Formalex Ltd. v. Abdoolally Ebrahim Co. (HK) Ltd.

DCCJ14886/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. CJ 14886 OF 2000

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J U D G M E N T

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1. This is a claim by the plaintiffs ("the landlords"), in the sum of $158,000, which is brought against the defendants ("the tenants"), being the cost of repairing the air-conditioning system at Flat E, 41st Floor, Block 3, Estoril Court, 55 Garden Road, Hong Kong ("the premises"), which form part of a large and well-appointed block of flats, which were let to the tenants under a lease ("the lease"), dated 21 April 1998, at a monthly rent of $110,000. I will need to make specific reference to some of the terms of the lease presently. The flats were constructed in the early 1980s and occupied from 1983. Many of the flats, including these premises, are fitted with a French-manufactured Trane air-conditioning system. It is the system that was originally installed in 1983 when the buildings were originally constructed. The tenant first went into occupation on 6 November 1989, under a lease signed at that time. The flat has been continuously occupied by Mr Jaffer Ebrahim, who is the chairman of the tenants company, as a home for himself and for his family under successive two-year agreements.

2. Briefly, the issue in this matter comes about in this way. As required by the various leases signed by the tenants, the tenants have engaged air-conditioning engineers to service the air-conditioning system on annual agreements. As from about mid-1999, Mr Ebrahim began to complain that the air-conditioning was not functioning properly and he paid for repairs to be carried out to it. It finally broke down completely in about the spring of 2000. Following this breakdown, there was a dispute between the parties as to the cause of the failure of the system and whether it required complete replacement or merely extensive repairs. This resulted in considerable delays and it was not until September 2000, following a long, hot summer without air-conditioning, that the landlords' contractors carried out extensive repairs and the system could be recommissioned. The landlords now claim reimbursement of those costs, alleging breaches of the lease by the tenants for failing to properly maintain the equipment. The tenants say that this is an old system, having been in continuous use since 1983 and, inevitably, as with any mechanical equipment, its useful life-span is finite, and that notwithstanding proper servicing, it had finally broken down. The tenants rely on the exception to the repairing covenants in the lease which excludes "fair wear and tear". There is also a counterclaim against the landlord which, inter alia, seeks damages to be assessed for the lack of air-conditioning during the summer. So this is what the case is all about.

3. I should now set out the various clauses in the lease which have a direct bearing on the dispute between these parties. The lease starts at page 14 in the bundle of agreed documents. The tenant's repairing covenant is at clause 2(e). In its material parts, it is as follows:

"Save as provided by clause 5(b) hereof, keep all the interior non-structural parts of the premises and in so far as damaged or destroyed by the act and neglect of the tenant, the landlord's fixtures therein, including but not limited to all doors and windows and electric wiring installations, air-conditioning plant and ducting in good, clean, tenantable, substantial and proper repair and condition, fair wear and tear excepted, and will so maintain at the expense of the tenant and deliver up the said premises to the landlord at the expiration or sooner determination of the said period in the like condition."

Clause 2(h) contains the notice provisions, whereunder the tenant is required to repair defects for which he is liable within 30 days of a notice in writing served on him by the landlord. It is as follows:

"Well and sufficiently repair and amend all defects and wants of repair for which the tenant is liable hereunder within 30 days after notice in writing thereof, given to the tenant or left on the premises by the landlord, and in the event of the tenant's failure to comply with any such notice, in all respects the tenant will permit the landlord and the landlord's agent, with or without workmen or others, with or without appliances, to enter with prior notice upon the premises to remedy all or part of such defects or wants of repair at the cost and expense of the tenant."

That notice has been served.

Clause 2(i) is an indemnity clause which purports to require the tenant to put right defects which he is required to keep in good repair under the lease, and to indemnify the landlord for any claims brought against the landlord by any third party in respect of such defects. Its terms are these:

"Save in the events for which provision is made by clause 5(b) hereof, if any damage is caused to the landlord or to any other person whomsoever directly or indirectly, through the defective or damaged condition of any part of the interior of the premises for which the tenant is responsible hereunder, including but not limited to doors, windows, electric wiring installations, air-conditioning plant and ducting and other landlord's fixtures, be wholly responsible therefor and shall make good the same by payment or otherwise and shall fully indemnify the landlord against all claims, demands, actions and legal proceedings whatsoever made upon the landlord by any person in respect thereof."

Clause 4 contains the landlord's covenants. These are referable to the counterclaim. (a) and (b) are as follows:

"(a) The tenant duly paying the rent and observing and performing the terms of this agreement shall have quiet possession and enjoyment of the premises during the said term without any interruption by the landlord or anyone lawfully claiming under, or through, or in trust for the landlord."

"(b) The landlord shall ensure that the roof and the main drain services and pipes and all the main walls and lifts and other common building services and facilities of the building are maintained in a proper state of tenantable repair and condition, the cost to the landlord. The landlord shall not be liable under the terms of this provision unless and until notice in writing shall previously have been given by the tenant to the landlord for the want of repair and amendment, or a request in writing shall have been previously sent to the landlord to come to view the state thereof, provided the landlord shall be entitled to have a reasonable time wherein to view and ensure the repair and amendment of the said defects."

Additional mutual covenants are contained in clause 5. Clause 5(f) relates to air-conditioning. It is as follows:

"During the tenancy hereby created, the tenant shall be entitled to the use of the air-conditioning plant and ducting where installed in the building by means of any individual unit in the premises ("the individual unit"), by the landlord in the property of the landlord, provided that the tenant shall be solely responsible for its running costs and proper maintenance. For such purposes, the tenant agrees that the landlord, or such other person as shall be appointed by the landlord, shall carry out the regular comprehensive maintenance and repair of the individual unit. The cost of this work and running costs shall be borne by the tenant absolutely, provided further that the tenant shall not be entitled to any abatement of rent in respect of any period during which the said air-conditioning plant shall not, for whatever reason, be operated. The tenant further agrees not to install any additional private air-conditioning units in the premises without the landlord's prior consent."

4. It is now convenient to consider the law regarding repairing covenants of this type and the exceptions accorded for fair wear and tear. Firstly, the standard of repair. Clause 2(e) contemplates "good, clean, tenantable, substantial and proper repair and condition". This type of expression is considered in the current edition of Woodfall, Volume 1, paragraph 13.041. Where the word "repair" is qualified by some such expression as "good, habitable" or "tenantable", it would appear that these expressions mean, in general, much the same thing, although this must not be regarded as an inflexible rule. Such factors as the length of the term and the circumstances of the lease may affect the construction used in a particular covenant, so that a definition of the expression "tenantable" or "habitable repair" laid down in one case is not necessarily to be imputed to every other case where the same or similar words are used. In the leading case of Proudfoot v Hart [1890] 2 QBD 42, Lopes LJ defined "good, tenantable repair" as being such repair as having regard to the age, character and locality of the house would make it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it, and he contrasted what it would mean in Grosvenor Square with what it would mean in Spitalfields. Whilst this may be accepted as an authoritative definition of what is meant by "good, tenantable repair", the editors of Woodfall note that caution must be exercised in applying it to a case where the facts differ materially.

5. Whilst this definition holds good to this day, I must be careful to remind myself that the facts and the sort of premises which have given rise to these authorities come from Victorian England, and that I am required to pronounce on an air-conditioning system in Mid-Levels, Hong Kong, at the turn of the 21st century.

6. Notwithstanding this distinction, I do find the passage in Woodfall, at paragraph 13.042, relating to the repair of an older building of considerable assistance, where I am here having to consider a repairing covenant relating to an air-conditioning system that was certainly getting on, to put it as neutrally as I can. The material part of this passage bears repetition here.

"When an old building is demised the lessee, by his repairing covenant is bound only to keep up the house as an old building and not to give back to the lessor a new one. In order to determine the standard of repair imposed by the covenant. The age and general condition of the premises, when demised, may be taken into account but the court is not concerned with matters of detail as to the exact state of repair in the premises when demised."

The question of fact which the court has to decide is, in the words of Tindal, CJ;

"Whether the lessee's have done what was reasonably to be expected of them. Looking at the age of the premises, on the one hand and to the words of the covenant which they have chosen to enter into on the other the operation of time and the elements are bound to result in some unavoidable deterioration which could be remedied only by building a new house. This the tenant is not obliged to do. He must however undertake all repairs which are possible to make good and protect against damage caused by time and the elements and his duty is to take care the premises do not suffer more than is unavoidably brought about by those agencies.

Time must be taken into account. An old article is not to be made new but so far as repair can make good or protect against the ravages of time and the elements it must be undertaken."

7. I apprehend that I must take as a starting point of this matter the state of this air-conditioning system as at 21 April 1998. It was by then 15 years old. As I judge it the fact that the defendants had been the tenants for the previous nine years or so, under identical repairing covenants, is neither here nor there.

Each tenancy brings its own self-contained rights and obligations. This is of some importance in this case because the landlord's case is put on the basis of long-term lack of repair and maintenance by the tenant which has resulted in the eventual, and I daresay, inevitable break down of the whole system. Nevertheless it is right to observe that at the end of each tenancy it would have been open to the landlord to have the system inspected and any dilapidations or defects caused by lack of proper repair over the life of the previous tenancy to have been put right. This has not happened. What has happened here is that these tenancies have, in effect, "rolled over" with negotiations on the rent but nobody has bothered to consider the state of the air-conditioning system so long as it appeared to be operating satisfactorily, which it did until it began to give trouble in 1999, a year into this particular tenancy. During this period, that is to say from 1989 until the final breakdown in early 2000, the tenant had employed air-conditioning engineers to service the system without any notable mishap until repairs were required as from 1999.

8. The standard of repair must therefore be viewed by reference to the age and the nature of the premises at the commencement of the lease - see also Hill and Redman paragraph 6544, page A1766.

9. Next I consider the exception of "fair wear and tear". The burden lies on the tenant to establish his case when an issue such as this falls to be decided. This is helpfully discussed at 13.046 and 13.047 in Woodfall as follows, 13.046:

"The liability under a repairing covenant is sometimes limited to the exception of dilapidations caused by fair or reasonable wear or tear. This is most usually found in furnished lettings of residential accommodation. The exception includes dilapidations caused by friction of air, by exposure and by ordinary use. So the painting of outside woodwork and re-pointing brickwork have been held to be excluded by the exception. So also has the repairing of a floor affected by dry rot, though a question arises whether this can be said to be the normal operation of natural causes within the principle laid down in later cases. In a case where there was an exception of fair, wear and tear, the court laid down the principle that while the tenant was responsible for repairs necessary to maintain the premises in the same state as when he took them, yet if wind and weather had a greater effect on the premises, having regard to their character, than if the premises had been sound, the tenant was not bound so to repair as to meet the extra effect of the dilapidations so caused. Reasonable wear and tear does not include destruction by a catastrophe never contemplated by either party, even if it resulted from the reasonable use of the premises. When the lessee has covenanted to repair the interior of premises, reasonable wear and tear excepted, you will not be liable for damage caused by the bursting of an outside water pipe which the landlord to whom it belonged had failed to repair after notice."

Next, 13.047, Tindal CJ stated the effect of a repairing covenant containing an exception of reasonable use and wear as follows:

"What the natural operation of time flowing on effects and all that the elements bring about in diminishing the value constitutes a loss which, so far as it results from time and nature falls upon the landlord and the tenant is to take care that the premises do not suffer more than the operation of time and nature would effect. He is bound by seasonable applications of labour to keep the house as nearly as possible in the same condition as when it was demised. More recently it was held that to bring dilapidations within an exception of reasonable wear and tear, two things must be shown: first, the dilapidations for which exemption is claimed were caused by normal human use or by the normal action of the elements; and secondly, that they are reasonable in amount, having regard to the terms of the contract to repair and the other circumstances of the case. Although the second branch of the above rule was later rejected by the court of appeal it has since been approved by the House of Lords. Reasonable wear and tear means the reasonable use of the premises by the tenant in the ordinary operation of natural forces. The exception of want of repair due to wear and tear must be construed as limited to what is directly due to wear and tear the reasonable conduct on the part of the tenant being assumed. He is bound to do such repair as maybe required to prevent the consequences flowing originally from wear and tear from producing others which wear and tear would not directly produce. If prove is given that the tenant is not keeping the premises in a fair and tenantable manner and not keeping the interior clean and well repaired and decorated, then at the very least, the tenant must establish that the matters complained of ought to be attributed to dilapidation or damage resulting from reasonable wear and tear and to nothing else."

10. What I get from these references therefore, is that I must attend with care to the particular defects of this air-conditioning system and decide to what extent this breakdown is due to want of proper repair and maintenance and therefore to a breach of the repairing covenant by the tenant for which he ought to compensate the landlord for having carried out the tenant's obligations by putting it back into proper repair. And to what extent, if any, this breakdown can be attributed to fair wear and tear thereby exempting the tenant from any liability.

Both parties have urged an all or nothing approach but clearly it is possible to examine the evidence in order to discover whether the proper outcome on the evidence is an apportionment of this cost. That could only be achieved if the evidence demonstrates that part of the breakdown is due to lack of repair and maintenance and another element can properly be ascribed to fair wear and tear as contemplated by Tindal, CJ in Gutteridge v Munyard 7C&P 129, C13.047 Supra. This examination is one that must be carried out in the context of a case which concerns plant and equipment which was 17 years old when it broke down, but of necessity in a fairly broad sort of way where the experts, helpful as they have been, have not been invited to specifically apply their expertise to this sort of exercise. And it must follow therefore that I must move with caution when I come to a conclusion of this sort and attempt such an apportionment.

11. From this I now turn to the evidence. The landlord's case, as one might expect, is relatively straight-forward. It starts with the repairing covenant, clause 2(e) supra. Mr Chiu, who appears for them, submits that it is common ground that the system was fully operational at the start of the tenancy. When one then considers the state of the components to the system that became inoperative and required either repair and/or renewal the evidence points to a failure to repair and maintain the equipment and that this is the sole attributable cause of the breakdown of the system. In relation to the claim that old age caused the breakdown, Mr Chiu points to the fact that 99 of the 101 chiller units at Estorill Court which are serviced by Trane are those that were originally installed in 1983. He says that this must substantially dispose of the argument that age explains the failure of the system at these premises. Proper servicing should have kept the unit operational.

12. The plaintiff's expert is Mr Patrick Chow. His witness statement starts at page 20 of the witness bundle, but he was also examined and cross-examined at some length. He is well qualified to speak on air-conditioning systems of this type. A graduate of a Canadian university and a chartered engineer, he has spent his professional career in this field. Whilst his expertise has not been challenged, Mr Nasir for the tenants, has rightly drawn attention to the fact that he does not come to court as a disinterested expert because he is the principal of Associated HVAC Contracting Company Limited who were the contractors engaged by the landlords to report on the causes of the breakdown and to carry out the repairs. He is therefore in a position of having to justify his involvement as an interested contractor as well as an expert whose task it is to assist the court. That is a fair point for Mr Nasir to make. It must affect the weight that I should attach to his evidence whilst in no way impugning his knowledge of the subject matter of his evidence.

13. The other matter which Mr Nasir has drawn attention to is also a valid point which comes about in this way. Once the system had broken down there had been much to-ing and fro-ing between the parties as to how the repairs should be effected and whether this was a case of total breakdown, requiring wholesale replacement of the units. On 8 June 2000, Mr Chow's company sent in Mr Yeung, an experienced technician to examine the unit and report on it. When he got there he found that it had been disabled from the mains, so that he could not operate it to discover what had caused the breakdown. He ran a practised eye over the dormant machinery and made, of necessity, a brief report over the telephone to Mr Chow. Based on that conversation, Mr Chow felt able to write a report to the landlords on 12 June which is at page 30 of the witness bundle. I am bound to say that it reads like a reasoned report with reasoned and detailed conclusions and it comes with a price tag of $180,000 for repairs.

Mr Chow accepts that a visual inspection of the sort carried out by Mr Yeung can be no substitute for a running test. He says the report at page 30 was written on a worst case basis and because the landlords required something in writing from him. That may have been so, but for my part I would have expected a highly provisional report such as this to have explained its limitations on its face and that it could not properly be relied on without a running test. I think Mr Chow was ill-advised to send it out in this way and I accept Mr Nasir's submission that this is something to be properly taken into account in assessing his technical credibility on the other aspects of his evidence. In saying this I wish to emphasise that this reflects no moral turpitude on his part. Mr Chow came over as a perfectly pleasant and patient witness who gave evidence for much of the trial itself, but nevertheless it is a shortcoming in his evidence.

14. That having been said, a running test was conducted by Mr Yeung and his team on 14 August for over two and a half hours - see page 33. And Mr Chow was able to say that the system was not as bad as had been set out in his first letter and the repair costs were then estimated down to $158,000. The extent of the required work is at page 41 of this bundle. It can be seen that both compressors needed replacing. The condenser coil, a large piece of equipment which has been brought to court for me to examine, was also so clogged up and damaged that it needed replacing, as were the fan motors which also needed replacing. Other items set out there also required serious attention but the main items that I have identified were the most serious defects. Mr Chow concludes that these replacements would not have been necessary but for the fact that any maintenance work that the tenants service engineer, Splendor Air-conditioning Service Company, had carried out was inadequate to meet the requirements of a proper maintenance regime.

As I follow his evidence the condenser coil has simply not been properly cleaned to keep its airways open. This should have been done by the application of proper "elbow grease" by the service technicians to clear out dust and dirt and to wash it down with water and six-monthly applications of cleaning chemicals. The effect of the clogging that was allowed to develop on the coil meant that the integrity and efficiency of the system was compromised. More particularly, this caused the compressors to work under greater pressure than was necessary. They operated under stresses, which they should not have been subjected to causing an early breakdown. All of this and the general dirty state of the equipment has led him to the conclusion that servicing has been perfunctory and rather shoddy. Although these were not the expressions that he used, that is the flavour of his evidence.

15. He then examined Splendor's service contract with the tenant, which is at page 26 of the agreed bundle, and found it to be deficient in content and the fee so modest that it simply would not be possible to carry out the maintenance tasks on a commercially viable basis.

16. The tenant's expert, Dr. Lim, comes, if I may say so, with impressive academic credentials, including a PhD. in mechanical engineering. He has experience in giving evidence in court on a regular basis which Mr Chow did not, and he comes as a neutral expert in the sense that he has no association with the party calling him, of the type that Mr Chow has, and to which I have drawn attention.

That having been said, he is less experienced, on a practical basis. He is a younger man, having graduated in 1991. Mr Chow had graduated in 1978. Dr. Lim's report starts at page 55 of the witness bundle. He has considered Mr Chow's reports and the nature of the work that was required to repair the unit with particular reference to the specific parts that needed replacing, because they could not be repaired. He also examined the condenser coil which had been stored at the landlord's premises and concluded that it was sufficiently clear to operate efficiently. Unfortunately his inspection was about 18 months after it had been removed from the unit and I simply cannot tell how it had been treated over this period so I am unable to have much regard to his observations on this.

I also examined it myself and it did appear rather dilapidated although parts of its surface were clear. Dr. Lim's material evidence is that one cannot expect a system, even if properly maintained, to run for as much as 25 years as had been contended on behalf of the landlords. Whilst not seeking to be mathematically precise about it, he considered that the life of a condenser coil could well be in the order of 15 years, after which it would require replacement.

His evidence is to the effect that equipment of this sort must be expected to fail through normal use even assuming competent servicing after this sort of timeframe of around 17 years.

17. The tenant has also called Mr Santi, page 17, a mechanical engineer largely with marine experience. He is an employee of the tenants. He was asked by Mr Ebrahim to have a look at the system. He confirmed that it had broken down. His visit was on 21 July 2000. He considered that the breakdown was the result of the normal ageing of the equipment. He is a ship's engineer and has much experience of air-conditioning systems at sea. He rather thought that the life of a compressor of this type would be about 10 years. He is not surprised that after 17 years these compressors have failed.

18. Mr Carlos Chan from Splendor also gave evidence. He has been in the business for many years. He described his company's costing of their service contracts with the tenants. He accepted that the cost was competitive but as the labour charge for the technicians, who were salaried, was fixed, Splendor was able to carry out these service contracts profitably. He produced various work sheets and was able to say, as best he could, given that it was not he who did the servicing, that the services described on his company's contracts had been carried out.

19. My findings on the evidence are these: I'm bound to say that I found Mr Carlos Chan a straight-forward and trustworthy witness, although of course his time in the witness box was brief and I am conscious of the fact that it was not he, but his workmen who did this servicing work. He has satisfied me that his company contracts are commercially viable and standard in the industry as to the scope of their work. Even Mr Chow agreed that theoretically they provided most of the servicing that would be required but he had doubted that it could be done on a commercial basis and he considered that for this money only a sub-standard service could be offered. I am against him on that.

The next question to determine is whether the contracted for work had been done. Some of the work sheets are there but the tenant has not been able to call the technicians who did the work and so there is an evidential gap there. I must assess the matter on all the evidence and draw the appropriate and correct inferences. As to the condenser coil, my sense of the evidence is that it has been maintained in an effective and substantial state of repair by the tenants service contractor. Mr Yeung has said that it was completely clogged up but his evidence needs to be tempered by the fact that he is hardly neutral in this matter. His employers have recommended the replacement of the condenser coil on the basis that it had not been properly maintained.

I also need to have regard to the age of this piece of equipment and to Mr Chan's evidence, he having impressed me as a competent operator who knows about running an efficient service company. I think inevitably with this type of equipment, that is to say the condenser coil, I cannot imagine that even a reasonably conscientious service technician would give it the sort of detailed cleaning that Mr Chow described to me and which I consider would be required to keep it in proper working condition after 17 years. That having been said, age is a real factor to be weighed in this.

Of this equipment the breakdown of the condenser coil I find to be a combination of perhaps less than ideal cleaning and the function of the passing years. I will leave over my apportionment between maintenance and the ageing process until after I have considered the other parts of this unit.

20. Next, the compressors which I think have very fairly been described as the heart of the system. Both have broken down to varying degrees and needed replacing. I have listened to the rival explanations for this breakdown and again I am satisfied that an apportionment between age and therefore normal use, and less than thorough or conscientious maintenance, is required and justified.

Similarly, I come to the same conclusion in respect of the fan motors and the other equipment that needed replacing. I find that the tenants service technicians have carried out regular maintenance but overall to a lesser standard that might have prolonged the life of this system, but I remind myself that the starting point for this servicing was a 15 year old system. It is impossible to arrive at a mathematically precise apportionment in this sort of matter.

Doing my best on all the evidence I conclude that 35 per cent is the result of a failure to repair and maintain as contemplated in the repairing covenant, but that 65 per cent, the majority, is the product of the ageing process within the fair wear and tear exception.

21. On these findings, it would not have been right to effectively provide the landlord with a substantially re-furbished or new air-conditioning systems at the tenants expense when at the start of the tenancy it was already 15 years old. On the other hand, the evidence has persuaded me that this breakdown, although substantially the result of ageing, has also been contributed to by some lack of repair and maintenance by the tenant. These are the proportions that the evidence suggest as being appropriate.

Accordingly, there must be judgment to the plaintiff in the sum of $55,300 on the claim being 35 per cent of $158,000. I will now hear the parties as to the question of interest and on how this leaves the counterclaim. In their final speeches, Mr Chiu and Mr Nasir had approached this on an all or nothing basis with the result that if the claim had succeeded in full, the counterclaim would have stood dismissed or if I had found that the tenant had made out the exception of fair wear and tear in full, I would have entered judgement on the counterclaim with damages to be assessed. But in these circumstances I propose to adjourn the question of the counterclaim for further argument to a date to be fixed.

I will not require argument today on costs until I decide on the fate of the counterclaim. No doubt the parties will wish some time to consider the terms of this judgment, and in any event the landlord may wish to have Mr Chiu on the argument, he having been released by me from attendance today. So that is the judgment.