SOUTH CHINA COLD STORAGE & INDUSTRIAL CO LTD AND OTHERS v. THE INCORPORATED OWNERS OF GOLD KING INDUSTRIAL BUILDING AND ANOTHER

CACV 14/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 14 OF 2013

(ON APPEAL FROM DCCJ 3471/2009)

____________

____________

_______________

J U D G M E N T

_______________

Hon Cheung CJHC:

1.  This is the defendants’ appeal from the judgment of HH Judge HC Wong dated 5 October 2012.

The facts

2.  The plaintiffs were the original owners and developers of a property on which an industrial building, known as Gold King Industrial Building, 35–41 Tai Lin Pai Road, Kwai Chung, New Territories, was subsequently built.  The plaintiffs sold all the units in the industrial building to different purchasers, but remain the registered owners of a private road which forms part of the common parts of the building.  Management of the land and building is governed by a deed of mutual covenant (“DMC”).  The 1^st defendant is the incorporated owners of the land and building, whereas the 2^nd defendant is the manager appointed by the incorporated owners to manage the land and building pursuant to the DMC and the Building Management Ordinance (Cap 344).

3.  In June 2008, the defendants caused to be erected on the private road a watchman post, the construction of which required the Building Authority’s consent under section 14 of the Buildings Ordinance (Cap 123).  However, no such consent was ever sought.  In July 2008, the plaintiffs by letter queried the 2^nd defendant whether the Building Authority had approved the construction of the watchman post, but received no meaningful reply.  On 1 November 2008, the Building Authority served a building order on the 1^st defendant requiring the demolition of the watchman post within 30 days.  The 1^st defendant lodged an appeal against the building order on 5 November 2008 but the appeal was subsequently withdrawn.  In the meantime, the 30‑day period for compliance with the building order had lapsed by 1 December 2008, and on 18 December 2008 the plaintiffs wrote to the 1^st defendant demanding compliance with the building order.  There was no reply to that letter.  According to the minutes of the 1^st defendant’s management committee meeting dated 21 January 2009, it was decided that the management office would arrange for the demolition of the watchman post, and would draft the tender documents for the 1^st defendant’s approval and decision.

4.  Before anything along those lines were done, on 19 February 2009 the Building Authority served a new building order, replacing the previous one, on the plaintiffs as registered owners of the private road, for the demolition of the watchman post within 30 days.  This prompted the plaintiffs to seek legal advice from their solicitors (Kenneth CC Man & Co), who immediately wrote to the defendants on 23 February 2009 requiring them to demolish the watchman post in compliance with the new building order within 10 days.  The letters were copied to the defendants’ solicitors (Chung & Kwan).

5.  On 25 February 2009, the 2^nd defendant wrote to the Building Authority regarding the new building order, requesting for an extension of time of 3 months to demolish the watchman post.  It represented to the Building Authority that according to legal advice, whilst the plaintiffs were the registered owners of the common areas, the 1^st defendant, as incorporated owners, was the “actual beneficiary” of the same (“實際受益人”).  The letter was copied to the plaintiffs and their solicitors.

6.  On 28 February 2009, the plaintiffs obtained a quotation for the demolition of the watchman post for $7,500.

7.  On 4 March 2009, the plaintiffs’ solicitors wrote to the 2^nd defendant querying the legal basis on which it stated in its earlier letter to the Building Authority that the 1^st defendant is the actual beneficiary (“實際受益人”) of the common areas of the building (including the private road).  The letter pointed out that the building order was directed at the plaintiffs as registered owners of the common parts, and that non‑compliance with the order might render the plaintiffs liable for prosecution under the Buildings Ordinance.  The 2^nd defendant was therefore asked to take immediate action to comply with the building order within 3 days, failing which the plaintiffs would proceed to appoint their own contractors to comply with the order without notice and to commence legal proceedings against the defendants for relief and costs.

8.  On 14 March 2009, the defendants’ solicitors replied to the plaintiffs’ solicitors’ letter dated 4 March 2009, referring the latter to an authority and suggesting that regarding the issue of the building order, “perhaps your clients [that is, the plaintiffs] may lodge appeal”.

9.  By a letter dated 16 March 2009, the plaintiffs’ solicitors wrote back to threaten proceedings against the defendants in view of their failure to demolish the watchman post up to that time.

