YICK FUNG HOLDINGS LTD v. SANDWOOD LTD

CACV 209/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 209 OF 2008

(ON APPEAL FROM DCCJ NO. 1355 OF 2007)

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JUDGMENT

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is the plaintiff’s appeal from a judgment of HH Judge Leung dated 18 April 2008 awarding the defendant the costs of the action including the costs of the trial, save that the plaintiff should have the costs of the adjournment on the third day of the trial.  At the conclusion of the hearing judgment was reserved which we now give.

Background

3.  This is an unusual case.  The trial which lasted eight days was conducted solely to determine the question of costs.  The plaintiff had commenced the action for a mandatory injunction to compel the defendant to reinstate part of the external wall of its unit but before the commencement of the trial reinstatement had taken place.  Thus there was no substantive relief that the court could have granted, the plaintiff having abandoned its damages claim.  As will become apparent from the chronology of events set out below, in my view, the eight-day trial could and should have been avoided had certain simple and elementary steps been taken timeously.  It is to be regretted that that did not occur.

4.  The plaintiff was the developer and the first owner of Wah Tat Industrial Centre, comprising three blocks on a podium in Kwai Chung, New Territories.  The development was completed in stages, between 1985 and 1988.  While many of the units have been sold off, the plaintiff retains ownership of various parts of the Centre including the external walls of the three blocks.  Under the deed of mutual covenant dated 25 September 1985 drafted by the plaintiff, the plaintiff was required to maintain the external walls.  

5.  The judge found that the plaintiff’s presence was to be found in the Centre throughout the 20 years since the completion of the development: it operated a car park, it provided loading and unloading services to the owners and occupiers of the Centre, it operated a sales office and remained the owner of over 60 factory units.

6.  The defendant acquired one of the units on the second floor of Block B in 1993.  By then, a number of owners had already altered the appearance of the external walls of their units, for example, by installing air conditioning units and metal frames of various types and by cutting away part of the external wall under the windows and installing, in its stead, a pair of doors.  Several years later, the defendant decided to install a pair of doors in order to allow the lifting of machinery for its printing business directly from outside the block into the unit and, in October 1997, it caused part of the external wall under the windows to be cut open for that purpose, after obtaining permission from the then manager of the Centre to do so.

7.  The incorporated owners of the Centre did not come into existence until mid-1995.  In 2003, it commenced proceedings (HCA 4580/2003) against the plaintiff in respect of disputed rights over various parts of the Centre including rights pertaining to the external walls.  Judgment was handed down in February 2006.  While resolving most of the disputes in favour of the incorporated owners, Poon J held that the plaintiff was entitled to exclusive possession of the external walls.  The plaintiff’s appeal against part of the judgment was dismissed in June 2006.

8.  In August 2006, the plaintiff’s solicitors sent letters to individual owners including the defendant demanding reinstatement of the external walls of their units which had been altered.

9.  The present action was brought in October 2006. The plaintiff’s pleaded case against the defendant was based entirely on alleged breaches of the DMC, including paragraph 13 of the Fourth Schedule, viz.:

“13.  Not to alter …the shape of the exterior walls of the said Building except in accordance with a resolution passed under Clause 10 of this Deed.”

The plaintiff sought a mandatory injunction for reinstatement of the external wall.

10.  In a home-made defence filed on 9 November 2006, the defendant pleaded, inter alia, that it had arranged with a contractor to carry out reinstatement works to the external wall before 30 November 2006 although reference to this was omitted from the amended defence filed in January 2007, after solicitors had been instructed.  Acquiescence was and remained one of the defences to the plaintiff’s claim.

11.  It is apparent from the photographs in the appeal bundles that there is no question but that alterations involving doors being installed by cutting the external walls would be visible from the podium.  As the judge observed, it is something that “must be obvious to anyone having a glance upwards”.

