THE INCORPORATED OWNERS OF KA WOO BUILDING v. LANDPARK LTD

CACV4146/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO.4146 OF 2001

(ON APPEAL FROM LDBM NOS.89, 90 & 183 OF 2001)

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J U D G M E N T

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Hon Waung J (giving the judgment of the Court) :

1. Ka Woo Building ("the Building") situated at 131-137 Woosung Street, Kowloon was erected in 1980, for mixed domestic and commercial usage. The Basement, the Ground Floor, the 1st and 2nd Floors are for commercial use and the 4th to 17th Floors are for domestic use. The 3rd Floor is a duct floor.

2. The mutual relationship of the owners of the Building is governed by a Deed of Mutual Covenant dated 27th August 1980 ("DMC"). By the 8th Schedule of the DMC, the shares in the Building are allocated as follows :-

Basement (Commercial)	15 shares
Ground Floor A (Commercial)	14 shares
Ground Floor B (Commercial)	8 shares
Ground Floor C (Commercial)	8 shares
1st Floor (Commercial)	6 shares
2nd Floor (Commercial)	6 shares
3rd Floor (Duct Floor)	1 share
4th to 17th Floors (Domestic)	1 share for each unit namely 28 shares in all
Main Roof	1 share

The Commercial units therefore take up some 58 shares out of a total of 87 shares in the Building.

3. Clause 7(c) of the DMC provides as follows :-

"The shares which each owner shall be liable to pay or contribute towards the management and maintenance expenses shall be calculated paid and borne in the proportions set against the respective units in the Ninth Schedule hereto provided that the owners of the Ground floor units and the whole basement shall not be required to contribute towards the cost of maintaining lifts in the said Building. In apportioning the management and maintenance expenses of the said Building, those costs incurred for the benefit of the owners of the non-domestic portions of the said Building shall be charged solely to the owners of the non-domestic portions of the said Building, those costs incurred for the benefit of the owners of the domestic portions of the said Building shall be charged exclusively to the owners of the domestic portions of the said Building and those costs incurred exclusively for the benefit of the owners of the said Building generally shall be apportioned between the owners of the non-domestic portions and the domestic portions of the said Building in such manner as the Manager shall consider to be fair and reasonable in the circumstances. Any work carried out on the structure and the painting or lime wash for the external walls of the said Building shall generally be deemed to be for the benefit of all the owners."

4. The 9th Schedule of the DMC provides as follows :-

"DOMESTIC BLOCKS/SECTION

Flats "A" and "B" on the Fourth to the Seventeenth (inclusive):- each flat/unit shall contribute 1/87th part or share of the costs for the maintenance of the said Building.

NON-DOMESTIC SECTION

The First floor shall contribute 6/87th parts or shares of the costs for the maintenance of the said Building. The Second floor shall contribute 6/87th parts or shares of the costs for the maintenance of the said Building. Shops "B" and "C" on the Ground floor: each Shop shall contribute 8/87th parts or shares of the costs for the maintenance of the said Building. Shop "A" on the Ground floor shall contribute 14/87th parts or shares of the costs for the maintenance of the said Building. Basement contribute 15/87th parts or shares of the costs for the maintenance of the said Building.

Third floor (Duct Floor) and the Main Roof shall not contribute any expenses or costs for the maintenance of the said Building."

5. The respondent herein Landpark Ltd ("Basement Owner") became the owner of the Basement in 1999 and paid the monthly management fees required by the applicant manager of the Building ("IO") until early 2000. Historically the management committee ("Committee") which controls and runs the IO has always drawn most if not all its members from owners of the domestic units. In 2000, the Basement Owner started to query the monthly management fees charged by the IO and complained that the commercial units had been overcharged and that no proper documents had been given to the Basement Owner showing how the monthly management fees imposed by the IO were calculated in accordance with the DMC. There was also complaint about the IO not taking steps to remedy the water leakage problems in the Basement. The Basement Owner refused to pay the monthly management fees starting from April 2000.

6. Proceedings therefore were commenced by the IO in the Lands Tribunal against the Basement Owner for payment of some 17 months of arrears of management fees at the monthly rate of $7,685.00, later amended to $7,643.12. The Basement Owner counterclaimed against the IO for damages suffered as result of the non-repaired leaking pipes in the Basement and for production of accounts and financial records for the period from January 1999 onwards which would show the items of expenses to be separately borne by the domestic portion and non-domestic portion.

