Wong Kam Kong v. Intercontinent Mercantile Co (A Firm)
Read the full judgment text of CACV 14/1968 on BabelCite. This Court of Appeal judgment was delivered on 9 July 1968.
1. This is an appeal from the District Court concerning a deposit of $4,800 paid under the terms of a tenancy agreement dated the 17th February, 1965. The agreement was for the lease of a flat on the second floor of No.36, Wing Hong Street, Kowloon, for a term of 4 years commencing from the 1st March, 1965. The flat was used for business purposes.
Cited by 11 cases
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IN THE SUPREME COURT OF HONG KONG APPELLATE JURISDICTION CIVIL APPEAL NO.14 OF 1968 (On Appeal from K.D.C., C.J. Action No.7711 of 1967) -----------------
Coram: Scholes & Mills-Owens, JJ. Date of Judgment: 9 July 1968 ----------------- JUDGMENT ----------------- 1. This is an appeal from the District Court concerning a deposit of $4,800 paid under the terms of a tenancy agreement dated the 17th February, 1965. The agreement was for the lease of a flat on the second floor of No.36, Wing Hong Street, Kowloon, for a term of 4 years commencing from the 1st March, 1965. The flat was used for business purposes. 2. There is little, if any, dispute as to the relevant facts of the case, which shortly are as follows. The plaintiff entered into the agreement as landlord and the defendant firm as tenants, and the defendants duly entered into possession of the premises and started to pay the rent therefor. However, on the 23rd July, 1967, a fire occurred in the building containing the premises causing some damage, but the trial judge found, and from this finding there has been no appeal, that the demised premises were not destroyed by the fire or rendered unsafe for human habitation thereby, and that what had occurred did not entitle the defendants to terminate the agreement under a particular clause thereof. The trial judge also found that the defendants' decision to move out of the premises was prompted by the stoppage of electricity, and by damage to the lifts and staircase of the building. The defendants moved out of the premises in question on the 25th or 26th July, 1967, moving out furniture and utensils, although they still continued to visit the premises regularly until about the 15th August, 1967, and last did so on the 10th September, 1967. It appears that the lifts were in operation again by the end of August, 1967, and that electricity was re-connected to the floor in question in September, 1967. The electricity supply was cut off by the Electricity Company immediately after the fire, and it is admitted by the defence that it would have been for the defendants to apply to have the electricity re-connected and that the defendants did not do so. On the 25th July, 1967, the defendants moved into other premises, namely the Lai Cheong Building, No.479, Castle Peak Road, which they had apparently acquired on the 23rd July, 1967, at first renting these new premises for 2 months only, but where the defendants thereafter have continued to carry on business. It is clear in the circumstances that the defendants abandoned the premises the subject matter of the tenancy agreement in question. On the 21st or 22nd August, 1967, the defendants saw the plaintiff and asked to be allowed to surrender the tenancy on account of the fire, but the plaintiff refused because he considered that the defendants were not telling the truth, because according to a notice which the defendants had put up they had removed their business to the Lai Cheong Building, opposite the building in question, and also because the plaintiff considered that the defendants should perform the terms of the tenancy agreement with the plaintiff. On the 15th September, 1967, the plaintiff distrained for rent upon the premises, but nothing but a pile of rubbish was found there, and the same day the plaintiff under the terms of the agreement exercised his power of re-entry of the premises by entering into possession thereof. The writ in the action was issued on the 22nd September, 1967. 3. In his statement of claim endorsed on the writ of summons the plaintiff claimed $4,800 being three months' arrears of rent at the rate of $1,600 per month for the period from 1st July, 1967, to the 30th September, 1967, $750 for maintenance and electricity charges for the same period at the rate of $250 per month, and $300 being garbage removal charges for the same period at the rate of $100 per month, making a total of $5,850. In their defence the defendants admitted the plaintiff's claim, but inter alia sought to set off the deposit of $4,800 which the defendants had paid to the plaintiff under the terms of the tenancy agreement. In his reply the plaintiff states in effect that the deposit was paid by the defendants to the plaintiff to secure the due performance and observance of the terms and conditions of the agreement, and was only returnable to the defendants if those terms and conditions were duly performed and observed, but otherwise the deposit was forfeitable to the plaintiff, and that in the events which had occurred, namely the failure to pay the rent, the re-entry and the consequent earlier-termination of the term, the plaintiff was entitled to and had forfeited the deposit, and that therefore the deposit could not be set off against the claim. 