SAM WOO MARINE WORKS LTD v. THE INCORPORATED OWNERS OF PO HANG BUILDING

LDBM 252/2014 & LDBM 255/2018 (Heard together)

[2020] HKLdT 56

LDBM 252/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT APPLICATION NO. 252 OF 2014

_________________

_________________

LDBM 255/2018

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT APPLICATION NO. 255 OF 2018

_________________

_________________

(Heard together)

_________________

J U D G M E N T

_________________

INTRODUCTION

1.  This is the judgment for two sets of proceedings between the same parties which were ordered to be tried together.

2.  Sam Woo Marine Works Ltd (“Sam Woo”) is the registered owner of shop 1 on the ground floor of Po Hang Building (“the Building”) and is represented by Ms Queenie Ng of Counsel. The Incorporated Owners of Po Hang Building (“IO”) is represented by Ms Becky Wong.  

3.  Sam Woo and the IO have had a long history of litigation at various levels of courts including the Small Claims Tribunal, the Lands Tribunal, the District Court, the Court of Appeal and the Court of Final Appeal. The District Court action (DCCJ 1271/2011) before the Hon Judge Kent Yee is of particular relevance to the present proceedings. A chronology of major events and previous litigation is set out at Appendix I.

LDBM 252/2014

Sam Woo’s Case

4.  Sam Woo commenced this set of proceedings against the IO on 15^th September 2014 for the IO’s failure to keep separate accounts for the charges, contribution and surplus of three types of costs, charges and expenses (collectively referred to as “Expenses”).

5.  Sam Woo contended that there are three types of Expenses under Clause 3(f) of the Deed of Mutual Covenant (“DMC”) namely:

(a)	Expenses relating to the lifts under Clause 3(f)(ix) (“Lift Expenses”);
(b)	Expenses relating to the sprinkler system, water tanks and pumps under Clause 3(f)(ix) (“Sprinkler Expenses”); and
(c)	Expenses under Clause 3(f) other than the Lift Expenses and Sprinkler Expenses (“Other Expenses”).

6.  Under the DMC, the ground floor owners shall be responsible for the Sprinkler Expenses and Other Expenses; the first floor owners shall be responsible for all the above expenses; and the upper floor owners[1] shall be responsible for the Lift Expenses and Other Expenses (“Contention 1”).

7.  Sam Woo further contended that under Clause 3(i)(a) of the DMC, further contributions as stipulated in Clause 3(h) is to be made only if the total monthly contribution of the three respective classes of owners is insufficient to cover their respective types of expenses (“Contention 2”).

8.  Sam Woo’s third contention was that the surplus, if any, of each classes of owners should only be used to defray the Expenses payable by that particular class (“Contention 3”).

9.  Sam Woo alleged that the IO should, but had failed to, keep separate accounts for the followings, resulting in indiscriminate use by the IO of the monthly contribution, the further contribution and/or the surplus:-

G/F	-  G/F owners’ expenses -  G/F owners’ monthly contribution -  G/F owners’ further contribution -  G/F owners’ surplus
1/F	-  1/F owners’ expenses -  1/F owners’ monthly contribution -  1/F owners’ further contribution -  1/F owners’ surplus
U/F	-  U/F owners’ expenses -  U/F owners’ monthly contribution -  U/F owners’ further contribution -  U/F owners’ surplus

10.  Sam Woo sought the following reliefs :-

(a)	a declaration that on the true construction of the DMC there exists an implied term imposing upon the IO a duty and obligation to keep separate accounts of all expenditures incurred in respect of all the Expenses under Clause 3(f) of the DMC and of all payment paid to the IO (or the Manager) under Clause 3(h) and (i) of the DMC by the owners for the time being of the G/F, the First Floor; and the upper floors respectively (“Relief 1”);
(b)	a declaration that the IO has been in breach of the DMC for failing to keep such separate accounts (“Relief 2”);
(c)	an account be taken of all the expenditures incurred and of all the payment paid to the IO (or the Manager) by the owners for the time being of the ground floor, the first floor, and the upper floors respectively (“Relief 3”); and
(d)	an order of the return by the IO to Sam Woo of the amount found to be attributable to Sam Woo due to the said breach by the IO on taking of such account (“Relief 4”).

The IO’s Case

11.  The IO did not dispute Contention 1 and admittedly there had been deficiencies in the preparation of accounts before.

12.  Ms Wong submitted that ever since the IO had realized the deficiencies, they had never refused to maintain separate accounts, apportion the Expenses and increase the management fees in accordance with Clause 3(f), (h), (i) and (j) and the DMC.

13.  To implement the keeping of separate accounts and apportioning of management fees in accordance with provisions of the DMC, the IO had engaged accountant to prepare revised budgets to re-calculate the correct amount of management fees of the Building from 1.9.2012 to 31.8.2019. The revised budgets and re-calculated management fees were approved in the Management Committee’s meeting held on 13.11.2018.

14.  To further implement the keeping of separate accounts and to reflect separate surplus/deficit in the Balance Sheets for the ground floor, first floor and upper floors owners, the Management Committee of the IO resolved on 29.11.2018 to adopt the amended audited Income and Expenditure Accounts and Balance Sheets from 1.9.2012 to 31.8.2019. The Management Committee further resolved that based on the amended audited Income and Expenditure Accounts and Balance Sheets including the surplus/deficit position, the management fees of the Building re-calculated during the meeting on 13.11.2018 shall remain unchanged.

15.  It was submitted that by December 2018, all the deficiencies in the accounts of the IO as complained by Sam Woo and forming the subject matter of LDBM 252/2014 had been remedied and rectified.

