Chung Hung Sang v. Gazebo Manufacturing (HK) Ltd and Another
Read the full judgment text of HCA 3980/1978 on BabelCite. This High Court CFI judgment was delivered on 13 June 1979.
1. The plaintiff, CHUNG Hung-sang, commenced this action on the 10th November 1978, against the then sole defendant, Gazebo Manufacturing (H.K.) Ltd, to obtain possession of premises situated at 4C, Seymour Road, 7/F., Hong Kong. The plaintiff sued as registered owner of the premises alleging that he was entitled to delivery of vacant possession as the defendant had failed to deliver possession upon the expiration of a notice to quit dated the 29th March 1978, which had terminated the tenancy on
|
HCA003980/1978
IN THE SUPREME COURT OF HONG KONG HIGH COURT -----------------
----------------- Coram: Power, J. Date of Judgment: 13 June 1979 ----------------- JUDGMENT ----------------- 1. The plaintiff, CHUNG Hung-sang, commenced this action on the 10th November 1978, against the then sole defendant, Gazebo Manufacturing (H.K.) Ltd, to obtain possession of premises situated at 4C, Seymour Road, 7/F., Hong Kong. The plaintiff sued as registered owner of the premises alleging that he was entitled to delivery of vacant possession as the defendant had failed to deliver possession upon the expiration of a notice to quit dated the 29th March 1978, which had terminated the tenancy on the 30th September 1978. The plaintiff claimed possession and mesne profits at the rate of $1,450 per month from the 1st October 1978, until vacant possession. On the 15th November 1978, the defendant entered an appearance through its solicitors, Messrs Hastings & Co. and on the 17th November 1978, a Mrs Punam Assan Datwani applied for an order that she be added as a defendant. 2. In a supporting affidavit, to which all parties made reference at the hearing of the action, Mrs Datwani stated that she was a director of the defendant and that she had been the lawful tenant of the suit premises since the 1st March 1978. She alleged that: "On the 1st February 1976, for accounting purposes, I wrote to the plaintiff, requesting that all rent receipts be issued in the name of the defendant company on the understanding that all other tenancy terms should remain unchanged". She alleged that the plaintiff had "accepted my said letter without demur and has since then issued all rent receipts in name of my company, i.e. the defendant company. However, on the 5th October 1976, at the plaintiff's request, the Tenancy Agreement referred to in paragraph 3 of the Statement of Claim was entered into on the same basis and understanding as stated above." She further alleged that the defendant company had "agreed to lend its name and to act as my trustee for the tenancy of the suit premises under circumstances and conditions as outlined above." She finally alleged that she had "at all material times been the lawful and beneficial tenant of the suit premises, that the defendant company has only been acting as my trustee and that I am, therefore, entitled to protection under the Landlord and Tenant (Consolidation) Ordinance." 3. On the 22nd December 1978, Mrs Datwani was, by consent, added as a defendant. 4. On the 13th November 1978, the defendant company, hereinafter referred to as first defendant, had filed a defence in which it pleaded that "with the full knowledge and consent of the plaintiff, the defendant entered into the Tenancy Agreement referred to as the Trustee for one of its directors, Mrs Punam Assan Datwani in pursuance of the latter's written request to the plaintiff dated the 1st February 1976." The first defendant submitted that Section 50(6)(k) of the Landlord and Tenant (Consolidation) Ordinance (Cap. 7) did not apply to it in its capacity as trustee. The only issue which the first defendant took with paragraph 3 of the Statement of Claim of the plaintiff, which had pleaded the Tenancy Agreement dated the 5th October 1976, made between the plaintiff and the first defendant under which the plaintiff let the suit premises to the first defendant for the term of 2 years commencing on the 1st February 1976, was that this agreement had been entered into by the first defendant in its capacity as trustee of Mrs Datwani with the full knowledge and consent of the plaintiff. As the pleadings stood it was not in issue that the first defendant had entered into a tenancy agreement with the plaintiff. The issues were (i) whether it had done so in the capacity of trustee for Mrs Datwani, and (ii) if so, whether the plaintiff knew of and assented to its acting in that capacity. These were the only issues raised by the first defendant in his defence. 5. On the 4th January 1979, Mrs Punam Assan Datwani, hereinafter referred to as second defendant, filed her defence. In this defence she repeated the defence filed by the first defendant and stated that by "a letter from the 2nd defendant to the plaintiff dated the 1st November 1976, the 2nd defendant nominated the 1st defendant, a private limited company incorporated under the laws of Hong Kong on the 14th day of January 1975, as her trustee for the said tenancy and requested that all rent receipts be issued in name of the 1st defendant in future on the specific understanding that all other tenancy terms should remain unchanged, with which request the plaintiff duly complied. However, on the 5th day of October 1976, the plaintiff requested that the said tenancy should be converted into the form of an agreement in writing for two years, to which the 2nd defendant agreed on the same understanding and basis as above." This defence raised the same issues as those raised by the defence of the first defendant. Neither defence made any suggestion either that the first defendant had acted ultra vires in entering into the contract or that the contract was void. 6. At the commencement of the hearing on 23rd of May Mr Fung, who appeared for the plaintiff, stated that he wished to make a submission upon a preliminary point of law namely that no defence had been disclosed in the pleadings of either defendant as Section 50(6)(k) of Cap. 7 would have no application to the first defendant even if it was acting as trustee for the second defendant as had been pleaded by the defendants. He contended that the plaintiff was, therefore, entitled, upon the pleadings, to an order for possession of the suit premises. 