Sik Kee Petroleum Co Ltd v. So Loi

DCCJ 6029/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 6029 OF 2006

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BETWEEN

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Coram:  Deputy District Judge R. Cheung in Chambers (open to public)

Date of Hearing: 25^th April 2007

Date of Handing down Decision:  7^th May 2007

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DECISION

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1.The Plaintiff sought to enforce the terms contained in the Minutes of Agreement ("the Minutes") annexed to a Tomlin Order. The Defendant opposed the application. Both parties are represented by Counsel.

Background

2.The background to the present disputes is as follows.

3.By a Tenancy Agreement dated 24 October 2005, the Plaintiff let the premises known as Shop 1 on the Ground Floor of Wing Fat Court to the Defendant for a term of 5 years from 8 October 2005 to 7 October 2010. The rent payable was $28,000 per month for the first three years. The Defendant also agreed to pay inter alia management charges.

4.Clause 2(e) of the Tenancy Agreement provides inter alia that the Defendant shall keep the interior of the subject premises in tenantable condition and to yield up the premises in such condition at the determination of the tenancy.

5.Clause 2(p) of the Tenancy Agreement is in the following terms:

“Not without the previous consent in writing of the Landlord to make many alterations or additions (whether of structural nature or otherwise) whether of structural nature or otherwise) to the premises or any part thereof or erect, install, remove or alter any fixture, partitioning or other erection or installation in the premises or any part thereof including in particular the fixtures, machinery, meters and switchboards in the premises or in the transformer room thereof without the like consent to make or permit or suffer to be made alterations in or additions to the electrical wiring and installations or to install or permit or suffer to be installed any equipment, apparatus or machinery which imposes a weight on any part of the flooring in excess of that for which it is designed or which requires any additional electrical main wiring or which consumes electricity not metered through the Tenant’s separate meter and not to suspend or permit or suffer to be suspend any excessive weight from any structure of the premises Provided that the consent of the Landlord may be given subject to such conditions as the Landlord may in his absolute discretion impose and the Tenant shall:-

(i)   forthwith at the request of the Landlord make good any such wall partition fixture installation or other part injured cut or maimed;

(ii)   forthwith at the request of the Landlord demolish and remove any alteration or addition made in breach of this Lease and restore the premises to their previous condition at the Tenant’s own cost and expense to the satisfaction of the Landlord;

(iii)   at the expiration or sooner determination of the tenancy at the Tenant’s own cost reinstate and restore the same to the plan and design as if such addition or alteration (or such of them as may be specified by the Landlord and without payment of any compensation by the Landlord to the Tenant) had not been made good all damage caused thereto to the satisfaction of the Landlord.”

6.For ease of reference, Clause 2(e) and Clause 2(p) of the Tenancy Agreement will be referred to as the "Reinstatement Covenants".

7.Clause 4(a)(i) of the Tenancy Agreement gives the Plaintiff inter alia a right of re-entry upon the Defendant's default in payment for 15 days. It is in the following terms:

“If the rent, Government rates and rent and the management fees or other outgoings hereby stipulated or any part thereof shall remain unpaid for 15 days after becoming payable (whether legally demanded or not) or if the Tenant or other person in whom for the time being the term hereby created shall be vested shall fail to observe or perform any of the covenants or conditions herein or shall become bankrupt or in the case of a limited company shall go into liquidation or a petition shall be filed for the winding up of the Tenant or the Tenant shall otherwise become insolvent or shall make any composition or arrangement with creditors or suffer any prosecution in respect of the non-payment of any money due to the Government or shall suffer any execution to be levied on the premises or otherwise on the Tenant’s goods or effects or if the Tenant persistently fails to pay the rent hereby stipulated as and when the same falls due then and in any of the said cases it shall be lawful for the Landlord at any time thereafter to re-enter upon the premises or any part thereof in the name of the whole and thereupon this Lease shall absolutely determine but without prejudice to any right of action of the Landlord in respect of any breach of the Tenant’s covenants and conditions herein contained AND a written notice served by the Landlord on the Tenant or left at the premises to the effect that the Landlord exercises the power of re-entry hereinbefore contained shall be a full and sufficient exercise of such power notwithstanding any statutory or common law provision to the contrary.”

