THE INCORPORATED OWNERS OF SEA VIEW ESTATE (WATSON ROAD) v. FORTUNA MANAGEMENT LTD

HCA4729/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

ACTION NO. 4729 OF 2003

J U D G M E N T

1.The plaintiff brings this claim against the defendant, its former building manager, for a declaration that their contractual relationship had been determined on 31 May 2003.  The plaintiff also claims an injunction to restrain the defendant from using or occupying the lot upon which its building, Sea View Estate (Watson Road), stands.  Other reliefs pleaded in the statement of claim are not pursued.

Engagement of the defendant as a temporary manager

2.Back in January 2003 the management of the plaintiff’s building was in disarray.  The chairperson had resigned and there was no manager to manage the building.  There was also no insurance for the building or for the public liability of its owners.  Insurance quotation could only be obtained after the management of the building was improved.  The owners in the AGM on 17 January 2003 appointed a new management committee.  They also resolved to appoint the defendant as their temporary building manager.  The resolution reads:

“6.  To resolve that a temporary building manager be appointed for a maximum period of four months.

It was unanimously decided to appoint FORTUNA MANAGEMENT LIMITED to be the temporary building management company for a maximum period of four months, until a permanent building manager is appointed, via tender process.”

3.The owners were then advised by the staff of the Eastern District Office and also a firm of solicitors.  They thought that they needed four months to select a permanent building manager through tender.  Pursuant to the resolution, the chairman, Mr John Lee, on behalf of the plaintiff, engaged the defendant as the temporary manager for four months from 27 January 2003 to 26 May 2003. 

Appointment of Eastpoint as permanent manager

4.On 5 May 2003 the owners held an AGM and resolved to appoint Eastpoint Property Management Limited as the permanent building manager.  By a letter from the plaintiff to the defendant also dated 5 May 2003, the plaintiff proposed to extend the engagement of the defendant to 31 May 2003. 

Defendant’s refusal to leave and its reason

5.However, the defendant refused to hand over the management of the building on 31 May 2003.  Its former solicitors argued that the plaintiff could only terminate the defendant’s engagement by following the procedure stipulated in paragraph 7(2) of the 7th Schedule of the Building Management Ordinance, Cap. 344.  They further said that since that procedure had not been followed, the defendant’s engagement would continue until it was followed. 

6.Subparagraph 7(1), (2) and (4) provide as follows:

“7. Termination of manager’s appointment by owners’ corporation

(1)  Subject to subparagraph (5) and (5A), at a general meeting convened for the purpose a corporation may, by a resolution of the owners of not less than 50% of the shares, terminate by notice the manager’s appointment without compensation.  (Amended 69 of 2000 s. 25)

(2) A resolution under subparagraph (1) shall have effect only if-

	(a)	the notice of termination of appointment is in writing;
	(b)	provision is made in the resolution for a period of not less than 3 months notice or, in lieu of notice, provision is made for an agreement to be made with the manager for the payment to him of a sum equal to the amount of remuneration which would have accrued to him during that period; (Replaced 69 of 2000 s. 25)
	(c)	the notice is accompanied by a copy of the resolution terminating the manager’s appointment; and
	(d)	the notice and the copy of the resolution is served upon the manager not more than 14 days after the date of the meeting.

(4) This paragraph operates without prejudice to any other power there may be to terminate the manager’s appointment.”

Further grounds of defence

7.In its defence and counterclaim the defendant further pleaded that the engagement would commence from 27 January 2003 until the appointment of a permanent property manager via a tender process. 

8.The contract between the plaintiff and Eastpoint was signed on 30 June 2003 and it provided that Eastpoint should commence with its service on 1 July 2003.  On this further line of defence, the defendant’s engagement would only have ended on 30 June 2003 and not 31 May 2003.

9.Counsel for the defendant in closing submissions added a further line of defence, namely that since the defendant was appointed the building manager of the building, it was in the same position as the first manager which was a party to and appointed by the DMC of the building.  Under the DMC, the manager had the right to resign but could not be removed by the owners.  Counsel thus argued that the only way for the owners to terminate the defendant’s engagement was by following the procedure in paragraph 7 of the 7th Schedule of the said Ordinance.  This is thus a further ground why that procedure should be followed.

Was the defendant the same as the Management Company appointed in and party to the DMC?

10.  deal with the last line of defence first.  Clause 6(A)(ii) and (iii) of the DMC provide as follows:

“(ii)

In the event of the Management Company giving notice as hereinbefore provided the Management Company shall forthwith convene a meeting of the Representative Committee as hereinafter provided to elect a manager to take the place of the Management Company and such meeting shall elect a manager who shall on the expiry of the notice given by the Management Company thereupon and henceforth become vested with all the powers and duties of the Management Company hereunder  …  If the Representative Committee fails or refuses to elect a manager as aforesaid the manager shall be the Representative Committee and such appointment shall have effect as if such appointment was made following election by the Representative Committee and shall be binding on the Owners.

