THE INCORPORATED OWNERS OF PO HANG BUILDING v. SAM WOO MARINE WORKS LTD

CACV 405/2021 & CACV 406/2021
(Heard together)

[2022] HKCA 733

CACV 405/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 405 OF 2021

(ON AN APPEAL FROM LDBM NO 252 of 2014)

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CACV 406/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 406 OF 2021

(ON AN APPEAL FROM LDBM NO 255 of 2018)

________________________

________________________

(Heard together)

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J U D G M E N T

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Hon G Lam JA (giving the Judgment of the Court):

Introduction

1.  These are two appeals both brought by Sam Woo Marine Works Ltd (“Sam Woo”)  from the judgment of Deputy District Judge Michelle Soong (“Judge”)  sitting as the Presiding Officer of the Lands Tribunal dated 24 December 2020 in the two cases of LDBM 252/2014 and LDBM 255/2018 heard together (“Judgment”).[1]

2.  In LDBM 252/2014, Sam Woo made complaint and sought relief against the Incorporated Owners of Po Hang Building (“IO” and “Building”)  for its failure to maintain separate accounts for the owners of units on the ground floor, first floor and upper floors respectively (whom we shall call the “G/F owners”, “1/F owners” and “Upper floor owners”)  in relation to building management expenses incurred as well as contributions paid by those separate groups of owners.   In LDMB 255/2018, the IO claimed against Sam Woo for unpaid management fees.

3.  After a trial, the Judge dismissed Sam Woo’s claim in LDBM 252/2014 and allowed the IO’s claim in LDBM 255/2018 in the amount of HK$237,884, with costs against Sam Woo in both cases.

Background

4.  Sam Woo has since 1992 been the owner of Shop 1 on the ground floor of the Building, situate at 2-8 Dundas Street and 43-49 Tung On Street in Kowloon.  There are 25 floors above the ground floor.  The owners have formed themselves into a corporation under the Building Management Ordinance (Cap 344)  (“BMO”).  The owners, the IO and the Manager of the Building are bound by a Deed of Mutual Covenant dated 18 January 1983 (“DMC”)  which contains provisions relating to, inter alia, the management of the Building and the financial contributions required from the owners of the various units in the Building for that purpose.  The relevant provisions of the DMC include:

   Clause 3(f)

“ Each owner shall pay all costs charges and expenses which may be or become payable for or in connection with the management maintenance repair and improvement of the said premises in accordance with the provision of these presents including but not limited to:-

(i)  – (v)  …

(vi)  The cost of operating maintaining repairing servicing replacing and renewing all the lifts in the said building PROVIDED ALWAYS that the owner or owners for the time being of the ground floor of the said building shall not be liable for payment of such expenses.

(vii)  – (viii)  …

(ix)  The cost of repairing renewing maintaining cleansing painting or decorating the common parts of the said building or any part or parts thereof and all water pumps tanks pipes sewers drains watercourses generator machine cables busbars wires wells electric pumps fire fighting equipment sanitary fittings refuse disposal equipment or services therein and all the apparatus equipment and convenience thereof save and except the cost of repairing renewing maintaining cleansing painting or decorating the sprinkler system together with all the water tanks and pumps therefor which shall be borne and paid by the owner or owners for the time being of the ground and first floors of the said building.

(x)  – (xiv)  …

(xv)  All other charges which the Manager shall consider necessary or requisite for the proper management operation and maintenance of the said premises and for the improvement and maintenance of the services amenities or facilities thereof.

(xvi)  – (xviii)  …”

   Clause 3(h)

“ Each owner shall pay to the Manager on account of his share of the said costs charges and expenses the following sum:-

(1)  $1,000.00 for Shop 1 on the ground floor per calendar month payable in advance; …”

[(2)  – (29)  set out the respective sums for the other units in the Building, making up a total of $57,990 including Shop 1]

   Clause 3(i)

“ If the total monthly payments payable to the Manager by the owners of the said premises under sub-clause (h)  hereof shall be insufficient to cover all or any of the said costs charges and expenses then:-

(a)  such owners shall make further contributions towards such expenses in the shares as provided in sub-clause (h)  hereof; or

(b)  pay to the Manager such revised monthly payment as the Manager shall think fit provided that such increase shall be in the proportion to the shares as provided in sub-clause (h)  hereof.”

   Clause 3(j)

“ If there should be any surplus after payment of all the costs charges and expenses then the surplus shall be held by the Manager in a bank account and shall only be applied by him in or towards payment of such costs charges and expenses thereafter to become due.”

   Clause 3(k)

“ Any person ceasing to be the owner of any undivided share in the said land shall in respect of the share or shares of which he ceases to be the owners thereupon cease to have any interest in the funds held by the Manager including the deposit paid under sub-clause (g)  hereof to the intent that all such funds shall be held and applied for the management of the said premises as herein provided irrespective of changes in ownership of the undivided shares therein …”

   Clause 13(k)

“ Any resolution on any matter concerning the said premises passed at a duly convened meeting by a majority of the owners present in person or by proxy and voting shall be binding on all the owners PROVIDED that:-

(i)  – (ii)  …

(iii)     No resolution shall be valid to the extent that it purports to alter or amended the provisions of these presents or is inconsistent herewith save as herein specifically provided.”