8.Clause 5(a) & (b) of the Tenancy Agreement is in the following terms:

“(a)    The Tenant shall on or before the execution hereof deposit and maintain with the Landlord the sum referred to as the Deposit in Part VII of the First Schedule to secure the due observance and performance by the Tenant of the agreements covenants stipulations and conditions herein contained and on the Tenant’s part to be observed and performed. The Deposit shall be retained by the Landlord throughout the term of this Lease free of any interest to the Tenant with power for the Landlord without prejudice to any other right or remedy hereunder to deduct therefrom the amount of any costs expenses loss or damage sustained by the Landlord as a result of any breach non-observance or non-performance by the Tenant of any such agreement covenant stipulation or condition. In the event of any deducting being made by the Landlord from the Deposit in accordance herewith during the currency of this Lease the Tenant shall forthwith on demand by the Landlord make a further deposit equal to the amount so deducted and failure by the Tenant so to do shall entitled the Landlord forthwith to re-enter upon the premises and to determine this Lease as hereinbefore provide.

(b)    Subject as aforesaid the Deposit shall be refunded to the Tenant by the Landlord without interest within 15 days after the expiration or sooner determination of this Lease and the delivery of vacant possession of the premises to the Landlord or within 15 days of the settlement of the last outstanding claim by the Landlord against the Tenant in respect of any breach non-observance or non-performance of any of the agreements covenants stipulations or conditions herein contained and on the part of the Tenant to be observed and performed whichever is the later.”

9.For ease of reference, Clause 5(a) & (b) of the Tenancy Agreement will be referred to as the "Deposit Covenants".

10.Clause 11 of the Tenancy Agreement gives the Plaintiff a contractual right to costs on an indemnity basis in taking recovery action. It is in the following terms:

“All legal costs and expenses incurred by the Landlord in demanding payment of rent or other outgoings and/or any other proceedings taken by the Landlord against the Tenant as a result of default of payment of rent or other outgoings by the Tenant or the breach by the Tenant of any covenants or conditions herein contained shall be borne and paid by or be recoverable from the Tenant on a full indemnity basis or as a debt and the deductible by the Landlord from the Deposit held by the Landlord hereunder.”

11.It is common ground that the Defendant had paid the Plaintiff the sum of $56,000.00 under the Deposit Covenant and this sum has never been refunded to the Defendant.

12.The Plaintiff issued the Writ herein on 8 December 2006. The Statement of Claim avers that the Defendant has been in breach of the Tenancy Agreement. There are averments to the effect that the Defendant is liable to pay the Plaintiff inter alia one month's arrears of rent for the period from 8 November 2006 to 7 December 2006 at the sum of $28,000.00 and management charges. The Statement of Claim refers to the abovementioned provision for re-entry and contains a prayer for an Order for possession of the demised premises. It is the Plaintiff's case that the lease was terminated by the issue of the Writ.

13.The Plaintiff has filed evidence to the effect that it was on 27 December 2006 (i.e. subsequent to the issue of the Writ) that the Plaintiff first became aware of the Defendant's having dismantled the fixtures and fittings in the demised premises and made additions and alterations thereto. The Plaintiff's request for reinstatement of the demised premises to the original condition was turned down by the Defendant. This fact is not disputed.

14.The Defendant filed an Acknowledgment of Service on 30 December 2006.

15.It is not in dispute that the Defendant had returned the keys of the premises to the Plaintiff on 4 January 2007.

16.The Plaintiff took out an Order 14 summons on 16 January 2007. Then, by consent, the action was settled by a Tomlin Order made on 3 February 2007.

17.Term 1 of the body of the Tomlin Order is in the following terms:

“All further proceedings in this action be stayed upon the terms set out in the Minutes of Agreement annexed hereto save for the purpose of enforcing the said terms with liberty to apply for such purpose.”

18.Term 1 of the Minutes annexed to the Tomlin Order provides as follows:

“The Defendant do pay the Plaintiff

(i)     the sum of 28,224.00 together with interest thereon at the rate of 10.934% per annum from the 25^th day of November 2006 to the date of this Order and thereafter at judgment rate until payment;

(ii)    rent/mesne profits in respect of the premises from the 8^th day of December 2006 to 4^th January 2007 in the sum of HK$25,290.30 (being HK$28,000 x 28/31) together with interest at judgment rate until payment;

(iii)    management charges in respect of the premises from the 1^st day of January 2007 to 4^th January 2007 in the sum of HK$96.80 (being HK$750 x 4/31) together with interest at judgment rate until payment; and

(iv)    rates and Government rent in respect of the premises from the 1^st day of January 2007 to 4^th January 2007 in the sum of HK$154.70 (being HK$3,480 x 4/90) together with interest at judgment rate until payment.”

19.For ease of reference, the payments prescribed under Term 1 of the Minutes will be referred to as "the agreed payments".

