Daily Tech Hongkong Co Ltd v. Iadvantage Limited

HCA 1415/2022

[2023] HKCFI 891

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1415 OF 2022

____________________

____________________

____________________

D E C I S I O N

____________________

Introduction

1.I have before me:

(1)  the summons of Daily-Tech HongKong Co. Limited (“DTHK”) dated 25 October 2022 for an interlocutory injunction against iAdvantage Limited (“D”) (“Injunction Summons”);

(2)  D’s summons dated 17 February 2023;

(a)  To strike out DTHK’s statement of claim; and

(b)  For summary judgment on D’s counterclaim (“the Strike-Out Summons”);

(3)  DTHK’s summons dated 8 March 2023 to adduce a 3^rd affirmation of Mr Yang (“the Yang 3 Summons”).

2.D submitted that it would only seek directions on the Strike-Out Summons, and the parties agreed to make submissions as to the appropriate directions immediately after receiving judgment on the Injunction Summons.

3.The Yang 3 Summons was not pursued at the hearing. This was because DTHK sought instead to rely on an email produced at the hearing from Industrial Bank Co Ltd dated 14 March 2023 (“the IB E-mail”). Mr Man SC on behalf of D agreed that the IB E-mail could be admitted de bene esse.

4.By the Injunction Summons, DTHK seeks an order that D be restrained from, inter alia, acting upon its termination notice dated 12 October 2022 in respect of a service agreement between the parties.

5.The evidence filed in respect of the Injunction Summons consists of:

(1)  1^st affirmation of Yang Guang dated 26 October 2022 (“Yang 1^st”)

(2)  1^st affirmation of Chan Man-Yuen Martin dated 9 December 2022 (“Chan 1^st”)

(3)  2^nd affirmation of Yang Guang dated 30 January 2023 (“Yang 2^nd”)

(4)  2^nd affirmation of Chan Man-Yuen Martin dated 9 February 2023 (“Chan 2^nd”)

(5)  Further, de bene esse, is the IB E-mail.

Material Facts

6.DTHK is a limited company incorporated in Hong Kong. It engages in the business of internet data centre (“IDC”) operations and is a service provider of internet infrastructure solutions. It is wholly owned by Daily-Tech Beijing Co., Limited (北京德利迅達科技有限公司) (“DTBJ”), a company incorporated in Beijing which also engages in the same line of business.

7.As providers of IDC and other value-added services, DTHK and DTBJ provide integrated services in, inter alia, server rooms, server hosting and maintenance, data storage and security, network connectivity and content distribution.

8.D is a limited company incorporated in Hong Kong. D operates a data storage centre at No.8 Wong Chuk Yeung Street, Fo Tan, Shatin, New Territories, Hong Kong (“the Data Centre”).

9.D primarily operates its business by providing data centre facilities and services within the Data Centre to its customers in return for payment of service fees and other charges. Its services range from power supply services to the provision of cooling systems and facilities monitoring services.

10.On or around 31 October 2015, DTHK, D and DTBJ (as guarantor) entered into a service agreement, pursuant to which D agreed to grant DTHK the right to use certain parts of the 4^th and 11^th Floors of the Data Centre operated by D (collectively, the “Licensed Area”) and supply to it supporting services at the Data Centre for a minimum period of 10 years (the “Service Agreement”).

11.The Service Agreement provides, inter alia, the following:

(1)  D shall grant a licence to DTHK to use the Licensed Area during the term of the Service Agreement for the sole purpose of accessing the services provided by D, provided that D shall retain ownership of the Licensed Area (Clause 5.1).

(2)  DTHK shall pay to D quarterly fees and charges for the use of the Licensed Area and the services provided by D at the Data Centre. Interest shall accrue on all outstanding fees at 2% per month, compounded on a monthly basis at the end of each month, and such interest shall be paid by DTHK to D on demand by D (Clause 6.1).

(3)  DTHK shall as security for its due performance and observance of all the terms contained in the Service Agreement:

(a)  Pay the Deposit (i.e. the Licensed Area Deposit and Utility Deposit) to D within 30 days upon the signing of the Service Agreement or at such other time as set out in Schedule 2 and Schedule 3 of the Service Agreement (as appropriate) (Clause 6.3(a)); and

(b)  Provide D within 60 days after the date of signing the Service Agreement a bank guarantee without any restriction in drawdown to be provided by a licensed bank in Hong Kong in such form to be approved by D to guarantee the due performance and observance by DTHK of all the terms contained in the Service Agreement (the “Bank Guarantee”) for the sum as set out in Appendix A to each of Schedule 2 and Schedule 3 of the Service Agreement (as appropriate) (Clause 6.3(b)).

(4)  In this regard, Appendix A to each of Schedule 2 (4^th Floor) and Schedule 3 (11^th Floor) of the Service Agreement, as referred to in Clause 6.3(b) thereof, provide as follows:

No.	Relevant floor	Period of performance	Timeframe for providing the Bank Guarantee	Amount (HKD)
1	4th Floor	1st to 36th months	Within 60 days upon signing of the Service Agreement (i.e. by 30 December 2015)	15,011,832
2	11th Floor			32,048,136
3	4th Floor	37th to 120th months	Within 30 days at the commencement of 4th year of the term (i.e. by 2 March 2019)	9,572,376
4	11th Floor		Within 30 days at the commencement of 4th year of the term (i.e. by 15 June 2019)	20,448,072

(5)  If there shall be any fees or other payments due and payable by DTHK under the Service Agreement which are in arrears, or if there shall be any breach by DTHK of any of the covenants, terms and conditions contained therein, D shall have the right to apply the Deposit or such part thereof and/or call on the Bank Guarantee towards payment of such arrears and/or remedying such breach (Clause 6.4).

