HOLIDAY RESORTS (MANAGEMENT) CO LTD v. LU HO BIN ALICE

DCCJ20069/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 20069 OF 2001

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JUDGMENT

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1. The Plaintiff was appointed under the Deed of Mutual Covenant ("DMC") as the manager of a residential development known as "Sea Ranch" situated at Yi Long Wan, Lantau Island, New Territories registered in the Islands Land Registry as Lot No. 178 and the extention thereto in Demarcation District No. 337 ("the Sea Ranch"). The Plaintiff's appointment was terminated by the Incorporated Owners of the Sea Ranch ("I.O.") under the Buildings Management Ordinance on 10th December 1999.

2. In December 1999 a new management company was appointed as the manager of Sea Ranch by the I.O. The new manager gave 3 months' notice to the Plaintiff to terminate the ferry service operated by the Plaintiff. The Plaintiff, however, alleged that the ferry service contract could not be unilaterally terminated for there was no provision for early termination in the 3 year contract.

3. The Defendant is a registered owner of apartment B on Studio Level of Block 4 Beach Chalet known as "Flat 4BC".

4. The Plaintiff claims against the Defendant for outstanding monthly management fees, ferry service and other charges from 31st January 1998. By consent, interlocutory judgment for management fees, ferry service charges, contribution to further management expenses, collection charges, costs of registering a memorandum of charge at the Land Registry up to and including 9th December 1999 with interest was entered with quantum to be assessed. Leave to defend the Plaintiff's claim for ferry service charges incurred on or after 10th December 1999 was ordered by Acting Registrar S. Kwang on 20th June 2002.

5. The parties came before me for the assessment of quantum payable and for trial on the Plaintiff's claim for ferry service charges incurred on or after 10th December 1999.

6. The Plaintiff took up a number of similar actions against various other owners, these were consolidated and heard by Judge Lok on 14th June 2002. Both parties confirmed that they would abide by the judgment of Judge Lok of 17th June 2002. The parties also referred me to the 18th May 2001 judgment of Deputy Judge Muttrie sitting in the High Court, in a consolidated action taken out by the Plaintiff against other owners in HCA Nos. 4978, 17643, 20857 of 1998 and 9502 and 9516 of 2000 where the learned judge gave a detailed outline of the background and history of the dispute between those parties. Judge Lok in his 17th June 2002 reasons for judgment referred to and relied on the findings of Deputy High Court Judge Muttrie.

7. Deputy High Court Judge Muttrie in the aforesaid consolidated action, held that although the Plaintiff had ceased to be the manager appointed, it nevertheless could maintain the actions in its own right for the expenses incurred. On the basis of the parties' agreement on Judge Lok's judgment, it follows that Deputy High Court Judge Muttrie's findings in the High Court action 4978, 17643, 20857 of 1998 and 9502 and 9516 of 2000 is also binding on the parties so far as the relevant circumstances and facts are concerned.

8. I am given to understand that the Plaintiff's claim against the Defendant in the present action is similar to the claim against the other defendants in the consolidated actions 20079, 20088, 20085, 20096, 20100, 20102, of 2001.

9. In his reasons for leave to defend at the application for summary judgment in the consolidated action of DCCJ Nos. 20079, 20088, 20085, 20096, 20100, 20102 of 2001 of 17th June 2002, Judge Lok on granting leave to defend considered that the agreement in the DMC that required the Plaintiff to provide ferry services is not a covenant that runs with the land and therefore is not enforceable against any person other than the original party of the DMC. He further commented that an agreement without termination clause appeared to be unreasonable and gave leave to the Defendants to defend. Those were obviously reasons given on granting leave to defend, not upon hearing evidence and due consideration of the terms and surrounding circumstances of the actions at trial.

