THE INCORPORATED OWNER OF WING MING INDUSTRIAL CENTRE v. HONG KONG QUALITY BRANDS ALLIANCE LTD

HCA 947/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 947 OF 2014

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D E C I S I O N

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1.  When the plaintiff’s application for judgment against the defendant under Order 14 came before me in July of this year, I gave unconditional leave to the defendant to defend. Had there existed any realistic condition to be attached to such leave I would have imposed it, but there was none.

2.  I was left with an almost overwhelming feeling that the defendant had no merit to advance by way of defence, not least because the original pleaded defence turned out to be a misleading waste of time.

3.  There were other applications heard at the same time but none had any justification save that concerning a proposed Amended Defence (and Counterclaim) and counsel for defendant virtually conceded that the defendant’s application to strike out the plaintiff’s claim as vexatious, an abuse of the process of the court or frivolous, was without merit.  In my view the defendant’s application was itself frivolous.

4.  The nub of the plaintiff’s case was that the defendant, as the sub‑tenant of the ground floor premises of a building of which the plaintiff was the Incorporated Owners, was in breach of the Deed of Mutual Covenant, the Land Grant and the Occupation Permit, in that it used the premises as a shop and/or showroom.  There is a typographical error in the last word of §1 of my judgment — “store‑room” should read “show‑room”.  The covenanted user was as transformer room, switch room, store, foyer, car parking area, and cockloft for storage and package room (all for non‑domestic use).

5.  The original defence to which I have referred denied any such breach but now, in a volte‑face, this is admitted.  The incontrovertible evidence shows the premises to be used as a shop and/or showroom.

6.  I do not propose to review all the matters set out in my original decision. Mr Jonathan Chang’s succinct argument was that since the breach was now conceded and the Incorporated Owners have a clear obligation to enforce the Dead of Mutual Covenant, they have no power to vary the covenant or waive any right to enforce compliance, or to acquiesce in any breaches.  Equity cannot aid the defendant.

7.  By contrast, but equally pithily, Mr Jin Pao, for the defendant, argued that it was entitled to seek equitable relief by reason of the plaintiff’s alleged acquiescence or waiver, and that procedure by way of Order 14 was therefore inappropriate.

8.  I was in the course of the argument referred to a number of cases supporting one argument or the other.

9.  These included the decision of Le Pichon JA in Kwok Mo Kai Doris v The Incorporated Owners of Karin Court, CACV 267 of 2005 (8 June 2006, unreported).  The learned Justice of Appeal asserted that the statutory obligation to enforce the Dead of Mutual Covenant may not be varied or negated “so that the concept of mutuality which underpins the DMC extinguishes a co‑owner’s assertion of waiver, estoppel and/or acquiescence.  The court should not allow such a claim.”  I said then that “on the face of it that makes the defendant’s claims untenable.”

10.  Put in another way, but reflecting the judge’s thinking and approach, the “concept of mutuality” of the deed of mutual covenant excluded any reliance upon waiver, estoppel etc because it would undermine and make a nonsense of the deed.  It is therefore important to bear in mind all three words — “deed”, “mutual” and “covenant”.  In effect the party to the covenant is undertaking not to rely upon any possible relief with which to slide out of what is an absolute obligation.  I am bound to say I found, and still find, that approach attractive.

11.  However the circumstances of that case are significantly different from that before me, and from those of the other decisions cited which I considered.  In the Kwok Mo Kai Doris case the Incorporated Owners sought to rely upon what it contended was waiver, or acquiescence and/or estoppel on the part of a co‑owner in not objecting to the amount of management fees levied on the premises owned by her (over a period of 12 years).  In short the Incorporated Owners, as manager, had, over a period of time, altered the apportionment of management expenses amongst the co‑owners.  Clauses 3(a) and 8(b) of the Third Schedule did not give it the power to alter the ratio and the mere fact that a co‑owner had paid in accordance with an exercise by the manager of a discretion which it thought it had, but which was in conflict with the express statutory provisions, did not entitle the manager to assert waiver etc, when the co‑owner terminated its compliance with the discretionary claim and relied upon the statutory provisions.  To my mind this case demonstrates an attempt to override the strict requirements of provisions in a DMC — thereby, unfairly and improperly prejudicing the rights of a co‑owner — by substituting a discretion for an absolute duty.  This case then has no application to the one before me.

12.  However the Court of Appeal had a decade earlier considered the situation in The Incorporated Owners of HoiLuen Industrial Centre v Ohashi Chemical Industries (Hong Kong) Ltd [1995] 2 HKC 11.  At page 13C‑D Godfrey JA said:

“It follows that in the instant case the plaintiffs were … bound to take proceedings for the enforcement of these covenants. It follows, too, that they could not have granted expressly to this defendant or any other owner of any unit in the building the right to act in contravention of the deed of mutual covenant … What cannot be done expressly cannot be done impliedly. … Equity will not hold him bound by acquiescence to allow something which he could not have allowed by express grant.”

