Harilela Hotels Ltd t/a Holiday Inn Golden Mile Hong Kong v. Hospitality Marketing Concepts (Hong Kong) Ltd and Another

HCA2523/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2523 OF 2004

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BETWEEN

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Before : Hon Waung J in Court

Date of Hearing : 26 September 2006

Date of Judgment : 26 September 2006

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J U D G M E N T

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1.This is a trial of an action before me of a claim brought by the plaintiff pursuant to an agreement entered on 24 May 2002 between the plaintiff (the owner of a hotel in Kowloon called Holiday Inn Golden Mile) and the 1^st and 2^nd defendants.  The 2^nd defendant is the guarantor under the agreement of the obligation of the 1^st defendant.

2.Everything turns in this case on the important provisions in the agreement relating to the relationship between the plaintiff and the defendants in respect of when a guaranteed sum to be paid to the plaintiff is not fully operative. 

3.The factual situation that gives rise to this agreement is this : the plaintiff, being a hotel, has a programme, which was running before this contract was entered into, whereby potential customers of the hotel would be recruited to join into a hospitality programme.  In return for these customers joining the programme and of course paying a yearly fee to the promoter of the programme, the immediate predecessor of the defendants, the hotel grants various discounts and privileges to these members of the programme. 

4.This agreement was entered into in May 2002 by the defendants who were taking over from their predecessors.  The broad feature of the agreement is that the income derived from the sales of membership by the defendants to members, namely from their subscriptions, would be shared between the plaintiff and defendants in the proportion of 45% to the hotel and 55% to the defendants.  There is a guaranteed minimum income that was supposed to be earned by the hotel and that was stated to be $5.7 million.  The agreement was granted exclusively by the hotel to the defendants so that the hotel could not go to anyone else to start another programme or competing programme. 

5.The contractual programme was to run for initially 26 months and later was extended, but we are only concerned with the 2^nd year.  For the 2^nd year, the income earned by the plaintiff under the agreement fell below the minimum of $5.7 million, and the hotel called upon the defendants to honour its guarantee, namely to pay the minimum sum of $5.7 million.

6.The defence which is the only issue now before this court in relation to the 2^nd year is that there was, what I might call, a non-compliance, so that clause 9.1 of the agreement becomes only partly operative.  Clause 9.1 of the agreement provides as follows :

“For each year of the Agreement, HMC guarantees Hotel HK$5.7 million contingent upon :-

a)    Complete database from HOTEL of approximately 11,000 primary current and non-expired members as of 15^th April with telephone numbers and other pertinent data.  If the database is less than approximately 11,000 primary members, the guarantee shall be prorated to reflect the lower number. …”

7.There is no dispute that as of 15 April, the database of the hotel of members of the programme was of 11,000 primary current and non-expired members.  The dispute is as to the consequence of what happened after 15 April 2002.  The case of the defendants is that as a result of the number of the current members having gone down, as I understand it, after 15 April so that by the effective date (that is the date when the agreement came into effect on the Effective Date) which is agreed to be 1 July, the defendants were in a less commercially favourable position than what they thought they had achieved under the agreement.  Everything therefore turns on the proper construction clause 9.1(a) of the agreement.  The 15 April is a critical date, but in the very forceful argument of Mr Sherry, he seemed to indicate that this is not of great significance whereas I emphasized to him that it is of the greatest significance.  The database of members was not expressed to be relating to either the Effective Date or to any other date before the Effective Date, but was by express reference to a particular chosen date of 15 April.  15 April in fact was a date before the signing of the agreement, so clause 9.1(a) did not even contain a warranty that as of the date of the agreement membership would be 11,000.  It was a warranty that as of 15 April 2002 the current members of the programme was 11,000.  There was nothing in the agreement which can be construed as a warranty or obligation on the part of the hotel, not to reduce the numbers or to warrant there would be 11,000 members as of 1 July or anything about not contacting members to renew or anything about renewing membership.  All these matters that were advanced by Mr Sherry in the course of his argument to persuade the court that there was a breach or, in his words, there is a case for pro-rating, were absent from the agreement. 

8.The second limb of clause 9.1(a) certainly provides for pro-rating, but the pro-rating only kicks in if several conditions are met :

(1)    it is less than 11,000; and

(2)    it is less than 11,000 as of 15 April.

The pro-rating can only relate to the 15 April date and cannot relate to number of members on any other date.

9.To succeed in his contention, Mr Sherry and the defendants will have to contend an implied term of various obligations and then to allege that there had been a breach of the implied term.  This was not pleaded, and certainly there is no case that such implied term can be made out. 

10.In my view, this is a commercial document and must be so construed.  I would accept everything that it said by the various quotations cited to me in the submissions of both counsel, that is : Jumbo King Ltd v. Faithful Properties Ltd [1999] 2 HKCFAR 279 at 296, and Chitty on Contracts, chapter 12 para. 43 (these are the cases cited by Mr Man, for the plaintiff) as well as the authorities cited by Mr Sherry, namely Murray v. Cathay Pacific Airways Ltd as well as River Trade Terminal Co. Ltd v. Secretary for Justice. 

11.The factual matrix is there, but what is important are the words in the agreement.  I must give meaning, a significant meaning, to the important words of “15 April”, which is a definite date expressed in the agreement.  That date, by express reference is of significance, and has a direct connection with the number of current members as of that date.  To accede to any of the submissions of Mr Sherry, I will have to ignore those words of 15 April as well as to construe it in such a way to contradict those words and replace it with the words of “1 July”.  It is a wholly impossible task for any commercial court to resort to such perverse construction. 

12.I can understand of course the frustration of the defendants, in that, they were hoping that they would inherit from the database, the 11,000 members existing on 15 April 2002.  But that is only a hope, there was nothing expressed in the commercial agreement as to their right, to have 11,000 members existing as of 1 July.  In the circumstances of this case, I think I can do nothing but to come to the conclusion that the database that was given was a complete database, there was nothing incomplete as alleged by Mr Sherry.  The only trouble of course was there might have been slippage from 15 April to 1 July so that the number of members had gone down, but that is not a basis for the application of the pro-rata provision.  The pro-rata provision only applies if the membership as of 15 April turned out to be less than 11,000.  But this is not the case here. 

13.In my view, therefore, the case of the defendants wholly fails.  There was no need for witnesses to be called.  I took the unusual step of calling upon Mr Sherry to address me immediately after I have properly understood from Mr Man’s opening what the case is about.  It seems to me that the construction of the contract is straightforward. 

14.The case advanced by Mr Man is compelling.  I cannot come to any other view.  I do not think that any argument advanced for the defendants has even a chance of being properly accepted.  It follows therefore that there must be judgment for the plaintiff in the sum now claimed. 

Mr Bernard Man,  instructed by Messrs Wilkinson & Grist, for the Plaintiff

Mr James Sherry, instructed by Messrs Minter Eillison, for the 1^st and 2^nd Defendants