THE INCORPORATED OWNERS OF JET FOIL MANSION v. YING KONG CO LTD

LDBM 371/2007

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT APPLICATIONS

NOS. 371, 372, 373, 374 AND 375 OF 2007

____________

DECISION

1.  Jet Foil Mansion is a multi-storey building at 415-421 Jaffe Road, Wanchai, Hong Kong.  The Respondent (Ying Kong) was the developer and is the owner of various parts of the building.  In 2007, the Applicant (the IO) filed 5 separate claims in the Small Claims Tribunal against Ying Kong for management fees in arrears for the period between 2005 and 2007.  Ying Kong contested and raised issues of construction of the deed of mutual covenants governing the building (DMC).

2.  The small claims were transferred to become these 5 Applications in this Tribunal.  On 13 October 2007, Messrs S K Lam, Alfred Chan & Co (SKLAC), solicitors, filed notice to act for the IO in these Applications.  These Applications were consolidated.

3.  Pleadings and witness statements have been filed and discovery has been carried out.  But on 11 July 2008, Ying Kong took out a summons with a view to striking out these Applications.

4.  At the last hearing on 15 October 2008, Ying Kong amended its summons.  By the amended summons, Ying Kong asked for an order in the following terms:

“1. The Applications be struck out for being abuse of process or stayed on the grounds that:

(a) The Applications were commenced and/or continued without proper authority of the Applicant; and/or

(b) Messrs S K Lam, Alfred Chan & Co., Solicitors & Notaries, have no authority to act for and on behalf of the Applicant;

1A. The notice of Messrs S K Lam, Alfred Chan & Co, Solicitors & Notaries dated 13^th October 2007 be set aside;

1B. Any other order which the Tribunal thinks fit on the further conduct of these Applications;

2. Messrs S K Lam, Alfred Chan & Co., Solicitors & Notaries do pay the costs of and occasioned by these Applications personally on an indemnity basis.”

(underlined as per the amendments)

3. This was the hearing of the amended summons.  During the hearing, Mr D Lam confirmed that Ying Kong no longer pursued the striking out for the alleged abuse of process.

4. Essentially Ying Kong argued that the IO contracted SKLAC as their solicitors in these Applications in the absence of tender procedure as required under sections 20A(2) and (2B) of the Ordinance.

The Ordinance

5.  Section 20A reads as follows:

“(1) The procurement of all supplies, goods or services required by a corporation in the exercise of its powers and the performance of its duties under the deed of mutual covenant (if any) or this Ordinance shall comply with such standards and guidelines as may be specified in a Code of Practice relating to such procurement.

(2) Subject to subsection (2A), any supplies, goods or services referred to in subsection (1) the value of which exceeds or is likely to exceed-

1. the sum of $200,000 or such sum in substitution therefor as the Authority may specify by notice in the Gazette; or

2. a sum which is equivalent to 20% of the annual budget of the corporation or such other percentage in substitution therefor as the Authority may specify by notice in the Gazette,

whichever is the lesser, shall be procured by invitation to tender.

(2A) Subsection (2) does not apply to any supplies, goods or services which but for this subsection would be required to be procured by a corporation by invitation to tender (referred to in this subsection as “relevant supplies, goods or services”) if-

(a) the relevant supplies, goods or services are of the same type as any supplies, goods or services which are for the time being supplied to the corporation by a supplier; and

(b) the corporation decides by a resolution of the owners passed at a general meeting of the corporation that the relevant supplies, goods or services shall be procured from that supplier on such terms and conditions as specified in the resolution, instead of by invitation to tender.

(2B) Where any supplies, goods or services are required under subsection (2)(b) to be procured by invitation to tender, whether a tender submitted for the purpose is accepted or not shall be decided by a resolution of the owners passed at a general meeting of the corporation.

(3) ……

(4) ……

(5) A contract for the procurement of any supplies, goods or services shall not be void by reason only that it does not comply with subsection (1).

