleged that D2 had failed to physically attend the offices of the HKMD to confirm the transfer and registration of the Jumbo Kitchen Boat and to physically deliver the Jumbo Kitchen Boat on that day. On the other hand, D2 alleged that it was P who had breached its obligation in failing to register for the transfer of the Jumbo Kitchen Boat.

5.  Less than 1 day later, at around midnight of 1 June 2022, D2 notified P that the Jumbo Kitchen Boat had capsized in the Shelter.

6.  The transfer of the Tai Pak Boats also did not materialise before the stipulated deadline of 31 July 2022.

7.  By a writ endorsed with a statement of claim issued on 7 November 2022, P commenced the present action against D1 and D2 based on the Agreement. It is pleaded that P had purchased the 4 Boats to take advantage of their unique identity and planned to refurbish them and operate them as restaurants again in the Shelter. P alleges that there is an implied term that Ds shall do all things necessary to enable the transfer of ownership and/or actual ownership of the 4 Boats. It is alleged that D1 and D2 had breached the Agreement in failing to deliver the Jumbo Kitchen Boat and Tai Pak Boats and to assist P to arrange for the transfer of ownership of the Tai Pak Boats. P claims specific performance of the Agreement and seeks damages for the alleged breaches.

8.  In relation to the Tai Pak Kitchen Boat, P discovered on 29 March 2023 that it had disappeared from the Shelter. P was subsequently informed that the same had been towed away much earlier on 7 March 2023 to Zhongshan, Mainland China for repairs, and has been torn down to its bare shell.

9.  In around April 2023, D2 began demolishing the Jumbo Kitchen Boat. D2 explained that this was done pursuant to directions from the HKMD to raise the capsized Jumbo Kitchen Boat from the water.

10.  P thus issued a summons dated 25 April 2023 (the “Preservation Summons”), and sought until determination of the action, or such further order of the Court, or with the written consent of P:

(1)  As against D1, preservation orders for the Tai Pak Boats.

(2)  As against D2, a preservation order for the Jumbo Kitchen Boat as currently represented by several cut-up parts of its hull (the “Remaining Hull Parts”).

11.  On 28 April 2023, and after a contested inter partes hearing, Lisa Wong J granted an interim-interim preservation order for the Remaining Hull Parts pending the substantive determination of the Preservation Summons (the “28 April Order”). The Remaining Hull Parts are now being stored on a vessel at P’s cost.

12.  The application for preservation orders for the Tai Pak Boats was not dealt with on 28 April 2023. The Tai Pak Restaurant Boat and the Tai Pak Fire Separation Barge remain at the Shelter in the water.

13.  P now seeks:

(1)  To continue the 28 April Order until final determination of the Action; and

(2)  An order to preserve the Tai Pak Boats.

Applicable Principles

14.  Parties accept that the applicable principles are as set out in Gentle Soar Ltd v CMBC Capital Finance Ltd & Ors[1]:

“(i) There is property which is bona fide the subject matter of the cause or matter, or as to which any question may arise;

(ii) Something ought to be done for the security of that property[2], because for example damages may not be an adequate remedy;

(iii) Unlike application for a Mareva injunction, no risk of dissipation needs to be demonstrated;

(iv) Even if there has been delay in making an application which may lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted;

(v) An enquiry into the relative merits of rival claims is not necessary. In respect of the merits of the claim, the party seeking the preservation order only needs to show that there is a serious issue to be tried on the merits on the normal American Cyanamid principles;

(vi) If the opposing party seeks to show that there is no serious issue to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out;

(vii) There is no strict requirement for an undertaking as to damages where the Court grants a proprietary injunction or a preservation order, albeit that the Court may require such an undertaking “where the circumstances warrant”; and

(viii) There is no need for P to show that damages would not be an adequate remedy.”

15.  Mr Ambrose Ho SC, senior counsel for P, submitted that as a fundamental principle, the court at the interlocutory stage would take whichever course that appears to carry the lower risk of injustice if it should turn out that it is wrong[3].

16.  Ms Eva Sit SC, senior counsel for D1 and D2, submitted that although adequacy of damages is not a necessary element, it is one of the factors the court may take into account, and the court will usually refuse to grant a preservation order if damages would be an adequate remedy[4].

Serious Issue To Be Tried on Enforceability of Agreement by Specific Performance

17.  The primary basis on which P claims interlocutory relief to preserve the Tai Pak Boats and the Remaining Hull Parts pending judgment or further order is its entitlement to specific performance of the Agreement as the final relief in this action.

18.  Ms Sit submitted that P has failed to show a serious issue to be tried on P’s ability to enforce the Agreement by specific performance, as it has failed to disclose any real prospect of succeeding in its claim. It is submitted that the Preservation Summons is misconceived as the Agreement was not a sale and purchase for the 4 Boats, but rather, an agreement for P, a shipyard, to provide disposal services for the 4 Boats at the consideration of HK$5.4 million. The transfer of ownership was only ancillary to the provision of services to enable P to lawfully take control of the 4 Boats which were regulated for public safety reasons by the HKMD.