7. At the trial before the Presiding Officer of the Lands Tribunal ("the Judge") four witnesses gave evidence for the IO and Mr Cheng, the director of the Basement Owner, gave evidence for the respondent. By his Judgment dated 18 December 2001 ("the Judgment"), the Judge dismissed the Counterclaim and gave judgment in favour of the IO for the outstanding arrears of management fees in the sum of $129,933.04.

8. The Basement Owner appeals to the Court of Appeal against the Judgment except in respect of the dismissal of the Counterclaim relating to damages for leaking pipes. At the hearing of the appeal, it is agreed that there are only three issues for determination by the Court of Appeal :-

1st Issue : Whether there was an implied term (as found by the Judge) that the Basement Owner has the obligation to pay the amount demanded by the IO even though such amount may be found to be not in accordance with the DMC;

2nd Issue : Whether the amount found by the Judge to be payable by the Basement Owner is a sum calculated in accordance with the DMC; and

3rd Issue : Whether the Basement Owner is entitled to the production of the back-up records and documents of the IO for the purpose of ascertaining the matter of charging/appropriation or apportionment of expenses between the domestic and non-domestic portions of the Building.

Implied term

9. The real issues between the parties in this litigation is whether the IO has any contractual right to charge the Basement Owner management fee :- (a) without explaining how it was arrived at; (b) without appropriating/charging or apportioning the expenses between the domestic portion and non-domestic portion; and (c) without deducting from sums to be appropriated/charged or apportioned the lift expenses.

10. There was certainly no issue of implied term in the pleadings. Nor did this issue feature in the written final submissions of the parties. The Judge unfortunately held in his Judgment that there is an implied term of the contract that the Basement Owner is contractually obliged to pay management fees of any demanded sum even if such sum may subsequently be found to be not in accordance with the DMC and that the remedy of the Basement Owner is restricted to seeking a refund of the excess when so ascertained.

11. Objection was raised by the Basement Owner to both the manner of the making of this finding of implied term as well as to the correctness of the finding. It is unfortunate that in his enthusiasm to do justice, the Judge overlooked the requirement that issues must be decided in accordance with the pleaded cases of the parties. An implied term such as this is very unusual and if relied upon as part of the pleaded case of the IO, will require pleadings of facts to support such a plea. No evidence on this unpleaded issue was led or considered. The finding of implied term in my judgment must be set aside.

12. It is strictly speaking not necessary for us to consider the correctness of that finding of implied term. But we are of the view, having heard argument on the point, that there is no legal basis for this finding of implied term. Without going into any detailed analysis, it seems to us that in the circumstances of this case, the finding of implied term offends against the well-accepted conditions necessary for the establishment of implied term. These conditions are clearly set out in Lewison on Interpretation of Contracts, para.5.03 as follow :-

"In order for a term to be implied the following conditions must be fulfilled:-

(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that it goes without saying;

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract."

13. Having regard to the lack of factual foundation for this non-pleaded issue, there was really no basis for the Judge to make any finding of implied term. It is highly questionable that in the context of deeds of mutual covenants of multi-storey buildings in Hong Kong and of this particular DMC, that it could be said that conditions (1), (2), (3) and (5) of Lewison are satisfied.

Is Judgment amount in accordance with DMC?

14. The primary objection of the Basement Owner to the Judgment is that the Judge did not fairly apply the important key provision of the DMC but instead accepted uncritically the evidence from the IO and from the Committee made up mostly of domestic owners. A correct understanding of the relevant provisions of the DMC is therefore essential.