5.  It can be seen from clause 3(f)  that not every expense mentioned therein falls on all of the owners.  It is common ground that the effect of clause 3(f)  is that the management expenses of the Building may be divided into three categories by reference to their respective incidence on the G/F owners, 1/F owners and Upper floor owners:

(1)  expenses relating to the lifts (“Lift Expenses”), for which by virtue of clause 3(f)(vi)  only the 1/F owners and the Upper floor owners are liable (and for which the G/F owners are not liable, obviously because they need not use the lifts for the enjoyment of their premises);

(2)  expenses relating to the sprinkler system together with the water tanks and pumps therefor (“Sprinkler Expenses”), for which by virtue of clause 3(f)(ix)  only the G/F owners and 1/F owners are liable (presumably because only those two floors are installed with sprinklers); and

(3)  all the other expenses covered by clause 3(f)  (“Common Expenses”), for which all the owners are liable.

6.  In other words, the G/F owners are responsible for Sprinkler Expenses and Common Expenses; the 1/F owners are responsible for all three categories of expenses; and the Upper floor owners are responsible for Lift Expenses and Common Expenses.  This was referred to below as “Contention 1” of Sam Woo, which was not disputed by the IO before the Judge.

7.  In about June 2007, Sam Woo began looking into the management expenses of the Building, especially the Lift Expenses.  Shortly thereafter, in 2008, Sam Woo commenced proceedings in the Lands Tribunal (LDBM 179/2008)  against the IO, raising an issue as to the precise proportion in which Sam Woo was obliged to bear the expenses of managing the Building.  Eventually, the Court of Appeal,[2] reversing the Lands Tribunal, held that Sam Woo’s share of expenses should be 1,000 / 57,990 pursuant to clause 3(h)  of the DMC, rather than 963 / 14,992 based on its proportion of undivided shares in the land pursuant to clause 5 of the DMC.

8.  On 1 April 2011, the IO brought proceedings in the District Court (DCCJ 1271/2011)  against Sam Woo for unpaid owner’s contributions in the sum of $211,407 towards the expenses of repairs and renovations of the Building.  The IO’s claim was not disputed as such, but Sam Woo alleged that it had overpaid management fees over the years which should be set off against the IO’s claim.  In particular, Sam Woo contended that each individual owner’s account should be considered separately, and that if there were unused funds in an owner’s account, no further contribution should be demanded from him.  Sam Woo put forward calculations of its alleged overpayment for the periods from February 1983 to April 2010, showing total overpayment of $272,100, but the court (Deputy District Judge Kent Yee)  (“Judge Yee”)  rejected them as “baseless and speculative”.  Judge Yee also rejected Sam Woo’s contention that the IO had to keep separate accounts for each individual owner.

9.  As a result, by judgment dated 8 December 2011 with reasons handed down on 19 December 2011 (“DCCJ 1271 Judgment”), Judge Yee upheld the summary judgment granted by a Master in favour of the IO, and subsequently refused leave to appeal.[3] Sam Woo’s application to the Court of Appeal for leave to appeal was also unsuccessful.[4]  We shall have to return to the proceedings in DCCJ 1271/2011 in more detail below, since the IO contends that the argument raised by Sam Woo in the present case is res judicata.

10.  Sam Woo paid its contributions for the repairs and renovations expenses following the DCCJ 1271 Judgment, but a dispute arose subsequently in relation to the general management fees.  This was apparently triggered by the Management Committee’s decision in July 2012 to increase by 15% the management fees payable by all owners with effect from the next financial year, commencing September 2012.  From September 2012 onwards Sam Woo had refused to pay the monthly management fees.  Sam Woo considered that the IO’s calculations of management fees payable were defective in that the Lift Expenses had not been excluded from the expenses borne by the G/F owners.

11.  In May 2013, the IO brought a claim in the Small Claims Tribunal against Sam Woo for unpaid management fees,[5] which was later transferred to the Lands Tribunal.[6]  In October 2013, the IO was advised by its own solicitors that the management fees increase in 2012 was not based on a budget prepared in accordance with the provisions of clause 3(f)  of the DMC.  The IO decided to discontinue the claim and to engage accountants to prepare a budget and advise on the preparation of proper accounts.

12.  On 12 September 2014, Sam Woo brought the application in LDBM 252/2014 in the Lands Tribunal against the IO in relation to the proper accounting of building management income and expenses.  The relief sought included:

(1)  a declaration that there is an implied term in the DMC that the IO has a duty to keep separate accounts of all expenses incurred pursuant to clause 3(f)  of the DMC and of all payments paid to the IO or the Manager pursuant to clauses 3(h)  and 3(i)  of the DMC by the G/F owners, 1/F owners and Upper floor owners respectively;

(2)  a declaration that the IO has been in breach of the DMC for failing to keep such separate accounts;

(3)  an account be taken of all expenditure incurred and of all payments paid to the IO or its Manager by the G/F owners, 1/F owners and Upper floor owners respectively; and

(4)  an order that the IO return to Sam Woo the amount found to be attributable to Sam Woo due to the IO’s breach upon taking such account.[7]

13.  In its Notice of Opposition in LDBM 252/2014, the IO contended, inter alia:[8]

(1)  The IO had not refused to maintain separate accounts and had indeed in December 2014 appointed an accounting expert to prepare budgets and accounts for the years from September 2012 to August 2015. The two declarations sought by Sam Woo were therefore unnecessary, premature or academic.

