CHINA WEAL PROPERTY MANAGEMENT LTD AND ANOTHER v. GOLDEN PLACE INVESTMENTS LTD

HCA2000/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2000 OF 2004

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J U D G M E N T

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1. The defendant appeals against the order of Master S.K. Kwang dated 26 July 2005 granting summary judgment to the plaintiffs. 

2. The 1^st plaintiff is the manager of a building called Fortress Tower.  It was so appointed under the Deed of Mutual Covenant (“DMC”) dated 18 March 1992.  The 2^nd plaintiff is the owners’ incorporation, incorporated under the Buildings Management Ordinance, Cap.344 on 29 July 2002.  The defendant is the registered owner of properties on the ground and first floors of the building.  The plaintiffs’ claim is for arrears of management expenses between 1 January 2003 and 30 April 2004, interest thereon and a collection charge, amounting in total to $2,075,265.71. 

3. There is no dispute that the management fees were demanded and went unpaid.  The defendant’s pleaded defence is that :

(1)	The plaintiff is not entitled to rely on the clauses of the DMC which it pleads, because the defendant was prohibited from attending the owners’ meetings to deliberate the annual budgets, by reason of its earlier failures to pay management expenses.  However, it failed to pay those expenses because there had been no valid resolution in any owners’ meeting ratifying the appointment of the 1st plaintiff by the 2nd plaintiff as manager of the building.  This is an issue to be resolved in pending High Court actions nos. HCA1670/2001 and HCA3468/2002, which have been consolidated; and this action should be stayed until the outcome of that consolidated action.
(2)	The plaintiffs rejected the repeated demands of the defendant to be represented at owners’ meetings which rendered such meeting invalid and their resolutions void.
(3)	Further or alternatively the plaintiffs failed to give formal notice of the budget for the relevant period as required by the DMC.  The plaintiffs refused or failed to post a notice at the general notice board of the building.
(4)	The particulars of the contributions are denied.  The sums claimed required to be fixed or ratified by the management committee in accordance with the DMC and were not validly fixed or ratified.
(5)	There is also a counterclaim.  The defendants allege that the plaintiffs, in breach of an implied term that consent would not be withheld under Clause 4(b) of Section V of the DMC, withheld consent for the defendant or its contractors to enter into a hoarded area forming part of the portions which it owned, thereby causing a delay in fitting-out works, which led to the loss of the deposit on an architect’s contract of $977,500, and loss of rent amounting to $3,060,000, for which sums the defendant counterclaims.

4. The only issues argued before me were the validity of the budgets showing the management expenses to be contributed, and the counterclaim. 

The consolidated action 

5. In HCA1670/2001, the 1^st plaintiff claims arrears of management expenses for the period from 1 October 2000 to 30 April 2001, and in HCA3468/2002 it claims arrears for the period from 1 September 2001 to 31 August 2002.  In the first of these actions, the 1^st plaintiff obtained a default judgment and presented a winding-up petition, but the defendant later successfully applied to have the default judgment set aside.  It appears that the defendant is relying on the same or similar arguments in all the actions because in evidence the defendant’s witness adopts what he has said in an earlier affidavit.

6. The land searches show that the defendant became the registered owner of the portions on the ground and first floors with which this case is concerned on 13 December 1994.  I am not told whether there has been any previous litigation over payment of management contributions.

Relevant provisions of the DMC

7. Clause C1 of Section VI of the DMC provides for that, for the purpose of fixing contributions to the management expenses, the manager shall prepare annual budgets.  All but the first are to be prepared in consultation with the Owners’ Committee.  The first budget is to cover the period to 31 December 1992.

8. Clause C3 reads :

“The annual budget once completed by the Manager shall be open for inspection by the Owners by posting up the same at the general notice board of the Building and Manager may alter such budget based on the suggestions made by the Owners but shall not be obliged to do so and the said annual budgets shall be subject to approval by the Owners in the Annual General Meeting of the Owners.”

