VIGERS HONG KONG LTD v. JUNSA DEVELOPMENT LTD

HCA 5173/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5173 OF 1998

BETWEEN

HCA 9036/1998

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9036 OF 1998

BETWEEN

Before : Hon Sakhrani J in Court

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JUDGMENT

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1. On 15 April 1997 the plaintiff as tenant entered into a provisional tenancy agreement with the 1^st defendant as landlord for the letting of the premises known as the ground floor entrance, 1^st, 2^nd and 3^rd floors of the building at 2A Mongkok Road, Kowloon, Hong Kong (“the premises”).  It is common ground that the provisional tenancy agreement was an agreement made partly orally and partly in writing.  In so far as it was in writing, the same was contained in the document in Chinese signed on behalf of the plaintiff and the 1^st defendant dated 15 April 1997 under the heading “PROVISIONAL AGREEMENT” (“the PA”).

2. It is also common ground that the plaintiff wanted to operate a sauna bathhouse at the premises.  The user of the premises as described in the PA was “Business carried on : High-class sauna spa”.  

3. As stated in the PA, the plaintiff and the 1^st defendant agreed that a formal Lease would be entered into.  Both of them also agreed to be represented by the same solicitors.

4. At all material times, Fong Tse Kin (“Fong”) of Vigers Hong Kong Ltd (“Vigers”) was the estate agent who acted for both the plaintiff and the 1^st defendant in the letting of the premises by the 1^st defendant to the plaintiff.

5. It is also common ground between the plaintiff and the 1^st defendant that they both retained Messrs K B Chau & Co (“KBC”) as their solicitors and that KBC prepared the formal Lease.  The formal Lease was signed by the representatives of the plaintiff and the 1^st defendant on or about 14 May 1997 at the offices of KBC.  

6. Under the formal Lease, the plaintiff was prevented from operating a sauna bathhouse without the prior written consent of the 1^st defendant.  The user that was provided therein was as follows :

“Not to use or occupy the said premises or any part thereof to be used for any purpose whatsoever other than for the Tenant’s lawful business office purpose which shall not be changed without the prior written consent of the Landlord…………..”

The actions

7. Vigers commenced HCA 5173 of 1998 (“HCA 5173”) by writ against the plaintiff for its commission on 1 April 1998.  The plaintiff commenced HCA 9036 of 1998 (“HCA 9036”) on 3 June 1998 against the 1^st defendant, Vigers and Fong claiming as against the 1^st defendant, rescission of the formal Lease alternatively, damages, and as against Vigers and Fong, damages for breach of duty and for negligence. Vigers also counterclaimed against the plaintiff for its commission.  

8. HCA 5173 and HCA 9036were consolidated by order of Master Lung on 21 September 1999. 

9. On 15 October 2001 the plaintiff commenced HCA 4486 of 2001 (“HCA 4486”) against KBC for damages for breach of duty in contract and for negligence. 

10. By a third party notice filed on 19 July 2002 in the consolidated action, Vigers and Fong brought third party proceedings against KBC for an indemnity or contribution against the plaintiff’s claim.  An order was subsequently made that HCA 5173 consolidated with HCA 9036 be tried together with HCA 4486. 

11. Subsequently, the plaintiff arrived at a settlement with Vigers and Fong and a consent order was made in the consolidated action by Master Woolley on 7 January 2004.

12. Vigers, Fong and KBC also settled the third party proceedings.  On 29 October 2004 I made an order in the consolidated action by consent of Vigers, Fong and KBC that Vigers and Fong do have leave to withdraw their third party claim against KBC.

13. The trial commenced before me on 1^st December 2004.  It was part heard and adjourned on 8 December 2004.  The number of days allotted for the trial was wholly inadequate.  This was because there had been a gross underestimation of the length of trial given by those representing the parties which was re-iterated by counsel at the pre-trial review and also at the commencement of the trial.  In view of the state of the court’s diary and counsel’s commitments, there was a long delay before the trial resumed.

14. The trial resumed on 28 November 2005.  On that day the plaintiff and KBC settled their disputes and a consent order was made in respect of HCA 4486.  The remaining part of the trial was in respect of HCA 9036 which was part heard and adjourned on 8 December 2004.  The plaintiff maintained its claims against the 1^st defendant and the 1^st defendant maintained its defence and counterclaim against the plaintiff.

Background

15. It is undisputed that the plaintiff was set up as a shelf company for the purpose of taking up the tenancy of the premises.  Ng King Kiu (“Ng”) together with other investors acquired the plaintiff in order to invest in the business of running a sauna bathhouse. 

16. It is also undisputed that the investors in the plaintiff included Ng, Chow Poo Yuen (“Chow”), Lai Kwong Ting (“Lai”), Lam Sai Wo (“Lam”). 

17. The 1^st defendant was a company with 2 shareholders and directors, namely, Shum Ngar On (“Shum Sr.”) and Shum Wai Sing (“Shum Jr.”).  Shum Sr. is the father of Shum Jr. 

18. The 1^st defendant owned the premises which it acquired in 1987.  At that time there was an industrial building on the land.  In or about 1994 or 1995 a successful application was made by architects on behalf of the 1^st defendant to the Town Planning Board for permission to put up an office development at the site of the premises.  Thereafter, the 1^st defendant developed the site by demolition of the industrial building and putting up in its place an office building.

19. However, it is significant that at all material times the site was zoned as “I” meaning that it was zoned as Industrial.  It is common ground between the parties that for sites zoned as “I” it was not possible to use the site or any part thereof as a sauna bathhouse.  This was not a use that would have been permitted by the Town Planning Board. However, if the site had been zoned as “C” meaning that it was Commercial, then it would have been possible to make an application for permission to use the premises as a sauna bathhouse.  It is not disputed that this is one of the uses that may be permitted with or without conditions on application to the Town Planning Board. 

