CHARTER BASE LTD v. THE INCORPORATED OWNERS OF GOLDEN BUILDING

HCA 558/2020

[2020] HKCFI 1591

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 558 OF 2020

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BETWEEN

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DECISION

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INTRODUCTION

1.  Charter Base Ltd (“the Plaintiff”) seeks an interlocutory injunction against the Incorporated Owners of Golden Building (“the IO”) in the form of the Order set out at paragraph 4 below.

2.  The Plaintiff is the owner of inter alia a cinema (“the Cinema”) located in the Golden Building (“the Building”) for which the IO is its incorporated owners.

3.  The Plaintiff complains that in disregard of the Deed of Mutual Covenant (“the DMC”), the IO has:

(1) Refused to repair the waterproof membrane (“the Membrane”) at the roof which is a common part of the Building; and

(2) Refused to allow the Plaintiff to have access to the Building’s common drainage and electricity facilities.

4.  The Plaintiff seeks two sets of interlocutory injunctions (issued in March 2020) against the IO.  In the draft Order placed before me, the Plaintiff seeks:

(A) Pending trial of this Action or further order, the Defendant, whether by itself or by or through its member(s), servant(s) or agent(s), be restrained from howsoever hindering, obstructing and/or interfering with the Plaintiff from carrying out reparation and/or remedial works at the roof (“the Roof”) of the Building to stop the water leakage (“the Water Leakage Injunction”).

(1) For the purposes of carrying out the said remedial and/or reparation works, the IO be restrained from hindering, obstructing and/or intervening the Plaintiff from:-

(a) erecting scaffolding at the external wall from ground floor to the Roof; and

(b) accessing the Roof.

(B) Pending trial of this Action or further order, the IO, whether by itself or by or through its member(s), servant(s) or agent(s), be restrained from howsoever hindering, obstructing and/or interfering with the Plaintiff and/or its tenant from:-

(1) carrying out works to (i) connect the drainage pipes in the auditorium (“the Auditorium”) to the common drainage pipes of the Building as identified in annexure 1 (ie the drainage plan) of the letter dated 5 July 2019 of the Associated Architects Limited (“the AAL Letter dated 5 July 2019”)  (attached to this Order under Annex A); (ii) connect the sprinkler system in the Auditorium to the sprinkler water tank and water pump room of the Building and connect the said sprinkler system in the Auditorium with the emergency supply of the Building as outlined in the plans under annexures 2 (ie the building plan) and annexure 3 (ie the FS pump power cable layout plan) of the said AAL Letter dated 5 July 2019;

(2) conducting the alteration and/or additional works as set out in the said AAL Letter dated 5 July 2019; and 

(3) accessing the corridor leading to the location for drainage pipes connection and the switch room of the Building as identified in blue in the location plan attached to the Order under Annex B during reasonable hours.

(“the Non Interference Injunction”)

5.  Given the background as set out below, and the possibility of the Plaintiff successfully claiming substantial damages against the IO (and I need to put it no higher than that) I believe that it is in the interests of all parties for me to determine this matter as soon as I can, to the extent it is possible to do so.

6.  The matter was first heard before Deputy High Court Judge Kenneth Wong on 15 May 2020, who gave directions for the filing of evidence and the fixing of a substantive argument with a time estimate of 3 hours, which is the hearing fixed before me today.

7.  Given that I have had the benefit of comprehensive written submissions and further helpful oral submissions from both Mr Kwong for the Plaintiff (with Mr Stephen Siu appearing with him) and Ms Fiona Chong for the IO, I was able to determine the matter today and I will now give reasons which will be comparatively and necessarily brief.

WATER LEAKAGE INJUNCTION

Merits of the claim

8.  The Plaintiff’s claim against the IO is based on a breach of duty to maintain the common parts.

9.  The IO accepts that the Membrane is a common part of the Building.

10.  The IO opposes the injunction on the grounds that it has been taking reasonable steps to deal with the water leakage problem.

11.  Accordingly, it does not agree that the Plaintiff should carry out the repair works by itself.

12.  I accept as submitted by Ms Chong, that although there is a duty on the IO, that duty is not an absolute duty to ensure that the common facilities would never break down: See S.18 of the Building and Management Ordinance and clauses 9(d)(5) and 9(d)(13) of the DMC.

13.  As the Court of Appeal explained in Lee Ming Yueh v Broadway-Nassau & Anor [2012] 5 HKLRD 208 “the overall duty was one of proper management which meant doing all that was reasonably required of a manager in the circumstances.”