(2)  Sam Woo was estopped by the DCCJ 1271 Judgment from contending that the G/F owners are not required to make further contribution if the total of the G/F owners’ contributions are sufficient to cover the expenses for which the G/F owners are responsible.

14.  It appears that the IO’s accounts continued to require revision to make them accord with the DMC and were not, on the IO’s own case, finalized until late 2018.  On 13 November 2018, the Management Committee passed a resolution to approve and adopt revised management fees for the various units in the Building for the period, partly retrospectively, from September 2012 to August 2019.  Amended audited income and expenditure statements and balance sheets in respect of the 6 financial years from September 2012 to August 2018 were adopted by the Management Committee on 29 November 2018, who also resolved that the management fees decided on 13 November 2018 did not require revision in the light of the audited accounts adopted.  According to the IO, by December 2018, all the deficiencies in the accounts complained of by Sam Woo had been rectified.[9]

15.  The revised monthly management fees for Sam Woo for 2012 to 2018 were calculated by the Management Committee as follows.  For each year, the amounts of the Sprinkler Expenses and the Lift Expenses are respectively identified.  Eliminating those two amounts from the total building management expenses, the amount of the Common Expenses is arrived at.  Sam Woo’s annual share of the Common expenses is calculated using the proportion of 1000 / 57990 in accordance with clause 3(h)  of the DMC; Sam Woo’s annual share of the Sprinkler Expenses is calculated using the proportion of 1000 / 6150 (the figure 6150 being the sum of the amounts specified for each G/F owner in clause 3(h)).  The sum of these two annual shares, divided by 12, produces the monthly fee payable by Sam Woo.

16.  This method recognises that by virtue of clause 3(f)(vi), Sam Woo is not liable for any part of the Lift Expenses, as it contends.  Indeed, as we understand its submissions, the only issue Sam Woo has with the IO’s method is that it does not apply any part of the previous year’s surplus in the G/F owners’ account as a credit in favour of the G/F owners for the current year.  So far as the years 2012 to 2018 are concerned, what the IO has done is to leave such yearly surplus (or deficit, as the case may be)  to accumulate in the reserves.  The audited balance sheet as at each year-end shows the year’s surplus (or deficit)  as well as the accumulated surplus (or deficit)  from September 2012 onwards in relation to each of the three classes of owners, in addition to a global sum of $1,944,829.99 for the reserves accumulated historically up to 31 August 2012.

17.  As Sam Woo had not paid any management fees for the period from September 2012 to December 2018 in the total amount of HK$237,884 based on the calculations adopted in November 2018, on 10 December 2018 the IO brought a claim in the Lands Tribunal against Sam Woo for that amount (LDBM 255/2018).  The grounds of opposition raised by Sam Woo to this claim are in essence the same grounds as it has raised in LDBM 252/2014.

The Lands Tribunal’s judgment

18.  As mentioned by the Judge,[10] there were two main contentions raised by Sam Woo that remained in dispute at trial, referred to below as “Contention 2” and “Contention 3” respectively:

(1)  under Clause 3(i)(a)  of the DMC, further contributions as stipulated in Clause 3(h)  is to be made only if the total monthly contribution of the three respective classes of owners is insufficient to cover their respective types of expenses (“Contention 2”); and

(2)  the surplus, if any, of each classes of owners should only be used to defray the expenses payable by that particular class (“Contention 3”).

19.  In her Judgment, the Judge rejected these two contentions and dismissed Sam Woo’s claim in LDBM 252/2014, holding, in summary:

(1)  The IO had rectified the previous deficiencies in its accounts by December 2018 and had started keeping separate accounts for the purpose of clause 3(f)  of the DMC.  The declarations sought by Sam Woo were therefore unnecessary and academic and should be refused.[11]

(2)  Sam Woo was precluded by the DCCJ 1271 Judgment from contending that the G/F owners were not obliged to make further contributions as long as the total of the G/F owners’ monthly contributions was sufficient to cover the G/F owners’ expenses, and also from advancing Contentions 2 and 3. Sam Woo’s interpretation of clauses 3(i)  and 3(j)  of the DMC had already been rejected in that action.[12]

(3)  Even if the matter was not res judicata, Contention 2 – which essentially states that the IO has no discretion and must exhaust any remaining funds before collecting contributions from the owners – should be rejected.  It would require a re-writing of clauses 3(i)  and (j)  of the DMC.  It is within the power of the IO, subject to the scrutiny of the owners in certain scenarios, to decide that a surplus should be maintained. There may be a need to maintain a surplus to cater for contingencies.[13]

(4)  Even if the matter was not res judicata, Contention 3 should also be rejected.  It would require further rewriting of clauses 3(i)  and (j)  of the DMC.  If the draftsman had intended that the surplus attributable to different classes of owners should be separately maintained and applied, the DMC would have so stated.  The court should be slow to imply terms into a DMC.  The test for implication of terms is not satisfied.[14]

(5)  There was no pattern of any surplus attributable to G/F owners being regularly used to subsidise the expenses for which only the other owners were responsible.  To the extent there was a deficit in relation to the Upper floor owners’ expenses in certain years, it might have been caused by the increase in legal expenses resulting from the IO’s litigation with Sam Woo.[15]

(6)  Even if there was a pattern of the G/F owners’ surplus being used to fill the Upper floor owners’ deficit, any aggrieved G/F owner could make comments on the annual budget or vote against it in meetings or make use of other means of procedures under the DMC and the BMO.  It was not a basis for introducing the scheme advanced by Sam Woo which was neither expressly nor impliedly agreed under the DMC.[16]

20.  As for LDBM 255/2018, the Judge rejected Sam Woo’s argument that the revised management fees were vitiated by the IO’s failure to maintain proper accounts and to apply any surplus attributable to G/F owners only towards the expenses for which they were responsible, and allowed the IO’s claim for unpaid management fees.

