Master Yield Ltd v. Ho Foon Yung Anesis and Others

CACV 67/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 67 OF 2012

(ON APPEAL FROM HCA NO. 866 OF 2008)

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BETWEEN

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JUDGMENT

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Hon Cheung JA:

1.I agree with the judgment of Lam JA and the orders he proposes to make.

Hon Kwan JA:

2.I agree with the judgment of Lam JA.

Hon Lam JA:

3.In this appeal, the Plaintiff (as tenant) of Shop SLG2 [“the Shop”] on the sub-lower ground floor of Westlands Gardens at Quarry Bay claimed damages for misrepresentations against its landlords, the Defendants.  I can take the background from para 1 of the judgment of Deputy High Court Judge M Chan [“the Judge”], as she then was,

“1.   Mr Ho Kan Bau (“Mr Ho”), originally named the 1^st defendant and since deceased, and the 2^nd defendant were the joint owners of the premises known as Shop SLG2 (“Property”) on the sub‑lower ground floor of Westlands Gardens, 1025‑1037 Kings Road, 2‑10, 12A‑12H Westlands Road, Hong Kong (“Westlands Gardens”).  The Property was put on the market for letting, and some time in August and September 2007, representatives of the plaintiff (“Company”) were shown the Property.  Ms Carrie Yeung (“Carrie”) and Mr Vincent Yeung (“Vincent”) of the Company visited the Property and saw air‑conditioning units installed at the external wall of Westlands Gardens, including an air‑conditioning unit on the external wall above the Property.  They claim that they were led to believe that air‑conditioning units could be installed at the external wall of the Property, and on that basis entered into agreements for the lease of the Property from the defendants.  It was only after renovation works had started at the Property that the Company discovered that the Incorporated Owners of Westlands Gardens (“IO”) had obtained an injunction to prohibit the defendants and their tenants from installing air‑conditioning units on the external wall of Westlands Gardens, and that consent from the IO was required before the Company could carry out any installation of its air‑conditioning units.  The Company claims that it required 12 air‑conditioning units to be installed on the external wall of Westlands Gardens for the operation of the business of a spa at the Property, which could not be done in the absence of the IO’s approval.  It claims that it was entitled to rescind the lease agreement, and to seek damages from the owners for misrepresentation.”

4.After a trial which lasted for 5 days, the Judge dismissed the claims. The Judge further held, if she had found in favour of the Plaintiff on liability, she would award damages as identified at paras 44 to 47 of her judgment, which the parties worked out to be $578,643.17.  The Plaintiff appealed, seeking to overturn the Judge’s judgment on liability as well as quantum.

5.Mr Paul Lam SC, appearing for the Plaintiff in the appeal but not below, abandoned the grounds of appeal set out in the Notice of Appeal and instead relied on the grounds set out in the Supplementary Notice of Appeal filed on 7 May 2013.

6.The Plaintiff had signed two tenancy agreements: a provisional tenancy agreement dated 19 September 2007 [“the PTA”] and a formal tenancy agreement dated 5 December 2007 [“the FTA”].  At the trial, the Plaintiff sued on the basis of misrepresentation made before the making of the PTA as well as misrepresentation made between the making of the PTA and the FTA.

7.The Judge found that no representation was made before the making of the PTA.  This is no longer challenged by the Plaintiff.  I need to say no more about it except to note it is common ground that based on the observations of its representatives at a pre-contract site inspection, the Plaintiff believed that it would be possible to install external air-conditioning units at the Shop.

8.As regards the representation made between the making of the PTA and the FTA, the Judge found that a representation had been made by a Mr Ho, Senior (who had sadly passed away before trial and therefore did not testify before the Judge).  The Judge also found that the representation was false.  However, the Judge held that the Defendants were not liable because the representation was not material and the Plaintiff was not induced by it to enter into the FTA. For that reason, the Judge dismissed the Plaintiff’s claims.

9.The Judge also found that the Plaintiff had affirmed the FTA after the discovery of the falsity of the representation.  But she held that, had she found for the Plaintiff on liability, the Plaintiff would be entitled to claim damages notwithstanding that it could not rescind the FTA.  On damages, the Judge held that the Plaintiff had failed to discharge its duty to mitigate its loss after its discovery of the need of the consent of the IO to install external air-conditioners.  She disallowed some items claimed by the Plaintiff incurred after 24 December 2007 and some expenses which could be used for other purposes.

The Representation

10.As the appeal on liability focused on the representation of Mr Ho, Senior made between the PTA and FTA, I shall set out the Judge’s finding in her judgment on this representation [“the Representation”] at paras 23 and 25,

“23. On the available evidence, I accept, on a balance of probabilities, that Mr Ho did represent to Esther that the only application, or consent, that was required from the IO was for the shop frontage or signage of the Property.  The fact that Mr Ho referred to the shop frontage or signage means that what was discussed between Esther and himself was or included application to, or approval or consent by, the IO.

…

25. On the evidence, I find that there was a misrepresentation made by Mr Ho that approval for the installation of air‑conditioners on the external wall of the Property was not required from the IO.”

11.The Defendants challenge this finding in their Respondent’s Notice (para 3) and Supplemental Respondent’s Notice (which they seek leave to file by a summons of 16 May 2013) (para 1).  The two paragraphs are the same except a further sub-para (e) was added in the Supplemental Respondent’s Notice.  Para 1 of the Supplemental Respondent’s Notice reads,

“1. The learned Deputy Judge erred in coming to a finding that Mr Ho Senior did make the 1^st Representation. The learned Deputy Judge failed to consider adequately or at all the reliability of the Plaintiff’s witnesses, in particular

(a) The “For Sale” notice claimed to be seen by Carrie before the inspections turns out to be an “after sale” notice installed by Midland Realty estate agent after the Provisional Tenancy Agreement;

(b) The date of taking the pictures by Vincent showing the air-conditioning installations condition during the site inspections was proved to be taken after the Provisional Tenancy Agreement was signed;

(c) The internal air-conditioner claimed by Vincent to be the one installed inside the Property and connected to the external air conditioning unit during inspections was shown to be the roller of part of a roller door;

(d) Carrie, Vincent and Esther recognized and believed that the width of the shop front of the Property was much narrower than the actual width of the shop front of the Property where, in fact, it was shown in trial and agreed by Carrie and Vincent that the shop front was much wider. Hence the shop front included a section where there was a location inside the Property at the left far end of the shop front where it could have been sufficient to install a heat dissipation unit of an air-conditioning system. The location and floor marking of which was undisputed by Vincent;

(e) Carrie during cross-examination did not even recall the 1^st Misrepresentation was actually made.”

12.I am not impressed by this attempt to challenge the factual finding of the Judge.  None of the grounds advanced by Mr Poon come within the kinds of error discussed by Bokhary PJ in Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at paras 43 to 46.  Nor am I satisfied that the finding, which is a finding of primary facts based on the evidence adduced before the Judge, is plainly wrong, see para 42 of Ting Kwok Keung.  The points raised in that Para 1 are all points pertaining to the credibility and reliability of the Plaintiff’s witnesses that could legitimately be raised in closing submissions (and they had been raised by Mr Poon in his closing submissions before the Judge).  It is the duty to the Judge to weigh the evidence with those points in mind. I see no reason for suggesting that the Judge did not have regard to these points in her assessment of the evidence. 

13.Mr Poon accepted that the points he made only go to the collateral issue of credibility of the witnesses of the Plaintiff and the significance of each of them may be peripheral.  He however submitted that the cumulative effect of these points warrant this court’s disturbance of the finding of the Judge.  With respect, I do not agree.    Even taking all these points into account, I see no basis for suggesting that it was not open to a reasonable tribunal of fact to accept the evidence of these witnesses. In my view, the points made by Mr Poon are not proper grounds for inviting this court to re-visit the weighing process. 

14.There was ample evidence before the Judge supporting her finding in this regard.  Because Mr Ho, Senior had passed away, there was no evidence at the trial contradicting the evidence of the Plaintiff’s witnesses.  On this issue, there was viva voce evidence from the agent (Esther) as well as two directors of the Plaintiff (Carrie and Vincent) about the Representation.  Though they were cross-examined by Mr Poon, as far as I can see there is nothing in such cross-examination which warrants a conclusion by this court that the Judge was plainly wrong in accepting their evidence.

Inducement

15.Turning next to the finding by the Judge that the Representation was not material and did not induce the Plaintiff to enter into the FTA, the Judge dealt with this at paras 27 to 30 of her judgment after stating her finding at para 26.  Her reasoning for coming to such finding was as follows,

(a) The Shop suited the Plaintiff’s its requirements for a spa business and it was the only premises inspected by its directors (para 27);

(b) The Plaintiff had legal advice when it signed the FTA and the FTA provided that it had to observe the DMC (para 28);

(c) Vincent saw air-conditioning units on the external wall and thought that installation of air-conditioning units would not be a problem. Even so, the Representation could not be objectively regarded as material (para 29); and

(d) A reasonable prospective tenant in the Plaintiff’s position would not have been deterred from signing the FTA by the fact that the consent of the IO was required for installation of air-conditioners (para 30).

16.In essence, Mr Lam challenges this finding by contending,

(a) The Judge erred in concluding that objectively speaking the Plaintiff could not have been induced by the Representation;

(b) The Judge erred in adopting a purely objective test in considering whether the Representation was material whilst the objective assessment should only be relevant to the onus of proof and the ultimate question should be whether the Plaintiff did in fact rely on the Representation; and

(c) The Judge failed to have regard to the evidence of the Plaintiff’s witnesses on the reliance placed by them on the Representation.

17.At the trial, the agent (Esther) gave evidence that it was at the request of the directors of the Plaintiff that she asked Mr Ho Senior whether there was any need to make other applications, including those about signage, air-conditioning and utilities.  Vincent also gave evidence to such effect.  It was in response to such request that the Representation was made.

18.Based on the Judge’s acceptance of their evidence as regards the Representation, it would appear that the Judge also accepted that the directors did instruct the agent to seek such information from Mr Ho Senior. 

19.In my view the Judge should have paid regard to such evidence in assessing whether the Representation was material and whether the Plaintiff was induced to enter into the FTA.  Unfortunately, she did not explain why despite such evidence she did not regard the Representation to be material.

20.There was also evidence given by Carrie in her third affirmation that had the Plaintiff known that the Representation was false, it would have rescinded the PTA (losing the initial deposit of $150,000) and would not have signed the FTA.  The Judge did not refer to this part of the evidence in her judgment.

21.Both counsel referred us to Museprime Properties Ltd v Adhill Properties Ltd [1990] 2 EGLR 196 on the proper approach in determining whether a representation induced a representee to enter into a contract. At p.201M, Scott J (as he then was) said,

“A representation is material, in my opinion, if it is something that induces the person to whom it is made, whether solely or in conjunction with other inducements, to contract on the terms on which he does contract. I would gratefully adopt the view expressed in Goff & Jones on the Law of Restitution 3^rd Ed, at p 168, which reads,

‘In our view any misrepresentation which induces a person to enter into a contract should be a ground for rescission of that contract. If the misrepresentation would have induced a reasonable person to enter into the contract then the court will, as we have seen, presume that the representee was so induced and the onus will be on the representor to show that the representee did not rely on the misrepresentation either wholly or in part. If, however, the misrepresentation would not have induced a reasonable person to contract, the onus will be on the representee to show that the misrepresentation induced him to act as he did. But these considerations relate to the onus of proof. To disguise them under the cloak of “materiality” is misleading and unnecessary.’

… I respectfully agree with that view of the law …”

22.This authority was not cited to the Judge. The ultimate question is whether a representee was induced by the representation and it is a question of fact to be asked in respect of this particular representee (as opposed to an objective reasonable bystander).  The effect of a representation on an objective reasonable bystander is only relevant in terms of onus of proof.  See Goff & Jones on the Law of Restitution 5^th Ed, at p 270-273.

23.Based on the reasoning of the Judge on this part of her judgment, in particular paras 29 and 30, there is some force in Mr Lam’s criticism that the Judge had adopted the standard of an objective reasonable bystander in considering whether the Plaintiff was induced by the Representation. Whilst the Judge did refer to the situation of the Plaintiff at paras 27 and 28 and first part of para 29 of the judgment, she did not refer to the more pertinent evidence on the subjective state of mind of the directors of the Plaintiff mentioned at paras 17 to 20 above.

24.As regards the objective effect of the Representation, bearing in mind the Judge’s finding on what was being represented in the Representation, it must be material for a tenant who intended to operate a spa business at the Shop as the installation of air-conditioning units could be reasonably contemplated.  In my view, with respect, this is a case where the onus is on the Defendants to show that the Plaintiff was not induced by the Representation.

25.Again with respect to the Judge, I do not think such onus can be discharged by the matters she alluded to at paras 27 to 29 of the judgment.  This is particularly so if one were to have regard to the evidence relevant to subjective state of mind to which she did not refer.

26.Mr Poon sought to rely on additional grounds to support the Judge’s finding of no inducement at para 2 of his Supplemental Respondent’s Notice.  In essence, he contended that the Plaintiff relied upon its directors’ mistaken belief on installation of air-conditioning unit at every shop along Tai Koo Shing Road and Westlands Road and mistaken belief on lack of space inside the Shop for installation of cooling tower to enter into the FTA.  I cannot see how these additional grounds would support a finding of no inducement.  It is well established that a representation need not be the sole inducement, see the above citation from Museprime Properties.  

27.On the evidence, it is clear to me that the Plaintiff was induced by the Representation in entering into the FTA.  The Defendants were therefore liable to pay damages to the Plaintiff under section 3 of the Misrepresentation Ordinance Cap 284.

Failure to mitigate

28.On the question of damages, the Judge found the Plaintiff to have failed in the discharge of its duty to mitigate.  It should be mentioned that the plea as to failure to mitigate has not been properly particularized in the Re-re-amended Defence and Counterclaim.  There is only a general plea at para 34,

“If, which is denied, the Plaintiff has suffered any loss and damage, it is averred that the Plaintiff has failed to mitigate its loss after knowing the falsity of the Representations and/or the breaches of the Defendants.”

29.There is no pleading as to the material facts relied upon by the Defendants to advance such a plea.  Such a general plea without any particulars is defective, see Hong Kong Civil Procedure 2013 para 18/8/17A and Geest plc v Lansiquot [2002] 1 WLR 3111 para 16.

30.There is little clue in the witness statement filed on behalf of the Defendants as to the case of the defence in terms of failure to mitigate.  At para 67 of the witness statement of Ho Foon Wah, she said,

“67. In any event, those damages and expenses in my eyes had been incurred voluntarily by the Plaintiff as the problem in respect of the installation of the air-conditioning unit emerged shortly after the Agreement had been entered into and the Plaintiff selected to initiate the application to the IO for obtaining the required approval for the installation of the air-conditioning units on the external walls and incurred expenses in associated with the application and selected to remain in the Property until January 2009.”

31.It is not clear whether the Defendants were advancing an argument that the Plaintiff should not have initiated the application to the IO for approval or that it should not have chosen to remain in occupation of the Shop.  Given that the application for approval was done with the support of the Defendants, as demonstrated by a letter of 19 May 2008 from the Defendants’ solicitors to the Plaintiff’s solicitors, in the circumstances of the present case, it is difficult to see how such an application can be regarded as a breach of the duty to mitigate.

32.Whilst the period of occupation up to January 2009 was obviously unreasonable in view of the termination of the tenancy on 22 April 2008, the Plaintiff had been ordered to pay mesne profits and such payment and payment of rent under the FTA were not included in the damages claimed by the Plaintiff.

33.At the court below, in his closing submissions, Mr Poon advanced the following arguments on failure to mitigate at para 146,

“146. D submits that P has not discharged its duty because

(a). Some are unreasonable because of the half month double pay in Chinese New Year when employees only worked for 1 month or less.

(b). P continued to stay on the premises until 10^th January 2009 when P handed the keys back to the Defendant Landlord.

(c). Shelf company namely Master Yield Limited, can still be reused and that Vincent did start another company with Carrie and even on the same business according to Vincent’s cross examination evidence. Hence the $7,000 start up fee could be exempted.

(d). Carrie in her evidence in chief stated that she did discharge P’s duty to mitigate by asking around friends and P did advertise for selling the furniture in mid-November 2010 Dec which was 2.5 years later [see Carrie 2^nd statement para. 9 to 11]. D submits that P need not just asked around friends and could have advertised much earlier and perhaps for longer periods.

(e). Carrie was cross-examined on the storage of these furniture and/or AC units between March 2008 and Dec 2010. She was asked whether there was any receipt for these storage goods. She alleged that these goods were stored in her family warehouse and that there was no document nor the requirement to pay. D submits that the Court should allocate appropriate weight to these oral evidence at this late stage.

(f). The 12 Air-conditioners units could have been resold since they were not being used.

(g). P’s contractors commenced insurance on 11.3.2008 with 3 subsequent extensions until 23 June 2008 for expiry in July 2008 after P had allegedly rescind.

(h). P paid for sofa from China on 30.4.2008.

(i).   There was the Design Fee of $15,000 from Million Interior on 21.6.2008 although Carrie now gave evidence that this was for an earlier job.”

34.The Judge accepted some of the points and did not deal with some other points. Before I discuss the Judge’s determination of the issue of mitigation, I must reiterate the undesirability of entertaining an unparticularized plea of failure to mitigate.  The lack of precision in the pleadings had led to inadequate attention being afforded to how the evidence on damages should be led and what essential findings of fact and law had to be made by the court below.  The plea was seized upon by Mr Poon to advance new arguments on failure to mitigate which apparently had not been advanced before the Judge, at any rate not in the written materials placed before us and in the judgment of the Judge.  (1) He contended that the cut-off point in terms of the damages recoverable should be earlier, viz around 8 December instead of 24 December 2007 and he suggested the Plaintiff should not have started any decoration works at all.  (2) He also contended for the first time in this appeal that two items included in the Plaintiff’s schedule of damages (Annex 1 to Carrie’s witness statement of 14 December 2010) overlapped with each other and one item should be in Thai baht instead of HK$.  (3) He advanced an argument based on the alleged delay on the part of the Plaintiff in submitting the signed structural engineer’s report to the IO in support of the application for approval.  All these are fact-sensitive and this court simply does not have the benefit of the necessary finding of facts from the court below to deal with them.  In accordance with the principle laid down in Flywin v Strong Associates [2002] 2 HKLRD 485, these points could not be raised in an appeal.

35.As it turned out, points (1) and (3) are entirely without merits.  I shall deal with (1) when I discuss the Judge’s determination of the cut-off point. Point (3) is demonstrably false given the acknowledgement on the part of the Defendants through their solicitors in the letter of 19 May 2008 that it was the intentional delay on the part of the IO to process the application for approval which caused the delay.  Given Mr Poon’s acceptance that point (2) had not been raised below, and it was not raised in the Respondent’s Notice or the Supplemental Respondent’s Notice, I am not minded to entertain the same.

36.Though the Flywin principle can provide a safeguard against the abuse of fact-sensitive new points being raised on appeal, it is also unsatisfactory that the Judge below had to deal with an unparticularized plea of failure to mitigate.  Further, it is unfair to the Plaintiff as it did not know what evidence had to be led to deal with the challenge based on the duty to mitigate.

37.In this appeal, I would only consider the issue of failure to mitigate by reference to the points dealt with by the Judge in the judgment. The Judge found the Plaintiff failed to mitigate its loss on the following bases,

(a) upon learning the requirement of obtaining consent from the IO on 24 December 2007, the Plaintiff should have suspended all fitting out and decoration works (para 43 of the judgment);

(b) the same cut-off point was applied in respect of expenses and materials purchased for the operation of the business (para 46);

(c) she was not satisfied that the Plaintiff had taken reasonable steps to dispose of the furniture, equipment and beauty products as advertisement for sale was only made in November 2010. On account of that, she only allowed 50% of the costs of those items (para 47).

38.The first two points hinge on the Judge’s holding that the Plaintiff should put everything on hold when it learnt about the need to obtain consent from the IO.  As mentioned, in the appeal Mr Poon submitted that the cut-off point should be even earlier because on the evidence the Plaintiff learnt of that need shortly after the signing of the FTA, well before 24 December.

39.With respect, on the facts of the present case, it is plainly wrong to come to such holding. The situation faced by the Plaintiff after the signing of the FTA was:

(a) The rent free period had started to run and eventually the Plaintiff had to pay rent even if the Shop was not ready;

(b) There was nothing to suggest to the Plaintiff that it would not be possible to obtain consent and the Defendants had assisted in obtaining such consent;

(c) There would be inevitable time lapse for the processing of the application for consent;

(d) The Plaintiff had lost its previous contractor due to delay in the signing of the FTA and a new contractor had been engaged in early December 2007.

40.The Judge did not appear to have these matters in mind in coming to her conclusion. Against such background, I do not think it is unreasonable for the Plaintiff to commence decoration works at the Shop in December 2007 and to purchase other materials for the purpose of the business before consent from the IO was forthcoming.

41.Mr Lam accepted the date of the termination of the FTA (22 April 2008) as a cut-off point. Once the Judge’s holding is reversed, I see no reason for adopting a cut-off point earlier than 22 April 2008.  It was a difficult choice for the Plaintiff and I cannot see any valid basis for suggesting that it was unreasonable for the Plaintiff to pursue with the attempt to get consent (with the support of the Defendants) until it received the letter of 22 April 2008 from the Eastern District Office.

42.As regards the failure to dispose of the materials in a timely manner and the 50% discount, despite Mr Lam’s attempt to persuade us otherwise by reference to the evidence of Carrie in her witness statement, I do not think there is any ground for us to interfere with the Judge’s conclusion.

43.On quantum, I would therefore allow the costs incurred prior to 22 April 2008 (and that would include the decoration costs) but apply a 50% discount to items (A) and (G) and some of the items included in the decoration costs which are actually purchase of equipment, furniture or other materials.  Mr Lam confirmed the Plaintiff will not pursue its claim of item (E).  It was agreed at the appeal hearing that we would only deal with the principles governing the calculation of quantum and the parties can then agree between themselves on the actual figures.  For that purpose, the parties should submit a joint letter reporting on the agreed figures within 7 days of the handing down of this judgment.  Judgment could then be entered in favour of the Plaintiff for that sum.

44.I propose to make an order that the appeal is allowed to the extent as indicated.  On the question of costs, in view of the abandonment of the grounds advanced in the original Notice of Appeal in Mr Lam’s skeleton submissions (and by then some costs had been incurred by the Defendants in the preparation of the Respondents’ Notice), I propose to order the Defendants to pay the Plaintiff 90% of its costs of the appeal. For the costs below, the Plaintiff failed on a number of issues on which we have not reversed the Judge: the Pre-contract Representations, the Affirmation, the 50% discount on the damages regarding items (A) and (G). In my view, a fair order for costs is that the Defendants shall pay Plaintiff 70% of the costs in respect of the Plaintiff’s claim below.

Mr Paul Lam, SC, instructed by ONC Lawyers, for the Plaintiff/Appellant.

Mr Vincent Poon, instructed by Y T Szeto & Co, for the 1^st & 2^nd  Defendants/Respondents.