(6) Where any supplies, goods or services are required under subsection (2) to be procured by invitation to tender, a contract for the procurement of the supplies, goods or services which does not comply with subsection (2) or (2B)-

(a) subject to any resolution passed by the corporation under paragraph (b) or any order made by the court under subsection (7), shall not be void by reason only that it does not comply with subsection (2) or (2B);

(b) subject to any order made by the court under subsection (7), may be avoided by the corporation but only for the reason that it does not comply with subsection (2) or (2B).

(7) In any legal proceedings in relation to a contract for the procurement of any supplies, goods or services to which subsection (2) or (2B) applies, the court may make such orders (including whether the contract is void or voidable) and give directions in respect of the rights and obligations of the contractual parties as the court thinks fit having regard to all the circumstances of the case, including (but not limited to) the following factors-

(a) whether the supplies, goods or services have been procured by invitation to tender;

(b) whether a general meeting of the corporation has been convened to consider the procurement of the supplies, goods or services;

(c) whether the Code of Practice referred to in subsection (1) has been complied with;

(d) whether the contract has been split, for the sole purpose of avoiding the compliance of the requirements in subsection (2) or (2B), from a contract which should have been made for the procurement of supplies, goods or services of a greater value;

(e) whether the supplies, goods or services were urgently required;

(f) the progress of any activities or works in relation to the supplies, goods or services;

(g) whether the owners have benefited from the contract;

(h) whether the owners have incurred any financial loss due to the contract and the extent thereof;

(i) whether the supplier of the supplies, goods or services under the contract has acted in good faith;

(j) whether the supplier of the supplies, goods or services under the contract has benefited from the contract; and

(k) whether the supplier of the supplies, goods or services under the contract has incurred any financial loss due to the contract and the extent thereof.

(8) For the purposes of subsection (7), where the court makes an order that the contract is voidable at the instance of the corporation, it shall also make an order that a general meeting of the corporation be convened and held in such manner as the court thinks fit, so as to decide whether the contract is to be avoided.

(9) ……”

Whether section 20A was breached

6.  These 5 claims for outstanding management fees over the same period of time, though in respect of different parts of the building owned by Ying Kong, should properly be pursued as one claim.  Obviously, the total amount being claimed would exceed the jurisdiction of the Small Claims Tribunal.  According to the affirmations filed on its behalf, the IO had consulted the manager and solicitors before these claims were filed.

7.  I can understand that exposure to legal costs may be minimised by filing the claims in the Small Claims Tribunal where no legal representation is allowed.  I am however curious how legal advice would have prompted or endorsed this to be done in view of the nature of these claims.

8.  The question raised is whether tender procedure was necessary.  The relevant time must be when the IO decided to contract SKLAC as its solicitors on record in these Applications in about October 2007.  This requires an assessment of whether at that time, the costs incurred or to be incurred exceeded or was likely to exceed HK$200,000 or 20% of the annual budget of the IO, whichever is the lesser.  Parties effectively expected this Tribunal to make this finding on the basis of the affidavit evidence.

9.  The IO produced the amounts of the annual budgets of 2007 and 2008.  The former was HK$593,084 and the latter was HK$489,579.70.  20% of the 2007 budget would be HK$118,616.80.  When SKLAC was contracted, were the costs to be incurred likely to exceed this amount (not to mention the lesser amount if the 2008 budget was applied)?

10.  According to the IO, after the small claims had been transferred to this Tribunal, the owners had discussion in owners’ meetings before retaining SKLAC to conduct these proceedings on its behalf.  The IO resolved to retain counsel only on 1 February 2008.

11.  The IO however provided no minutes or details of the relevant owners’ meetings.  But it suggested that SKLAC and the manager had at one stage advised that tender procedure was not really necessary.

