Ho Kan Bau and Another v. Yeung Man Lung, Vincent

HCA 789/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 789 OF 2009

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BETWEEN

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REASONS FOR JUDGMENT

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I.  Background

1.The Plaintiffs (“Landlords”) were/are the registered owners of Shop SLG2, Sub Lower Ground Floor, Westlands Gardens Nos.2-10, 12A-12H Westlands Road, Hong Kong (“Shop”).  The Shop could only be used for business purposes.

2.On 19 September 2007, the Landlords and Master Yield Limited (“Tenant”) entered into a provisional tenancy agreement (“PTA”), and the Tenant became the tenant of the Shop for a term of 2 years.

3.In consideration of the Landlords entering into a tenancy agreement with the Tenant for the Shop, the Defendant as guarantor entered into a Guarantee dated 18 October 2007 in favour of the Landlords (“Guarantee”).

4.In the Guarantee, the Tenant agrees to inter alia the following:

(a)  “In consideration of the [Landlords] agreeing to enter into the Tenancy Agreement with the Tenant, the [Defendant], as primary obligor and not merely as surety, hereby irrevocably and unconditionally guarantees to the [Landlords] the due and punctual payment to the [Landlords] of all sums payable now or in the future by the Tenant under the Tenancy Agreement as and when the same shall become due and due performance and observance of all the Tenant’s covenants therein contained.  The [Defendant] unconditionally agrees with the [Landlords] that whenever the Tenant fails to make payment when due of any sum whatsoever under the Tenancy Agreement or commit a breach of the terms and conditions of the Tenancy Agreement, the [Defendant] shall, upon demand forthwith pay and make good to the [Landlords] all arrears of rent and all losses damages arising as a result of the Tenant’s breach and costs and expenses thereby arising or incurred by the [Landlords].  The [Defendant] also agrees to remedy any breach of the terms and conditions of the Tenancy Agreement.” (“Clause 1”)

(b)  “…… The liability of the [Defendant] is absolute and shall not be discharged whatsoever except by full payment of all sums due under the Tenancy Agreement and the Tenant’s full and complete performance and observance of the terms and conditions of the Tenancy Agreement by the Tenant.” (“Clause 3”)

(c)  “The [Defendant] shall not be exonerated and his liability under this Guarantee shall not be lessened or impaired by any time, indulgence or relief being given by the [Landlords] to the Tenant or any other person, …… by the taking, variation, compromise, renewal or release of or refusal or neglect to perfect or enforce any right, remedies or securities against the Tenant or any other person under the Tenancy Agreement or otherwise or by anything done or omitted which but for this provision might operate to exonerate the [Defendant].” (“Clause 4”)

(d)  “The [Defendant] hereby waives all rights the [Defendant] may have of first requiring the [Landlords] to proceed against or enforce any guarantee or security of, or claim payment from, the Tenant or any other person whether the same may arise under the governing law of this Guarantee or otherwise howsoever.” (“Clause 6”)

(e)  “In addition to the guarantee contained herein and separate therefrom the [Defendant] hereby irrevocably agrees to indemnify the [Landlords] against all proper and reasonable expenses (including legal expenses on a full indemnity basis) which it may incur in proceeding against the Tenant.” (“Clause10”)

5.On 5 December 2007, the Landlords and the Tenant entered into a formal tenancy agreement (“Tenancy Agreement”) for a term of 2 years from 5 December 2007 to 9 December 2009 at a monthly rent of HK$150,000.00 to be paid in advance on the 10^th day of each month with a rent-free period from 5 December 2007 to 9 January 2008.  Apart from the rent, the Tenant also had to pay management fees, government rates as well as sewage charges.

6.Upon entering into the Tenancy Agreement, the Tenant paid to the Landlords the deposit of HK$300,000.00 and the first month’s rent after the rent-free period.

7.The Tenant took possession of the Shop and carried out decoration works thereat.

8.Disputes arose between the Landlords and the Tenant over the tenancy (see paragraphs 16-26 below).  But there is no dispute that the Tenant did not pay any further rent as from February 2008, and did not pay any management fees, government rates or sewage charges as from April 2008.