10. The Defendant denies she is liable to the Plaintiff according to her re-re-amended defence filed on 11th October 2003. She claims that the management fees, the ferry service charges and management expenses charged were without the approval of the I.O. and the Plaintiff has no locus standi to sue for recovery. The Defendant further claims that the Plaintiff had no right to operate the ferry service upon its termination as the management company for the Sea Ranch under the DMC, and in any event the Plaintiff had failed to act in the best interest of the owners and the I.O. by entering into the 3 year ferry service contract without a break clause and it had failed to mitigate its loss. The Defendant claims the Plaintiff was guilty of wilful negligence under Clause 7 (d) of the DMC. The Defendant further seeks to set off cash payments of ferry charges that she paid against the monthly fixed charge claimed by the Plaintiff up to December 1999.

Background

11. Mr. Lau, the Plaintiff's counsel, submitted that there was no evidence the Plaintiff was under the control of the developer. Furthermore, Deputy High Court Judge Muttrie found in the consolidated HCA No. 4978, 17643, 20857 of 1998 and 9502 and 9516 of 2000 that at the material period of time, the Plaintiff is not a subsidiary of the developer. The developer Hutchison Whampoa Ltd. had sold all of its shares to the individual owners of the Sea Ranch. The Plaintiff's directors were owners who were elected by the other owners of units of the Sea Ranch as are the members of the I.O.

12. A series of litigation by the Plaintiff against individual owners of units at the Sea Ranch to recover management fees and expenses, ferry charges and miscellaneous fees arose out of disputes between one faction of owners who are members of or supporters of the management committee of the I.O. and the other faction of owners or supporters of the Plaintiff's present board of directors. It has been suggested that the Defendant in the instant case is one of the owners belonging to the first faction and the present action is one of the actions the Plaintiff took out against such an owner. I do not propose to refer to previous litigation further then it is necessary unless they have any direct effect on the present action save that Deputy High Court Judge Muttrie in his 18th May 2001 judgment had found for the Plaintiff at the High Court hearing, it is noted, however, that that previous trial dealt with an earlier period to the present action.

13. From the background of previous litigation, it is indicative that many of the owners and residents represented by the I.O. have been questioning the service and the operation of the Plaintiff. This led to the eventual replacement of the Plaintiff by the I.O.'s appointment of Messrs. A.G. Wilkinson and Associates as the manager to manage the Sea Ranch since 10th December 1999.

The Deed of Mutual Covenant

14. The Plaintiff's action is based on the said DMC. Under the DMC, the management of the said land was to be undertaken by the Plaintiff (see Clause 6 (a) of the DMC). It has been conferred extensive authority in the management of the Sea Ranch. It is, therefore, necessary to refer to the DMC to examine the authority conferred.

15. Under Clause 6 (b) of the DMC the Management Company has been made accountable to the owners of the undivided shares at Sea Ranch:-

"6(b) The Management Company shall be responsible and accountable to the owners for the time being of the undivided shares in the said land and the said Sea Ranch acting collectively through the Company but not to owners individually."

Under Clause 6 (c) (1) of the DMC, it is provided that the Management Company is remunerated in the form of a monthly payment by the owners as part of budgeted expenditure. While the ferry service is also to be paid for by the owners at a rate decided by the Management Company. Clause 6 (c) (2) provides that:-

"(2) The remuneration of the Management Company of the ferry services hereunder shall be at the rate and payable in such manner as the company shall in its absolute discretion decide which amount shall be paid by the owner or owners thereof for the time being as part of the budgeted expenditure for the said land and the Sea Ranch as herein mentioned. Such remuneration shall be subject to review by the Company in its absolute discretion at intervals of every six months after the issuance of the Occupation Permit for the said Sea Ranch or any part thereof."

16. So far as the provision of the ferry services, management and operation is concerned, the authority of the Management Company is unrestricted under Clause 7 of the DMC:-