14.  The IO submits that it has since August 2018 taken appropriate and reasonable steps to deal with the water leakage.  There were some going back and forth between the parties, as to who should pay and who should pick the contractor for the work.

15.  At one stage, the Plaintiff had apparently offered to pay although it did not have to so, so that the works could be completed faster.  This was refused because the IO took the view that it should not and could not delegate that responsibility of repairing the Membrane to the Plaintiff and that it would be improper to allow the Plaintiff to bypass proper procedures under the BMO simply to save time.

16.  I note that in a meeting of the IO which was supposed to be scheduled on 22 April 2019, the IO gave 3 options to consider, 2 of which involved the Plaintiff as opposed to the IO paying.  This then led to the Plaintiff’s complaint on 8 April 2019, which in turn led to the IO cancelling the meeting.

17.  This was due, the IO submit, to various requirements under the BMO which require sufficient notice to be given.  In so far as it goes this is true, however this does not entirely explain why 2 of the 3 options put on the table in the first place did not have sufficient justification to be put forward[1].

18.  The IO also complained that between mid-2019 and February 2020 there was radio silence on the part of the Plaintiff.  The IO further point to the fact it had not been passive, but rather it had to deal with a number of matters and works which were more urgent in the sense that these posed greater dangers or risks to the building than the water leakage issue.

19.  The IO also seeks to argue that the apparent delay in seeking the injunction negated at least partly the alleged urgency of the matter and hence the lack of justification to seek injunctive relief.

20.  In short, it is submitted that the Plaintiff cannot just take over the repair work simply because it is willing to pay for it and that duty should really be on the IO to get it done pursuant to the statutory framework.

DISCUSSION AND ANALYSIS

21.  The IO submit that the damage has been greatly exaggerated by the Plaintiff and that in the IO’s expert view there is no imminent danger, and that the current condition of the concrete was not as bad as that opined by the Plaintiff’s expert.

22.  In any event the IO submit that there is no serious suggestion of actual concrete spalling leading to risks to personal safety.

23.  The IO further submit that the Court should be cautious when it considers the Plaintiff’s expert report, noting that while he explained that if no repair works were to be conducted in the ‘near future’ no guidance was given as to what that term precisely meant.

24.  Ms Chong also noted that while the IO’s expert had carried out a visual inspection only, in fact the Plaintiff’s expert also did the same and he had only used the other testing methods in so far as the causes of water leakage were concerned rather than for the purpose of testing the quality of the concrete.

25.  The IO point to the fact that ultimately the repair costs to be incurred will have to be borne out by the owners of the Building (“the Owners”).  I agree that the Owners’ interest is at stake and is an important consideration.  It is said that the IO (and thus the Owners) should be given a choice as to which contractor is to be engaged and be properly informed of the budget of such works.

26.  Mr Mak the chairman of the IO in his affirmation evidence estimates that the costs of the works to be done would be in excess of HK$5M. 

27.  For reasons I further elaborate below I consider this to be ‘the elephant in the room’ in the present case.

28.  While the IO has been pondering about how to effect the repair works, there is no explanation or suggestion that it had already taken any concrete steps so as to raise funds for this purpose.

29.  The Plaintiff has exhibited the financial statements of the IO as at April 2020.  These disclose that:

(1) It holds about $1.8M in cash.

(2) Other assets including fixed assets of $1.7M.

(3) The net assets are about $1.7M.

(4) In terms of income and expenditure, the fees generated from the Common Area are about $660,000 whereas the expenses are approximately $400,000 whereas for the Shopping Arcade the fees generated are about $600,000 which basically covers the expenses.  The net surplus for both on a monthly basis is thus $200,000.

30.  Although the problems associated with the water leakage have been brought to the attention of the IO in the middle of 2018 it is not clear from the evidence what concrete steps (if any) have been taken to sort out the financing of that project; when it had to deal with other more imminent problems.  This is not meant to be a criticism on the part of the IO. Either it would have to raise fees steeply or come up with a cash call on the Owners.

31.  It is not difficult to envisage this will not be a popular move, not least given the current economic circumstances and one can see why anyone in that position would not necessarily proceed with alacrity or enthusiasm.

32.  I note that after the proceedings were commenced the IO has convened management committee meetings on 26 May 2020 and 8 June 2020 largely to invite consultants to submit tenders.   

33.  Given the many statutory and other constraints the IO as an incorporated owner is acting under, its financial position and the need for it to internally push for such a project with significant capital expenditure it is unlikely the works would be completed quickly. 