9.On 16 May 2008, the Tenant commenced HCA No.866/2008 (“First Action”) against the Landlords for inter alia misrepresentation and breach of contract as a result of disputes with the Landlords over the Tenancy Agreement.  On 30 June 2008, the Landlords filed their Defence and Counterclaim in the First Action.  On 26 September 2008, they amended the Defence and Counterclaim and issued a summons for summary judgment on the counterclaim.

10.On 10 January 2009, the Tenant returned possession of the Shop to the Landlords.  The Landlords claimed that in breach of the Tenancy Agreement, the Tenant failed to deliver up the Shop to them in its original state and/or in good repair and condition.

11.On 23 February 2009, Master S Kwang granted summary judgment on the counterclaim in the First Action.

12.On 4 March 2009, the solicitors for the Landlords issued a demand letter to the Defendant for payment of the sum of HK$1,713,503.00 which the Tenant was obliged to pay the Landlords under the summary judgment on the counterclaim in the First Action (“Arrears”) as well as for payment of the expenses for reinstating the Shop back to good repair and condition in the sum of HK$116,800.00 (“Reinstatement Expenses”) and the legal costs incurred by the Landlords in the First Action in the sum of HK$180,000.00 (“Legal Costs”).

13.The Landlords produced bills of costs by the their former and present solicitors and counsel’s fee notes for the First Action.  These bills of costs and fee notes do not draw a clear demarcation between costs incurred for work done for the defence and work done for the counterclaim in the First Action.

14.The Tenant appealed against Master S Kwang’s decision in the First Action.  On 30 June 2009, Suffiad J granted leave to the Tenant to amend its pleadings.  On 25 August 2009, Suffiad J affirmed Master S Kwang’s decision but held that credit should be given for the amount of the deposit paid by the Tenant (“Appeal Decision”). In the Appeal Decision, the learned judge also ordered stay of execution of the judgment on the counterclaim pending trial of the Tenant’s claim in the First Action.

15.In the present action, the Landlords claimed against the Defendant for the Arrears in the sum of HK$1,713,503.00, the Legal Costs in the sum of HK$180,000.00, and the Reinstatement Expenses in the sum of HK$116,800.00.

16.The Defendant by his Defence filed on 4 May 2009 denied the Landlords’ claim.  He averred that before entering into the Tenancy Agreement, the Tenant had made known to the Landlords and their property agent that they intended to rent the Shop to operate a spa and beauty treatment business.  Before signing the Tenancy Agreement, the Tenant specifically asked the Landlords through their property agent whether special approval from the incorporated owners of the building where the Shop was situate (“IO”) was required for installing utilities and air-conditioners, and the response was that approval from the IO was not required except for shopfront signage.  In reliance of such 1^st representation, the Tenant entered into the Tenancy Agreement and paid the deposit and first month’s rent.

17.The Tenant went on to aver that on/about 8 December 2007, it started decoration works at the Shop but was told by the building management office that no air-conditioners could be installed due to an injunction prohibiting the same.  On/about 10 December 2007, upon enquiry by the Tenant, the Landlords through their agent represented that it was due to the fault of the previous tenant in failing to pay the monthly fee to the IO for installing air-conditioners that led to the injunction, but the Landlords as landlord would pay such monthly fee, which payment would discharge the injunction.  In reliance of such 2^nd representation, the Tenant continued with the decoration works of the Shop.

18.The Tenant continued to aver that on/about 14 December 2007, the Landlords through their agent informed the Tenant that the monthly fee had been paid to IO so the Tenant would soon receive a letter informing them the injunction had been discharged and they could proceed with installing the air-conditioners.  In reliance of such 3^rd representation, the Tenant continued with the decoration works of the Shop, and started to employ staff and to procure equipment/materials for the business.