Appeals

21.  The main contentions of Sam Woo on these appeals may be summarised as follows:

(1)  The DCCJ 1271 Judgment does not give rise to any relevant res judicata or issue estoppel.

(2)  The surplus attributable to a class of owners in one year should be carried forward to the budget and the income and expenditure statement as a credit towards the receipts from that class of owners in the following year.  The IO must take account of the surpluses attributable to the respective classes of owners in deciding what monthly management fees or further contributions it should levy on the owners.

(3)  Clauses 3(i)  of the DMC should be construed, or a term should be implied, to the effect that any demand for further contributions or increased monthly management fees from a class of owners may be made only if the monthly payments payable by that class of owners are insufficient to cover the expenses for which that class of owners are responsible.  Such insufficiency is assessed after taking into account the surplus as stated above.

(4)  Clause 3(j)  of the DMC should be construed, or a term should be implied, to the effect that the surplus attributable to one class of owners should only be applied towards the expenses for which that class of owners are responsible under clause 3(f).

(5)  The IO’s accounts and calculations have been done in breach of the DMC because they failed to take into account and give credit for the surplus in relation to each class of owners in the way Sam Woo contends for.

(6)  The Judge’s finding that there was no pattern of the G/F owners’ surplus being regularly used for the other owners’ expenses is irrelevant and inconsequential.  Further, it was based on a mistaken understanding of the evidence and on an analysis done by the Judge without hearing the parties.

22.  Based on these contentions, Sam Woo asks for a declaration that the IO has been in breach of the DMC for failing to keep proper separate accounts with surplus attributable to each of the three classes of owners carried forward from the previous financial years.  It also seeks an order for an account to be taken of all the payments paid to the IO by, and the surplus accrued in respect of, each of the three classes of owners from 15 September 2008 (being 6 years before the commencement of LDBM 252/2014), or from 1 September 2012, and an order allocating the surplus found upon the taking of such account to the respective classes of owners.  In relation to LDBM 255/2018, Sam Woo seeks an order dismissing the IO’s claim.[17]

23.  Prior to the hearing of the appeals, all the contentions and reliefs advanced and sought by Sam Woo were contested by the IO.  As will be seen below, in the course of the hearing, counsel sensibly revised or refined their respective clients’ position, with the result that the matters that eventually required determination by this Court were considerably narrowed down.

24.  We propose to deal with question of issue estoppel first, followed by the construction of or implication of terms into the DMC and the alleged breach by the IO in relation to the surpluses, before dealing with the outcome in the two sets of proceedings.

Whether Sam Woo’s contentions are precluded by issue estoppel

25.  There is no dispute that we are not concerned with cause of action estoppel, but issue estoppel. Nor is there any dispute regarding the relevant principles of issue estoppel. The debate concerns the scope of the court’s determination in DCCJ 1271/2011. As stated in the oft-cited passage from Halsbury’s Laws of England (4^th ed), vol. 16(2), [980] (quoted e.g. in 莊裕安 對 帝譽服務有限公司 [2019] HKCA 1243 at [13]), an issue estoppel precludes a party “from contending the contrary of any precise point which, having once been distinctly put in issue, has been solemnly and with certainty determined against him”.  It has also been said that the estoppel applies to matters “fundamental or cardinal” to the prior decision, “legally indispensable” to the conclusion, or “necessarily involved in it as its legal justification or foundation”, as opposed to “steps in the process of reasoning tending to establish or support the proposition upon which the rights depend”: Blair v Curran (1939)  62 CLR 464, 531-533, per Dixon J.

26.  As mentioned above, in DCCJ 1271/2011 the IO claimed against Sam Woo the sum of $211,407 as contribution for the cost of repairs and renovation works for the Building. Sam Woo’s defence was that it had made overpayment over the years totalling $272,100, because funds from its contributions had been used towards Lift Expenses for which it was not actually liable.  It was therefore not liable to make further contribution until the overpaid surplus had been used up.  It was submitted on behalf of Sam Woo that on a proper construction of the DMC, “Clause 3(i)  impliedly obliged the IO to keep separate accounts for individual owners instead of/in addition to a global management account for the entire Building” and that “each of the individual owners’ accounts should be considered separately and if there is sufficient unused fund in his account, no further contribution should be demanded from him”.[18]

27.  As mentioned above, Judge Yee rejected Sam Woo’s calculations of estimated overpayment, which went as far back as 1983, as being “baseless and speculative”.[19]  He went on to reject Sam Woo’s argument for the maintenance of individual owners’ accounts as follows:

“ 23. Clause 3(i)  first sets out the condition under which further funds will have to be contributed by owners. It refers to the total monthly payments payable to the Manager by the owners of the Building under Clause 3(h). Clause 3(h)  sets out the amount of monthly payment of each owner has to pay and it is applicable to all the owners. The total monthly payments payable to the Manager in Clause 3(i)  clearly refers to the total amount of monthly payments payable by all the owners of the Building.