15. The structure of this DMC makes it clear that although the commercial owners take up two thirds of the total shares in the Building, the payment for the management and maintenance of the Building is not to be on that basis or in accordance simply with the number of shares held by each owner. The result of a careful compromise was reflected in the DMC and in particular in the key Clause 7(c) of the DMC, so that all management and maintenance expenses are to be charged, appropriated and apportioned in a fivefold calculation :-

Firstly, by charging the costs incurred for the benefit of the owners of the commercial portions of the Building to solely the commercial owners ("1st Calculation);

Secondly, by charging the costs incurred for the benefit of the owners of the domestic portions of the Building to solely the domestic owners ("2nd Calculation");

Thirdly, by apportioning the costs incurred for the benefit of the owners of the Building generally between the owners of the domestic portions and the owners of the commercial portions in such manner as the Manager shall consider to be fair and reasonable in the circumstances (3rd Calculation");

Fourthly, in appropriating costs and expenses under the aforesaid three calculations, to exclude the owners of the Ground Floor and Basement from any liability or contribution in respect of costs of maintaining lifts in the Building (4th Calculation");

Fifthly, in cases where the 1st, 2nd, 3rd and 4th Calculations are not applicable to some expenses, to apply in relation to only these expenses the 9th Schedule of the DMC, namely on basis of the shareholding of the units.

16. All costs and expenses incurred by the IO must therefore be subject to these fivefold calculations and each owner is entitled under the DMC to the proper application of the contractual provisions by the Committee.

17. That the DMC intends that there is to be no automatic allocation of all expenses to the 5th Calculation or the 3rd Calculation of "Building benefit generally" is made clear by the last sentence of Clause 7(c) where works done to external walls either by way of work on structure or by way of painting or lime wash of external walls are deemed to be for the benefit of all the owners. If there is to be a blanket application of expenses on the proportionate shareholding basis (which would of course be grossly unfair to the commercial owners), then there is simply no reason to set out in such detail, the last sentence of that Clause as well as the provisions therein relating to the 1st Calculation, 2nd Calculation and 3rd Calculation. The guideline in the last sentence provides a clear instruction to the Committee that not all work done in the Building fall into the 5th Calculation or 3rd Calculation category. Work for example done to the common parts internal walls will not be considered for the benefit of all the owners. If all the common parts internal walls of the Building are repainted, then what is contractually required by the DMC is for those costs incurred for the painting of the commercial portions to be charged to the commercial owners (per 1st Calculation) and those costs incurred for the painting of the domestic portions to be charged to the domestic owners (per 2nd Calculation). If therefore $30,000.00 had been incurred, in total, for the painting of all the common parts internal walls of the Building and by reference to areas painted, 20% is for the commercial, 75% is for the domestic and 5% is exclusively for the benefit of the building as a whole such as the caretaker office etc., then the proper application of the DMC would require the commercial owners to be responsible for 20% of $30,000.00 (namely $6,000.00), the domestic owners to be responsible for 75% of $30,000.00 (namely $22,500.00). The owners as a whole shall only be responsible for 5% of $30,000.00 (namely $1,500.00) to be apportioned by the Manager amongst the domestic owners and commercial owners as provided in the 3rd Calculation. Based on the above, the Basement Owner will pay for the internal wall painting, its share of the commercial portion painting namely 15/57 of $6,000.00 or $1,579.00, plus its fair share of the "Building benefit generally" of $1,500.00, let us say a maximum of $259.00 (on the basis of per shareholding in the Building, i.e. 15 out of 87 of $1,500.00) or the total sum of $1,838.00. This is a very much lower figure than any distorted application of the entire $30,0000 under the 3rd Calculation or a simple application of the 9th Schedule under the 5th Calculation, producing a much larger sum of $5,172.00 (15/87 times $30,000.00).

18. The evidence shows that the Committee adopted historically inherited figures for the various units (going back many years) and then simply applied to these figures a periodic percentage increase as the current management fee payable for the various units. No regard was given in any year as to whether any part of the various expenses was for the benefit of the commercial portions, for the benefit of the domestic portions or for the benefit of the building generally and to make appropriate apportionment. What is objectionable with this approach is that it assumed that the historic figures were in accordance with the DMC fivefold Calculations (which is doubtful) and that this sanctions the Management (composed mostly of domestic owners) imposing monthly management fees which are biased in favour of the domestic owners. The result is an unfairness to all the commercial owners and in particular to the Basement Owner and the Ground Floor Owner who enjoy one further advantage over the other commercial owners in that Clause 7(c) expressly exclude the Ground Floor and Basement from bearing any of the lift maintenance costs.