20. I was also referred to the Town Planning Board guidelines for application of commercial bathhouse and massage establishment under section 16 of the Town Planning Ordinance.  Under paragraph 1.1, it was provided that the guidelines were intended to provide guidance for prospective applicants to prepare applications with respect to commercial bathhouses and massage establishments in various zones “including “Residential (Group A)”, “Commercial/Residential”, “Commercial” and “Comprehensive Development Area”.”  This suggests that applications to run a sauna bathhouse in those zones may be made. However, sites zoned as Industrial are not included.

21. There was evidence from Fong and Ng, which I accept, that in Hong Kong sauna bathhouses have been operating in some buildings which are not entirely commercial buildings.  In particular, there was evidence that the Pak Tai Ho Sauna had been operating in a building in Shanghai Street which also included residential units.  Investors of the Pak Tai Ho Sauna included Ng and Chow.  As the guidelines suggest, it is possible to apply to operate a sauna bathhouse in a zone which is Commercial/Residential.  

22. It is also undisputed that Ng was an experienced sauna operator. He knew that an application to operate a sauna bathhouse involved satisfying various Government departments and that the procedure was cumbersome and tedious.  He also knew that there was no guarantee that a licence to operate a sauna bathhouse would be obtained.  He did in the past engage professionals to make the necessary applications for him.  However, it is common ground that for sites zoned as Industrial, there was no prospect of obtaining a licence to operate a sauna bathhouse because that was not a use that would have been permitted in any event. 

The Agreed Issues

23. The agreed issues between the plaintiff and the 1^st defendant are :

“ The Plaintiff’s Claim
1.	Did the Shums or either of them prior to the signing of the Tenancy Agreement represent to [Ng] and warranted that the premises could be used as a sauna bathhouse?
2.	Was it a term of the Tenancy Agreement that the premises could be used for operating a sauna bathhouse thereat?
3.	Did [the plaintiff] execute the formal Lease under a mistake of fact that the lease incorporated the same term as to user as in the Tenancy Agreement?
4.	What is the legal effect of cl.  cl.5(k) of the formal Lease?
5.	Was [the plaintiff] entitled to rescind the formal Lease by reason of :-
	1)	Misrepresentation
	2)	Mistake
6.	Was [the plaintiff] thereby entitled to return of deposits and reimbursement of wasted expenditure?
7.	Was there an agreement to vary the formal Lease in the manner as pleaded in paragraph 24A of the Amended Statement of Claim?
The Counterclaim
8.	Was [the plaintiff] in repudiation of the formal Lease?
9.	If so, what is the quantum of damages suffered by the Landlord?”

24. I heard evidence from Ng, Kong Wai Muk (“Kong”), Fong and Shum Jr.

25. The case turns on the credibility of the witnesses.  I have borne in mind that the witnesses have had to recollect events going back about 7 years or so and that it is highly likely that there will be differences in their recollection.  However, having heard and seen the witnesses I believe parts of the evidence of Ng, Fong and Shum Jr. but disbelieve other parts.  This is dealt with below.  As regards Kong, I accept his evidence.  In my view he was a truthful and reliable witness and I believe him.

Issue 1

26. The plaintiff’s case is that the Shums or either of them made a representation at the meeting on 15 April 1997 that the premises could be used for a sauna bathhouse. 

27. Paragraph 10 of the amended statement of claim pleads :

“On or about 15^th April 1997, Mr. Ng made known to [Shum Sr.] and his son [Shum Jr.] a director of the 1^st Defendant the Plaintiff’s intended user of the Premises as a sauna.  In order to induce the Plaintiff to enter into the [PA], [Shum Sr.] on behalf of and as an agent of the 1^st Defendant and in the presence of [Shum Jr.] orally warranted to and made the representation to the Plaintiff that the Premises could be used for saunas as a business undertaking and impliedly warranted that the same were zoned as commercial and the said warranty became an express term of the agreement pleaded in paragraph 12 hereof.”

28. Prior to the meeting at the 1^st defendant’s offices on 15 April 1997, Ng and the other investors had not met the Shums.  This is not disputed.  Ng had been dealing with Fong of Vigers before meeting the Shums.  Fong had read advertisements placed by the 1^st defendant for renting out premises in the building at 2A Mongkok Road in or about November 1996.  Fong had received the particulars and plans of the building from Shum Jr.

29. Ng said that he only met Fong in April 1997 whereas Fong said that he met Ng and the other investor Chow in or about November 1996.  I believe Fong and disbelieve Ng on this and prefer the evidence of Fong to that of Ng on this.  It is clear that by the time Fong wrote the letter dated 20 November 1996 to the associate company of the 1^st defendant containing an offer to rent the premises, a genuine offer had been made on behalf of Ng and his investors to rent the premises to operate a sauna bathhouse thereat.  This was even before Ng had inspected the building.  He only inspected the building on 4 occasions subsequently and before the meeting on 15 April 1997. 

30. It seems to me, and I so find, that by 15 April 1997, Ng and his investors were keen to rent the premises to operate a sauna bathhouse there.  Ng was an experienced sauna operator.  He had inspected the building where the premises were situate.  It looked like a commercial building.  According to Ng’s evidence, he thought that if the building was commercial then a licence to operate a sauna bathhouse could be obtained.  He knew that there was no guarantee that a licence would be obtained as it involved going through a cumbersome procedure with various Government departments involved.  However, he made it plain in his evidence that he thought that in order to operate a sauna bathhouse the building had to be a commercial one.  It seems to me that he had decided to rent the premises even before he ever met the Shums.  Ng’s concern was whether the building was a commercial building.  Ng also knew that the Hawaii Sauna was operating in a building just across the street from where the premises were.  Both Fong and Shum Jr. said that at the meeting on 15 April 1997 Ng told them about his intended investment (which did not materialise) in the Hawaii Sauna.  I accept this part of their evidence.