24. Worthy of note in Clause 3(i)  are the words ‘total’, ‘payable’ and ‘under Clause 3(h)’. They clearly refer to the total monthly payments which are to be paid by all the owners under Clause 3(h). The construction advocated by Ms. Ng actually entails a substantial rewriting of Clause 3(i): ‘those unused portion of the total monthly payments payable which have already been paid by an owner to the Manager by the owners.’ The word ‘total’ is then rendered otiose too. This cannot be right.

25. The purpose of Clause 3(i)  is very clear. If the manager finds that the total monthly payments payable by all the owners under Clause 3(h)  is not sufficient to cover any costs, charges or expenses, he can make a collective fund-raising exercise by either (a)  requiring all the owners to make further contributions in the shares as provided in Clause 3(h)  or (b)  revising the monthly payment payable to the manager by all the owners provided that such increase shall be in the proportion to the shares as provided in Clause 3(h). The obligation to provide further contribution by either way falls upon all the owners and not any individual owners.

26. In fact, as submitted by Mr. Chang, counsel for the IO, Ms. Ng’s construction of Clause 3(i)  would lead to an absurd result. If her construction were right, the IO must first exhaust the management fund contributed by an individual owner before he is required to contribute additional funds or even to continue to pay the monthly payment under Clause 3(h). If that is the case, there would be not much point in requiring the owners to make payments on a monthly basis and instead management fees should be collected on need basis only.

27. This is for obvious reason unworkable in the real world. Of course the manager requires some surplus in the management fund to allow flexibility and cover all the possible contingencies. Moreover, Clause 3(j)  plainly envisages surplus in the management fund and dictates how it should be applied. Similarly, Clause 3(k)  prescribes how the unused portion of the management fund contributed by a former owner should be applied after he ceases to be an owner.” (original emphasis)

28.  The contention raised by Sam Woo and rejected in those proceedings was that the IO was obliged to maintain a separate account for each individual owner.  The IO in contrast took the position that there was no need for any segregation whatsoever.  The contest was between keeping such individual owners’ accounts (instead of or in addition to an overall global account for the Building)  on the one hand and keeping only an overall global account for the Building on the other.  The question of keeping three sets of accounts for the three classes of owners – which may be viewed as a halfway house between the parties – did not arise and was not debated.

29.  Once attention is directed to the precise issue determined there, it seems to us there is no estoppel arising from the DCCJ 1271 Judgment relevant for present purposes.  Despite having succeeded in DCCJ 1271/2011, the IO has since recanted its previous position and accepted that it has an implied obligation under the DMC to keep separate accounts of all expenses incurred and of all payments paid to the IO by the G/F owners, 1/F owners and the Upper floor owners respectively; hence the admission[20] that its previous budgets (prepared prior to 2018)  were not made in accordance with clause 3(f), (h)  and (i)  of the DMC.

30.  Admittedly Sam Woo’s argument in the present case bears similarities to its argument in DCCJ 1271/2011.  It is also true that there are words and phrases in the passages quoted above from the DCCJ 1271 Judgment that refer to “total” payments and “all” the owners which, on their face, seem to be against Sam Woo’s argument here.  But they must be seen in the context of the question before the court in that case.  The court was not there asked to decide whether three separate accounts should be maintained for the three different classes of G/F, 1/F and Upper floor owners and the implications of maintaining three such separate accounts.  “Total” and “all” were being used in contradistinction to an “individual” owner.  It cannot be inferred that the court had necessarily ruled out a construction of the relevant clauses that recognise the existence of three different classes of owners with different liabilities for expenses.

31.  Indeed, in his subsequent reasons for refusing leave to appeal, Judge Yee stated at [14]:

“ … There can be no dispute that Clause 3(i)  of the DMC is applicable to all the owners of the Building. The costs, charges and expenses referred to therein are those set out in Clause 3(f)  of the DMC. Among them, however, some are to be borne and paid by certain owners only: Clauses 3(f)(vi)  and (ix)  of the DMC. Thus, only “such owners” who are liable to bear and pay those costs, charges and expenses under Clause 3(f)(vi)  and (ix)  are required to make further contributions towards such costs, charges and expenses pursuant to Clause 3(i). In other cases, for costs, charges and expenses other than those specified in Clause 3(f)(vi)  and (ix), “such owners” actually include all the owners when all of them are liable to bear and pay such expenses pursuant to Clauses 3(f)  and (i)  of the DMC.”

32.  In other words, in contrast to [24] – [25] of the DCCJ 1271 Judgment, Judge Yee recognised here that while further contributions towards Common Expenses may be demanded from all the owners of the Building, further contributions towards Lift Expenses and Sprinkler Expenses (covered by clause 3(f)(vi)  and (ix))  may not be demanded from all the owners simpliciter under clause 3(i), but only from all the owners who are liable to bear such expenses under the DMC.  This interpretation would not render the word “total” in clause 3(i)  otiose.

