THE INCORPORATED OWNERS OF PROVIDENT CENTRE v. WHAMPAO PROPERTY MANAGEMENT LTD

LDBM 268 OF 2002

 IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT Application No. 268 of 2002

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J U D G M E N T

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1. The Applicant was incorporated in August 2002. By that time the then building manager, the Respondent, had accumulated a surplus of about 12 million which was held as cash deposits at the bank account of the Respondent. Shortly after its incorporation, the Applicant asked for the transfer of cash deposits at the bank to the bank account of the Applicant.  Apparently and understandably the Respondent wanted to retain a certain part of the funds. Despite various discussions and meetings between the parties taken place for a period over a month, the parties did not reach any agreement on the arrangement for the transfer of funds. The strain between the parties must have been more serious than that which was willingly admitted by the witnesses. However subtle and slight the strain might have been initially, it developed into a serious and open dispute when the legal adviser (‘CMS’) of the group to which the Respondent belonged took over the discussion.

2. There were complaints about the attitude of CMS and other representatives of the Respondent.  All these were not relevant or have become irrelevant in these proceedings. The first significant event as rightly drawn to my attention by Mr. Lau, counsel for the Applicant, is the sending of a cheque to the Applicant’s then solicitors (‘L & C’) on 7^th November 2002.  This cheque was made out to the name of the Applicant in the sum of $9.6 million representing part of the funds held by the Respondent.  The covering letter stipulates a condition for the release of the cheque to the Applicant, namely the production of the minutes of the requisite resolution of the management committee. There is no dispute that such condition was later satisfied. Despite that the Applicant for some bizarre reasons did not seek to present the cheque for payment.  Apparently the Applicant was acting on legal advice in refusing to accept the transfer of this huge sum.   The whole idea of asking for the transfer of the funds is at the very least that the Applicant would feel more secure to keep its own funds than to leave it in the hands of the Respondent as one of the Applicant’s witness put it “ better in my pocket than in yours”. Although Mr. Lau dissociated himself and those presently instructing him from such legal advice, with his characteristic gallantry he came to the rescue of L & C and attempted to defend the soundness of the legal advice and the decision of the Applicant. With great sympathy to him he could do no better than to elaborate on the reasons hinted at in the letter of 29 November 2002 of L & C to CMS.  Mr. Lau argued that accepting the cheque would jeopardise the position of the Applicant in seeking the transfer of all funds to it, namely about $12 million, as the cheque was not offered in part and partial settlement. Mr. Lau sought support in the relevant correspondence between L & C and CMS.

3. The covering letter for the cheque of $9.6 million states that:

“ We have been instructed by our client to deliver to you a cheque in the sum of HK$9.6 million ---being the balance of the fixed deposits.  Our respective clients have agreed that our client shall retain a sum of HK$2,636,097.76 for the purpose of fulfilling the fund requirement for November 2002.(please see the attached Appendix for the breakdown)” .

This sum was estimated by the Respondent to be the monthly average of the annual budget. 

4. In their letter of 29 November, L & C asked CMS was to confirm their own understanding that the offer of the cheque of $9.6 million was paid in part and partial settlement of the indebtedness.  In reply to which CMS in their letter of 6 December refuted such understanding.  However the basis for refutation was spelt out clearly in their letter.    

5. From the above correspondence which was drawn to my attention by Mr. Lau, one can see two obvious points. Firstly it was not disputed by CMS that the Respondent was holding funds to the order $12 million. Secondly the only dispute related to the funding requirement of the Respondent and procedures for approval by the Applicant of the funding.   

6. The above covering letter would not have been too difficult to understand, had the Applicant let common sense prevail.  It is unnecessary for L & C to clarify the offer with CMS. According to the terms of the letter, once the requisite minutes of resolutions was produced to CMS, the condition would have been complied with and L & C could release the cheque to the Applicant for presentation to the bank.  If such course was adopted, there was nothing to prevent the party from carrying on with the dispute about the funding arrangement and in the event of failing to reach agreement, cashing the cheque would not have compromised the chances of success of taking legal action if it saw fit to do.

7. If the refutation in the letter of CMS represented a change of mind and position of the Respondent and operated to prevent the Applicant from accepting the cheque, as Mr. Lau appeared to argue, such consequence was brought about by the unnecessary request for clarification.  However, the correct interpretation of the correspondence, especially in the light of the history of dispute, does not support Mr. Lau’s argument.  CMS stated clearly in the letter the basis of refutation which was nothing but claiming the right of the Respondent to retain the balance of the funds.  It cannot be interpreted to mean that the Applicant could not present the cheque for payment without compromising their right to the balance of about $2.6 million. 