31. I do not believe Shum Jr. when he said that he told Fong that the land on which the premises was situate was Industrial when he supplied him with the particulars of the building back in November 1996.  On this dispute of fact I believe Fong and disbelieve Shum Jr. 

32. I also do not believe Shum Jr. when he said that at the meeting on 15 April 1997 he told Ng that the land was industrial.  On this dispute of fact, I believe Ng and disbelieve Shum Jr.

33. I find that neither party applied their mind to whether the site was zoned as Industrial or not.  That was not their concern.  Ng’s concern, as appears from the statements he made at the meeting and the questions that he asked, was whether the building was commercial.  There is no doubt that the building was commercial in the sense that it was an office block.

34. Ng gave evidence that he went to the meeting on 15 April 1997 together with Fong and his other investors, Chow, Lai and Lam.  Fong said that he went there first without the tenant’s representatives as he had already agreed the rent at $25 per sq. ft. with Shum Jr. 

35. Shum Jr. said that Fong went to the 1^st defendant’s offices together with Ng and the 3 other representatives of the tenant.  

36. On this issue of fact, I prefer the evidence of Ng and Shum Jr. to that of Fong and find that Ng and the other representatives of the plaintiff went to the 1^st defendant’s offices on 15 April 1997 together with Fong.  They were equipped with the cheque for $356,250, representing one month’s rental as deposit at $25 per sq. ft., which, as appears from the evidence of Shum Jr., had already been issued in advance.  I accept this evidence. 

37. Before the meeting, Ng had also signed the PA where the rent stated was the equivalent of $25 per sq. ft.  I find that the sum had not yet been agreed with the 1^st defendant in advance of the meeting.  I do not believe Fong when he said that there had already been an agreement reached with the 1^st defendant to rent it out at $25 per sq. ft. in advance of the meeting but that when he arrived there, Shum Sr. asked for $2 more. It is more likely, and I so find, that Ng and his investors went there with Fong with a signed agreement and cheque in hand in the hope that the 1^st defendant as landlord would accept the same.  Eventually the parties negotiated terms and came to an agreement for the rental at $27 per sq. ft.  Amendments were made to the PA and initialled by Ng and Shum Jr. and the PA was also signed by Shum Jr.

38. As to the representation which is alleged by the plaintiff to have been made by Shum Sr., Ng said that he was a bit worried at the meeting and asked for the occupation permit and deed of mutual covenant.  He asked if the building was really a commercial one and whether it would be possible to apply for a licence for a sauna.  He said that Shum Sr. told him not to worry because there was a sauna just opposite the street.  

39. Fong also said that at the meeting Ng said that he was going to run a sauna and that Shum Sr. said that the premises could be used for anything.  However, Fong said, and I accept, that the landlord did not give a warranty that a sauna could be operated there.  Fong said that he never told Ng, contrary to his witness statement at paragraph 4, that the premises were suitable for use as a sauna bathhouse.  He agreed in cross examination that the Shums or either of them said that subject to Government approval, the landlord would have no objection to the tenant running a sauna bathhouse at the premises.  

40. That is also consistent with what Shum Jr. said in evidence.  Shum Jr. said that he told Ng at the meeting that he did not object to him running a sauna bathhouse there but that he had to apply for a licence himself.

41. I accept the evidence of Shum Jr. and Fong on this as I believe them. I find that no warranty was given by the landlord to Ng and his investors at the meeting on 15 April 1997 that the premises could be used as a sauna bathhouse.  I disbelieve Ng on this.  I find that Shum Jr. on behalf of the 1^st defendant merely said that subject to a licence being obtained, he would have no objection to a sauna bathhouse being operated at the premises. 

42. As to issue 1, I find against the plaintiff. I find that neither of the Shums prior to the signing of the PArepresented to Ng and warranted that the premises could be used as a sauna bathhouse.

Issue 2

43. The PA stated that the business carried on was “high-class sauna spa”.  Fong said in evidence that it was Ng who suggested that “high-class sauna spa” be inserted in the document.  I accept this part of his evidence.  The PA was prepared and typed out before the meeting with the Shums on 15 April 1997 and it is unlikely that Fong himself would have described it as “high-class”.  In my judgment this was a permitted user of the premises.  It was not a term that the premises could be used for operating a sauna bathhouse.  I have found that there was no representation and warranty made by either of the Shums that the premises could be used for operating a sauna bathhouse.  Issue 2 is also resolved against the plaintiff and I find that it was not a term of the provisional tenancy agreement that the premises could be used for operating a sauna bathhouse thereat.

Meeting at KBC’s offices

44. There is a dispute of fact as to who went to KBC’s offices when the formal Lease was executed by the plaintiff and 1^st defendant and what happened there.  

45. It is common ground that on or about 14 May 1997 the formal Lease was executed at the offices of KBC.  It is also common ground that C H Lau (“Lau”), clerk at KBC, was present at the time and he was the one who attended to the execution of the formal Lease.  The case of the plaintiff and the 1^st defendant is that KBC were acting for both the landlord and the tenant at the material time.  This is disputed by KBC whose case was that KBC acted only for the 1^st defendant.  However, KBC and the plaintiff have settled their dispute with the consent order made on 28 November 2005.  I have not heard any evidence from Lau.

46. It is, however, common ground between the plaintiff and the 1^st defendant that KBC acted for both parties at the time.

47. Ng gave evidence that after signing the PA, he received a telephone call from Lau who enquired whether he was renting the premises and said that the landlord had informed him that they were going to use the same solicitors.  Ng confirmed the same and said that he would await his call after the formal Lease was prepared.  Ng also told him to contact his accountants for all necessary documents.  His accountants were Right Point Accountancy Ltd.

