Winland Investment Ltd v. King's Dyeing and Weaving Factory Ltd and Another

HCA007312/1986

1986, No. A7312

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: The Honourable Mr. Justice Nazareth in Chambers

Date of Hearing: 10 April 1987

Date of Delivery of Judgment: 16 April 1987

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JUDGMENT

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1. This is an appeal by the Plaintiff against the order of the master striking out part of its Statement of Claim.

2. In its Statement of Claim, the Plaintiff claims that –

3. The Plaintiff seeks to recover possession and arrears of rent. Its primary cause of action   rests upon the forfeiture of the lease by reason of -

4. The liquidator of the 1st Defendant contends that the 2nd lease and the Deed of Surrender of the 1st lease are not valid, and that the 2nd Defendant remains in lawful possession under the 1st lease. The Plaintiff denies that, but in the alternative claims possession by virtue of forfeiture of the 2nd lease by reason of the same grounds as are relied upon in the case of the lst lease.

5. Paragraph 4 of the Statement of Claim is in the following terms -

6. Clause 3(c) of the 1st lease, which is referred to in the foregoing paragraph, is part of the Lessor's covenants and is couched in the following terms -

Clearly on its face clause 3(c) does not "prohibit" the assignment of the lease.

7. The 1st and 2nd Defendants applied by summons to strike out the 1st sentence of paragraph 4 of the Statement of Claim and on 16th March 1987 the master struck out that sentence. The only material before him was the lease. I have not been informed of the master's reasons for his decision. Since this is an appeal by way of rehearing, that does not matter. It may well be that he took the view that the first sentence of paragraph 4 of the Statement of Claim could not possibly be supported by clause 3(c) of the 1st lease, and should therefore be struck out. Mr. Christopher Smith for the 2nd Defendant supports that decision upon essentially the same ground.

8. The application to strike out referred to Ord. 18 r. 19, but not to the specific ground therein which should have been specified. This nonetheless seems clearly to be that it discloses no reasonable cause of action. No reference was made to the inherent jurisdiction of the courts; but it is not suggested that the court is thereby precluded from exercising its inherent jurisdiction. It is helpful to set out the legal position under Ord. 18 r. 19 as this is so easily overlooked. It is set out at page 305 of the Supreme Court Practice 1985 as pointed out by Sears J. in the following passage in Carrian Investments Ltd. v. Wong Chong-po (1986) HKLR 945, 946:

"It is becoming more common for applications to be made to strike out pleadings or parts of pleadings without perhaps realizing what the role of the court is. In my judgment, the role of the court can be expressed in this way. Firstly, it is clear from the abundance of authorities conveniently set out and summarized at page 305 of the Rules of the Supreme Court Practice 1985 that it is only in plain and obvious cases that recourse should be had to this summary process Words such as 'where the claim is obviously unsustainable', 'no reasonable cause of action' are found and it is forgotten that this indeed is a process which should only be rarely used because it is only in that rare category of cases that the court can say such an action is unsustainable,"

Also in 1986 the House of Lords in Williams & Humbert v. W & H Grade Marks (1986) 1AC 363, held, as summarised in the head note, that:

"Where an application to strike out a pleading under R.S.C., Ord. 18, r. 19 involved prolonged and serious argument the court should generally decline to proceed with the argument unless it was satisfied that striking out would obviate the necessity for a trial or substantially reduce the burden of preparing for a trial."

9. Proceeding then to the subject matter of the appeal, it is well settled and is not disputed that in the absence of express agreement a tenant may freely assign his lease; permission of the lessor is not needed. But Mr. Swain for the Plaintiff contends that the parties to the 1st lease agreed to such a covenant because that can be inferred from the lease; that if it can properly be inferred, it is as good as an express covenant; and that it is only necessary to plead the effect of the covenant.

10. It is convenient to begin by considering whether a covenant not to assign can be inferred from the lease. Although the now common lessee's covenant not to assign does not appear in the 1st lease, clause 3(c), it is submitted by Mr. Swaine, clearly suggests a corresponding obligation upon the lessee not to sublet without the permission of the lessor; furthermore that that is put beyond question by the earlier reference to "permitted assigns" in the lease. Prima facie such a suggestion is at least arguable unless precluded by very clear authority. Indeed the Privy Council considered that such a suggestion arose upon a situation, not dissimilar in my view, in a lease in De Soysa v. De Pleiss Pol (1912) AC 194, 203. Mr. Smith points to the words "where not inapplicable" which follow the reference to "permitted assigns "as rebutting the suggested inference. Nonetheless in my judgment, the inference contended for is clearly arguable and not obviously unsustainable. I find myself unable to dismiss the suggestion out of hand.

