XCHRX STRATTON PROPERTY MANAGEMENT LTD. v. POFIELD INVESTMENTS LTD.

HCA 11432/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11432 OF 1999

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J U D G M E N T

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Background

1. This appeal concerns a point of construction in respect of the Deed of Mutual Covenant dated 28 April 1981 ["the DMC"] of the United Centre, a building at 95 Queensway Hong Kong. The Plaintiff is the manager of the building. The Defendant is the registered owner of Shop Nos. 1001-104 and 1019 -1043 of the building. Those units were sold to the Defendant in 1994 by BBMB Finance (Hong Kong) Limited as mortgagee in possession. The dispute is about the Defendant's obligation to pay a security deposit under Clause 13(o) of the DMC and the obligation (if any) of the Plaintiff to transfer the deposit paid by the previous owner into the name of the Defendant as new owner under Clause 13(n).

2. In this action, the Plaintiff sued the Defendant to recover the sum of $286,866 as deposit payable under Clause 13(o). The Defendant denied that it was under any obligation to pay because the Defendant said that the Plaintiff was under an obligation to transfer the deposit paid by the previous owner into the name of the Defendant under Clause 13(n). Other arguments had been advanced by the Defendant in past. However, when the appeal came before me, Mr. Chan S.C. appearing for the Defendant did not rely on those other arguments.

3. After close of pleadings, the Plaintiff took out an Order 14 summons on 19 May 2001 and the Defendant took out an Order 14A summons on 1 June 2001. The summonses were heard by the Master on 10 December 2001. The Master granted summary judgment in favour of the Plaintiff and dismissed the Defendant's Order 14A summons. The Defendant appealed against that decision.

4. As I said, at the hearing before me, Mr. Chan only relied on one argument. For that purpose, he applied for leave to amend the Order 14A summons. Subject to question of costs, Mr. Li counsel for the Plaintiff did not object to the amendments. I granted leave accordingly. In its final form, the relevant part of the Order 14A summons asked for determination of the following issues,

"that the following questions of construction be determined by the Court, namely, whether upon the proper construction of the Deed of Mutual Covenant of United Centre dated 28 April 1981:

1. [(a) was no longer relied upon by Mr. Chan];

(b) further or alternatively, upon the transfer of any undivided shares in United Centre, the Manager is obliged to transfer any deposit paid in respect of those shares and still held by him into the name of the transferee of the shares pursuant to the terms of the said Deed of Mutual Covenant and in particular clause 13(n) thereof;

(c) further or alternatively, any discretion conferred upon the Manager under the Deed of Mutual Covenant must not be exercised arbitrarily, capriciously or unreasonably;

2. that if the answer to any one or more of the above questions be in the affirmative, the above-named action be dismissed with costs to be paid by the Plaintiff to the Defendant, to be taxed if not agreed."

The relevant provisions of the DMC

5. Clause 13(n) of the DMC reads,

"Any person ceasing to be the owner of any undivided share in the said premises and the said building shall in respect of the share or shares of which he ceases to be the owner thereupon cease to have any interest in the funds held by the Managers to the intent that all such funds shall be held and applied for the management of the said premises and the said building as herein provided irrespective of changes in ownership of the undivided shares therein PROVIDED that any deposit paid by any such owner and still held by the Managers may be transferred into the name of the new owner of such undivided share AND PROVIDED further that upon the rights and obligations hereunder being released as provided in Clause 21 hereof or upon the said premises reverting to the Crown and no renewal of Crown Lease or further Crown Lease being obtainable any balance of the said funds shall be divided proportionately between the owners of the said undivided shares immediately prior to such release or reversion."

6. The next provision, Clause 13(o) is also germane,

"As security against his liabilities under this Deed, each owner shall deposit with the Managers the sum of moneys equivalent to 3 months maintenance and air conditioning expenses as first estimated by the Managers for each unit as standing deposit and such sum shall not be set off against contributions to be made hereunder."

7. Counsel have referred me to other clauses in the DMC. I do not think it is necessary for me to set out those.

Approach to construction

8. Mr. Chan referred to the dicta of Lord Hoffmann in Jumbo King v. Faithful Properties [1999] 2 HKCFAR 279 at 296,

"The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain. The only escape from the language is an action for rectification, in which the previous negotiations can be examined. But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail."

9. I would respectfully adopt this approach and I do not understand Mr. Li to have argued otherwise.

The submissions of the Defendant

10. Mr. Chan submitted that one should first examine the practical object of the relevant clauses. In the present context, he emphasized that clause 13(o) stipulated that the purpose of the deposit was to serve as a security for the liabilities of the owner under the DMC. It was therefore not meant to be a further management fee or a further contribution to the fund available to the Manager to be utilized for the management of the building. Although Mr. Chan accepted that a discretion is conferred on the Manager by the use of the word "may", he submitted that the discretion under Clause 13(n) has to be exercised with that practical object in mind. In the present circumstances, where there was no outstanding liabilities due from the outgoing owner and the deposit remained there, the Manager was obliged to exercise his discretion by transferring the deposit to the name of the new owner when the previous ceased to have any interest in respect of the same.

11. Mr. Chan accepted that the word "may" in Clause 13(n) does not mean "shall". However, he submitted that there was a duty to exercise the discretion reasonably and in good faith. He relied on the dicta of Leggatt LJ in Abu Dhabi National Tanker v. Product Star Shipping [1993] 1 Ll Rep 397 at p.404,

"Where A and B contract with each other to confer a discretion on A, that does not render B subject to A's uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably."

12. In essence, Mr. Chan's submission was that when there was no outstanding liability, it would be an arbitrary, capricious or unreasonable exercise of the discretion if the Manager did not transfer the deposit into the name of the new owner. This is because such exercise of discretion would be contrary to the practical object of the deposit, viz. as security rather than as contribution to the management fund generally.

13. Hence, Mr. Chan said that in the circumstances of the present case, the Manager was in fact obliged to exercise his discretion by making the transfer. Failure to do so amounted to a breach on the part of the Manager and Mr. Chan submitted that the court could intervene by either decreeing specific performance or awarding damages. Although Mr. Chan did not say so, logically, the court could also intervene by refusing to allow the Manager to sue the new owner for payment of deposit under Clause 13(n) without taking into account of the deposit which should have been transferred.

Submissions of the Plaintiff

14. Mr. Li argued that there was no scope to imply any requirement of reasonableness with regard to the exercise of discretion. He cited the case of The Incorporated Owners of Mai On Industrial Building v. Hedit Ltd., HCA No. A6529 of 1987, 18.12.1987 and Perfect World Co. Ltd. v. Chiang Yiu Chung HCA No. A3712 of 1993, 19.7.1993. In those cases, the court held that when a deed of mutual covenant provided that certain acts were prohibited without the consent of a manager, there was no room for implying that such consent would not be unreasonably withheld.

15. In the alternative, if there was a duty to act reasonably and in good faith, Mr. Li submitted that given the multilateral nature of the rights and obligations as defined by the DMC, the test of reasonableness have to be applied with regard to the interest of all concerned, viz. not confining to the interest of the Manager and the previous owner and the new owner. The interests of the owners of the building should also be relevant. Mr. Li referred to the first part of Clause 13(n) which stipulated that upon the cessation of interest of the outgoing owner in the deposit, all such funds shall be held and applied for the management of the building.

16. Having regard to the interest of the other owners, Mr. Li said that the exercise of the discretion by the Manager in the present case could not be said to be unreasonable.

My analysis

17. Whilst I am prepared to accept that the Product Star test is relevant for construction of Clause 13(n), I think the requirement of reasonableness has to be qualified. In this connection, the dicta of Ribeiro PJ in Regal Success v. Jonlin Limited [2000] 3 HKLRD 597 is relevant. At p.608I to 609D, His Lordship said,

"Where the solicitors, apparently acting in good faith, express their view as to title, the court will not invalidate that opinion on the basis of "unreasonableness" even if its legal basis may be debatable unless the opinion can be seen to be patently wrong or absurd.

Farwell J put the test as follows :-

" ...... what do the judges mean when they talk about unreasonableness? In my judgment, when they are using the word 'unreasonable', they are dealing with a position where the solicitors are not acting in good faith--that is to say, where, to assist their client, and get him out of the contract, or for some other reason, the solicitors refuse to approve the lease, without giving the matter any consideration at all, or where their reasons for disapproval are so patent and absurd that the court can say in a moment: 'This is ridiculous and the solicitors cannot possibly make such an objection as that.' "Caney v Leith [1937] 2 All ER 532 at 538

While it may not be necessary to go so far as to require the opinion to be so objectionable that it suggests bad faith on the part of the solicitor, Farwell J's approach of permitting a challenge only where the objection can quickly be seen to be absurd or ridiculous, is a test that has been widely adopted and is plainly the appropriate approach to "unreasonableness" in this context."

These were said in the context of a sale and purchase agreement containing a provision stipulating that if the solicitor for the purchaser was not satisfied with the title of the vendor, the purchaser could have an option to terminate the agreement. In my judgment, although the context was different, the same principle applies to the present case.

18. In the dicta of Leggatt LJ in Product Star, the objective requirement for the exercise of the discretion was that "it must not be exercised arbitrarily, capriciously or unreasonably". On the facts of the case, Leggatt LJ held that the ship owners had acted capriciously and unreasonably (see p.407). However, Leggatt LJ also observed that the objective test of reasonableness applied by the judge at first instance was inappropriate (see p.407 second column). Although His Lordship did refer to the decision as unreasonable, the fatal finding relied on by him suggested that it was regarded as unreasonable as much as being capricious. So understood, the reference to "unreasonable" by Leggatt LJ fit nicely with the approach of Ribeiro PJ in Regal Success. In any event, if there is any difference between the approach of Leggatt LJ and Ribeiro PJ, I am bound by the latter.

19. If the requirement of unreasonableness is understood in that way, there is no conflict with the cases cited by Mr. Li. (See Cryer v. Scott Brothers (1986) 55 P&CR 183; In Jillas' Application [2000] 2 EGLR 99) The implication of such a term is clearly necessary for the business efficacy of the DMC. It could not be expected that the parties would agree to give the Manager authority to exercise the discretion arbitrarily, capriciously or unreasonably (in the meaning as described by Ribeiro PJ). Hence, the question is whether the reasons given by the Manager for the refusal to transfer the deposit are so patent and absurd that the court can say in a moment: "This is ridiculous and the Manager cannot possibly refuse on those grounds".

20. In paragraph 13 of the Affidavit of Hung Mun Wa filed on 15 May 2001, the Manager gave the following reasons for the refusal to transfer the deposit,

(a) absence of instruction from the previous owner for the transfer;

(b) potential liability of the Manager towards the previous owner;

(c) deposit of the previous owner will be used for the benefit of all owners;

(d) difficulty in enforcement of DMC if the Defendant is excused.

21. I agree with Mr. Chan that the first two reasons could not stand. In the light of the clear provision in Clause 13(n) that the previous owner ceased to have any interest in the deposit, those two grounds were patently absurd. However, it is not so clear with regard to the third reason. Mr. Chan said it would be against the stipulated object for the collection of the deposit, viz. as security, under clause 13(o). Yet, when the previous owner sold the property, the situation became one governed by Clause 13(n). Of course there is a discretion conferred upon the Manager to effect a transfer. But one cannot say that it was envisaged that the deposit must either be used up for the satisfaction of the liabilities of the previous owner or held as security for potential liabilities of previous owner or be transferred to the new owner. A fourth possibility is clearly authorized by the first part of Clause 13(n) which clearly provided that such deposit as held by the Manager shall be held and applied for the management of the building. Hence, I cannot say that it was patently wrong or absurd for the Manager to consider the use of the deposit for the benefit of all the owners.

22. It is fair to say that the fourth reason given by the Manager has not been clearly explained in the Affirmation. However, if the situation was that this practice of collecting deposit from successive new owners have been followed consistently, one could see the difficulty faced by the Manager if the Defendant alone was excused. There is no evidence before me as to whether this was the case and I have to ignore what Mr. Li said to me in connection therewith. However, Mr. Chan told me that the Defendant was not saying that it was being treated in a discriminatory manner when deposit was demanded from it. There is therefore at least a possibility that the fourth reason could be justified and I cannot say it must be dismissed as absurd.

23. On the whole, I cannot be satisfied that the court must say at the end of the day that the Manager has exercised its discretion arbitrarily, capriciously or unreasonably.

24. Mr. Chan submitted that when the DMC was executed, the common intention of the parties was that when an owner sold his unit, his deposit would be transferred to the new owner. Applying the test of Lord Hoffmann, one must give effect to that common intention. With respect, I do not think one can say that there was such common intention. Lord Hoffmann emphasized that the agreement must be construed as a whole and if the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language. In my judgment, it is plain from the first part of Clause 13(n) that one possibility is to have the deposit applied by the Manager for the management of the building. This seems to me to be a sensible option and I see no reason why I should not give effect to the plain meaning of the clause.

My decision

25. It follows that I cannot dismiss the Plaintiff's claim on a point of law or construction. With regard to the Order 14 application, Mr. Chan submitted that if I were not with him on the Order 14A, he should have leave to defend. He identified the following issues as triable issues,

(a) the Product Star point which is essentially a point of law and I have already dealt with;

(b) the question whether the Manager exercised the discretion arbitrarily, capriciously or unreasonably.

26. As I have explained, the second issue depends on some factual background on which evidence is lacking before me (see paragraph 22 above). Should I give leave to defend on that basis? It has to be remembered that in an Order 14 application, the burden is on the Defendant to show that there is a triable issue. Mr. Chan has argued the defence case based on a point of law. Although I agree with him that the discretion has to be exercised in a manner which is not arbitrary, capricious or unreasonable, I do not think it is correct to say that simply because there was no outstanding potential liability on the part of the previous owner, the Manager was obliged to transfer the deposit. The only basis on which Mr. Chan said that the discretion was exercised unreasonably was that the deposit was only meant to be a security. For reasons given, I hold that such attack fail. That being the case, the defence has not advanced before me any other basis to attack the exercise of the discretion (the other arguments previously advanced were not relied upon by Mr. Chan), the position is that I am not concerned as to whether there are other possible line of attacks against the exercise of discretion. The absence of evidence as to how the discretion has been exercised in the past does not matter because Mr. Chan did not rely on that as a ground of attack.

27. I therefore hold that the Master was correct to grant summary judgment in favour of the Plaintiff pursuant to the Order 14 summons of the Plaintiff. Although I would answer question 1(c) in the Amended Order 14A summons in the affirmative, subject to the qualification as to the meaning of "unreasonable" as stated in Paragraphs 17 to 19 above, I would answer question 1(b) in the negative. As to question (2), it is not a pure question of law or a question of construction. It follows that the Master was also correct in dismissing the Order 14A summons of the Defendant.

28. For these reasons, the appeal must be dismissed. I also make a cost order nisi that the Defendant pays the Plaintiff's costs of the appeal, such costs to be taxed if not agreed.