19.  In support of her submissions, Ms Sit relied on the following:

(1)  It is clear from the name of the Agreement (“船舶處理服務合同”), that this was an agreement for P to provide services to D1 and D2 in the context of P being a shipyard and D1 and D2 paying P a substantial sum of $5.4 million, and NOT a contract for the sale and purchase of the 4 Boats.

(2)  The fact that the 4 Boats were at the material time no longer run as restaurants and were idle, attracting huge potential liabilities to their owners needs to be taken into account. This provides the context as to why D1 and D2 were willing to pay P HK$5.4 million to dispose of the 4 Boats for them.

(3)  As D1 and D2 were required to pay P a sum of HK$5.4 million and P only had to pay a nominal sum of HK$1 per boat, the payment terms clearly indicated that D1 and D2 required the services of P, as opposed to a sale of the 4 Boats to P.

(4)  P’s obligation under the Agreement included towing the 4 Boats away from the Shelter, contradicting any allegation that P could utilise the mooring rights attached to the 4 Boats.

20.  Ms Sit further submitted that specific performance is a discretionary remedy and the granting of such remedy is guided by principles. It is submitted that in the circumstances of the present case, such a remedy will not be granted:

(1)  It was expressly provided that if the timetable was not complied with, the Agreement would terminate immediately. There was no difference whether the failure to complete was due to P’s or D1 and D2’s fault. As such, P is precluded from seeking specific performance as the Agreement had been terminated already.

(2)  The fact that there is in existence an automatic termination mechanism and an express recognition of consequence is a complete bar to a request for specific performance.

(3)  As the Agreement had been terminated with effect from 1 June 2022, there was no further obligation in relation to the Tai Pak Boats. Without a valid enforceable contract, the court will not act in vain.

(4)  Parties have entered into an express contractual bargain on the consequences of breach. The Agreement has stipulated that in the event that D1 and D2 were at fault, the Deposit paid will be forfeited. Conversely, if P were at fault, D1 and D2 could demand a pro rata return of the Deposit. As there is express provision in the Agreement governing the scenario where each party is at fault and the respective consequence of breach, there can be no room for P to seek specific performance.

(5)  As the amount of damages have been expressly set out and agreed upon, it is clearly an adequate remedy.

21.  Mr Ambrose Ho SC, senior counsel for P on the other hand submitted that whether the Agreement was for the sale and purchase or for disposal services of the 4 Boats is a matter to be resolved at trial. In any event, Mr Ho relied on the following to argue that there is a serious issue to be tried on whether P is entitled to specific performance of the Agreement:

(1)  The dispute on whether P or D2 was in breach first is to be resolved at trial.

(2)  D2 was arguably in breach by failing to transfer and/or deliver the 4 Boats to P and by failing to maintain the Jumbo Kitchen Boat in a safely moored state.

(3)  If they had been in breach, D1 and D2 cannot rely on Clause D(2) to say that the Agreement had been terminated by reason of the prevention principle. In Kensland Realty Ltd v Whale View Investment Ltd & Anor[5], the purchaser of a landed property complained that its inability to complete in time was due to the vendor’s fault, as it has failed to give split-cheque instructions in good time. The claim for specific performance of the contract of sale by the vendor was allowed. In the present case, Mr Ho submitted that D1 and D2’s failure to complete before the deadline was the direct cause of the lapsing of the completion before the 31 May 2022 deadline. As a result, it is argued that D1 and D2 are prevented from relying on the automatic termination clause.

22.  Mr Ho further submitted that damages would not be sufficient as:

(1)  the 4 Boats and their HKMD licences are invaluable and unique, especially their rights to permanently station at Aberdeen.

(2)  the 4 Boats also have a unique identity and history attached to them and are not readily replaceable.

(3)  The Remaining Hull Parts are also invaluable to P as they can be used to reinstate the Jumbo Kitchen Boat and/or to investigate the cause of the capsizing incident.

Discussion – Serious Issue to be Tried

23.  Ms Sit, in submitting that there is simply no serious issue to be tried, needs to demonstrate and persuade the court that the claim should be struck out[6]. This is a high threshold. The court needs to be satisfied that the claim is obviously unsustainable and it must be impossible, not just improbable for the claim to succeed.

24.  I am mindful that in examining whether there is a serious issue to be tried, I should not embark on a trial run of P’s claim and D1 and D2’s defence and come to a conclusion on whether I think P’s claim should fail. That, as submitted by Mr Ho, is a task for the trial judge. At this juncture, the court can only decide whether it is impossible for P’s claim to succeed at trial.

25.  Despite the force of Ms Sit’s very persuasive arguments, I am ultimately of the view that the high threshold of “impossible for the claim to succeed” is not met in the present case because:

(1)  It cannot be decided at this juncture which party was in breach of the Agreement. If it is ultimately found that D1 and D2 had deliberately failed to complete their obligation in the completion of the transfer of title of the Jumbo Kitchen Boat on 31 May 2022, the prevention principle might apply so that D1 and D2 cannot take advantage of the automatic termination clause of the Agreement.

