Holdwin Ltd v. Prince Jewellery and Watch Co Ltd (Formerly Known As Success Light Investments Ltd

HCA 718/2020 &
HCA 414/2021

[2021] HKCFI 2735

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 718 OF 2020

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 414 OF 2021

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(Heard Together)

Before:  Deputy High Court Judge William Wong SC in Chambers

Date of Hearing: 29 June 2021

Date of Decision: 20 September 2021

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DECISION

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A. INTRODUCTION

1.There are two applications before this Court which were ordered to be heard together pursuant to the directions made by Deputy High Court Judge Winnie Tsui on 26 May 2021:-

(1)   First, by notice of appeal dated 8 March 2021, the Defendant appeals against the decision of Master Norman Nip on 22 February 2021 granting summary judgment in favour of the Plaintiff in HCA 718/2020 (the “Appeal”); and

(2)   Secondly, by way of Summons dated 8 April 2021, the Plaintiff applies for summary judgment against the Defendant in HCA 414/2021 (the “Summons”).

B.   BACKGROUND

2.The Plaintiff, qua landlord, leased to the Defendant, qua as tenant,  a 3-floor shop premises^[1] located in the “Bo Yip” Building in Tsim Sha Tsui (the “Premises”). Shortly after the outbreak of the Covid-19 pandemic in Hong Kong, the Defendant began to default on its payment obligations to the Plaintiff.

3.The Defendant is a chain retailer in luxury watches, jewellery and other high-end products. It and its affiliates operate more than 21 retail branches in Hong Kong, including more than 6 shops in Tsim Sha Tsui.

4.On 20 March 2012, the Plaintiff and the Defendant entered into a written lease for a fixed term of 6 years from 1 June 2012 to 31 May 2018 (the “Lease”). The Lease was subsequently extended by a letter of renewal dated 18 August 2015 for a fixed term of 3 years from 1 June 2018 to 31 May 2021 at a monthly rent of $3,120,000 (“the Letter of Renewal”).

5.Since August 2019, the Defendant has been periodically asking the Plaintiff to reduce the monthly rent of the Lease by 50% to no avail.

6.In February 2020, the Defendant began to default on its payment obligations to the Defendant under the Lease. 

7.On 20 March 2020, the Defendant issued a letter to the Plaintiff enclosing 2 cheques for a total sum of HK$3,347,965 which were said to represent 50% of the rents for February and March 2020. The Plaintiff maintains that there has been no agreement between the parties to reduce the rent. The payment was subsequently accepted by the Plaintiff to settle various outstanding charges for March 2020.

8.Between April and July 2020, the Defendant made further part payments to the Plaintiff in respect of the outstanding sums due under the Lease.

9.On 19 May 2020, the Plaintiff commenced HCA 718/2020 claiming against the Defendant the outstanding sums owed under the Lease for the period between 1 April and 18 May 2020 which amounted to HK$5,017,061.11.

10.On 26 June 2020, the Defendant informed the Plaintiff that it would cease business operations in the Premises. The Plaintiff replied on 30 June 2020 indicating that it would not accept repudiation of the Lease and insisted that the Defendant was to comply with its payment obligations until the expiry of the term of the Lease. On 1 July 2020, the Defendant ceased its business in the Premises.

11.On 8 October 2020, the Defendant asked the Plaintiff whether vacant possession could be delivered up so that all payment obligations could be released and discharged.

12.On 28 October 2020, the Plaintiff made an application for summary judgment against the Defendant .

13.On 2 November 2020, the Defendant issued a letter to the Plaintiff enclosing the keys of the Premises and urged the Plaintiff to accept delivery up of the Premises.

14.By reply letter of 11 November 2020, the Plaintiff refused to accept delivery up of the Premises or repudiation of the Lease, and stated that the Lease was to continue until 31 May 2021. 

15.On 22 February 2021, the Plaintiff’s summary judgment   application was heard before Master Norman Nip. The Master granted summary judgment in favour of the Plaintiff in HCA 718/2020 in the amount of HK$3.371 million together with pre-judgment interest and 50% costs to the Plaintiff to be taxed on an indemnity basis.

16.On 8 March 2021, the Defendant appealed against this decision.

17.On 17 March 2021, the Plaintiff commenced HCA 414/2021 claiming outstanding rent and other expenses due from 19 May 2020 to 16 March 2021 in the amount of HK$33,285,021.50 and interest thereon. 

