THE INCORPORATED OWNERS OF MILLION FORTUNE INDUSTRIAL CENTRE v. JIKAN DEVELOPMENT LTD AND ANOTHER

CACV 381 & 503/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 381 & 503 OF 2001

(ON APPEAL FROM HCA NO. 14915 OF 1998)

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J U D G M E N T

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Hon Rogers VP:

1. These appeals were from a judgment of Deputy High Court Judge To given on 9 February 2001 whereby it was adjudged that the 1st and 2nd defendants should jointly and severally pay the plaintiff the sum of $3,531,301.25 together with interest at judgment rate from 17 September 1998. At the conclusion of the hearing of the appeals judgment was reserved.

Background

2. The action concerned parking fees which had been collected in respect of the use of the Common Parts of Million Fortune Industrial Centre ("the Building") for the purposes of parking vehicles and the costs of employing staff at the Building who were engaged in the collection of parking fees on behalf of the 1st defendant. The deed of mutual covenant (the "DMC") in relation to the Building is dated 29 April 1989. The parties to the DMC were Lac Kar Investment Company Limited, which was the developer and is referred to in the DMC as the First Owner, Square Construction Co. Ltd, which was the Second Owner, and the 2nd defendant in this action, Plotio Property and Management Company Limited, who was the Manager of the Building from June 1989 until 30 April 1998.

3. By an assignment dated 7 July 1989, the First Owner assigned to the 1st defendant 23 of the 17,180 undivided shares "TOGETHER with the exclusive right and privilege to hold, use, occupy and enjoy FIRST ALL THOSE the Common Parts and External Wall of the Building more particularly described in the Deed of Mutual Covenant and Management Agreement registered in the Land Office by Memorial No. 4109879 and SECONDLY ALL THOSE LORRY PARKING SPACES on GROUND FLOOR of the said Building".

4. There were apparently seven lorry parking spaces, two of which were subsequently sold. In May 1996, there was an assignment between the First Owner as vendor, a company by the name of Grade Open Limited as the confirmor and the 1st defendant as the purchaser of 14 undivided shares and the exclusive right to 14 car parking spaces on the ground floor of the Building.

5. It appears from the judgment that between 1989 and 1997 the 1st defendant had control of the management of the Building by reason of its majority share holding and hence it controlled the 2nd defendant. The matter in dispute arises because areas of the Building which were designated as Common Parts have been used for parking spaces and parking fees have been collected in respect thereof and not paid into the Management Sink Fund as required under the DMC. Those fees were levied on the basis of time charges (hourly and half-hourly). They were collected by the 2nd defendant until the 2nd defendant's appointment as Manager was terminated. Until approximately July 1997 the fees were paid over by the 2nd defendant to the 1st defendant.

6. The major point taken on this appeal is that the plaintiff has no right of action to claim recovery of the parking fees which were collected under the provisions of the Building Management Ordinance, Cap. 344 (the "Ordinance") prior to its incorporation on 29 October 1997. It is said that the right to recover those fees is a right which belongs to those who were owners at the time that the relevant fees were collected. As a subsidiary point Mr Ho SC, on behalf of the 1st defendant, has argued that his client, being one of the co-owners, was entitled to retain the fees which had been paid to it. He pointed to the absence of any statutory provision in force in Hong Kong at the relevant time equivalent to section 27 of the Statute of 4 Ann. c.16. As regards the damages which have been awarded, the points taken include a challenge as to the basis of calculation of the parking fees collected by the 2nd defendant in respect of parking in the Common Parts. It is also said that any claim against the 1st defendant in respect of the employment of staff to collect parking fees on behalf of the 1st defendant would be statute-barred after six years. It was further argued that in calculating the amount of staff whose engagement was attributable to work carried out on behalf of the 1st defendant the judge took into account an excessive number of staff for the majority of the period.

7. Mr B K Ho, on behalf of the 2nd defendant, sought to raise an argument that there had been an agreement for the benefit of the co-owners entered into by the 2nd defendant with the 1st defendant which enabled extra parking to be provided which benefited the co-owners. The existence of that agreement was specifically rejected by the judge. When this was pointed out Mr Ho did not pursue the argument further.

The Deed of Mutual Covenant

8. In order to assess the plaintiff's claim it is necessary to examine the provisions of the DMC. Under clause 1 Car Parking Spaces are defined as spaces in the Building which were so designated by the First Owner and/or the Manager. Lorry Parking Spaces has a similar definition. The Manager is defined as the 2nd defendant and the sub-contractors or agents or another manager appointed by the owners of the Building under the Deed or the corporation incorporated under the Multi-Storey Building (Owner's Incorporation) Ordinance, Cap. 344. The Common Parts are defined as including, unless otherwise designated by the First Owner, "the loading and unloading area (if any) and all the drive-ways (if any) and leading to and from all the entrances and exits on the Ground Floor and First Floor.".