(2)  It is arguable that despite the fact that the sale and purchase of the 4 Boats was not the main subject matter in the Agreement, the transfer of the 4 Boats is clearly something that P would have been entitled to under the Agreement, and as such it is open for P to insist on the transfer of the 4 Boats to be specifically performed, as part of the bargain.

(3)  I agree with Mr Ho that due to the uniqueness of the 4 Boats and the fact that the licences attached to them are irreplaceable, it is arguable that damages would not be an adequate remedy and specific performance is required.

26.  As such, I am of the conclusion that “the impossible to succeed” hurdle is not met and there is a serious issue to be tried as to whether the Agreement was specifically enforceable.

Discussion - Balance of Convenience

27.  Ms Sit submitted that in any event, on the balance of convenience, the application should be refused:

(1)  There is no dispute that ownership of the Jumbo Kitchen Boat had remained with D2 at the time of its capsize. D2 thus proceeded with the salvage operations as demanded by the HKMD as owner of the Jumbo Kitchen Boat, at its costs, which have already run up to millions of dollars.

(2)  The fact that the Tai Pak Boats are of a certain vintage means that there may be imminent need for repairs and there are potential sinking risks. Granting a preservation order would in effect be requiring D1, the legal owner of the Tai Pak Restaurant Boat and the Tai Pak Fire Separation Barge, to leave them in the water at the request of P, who is a non-owner, with no legal liability for anything that might happen to the 4 Boats in the meantime.

28.  In answer to Ms Sit’s argument, Mr Ho submitted that if P prove to be ultimately successful in its claim, the fact that D1 and D2 refuse to transfer the title to the 4 Boats to P and continue to be exposed to the potential liability is their own doing. They could choose to transfer the title of the Tai Pak Boats and the Remaining Hull Parts to P at any time if they wished. This should not go to the balance of convenience.

29.  I am of the view that the issue of the continuous accumulation of repair costs is ultimately a matter affecting the precise form of how the Tai Pak Boats and the Remaining Hull Parts are to be preserved and the amount of the fortification on the undertaking as to damages, rather than a matter affecting whether a preservation order ought to be granted on a balance of convenience.

30.  As to balance of convenience, Mr Ho submitted that in relation to the Remaining Hull Parts, D2 would suffer no prejudice for the 28 April Order to be continued, as the Remaining Hull Parts are being stored at P’s costs. As regards the Tai Pak Boats, the preservation order aims to protect the existing layout, structure and nature corresponding to their respective unique licence(s) granted by the HKMD and would not prevent D1 from carrying out genuine repairs to the same for the purpose of maintaining their safety and seaworthiness by obtaining relevant prior approval from HKMD. On the other hand, the potential loss of the Tai Pak Boats and the Remaining Hull Parts is irreversible and cannot be compensated by damages.

31.  Therefore, weighing up the potential prejudice to D1 and D2, which can be measured in terms of money and time, as against the potential prejudice to P, which cannot be compensated by damages, as the Tai Pak Boats and the Remaining Hull Parts could potentially be disposed of if no preservation order is in place, I agree with Mr Ho that the balance of convenience lies in favour of granting a preservation order over the Tai Pak Boats and the Remaining Hull Parts.

32.  Based on the above, I am of the view that in principle, a preservation order in relation to the Tai Pak Boats and the Remaining Hull Parts ought to be granted.

Form of Preservation Order and Amount of Fortification

33.  Ms Sit submitted that additional fortification should be ordered against P, if preservation orders were to be granted because:

(1)  as to the Tai Pak Kitchen Boat, D1 had entered into a contract for the repair with a 3^rd party (amounting to about HK$7 million) and if it is ordered that further works are to be stopped, D1 would stand to suffer losses.

(2)  There is also evidence that the amount so far expended by D2 that is referrable to the 28 April Order have already come to HK$1 million in connection with the Jumbo Kitchen Boat.

(3)  There is no dispute that the Tai Pak Restaurant Boat and the Tai Pak Fire Separation Barge would be exposed to considerable risks if left in the water. The form of preservation would directly affect how much additional fortification should be ordered, if any.

34.  I agree with Ms Sit that additional fortification may be required depending on the form of preservation. E.g., should the Tai Pak Restaurant Boat and the Tai Pak Fire Separation Barge be removed from water and be stored on land and the likely costs arising therefrom. I would therefore direct that parties do try to agree on the form of preservation and the amount of additional fortification required (if any) within 21 days hereof, failing which, a hearing should be fixed before me with 3 hours reserved.

35.  For the avoidance of doubt, the status quo of the Tai Pak Boats and the Remaining Hull Parts should be preserved in the meantime.

Costs

36.  I make a costs order nisi for the costs of the hearing on 7 March 2024 to be costs in the cause, with certificate for 2 counsel, to be taxed if not agreed.

37.  I thank counsel for their able assistance.