7. So that the action could be concluded in one hearing Mr Fung, at the urging both of Mr Bokhary, who appeared for both defendants, and the Court, agreed not to pursue this matter as a preliminary point but to have it determined at the conclusion of the hearing of evidence. He then called the plaintiff. At this stage Mr Fung asked for leave to file a reply. In this reply the plaintiff contended that the first defendant was not empowered to act as the trustee of the second defendant because such act was ultra vires the first defendant. At this point Mr Bokhary objected to the filing of the reply and asked for an adjournment until the following morning so that he could consider the implications of the matters raised therein. When the Court indicated that it considered that Mr Bokhary should have time to look into these matters, Mr Fung pressed to continue with his preliminary point and, leave being given to him to do so, argument commenced thereon. Mr Fung addressed and then Mr Bokhary replied. In the course of the afternoon, during his reply, Mr Bokhary stated that he wished to amend his defence by inserting the words "trustee and/or agent and/or nominee" wherever the word "trustee" appeared in the defences. He also asked to add, at the end of each defence, the words: "The second defendant, at all material times, was the tenant of the suit premises within the meaning of part II of the Landlord and Tenant (Consolidation) Ordinance, Cap. 7". This application having been allowed it became pointless to pursue the preliminary point further as the amended defence now raised issues which could not be disposed of therein. The matter was then adjourned to the following morning at which time Mr Fung was given leave to file his reply which now read, in paragraph two, that "The first defendant is not empowered to act as the trustee and/or agent and/or nominee for the second defendant because such purported act is ultra vires the first defendant company." At this point the defendants, by the amendments to their defences, had raised two further matters. 8. The issues now were:
All of these issues were raised by the defendants. I turn now to consider the plaintiff's reply. I must say that I find paragraph two of the plaintiff's reply difficult to understand. It reads as follows:
9. The use of the present tense, where one would have expected the past tense to be used, does not make it any easier to follow. However I am satisfied that what it really pleads is that the first defendant was not empowered to act as trustee and/or agent and/or nominee, and that if it purported so to act then it was acting beyond its powers. It certainly does not contain any admission that the first defendant did act as trustee and/or agent and/or nominee of the second defendant. The plaintiff was denying that the first defendant was the trustee and/or agent and/or nominee of the first defendant and was saying that if the defendants succeeded in establishing that the first defendant was purporting to act as trustee and/or agent and/or nominee of the second defendant at the time it entered into the tenancy agreement then it was acting beyond its powers. This issue, if it can properly be called such, was one that would only arise if the defendants succeeded in establishing that the first defendant purported to act as trustee and/or agent and/or nominee when it entered into the tenancy agreement. 10. Mr Fung called the plaintiff, CHUNG Hung-sang, as his first witness. Mr Chung stated that he had let the suit premises to Mr A.C. Datwani, the husband of the second defendant, in April 1978 under a written agreement for a period of 2 years and that this written agreement had been renewed for further periods of 2 years in 1970 and 1972. He said that when it expired in 1974 Mr Datwani requested that the tenant's name be changed to that of his wife, as he was not always in Hong Kong, and that an agreement for another period of 2 years was then entered into which was in the name of and was signed by the second defendant. The plaintiff said that during the first six years he issued rent receipts to Mr Datwani and that after 1974 he issued them to the second defendant. He said that originally he had looked to Mr Datwani to pay the rent and that after 1974 he looked to the second defendant in that regard. He said that the second defendant's tenancy expired on the 31st January 1976 and that at the beginning of February she had written a letter to him. (Page 44 of the agreed bundle). This letter, which was signed in the name of Mrs Punam Assan Datwani, stated "as from 1st February 1976 please issue rent receipt for the above flat, instead of my personal name, in the name of M/S Gazebo Manufacturing (H.K.) Limited, of which I am the Director. All other tenancy terms remain unchanged." The plaintiff stated that at that stage he did not accede to this proposal because the Tenancy Agreement had expired and