(6)  D may terminate the Service Agreement by immediate written notice to DTHK if DTHK, amongst other things, shall be in breach of any of its obligations under the Service Agreement and the same is not remedied within 30 days’ notice of default (if capable of being remedied) (Clause 15.3(a)).

(7)  Without prejudice to any other provision, if DTHK commits a breach of the Service Agreement, D shall have the right to suspend and/or terminate all or any of the services and the Licence and deny access by DTHK to any of the Equipment without prior notice without being liable to DTHK in any way. Once the services have been suspended or terminated or the Licence is revoked or access to the Equipment is denied, reinstatement of the Services and the Licence shall be at the sole discretion of D and subject to such conditions as D may think fit (Clause 15.5).

(8)  DTHK may sub-license to a person or permit a person to occupy all or any part of the Licensed Area pursuant to the terms of the Service Agreement (Clause 20.1). Such sub-licensing, sub-contracting, novation, transfer, assignment, delegation, holding on trust or encumbrance regarding all or any rights or obligations of DTHK under the Service Agreement to any third party shall be subject to the restrictions or requirements set out in a novation agreement to be signed by DTHK and D with the third party (Clause 20.2).

(9)  The Service Agreement shall be construed in accordance with the laws of Hong Kong, and D and DTHK submits to the exclusive jurisdiction of the courts of Hong Kong (Clause 21.3).

12.The current licence fee payable by DTHK to D is about HK$4.5 million per month, with electricity bills of around HK$3 million per month payable on top.

13.At all material times, DTHK sub-licensed the Licensed Area to China Telecom Global Limited (“CTG”).

14.On 3 December 2015, the Hong Kong branch of China Minsheng Banking Corporation Limited (“CMBC HK”), issued a bank guarantee which was in a form acceptable to D, notwithstanding it had a validity period of 1 year rather than 3 years (“the CMBC Guarantee”). Whilst in December 2015, DTHK and D discussed the execution of an addendum to the Service Agreement to address renewal of the guarantee (“the Renewal Arrangement”), no such addendum was executed. The CMBC Guarantee was sent to D on 8 January 2016. It expired on 21 December 2016: Yang 1^st §26(9).

15.It is not disputed that:

(1)  The contractual deadline for providing a bank guarantee for the 37^th to 120^th months (i.e. years 4 to 10) fell due on 2 March 2019 (for the 4^th Floor) and 15 June 2019 (for the 11^th Floor) respectively.

(2)  DTHK did not provide any further bank guarantee on 2 March 2019, on 15 June 2019, or at all.

16.Although there had been some defaults in payment by DTHK, the Service Agreement apparently operated without significant problems until around late 2020. The payment defaults then became more significant. This led to D issuing notices of default and notices of suspension under the Service Agreement.

(1)  On 7 January 2022, D issued a notice of default stating:

(a)  Unpaid fees had reached approx. HK$30 million;

(b)  D had applied the deposit towards payment of the fees;

(c)  DTHK was required to pay the unpaid fees of approx. $13 million and to top up the amount of deposit to HK$17,794,594.

(2)  On 21 January 2022, D issued a notice of default stating:

(a)  DTHK had failed to top up the amount of deposit to HK$17,794,594;

(b)  DTHK was required to remedy this within 30 days.

(3)  D issued a notice of suspension dated 4 February 2022 in respect of the failure to comply with the 7 and 21 January 2022 demands.

(4)  Services to DTHK resumed on 10 February 2022 after the agreement of a revised payment schedule.

(5)  On 12 August 2022 D issued a notice of default in respect of unpaid fees and interest in the sum of HK$27,741,235.13. D demanded payment within 30 days.

(6)  On 31 August 2022, D issued a notice of demand seeking the provision within 30 days of a bank guarantee pursuant to Clause 6.3(b) of the Service Agreement for a sum of HK$30,020,448, in respect of the use of the 4^th and 11^th Floors from the 4^th to 10^th years (“the Bank Guarantee Demand”).

(7)  On 13 September 2022, D suspended services on the basis of non-compliance with the 12 August 2022 demand for non-payment.

(8)  By 14 September 2022, DTHK paid the overdue sum and D reinstated services.

(9)  On 14 September 2022, D chased DTHK in respect of the provision of the bank guarantee.

17.By email dated 21 September 2022 to D, DTHK stated that more time was required for DTHK to procure a bank guarantee in favour of D, and asserted reasons for that including tightened regulatory controls over cross-border guarantees since 2017, and DTHK not having a banking relationship with a Hong Kong bank which would provide guarantees.

18.DTHK proposed the following alternatives for D’s consideration in the event that the bank guarantee for HK$30,020,448 required by D could not be provided in time:

(1)  Pledge over CTG receivables. On 28 September 2022, DTHK proposed granting a pledge in favour of D over DTHK’s account receivables from CTG. A draft pledge agreement was sent to D for its review. This did not include CTG as a party. On 29 September 2022, D stated that it would consider such a pledge if CTG was a party. No further draft was forthcoming. On 7 October 2022, D rejected the aforesaid proposal.

(2)  Increased deposit. On 9 October 2022, DTHK offered to increase the amount of deposit payable to D under Clause 6.3(a) by HK$10,000,000. This proposal was rejected by D on 12 October 2022.

19.On 12 October 2022, D issued a termination notice to DTHK, on the basis of DTHK’s non-compliance with the Bank Guarantee Demand (“the Termination Notice”).

20.After issuing the Termination Notice, D approached CTG as to the possibility of signing a new contract directly with CTG in respect of the Licensed Area.

21.DTHK took out the Injunction Summons on 25 October 2022.

22.On 27 October 2022, the parties agreed to continue to perform the Service Agreement pending this Court’s determination of the Injunction Summons, as recorded in a consent order of the same date (“the Interim Arrangement”).

23.Against the above backdrop, DTHK seeks interlocutory injunctive relief to restrain D from acting upon the Termination Notice.