10.  By a letter of the same day, the defendants’ solicitors replied that their clients were prepared to remove the watchman post but they needed time.  The solicitors did not understand why the plaintiffs threatened to issue proceedings “when there is no dispute on liability”.

11.  By a letter dated 11 March 2009, which was only posted on 19 March 2009 and received by the plaintiffs on 20 March 2009, the Building Authority informed the plaintiffs that pursuant to an application by their “representative” the Building Authority agreed to extend the time for demolition to 20 May 2009.

12.  On the same day, the plaintiffs through a Mr Chan telephoned the Building Authority and informed the latter that the 2^nd defendant was not the plaintiffs’ “representative”.  The judge found that this “caused the [Building Authority’s] withdrawal [of] the time extension for compliance” (para 51), thus restoring the deadline for compliance with the building order to 20 March 2009.

13.  According to the minutes of another meeting of the management committee of the 1^st defendant held on 24 March 2009, the 2^nd defendant had already obtained a quotation for the demolition of the watchman post and the contractor concerned was only able to undertake the work on 8 April 2009 at the earliest.

14.  On 8 April 2009, the watchman post was removed by the 2^nd defendant’s contractor.  On 14 April 2009, the Building Authority wrote to the plaintiffs confirming that the building order had been complied with.

15.  By a letter dated 13 May 2009, the plaintiffs through their solicitors demanded payment from the defendants of $67,510 being the legal costs they had incurred as a result of the building order.  A bill was attached to the letter.  According to the bill, no less than 15 hours of solicitors’ work had been performed ($57,000); counsel fee of $10,000 had been incurred, and there was another sum of $510 for miscellaneous expenses.

16.  Further correspondence between the solicitors followed in which liability for the legal costs claimed was disputed, which eventually led to the commencement of proceedings on 29 July 2009.

The proceedings below

17.  Originally, the defendants disputed liability but on the first day of trial, the defendants through counsel accepted that they had acted in breach of the DMC by erecting the watchman post without obtaining the consent of the Building Authority.  The remaining issues were whether the defendants were liable to compensate the plaintiffs for the legal costs claimed and the amount thereof.

18.  The judge obviously thought that the plaintiffs had over-reacted to the entire situation and had only themselves to blame for the legal costs incurred:

“51. While I appreciate the plaintiffs would feel anxious that their ownership of the common areas of the Building should not be disturbed by the IOC’s failure to demolish the structure before the expiry of the time specified by the BA, I failed to understand why the plaintiffs should have caused the BA’s withdrawal the time extension for compliance. The plaintiffs’ Mr Chan might be correct in calling up the BA to clarify that the defendants were not authorised by the plaintiffs when they made the extension application, it is inconsistent for the plaintiffs not to obtain an extension of time to enable the IOC and the management company to instruct a contractor to remove the structure. …

52.    That being the case, it is difficult to understand why the plaintiffs would feel there is a need to obtain legal advice to the extent of giving instructions to issue proceedings against the IOC and the management company.  The plaintiffs may wish to seek independent legal advice on the s 24(1) order if they are not satisfied with the answer from the BA on the demolition order or the advice of the IOC’s legal adviser, it is a different matter for the plaintiffs to instruct their own solicitors to engage counsel to take out injunctive proceedings against the IOC and the manager. …”

19.  The judge also considered it wholly unreasonable for the plaintiffs to have incurred over $67,000 in legal costs when the quotation they had obtained to demolish the watchman post was only for $7,500.

20.  It is clear from the transcript of the final submissions that the judge heard submissions from counsel on both sides on how, if at all possible, she could, on the evidence available, award part only of the legal costs claimed by the plaintiffs to them which she would consider to be reasonable.  However, the judge did not discuss any of this in her judgment.  After saying that “the plaintiffs have a duty to mitigate their loss and not to take up unnecessary litigation” (para 54), the judge simply dismissed the plaintiffs’ entire claim for damages (para 55).  She added that “the plaintiffs have failed to act prudently or co‑operate with the [1^st defendant] that resulted in incurring legal expenses unnecessarily, it was self-induced”.  She also awarded the costs of the action to the defendants.