"7	POWERS AND FUNCTIONS OF THE MANAGEMENT COMPANY
	(a)	The Management Company shall (subject as herein otherwise specifically provided) have full and unrestricted authority to do all such acts and things as may be necessary or requisite for the management of the said land and the said Sea Ranch and the provision of a Ferry Service between the Sea Ranch and Hong Kong Island and anything reasonably incidental thereto.
	(b)	Without in any way limiting the generality of the foregoing, the Management Company shall have the following powers and duties, namely:-
		(2)	To demand, collect and receive all amounts payable by owners under the provisions of this Deed.
		(8)	To repair and keep in good repair and condition the main structures, roofs, paths, common rights of way, the pier and fabric of the said Sea Ranch its equipment, apparatus, services, the Utility Facilities, the common areas and fittings thereon and when necessary to replace any part or parts thereof which require replacement.
		(24)	To do all such other things as are reasonably incidental to the management of the said land, the said Sea Ranch and the ferry services.
	(c)	All acts and decisions of the Management Company in accordance with the provisions of this Deed in respect of any of the matters aforesaid shall be binding in all respects on all the owners for the time being of any undivided share in the said land and the said Sea Ranch."

17. Under Clause 7(d) the Management Company is liable to the owners save in cases where acts involving criminal dishonesty or wilful negligence.

 

"(d)

The Management Company shall not be liable to the owners or any of them or to any person or persons whomsoever whether claiming through, under or in trust for any owner or otherwise, for or in respect of any act, deed, matter or things done or omitted in pursuance or purported pursuance of the provisions of this Deed not being any act or omission involving criminal liability or dishonesty or wilful negligence and the owners shall fully and effectually indemnify the Management Company from and against all actions, proceedings, claims and demands whatsoever arising directly or indirectly out of or in connection with the management of the said land and the said Sea Ranch and the operation of the ferry services or any act, deed, matter or thing done or omitted as aforesaid and all cost and expenses in connection therewith and not involving criminal liability, dishonesty or wilful negligence on the part of the Management Company."

18. The Management Company is further authorised to take action in enforcing the DMC provisions including suing the defaulting owners under Clause 7(j) & (h) :

 

"(j)	Notwithstanding the powers conferred on the Management Company by this Clause, any one or more owners shall be entitled to take action to enforce the provisions of this Deed and, if at any time no Management Companies are appointed or acting hereunder or any Management Company so appointed or acting refuse or fail to enforce any of the provisions of this Deed, any one or more owners appointed by resolution passed pursuant to Clause 10 hereof shall be entitled to sue any defaulting owner on behalf of himself or themselves and all other owners and the provisions of this Clause shall apply mutati mutandis to any action or proceeding brought by such owner or owners and to the recovery of any costs, damages or other moneys awarded therein.
(h)	The Management Company shall further have power to commence proceedings for the purpose of enforcing the observance and performance by any owner of any one or more undivided shares in the said land or the said Sea Ranch and any person occupying any apartment through under or with the consent of any such owner of the covenants, conditions and provisions of this Deed and of recovering damages for the breach non-observance or non-performance thereof. The provisions of paragraphs (e), (f) and (g) of this Clause shall apply to all such proceedings and to the recovery of any costs, damages or other moneys awarded therein."

19. The Sea Ranch has a background of its developer Hutchison Whampoa having developed it in 1984, subsequently transferred all of its interests to a company called Holiday Resorts (Holdings) Ltd. ("Holdings Ltd.") incorporated by the owners of units in the Sea Ranch. Each apartment/unit owner was entitled to subscribe to 1 share in the company. Prior to 1996, all the owners were said to be on good terms and some of the management committee members of the Incorporated Owners of the Sea Ranch were also directors of the Plaintiff. The Defendant was at one time involved as a committee member of the I.O. and in the Plaintiff. It was not until after 1996 that disputes arose between the two different factions of owners of the Sea Ranch.

20. It, therefore, is incorrect to suggest that after the transfer of interests by Hutchison Whampoa Ltd. to Holiday Resorts (Holdings) Ltd. ("Holdings Ltd.") the developer had installed its own subsidiary as the management company of the Sea Ranch. It is certainly true though that the DMC did confer extensive authority on the management company to manage the Sea Ranch.

Conflict of Interest

21. Mr. Yuen, counsel for the Defendant, attempts to show the Plaintiff solicitors Messrs. M.K. Lam & Co. have a conflict of interest as certain partners of the firm together held 25 shares in the Holdings Ltd. Mr. Yuen submitted that they have vested interest in the present litigation not only in its outcome but also in the legal costs recoverable should the Plaintiff be successful in the action.