18.On 8 April 2021, the Plaintiff took out the present application for summary judgment in HCA 414/2021.

19.The Plaintiff now claims against the Defendant the total amount of HK$34,401,340.35 (inclusive of interest accrued up to 17 March 2021) and further interest thereon up to 28 June 2021.

20.The Defendant disputes that the sums are owed to the Plaintiff. The Defendant’s case is that the Covid-19 pandemic was a frustrating event that had the effect of discharging the lease agreement, or alternatively, it relies on the operation of a force majeure clause to suspend or cease its obligations under the agreement. The Defendant also contends that the Plaintiff was not entitled to affirm the contract and sue on a debt action.

C.   ISSUES

21.The Court is asked to determine whether the Defendant has raised an arguable defence on the following issues:- 

(1)   Whether the Lease may be discharged by frustration as a result of the Covid-19 pandemic (the “Frustration Issue”)?

(2)   whether Section VIII of the Lease, i.e., the Abatement of Rent and Development Clause, applies as a force majeure clause in the event of the Covid-19 pandemic to suspend or cease the Defendant’s obligations under the Lease (the “Force Majeure Issue”)?

(3)   whether the Plaintiff was entitled to claim for the sums owed under the Lease in an action in debt (the “Proper Remedy Issue”)?

D.     APPLICABLE LEGAL PRINCIPLES ON SUMMARY JUDGMENT

22.The principles on summary judgment are well established and not in dispute. The burden is on the Defendant to show that there are triable issues.  It has to satisfy the Court that it has a real or bona fide defence. Unless a difficult question of law is raised, the Court may determine points of law under the summary judgment procedure. See Hong Kong Civil Procedure 2021 §14/4/9 and 12.

E.   ANALYSIS

E1     FRUSTRATION ISSUE

23.As a general rule, a contract may be discharged on the ground of frustration when something occurs after the formation of the contract which (1) renders it physically or commercially impossible to fulfil the contract or (2) transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract: Chitty on Contracts, 33^rd ed. (2018), Vo1.1, at §23-001. 

24.It is common ground between the parties that the common law doctrine of frustration applies to leases. This has been the position since the leading case of National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 and is now well established law in Hong Kong. Counsel for the Plaintiff and the Defendant both extensively relied on National Carriers in which the relevant test was stated by Lord Simon of Glaisdale as follows:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.” (at 700F) [emphasis added ].

25.A more recent formulation of the doctrine of frustration was given by Rix LJ in Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The Sea Angel) [2007] 1 CLC at [111] in which he said that the application of the doctrine of frustration requires a “multifactorial approach”.  As to the applicable test for frustration, relevant factors include:-  

(1)   the terms of the contract and its context;

(2)   the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract at any rate so far as these can be ascribed mutually and objectively;

(3)   the nature of the supervening event; and

(4)   the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.

26.He then went on to say at [111]-[112] that:-

“…Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as ‘the contemplation of the parties’, the application of the doctrine can often be a difficult one. In such circumstances, the test of ‘radically different’ is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.

What the ‘radically different’ test, however, does not in itself tell us is that the doctrine is one of justice, as has been repeatedly affirmed on the highest authority. Ultimately the application of the test cannot safely be performed without the consequences of the decision, one way or the other, being measured against the demands of justice. Part of that calculation is the consideration that the frustration of a contract may well mean that the contractual allocation of risk is reversed. … If the provisions of a contract in their literal sense are to make way for the absolving effect of frustration, then that must, in my judgment, be in the interests of justice and not against those interests. Since the purpose of the doctrine is to do justice, then its application cannot be divorced from considerations of justice. Those considerations are among the most important of the factors which a tribunal has to bear in mind…”.

[emphasis added ].

27.What is in dispute in the present case is whether in the particular circumstances of the Lease the Covid-19 pandemic constitutes such a frustrating event to bring the Lease to an end. The Defendant’s position is that the Covid-19 pandemic led to a significant drop in the number of tourists and overseas visitors in Hong Kong, which in turn caused the Defendant’s business in the Premises to suffer financially.

28.The courts have in a number of recent cases held that the Covid-19 pandemic does not constitute a frustrating event. See e.g.:-

(1)   The Centre (76) Ltd v Victory Serviced Office (HK) Ltd [2020] HKCFI 2991. This case concerned a tenancy agreement which was said to have been, amongst other things, frustrated in light of the social disruption and Covid-19 pandemic.

Despite the fact that the tenant leased the premises for the purpose of operating a flexible workspace business for renting to customers, the Court noted that there was no change in the nature of the tenant’s obligations, which was to observe the covenants, terms and conditions of the tenancy agreement. Even though the social disruption and the Covid-19 pandemic rendered the tenant’s business operation more onerous and unprofitable, the Court held that would not amount to frustration. Frustration was not to be lightly invoked to relieve contracting parties of the normal consequences of imprudent commercial bargain or commercial risk. This makes perfect sense.

Sunbroad Holdings Ltd v A80 Paris HK Ltd [2021] HKCFI 1422.  In this case, the tenant had leased premises for the operation of a retail shop to sell beauty equipment and hair products.  The tenant sought to discharge the tenancy agreement on the ground of frustration as a result of social unrest and the Covid-19 pandemic. The Court held that these events did not fundamentally change the nature of the outstanding contractual rights and/or obligations from what the parties reasonably contemplated at the time of the execution of the tenancy agreement.  In any event, the Court stated that even if the tenant’s business was subject to a mandatory closure order (which it was not), the tenant in that case would not be prevented from operating such business for a significant portion of the remainder of the lease term.

(2)   In the English case Salam Air SAOC v Latam Airlines Group SA [2020] EWHC 2414 (Comm), an injunction was sought by a lessee of aircraft to restrain the lessor from making a demand under standby letters of credit against it. The court was seized with the question of whether the impact of Covid-19 pandemic, i.e., the regulations issued by the Public Authority for Civil Aviation which severely restricted air travel, was a frustrating event.

Upon reviewing the terms of the contract, Mr Justice Foxton found that the lessee’s case on frustration was weak as it was clear from the terms in which the contract was drafted that the obligation to pay rent and the attendant risk fell on the lessee.  He noted that:

“… While I accept that the terms of the contract in issue are not necessarily determinative of the issue of frustration, the nature of the contract and its terms are of obvious relevance when considering whether the contract has been frustrated by a particular event and how particular risks have been allocated.”

[emphasis added ].

29.Whilst the above cases may serve as a useful reference point, Mr Chan for the Defendant rightly submitted that whether there has been a frustrating event must turn on the specific facts of the case.

30.However, on the facts of the present case, I am unable to find that the Covid-19 pandemic constitutes a frustrating event.

31.The starting point must be to look at the nature and express terms of the parties’ contract. These are, in this case, substantially set out in the Lease (and Letter of Renewal).

32.It is important to bear in mind that the form of contract which the Defendant seeks to discharge on the ground of frustration is a lease agreement. The court has previously noted that the circumstances in which the doctrine of frustration would apply to a lease are “extremely rare”: National Carriers (supra) at p.689A per Lord Hailsham of St. Marlebone.

33.The nature and object of the Lease were essentially for the limited purpose of letting and taking of the Premises. It was not a joint venture or commercial enterprise in which the parties had agreed on shared purposes for the profitable operation of the Defendant’s business at the Premises. Subject to certain restrictions in the Lease, the Defendant’s use of the Premises as a tenant (and from which it carried on its business) was a matter with which the Defendant was alone concerned.

34.Further, contrary to Mr Chan’s submissions, there is nothing particularly unusual about the terms of the Lease and the parties’ rights and obligations contained therein. The salient terms are set out below:-

(1)   The Lease was a fixed term commercial lease for 6 years (and extended for 3 years).

(2)   The Plaintiff’s obligations under the Lease were limited to those typically given by a landlord for the tenant’s proper use and enjoyment of the property (e.g., quiet enjoyment, keeping the Premises in proper condition, maintenance, etc).

(3)   The Defendant’s payment obligations under the Lease, included the payment of monthly rent at an agreed sum and other outgoing expenses and charges.  These obligations were not conditional on the Defendant’s business performance, sales turnover or use (let alone profitable use) of the Premises. On the contrary, the Defendant agreed to pay rent “without any deduction and not to exercise any right or claim to withhold rent or other claim to set off (whether legal or equitable whatsoever).”

(4)   The Defendant agreed not to use the Premises for any purpose other than the Defendant’s own business for selling jewellery, watches and such other similar luxury products. In the absence of prior written consent of the Plaintiff, the Defendant was not to sell any type of items or provide services other than the said business.

(5)   Notably, the parties expressly covenanted that the Plaintiff did not “warrant that the Premises are fit for any particular purpose” [emphasis added ].

(6)   The Defendant agreed to keep the Premises open for business furnishing high class service to patrons and customers at all times of the year within normal business hours and other time during which the Defendant reasonably required closure of the Premises.

(7)   The Defendant was entitled to sublet a considerable part of the Premises to any associated or subsidiary company that was majority-owned by the Defendant or the Defendant’s major shareholder with the prior written consent of the Plaintiff (such consent not to be unreasonably withheld or delayed) and the existing mortgagee. The sub-lessee was to only engage in trading of high-class imported wine or other rental business, or high-end western style food and beverage operations.

35.From the above terms, I note that:

(1)   The parties’ respective rights and obligations were similar to those typically found in standard commercial tenancy agreements.

(2)   Such rights and obligations under the Lease and the performance thereof were not predicated on the success (or failure) of the Defendant’s business nor the profitable use of the Premises by the Defendant.

(3)   The Defendant has not indicated how the Covid-19 pandemic has specifically altered any of the parties’ rights and obligations under the Lease as contemplated at the time of the execution of the Lease.

(4)   What aggrieves the Defendant is more of a general complaint that the pandemic – or more precisely, its economic effect as reflected in the decrease in the number of tourists and overseas visitors in Hong Kong – is said to have made the Defendant’s business at the Premises financially untenable. This is a common problem faced by retailers in Hong Kong during the Covid-19 pandemic.

(5)   However, one has to recognise that ensuring the financial viability of the Defendant’s business was not the purpose of the Lease nor could it be reasonably suggested that was what the parties had contemplated at the time of entering the Lease. Unless such purpose constituted a part of the parties’ contractual arrangement, that surely cannot be the case otherwise any supervening event which might materially impair the Defendant’s business could be a frustrating event (e.g., global events which threaten supply chains, cross-border travel, economic crises, etc to think of a few). It is therefore a non sequitur to say that the pandemic significantly changed the nature of the Lease or the parties’ rights and obligations.

(6)   Moreover, the Defendant was not prevented from using the Premises or operating its business at the Premises. The Defendant suffered a relatively kinder fate than those businesses in Hong Kong which have been subject to mandatory closure orders. Indeed, what transpired was the very opposite of that. After the outbreak of the Covid-19 pandemic in late January 2020, the Defendant continued to use and operate its business out of the Premises. The Defendant continued doing so for a considerable amount of time after the outbreak of the pandemic. Clearly the pandemic did not prevent the Defendant from using or carrying on its business at the Premises as was envisaged under the Lease. The Defendant and the Plaintiff were both capable of performing their respective obligations under the Lease. Whilst it is true that the Defendant’s turnover had dropped significantly and unfortunately so, it is, in my view, difficult to say that either the rights and obligations, or the identity of the Lease, had become radically different as a result of the Covid-19 pandemic.

(7)   Even if one were to assume that the nature and purpose of the Lease was that as alleged by the Defendant, the Defendant’s argument would still fail. It is not the Defendant’s position that no revenue was generated from its business at the Premises during the pandemic, only that it was said to be less or not profitable.

(8)   Further, as per the terms of the Lease, the Defendant was not restricted to selling jewellery, watches and other similar luxury products in the Premises, provided it obtained the prior written consent of the Plaintiff. The Defendant could have also explored sub-letting part of the Premises. There is no suggestion that the Defendant took any such steps or explored alternative means of operating its business in the Premises. In this regard, it has been held that frustration only availed a party who had no alternatives to performing a contract; where there are alternative means to perform the contract and the defendant elected not to do so, frustration could not be relied on as a defence: J. Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 at pp. 9, 10, 13 and 14 per Bingham LJ and Dillon LJ.

(9)   As held in National Carriers and repeatedly emphasized in subsequent cases, it would not amount to frustration simply because the Defendant’s business operations became more onerous and/or unprofitable.

36.Perhaps recognising the fatal flaw in the Defendant’s position, Mr Chan submitted that the Lease was a “special lease”. He argued that the Lease contained “key and overarching provisions reflective of the deep, intertwined and interdependent collaborations between P (with P taking on an active and supervisory role) and D in the latter’s use of the Shop Premises”.

37.I am not persuaded by this argument.

38.As explained above, the Lease’s express terms did not have the effect as alleged by the Defendant.

39.Moreover, it is not the Defendant’s case that there existed any collateral agreement or arrangement between the parties outside of the Lease in this regard, nor is there any evidence of the same.

40.Similarly, there is no evidence at all to substantiate the Defendant’s claim that a “special lease” was what the parties had contemplated at the time the Lease was executed, nor that the parties had intended to re-allocate the Defendant’s own business risk such that the risk was to be borne by or shared with the Plaintiff.

41.Despite Mr Chan’s valiant attempt to characterise the agreement contemplated under the Lease as something more, that is manifestly not the case here.

42.In any event, the Defendant’s conduct during the relevant period has been inconsistent with its claims of frustration and would cast serious doubt on the bona fides of its defence:-

(1)   as noted above already, the Defendant continued to use and carry on business in the Premises up until July 2020, after the outbreak of the pandemic (and indeed during a few months of relatively few Covid-19 cases in Hong Kong);

(2)   significantly, the Defendant did and continues to carry on business in its stores at various other locations in Tsim Sha Tsui. The Defendant is said to have been granted rent reduction at some of its other shop locations. However, the Court has not been informed of the extent of the rent reduction; and

(3)   the Defendant offered to the Plaintiff that it would perform its obligations under the Lease on the basis of a 50% reduction in rent.

43.I have further considered this matter through the prism and according to the dictates of justice.  In light of the analysis above, I do not think a different decision would be warranted in this case.  Although I am deeply sympathetic to the plight of businesses and persons who have suffered financial hardship during the pandemic, I am not persuaded that it would be just to relieve the Defendant of the consequences of its bargain in any event. As a sophisticated and substantial business, the Defendant has assumed the risk of entering into the Lease and operating a business at the Premises; in proceeding with that business decision, the vicissitudes of economic fortune must have been an event that the Defendant, as a commercial entity, has to face.

44.The Defendant’s defence of frustration must accordingly fail.

E2     FORCE MAJEURE ISSUE

45.As an alternative defence, the Defendant seeks to rely on the operation of a force majeure clause in the Lease, which is said to have been triggered by the Covid-19 pandemic, and therefore the Defendant claims it was not obligated to make rent payments under the Lease or that it validly put an end to the Lease.

46.The parties are agreed that Section VIII of the Lease, i.e., the Abatement of Rent and Development Clause (the “Rent Abatement Clause”), is a force majeure clause.

47.The parties are also agreed that it is a question of construction of the Rent Abatement Clause as to whether the operative events have occurred that would effect the consequences in such clause.

48.As to the proper approach of construing a force majeure clause, Mr Chan for the Defendant relies on Goldlion Properties Ltd v Regent National Enterprises Ltd (2009) 12 HKCFAR 512 where Bokhary and Chan PJJ stated that:

“…Like any other contractual provision, a force majeure clause is to be given a fair reading in its factual matrix. Of course since contracts are made to be performed, clauses invoked to remove or modify obligations of performance ought at least in general to receive a strict construction. Such a construction means that any ambiguity would be resolved against the party seeking to rely on the clause. But that is not to say that such clauses, made within the freedom of contract, are to be viewed with hostility. It is not for the courts to encourage or discourage such clauses…”

[emphasis added ].

49.The effect of a force majeure clause depends in each case on the specific words used. This is a specific factual inquiry that would define the precise scope and ambit of the clause: see e.g., Treitel, Frustration and Force Majeure, 3^rd ed., at §12-026; also see RDC Concrete Pte Ltd v Sato Kogyo (S) Pty Ltd [2007] 4 SLRIR) 413 at [54] per Andrew Phang JA.

50.The Rent Abatement Clause is reproduced in full below:-

“Suspension of Rent in Case of Fire Etc.

