The Urban Council v. Lee Tat Wah

HCA008002/1981

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Deputy Judge Davies.

Date: 13 April 1984

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JUDGMENT

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1. In this action, the plaintiff is the Urban Council, claiming against the defendant Lee Tat Wah a sum of money in respect of arrears of monthly licence fees.

2. The basic history of the matter is fairly straightforward.

3. On 26th February 1980, the plaintiff and the defendant entered into an agreement whereby the defendant was granted a licence to occupy and do business at two refreshment Kiosks on the beach at Deep Water Bay for a period of two years and nine months, as from 1st March 1980.

4. On 29th September 1980, the plaintiff gave written notice to the defendant that the agreement was terminated (and it follows, the licence revoked). The grounds for the plaintiff's decision to take this action were certain alleged breaches by the defendant, of the terms of the agreement.

5. The selection of a licensee had been decided on the basis of tender, and it is not in dispute that the defendant's tender of $27,500.00 per month had been the highest tender. The licences were accordingly granted to the defendant, and the fees payable were fixed at $27,500.00 per month.

6. At the commencement of the agreement, the defendant was required to deposit the equivalent of 3 months' licence fees in advance, and the defendant duly paid this sum of $82,500.00.

7. As consequential to the alleged breach of contract by the defendant, and the resultant early termination thereof, the plaintiff claims that this 3-months' deposit is forfeit, on the basis that it is estimated damages, and not a penalty.

8. It is the plaintiff's contention that after termination of the agreement at the end of September 1980, the defendant at no time delivered up vacant possession of the two Kiosks, and that the plaintiff recovered possession only by means of forcible re-entry on 27th May 1981.

9. The defendant in any event had not paid his licence fees for the month of September, and now in his writ, the plaintiff claims the fees for that month, and in addition, fees up to and including May 1981, the total sum being $247,500.00

10. The defendant's case as it emerges from the pleadings, is first and foremost that the plaintiff's termination of the agreement was in itself a wrongful breach of contract, and accordingly, the defendant originally counter-claimed for damages arising from (estimated) loss of profits as from November 1980 (when he ceased trading at the beach ) to 30th November 1982, the date of expiry of the agreement. That loss is estimated at $8000.00 per month.

11. As to the deposit, the defendant contends that even in the event of the plaintiff's entitlement to terminate the agreement, the deposit is not forfeit, because it is not an estimate of anticipated liquidated damages, but nothing more or less than a penalty.

12. Finally, as to the arrears of license fees, (or "mesne profits" as they have been sometimes called), the defendant's case is that after his employees had sold off the stock, the premises were effectively vacated, and that was sometime in October, or at the latest November, 1980. He therefore denies any liability for the continued payment of license fees beyond that time.

13. Those are the issues raised between the parties in the present case.

14. Mr. Burdett, for the plaintiff conceded at the outset of the trial that if (as is the plaintiff's case), the deposit was properly forfeit on the basis that it is an estimate of possible damages resulting from early termination of agreement, then in the event of the plaintiff recovering arrears of license fees, the amount of the deposit should be set off against them.

15. In effect, this set-off would reduce the plaintiff's claim to 6 months arrears of license fees@$27,500.00 = $165,000.00

16. As matters presently stand, the issue of the deposit is the only one remaining in connection with the counter-claim, because the defendant announced at the close of his defence that he was abandoning his counter-claim for loss of profits.

17. It seems, therefore, that in their most convenient order, I should decide the issues as follows:

18. I will, therefore deal with these issues seriatim.

1) The alleged breaches The plaintiff has relied upon a number of alleged breaches of contract as grounds for the decision to terminate the agreement with the defendant.

19. Of these, the one which has attracted the most emphasis is the erection by the defendant of additional structures. This is expressly forbidden by clause 4 of the First Schedule to the agreement.

20. There were three such structures, and there is no dispute that the defendant did in fact erect them. They were all at the Western, or old Kiosk, and they were an additional storage area, at the rear of the Kiosk, a canopy at the front of the Kiosk, and a wire-netting fence to protect customers from stray golf balls from the nearby Deep Water Bay Golf Course.

21. Although as I have said, there were other alleged breaches, it has been this breach of clause 4 which the plaintiff has in effect regarded as the main peg upon which to hang its hat.

22. Technical breaches they may have been, but I confess that when I first heard of them, I was at somewhat of a loss to understand what all the fuss was about, since none of the structures appeared to be doing any harm, but on the contrary, at least the safety fence and the canopy were highly beneficial to all and sundry.

23. Mr. P. A. Rull, the then Hong Kong Regional Amenities Manager of the Urban Services Department, was PW1. He was the officer with,  inter alia, responsibility for control of beach Kiosks.

