THE INCORPORATED OWNERS OF NO.88 LOCKHART ROAD v. KAR KAR DEVELOPMENT LTD AND ANOTHER

HCA 2239/2014

[2018] HKCFI 884

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2239 OF 2014

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REASONS FOR DECISION

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1.  This is the plaintiff’s application for leave to discontinue the action as against the 2^nd defendant on terms that it pays the plaintiff costs of this action and the same be taxed on indemnity basis.

2.  The 2^nd defendant agrees to the discontinuance but disputes the costs order sought.

3.  At the end of the hearing I give the leave and order that the 2^nd defendant pays the plaintiff the costs of this action, including the costs of this application with certificate for counsel, on a party and party basis, with reasons to be given later.

4.  This I now do.

Background and undisputed facts

5.  The following background and material facts are not disputed.

6.  The plaintiff is the Incorporated Owners of No.88 Lockhart Road (“the Building”).

7.  The 2^nd defendant was at all material times the registered owner of the 12^th Floor of the Building (“the Property”) and landlord of the 1^st defendant.

8.  The 1^st defendant was the tenant of the Property under a tenancy agreement made with the 2^nd defendant dated 28 June 2013 (“the Tenancy Agreement”).  The term of the tenancy was 3 years beginning on 10 July 2013 and ending on 9 July 2016 with an option exercisable by the 1^st defendant to renew for another 2 years.

9.  Since late October 2013, the 1^st defendant had been operating a redemption centre in the Property (“the Redemption Centre”) in which holders of coupons and certificates or the like given under various promotional and incentive schemes could collect a variety of gifts, goods and items.

10.  As a result, excessive amount of bulky cargoes and goods were regularly and frequently delivered to the Property.  As there was no cargo lift in the Building, the delivery of these cargos and goods had to be made through the main entrance and the lobby at the ground floor of the Building and then via the 2 passenger lifts to the Redemption Centre. The operation of the Redemption Centre also generated huge volume of visitors and customers.

11.  Such user by the 1^st defendant obstructed the main entrance, the use of the lobby and the lifts, which of course were common parts and common facilities of the Building.

12.  So much was the nuisance, annoyance and inconvenience caused thereby to the other owners, tenants and occupiers of the Building that between November 2013 to June 2014, a complaint letter was signed by 17 owners/tenants/occupiers of the Building addressed to the plaintiff, various Management Committee Meetings were held, some with representatives of the 1^st and 2^nd defendants, and an EGM of the plaintiff was also held passing a resolution to prohibit the 1^st defendant from such excessive user.

13.  These meetings and various measures including the erection of bollards in the lift lobby did not resolve the situation.

14.  On 26 June 2014, another EGM was held, attended by the 2^nd defendant, among others, in which a resolution was passed to apply for a court injunction against the 1^st and 2^nd defendants.

15.  On respectively 17 September 2014 and 3 October 2014, 2 letters before action were sent by the solicitors for the plaintiff to the 2^nd defendant.  In the latter one, the plaintiff expressly invited the 2^nd defendant to join as co-plaintiff to sue the 1^st defendant.  The 2^nd defendant did not respond to that at all.

16.  This action then was commenced on 5 November 2014. Two days later, the 2^nd defendant’s solicitors wrote to the plaintiff denying having permitted the 1^st defendant’s breach of the DMC and asked the plaintiff to discontinue the action against it.

17.  On 14 January 2015, the 2^nd defendant filed its Defence and Counterclaim counterclaiming against the plaintiff loss over RMB 18 million alleging that this action has fouled a deal causing forfeiture of deposit in the said sum and loss of profit.

18.  On 21 May 2015, the plaintiff applied inter partes for an interim injunction to restrain the 1^st and 2^nd defendants.

19.  While that application was progressing and on 22 October 2015, by a resolution passed in an EGM of the plaintiff held that day, a new delivery arrangement was agreed and implemented[1].  Apparently, the new system worked well and solved the obstruction and inconvenience caused by the 1^st defendant’s such excessive user.

20.  On 31 December 2016, the 1^st defendant ceased operating the Redemption Centre.  On 8 January 2017, it vacated the Property.