Interlocutory injunction: standard of proof

24.DTHK and D disputed the applicable legal principles for the grant of an interlocutory injunction in this case.

(1)  DTHK asserted that the American Cyanamid principles apply. i.e. it is for the plaintiff to show that (1) there are serious issues to be tried on the merits of the case; (2) damages would not be an adequate remedy; (3) the balance of convenience lies in favour of the grant of an injunction; and (4) it is just and convenient to grant the injunction: Hong Kong Civil Procedure 2023 at §§29/1/8.

(2)  D asserted that where an injunction would arguably determine the action, then as to the merits of DTHK’s case, the applicable standard is “at least likely to succeed at trial” (Brave Venture Ltd v Xinhua News Media Holdings Ltd [2017] 5 HKLRD 153 §20 (M Chan J)) alternatively a “good prospect of success” (Abbott GmbH & Co KG v Pharmareg Consulting Co Ltd [2009] 3 HKLRD 524 §27 (Sakhrani J); Hong Kong Civil Procedure 2023 §29/1/18.

(3)  D further asserted a higher burden of proof when seeking an interlocutory mandatory injunction but I do not regard those principles applicable to the form of relief being sought by the Injunction Summons.

25.D asserted that this injunction application will effectively determine the action because it is unlikely that the matter will get to trial and have judgment delivered before 2026, which would be after expiry of the Service Agreement in respect of one part of the Licensed Area in January 2026 and in respect of the other part of the Licensed Area in May 2026. At the very least, D would have been required to remain party to the Service Agreement for the substantive remainder of its term.

26.DTHK responded that 2026 was a pessimistic view of the likely timing for getting to judgment, but did not, and realistically could not, contest that it is likely that an interim injunction pending judgment in the proceedings would mean a continuation of the Service Agreement for the substantive remainder of its term.

27.It seems to me that if the injunction is granted, DTHK will effectively win whatever the outcome at trial; and if the injunction is not granted, D will effectively win whatever the outcome at trial. On that basis, the higher standard of “at least likely to succeed at trial” is applicable.

Merits of DTHK’s Case

28.DTHK asserted in any event that it has a good prospect of success in establishing that D has no valid ground for terminating the Service Agreement and/or requiring DTHK to vacate the Licensed Area. The grounds relied on by DTHK are:

(1)  D has waived its right to insist on DTHK’s strict compliance with Clause 6.3(b) of the Service Agreement and cannot rely on the same in purporting to terminate the Service Agreement;

(2)  D is only entitled to retract its earlier waiver on the giving of reasonable notice, and no such reasonable notice had been given to DTHK.

(3)  Alternatively, DTHK is in any event entitled to seek relief from forfeiture of the Service Agreement.

(i)  DTHK’s case on waiver/estoppel

29.The principles on waiver and promissory estoppel were not seriously disputed, albeit the parties relied on many different authorities. I confine myself to the principles as stated in the leading authorities:

(1)  Promissory estoppel, otherwise known as waiver by estoppel has 3 essential elements: first, a clear and unequivocal representation by the person said to have waived rights, whether by words or conduct, that the representor’s legal rights will not be insisted upon; second, reliance by the representee on the representation; and third, it would be inequitable for the representor to go back on the representation: Hua Tyan Development Ltd v Zurich Insurance Co Ltd (2014) 17 HKCFAR 493 §18; Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1 at §§55-56.

(2)  The Court is generally reluctant to deprive a party of its right to object to breach merely because that party does not require strict compliance with the contract at all times: The Scaptrade [1981] 2 Lloyd’s Rep 425, 430-431. An overly muscular forbearance doctrine will discourage cooperation and force the parties prematurely into litigation: Wilken §8.26.

(3)  Mere delay in prosecuting a claim cannot amount to a promise not to do so in the future. At most the delay would amount to an implied representation that the claim was not, at the time, being pursued: Wilken §8.22. Inactivity, even if prolonged, is as likely to be attributable to carelessness as an intentioned act and pure inactivity will almost always be equivocal: Wilken §8.21; The Leonidas D [1985] 2 All ER 796, 808.

(4)  The parties sought to rely on different parts of Treitel on the Law of Contract (15^th edn) at §§3-081 – 3-082 to support their arguments but it seems to me that those passages may fairly be summarised as follows:

(a)  The requirement of a clear and unequivocal representation is to prevent a party from losing his legal rights merely because he has granted some indulgence by failing throughout to insist on strict performance of a contract;

(b)  In the course of negotiations for settlement of a dispute arising out of a contract, whilst mere inactivity per se will not normally suffice to constitute a clear or unequivocal promise or representation that the promisor will not insist on his strict legal rights, a failure to object to a known breach, defect or deficiency within a reasonable time of its discovery may be regarded as an unequivocal indication of the injured party’s intention not to insist on his strict legal rights. The same position seems to be the same if the defect or deficiency was obvious or could have been reasonably discovered by the injured party.

(c)  Silence and inaction would only be sufficient where “the law imposes a duty to disclose facts or to clarify a legal relationship and the party under the duty fails to perform it”.

(5)  DTHK relied on Vitol v Esso Australia [1989] 2 Lloyd’s Rep 451. That was a case where the parties listed their disputes within a without prejudice agreement, and it was held that one of the parties was estopped from raising a different dispute subsequently.

(6)  As a matter of principle, it is undisputed that:

(a)  Where there has been a temporary waiver of rights, that waiver may be withdrawn upon reasonable notice.

(b)  A “reasonable” notice is one which would give the promisee (in this case, DTHK) a reasonable opportunity of resuming his position: Ajayi v RT Briscoe (Nigeria) Ltd [1964] 1 WLR 1326 (PC) at 1330 per Lord Hodson.

30.Whilst accepting that mere silence by D in response to DTHK’s failure to provide a guarantee would not amount to a representation, DTHK asserted that there had been conduct over and above silence which amounted to a representation.