24. He explained that it was the plaintiff's policy not to allow extensions of space without reference to a higher authority, e.g. a select committee.

25. The reason he gave for this was that if tenders were invited on the basis that a limited area only was available, (and that was the case in this instance), then if the successful tender was allowed to expand the premises, it would be unfair to other persons who had also submitted tenders.

26. This sounded to me a reasonable and commendable argument.

27. Although the evidence as to precisely what happened is somewhat vague, it seems that the defendant's original request for permission to erect additional storage space (first made on 26th February 1980) was referred to some faceless individual or body of officials, and refused. The defendant was informed of this by letter dated 11th April 1980 (Item 4 of the plaintiff's bundle of documents).

28. It is not my function to praise or criticise that decision; it was entirely a matter for the plaintiffs.

29. What I do, however, find amazing, and which is completely unexplained, is that the defendant's predecessor and the defendant's successor, both of whom had/have agreements with the plaintiff similar, if not identical, to that of the defendant, erected structures just the same as those of the defendant, without any recriminatory action from the plaintiff.

30. The defendant knows all about his predecessor Mr. Law Kam For, because he worked for him at the beach Kiosks; and the plaintiff has conceded that the defendant's successor has the additional structures.

31. Thus, two other licensees were "allowed" benefits which were denied to the defendant.

32. Quite naturally, this has led to strong resentment on the part of the defendant, who now accuses the plaintiff of caprice and victimsation.

33. This inconsistent conduct on the part of the plaintiff does not affect the legal position, but it is a disaster in terms of public relations; and I think it probable that it was the main factor which led to this action. One can only hope that the reasons for the inconsistency are not sinister ones.

34. Mr. Burdett has correctly pointed out that the letter of 11th April killed only one of the defendant's three proposals, and had the defendant complied with the letter in respect of the fence and the canopy, those matters might have been successfully concluded.

35. That is so, of course, but the defendant has emphasized that this extra storage space was vital to his operation; and it is clear to me that his disappointment over that matter marked the beginning of his disillusionment with the plaintiff.

36. In the event, the defendant did not dismantle any of the three structures which he had erected, and the plaintiff terminated the agreement on 29th September 1980.

37. The defendant's evidence concerning these structures is that on 25th February 1980, he had discussed his proposals with Mr. Rull, and on the following day, 26th, when he returned and signed the agreement.  Present were Mr. Rull, Mr. K.K. Wong, and an Indian officer. The plans for the structures were already there.

38. It is the defendant's evidence that Mr. Wong said "If those structures were there in the past, you can have them in the same way."

39. The defendant left his plans with these gentlemen, and shortly after taking possession of the Kiosks, he put up the structures on the Western Kiosk. The rest is history.

40. Neither Mr. K.K. Wong nor the Indian officer have given evidence, but Mr. Rull is emphatic that he went to pains to point out to the defendant at that meeting of 26th February that the decision or the proposals did not rest with him, but would have to be referred to a higher authority.

41. I accept this evidence of Mr. Rull because I believe that he did not have the authority to approve the defendant's plans, and it would therefore have been pointless for him to pretend that he had.

42. On the other hand, I think it probable that there was a misunderstanding on the part of the defendant.

43. It seems that Mr. K.K. Wong was the main spokesman, and it was very possible that he said something which the defendant misinterpreted.

44. I do not however believe that the defendant was given any verbal assurance that his plans would be approved, and accordingly there was no oral variation in the terms of the written contract, which were and which remained, binding upon the defendant.

45. Accordingly, though not without some reluctance, I find that the defendant was in breach of clause 4 of the first schedule, a situation which entitled the plaintiff to terminate in accordance with clause 9 of the agreement itself.

46. This being so, it is unnecessary for me to go at length into the other alleged breaches.

47. One was the undisputed fact that for a period of time, the Eastern (or new) Kiosk was not open for business. However the defendant rectified this as soon as he received the plaintiff's complaint. He explained that the only reason why he had not opened the Kiosk was because he had not yet received a light refreshment restaurant license in respect of it, and was therefore afraid that he might be breaking the law.

48. I accept this, and in terms of a breach of contract, regard the matter as minor.

49. In my view, the defendant made a good point when he said that, paying as he was a huge licene fee of $27,500.00 per month, he was not inclined to unnecessarily lose profits by leaving one of his two Kiosks closed without a reason.

50. Another complaint was that on menu boards and on the walls, there were advertisements for certain proprietary brands of article, e.g. cigarettes.