4. The learned trial judge found that the deposit was liquidated damages and not a penalty, and he also came to the conclusion that the plaintiff's loss was the actual amount claimed by the plaintiff in his writ, and he was unable to say that the intention of the parties as expressed by the tenancy agreement was to give to the plaintiff the sum claimed as well as the deposit, and he therefore allowed the amount of the deposit to be set off against the plaintiff's claim. 5. The plaintiff appealed against the trial judge's decision whereby it was adjudged that the deposit of $4,800 should be set off against the plaintiff's claim of $5,850. 6. Under the terms of the agreement the rent for the premises was payable in advance on the first day of each calendar month. 7. The deposit was payable under Clause (2) (a) of the tenancy agreement which is as follows:- "(2) The Tenant to the intent that the obligations may continue throughout the term hereby created hereby agrees with the Landlord in the manner following. THAT IS TO SAY:-(a) To pay to the Landlord upon the signing hereof by way of deposit the sum of HK$4,800.00 to secure the due performance and observance of the terms and conditions herein contained." 8. The return and the forfeiture of the deposit are dealt with in clause (3)(c) of the agreement which states:- "(3) The Landlord hereby agrees with the Tenant as following:- 9. Clause (4)(a) of the agreement gives the landlord the added power of re-entry either for non-payment of rent or for failure to perform or observe any of the terms and conditions of the agreement, and the clause expressly states that any such determination shall be without prejudice to any right of action of the landlord in respect of any breach of the Tenant's term (sic) and conditions therein contained. 10. On the hearing of the appeal counsel for the plaintiff contended that the learned trial judge had erred in law in holding that the sum of $4,800, the deposit, could be set off against the plaintiff's claim of $5,850, and that he had erred in not holding that the plaintiff was entitled to and had forfeited the deposit, and that he had also erred in treating the claim for three months arrears of rent and charges as a claim for damages from which the sum representing the deposit could be properly deducted. Counsel submitted that it was clear that the defendants did not intend to go on with the lease, and had used the fire as an excuse to move out of the premises in question; that the defendants had failed to perform the terms and conditions of the agreement in that they had failed to pay the rent on due dates, and had abandoned their obligations under the agreement for the rest of the term of the agreement, and there was therefore a breach of their obligation under the agreement to hold the premises for the full term of four years. Counsel for the plaintiff agreed that, if the plaintiff's claim had been for damages, the deposit could have been set off against such a claim because a deposit is in lieu of damages for breaches, and a tenant should not have to pay damages for the same thing twice, but in the present case there was no claim for damages, only for arrears of rent and charges; the deposit was in lieu of damages for the defendants' breach of their contract, and the plaintiff was entitled both to the arrears of rent and charges and to damages for the defendants' breach of the terms and conditions of the agreement; it was neither fair nor correct to deduct the one from the other; if there had been no arrears of rent or charges the plaintiff would still have been entitled to forfeit the deposit. Counsel contended that the question was not whether the deposit was a penalty or liquidated damages; in the case of a deposit the authorities were clear on the proposition that once a deposit was paid and there was a breach of the agreement by the payer of the deposit the deposit was forfeitable. Further, in the present case there was an express agreement for the forfeiture and the defendants could not recover back the deposit they had agreed to forfeit, and it followed that if the defendants were not entitled to the deposit he could not set it off against the plaintiff's claim; the court should not substitute its own terms for those of the contract. Counsel for the plaintiff went on to maintain that the trial judge was quite right in deciding that the deposit was liquidated damages and not a penalty, but he contended that it was not necessary to make such a finding. Shortly, the trial judge had found the deposit to be liquidated damages - that was for breach of contract, not for arrears of rent and charges, and the arrears of rent and charges claimed were quite independent of any claim for damages, but the trial judge had wrongly sought to set off one against the other, both of which were payable under the contract, the deposit being the remedy for the breaches. Counsel contended that one could not set off a sum to which one was not entitled. It was the intention of the parties, as provided by the agreement, that for breaches of the agreement by the defendants the plaintiff could both re-enter and forfeit the deposit, and that, in the circumstances of what had occurred, the plaintiff had exercised both rights. 11. Counsel for the defendants relied on two grounds as to why the judgment should be affirmed. The first was that by taking distraint proceedings the plaintiff had waived his right to forfeit the deposit, but the only authority he cited allegedly to support this contention was paragraph 2055 at page 945 of volume I of the 26th Ed. of Woodfall on Landlord & Tenant. 12. Counsel for the plaintiff replied that the point regarding waiver had not been taken in the court below, nor had it been pleaded, and accordingly no evidence had been led in respect of it, and that if it was a defence it should have been specifically pleaded, and it was now impossible on the evidence to say at what stage the forfeiture of the deposit took place, but that in any event the distress was not a waiver of the forfeiture of the deposit, waiver must be of a particular breach, and there was no evidence that the plaintiff had waived the forfeiture of the deposit. We would say at once, quite apart from the fact that waiver was not pleaded or raised in the court below, that on its merits we consider that there is no substance in the defendants' contention in this respect. The paragraph of Woodfall on Landlord and Tenant to which reference was made deals with the waiver of forfeiture of leases by distraining for rent, and has nothing to do with the forfeiture of deposits. The principle is that distress can only be levied on a tenant, and so obviously, as a general rule, the landlord cannot be said to have forfeited a lease if he takes proceedings showing that the tenant is still his tenant, but this doctrine has nothing whatsoever to do with the forfeiture of deposits. We are satisfied and hold that the right of forfeiture of the deposit was not waived on account of the plaintiff taking distress proceedings. 13. The second ground relied upon by counsel for the defendants was that clause 3(c) of the tenancy agreement, which deals with the forfeiture of the deposit, was a penalty or of a penal nature, and that it would be unconscionable for the plaintiff to retain the deposit having recovered judgment for the arrears of rent and charges. He thus asks that equity should intervene. Counsel for the defendants submitted, and it was conceded by counsel for the plaintiff, that the plaintiff could not recover rent or charges accruing due in respect of any period after the re-entry, and in support of this contention he cited the recent case of Dor Fook Company Ltd. v. Tai Hing Cotton Mill Ltd. & Another(1) which, however, related to a surrender. Counsel for the defendants, relying on that proposition, alleged that the only damage suffered by the plaintiff was the 3 months rent and charges in arrears, for which he had obtained judgment, and that, if by the plaintiff's own action of re-entry he had lost the right to sue for further rent and charges, that was not the fault of the defendants but of the plaintiff. Counsel maintained that the plaintiff could have kept the tenancy alive and continued to sue the defendants for rent, or he could have re-let the premises with notice thereof to the defendants and on the defendants' account, but instead he had chosen to re-enter. The plaintiff had recovered the rent and charges due and now wanted to or had forfeited the deposit, and it therefore appeared to counsel that the plaintiff was seeking to recover twice for the same rent. It was not a case of a blatant breach by the tenant but one on account of the circumstances in which the defendants had found themselves placed due to the fire, and that it would be harsh on the defendants, who were not trying to avoid payment of the rent due, to stop the from setting off the amount of the deposit against the rent due. Counsel submitted that the plaintiff had suffered no damage and it would therefore be unconscionable to allow him to retain the deposit. Counsel for the plaintiff replied that equitable relief was limited to the granting of time to pay to a defaulting party and that there was no basis for the granting of equitable relief in the circumstances of the present case. 14. We think that it is clear from the authorities that at common law the deposit paid by the defendants to the plaintiff, under the terms of the agreement, is not recoverable, and could not therefore be used as a set off against the plaintiff's claim unless it be upon some equitable principle. 15. Some of the authorities dealing with the position of a deposit at common law are as follows, and although they are cases of sale the same principle applies to deposits made under tenancy agreements, and indeed the learned authors of Woodfall on Landlord and Tenant cite them in support of the law governing deposits made under tenancy agreements. 16. In the case of Hinton v. Sparkes(2) Bovill C.J. stated:- "By the conditions of sale a deposit of 50L. was to be paid down, which was to be allowed as part payment on the completion of the agreement. When the agreement was signed the deft. gave an I O U for 50L., and I quite agree that the I O U does not preclude the parties from showing that there was no consideration for it, and no money due to the plt. But at the time the I O U was given the money was due, and therefore I think that as it was taken instead of money it must be treated as money. The substance of the transaction was that the I O U was given as money, and I agree that the question turns on the construction of the agreement, and the intention of the parties as there expressed. In construing the agreement we have derived some assistance from the decided cases pointing out the injustice that would follow if, where money is to be paid on nonperformance of some small item, it were to be considered as liquidated damages and not as a penalty. But here in the same agreement there is a stipulation as to the deposit and the forfeiture of it, and in none of the decided cases has there been a stipulation as to the forfeiture of a deposit. (His Lordship read the clause in the agreement as above set out, and proceeded as follows): The 50L. was to be paid at the time the agreement was executed, and for that an I O U was given, and was treated as the deposit by both parties. In the case of Palmer v. Temple, 9 A. & E. 508, there was a stipulation that if either party made default he should forfeit 1000L., and the court came to the conclusion that the 1000L. was a penalty, and not liquidated damages, and it may be gathered from the judgment of the Court of Q.B. in that case, that they were of opinion that the deposit would not be forfeited unless there was some stipulation to that effect. In Casson v. Roberts, 32 L.J. 105, Ch. it was held that there must be an agreement, express or implied, for the purpose of working a forfeiture of a deposit, and that there was no authority to show that it would be forfeited without an agreement to that effect. With that case I entirely concur, and therefore it is only necessary to see if in this case there is an agreement express or implied that the deposit should be forfeited. Here there is an express stipulation that on an event which clearly occurred, the deposit should be forfeited, and it is added 'in part of the following damages.' Treating the I O U as money, the deposit was in the hands of the vendor. Then can it be recovered back? That is the test, and the real question in the case. At first I had some doubt on the argument of Mr. James whether this was not a penalty, but on the construction I put on the agreement, I think the intention of the parties was that it should be forfeited, and therefore I think that if the money had been paid it could not have been recovered back, and that whether the I O U was payment or not, this action might be maintained. I think the cases as to penalties and liquidated damages have no application to a case like this, and therefore this rule must be discharged." and Willes J. was of the same opinion. 17. In the case of Wallis v. Smith(3) Jessel M.R. when dealing with the question of whether a sum of money was a penalty or liquidated damages, stated:- "I now come to the last class of cases. There is a class of cases relating to deposits. Where a deposit is to be forfeited for the breach of a number of stipulations, some of which may be trifling, some of which may be for the payment of money on a given day, in all those cases the Judges have held that this rule does not apply, and that the bargain of the parties is to be carried out. I think that exhausts the substance of the cases." 18. In the same case(3) in the court of first instance, after reviewing the authorities on the same question Fry J. said:- "These authorities are very strong to shew that, where a deposit has been placed in the hands of a third person, and that is primarily the fund for payment of the sum in question, that sum is liquidated damages and not a penalty." 19. In the case of Pye v. British Automobile Commercial Syndicate, Ltd.(4) Bigham J. said:- "There is also this further fact that this agreement does not merely contain a stipulation that in the event of a breach of the contract the sum of 300L. shall be paid as liquidated damages. The plaintiff here has himself already paid this sum to the defendants. He has parted with the money, and that circumstance is significant to shew that he did not intend to have it back if he committed a breach of agreement." 20. In the case of Willson & Another v. Love & Others(5) which case concerned sums to be paid in the event of certain breaches of covenant in a lease, Rigby L.J., when referring to the case of Wallis v. Smith(3) said:- "The case of Wallis v. Smith, which has been relied upon for the plaintiffs, does not in my opinion render much assistance in deciding this case. The actual decision in the case appears to me to be undoubtedly right; but the question which in effect was being dealt with was as to the forfeiture of a deposit -- a question which involved different considerations from those involved in the present case." 21. It may also be noted that the learned authors of the 26th Edition of Woodfall on Landlord & Tenant state at page 345 in paragraph 823:- "Where a deposit is made to secure the due performance of a written contract, and it is to be forfeited in case of any breach, such forfeiture may be enforced, and is not considered as a penalty; or, instead thereof, the amount of damage actually sustained may be recovered." 22. We now come to the question as to whether or not equity should intervene. Counsel have cited the cases of Stockloser v. Johnson(6), Campbell Discount Co. Ltd. v. Bridge(7) in the Court of Appeal, Bridge v. Campbell Discount Co. Ltd.(8) being the same case in the House of Lords, and Galbraith v. Mitchenall Estates Ltd.(9) In Johnson's case(6) Somervell and Denning L.JJ. took the view that the court had jurisdiction to relieve against forfeiture of instalments after rescission if in the actual circumstances of the case it would be unconscionable for the vendor to retain the instalments; Romer L.J. was of the opinion that after rescission the court had no jurisdiction to grant relief (other than possibly an extension of time for payment) in the absence of fraud, or sharp practice or other unconscionable conduct at the time the contract was made. It would appear to be clear from that case that the conduct of the party opposing the claim for relief must be at least unconscionable for equity to intervene, all the learned Lord Justices agreeing that where there was unconscionable conduct equity would intervene (but not being in agreement as to the relevant time at which it was to be judged whether the conduct was unconscionable). In Bridge's case(7) in the Court of Appeal, it was unanimously held that for equity to intervene it had to be shown that the bargain was unconscionable, but when the same case(8) was before the House of Lords it was decided on different grounds and Johnson's case(6) was not mentioned. In Galbraith's case(9) Sachs J. dealing with those cases said:- "In Stockloser v. Johnson the first of the foregoing views was adopted by Somervell and Denning, L.JJ. and, had the matter rested there, it might well have been proper for a court of first instance simply to follow the majority view. When, however, Stockloser v. Johnson came under discussion in the Court of Appeal in Campbell Discount Co., Ltd. v. Bridge, it is apparent from the report that it was the view put forward by Romer, L.J. which was supported by Harman and Davies, L.JJ., and also, as I understand it, by Holroyd Pearce, L.J. 23. It should be mentioned that in the Johnson case(6) Romer L.J. had said:- "Pausing then at this point, it appears to me that the cases establish that if a purchaser defaults in punctual payment of instalments of purchase-money the court will, in a proper case, relieve the purchaser from his contractual liability to forfeit instalments (apart from the deposit) already paid to the extent of giving him a further chance and further time to pay the money which is in arrear if he is able to do so; but the cases do not, in my judgment, show that the court will relieve such a purchaser to any further extent than this." Lord Radcliffe in Bridge's case(8) said:- "I know, of course, that, to travel to another branch of equity's relief jurisdiction, the precise reason why a deposit made on a sale of land is not recoverable if the bargain goes off by the purchaser's default is that it is treated as a guarantee (see Howe v. Smith 1884, 27 Ch. D.89); but, nevertheless, every penalty, even a penal bond, is in some sense a guarantee for the due performance of the contract, and I do not see any sufficient reason why, in the right setting, a sum of money may not be treated as a penalty, even though it arises from an obligation that is essentially a guarantee." 24. Obviously the authorities are in a state of flux, but it does at least appear to be clear that if in a case such as that now before us the setting is such that the deposit is to be treated as a penalty, and if there is any jurisdiction in equity to grant relief against the forfeiture of such a deposit, relief is restricted to the case where the agreement providing for forfeiture, or possibly the act of forfeiture, is unconscionable. In the present case there was nothing unconscionable in the clause permitting forfeiture. Such clause are a common feature of tenancy agreements in Hong Kong. And there was nothing unconscionable in the conduct of the plaintiff landlord in forfeiting the deposit. He could have refrained from re-entry and continued to force the defendants to pay rent as it accrued due under the tenancy agreement. On re-entry he was obliged to re-let the premises at a considerably lesser rent. Loss has fallen on him not on the defendant tenants. The agreement was for the forfeiture of the deposit in the event of the defendants committing a breach of any of the terms or conditions of the agreement. The defendants expressly bound themselves to the forfeiture and made the deposit at the outset. They became in breach not only by not paying rent but by abandoning the tenancy. 25. We are therefore of the opinion that the plaintiff had the right at common law to forfeit the deposit, and that the defendants were not entitled in equity to have the forfeiture set aside either wholly or in part. It follows that if the defendants were not entitled to relief against forfeiture of the deposit it should not have been set off against the plaintiff's claim. 26. In the result we allow the appeal; the order for set off is rescinded, and judgment will be entered for the plaintiff for the plaintiff's full claim of $5,850.
9th July, 1968. (1) O.J.377 of 1967 Judgment dated 9.11.1967. (2) 17 L.T.R., N.S. 600 (3) (1882) 21 Ch. D. 243 at 258 and at 252; (4) (1906) 1 K.B. 425 at 430; (5) (1896) 1 Q.B. 626 at 633. (6) (1954) 1 Q.B. 476 at 499; (7) (1961) 2 A.E.R. 97; (8) (1962) 1 A.E.R. 385; (9) (1964) 2 A.E.R. 653. (8) (1962) 1 A.E.R. 385 at 396. |
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