20.Term 4 of the Minutes provides as follows:

“The Defendant do pay the Plaintiff costs of this action on a full indemnity basis, to be taxed if not agreed.”

The Present Application

21.The Plaintiff by its summons filed herein on 12 March 2007 is seeking to enforce the abovementioned Terms 1 and 4 of the Minutes annexed to the Tomlin Order. The summons is so worded as to be also asking for the uplifting of the stay of proceedings ordered in the Tomlin Order. However, at the hearing Counsel for the Plaintiff did not proceed on that basis. Counsel for the Plaintiff said that the uplift of the stay is not necessary for the enforcement of the terms in the Minutes. That must be correct.

22.The Plaintiff has filed a number of Affirmations in support of its application. The Defendant has filed one. There is a letter dated 19 April 2007 from the Plaintiff's solicitors to the Defendant stating inter alia that the reinstatement expenses occasioned by the Defendant's breach of the Reinstatement Covenants amount to $146,800.00 and that the deposit money of the Defendant has thus been "deducted".

23.Under Clause 4(a)(i) of the Tenancy Agreement the Plaintiff is entitled to claim damages for the reinstatement expenses notwithstanding the termination of the Tenancy Agreement. The exercise of the right to re-entry does not prejudice the Plaintiff's right in respect of such breaches.

24.It is common ground that the Defendant has not paid the Plaintiff the agreed payments under Term 1 of the Minutes. So, on what ground may the Defendant oppose the present application?

25.From what I can make out of the Defendant's contentions, the main thrust of the Defendant's opposition is that he has a present right of set-off. According to the Defendant, the deposit in the sum of $56,000.00 held by the Plaintiff under the Tenancy Agreement is due to be refunded to the Defendant. Hence, the Plaintiff owes the Defendant a debt of $56,000.00. The Defendant seeks to set off the debt of $56,000.00 owed by the Plaintiff towards the agreed payments, which at the date of hearing amounted to slightly less than $56,000.00 (see pages 35-36 of Trial Bundle B, hereafter "B35-36", mutatis mutandis).

26.I appreciate that if the Defendant's contention above is arguable, then I should not dispose of the Plaintiff's application summarily. I would have to consider making directions for the filing of pleadings, discovery and a full blown trial: Peter Yiu Sing Chan v. Lam Yat Wah, HCMP 19/1972 & 3481/1973 (consolidated), 9 April 1990 applied.

27.I would also follow Luk Por v. Chau Kim Hung, HCA 10369/1997, 8 October 2003 and hold that the Plaintiff is entitled to apply to enforce the terms of the Minutes without the need to commence a fresh action for such an application. The Defendant has not taken any issue on this anyway.

28.The Plaintiff's answers to the Defendant's opposition though presented in a different fashion may be understood in the following manner: First, the Plaintiff says that the Tomlin Order precludes the Defendant from raising the above set-off. Second, if the Tomlin Order does not preclude the Defendant from raising the above set-off, the Plaintiff says that the right of set-off has not yet arisen. Third, if the right of set-off has arisen, the Plaintiff says that it has the right to set off from the deposit money due to be refunded to the Defendant against other liabilities due and owing by the Defendant towards the Plaintiff. The Plaintiff has exercised its right of set-off and thereby extinguished the Defendant's right to the refund of the deposit money. In this connection, at the hearing, I have heard submissions concerning the Defendant's liability to pay the Plaintiff (1) damages in respect of reinstatement expenses occasioned by the Defendant's breach of the Reinstatement Covenants; and (2) costs of the action on an indemnity basis pursuant to Term 4 of the Minutes. More will be said about the Plaintiff's answers later.

29.At this juncture, I should note that Counsel for the Defendant has expressly renounced that the Defendant is contending that the Plaintiff is holding the deposit money under a Quistclose trust: see Quistclose Investments Ltd. v. Rolls Razor Ltd. (1970) AC 567. Counsel for the Plaintiff also says that the deposit money is not under any trust.

30.It would be odd indeed if I were to find the existence of a trust in respect of the deposit money in such circumstances. I find that there is no Quistclose trust on the deposit money. Even if there were a Quistclose trust, I do not consider that the trust has the effect of compelling the Plaintiff to deal with the deposit money strictly in accordance with the express provisions of the Deposit covenant. In short, I do not consider that such a trust, if it does exists, preclude the Plaintiff from applying the deposit money towards diminution or satisfaction of the reinstatement expenses and legal costs.