48. Subsequently Ng received another call from Lau telling him that the formal Lease was ready and Lau asked him to bring along the company seal and other relevant documents and also a cheque and to attend the offices of KBC for signing the formal Lease.

49. Ng said that he attended KBC on or about 14 May 1997 with Fong and Lai.  He said Shum Jr. also came to the meeting but that Shum Sr. was not there.  He said that he had not seen the draft lease before going up to KBC’s offices.  There is no dispute that Lau did not explain the formal Lease in detail  cl. cl.at the meeting.  

50. By cl.  cl.1 of the formal Lease it was provided that in consideration of the rent provided in the formal Lease and of the terms contained therein the 1^st defendant as landlord demised unto the plaintiff as tenant the premises “subject to the Tenant’s use, occupation and enjoyment of the [premises] only for the purposes set out in Part IV of the First Schedule hereto and not for any other purpose whatsoever”.

51. Part IV of the First Schedule provided that the user was as follows :

“ Not to use or occupy the [premises] or any part thereof to be used for any purpose whatsoever other than for the Tenant’s lawful business office purpose which shall not be changed without the prior written consent of the Landlord …………..”

52. The formal Lease expressly prohibited the plaintiff from using the premises for any purpose whatsoever other than for business office purpose without the prior written consent of the landlord.  The plaintiff was thus expressly prohibited from operating a sauna bathhouse at the premises.  Quite apart from the question of whether the plaintiff would successfully obtain a licence from the authorities to operate a sauna bathhouse, the formal Lease did not permit the plaintiff to operate a sauna bathhouse at the premises without the landlord’s prior written consent.

53. Kong was the general manager of Right Point Accountancy Ltd. which provides, inter alia, secretarial, accounting and audit services for companies.  He gave evidence that in or about mid April 1997, Ng instructed him to acquire a shelf company to carry on the business of a sauna bathhouse under the style or name of King Sauna.  Ng told him that the registered office would be at the premises and that he was negotiating a lease of the premises with the owner.  He reserved the plaintiff for Ng.  On or about 18 April 1997 Ng provided him with a copy of the PA and instructed him to prepare the relevant documents.

54. Kong said that prior to 8 May 1997 his company received further instructions from the plaintiff to prepare a board resolution.  His staff drafted the minutes of the meeting of the board of the plaintiff.  Kong signed a copy of the draft minutes.  The commencement date of the lease and the signature for the Chairman were left blank.

55. Kong confirmed that the board of the plaintiff did not hold a meeting on 8 May 1997 and the formal Lease was not tabled at the meeting as the minutes record.  He also said that he did not see the formal Lease.  He said that what was prepared as the board minutes was a draft to facilitate the signing of the formal Lease.  He was emphatic that he had not seen a draft lease of the premises when the draft board minutes were prepared.  I believe Kong and accept his evidence.

56. It seems that the draft minutes had been supplied to Lau prior to the meeting at KBC’s offices on or about 14 May 1997.  Ng said, and I accept, that he signed the board minutes at the offices of KBC as Lau asked him to sign the same.  No doubt the solicitors required a board resolution authorising the plaintiff to enter into the formal Lease. 

57. Ng also said that there was no board meeting held on 8 May 1997 where the formal Lease was tabled.  I believe Ng on this and accept his evidence. 

58. I find that there was in fact no meeting of the board of the plaintiff on 8 May 1997 and that the formal Lease was never presented to the plaintiff, Kong or to Fong prior to the meeting at KBC’s offices.

59. Ng also said that he was not supplied with a copy of the formal Lease after he had executed the same on behalf of the plaintiff.  By the letter from his then solicitors dated 24 December 1997 to KBC the plaintiff was asking to be supplied with a copy of the formal Lease.  This confirms that the plaintiff had not received a copy of the same by that date.

60. Ng said that at the meeting he told Lau that the purpose of renting the premises was for operating a sauna.  Lau pointed to the PA and said that he knew about it as it was so stated there.  Ng also said in evidence that Lau never told him that the formal Lease described the user of the premises as “office”.  What is significant is that Ng said in evidence that Lau told him at the meeting that the premises could be used to operate a sauna, no problem.   Ng said that Lau did say to him that it was written in the formal Lease that the premises could be used as a sauna.  At the time that Lau said this to Ng, Shum Jr. was present and was able to hear this.  Shum Jr. did not dissent from this.  Lau, apart from acting for the plaintiff, was also acting for the 1^st defendant.

61. Fong gave evidence that he went to KBC’s offices when the formal Lease was executed.  He said that he was very sure that there were 4 representatives from the plaintiff and not just 2 of them, Ng and Lai.  He also said that both Shums were there, not just Shum Jr.  He said that he heard Lau explainthe formal Lease briefly, not term by term.  He heard Lau say that the premises could be used as a sauna and that there was no response from the Shums at that stage.  He further said that Ng said that he was going to run a sauna and asked whether he could do that.  He said that both Shums said at the same time “yes”.  I am unable to accept this part of Fong’s evidence.  Both Ng and Shum Jr. said that Shum Sr. was not there and both of them said that only 2 representatives of the plaintiff were there and not 4 as Fong had said.  It seems to me that Fong’s memory has failed him on this and his recollection of the events at the offices at KBC’s offices is unreliable.  I place no reliance on his evidence as to what happened at KBC’s offices.

62. Shum Jr. gave evidence that he went to KBC’s offices without his father.  He also said that Ng and Lai went there.  Fong was also there.  He said that Lau took about half an hour giving a general explanation and he didn’t go through the formal Lease word by word.  It seems to be clear, and I so find, that Lau did not go through the whole formal Lease with the persons present at the meeting.

63. Shum Jr. also said that at the time of execution of the formal Lease the occupation permit had not yet been issued.  It was agreed that the lease would commence 2 days after the issue of occupation permit.  This is not really disputed and I accept this.

