CHAU CHUN WAI v. INCORPORATED OWNERS OF JOYFUL VILLAS

Building Management Case No. 177 of 1995

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HEADNOTE

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Building Management - Award of Building Service Contract - Tender Procedure - Breach of Code of Practice - Foss v. Harbottle Rule - Consequences of Breach of Code of Practice - Building Management Ordinance, Cap. 344, s. 44

By section 44 of the Building Management Ordinance, Cap. 344, the Secretary for Home Affairs may issue Code of Practice which requires at least 5 tenders for award of any contract for provision of supplies, goods or services of the value likely to exceed $100,000. An owners incorporated awarded a contract for over $600,000 for renovation of the lifts without going through tender procedure as required by the Code of Practice. However, the owners incorporated had issued notice in writing of the proposal to award the renovation contract, with relevant particulars such as quotations obtained from two engineering firms, to all its members the majority of whom replied with consent. Section 44(2) of the Ordinance provides that a failure on the part of any person to observe a Code of Practice shall not of itself render that person liable to criminal proceedings of any kind but any such failure may, in any proceedings whether civil or criminal including proceedings for an offence under the Ordinance, be relied upon as tending to establish or to negative any liability which is in question in those proceedings. One member, the applicant, contended that the award was wrong and members had been misled into thinking that a majority had already agreed to the proposal when the notice setting out the proposal was given.

Held: (1) The requirement of a specific number of tenders by the Code of Practice may be viewed as impractical because an owners incorporated has no control over how many contractors may submit tenders; querae whether the Tribunal has power to declare the relevant provision in the Code of Practice invalid for being unreasonable and impracticable. (2) Section 44(2) of the Building Management Ordinance is very vague on the consequence for breach of the Code of Practice; in any event, that provision does not render a breach conclusive factor for the consideration of any issue of liability. (3) Granted that there is a breach of the Code of Practice, it does not necessarily render the decision of an owners incorporated to incur expenses invalid nor does it necessarily absolve its members from liability to contribute to such expenses. (4) Even if there was breach of the Code of Practice affecting the validity of decision of the owners incorporated, the Foss v. Harbottle rule should apply to owners incorporated and the majority consent has cured the defect. (4) In the circumstances of the case, even assuming there was breach and having regard to section 44(2) of the Building Management Ordinance, no order made.

L.T. Case No. BM177 of 1995

IN THE LANDS TRIBUNAL OF HONG KONG

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JUDGMENT

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The applicant came before me on 7th March, 1996 for determination of a building management dispute. At that stage, the applicant named the chairperson, a lady, of the management committee of the Owners Incorporated of Joyful Villas ("the Owners Incorporated") as the respondent. I explained to the applicant that if he was seeking relief that would bind the Owners Incorporated, and it seemed to me that only the Owners Incorporated could provide the remedies or cause such remedies to be brought about, he should bring proceedings against the Owners Incorporated rather than a member of the management committee. Thereupon, the applicant amended, with leave of the Tribunal, the name of the respondent to the Owners Incorporated. After re-service and other necessary procedure, the parties came before me on 3rd June, 1996 for trial.

2. The parties were in agreement over all the essential facts. The applicant is at all material times the owner and occupier of the unit situate and known as Room 1005, Block 1, 11 Hong Lee Road, Joyful Villas, Kwun Tong, Kowloon. The respondent is at all material times the registered owners corporation for the said Joyful Villas ("the Villas"). The applicant complained of two matters. First, the management committee awarded a contract for renovation of the lifts at the Villas ("the contract") without going through tender procedure as required by a Code of Practice issued by the Authority. This is admitted by the respondent. But the respondent said that before the contract was awarded all members of the Owners Incorporated had been consulted by notice in writing with relevant particulars such as quotations obtained from two engineering firms and each member had given the opportunity to return a written vote on the proposal. This is also admitted by the applicant. The respondent further said that the contract was awarded after receiving support given in writing by the majority of the members of the Owners Incorporated. The applicant, on the other hand, whilst not denying a majority of the members had given written consent, contended that members had been misled into thinking that a majority had already agreed to the proposal when the notice setting out the proposal was given.

3. Secondly, the applicant said that he had been refused the right to inspect minutes of meetings and certain accounts kept by the Owners Incorporated. Mr. Chu for the respondent denied such refusal but undertook to deposit the relevant minute book and documents at the Kwun Tong City District Office within two weeks from today so that the applicant can inspect them. Since the applicant indicated in court that he is happy with this arrangement, this second complaint was no longer a live issue. The Tribunal, therefore, was left with the complaint pertaining to the renovation contract only.

4. Pursuant to section 44 of the Building Management Ordinance, Cap. 344 ("the Ordinance"), the Secretary for Home Affairs may issue a code of practice on building management. It is not disputed that the Secretary for Home Affairs did issue a Code of Practice on Procurement of Supplies, Goods and Services ("the Code of Practice"). According to Paragraph 1 of the Code of Practice, the Owners Incorporated must use tender procedure for awarding any contract for provision of supplies, goods or services likely to exceed $100,000 in value. The consideration for the contract awarded by the Owners Incorporated was in excess of $600,000, so the respondent was bound to follow tender procedure. Paragraph 4 in the Code of Practice further says that,

"The minimum number of tenders to be sought shall be as follows:-

(a) 3 in the case of tenders for supplies, goods or services exceeding a value of $10,000 but not exceeding a value of $100,000; or

(b) 5 in the case of tenders for supplies, goods or services exceeding a value of $100,000."

5. The respondent, no doubt on good advice from Mr. Chu, admitted that no tenders were invited before the award of the contract. Instead, quotations were obtained from respectively a well-known lift supplier and the current maintenance contractor of the lifts at the Villas. The lift supplier quoted over $900,000. The maintenance contractor quoted $600,000 odd. The respondent then issued written notice to all members setting out the quotations obtained, recommended giving the work to the current maintenance contractor and asked each member to file a return to indicate support or objection to the proposal. The polling result was 214 votes for the proposal, 12 objections and 120 members abstained. The respondent justified the award of the contract on such support.

6. Incidentally, Mr. Chu for the respondent told me that before the contract was awarded, the lady chairperson of the management committee spoke with an officer of the ICAC over the telephone about difficulties with following the tender procedure. The problems was that the Owners Incorporated could face problems in future if the renovation contract was awarded to a firm other than the current maintenance contractor for the current maintenance contract might blame the renovation contractor for careless tampering with lifts thereby causing break-downs not covered by the maintenance contract. In such event, the respondent could be caught between two contractors each putting technical problems on the other. Apparently, the ICAC officer expressed sympathy with the predicament of the Owners Incorporated. Mr. Chu readily admits that the opinion of an ICAC officer cannot over-ride the binding effect of the Code of Practice which is, after all, a statutory instrument having the force of law.

7. My immediate reaction to Paragraph 4 of the Code of Practice was that it may be viewed as impractical. A party issuing invitation for tender usually has no control over how many tenders may be forthcoming. If only three contractors are interested in a work programme involving $1 million contract sum, then there would not be enough tenders to satisfy the requirement of Paragraph 4 of the Code of Practice. What happens if there are not enough tenders? Does that mean that the work should never be done even if it is absolutely necessary? I would have thought that it matters not how many tenders are obtained so long as an open invitation for tender has been duly published and followed through fairly. For a while, I wondered if I had the power to and should declare Paragraph 4 of the Code of Practice invalid for being unreasonable and impractical.

8. On the other hand, however, I found that the law is very vague about the consequence for breach of the Code of Practice. Section 44(2) of the Ordinance says that,

"A failure on the part of any person to observe a Code of Practice issued under subsection (1) shall not of itself render that person liable to criminal proceedings of any kind but any such failure may, in any proceedings whether civil or criminal including proceedings for an offence under this Ordinance, be relied upon as tending to establish or to negative any liability which is in question in those proceedings."

It is immediately apparent from the wording that a breach only tends to establish or negative liability, it does not lead to any categorical consequence. It certainly does not enable the Tribunal, as the applicant at one stage suggested, to remove the management committee from office. This case did not call into question any issue of liability. The respondent is not liable to the applicant because he has not paid any contribution towards the expenses for renovation of the lifts. I was told that all except two small owners in the Villas have paid contribution towards the expenses; but the applicant had no locus standi to recover such contribution on behalf of his neighbours nor was he seeking to do so. The respondent was not here suing the applicant for such contribution either.

9. In my view, the Code of Practice only seeks to prescribe a fair procedure for determining whom should be awarded a contract for the provision of supplies, goods or service. It does not go into the matter of justification for an expenditure nor the liability of individual owners for contribution towards such expenditure. For instance, an owners incorporated may properly and lawfully decide that there should be renovation of the lifts and that each small owner must pay so much on account towards the renovation expenses, and then, having collected all the contributions, accepted a single tender for the renovation contract. The acceptance of the single tender may be wrong, but that does not render the decision to renovate the lifts an invalid one and small owners have no reason to refuse to contribute.

10. In the present case, the respondent has properly polled all the members and obtained the consent of a comfortable margin of majority. The applicant said that at least some members might have been led to think that a majority of them had already consented to the proposal. Having studied very carefully the wording of the notice (in Chinese) issued to the members, I would not say the members could have been misled by the notice, for it was couched in the appropriate future tense so that no reasonable man reading it carefully should think that majority support had been obtained. Few members would have bothered to reply in writing as the notice requested had they been misled in the way as suggested by the applicant. Even if we treat the members who abstained as having been misled, their number is not large enough to out-weigh the consenting majority who obviously had not been misled.

11. Granted that there was a comfortable margin of majority consent, I saw no reason why the applicant, being a member of a community, should not be bound by the rule of the majority of his community. Notwithstanding the breach, I should think the logic and common sense behind the Foss v. Harbottle rule applies equally to owners incorporated as it applies to incorporated companies in general. In view of all the circumstances, I decided that the Tribunal should make no order on the applicant's first complaint except to note, as the parties have agreed, that each should bear its own costs.