he was not prepared to collect any rent until there was an upward adjustment thereto. He said that he spoke to Mr Datwani on the telephone in about the month of February and asked him if he was going to deliver the premises back or agree upon a new rent. He said that the matter was stalled off until May when he sent his son to see Mr Datwani but that there was no result from this meeting and that the new rent was not agreed upon. He said that on the 1st June 1976 he was sent a cheque in the amount of 5 months rent at the old rate under the cover of a letter signed by the second defendant but that he refused to accept the cheque and returned it. He said that on the 29th June Mr Datwani, who was accompanied by his secretary, a Miss Mo, called upon him at his office and that the rent and the name of the tenant were then discussed. He said that it was agreed that starting from the 1st February the new rent would be $1,450 per month and the tenancy agreement would be in the limited company's name (the first defendant) and the period would be for two years. He said that on the 29th June he issued a rent receipt in the name of the first defendant for the sum of $7,250, being 5 months rent from the 1st February to the 30th June 1976. (Page 29 of the agreed bundle). He said that in October a written tenancy agreement (Page 46 of the agreed bundle) was entered into pursuant to the oral agreement of 29th June. This agreement is stated to be between Mr CHUNG Hung-sang and M/S Gazebo Manufacturing (H.K.) Limited and is signed by the plaintiff as landlord and by Mrs Punam Assan Datwani, the second defendant, as the Managing Director of Gazebo Manufacturing (H.K.) Limited as tenant. The plaintiff said that after the agreement of the 29th June rent receipts were issued to the first defendant. The plaintiff said there was no mention to him that the first defendant would be a trustee of the second defendant or that the first defendant would hold the tenancy as an agent or nominee of the second defendant. He said that, prior to the signing of the agreement, sometime in September 1976 Mr Chu, who was then a solicitor of Messrs Peter Mo & Co. had advised him that it was alright for the limited company to sign and that a limited company was not within the protection of the Landlord and Tenant (Consolidation) Ordinance. He said that when the agreement expired on the 31st January 1978 he wished to obtain possession of the premises for his son who was to be married and that he therefore issued a notice to quit. The plaintiff was in no way shaken in cross-examination. 11. The next witness was Mr Winston CHU, who had, at the relevant time, been a partner of Messrs Peter Mo & Co He said that he did advise the plaintiff sometime during July 1976 that the taking up of a tenancy by a limited company instead of the personal name of the tenant would have the effect of depriving the tenant of the protection of the Landlord and Tenant Ordinance. He said that in 1978 after the expiry of the Tenancy Agreement he received instructions to issue a notice to quit. The last witness called by the plaintiff was Mr Eddie HO, a clerk who had been employed by Peter Mo & Co. in March 1978, who gave evidence as to the posting of the notice to quit on the suit premises on the 29th, 30th and 31st of that month. Mr Fung then closed his case. 12. At this stage Mr Bokhary announced that he was not calling evidence and that he conceded "that the entry into the tenancy agreement for any purpose whatsoever was ultra vires the power of the company." This sweeping concession was, presumably, a response to the plaintiff's reply which had pleaded that the first defendant was not empowered to act as a trustee and/or agent and/or nominee of the second defendant because such an act was ultra vires the first defendant. There was no suggestion in the reply that the first defendant had no power to enter into the tenancy agreement only that it had no power to enter into the Tenancy Agreement as a trustee and/or agent and/or nominee of the second defendant. It is clear from the Exhibit 1A, the Memorandum and Articles of Ass ciation of the first defendant, that it has power to enter into a tenancy agreement (see Object 28 on page 10 thereof). Indeed the case put forward by the plaintiff was that the first defendant did have power to enter into the Tenancy Agreement and that it had done so and was bound thereby. Up to this point the contention of the defendants had been that the first defendant had entered into the tenancy agreement but that he had done so as trustee and/or agent and/or nominee of the second defendant. The defendants had, thus far, never contended that the agreement was ultra vires the first defendant. Whatever may be the effect of Mr Bokhary's concession one thing it does not do is to establish that the agreement was ultra vires the company. Indeed in fairness to Mr Bokhary it must be said that he did not seek to so argue in his final submission. There was, as I have indicated, no evidence called by the defendants. As the matter stood I was satisfied as to the truthfulness of the plaintiff and his witnesses and I accepted their evidence. 13. Mr Fung addressed upon the basis that there was no evidence before the Court that the first defendant was ever the trustee and/or agent and/or nominee of the second defendant and that what the Court had before it was evidence of an ordinary tenancy agreement regularly entered into by the first defendant acting through one of its directors and that as the first defendant was a company it was not protected by Part II of Cap. 7. 14. Mr Bokhary then addressed the Court. His first contention was that the evidence of the plaintiff established that the second defendant was a tenant of the suit premises as that term is defined in Section 49 of Cap. 7. He based this submission, in the main, upon the following questions and answers in his cross-examination of the plaintiff:
Mr Bokhary argued that these answers showed that there was still a relationship between the plaintiff and the second defendant and that this relationship was one of landlord and tenant. I find myself quite unable to agree with this argument. When those answers are placed in the context of the whole of the plaintiff's evidence it seems to me clear that all he was saying in them was that he knew that the rent was coming from the Datwanis, as they controlled the first defendant, and that he knew that if rent was not paid he would be able to bring an action for possession. I am quite satisfied that these questions and answers do not establish any relationship of landlord and tenant between the plaintiff and the second defendant. Mr Bokhary then submitted that the onus was on the plaintiff to establish positively that the tenancy agreement was intra vires the first defendant. By this Mr Bokhary appeared to be suggesting that the same onus lay upon the plaintiff to establish that the agreement was intra vires as he would have borne had that specific issue been placed squarely upon him by the pleadings. To be fair to Mr Bokhary he did not pursue this argument at length. I am quite satisfied that as the pleadings stood in this matter there was no such onus on the plaintiff. Mr Bokhary then argued that the evidence as it stood established that the tenancy agreement was ultra vires the first defendant and that it was therefore void and that as the second defendant had continued to occupy the premises after the expiration of her tenancy agreement in 1976 she must be regarded as a tenant holding over who, not having been replaced by any other tenant, was entitled to the protection of Part II of Cap. 7. At this point in his address Mr Bokhary asked to amend both defences by adding the following words to each "In the alternative to the foregoing the defendant says that the agreement reached in paragraph 3 of the Statement of Claim is ultra vires the first defendant and accordingly is now void and of no effect whether to replace the second defendant or at all." 15. The request for a further amendment at this stage of the hearing was refused. Mr Bokhary then contended that he must still succeed, even though the amendment had not been allowed, as the evidence showed that the agreement was ultra vires the first defendant and that it was therefore absolutely void and that the Court was bound in the circumstances to refuse to give it any effect even though the ultra vires contention was not raised by the pleadings. 16. It was unfortunate that this and the following submissions which Mr Bokhary then made were raised so late in the trial that neither party had adequate opportunity to assist the Court by full research into the relevant authorities. 17. It is of interest to note that in the United Kingdom the doctrine of ultra vires has now been abolished by the European Communities Act of 1972 in favour of a person dealing in good faith with a company. However the position in Hong Kong remains as it was in the United Kingdom prior to 1972 as this legislation has never been enacted in the Colony. Mr Bokhary cited Palmer's Company Law Vol. 1, 2nd Edition, at 9-22 which reads as follows : "Under the old law, where a company does an act which is ultra vires, no legal relationship or effect ensues from it. Such an act is absolutely void and cannot be ratified even if all the shareholders agree." Mr Bokhary in his following argument appeared to draw no distinction, as far as the rules of pleading are concerned, between an ultra vires contract and an illegal contract. With regard to illegality Odgers' Principles of Pleading and Practice, 21st Edition, at 179 states : "Illegality, once brought to the attention of the court, overrides all questions of pleadings, including any admissions made therein." 18. An examination of the cases cited by Odgers, in the section headed "Illegality" from which the above quotation is taken, indicates that this proposition of law refers to cases of what might be termed strict illegality i.e. contracts that are illegal, and therefore void, because they offend against public policy or some specific legislation such as the Gaming Act, the Hire Purchase Legislation, the Money-lenders Act or the Defence Regulations. It is true that there are similarities between contracts that are void because of illegality and those that are void because of an ultra vires act by a company. However I have considerable doubt that the same consequences follow the failure to plead an ultra vires act as follow the failure to plead illegality. The difference between illegality and ultra vires was clearly set out by Buckley L.J. in Re Birkbeck Permanent Benefit Building Society (1912) 2 CH 231 at 233, where he stated that : "In dealing with this branch of the law it is necessary to bear steadily in mind the difference between illegality and ultra vires. A transaction which is illegal is forbidden by law. A transaction which is ultra vires is precluded by the incompetence of the actor. The act may be a perfectly legal act, but is one which that person cannot do." It is clear that there are material differences between voidness because of illegality and voidness because of ultra vires. In the present case there is no suggestion of illegality. What is suggested is that the first defendant did a legal act but that it was one which overstepped the limits of the powers under which the law permitted it to operate. It may well be settled law that where there is voidness for illegality and where this becomes apparent in the course of trial the Court must, even though it has not been pleaded, refuse to enforce any rights that have arisen under the illegal contract. The reason why this should be so was forcibly stated by Lindley L.J. in Scott v. Brown, Doering, McNab & Co. (1892) 2 Q.B. 724, at 728, as follows :