64. The occupation permit was in fact issued subsequently on 20 May 1997.  Thus the commencement date would be 22 May 1997.  However, the commencement date was not known at the time of execution of the lease on or about 14 May 1997.  It is plain, and I so find, that the date of commencement of the lease and the period of the lease was only inserted in the formal Lease subsequent to the execution thereof.  These were left blank at the time of execution and was only filled in subsequently by the solicitors.  This must also have been the situation as regards the board minutes of the plaintiff dated 8 May 1997.  It is also clear, and I so find, that the dates of commencement and the period of the lease were only inserted in the board minutes subsequent to the lease, probably by someone at KBC as they were the solicitors for both parties in the transaction.

65. Shum Jr. gave evidence that Lau also mentioned at the meeting that the user of the premises was office and that he neither heard Ng ask whether he could operate a sauna there nor Lau say that it could be used as a sauna bathhouse.

66. On this dispute of fact, I much prefer the evidence of Ng to that of Shum Jr.  Mr. Lee, for the 1^st defendant, submitted that Ng should not be believed.  He referred also to the letters before action against the 1^st defendant, Vigers, Fong and KBC written by the then solicitors for the plaintiff, where there was no complaint of misrepresentation by Lau.  I have considered all of counsel’s submissions.  I am, however, satisfied that Ng was telling me the truth on these matters and that Shum Jr. was not.  

67. In my judgment it is inconceivable that Ng would have agreed to enter into the formal Lease if he had been told by Lau that the user provided therein was office.  All along the plaintiff wanted to operate a sauna bathhouse at the premises and this was known to the plaintiff and the 1^st defendant and also to KBC as the user was clearly stated in the PA. I find that Ng made it plain to Lau at the meeting that the plaintiff intended to operate a sauna bathhouse there and that Lau assured him that the user provided for in the formal Lease allowed him to do that.  Had the plaintiff been told that the user stated in the formal Lease was office and that the formal Lease prohibited the plaintiff from operating a sauna bathhouse at the premises without the prior written consent of the landlord, I have no doubt that the plaintiff would have refused to execute the formal Lease.  After all, Ng and his other investors had already acquired the plaintiff and were prepared to invest substantial sums in taking up a tenancy for 6 years.  They were going to engage professionals to assist them with the relevant application for a licence and they were also going to undertake expensive renovation expenses for the premises so that it could be used as a sauna bathhouse. 

68. I find that Lau, who was not only acting for the plaintiff but also for the 1^st defendant, made the representation that it was provided in the formal Lease that the plaintiff was permitted to use the premises for operating a sauna bathhouse and it was as a result thereof that the plaintiff entered into the formal Lease.  This was clearly a misrepresentation on the part of Lau who was also acting for the 1^st defendant.  I also find that Shum Jr. heard this and did not dissent from it.  I do not believe Shum Jr. when he said that Lau mentioned at the meeting that the user of the premises was office.  I have no hesitation in believing Ng and disbelieving Shum Jr. on these matters.

Clause 5(k)

69. The 1^st defendant relies on cl.  cl.5(k) of the formal Lease. This provided that :

“The Landlord shall not be bound by any oral representations or oral promises with respect to the said building and its appurtenances or in respect of the said premises except as herein expressly set forth with the object and intention that the whole of the agreement between the Landlord and the Tenant shall be set forth herein and in no way modified by any oral discussions which may have preceded the execution of this Tenancy Agreement.”

70. The 1^st defendant’s case is that cl. 5(k) is an entire agreement clause  cl.and that the plaintiff cannot rely on any oral representations that were made.  The 1^st defendant also submitted that it mattered not whether Ng had read the formal Lease before signing it and relied on L’Estrange v F. Graucob, Limited [1934] 2 KB 394.

71. In my judgment, L’Estrange v. F. Graucob is distinguishable on its facts.  It provides no assistance to the 1^st defendant.  It was held there that as the buyer had signed the written contract and had not been induced to do so by any misrepresentation, she was bound by the terms of the contract, and it was wholly immaterial that she had not read it and did not know its contents.

72. In the present case, I have found that there was a misrepresentation made by Lau, who also acted for the 1^st defendant, that in the formal Lease it was provided that the plaintiff was permitted to operate a sauna bathhouse at the premises when in fact the user provided in the formal Lease did not permit this.  As Ng, on behalf of the plaintiff, signed the formal Lease as a result of the misrepresentation, the plaintiff was not bound by the same and was entitled to rescind the same.

Issues 3, 4 and 5

73. As to issues 3, 4 and 5, the plaintiff was entitled to rescind the formal Lease by reason of misrepresentation.  It seems to me that the plaintiff was entitled to rescind the formal Lease as a result of misrepresentation rather than by reason of a mistake on the part of Ng.  As there was a misrepresentation resulting in the plaintiff entering into the formal Lease, the 1^st defendant is not entitled to rely on cl. 5(k) of the formal Lease.  By issue of the writ on 3 June 1998, the plaintiff has effectively rescinded the formal Lease.

Issue 6

74. As to issue 6, it seems to me that the plaintiff is entitled to the return of the deposits paid under the formal Lease.  Mr. Walter Lau, for the plaintiff, accepted that unless he could show that there was a breach of the provisional tenancy agreement the plaintiff was not entitled to claim the sum of $150,000 being the fees paid to Lanbase Surveyors Ltd by the plaintiff as wasted expenditure.  I have resolved issue 2 against the plaintiff and found that there was no term in the provisional tenancy agreement that the premises could be used for operating a sauna bathhouse thereat and it follows that there has been no breach of the provisional tenancy agreement.  It is admitted by paragraph 8B of amended defence and counterclaim of the 1^st defendant that upon entering into the formal Lease the plaintiff paid the 1^st defendant the sum of $1,353,750 which represented balance of rental deposit, one month’s rent in advance and monthly surcharge in advance for airconditioning and maintenance charges.  The only sums that the plaintiff is entitled to recover is therefore the sums paid under the formal Lease, namely, the sum of $1,353,750 paid on or about 14 May 1997.