16.  As steps had already been taken by the IO to comply with DMC clauses to keep separate accounts, the declarations sought by Sam Woo (i.e. Relief 1 and Relief 2 in paragraph 10 above) were not only unnecessary and academic曾婉玲 訴 兆隆苑業主立案法團 LDBM 199/2001 (unreported, 18.9.2001), but also erroneous.

17.  IO disagreed to Contention 2 and Contention 3 which were by and large a matter of construction of the DMC.

18.  Ms Wong submitted that Deputy Judge Kent Yee (as he then was) had already ruled on the interpretation of the relevant clauses (i.e. Clauses 3(i) and (j)) in DCCJ 1271/2011. Specifically, Sam Woo shall be estopped from asserting that by reason of Clause 3(i), the ground floor owners were not obliged to make further contributions as long as the total of the ground floor owners’ monthly contribution was sufficient to cover the ground floor owners’ expenses because such interpretation of Clauses 3(h) and (i) was rejected by Deputy District Judge Kent Yee (as he then was) in DCCJ 1271/2011. By the principle of res judicata, Sam Woo shall be estopped from reopening and/or challenging the interpretations made by Judge Yee especially when their application for leave to appeal against the Judge’s ruling had already been refused by the Court of Appeal. On a true construction of the DMC, the IO should not be required to take account of all expenditures to the extent as sought in Relief 3.

19.  Concerning Relief 4 (i.e. refund), the IO alleged that due to their acquiescence in the previous payment and apportionment, Sam Woo shall be estopped from claiming for an account of the Expenses and for an order for return of the overpaid expenses before September 2012.

SAM WOO’S CHANGE / CLARIFICATIONS OF POSITION AT TRIAL

20.  Before proceeding to the discussion part, it would be helpful for me to interpose a brief account of Sam Woo’s change or clarifications of their position at trial. In her opening submissions, Ms Ng emphasized that Sam Woo was not challenging the figures or the ratio of sharing expenses. They would not ask for return of overpayment anymore because she was aware of His Honour Judge Kent Yee’s judgment and realised that there was no provision in the DMC for a return, nor would they ask for set off. Sam Woo only asked that the surplus attributable to the ground floor owners be taken into account in the budgets.

21.  Based on the budgets prepared by the IO, she noted that there was $1.9 odd millions of surplus accumulated as in 31 August 2012. However, this sum could not be differentiated between the three classes of owners.  In Ms Ng’s opinion, even though the IO had already prepared separate accounts, those accounts were still not compliant with the DMC because they did not show the surplus attributable to different classes of owners.  In Ms Ng’s words, Sam Woo’s claim was more like allocation of funds rather than actual return of money and it was Sam Woo’s position that as long as there was no separate account and no proper allocation of surplus/funds, the IO had no right to claim outstanding management fees.

22.  For LDBM 252/2014, Ms Ng would abandon Relief 4 but would like to seek an additional relief that “an order be made by this Tribunal for allocation of surplus, if any, to the respective three classes of owners on taking such account” (hereinafter referred to as “Relief 5”).

23.  For Relief 3, Ms Ng clarified that the phrase “for the time being” in this relief should mean “since the first day when the occupation permit of the Building was issued (i.e. 1983)” . In other words, Sam Woo asked that accounts be taken by the IO of all the expenditures incurred and payments made to the IO by all the owners since 1983.  Ms Ng prayed the alternative relief that if the Tribunal was not with her on the year of 1983, then account shall be taken from year 1992 when Sam Woo became one of the registered owners of the Building.

Discussion

24.  As parties have no disagreement on Contention 1, it requires no determination of this court.

25.  As for Contention 2 and Contention 3, I would begin by setting out the reasoning of Deputy Judge Kent Yee (as he then was) in DCCJ 1271/2011 concerning the interpretation of the relevant DMC clauses (as follows)[2]:

“23.   Clause 3(i) first sets out the condition under which further funds will have to be contributed by owners. It refers to the total monthly payments payable to the Manager by the owners of the Building under Clause 3(h). Clause 3(h) sets out the amount of monthly payment of each owner has to pay and it is applicable to all the owners. The total monthly payments payable to the Manager in Clause 3(i) clearly refers to the total amount of monthly payments payable by all the owners of the Building.

24.  Worthy of note in Clause 3(i) are the words “total”, “payable” and “under Clause 3(h)”. They clearly refer to the total monthly payments which are to be paid by all the owners under Clause 3(h). The construction advocated by Ms. Ng actually entails a substantial rewriting of Clause 3(i): “those unused portion of the total monthly payment payable which have already been paid by an owner to the Manager by the owners.” The word “total” is then rendered otiose too. This cannot be right.

25.  The purpose of Clause 3(i) is very clear. If the manager finds that the total monthly payments payable by all the owners under Clause 3(h) is not sufficient to cover any costs, charges or expenses, he can make a collective fund-raising exercise by either (a) requiring all the owners to make further contributions in the shares as provided in Clause 3(h) or (b) revising the monthly payment payable to the manager by all the owners provided that such increase shall be in the proportion to the shares as provided in Clause 3(h). The obligation to provide further contribution by either way falls upon all the owners and not any individual owners.

26.  In fact, as submitted by Mr. Chang, counsel for the IO, Ms. Ng’s construction of Clause 3(i) would lead to an absurd result. If her construction were right, the IO must first exhaust the management fund contributed by an individual owner before he is required to contribute additional funds or even to continue to pay the monthly payment under Clause 3(h). If that is the case, there would be not much point in requiring the owners to make payments on a monthly basis and instead management fees should be collected on need basis only.

27.  This is for obvious reason unworkable in the real world. Of course the manger requires some surplus in the management fund to allow flexibility and cover all the possible contingencies. Moreover, Clause 3(j) plainly envisages surplus in the management fund and dictates how it should be applied. Similarly, Clause 3(k) prescribes how the unused portion of the management fund contributed by a former owner should be applied after he ceases to be an owner.”

