SONG LING IN VESTMENT CO. LTD. v. KIN HING GODOWN LTD.

IN THE COURT OF APPEAL

1994, No.4
(Civil)

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J U D G M E N T

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Power, V.-P.:

1. This is the judgment of the Court.

The Claim

2. The appellant was the original owner of the Song Ling Industrial Building, a 13-storey factory building situated at 40-42, Ta Cheung Ping Street, Kwai Chung, New Territories, the ownership of which is notionally divided into 172 equal and undivided shares of which 10 are apportioned to each floor. The appellant having sold the ground floor, the 4th, the 7th, the 8th, the 9th, the 10th floors and the 11th floors now holds only the 1st, the 2nd, the 3rd, the 5th, the 6th floors and the roof. Kin Hing Godown Limited, the respondent, is the registered owner of the 8th floor. It is not disputed that the respondent is bound by the covenants, restrictions and conditions in a Management Agreement dated 20th June 1972 and a Deed of Mutual Covenant of the same date.

3. Clause 1 of the Management Agreement appointed the appellant as manager of the building, in which capacity it brings this action. It claims to have performed renovation work on the building pursuant to and in the performance of its duties under the Management Agreement and the Deed of Mutual Covenant and claims that the respondent is liable to pay and to indemnify it in the amount of its share of the cost of the said work in the sum of $96,300. It claims in the alternative that the respondent is liable to pay its share as the work was done pursuant to a resolution passed at a meeting of owners convened in accordance with Clause 12 of the Deed of Mutual Covenant.

The Facts and the District Court Decision

4. Judge Downey, having heard evidence in the District Court, handed down a decision on 14th July 1993 dismissing the claim. The owner of the 11th floor was and is a company known as Run Link Investments Ltd. One of its directors and shareholders is a Mr. Yu Hing On ("Mr. Yu"). He was also the sole proprietor of the Lee Cheong Construction Company ("Lee Cheong") which performed the renovation work, the subject of the claim. Further he and a Mr. Ng Cho-sing were at the relevant time the appointees by the appellant as joint managers of the building. On 28th December 1990 there was a meeting of owners which purported to have been called in accordance with Clause 12 of the Deed of Mutual Covenant. The judge held that this was not a validly constituted meeting as no written notice was given and no chairman was appointed to conduct it. There was, however, no substantial dispute as to what transpired at this meeting and the judge was satisfied that it reached consensus on three matters:

(i) the building should be renovated because of its age;

(ii) the renovation work should be properly supervised by an architect so as to gain governmental approval; and

(iii) tenders for the renovation work should be called for.

Agreement as to the latter point was reached following a suggestion by Mr. Yu and the judge was satisfied that the suggestion was made "solely with his own interests and intentions as the sole proprietor of Lee Cheong in mind". Those who attended that meeting signed an attendance sheet but it is not easy to ascertain from the signatures exactly how many of the owners were represented. There is no issue, however, that the appellant and the respondent 0both had representatives at the meeting and that the majority of the owners were represented. There does not appear to have been any specific evidence in this regard but the judge thought it probable that the other owners did not know that Mr. Yu was the proprietor of Lee Cheong. However, the judge did state, " I cannot say whether those interests were already known to the other owners."

5. Two tenders were submitted for the work, one from Kam Chung Construction Engineering Company in the sum of $1,432,800 and one from Lee Cheong in the sum of $1,155,600. These tenders were considered at a meeting on 13th March 1991. Again a majority but not all of the owners were present. At this meeting Mr. Lam Kwok Woon again represented the respondent. The judge was critical of the tendering procedure stating:

"I do not know who invited tenders for the work; nor how such invitations were made known to potential contractors."

However an indication of what was intended to be done is given in the following extract from the minutes of the December meeting-

"Regarding the question of tender, all presentees can submit the tender or introduce someone to submit the tender. At the third meeting, the tender which is honest and of reasonable price will be chosen."