31.In light of the need for there to be a clear and unequivocal representation, I sought clarification as to what exactly was the representation alleged to have been made by D and how it was made. Mr Lam SC for DTHK responded:

(1)  DTHK’s case is that D represented that it would not enforce Clause 6.3(b) without reasonable notice; (Mr Lam stated, moving away from the position in his skeleton argument, that DTHK no longer pursued the claim that the representation was that D would never enforce Cl 6.3(b)).

(2)  Mr Lam submitted that both permanent and temporary waiver of rights had been pleaded. He referred me to paragraphs 20 and 32 of the Statement of Claim (“SOC”).

(3)  Mr Lam further submitted that the matters which DTHK states amounts to a representation that D would not rely on Clause 6.3(b) were pleaded at paragraphs 21 to 32 of the SOC, and set out at paragraph 47 of his Skeleton and paragraph 5 of his Skeleton in Reply.

32.I will consider all allegations made in the SOC and the skeleton arguments for completeness’ sake.

33.The SOC paragraphs 15 to 32:

“15. In or around mid-December 2015, shortly after the Service Agreement was entered into, DTHK and DTBJ, pursuant to Clause 6.3(b) of the Service Agreement (as pleaded at Paragraph 9(3)(b) above), arranged for a bank guarantee from the Hong Kong branch of China Minsheng Banking Corporation Limited (“CMBC HK”) in favour of iAdvantage in the form of an outbound security …, with the knowledge of and consent from Mr Benny Yeung (“Mr Yeung”) of iAdvantage, as follows:

(1) DTBJ provided security in respect of DTHK.'s obligations under the Service Agreement in favour of the Xi' An branch of China Minsheng Banking Corporation Limited (“CMBC Xi' An”) in Mainland China;

(2) CMBC Xi'An in turn instructed CMBC HK to issue a bank guarantee in favour of iAdvantage.

16. At the time, it was the standard practice of Mainland Chinese banks to issue outbound securities for no longer than one year. As CMBC HK had already approved the issuance of a one-year guarantee to DTHK at the time, whereas Appendix A to Schedules 2 and 3 of the Service Agreement (as pleaded at Paragraph 9(4) above) envisages a bank guarantee for the 1^st to 36^th months (i.e. the first 3 years) of the Service Agreement to be provided to iAdvantage within 60 days of the signing of the Service Agreement, Mr Yang Guang (“Mr Yang”) of DTHK proposed to Mr Yeung by email that the parties proceed with the one-year guarantee approved by CMBC HK and that DTHK would apply for a renewal of the 1-year guarantee from CMBC HK upon its expiration (the “One-year Arrangement”).

17. Mr Yeung agreed to the One-year Arrangement on behalf of iAdvantage but suggested that this be reflected in an addendum to the Service Agreement. Following such suggestion, the parties started negotiating the terms of the addendum from around December 2015 to January 2016. However, no such addendum was eventually executed by either party due to a lack of response from iAdvantage.

18. On 30 December 2015, CMBC HK formally issued a guarantee in favour of iAdvantage as security for DTHK's obligations under the Service Agreement (the "CMBC Guarantee"). The CMBC Guarantee was stated to take effect from the date of issuance and to remain valid for 12 months, with an expiry date of 21 December 2016. The executed version of the CMBC Guarantee was sent to Mr Yeung of iAdvantage by Mr Yang of DTHK on 8 January 2016.

19. Since the issuance of the CMBC Guarantee in favour of iAdvantage on 30 December 2015, iAdvantage never raised any issue, objection or concern with respect to the form, date of expiry and/or validity of the CMBC Guarantee notwithstanding iAdvantage's knowledge and approval that the CMBC Guarantee only had a one-year period of validity, that it had expired on 21 December 2016 and that the parties never executed the proposed addendum.

20. By reason of the foregoing, iAdvantage unequivocally represented to DTHK that it would forbear enforcement or reliance on Clause 6.3(b) of the Service Agreement, at least insofar as the requirement for the provision of a bank guarantee for the 13^th to 36^th months is concerned. This was reasonably relied upon DTHK, who then did not pursue the renewal of the CMBC Guarantee after its expiry.

C. Disputes arising under the Service Agreement

Cl. Payment Disputes

21. On 14 August 2020 and 8 September 2020 respectively, DTHK discovered defects in relation to the supply of chilled water critical for cooling purposes (the "Chilled Water Incident") and water leakage on the 11^th Floor of the Data Centre, which constituted breaches of the Service Agreement on the part of iAdvantage.

22. The Chilled Water Incident caused serious disruption to the services provided by iAdvantage to DTHK and in turn to DTHK's customers. Therefore, DTHK requested a deduction of the claim amounts caused by the Chilled Water Incident from any payments owing to iAdvantage at the time. iAdvantage disputed these proposed deductions.

23. On 7 January 2022, iAdvantage issued a Notice of Default (the “7 Jan Payment Notice”) to DTHK, demanding payment of a sum of HK$30,856,909 under the Service Agreement and stating, inter alia, that iAdvantage had exercised its right to apply the entire amount of the Deposit it held towards payment of the said outstanding fees. iAdvantage further requested DTHK to top up the Deposit in the sum of HK$17, 794,594 within 7 days thereof and to pay the alleged unpaid fees in the sum of HK$13,062,315 (after application of the Deposit) within 30 days thereof.

24. On 21 January 2022, iAdvantage issued another Notice of Default (the “21 Jan Payment Notice”) alleging that DTHK had failed to top up the Deposit, and that iAdvantage would exercise its right to terminate the Service Agreement pursuant to Clause 15.3 of the Service Agreement if DTHK failed to remedy the same within 30 days.