If the Premises or the Building or any part thereof shall at any time during the Lease be destroyed or damaged or become inaccessible owing to the fire water storm typhoon defective construction white ants earthquake subsidence of the ground or any calamity or causes beyond the control of the Lessor so as to render the Premises unfit for commercial use or inaccessible (not attributable to any act or default of the Lessee) or if any time during the continuance of this Lease the Premises or the Building shall be condemned as a dangerous structure or a demolition order or closing order shall become operative in respect of the Premises or the Building then the rent hereby reserved or a fair proportion thereof according to the nature and extent of the damage sustained or order made shall be suspended until the Premises or Building shall again be rendered accessible and fit for commercial use Provided that should the Premises or the Building not have been reinstated within two months from the occurrence of such destruction or damage order either the Lessor or the Lessee may at any time before the same are so required and reinstated give to the other of them one month's notice in writing to determine this Lease and upon the expiration of the said notice everything herein contained shall cease and be void without prejudice to the rights and remedies of either party against the other in respect of any antecedent claim or breach of the agreements stipulations terms and conditions herein contained or of the Lessor in respect of the rent and other charges payable hereunder prior to the coming into effect of the suspension. Nothing in this Section shall be construed as requiring the Lessor to repair or reinstate the Premises if in its opinion it is not reasonably economical or practicable so to do."

[emphasis added ].

51.On a proper construction of the Clause, I am not persuaded that the Covid-19 pandemic falls within the scope of the Rent Abatement Clause. In my view, the operation of the Rent Abatement Clause is premised upon physical damage to the Premises (or the Building containing the Premises). This is apparent from the ordinary and natural meaning of the words used in the clause and when construing the clause in its entirety:-

(1)   the clause is entitled “Abatement of Rent and Development”;

(2)   the clause is further described in a sub-heading as “Suspension of Rent in Case of Fire etc”;

(3)   the clause begins with the words “if the Premise or the Building…shall at any time during the Lease be destroyed or damaged or become inaccessible…” [emphasis added ]. The Rent Abatement Clause is therefore only applicable in these circumstances;

(4)   the specific words used in the Rent Abatement Clause that would constitute operative events of force majeure all relate to the physical destruction of or damage to the property, the condemning of the Premises as a dangerous building, or the existence of a demolition order or a closing order;

(5)   the Rent Abatement Clause makes provision for either party to cease the Lease in the event that the Premises have not been “reinstated within two months from the occurrence of such destruction or damage” [emphasis added ]; and

(6)   there is a reservation at the end which provides that the Plaintiff is not required to “repair or reinstate” the Premises if it is not reasonably economical or practicable to do so.

52.Mr Chan submitted that the Covid-19 pandemic is caught by the words “or any calamity or causes beyond the control of the Lessor”.  I disagree.  It is common ground between the parties that a force majeure clause must be construed strictly.  That is the starting point.  As explained above, the Rent Abatement Clause is concerned with physical effects and damage to the Premises. The words “calamity” or “causes” must be construed in the context of that clause and with reference to other words in the sentence.  If it were otherwise, these words could be stretched beyond meaning and would encompass any variation of misfortune and undesirable events that might threaten the accessibility of the Premises.

53.In the present case, the Covid-19 pandemic, being a disease, did not result in the destruction or damage to Premises or the Building (or any parts thereof).  The Premises was also not rendered inaccessible during the relevant period (see §57 below).  The pandemic is therefore not a “calamity” or “cause” for the purposes of the Rent Abatement Clause.

54.In the circumstances, I am unable to accept Mr Chan’s submission that the Covid-19 pandemic falls within the scope of the Rent Abatement Clause.

55.If I am wrong on this analysis, I would still consider the Rent Abatement Clause to be inapplicable. The Rent Abatement Clause only becomes operative if the Premises are rendered “unfit for commercial use or inaccessible”.

56.Neither condition is satisfied in the present case.  At the material times, Hong Kong was not under lockdown nor were the Premises subject to any mandatory closure order.  The Premises remained in use and was fully accessible to customers and patrons (including even tourists and overseas visitors who were willing to undergo the requisite quarantine in Hong Kong). See e.g., The Centre (76) (supra) at [41].

57.As to whether the Premises were fit for commercial use, it should be clear from the discussion on the Frustration Issue that the Premises remained fit for commercial use.  Without repeating those points in detail, a quick summary would suffice:-

(1)   it is not suggested by the Defendant that the Lease could not have any commercial use because of the pandemic. Indeed the Defendant continued to carry on business out of the Premises until July 2020;

(2)   to the extent that the Defendant is complaining it could not use the Lease for a particular purpose, i.e., selling jewellery and other luxury items specifically to tourists and overseas visitors, this argument is clearly without any merit. The terms of the Lease expressly provide that the Plaintiff does not warrant the Premises are fit for any particular purpose . The availability of tourists and overseas visitors in Hong Kong is wholly irrelevant to the question of whether or not the Premises was fit for commercial use in this case; and

(3)   it was also open to the Defendant to seek approval from the Plaintiff to use the Premises for other commercial purposes, or sublet parts of the Premises and yet it failed to take any such steps.