The Decision on the Alternative Claim

6. The trial judge was not impressed of the evidence of Mr. Yu and had come to the following conclusion:

"On the contrary I am led by the evidence laid before me, and my assessment or perception of the demeanour of Mr. Yu when he gave his evidence before me, to the conclusion that the owners were eventually dragooned in March 1991 into accepting the quotation or 'tender' of Lee Cheong as a result of an improper of combination of the plaintiff's supposed majority control over all units in the building; their position or their understanding of their position, as manager under the D.M.C. and the M.A.; the price of Lee Cheong's quotation; and a belief that such quotation and that submitted by Kam Chung Construction Engineering Company had been solicited by fair and honest methods of competitive bidding. In short, the plaintiff has, in my judgment, wholly failed to show that the renovation work was carried out pursuant to the wishes of the owners of the building, as they were revealed at the second meeting. I will shortly consider whether it was carried out in accordance with valid resolutions or decisions made at the so-called "third meeting" which took place on 13th March 1991."

The judge was satisfied that Mr. Yu had composed his tender and reached his price after having seen that of Kam Chung and that he was not truthful when he gave evidence to the contrary. The judge was further satisfied that there was no proper meeting on 13th March and that the tender of Lee Cheong was therefore never approved at a properly constituted meeting. This disposed of the alternative basis of the appellant's claim and there is no challenge to the judge's decision thereon.

The Principal Claim

7. Mr. Ho, who appears for the respondent, submits that the appellant's claim to recover under the Deed of Mutual Covenant and the Management Agreement fails at the outset. He does not suggest that the meetings were valid but submits that the appellant, having called the meetings under Clause 12 of the Deed of Mutual Covenant at which the co-owners arrived at a consensus, cannot now fall back and rely upon Clause 2 of that Deed. He submits that to allow them to do so would be against common sense and against the general spirit of the Deed. We cannot agree. Clause 12 allows the owners to call meeting and to pass resolutions which, to use its own words, "shall be binding on all of the owners ...". They do not bind the manager nor affect its rights and duties under the deed.

8. The judge dealt also with the plaintiffs' claim that it was entitled to recover the amounts under the Deed of Mutual Covenant and the Management Agreement. In this regard he held:

"There are, indeed, several and wide powers conferred on the plaintiff by the D.M.C. and M.A. to maintain, repair, service, clean paint and renew the building and common parts thereof. They may be wide enough to include everything which Mr. Yu did, or was engaged to do, in this case. But, it is in my view, strange that no one from the plaintiff has been called to give evidence in this case, notwithstanding the matters alleged by the defendant in the pleadings, to show that such work was essential or necessary because of the condition of the building ...."

The judge went on to state that:

"... the plaintiff went ahead with this renovation, in almost total and arrogant disregard of the wishes or interest of the defendant and other owners of the building. The plaintiff did so, perhaps, because of its belief that its actions as manager could not be called in question by reason of the wide powers given by the D.M.C. and M.A., and its ownership of five floors in the building. It has failed to prove that the tendering process was carried out in accordance with the clear wishes of the owners, as expressed at the second meeting; and ignored the clear indication that the desirability of the proposed renovation was a matter which the owners wished to determine at a properly constituted meeting; and was not a matter which fell within the very wide authority conferred on the plaintiff by the M.A. and D.M.C."

The judge rejected the submission that Miss Lam, for the appellant, had urged upon him that:

"The relationship between the plaintiff and the owners is to be likened to that between a board of directors and the shareholders of a limited company in general meeting".

He held that:

"In the present case, a closer analogy would be that of a partnership, where one partner is authorized to manage the business, and provision is made for differences of opinion to be decided by the majority, subject to the duty of utmost good faith which requires, at least, the giving of proper notice to the minority and affording them a realistic opportunity of discussion. That did not happen in this case."

He went on to state:

"In my judgment, the plaintiff proceeded to engage Lee Cheong with unseemly haste and did not act with a degree of good faith expected by co-owners of each other, or of a manager or agent."