33.  It is unnecessary to refer to the Court of Appeal’s decision refusing leave to appeal from the DCCJ 1271 Judgment,[21] for there is no suggestion that there is any additional or wider issue decided there by the Court of Appeal.

34.  For these reasons, we accept Sam Woo’s submission that there is no issue estoppel against it.  We should make it clear though that we consider it most unsatisfactory for Sam Woo to have contended in DCCJ 1271/2011 only that the IO should keep separate accounts for individual owners, and having failed there, to have raised the alternative argument in subsequent proceedings that the IO should keep separate accounts for the three classes of owners.  As the IO has not argued that there is an estoppel founded on an abuse of process in the sense laid down in cases such as Henderson v Henderson(1843) 3 Hare 100 and Ko Hon Yue v Chiu Pik Yuk (2012)  15 HKCFAR 72, however, we say no more about this.

Construction of or implication of terms into the DMC

35.  What then is the meaning of clauses 3(i)  and (j)  in relation to the expenses for which not all the owners of the Building are responsible? 

36.  The relevant principles of construction are not in dispute.  The exercise of interpretation involves an attempt to discover what a reasonable person would have understood the parties to mean, having regard not merely to the individual words used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve: Jumbo King Ltd v Faithful Properties Ltd (1999)  2 HKCFAR 279, 296.  Mr Anson Wong SC, who has appeared for Sam Woo on these appeals but not below, also relied on the following passage in The North Eastern Railway Co v Lord Hastings [1900] AC 260, 267-268:

“ the deed must be read as a whole in order to ascertain the true meaning of its various clauses, and … the words of each clause should be so interpreted as to bring them into harmony with the other provisions of the deed if that interpretation does no violence to the meaning of which they are naturally susceptible, or … you may disregard the literal meaning of the words and give them another meaning if the words are sufficiently flexible to bear that interpretation”.

37.  Within the DMC, clause 3(f)  is the charging provision[22] which sets out the various building management expenses and the owners who are liable for them respectively.  Clause 3(h)  sets out the initial monthly contribution towards the expenses for each unit in the Building.  Clause 3(i)  governs the situation where the monthly payments are insufficient to cover their expenses, and makes two separate provisions: (a) obliging the owners to make further contributions, or (b)  obliging them to pay revised monthly payment increased, in both cases in proportion to the shares specified in sub-clause (h).  Clause 3(j)  in contrast deals with the situation where there is a surplus after payment of expenses.

38.  One can readily see that clause 3(i)  was not drafted with specific attention to the situation where the expense in question is not one for which all the owners are responsible, and it refers to “total monthly payments”.  Nevertheless, reading all the relevant provisions together and trying to give effect to them all, as one must, the correct meaning is reasonably clear.  Take further contributions in clause 3(i)(a)  for example.  There is force in Mr Wong’s submission that “such owners” in clause 3(i)(a)  refer to such owners who are responsible for the expense in question and whose monthly payments are insufficient to cover that expense.  This coincides with Judge Yee’s view in the passage quoted from his reasons for refusing leave to appeal in [31] above.  Plainly it would make no sense, for example, to require G/F owners to make further contributions towards a particular Lift Expense, or to require Upper floor owners to make further contributions towards a particular Sprinkler Expense.  At the hearing Ms Becky Wong, who appeared on behalf of the IO, eventually accepted this to be the correct position.  Clearly the further contributions so collected can only be used to pay the specific expenses in question for which the owners required to make such contributions are liable.

39.  Thus when clause 3(i)  refers to “total monthly payments payable” being “insufficient to cover” certain expenses, one must also take account of the provisions in clause 3(f)  as regards which owners are responsible for which expenses. 

40.  Mr Wong submits that the words “such owners” must have been inadvertently omitted and should be inserted at the beginning of sub-clause (b)  of clause 3(i), and Ms Wong does not dissent.  This seems to us to be correct.  The above construction also applies in principle to clause 3(i)(b)  as corrected.  As recognised by Mr Wong, however, when it comes to increasing the monthly payments under clause 3(i)(b), the Manager’s considerations would be broader and extend to all recurrent expenses most of which are to be shared among all the owners. Confining such an increase to one or two classes of owners would perhaps seldom be justified, subject to the point advanced by Sam Woo about the application of surplus, which we shall presently discuss.

41.  Clause 3(j)  of the DMC provides that any surplus “shall only be applied … in or towards payment of such costs charges and expenses thereafter to become due”.  Where, on the basis of separate accounts being maintained, a surplus has resulted in favour of one particular class of owners, Contention 3 of Sam Woo becomes relevant.  Despite having apparently disputed Contention 3 below, at the hearing before us Ms Wong on behalf of the IO accepted it.  It is therefore common ground that any surplus attributable to a particular class of owners may only be applied towards payment of those expenses for which that class of owners are liable under clause 3(f).  This does not deal with the timing of the application of the surplus, which we deal with below.

Pre-September 2012 accumulated surplus

42.  On this footing there was prima facie justification for Sam Woo to call for an account of how much of the pre-September 2012 reserves in the total amount of $1,944,829.99 was attributable to the three classes of owners respectively.  Such an account, even if limited to 6 years before the commencement of LDBM 252/2014,[23] would undoubtedly be very tedious and costly.  It is therefore commendable that, adopting a practical approach, Mr Wong indicated that Sam Woo would be content if the IO would only apply those undivided accumulated reserves in future towards Common Expenses, and Ms Wong on behalf of the IO agreed with this restriction.