9. Clause 9 of Part H of Section VI, to which I was not referred in argument, also requires the manager, prior to the commencement of each financial year to prepare an annual budget of all estimated expenditure, to include all sums necessary to meet the expenses of the current year and an amount for contingencies.  The manager may prepare a revised budget for the current year, if it considers that the budgeted sums for the current year are insufficient, and shall upon request provide copies to each owner affected thereby.

10. Clause 21 of Section VIIB of the DMC, to which I was likewise not referred in argument provides that the Manager shall convene an Annual General Meeting (“AGM”) of the owners in each and every year for the purpose, inter alia of approving the budget for the following year.

11. Part C of Section VII gives the owners the power to form a Management Committee for the purpose of incorporating the Owners under the provisions of Cap.344.  During the existence of an Owners’ Incorporation under the statute it is provided that the rights, duties etc. conferred on the Manager by the DMC are vested in the Owners’ Incorporation.  Clause 4 of Part C concludes :

“No provision in this Deed shall prejudice the operation of the Multi-Storey Building (Owners’ Incorporation) Ordinance (Cap.344 Laws of Hong Kong).”

The ordinance referred to was of course superseded by the current Buildings Management Ordinance. 

12. So far as I can see there is no provision in the DMC for what is to happen if the owners in the AGM do not approve the budget, or if no AGM is held, or if no budget is prepared.

13. It must however be remembered that the DMC by Clause 4 of Section provides :

“Each Owner shall pay to the Manager on the due date the Manager’s Remuneration and Management Expenses as herein provided.  No Owner shall be called upon to pay more than his due proportion, and neither shall any Owner be allowed to evade his responsibility to pay his due proportion of the said Manager’s Remuneration and Management Expenses for his Unit whether it is vacant or occupied and whether sold or unsold.”

14. It follows that any dispute about the validity of the budgets can only affect the quantum of the due proportion of management expenses to be paid.  The owner cannot escape liability for them, even if ultimately the courts may have to decide the quantum.

Relevant provisions of the Ordinance

15. Subsection (1) section 21 provides that the contribution of the owners to the incorporation’s funds is to be determined by the management committee.  Subsection (4) provides that 5^th Schedule shall have effect with respect to the amount to be determined under subsection (1), the preparation of budgets by the management committee for such determinations and the supply of copies of any documents in respect of those budgets.  Subsection (5) provides :

“In the event of any inconsistency between this section (which shall be construed to include the Fifth Schedule) and the terms of a deed of mutual covenant or any other agreement, this section shall prevail.”

16. The 5^th Schedule, which I do not need to reproduce here, requires the management committee to prepare a budget and with what is to be included in it.  A copy is to be provided to any owner on his written request. 

17. Subsection (1) of section 22 provides that the owners’ contributions to the amount determined under section 21 shall be fixed by the management committee in accordance with the deed of mutual covenant (if any) and payable at such times and in such manner as the management committee may determine.

18. Subsection (4) of the same section provides for a certificate in writing signed by the chairman of the management committee stating the amount of a contribution and when it is payable shall be admissible as prima facie evidence of the facts stated therein without further proof.

19. Section 34C provides :

“(1) This Part, except where otherwise expressly provided, applies only to a building in respect of which a deed of mutual covenant is in force whether that deed came into force before or after the material date.
(2)   In the event of any inconsistency between this Part and the terms of a deed of mutual covenant or any other agreement, this Part shall prevail.”

20. The material date is defined as the commencement of section 29 of the Multi-storey Building (Owners Incorporation) (Amendment) Ordinance 1993.  Section 34E(1) provides for the implied incorporation of provisions in the 7^th Schedule into deeds of mutual covenant made after that date, and from the material date into those made before that date.  It is not disputed that this section applies to the DMC concerned here.