19.The Tenant claimed that on/about 24 December 2007, it received a letter from the IO’s solicitors requiring them to remove the air-conditioners due to the injunction granted in Lands Tribunal proceedings LDBM292/2006 (“LT Action”).  The Tenant later discovered that the IO took out the LT Action against the Landlords in 2006 for breach of the deed of mutual covenant for installing air-conditioners without prior approval, and that the injunction requiring removal of the air-conditioners was made on 8 November 2007, ie nearly a month before the signing of the Tenancy Agreement.  Hence, it was said that the Landlords’ representations were false and made fraudulently or recklessly with a view to induce the Tenant to act to its detriment.

20.In the Amended Statement of Claim in the First Action, the Tenant pleaded a pre-contractual representation by the Landlords that air-conditioners could be installed at the Shop as a result of failure to disabuse the Defendant of such belief from observations of air-conditioners inside and at the external wall of the Shop during site inspection.  The Tenant claimed it entered into the PTA in reliance of such pre-contractual representation, and the Landlords failed to inform the Tenant that air-conditioners could not be installed at the Shop or that the IO had taken legal action against them in relation to such matter despite the fact they owed to the Tenant a duty of disclosure.  The Tenant claimed that such pre-contractual representation was false and the Landlords were in breach of their duty of disclosure.  It also acted to its detriment by entering into the PTA and/or the Tenancy Agreement.

21.The Tenant added that by reason of the damages it suffered as a result of the falsity of the 1^st representation referred to in paragraph 16 above, it was unreasonable for the Landlords to rely on clause 1 of the Tenancy Agreement which required the rent to be paid without deduction and set off.

22.In respect of the 2^nd representation referred to in paragraph 17 above, the Tenant’s pleadings in the First Action claimed that the Tenant had indicated to the Landlords’ daughter it would be willing to pay the monthly fee to the IO for installing the air-conditioners at the external wall of the Shop after it became the tenant of the Shop, and there was a further agreement with the Landlords that in consideration of the Tenant not rescinding the Tenancy Agreement and agreeing to pay such monthly fee the Landlords agreed to secure the discharge of the injunction and to obtain the IO’s approval for such installation.

23.The Tenant no longer relied on the 3^rd representation referred to in paragraph 18 above.  However, the Tenant claimed that upon enquiry after receipt of the letter from the IO’s solicitors dated 24 December 2007, the Landlords’ daughter orally represented that the injunction had been discharged and the Tenant could write and apply to the IO for installing air-conditioners at the external wall of the Shop and for paying pay the promised fee. In reliance of such representation, the Tenant wrote to the IO on 31 December 2007.  But on 11 January 2008 the IO replied by refusing to discuss with the Tenant.  It was said that further liaison led to an oral agreement in mid-January 2008 between the Tenant and the Landlords for extension of the rent-free period until after the resolution of the issue of the installation of air-conditioners.

24.It was said that as a result of the false representations and/or breaches of contract by the Landlords, the Tenant was unable to commence its business and incurred expenditure in decorating the Shop, employing staff and purchasing materials, and thereby suffered loss and damages. 

25.The Tenant claimed that by reason of the rent-free agreement, it was not required to pay rent to the Landlords.  Alternatively, since it turned out that the Landlords were incapable of giving consent for the installation of the air-conditioners, the Landlords were in breach of an express term of the Tenancy Agreement that they as landlord were capable of giving consent to the Tenant to make reasonable alteration and/or addition and/or installation and/or improvement to the Shop.  Further alternatively, the Defendant claimed that the Landlords were in breach of an implied term of the Tenancy Agreement that air-conditioners could be installed at the Shop.

26.In the First Action, the Tenant claimed for declarations that the PTA and the Tenancy Agreement had been rescinded, and that the Tenant was not liable to pay rent due to the rent-free agreement or alternatively that he was entitled to set off the rent due to the Landlords from loss and damages suffered. The Tenant also claimed for damages to be assessed.

27.Suffiad J in the Appeal Decision rejected any entitlement by the Tenant to claim equitable set off as a defence to the counterclaim in the First Action because (a) the terms of the Tenancy Agreement prohibited the raising of such defence to a claim for the Arrears and (b) the Landlords could not have resiled from the Tenancy Agreement notwithstanding the alleged misrepresentations since they retained possession of the Shop after having known of the true facts for some time.  Suffiad J also ruled there was no concluded agreement to extend the rent-free period.