19. At the hearing before us it was said that the Judgment was based not on historic figures but on actual expenditure apportionment The Table relied upon by the IO at page 175 of the Bundle and set out by the Judge at paragraph 8.6 of the Judgment clearly shows the erroneous conclusion of the Judge and of the IO that the Basement Owner had not been overcharged for the reason that 15/87 of the total monthly expenses produces a monthly figure for the Basement (H) which is more or less the same as the monthly management fee demanded (C). The Table only serves to demonstrate that there had been no proper application of the DMC Calculations. The demanded monthly fee (derived from the historic figure) was defended on the basis that it was no more than 15/87 of the total expenses. What it clearly demonstrates is that there was no apportionment or even attempted apportionment under the 3rd Calculation between the domestic and commercial. Even a 50/50 apportionment between the domestic and the commercial would have resulted in a much more favourable figure for the commercial owners.

20. It was argued before us that notwithstanding the non-application of the contractual provisions of the DMC or at least the lack of any demonstrable documentary application of the DMC, nevertheless the Basement Owner had not been over-charged. It cannot be denied that there is no document which shows how the monthly maintenance fee sought by the IO against each owner was arrived at in accordance with the DMC Calculations. In the absence of a document which shows the fivefold Calculations required under Clause 7(c), I do not see how it is possible for the IO to demonstrate that the Basement Owner had not been overcharged or had been correctly charged which is really the critical question on this appeal. Absent the implied term, the IO has not shown (so far) that it is entitled to the Judgment sum entered by the Judge. The Judgment therefore must be set aside.

21. There is an alternative basis for our conclusion that the Judgment must be set aside and that is because the Trial went wrong when there was no proper appreciation by the Lands Tribunal and by the IO as to the true nature of the 3rd Calculation. What is required by the 3rd Calculation is not an apportionment amongst the owners in accordance with their shareholdings but an apportionment between two sets of interests namely the domestic and the commercial owners under the 3rd Calculation. The words used are "shall be apportioned between the owners of the non-domestic portions and the domestic portions of the said Building ..." (underlining supplied). Take for example the three items of heavy expenses which feature constantly in the evidence and in the budgets, namely the caretaker wages, the cleaner wages and lift maintenance. The demands and usage by the domestic and the commercial portions in relation to each item are not the same. If the lifts are more heavily used by the domestic than by the commercial (only 1st and 2nd Floors of the Commercial use the lifts as opposed to 4th to 17th Floors) then a proper apportionment under the 3rd Calculation in respect of lift maintenance costs might be 80% for domestic and 20% for commercial. On the other hand, the cleaning done might reflect an apportionment of say 60% domestic and 40% commercial. The caretaker wages might even reflect an equal usage so that a 50/50 apportionment is more reasonable in the circumstances. What is important is to appreciate that there can be no automatic global formula to apply to all the expenses and the contract demands a proper application of the provisions of the DMC. This had not been done and the Judgment must therefore be set aside. I will order a Re-Trial before a differently constituted Tribunal.

Counterclaim for documents

22. The matter of Counterclaim for the documents can be disposed of fairly quickly. Having regard to the fact that there will be a Re-Trial it is not necessary for us to express any concluded view on the Counterclaim.

23. It was most unfortunate that due to a technicality the Judge refused to make an order for discovery of the relevant accounting documents on the material dispute of whether the expenses ought to be charged/appropriated under the 1st Calculation, 2nd Calculation, 3rd Calculation and 4th Calculation and on the proper apportionment under the 3rd Calculation. The nature of the expenses and therefore the documents in respect of all the expenses are relevant. What the Basement Owner sought is more than the accounts but the primary documents such as the bills, quotations, invoices and vouchers etc. There is no contractual entitlement in the DMC to these primary documents although in the relevant Schedule of the Building Management Ordinance there are references to these documents. But whether there is a cause of action or not, there can be no doubt that these documents are not irrelevant. We see them as being highly relevant and primarily discoverable. The matter of the discovery of these documents ought to be properly dealt with prior to the Re-Trial so that the new Trial can proceed on a fair determination of whether any of the various costs (as evidenced by the primary documents) had been properly calculated, charged, appropriated or apportioned in accordance with the contractual Calculations under the DMC.

Costs of the appeal

24. In the circumstances, as the Basement Owner has succeeded in this appeal, we make an order of costs nisi that the costs of the appeal be to the Basement Owner Appellant and that the costs below should be costs in the Re-Trial.