25. On 4 February 2022, iAdvantage issued a Notice of Service Suspension, by which it exercised its right under Clause 15.5 of the Service Agreement to suspend its provision of services to DTHK and deny DTHK's access to the equipment at the Data Centre commencing from 23:59:59 on 7 February 2022.

26. On or about 10 February 2022, following negotiations between the parties, DTHK and iAdvantage reached an agreement to revise the payment schedule under the Service Agreement (the “Feb Revised Payment Schedule”). Pursuant to and in reliance upon the Feb Revised Payment Schedule, DTHK made further payments to iAdvantage over the first half of 2022 to settle outstanding payments due under the 7 Jan Payment Notice and 21 Jan Payment Notice, as well as other ongoing payments accrued since January 2022. All issues referred to in the 7 Jan and 21 Jan Payment Notices have been fully resolved.

27. On 14 April 2022, both DTHK and iAdvantage reached a further agreement on payment arrangements for the subsequent quarter (the “April Revised Payment Schedule”). DTHK fully settled the relevant outstanding fees from May to June 2022 in accordance with and in reliance upon the April Revised Payment Schedule.

28. By a written confirmation from iAdvantage on 8 August 2022, iAdvantage confirmed with DTHK that the collection status under the Service Agreement had reverted to normal. iAdvantage then requested DTHK to settle its electricity bills from May to August 2022 and rent from August to October 2022.

29. On or about 15 August 2022, iAdvantage issued a Notice of Default dated 12 August 2022 (the “Aug 12 Payment Notice”), stating that DTHK allegedly owed iAdvantage a sum of HK$27,741,235.13, including overdue interest which had not been mentioned in previous correspondence and that it would exercise its right to terminate the Service Agreement pursuant to Clause 15.3 of the same unless the same was settled by DTHK in full within 30 days.

30. On 17 August 2022, Ms. Lyone Peng of DTHK responded to the Aug 12 Payment Notice by email, stating that DTHK was entitled to withhold from iAdvantage payment of electricity charges by reason of the Chilled Water Incident (as pleaded at Paragraphs 21 and 22 above). However, by a letter on 24 August 2022, iAdvantage insisted that DTHK make the relevant payments within 30 days, failing which iAdvantage would exercise its right to terminate the Service Agreement.

31. Notwithstanding (1) iAdvantage's issuance of various notices of default as aforesaid; and (2) iAdvantage's knowledge that the CMBC Guarantee had expired on 21 December 2016, at no time and in none of these notices did iAdvantage mention any default on the part of DTHK to procure a new Bank Guarantee pursuant to Clause 6.3(b) of the Service Agreement. In fact, iAdvantage never mentioned any need for DTHK to provide the Bank Guarantee since the One-year Arrangement was concluded until it issued the Aug 31 Demand on 31 August 2022 ...

32. iAdvantage's aforesaid actions (and inaction) reinforce its earlier representation to DTHK that it would not rely on Clause 6.3(b) of the Service Agreement throughout the term of the Service Agreement (see Paragraph 20 above). This was reasonably relied upon by DTHK, who all along proceeded on the same basis and, amongst other things, refrained from taking active steps to procure a new bank guarantee as replacement for the expired CMBC Guarantee.”

34.DTHK’s Skeleton Argument paragraph 47 is as follows:

“Applied to the present facts, it is obvious that iAdvantage did make a clear and unequivocal representation that it would not insist on its strict contractual right under Clause 6.3(b) of the Service Agreement:

(1) Ever since the parties left off their discussion on the requirement for DTHK to provide the Bank Guarantee in mid-January 2016, iAdvantage never again brought up the need for DTHK to provide a Bank Guarantee pursuant to Clause 6.3(b) …

(2) Whilst DTHK was required to provide a Bank Guarantee for the 37^th to 120^th months by 2 March 2019 (for the 4^th Floor) and 15 June 2019 (for the 11^th Floor) respectively, iAdvantage again never demanded the same from DTHK, at least not until it first made such a demand over 3 years later on 31 August 2022 pursuant to the 31 Aug Notice …

(3) However, iAdvantage clearly knew, from the very inception, that no Bank Guarantee had been provided by DTHK since the CMBC Guarantee expired on 21 December 2016:

(a) The fact that the CMBC Guarantee only had a 1-year validity period was clearly known to, and in fact consented to by iAdvantage itself. Indeed, it was against such backdrop that iAdvantage agreed to the Renewal Arrangement …

(b) However, notwithstanding the expiry of the CMBC Guarantee on 21 December 2016, iAdvantage took no action all this time. It never mentioned the need for a replacement guarantee to be provided by DTHK, let alone demanded the same from DTHK.

(c) When the time came for DTHK to procure a Bank Guarantee for the 37^th to 120^th months latest by 2 March 2019 (for the 4^th Floor) and 15 June 2019 (for the 11^th Floor), iAdvantage again took no action and continued its licence with DTHK.

(d) Indeed, even on iAdvantage’s own case (which is not admitted), it had discovered the lack of any valid Bank Guarantee in place latest by August 2020: Chan 1^st §77 … Yet it never took any steps to follow-up with DTHK.

(e) Moreover, while iAdvantage served various notices of default and suspension notices to DTHK from January to August 2022, all of which were eventually complied with by DTHK, none of these notices made any mention of the requirement for DTHK to provide the Bank Guarantee …

(f) In other words, iAdvantage repeatedly relied on one ground (default in payment) and not the other (failure to provide the Bank Guarantee), even though the latter could have been advanced at the time on facts already known to iAdvantage. This, as said (see §46(5) above), constituted a tacit representation by iAdvantage that the latter ground (viz. the requirement to provide a Bank Guarantee) would not be relied upon by iAdvantage as a ground for termination.