28.On 12 June 2009, the Landlords issued an Order 14 summons in the present action (“Landlords’ Summons”).  The Landlords filed the affirmation of the 1^st Plaintiff dated 6 June 2009 to verify their claim.

29.On 24 September 2009, the Defendant issued a summons asking to stay further proceedings in this action pending trial of the Tenant’s claim in the First Action (“Defendant’s Summons”).  The Defendant filed his affirmation on 22 September 2009 to oppose the Landlords’ Summons and to support the Defendant’s Summons.  He confirmed he was/is a director of the Tenant and adopted the pleadings and affirmation evidence filed by the Tenant in the First Action.  He further confirmed that he would not dispute his liability to the Landlords under the Guarantee, and would make payment to the Landlords should the Tenant be found liable to pay them any money under the First Action.  But since his liability was co-extensive with that of the Tenant and a stay of execution was granted in respect of the judgment on the counterclaim in the First Action, the Defendant argued that he should be entitled to an interim stay of the present action or at least a stay of execution if judgment were to be entered in favour of the Landlords against him in the present action pending resolution of the Tenant’s claim in the First Action.

II.  Discussion

30.I agree with Mr Lo, counsel for the Landlords, that it is clear from the plain wording of Clause 1 that although the Defendant was described as a guarantor he was in fact a primary obligor and not merely a surety.  Indeed, Ms Ng, counsel for the Defendant, very fairly did not suggest otherwise.

31.Mr Lo submitted there was no defence to the Landlords’ Summons in respect of the outstanding Arrears because (a) the Defendant by his affirmation confirmed he would not dispute his liability under the Guarantee, and (b) judgment was entered against the Tenant in respect of the Arrears in the First Action.

32.Although there was no judgment against the Tenant in respect of the Reinstatement Expenses and the Legal Costs, I agree with Mr Lo that Clause 6 made clear there was no need for the Landlords to first take action against the Tenant.  In any event, Ms Ng confirmed that the Defendant would not dispute the quantum of the Arrears and the Reinstatement Expenses as claimed. Subject to the arguments in relation to the Defendant’s Summons, I tend to agree there is no triable issue in relation to the Arrears and Reinstatement Expenses.

33.As to the matter of the Legal Costs, the question is whether the Landlords have established a case for claiming the Legal Costs in the sum of HK$180,000.00, and whether there is any arguable defence or triable issue in relation to the same.

34.To reiterate, Clause 10 provides that the Defendant irrevocably agrees to indemnify the Landlords against all proper and reasonable expenses (including legal expenses on a full indemnity basis) which the Landlords may incur in proceeding against the Tenant.

35.On 23 February 2009, Master S Kwang in the First Action ordered that the costs of the Landlords’ counterclaim including costs of the summary judgment application in the First Action and all costs reserved thereunder be to the Landlords with certificate for counsel to be taxed if not agreed.  Such costs order was upheld on appeal.  On 15 September 2009, Suffiad J held there be no order as to costs in respect of the costs of the appeal.

36.In light of Clause 10 and the above costs orders by Master S Kwang and Suffiad J in the First Action, the Defendant is plainly liable on the Guarantee for legal costs incurred by the Landlords in proceeding against the Tenant by way of the counterclaim in the First Action. But is he liable for costs incurred by the Landlords in respect of the First Action on a global basis and for HK$180,000.00 as claimed?  The solicitors’ bills of costs and counsel’s fee notes put forward by the Landlords as well as Landlords’ pleaded claim for the Legal Costs cover not just costs incurred in respect of the counterclaim in the First Action but also in respect of defending the Tenant’s claim in the First Action.

37.Mr Lo conceded that in fact the Landlords should only seek interlocutory judgment for legal costs incurred by the Landlords in proceeding against the Tenant for recovery of the Arrears (ie the counterclaim) in the First Action to be assessed on full indemnity basis.  Mr Lo confirmed that the Landlords did not and would not claim against the Defendant for costs incurred in defending the Tenant’s claim in the First Action.