The arguments

21.  In this appeal, Mr KM Chong (who did not appear below), leading Ms Yvonne Yip (who appeared at trial), submitted on behalf of the plaintiffs that the judge erred in a number of aspects. Essentially, counsel argued that the judge, having accepted that it was reasonable for the plaintiffs to seek legal advice after receipt of the building order, ought to have allowed the claim for the legal expenses actually incurred in total, in the absence of any plea of failure to mitigate, to act prudently or to co-operate with the 1^st defendant – they were not issues pleaded in the defence.

22.  Mr Paul Wu (who did not appear below), for the defendants, supported the judge’s reasoning and decision to the following extent.  He accepted that it was reasonable for the plaintiffs to seek legal advice after receipt of the second building order.  However, he pointed out that the plaintiffs had known from the management committee meeting on 21 January 2009 that the defendants had resolved to demolish the watchman post.  After the issue of the second building order, the defendants had clearly indicated to the plaintiffs that they were going to demolish the watchman post and all they needed was time.  Counsel therefore contended that once the plaintiffs learned of the Building Authority’s extension of time on 20 March 2009, there was no reason for them to continue seeking legal advice and thus incurring further costs.  Mr Wu argued that the judge was right in finding that the plaintiffs had overreacted to the situation, but accepted that even in that scenario, the plaintiffs would still be entitled to claim the legal costs incurred up to 20 March 2009.  He submitted that such legal costs should be in the region of $30,000.

Liability

23.  Liability in the present case is beyond dispute.  The defendants had obviously acted in breach of the DMC, an instrument binding on the plaintiffs and all co-owners (and thus the incorporated owners), by erecting on the private road the watchman post without the consent of the Building Authority.  That led directly to the service of the building order on the plaintiffs.  Nobody has suggested that the Building Authority was wrong in serving the building order on the plaintiffs, as registered owners of the private road: section 24(2)(a) of the Buildings Ordinance.

Causation

24.  There can also be no dispute, and the judge accepted, that it was perfectly reasonable for the plaintiffs to seek legal advice after receipt of the building order.  There are of course civil consequences for non‑compliance with a building order. Moreover, there is a potential criminal liability for non-compliance: section 40(1BA), Buildings Ordinance.  In the present case, the matter was complicated by the fact that whilst the plaintiffs are the registered owners of the private road where the watchman post was erected, the watchman post was under the control of and used by the defendants.  There could be doubts as to whether the plaintiffs could themselves remove the watchman post without the agreement of the defendants. It was reasonable for the plaintiffs to seek legal advice and it was perfectly legitimate for them to instruct lawyers to write to the defendants asking them to remove the watchman post within the deadline imposed by the building order.

25.  I do not agree with Mr Wu, or the judge, that the position changed subsequently.  The only significant thing that happened subsequently was the grant of an extension of 3 months by the Building Authority upon the 2^nd defendant’s application purportedly as representative of the plaintiffs, which was then withdrawn by the Building Authority after it learned of the true position from the plaintiffs.  Both Mr Wu and the judge plainly took the view that the plaintiffs, in light of the Building Authority’s readiness to grant an extension of 3 months, could and should have then taken a more relaxed attitude towards the building order, and adopted a wait and see approach before incurring further costs, particularly costs towards commencement of proceedings.

26.  In my view, one must not lose sight of the real issue here, that is, causation in terms of the reasonableness of the steps taken by the plaintiffs to protect their interest: see generally McGregor on Damages (18^th ed), paras 6‑145 to 6‑151.  Put in context, the question becomes whether it was unreasonable for the plaintiffs to continue seeking legal advice, including legal advice on commencement of proceedings if necessary, regarding the building order, such that the subsequent legal costs so incurred should be regarded as loss caused not by the defendants’ breach, but by the plaintiffs’ own action.

27.  In my view, the answer must be “no”.  As Mr Chong submitted, the history of the matter did not inspire confidence from the plaintiffs in the defendants.  The watchman post was wrongly erected on the private road by the defendants in the first place.  It then remained there for months, despite the service of the first building order.  The plaintiffs had written to the defendants querying the lawfulness of the building work but the latter had chosen not to give a positive reply.  At one stage, they even appealed against the first building order.  After that appeal was withdrawn, whilst the management committee resolved to demolish the watchman post, the defendants were obviously taking their time to do so.  As a matter of fact, nothing was done and not a quotation was obtained until after the service of the second building order and the receipt of solicitors’ letters from the plaintiffs.