(g) The fact that iAdvantage failed to object to DTHK’s deficiency in performance, which was known to it, within a reasonable time of its discovery until over 3 years (or almost 6 years from the date of expiry of the CMBC Guarantee) later, clearly constitutes an unequivocal representation of iAdvantage’s intention not to insist on its strict contractual rights under Clause 6.3(b).”

35.Mr Lam’s Skeleton in Reply paragraph 5 is as follows:

“P does not rely on in isolation D’s inactivity and failure to enforce Clause 6.3(b) for over 3.5 years. Rather, D’s inaction is to be viewed against:

(1) D’s admitted knowledge that no effective Bank Guarantee had been provided by P since August 2020 (Chan 1^st §77 [A/7/121]), if not,

(a) “…was keen to maintain a good relationship with CTG”; and/or

(b) saw no pressing need for the protection of a bank guarantee... from around July 2017 to July 2020 [when] [P’s] payment record had improved

See: Chan 1^st §75-76 [A/7/120-121]; P’s Main Skeleton §49; §14 of D’s Skeleton; SoC §31 [A/2/14]).

(2) D consciously not enforcing Clause 6.3(b) but actively asserting other breaches over the years (P’s Main Skeleton §§32(3), 47(3)(e)-(g)) (§§22-24 of SoC) [A/2/12-13];

(3) D’s previous requests for P to top-up the Deposit in January 2022, again without any mention of a Bank Guarantee: Yang 1^st §§32-33 [A/6/79]; §23 of the SoC [A/2/12].

(4) D positively exercising its discretion to reinstate services to P after suspension upon revised payment schedule being agreed between the parties on 10 February 2022 without requirement or mention of a Bank Guarantee (§18.1 of D’s Skeleton; §§25-26 of SoC [A/2/13]; Yang 1^st §34-35 [A/6/80]; [B1/375]).”

36.In oral submissions, Mr Lam emphasised:

(1)  that by D pursuing DTHK for defaults in payment under the Service Agreement, at a time when D knew of DTHK’s failure to provide guarantees but made no demand in respect of those, then that conduct amounts to a representation that there would be no enforcement of Clause 6.3(b) in respect of the guarantees; and

(2)  that a failure by D to reserve its rights in relation to provision of bank guarantees when addressing non-payment of fees and suspension of services gives rise to the relevant representation. DTHK points to:

(a)  On the one hand, the notices of suspension of services in February 2022 which stated “In the meantime, all our rights in this matter (including our rights to claim against you for all loss, damage, interest, cost and expense sustained by us) are hereby expressly reserved.”

(b)  On the other, when D reinstated services (which was pursuant to Clause 15.5 at the sole discretion of D and subject to such conditions as D might think fit) D did not reserve any rights or impose any conditions in particular in relation to the provision of bank guarantees.

37.So far as the factual background is concerned, there is a great deal of common ground:

(1)  It is not disputed that DTHK and D agreed, notwithstanding the contractual requirement to provide a 3-year guarantee at the outset of the Service Agreement, that it was acceptable to D to provide a 1-year guarantee at the outset, with what happened for the 2^nd-3^rd years being unresolved.

(2)  It is undisputed that between 14 August 2020 and August 2022 there were issues arising between the parties in relation to services provided and the late payment of fees.

(3)  It is undisputed that there was no discussion of the contractual requirement to provide a bank guarantee in that time period.

(4)  As to the late payment of fees, it is undisputed that there were agreements for revised payment schedules.

(5)  There is no suggestion of any agreement expressed to cover all issues arising under the Service Agreement at any particular time.

38.Having regard to all of the allegations made on behalf of DTHK whether in the SOC or skeletons or oral submissions, D’s conduct seems to me to be entirely consistent with a decision to pursue non-payment now and not, for now, to pursue non-provision of guarantees. D is entirely justified in taking an approach not to pursue its legal rights until it sees fit. In contrast to Vitol, there has been no agreement between DTHK and D purporting to settle all issues under the Service Agreement. They have settled individual payment disputes as and when they arose.

39.As stated above, by the time of the hearing, Mr Lam was not pursuing the pleaded permanent waiver argument. However, I pause at this point to note that I do not consider it arguable (let alone consider that DTHK is likely to succeed in establishing) that the largely undisputed conduct of D prior to the Bank Guarantee Demand amounted to a representation that there would be no enforcement of Cl 6.3(b) in respect of the guarantees.

40.In my view paragraphs 20 and 32 of the SOC, as identified by Mr Lam, do not amount to a plea of temporary waiver. However, paragraph 50 of the SOC pleads:

“Further and/or alternatively, even if iAdvantage were entitled to retract its earlier waiver of DTHK's strict compliance with Clause 6.3(b) of the Service Agreement (which is denied), iAdvantage had failed to give reasonable or sufficient notice to DTHK before requiring DTHK to recomply with its obligations under Clause 6.3(b). More specifically:

(1) DTHK was only given around 1.5 months' time (from 31 August 2022 when the Aug 31 Demand was served on DTHK to 12 October 2022 when the Purported Termination took place) to comply with iAdvantage's abrupt request for the provision of a bank guarantee covering the 3 7^th to I 20^th month period.

(2) Such short notice was unreasonable and wrongful in the circumstances since, amongst other things:

(a) iAdvantage had full knowledge of the genuine and practical difficulties faced by DTHK in securing a bank guarantee, as communicated to it by DTHK (see Paragraph 40 above);

(b) iAdvantage had full knowledge of the various proposed alternatives to the provision of a bank guarantee offered by DTHK (see Paragraph 41 above);

(c) A reasonable period of time was objectively required for applications of bank guarantees to be made and approved (see Paragraph 40 above);

(d) iAdvantage had no urgent need to secure any bank guarantee from DTHK to satisfy any outstanding indebtedness on DTHK's part, since DTHK had fully settled all outstanding sums owed to iAdvantage at the time of the Purported Termination on 12 October 2022, save for a disputable sum of HK$923,556 which had been fully settled on 14 October 2022 (see Paragraphs 37 to 39 and 42 hereinabove);

(e) iAdvantage held and continues to hold the Deposit paid by DTHK in the sum of HK$17,794,594 pursuant to Clause 6.3(a) of the Service Agreement as security; and

(f) iAdvantage simultaneously had the additional benefit of the corporate guarantee given by DTBJ in its favour pursuant to Clause 18 of the Service Agreement.