38.Subject to arguments on the Defendant’s Summons, Ms Ng had no quarrel with Mr Lo’s formulation in the above paragraph. In my view, it must be correct that the Landlords will at best secure interlocutory and not final judgment for the legal costs as formulated.  After all, Clause 10 only permits the Landlords to recover proper and reasonable expenses which obviously require assessment by the court.  In any event, costs on full indemnity basis are not necessarily the same as costs on solicitor and own client basis put forward by the Landlords by way of their solicitors’ bills of costs and counsel’s fee notes.

39.Given Ms Ng’s stance, I need not deal with a short point she raised in relation to the Landlords’ claim for the Legal Costs, but I do so briefly for the sake of completeness.  Ms Ng complained that the summary judgment application in respect of the Legal Costs was premature since the costs order made by Master S Kwang in the First Action and as affirmed by Suffiad J had not been taxed. I am not persuaded by such argument.  Quite simply, inter partes taxation between the Landlords and the Tenant on party and party basis is not relevant to the Defendant’s liability under the Guarantee for legal costs incurred by the Landlords on full indemnity basis for proceeding against the Tenant.

40.In light of the aforesaid decisions by Master S Kwang and Suffiad J and the above analysis, but subject to arguments on the Defendant’s Summons, I am of the view there is no arguable defence as to liability in relation to legal costs incurred by the Landlords for proceeding against the Tenant by way of counterclaim in the First Action for recovery of the Arrears.

41.Turning to the Defendant’s Summons, Ms Ng submitted that since the present case and the First Action arose out of the same set of facts, so in order to save time and costs the court should not grant any summary judgment but should stay the present action pending the determination of the Tenant’s claim in the First Action. 

42.In my view, such submission does not fully address the heart of the issue.  There is no dispute that in the First Action the Tenant has raised against the Landlords a cross-claim for unliquidated damages but such cross-claim does not amount to any defence of equitable set off to the Landlords’ counterclaim for the Arrears (see paragraphs 49-61 of the Appeal Decision as well as the summary judgment in favour of the Landlords for the Arrears in respect of the counterclaim in the First Action).  The crux of the issue is whether the existence of such cross-claim for unliquidated damages by the Tenant against the Landlords justifies granting leave to the Defendant to defend the present action.  If there is no merit to such argument, there is little reason to grant any interim stay of the present proceedings pending the outcome of the Tenant’s claim in the First Action.

43.Ms Ng alternatively argued that if the court were minded to grant summary judgment against the Defendant in favour of the Landlords in the present action, it would be manifestly unjust for such judgment to be enforced without taking into account the stay of execution in the First Action since (a) there was sufficiently close connection between the Tenant’s claim in the First Action and the present action and (b) the Guarantee was given in connection with the Tenancy Agreement.  Ms Ng further argued that if the Tenant succeeded and were awarded damages on its claim in the First Action sufficient to extinguish the judgment debt for the Arrears under the counterclaim in the First Action, the Landlords would not be able to enforce the Guarantee against the Defendant.  She submitted that had the Defendant been a party to the counterclaim in the First Action, a stay of execution might well have been granted in his favour on the same principle.

44.In short, Ms Ng’s arguments are premised on the alleged co-extensive nature of the Defendant’s liability to the Landlords under the Guarantee and the Tenant’s liability to the Landlords after taking into account any damages that might be awarded in its favour on its claim in the First Action.  But apart from such contention, the Defendant raised no other argument.

45.Mr Lo counter-argued that the stay of execution ordered in the First Action was due to the Tenant’s cross-claim against the Landlords, but there should not be any stay of proceedings or stay of execution in the present action because the Defendant had no cross-claim against the Landlords and further because the Defendant’s liability was primary and absolute as per Clauses 1, 3 and 4 and independent of the Tenant’s cross-claim.

46.In light of the above, I am of the view that if summary judgment were to be entered against the Defendant in the present action, the true issue is whether the Defendant is entitled to reduce and extinguish his own liability under the Guarantee by any damages that might be awarded in favour of the Tenant in respect of its cross-claim against the Landlords in the First Action.  If there is no merit to such argument, there is little reason to grant any stay of execution in the present action.