31.The Defendant's answer to the Plaintiff's above answers is that the Plaintiff is not entitled to claim damages in respect of the reinstatement expenses since the Plaintiff has not included the claim in this action. I understand that the Defendant is relying on the Res Judicata principles in the wider sense.

32.I would deal with the Defendant's Res Judicata objections first. I find it quite unarguable. The undisputed fact is that at the time the Writ was issued, the Plaintiff was not yet aware of the Defendant's breach of the Reinstatement Covenants. The Writ was filed on 8 December 2006. The Plaintiff made the discovery on about 27 December 2006 (see A130). I would hold that the Plaintiff is not precluded from claiming damages in respect of the reinstatement expenses in a subsequent action: Ray Chen v. Anita Wan Ching Lam & Another, HCA 4582/2001, 9 May 2002 applied. The Plaintiff is not precluded from setting off the reinstatement expenses against the deposit money refundable to the Defendant for the purpose of the present application.

33.I would now return to the Plaintiff's answers to the Defendant's opposition.

34.I do not consider the Tomlin Order precludes the Defendant from raising a set-off in relation to the deposit money. Nothing points to that expressly or by implication.

35.However, I find that the Defendant's right to set-off has not yet arisen. Under Clause 5(b) of the Tenancy Agreement, the right to the refund of the deposit money only arises when 15 days have elapsed after the Defendant has settled the last of the Plaintiff's outstanding claim.

36.The Plaintiff has an outstanding claim for legal costs that is not yet settled. I am told that there was no agreement on the amount of such legal costs, and taxation proceedings are under way. The Plaintiff's bill of costs that has been rendered to the Defendant comes to $48,000.00 odd. The Appointment to Tax was filed on 2 April 2007.

37.I take the view that the Plaintiff has made a claim for such legal costs since the issue of the Writ herein and that the claim subsists throughout and remains outstanding. The Plaintiff is not guilty of unconscionable delay in the quantification and prosecution of its such claim.

38.The Plaintiff also has an outstanding claim for damages in respect of the reinstatement expenses. In the letter dated 4 January 2007 from the Plaintiff's solicitors to the Defendant's solicitors, the Plaintiff has made such a claim. The claim subsists throughout and remains outstanding. Again, the Plaintiff is not guilty of unconscionable delay in the quantification and prosecution of its such claim.

39.Since the right to the return of the deposit money has not yet arisen, the Defendant can have no right of set-off at present. The Defendant's opposition thus failed on this account.

40.Even if I were wrong on the above, and assuming for the time being that the right to the refund of the deposit money has indeed arisen, the Defendant's opposition grounded on set-off is nonetheless quite unarguable. As noted earlier, the Plaintiff has filed evidence to the effect that the damages in respect of reinstatement expenses occasioned by the Defendant's breach of the Reinstatement Covenants amount to at least $146,800.00. Against this, the Defendant has made no more than a bald and obscure assertion that he would challenge the figure. The Defendant does not even say what should have been the reasonable figure for the reinstatement expenses.

41.The Defendant's opposition also failed on this account.

Costs

42.On the question of the costs of this application, I am of the view that the present situation is nonetheless covered by Clause 11 of the Tenancy Agreement. The Plaintiff has a contractual right to indemnity costs. I take the view that notwithstanding the termination of the Tenancy Agreement, the application of Clause 11 survives and covers the present situation. The law is that costs is a matter within my discretion but where there is a contractual right to indemnity costs, the discretion should ordinarily be exercised to reflect that contractual right: see Gomba Holdings (U.K.) Ltd. & Others v. Minories Finance Ltd. & Others, (1993) Ch 171, 30 January 1992. I see nothing that persuades me not to order indemnity costs.

43.Even if I were wrong on the above and that the correct view is that the Plaintiff at present no longer has a contractual right to indemnity costs covering the present application, I would still take into account Clause 11 in the exercise of my discretion.

44.I would order indemnity costs accordingly.

Orders

45.I would make an Order in terms of Term 1 and Term 4 of the Minutes of Agreement annexed to the Tomlin Order herein made on 3 February 2007.

46.There be an Order Nisi that the Defendant do pay the Plaintiff's costs of and incidental to this application on an indemnity basis, to be taxed if not agreed. There shall be Certificate for Counsel. For the avoidance of doubt, this includes the costs reserved for the hearing on 19 March 2007. Unless an application to vary this Order Nisi is made, it will become absolute in 14 days.

Representation:

Mr. Kenny Lin, instructed by Messrs. W.L. Yuen & Co., for the Plaintiff

Mr. Matthew Chong, instructed by Messrs. Y.L. Yeung & Co., for the Defendant