(3) In the circumstances, iAdvantage failed to give reasonable and/or sufficient notice to DTHK before seeking to reclaim reliance on Clause 6.3(b). It follows that iAdvantage was not entitled to reassert its rights under Clause 6.3(b) and rely on the same to terminate the Service Agreement without first giving reasonable notice of the same to DTHK.”

41.Mr Man SC submits that, adopting the Ajayi principled approach, reasonable notice is the time needed for the change in circumstances to be restored. He further submits that DTHK has given no evidence of any change of position or inequity suffered so no extra time is required. I am inclined to agree. Nevertheless, I will assume for present purposes that, if DTHK did not seek and obtain a bank guarantee because of D’s representation that it would not rely on Clause 6.3(b), then reasonable notice would be the period required in which to obtain a bank guarantee. As the reasonable notice period is to be determined at the time of giving notice, one is considering reasonable expectations of obtaining a bank guarantee in August 2022 (and not events occurring thereafter). Relevant factors may include:

(1)  Under Clause 15, the parties envisaged that any default could be remedied within 30 days;

(2)  The reasonable time period would assume that the person requesting a guarantee would be creditworthy and/or capable of supporting a guarantee by way of security and the reasonable time required would allow for negotiations, and the execution of satisfactory documentation.

(3)  Both contracting parties are Hong Kong companies conducting business in Hong Kong. The Service Agreement itself is a contract requiring the provision of substantial services and the payment of substantial sums of money. One would expect both parties to have banking relationships in Hong Kong.

(4)  There had been a history of minor breaches in the contract, but from late 2020 the breaches had become more serious and had prompted 2 periods of suspension of service. In that context, the full portfolio of security envisaged by the Service Agreement became more important (i.e. full bank guarantees in addition to the deposit and corporate guarantee).

(5)  On DTHK’s evidence:

(a)  CMBC HK had stopped providing guarantee services;

(b)  to obtain a guarantee from a Hong Kong-based bank, it would require a banking relationship with the bank which it did not yet have;

(c)  travel restrictions were in place between Hong Kong and the mainland, which prevented DTHK’s sole director from travelling from the mainland to Hong Kong to open a Hong Kong bank account;

(d)  to obtain a guarantee from a mainland-based bank would be a lengthy, uncertain and unpredictable procedure.

42.DTHK itself claimed a reasonable notice period was 3-6 months. That appears to me to be unduly generous as a reasonable time within which to obtain a bank guarantee for the purposes of the Service Agreement, having regard to the factors above.

43.However, D was prepared to argue the matter on the basis of 3-6 months being a reasonable notice period. That is because, even allowing 6 months as a reasonable notice period, that would have expired at the end of February 2023, weeks ago, without the provision of a guarantee. Accordingly, on DTHK’s own case, any estoppel by representation was effectively withdrawn and ceased to apply by the end of February 2023. It seems to me that DTHK cannot credibly assert an effective estoppel at this point in time.

44.For the above reasons, it seems to me that, in respect of its case on waiver, DTHK fails at the first hurdle (i.e. sufficient merits), but I briefly consider the remaining arguments on waiver for completeness’ sake.

45.Detrimental reliance. Paragraph 49 of the SOC pleads:

“In the premises, iAdvantage clearly and unequivocally represented to DTHK that it would forbear and/or otherwise waive strict compliance with Clause 6.3(b) by DTHK. This had been reasonably relied upon by DTHK, who thereby took no steps to procure a substitute bank guarantee over the years. In these circumstances, it would be inequitable to allow iAdvantage to rely on any alleged breach of Clause 6.3(b) by DTHK to terminate the Service Agreement.”

46.It is not clear to me that DTHK has pleaded any detriment, or detrimental change of position.

(1)  DTHK claims that on the basis of D’s representations by conduct, DTHK saw no need, and took no steps, to procure a new bank guarantee or set up a bank account in Hong Kong. When D made the Bank Guarantee Demand, Mr Yang took steps to contact various banks in the hope of securing a bank guarantee. DTHK states that this demonstrates that DTHK has always been willing to take reasonable steps to remedy inadequacies on its part (if any), and that, but for D’s representation, it simply would not have been in the same position as it now finds itself in – having to scramble for solutions when inadequate time has been given to it by D to take steps to re-comply with Clause 6.3(b).

(2)  At most, DTHK did not go out and seek a bank guarantee on the basis of a representation that D did not require it. I see no harm suffered; only that DTHK was not required to take action.

47.Unconscionability. DTHK asserts it would be most unfair and unconscionable to now permit D to seek to terminate the Service Agreement by abruptly resurrecting its contractual right under Clause 6.3(b). DTHK states that there were a number of reasons for it being unable to obtain a guarantee at that time including mainland regulatory controls, its lack of relationship with a Hong Kong bank, and time-consuming procedures for obtaining a guarantee in the mainland. DTHK has not established that any of these factors would have been missing had there been no representation or promise to forebear. However, if the alleged promise of forbearance was established, it may be arguable (I put it no higher and this is not a point I need to decide in light of the above) that it is unconscionable to require a guarantee to be provided within 30 days.

(ii)  DTHK’s case on relief from forfeiture of the Service Agreement

48.The Court has jurisdiction to grant relief against forfeiture in respect of the forfeiture of a proprietary or possessory interest. The paradigm case for relief is where the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest and costs (as appropriate): Shiloh Spinners Ltd v Harding [1973] AC 691 at 722.