Godfrey JA however went on to quote the trial judge as follows:

“I find that the Defendant has not proved that the Plaintiffs acquiesced in its erection of a cooling tower.”

before going on to say himself:

“That being so, no question of injustice or unfairness arises at all, no case for the intervention of equity has been established. … The defendant has no case; having failed to prove acquiescence, it has no ground for asking us to interfere with the judge’s exercise of his discretion.”

13.  The factual matrix of that decision is straightforward.  In beach of the DMC, an owner of a unit in the building had erected an air‑conditioning cooling tower. So it appeared had a number of other co‑owners.

14.  The Incorporated Owners obtained a mandatory injunction compelling the co‑owner to demolish the tower.  The trial judge had found that the co‑owner had not proved that the plaintiffs (Incorporated Owners) had acquiesced in the erection of the cooling tower, the other co‑owners who had created similar towers not having been called upon or compelled to demolish theirs.

15.  The headnote to the case does not in fact do justice to the judgment.  It is clear from the judgment of Godfrey JA (at p 13C‑14B) that he was riding two horses though they were travelling in the same direction.

16.  The first part of the judgment deals with the effect of section 18(1)(c) of the Multi-Storey Buildings (Owners Incorporation) Ordinance (Cap 344) under which the Incorporated Owners had the right and duty to enforce the covenant, this included:

“… the following duties …

(15)    to remove any structure, fitting or other things in or on any part of the Land and the Building which have been erected in contravention of the terms of this deed.”

17.  I have already quoted the salient aspects of that part of his judgment which can be summarized as follows:

(a) the plaintiffs were bound to take proceedings to enforce the covenant;

(b) they cannot grant expressly the right to act in contravention of the covenant;

(c) accordingly they cannot impliedly grant the right to contravene the covenant; and

(d) equity will not bind him by acquiescence to allow what he could not allow by express grant.

He accordingly dismissed the appeal on those grounds.

18.  However he then went on:

“Even if I were wrong so far, I would still … dismiss this appeal because, as the judge thought, there was no good ground why in the exercise of his discretions, he ought to refuse the injunction the plaintiffs claimed.”

and:

“It is the judge who is entrusted with the function of granting or refusing the equitable remedy of injunction,”

having said immediately beforehand,

“It is a strong thing for this court to interfere with the exercise of the discretion of the judge in such a case.”

19.  Of course the appellate judge’s consideration of the trial judge’s discretion was in the context of an application for a mandatory injunction, but in the next breath he quoted the trial judge as follows:

“I find that the defendant has not proved that the plaintiffs acquiesced in its erection of the cooling tower.”

20.  That was of course a clear finding of fact with which the Court of Appeal could not (or should not) interfere unless there had been a faulty assessment of the factors which had to be taken into account.

21.  What Godfrey JA did not say (and neither did either of his two brothers) was that a consideration of acquiescence, on the facts, by the judge was irrelevant, because the incorporated owners had a right and duty to enforce the covenant which could not be affected by any equitable claim of acquiescence or waiver.  Indeed it is clear that he did not discount the possibility of equitable relief in the form of a defence based on acquiescence, occupying the court’s attention as a valid argument.  Because the defendant had failed to prove that the plaintiffs acquiesced in its erection of the cooling tower:

“… no question of injustice or unfairness arises … no case for the intervention of equity having been established. … having failed to prove acquiescence, it has no ground for asking us to interfere with the judge’s exercise of his discretion.”

22.  It is clear, at the very least, that the court considered that if acquiescence were to be established on the facts then this would be a basis for seeking equitable relief to remedy an injustice or unfairness.  At the very least there is an argument that that court’s decision contained an inconsistency.

23.  The last two decisions for consideration also have a factual matrix which calls for attention.

24.  In The Incorporated Owners of Hong Kong House v Senfield Limited, CACV 117 of 2003, (12 November 2003 unreported) the Court of Appeal (Ma CJHC, as he then was, and Stone J) was asked to consider the decision of the late Judge Ian Carlson, whereby on an Order 14 application by the plaintiff (Incorporated Owners) he gave unconditional leave to defend in respect of two of the plaintiff’s claims, identified as the “Water Tanks” and “Neon Sign” claims.

25.  As far as the Water Tanks were concerned the defendant had connected its sprinkler system to them but without permission from the plaintiff.

26.  The court, in a rigorously practical approach, determined that the defendant’s sprinkler system, which it was obliged to have under the fire regulations, could operate only if a supply of water was available, hence the connection made.  In any event the plaintiffs were obliged to make a supply of water available under Clause 3(c) of the Deed of Mutual Covenant.