11. I turn then to consider the issue of whether such an inferred or implied covenant can be regarded as an express covenant. While a covenant strictly is an agreement under seal, it seems that "the word will, however, be construed to cover stipulations in an agreement under hand if otherwise it would have no effect "and that "due regard must be paid to the intentions of the parties as collected from the whole context of the instrument". "No particular technical words are necessary for the making of a covenant ... an agreement may be collected from the entire instrument and a covenant when so made out by construction, sometimes called an implied covenant, is for all purposes an express covenant, and is as effectual as if the word "covenant" had been used" Halsbury Laws, Vol. 12 paras. 1540 and 1541. A footnote to the latter paragraph quotes the following passage from the judgment of Tindall C.J. in Williams v. Burrell (1845) 1CB 402, 431:

"The legal effect and operation of the covenant, whether framed in express terms, that is whether it be an express covenant, or whether the covenant be matter of inference and argument, is precisely the same; and an implied covenant in this sense of the term differs nothing in its operation and legal consequences from the express covenant"

And in paragraph 1-1072 of Woodfall Landlord & Tenant it is said that:

"Sometimes parties use express words in a deed not amounting in terms to a covenant, from which the law implies a covenant as a matter of construction in order to carry out the intention of the parties. Such covenants arising by construction of express words, are properly classified with express covenants."

In the foreCoing passages the Defendants have formidable authority to overcome not just in their clear indication that covenants can be implied, but in having to show that the contrary is not even arguable and that that issue can be resolved summarily without prolonged and serious argument. I do not consider that it is open to me to go outside the text of the lease and have regard to the submission that as the lease was for a very large and valuable premises and for a very substantial rent, the only conclusion is that the usual lessee's covenant not to assign included in precedents could only have been quite deliberately omitted by design. And even if that were open to me I would not be disposed to accept the submission; I think the opposite conclusion flows from the inclusion of the reference to "permitted assigns" and of clause 3(c) and is the more valid.

12. Nor am I persuaded that clause 3(c) would not be rendered nugatory by the view contended for by the Defendants, or that the explanation for clause 3(c) is to establish privity of contract. I accept that the usual consequence of breach of a covenant against assignment is forfeiture and that forfeitures are odious in lava and should be strictly construed. The jeopardy in which even innocent strangers may be put is obvious. However innocently, if the covenant is breached, there may be no relief from forfeiture - Barrow v. Isaccs (1891) 1QB 417. It would indeed seem wrong if so drastic a penalty could creep in by insinuation of a landlord's covenant, as Mr. Smith eloquently put it. But that is not the position here. If, applying the proper rules of construction, a lessee's covenant against assignment can be properly implied (and in my view that certainly seems to be so) then there is the ample authority that I have referred to, to treat that as an express covenant. The authorities cited by Mr. Smith do not lead me to a contrary view. Even if forfeiture clauses are to be construed strictly, it by no means follows that the covenant against assignment contended for cannot be implied from the terms of the lease, nor that the ordinary principles of construction are displaced. In reliance upon Church v. Brown 15 VES JUN 257 Mr. Smith asks what are to be the precise terms of that covenant. I think the answer emerges with sufficient clarity in this case from clause 3(c). And that I think is in turn points to the answer to the invitation to reject it as a clog on the tenant's right to sublet on the strength of Sweet & Maxwell Ltd. v. Universal News Services (1964) 2QB 699.

13. It has also to be considered whether the 1st sentence of paragraph 4 of the Statement of Claim is not deficient in another respect. The lessor's covenant in clause 3(c) is only to permit the lessees to underlet or sublet. It does not on its face refer to assignment by the lessees. I accept as Buckley J. explained in Sweet & Maxwell v. Universal News Services, that a covenant against assignment does not inhibit underletting or indeed all subletting. The converse does not necessarily follow and I think it is possible to argue as Mr. Swaine does, that if giving up half the term is restrained, then giving up the whole term must be restrained; likewise that if subletting of the entire term is restrained, so must assignment be. On the authorities cited this would not be dealt with as an abstract question.

14. Mr. Smith has been remarkably frank, the 1st Defendant has pleaded fraud against the Plaintiff. The 2nd Defendant now has to make a decision. So it needs to know where it stands. One can sympathize. But that is no reason to strike out part of paragraph 4. And there may well be other remedies.

15. To return then to the authorities upon Ord. 18 r. 19, the claim in relation to paragraph 4 is by no means "obviously unsustainable". The application to strike out does appear to me to involve prolonged and serious argument; argument that will have to be dealt with fully at the hearing, for which reason it is not appropriate for me to canvass it in any great detail in this judgment. Furthermore there are six issues in this case, comprising the 3 grounds for forfeiture of the 1st lease, and again those same grounds for forfeiture of the 2nd lease. Striking out part of paragraph 4 I will only dispose of the single ground of assignment of the lst lease, leaving it extant in regard to the 2nd lease. Manifestly the necessity for a trial will neither be obviated nor will the burden of preparing for a trial be substantially reduced.

16. For the foregoing reasons the appeal must be allowed and the master's decision set aside.

17. As to the Plaintiff's application for leave to amend its Statement of Claim, now that its appeal has been allowed, it will be able to pursue the ground specified in the first sentence of paragraph 4. For the purpose of determining the real question in dispute and the entire dispute in that regard, I think it should have leave. The Defendants can be provided with sufficient time to respond and likewise they can be indemnified in costs.

18. I will now hear counsel as to the terms of the orders to be made, directions and costs.

Representation:

Mr. John Swaine, Q.C. and Mr. Benjamin Yu instructed by Messrs. C.Y. Kwan & Co. for Plaintiff.

Mr. Booker of Messrs. Coward Chance for 1st Defendant.

Mr. Christopher Smith instructed by Messrs. Masons & Marriott for 2nd Defendant.