49.Accordingly, DTHK must establish a good prospect of success of establishing at trial that:

(1)  It has proprietary or possessory interest in the Licensed Area;

(2)  It is able to effectively make good its default in providing bank guarantees pursuant to Clause 6.3(b).

50.The jurisdiction to grant relief against forfeiture may be engaged if the person seeking such relief has proprietary or possessory rights over real property: Vauxhall Motors Ltd v Manchester Ship Canal Co Ltd [2020] AC 1161 at §§41-47, §60. In that case it was found that the party seeking relief against forfeiture had a virtually exclusive right of control over the property in question, notwithstanding the licensor retained certain default rights to intervene if the licensee failed to observe certain obligations.

51.Mr Man SC for D submitted that there can be no possessory interest unless there is exclusive control over the property. For present purposes, I note that Vauxhall was a case of “virtually exclusive control”.

52.DTHK submits that it can satisfy the test of possessory rights on the basis that it was given wide-ranging rights to use, control and access the Licensed Area:

(1)  DTHK is expressly granted “a licence” to use the Licensed Area during the Term to access the services provided by D (see Clause 5.1);

(2)  DTHK is allowed to equip itself with a private key or other security device to the Licensed Area, provided that it has obtained the prior written consent of D (Clause 5.2);

(3)  In contrast, D is required to provide at least 3 days’ advance notice to DTHK, and obtain DTHK’s prior written approval (which shall not be unreasonably withheld, delayed or conditioned), before entering the Licensed Area or accessing any equipment therein save in emergency circumstances (Clause 5.1);

(4)  D’s own evidence acknowledges that D “does not control the access to the areas licensed to its customers, the security for which is maintained by the customers themselves. The areas licensed to DTHK are self-contained rooms... D does not go into DTHK’s rooms unless there is an emergency as envisaged in Clause 5.1 of the Service Agreement” (emphasis added): Chan 1^st §§29-30.

53.For present purposes, I accept that DTHK has a good prospect of success of establishing at trial that it is conferred a possessory interest over the Licensed Area.

54.However, DTHK is unable to satisfy me that it can make good its default in providing bank guarantees. The short point is that, even by the time of the hearing of the Injunction Summons, DTHK was unable to provide a bank guarantee in the amount of HK$30,020,448, or equivalent security. DTHK was only able to point to the IB E-mail. That indicated at best the possibility of a guarantee being issued by the end of the week commencing 13 March 2023. I agree with Mr Man’s submission to the effect “too little, too late”.

55.DTHK suggested that the Court could order an injunction on condition that DTHK provide equivalent security such as a cash deposit or a cashier’s order. I have no doubt that such type of security would be as good as bank guarantee. However, given that DTHK has suggested such alternative security in its evidence since October 2022 but has not provided the same, I am not satisfied that it is available.

56.DTHK cannot conceivably obtain relief against forfeiture when it is unable to put D into an equivalent position of having the security of a bank guarantee as provided by Clause 6.3(b).

57.I did hear argument on other reasons why an injunction should not be granted. I will consider them briefly. However, on the basis of DTHK being unable to establish sufficient merits in its case, I will not grant the requested injunction.

Adequacy of damages

58.DTHK submitted that damages would be wholly inadequate for DTHK in this case on the basis that:

(1)  Clause 11 of the Services Agreement would effectively limit the damages recoverable by DTHK for wrongful termination at about HK$50 million.

(2)  Forfeiture of the Service Agreement would effectively end DTHK’s business relationship with its valuable customer, CTG.

59.The evidence does not support these submissions.

(1)  DTHK has not articulated what damages it would suffer that would exceed HK$50 million. It points to the need to reinstate the Licensed Area on termination, and that DTHK had spent in the region of HK$110 million in equipping the Licensed Area. However, that obligation arises at the expiry of the Service Agreement in any event and is not a loss caused by earlier termination.

(2)  DTHK has not provided information as to the relationship with its customer, CTG, other than it apparently provides CTG with the use of the Licensed Area for a lower fee (HK$7.4 million) than DTHK is paying D (HK$7.5 million). In other words, all that the evidence shows is that DTHK’s relationship with CTG in respect of the Licensed Area is loss-making. No evidence is given as to what other value is provided by CTG to DTHK.

60.In reply submissions, Mr Lam SC suggested that where DTHK sought specific performance at trial, damages would never be adequate. He relied on Verrall v Great Yarmouth BC [1981] 1 QB 202 and Hanbury and Martin on Modern Equity (21^st ed.) paras 30-009 to 30-012. As I read those authorities, there will be cases in which specific performance is claimed and damages will not be an adequate remedy, and an interlocutory injunction should issue. However, that is a matter for the applicant for the injunction to establish. That has not been established here.

61.I am prepared to accept Mr Lam’s submission for present purposes that the adequacy of damages should not be treated as an independent consideration, but rather as one of the matters to be taken into account in considering what order to make (Spry on the Principles of Equitable Remedies (9^th ed.) at p.474). This does not materially affect my decision.

62.Accordingly, even if there had been a good prospect of success on the merits of DTHK’s case, DTHK has not satisfied me that damages would not be an adequate remedy, and that therefore interim injunctive relief is necessary.

63.Accordingly, I dismiss the Injunction Summons. I make an order nisi that DTHK bear D’s costs of and incidental to the Injunction Summons, to be taxed if not agreed. In the absence of any order to vary, the order will become absolute after 14 days.

64.The parties should liaise in respect of appropriate directions for the Strike-Out Summons and submit their proposed directions within 3 days hereof.

Mr Douglas LAM SC and Ms Clara WONG, instructed by Messrs Reed Smith Richards Butler, for the Plaintiff

Mr Bernard MAN SC and Mr Danny TANG, instructed by Messrs Mayer Brown, for the Defendant