34.  It seems fairly clear that it would not at all be easy for the IO to quickly raise the necessary funds in order to proceed with any degree of expedition.

35.  Unfortunately, there is no ‘good option’ available to the IO in the sense that any delay may result in losses it might have to compensate the Plaintiff for in terms of lost rental.  Given the magnitude of that amount (possibly in the region of $1m per month) and comparing that with the costs of the repair and the amount it has in reserve, the downside to the IO could be very significant if nothing is done now.

36.  Amongst the various possible scenarios, the Court is obviously concerned about the scenario whereby no injunction is granted but the Plaintiff being successful at trial, whereby the IO might face a very significant claim running in the dozens of millions of HK$. 

37.  Assuming there are factual and some expert witnesses, even with a speedy trial, it may be that the matter could not be tried and decided before the end of 2021 if not later.

38.  It seems to me that there is sufficient evidence showing that the problems resulting from water leakage have a material impact on the leasing of the cinema, and it is therefore only logical that this would result in some form of loss.  I of course bear in mind as Ms Chong has highlighted that the issue was mentioned somewhat belatedly or at least this was not until fairly recently emphasized to the degree it now has.

39.  Nevertheless I consider on the evidence before me that there is a clear and present risk (and it is not necessary or desirable for me to quantify that risk at this juncture) of the IO ultimately being liable for a significant amount of loss, even if it is not quite the $1M plus per month alleged, given the present situation in Hong Kong.

40.  The reality is that to some extent the IO is between Scylla and Charybdis, facing very significant capital expense in the short to medium term or if that is delayed still having to incur significant capital expenses (perhaps slightly reduced by a more extensive form of costs control) but having to face on top the risk of rental loss incurred by the Plaintiff which is in monetary terms very significant, at least compared with the capital expenditure.

41.  Ms Chong fairly acknowledged that if the Plaintiff did the work first, the question of quantum could be adequately dealt with at trial although she submitted that this would result in a waste of time and costs in the future.

42.  I recognize that there will be costs involved in that exercise although these do not seem to me to be too significant if they will involve the Court determining:

(1) what is the “minimum” reasonably to be done by the IO to fulfill its obligation; and

(2) what the costs of doing that would be.  This can be done with the assistance of quantity surveyors and other construction professionals.  I do not believe this would be too protracted or complicated.

43.  To further assuage the IO’s worries, Mr Kwong on behalf of the Plaintiff further undertook that at most the Plaintiff would seek no more than HK$5M for the works done pursuant to the Water Leakage Injunction, even if it were to succeed at trial for the recovery of costs.

44.  The converse of not granting an injunction is that there is some risk the Plaintiff will be able to successfully claim some or all of its lost rental income.  This could potentially be very significant at least compared with the costs of the exercise in the paragraph 42 above.

45.  I have borne in mind the fact that the IO have been operating under a rigorous and somewhat rigid regime (imposed by the BMO for entirely understandable reasons, not least to keep costs reasonable and avoid corruption/collusion): see in particular sections S20(2)(a) and (b) and also the Code of Practice on Procurement of Supplies, Goods and Services.

46.  These of course would not be relevant if the Plaintiff is allowed to proceed and the IO would at most be required to foot the bill at a later stage but only for a reasonable sum being the minimum amount required to do the works to a standard which is required of them and no more.

47.  All in all:

(1) I believe that the grant of the Water Leakage Injunction would not have the effect of disposing of the action or even substantially disposing of the action.  Ultimately something has to be done and the bigger question is exactly what should be done at a minimum, and at what costs.

(2) Ultimately the Plaintiff will decide what plan to pursue and at what costs but it will not get carte blanche in terms of reimbursement.  At most, it would simply set the reasonable amount of costs, subject to a HK$5M cap, which should have been incurred in order to do the minimum required in the circumstances.

(3) On that basis, the Plaintiff has shown has a serious issue to be tried.

(4) Even if I had considered that this Order would in effect have practically disposed of the action and thus needed to be satisfied to the higher standard I would have found that on the evidence before me, the Plaintiff has met that threshold.  In those cases, the Court would be entitled to have a “higher regard to the merits of the plaintiff’s case so far as is relevant to the particular claim” (per Chow J in BMC Global Ltd v TOR Asia Credit Master (unrep judgment dated 14/10/2016).  See also Lansing Linde Ltd v Kerr [1991] 1 WLR 251 explaining why in such circumstances there is need to adjust the ‘American Cyanamid’ guidelines.