21.  Between 12 November 2015 to 12 May 2017, there were without prejudice communications[2] between solicitors for the plaintiff and those for the 2^nd defendant; initially, to discuss the disposal of the application for interim injunction, and since 1 April 2016, to settle this action.  This chain of discussion ended with the plaintiff’s final offer made by letter dated 18 April 2017 to discontinue this action upon terms that the 2^nd defendant paying 50% of the plaintiff’s costs and discontinuing its counterclaim against the plaintiff.  The 2^nd defendant did not take up this offer.

22.  In the meantime, the plaintiff applied for and on 9 May 2017 obtained leave to discontinue this action as against the 1^st defendant and to withdraw the application for interim injunction and the 1^st defendant was ordered by Madam Justice Mimmie Chan, having heard arguments, to pay the plaintiff the costs of this action and of the application for interim injunction.

23.  Costs however continued to be spent in the action between the plaintiff and the 2^nd defendant. A Case Management Summons was heard on 10 May 2017.  It was directed, among others, that the parties were to exchange witness statements on or before 30 August 2017.

24.  The plaintiff had duly prepared its witness statements ready for exchange on or before 30 August 2017.

25.  On 14 September 2017, by consent, leave was granted to the 2^nd defendant to discontinue its Counterclaim against the plaintiff and the 2^nd defendant was ordered to pay to the plaintiff the costs of and occasioned by the Counterclaim.

26.  On 30 November 2017, the plaintiff took out this application.

Applicable principles concerning costs of the action upon discontinuance

27.  The parties do not dispute the principles. Those relevant to this application are :

(a)  The court has a complete unfettered discretion on costs, and the exercise of discretion is to be based on doing justice between the parties.

(b)  The starting position is for the costs to be paid by the discontinuing party (Townmens Investment Co Ltd v Wider River Ltd (In Liquidation)[3]unless it can be displaced by the demonstration of exceptional circumstances: Mariner International Hotels Ltd v Atlas Ltd (No.2)[4].

(c)  Where parties (as in the present case) have chosen not to go to trial to resolve their outstanding questions of costs, a claimant (the plaintiff in this case) shall be required to demonstrate, “that his case is so strong that he is bound to win had it gone on to trial and therefore he was justified in commencing the action in the first place…”: Anmol Kumar Sawlani v Yeshma Gobindram Sawlani[5]

The plaintiff’s case against the 2^nd defendant and its Defence

28.  The plaintiff submits that it is bound to win as against the 2^nd defendant had the matter gone to trial; and that it now seeks to discontinue as the 1^st defendant has moved out and it is now unnecessary to pursue the action as its main aim was to stop the breach by an injunction.

29.  In the Amended Statement of Claim, the plaintiff claims against the 1^st and 2^nd defendants for their breaches of Clauses 5(b), 5(d), 7(c) and 7(e) of the DMC.

30.  The 2^nd defendant’s Defence consists of non-admissions and a denial that it had not caused or permitted any inconvenience, disturbance, annoyance or nuisance to the other owners of the Building.

31.  The parties confirm that there is no dispute of material facts for the purpose of this application.

Clauses 5(b), 7(c) and 7(e) of the DMC and Clause 4 of the Tenancy Agreement

32.  It is convenient to first deal with Clauses 5(b), 7(c) and 7(e) of the DMC and leave Clause 5(d) to a later section below.

33.  Clauses 5(b), 7(c) and 7(e) of the DMC provide :

“5(b) The Owners or any persons authorized by the Owners to use the Common Areas or Common Facilities of and in the Property and the Building shall use them in a careful manner and shall not do anything which shall or is likely to cause damage or injury thereto or inconvenience to other owners.

…

7. Each Owner and his successors and assigns shall at all times hereafter be bound by and shall observe and perform the following covenants provisions and restrictions:

…

(c) Not to use his Commercial Unit or any other part of the Building for any illegal or immoral purposes nor do or permit to be done anything therein or thereupon which may create unnecessary noise or may be a nuisance or annoyance to or may cause damage or inconvenience to the other occupiers of the Building or the neighbouring buildings.

…

(e) Not to put or place any dust bins, garbage cans, goods or chattels or any other things in the common entrances, staircases, landings, common passages or other Common Areas of the Building save as designated by the Manager.”

