KAI FUNG CONSTRUCTION CO. (a firm) v. INCORPORATED OWNERS OF MAN WO GARDEN MANSION

CACV 427/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 427 OF 2001

(ON APPEAL FROM HCA 4726 OF 1997)

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REASONS FOR JUDGMENT

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Hon. Cheung JA:

1. The appeal was dismissed by this court at the conclusion of the hearing. I now give my reasons.

The plaintiff's claim

2. The plaintiff was a building contractor. The 1st defendant was the Incorporated Owners of a building known as Man Wo Garden Mansion ("the Building") at 38 Yuet Wah Street, Kwun Tong, Kowloon. The 2nd to 6th defendants were members of the management committee of the 1st defendant.

3. The plaintiff's case is that the 1st defendant had by a written invitation dated 22 August 1996 invited tenders for renovation work to be carried out at the Building. On 28 August 1996 the plaintiff submitted a tender in a sum of HK$10,768,000.00. On 7 September 1996 the 1st defendant, pursuant to a resolution of the meeting of the Incorporated Owners of the Building held on 6th September 1996, accepted the plaintiff's tender.

4. On 11 September 1996 the tendered offer was reduced to a written contract ("the contract") and executed by both the plaintiff and the 1st defendant, by which the plaintiff agreed to carry out renovation work on the Building for the total price of HK$10,768,000.00. Pursuant to the contract the plaintiff commenced the renovation work on 13 September 1996 by erecting scaffoldings around the Building.

5. On 18 September 1996 the 1st defendant ordered the plaintiff to cease work immediately and prevented the plaintiff from carrying out the renovation work. By a letter dated 26 September 1996 the 1st defendant's solicitors informed the plaintiff's solicitors that the contract had been unauthorized and requested the plaintiff to remove its scaffolding from the Building.

6. The plaintiff alleged that the 1st defendant had repudiated the contract and by a letter dated 17 April 1997 accepted the repudiation. The plaintiff asked for damages for breach of contract including loss of profit from the 1st defendant. The plaintiff did not provide particulars of damages in the statement of claim.

7. The case of the plaintiff against the 2nd to 6th defendants was framed in the alternative. It was pleaded that the 2nd to 6th defendants warranted to the plaintiff that they were authorized by the 1st defendant to make the contract for the 1st defendant. However, instead of making a claim against all the 2nd to 6th defendants, the plaintiff pleaded that :

" If the 2nd and 3rd defendants had no authority to enter into the said contract on behalf the 1st defendant, which the plaintiff denies, the 2nd and 3rd defendants are in breach of their said warranty of authority, and in consequence the plaintiff is unable to enforce the said contract against the 1st defendant and has thereby suffered loss and damages."

It was not clear from the pleadings how the plaintiff intended to deal with the 4th, 5th and 6th defendants.

8. The 2nd and 3rd defendants did not file any acknowledgment of service of the writ. Default judgment was entered by the plaintiff against them.

9. The 1st defendant in turn issued third party proceedings against the 2nd to the 6th defendants seeking indemnity from them in the event that the 1st defendant was adjudged to be liable under the contract. The 4th to 6th defendants also issued third party proceedings against the 2nd and 3rd defendants claiming indemnity by them against their liability to the plaintiff.

The decision

10. On the first day of the trial the plaintiff withdrew its claim against the 4th to 6th defendants. However, the third party proceedings continued which were heard together with the plaintiff's claim against the 1st defendant. Deputy High Court Judge Whaley dismissed the plaintiff's claim against the 1st defendant. As the question of indemnity did not arise, the judge did not make any order in relation to the two sets of third party proceedings.

The appeal

11. The plaintiff appealed against the order dismissing its claim against the 1st defendant.

The defence

12. The defence of the 1st defendant on the contract can be summarized as follows :

(1) The management committee had no authority to agree to appoint the plaintiff as the contractor because many of its members were invalidly appointed as members and the meeting in which the management committee resolved to appoint the plaintiff as the contractor was invalid due to the absence of a quorum.

(2) The management committee had no authority to appoint the 2nd defendant to sign the contract on its behalf because many of the members who signed on the appointment letter were not validly appointed as members.

(3) The tender by the plaintiff could only be accepted by the 1st defendant at a general meeting as required by section 28A of the Building Management Ordinance and the Code of Practice issued under section 44 thereof. This requirement had not been complied with.

(4) The management committee required the contract to be signed by the 2nd defendant and to be countersigned by the treasurer i.e. the 3rd defendant together with the vice-chairman of the management committee. The contract was only signed by the 2nd and 3rd defendants without the signature of the vice-chairman.

(5) The contract was not properly executed because at the time of the execution although Mr. Mown, the proprietor of the plaintiff and the 2nd defendant had signed their names on the contract, the handling solicitor had made known to them that the contract would not be binding upon the parties until the fulfillment of certain conditions. These conditions were not fulfilled.

The cause of action

13. The cause of action of the plaintiff was based on the contract he had signed in September 1996. The judge's finding was that the parties intended that a binding contract would only come into existence when the terms of the tender documents had been supplemented and reduced to writing and had been duly executed by the parties in the presence of the 1st defendant's solicitors. There was no appeal against this finding. In the light of the evidence this finding can hardly be challenged because after the plaintiff had submitted the original tender on 28 August he had amended the tender and increased the costs of the 1st defendant by HK$1,860,000.00. This amended tender was submitted some time after 7 September 1996 when the management committee accepted the original tender

Execution of the contract

14. Although the 1st defendant had raised various defences, the focus of the trial and of this appeal was on whether the contract was properly executed.

Mr. Lai's evidence

15. The contract was executed in front of a solicitor, Mr. Lai Fat Keung Eric ("Mr. Lai"). His firm was approached by the 2nd defendant to witness a contract. His evidence was that on 10 September 1996, the 2nd defendant and Mr. Mown Kai Yin ("Mr. Mown") attended his office. He was shown five copies of contract which were in identical terms. It was agreed that he would not be responsible for the contents of the contract and his only duty was to witness the signatures of the plaintiff and the representatives of the 1st defendant. He also agreed with the 2nd defendant that he would represent the 1st defendant at a later stage in the collection from the owners of the Building their shares of the renovation costs. He would also send out letters of demand and commence legal actions against the owners for the recovery of the costs in case of default.

16. Mr. Mown produced to Mr. Lai a business registration certificate of the plaintiff which did not show the identity of the sole proprietor of the business. Mr. Lai informed him that it would be necessary to do a business registration search in order to confirm that Mr. Mown had the authority to sign on behalf of the plaintiff. Mr. Mown requested him to witness his signature in the meantime so that he would not have to come back to sign the contract at a later stage. Mr. Lai agreed but making it clear to Mr. Mown that if the search revealed that he was not the sole proprietor his signature would not be valid.

17. Mr. Lai also told the 2nd defendant that before the contract was signed, it was advisable for him to have a resolution that had been passed at a meeting of all the owners of the Building accepting the appointment of the plaintiff to carry out the renovation work. The 2nd defendant stated that he had the written consent of the owners and he produced a bundle of questionnaires that had been sent to the owners soliciting their views on the extent of the renovation work. He also produced an announcement of tender by the management committee which confirmed that the plaintiff had been selected as the contractor.

18. When Mr. Lai examined the questionnaires, he discovered that they reflected different views and he informed the 2nd defendant that they did not satisfy the requirement of clause 15(K) of the Deed of Mutual Covenant ("DMC") of the Building which provides that :

" A resolution in writing signed by owners who in the aggregate have vested in them for the time being more than one half of the shares in the said premises shall be as valid and effectual as if it had been passed at a duly convened meeting of the owners."

19. The 2nd defendant informed Mr. Lai that the management committee had found it unnecessary to hold a meeting of the owners since the committee had been advised that it had the power to carry out the repairs by appointing a contractor and entered into the contract. Mr. Lai then requested the 2nd defendant to at least show him a resolution of the management committee approving the appointment of the plaintiff as the contractor and authorizing the 2nd defendant to sign the contract on the 1st defendant's behalf. The 2nd defendant thereupon showed him a copy of the authorization letter. The letter was dated 7 September 1996 and signed by the Chairman of management Committee. The letter stated that :

" To : The Incorporated Owners of Man Wo Garden Mansion

Dear Sir/Madame,

(As a result of) voting by (members of) the owners' committee, the maintenance and repair work for Man Wo Garden Mansion will be contracted to Kai Fung Construction Company (i.e. the plaintiff). It was (also) resolved by votes that Hung Chun Wah i.e. the 2nd defendant, Secretary for this Building was to proceed to the lawyer's office for the signing of the contract, and thereafter have the contract brought back (sic) to allow the Treasurer and the Vice-chairman to sign belatedly."

20. When Mr. Lai noticed the letter had only been signed by Chairman, he told the 2nd defendant that what was required was a resolution of the management committee signed by all the members present at the meeting and sufficient to form a quorum. The 2nd defendant agreed that he would bring the required resolution to Mr. Lai in due course. He would also procure the Treasurer and Vice-chairman to attend and sign the contract in the presence of Mr. Lai. He also requested Mr. Lai to allow him to sign in the meantime so as to avoid having to come back to sign at a later stage. Mr. Lai agreed but at the same time he made it clear to both the 2nd defendant and Mr. Mown that the contract would not be binding upon the parties until :

(1) A search had been made against the business registration particulars of the plaintiff;

(2) The required written resolution of the management committee had been received by him; and

(3) The contract had been signed by both the treasurer and vice-chairman of the management committee.

21. Mr. Mown and the 2nd defendant both indicated their understanding and accepted his explanation of the position. They then appended the chops of the plaintiff and the 1st defendant respectively on the contracts and signed. Mr. Lai witnessed the signature of Mr. Mown but not that of the 2nd defendant since the terms of the authorization letter produced by the 2nd defendant required the contract to be signed by three committee members.

22. The 2nd defendant then requested Mr Lai to allow him to take the copies of the contract away saying that he needed them to carry out certain preliminary work and promised to request the Treasurer and Vice-chairman to bring the copies back together with the required resolution and sign them.

23. Mr. Lai kept one copy for his record and allowed the 2nd defendant to take away the remaining copies.

24. A few days later an authorization letter was forwarded to Mr. Lai signed by the 3rd to 6th defendants and Wong Woon Tai. Upon making further enquiries, Mr. Lai discovered that Wong was not a committee member whereupon he instructed his clerk to request the 2nd defendant to supply a valid resolution duly signed; also to return the copies of the contract which he had taken away; and to request the Treasurer and Vice-chairman of the committee to attend and sign the contract in his presence as soon as possible.

25. He then learnt that the owners of the Building had met and resolved to discharge the existing committee members and elected a new committee so that it would be no longer possible to obtain the required resolution. The matter was never followed up. The Treasurer and Vice-chairman did not attend to sign the contract in his presence.

Mr. Mown's evidence

26. On 11 September 1996, Mr. Mown attended the office of Mr. Lai where he met the 2nd defendant. Mr. Mown said that before any signing took place, Mr. Lai asked the 2nd defendant if the contract had been approved by a resolution passed at a meeting of the owners. The 2nd defendant replied that the owners had been informed that such a meeting would be held but had failed to attend. The 2nd defendant then produced a pile of letters which he said were authorizations from the owners for the carrying out of the renovation work. Mr. Lai went through the documents and after he had counted them, stated that a sufficient number of owners had agreed to enable the signing to go ahead. Mr. Lai then asked Mr. Mown to produce the original of the plaintiff's business registration certificate, whereupon he immediately went and collected such from the plaintiff's office and handed it to Mr. Lai, who then confirmed that everything was now in order and the contract could be executed. Mr. Mown then signed the contract on behalf of the plaintiff and the 2nd defendant signed on behalf of the 1st defendant. Mr. Mown left, taking with him a copy of the signed contract.

Mr. Lai's evidence was accepted

27. The learned judge was critical of the conduct of Mr. Lai. He said that his conduct in the meeting was clearly not what it should have been : he appears to have allowed his eagerness to please Mr. Mown and the 2nd defendant to take precedence over what should have been his insistence on the application of proper professional standard. By this, the judge was clearly referring to Mr. Lai allowing the Mr. Mown and the 2nd defendant signing their names and putting the chops of the plaintiff and the 1st defendant on the contract without the confirmation that they had the authority to do so. Nonetheless, the learned judge was satisfied that Mr. Lai's testimony was the truth as to what transpired in his office and he said he preferred his version of the events whenever it conflicted with that of Mr. Mown. He found that the contract was not properly executed.

Appeal against finding of fact

28. The appeal was against the finding of fact by the judge. It was argued that the judge ought to have rejected the evidence of Mr. Lai and his finding was against the weight of evidence, namely, that of Mr. Mown.

The principle

29. This court has stated in Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd & Ors [1998] 3 HKC 153 that :

" In respect of a judge's finding of primary fact, particularly a finding based on the credibility of a witness, before we disturb such a finding, we must be satisfied that there was no evidence to support it; or that it ran counter to documentary or other incontrovertible evidence which the judge must have overlooked; or that it can only have been based on a misapprehension of the facts or some faulty process of reasoning. So the burden on a party who seeks to convince us that a trial judge's findings of primary fact were unjustified is a heavy one ......"

The submission on Mr. Lai

30. In respect of Mr. Lai's evidence, it was submitted that Mr. Lai had no idea of the date of the meeting with Mr. Mown and the 2nd defendant. He could not produce evidence that he had kept attendance notes of the meeting. He did not conduct any search on the plaintiff until four or five days after signing of the contract, by which time the management committee had been replaced. He attested the signature of Mr. Mown before he could ascertain if Mr. Mown had the authority to sign on behalf of the plaintiff and if Mr. Mown's signature was authentic. He had allowed the 2nd defendant to sign on behalf of the 1st defendant. In the circumstances the contract appeared to be properly executed.

31. It was further submitted that Mr. Lai was the 1st defendant's solicitor and in knowing that the plaintiff was not legally represented did not advise the plaintiff to receive independent legal advice. He did not ask the plaintiff to give him a written waiver or disclaimer. He did not obtain any written waiver from either the 1st defendant or the plaintiff in respect of the non-compliance of clause 15(K) of the DMC. He gave four copies of the executed contract to the 2nd defendant knowing that they were not binding. He did not take any follow-up action in respect of the four missing copies of the executed contract or the missing resolutions of the management committee. He did not write to the new management committee to clarify the situation and he did not get in touch with the plaintiff to inform him of the situation. He did not make any effort to declare the executed contract void.

32. I fail to see how any of the matters raised by plaintiff would enable this court to interfere with the finding by the judge. The judge had observed both Mr. Mown and Mr. Lai giving evidence. Despite his criticism of Mr. Lai, the judge accepted his evidence. There was some minor discrepancy in Mr. Lai's evidence on the date of the meeting but he explained how the mistake occurred. Mr. Lai accepted that he did not write any attendance note immediately after the meeting, however, a few days after he learnt that the 1st defendant had replaced the management committee, he recorded in his computer the events that had happened. Based on this note, he prepared his witness statement. The witness statement was an expansion of the note and he did not keep the original note he made of the matter. Hence, Mr. Lai's recollection of the events was not simply based on memory but on a note he had prepared shortly after the event. If the judge accepted Mr. Lai's evidence, he was clearly entitled to the view that the events as disclosed by Mr. Lai was the truth.

33. The only criticism that can be made against Mr. Lai is that he allowed the parties to sign the contract in escrow without confirming this in writing. Again, if the judge accepted his evidence, then the absence of any written confirmation would have no effect on the finding. Likewise, the absence of any written confirmation waiving the liability by either Mr. Mown or the 2nd defendant of Mr. Lai's act is irrelevant. The fact that he did not take any follow-up action after he learnt the management committee had been replaced, whether by itself or taken together with the other matters, is not sufficient to upset the finding by the judge.

The submissions on Mr. Mown

34. In relation to Mr. Mown's evidence, it was submitted that neither the defence counsel nor the judge had not put to Mr. Mown that his evidence on the execution of the contract was not true. I do not find this to be a valid argument. First of all, the plaintiff had not even included the transcript of Mr. Mown's evidence in the appeal bundle. I have no idea what was put to him in cross-examination. In any event, the 1st defendant had stated in the Voluntary Particulars that the plaintiff knew the contract was not duly executed because Mr. Mown was well aware of the circumstances when Mr. Lai put his signature on the contract. The circumstances were detailed in Mr. Lai's witness statement. This being the allegation of the 1st defendant, Mr. Mown should have been asked by his own counsel when giving evidence in chief of his response to the allegations raised by the 1st defendant. This was not done. The plaintiff cannot now turn around and say that the 1st defendant had not challenged Mr. Mown on the truth of the evidence.

35. According to Mr. Mown, the contract was also signed by the 3rd defendant. The judge accepted Mr. Lai's evidence that the 3rd defendant did not attend Mr. Lai's office and did not sign the contract in his presence.

36. Mr. Mown's witness statement dealing with the execution of the contract stated that :

" (1) I as manager signing on behalf of the plaintiff;

(2) The 2nd defendant for the 1st defendant, the 3rd defendant also co-signed at a later time for the 1st defendant; and

(3) Mr. Eric F.K. Lai signed as the 1st, 2nd and 3rd defendants' solicitors and notary and witnessed to my signature."

37. If the 3rd defendant had in fact signed the contract at the meeting one failed to see why Mr. Mown should say the 3rd defendant "co-signed at a later time for the 1st defendant". This highlighted the unsatisfactory state of Mr. Mown's evidence. The finding by the judge was that Mr. Mown was familiar with the statutory requirement of entering contract with the owners of buildings. Such a contract required the approval of the owners in meeting. With this background Mr. Mown was clearly aware of the importance of Mr. Lai requiring the 2nd defendant to produce the necessary resolutions before the contract could become valid.

Conclusion

38. These are the two points relied upon by the plaintiff in the appeal. They are totally without merit. This being the position, there is no need to deal further with the arguments of the 1st defendant in relation to damages and that the 2nd and 3rd defendants had no actual or ostensible authority to act for the 1st defendant.

Rogers VP : I agree.

Le Pichon JA : I agree.