12.  The IO relied on what happened afterwards, saying that up to March 2008, it had paid legal fees in the sum of HK$57,996 to SKLAC.  According to the minutes of the owners’ meeting on 18 March 2008, the payment was made in that very same month.  For the purpose of determining the amount of the owners’ contributions towards funding the litigation, the estimated fees of solicitors and counsel were also provided in that meeting.  Apart from counsel’s fee, SKLAC estimated its fees to range between HK$60,000 and HK$100,000.  As Mr D Lam observed, it is unclear whether this range included the HK$57,996 already paid.

13.  According to the IO, SKLAC advised that up to the filing of witness statement (in May 2008), the legal fees were about HK$70,000.  Again it is unclear whether this amount already included the sum of HK$57,996 already paid.

14.  The IO also suggested the possibility of mediation under the pilot scheme that could help keeping the costs low.  But it did not suggest how likely the dispute was to be resolved that way.  The fact was that Ying Kong put its solicitors on record in August 2007 soon after the transfer.

15.  In the 18 March 2008 meeting, apart from its fees, SKLAC also estimated counsel’s fee to range from HK$100,000 to HK$180,000.  It was therefore resolved to call upon the owners to contribute a total sum of HK$283,500 to fund the litigation.  The IO however suggested that this was called for merely out of prudence and the IO had no intention of utilising the entire amount.  In my view, the range of fees of solicitors and counsel must be what SKLAC estimated and advised the IO to expect in the conduct of this litigation.

16.  Mr K Lam argued that even assuming that the IO might be caught by section 20A(2), it was saved by section 20A(2A).  The reason was that SKLAC were simply contracted to provide the same type of service as those SKLAC were at that time already supplying to the IO.  I doubt whether this is correct and counsel also did not suggest any authority on what amounts to the same type of services for the purpose of section 20A(2A)(a).

17.  However, whether I am right about section 20A(2A)(a) or not, section 20A(2A)(b) specifies the additional requirement that the corporation has to decide by an owners’ resolution passed at a general meeting that such services shall be procured from the same supplier on such terms and conditions as specified in the resolution, instead of by invitation to tender.  There was simply no such resolution for the purpose of contracting SKLAC to act for the IO in these Applications.

18.  The IO also suggested that they did tender for the service of solicitors and barristers.  The invitation was said to have been sent before the 18 March 2008 meeting, but apparently after SKLAC had already been contracted.  Indeed the quotation from one firm was dated 31 March 2008 and a quotation from one counsel was dated as late as May 2008 and addressed to SKLAC.  I fail to see the relevance of such evidence.

19.  With the materials in hands, I see the basis for Ying Kong’s suspicion that the legal costs at the relevant time was likely to exceed 20% of the 2007 budget.

20.  However, as much as I doubt whether I have sufficient to make a finding on the basis of the affidavit evidence, I doubt whether it is necessary.  I shall explain below even assuming that section 20A(2) applied but was not complied with.

Effect of non-compliance

21.  Mr D Lam for Ying Kong relied on the court of appeal decision in Wong Tak Keung Stanley v The Management Committee of the Incorporated Owners of Grenville House, CACV 244/2003, 17 December 2003, and submitted that compliance with section 20A(2) is mandatory and a statutory duty on the part of the IO.

22.  Yet as to the effect of non-compliance, the court of appeal in The Incorporated Owners of Hip Wo House v Gallant King Development Limited, CACV 429/2006, 30 May 2007, said that it was more probable than not that such non-compliance would render the contract voidable rather than void.  In other words, it would be open to the owners to elect to affirm the contract notwithstanding the absence of tender procedure.  The contract remains valid until it is set aside.

23.  Both the Wong Tak Keung Stanley case and the Hip Wo House case were dated prior to the commencement of effect of the various amendments of section 20A in August 2007, which apply to the present case.

24.  The current subsection (5) made clear that a contract shall not be void by reason only that it does not comply with subsection (1).  The current subsection (6) made clear that a contract shall not be void by reason only that it does not comply with subsection (2) or (2B), unless the owners resolve at a general meeting to avoid it for that reason or the court orders otherwise under subsection (7).