34.  Clause 4 of the Tenancy Agreement provides :

“The Tenant [the 1^st defendant] … shall observe and perform the covenants, terms and conditions of the Deed of Mutual Covenant … relating to the Premises…”

Excessive user by the 1^st defendant clearly amounted to “inconvenience to other owners”, “nuisance”, ”annoyance” and placing of goods in Common Areas and was a breach of Clause 4 of the Tenancy Agreement

35.  The plaintiff exhibited 99 pages of photos, each containing up to 9 small ones, depicting the street just outside the entrance to the Building, the entrance, the lobby area and the lifts when deliveries were made to the Redemption Centre.  They showed that the pedestrian walkway just outside the entrance was blocked by carts of goods of substantial sizes, the entrance and the lobby were likewise filled with and blocked by cart loads, and/or big carton boxes and big plastic bags lying around, of goods and chattels, and the lift lobby and the two passenger lifts were also completely filled with such goods and their delivery workers.

36.  By looking at these paragraphs, it is clear without a doubt that while the deliveries were in progress, all other owners, occupiers and visitors of the Building were extremely inconvenienced in using the entrance, lobby and the lifts, if not completely hindered from using the same.

37.  The plaintiff’s schedules showing usage of the lifts of the Building in the period from December 2013 to April 2015 recorded that in most days, there were two deliveries made to the Redemption Centre, each lasted from about half an hour to an hour; and they all occurred in office hours, around 11 am and 4 pm.

38.  Similar schedules recorded visitor flow of between three hundred odd to four hundred odd persons to the Redemption Centre each working day during similar periods.

39.  Various owners also complained that the fire exit route on the ground floor was blocked and the smoke doors on the 12^th Floor of the Building were kept open during the deliveries.  Such would pose fire hazards.

40.  The 2^nd defendant does not dispute those photos or the veracity of the said schedules.

41.  Having considered those photos and the information contained in the said schedules, I am left without a doubt that such user by the 1^st defendant of those common areas and the lifts caused “inconvenience to other owners”, “nuisance” and ”annoyance” andwere “placing of goods in Common Areas” within the meaning of, and were acts covenanted against in, the above cited clauses in the DMC. 

42.  It therefore also follows that the 1^st defendant has been in breach of Clause 4 of the Tenancy Agreement.

Breach of clause 7(c) of the DMC by the 2^nd defendant

43.  By Clause 7(c) of the DMC, the 2^nd defendant covenanted not to permit to be done anything in any other part of the Building which may be a nuisance or annoyance to or may cause inconvenience to the other occupiers of the Building.

44.  As to the meaning of “permit”, both counsel for the plaintiff and the 2^nd defendant relied on the Court of Appeal case of Realty Harvest Ltd. & Ors v Gold Margin Development Ltd. & Another[6].  In that case, likewise the owner landlord was sued for having permitted its tenant to breach a covenant in the DMC.  Leong CJHC delivered the judgment of the Court and cited with approval and applied the following passage in the judgment of Atkin LJ in Berton v Alliance Economic Investment Co Limited.[7]

“… To my mind the word ‘permit’ means one of two things, either to give leave for an act which without that leave could not be legally done, or to abstain from taking reasonable steps to prevent the act where it is within a man’s power to prevent it …”

45.  Applying that meaning, the plaintiff’s case is that the 2^nd defendant has abstained from taking reasonable steps, which were within its power to take, to prevent the 1^st defendant’s such breaches.  And that the 2^nd defendant has so abstained, in that the 2^nd defendant has not

(a)  demanded in writing the 1^st defendant to cease and desist from such excessive user or ever written to threaten to enforce Clause 4 of the Tenancy Agreement;

(b)  taken any legal action whatsoever against the 1^st defendant; and

(c)  refused to join as a co-plaintiff even though it has been invited by the plaintiff on 3 October 2014 to do so.

46.  It is common ground that the 2^nd defendant has not taken any of those steps mentioned above.

47.  Mr. Wong, counsel for the 2^nd defendant, in an attempt to ventilate various matters put forth in the affirmation of Mr. Wong Wing Ming, the director of the 2^nd defendant, argued the following.

