THE INCORPORATED OWNERS OF SOUTH SEAS CENTRE, MODY ROAD v. SOUTH SEAS ON CENTRE MANAGEMENT CO LTD

HEADNOTE

                    Deed of Mutual Covenant - effect of breaches of contract by the 'Manager' thereunder - circumstances under which owners can repudiate the contractual terms in the Deed of Mutual Covenant, and the effect of the Manager's refusal to accept any such repudiation.

                    Powers exercisable under the Multi Storey (Owners Incorporation) Ordinance and the extent to which they can be exercised when Managers are still performing functions as Managers in accordance with a Deed of Mutual Covenant.

                    Circumstances when it may be appropriate for an injunction to be granted to owners to restrain a Manager from continuing to perform its duties as  under a Deed of Mutual Covenant.

Held    Any breaches of the terns of the Deed of Mutual Covenant must go to the root of the contract. This was not established in this application and the grant of an injunction was refused.

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JUDGMENT

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1. The Plaintiffs are seeking an injunction which would have the effect of excluding the 1st Defendant from performing their functions as managers of South Seas Centre which is a new commercial building in Tsim Sha Tsui East. The lower floors of the building are used as shop premises and the upper parts comprise offices. There are car parks in the basement.

2. The occupation permit of the building was issued in February 1982. The 2nd Defendant was the developer of the building and at the present time retains a 29%  interest in the building. Shortly after the occupation permit was issued, various units in the building were sold to different purchasers. All of the assignments to different purchasers were, as is customarily the practice, made subject to a Deed of Mutual Covenant. The Deed of Mutual Covenant which is dated the 4th of May, 1982 was made between the 2nd Defendant, the 5th Defendant, Tokyo Finance Asia Ltd. and the 1st Defendant. It is not disputed that the 2nd Defendant and the 1st Defendant are associated companies and have similar interests in this litigation.

3. It is evident from the various affidavits and affirmations which have been filed that almost from the outset problems have arisen concerning the management of the building. It is, however, clear that this issue is vigorously contested and it is the 1st Defendant's case that the building has been maintained and managed in a reasonable manner. It would appear that a number of the purchasers of units joined together in an attempt to form a united front. The most active of the owners has been a Mr. Christopher Maude, who is a director of Deacon & Company Ltd, Initially the complaints which were made related to the dirty and unsatisfactory state of the building. In January 1984, Mr. Maude asked the 1st Defendants to produce to him the management accounts for his inspection pursuant to his rights under the Deed of Mutual Covenant. According to his evidence in various affidavits, he was not satisfied with the accounts and information with was furnished to him. Mr. Maude continued to press for further information. As he was not satisfied with the information he was obtaining from the 1st Defendant, a decision was made by a number of the owners to form the Plaintiff corporation in accordance with the provisions contained in the Multi-storey buildings (Owners Incorporation) Ordinance Cap. 344. The Plaintiff was incorporated on the 25th of October 1984. After the formation of the Plaintiff, the owners used the Plaintiff as a vehicle to press what they perceived to be their interests. Support for the Plaintiffs seems to have gathered momentum and Mr. Kwok, the solicitor representing the Plaintiffs, filed an affidavit shortly before the hearing in which he stated that at the end of April, 1985, 59% of the owners of the building supported the Plaintiffs and their stated objectives.

4. I think that it could fairly be said that as matters preceded the lines of battle between the parties shifted. As Mr. Maude and the Plaintiffs obtained more information from the 1st Defendants, the emphasis of their attacks became concentrated on the accounts and accounting practices of the 1st Defendant rather than upon the maintenance or lack of maintenance of the building Mr. Ronny Wong, who was representing the Plaintiffs, indicated during the hearing that the grounds upon which he based his application related to what can loosely be described as the accounting irregularities.