12.  Plainly, when the sole purpose of the proceedings was to seek reinstatement of the external wall, it is surprising, to say the least, that after receipt of the original defence and certainly by the end of 2006, the plaintiff had not bothered to verify whether or not reinstatement had taken place as asserted by the defendant.  After all, that did not require anything more than an upward glance at the relevant exterior wall of Block B.  At that stage, costs would have been minimal and by no stretch of the imagination could they have been a sticking point in settling the dispute.

13.  Then, in witness statements filed in June 2007 on behalf of the defendant, it was stated that the external wall had been reinstated on 20 November 2006.  Again, the plaintiff failed to take the obvious step to check the veracity of that statement.  The plaintiff did nothing for three months afterwards for which there is simply no explanation, much less any satisfactory explanation.

14.  A month before the trial date, on 17 September 2007, the plaintiff’s solicitors requested proof of the reinstatement.  The defendant provided a letter from the then manager of the Centre and also a certificate from its architect stating that the reinstatement had been in accordance with the provisions of the Buildings Ordinance.  The plaintiff, not being satisfied with what the defendant had provided, instructed its own architect who, on 12 October 2007, issued the requisite certificate after carrying out a scanner test.

15.  The trial commenced on 17 October 2007.  The issue as to costs meant that the trial had to be conducted as if reinstatement had not occurred and the question was whether the plaintiff was entitled to a mandatory injunction.  After a detailed consideration of the facts of this case, the judge found that the plaintiff had acquiesced in the breach of the DMC: it never sought to assert its contractual entitlement to enforce the DMC for 20 odd years, from 1985 to 2006, when during the 20-year period, its presence could be found at the Centre (see § 5 above) and when the scale and prevalence of the practice of owners in opening up the external walls and installing doors was notorious.  The judge concluded that an injunction should not be granted because of that acquiescence and “in any event equity consideration”.

This appeal

16.  Mr Chan Chi Hung SC who appeared for the plaintiff sought to impugn the judge’s finding of acquiescence by contending that (1) it was not within the plaintiff’s power to permit an act that was a contravention of statute and thus illegal; (2) acquiescence required knowledge of the infringement and the judge erred in finding that the plaintiff had the requisite knowledge; and (3) the judge erred in holding that there can be no resumption as such of a negative covenant.

Illegality

17.  Mr Chan initially sought to rely on a building order dated 29 March 2006 served on the plaintiff requiring certain works to be carried out to the exterior of the Centre, the suggestion being that the doors installed by the defendants formed part of the subject matter of that order.  But the building order is concerned with

“ (a)  …loose cracked and otherwise defective concrete …existing exposed steel bars of loose rust and foreign matter…

  (b)  …loose and defective external rendering…”. 

It contained no reference to any illegal structures or any requirement to remove them and reinstate.  In my view, the building order is irrelevant and cannot assist the plaintiff.

18.  It was then said that the illegality consisted of a breach of section 14(1) of the Buildings Ordinance which prohibits the carrying out of any building works without the prior approval and consent of the Building Authority.  In other words, it was asserted that the removal of part of the external wall and the installation of the doors had been done without the requisite approval and consent.

19.  First, Mr Chan advanced what may be broadly described as a social policy argument inasmuch as it was said that certain statutes were not susceptible to waiver by contract or estoppel because of public policy considerations.  As explained by Viscount Ratcliffe in his speech in Kok Hoong v Leong Cheong Kweng Mines Ltd [1964] AC 993 at 1016, this is because of the need to give effect to “social policy” in the interests of the public, irrespective of what the parties may have created by their conduct or otherwise.  Even so, it would appear that

“before a court so holds, it will consider whether the public policy embodied in the statute outweighs the demands of justice in the particular case, requiring for its furtherance that the unfairness that is the foundation of the estoppel should go unremedied.”

See Spencer Bower, The Law Relating to Estoppel by Representation, 4^th ed. p. 162.

20.  Mr Chan then cited, inter alia, the following passage from the judgment of Yuen JA in The Incorporated Owners of Champion Court v Pang Ping Fan Peter & Ano, unreported, CACV 317/2006, 23 May 2008 as illustrative of the general social policy said to underlie the current approach of the courts in enforcing DMCs:

“17.  …that incorporated owners cannot acquiesce in the retention of illegal structures is by now well-established.  The rationale is that since it is not within the power of incorporated owners to expressly permit illegal structures to be constructed, it is consequently not within their power to acquiesce in their retention: see e.g. The Incorporated Owners of Chungking Mansion v Shamdasani, Murli Pessumal [1991] 2 HKC 342 and  The Incorporated Owners of Hoi Luen Industrial Centre & anor v Ohashi Chemical Industries (Hong Kong) Ltd [1995] 2 HKC 11, where Godfrey JA held:

“What cannot be done expressly cannot be done impliedly.  Although equity will sometimes restrain a plaintiff in the exercise of his legal rights because it would be inequitable and unjust in all the circumstances to allow him so to exercise those legal rights, equity will not hold him bound by acquiescence to allow something which he could not have allowed by express grant”. ”

He submitted that it was therefore not within the plaintiff’s power to have acquiesced in a breach of the DMC.

21.  But as Miss Rachel Lam (who appeared for the defendant) very ably put it in her persuasive argument, the position of the incorporated owners is very different because they are under a statutory duty to enforce the DMC.  The incorporated owners are not in a position to acquiesce in breaches of the DMC because of the duties imposed on them by section 18(1)(c) of the Building Management Ordinance, Cap. 344.  The plaintiff, as the owner of private rights, namely, the exclusive possession of the exterior walls, is at liberty to waive any infringement of its rights and there is nothing to prohibit it from so doing.  In my view, the general social policy argument does not arise on the facts and, certainly, no case has been made out for extending the policy considerations behind section 18 of the Building Management Ordinance to private parties.

22.  Further, I agree with Miss Lam’s submission that each case must depend on its own facts.  Here, not only did the defendant succeed in establishing its defence of acquiescence, the judge considered that, in any event, a mandatory injunction should not issue because he did not consider that it would be equitable to do so given the facts of the case.  In other words, the judge did not consider it either fair or just to grant injunctive relief.  So, acquiescence aside, the plaintiff has to surmount a further hurdle before it can succeed on this appeal.

23.  Focusing on the pleaded claim, it is at once apparent that the complaint is about breaches of the DMC, specifically, of paragraph 13 of the Fourth Schedule (as to which see § 9 above) and not about contraventions of section 14 of the Buildings Ordinance or, for that matter, of any of the regulations made thereunder.  In any event, any contravention of the Buildings Ordinance would be a matter for the Building Authority and not the plaintiff.

24.  The defence to the plaintiff’s claim for breach of paragraph 13 is acquiescence.  Assuming (without deciding) that the installation of the doors contravened section 14 of the Buildings Ordinance, the fact that that illegality emerges as part of the background will not preclude a party from raising a defence such as acquiescence so long as that party is not forced to plead or rely on the illegality as part of its defence.  See Tinsley v Milligan [1994] 1 AC 340 at 376C-E, 377A-C.  The defendant finds itself in that position.  It is therefore not precluded from raising acquiescence as a defence.

25.  For those reasons, I consider Mr Chan’s illegality argument to be misconceived.  It falls to be rejected.

Knowledge for acquiescence

26.  The judge found (at § 62) “the scale and prevalence” of infringements such as opening up the external wall to make access for machinery “sufficiently notorious in the Centre throughout the past 2 decades” and that it was “not realistic” for the plaintiff to deny knowledge of the widespread infringements.

27.  The plaintiff contended that for the defence of acquiescence to succeed, it must be shown that the plaintiff had specific knowledge of the particular individual breach at the specific time each breach occurred.  Hence, it was said that the judge was in error in holding (at § 53) that

“it matters not whether it is proved that [the plaintiff] was aware of the particular opening made by [the defendant].”

28.  As to requisite knowledge, Miss Lam helpfully and accurately set out the following propositions, distilled from the authorities, with which I agree:

“ (1)  It is sufficient that at the relevant time the party concerned knew of the facts or matters that gave rise to his right to equitable relief, even although he may not have fully understood, as a question of law, the rights that he possessed.  The paramount question relates to the justice or injustice of granting the particular relief that is sought and the degree of knowledge required in any situation must depend on all other circumstances.  See Spry on Equitable Remedies, 6^th ed., pp.440-442.

  (2)  It is thus sufficient that the party knew the facts “constituting the title to relief”.  See Spry, p.431; Lindsay Petroleum Co. v Hurd (1874) L.R. 5 P.C. 221 at 241.

  (3)  It is ordinarily sufficient that the plaintiff has been put on suspicion, that is, that he is aware of sufficient matters to raise in his mind a doubt whether an infringement of his rights has taken place.  See Spry, p.431; Marquis of Clanricarde v Henning (1861) 30 Beav. 175, 54 E.R. 855.”

29.  Applying those principles, the judge was plainly entitled to reach the conclusion that he did that the plaintiff had the requisite knowledge and no exception could be taken to his view that equity would not assist the plaintiff simply because it did not know that particular breach by the defendant particularly when the defendant’s breach did not differ from the others in both form and gravity.

30.  The judge’s approach is also consistent with Privy Council’s decision in Attorney General of Hong Kong v Fairfax Ltd [1997] HKLRD 243.  The question in that case was whether the Crown as landlord had abandoned a covenant contained in a Crown lease that only individual villa residences be erected on the lot (subdivided into 28 sub-plots) by acquiescing over very many years in the development of the whole of that lot in a manner inconsistent with the covenant.  It was held that the fact that the defendant was unable to lead evidence showing specifically that any relevant servant of the Crown aware of what was going on did not preclude proof of knowledge.  As Lord Browne-Wilkinson stated in his speech (at 246C):

“   In the absence of any explanation the only possible inference from the fact that over a period of forty years multi-storey blocks have been built over virtually the whole of Lot 757 is that everyone, including the Crown, must have been aware of those facts.  An area of 2 1/2 acres has been transformed into an area of high-density high-rise buildings.  It would take compelling evidence, which is lacking, to rebut the inference that everyone concerned with that land was well aware that it was not being used for villas.  As Leonard J said in the Court of Appeal: “The suggestion that the Crown as landlord did not know of the development is unrealistic”.”

Resumption of rights

31.  Mr Chan took issue with the holding that a resumption of rights by reasonable notice has no application to negative covenants and is restricted to reviving rights under positive obligations of the defaulting party.  Put differently, if acquiescence were established, could the plaintiff nevertheless have resumed its rights in 2006 on reasonable notice?

32.  The first objection raised by Miss Lam is that this matter has not been pleaded and has never been the plaintiff’s case.  That aside, she submitted that the judge’s analysis was correct.  The “rights” with which paragraph 13 of the Fourth Schedule is concerned is the right to require the defendant “not to alter … the shape of the exterior walls …”.  The act of alteration had occurred and concluded in 1997.  Once a negative covenant is abandoned, for example, through acquiescence, that would be the end of the matter as there would be nothing left in the covenant that could be resumed.

33.  Given that the resumption of rights was not an issue in the action, the question posed is academic and should not have been entertained below.  It would follow that the correctness or otherwise of the judge’s holding has no relevance to this appeal.  Accordingly, it is unnecessary to address the merits.  I would merely observe that the abandonment of a negative covenant would, in practical terms, be equivalent to foregoing the benefit of that covenant.  Once foregone, it is difficult to see how it could revive.

Conclusion

34.  I would dismiss this appeal.  I would also propose that there be an order nisi of costs in favour of the defendant.

Hon Hartmann JA:

35.  I agree.

Hon Rogers VP:

36.  There will accordingly be an order in terms of § 34.