8. Furthermore, by the time L & C sought clarification on the offer of the cheque, it was the last but one day of November.   Not much of the balance of $2.6 million which the Respondent had initially retained for November expenses would have been left, if any.  Assuming the worst imaginable scenario that the Applicant was presumed to fear, namely that accepting the cheque meant it had foregone the right to claim the immediate transfer of the balance, it would not have been worthwhile at all to pursue the matter. It is not a question of hindsight as suggested by Mr. Lau. Cashing in the cheque is the obvious course that should have been taken and simple common sense dictates that such course should be taken irrespective of what legal advice it had received. At least one of the management committee member who happened to give evidence for the Applicant tended to agree with this.  I sincerely hope that no individual owner of the estate has been led into believing that this litigation involves a question of $12 million.

9. Mr. Lau also attempted to justify the Applicant’s decision of not cashing the cheque. He referred me to the letter of CMS dated 3 January 2003 for support.  On the contrary this letter does not support the decision not to cash the cheque but makes it more puzzling. There was some intervening correspondence between respective legal advisers of the parties.  The on going  dispute about provision of funds was getting worse. In the mean time the Applicant terminated the management contract of the Respondent.  In the said letter of 3 January CMS once again reiterated their position on the transfer of funds, only this time with some finality. They stated in the letter that:

“ The sum of $9.6 million represents the whole credit balance  which is transferable to your client and the payment of this sum is the full and final payment of such management funds held by our client. ----

“ The present bank balances—are as follows:

-Current account---: $66,863.45

-Time deposits---:  $500,00.01

“ Since your client served a notice of termination on 17 December---management and security staff will have to be made redundant.  Our client has retained the balance of funds in the above bank accounts for related termination payment---”

If the Applicant had not previously understood Respondent’s position on the cheque, this letter should have left the Applicant in no doubt that the cheque could be cashed without admitting anything. This letter made it clear that the Respondent was not going to make any further transfer of funds for the time being.   In view of the termination of the management contract, final account has to be rendered to the Applicant. CMS made it clear that no further transfer of deposits would be made before all accounts had been finalised.   Mr. Lau simply failed to convince me that this letter could justify the decision by the Applicant not to cash in the cheque.

10.  Looking at all circumstances and the correspondence, I cannot see any useful purpose that could have been served by not cashing in the cheque of $9.6 million.  I must come to the conclusion that there is in fact none whatsoever.

11.  Another curious feature in the conduct of the Applicant is that in the middle of negotiation or discussion about the transfer and other matters between the respective legal advisers it initiated the present legal proceedings in person on 21 October 2002. As to why he did not engage L & C in taking out the present proceedings, I really do not understand. The only relief the Applicant sought in the Notice of Application is for the transfer of $12 million bank deposits to it.  The Notice of Application was served on the Respondent in the same month.  The Notice of Opposition was filed in January 2003. In which Notice of Opposition the position of the Respondent is the same as that expressed in the correspondence I have referred to .  It is clear that the Respondent maintained that it had returned $9.6 million by way of the said cheque and that it had the right to refuse to transfer the balance of the deposits.  The only issue on the pleadings as it stood at the time is over the right for the Respondent to keep the balance.  The Respondent has unconditionally conceited that $9.6 million should be transferred to the Applicant and which transfer had been effected by delivering the cheque.  The Applicant’s cashing in the cheque cannot possibly affect the litigation of the issue over the claim for the return of the balance of about $2 million.  I can only guess the reason for not so accepting the cheque.  It might have been the case that the Applicant wrongly misled himself into the nature of the claim. The Applicant or its adviser drew the simple but entirely wrong analogy.  They must have thought it was debt claim and that accepting a partial sum would mean foregoing the balance. The analogy they should have drawn is as follows.  A person has sent his ten cars to a garage for repairs. A dispute arises as to costs of repairs and the car owner refuses to pay.  The garage operator has refused to return all the cars claiming a lien over them for repair costs. After negotiation and initiating proceedings for the return the cars, the garage operator offers to return nine of the cars but insists on his right to a lien over the remaining car.  Is there any logic in the car owner’s refusal to take back the nine cars? Can a car owner in such a situation and with his own interests in mind rightly think he should leave all the cars with the garage until the dispute has been determined in court or otherwise, particularly when he trusts himself more than the garage operator in keeping the cars safe?