5. The Plaintiff's first and perhaps most important complaint was that without any authority, the 1st Defendants had entered into a contract with Sino Estates Services Ltd., one of their associated companies, whereby Sino Estates agreed to undertake the day-to-day management of the building in consideration of their being remunerated at the rate of $70,000.00 per month which was charged to the account of the owners. Under the Deed of Mutual Covenant, the 1st Defendants were required to perform this function and they received a commission amounting to 15% of all management fees payable for performing this service. It will be appreciated that if this allegation can be sustained, there would be a duplication of remuneration which would redound to the disadvantage of the owners. The second complaint made by the Plaintiffs was that the 1st Defendants had levied excessive maintenance charges. On the basis of the information provided by the Plaintiff, one result of the excessive charges is that the surplus funds held for future contingencies have been unduly inflated. Also, of course, the amount of the commission payable to the 1st Defendants has been unnecessarily increased. Also associated with this complaint, the Plaintiffs learned that the 1st Defendants had allowed the 2nd Defendant to get seriously into arrears in respect of their contribution towards maintenance charges. These arrears had amounted to something in the region of 4 million dollars. The final matter complained of was that the 1st Defendant had deposited the surplus funds in interest bearing deposit accounts in Sing Ho Finance Co. Ltd., a deposit taking company, which is also associated with the 1st and 2nd Defendants. The main complaint here was that the Deed of Mutual Covenant provided that surplus funds should be deposited in a nominated bank. It appears, however, to be common ground that belatedly the monies are now deposited in a bank.

6. The Plaintiffs held a meeting on the 12th of February, 1985. At this meeting, a resolution was passed dismissing the 1st Defendants from their office as managers. They also resolved to assume the post and duties of managing the building. They informed the 1st Defendant of these resolutions by a letter dated the 13th February, 1985. I think that it maybe helpful to set out the terms of this letter.

7. It is evident from affidavits which were filed on behalf of the 1st Defendant that they did not accept this repudiation of the contractual terms contained the the Deed of Mutual Covenant. The 1st Defendants continued to attempt to exercise their functions as managers of the building. It will be appreciated that all of this led to a highly unsatisfactory state of affairs where both the Plaintiffs and the 1st Defendants were attempting to perform the functions of managers of the building. The Plaintiffs issued the generally indorsed writ in these proceedings on the 7th March, 1985. On the same date, the Plaintiffs issued the present summons. On the 13th March, the 2nd, 3rd, 4th and 5th Defendants issued a summons to be joined as parties to the proceedings and on the 15th March, Mr. Justice Hunter made an order for this. These Defendants between them hold a 34% interest in the building. The interest they assert in the proceedings is that they oppose the action taken by the Plaintiffs.

8. During the course of his submission to me, Mr. Ronny Wong informed me that he was placing reliance upon the Defendants fundamental breach of their contract under the terms of the Deed of Mutual Covenant. He was not claiming that the Plaintiffs had been appointed as managers pursuant to clauses 5 & 12 of the Deed of Mutual Covenant. On reflection, this approach appears to be wise. Under clause 5, the 1st Defendants were appointed as managers for a period of 5 years. It would appear that the question of the appointment of a successor to the 1st Defendants can only arise after the expiration of this period. It would also appear that the Plaintiffs are placing reliance upon the provisions contained in the Multi-storey buildings (Owners Incorporation) Ordinance as their authority to manage the building. I think that if Mr. Ronny Wong is able to establish that there has been a breach of contract which goes to its root, he is right in his submission that the Plaintiffs would have power under the said Ordinance to exercise functions as managers. Section 18(1)(c) of the Ordinance provides :-

"Do all things reasonably necessary for the enforcement of the obligations contained in the Deed of Mutual Covenant (if any) for the control, management and adminstration of the building."

 

9. The main issue I have to decide is whether the Plaintiffs have in accordance with the principles propounded in American Cynamid Co. v Ethicon Ltd. ⁽¹⁾ established a sufficient case that the 1st Defendants have been in breach of a condition of the contract under the Deed of Mutual Covenant which goes to the root of the matter.

10. Mr. Ronny Wong referred me to para. 1591 of Chitty on contracts, General Principles, 25th Edition. He argued that on the facts before me, there was essentially no dispute that the 1st Defendants had been guilty of serious breaches of contract and that the Plaintiffs were entitled to treat themselves as discharged from their liability further to perform their own unperformed obligations under the contract. I do not think for one moment that the Plaintiffs have established this. In the course of an able submission, Mr. Litton, for the 1st Defendants dealt comprehensively with the principles which should govern such a position. He referred to the passage on p.66 of the judgment of Diplock, L.J. in Hong Kong Fur Shipping Co. Ltd. v Kwasaki Kisen Kiasha Ltd. ⁽²⁾

"Does the occurence of the event deprive the party who has further undertakings to perform of substantially the whole benefit which was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings".