(emphasis added)

26.  Sam Woo’s leave to appeal against the said judgment of His Honour Judge Kent Yee was refused by the Court of Appeal which upheld the Judge’s interpretation of the DMC and his reasoning. I entirely agree to His Honour Judge’s interpretation.

27.  Ms Ng in her oral submissions submitted that there is no res judicata because DCCJ 1271/2011 concerned things different from the present case. She specifically referred to certain paragraphs of His Honour Judge’s judgment and expressed the following comments:-

(a)	Paragraph 25: focused on “individual” but the present case concerned “classes of owners”;
(b)	Paragraph 26: did not concern Sam Woo’s focus here which was about “separate accounts, surplus and insufficiency”;
(c)	Paragraph 27: Sam Woo agreed that IO could have contingency but the accounts prepared by the IO did not appear to contain such an item;
(d)	Paragraph 28: before His Honour Judge there was no evidence but up to now there was evidence (in the form of some statements) showing that the surplus over the years of over 1.9 million had not been applied towards charges and expenses.

28.  Regarding Ms Ng’s comments in paragraph 27(a), I cannot comprehend what is meant by these proceedings concern “classes of owners” rather than “individual”. This is not a class action and, no matter in DCCJ 1271/2011 or these proceedings, Sam Woo are litigating on their own behalf but not for a class of owners. Both the District Court proceedings and the present proceedings essentially concern the same DMC provisions which shall carry the same meaning no matter the litigant participates in the proceedings as an individual or as a class.

29.  I also do not understand why it is said that His Honour Judge’s judgment focus on “individual”. In the last sentence of paragraph 25 of the Reasons for Judgment, His Honour Judge highlighted that “the obligation to provide further contribution by either way falls upon all the owners and not any individual owners.”. Clearly, Clause 3(h) was construed by His Honour Judge to create an obligation on all owners, rather than any individual owners, to make further contribution in the prescribed situations.

30.  Concerning Ms Ng’s comments in paragraph 27(b), His Honour Judge did not agree with Ms Ng that Clause 3(h) shall be construed to mean that “the IO must first exhaust the management fund contributed by an individual owner before he is required to contribute additional funds or even to continue to pay the monthly payment under Clause 3(h)”. In other words, His Honour Judge considered that whether there was surplus or insufficiency was wholly irrelevant. If “surplus and insufficiency” is Sam Woo’s focus in the present proceedings, this has already been dealt with by His Honour Judge’s interpretation of Clause 3(h).

31.  As regards paragraph 27(c), I heard of no submission from Ms Ng as to the basis for the contention that there must be an item described as “contingency” in the annual budgets or financial statements of the Building before IO could as a matter of fact and practice allow surplus to remain in their general fund account, bearing in mind that the establishment of a “contingency fund” is not compulsory but is optional under section 20(2) of the Building Management Ordinance (“BMO”). In any event, I do not see how this argument could render Judge Yee’s interpretation of the relevant DMC provisions not applicable to this case which involves the same parties, the same DMC and, in essence, the same subject matters as in DCCJ 1271/2011.

32.  Concerning paragraph 27(d), I do not think Sam Woo’s complaint is justified. Clause 3(j) of the DMC stipulates that:

“If there should be any surplus after payment of all the costs charges and expenses then the surplus shall be held by the Manager in a bank account and shall only be applied by him in or towards payment of such costs charges and expenses thereafter to become due.”

33.  Clause 3(j) requires that any surplus could only be applied towards payment of the costs, charges and expenses of the Building that become due in the future, but not to be applied for any other purpose. There is, however, no requirement as to when the surplus shall be used.

34.  In my opinion, Ms Ng’s attempts to differentiate the present case from DCCJ 1271/2011 is unconvincing. The reasoning of and the interpretations of the relevant DMC provisions by Judge Yee in DCCJ 1271/2011 are relevant and applicable to the issues in the present case.

35.  I agree with Ms Wong on her res judicata argument in relation to the DMC provisions that had already been construed and ruled by Judge Yee in DCCJ 1271/2011. That notwithstanding, even if I proceed on the assumption that res judicata does not apply and this tribunal is to rule on the interpretation of the relevant DMC provisions afresh, I am still not persuaded by Sam Woo’s interpretation for the reasons set out below.

36.  The combined effect of Sam Woo’s Contention 2 and Contention 3 is that the surplus of (or up to) a particular financial year resulting from a particular class of owners must be used towards paying the expenses for the next financial year of that particular class of owners and, only when there is a shortfall, then management fees could be collected from that class of owners.

37.  As I see it, Contention 2 is equivalent to a time requirement on the IO as to when the surplus, if any, shall be used and when management fees could be collected from owners.

38.  In my opinion, Sam Woo’s contention is flawed on two levels. First, it contradicts the construction of Clause 3(i) as already ruled by His Honour Judge (which I entirely agree and adopt) and requires a material rewriting of Clause 3(i) as observed by Judge Yee as follows:

“If those unused portion of the total monthly payments payable which have already been paid by an owner to the Manager by the owners under sub-clause (h) hereof shall be insufficient to cover all or any of the said costs charges and expenses then:-
(a)	such owners shall make further contributions towards such expenses in the shares as provided in sub-clause (h) hereof …”

39.  I further observe that such contention would necessarily involve a material re-writing of Clause 3(j) as well:

“If there should be any surplus after payment of all the costs charges and expenses then the surplus shall be held by the Manager in a bank account and shall only be applied by him in or towards payment of such costs charges and expenses thereafter to become due as fall due in the financial year(s) that immediately follows.”

