ROYCE EQUIPMENT SUPPLIES LTD v. COUNTER WIN INVESTMENT LTD

DCCJ 3111/2005

 IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3111 OF 2005

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JUDGMENT

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1.  This is an application for interlocutory judgment under Order 14 of the Rules of District Court for the sum of HK$257,800.00.

Background:

2. By a lease agreement dated 10/6/2003 (the “Lease”), the defendant agreed to lease the premises known as Lots 244 and 243 in D.D. 130 San Hing Tsuen, Lam Tei, Tuen Mun, New Territories, Hong Kong (the “Premises”) to the plaintiff, for a term of four years commencing on 1/8/2003 and expiring on 31/7/2007.

3. By a subsequent oral electricity usage agreement, the plaintiff agreed to allow the defendant to use electricity supplied to the plaintiff and the defendant agreed to reimburse the plaintiff all electricity charges.

4. On or about June 2004, the plaintiff incurred costs in the sum of HK$33,000.00 to engaged a contractor to level part of the Premises.

5. On or about early 2005, the parties desired to terminate the Lease and by a written termination agreement dated 15/3/2005 (the “Termination Agreement”), the parties agreed to the following:

(i) On the request of the defendant, the plaintiff agrees to early termination of the Lease;

(ii) The plaintiff shall quit the Premises within one and a half month from signing the Termination Agreement;

(iii) Within 10 days from signing of the Termination Agreement, the defendant shall pay the plaintiff the total sum of HK$298,460.00, being the total of:

(a) liquidated damages equal to half of the total monthly rents for the balance of the lease term, HK$243,000.00;

(b) the original rental deposit HK$18,000;

(c) half of the original ground leveling contract fee HK$16,500 and

(d) outstanding electricity charges HK$20,960.00.

The claim:

6. The plaintiff quit the Premises on 9/4/2005, however irrespective of repeated request and demands, the defendant refused to pay the agreed sum of HK$298,460.00.

The defence and counterclaim:

7. The defendant raised no defence, but counterclaimed against the plaintiff.

8. The defendant alleged before the parties agreed to terminate the Lease, they first reached an oral agreement to substitute a piece of land in the Premises with a piece of land in Lot 241 (the First Oral Agreement”).

9. The additional terms of the First Oral Agreement were:

(i) The defendant would carried out renovation works on Lot 241 pursuant to the plaintiff’s instructions; and

(ii) The costs of the renovation would be borne by the defendant.

10. Later, again prior to the execution of the Termination Agreement, the parties decided to terminate the Lease instead (the “Second Oral Agreement”). The terms of the Second Oral Agreement included, inter alia, the plaintiff shall reimburse and compensate the defendant HK$257,800.00 for the charges paid by the defendant in connection with renovation work on Lot 241.

11. Irrespective of repeated requests and demands, the plaintiff failed to pay the defendant the sum of HK$257,800.00. The defendant therefore counterclaims against the plaintiff for HK$257,800.00.

12. In Mr. To Ho Sum Eddy’s affirmation, he alleged objects and rubbish were left on the Premises, therefore vacant possession was never delivered by the Plaintiff. Prior to commencement of this hearing Mr. Hui, counsel for the defendant, conceded that vacant possession was not at issue.

13. After commencement of this action, the defendant paid the plaintiff HK$40,660.00, being the difference of the claim and the counterclaim. Accordingly, the claim and counterclaims are now both HK$257,800.00.

The law:

14. The legal principle is well known: “The defendant must show that there are triable issues. He has to satisfy the court that he has a ‘real or bona fide defence.’ If he makes an allegation, it must be credible or believable in the light of the evidence placed before the court.” [Para 14/4/9 Hong Kong Civil Procedure 2006].

15. Mr. Hui argued that the Second Oral Agreement was not an agreement collateral to the Termination Agreement but an agreement independent of the same; however the alleged terms of the Second Oral Agreement, as stated in paragraph 13 of the Defence and Counterclaim, are:

“ a) The Plaintiff request and offered, and the Defendant agreed to the cause early termination to the Tenancy,

b) The Plaintiff shall vacate the Lot Nos. 244 and 243 in D.D. 130 in or about the Easter Holidays,

c) The Defendant shall pay to the Plaintiff a payment of HK$298,460, and

d)            The Plaintiff shall forthwith reimburse and compensate the Defendant the charges, fees and expenses paid by the Defendant in connection to the renovation works in Lot No. 241 of HK$257,800.00.”

16. My review of the Termination Agreement however, reveals that clauses (a), (b) and (c) of the alleged Second Oral Agreement are already contained in the Termination Agreement.

17. The preamble of the Termination reads: “ …甲方向乙方提出終止二零零三年六月十日所訂立之租約, 而雙方同意按下列條款終止上述租約。” (甲方was the defendant and 乙方was the plaintiff). One can clearly see that except for who initiated the termination, this part of the preamble was the same as clause (a) of the alleged Second Oral Agreement.

18. Clause 4 of the Termination stated: “…承租人(乙方)須在此協議書簽訂及收妥項目1,2,3之款項後壹個半月内遷出上述租用地址.” Clearly, this is the same as clause (b) of the alleged Second Oral Agreement.

19. Clauses 1, 2 and 3 of the Termination Agreement stated the defendant shall pay the plaintiff various sums of money the total was HK$298,460, the same amount as in clause (c) of the alleged Second Oral Agreement.

20. The alleged Second Oral Agreement was clearly not an independent agreement but merely the Termination Agreement with the addition that the plaintiff agreed to pay the defendant HK$257,800.00. The alleged Second Oral Agreement was therefore collateral to the Termination Agreement.

21. In Bank of India v. Surtani Murlidhar Parmanand [1994] 1 HKC 7, Nazareth JA, stated (at 11I to 12C):

“ Since the defence rest upon a collateral oral agreement, the sole effect of which is to vary the settlement deed, the threshold onus is in a sense compounded by the onus to strictly prove such agreement. That onus, as approved by Lord Goff in Universal Dockyard Ltd v Trinity General Insurance Co Ltd [1989] 2 HKLR 160, 164, was propounded in the following way by Lord Moulton in Helibut, Symons & Co v Buckleton [1913] AC 30 at 47, 48:

‘ Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contracts, but the existence of an animus contrahendi on the part of all the parties to them, must be clearly shown. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existing of verbal collateral agreements relating to the same subject matters.’” (Emphasis added)

22. Perhaps I will deal with one of Mr. Hui’s legal proposition now. Citing Axel Johnson Petroleum AB v. MG Mineral Group AG [1992] 2 All ER 163 as support and quoting paragraph 14/4/14 of the Hong Kong Civil Procedure 2006, Mr. Hui stated in paragraph 35 of his skeleton submission: “ If the defence of set-off is raised, the Defendant is entitled to unconditional leave to defend”.  In his oral submissions, Mr. Hui clarified that this proposition applies to legal set-offs.

23. A careful reading of Axel Johnson Petroleum does not justify Mr. Hui’s legal proposition. The head-notes read, in part:

Held- Having regard to the fact that the amount of the defendants’ counterclaim was ascertainable on the basis that it represented the difference between the contract price which the defendants had paid to the oil suppliers and the lesser price which the plaintiffs claimed they were bound to pay, it was clear that the counterclaim was for a liquidated claim and as such, was capable of being set off at law against the plaintiffs’ claim. Moreover, since the question whether the defendants were entitled to recover the amount of their counterclaim constituted a trible issue of liability and since the amount due to the defendant if they succeeded on the liability issue was an ascertainable sum which was capable of being set off, it was also clear that the counterclaim constituted a prospective defence which entitled the defendants to unconditional leave to defend….” (Emphasis added)

24. In any event, the White book further stated in paragraph 14/4/14:

“On the other hand, the mere fact that the defendant has a counter claim does not necessarily entitle him to defend (Anglo-Italian Bank v. Wells & Davies (1878) 38 L.T. 197.).” Accordingly, there is no general legal principle that the mere fact a defendant has an alleged legal set-off, automatically entitles him to unconditional leave to defend. I am of the view that whether legal or equitable set-off, the applicable law is still the same: Is the defendant’s counterclaim credible or believable in the light of the evidence placed before the court?

The Issues:

25. Mr. Hui, raised six issues in his skeleton submissions:

“27. When did the 1^st Oral Agreement take place? (in January 2005 or December 2004, as it was a common ground that both parties had discussed about the substitution of lands.)