(iii)

For the purpose of this Deed, the Management Company where not inapplicable shall mean the Management Company appointed by this Deed or the manager for the time being appointed pursuant to Clause 6(A)(ii) hereof.”

11.However, the role, powers and duties of the management company or manager as referred to in the DMC were not the same as those of the defendant in the capacity of a temporary building manager.  In addition to all the usual powers and duties given to the manager of the building, clause 7 of the DMC bestowed upon the management company the responsibility and the full and unrestricted authority to do all such acts and things as may be necessary or requisite for or in connection with the building, the land and the management thereof.  Clause 28(ii) of the DMC further provides that:

“(ii)

In the event however of incorporation of the owners in accordance with the said Ordinance the Corporation shall be vested with all the right duties and obligations imposed on the Management Company and subject to any provisions herein and any extension or modification thereof,...”

12.The position of the management company or manager as carved by the DMC is very analogous of that to the plaintiff as an incorporated owner.  Once the plaintiff was incorporated, there was no more room or need for the existence of the same management company or manager as before.  Its role would be taken over by the plaintiff.  Any manager appointed by the plaintiff would not occupy the same position as the manager appointed prior to the plaintiff’s incorporation.  Hence I hold that the defendant was not a manager as appointed by or under the DMC.  It was just a temporary manager appointed by the plaintiff pursuant to its powers and duties in the said ordinance.  The defendant therefore could not have enjoyed the security of tenure provided by the DMC to a manager appointed thereunder and before the plaintiff’s incorporation.

Appointment until permanent manager engaged by the plaintiff?

13.The next defence is whether the defendant’s engagement would only have expired on 30 June 2003 upon the appointment of Eastpoint and not on the earlier date of 31 May 2003.  The resolution of the AGM was not worded entirely satisfactorily.  It referred to the temporary appointment for a maximum period of four months but was appended at the end with a phrase saying “until a permanent building manager is appointed, via tender process”.  However, the expression “a maximum period of four months” appeared twice and the owners obviously contemplated that the tendering process would take about four months.  They therefore resolved to engage the defendant for four months.  Another possible construction is that the temporary engagement would last until a permanent manager was appointed but in any event subject to a maximum of four months.  Either way, the engagement would automatically end no later than the expiry of the four months, even if there was still no appointment of a permanent manager.

14.The resolution was not to engage the plaintiff for four months and then extend the engagement to the time when a permanent manager was appointed, if no appointment was made within the four months.  The phrase “appended to the resolution” merely described the event to happen within the four months and not an extension of the engagement. 

15.Nevertheless the terms of engagement might not have been the same as the terms of the resolution because the resolution was not shown to Mr Kong of the defendant when the contract was made verbally between him and Mr John Lee on 25 January.  Mr Kong only saw the resolution on 27 or 29 January.  I therefore have to look at other evidence to find out the terms of engagement. 

16.Mr John Lee, who was responsible for making the contract with Mr Kong of the defendant, said in paragraph 10 of his witness statement:

“10.  At the subsequent Management Committee meeting held on 25 January 2003, at which Kant Kwong, director and General Manager of the Defendant, also took part, the Defendant verbally agreed to accept the Plaintiff’s appointment as temporary property manager for a period of 4 months commencing from 27 January 2003 until 26^th May 2003.  The Defendant’s acceptance of such engagement was duly recorded in the Minutes of the said Management Committee meeting.”

17.The record in the minutes of the management committee meeting was, however, brief.  It merely said that Mr Kong had, in accordance with the appointment in the AGM, verbally agreed to take over the temporary management of the building as from 27 January 2003. 

18.The documents emanating from the defendant may be more telling.  On 27 January 2003 the defendant furnished a letter signed by Mr Kong to the plaintiff.  The first paragraph of the letter said:

“The letter is to confirm that Fortuna Management Limited “Fortuna” is appointed as the transitional Property Manager of the Sea View Estate by IOSVE starting from 27 January to 26 May, 2003 (subject to 14 days notice of termination for both parties) inclusive in accordance with the resolution passed on the General Meeting of the owners of Sea View Estate on 17 January, 2003.”

Both sides agree that the 14-day notice provision had not been incorporated into the contract as the plaintiff did not accept it. 

19.Mr Kong also compiled a Chinese working report dated 17 February 2003.  It started by saying that commencing from 27 January 2003, the defendant was formally engaged by the plaintiff to manage the estate temporarily until a renewed tendering process four months later. 

20.The defendant also submitted a tender compiled by Mr Kong to the plaintiff.  It also referred to the temporary appointment by saying “On 27 January, 2003 we are so pleasant being appointed by the IOSVE as temporary Property Manager for SVE (4 months) under the AGM resolution”. 

21.None of the three documents expressly said that the temporary engagement would last until the appointment by the plaintiff of a permanent manager.  I also note that the letters issued from the defendant’s side from 20 May 2003 onwards made no mention of the temporary appointment would last until the appointment by the plaintiff of a permanent manager.  However, Eastpoint was ready to take over the management from 1 June onwards and the defendant would not have advanced its interests by referring to this.  I will thus not hold the lack of mentioning of this matter against the defendant in considering whether the defendant’s engagement had lasted until 30 June.

22.I now look at Mr Kong’s evidence.  He said in paragraph 12(2) of his witness statement:

“(2)      The appointment would commence from 27^th January 2003 for a period of 4 months until appointment of permanent property manager for the Estate (“the Permanent Property Manager”) via a tender process for the selection and appointment of the Permanent Property Manager…”

23.In his evidence-in-chief he said that the plaintiff had to serve a three-month notice of termination to determine the defendant’s temporary engagement.  However, he added in the same breath that he understood the appointment was for four months until the appointment by the plaintiff of a permanent manager.

24.In cross-examination, he agreed that the term of employment that Mr John Lee had agreed with him was four months and he insisted that he had made it clear to Mr Lee that a three-month notice of termination was required before the engagement could be determined.

25.In re-examination, he further said that he had agreed with Mr Lee to have a four-month engagement with a reasonable notice of termination and he understood that reasonable notice to be of three months.

26.This requirement of reasonable notice or three-month notice cannot be read into the resolution of the AGM on 17 January however one would construe it.  The defendant’s temporary engagement also could not have ended both at the appointment of a permanent manager and at the expiry of a reasonable notice or a three-month notice.  There is also no evidence that such condition of notice of termination was within the contemplation of the owners or Mr John Lee.

27.The contemporaneous correspondence from the defendant’s side also did not mention that there was any agreement for a reasonable notice or a three-month notice.  The demand for notice was made by the defendant’s former solicitors pursuant to the 7th Schedule of the said ordinance and not pursuant to any agreement between the parties. 

28.It was obvious that when Mr Kong was giving oral evidence, he had not made up his mind where to anchor his case.  On the one hand, he was desirous of arguing for a three-month notice, but on the other hand, he wanted to benefit from the poor drafting of the resolution of the AGM on 17 January.  But he could not have the best of both worlds.  In the end he created an impossible case for the defendant. 

29.In fact, before the commencement of the trial, the defendant also argued that Mr Lee had promised the defendant through Mr Kong that if the defendant could provide a satisfactory management service in those four months and also submit the lowest tender for the appointment of permanent manager, the defendant would be appointed as the permanent manager.  On that basis the defendant had also counterclaimed loss of the profits that it would have earned as the permanent manager for two years. 

30.This counterclaim was abandoned only at the start of the trial.  However, the raising of this counterclaim made the defendant’s case look bad and the credibility of Mr Kong low.  This alleged promise did not appear in all the documents sourced from the defendant prior to 11 July 2003.  It was only mentioned for the first time by the defendant in a letter to all owners dated 11 July 2003.  If Mr Lee had indeed made this promise, which was of crucial importance to the defendant, I cannot imagine why it would not have been referred to in the defendant’s documents prior to 11 July 2003.  Mr Kong said that this promise was indeed mentioned in a draft contract supplied by the defendant which had not been signed by the plaintiff and had become lost.  I find this only a convenient excuse.

31.There is a further reason why I do not believe Mr Kong on this allegation.  Mr Kong has been in the building management profession for 17 to 18 years and of which he was in a managerial position for over three years.  He knew that the appointment of a permanent manager for two years could only be decided on by the owners in a general meeting.  The promise that Mr Lee had allegedly made could have resulted in the appointment of the defendant as the permanent manager without the matter being considered in a general meeting of the owners.  Mr Kong knew that Mr Lee could not have made the promise.  When this requirement was raised with him, he said he had forgotten about it.

32.I think Mr Kong must have worked very hard during the defendant’s temporary appointment and was very hopeful that the defendant would obtain the permanent appointment.  However, when the owners favoured Eastpoint, he must have been frustrated.  Out of frustration, he fabricated this alleged promise to block the appointment of Eastpoint.  He could not have forgotten the need for such appointment to be decided on by the owners in a general meeting.  It is a matter too crucial to be ignored or forgotten.

33.All in all, I find Mr Kong an unreliable witness.  I accept Mr Lee’s evidence which was clear and straightforward.  I find that Mr Lee had not made the alleged promise of permanent appointment of the defendant on conditions of good performance and lowest price in the tender.  I also find that he and Mr Kong had agreed that he defendant would only be engaged for four months from 27 January 2003 to 26 May 2003 and he had not agreed to have the defendant’s service to go beyond the four months until a permanent manager was appointed.  The defendant therefore fails in the second line of defence as well.

The applicability of paragraph 7 of the Seventh Schedule

34.Before the introduction of paragraph 7 in the 7th Schedule, there was no way for owners of buildings to terminate the service of those managers who were parties to and appointed by the DMCs if the DMCs did not provide means for termination by the owners.  That scenario was very unsatisfactory as the owners of many buildings were saddled with building managers who did not perform properly.  The introduction of paragraph 7 in the 7th Schedule of the ordinance solved the problem. 

35.However, it is the defendant’s argument that paragraph 7 is a mandatory requirement.  If the contract of engagement between the incorporated owners and the building manager does not provide for termination by notice, then the only way to terminate the contract is to follow the procedure in paragraph 7.  The defendant says this is so regardless of whether the contract is agreed to be for a fixed term or is an open-ended one.

36.I have no difficulty with an open-ended contract without any provision for termination by notice.  Obviously the owners will have to follow paragraph 7 before they can terminate the contract.  They must obtain agreement of the owners of at least 50 per cent of the shares of the lot and the building to the termination, otherwise the contract will just continue. 

37.However, I have difficulty in accepting that this is also the case for fixed term contracts.  If so, paragraph 7 would have taken away the parties’ liberty to agree on the length of their contracts.  The wording of paragraph 7 also does not support such a construction.  Paragraph 7(1) merely says that the owners of at least 50 per cent of the shares can resolve in a general meeting to terminate the appointment by notice without compensation.  It provides a means for the owners to terminate the appointment, but it does not prevent a fixed term appointment to expire at the end of the term.  It does not say that fixed term appointments will not expire by effluxion of time but can only be terminated by the owners’ resolution in a general meeting and in accordance with the procedure in it. 

38.  also do not see any inconsistency between a fixed term appointment and Part VIA and/or the 7th Schedule of the said ordinance.  There is also no ambiguity in the meaning of paragraph 7 of the 7th Schedule.  Since I have found that Mr Lee and Mr Kong had agreed that the temporary engagement of the defendant would only last for four months expiring on 26 May 2003, I would also reject the line of defence.

39.I also note that the plaintiff had by its letter of 5 May offered to extend the defendant’s engagement to 31 May but that offer was not taken up.  Though the defendant continued to provide its service after 26 May, that was not because of its acceptance of the offer.  However, the defendant had been paid up to 31 May and also reimbursed part of its out of pocket expenses for June 2003.  There is no claim relating to the period between 27 May to 31 May that needs to be decided except that the letter might have created a licence for the defendant to remain in the building until 31 May. 

Declaration

40.I therefore declare that the defendant’s temporary engagement had ended on 26 May 2003 by effluxion of time and it was no longer entitled to remain in the lot and the building as the manager from 1 June 2003 onwards.

41.At the end of submissions, counsel for the defendant advised me that if I should decide the claim against the defendant and am prepared to grant the injunction in terms of paragraph 3 of the relief in the statement of claim, namely to restrain the defendant whether by its servants or agents howsoever from using or occupying the plaintiff’s land, then the defendant would undertake to this court in the same terms in return for the court not granting the injunction.  I now accept the defendant’s undertaking in those terms (but only as the manager of the building) and I will not grant an injunction against it.

42.The plaintiff has also prayed for reliefs for delivery up of properties and payment of damages which included the remuneration it had paid Eastpoint for the period between 1 to 26 July when the defendant wrongly held onto the manager’s position.  These have been abandoned and I will not make any order on them. 

43.The defendant has a counterclaim for remuneration for June to August 2003 and also some other expenses.  Since I have held that the engagement had lapsed on 26 May and any licence to remain by reason of the plaintiff’s letter of 5 May would also have expired on 31 May, I will therefore dismiss the counterclaim as well. 

44.Finally, I make an order nisi that the defendant do pay the plaintiff the costs of the action and of the counterclaim.  I have considered whether to apply the District Court scale.  However, this case was transferred from the District Court to this court merely because of the quantum of the counterclaim.  I therefore see no reason why the plaintiff’s costs should be assessed on the District Court scale.