21. Paragraph 1 of the 7^th Schedule provides :

“	(1)	Subject to subparagraphs (3), (5), (6) and (8), the total amount of management expenses payable by the owners during any period of 12 months adopted by the manager of a building as the financial year in respect of the management of that building shall be the total proposed expenditure during that year as specified by the manager in accordance with subparagraph (2).
	(2)	In respect of each financial year, the manager shall—
		(a)	prepare a draft budget setting out the proposed expenditure during the financial year;
		(b)	send a copy of the draft budget to the owners’ committee or, where there is no owners' committee, display a copy of the draft budget in a prominent place in the building;
		(c)	send or display, as the case may be, with the copy of the draft budget a notice inviting each owner to send his comments on the draft budget to the manager within a period of 14 days from the date the draft budget was sent or first displayed;
		(d)	after the end of that period, prepare a budget specifying the total proposed expenditure during the financial year;
		(e)	send a copy of the budget to the owners’ committee or, where there is no owners’ committee, display a copy of the budget in a prominent place in the building.
	(3)	Where, in respect of a financial year, the manager has not complied with subparagraph (2) before the start of that financial year, the total amount of the management expenses for that year shall—
		(a)	until he has so complied, be deemed to be the same as the total amount of management expenses (if any) for the previous financial year;
		(b)	when he has so complied, be the total proposed expenditure specified in the budget for that financial year, and the amount that the owners shall contribute towards the management expenses shall be calculated and adjusted accordingly.
	(4)	Where a budget has been sent or displayed in accordance with subparagraph (2)(e) and the manager wishes to revise it, he shall follow the same procedures in respect of the revised budget as apply to the draft budget and budget by virtue of subparagraph (2).
	(5)	Where a revised budget is sent or displayed in accordance with subparagraph (4), the total amount of the management expenses for that financial year shall be the total expenditure or proposed expenditure specified in the revised budget and the amount that owners shall contribute towards the management expenses shall be calculated and adjusted accordingly.
	(6)	If there is a corporation and, within a period of 1 month from the date that a budget or revised budget for a financial year is sent or first displayed in accordance with subparagraph (2) or (4), the corporation decides, by a resolution of the owners, to reject the budget or revised budget, as the case may be, the total amount of management expenses for the financial year shall, until another budget or revised budget is sent or displayed in accordance with subparagraph (2) or (4) and is not so rejected under this subparagraph, be deemed to be the same as the total amount of management expenses (if any) for the previous financial year, together with an amount not exceeding 10% of that total amount as the manager may determine.
	(7)	If any owner requests in writing the manager to supply him with a copy of any draft budget, budget or revised budget, the manager shall, on payment of a reasonable copying charge, supply a copy to that person.
	(8)	For the purposes of this paragraph, ‘expenditure’ (開支) includes all costs, charges and expenses to be borne by the owners, including the remuneration of the manager.”

Evidence

22. It appears from the evidence of the Chairman of the 2^nd plaintiff that in both 2002 and 2003 the 2^nd plaintiff through the 1^st plaintiff prepared the budget for the following year.  According to him this was done “in accordance with Schedule 5 and/or Schedule 7 and/or the provisions in the said DMC”.  The budget was approved by the Management Committee of the 2^nd plaintiff without objection by any owner.  A notice and minutes of the meeting are produced as is a notice to the owners publishing the approved budget.  It is said that the budget was “also” posted up at a notice board on the 1^st floor of the building.  The witness also exhibits a copy notice to the Management Committee seeking its comments as required by the Ordinance and a subsequent copy notice to the owners announcing that no comment had been received from the owners in respect of the budget.  There is no specific evidence that the documents were individually posted or delivered to the owners.  The notices bear “Faxed” chops but it is not made clear that they were faxed to the owners. 

23. The defendant through its consultant says (in an affidavit in the earlier proceedings, but adopted for these proceedings) that there was never any consultation with the Owners’ Committee prior to preparation of the budgets; they were not posted up as required and there was never any AGM.  Therefore, the budgets are invalid.  Further, it is said that the Owners’ Committee was not validly appointed in that it did not include a representative of the shop floors, and that the maintenance of and contributions to a sinking fund, required by the DMC was also in breach of the provision of the DMC.  The latter points do not concern us for the purposes of this appeal.

The DMC and the Ordinance

24. It appears to me that the Ordinance, by the provisions set out above, provides a complete code of procedure for the fixing of the total amount of management expenses for the financial year, the making of the annual budget and its approval by the owners.  Where there is inconsistency the statutory provisions supersede the provisions of the DMC and obviously will apply where there is no corresponding provision in the DMC.