40.  In my view, such an interpretation of Clause 3(j) is plainly incorrect.

41.  It is noted that Clause 3(f) of the DMC spells out a variety of expenses that may be or become payable for or in connection with the management, maintenance repair and improvement of the Building, such expenses include but not limited to electricity or similar charges, statutory outgoings, remuneration for the Manager and other hired persons, refuse disposal costs, “uniform stores tools equipment and medical attention for staff”, lift expenses, utility and deposits payable for common parts, government rent, costs of repairing renewing maintaining cleansing painting or decorating the common parts, insurance, costs of purchasing/hiring plants and equipment, legal costs and all other charges which the Manager or the IO shall consider necessary or requisite for the proper management operation and maintenance of the building and for the improvement and maintenance of the services amenities.

42.  Some of the aforementioned expenses are non-recurring in nature and may not always appear in an annual budget. The very purpose of allowing a surplus in the accounts maintained by the IO is to have readiness a fund to deal with possible contingencies and to meet unexpected or urgent management expenses that has not been catered for whether sufficiently or at all in the budget for a particular year.

43.  Absent any requirement in the DMC requiring the exhaustion of any surplus (whether the surplus is attributable to all owners or particular classes of owners) before management fees can be collected (whether from all owners or particular classes of owners), I believe it is within the power of the IO to decide that a surplus shall be maintained for the due management of the Building. It also comes within the power of the IO to decide at what suitable time what amount of surplus shall be utilized for which management-related expenses as long as the requirement in Clause 3(j) is satisfied that is, the expenses must fall within the nature or scope as defined in Clause 3(f).

44.  Such decision of the IO is not completely without confinement but could be subject to the scrutiny of owners in certain scenarios which shall not be elaborated here. This is because these proceedings are not about the reasonableness or unreasonableness of the IO’s exercising the discretion or power to use or retain whatever amount of surplus standing in their account which was not pleaded, not argued and with no evidence adduced. Sam Woo’s contention was essentially that the IO had no discretion in that regard but must exhaust the surplus before management fees or financial contributions could be collected from owners. As discussed above, I cannot agree to this proposition.

45.  Certain provisions in the Building Management Ordinance, Cap.344 were also drafted in such a way to embrace a need for the IO to retain some surplus and reserve to meet contingencies.

46.  In The Incorporated Owners of Four Winds Apartment v Koa Hsung Land Investment Company Limited & Ors, LDBM 218/2005 (Date of Judgment: 6.11.2006), Judge Yung when discussing general fund and contingency fund said that there is no magic in the word “general” and it simply covers every types of expenditure of building management which an owners’ incorporation has to meet. The Judge further explained that: -

“9. …

It should be noted general fund does mean general. It covers every types of expenditure of building management which an owners incorporation has to meet. Contingency fund is established to provide for the expenditures of the same nature as those covered by the general fund. Its purpose is to set aside a reasonable amount of money for contingency purpose or to supplement the general fund. An owners incorporation may or may not establish a contingency fund. The word “may” is used in subsection (2) as opposed to “shall” in subsection (1). Further there is no requirement for the funds to be kept in separate bank accounts as long as the funds should be put in an interest bearing bank account. The right to establish two funds has the practical effect of entitling owners incorporations to maintain or to accumulate the surpluses from collection of monthly management fees as contingency fund, and, to raise fund to eliminate deficits without raising the monthly management fees. Very often owners would challenge the need to raise the fund for repair or renovation work when there is surplus to defray the costs. Some owners, like the present Respondents, may query the need to increase management fees when there is a surplus.

10.  When owners incorporations want to raise fund for the management of the building by way of increase in monthly management fees, or by calling for lump sum contributions, they simply explain the need for such exercise. Very often they would not clearly set out which provisions in the Ordinance they rely on. The fact they have failed to mention names of the funds is not fatal. It is not even necessary. It is the procedure and the reasons behind for raising the management fees or funds that should be looked at.

11.  In the instant case, a general fund must have been established although no one can point to any document referring to the date of establishment. Monthly management fees have been collected for a long time. Income and expenditures accounts were compiled and audited year and after year. This practice clearly points to the inescapable conclusion that the Applicant has maintained a general fund.”

47.  Judge Yung’s decision was affirmed on appeal: CACV 438/2006 (Date of Judgment: 6.6.2007)[3]. Clearly, the need for the IO to have surplus and reserve to meet management contingencies is anticipated and respected both in the Building Management Ordinance, Cap.344 as well as the DMC at suit.

48.  In my opinion, Sam Woo’s contention that the surplus of (or up to) a certain financial year shall be utilized in the next financial year (or shall be exhausted in the ensuing years) before further management fees could be collected is, conceptual-wise, a complete ignorance of and in disagreement with the need to maintain a surplus to cater for contingencies. I am not persuaded by this construction of Clause 3(j) which is an unwarranted curtailing of IO’s power and function and is unconducive to the proper management of the Building.

49.  As I do not see the slightest evidence of the IO’s not going to apply the surplus towards the future management expenses of the Building or the IO’s having applied the surplus towards any purpose other than the management expenses set out in Clause 3(f), I do not find any breach of Clause 3(j) on the part of the IO.

50.  In addition to the aforesaid “time requirement” on the utilization of surplus as imposed through Contention 2, Sam Woo further asserted Contention 3 to impose a “class requirement” that surplus attributable to a particular class of owners shall be applied only towards the management expenses of that specific class of owners.