9. It is clear on reading the DMC that the First Owner was not given the exclusive use of the Common Parts of the Building. Although under clause 5 of the DMC there are listed a number of rights and privileges to which the First Owner was entitled, the Common Parts do not form part thereof. Indeed in sub-clause (f) the right given to the First Owner was only the absolute right to designate the exclusive use of the passages, corridor ways, landings which are not for the common use of the Premises and/or the Building. If the matter were in any doubt, the First Schedule specifically lists those parts of the Building of which the First Owner had the exclusive use and although car parking spaces and lorry parking spaces are referred to, there they were "as are more particularly described in the Fourth Schedule" and the First Schedule makes clear that the areas specified for the exclusive use of the First Owner do not include the Common Parts. The Fourth Schedule makes clear the distinction between the Common Parts and the car and lorry parking spaces. Moreover, under clause 9 of the Third Schedule the owners undertook to use the parts of the Building intended for common use for the purpose of access to and egress from their workshops and not otherwise. Furthermore, under the Third Schedule the owners of the shares relating to the Common Parts were absolved from any requirement to pay or contribute to the costs and charges relating to the management of the building to which all the other owners had to contribute. In contrast the owners of car and lorry parking spaces were not so exempt.

10. Thus whatever the effect of the assignment of 7 July 1989, it did not give the 1st defendant the exclusive use of the Common Parts. Still less did it give the 1st defendant or any individual owner the right to use the Common Parts for its own private commercial use as a car park where fees were charged.

11. The Deed of Mutual Covenant provided for a scheme for the use of the Common Parts for the purposes of lorry and car parking spaces. Clause 8(b) of the DMC gave the Manager the power:

"(i) to allocate and designate the Common Parts on the Ground Floor or any part or parts thereof as Lorry Parking Space(s) and Car Parking Space(s) for the exclusive use of any Owners, occupiers, licencees, tenants or visitors at such charges and on such terms and conditions as the Manager shall from time to time thinks fit subject to the approval of the First Owner and (ii) to lease from the Owner(s) for the time being the Lorry Parking Space(s) and Car Parking Space(s) at such terms and conditions as the Manager deems fit for the exclusive use of any Owner, Occupier, licencees, tenants or visitors at such charges and on such terms and conditions as the Manager thinks fit PROVIDED THAT any charges or consideration to be received by the Manager from the above shall be deposited to the Management Sink Fund."

This has to be read in conjunction with the other clauses in the DMC. In this context mention might be made of clause 8(a) which gives the Manager "the full and unrestricted authority to bind each owner in all matters relating to action authorised under the DMC and to the management of the Building the Premises or the Common Parts". It is the plaintiff's case that the money charged by the 1st defendant and collected on its behalf by the 2nd defendant in respect of the use of the Common Parts for car and lorry parking falls within clause 8(b), and therefore should have been deposited to the Management Sink Fund.

12. The significance of payment into the Management Sink Fund becomes more apparent on consideration of the Third Schedule. Clause 1(h)(ii) provides that if the total contributions payable by the co-owners for management expenses are insufficient to cover the expenses of the Manager, then the deficit has to be made up in the specified proportions. Under clause 1(h)(iii), if there is any surplus after the payment of all costs, charges and expenses then the surplus has to be held by the Manager and "shall only be applied in or towards payment of such costs, charges and expenses thereafter to become due". Clause 9(b)(ii) requires the Manager to pass on all accumulated surplus for the account of the owners to any new manager or corporation which is appointed.

13. A number of points were taken on behalf of the 1st defendant as to why clause 8(b) was inapplicable in the circumstances of this case. First, it was said that there had been no evidence to show parking spaces had been allocated or designated in the Common Parts on the Ground Floor. Since the finding of the judge was that from the time, or even before that time, when the 1st defendant took the assignment of 7 July 1989, spaces in the Common Parts were used for parking spaces and time charges were raised in respect thereof it is clear that there must have been some allocation and designation, particularly as it was the 2nd defendant that was collecting the charges. Indeed, Mr Mok, on behalf of the plaintiff, pointed out that there were parking spaces which were marked out on the ground.