47.Notwithstanding the importance of the above issues (which are matters of mixed fact and law) to the determination of the Landlords’ and Defendant’s Summonses, neither counsel cited any authority on these issues.  At the hearing, I have referred counsel to two learned texts on contracts of guarantee and several cases cited therein.

48.In my view, a guarantor may be exonerated from liability by seeking to rely on claims and defences which the principal debtor has against the creditor.  But the law does not permit all cross-claims available to the principal debtor to be pleaded by the guarantor.  Further, the terms of the guarantee itself may preclude the guarantor from pleading cross-claims and defences available to the principal debtor.

49.Here, although there are no clear express words in the Guarantee to exclude the Defendant’s right to raise any right of set off under common law and equity, there is no dispute that (a) the Defendant has not raised any personal right of set off against the Landlords and (b) the Appeal Decision held that the Tenant is precluded under the Tenancy Agreement from raising any defence of equitable set off against the Landlords’ claim for the Arrears.  In my view, there is no arguable defence by the Defendant in relation to the Arrears.

50.Ms Ng submitted that because the Defendant was not a party to the First Action, the Appeal Decision was not binding on him and he would be at liberty to argue afresh whether the Tenant was precluded from raising any defence of equitable set off against the Landlords’ claim for the Arrears.  I do not agree.  The fact that the Tenant itself did not have any arguable defence to the Landlords’ claim for the Arrears in the First Action (as evident by the summary judgment on the counterclaim) is sufficient to dispose of this argument. Even for a guarantor who is a surety and not a primary obligor, O’Donovan and Phillips in The Modern Contract of Guarantee (English ed, 2003) at para.11-58 at p.605 states as follows:

“There is a threshold question here: does the principal’s claim amount to a defence in a strict sense, as distinct from a counter claim?  If the principal debtor does not have a defence, the general principle of co-extensiveness will prevent the guarantor from resisting an application by the creditor for summary judgment. ……”

I will discuss the position of a primary obligor below.  It suffices to state here that the analysis below does not aid Ms Ng’s contentions.

51.In respect of the Landlords’ claim for Reinstatement Expenses in the agreed sum and for the Legal Costs limited in the manner discussed in paragraph 37 above, I note from the Tenancy Agreement that the “without any deduction or set off (legal or equitable)” proviso is not applicable.  This squarely raises the issue of whether the Defendant can put forward the Tenant’s cross-claim against the Landlords in the First Action as a defence of equitable set off given the close connection between the claim for the Reinstatement Expenses and the Legal Costs limited as aforesaid on the one hand and the Tenant’s claim against the Landlords for misrepresentation and breach of contract on the other hand.

52.But as explained in paragraph 48 above, the terms of the guarantee itself may preclude a guarantor from pleading cross-claims and defences available to the principal debtor.  Thus if the guarantee expressly by construction requires the guarantor to pay an amount irrespective of the mutual liabilities of the creditor and principal debtor, the guarantor cannot raise a set off or cross-claim (see Halsbury’s Laws of Hong Kong Vol. 13(2) (2008 Reissue) para.[200.078] at pp.394-395).

53.In Hyundai Shipbuilding & Heavy Industries Co Ltd v Pournaras [1978] 1 Lloyd’s Rep 502, certain shipbuilding contracts were guaranteed by the defendant under letters of guarantee which provided inter alia that:

“…… In consideration of your entering into the shipbuilding contract …… the [defendant] hereby irrevocably and unconditionally guarantees the payment in accordance with the terms of the contract of all sums due or to become due by the buyer to you under the contract and in case the buyer is in default of any such payment the [defendant] will forthwith make the payment in default on behalf of the buyer ……”

It was held that the commercial purpose, obvious intent and true construction of the guarantees was such that the defendant’s contention that all the guarantees did was to bind the guarantor to ensure performance by the buyer of the buyer’s obligations was really not arguable; and the true meaning was that if the buyer did not pay in time the guarantor would pay.  Since the avowed object of the guarantees was to enable the plaintiffs to recover from the defendant the amount due irrespective of the position between the plaintiff and the buyer, the defendant could not plead any set off as a result of the buyer’s claim for loss and damages against the plaintiffs.  This case was applied in Hyundai Heavy Industries Co Ltd v Papadopoulos & ors [1980] 2 All ER 29.