12.  The correspondence shows that the present solicitors (‘MKL’) started to act for the Applicant in place of L & C about March 2003. In his letter of 16 April 2003, MKL had the good sense of asking for a replacement cheque for the $9.6 million, giving the reason that L & C refused to release the cheque to the Applicant.  By this time, the Respondent has also changed its solicitors and has engaged the present solicitors (‘D & P’). Both counsels for the parties did not address me on the significance of the allegation by MKL that L & C refused to release the cheque. I assume that nothing significant turns on that. In any event, D & P refused to issue a replacement cheque.  By requesting a replacement cheque MKL apparently wanted to adopt a more sensible approach than previously adopted by the Applicant or its former solicitors for that matter.  Regrettably, MKL fell back to the previous position when they returned the cheque on 6 May. It is alleged that the cheque has become stale. It is not necessarily  the case that the bank will not honour a stale cheque. No argument on this point was presented on behalf of the Respondent by its counsel, Mr. Man. This is perfectly understandable. This point is irrelevant.  The Applicant through MKL manifested the intention of not presenting the cheque for payment. In the meantime not only did the Respondent refuse to issue a replacement cheque, it had already lodged its counter-claim for expenses it had incurred on behalf of the Applicant. The dispute between the parties has reached a point which cannot be resolved before taking the final account.

13.  On the pleadings as it now stands, the Applicant is in effect claiming what is due to the Applicant as indebtedness. The relief sought in the Amended Notice of Application reads: “ –the Applicant claims for payment and return of all the fixed deposits of about HK$12 million from the Respondent forthwith or such amount as shall be found due by the Respondent to the Applicant after audited accounts shall have been rendered by the Respondent to the Applicant.”  The defence to the main- claim is that the Respondent is entitled to keep the balance of the deposits and therefore has fulfilled the obligation to transfer the funds to the Applicant when they delivered the cheque of $9.6 million. Its counter-claim is for expenses it has incurred on behalf of and for the Applicant.  The fundamental point for the counter-claim must be that the Respondent could not have used the fund of $9.6 million set aside to meet the said cheque.

14.  The Respondent ceased to be the building manager as from 1 April on the termination of its contract by the Applicant. Since then the final accounts rendered by the Respondent to Applicant has been scrutinised by the Applicant’s auditor. In his opening Mr. Lau informed me that now only three items in the final accounts would be disputed.  I believed at that time and I was given to understand that the dispute would not be anything like doing a whole scale auditing work at the trial. This is one of the reasons for me to permit the trial to proceed not strictly on the pleadings.  The other obvious reason is to save unnecessary costs of the party. I believed then and I still believe that determining these disputed items would put an end to the dispute of the two parties once and for all.

15.  Mr. Lau stressed in his submissions that the Applicant had not yet received a single cent of the funds whatever amount it should be. Neither he nor Mr. Man addressed me on the right of the Respondent to retain the balance of deposits when they issued the cheque of $9.6 million. The Applicant seemed to suggest that the Respondent was merely a servant and as such was bound to comply with every direction given by the Applicant. This cannot be right. A building manager has its own duty to perform and must exercise its own independent judgment in building management matters. Prima facie there is nothing wrong for the Respondent to keep a sum representing the monthly average of the annual budget.   Counsels did not address me on purported right to retain sufficient funds before the Applicant agreed to take over the obligation to pay the bills itself. I do not think this in dispute. However there was some argument as to what amount the Respondent should retain.  In all circumstances, I do not think it unreasonable for the Respondent to keep itself in funds to the amount of the monthly average of the budget at the time. It could be revised from time to time when a more accurate assessment could be made or other agreeable procedure had been worked out. Regrettably none was in place. Each party insisted on its own right. Without the assistance from counsel in respect of the relevant provisions in the management contract or in the deed of mutual covenant, I do not find the Respondent in breach of any of these provisions.  In any event I do not believe this is a genuine dispute between the parties. If it has been the issue could have been determined speedily back in 2002 when the Applicant filed its claim for the return of the whole sum of $12 million. It would have also failed as matter of hindsight on the evidence.

16.    The case has been argued at the trial by the Applicant more like a debt claim than a building management matter. The crux of the case for the Applicant is that now that the account has been finalised and the Respondent has not yet returned the money to the Applicant.