51. I can only suppose that the reason why this is considered objectionable is that the Urban Council wishes to avoid giving the impression that it, or its licensee is sponsoring or promoting any particular make of article. If so, it is understandable, but taking broad view it seems pretty harmless. The defendant said it happens in beach Kiosks on many other beaches, and he may well be correct.

52. It is no more than a minor technical breach, and by raising and seeking to depend on such matters, the plaintiff has created a most unfortunate impression that it was determined to "throw the book at" the defendant on the slightest provocation.

53. There was in my view only one other complaint which was serious enough to take cognizance of - that is the complaint of overcharging.

54. The defendant has denied any knowledge of this, and has submitted that had such misconduct taken place, the victim would either complain to the Kiosk operator, or to a beach attendant; and no such complaints were brought to his notice.

55. I am unable to agree with this submission. Many people prefer to take their complaints direct to authorized bodies such as the Consumer Council. Evidence was given by a witness, Mr. Evans, of being charged $1.50 for a carton of Vitasoy, the list price being $1.10. The Kiosk operator, he says, shrugged off his complaint, so he reported the matter to the Consumer Council.

56. The defendant had very little answer to this witness's evidence.

57. The defendant may not have been aware of, or a party to, this overcharging, but he must nevertheless take responsibility for the misdeeds of his employees.

58. In my view, this was a serious category of breach, which if repeated, (as it appears to have been from the span of the complaints) would certainly justify termination of the agreement under clause 10(a) of the first schedule.

59. To sum up thus far, my answer to question 1) as set out earlier, is that the plaintiff was entitled to terminate the agreement and accordingly was not in breach of contract by so doing on 29th September 1980.

2) The deposit     The deposit of $82,500.00 is required by clause 8 of the agreement itself.

60. Clause 9 provides, inter alia, that if the licensee breaches any of the items of the agreement, the Council may terminate the agreement by notice in writing, and that in such event, the sum specified in clause 8 shall be forfeit ...... as agreed liquidated damages. (The underlining is mine).

61. Obviously the draftsman of this agreement anticipated the possible difficulty which has in fact arisen in this case.

62. Although by using this expression the plaintiff hoped to make his intention clear (I have no idea what the expression appears like when translated into Chinese characters), and to bind the defendant thereby, the question whether the deposit was a genuine assessment of possible damages or its forfeiture a penalty, is one which can only be decided by the court.

63. Mr. Burdett has submitted that a figure representing three months of license fees is in effect a realistic estimate of the plaintiff's likely loss in the event of termination, since the evidence indicates that it would take approximately that length of time to appoint a new licensee.

64. Mr. Rull was cross-examined on this subject by the defendant, and he replied that a) certain repairs might be necessary to the Kiosks before a new licensee could take over, and b) by going through the existing tendering procedure, it would take approximately 3 months to select another licensee.

65. This latter evidence was unchallenged, it is perfectly feasible, and in my view, should be accepted.

66. My finding, therefore, is that on balance, the deposit must be regarded as an estimate of damages rather than as provision for a penalty.

67. Accordingly the relevant provisions of clause 9 are enforceable, and the plaintiff is justified in regarding the $82,500.00 as forfeit.

3)  License fees for period to 27th May 1981 Rightly or wrongly, I take the view that on this issue, the plaintiff's stance is on very shaky ground.

68. Mr. Burdett has put before me two authorities which if we were dealing with a lease or tenancy agreement, would be very helpful indeed.

69. The agreement between the plaintiff and the defendant was however of an entirely different character.

70. It conferred no possessory rights or proprietary rights in relation to the premises.

71. Clause 1 of the agreement spells out the nature of the grant quite clearly:

".... the Council grants to the Licensee the exclusive right to carry on the business of selling to (sic) commodities specified .... at the two refreshment Kiosks ..... and to conduct such business from the Kiosks ......"

72. Thus, there is a clear limit to the terms of the grant. The defendant was definitely not the plaintiff's tenant and had none of the rights or obligations which arise from express or implied lease covenants.

73. There are two provisions in the agreement as to what is to follow upon termination. They are clause 9:-

74. Those were the four corners of the agreement, and indeed what more was necessary?

75. It is the plaintiff's case that with effect from whatever time trading ceased at the Kiosks, both were left locked by the defendant and/or his employees.

76. PW2 Mr. Ng, an U.S.D. officer, gave evidence of a number of visits to the Kiosks between December 1980 and May 1981, and of finding both Kiosks looked on each occasion.  On 27th May 1981, he was one of a number of officers who broke the locks on the Kiosks and entered them.

77. The defendant does not seriously challenge this evidence. His case is in effect that he does not know what happened.

78. He was unable to pay the wages of his employees and thus gave them carte blanche to sell the stock in the Kiosks and keep the proceeds of sale to recoup themselves.