14. Another point taken was that the terms of clause 8(b)(i) require that the acts of allocation and designation of the Common Parts and the charges and the terms and conditions laid down by the Manager were subject to the approval of the First Owner. It was said that there was no evidence that the First Owner had given such approval. As has been pointed out, the First Owner remained an owner of some of the undivided shares at least until 1996. In those circumstances it can hardly be said that there had not been implicit, if not explicit, approval of the use of the Common Parts for parking. In any event, I consider it is legitimate to read the provision that the allocation and designation was subject to approval as meaning that the allocation and designation could be made by the Manager, but that such decision by the Manager could be overridden by the First Owner if the First Owner should so choose.

15. An even less meritorious point was raised by Mr Ho on behalf of the 1st defendant that clause 8(b) bound the manager, that is the 2nd defendant, but did not bind the recipient if the Manager chose to pay the parking fees collected over to some person or fund other than the Management Sink Fund. In view of the fact that the 1st defendant was bound by the provisions of the DMC precisely because it had become an owner of undivided shares under the assignment of 7 July 1989, if for no other reason, the 1st defendant would have been bound by the provisions of the DMC including clause 8(b). Furthermore, in view of the way that the monies derived from parking were to be collected and used to defray the expenses of maintaining the Building, and were not to be available to the owners in the form of direct payments or even a distribution of a surplus, even if the 1st defendant had not been bound by the terms of the DMC, knowledge of those arrangements would have bound it as a recipient of the monies in breach of the 2nd defendant's obligations.

16. The only other argument in relation to clause 8(b) which I would mention, even though it too lacks any merit, is that it was in the power of the Manager under clause 8(a)(ii) "to allocate or re-designate the common part or parts thereof for the exclusive use of any Owner or third party subject to the rights of the First Owner (as reserved if any) and the approval thereof." If this argument, which, like the previous arguments, was not contained in the written skeleton on behalf of the 1st defendant, has been properly understood, it was that it was open to the Manager to allocate or re-designate common parts to the exclusive use of one of the owners, in this instance the 1st defendant. That, in my view, is clearly to take the sub-clause out of its context. The context is that it is part of the clause which includes clause 8(b), and if parts of the Common Parts are to be treated as parking spaces they have to be dealt with in accordance with clause 8(b).

17. However, the major point taken on behalf of the 1st defendant was that the plaintiff could not sue in respect of any wrongs which had been committed prior to its incorporation. It was said that any right of action was a personal right which did not run with the land but was a right which belonged to each individual owner at the time that the wrong was committed. The upshot of the argument, from which Mr Ho did not shrink, was that if parking fees which should have been paid into the Management Sink Fund were otherwise diverted, the right of action lay in each individual owner. If the Manager were not prepared to take action, then every person or company who was an owner at the relevant time would have to take action to enforce the provisions of clause 8(b) of the DMC in order to ensure that the monies were paid over. This, it was said, was despite the fact that the owners individually were not entitled to any sums and that claimed monies recovered were required to be credited to the Management Sink Fund.

18. This wholly unattractive argument would lead to litigation which could only be described as inconvenient and cumbersome. But in my view there is a short answer to this point. The monies which the Manager received as parking fees in respect of car and lorry parking in the Common Parts was money which was impressed with a trust. That money could only be used, as indicated above, for the purposes of the maintenance of the Building. No owner had any right to that money or any part of it. All owners had bound themselves in such a way that the money could only be used for common purposes, namely management expenses. On ceasing to be an owner by sale of the relevant undivided shares each owner would cease to have any interest in that money. The money would remain in the Management Sink Fund, or be designated to be put in that fund, to the ultimate benefit of those who were the future owners of the Building, in other words, owners of the undivided shares.

19. In those circumstances, the provisions of section 16 of the Ordinance are in my view apposite. They read:

"When the owners of a building have been incorporated under section 8, the rights, powers, privileges and duties of the owners in relation to the common parts of the building shall be exercised and performed by, and the liabilities of the owners in relation to the common parts shall, subject to the provisions of this Ordinance, be enforceable against, the corporation to the exclusion of the owners, and accordingly - ..."