(5) In the present case I believe that the balance of convenience is strongly tilted in favour of the grant of the Order, taking into account:-

(a) The time it would take to effect the repairs if this is left to the IO as opposed to letting the Plaintiff do it especially when it is not apparent that the IO has at hand the funds to get the works going. 

(b) Notwithstanding that I accept the Plaintiff did not come at the earliest opportunity so to speak, I consider that it was reasonable for it to either make offers to the IO to avoid litigating (which included between June and August 2018 a proposal for the Plaintiff to bear the costs of the repairs) or to see if the IO would be able to proceed with the repairs.  In any event I do not consider on the facts of the present case to be one where it would or it has become unjust to grant equitable relief (see Re Wako Giken [2010] 4 HKLRD 121 per Harris J at paragraph 24).

(c) There is a risk of a substantive claim by the Plaintiff for loss of rental.  As explained above, I do not need to either decide how likely such a claim is to succeed nor its quantum but it seems on the evidence before me that risk is real and the quantum of losses is likely to run in the millions if the situation is not remedied rapidly.  This is something which needs to be carefully borne in mind and I will come back to this.

(d) Although there is no suggestion in the expert evidence of any ‘imminent’ risk of injury to persons nor is there currently any spalling (although the factual deponent for the Plaintiff hints at it), there is some suggestion that the longer one waits the more difficult it may be to remedy the situation.  I also note that there is some dispute between the experts as to how bad/serious the situation currently is and how long can one wait before it will get significantly worse.  While the Plaintiff’s expert this has to be done ‘in the near future’ it is not entirely clear what that entails. 

(e) It is important to bear in mind that it is not disputed that the work have to be done, the only question is exactly the scope of the work and at what costs that will be done.  Hence this is not a case where an option would be for nothing to have to be done or to be paid for by the IO. 

(f) The Plaintiff is on the evidence clearly good for its undertaking as to damages (should the injunction have been wrongly granted). The Plaintiff owns the Auditorium and the Cinema which collectively are worth some $660M.  In any event it is not easy to conceive of any significant damage which would arise by reason of the Water Leakage Injunction Order, whereas I note that the IO’s present financial situation is a bit stretched although I accept it may be able to call upon the resources of the Owners.

48.  As it has often be said, at the interlocutory injunction stage, the principal concern of the court is that it might make a wrong decision in the sense that after trial, the party to whom an interlocutory injunction has been granted may lose or the party who has been refused one, may win.  The court will therefore take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong.  This fundamental principle is the source of the guidelines that have evolved for the determination of interlocutory injunctions[2].

49.  I note that in the cases cited by Mr Kwong which were proceedings before the Lands Tribunal , the IO was given a period of time to effect the works failing which the Plaintiff was allowed to do it itself instead[3].  I consider that in many cases of course, if not the vast majority of the cases, that may be the appropriate course to take.  Whether to order that or to allow a plaintiff to proceed directly first would be a decision which has to be made having regard to all the relevant circumstances and the practical reality of the situation.  There is no immutable rule or practice.

50.  All in all, I have little doubt on the evidence before me that granting the Water Leakage Injunction (on the basis of the additional undertaking provided this morning) is the course which carries the least risk of injustice.

INTERFERENCE INJUNCTION

51.  The Plaintiff submits that for the Cinema to operate it is necessary for it to carry out certain renovation works.  To this end the Plaintiff and its tenant need to access the common drainage pipes and the sprinkler system to the emergency electricity system of the building.  For this purpose the Plaintiff has engaged Associated Architects to advise on the said renovation work.  The same have been approved or not objected by the Buildings Department, the Fire Services Department and the Water Supplies Department.

52.  That plan which is referred to in the draft Order, and dated 5 July 2019 was apparently only first produced by the Plaintiff to the IO in March this year when an application was made for the injunction.

53.  The Plaintiff relies on clauses 5(a) and 5(b) (1) of the DMC which sets out the Plaintiff’s rights.  I set them out here:

Clause 5(a)(1): “Subject as hereinbefore mentioned, every owner for the time being of one or more undivided shares in the said land and building in common with the others of them and all others having the like right shall have the right to use for all purposes connected with the proper use and enjoyment of the unit owned by him the entrance lobbies, transformer room, metre rooms, machine rooms, staircases, passages, landings, lifts, escalators (save and except the Cinema Hall and the staircases and escalators respectively serving the Cinema and the 1^st Floor exclusively) apparatus, equipment and services of the said building and the other common areas within the said land…”

Clause 5(b)(1): “Subject to the provisions of this Deed, the owner of each undivided share and unit shall hold the same:-

(1) Together with the free and uninterrupted passage and running of water, sewage, gas and electricity from and to the said unit through the sewers, drains, water-courses, cables, pipes and wires which now are or may at any time hereafter be in under or passing through the said land or any other portion of this said building.”