51.  I heed of no provision in the DMC, not in Clause 3(j) (which deals with surplus) or anywhere, that supports Sam Woo’s assertion. I would say that seeking to construe Clause 3(i) and/or (j) this way, Ms Ng read even more words into the DMC provisions out of her invention. Her contention required further material rewriting of Clauses 3(i) and 3(j) as follows:

Clause 3(i)

“If those unused portion of the total monthly payments payable to the Manager by the owners of the said premises which have already been paid by a class of owners under sub-clause (h) hereof shall be insufficient to cover all or any of the said costs charges and expenses then:-

(a)  such class of owners shall make further contributions towards such expenses in the shares as provided in sub-clause (h) hereof …”

Clause 3(j)

“If there should be any surplus attributable to any class of owners after payment of all the costs charges and expenses which that class of owners shall bear then the surplus shall be held by the Manager in a bank account and shall only be applied by him in or towards payment of such costs charges and expenses of that class of owners thereafter to become due as fall due in the financial year(s) that immediately follows.”

52.  One may wonder if the draftsman of the DMC did intend that the surplus attributable to different classes of owners be separately maintained and be distinctively applied towards the respective expenses of different classes of owners, why the draftsman did not simply state so in the DMC.

53.  Chances are the draftsman in truth had never intended that surplus shall be administered by such a microscopic approach since the administrative costs thereof might outweigh any benefit therefrom. The absence of such a requirement in the DMC could well be the exact result of a conscious decision of the draftsman not to waste time and costs on minutia and triviality in the management of surplus.

54.  It is trite that the Court will be slow to imply terms into a DMC. The main reason for this derives from the fundamental principles of freedom of contract and sanctity of contract which underlie the classical theory of contract. This theory assumes that the parties to a contract are in the best position to determine their rights and obligations. If they had wanted to qualify their rights or the manager’s or the IO’s powers, they could easily have done so[4].

55.  At common law, terms are implied on the basis of the presumed common intention of the parties. There is no power to imply a term into the DMC simply because it is reasonable to do so. The general rule as clearly set out in Lewison on Interpretation of Contracts, para 5.03 is that the courts will only imply a term if it is:

(a)  reasonable and equitable;

(b)  necessary to give business efficacy to the contract, so no term will be implied if the contract is effective without it[5];

(c)  so obvious that “it goes without saying”, the so-called “officious bystander” test[6];

(d)  capable of clear expression; and

(e)  does not contradict any express term of the contract[7].

56.  In the circumstance of the present case, I do not think the above test is satisfied for the court to imply into the DMC terms requiring the surplus be used in the specific way as desired and contended by Sam Woo.

57.  The legal position aside, I would deal with the question of whether there is any or sufficient evidential basis for Sam Woo to complain that, as a matter of fact, management fee surplus attributable to ground floor owners has been indiscriminately used to subsidize the expenses of other owners.

58.  Ms Ng relied on the summaries of income and expenditure prepared by the IO’s auditors (“the audited summaries”) as evidence to show that ground floor owners “always” or “usually”[8] have management fees surplus annually whereas owners of other floors sometimes have a surplus balance and sometimes a deficit.

59.  I see some fundamental problems in this argument and append below a table of the relevant information[9] as extracted from the audited summaries for ease of illustration. In the table, all figures are round off to whole number without decimals for simplicity.

Year	Upper floors surplus (deficit)	Legal or professional expenses for Upper floors (Remarks)	Ground floor surplus (deficit)	Legal or professional expenses for Ground floor (Remarks)
2012/2013[10]	Surplus: $11,344	$45,589	Surplus: $21,205	$2,280
2013/2014[11]	Deficit: ($273,231)	$293,199	Deficit: ($534)	$14,662
2014/2015[12]	Surplus: $159,214	$53,634	Surplus: $10,240	$2,682
2015/2016[13]	Deficit: ($131,574)	$450,079	Surplus: $3,549	$22,506
2016/2017[14]	Deficit: ($84,143)	$369,628	Surplus: $5,689	$18,483
2017/2018[15]	Surplus: $777,637	$32,180	Surplus: $52,018	$1,609

60.  As shown in the table, the ground floor owners actually had a deficit of $533 in year 2013/2014.

61.  It is noted that upper floor owners had a surplus of $11,344 in 2012/2013; a surplus of $159,214 in 2014/2015; and a surplus of $777,637 in 2017/2018. During these years, there should not be any use of ground floor owners’ surplus to subsidize upper floor owners’ expenses. It is also observed that the legal/professional expenses incurred during these years were relatively low, in the region of $32,180 and $53,634 only.

62.  The status changed in some other years. Upper floor owners started to have a deficit of $273,231 in 2013/2014; a deficit of $131,574 in 2015/2016; and a deficit of $84,143 in 2016/2017. It is observed that during these years, the legal and professional expenses became quite substantial, ranging from $293,199 in 2013/2014, $369,628 in 2016/2017 to $450,079 in 2015/2016. Coincidentally, it is noted that Sam Woo and the IO were engaging in litigation during these years which could be the cause of the substantial increase in legal expenses and hence the deficit.

63.  I pause here to make two qualifications to the above analysis. First, I have no definite answer as to whether the protracted litigation between Sam Woo and IO was the actual cause of upper floors’ deficit balance in certain years, suffice it to say that based on the evidence before me, this appears to be a probable cause.

64.  Secondly, my doing the above exercise shall not be taken as my approval of the microscopic way in calculating, apportioning or otherwise dealing with the surplus attributable to different classes of owners as advocated by Sam Woo. The purpose of the above analysis is to illustrate that even if conceptually I buy into Sam Woo’s approach of microscopic calculation, as a matter of evidence I still do not observe a consistent pattern of unfair utilization of ground floor’s surplus to subsidize other owners because the hard data reflects that when legal expenses were insubstantial, upper floors actually had surplus and required no subsidy from other classes of owners.