At the date of incorporation of the plaintiff, the owners for the time being of the Building enjoyed a right to enforce reimbursement of the parking fees which had been passed to the 1st defendant. In those circumstances the Incorporated Owners clearly had the right to take action on behalf of the owners collectively. In this respect I would also draw attention to what was said by Litton PJ in Chi Kit Co. Ltd v Lucky Health International Enterprise Ltd [2000] 3 HKC 143 at 152. In dealing with the provisions of section 17(1)(b) of the Ordinance he considered an argument which had been raised, and was mentioned at page 151D, that only owners of a building who were owners at the time were liable to contribute to a judgment obtained against the incorporated owners. The point was thus slightly different from that raised in this case, but nevertheless at page 152C-E Litton PJ said:

"It must be borne in mind that the primary meaning of 'owner' in the Ordinance is 'a person who for the time being appears from the records at the Land Registry to be the owner of an undivided share ...'. In my judgment, there is nothing in the context which requires the meaning of 'owner' in s 17(1)(b) to be construed differently. This construction accords with the scheme in the Deed of Mutual Covenants applicable in the present case - and perhaps countless others - where the rights and liabilities of owners generally pass with the land."

20. I have no doubt that the judge below was perfectly correct (at page 11 of his judgment) where he said that the right which was sought to be enforced "was bestowed by the DMC on the co-owners qua owners of the Building." In the circumstances it becomes unnecessary to consider further the argument that one of the co-owners can take a benefit intended for the co-owners without accounting to the other owners. In this case the co-owners have agreed through the DMC what shall happen to the money.

Quantum

21. The first task which faced the judge below was to assess the parking fees which had been received by the 2nd defendant and passed to the 1st defendant in respect of parking in the Common Parts in the period from May 1989 to June 1998. The first point to note in respect of this is that in the first instance it was the responsibility of the 2nd defendant, who collected those fees, to give a proper account as the Manager as to what those fees were. The 1st defendant left the task of collecting the parking fees to the 2nd defendant, who thus acted as the 1st defendant's agent. The matter goes further than that. According to the first witness statement of Mr Chui Woo Ping, the chairman of the plaintiff, which was adopted as part of his evidence in chief, since late 1993 he had written many letters of complaint to the 2nd defendant about the parking area. The specific complaints were that the expenses incurred in the management and control of the parking area which belonged to the 1st defendant were borne by all the owners of the Building. The second complaint was that income derived from parking in the common areas was never accounted for by the 2nd defendant and deposited into the Management Sink Fund. In those circumstances the 2nd defendant, and through it the 1st defendant, had been alerted to the fact that the 2nd defendant itself and the 1st defendant were acting in breach of the DMC and were handling and receiving monies contrary to the provisions of the DMC.

22. The judge did not have the figures for the relevant monies collected by the 2nd defendant and passed to the 1st defendant. The first figure which the judge had was the total income for the period, amounting to $4,565,840, but this included parking fees derived from the 1st defendant's own parking spaces as well as from the parking which had taken place in the Common Parts. The only other data which the defendants could supply was from the 2nd defendant for the six-month period from July 1998 to December 1998. The income there from parking in the Common Parts was given as $56,420 and for the whole of the ground floor, including the 1st defendant's own parking spaces, was $231,545. The plaintiff on the other hand was able to supply figures for parking fees collected in the period from 18 January to 31 July 1999. This amounted to $165,455.00. There was then an argument as to which figures should be taken. In the end the judge took a figure of monthly income derived from the parking spaces in the Common Parts based upon an average of the figures which were available namely from July 1998 through to 31 July 1999.

23. In my view, the defendants were extremely fortunate in the approach taken by the judge. The judge was justifiably sceptical of the accuracy of the 2nd defendant's figures for July to December 1998. Moreover, ever since the case of Armory v Delamirie (1722) 1 STR 504 it has been recognised that, as a matter of practical reality, facts will be presumed against a person who does not produce information, goods or a document in circumstances where he should do so. In the case of Hong Kong and Shanghai Banking Corporation v Chan Yiu-wah and Another [1988] 1 HKLR 457 the doctrine which led to the decision in that case was examined carefully by all three judges in the Court of Appeal. Hunter JA said, at page 510, that it was no more than a particular application of the maxim that no man can place himself in a better position by his own wrong. He said that this operated at two levels. The highest level is where the evidence suggested a deliberate destruction. If such were the case everything would be presumed against persons who had by their acts put themselves in a position where their evidence could not be relied upon. Hunter JA then went on at 510J - 511B:

"At the lower level of application not inconsiderable rewriting of the maxim ('omnia praesumuntur contra spoliatorem') seems to me really to be necessary. First, in certain contexts at least, spoliator can be equated with tortfeasor e.g. where the act of destruction is also an act of conversion however accidentally caused. Secondly, 'all' requires two qualifications. First, the destruction has to be of something which might assist to prove the plaintiff's case, which, secondly, puts the plaintiff in particular difficulty owing to the lack of other evidence in his possession. Thirdly, there arises not so much a presumption with the consequences considered above, but an inference which transfers the evidential burden of proof upon the very matter rendered uncertain by the destruction."