We are not persuaded that the judge's approach using the analogy of a partnership was a correct one. The relationship between the appellant as designated manager and the owners is, the meetings having been held to have no legal effect, governed by nothing other than the Management Agreement and the Deed of Mutual Covenant. The management is authorized and in some cases required to perform the duties imposed upon it by those documents and is entitled to recover expenditure made in the exercise of those duties. It is essentially a contractual matter. If the management carries out required or authorized repairs it is entitled to recover what has been properly expended thereon. It would, of course, not be entitled to recover any monies expended on unauthorized unnecessary repairs or any unreasonable expenditure on authorized repairs. The meetings having been held invalid the questions to be asked were whether repairs were authorized, whether the work was done and whether a proper amount was expended thereon. If these questions are answered in the appellant's favour, whatever the skullduggery of Mr. Yu, the appellant is entitled to payment for the work done.

9. The answers, we are satisfied, are contained, for the most part, in documents which came from Mr. Michael W.K. Yuen, an authorized architect. Mr. Yuen was to be called by the appellant but we are told that, in the outcome, the respondent did not require his presence but allowed documents to be tendered by consent. The first of these is headed "Repair works 40-42 Ta Cheung Ping Street, Kwai Chung, N.T. Scope of Works - Outline Specification" This is an important document as it indicates the nature of the work to be done.

10. This document is clearly concerned with defects in the structure of the building occasioned by wear and tear. What we must ask is whether these defects were such as the appellant was required or, at least, authorized to remedy in accordance with the provisions of the Deed of Mutual Covenant and the Management Agreement.

11. The Deed of Mutual Covenant provides, inter alia:

Clause 2

"Each owner shall be bound by and shall observe and perform the following covenants provisions and restrictions:

(f) The owner of each floor other than the owner of the roof in the said building shall pay in the proportion of one share per floor of the following costs charges and expenses, namely:-

(iv) The cost of keeping in good and tenantable repair and condition (including whenever necessary the cost of replacement) the foundations the side walks main walls supports beams gutters fences chimneys and all external parts of the said building and the cost of renewing maintaining cleansing painting or decorating the said building or any part or parts thereof and all water pumps tanks pipes wells sewers drains water course conduit cables wires fire fighting equipment or plumbing apparatus sanitary fittings refuse disposal equipment or services therein and all other apparatus equipment and conveniences thereof."

"(ix) Such legal or other fees and costs which may be incurred by the Manager in the performance of any duty or in the exercise of any power hereunder;"

"(xi) Any other costs and expenses other than those specified in sub-clause 5(g) and (h) hereof charged or assessed on or payable in respect of the said premises or the said building."

"(m) The Manager shall have power and authority to do all or any of the following acts and things, namely:-

(v) To repair renew maintain service clean and paint the said building or any of the common areas and common facilities thereof and for such purpose to engage and to enter into contracts with any person firm or corporation."

"(s) The common parts services and facilities referred to in these presents shall include the following:-

(I) the entrance hall staircases landings and passages and such portion of the roof reserved and designated for the installation of the water tanks pump house machine room and equipment which are not included in any part of the building exclusively owned by one owner or several co- owners.

(ii) the sewers gutters drain watercourses cable wells pipes pumps tanks wires sanitary fittings fire fighting and refuse disposal equipment and other apparatus and equipment used or installed for the benefit of the said building as part of the amenities thereof are not by any individual owner for his own use or purposes."

12. The Management Agreement provides, inter alia:

Clause 2

"The duties of the manager shall be generally to manage and provide services for the whole of the said building to the satisfaction of the Company and in particular but without derogating from the generality of the foregoing to do the following:-

(d) To keep in good order and repair the lighting and ventilation of the common parts of the said building and all fire fighting equipment all plumbing apparatus sanitary fitting and refuse dispose equipment of the said building.

(f) To repair and keep in good repair and condition all common parts of the said building and as and when necessary to replace any part or parts thereof as shall have been damaged or destroyed.

(g) To paint or whitewash or treat with cement wash such of the common parts of the said building as should be painted white- washed or treated with cement wash at such intervals as the same may reasonably be required to be done and in any event if so required by any Government Authority.

(h) To paint or treat with cement wash the exterior parts of the said building from time to time as required by a resolution passed at a meeting of the owners for the time being of the floors in the said building.

(i) To replace any glass in any windows or doors of the common parts of the said building that may be broken.

(j) To keep in good repair and condition all water pumps tanks wells pipes sewers drains watercourses conduits cables and wires in the said building which are for the common use of the occupants of the said building.

(k) To keep the lifts of the said building in good repair and condition and to replace any parts that may be broken damaged or destroyed."

Clause 3:

"The manager may employ such person or persons as shall be reasonably necessary to carry out its duties hereunder and may enter into contracts with experts for maintenance repair and renewal of the lifts or any of the common parts and services of the said building."

Clause 5:

"The common parts services and facilities referred to in this Agreement shall include the following:

(a) The entrances halls staircases landings and passages which are not included in any part of the said building exclusively owned by one owner or several co-owners.

(b) The sewers gutters drains watercourses conduits cables wells pipes pumps tanks wires sanitary fittings fire fighting and refuse disposal equipment plumbing apparatus and other apparatus and equipment used or installed for the benefit of the said building as part of the amenities thereof and not by any individual owner for his own use or purposes.

(c) The loading and unloading space on the ground level marked 'Loading and Unloading Space' on the Basement Floor plan annexed to the Deed of Mutual Covenant.

(d) The lifts.

(e) The Transformer Room and Switch Room on the Ground floor."

Was the Work required or authorized

13. It is necessary to determine whether the work tendered was work which the manager was required or authorized to do. When so doing it is helpful to look at the architect Mr. Yuen's "Outline Specification" and at the tender of Lee Cheong which we set out hereunder.

The "Outline Specification"

"Repair Works

40-42 Ta Cheung Ping Street, Kwai Chung, N.T.

Scope of Works - Outline Specification

Floor - Basement, G/F, 1/F, 2/F, 3/F, 4/F, 5/F, 6/F, 7/F, 8/F, 9/F, 10/F & 11/F & Roof.

2 - Staircases.

2 - Lifts.

2 - Lavatories each floor

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A. Remove loose cracked and otherwise defective concrete from the reinforced concrete structure of the building, clean existing exposed steel bars of loose rust and foreign matter, provide and securely fix in place additional steel bars as necessary and reinstate. New concrete is not to be placed prior inspection by the Architect.

B. Remove all loose and defective external rendering and internal plastering.

C. Repair, secure or replace all loose and defective frames glazing.

D. Repair, secure or replace all defective drainage pipes including all soil & waste, rain water and vent pipes.

E. Provide 2 coats of external paint for all external walls and provide 2 coats of internal paint to internal staircases, and common areas."

The Tender of Lee Cheong

"Order No ... Specialized B.O.O. Ref, No ... in renovation Lot No .... work of Our Ref.No ... Buildings To: Kwai Chung, 40-42 Ta Chuen Ping Street, Kwai Chung New Territories. Quotation for renovation works

LEE CHEONG CONSTRUCTION CO. 12/F, Song Ling Industrial Building, 40-42 Ta Chuen Ping Street, Kwai Chung, Tel: 4801612-3 Dated : 11-3-1991

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According to the requirements of Yuen Wing Keung, architect and the standard of the letter of compliance by the architect appointed by Song Ling Investment Co. Ltd., all items of works from Ground Floor to 12/F and roof, lifts and toilets of all floors:-

1. Erecting scaffoldings of whole building and safety devices.

2. To reinstate the external walls, open space, staircase, store-room, roof, corridors and public areas, pillars, railings, stainless steal and concrete parts of the building according to the requirements Public Works Department and architect and subject to the letter of satisfaction by the architect.

3. Inspection all drainage system including rainwater pipes, sewage pipes, air-pipes, extra pipes and replace part of them. Replace and repair and water pipes to the water tanks in the toilets. (If all are to be replaced by new, then it would be in accordance with the original size including the sewage holes under the ground). Use PVC plastic pipes, all white in colour, then add $60,000.00 to the construction costs.

4. The water tank on the roof will be made in accordance with its original size including cleaning the water tank and made new water pipes from under the ground and two iron ladders.

5. The fire services water tank on the roof top will be made good by removing the original layer of covering and replace by water-proof covering with the part beside the top of the lifts be made good by black top.

6. All broken windows at the staircases and toilets will be replaced.

7. All wooden doors to fire exit and male and female toilets be repaired and painted. Made good all broken ones.

8. After removing all iron structures on the external walls, then clean the dust from the wall surface, wash off the moss, two layers of paints; two layers of water-proof paint on the inner part of the front and rear staircase and public areas. Two layers of paints on all external stainless steal windows.