65.  Put it in another way, from the evidence I do not see a situation where other owners have had a pattern of regularly using ground floor owners’ surplus which caused unfairness to ground floors and hence triggered off the litigation. To the contrary, the incidents of litigation appeared to have caused deficit balance to upper floor owners in several years which required subsidy, if there was in fact any subsidy at all. If that represents the truth, in a way Sam Woo was the one that caused or at least contributed to the perceived unfairness which they now complain about.

66.  In any event, even if there really exists a pattern of ground floor owners’ surplus being unduly utilized to subsidize upper floor owners’ deficit (I do not observe such a pattern), since the problem stemmed from an inaccurate estimate in the annual budgets leading to recurring surplus attributable to a particular class of owners, any aggrieved owner could express comments on the annual budget (or the draft thereof) or even vote against it in meetings. Any aggrieved owner, be his grievance subjective or justified, could make use of all available means or procedures under the DMC and/or the BMO to try to change any situation which in his opinion was not right. But the bottom line is, it is not up to any individual owner to invent and introduce into the DMC a scheme in order to meet his personal yardstick of fairness when the scheme was not a thing agreed to by the contracting parties to the deed nor was it so clear, obvious, reasonable and necessary for the effective management of a building that it should be taken as impliedly agreed.

67.  The above analysis of factual evidence is only secondary as Sam Woo’s case shall be defeated as a matter of legal principles in any case.

Disposition

68.  I agree with Ms Wong that since the IO has already taken steps to and, on their own volition is willing to, keep separate accounts, Reliefs 1 and 2 in the form of declaration is unnecessary and academic.

69.  Ms Ng counter argued that the question was not academic because in her opinion, IO was still not complying with the DMC because the separate accounts were still not reflecting the surplus/deficit carried forward from the previous years and attributable to respective classes of owners.

70.  I already ruled that there is no requirement in the DMC whether by express clause or implied term for surplus from a particular class of owners be strictly applied only towards the expenditure of that class of owners. As Sam Woo’s rationale behind these prayers cannot stand, these prayers must also fail.

71.  For the same reason, I do not see any basis or any need to direct that account be taken of each and every payment made to the IO by all owners of the Building since the issue of occupation permit in 1983 (Sam Woo’s primary position) or since Sam Woo became an owner of the Building in 1992 (Sam Woo’s fallback position). Relief 3 is not granted.

72.  In any event, this relief is simply too vague in substance and too wide in scope. Ms Wong for the IO submitted that a substantial period thereof may be time-barred or disallowed by reason of acquiescence. I would not elaborate on these topics as such discussion is unnecessary.

73.  Relief 4 (i.e. refund) was abandoned by Sam Woo at trial.

74.  For the same reason and since Relief 3 is refused, Relief 5 (i.e. allocation of surplus to respective three classes of owners on taking of accounts in Relief 3) must also fail.

LDBM 255/2018

The IO’s Case

75.  On 10 December 2018, the IO commenced LDBM 255/2018 against Sam Woo claiming: -

(a)	Outstanding management fee of Shop 1 in the sum of HK$237,884;
(b)	Further outstanding management fee of Shop 1 from 1.1.2019 at the rate of HK$3,208 per month; and
(c)	Interest thereon.

76.  The background leading to this set of proceedings is basically the same as that of LDBM 252/2014, the major events are set out in Appendix I to this judgment.

77.  The IO contended that by a resolution of the Management Committee of the IO passed on 13.11.2018, revised Budgets were approved and the correct amount of management fees of the Building from 1.9.2012 to 31.8.2019 were re-calculated[16].

78.  By a resolution of the Management Committee of the IO passes on 29.11.2018, the revised audited Income and Expenditure Accounts and Balance Sheets were approved and adopted[17].

79.  Notwithstanding the revision, Sam Woo refused to pay the revised management fee, details of which are as follows: -

Period	Revised management fee (per month)	Amount outstanding
Sept 2012 – Aug 2013	$2,434	$29,208
Sept 2013 – Aug 2014	$3,161	$37,932
Sept 2014 – Aug 2015	$2,808	$33,696
Sept 2015 – Aug 2016	$3,673	$44,076
Sept 2016 – Aug 2017	$3,609	$43,308
Sept 2017 – Aug 2018	$3,104	$37,248
Sept 2018 – Dec 2019	$3,208	$12,416
	Total	$237,884

80.  As at today, Sam Woo still has not paid any part of $237,884 and the management fee after January 2019 up to today.

81.  The IO’s legal basis for fixing the amount of management fees is founded on Clause 3(i) and Section 20, 21 and 22 of the BMO.

82.  Ms Wong on behalf of the IO submitted that the interpretation of Clause 3(i) had already been ruled in DCCJ 1271 Judgment. Deputy Judge Kent Yee (as he then was) had already explained in paragraphs 26 and 27 of the DCCJ 1271 Judgment that the effect of Clause 3(i) was not that the IO could only resolve to demand or increase management fee when there was a deficit. Whether there was any surplus was irrelevant to Sam Woo’s liability to pay management fee. A fortiori, Sam Woo could not and had no legal basis to request the IO to defray the surplus first before demanding it to pay management fee.

83.  It was further submitted that irrespective and independent of Clause 3(j) of the DMC and irrespective of whether there was any surplus or deficit and how much it was, the IO was entitled to demand, collect and increase the management fee from Sam Woo pursuant to Sections 20, 21, 22 and Schedule 5 of the BMO, as the management fee formed part of the general fund mandatorily established by the IO under Section 20 of BMO.

Sam Woo’s Case

84.  Sam Woo repeated its interpretations on the relevant clauses as set out in LDBM 255/2014[18].

85.  Sam Woo contended that its refusal to pay the revised management fee is due to the IO’s failure to prepare proper accounts in accordance with the DMC[19].

86.  In respect of the revised budgets passed pursuant to the resolution passed on 13.11.2018, Sam Woo’s arguments were three-fold. First, by virtue of Clause 3(i) and (j), account should be taken of the surplus and/or insufficiency which existed in respect of the ground floor owners at the conclusion of a financial year when determining the amount of management fees payable by the ground floor owners. Since the ground floor owners’ surplus and/or insufficiency had not been included in the ground floor owners’ account in the revised Income and Expenditure accounts and Balance Sheets from September 2012 to August 2018, the revised calculation were still in breach of the DMC (“First Argument”).

87.  The resolution of “各出席委員議決通過不會退回或追收寶亨大廈業主2018年12月或以前已繳付的多收或少收的管理費。” (translated as: “There shall be no refund for the overpayment of Management Fee or no action shall be taken with regard to the arrear of Management Fee prior to December 2018”) was in breach of Clause 3(i) and/or 3(j) (“Second Argument”).

88.  It was further contended that the further contribution (in the form of the increase of the management fee) was not increased in accordance with the management share in breach of Clause 3(i)(b) (“Third Argument”).

89.  Therefore, the relevant resolutions passed were all invalid by virtue of Clause 13(k)(iii) of the DMC[20], which provides that: -

“Any resolution on any matter concerning the said premises passed at a duly convened meeting by a majority of the owners present in person or by proxy and voting shall be binding on all the owners PROVIDED that:-

…

(iii)  No resolution shall be valid to the extent that it purports to alter or amend the provisions of these presents or is inconsistent herewith save as herein specifically provided.”

Discussion

90.  The discussions in LDBM 252/2014 can sufficiently deal with the First Argument.

91.  Concerning the Second Argument, since the resolution of “各出席委員議決通過不會退回或追收寶亨大廈業主2018年12月或以前已繳付的多收或少收的管理費” is irrelevant to and has no impact on the present proceedings, whether it is valid or invalid shall not be our present concern.

92.  As regards the Third Argument, with respect, this argument of Sam Woo was convoluted. At trial, I invited Mr Chiu, Sam Woo’s factual witness, to elaborate why Sam Woo considered that IO’s revised calculations were not in accordance with the management share in Clause 3(i)(b) which requires that payment “shall be in the proportion to the shares as provide in sub-clause (h) hereof”. Clause 3(h) could be found at Appendix II to this judgment.

93.  Mr Chiu said that if the revised management expenses were calculated in accordance with the following approach, in his view they were in accordance with Clause 3(i)(b) and Clause 3(h) of the DMC.

(a)	For the expenses that were payable by all owners, the apportionment of such expenses among all owners shall follow the proportion in Clause 3(h).
(b)	For the expenses that were payable by ground floor and first floor owners (i.e. Sprinkler Expenses), the IO should work out a proportion vis-à-vis ground floor owners and first floor owners. This could be done by first adding up all the amounts from subparagraphs (1) to (28)[21] to get a total. Then, the amount payable by Sam Woo (i.e. $1,000) to that total amount will become Sam Woo’s percentage of share of the expenses payable by ground floor and first floor owners. The share percentage or proportion of other ground floor and first floor owners could be worked out by the same method so on and so forth.
(c)	For the expenses payable by first floor and upper floor owners, a proportion vis-a-via first floor and upper floor owners could be worked out in the like manner.

94.  From the explanatory sheets[22] setting out the method of calculations by the IO’s auditor, it appears that the auditor was in fact following the proportion which was considered to be correct by Mr. Chiu. Such being the case, I do not understand why Sam Woo would challenge that IO’s revised calculations were not in accordance with the proportion under Clause 3(h).

95.  During oral closing submission, I invited Ms Ng to explain the exact challenge in their Third Argument. She clarified that they considered the proportion in Clause 3(h) not adhered to only because the auditor did not take into account the surplus/deficit attributable to ground floor owners in deciding to revise/collect management fees, which was in contravention of Clause 3(i) on its proper interpretation. Leaving the question of surplus/deficit aside, the revised calculations per se did not depart from the proportion in Clause 3(h).  In other words, Sam Woo would allege that the revised calculation did not adhere to the Clause 3(h) proportion if and only if their argument under Clause 3(i) was successful.

96.  As Sam Woo’s argument about Clause 3(i) did not succeed, there is no issue of the revised calculations having violated the Clause 3(h) proportion.

97.  Sections 20, 21, 22 and Schedule 5 of the BMO empower the IO to demand, collect and increase the management fee from the owners of the Building which is in addition to the charging provision in the DMC. The IO produced evidence to show that the revised Budgets (together with the re-calculated amount of management fees for the relevant period), the revised Income and Expenditure Accounts and Balance Sheets as prepared/audited by auditors were approved and adopted by the owners through resolutions.

98.  I am satisfied on a balance of probabilities that the IO has proved their case in their claim for outstanding management fees against Sam Woo, subject to paragraph 116 below.

Unpleaded Issues

99.  Before moving on to the disposition part, it may be helpful for me to briefly account Sam Woo’s attempt to raise unpleaded issues at the stages of oral opening submissions and written closing submissions.

100.  Approaching the end of her opening submissions, Ms Ng raised an additional issue in LDBM 255/2018 in relation to the IO’s revised calculations of outstanding management fees. She contended that the IO used a wholly wrong mechanism to do the re-calculation by using actual expenditure instead of estimate and that would result in Sam Woo’s having to pay management fees different from those payable by other owners as the management fees payable by the latter was calculated by estimated expenditure.

101.  I expressed my concern about Sam Woo’s raising unpleaded issue at the end of her oral opening submissions which was prejudicial to the IO. Whilst Ms Ng admitted that they had not raised this issue in the Notice of Opposition or other court documents filed in these proceedings or even in her written opening submissions. But she opined that this issue needed not be raised in advance but could be dealt with by Counsel by oral submission without evidential basis. As expected, this met with strong objection from Ms Wong.

102.  I had grave reservation whether this issue really required no evidential basis as claimed by Ms Ng because apparently the subject matter was one about preparation and auditing of accounts. I would think that if this issue had been pleaded in Sam Woo’s Notice of Opposition or at least raised in their witness statements, the IO would have had a chance to consider how to prepare evidence to deal with the same.  The IO could, if necessary and with the leave of the court, obtain evidence from their accountant to explain the reason why the revised calculations had been prepared in that particular method from the accounting point of view.

103.  I stood down for about 20 minutes for the parties to reflect on their respective positions or to take instructions if necessary in light of this unexpected development. When the trial resumed, Ms Ng retracted from her admission mentioned in paragraph 101 above and claimed that paragraphs 12 and 13 of the 2^nd supplemental witness statement of Madam Cheung[23] and paragraph 14 of the witness statement of Mr Chiu[24] had already covered the new issue.

104.  In my view, Ms Ng’s assertion was a distortion and over-stretching of the meaning of the said witness statements[25]. The said paragraphs which Ms Ng relied on did not raise the new issue whether sufficiently clearly or at all as a matter of fact.

105.  I note that the revised calculations relevant to the new issue had been exhibited to the statement of the IO’s factual witness (Mr Chan) dated 17 December 2019 which means Sam Woo should be well aware of these calculations at least 9 months before the trial or could be even earlier. Ms Ng provided no explanation why Sam Woo did not see fit to apply for leave to amend their Notice of Opposition or file further evidence in order to properly bring in this new issue (if they considered this issue relevant at all) in advance of the trial. As I found it grossly unfair for Sam Woo to raise unpleaded issue in the course of trial by slipping it through the end of Ms Ng’s oral opening submission, I decided that the new issue would not be considered and gave my reasons therefor on the spot.

106.  The second occasion was, in her written closing submissions dated 28 October 2020, Ms Ng introduced some new term/assertion which do not appear to have been pleaded or mentioned in Sam Woo’s Notice of Opposition or her written Opening Submission. One example is paragraph 25 of her written closing submissions which stated that:

“In the light of Clauses 3(h), (i) and (j), the account of the Building must be a running account (流水帳) in which the balance is carried forward every year. Unless the allocation of surplus/insufficiency of each class of owners is ascertained, the account can never be in compliance with the DMC.”

107.  The term “running account” can carry different meanings. According to Collins English Dictionary, it is another name of “current account”. From the financial perspective, it could mean a facility under a credit agreement whereby the consumer is enabled to receive from time to time, from the creditor or a third party, cash, goods or services to an amount or value such that the credit limit (if any) is not at any time exceeded.

108.  What Sam Woo actually means by contending that the account of the Building must be a “running account” is far from clear.

109.  If, by using the term “running accounts”, Sam Woo is discontent about the surplus/deficit balance not having been carried forward to the next financial year, I am afraid this is not the case because the balance sheets[26] do set out the cumulative surplus/deficit from previous years.

110.  If by using that term, Sam Woo is in essence complaining that the surplus of the previous financial year(s) attributable to ground floor owners has not been reflected in the revised calculations and, therefore, has not been exhausted before ground floor owners were required to pay management fees, this argument is no different from their arguments in LDBM 252/2014 and could be dealt with in the previous discussions.

111.  If, by using the term “running account”, Sam Woo is taking a new issue about the correctness of the accounting practice or approach adopted in preparing the revised calculations, then I would consider it utterly unfair for Ms Ng to only raise this at such a late stage, depriving the IO of the chance to collect evidence from their accountants about the accounting practice they adopted and any rationale behind.

112.  In Grand Power International Limited v Chan Sing Hoi Enterprises Limited [2020] 2 HKLRD 142 which is also a building management case tried in the Lands Tribunal in the first instance, the Court of Appeal found that justice would best be served in the circumstances of that case by refusing to allow a party to run an unpleaded case. Similar to the Grand Power case, the parties here have had legal representation throughout the proceedings. I see no reason why Sam Woo should be allowed to ambush their opponent by belatedly raising unpleaded issues.

113.  Fairness and prejudice aside, Ms Ng did not cite any authority which mandatorily required the budgets or financial statements be prepared as or in the method of “running account” to form the legal basis for such an argument.

114.  Suffice it to say that any challenge to the accounting practice or approach was only raised by Ms Ng from the bench without the opinion from an accountant in support whereas the revised calculations of the IO were prepared or audited by accountants, even if Sam Woo is permitted to run this unpleaded case (I do not permit actually), I do not feel the strength of such argument any way.

Disposition

115.  By reason of the above analysis, I order Sam Woo to pay to the IO the outstanding management fee from September 2012 to December 2018 in the total sum of $237,884 (for the breakdown see paragraph 79 above)[27] together with the interest thereon at judgment rate from the date of judgment until payment.

116.  Although IO is also claiming further outstanding management fee “from January 2019 onwards at the rate of HK$3,208 per month”, this part of the claim is not allowed for the reason that the cause of action about Sam Woo’s arrears of management fees since January 2019 had yet to be accrued to the IO at the time when they commenced the present proceedings on 10 December 2018.

COSTS

117.  Ms Ng and Ms Wong agreed that costs should follow the event. As Sam Woo lost in both LDBM 252/2014 and LDBM 255/2018, they should bear the IO’s costs in these two applications to be taxed on the District Court scale if not agreed.

Appendix I

Appendix II

Clause 3(h) of the DMC