58.I therefore find that the Defendant has not raised any credible or arguable defence in respect of the Rent Abatement Clause.

E3     PROPER REMEDY ISSUE

59.It is the Defendant’s case that the Plaintiff is not, in any event, entitled to affirm the Lease upon the Defendant’s repudiation and sue on the debt owed under the Lease. The Defendant maintains that an action lies only in damages which means the Plaintiff would be subject to the duty of mitigation, amongst others.  I disagree.

60.The applicable principles in respect of affirming a contract and suing for sums agreed thereunder are as follows:-

(1)   Upon a repudiation of the contract, the innocent party may elect to affirm the contract and hold the other party to the contract.  In such circumstances, and subject to certain restrictions, the innocent party may claim for the agreed sums owed to it under the contract in an action in debt, rather than sue for damages: Chitty (supra) at §§27-002 and 27-005 to 27-010.

(2)   The restrictions are: if the innocent party (1) requires the other party’s cooperation to perform; or (2) has no “legitimate interest, financial or otherwise, in performing the contact, rather than claiming damages” in which case the Court would decline to grant the remedy of an agreed sum: see White & Carter v McGregor [1962] AC 413 at p.431 per Lord Reid; also see Geys v Societe Générale, London Branch [2012] UKSC 63 at [86] per Lord Wilson. It now appears to be settled law that these restrictions do not apply to a party’s general right to affirm a contract, only the remedy available to a party (see Geys above, supra).

(3)   The cases in which the court will not allow the innocent party to enforce his full contractual right to maintain the contract in force and sue for the contract price are said to be “very limited”.  The characteristics of such cases are that an election to keep the contract alive would be “wholly unreasonable” and that damages would be an adequate remedy, or that the landlord would have no legitimate interest in making such an election: see Reichman v Beveridge [2007] 1 P&CR 20 at [17] and [40] per Lloyd LJ.

(4)   In the context of a lease agreement, the landlord’s position cannot be described as wholly unreasonable if it decided that the defaulting tenant should bear the burden of finding a solution, in circumstances in which the lease allows the tenant to do so, with an obligation on the landlord not unreasonably to refuse consent to such a proposal: Reichman (supra) at [31];

(5)   In this regard, the burden of proof is on the contract breaker and it is not discharged merely by showing that the benefit to the innocent party is small compared to the loss to the contract breaker: Reichman (supra) at [41]; Chitty (supra) at §27-008.

61.Reichman (supra) was followed in the Hong Kong Court of Appeal case Funfair v Wong Lui Wing [2007] 3 HKLRD 609, where it was held at [20] and [27] per Tang V-P (as he then was) that:-

(1)   A lease could not be unilaterally terminated unless expressly provided for. A repudiatory act which was not accepted did not have effect.

(2)   The landlord was entitled to insist on payment of rent by the tenant unless he was seeking to enforce the agreement in wholly unreasonable circumstances.

(3)   The requirement of the other party’s cooperation to perform was inapplicable to rent claims under a lease agreement because an estate was already granted to the tenant at the commencement of the tenancy. The tenant had exclusive possession until the end of the lease and the landlord had no further corresponding duties.

62.Further, it is well established that an action in debt or for an agreed sum is not subject to the duty of mitigation: see Jervis v Harris [1996] Ch 195 at p.202G-H per Millet LJ (as he then was); and Strong Offer Investment Ltd v Nyeu Ting Chuang (2007) 10 HKCFAR 529 at [46]-[47] per Chan PJ. This principle applies also to leases: see Reichman (supra); also see: Emmet & Farrand on Title (Release 125, 2021) at §§26.625 – 26.626; and Woodfall on Landlord & Tenant (Release 124, 2021) at §17.315.