75. The plaintiff is not entitled to the return of the sum of $356,200 paid under the provisional tenancy agreement.  There is no claim for rescission of this agreement.  The amended statement of claim by prayer (a) seeks rescission of the formal Lease, not the provisional tenancy agreement.  In my judgment the plaintiff is not entitled to the return of the sum paid under the provisional tenancy agreement.

76. The plaintiff is also not entitled to claim from the 1^st defendant the sum of $52,828.50 for legal fees paid to KBC.  This was for legal services rendered by KBC to the plaintiff and this is a matter between the plaintiff and KBC.

Issue 7

77. Ng also gave evidence about what happened a few days after the execution of the lease.  That was when Ng attended the Town Planning Board offices to obtain application forms for a licence to operate a sauna at the premises.  He discovered from the staff there that he could not apply for a licence as the land where the premises were situate were zoned Industrial.  This came as a surprise to him.  I accept his evidence on this.

78. Ng also gave evidence that subsequently he and Shum Sr. reached an oral agreement to vary the lease.  The plaintiff’s case is pleaded at para. 24A of the amended statement of claim as follows :

“ Alternatively, by an oral agreement made on a day in about the middle of May, 1997 between [Ng] of the Plaintiff and [Shum Sr.] acting as agent for and on behalf of the 1st Defendant and in consideration of the Plaintiff not seeking to rescind the Lease immediately, it was agreed that the Lease be varied in the following respects, that is to say :-
(a)	the Plaintiff would at its own costs apply in the name of the 1st Defendant for a change of the user of the Premises so that the Plaintiff could lawfully use the same as a sauna;
(b)	the 1st Defendant would not charge the Plaintiff any rent until the change of user of the Premises was granted and there would be a rent free period of 3 months from the date of the grant of change or user;
(c)	In the event that the application for the change of user was unsuccessful, the Lease would thereby be terminated and the 1st Defendant would refund in full the deposits, the advanced payment of one month’s rental and management fees (hereinafter collectively referred to as “the said Sums”) paid by the Plaintiff.”

79. Ng gave evidence that subsequent to his agreement with Shum Sr., Lanbase Surveyors Limited was instructed to apply for a rezoning of the land in the name of the 1^st defendant.  The plaintiff paid Lanbase Surveyors Limited $150,000 for this.  However, the application was unsuccessful. 

80. The plaintiff relies on the oral agreement as its alternative case.  As the plaintiff has succeeded on its primary case on rescission of the formal Lease, issue 7 does not arise.

Issues 8 and 9

81. As I have found that the plaintiff was entitled to rescind the formal Lease by reason of misrepresentation, the 1^st defendant fails in its counterclaim.  Issue 8 is resolved in favour of the plaintiff.  I find that the plaintiff was not in repudiation of the formal Lease.  Issue 9 does not arise.

Conclusion

82. I give judgment for the plaintiff in the sum of $1,353,750.  

83. The plaintiff is also entitled to interest on the said sum of $1,353,750 from issue of the writ on 3 June 1998 until judgment at 1% above prime rate and thereafter at judgement rate until payment and I also give judgment to the plaintiff for the same.

84. The 1^st defendant’s counterclaim is dismissed.

85. I also make an order nisi that the 1^st defendant do pay the plaintiff its costs of the action and of the counterclaim.

HCA5173/1998,
HCA9036/1998 &
HCA4486/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5173 OF 1998

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(HCA5173/1998 consolidated with HCA9036/1998
and ordered to be tried together with HCA4486/2001)

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J U D G M E N T

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Background

1. This dispute arose out of a tenancy agreement dated 13 May 1997 ("the Agreement") made between Appearance Estate Limited ("Appearance") as landlord and Junsa Development Limited ("Junsa") as tenant in respect of G/F, 1/F, 2/F & 3/F, 2A, Mongkok Road, Kowloon ("the Property").

2. Junsa was acquired by its current shareholders for the purpose of carrying on the business of a sauna operator. Its issued share capital is HK$10,000 divided into 10,000 shares of HK$1.00 each, of which 9,000 shares have been issued to and paid up by nine individuals equally, including Mr Ng Kin Kiu ("Mr Ng"). Mr Ng is by profession a sauna operator.

3. In about April 1997, Junsa engaged the service of Vigers Hong Kong Limited ("Vigers") to find and advise on the suitable premises to run a sauna house. Mr Fong Tse Kin ("Mr Fong") of Vigers was the estate agent responsible for the transaction in question. Through Mr Fong, the Property was introduced to Junsa. On 15 April 1997, Junsa entered into a provisional tenancy agreement with Appearance and paid a sum of HK$356,250 as the initial rental deposit. It is stated in the provisional agreement that the business to be operated at the Property was a high class sauna spa. By a written agreement dated 21 April 1997, Junsa agreed to pay Vigers commission of HK$90,000 upon successful execution of the formal lease of the Property. On or about 14 May 1997, Appearance and Junsa entered into the Agreement (which superceded the provisional agreement). Pursuant to Clause 1 of and Part IV of the First Schedule to the Agreement, the user of the Property was "business office purpose". Junsa paid a sum of HK$1,353,750 of which HK$1,282,500 as further rental deposit and the balance as management fees. The Agreement was prepared by Messrs KB Chau & Co.