22. Given the history of bad blood between the post 1996 Incorporated Owners of the Sea Ranch ('I.O.') and the Plaintiff and the series of litigation waged between the two factions of owners, it is understandable the Defendant having been previously involved with the management of the Plaintiff and had also been actively involved in the I.O. would be suspicious of the relationship between the Plaintiff and Messrs. M.K. Lam & Co. as the Plaintiff's solicitors when one or more of the firm's partners have been involved in the present management of the Plaintiff.

23. On the other hand, so far as the present action is concerned, professional misconduct would first have to be shown if the Defendant wishes to find fault with Messrs. M.K. Lam & Co. representing the Plaintiff. So long as the Plaintiff's solicitors complied with the code of conduct of their profession and acted properly and in accordance with rules of procedure, it is not actionable. Neither does the fact that a company whose shares are held by certain members of Messrs. M.K. Lam & Co. may have lent money to keep the Plaintiff from insolvency should render the legal representation of Messrs. M.K. Lam & Co. technically improper provided the case is handled by a member of that firm who is not in charge of the Plaintiff.

24. No sufficient evidence of the aforesaid misconduct had been placed before me to conclude the Plaintiff's solicitors have acted improperly other than the confusion of Mr. Kam's dual role at the initial stages of the trial when he appeared alone presumably both as a director and authorised representative of the Plaintiff and as its solicitor and advocate. He was requested to clarify whether the Plaintiff was acting in person or represented by him as its solicitor and advocate. This confusion was overcome when counsel Mr. Walter Lau was instructed to appear on behalf of the Plaintiff after the trial commenced.

25. For the purposes of these proceedings, I do not intend to go into the merits of and the number of actions taken up by the Plaintiff against other owners for I do not find these to be relevant, suffice it to say they had undergone due process of law and the Plaintiff had been successful in recovering both management expenses and legal costs.

26. Mr. Yuen criticised the huge costs of litigation to be unnecessary and unreasonable citing the litigious attitude of the Plaintiff indicated in the audit reports. I find this criticism to be unfounded. It is the duty of the Management Company to pursue outstanding management expenses and fees under the DMC. As to the reasonableness of the legal fees charged, I am given to understand, costs were recovered after taxation before the masters in the registry. Should the Defendant find the Plaintiff's solicitors had overcharged the company, she would no doubt raise it at an appropriate venue.

Was there a deficit?

27. I find the audited accounts have been properly prepared, the auditors having disclosed all necessary related matters. A deficit had existed at 31 March 1999 which Deputy High Court Judge Muttrie accepted to have incurred due to unpaid management fees and the high costs of running regular ferry services. He further found the Holdings Ltd. had 'prop up' the Plaintiff to keep it afloat. The audit reports certainly testify to the truth of this finding. This deficit had increased from $1,556,608 on 31 March 1999 to $2,706,312 on 10 December 1999. It included $1,045,485 legal fees incurred, the balance after deducting this sum is a deficit of $1,660,827.

28. So far as the legal fees are concerned, the Plaintiff recovered costs on an indemnity basis at the hearing before Deputy High Court Judge Muttrie. This amply explained the reasonableness of the legal action taken. I am satisfied that the auditors had after reviewing documents shown to them accepted as indicated in the audit reports that a large part of the $1,038,075 paid to Messrs. M.K. Lam & Co. was counsel fees, court and law costs draftsman fees in the actions for the recovery of management fees from owners. I can find no basis to question the accuracy of the audit reports. Under Clause 8(j) and (h) of the DMC referred to above, the Plaintiff is fully entitled to enforce the payment of management fees and bring actions against the owners for their recovery. I am satisfied that the Plaintiff acted correctly in pursuing the recovery of unpaid management fees by legal means. I find no merits in the Defendant's criticism on legal costs incurred.