48.  It is said that the 2^nd defendant has already done all that was reasonable in the circumstances to help resolve the matter, which included, in gist,

(a)  participated in all meetings to discuss solutions;

(b)  having been cooperative in implementing various measures, including the erection of the bollards;

(c)  facilitated communication by authorizing in writing in May 2014 1^st defendant to represent the 2^nd defendant in the discussion with the Management Committee; and

(d)  it agreed to the plaintiff taking legal action against the 1^st defendant, but just not against the 2^nd defendant.

49.  Those steps might seem good to the 2^nd defendant, they were however neither here nor there insofar as its liability not to permit the breaches is concerned.  The test as to whether the 2^nd defendant has “permitted” is not a vague one of whether the 2^nd defendant has been reasonable in general, or whether it has acted reasonably from the perspective of a commercial landlord.  Rather, as set out above concerning the meaning of “permit”, the test is whether the 2^nd defendant has taken reasonable steps within its power to prevent the breaches by the 1^st defendant.

50.  It is then argued that it is not reasonable to require the 2^nd defendant to take legal action.  It is submitted that the question of whether certain otherwise legitimate user of the common areas and facilities amounted to an inconvenience to other occupiers or amounted to a nuisance and annoyance is a very disputable one.  It would therefore be unreasonable to require a landlord to expend substantial legal costs every time a dispute of such nature arises.

51.  It is further submitted that by so requiring, it would tantamount to requiring the landlord to prevent a breach “at all costs” rather than just taking “reasonable” steps.

52.  While this line of argument may have its place in appropriate factual situations, I find it totally devoid of merits on the present facts.

53.  The inconvenience and nuisance caused by the 1^st defendant has begun since late 2013.  Its extent has been under much complaint and discussions and meetings in which the 2^nd defendant participated.  By the time the EGM was held on 26 June 2014 (in which the 2^nd defendant attended) in which the resolution to apply for court injunction as against the 1^st and 2^nd defendants was passed by 85% of the votes, it had to be most evident to the 2^nd defendant that legal action was imminent.  In my view, by that time, seeking proper legal advice and taking the appropriate legal action against the 1^st defendant for breaches of the DMC and Clause 4 of the Tenancy Agreement were clearly reasonable steps that the 2^nd defendant could have and should have taken.  That would be even more so when shortly after, solicitors’ letters before action were issued by the plaintiff to the 2^nd defendant.

54.  I therefore reject the 2^nd defendant’s such submissions.

55.  In short, I find that despite it was within its power, having a good cause, and even being invited to by the plaintiff, the 2^nd defendant has failed to take any enforcement action as against the 1^st defendant to prevent further breaches.

56.  I therefore hold that had the matter gone to trial, the plaintiff is bound to win in its claim against the 2^nd defendant that it has breached Clause 7(c) of the DMC.

No breach of clause 5(d) of the DMC by the 1^st and 2^nd defendant

57.  At the hearing, it is argued by Mr. Yu counsel for the plaintiff, with some persistence, that the 2^nd defendant has also breached Clause 5(d) of the DMC.  In deference to counsel’s argument, I will deal with this briefly.

58.  Clause 5(d) provides :

“… each Owner will take all possible steps to prevent his tenants, occupiers or licensees from doing any act, deed, matter or thing which in any way interferes with or affects or which is likely to interfere with or affect the management and the maintenance of the Building as herein provided”.

59.  Mr. Yu submits that under this clause the 2^nd defendant was required to “take all possible steps to prevent” as opposed to just “take reasonable steps”.  He relies on the words “affect the management” and submits that they should be interpreted, as the generality and width of those words would allow, to cover this situation where the 1^st defendant’s excessive user required the plaintiff to alter, or expend additional work and effort in, the management of the Building – which therefore has been “affected”.

60.  If such wide interpretation is adopted, then conceivably many acts by an owner or occupier, legitimate or otherwise, may easily be caught by this clause.  Say for example, if a tenant consistently takes out garbage twice the volume of other tenants’ necessitating replacing the common garbage bin with a larger one and over-time work by the caretaker, could it be said then that his actions have “affected the management” under this wide interpretation, and therefore constitute a breach of Clause 5(d) ? Also, let’s test this wide interpretation against the implementation of the said new delivery system.  Under this new system, the deliveries to the Redemption Centre would be made in off-hours – 7 to 9 pm on weekdays - thus necessitating various changes to be made in the management of the Building.  Again, under this wide interpretation, “the management of the Building would have been affected” and Clause 5(d) breached.  Yet, there is no such complaint from the plaintiff. 