79. He said that he himself did not go to the beach - he had by then totally lost interest - and he understood that the sale of stock was completed by late October or early November 1980.

80. He was unaware whether or not his employees locked the Kiosks when they finally left.

81. At a fairly early stage, the plaintiff had engaged the services of the Legal Department, and it is clear that throughout this period of time from the termination of the agreement until 27th May 1981 (and indeed beyond), there was protracted correspondence between the Legal Department and the defendant's solicitors.

82. It is quite apparent that the Legal Department were attempting to handle the dispute with kid gloves on, and that in fact, is why no forced entry was made into the Kiosks until late in May 1981.

83. Of course, the defendant was under the contract obliged to vacate forthwith.

84. I am prepared to accept that his employees left at about the end of October.

85. But I also accept Mr. Ng's evidence that the premises were left locked. The defendant could and should have ensured that the premises were left unlocked, so that re-entry could be made by the plaintiff without breakage.

86. Be that as it may, however, the plaintiff had its remedy within the terms of the agreement, and could have made a forcible re-entry at any time. After early November, the defendant was no longer in physical occupation (a fact which the plaintiff could have discovered by inquiring from the beach-attendants). All the plaintiff needed to do to regain entry was to engage the services of a competent locksmith.

87. None of that would have prejudiced the negotiations; on the contrary, the plaintiff's hand would have been strengthened considerably if there had been a re-entry.

88. What the defendant had contracted to pay under the agreement were trading- license fees, no more, no less. In my view, there is no way in which the plaintiff can claim such fees after the license was withdrawn.

89. What the plaintiff can in principle claim is damages in respect of any tangible loss which may have been suffered. To the extent that the expression "meshe profits" is a pseudonym for damages, its use is not entirely out of place.

90. Without doubt, therefore, any expenses involved in making the forcible re-entry could have properly been claimed against the defendant. So also could loss of license revenue, but subject of course to the plaintiff's obligation to minimize the damages.

91. With respect, this aspect of the matter was clearly not given sufficient weight by the plaintiff's legal advisers.

92. The plaintiff was not entitled to sit back, do nothing and clock up the months in respect of which it would later claim $27,500.00 per month. The plaintiff's rights under the agreement were crystal-clear, and could and should, have been enforced at a much earlier stage.

93. I think it must fairly be conceded that short of possibly causing some unpleasant incident, it would not have been easy for the plaintiff to have re-entered before the end of October, because trading (in the form of selling-off stock) was still continuing.

94. But from that time onwards, had the plaintiff decisively exercised his rights, the Kiosks could have been put up for tender, and allowing for a further three months to complete the procedure, a new licensee could have been appointed by the end of January 1981.

95. All that could and should have been done irrespective of the negotiations continuing between the Legal Department and the defendant's solicitors.

96. The three-month interval before appointment of a new licensee is precisely what, as Mr. Burdett submitted, the deposit was intended to cover, in terms of estimated damages. Thus I regard any claim in respect of that period as having been effectively satisfied by the forfeiture of the deposit.

97. It will be recalled, however, that the defendant has never paid his license fees for September 1980. The plaintiff's claim to that appears to me to be formidable.

98. Finally, what about October 1980? I have construed the agreement strictly in relation to how the plaintiff should have reacted. In fairness, I think the agreement should be construed equally strictly against the defendant.

99. Clause 9 calls for the licensee to "immediately vacate" the Kiosks.

100. Clause 13 requires the licensee to "forthwith deliver up vacant possession".

101. It is common ground that the defendant did not do this, following receipt of the letter of 29th September which terminated the agreement.

102. He clearly regarded himself as entitled to a period of grace in which his employees could sell the stock. The agreement made no provision for any such period of grace; and therefore, applying the terms of the agreement strictly, as I do, the continued occupation of the Kiosks during October 1980, was in breach of the agreement, and in practical terms, delayed by one month the plaintiff's opportunity of peaceably and without embarrassment to any individual or the public, gaining re-entry, and it follows, appointing anew licensee.

103. In terms of damages, I regard that as properly assessed at one month's license fees - $27,500.00.

104. To sum up, my finding is that the plaintiff is entitled to recover from the defendant the license fees for September 1980, and damages in respect of October 1980 which I assess at one month's license fees.

105. Each of these items being $27,500.00, judgment is accordingly entered for the plaintiff against the defendant in the sum of $55, 000.00.

106. In the absence of any submissions to the contrary, it is my view that costs should follow this event, and I accordingly order that the costs of this action be the plaintiff's costs against the defendant,  to be taxed unless agreed between the parties.

Representation:

Mr. Burdett, Crown Counsel for Plaintiff.

Defendant in person.