The increase ferry charge of $820 up to 10 December 1999

29. This charge was increase to $820 from the previous $200 per month. The evidence from the Plaintiff's manager Miss Leung and the audit reports clearly established that the ferry service had been expensive to maintain. In fact, this was anticipated at an early stage by the developer for Clause 7(b)(9) and (14) of the DMC had made provisions for a separate account for the ferry service and that it should be operated on a 'break-even basis'. The evidence also showed that even at $820 per month the deficit though reduced still existed. On that basis, the increase was unavoidable.

Post 10 December 1999 Ferry Service Charges

30. This is one of the two main items disputed in this action. The Defendant adduced evidence from Messrs. A.G. Wilkinson & Associates Property Management Ltd. in charge of management of the Sea Ranch since 10 December 1999. A copy of the hiring agreement dated 1 December 1999 for the supply of ferry services to Sea Ranch for one year commencing on 11 December 1999 had been produced. It is not disputed that this service though similar to the service provided by Pana Ocean was supplied at $177,000 per month, as opposed to the charge of $205,000 per month charged by Pana Ocean.

31. The Plaintiff adduced evidence from Miss Candida Mo Chi Fun, director of Ocean Leader Limited trading as Pana Ocean with whom the Plaintiff signed an agreement on 1 March 1995 to provide regular ferry service at the Sea Ranch at $230,000 per month. On 1 March 1998, the agreement was renewed at the charge of $205,000 per month for a further period of 3 years. The second agreement was reached after the Plaintiff had invited tenders for the ferry service. Miss Mo believed her company's tender was the lowest when Pana Ocean was awarded the 3 year contract on 1 March 1998. She claimed she was approached by Mr. George Chong in mid 1999 who was the then chairman of the I.O. to enter into a ferry service contract with the I.O., but she rejected the offer at the time because she did not wish to break the existing contract with the Plaintiff. Miss Mo further explained that her company had at the time of the first ferry service agreement in 1995 obtained an exclusive ferry service license from the Marine Department to operate the Sea Ranch to Cheung Chau and Hong Kong Island routes. Her company had invested about $3.4 million in the purchase of two vessels and hired qualified staff to operate the ferry service. It had also made improvements to the two vessels for the second agreement period, for these reasons, Pana Ocean would not have accepted an early termination clause (break clause) in the hiring agreement. However, due to the later competition from the A. G. Wilkinson & Associates' alternative ferry service, the Plaintiff and Pana Ocean was forced to discontinue the ferry service in June 2000 after operating at a deficit in spite of a reduction of monthly charges by Pana Ocean to $190,000 for the period 1 December 1999 to 28 February 2000, which was further reduced to $170,000 from 1 March 2000 to 30 April 2000, and to $135,000 from 1 May to 30 June 2000.

32. I find Miss Mo to be a truthful witness, in 1998 she obviously considered her company had strong bargaining power as the sole licensee to operate the Sea Ranch ferry routes. The Defendant's allegation that the Plaintiff had failed to seek the approval of the I.O. before entering into the second agreement with Pana Ocean is unsubstantiated. The second agreement was entered into on 1 March 1998, over 21 months before the Plaintiff's appointment was terminated on 10 December 1999, and it was done after a tendering process and negotiations. Pana Ocean clearly had a distinct advantage for being the sole licensed ferry operator for the Sea Ranch routes from the Marine Department and, further, had the experience of having run the operation under the first agreement. The reasonableness of the terms of the agreement is determined by the circumstances at the time of the agreement, not 21 months after it was signed when the Hong Kong economic climate had changed completely.

33. As to the issue of whether the Plaintiff had the right to run the ferry service after 10 December 1999 and whether the Plaintiff can enforce the DMC on the Defendant because she was not one of the original parties to the DMC, I find no merits in this argument. The issue is not whether the covenant in the DMC runs with the land or not. Under the Assignment dated 13 December 1985 from Liu Chong Hing Bank Ltd. to the Defendant (page 71-76 of the bundle), the Defendant's interests in the property is subject to and with the benefit of the DMC. The DMC and management agreement were specifically referred to in the schedule of the Assignment (page 74 of the bundle). The said DMC (page 1-70 of the bundle) made specific references to the number of parts or shares in the development of the Sea Ranch and the assignment of one share each to each chalet or apartment owner and the right each owner has in the undivided shares and to use and enjoy the common parts and other facilities in the Sea Ranch such as the pier, walkways and stairs etc. in return for the owner's duty to pay for their management, repair and maintenance. It is therefore not opened to the Defendant to claim that she is entitled to enjoy the benefits without the burden under the DMC.

34. That being so, the Defendant is bound by the terms and conditions under the DMC and is therefore bound to indemnify the Plaintiff for the deficit suffered by it because of the ferry service contract with Pana Ocean, the costs of pier repair and the legal costs incurred to enforce payment of management charges from owners who defaulted, collection charges and the interests on expenses so incurred.

Repair and maintenance of the pier

35. Under the DMC, the Plaintiff, as the appointed manager, had a duty to keep and maintain the amenities in good repair. The Defendant claims that the Plaintiff was in breach of its duty to maintain the Sea Ranch. The Defendant alleged the pier was poorly maintained. Evidence relied on by the Defendant included photographs taken of the pier.

36. The Plaintiff adduced evidence from the pier repair contractor King Success Engineering Ltd.'s director and manager Mr. Shek Kam Tim on the repair work done including repair of the fenders, the exposed concrete and steel beams and the deck of the pier, the pier steps, landings and railings etc. I have been shown copies of the photo records from the Government's Technical Services Division of the Civil Engineering Office of the Civil Engineering Department dated 4 August 1998. It was at the order of the Civil Engineering Department that the Plaintiff as the manager took up the repair work. King Success Ltd. was awarded the contract in June 1999 after a tendering process in November 1998. According to Mr. Shek, repair work began in July 1999 and completed on 29 November 1999. The work was found to be satisfactory by officers of the Civil Engineering Department. Mr. Shek claimed that King Success did not receive any request to follow up the repair work during the following 12 months warranty period.

37. The Defendant called no evidence from the Civil Engineering Department to rebut the Plaintiff's claim that the work of King Success satisfied the Civil Engineering Department's requirements. On this basis, I am satisfied the pier repair costs was necessarily incurred and the work was satisfactory at the time of its completion. After completion, the new management company could have requested King Success to follow up and maintain the work done during the 12 months warranty period, it is unfortunate that this was not done. It is likely that had there been no dispute between the new and old management companies, the degree of the subsequent deterioration in the form of loose fenders, pier landings and steps could have been minimized. Given the location of the pier at the Sea Ranch, it exposed to the elements, and it is to be expected that constant maintenance work would be required. I do not find the Plaintiff to be wilfully negligent or had been in breach of its duty as the manager. Consequently, it is entitled to be reimbursed the $680,000 pier repair costs.

Set off of ferry charges

38. After careful consideration of the evidence of Madam Lu on the post 10 December 1999 collection of ferry charges and Mr. Chow Suk Ping's evidence on the past practice of collecting ferry charges, I am satisfied that Madam Lu is an honest witness and that because of the background of dispute between the I.O. and the Plaintiff and the controversy over the increased ferry charges, she had been asked to pay the ferry charges in cash instead of travelling on credit on such trips. I also accept she did pay in cash when she commuted to work from the Sea Ranch. On this basis, she should be allowed to set off such cash payments supported by receipts against the $820 per month charged.

Conclusion

39. The Plaintiff is entitled to recover :

a)	Unpaid management fees			$51,840.00
b)	Ferry service charges
	(i)	31/1/98 to 30/11/99	$15,560.00
	(ii)	post 9/12/99 indemnity	$4,920.00
			$20,480.00
		less cash payments	$7,484.00
			$12,996.00
				$12,996.00
c)	Pier repair contribution			$4,600.00
d)	Collection charge			$300.00
e)	Registration fee			$4,240.00
	Total			$73,976.00

40. Interests - the Plaintiff is entitled to interests from 31/9/98 to 30/6/00 and interest is payable on the judgment sum from date of writ to date of judgment at half judgment rate, thereafter at judgment rate until full payment.

41. Costs nisi - Costs to the Plaintiff to be taxed if not agreed with certificate for counsel.