 

11. I do not consider that the breaches of contract which have been alleged by the Plaintiffs can possibly be said to have such serious consequences even if the Plaintiff is able to prove them at the trial of the action. The most serious breach complained of is, in my view, the complaint that the 1st Defendant has either assigned or sub-contracted their contractual obligations to Sine Estates. In my view, it is necessary to go behind the terms which were expressed in the contract between these parties. The 1st Defendants have in affidavits filed on their behalf claimed that they still perform many of the functions and duties as managers notwithstanding this contract. Clause 5(g) of the Deed of Mutual Covenant attempts, in my view rather inadequately, to provide for circumstances when the managers can instruct independent parties to perform duties which have to be paid for by the owners. Clause 5(g)(ii) provides authority for the remuneration of "accountants, caretakers, watchmen, security guards, cleaners , gardeners, attendants and the like". This is all very vague.

12. At the trial, it may be possible for the 1st Defendants to justify many of the functions which are undertaken by Sino Estates under their contract. What is clear though is that from a practical point of view, the 1st Defendants or Sino Estates are substantially, performing the duties imposed on the 1st Defendant under the Deed of Mutual Covenant. This can be seen by the nature of the complaints which are made against them by different owners. Essentially they relate to matters of detail rather than points of substance. It is also significant to note that one of the members of the management committee of the Plaintiffs saw fit to address a complaint to the Plaintiffs at quite a late stage in this dispute. There has not been any suggestion that there has been any disruption or discontinuance of the essential services provided to the building. I do not accept that even if the Plaintiffs are able to prove the breaches of contract they complain of that it can be argued that they go to the root of the contract. There is no doubt in my mind that the management contract under the Deed of Mutual Covenant is still in existence having regard to the 1st Defendant's refusal to accept the Plaintiffs repudiation of the contract.

13. The next matter I will consider is the urgency of this application. I do not think that the Plaintiffs have in any way made out a case of urgency. On the evidence before me, the building continues to function in a reasonably satisfactory manner. There is also no reason to suppose that the interests of the Plaintiffs will be seriously prejudiced if the matters they have referred to are dealt with in due course at the trial of the action and an injunction is not granted. Mr. Litton with some justification was particularly concerned that if an injunction is granted, that will be the end of the matter. This problem was considered by Lord Diplock at p.626 of NWL Ltd. v. Woods ⁽³⁾: -

"Where, however, the grant or refusal of the interlocutory injunction will have the practical effect of putting an end to the action because the harm that will have been already caused to the losing party by its grant or its refusal is complete and of a kind for which money cannot constitute any worthwhile recompense, the degree of likelihood that plaintiff would have succeeded in establishing his right to an injunction if the action had gone to trial is a factor to be brought into the balance by the judge in weighing the risks that injustice may result from his deciding the application one way rather than the other."

 

14. I think that such considerations do arise in the present case. This is a factor which I have weighed in the balance.

15. There are a number of other factors which I have considered to be relevant. There is no doubt in my mind that if I were to grant the injunction which is sought, there is a grave risk of massive disruption of the services provided at the building. There is likely to be a considerable upheaval if new managers attempt to perform or undertake the duties of the managers under the Deed of Mutual Covenant. There is no assurance that the Plaintiffs, even if they are able to secure the services of appropriate agents, will be able to exercise the necessary functions in an efficient and satisfactory manner.

16. It is also necessary to consider the effect of an injunction upon contractual commitments which had been entered into by the 1st Defendant with other independent parties such as for example, the operators of lifts. It is also necessary to have regard to the possible consequences to parties who are either contemplating buying or selling units in the building. Any substantial change in the arrangements for the management of the building may well have unforeseen consequences.

17. I have also considered the submissions which were made by Mr. Wesley Wong on behalf of the 2nd, 3rd, 4th & 5th Defendants. He adopted the submissions of Mr. Henry Litton and informed me that his clients were vehemently opposed to any change in the arrangements for the management of the building. I considered that the concern which has been expressed is legitimate and this affords further grounds for refusing to grant the injunction sought.

18. For the reasons I have given I am not prepared to grant the relief sought by the Plaintiffs. I will hear the parties as to costs.

(1)    1975 1 All ER 504

(2)    1962 2 QB 26

(3)    1979 3 All ER 614