Disputes

4. Junsa refused to take possession of the Property on the ground that it was induced into entering into the provisional agreement and the Agreement by misrepresentations of Mr Fong and Mr Shum Wai Shing of Appearance. When the plaintiff engaged the service of Vigers, Mr Ng made known to Mr Fong of Junsa's intention of renting premises for operating the business of a sauna house. Mr Fong misrepresented to Mr Ng that it was lawful to use the Property for running a sauna house as a commercial undertaking. On or about 15 April 1997, Mr Ng told Mr Shum Wai Shing of the plaintiff's intended user of the Property as a sauna house. Mr Shum misrepresented to Mr Ng that the Property could be so used. However, according to the draft Mong Kok Outline Zoning Plan NO.S/K3/10, the Property was zoned "Industrial", which prohibited the user thereof as a sauna house. It was Junsa's case that Mr Ng and another director of Junsa who executed the Agreement were not conversant with the English language. They did not know that the user of the Property pursuant to the Agreement was contrary to the one stated in the provisional agreement.

5. Not surprisingly, what followed is a string of actions.

6. On 1 April 1998, Vigers commenced HCA5173/1998 against Junsa for the commission of HK$90,000. In its defence and counterclaim, Junsa pleaded the defence of misrepresentation (as outlined above) and counterclaimed for damages.

7. On 3 June 1998, Junsa commenced HCA9036/1998 against Appearance, Vigers and Mr Fong, alleging, among other things, misrepresentation (as outlined above) and claiming against Appearance for rescission of the Agreement or alternatively damages and against Vigers and Mr Fong for damages.

8. Pursuant to the order of Master Lung dated 21 September 1998, the two actions were consolidated. Among other things, Vigers' claim for commission in HCA5173/1998 was ordered to stand as its counterclaim in HCA9036/1998 and Junsa's counterclaim in HCA5173/1998 was struck out.

9. On 15 October 2001, Junsa commenced HCA4486/2001 for damages against K.B. Chau & Co., alleging that Junsa and Appearance jointly retained K.B. Chau & Co. to prepare the Agreement and that the latter was negligent in the preparation of the same, having failed, among other things, to make property inquiry into the user of the Property and advised Junsa accordingly. In its defence, K.B. Chau & Co. denied, among other things, that they acted for Junsa or that it owed any duty of care to Junsa. On 12 June 2002, this action was ordered to be tried at the same time with the consolidated action.

10. Further, pursuant to the order of Master Lung dated 17 July 2002, Vigers and Mr Fong joined K.B. Chau & Co. as a third party in the consolidated action, alleging that any loss suffered by Junsa was caused by negligence on its part.

Applications for security for costs

11. By summonses dated 5 September 2002, 14 September 2002 and 3 October 2002, Appearance, Vigers and Mr Fong (defendants in HCA9036/2002) and K.B. Chau & Co. (defendant in HCA4486/2002) applied for security for costs against Junsa under section 357 of the Companies Ordinance, Cap.32 and Order 23 rule 1 of the Rules of the High Court. The applications were heard by Master Woolley. On 14 January 2003, the learned master ordered Junsa to provide security for costs to (1) Appearance in the sum of HK$850,000; (2) Vigers and Mr Fong in the sum of HK$ 1 million; and (3) K.B. Chau & Co. in the sum of HK$700,000. Apparently, the security for costs is up to and including trial.

12. Dissatisfied, Junsa now appeals.

The Law

13. It is, I believe, convenient to first summarize the general principles applicable to applications of this sort.

14. Section 357 of the Companies Ordinance provides :

"Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

15. The prerequisite of applying section 357 is that there is reason to believe that the company concerned will be unable to pay the costs of the defendant if successful in his defence. Once that is established, the court has a complete discretion whether or not to order security. The relevant principles as to how the court should exercise that discretion had been summarized in Keary Developments Ltd v. Tarmac Construction Ltd [1995] 3 All ER 535 by Peter Gibson J at pp.539h-540j and adopted by the Court of Appeal in Wing Hing Provision, Wine & Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd [1998] 4 HKC 461 at 464A-F. They are :

(1) The court has a complete discretion to order security, and accordingly it will act in the light of all the relevant circumstances.

(2) The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.

(3) The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

(4) In considering all the circumstances, the court will have regard to the plaintiff's prospect of success. But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.

(5) The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.

(6) Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence. The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.

16. With these principles in mind, I turn to consider whether security for costs should be ordered against Junsa.

Whether to order security

17. It is not in dispute that Junsa will be unable to pay the defendants costs if successful in their defence. It is a shell company acquired for the sole purpose of entering into the Agreement. Indeed, it has not carried on any business other than entering into the Agreement. It has a limited share capital of HK$9,000 contributed by nine different shareholders equally. It has no other assets. It does not have a place of business and its registered office is that of its company secretary, which is an accountancy firm. The prerequisite is thus satisfied.

18. Opposing the application for security, Mr Chong, counsel for Junsa, first submitted that Junsa has a good prospect of success against the defendants. I do not propose to go into the merits of the plaintiff's claims in detail because in my view, it cannot be demonstrated that there is a high degree of probability of success or failure. In light of nature of the plaintiff's allegations, much if not all of the factual controversy can only be determined after trial. Accordingly, I will not deal with Mr Chong's submissions in this respect.

19. Mr Chong next submitted that the plaintiff's impecuniosity is caused by the defendants. According to Mr Ng's first affirmation filed on 8 October 2002, all payments made by Junsa in connection with the transaction in question totaling some HK$1.9 million were made from monies advanced by him. He himself is a sauna operator. The recent economic recession had an adverse impact on his business and he had been unable to pay the security for costs claimed. In his second affirmation filed on 19 March 2003, Mr Ng had this to say :

"3. As was stated in my said affirmation, all these payments were made by me on behalf of the company. The other eight shareholders did not intend to take an active part in the proposed business. Obviously once the premises was acquired, further funds would be needed to fit out the premises and it was intended that this would be done by way of shareholders advances. It is the Plaintiff's case that the money that I advanced was totally wasted as a result of the acts and defaults of the Defendants is that because of planning restrictions the Plaintiff was unable to operate a sauna business.