24. In this case the 2nd defendant was an accounting party and the 1st defendant was a party to the arrangement (i.e. the DMC) by which the 2nd defendant became an accounting party to all the other owners of the Building. More than that, since 1993 the 2nd defendant, and through it the 1st defendant, had been reminded of their obligations to account. In my view, had the judge below proceeded upon the basis of the plaintiff's figures from January to July 1999 I doubt that the defendants could have had any cause for complaint. They were under a duty to account, they were reminded of that duty and they should have kept proper records. In so saying I am mindful of and do not ignore the point made in the judgment of Russell LJ at page 267 of the report of the decision in General Tire and Rubber Company v Firestone Tyre and Rubber Company Limited and Others [1975] RPC 203. In that case he referred to the decisions of Armory v Delamirie and the judgment of Winn LJ in Seager v Copydex [1969] RPC 250 but he doubted the application of the maxim in cases, such as was before the Court of Appeal, where what was at issue was the number of tortious acts, in that case patent infringement. The distinction between the General Tire case and one such as the present is that in a patent infringement case until infringement is held the obligation to keep records presumably does not arise. In this case the obligation to keep account was always there and the 2nd defendant had been reminded of it.

25. A further point taken on behalf of the defendants concerned the collection of parking fees for parking which occurred in Common Parts but outside the designated parking areas. Although it had been demonstrated in one of the photographs which was before the court that such had happened, whether that had happened when the 2nd defendant was in charge of the collection of the parking fees and the extent to which that had happened after December 1998 are by no means clear. It was said that collection of fees by the plaintiff in respect of such parking in the period from January to July 1999 might have swelled the plaintiff's figure for that period. Moreover, in my view, such parking appears to have been sanctioned by the 2nd defendant because there seem to have been markings for parking spaces painted on the ground. The collection of fees in respect of parking in any area of the Common Parts also fell within the provisions of clause 8(b) and any fees collected for such parking should also have been paid into the Management Sink Fund.

26. Issue was further taken in respect of the calculations which appeared (on page 20 of the judgment) whereby for the majority of the period from May 1989 to December 1998 the judge attributed three employees of the 2nd defendant as having been engaged to collect parking fees which were the 1st defendant's parking fees. Two points were taken in this regard. In the first place, it was said that part of the fees collected were the fees for parking in the Common Parts for which the 2nd defendant's employees would have had to be engaged had the money been paid into the Management Sink Fund. In the second place, it is said that it was demonstrated that from November 1997 until December 1998 only one extra employee was needed. It was thus said that for the whole period the defendants should only be charged for one extra employee.

27. The short answers to those points are that the judge held that the extra employees were engaged in collecting the fees for parking in the 1st defendant's parking spaces. The fact that they also collected fees for parking in the common parts does not alter the fact that extra employees had to be engaged. In my view, again, the judge did the best he could given the material that was available to him, and I see no basis for altering his view in this regard. In relation to the period from December 1997 to December 1998 our attention was drawn to the witness statement of Mr Yu Kin Cheung who had been the building supervisor at the Building from March 1991 until September 1996 and thereafter he had been the 2nd defendant's area supervisor. His witness statement was taken as part of his evidence in chief and he explained in paragraph 9 of the statement that the number of staff were decreased from six to four after the economy started to collapse. On the evidence therefore, the reduction in staff was due to a lower usage rate because of the economic downturn.

28. The point was also taken under the Limitation Ordinance Cap. 347 that a claim could not be made in respect of the employment of staff used for the 1st defendant's purposes which extended more than 6 years before the issue of the writ. As Mr Mok pointed out on behalf the plaintiff, the claim in this respect was against the Manager for waste of assets of which the 2nd defendant had control under the terms of the DMC. The waste consisted of the payment of costs and expenses towards staff salaries for the benefit of the 1st defendant who was also a party to the DMC. Since the DMC was a document under seal it was a specialty: see Aiken v Stewart Wrightson Agency Ltd [1995] 1WLR 1281at 1292. In those circumstances the limitation period under Section 4(3) of the Ordinance is 12 years.

Conclusion

29. In conclusion I consider that this appeal must be dismissed with an order nisi of costs in favour of the plaintiff.

Hon Le Pichon JA:

30. I agree.

Hon Stone J:

31. In my view this appeal was without merit. I agree that it should be dismissed for the reasons given by the Vice President.

Hon Rogers VP:

32. There will be an order as set out in paragraph 29.