61.  I do not think such wide interpretation is intended by Clause 5(d).  Building management in Hong Kong is far from easy and complicated.  It has to constantly adjust and improve, sometimes as a result of certain legitimate acts or user by owners or occupiers.  The wide interpretation contended would render all those acts or user breaches of Clause 5(d).   With respect to Mr. Yu, the result brought about by such wide interpretation can be quite absurd.

62.  It is trite that the purposive approach of interpretation, rather than reading words literally by their plain natural meaning, should be preferred.  Adopting a purposive approach, I think the words “affect” and “management” should be narrowly construed with the effect that the acts covenanted against by that part of Clause 5(d) are acts that “interfere with or adversely affect directly the acts of, or measures taken for, managing the Building”.

63.  I am therefore unable to accept the wide interpretation contended.  I conclude that I am not satisfied that the plaintiff is bound to win as against the 2^nd defendant in its allegation of breach of Clause 5(d) had the matter gone to trial.

The 2^nd defendant should pay the plaintiff costs of this action

64.  It is argued by the 2^nd defendant, as was put forth by Mr. Wong Wing Ming in his affirmation, that the problem persisted because the plaintiff had failed to come up with the new delivery system earlier and it is now shifting the blame to the 2^nd defendant.  Therefore, the 2^nd defendant should not be liable in costs.

65.  I do not agree.  I think by so arguing it is the 2^nd defendant who is trying to divert the focus away from its own responsibility and liability.

66.  The new system was able to be agreed to by the 1^st defendant, almost a year after this action was commenced, no doubt under some pressure of enforcement action in the form of this litigation, a step that the 2^nd defendant has failed or refused to take.

67.  The obligation not to permit by taking reasonable steps to prevent has always been the personal and primary responsibility of the 2^nd defendant under Clause 7(c) of the DMC, which it failed.  The fact that the plaintiff and other owners and occupiers and the 1^st defendant were able to achieve a workable and amicable compromise in the form of the new delivery system attracts commendation to them, but no credit to the 2^nd defendant; nor afford the 2^nd defendant any defence to its failure.  Further, I do not think the plaintiff could or should be faulted for not having been able to achieve that earlier.

68.  For costs purposes, it would suffice for the plaintiff to win as against the 2^nd defendant its claim for breach of Clause 7(c) of the DMC.  Though the plaintiff might not win in respect of Clause 5(d) had the matter gone to trial, in my view, the usual costs incidence of following the event would not have been affected.

69.  I am therefore satisfied that the 2^nd defendant should pay the plaintiff the costs of this action.

On party and party and not on indemnity basis

70.  The plaintiff seeks costs of the action to be taxed on indemnity basis.  Mr. Yu relies on two grounds :

(a)  It was unreasonable for the 2^nd defendant to refuse to join as co-plaintiff; and

(b)  It was unreasonable for the 2^nd defendant to turn down the plaintiff’s offer by letter dated 18 April 2017 to discontinue this action upon terms that the 2^nd defendant paying 50% of the plaintiff’s costs and discontinuing its counterclaim against the plaintiff – which was an offer very favourable to the 2^nd defendant.  And as a result, further costs were unnecessarily spent.

71.  The plaintiff however accepts that the 2^nd defendant’s failure to join as co-plaintiff and to take up the said offer for settlement would now be met with an adverse costs order (on party and party basis) compensating the plaintiff the costs that it has to further expend as a result, to the extent they are necessary or proper.

72.  The plaintiff does not complain of any other conducts of the 2^nd defendant that might amount to an affront to the court or the like.  Nor can the plaintiff point out any item of costs, which unless to be assessed at the more generous basis of indemnity, would leave the plaintiff unfairly out of pocket.

73.  I therefore do not think indemnity costs should be awarded against the 2^nd defendant.

Disposal

74.  Parties do not dispute that costs of this application should follow the event with certificate for counsel.

75.  For these reasons I make the order set out in paragraph 3 hereinabove.

76.  For the avoidance of doubt, the costs of this action to be paid by the 2^nd defendant should include the costs of preparation of the plaintiff’s witness statements, though the same have not been exchanged.

77.  I thank both counsel for their assistance rendered to the court.