Alleged breach of DMC by IO in relation to application of surpluses

43.  The remaining bone of contention is whether the IO has acted in breach of the DMC by keeping the surpluses in the reserves and determining the level of monthly management fees without first using the surpluses to pay for current liabilities.  Sam Woo’s submissions in this regard have been put in different forms at different stages of the proceedings.  First, in its pleadings, Sam Woo contended that further contribution is to be made if the monthly payment is insufficient, that the surplus in one financial year shall be used to defray the expenses in the next financial year, and that the IO is not entitled to demand payment of further contribution or increased monthly payment from the G/F owners unless there is an “insufficiency” relating to the expenses payable by G/F owners.  This was essentially the case run by Sam Woo at trial which meant that the IO has to apply any surplus in one year attributable to one class of owners towards payment of the expenses payable by that class of owners in the next year, and only when there is a shortfall can management fees be demanded from that class of owners.[24] This is also reflected in Sam Woo’s argument on these appeals that the G/F owners’ surplus in one year should be “carried forward” or “brought forward” as the first item of income received from G/F owners.  Thus the declaration Sam Woo seeks from this court is targeted at the IO’s failure to carry forward the surplus attributable to each of the three classes of owners in this way.

44.  The Judge dealt with this argument in the Judgment as follows:

“  41.    It is noted that Clause 3(f)  of the DMC spells out a variety of expenses that may be or become payable for or in connection with the management, maintenance repair and improvement of the Building, such expenses include but not limited to electricity or similar charges, statutory outgoings, remuneration for the Manager and other hired persons, refuse disposal costs, “uniform stores tools equipment and medical attention for staff”, lift expenses, utility and deposits payable for common parts, government rent, costs of repairing renewing maintaining cleansing painting or decorating the common parts, insurance, costs of purchasing/hiring plants and equipment, legal costs and all other charges which the Manager or the IO shall consider necessary or requisite for the proper management operation and maintenance of the building and for the improvement and maintenance of the services amenities.

   42.    Some of the aforementioned expenses are non-recurring in nature and may not always appear in an annual budget. The very purpose of allowing a surplus in the accounts maintained by the IO is to have readiness a fund to deal with possible contingencies and to meet unexpected or urgent management expenses that has not been catered for whether sufficiently or at all in the budget for a particular year.

   43.    Absent any requirement in the DMC requiring the exhaustion of any surplus (whether the surplus is attributable to all owners or particular classes of owners)  before management fees can be collected (whether from all owners or particular classes of owners), I believe it is within the power of the IO to decide that a surplus shall be maintained for the due management of the Building. It also comes within the power of the IO to decide at what suitable time what amount of surplus shall be utilized for which management-related expenses as long as the requirement in Clause 3(j)  is satisfied that is, the expenses must fall within the nature or scope as defined in Clause 3(f).

   44.    Such decision of the IO is not completely without confinement but could be subject to the scrutiny of owners in certain scenarios which shall not be elaborated here. This is because these proceedings are not about the reasonableness or unreasonableness of the IO’s exercising the discretion or power to use or retain whatever amount of surplus standing in their account which was not pleaded, not argued and with no evidence adduced. Sam Woo’s contention was essentially that the IO had no discretion in that regard but must exhaust the surplus before management fees or financial contributions could be collected from owners. As discussed above, I cannot agree to this proposition.

   45.    Certain provisions in the Building Management Ordinance, Cap.344 were also drafted in such a way to embrace a need for the IO to retain some surplus and reserve to meet contingencies.

[The Judge then referred to the case of The Incorporated Owners of Four Winds Apartment v Koa Hsung Land Investment Company Limited & Ors (LDBM 218/2005; 6.11.2006)  and (CACV 438/2006; 6.6.2007)]

   48.    In my opinion, Sam Woo’s contention that the surplus of (or up to)  a certain financial year shall be utilized in the next financial year (or shall be exhausted in the ensuing years)  before further management fees could be collected is, conceptual-wise, a complete ignorance of and in disagreement with the need to maintain a surplus to cater for contingencies.  I am not persuaded by this construction of Clause 3(j)  which is an unwarranted curtailing of IO’s power and function and is unconducive to the proper management of the Building.”

45.  The Judge was in our view correct in rejecting Sam Woo’s argument as presented in the Tribunal.  Similar views had been expressed by Judge Yee in the DCCJ 1271 Judgment at [27] (quoted in [27] above).  Clause 3(j)  of the DMC does not expressly require any surplus arising in one year to be immediately applied in the following year.  There is no basis to imply such a requirement.  Nor do the words “insufficient to cover” in clause 3(i)  preclude the IO from building up reserves or require the exhaustion of all reserves, for the reasons given by the Judge.  The IO is required by section 20(1)  of the BMO to establish and maintain a general fund, and empowered by section 20(2)  to maintain a contingency fund.  The Manager is required by section 4 of Schedule 7 to the BMO to establish and maintain a “special fund” to provide for expenditure of a kind not expected to be incurred annually.  The provisions in the DMC have to be approached consistently with these statutory provisions.

46.  It is notable that in the Notice of Appeal, Sam Woo changed tack and contended that “whilst it is accepted that the IO is entitled to maintain a certain level of surplus to cater for contingencies” by making all such provisions and allowances as deemed necessary in the annual budget, it is wrong for the IO to demand further contributions or increased monthly payments from a class of owners when there is a surplus in the budget account.