54.  The Plaintiff says that from the summer of 2018 all the way up to mid-February of this year it has sought the IO’s consent for connecting to the emergency electric supply of the Building as well as connecting the sprinkler system to the emergency power supply of the Building.

55.  Whether the Plaintiff has an arguable right to the order it seeks must be dependent on the construction of the DMC and how it applies in the present facts of this case.

56.  While the Plaintiff in its skeleton implies that there is no arguable defence to the injunction under this limb, this seems to me to be putting the position too high.  For reasons which are apparent below, I will not analyse this issue nor say anything more about it.

57.  It seems to me however that there is force in Ms Chong’s submission that prior to the 19 June letter 2020 sent by the Plaintiff to the IO, it was not entirely clear to the IO what those works now covered by the Non Interference Injunction precisely covered or what that would cover in particular.  

58.  I accept of course that there was some further elaboration in the Plaintiff’s affirmation in reply and also some of the legitimate concerns of the IO have now been addressed in the form of undertakings as set out in the draft Order.

59.  If it was not previously clear to the IO, the legal and factual basis of the request, this must have by now become clear.  In light of the various undertakings now offered on behalf of the Plaintiff, the IO can and in my view should take a considered decision in whether to consent to the Non Interference Injunction Order or resist it bearing in mind the legal and evidential threshold, as well as the balance of convenience and adequacy of damages and the potential losses of the Plaintiff which the Plaintiff may claim against the IO should an injunction be refused but should the Plaintiff succeed at trial.

60.  I therefore decline to make an order on the Non Interference Injunction but will give liberty to the Plaintiff to restore this part of the summons for a date to be fixed with 3 hours reserved not earlier than 1 October 2020 while expressing the confident hope  that in the light of the indications given by the Plaintiff and the sensible legal advice which will be provided to the parties; that some form of arrangement could be entered so as to avoid (1) significant costs to be incurred in this litigation (both the party’s costs and the other side’s costs for the losing party) which may include a lengthy and costly trial (2) the risk of losing the trial and the possible damages associated with it.

61.  The additional time and evidence (see below) to explain precisely what those works envisaged by the Plaintiff to include (time, risks, inconvenience etc) will together with the practical considerations set out above, will have to be weighed by the IO so that it can make an informed and considered decision, with the benefit of legal advice on how best to proceed in the best interests of the Owners.

62.  Given that I have acceded to the Plaintiff’s application on the Water Leakage Injunction, I believe that work on the same can commence shortly.  Should no agreement be reached on the Non Interference Injunction, hopefully this matter could be determined shortly, and since the work dealing with water leakage would have commenced if not completed, the remaining works therefore could proceed shortly afterwards should the Non Interference Injunction later be granted (on the assumption that the matter cannot be resolved amicably before that).

DISPOSITION AND COSTS

63.  I will make an order in terms of the Water Leakage Injunction upon the further undertaking offered by the Plaintiff this morning and adjourn the Non Interference Injunction.

64.  I make the following additional directions:

(1) The Plaintiff to file further evidence on the matters referred to at paragraph 61 above within 14 days;

(2) The IO do have leave to file evidence in reply if so advised 21 days thereafter;

(3) The Plaintiff do have leave to file evidence in reply 14 days thereafter;

(4) Leave to restore forthwith the remaining part of the Summons with a 3-hour time estimate for a date not earlier than 1 October 2020 (should the matter need determination).

Costs

65.  I will order that costs that costs be reserved. To some extent the matter will be considered in the round once a decision is also made on the Non Interference Injunction if the matter cannot be amicably resolved before then.

66.  Given the costs involved in the present proceedings (both which have been incurred and those which are to be incurred if the matter is to be litigated until trial) I would urge both parties and their respective legal advisers to consider resolving their dispute out of Court, if possible, and to consider the use of mediation in order to resolve the dispute in a way which is costs effective and practical.  This would be in the interests of both parties and an early resolution would avoid a ballooning of costs.

67.  It remains for me to thank both parties counsel for their helpful assistance.