9. All illumination tubes on the public areas and lifts be installed with two sets of "48" inches. All floors of staircases be installed with new lightings. New wiring for the two lifts and made a new switch-controlling room.

10. Made good and clean all areas and the miscellaneous items, rubbish.

11. Install new iron door to the rear staircase on the ground floor.

(The costs of the above items including materials and works, totalling Hong Kong Dollars One Million One Hundred and Fifty-five thousand Six Hundred).

Remark:

in respect of the work in item 3 above; if renew all by PVC plastic pipes, then the extra cost is sixty thousand. Then the total is One Million two hundred fifteen Twenty One thousand Six Hundred.

14. We do not intend to deal individually with the items common to the two documents. Suffice to say, having been assisted by Miss Lam's careful analysis, we are satisfied that such items were work which the appellant was required or authorized to do.

15. So much for the common items. As to the six other matters included in the Lee Cheong quotation, items 4,5,7,9,10 and 11, we are, again, satisfied that they were work which the manager was required or authorized to do.

Was the Work Done ?

16. The appellant relies upon the letter from the architect Mr. Yuen which certified, on 28th September 1991, that it was. He stated:

"This is to certify that the repair work at the captioned building have been satisfactorily completed by the Contractor under our supervision."

This statement, if it can be accepted, would be sufficient to establish that the work was done. We will turn later to consider criticism of the material that came from Mr. Yuen.

Was any Unnecessary Work Done ?

17. There was, we are satisfied, no evidence which would have supported a finding that any of the work was for unnecessary items, nor was there any cross-examination to that effect. Indeed the judge did not appear to have formed the view that unnecessary work was done. He said:

"If a meeting of all owners were properly convened, and full disclosure of all material matters were duly made to all owners, it may be that a majority would rectify the plaintiff's unilateral decision to engage Lee Cheong to carry out the renovation work."

The only mention in the judgment of unnecessary items was as follows:

"There is some slender evidence that he (Mr. Leung of the respondent) believed that Mr. Yu was charging for unnecessary items."

The judge, however, went on to say:

"But although the evidence may point to a stubborn refusal to honour the defendant's obligations (contrary to my findings), I am unable to find any evidence which suggests that it ever acquiesce in any of the decisions or actions on which the plaintiff relics in the acquiesced present proceedings"

The judge was here clearly not making any finding that unnecessary work was done. His findings was as to whether the work done had ever been approved by the respondent.

Was the Price Fair and Reasonable ?

18. The only remaining issue, the onus as to which was on the appellant, was whether the price charged was a proper one. In this regard the appellant relies upon the letter from Mr. Michael Yuen, the architect, dated 6th October 1992 in which said:

"In my opinion, the price quoted by Lee Cheong Construction Co. was fair and reasonable. Our previous documents are attached herewith for your easy reference."

The appellant suggests that this puts the question of the propriety of the amount charged beyond argument. We are mindful, however, of the judge's observation that he considered certificates of Mr. Yuen as "highly questionable". He based this observation on the uncertainty as to who had actually employed Mr. Yuen and upon the evidence that he had made a total of only three visits to the building.

19. The documents, as we have already indicated, were tendered by consent. It is true that there was no admission as to the truth of their contents; however there was no real challenge thereto. No evidence was called to suggest that the work had not been properly done or that the price charged was not fair and reasonable. Nor was any issue joined in those regards in cross- examination. We are satisfied that neither of the two matters to which the judge referred nor anything in the evidence warranted the conclusion that the documents were "highly questionable". We are satisfied that the work was of a kind that the appellant as manager was either required or authorized to do, that it was done and that the price was fair and reasonable.

20. For the foregoing reasons, we are satisfied that the appeal must succeed. We set aside the judgment for the respondent and in place thereof give judgment for the appellant in the amount claimed.

21. Judgment for appellant in the sum of $96,300 with interest at prime rate plus 1% from date of writ to date of judgment.

22. Costs both here and below to the appellant. We certify fit for appearance of counsel in the District Court.