25. Unlike the DMC the 7^th Schedule provides for what is to happen if the owners are not given notice of the budget, or if, in an owners’ meeting, they do not approve it.  Until the manager complies with the notice requirements in paragraph 1(2) the total amount of management expenses is deemed to be the same as in the previous year.  After he complies, his budget is followed.  Where there is a corporation, as there is in this case, it may decide within one month from the manager’s compliance, by a resolution of the owners reject the budget and, if that happens, then until another budget is duly notified and approved, the total management expenses are be deemed to be the same as in the previous year plus a maximum of 10%.

26. I accept that the legislature intended the budget to be subject to the scrutiny of the owners, but it does not follow that there is any duty on the manager or the corporation to hold a general meeting or an AGM to ratify the budget.  By section 34D(4) the resolution referred to in paragraph 1(6) is defined as a resolution passed at a general meeting of the corporation convened and conducted in accordance with the 3^rd Schedule.  That Schedule provides for the management committee to call AGMs according to the timetable set out and to call a general meeting at any time for such purposes as it thinks fit, but it also provides that the chairman of the management committee shall convene a general meeting of the corporation at the request of not less than 5% of the owners for the purposes specified by such owners within 14 days of receiving such request.

27. It is argued that the Ordinance should not be construed to water down the rights of the parties under the DMC.  But it does not.  If the owners do not like the budget they, or 5% of them can call a meeting to attack it.  They do not need to wait for an AGM to approve or disapprove it. 

28. It is true that there is a dispute as to whether the defendant received notice of the budget.  Its witness says that the budget was never posted up.  This, it is said, is a triable issue.  But, as I see it, this makes no practical difference.  Under paragraph 1(6) of the 7^th Schedule, if the notice requirements, including posting are not complied with, the total amount of management expenses is deemed to be the same as in the previous year.  As may be seen from the plaintiff’s documents, the individual contributions did not increase. 

29. It follows that any dispute over the validity of the budget, and the assessment of the management expenses to be paid, could only be academic.  It would make no difference to what the defendant ultimately had to pay.  It affords no defence.

Counterclaim

30. The defendant says that it had entered into a joint venture agreement with one Dragonland Trading Ltd, which was the tenant of property on the 2^nd floor of the same building, to set up a medical centre on the ground floor within the defendant’s portions.  The defendant agreed to complete the renovation and fitting out work for the medical centre on or before 31 March 2001 so that the other party could take over possession of it on that day for letting out.  The defendant was guaranteed rent at $170,000 per month for 18 months from 1 April 2001 to 30 September 2002.  But, says the defendant, the 1^st plaintiff on 12 February 2001 locked up the entrance to the hoarded area giving access to the part of the defendant’s portions of the ground floor where the fitting out work was being done.  Further, in breach of an implied term of the DMC the 1^st defendant unreasonably withheld written consent for the work to be done.  The work could not be completed in time; and so the defendant lost the deposit it had paid its architect, of half the architect’s fees; and it lost the 18 months’ guaranteed rent. 

31. In the Defence and Counterclaim it is pleaded that a Mr Fung of the 1^st plaintiff indicated to Mr Pena of the defendant that it was the 1^st plaintiff’s practice to charge 10% of the total value of the fitting-out work, to which Mr Pena did not agree.  Thereafter the 1^st plaintiff withheld the granting of written consent. 

32. From the pleadings in the consolidated action and in the contemporary correspondence it appears that the dispute was rather about the demolition or alteration of an electric switch room, to which the 1^st plaintiff objected.  From the correspondence it appears that the problem arose on 23 March 2001; any earlier incident of locking up the entrance does not seem to have made any difference to the works.  The defendant through solicitors claimed that it could not get into the work site from 23 March onwards; but the same solicitor’s letter of 2 April 2001 indicated that the defendant was to commence the “alteration and addition” works on 2 April 2004.

33. It does not, therefore, appear that the breach of the implied term pleaded is supported by the contemporaneous documents. 