47.  Ms Wong was, in our view, justified in objecting to Sam Woo’s departure from the case it had hitherto run.  The new contention is not supported by its pleadings and no amendment has been proposed.  Questions of fact or mixed fact and law may be relevant to this contention, such as what would be an objectively appropriate level of surplus to retain, what contingencies the IO is entitled to provide for, what considerations the IO took into account and what decisions it actually made in this regard, and whether the contingencies and provisions considered must be included in the budget.  None of this was investigated at trial.  It is not open to Sam Woo to run this new case when it cannot demonstrate that there is no reasonable possibility the state of the relevant evidence would have been materially more favourable to the IO if the point had been taken at trial: Flywin Co Ltd v Strong & Associates Ltd (2002)  5 HKCFAR 356, at [38].

48.  In its skeleton argument for the appeals, Sam Woo further modified its contention to say that “whilst the IO is entitled to maintain a certain level of surplus to cater for contingencies, it is a breach of the express or implied term of the DMC for the IO to set the level of contributions to be sought from a class of owners without referencing surplus of that particular class of owners arising from their previous contributions …” (our italics).[25] In his oral submissions, Mr Wong likewise submitted that in deciding whether to call for further contribution or increase the monthly payment under clause 3(i), the IO has to look at the accumulated surplus in relation to a particular class of owners before deciding whether there is “insufficiency” within the meaning of clause 3(i).

49.  Quite apart from the fact that this is a further illegitimate departure from Sam Woo’s case run at trial, this complaint must fail because there is simply nothing to show that the IO had breached this alleged duty of taking the surplus into account when deciding the level of management fees.  Reference was made to the Management Committee’s resolution on 29 November 2018 that it was unnecessary to re-determine the recently revised management fees in light of the audited accounts adopted on that day.  But those fees were determined only two weeks earlier based on the revised budgets.  There is nothing to suggest that the IO did not have knowledge of, and did not take into account, the broad position with regard to the surpluses at the time.

50.  For these reasons, we hold that Sam Woo has failed to prove that the IO has breached the DMC in determining the level of management fees for the years 2012 to 2019 and in adopting the revised audited accounts for the years 2012 to 2018, as it did in November 2018, without applying the accumulated reserves.

IO’s claim for unpaid management fees in LDBM 255/2018

51.  The only real defence raised by Sam Woo to the IO’s claim for the unpaid management fees for the months from September 2012 to December 2018 is that the IO breached the DMC in determining the management fees payable by Sam Woo, and that the resolution was consequently invalid by reason of clause 13(k)(iii)  of the DMC.  In light of our conclusions above, this defence fails.  The Judge was correct in entering judgment against Sam Woo in LDBM 255/2018.

Conclusion and disposition

52.  In summary, the position is that:

(1)  We hold that Sam Woo is not precluded by issue estoppel from raising the arguments it did below.

(2)  It is common ground that the IO has to maintain separate accounts in relation to the expenses and the three classes of owners, namely, G/F owners, 1/F owners and the Upper floor owners respectively.

(3)  We take the view that where one is concerned with contributions for expenses payable not by all of the owners but by a particular class of owners, then the phrase “such owners” in clause 3(i)  of the DMC should be taken to refer to those owners who are responsible for those expenses under clause 3(f).  This was accepted by the IO at the hearing.

(4)  The IO also accepted at the hearing that clause 3(j)  of the DMC means that any surplus attributable to a particular class of owners may only be applied towards payment of those expenses for which that class of owners are liable.

(5)  It is unnecessary to order an account of how much of the pre-September 2012 accumulated surplus was attributable to the G/F owners, 1/F owners, and the Upper floor owners respectively, in light of the IO’s agreement that such accumulated surplus will only be applied in future by the IO towards Common Expenses.

(6)  We hold that neither clause 3(i)  nor clause 3(j)  of the DMC automatically requires the IO to apply all of the surplus attributable to a particular class of owners in one year towards payment of the expenses payable by that class in the immediately following year.  Sam Woo has failed to prove that the IO breached the DMC in determining the amounts of management fees payable for the years 2012 to 2019 and in adopting the revised audited accounts for the years 2012 to 2018, as it did in November 2018, without applying any part of the surplus attributable to the G/F owners.

53.  It follows that Sam Woo is not entitled to the declaration sought as described in [22] above.  And as an account in relation to the pre-September 2012 surplus is no longer necessary, there is no relief called for in LDBM 252/2014.  It follows that although Sam Woo has succeeded in part in relation to the construction of clauses 3(i) and (j) of the DMC, the correct order is that the appeal in CACV 405/2021 be dismissed.

54.  For the above reasons, the appeal in CACV 406/2021 is also dismissed.

55.  As an order nisi, we order that:

(1)  the IO is to pay half of Sam Woo’s costs below in LDBM 252/2014;

(2)  Sam Woo is to pay the IO’s costs below in LDBM 255/2018;

(3)  the IO is to pay half of Sam Woo’s costs of the applications for leave to appeal in this court and below;

(4)  there be no order as to costs in CACV 405/2021; and

(5)  Sam Woo do pay the IO’s costs in CACV 406/2021.