4. I was informed by my solicitors that on the hearing of the Defendants' application for security for costs, HK$2,550,000.00 was ordered to be paid by the Plaintiff and that all proceedings were stayed pending the provision of such security.

5. After my solicitors had informed me of the outcome of the hearing, I called for a shareholders meeting. As I have stated there are nine shareholders in the Plaintiff. They are Chan Leung Huen, Chow Poo Yuen, Chiu Man Kwong, Shi Wai, Lai Kwong Ting, Tam Wing Sum, Pak Yin Yu, Wong Yip Hin and myself. As the Plaintiff was not able to commence business, the shareholders have not met frequently and I have lost contact with Chan Leung Huen, Chiu Man Kwong, Shi Wai, Tam Wing Sum and Pak Yin Yu. As a result only Chow Poo Yuen, Lai Kwok Ting and Wong Yip Hin attended the meeting on 27 February 2003.

6. The position was that if all the active shareholders contributed their share of the security awarded, each would have to contribute approximately HK$638,000.00. If any of the shareholders failed to contribute his share, the balance would have to be made up by the other shareholders. The moneys claimed in the action was provided by me and, if the action was succeeds, the funds recovered would result in the repayment of the advances made by me. As I have stated, none of these other shareholders have yet to contribute to the operation of the intended business.

7. Not surprisingly none of the other shareholders agreed to contribute towards the sum that the Plaintiff is now ordered to provide by way of security. As I stated in my earlier affirmation, I am unable to provide such a sum from my own resources. I am probably able to obtain loans from my friends of about HK$300,000.00 which is the best I can do but the result of the Order will inevitably be that the action will not proceed."

20. I do not accept that the plaintiff's impecuniosity was caused by the alleged misconduct on the part of the defendants that took place nearly six years ago. Its present predicament is caused by (a) the inability of Mr Ng to raise further funds because he was hard hit by the recent economic downturn and (b) the unwillingness of other shareholders to make any financial contributions. This brings me to Mr Chong's third submission.

21. Mr Chong submitted that the orders for security in the total sum of some HK$2.5 million would have the unjust effect of stifling the plaintiff's claims. In this connection, I should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. While apparently Junsa is unable to provide security out of its own resources, it has to prove that funds cannot be obtained from its backers, otherwise the suggestion of potential injustice will not be demonstrated : Flender Werft AG v. Aegean Maritime Ltd [1990] 2 Lloyd's Rep 27, per Saville J at pp.29-30, Dragges et Travaux Public v. Hong Kong Chinese Insurance Co. Ltd & another [1993] 1 HKC 671.

22. On the materials now before me, there is simply no evidence to suggest that the three shareholders whom Mr Ng met at the meeting referred to in his second affirmation do not have the ability to provide security. For reasons of their own, they are willing to fund Junsa in its business operations but not the present litigations. In short, as rightly observed by Mr Fung, counsel for Appearance, "they are willing to pay good money to go after good money but not good money after the bad". That is not a ground of opposing an order for security for costs: cf. Flender Werft AG v. Aegean Maritime Ltd [1990] 2 Lloyd's Rep 27, per Saville J at p.30. See also Esquire (Electronics) Ltd v. HSBC, HCA11077/1994, unreported, where Waung J said at para.10 that unwillingness on the part of a person who is able but refuses to provide security is not an answer to an application for security. In my view, Mr Chong's third submission must fail.

23. Mr Chong then took the point that K.B. Chau is a third party to HCA9036/1998. The factual disputes pertaining to K.B. Chau & Co. in that action and HCA4486/2001 are just the same. It is therefore wrong to order security for costs in favour of K.B. Chau & Co. I am unable to accept this submission. The factual disputes may well be the same. But in HCA9036/1998, K.B. Chau & Co.'s liability towards Vigers and Mr Fong would not arise if the Junsa's claims against them fail. In HCA5173/1998, K.B. Chau & Co.'s liability is independent of any allegations of misrepresentation raised by Junsa against the other parties. As a defendant in that action, K.B. Chau & Co. is entitled to apply for security for costs against Junsa.

24. Mr Chong finally submitted that in HCA5173/1998, the matters relating to the defence advanced by Junsa in defending Vigers' claim is just the same as those relied on by Junsa in supporting its claims for damages against Vigers in HCA9036/1998. Pursuant to the order of Master Lung dated 21 September 1998, Vigers' claim now stands as its counterclaim in HCA9036/1998. In the circumstances, it would be wrong to order Junsa to provide security for costs in favour of Vigers for its counterclaim. Again, I am unable to accept this submission. The mere fact that Vigers has a counterclaim which is based on its defence to Junsa's claim is not a valid ground of opposing the application for security. Vigers is facing a substantial claim in HCA9036/1998. It can certainly ask for security for its costs for defending the action.

25. The security, as I understand it, is up to and including trial. Mr Chong has not made any substantial submissions on the quantum of the security. In any event, I do not consider the figures unreasonable in the circumstances.

Conclusion

26. For the above reasons, I will dismiss Junsa's appeals and order it to pay the costs of the appeals to the respective respondent, to be taxed if not agreed.

Representation:

Mr K. M. Chong, instructed by Messrs Tang, Wong & Cheung, for the Plaintiff in HCA9036/1998 and the Defendant in HCA5173/1998 and the Plaintiff in HCA4486/2001

Mr Alfred K.C. Fung, instructed by Messrs Leung Chan & Pang, for the 1st Defendant in HCA9036/1998

Ms D. Chu, of Messrs Skrine Thomas Sharrock, for the 2nd and 3rd Defendant in HCA9036/1998 and the Plaintiff in HCA5173/1998

Mr Eugene Fung, instructed by Messrs Baker & McKenzie, for the Defendant in HCA4486/2001