JAPSIGNAL PROPERTY MANAGEMENT CO LTD v. THE INCORPORATED OWNERS OF PRAT MANSION

DCCJ 3245/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3245 OF 2003

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BETWEEN

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JUDGMENT

1.  The Plaintiff is a limited company incorporated in Hong Kong, carrying on the business of building management. The Defendant is the owners incorporation of Prat Mansion (the “IOC”) situated at No. 26 – 36 Prat Avenue, Hong Kong (hereinafter referred to as “Building”).

2.  By a Property Management Contract entered on 31 May 2002, the Plaintiff agreed to act as the manager of the Building in the terms and conditions contained in the said Property Management Contract (hereinafter referred as “the Contract”).

3.  The Contract was for a period of 2 years commencing on 1 August 2002 to 31 July 2004. It was written by the Plaintiff in Chinese and signed by representatives of the Plaintiff and the Defendant (pages 168 to 173).

4.  Clause 3 of the Agreement provided:

“（三）管理合約續約與終止方式：

1．  委托人同意由接管日起給予經理人管理按金港幣$42,500.00作經理人管理大廈每月代支費。

2．  合約期滿前兩個月如雙方無任何書面通知對方不續約，此合約將自動延續一年，所有合約條款照舊，但經理人每月之合約費則另行商討。為保障雙方，如終止此合約須以香港政府以建築物管理條例（第344章）為依歸。

3．  此合約為期兩年，此合約最少實行半年，而期滿後任何一方欲終止此合約，必須給予對方三個月書面通知，如欲即日解僱，任何一方須給予對方三個月（90天）書面通知或給予對方三個月之合約費（HK$127,500.00）作為賠償。

4．  當管理合約終止不再續約時，管理收支如有盈餘或超支，雙方均必須在合約期滿後之一個月內清付一切欠對方款項或可以扣除按金以適當核對帳目。”

5.  Under paragraph 5 of the Plaintiff’s Statement of Claim, the Plaintiff’s interpretation of Clause 3(3) of the Contract is as follows:

“This Contract is for a term of 2 years, this Contract must be performed for at least half a year, if after the expiry of which either party intends to terminate the contract, must give to the other party 3 months’ notice in writing, if intends to terminate with immediate effect, either party must give to the other 3 months (90 days) notice in writing or pay to the other 3 months’ contract fee (HK$127,500.00) as compensation.”

6.  The Plaintiff claimed that under the provisions of Clause 3(3) notice of termination of the Contract can only be served by either party after the expiry of 6 months from the commencement of the Contract. The Plaintiff therefore claimed the earliest possible date of termination of the Contract was 1 May 2003. Consequently, when the Defendant served a notice of termination of the contract on 18 November 2002 to take effect on 18 February 2003, the notice of termination was not effective and the Defendant had thereby wrongfully repudiated the Contract. The Plaintiff accepted the repudiation by ceasing to provide management service to the Building from 18 February 2003.

7.  The Plaintiff’s claim is under Clauses 2(1) and 2(4) of the Contract for expenses amounting to $42,500.00 per month plus disbursements actually incurred to be reimbursed to the Plaintiff by the Defendant. The claim for disbursements amounted to $31,404.00 and liquidated damages in the sum of $127,500.00.

The Defence Case

8.  The IOC claimed Clause 3(3) of the Contract failed to prescribe when the notice of termination of the Contract must be served. Further, termination of the Contract is provided for under Clause 7 of the Seventh Schedule under Section 34E of the Building Management Ordinance, Cap. 344 of the Laws of Hong Kong (“BMO”). The IOC argued that Clause 3(3) of the Contract is subject to Clause 7 of the Seventh Schedule by virtue of Clause 3(2) and/or Clause 4(10) of the Contract.

9.  Mr. Chan, representing the IOC, gave the IOC’s interpretation of Clause 3(3) of the Contract as follows:

“This agreement is for a term of 2 years, the agreement shall continue for at least 6 months, any party want(s) to terminate this Agreement after expiry of the term, must give the other party 3 months’ written notice, if anybody wants to dismiss the other party immediately, that party shall give the other party 3 months (90 days) written notice or give the other party 3 months’ contract sum (HK$127,500.00) as compensation.”

10.  The Defence claimed:

(a)  The Notice was issued in compliance with Clause 3(3) and there is no restriction on the timing of service of the Notice.

(b)  The Notice was issued in accordance with paragraph 7 of the Seventh Schedule of the BMO (as effective in 2003).

(c)  The Defendant accepted the repudiatory breach of the Plaintiff by the issue of the Notice.