63.The Defendant seeks to rely on Sunbroad Holdings at [65]-[73] where the Master found there was a triable issue on whether the landlord ought to have accepted early termination of the tenancy agreement and if there a duty of mitigation on the part of the landlord. But this case does not assist the Defendant. The learned master did not opine on the merits and explicitly stated that he did not have the benefit of the parties’ detailed submissions on the issue. The authorities and principles described above were not properly canvassed before the learned Master. Accordingly, I would follow the approach set out above and which I consider to be binding on this Court.

64.Applying these principles, I do not consider that either of the conditions described by Lord Reid in White & Carter are satisfied in this case. On the contrary, I consider that the Plaintiff acted reasonably in affirming the Lease in the circumstances of this case.

65.First, insofar as the first condition is concerned, the Lease did not require the Defendant’s cooperation to perform, as explained in Funfair.

66.Secondly, as to whether the Plaintiff had any legitimate interest in performing the contract, or whether it was seeking to enforce the Lease in wholly unreasonable circumstances, the following matters are relevant:-

(1)   The Defendant offered to deliver up the Premises in October 2020 with only 7 months left remaining before the expiry of the Lease.  The Premises was a 3-storey, 13,000 square feet store located in Tsim Sha Tsui.  Mr But for the Plaintiff submitted that it would have been very difficult to secure a replacement tenant for a commercial lease within a limited time span. I agree.

(2)   To the extent any replacement tenant could be found, it was highly unlikely that such tenant would agree to a short lease of 7 months or less, after taking into account the time to identify prospective tenants.

(3)   From the Plaintiff’s perspective, it was likely if not probable that any lease entered into during this period would suffer from depressed or reduced rates given the pandemic and the state of the market. If the Plaintiff proceeded to enter into any tenancy agreement any longer than the remaining term of the Lease, there was a real risk that the Plaintiff might be “locked” into a tenancy agreement at a lower rental rate and potentially suffer loss of future rent. It would appear that the loss of future rent is not recoverable in damages against the Defendant: see Reichman (supra) at [28] and [42]. In such circumstances, damages would not be an adequate remedy for the Plaintiff.

(4)   It would have been reasonable for the Plaintiff to adopt a wait-and-see approach before committing to a lease agreement with a new tenants given the ongoing pandemic. It follows that in such circumstances it was reasonable for the Plaintiff to affirm the Lease and insist on the Defendant making payment of the rent under the Lease. There is a clear legitimate financial interest on the part of the Plaintiff to see that the Lease was performed otherwise the Plaintiff may have suffered financial loss.

(5)   In any event, Mr But for the Plaintiff submitted that the Plaintiff did use its best endeavours to seek a tenant in the meantime and took active steps to do so, including engaging with major estate agents to identify prospective tenants. Apparently no party expressed any interest in leasing the Premises or any part of it.  I consider this to be cogent evidence in support of the reasonableness of the Plaintiff’s conduct.

67.Thirdly, I also note that the Lease expressly provides that outstanding rent and charges were to be recoverable as a debt.

68.In view of the foregoing, I am of the view that the Plaintiff was entitled to affirm the Lease upon the Defendant’s repudiation and bring an action in debt against the Defendant for the outstanding arrears.

F.   DISPOSITION

69.For the reasons stated above, the Defendant has failed to show that it has an arguable or bona fide defence to the Plaintiff’s claim.

70.Accordingly, the Plaintiff is entitled to summary judgment against the Defendant for the amount of HK$34,401,340.35 (inclusive of interest up to 17 March 2021) and further interest from 18 March 2021 to the date hereof, and thereafter at judgment rate until payment.  The parties are to agree on the interest up to the date of the judgment failing which the parties are directed to write to this Court for further directions.

71.The Defendant’s appeal against Master Norman Nip’s decision is also dismissed.

72.In view of Clause 38 of Section III of the Lease, I make an order that the Defendant shall pay the Plaintiff’s costs of the Appeal and the Summons on an indemnity basis to be summarily assessed.

G.     SUMMARYASSESSMENT OF COSTS

73.On quantum, I summarily assess the Plaintiff’s costs on an indemnity basis as follows:

(1)   in the Appeal (HCA 718/2020): HK$545,000; and

(2)   in the Summons (HCA 414/2021): HK$265,000.

74.Finally, it remains for me to thank Mr But for the Plaintiff and Mr Chan for the Defendant for their helpful assistance to this Court.

Mr Adrian But, instructed by Sidley Lee & Co for the plaintiff

Mr Frederick Chan, instructed by Nixon Peabody CWL for the defendant