17.  One of items in dispute relates to the costs of staff members who served both the Applicant and the owners in the commercial portion of the estate. Initially Mr. Lau raised a number of points in this respect. Some of them have now been fairly and rightly abandoned. The only remaining point is the apportionment.  The Respondent apportioned the costs by reference to the undivided shares. Mr. Lau submitted that this is not fair. It should be assessed on actual time basis or some other basis. He submitted that the Respondent had the burden to justify the basis before the Respondent could charge the apportioned costs to the account of the Applicant.  This proposition appears to be sound.  In a similar case, the apportionment can be made as accurately as the parties require.  I would not say the method adopted by the Respondent is the best.  However one must not lose sight of the costs involved in devising an ideal system of apportionment and of the costs of working the system.  Employing professionals in different fields, say, economists, surveyors, actuaries, costs accountants, statisticians etc. to conduct an intensive and extensive survey over a long period and to devise a method of apportionment will certainly provide a better apportionment system.  If the Respondent had done exactly that which would have invariably incurred colossal fees for these professionals, it will certainly and rightly be criticised by the Applicant for squandering management funds.  In my view it is a question of reasonableness.  First I find that it is reasonable to arrange for the staff member in question to serve both the Applicant and the commercial owners.  I do not think there can be any dispute on that.  It would cost each of them more if each were to employ their own staff.  The remaining question is apportionment. The apportionment suggested by Mr. Lau is not workable.  The method must be very tedious if it has to be carried out to serve the purpose.  The Respondent adopted the conventional method commonly resorted to in the building management industry.  Such method of apportionment had been applied all these previous years in the instant estate.  It is not unreasonable for the Respondent to use the same method in the final accounting period of their contract.  I do not find any merit in the challenge of the apportionment of staff costs.

18.  The second disputed item is the payment of expenses in the total sum of $405,206.91 by the Respondent after termination.  On this point Mr. Lau’s argument is as simple as it is strong, namely, that the Respondent is a busy body.  Mr. Man has no answer to this argument.  Mr. Lau must be right.   After termination the Respondent has no duty or authority to effect these payments.   Apparently there is no challenge to the liability of the Applicant to the payees for these expenses.   Therefore the Applicant has not suffered loss or damage.  Claiming for the refund of these payments is very technical. I pressed Mr. Lau to forgo this item but failed as he was bound by his instructions. The Applicant is entitled to rely on this technical ground and this sum must therefore be refunded.

19.  The third item in dispute relates to electricity charges. The major dispute is the appropriateness of the methodology in calculating from the readings of a hundred meters the charges attributable to the Applicant.  The Applicant alleged that the calculation of electricity charges by this methodology is inappropriate. In his closing submission Mr. Lau conceded that in view of the evidence of the witnesses especially his own he could not pursue this point. Only one point remains to be disputed, namely the alleged undercharging of $18,646.03 in 1999.  To rectify this the Respondent debited this item in the final accounts. Mr. Lau’s argument is again very simple and forceful.  There is no evidence to support this. The fact that it appeared in the final accounts is no evidence in the particular circumstances of the case. It is no more than a self-serving assertion.  Mr. Lau is right in contending that the Respondent has the duty to resort to the previous accounts or some other documents or oral testimony to explain how this undercharge came about.  The Respondent simply failed to do that. Accordingly the Respondent cannot rightly deduct this item from the funds of the Applicant.

20.  While I have expressly and impliedly criticised the Applicant for being non-practical and technical, the same comment can apply to the Respondent’s counter-claim.  There was argument at the trial as to why the Respondent did not use the $9.6 million for paying bills.  Mr. Man has been in a very difficult position indeed.  He did not and could not suggest what relief I should give the parties.  He merely submits that the Applicant should get a certain sum.

21.   In view of my finding and to use Mr. Man’s terminology the Applicant should get back $ $6,840,169.25  (i.e. adding back the above two sums of $18,646.03 and $405,206.91 to Mr. Man’s calculation). A declaration to this effect seems to be the appropriate relief. On second thought another relief seems more appropriate.  After the termination of the management contract and the return of the cheque for $9.6 million, the funds still in the hands of the Applicant after finalising the account became a debt due and payable.  The fact that the Applicant was disputing the account or in the course of doing its own auditing did not exonerate the Respondent from not paying the debt due. It is trite law that it is the duty of the debtor to pay the creditor. In any event, the Applicant is always demanding for the return of funds. No such tender was made. Therefore the appropriate order is the one I now give: ‘The Respondent do pay the applicant the sum of $6,840,169.25 with interest thereon at 1/3 of judgment rate from 6 June 2003 until payment.”  This is an unusual case, the question of costs should be reserved for argument.