27.  There was however a clear dispute on the facts relating to whether or not the plaintiff made an offer of a supply of water, whether the defendant’s actions were proper or not, and what were the requirements of reasonableness in relation to both parties.  Ma CJHC said:

“Whether this can give rise to any defence of waiver, estoppel or laches, is another matter that cannot easily or comfortably be disposed of now. The possibility is also to be borne in mind that such delay as may be found to exist in the present case could feature in the court’s discretion whether or not to grant an injunction, which is of course an equitable remedy.”

28.  On the “Neon Sign” claim the court had an equally forthright view — “It is arguable that the Plaintiff may be estopped from now complaining about the sign or may have waived its right to do so.  Acquiescence and laches may also feature.”

29.  Of course the factual matrix of that decision is substantially different from the one with which I am concerned.  It is of note that the decision of the Court of Appeal in Incorporated Owners of Hoi Luen was not referred to the court.

30.  Finally there are the two decisions of the High Court in Hollywood Shopping Centre Owners Committee Ltd v The Incorporated Owners of Wing Wah Building Mongkok Kowloon.  The first is by Mr Recorder Fok SC (as he then was) on 23 April 2008 which was in the context of an application by the defendants (the Incorporated Owners) for judgment under Order 14 and the second, following the actual trial of the action, by Mr Recorder Rimsky Yuen SC on 16 August 2010.  Both decisions are unreported.  I need only consider the matter in the context in which it came before Recorder Fok for obvious reasons.

31.  The defendant’s contention (the essence of its counterclaim) was that the co‑owner had breached the Deed of Mutual Covenant by converting a canopy to its own use for advertising purposes.  The plaintiff in answer thereto, relied upon the equitable defences of acquiescence, waiver and/or estoppel.  There were other legal issues with which I do not need to be concerned.  The Recorder refused the application for summary judgment under Order 14 on the basis that there was an arguable case based on waiver, acquiescence, estoppel and laches even though it was not pleaded at that time.  The defence therefore was even more deficient than that in the case before me.  In a very full judgment following trial the Recorder (Rimsky Yuen SC) considered with great care all the aspects of the defence eventually pleaded.

32.  What then is to be derived from a consideration of these decisions?  It would appear that a breach (or breaches) of the Deed of Mutual Covenant, whether admitted or proved, do not ipso facto constitute an absolute bar to equitable relief.

33.  The two decisions of the Court of Appeal, chronologically on either side of the decision in Hong Kong House, appear to indicate that a breach of the Deed of Mutual Covenant by a co‑owner entitles the Incorporated Owners, as Manager, to judgment, as there cannot be an equitable defence based on waiver, acquiescence, laches or estoppel.  Yet, almost in the same breath the decision of the Court of Appeal in 1995 (the Hoi Luen case), the judgment of Godfrey JA envisages a defence of acquiescence based in equity.  The decision in Hong Kong House categorically asserts this. 

34.  I am not trying this case on the papers or the limited evidence.  I have expressed already my reservations or misgivings about the defendant’s case but this is far from saying the defence is incredible.

35.  I take the view however that the plaintiff’s arguments in law should be considered by the Court of Appeal, particularly in the light of the three earlier decisions of the court.  Although each case, based upon breach of the Deed of Mutual Covenant, has its own discrete facts, it is not clear in my view that equitable relief will automatically be available to the party occasioning the breach, or that there are types of breach which may constitute an unarguable state of affairs in which there is no defence, because the Incorporated Owners are in law, not permitted, expressly or impliedly, to allow breaches of the Deed of Mutual Covenant.

36.  Mr Chang relies on the approach of Recorder Rimsky Yuen SC in the Hollywood case in which (at paragraphs 57 to 59) he drew a distinction between breaches of the Deed of Mutual Covenant which the Incorporated Owners were empowered to tolerate and those in which the Incorporated Owners were precluded from tolerating or acquiescing in and to which the co‑owners could not set up any of the equitable defences.  This approach by the Recorder reflected the varying decisions and sets of circumstances of the earlier decisions to which he was referred. I bear in mind that I have been dealing with an application for summary judgment and the criteria to be adopted in that context.

37.  Mr Jin Pao has argued, equally succinctly, that the authorities leave open clearly, at least at the stage of an Order 14 hearing, that the equitable defences are available to the defendant in respect of the now conceded breach of the Deed of Mutual Covenant.

38.  I consider that the plaintiff has at least a reasonable prospect of persuading the Court of Appeal that where the Deed of Mutual Covenant provides for a specific user of the premises which the co‑owner has undertaken to honour — “The concept of mutuality which underpins the DMC” applying the terminology of Le Pichon JA — the equitable defences raised are not available to justify a breach of such.

39.  The decisions of the Court of Appeal so far do not specifically exclude the consideration of such equitable defences in that context, and if there be any inconsistency in the existing decisions, they should be clarified or rationalised with specificity.

40.  Accordingly I give leave.  The costs of this application will be costs in the appeal.