34. Whether or not there was any implied term or any breach of it, there does appear to have been some delay as a result of which the work was not completed before 31 March 2001.  However, it is argued for the plaintiffs that the defendant’s allegations of loss are mere allegations.  That seems right.  There is a quotation from the architect company which shows that 50% of its fee was payable on acceptance of the offer, but nothing to show that the architect did not complete the work.  There is nothing to show when the work was completed and no correspondence to indicate either that Dragonland Trading Ltd repudiated the joint venture because the work was not completed on time or, if it did not repudiate, that it did not pay the defendant the guaranteed rental income for the full 18-month period.

35. I do not see, therefore that the defendant has raised an arguable counterclaim.  If I am wrong in this, however, it is also to be noted that the same counterclaim is being used to counter the claims in the consolidated action.  The total of all the claims is about $8 million; well in excess of the counterclaim.  The counterclaim cannot set off all the plaintiff’s claims.

36. Perhaps more important is the question of connection between the claim and the counterclaim in this action.  The principles are set out in paragraph 14/4/14 of the Hong Kong Civil Procedure 2004, as follows :

“	(a)	where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to defend to the extent of the set-off and the court has no discretion;
	(b)	where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;
	(c)	where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;
	(d)	where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay;
	the lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case(p.294) (United Overseas Ltd v Peter Robinson Ltd, 26 March 1991, CA, Transcript 91/0297, per Bingham LJ).”

37. The defendant does not seem to have a legal set-off here.  That was defined by Lord Dennning MR in “The Brede” [1973] 3 A.E.R. 589 as applying only “where the claims on both sides are liquidated debts or money demands which can be ascertained with certainty at the time of pleading.” These cross-claims in order to found a legal set-off “must arise out of separate transactions”.  I do not see that the defendant’s claims can be ascertained with certainty.  There needs to be proof of whether the joint venture proceeded, and if it did not, what the losses were. 

38. For equitable set-off to apply it must therefore be established, first that the counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other, per Simon Brown LJ in Esso Petroleum v.Milton [1997] 1 WLR 938 at p.950D. 

39. Here I do not see that there is such a close connection.  It is true that the plaintiff’s claims arise out of breaches of express terms of DMC and the counterclaim is said to arise out of the breach of an implied term of the DMC, but that seems to be the only connection.  The subject matter is entirely different.  In fact, the implied term pleaded is that the 1^st defendant would carry out its services with reasonable skill and care, and for the benefit of the owners.  But if, because of a dispute, the 1^st defendant padlocked the hoarding — for that is what the defendant’s solicitor says in his letter of 26 March 2001 — that is not a matter of lack of skill and care, it is a matter of trespass.  If it is a matter of skill and care, the incident itself is not connected with the non-payment.  I do not see any close connection and I do not regard it as manifestly unjust to allow the plaintiff’s claim to be enforced without regard to the defendant’s claim, particularly where that claim is being used as a counter to other claims for management expenses. 

40. I therefore take the view that the plaintiff is entitled to judgment, without a stay pending the resolution of the counterclaim.  It is not necessary to draw a distinction between the position of the 1^st and 2^nd defendants although the counterclaim, having come into existence before the incorporation of the 2^nd defendant, is brought only against the 1^st defendant.  In fact I do not think there is a distinction; I accept the submissions of Ms Chow that in 2001 the 1^st plaintiff was acting as agent and representative of all the owners in matters concerning the management of the building and other rights and duties under the DMC, and that on incorporation such rights and liabilities passed to the 2^nd defendant.  But that is academic now.

41. As to the interest ordered, this is provided for by the DMC.  The master ordered costs on the indemnity basis.  The DMC provides for costs on the solicitor and own client basis.  I presume that indemnity costs were ordered because while the DMC provides for the manager to have costs against an owner who defaults in payment of management expenses on a higher basis than the party and party basis, there is no provision in Order 62 of the Rules of the High Court for the solicitor and own client basis.  While costs are discretionary, I do not see that the order should be disturbed here.

42. The appeal is dismissed with costs to the plaintiff to be taxed if not agreed.