11.  The Defendant and the Plaintiff reached a settlement on the Defendant’s counterclaim before the commencement of the trial. The issue remaining at trial is whether the Defendant has lawfully terminated the Contract and whether the Plaintiff is entitled to any part of the sum claimed.

The Plaintiff’s evidence

12.  The Plaintiff’s witness Mr. Chow admitted he had drafted the Contract and he had also explained to Madam Fong over the telephone the terms of the Contract including Clause 3(3) that the appointment of the manager must continue for at least 9 months before termination. Mr. Chow claimed he believed Madam Fong had read the whole of the contract before the telephone conversation for she had pointed out to him three typing errors on the draft contract during the telephone conversation. It was Miss Tsui’s evidence that it was the Plaintiff’s usual practice for its contracts to be terminated only after 9 months of service as the 3 months notice of termination could only be served 6 months after the commencement of the Contract. The Plaintiff claimed it would take a few months for the new manager to the Building to rectify and implement the necessary repairs and to establish a routine maintenance procedure in the Building. Miss Tsui further claimed that at the time of the signing of the Contract, she had repeated Clause 3(3) to Madam Fong, the chairman of the IOC of the Building. She claimed she told Madam Fong 3 month notice can only be served at the end of 6 months or payment of 3 months’ service charges in lieu be made should any party wish to terminate the Contract. She claimed Madam Fong understood what she meant at the time. At the time, Madam Fong also pointed out 3 typing errors in the contract to her before the Contract was signed.

13.  Even though Miss Tsui received the notice of termination on 18 November 2002 by post, she claimed it was not attached with a copy of the resolution of the general meeting of the members. She further claimed that no one at the Plaintiff had asked Madam Fong for a copy of the EGM minutes. She denied Madam Fong had telephoned her office to enquire if the Plaintiff had received the notice of termination with the resolution or that Madam Fong had faxed a copy of the resolution to the Plaintiff’s office.

14.  Miss Tsui agreed that there were two complaint letters received by the Plaintiff but claimed that the IOC refused to cooperate with the Plaintiff over the resolution of the complaints. She claimed the short circuit at the management office was caused by the overloading of the power supply to the management office not because the Plaintiff’s staff had overloaded the air-conditioner socket. She claimed the Plaintiff did obtain a quotation for the rewiring of the management office, but the IOC refused to accept the Plaintiff’s proposal and engaged its own electrician to fix the short circuit problem.

15.  Miss Tsui further admitted that the Plaintiff’s solicitor did respond on 18 October 2002 to the IOC chairman’s complaint letter of 10 October 2002 explaining the solutions and the work done on the 4 items of complaint raised by the IOC on the poor management of the Building. These included the work done on the short circuit problem at the management office, the Building’s back gate was removed due to damage on 8 September 2002, the stoppage of flush water supply to the Building and the night watchman smoking at work in the Building.

The Defence’s evidence

16.  It was Madam Fong’s evidence that she had never met Mr. Chow in person, neither did Mr. Chow send her a draft of the Contract before the Contract was signed. The first time she met a representative from the Plaintiff was on the day of the signing when she met Miss Tsui. She claimed that was the first time she was shown the Contract and she found immediately three typing errors in the document which she asked Miss Tsui to correct. She claimed the Plaintiff’s staff did not explain the agreement to her leaving her to read the entire agreement herself before signing. She maintained she understood Clause 3(3) to mean that even though the contract period was 2 years, the contract could be terminated by giving 3 months’ notice of termination or payment in lieu provided the contract would run for a minimum period of 6 months.

17.  Madam Fong further claimed that the Plaintiff had failed to perform duties under the Contract and was in breach of the management agreement. She cited several incidents such as:- failure to clean the common areas regularly, watchmen smoking on duty, the Building’s back gate was often kept opened without supervision, no flushing water supply, breakdown of the CCTV system in the lifts, etc. More importantly, the Plaintiff had failed to submit monthly accounts to the IOC resulting in the IOC auditor’s formal notification in writing that the Plaintiff had failed to provide sufficient audit trail for an audit on the management accounts. Consequently, members of the IOC convened an EGM and resolved to terminate the Contract with the Plaintiff on 15 November 2002. The meeting was attended by Mr. Leung, a staff of the Plaintiff and a solicitor engaged by the IOC. Subsequent to the meeting, the IOC’s solicitor was instructed to draft and post the letter of termination with the resolution to the Plaintiff’s registered office.