54.Borrowing the principles in the Hyundai cases and looking at the factual matrix of the background in this case, it is evident from the Guarantee that as a matter of business the Landlords wanted financial protection from the Defendant director against whom liability could be enforced in the event of non-payment by the corporate Tenant.  The tenor of Clause 1 and the reference therein to the Defendant’s agreement to “forthwith pay and make good to the [Landlords]” (a) all arrears of rent, (b) all loss and damages arising out of the Tenant’s breach and (b) costs/expenses thereby arising or incurred by the Landlords make it abundantly clear that the Defendant has covenanted to pay to the Landlords if the Tenant does not pay on time.  In the circumstances, bearing in mind the commercial utility of the Guarantee, I am persuaded that to allow the Defendant to plead any set off in reliance of the Tenant’s claim against the Landlords in the First Action will nullify such purpose, and the Defendant is therefore precluded from doing so on the construction of the Guarantee.

55.Even if I am wrong and the construction of the Guarantee permits a defence of set off to be raised, and further assuming that there is an arguable set off by reason of the Tenant’s claim against the Landlords in the First Action, is this precluded in the present case because the Defendant is a primary obligor?

56.Ms Ng fairly conceded that given the Defendant was a primary obligor, her submissions that relied on the co-extensiveness principle between primary debtor and guarantor cannot stand.  In National Westminster Bank plc v Skelton [1993] 1 WLR 72, the mortgagors gave a mortgage over property to a bank to secure the liabilities of a company. The company was in liquidation.  The mortgagors in their defence pleaded a set off and cross-claim for damages by the company against the bank. The bank applied to strike out such part of the defence. Slade J assumed in favour of the mortgagors that they had a good defence of set off and cross-claim against the bank if the matter were allowed to go for trial. There were certain arguments as to why an order for possession should be granted, eg the mortgagee’s undoubted right to possession under the mortgage, with which I am not concerned.

57.Of interest is clause 11 of the mortgage which, so far as material, provided as follows:

“…… as between the mortgagor and the bank the mortgage is to be deemed to be a primary security and the mortgaged property is to be deemed to stand charged with the moneys or liabilities hereby secured as if they were primarily due from the mortgagor.”

58.Such clause, like Clause 1 of the Guarantee, in effect makes the mortgagor a primary obligor vis-à-vis the bank. Indeed, Slade J at p.80 of the judgment said as follows:

“…… In my judgment, …… [clause 11 of the mortgage] makes it clear that in any dispute between the bank and the mortgagors, their obligations as mortgagors, …… are to be no less extensive than they would be if the debts in question were due from them as primary debtors rather than as mere guarantors.  In particular this provision, in my view, makes it clear that in any dispute between the bank and the mortgagors it is not to be open to the mortgagors to rely upon any right of cross-claim or set off to which the principal debtor, the company, may be entitled as against the creditor.”

59.Slade J went further to say at p.81 as follows:

“Though I have concluded that the order for possession made in favour of the bank must stand, this conclusion will not, of course, preclude the defendants from pursuing such personal rights as they have either against the company in liquidation, for which purpose they would presumably have to obtain the leave of the court, or against the bank. ……”

In the present case, as explained above, the Defendant has not disclosed any personal claim against the Landlords.  In the absence of any entitlement to rely on the Tenant’s cross-claim against the Landlords in the First Action, he is left with a personal right of recourse against the Tenant.  However, this is not a matter which concerns the Landlords as creditor or justifies any grant of interim stay of proceedings or stay of execution pending the determination of the Tenant’s claim against the Landlords in the First Action.