28.  Even after the plaintiffs’ solicitors wrote to demand immediate demolition of the watchman post, the defendants through their solicitors took the position that it was basically a matter for the defendants to deal with, and it had really nothing to do with the plaintiffs.  As mentioned, they regarded the 1^st defendant as the “actual beneficiary” of the common areas and said that they would take over the handling of the matter from the plaintiffs.  The 2^nd defendant actually applied for an extension of time as the plaintiffs’ “representative”.  It is important to appreciate all this from the plaintiffs’ point of view.  From the plaintiffs’ perspective, they were being asked by the defendants to leave things in their hands, despite their poor track record.  Moreover, the defendants’ solicitors even suggested that the plaintiffs should appeal from the building order on the ground that it had been wrongly served on the plaintiffs.  I accept Mr Chong’s argument that looking at matters from the plaintiffs’ perspective, it was a most alarming attitude.

29.  In this regard, one must also guard against judging reasonableness with the benefit of hindsight. Of course, we now all know that the watchman post was demolished on 8 April 2009.  But at the time, there was simply no reliable indication as to when the building order would be complied with and what the Building Authority’s attitude would be.

30.  The judge criticised the plaintiffs for causing the withdrawal of the extension of time.  I do not think the evidence supported the finding.  In any event, it must be firmly borne in mind that we are not here to judge the quality of the legal advice obtained by the plaintiffs.  One lawyer may reasonably have advised the plaintiffs to adopt a hard-line approach towards the matter.  Another lawyer may reasonably have advised the plaintiffs to handle it in a more relaxed and accommodating way.  The events must be looked at from the perspective of the plaintiffs as layman at the time.  Once it is accepted, as it should, that it was reasonable for the plaintiffs to seek legal advice following the receipt of the building order, it must follow that they were entitled to rely on the legal advice they got from their advisors, in the absence of any suggestion of incompetence on the part of the latter (of which the plaintiff knew or ought to have known).  There is certainly no evidence that the plaintiffs had chosen to act against any legal advice they got.  Nor is there any evidence that the plaintiffs’ lawyers had advised them after learning of the extension of time of 3 months that they should put the matter on hold for the time being.

31.  For these reasons, the plaintiffs cannot be criticised for continuing to seek legal advice even after learning of the extension of time granted by the Building Authority.  I therefore reject Mr Wu’s argument on causation and differ from the judge on whether the plaintiffs have overreacted to the situation.

Quantum

32.  Turning to the quantum of the bill, it must be remembered that one is not engaged in any costs assessment or taxation exercise here.  The legal costs claimed by the plaintiffs are claimed as the loss and damage they have suffered as a result of the defendants’ breach.  There is no dispute that those costs have been incurred.  In the defence, the plaintiffs were simply put to strict proof of the claimed amount of legal costs.  There was no plea that any particular item of work was unrelated to the building order or that the amount charged was excessive (subject to the causation point discussed already).  As explained, the dispute centred on whether post‑20 March 2009, legal work should continue to be done.  Nor was there any suggestion in the defence that the plaintiffs themselves should – by way of mitigation – have taken the bill to taxation pursuant to the provisions in the Legal Practitioners Ordinance (Cap 159).

33.  In those circumstances, the plaintiffs’ claim must be allowed in full.

Outcome

34.  For these reasons, I would allow the appeal, set aside the order and judgment made below, and in substitution thereof, I would order that judgment for $67,510 be entered for the plaintiffs against the defendants, together with interest at the rate of 4% per annum from the date of writ to the date of judgment (and thereafter at the judgment rate until payment).  I would also award the costs below to the plaintiffs, to be taxed if not agreed.

35.  As for the costs of this appeal, I would make a costs order nisi that they be borne by the defendants, to be taxed if not agreed.

Hon Cheung JA:

36.  I agree with the judgment of the Chief Judge.

Hon Kwan JA:

37.  I agree with the judgment of the Chief Judge.

Hon Cheung CJHC:

38.  Accordingly, the appeal is allowed and the court makes the orders indicated in paragraphs 34 and 35 above.