25.  Under subsection (7), the court retains the discretion to still order whether the contract is void or voidable.  The court is expressly required to have regard to all the circumstances of the case including but not limited to the factors listed thereunder.  Both parties drew my attention to various particular circumstances of the present case with reference to some of those factors.  But after considering these circumstances, it is clear to me that the contract between the IO and SKLAC could not be void.  The contract could at most be voidable.  On this basis, I consider each part of the present application.

Whether the Applications were commenced and/or continued without proper authority of the Applicant

26.  These Applications originated from the claims filed with the Small Claims Tribunal.  As no legal representation was allowed in the Small Claims Tribunal, there was strictly no issue of the authority of SKLAC to act for the IO in filing the claims in the first place.

27.  But whether these proceedings were “commenced” only upon the Notice of Application being filed after the claims had been transferred to this Tribunal, there is up to this moment no question as to the authority of SKLAC to act for the IO.  It cannot be said that these Applications were commenced or continued without proper authority of the IO.

28.  The application for stay on the ground set out in paragraph 1(a) of the amended summons fails.

Whether SKLAC have no authority to act for and on behalf of the IO

29.  For the above reasons, it cannot be said that SKLAC have no authority to act for and on behalf of the IO.  SKLAC had and still have such authority unless and until the IO chooses to revoke it by avoiding their contract.

30.  The application for stay on the ground set out in paragraph 1(b) the amended summons also fails.

Whether the notice to act should be set aside

31.  It follows from above that in the absence of avoidance of their contract and revocation of SKLAC’s authority to act by the IO, the notice of SKLAC to act for the IO was and still is perfectly valid.  There is no basis for setting it aside at this moment.  This part of the application fails too.

SKLAC to bear costs personally

32.  There is no basis for the order that SKLAC be personally liable for the costs of and occasioned by these Applications on an indemnity basis.  Paragraph 2 of the amended summons fails.

Any other order for the further conduct of these Applications

33.  Ying Kong introduced paragraph 1B by the amendment to the original summons clearly with sections 20A(7) and (8) in mind as a fall back.  Mr D Lam submitted that if I am satisfied that the contract between the IO and SKLAC is voidable, I shall make such order under subsection (7) and also order that the IO should convene and hold a general meeting so as to decide whether the contract is to be avoided under subsection (8).  Pending that, the proceedings in these Applications should nevertheless be stayed.

34.  Section 20A(7) confers on the court the discretion to make order on the binding effect of the contract between the corporation and its contracting party and to make directions on their respective rights and obligations in any legal proceedings in relation to the contract in question.

35.  I do not agree that these Applications or the present application by Ying Kong fall within the context of section 20(2A)(7).

36.  It might have been different if the IO had sued Ying Kong as an owner for his contribution towards such fees payable to SKLAC.  Ying Kong could have raised the same issue as his defence.  Alternatively, Ying Kong as an owner might have been in a position to initiate separate legal proceedings against the IO with a view to avoiding the contract between the IO and its solicitors.

37.  I can also understand that if Ying Kong as the Respondent is ordered to pay any costs of the IO in these Applications, Ying Kong may take the same issue and argue that on the basis of the indemnity principle, it is not liable to pay such costs that the IO should not itself be liable to pay under the problematic contract with SKLAC.  Mr K Lam provided an example of that – Speedy Gainer Limited v The Incorporated Owners of Malahon Apartments, CACV No. 336 of 2004, 9/10/2006.

38.  My conclusion is that section 20A(2A)(7) cannot be the fall back of Ying Kong upon its failure to ask for stay of proceedings under paragraph 1 of the amended summons.  Paragraph 1B of the amended summons therefore fails too.

Costs

39.  Notwithstanding the amendment to the summons, Ying Kong fails on all fronts in this application.  Ying Kong’s amended summons is dismissed with costs to the IO.  Costs shall be taxed on the District Court scale, if not agreed, with certificate for counsel.  In the absence of any appointment within 14 days to argue costs, this costs order shall become absolute.

Representation: