Introduction
With the outbreak of the novel Coronavirus (COVID-19), businesses in Hong Kong, and around the world, have been facing severe challenges caused by the pandemic. One of the challenges is to ensure or secure due performance of obligations under existing contracts, which continue to fall due despite the unprecedented disruption of business activities.
Against this background, businesses may enter into negotiations with their counterparties to look for a solution. The parties' conduct in the course of these negotiations, irrespective of their outcome, may expose them to potential disputes, such as the existence of any agreement to vary the existing contract, the terms of the variation agreement, the enforceability of any such agreement or representations made during the parties' negotiation. These issues have been argued and considered in a great number of cases and were again raised in the recent Hong Kong Lands Tribunal case of Lam Yin Ling Sendy v Chan Lee [2020] HKLdT 6.
This update will first briefly examine the decision on these issues in the Lam Yin Ling Sendy case, followed by a broader analysis of what parties involved in re-negotiation of contract terms should beware of when entering into negotiations, which are faced by many businesses in the current challenging times.
Lam Yin Ling Sendy v Chan Lee
In this Lands Tribunal case in Hong Kong, the applicant-landlord sued the respondent-tenant for, among other things, arrears of rent and repossession of the leased premises which were used by the respondent as a guesthouse under two successive tenancy agreements. The relevant issues for present purposes concerned the first tenancy agreement in which the rent was HK$50,000 per month. The applicant sued the respondent for the arrears of rent under this agreement arising from the respondent paying rent at a reduced rate.
In her defence, the respondent alleged that (i) there were three oral agreements with the applicant to vary the rent payable under the first tenancy agreement; and (ii) pursuant to the doctrine of promissory estoppel, the applicant was estopped from recovering the full amount of rent under the first tenancy agreement as a result of representations her brother made (allegedly on her behalf) in the course of discussions with the respondent throughout the term of the first tenancy agreement.
Regarding the alleged amendment of the first tenancy agreement by oral agreements, the Lands Tribunal found that while there were discussions about rent reductions, other than an initial seven-month temporary reduction recorded in writing, there were no oral agreement for the alleged reductions at all. The Tribunal also doubted the purported consideration the respondent’s counsel put forward, namely increasing the prospect of recovering some rent from the respondent (as opposed to none, should the respondent default) given the financial difficulties the respondent's guesthouse suffered, was sufficient to support a variation of the original terms. The Tribunal cited the UK Supreme Court judgment in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2019] AC 119, which doubted “expectations of practical value” could amount to good consideration to support a variation of contract (which will be discussed further below).
As for the promissory estoppel defence, the respondent relied on her WhatsApp discussions with the applicant’s brother, who regularly replied “ok” and “thank you” in response to the respondent’s messages that she had paid the rent at the reduced rate. However, the Lands Tribunal held that these expressions were equivocal as to whether the payments at a reduced rate were acceptable and could not satisfy the requirement of a clear and unequivocal representation for promissory estoppel set out in Central London Property Trust Limited v High Trees House Limited [1947] KB 130. In any event, the respondent suffered no detriment and it was not inequitable for the applicant to recover the full rent.
Accordingly, the respondent was ordered to pay the shortfall of the full rent under the first tenancy agreement.
Issues Parties Involved in Re-negotiations of Contract Terms Should Beware Of
As can be seen from our summary of the Lam Yin Ling Sendy case above, where there are re-negotiations of contract terms, there could be allegations of variation of the original terms and promissory estoppel. The rest of this update will further discuss these issues in turn.
Variation of Contract
Is there good consideration?
In common law, any variation of a contract, like its formation, should be supported by good consideration.
In challenging economic times, it is not uncommon for parties to agree to vary the terms of an existing contract to avoid default of liabilities. A paying party under a contract may propose part payment in satisfaction of its full payment obligation, deferred payment or payment by installments. A party under an obligation to provide goods or services may seek its counterparty's agreement to make additional payment to secure timely performance of the obligation by the first party.
Traditionally, as decided by the House of Lords in Foakes v Beer (1884) 9 App Cas 605, a creditor’s promise to accept part payment in satisfaction of the full debt or deferred payment is unenforceable for lack of good consideration, as the counter-promise by the debtor is simply to perform his existing duty owed to the creditor (i.e. to repay the debt).
However, in Williams v Roffey Bros & Nicholls (Constructors) Ltd [1991] 1 QB 1, the English Court of Appeal held that the performance of an existing contractual duty could amount to good consideration if a “practical benefit” is conferred on the promisor for additional payment. Such “practical benefit” may take the form of a better prospect of the promisee’s performance of his existing contractual duty. This ruling does not sit comfortably with Foakes v Beer since both the promise to accept reduced/deferred payment and the promise to make additional payment correspond with the counterparty’s performance of his existing duty to pay the debt and to provide goods or services respectively.
The conflict between these two cases was raised before the UK’s highest court in Rock Advertising Ltd v MWB Business Exchange Centres Ltd. Unfortunately, while acknowledging that arguments to distinguish the two cases are “somewhat forced” (as attempted by the English Court of Appeal in that case), the Supreme Court declined the opportunity to re-examine the relevant principles.
In Hong Kong, there are respective lines of cases applying Williams v Roffey Bros and Foakes v Beer. Williams v Roffey Bros has been applied to cases involving additional payment for existing contractual works, such as UBC (Construction) Ltd v Sung Foo Kee Ltd [1993] 2 HKLR 207, and even to the reduction of employees’ benefits with the practical benefit of avoiding a lawful termination during economic downturn in Yeung Kin Ha v El Grande Holdings Ltd [2004] HKLRD G4.
On the other hand, in the debt recovery context, Foakes v Beer has been applied in Hong Kong, such as the Court of Appeal decision in Bank of China (Hong Kong) Ltd v Cosan Ltd [2007] HKEC 856. However, in the context of resisting a summary judgment in Lim Nyuk Foh v Ho Kam Choy [2017] HKEC 1100, leave was granted to the defendant-debtor to defend the plaintiff-creditor’s claim based on the “practical benefit” line of cases.
In light of the uncertain position, a party seeking to vary the terms of an existing contract should try to identify some benefits to the counterparty which it is not bound to provide to the counterparty under the original terms. Examples include:
- Early part payment of a debt before the due day,
- Payment of a debt in a different currency; and
- The debtor’s forbearance to enforce a cross-claim against the creditor in exchange for part payment of the debt.
Proof of agreement to vary the contract
(i) No oral modification clause (NOM clause)
It is common for parties to incorporate NOM clauses in commercial contracts. Such clauses usually state that any amendment or variation to the agreement is not effective unless such amendment or variation is in writing and signed by the parties. The effectiveness of such expressed term in limiting the parties' right to vary the contract by oral agreement have been subject to debate for years. It was argued that if the parties orally agree to vary the terms of the contract, they must also have agreed to vary the NOM clause in the contract.
In Rock Advertising Ltd, the UK Supreme Court concluded that NOM clauses are effective. Lord Sumption, who gave the leading judgment with which the majority agreed, pointed to three significant practical advantages of an enforceable NOM clause:-
"The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment. Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms. Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them."
Though, this issue has not been authoritatively decided in Hong Kong, it is likely that a Hong Kong court would follow the decision in Rock Advertising Ltd.
Where the parties seek to vary the terms of an existing contract, they should check if there is any NOM clause in the contract. If there is, the parties should adhere to the formality requirements the NOM clause prescribes.
(ii) Absence of NOM clause
As can be seen from the summary of the Lam Yin Ling Sendy case, various issues could arise from informal communications between the parties. In the absence of proper written records, the parties could easily be exposed to potential disputes, such as the existence of any agreement to vary the existing terms, the terms of the variation agreement, the meaning of certain equivocal words used in informal communications and the authority of the person to agree to a variation.
Further, for the practical advantages identified by Lord Sumption in Rock Advertising Ltd stated above, which equally apply to situations where there is no NOM clause, it is in the interest of the parties engaging in re-negotiation of contract terms, even in the absence a NOM clause, to insist that all variations be subject to contract, which should be properly recorded and endorsed by the parties in writing.
Promissory Estoppel
Where the parties' interaction falls short of an enforceable agreement, the doctrine of promissory estoppel may apply to prevent a party from acting in a certain way inconsistent with the representations made during negotiations. This doctrine was first developed under English law, in Central London Property Trust Limited v High Trees House Limited [1947] KB 130 and has been applied in Hong Kong, The Hong Kong Court of Final Appeal in Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1 summarised the requirements as follows:
- The parties are in a relationship involving enforceable or exercisable rights, duties or powers;
- One party (the promisor), by words or conduct, conveys or is reasonably understood to convey a clear and unequivocal promise or assurance to the other (the promisee) that the promisor will not enforce or exercise some of those rights, duties or powers; and
- The promisee reasonably relies upon that promise and is induced to alter his or her position on the faith of it, so that it would be inequitable or unconscionable for the promisor to act inconsistently with the promise.
Parties engaging in re-negotiation of a contract should bear this doctrine in mind. For example, in the case of a request for part payment or deferred payment arrangement, if the intention is to reserve the right to recover the whole debt at a later time or if the paying party defaults in making any payment under the varied contract, this should be made clear, and preferably by making an express reservation of right in writing and signed by both parties. Such party should also refrain from acting in any way which is inconsistent with its contractual rights, to avoid giving an impression to the counterparty that it will not enforce or exercise its contractual rights.
Concluding Remarks
In the challenging economic times, businesses may find it difficult to comply with their obligations under existing contracts and seek to enter into commercial negotiations with the counterparties to find a commercial way out.
In such context, businesses should pay attention to the following:
- A party seeking to vary the terms of an existing contract should try to identify some benefits to the counterparty which it is not bound to provide to the counterparty under the original terms to ensure that there is sufficient consideration to support the variation.
- The parties should check if there is any NOM clause in the contract. If there is, they should adhere to the formality requirements the NOM clause prescribes.
- Where there is no NOM clause in the existing contract, it is still in the interest of the parties to insist that all variations be subject to contract, which should be properly recorded and endorsed by the parties in writing.
- In any event, even if the results of the negotiations fall short of an enforceable agreement, the doctrine of promissory estoppel may apply to representations made during negotiations to prevent a party from acting in a way inconsistent with such representations. If the intention is to preserve certain right under the original contract, this should be made clear, and preferably set out in writing and signed by the parties.Such party should also refrain from acting in any way which is inconsistent with its contractual rights, to avoid giving an impression that it will not enforce or exercise its contractual rights.