19. The authorities do not, however, as far as I have been able to ascertain, indicate with any degree of certainty, that this principle applies to contracts that might be void because of ultra vires. Both Bullen and Leake's "Precedents of Pleadings" and Odgers are silent on this matter. I must say that I incline to view that if it is not pleaded then an ultra vires act cannot be relied upon by a company to void a contract in an action brought against it by an innocent third party. The view that an innocent third party stands in a special position is given support by the judgment of Roxbrugh J in Re Jon Beauforte (London) Ltd (1953) Ch. 131 in which the learned judge was clearly impressed by the fact that the person dealing with the company in that case had notice that the transaction was ultra vires. 20. I can see no reason why the ordinary rules of pleading should not apply in such a case. These are set out in Odgers, at 84, as follows: "All facts tending to show the insufficiency or illegality of any contract must be specially pleaded. To say 'There never was any contract', is a different thing from saying 'There was a contract but I contend it is invalid.'" 21. It would be contrary to neither justice nor common sense that the exception to the above-stated rule, i.e. that the courts must take note of illegality leading to voidness, even though not pleaded, when it becomes apparent in the course of the trial, should not be extended beyond illegality and should have no application to voidness consequent upon an ultra vires act. 22. Even if I am not correct in thinking that an ultra vires act can only be relied upon if it is pleaded I am quite satisfied that the principles governing the failure to plead illegality must apply, a fortiori, to the failure to plead ultra vires. In the present case even if we apply those principles they are of no assistance to the defence. Odgers, in qualification of the quotation from page 179, set out above, states: "Otherwise, where the contract is not ex facie illegal, as a general rule the court will not entertain the question of illegality unless it is specifically pleaded and the court is satisfied that it has before it all the necessary facts concerning the contract and its setting." This principle was clearly explained by Lord Moulton in North Western Salt Company Limited v. Electrolytic Alkali Company Limited (1914) A.C. 461, at 475, as follows :
23. I am satisfied that the contract was, as the evidence stands, ex facie intra vires. Wood V.C., when dealing with a power to "make or take leases". which is the same power as that given by Object 28 to the first defendant, stated in a footnote to In re London and Colonial Company (1868) 5 L.J. Eq 561, at 562, that : "By the words 'make or take leases', it is obviously intended to give to this company the power of making the best arrangements they can for carrying on their business in what they think the most effective manner". In the present case the first defendant had the power to take leases, i.e., paraphrasing the words of Wood V.C., to make the best arrangements for carrying on its business in what it thought the most effective manner. The evidence is that the first defendant entered, in a regular way, into a lease. That lease was, therefore, ex facie intra vires and there is, I am satisfied, no evidence before this court upon which a finding that the first defendant acted beyond its powers could properly be made. The question of voidness should not therefore be entertained both because it was not pleaded and because I am not satisfied that I have before me all the necessary facts concerning the contract and its setting. Indeed this situation has, it might be contended, been brought about by the defendants themselves as they alone would have full knowledge of the necessary facts covering the contract and its setting and they elected not to give or call evidence. 24. I am satisfied that on 5th October 1976 the first defendant, a limited company, entered into a written tenancy agreement with the plaintiff whereby the plaintiff let the suit premises to the first defendant for a period of 2 years from 1st February 1976 and that, when so doing the first defendant was not acting as the trustee and/or agent and/or nominee of the second defendant. I am satisfied that the first defendant is a corporation and that it is therefore, excluded from the protection of Part II of Cap. 7 by S.50(6)(k) of that ordinance. I am satisfied that after the expiry of the agreement on 31st January 1978 the first defendant remained in occupation of the said premises as a monthly tenant until that tenancy was determined by a notice to quit which expired on 30th September 1978. I give judgment for possession of the suit premises to the plaintiff. I order the first defendant shall pay to the plaintiff mesne profits at the rate of $1,450 per month from 1st October 1978 until delivery up of vacant possession. I order the defendants to pay the plaintiff's costs of the action to be taxed.
Representation: D. Fung (K.K. & Winston Chu) for plaintiff Bokhary (Hastings & Co.) for defendants |