60.For completeness, I should mention that Ms Ng relied on Hopeson Engineering Limited v Able Engineering Ltd HCA1668/2003, Deputy Judge To (unreported, 17 September 2003) in support of her contention that there should be stay of execution pending the determination of the Tenant’s claim against the Landlords in the First Action.  However, the factual scenario in Hopeson Engineering Limited is quite different from that in the First Action and the present case.  In Hopeson Engineering Limited, the plaintiff commenced 2 separate legal actions against the same defendant, so when the court granted summary judgment against the defendant in 1 action, execution was stayed until the trial of the defendant’s counterclaim in the other action or further order. Such factual matrix is more akin to the situation of the Tenant who successfully applied to stay the judgment on the counterclaim in the First Action pending the resolution of its cross-claim against the Landlords.  But it is a far cry from the present scenario where the Defendant as primary obligor under the Guarantee is not entitled to rely on the co-extensiveness principle or the aforesaid set off and/or cross-claim by the Tenant against the Landlords.

61.Consequently at the hearing, I granted the following orders:

(a)  there be final judgment in this action in favour of the Landlords against the Defendant in respect of:

(i)  the sum of HK$1,713,503.00 being outstanding rent, mesne profits, rates, management fees and sewage related charges payable under the Guarantee but credit shall be given for the deposit in the sum of HK$300,000.00 forfeited by the Landlord, and

(ii)  the sum of HK$116,800.00 being outstanding Reinstatement Expenses

together with interest on the aforesaid sums at judgment rate from the date of the Writ of Summons to the date of judgment herein and thereafter at judgment rate until payment;

(b)  there be interlocutory judgment in favour of the Landlords against the Defendant for legal costs incurred by the Landlords in proceeding against the Tenant in the First action to be assessed on full indemnity basis;

(c)  costs of the Landlords’ Summons including all costs reserved in respect of such summons be paid by the Defendant to the Landlords with certificate for counsel;

(d)  no later than 21 days from the date of the hearing parties do jointly write to myself to propose directions as to the further conduct of the present action and such joint application shall be dealt with on paper unless otherwise directed;

(e)  the Defendant’s Summons be dismissed;

(f)  costs of the Defendant’s Summons including all costs reserved in respect of such summons be paid by the Defendant to the Landlords  with certificate for counsel;

(g)  the Landlords do within 7 days from the date of the hearing lodge with the court and serve on the Defendant revised statement of costs for the purpose of summary assessment of the costs orders in (c) and (f) above;

(h)  the Defendant do within 7 days thereafter lodge with the court and serve on the Landlords a short and succinct list of objections in bullet point format not exceeding half a page;

(i)   summary assessment of the costs orders in (c) and (f) above be adjourned to be heard before myself in chambers (open to the public) with half hour reserved, and the Landlords’ solicitors do within 7 days from the date of the hearing fix the date of such adjourned hearing with the Listing Clerk.

62.In respect of paragraph 61(a) above, Mr Lo argued that notwithstanding Suffiad J’s ruling to the contrary in the Appeal Decision, the Landlords need not give credit for the deposit of HK$300,000.00.  The Appeal Decision is binding on the Landlords, and it sets out in clear terms what are the arrears due from the Defendant to the Landlords under the Tenancy Agreement.  There is no merit to this argument.

63.In respect of paragraph 61(d) above, it appears from the Landlords’ concession at paragraph 37 above that the sole remaining substantive matter in the present action is the assessment of the legal costs for which interlocutory judgment on liability has been entered (see paragraph 61(b) above).  Since this falls within a small compass and should not involve substantial factual disputes, both parties are encouraged to constructively confer and agree on a simple and practical way forward for the assessment without disproportionate effort and costs.

64.In respect of the costs orders in paragraph 61(c) and (f) above, there is no reason why costs should not follow event. At the hearing, I at first tried to proceed with summary assessment of the relevant costs orders, but the statement of costs prepared by the Landlords’ solicitors was so unclear that an adjournment was necessitated. I informed Mr Lo that as a result of the adjournment, the Landlords may be at risk as to costs of the adjourned hearing for summary assessment of costs.

Representation:

Mr Anthony Lo instructed by Messrs Y T Szeto & Co for the Plaintiffs.

Ms Queenie Ng instructed by Messrs Au Thong & Tsang for the Defendant.