18.  Madam Fong further claimed that she called the Plaintiff’s office and talked to a Miss Lee of the Plaintiff’s office to find out if the Plaintiff received the termination letter and the resolution on the morning of 18 November 2002. She claimed that Miss Lee admitted the termination letter was indeed received but it was not accompanied by the EGM resolution. She immediately faxed a copy of the EGM resolution together with the letter of termination to the Plaintiff’s office. Receipt of the termination letter and EGM resolution was confirmed by Miss Lee on the telephone.

Findings

Interpretation of Clause 3(3) of the Contract

19.  Both the Plaintiff and the Defendant led evidence on the parties’ pre-contract negotiations and understanding before the signing of the Contract. The evidence of Miss Tsui and Mr. Chow of the Plaintiff and Madam Fong of the Defendant on Clause 3(3) were completely different on whether Clause 3(3) was explained to Madam Fong before the signing of the Contract. Mr. Chow claimed he had sent by fax a draft of the Contract to Madam Fong and explained to her over the telephone the meaning of Clause 3(3) while Madam Fong denied she saw it before the day of signing or talked to Mr. Chow on the telephone about Clause 3(3) prior to the signing.

20.  As the Contract is in writing, the Court will look at the agreement for its construction. As Lord Simon of Glaisdale held at page 263 of the House of Lord case of Wickman Machine Tools Sales Ltd. v. LG Schuler A.G.[1974] AC 235:

“…. the question to be answered always, ‘What is the meaning of what the parties have said?’ not, ‘What did the parties mean to say?’ … It being a presumption juris et de jure …that the parties intended to say that which they have said.”

He continued at page 263G:

“It is, of course, always open to a party to claim rectification of an instrument which has failed to express the common intention of the parties; but, so long as the instrument remains unrectified, the rule of construction is as stated by Norton.  It is, indeed, the only workable rule.”

21.  I am aware the contra preferentum doctrine is applicable in the present case and that the Contract was drafted by the Plaintiff. The Court will look to find the meaning of Clause 3(3) of the Contract. It is unfortunate that the meaning of the second part of Clause 3(3) of the Contract is ambiguous. Lord Bridge said in Mitsui Construction Co. Ltd. v. Attorney General of Hong Kong (1986) 33 Build. L.R.1 (P.C.), the fact that the contract was badly drafted:

“… affords no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language they have used interpreted in the light of the relevant factual situation in which the contract was made.  But the poorer the quality of the drafting, the less willing any court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis.”

22.  I am further aware that in Wickman Machine Tools Sales Ltd. v. L.G. Schuler AG, Lord Reid held:

“The fact that a particular construction leads to a very unreasonable result must be a relevant consideration.  The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make their intention abundantly clear.”

23.  From the words used in Clause 3(3), there is a clear intention for the agreement to run for a period of two years. It is important to note that the second sentence in Clause 3(3) stipulated the contract must operate for at least 6 months. It did not specify it should run for a minimum period of 9 months for if that was the intention of the parties, Clause 3(3) would have so stated. In spite of the lack of proper punctuations save for the commas used in the whole of Clause 3(3), Clause 3(3) can be divided in 3 parts. The first part being the term of the Contract and the minimum period it should run; the second part being the service of 3 months notice of termination to be in writing; the third part on payment in lieu of the 3 months notice of termination.

24.  The proper construction of Clause 3(3) in my view, is as follows: the 2-year Contract shall run for a minimum period of 6 months; should any party wish to terminate the contract, a 3 months notice of termination in writing must be served or payment in lieu of notice equivalent to 3 months service expenses shall be made.

25.  I am satisfied the IOC’s resolution at the EGM on 15 November 2002 did comply with the requirement of the BMO. It was followed by a written notice giving the Plaintiff 3 months notice of termination. The Plaintiff argued that the 3 months notice of termination can only be served after the expiry of 6 months from the date of commencement of the Contract. I cannot agree Clause 3(3) specified such a requirement. The crucial words the Plaintiff relied on in 3(3) were: “而期滿後任何一方欲終止合約” which the Plaintiff translated as “if after the expiry of which either party intends to terminate the Contract”. The Defendant translated it as “any party want(s) to terminate this agreement after expiry of the term”. It is not clear what “期滿後” referred to. Clause 3(2) of the Contract had also referred to the words “合約期滿前” specifying an automatic renewal of the Contract should there be no notice in writing of discontinuance after the contract period. While the words “合約期滿” in Clause 3(2) had clearly referred to the contractual period of 2 years, the words “期滿後” in Clause 3(3) is not so clear. Did it refer to the entire contractual period of two years? Or did it mean the 6 months period?

26.  As the reference to the words “期滿後” is unclear, one has to look at the context of Clause 3(3). The third part of Clause 3(3) stated “should any party wish to immediately terminate the agreement, 3 months’ notice must be given in writing or pay a compensation in lieu of 3 months’ notice as compensation.” Reading it together with the first and second part, it means the IOC can serve a notice to the management company giving 3 months’ notice of termination of the two year contract, and the Contract shall operate for a minimum period of 6 months.

27.  In the present case, the management agreement was entirely drafted by the Plaintiff. Other than pointing out to the Plaintiff’s representative that three words were wrongly typed in the Contract, the Defendant took no part in the drafting of the Contract whatsoever. Consequently, the Contract itself cannot be regarded as a document contributed by both parties. The words and punctuations chosen belonged to the Plaintiff entirely. To construe the Contract in the manner submitted by the Plaintiff, Clause 3(3) should have stated the service of 3 months notice of termination to be operable only upon the expiry of the first 6 months of the contract, and the earliest date of termination would take place after the expiry of 9 months of the contract unless payment in lieu of 3 months’ notice is made. Unfortunately, Clause 3(3) did not so state or could be so understood. It follows Clause 3(3) cannot be construed in the manner the Plaintiff claimed. So far as is understood by the Defendant, Clause 3(3) meant that the Contract was for a period of 2 years but it can be terminated by the service of a 3 months written notice so long as the Contract lasted for at least 6 months, with a proviso that the 3 months notice can be substituted by a payment in lieu of notice. I find this interpretation to be the direct understanding of Clause 3(3) for a reasonable party to the contract.

28.  In coming to the aforesaid construction of Clause 3(3) of the Contract. I have adopted the House of Lords’ decision in the case of Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, where the House of Lord held:

“that in construing contractual documents the aim was to find the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties, including anything which would have affected the way a reasonable man would have understood it, but excluding previous negotiations and declarations of subjective intent; that the meaning which a document would convey to a reasonable man was what the parties using its words against the relevant background would reasonably have been supposed to mean and included the possibility of ambiguity and even misuse of words or syntax; that the court was not obliged to ascribe to the parties an intention which plainly they could not have had, and in choosing between competing unnatural meanings was entitled to decide that the parties must have made mistakes of meaning or syntax.” (p.897 A-C)

29.  I further find Madam Fong’s evidence to be credible. Had a copy of the Contract been sent to her before signing and had she pointed out the 3 typing errors to Mr. Chow on the phone as Mr. Chow claimed, the Contract would have been amended and reprinted to remove the errors before signing. However, Mr. Chow admitted the Contract was not amended when Miss Tsui took it to Madam Fong to sign. It was amended by hand at the meeting. I find it unlikely that Mr. Chow could have allowed an unamended contract to be signed if Madam Fong had already pointed the 3 errors out to him over the phone. I am not convinced he had explained Clause 3(3) to Madam Fong over the telephone, or Miss Tsui had explained Clause 3 to Madam Fong before it was signed other than allowing Madam Fong to read it for herself.

Seventh Schedule of the BMO

30.  Clauses 3(2) and 10 of the Agreement stated that in case of dispute on the termination of the Contract and the contract terms, the BMO shall be applicable. It is the Plaintiff’s argument that the Defendant had failed to meet the requirements of paragraph 7(2) of the Seventh Schedule of the BMO in the termination of the Contract. Paragraph 7(2) of the Seventh Schedule provides:

“A resolution under subparagraph (1) shall have effect only if –

(a)  the notice of termination of appointment is in writing;

(b)  provision is made in the resolution for a period of not less than 3 months notice or, in lieu of notice, provision is made for an agreement to be made with the DMC manager for the payment to him of a sum equal to the amount of remuneration which would have accrued to him during that period;

(c)  the notice is accompanied by a copy of the resolution terminating the DMC manager’s appointment; and

(d)  the notice and the copy of the resolution is given to the DMC manager within 14 days of the date of the meeting.

(3)  The notice and the copy of the resolution referred to in subparagraph (2)(d) may be given (amended 5 of 2007 section 32).

(a)  by delivering them personally to DMC manager; or

(b)  sending them by post to the DMC manager at his last known address.”

31.  The Defence argued that the Plaintiff quoted a wrong version of the Seventh Schedule which took effect after the amendment to the BMO in 2007. As this incident took place before the amendment in 2007, the pre-2007 version of the BMO is applicable.

32.  Paragraph 7(4) before it was repealed in 2007 provided:-

“(4)  This paragraph operates without prejudice to any other power there may be to terminate the manager’s appointment.”

33.  It is not disputed that the Plaintiff’s staff Mr. Leung attended the extraordinary general meeting of the IOC. Mr. Leung was told he was not required to record the minutes of the meeting, the minutes of meeting was recorded by the solicitor of the IOC. In spite of that, it was within Mr. Leung’s personal knowledge that at the meeting the members had resolved to terminate the services of the manager and a 3 month notice was to be given by letter to be drafted by the solicitor of the IOC. A copy of that resolution was posted on the notice board by an employee of the Plaintiff on duty at the Building. Consequently, it cannot be denied that the Plaintiff had constructive notice of the resolution even before the receipt of the notice of termination that the IOC members had resolved to terminate its services at the general meeting on 15 November 2002.

34.  I accept the evidence of Madam Fong that she had personally faxed a copy of both the termination letter and the resolution on the morning of 18 November to the Plaintiff’s office. That a staff at the Plaintiff’s office informed her the resolution and the letter of notice had been received by fax. Consequently, the Plaintiff had de facto notice of both the notice of termination and the resolution.

35.  The pre 2007 version of the BMO Schedule 7 paragraph 7(3) stated:

“(3)  Service of the notice and the copy of the resolution required to be served under subparagraph (2)(d) may be effected –

(a)  personally upon the manager; or

(b)  by post addressed to the DMC manager at his last known address; or

(c)  by leaving the notice at the address of the registered office of the corporation.”

36.  The applicable word is ‘may’ for notices to be served under 3(2)(a), (b) and (c). Therefore, service may be by other means. Clearly, notice was given to the Plaintiff when a senior staff of the Plaintiff attended the EGM and later its staff (the watchman) was given a copy of the resolution and posted it on the notice board of the Building, and furthermore, the Plaintiff’s office received by fax from Madam Fong a copy of the letter of termination and resolution on 18 November 2002.

The Defendant’s Claim of the Plaintiff’s Breach of Contract

37.  The applicable 2002 and 2003 BMO Schedule 7 paragraph 7(4) stated that paragraph 7(4) operates without prejudiceto any other power there may be to terminate the manager’s appointment.

38.  It is the IOC’s claim that the Plaintiff had failed to deal with the complaints raised by the IOC and its members in September and October 2002. It is further the IOC’s claim that the Plaintiff had failed to manage the building properly or to resolve the complaints raised by the IOC members and the occupiers of the building speedily and effectively, therefore, the Plaintiff had committed a fundamental breach of the Contract.

39.  The Defence referred to the judgment of the English Court of Appeal case of Deco-Wall International S.A. v Practitioners in Marketing Ltd. [1971] 1 W.L.R. 361 where Buckley L.J. held at page 380 A to B:-

“To constitute repudiation, the threatened breach must be such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract.  The measure of the necessary degree of substantiality has been expressed in a variety of ways in the cases.  It has been said that the breach must be of an essential term, or of a fundamental term of the contract, or that it must go to the root of the contract.”

40.  At page 380C, he put into context what constituted repudiation:

“Will the consequences of the breach be such that it would be unfair to the injured party to hold him to the contract and leave him to his remedy in damages as and when a breach or breaches may occur?  If this would be so, then a repudiation has taken place.”

41.  The evidence of Madam Fong is supported by various letters written to the IOC by the occupants of the Building and her own letters to the Plaintiff. They stated the Plaintiff’s performance was so poor that within the first 2 months of the contract repeated warnings were given to the Plaintiff. However, in spite of repeated warnings, the Plaintiff failed to perform the contract to the satisfaction of the IOC. Consequently, the IOC resolved at an extraordinary general meeting to terminate the Plaintiff’s contract.

42.  Lord Wright in the case of Smyth & Co. v. Bailey Son & Co. [1940] 3 All E.R. 60 at 72 held:

“I do not say that it is necessary to show that the party alleged to have repudiated should have an actual intention not to fulfil the contract.  He may intend in fact to fulfil it, but may be determined to do so only in a manner substantially inconsistent with his obligations, and not in any other way.”

I find this was indeed the case with the Plaintiff.  The Plaintiff had clearly failed to work with the IOC in resolving the problems in the management of the building resulting in the IOC finding it could not accept or tolerate the unsatisfactory performance of the Plaintiff.  The breach had therefore gone to the root of the Contract.

Conclusion

43.  Under such circumstances, when the performance of the Plaintiff was substantially below the expectations of and the standards required by the Defendant as implied in the Contract, it clearly had committed a fundamental breach of the Contract. Consequently, the IOC was entitled to terminate the Contract in accordance with Schedule 7 of the BMO, an EGM was held and the members resolved to terminate the Contract under Schedule 7 of the BMO.

44.  For the aforesaid reasons, I dismiss the Plaintiff’s claim against the Defendant, with costs to the Defendant, to be taxed if not agreed.