28. Who initiated the Termination Agreement?

29. Did the 2^nd Oral Agreement exist?

30. Was the Defendant in breach of the Condition Precedent for Substitute as alleged by the Plaintiff?

31. Why was the Termination Agreement entered into?

32. Is the defence of the Plaintiff to the counterclaim of the Defendant creditable and believable?”

26. Mr. Yim, counsel for the plaintiff, disagreed and stated all of Mr. Hui’s issues except one, were simply background facts that may help to determine the sole issue: Whether the existence of the Second Oral agreement is creditable and believable? 

27. I think the issue is even simpler. Since the Termination Agreement already contains 3 out of 4 clauses in the alleged Second Oral Agreement, the sole issue is therefore: Whether defendant’s allegation of the existence of the fourth clause in the Second Oral Agreement is credible or believable? None of the other issues raised by Mr. Hui is relevant. 

Application:

28.  Mr. Hui’s main arguments in support of the defendant’s case is the allegation that the parties reached numerous oral agreements in the past, which shows an acceptance of oral agreements in the conduct of their dealings with each other. A careful review of these incidents of oral agreement reveals that these were either trivial matters or that the parties have not yet reached final agreements on them.

29. For example, the 12/4/2003 oral agreement dealt with a one-day license. The electricity agreement dealt with relatively small sums of money, which if the defendant fails to repay on a timely basis, the plaintiff could stop the supply with ease. The temporary licenses for December 2004 and January 2005 were just that, temporary. All of the discussions and negotiations in respect to substitution of land in Lot 243 and 244 with land in another lot were only discussions, before the parties could reach consensus, they agreed to terminate the Lease and therefore no written agreement about the substitution of land was prepared.

30.  The Termination Agreement, on the other hand was reduced into writing almost immediately. From the draft Termination Agreement (page 124 of the bundle of documents), one can see that the plaintiff first proposed the termination terms to the defendant on 15/3/2005. There were clearly further negotiations, because the total compensation payable to the plaintiff was reduced from HK$557,960.00 (as contained in the draft version) to HK$298,460.00 (as contained in the signed version). The termination Agreement was then signed, either on the same day, in accordance with the date on the Termination Agreement or on the next day (16/3/2005), in accordance with Mr. Liu Chung Law Philip’s affirmation. 

31.  Unlike the parties in Shun Shing Economic United v Hong Kong Humin Co. Ltd. [1989] 2 HKLR 668 where Mr. Justice Liu (as he then was), found a lack of documentary evidence acceptable because: “The parties seemed to have been contented without confirmation in writing.” Here on the other hand, the parties were not so contented; they reduced their agreements on terminating the Lease into writing immediately.

32.  After stating the terms of the alleged Second Oral Agreement in paragraph 13 of the Defence and Counterclaim, the defendant continued in paragraph 14, as follows:

“Upon the premise, consensus and understanding of the 2^nd Oral Agreement, the Termination Agreement was entered into between the Plaintiff and the Defendant.”

33. It was therefore the defendant’s case that the Termination Agreement was prepared pursuant to the alleged Second Oral Agreement. The question that begs to be asked is: If the parties had agreed to 4 clauses in the alleged Second Oral Agreement, then why only 3 clauses were incorporated into the Termination Agreement?

34.  This is especially strange when the contemporaneous documents suggested a wholly different story from the defendant’s case. First, a draft agreement was prepared by the plaintiff and send to the defendant; second, the parties held further negotiations; third, amendments were made to the draft and finally the Termination Agreement was signed.

35.  In view of the aforesaid and the fact that if an agreed term was missing from the Termination Agreement, the parties had plenty of time and opportunity to add it into the final draft before execution, there is only one logical explanation for any missing clause in the final executed Termination Agreement - there was never any such agreement to begin with.

36.  Irrespective of the valiant effort of Mr Hui, to paraphrase the inimitable Mr. Justice Godfrey J.A. in Man Earn Ltd. v. Wing Ting Fong [1996] 1 HKC 225, the counterclaim was clearly ‘frivolous and practically moonshine’, the plaintiff should have its summary judgment.

Orders: