HOLIDAY RESORTS (MANAGEMENT) CO LTD v. KING DOH RESTAURANT LTD

DCCJ 20079/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 20079 OF 2001

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(Consolidated by the Order of Acting Registrar S. Kwang of
District Court dated 6th December, 2001)

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Judgment

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Introduction

1. This is yet another chapter in the seemingly endless litigation between the residents of Sea Ranch, Lantau and the now former Management Company of this residential development.

2. There are a number of actions before the court that very sensibly had been consolidated and tried together. The Plaintiff as the then management company is claiming outstanding monthly management charges, charges for the provision of the ferry service, a one-off contribution for charges relating to the cost of repairs for the ferry pier, and a collection charge and interest on the arrears. There had also been a claim for expenses for registering a memorandum of a charge against each of the Defendants properties at Sea Ranch but there has now been a payment into court in respect of this which has been accepted by the Plaintiff with the result that this element of the claim has now gone.

3. Each of the Defendants is, or was at times material to this matter, the owner of a residence at Sea Ranch. All owners' upon having a unit conveyed to them become bound by the terms of the Deed of Mutual Covenant ("the DMC") some of the terms of which I will need to make specific reference to in the course of this judgment. Suffice it to observe at this stage that the DMC requires an owner to pay his or its, in the case of a corporate owner, share of the monthly management charge as well as the charges for the Ferry Service. The only practical means of access to Sea Ranch is by private ferry from Central or by public ferry from Central to Cheung Chau and from there by private ferry service to Sea Ranch. The Management Company (the Plaintiff) is also entitled to charge interest on outstanding Management charges under the DMC as it is able to levy a collection charge and that is how these elements of the claim come about. The repair costs for the ferry pier are also recoverable under the terms of the DMC which casts a duty on the Plaintiff to keep the pier under good repair.

4. I do not propose to make any detailed reference to the previous litigation between the parties, some of which has gone as far as the Court of Appeal, save to observe that many of the residents represented by the Incorporated Owners of the development have long complained that the quality of service provided by the Plaintiff has been below standard and previous attempts had been made by the Incorporated Owners ("the IO") to remove the Plaintiff from its management role and replace it with a manager of their choosing. This they finally achieved on the 10th December 1999 and in the Plaintiffs place the IO's have appointed Messrs. A.G. Wilkinson and Associates to manage Sea Ranch with whom they are said to be entirely satisfied particularly when compared with the Plaintiff. The IO's are led, I think that is a fair description, by Mr. George Chong who either by himself or through companies controlled by him owns 16 units out of the 200 which comprise the entire development.

5. Having brought these actions of the Plaintiffs then went by Order 14 to seek summary judgment in which they were partially successful. The application came before Judge Lok on the 14th June last year when the judge entered interlocutory judgment in favour of the Plaintiff in respect of the Defendants liability to pay management charges, ferry charges, contribution to further management expense (being the repair of the ferry pier), collection charges, registration costs (now settled) and interest on late payment, with quantum to be assessed. As to the ferry charge after termination of the Plaintiff's management contract the judge gave unconditional leave to the Defendants to defend the claim. The judge's order is at A21 and his judgment is at A26 to 32.

6. Mr. Walter Lau, who appears for the Plaintiff, had submitted in opening his case that the effect of Judge Lok's order meant that all he needed to do was to prove the amount of the outstanding arrears and the basis of quantification for interest and late charges in respect of matters in which interlocutory judgment had been entered whilst accepting that on the post-termination ferry charges he would need to show that the Defendants' were liable for these as a matter of law in addition to proving quantum.

7. Mr. Bernard Yuen, for the Defendants, took issue with this and I was required to give a ruling as to the parameters of the enquiry as to the assessment of damages. My ruling is dated the 13th May 2003. I decided that I should and would have evidence of and have regard to, the quality of the particular services charged for, and the reasonableness of those charges; and that it was not sufficient for Mr. Lau to merely prove, by vouchers or otherwise, that items were outstanding or that certain works had been carried out and not paid for. As a result of this ruling I directed that the Defence should be amended to reflect the Defendants particular complaints as to the services provided which Mr. Yuen had complained of, so that Mr. Lau knew what case he was to meet and, equally, I gave Mr. Lau leave to amend the statement of claim and the Replies so that the Plaintiffs case might be fully pleaded in the light of the amendments to the defence.

The scheme of management as comtemplated in the DMC

8. Before I embark on an analysis of the issues that call for resolution it would be helpful to identify those parts of the DMC which the Plaintiff relies on as justifying the claims that are now made against the Defendants in these actions. The DMC is dated the 31st July 1979 when Sea Ranch, although still under construction, was nearing completion. It is a tripartite agreement between Holiday Resorts (HK) Ltd the developer, the Plaintiff its related company as the Manager of the development and Adfyl Design Associates Limited one of the original purchasers of a unit at Sea Ranch. The document is at B1 to 70. It is in a form commonly found in such developments in Hong Kong then and now.

9. Clause 2 of the preamble recites what Sea Ranch as a development comprises including amongst other things at (e) "A pier" which formed part of "the Utility Facilities" [B2].

Clause 7 of the preamble recites the Plaintiffs role and powers as the Management Company;

"(7) The Company and the Apartment Owner have agreed with the Management Company for the Management Company to undertake the Management, operation, servicing, maintenance, repair and insurance of the said land, the said Sea Ranch, the Utility Facilities and the operation of the ferry services to and from the said Sea Ranch from such part or parts of Hong Kong Harbour as the Management Company shall at its absolute discretion decide (all or any of which activities are hereinafter included under the word "management") for the period and on the terms and conditions hereinafter mentioned and the parties hereto have agreed to enter into this Deed for the purpose of making provision for such management and of defining and regulating the rights interests and obligations of themselves and all subsequent owners in respect of the said land and the said Sea Ranch." [B4 and 5]

Clause 4 of the Agreement itself which refers to the owners, in this case the Defendants, binds the Defendants in these terms :

"The Owner or owners for the time being of any equal undivided part or share or a portion or portions thereof in the said land and the said Sea Ranch shall at all times hereafter be bound by and shall observe and perform the covenants provisions and restrictions set out in the third Schedule hereto." [B6]

The Third Schedule, in its material parts is as follows :

"The Third Schedule above referred to the due proportion all costs, charges and expenses which may be or become payable for or in connection with the management of the said Sea Ranch and the operation of the ferry services in accordance with the provisions of this Deed including but not limited to :

(1) Crown Rent

(2) Electricity, water caretaker's telephone and other similar charges for or in connection with the said land and the said Sea Ranch as a whole and not being in respect of the use of or consumption in any particular apartment or other area enjoyed exclusively by one owner.

(8) The cost of repairing, renewing, maintaining, cleaning, painting or decorating the said Sea Ranch or any part or parts thereof and the pier, Utility Facilities.

(13) The costs including the capital costs thereof for the operation and maintaining the ferry services.

(15) Management, accountancy, legal advisory and consultation fees and all expenses properly incurred by the Management Company in carrying out its duties and obligations hereunder.
[B38 to 40]

Clause 7 is entitled " Powers and Functions of the Management Company". I will set out only those parts that matter in this case

"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 :-

(1) For the purpose of financing the management maintenance improvement and operation of the said land, the said Sea Ranch, the Utility Facilities and the operation of the said ferry services including amortisation of the capital costs therefor, to prepare two separate annual budgets (i) showing the estimated expenditure for the ensuing year including suitable provision for periodical renovations and replacements as herein provided for the management, maintenance and operation of the said Sea Ranch and the Utility Facilities but excluding items which are the responsibility of any payable by individual owners directly and the operation of the ferry services (hereinafter called "the Estate Management Account") and (ii) showing the estimated expenditure for the ensuing year for the operation the ferry services including amortisation of the capital costs therefor (hereinafter called "the Ferry Services Account").

(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 pier] and when necessary to replace any part or parts thereof which require replacement.

(14) To operate the ferry services to the said Sea Ranch from such part or parts of Hong Kong Harbour and in such manner and to set charges, rules and regulations for the use of the same as the Management Company shall at its absolute discretion and from time to time decide with a view to operating the ferry services on a break-even basis with provisions for all operational charges including amortisation of capital costs for owning and/or chartering such ferries and the management fees for operating such ferry services to be borne and paid absolutely by the owners of any undivided part or share in the said land and the said Sea Ranch in the proportions as the Management Company shall at its absolute discretion decide from time to time whose decision hereto shall be final and binding on all such owners.

(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.

(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 thing 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 expense in connection therewith and not involving criminal liability, dishonesty or wilful negligence on the part of the Management Company." [B8, 9, 11, 12, 13, 16 & 17]

10. It is from these parts of the DMC which the Plaintiff now seeks to justify its claims against the Defendants.

Judge Muttrie's Judgment

11. I should also make reference to a judgment of Judge Muttrie, sitting as a Deputy High Court Judge, dated the 18th May 2001 [page C462]. In that matter the judge had to consider broadly similar disputes between the Plaintiff and a number of the owners of properties at Sea Ranch including some who are Defendants in these actions. One of the matters that the judge had to decide concerned a very substantial deficit that the Plaintiff had accumulated in managing the development simply because many of the owners with whom it was at loggerheads and who wished, in related actions, to remove it from its management position, had refused to pay their management charges. Instead of doing so they paid these charges to the IOs. In order to keep the management going the Plaintiff was then obliged to borrow from its related company Holiday Resorts (HK) Ltd. This indebtedness was then shown in the Plaintiff's audited accounts. The owners did not accept the authenticity of then running deficits suggesting, amongst other reasons, that this was due to mismanagement quite apart from more sinister and damaging allegations of the type that individuals and companies make about each other when they are in a state of open hostility as these parties have been since about 1996. Having heard the evidence on this issue Judge Muttrie was in no doubt that the deficit was a genuine one and one that had been caused by the owners refusal to pay the Plaintiff its management charges. Having reached that conclusion he then entered judgement on the arrears of management charges. Mr. Lau, quite understandably, seeks to rely on those findings by the judge, from which there was no appeal, the various amounts of the judgement having been satisfied by the Defendants in that action. One of the issues which repeats itself in this case is the question of the deficit in the Plaintiffs accounts, now for a period subsequent to that covered in the action before Judge Muttrie. Mr. Lau submits that this issue is now "res judicata" and that these Defendants cannot suggest that a different finding is open to me on the deficit as well as the reasons for that deficit. In my judgment whilst Mr. Lau is plainly entitled to get support from Judge Muttrie's favourable findings I don't believe he can go so far as to say that the matter is "res judicata" where I am faced with a subsequent period of time. I will look at the issue afresh whilst bearing in mind that in previous identical circumstances the High Court has held for the Plaintiff on this issue. In the end it is a matter only going to credit from which the Plaintiff can draw support.

The Accounting evidence

12. It is convenient to take this first because this will be the yardstick by which the rest of the Plaintiff's case will be measured in terms of its financial accuracy and its "housekeeping" abilities. The Plaintiffs witness on this issue is Mr. Andrew Yiu a Certified Public Accountant who has audited the Plaintiff's accounts for the period 1st April 1999 to 10th December 1999 when the Plaintiff ceased being the management company for Sea Ranch. Having regard to that audit he confirms the deficit for this period to be $1,149,704.00 which has been caused by the excess of expenditure over income. That expenditure he confirms has come from the management of Sea Ranch and the operation of the Ferry Service. The income from management fees and ferry ticket sales has been insufficient to balance the books. He has added to that deficit the accumulated deficit from the previous accounting period in the sum of $1,556,608 which produces a total deficit of $2,706,312.00. These accounts have been arrived at by adopting conventional accounting standards including the examination of vouchers reflecting items of expenditure. His opinion is that proper accounts have been kept over the periods covered by his audit. He is also satisfied from his examination of the accounts that the Plaintiff has had to look to its parent company Holiday Resorts (HK) Limited to meet the shortfall on its behalf. Mr. Yiu has been strongly pressed by Mr. Yuen to explain a number of the features of the accounts particularly some items of expenditure and the issue of further shares that was done in order to increase capital. Having heard his evidence I am entirely satisfied that the Plaintiffs have operated the management of Sea Ranch on a proper and professional basis. I am also in no doubt that the deficits that have arisen have been the result of, in part, the failure by some residents to pay management fees to it whilst it has been under a continuing obligation to carry out its duties of managing Sea Ranch and paying for the services that it employs in order to perform its management tasks. The effect of this finding is that, as a matter of doing the sums as it were, the Plaintiff has satisfied me that there has been a proper accounting by it in terms that it has accurately recorded the income received from management fees payable to it; it has accurately recorded the outstanding indebtedness to it in respect of management fees that it should have received but has not been paid and that as a result this has all been done at the price of a running deficit which has had to somehow be met by its parent.

9. From that position I now need to consider the separate issues which I have already referred to which require an examination of, in some cases, the quality of the service provided by the Plaintiff.

Legal Fees

10. One of the major items in the accounts which has boosted the Plaintiff's expenditure has been $1,045,485 in legal fees to recover outstanding management charges unpaid by a number of the residents and other actions in this long drawn out struggle between the management company and some of the residents. Under Clause 7(b)(22) of the DMC the Plaintiff has the right to take legal proceedings to enforce payment of outstanding management charges. These fees on solicitors and counsel were necessarily incurred to secure payment of these charges. What is absolutely clear is that in bringing such actions the Plaintiff has been singularly successful and has also been given costs on an indemnity basis after trial. Criticism has been made for such expenditure but I am afraid that I can see no basis for such criticism. The reality of the matter is that strong comment would have been warranted had the Plaintiff sat back and done nothing and allowed the deficit and outstanding management charges to accumulate. On the contrary it has done its duty and succeeded in getting judgment in a number of actions which have been hard fought with, on occasion, both sides instructing leading counsel. There is nothing in such criticism of the Plaintiff.

The repair to the Pier

11. This has cost $680,000. I have drawn attention to the part of the DMC which casts a duty on the Plaintiff to keep, amongst other amenities, the pier in good repair. The evidence is that a proper tendering process was undertaken and that the lowest bid by King Success was the successful one. Mr. Shek, its principal, has given evidence and he has been closely cross-examined by Mr. Yuen as to the quality of the work that has been done. Firstly, I am entirely satisfied that the appointment of King Success to do this work was fully justified. Apart from being the lowest bidder, King Success had the technical experience to do this type of work. I am satisfied that the work had been carried out to a proper standard and that the cost of $680,000 has been paid by the Plaintiff to King Success. Questions have arisen as to the quality of some of this work with particular reference to the fact that a number of the wooden fenders to the pier had fallen into the sea. Having listened to what has been said I am satisfied that this is to be expected having regard to the pressures on the pier from wind, sea and the many vessels that come alongside. What in fact caused the fenders to detach themselves from their brackets was a loosening of the nuts that held them tight into their retaining brackets. The wood used was appropriate and the brackets of good design and fit. Regular tightening of the nuts would have prevented this happening. Given the passage of time before this occurred I would characterise this as part of the 'fair wear and tear' that one might expect. Other matters have been highlighted referable to the steps of the pier which have required subsequent repair but I am satisfied that these defects came after the Plaintiff's term of management came to an end and such repairs were not required when King Success were called on to do their works. I find therefore that the Pier repairs by King Success have been done to a proper standard, following an appropriate selection process and that the amount of $680,000 has been actually and reasonably expended by the Plaintiff for which they must be reimbursed.

The Increased ferry charges - $820

12. These increased from $200 a month to $820. The justification for this is that the service needed to be operated under the terms of the DMC on a "break-even basis". (Clause 7(b)(9) and (14) B9 and B13). There is also a requirement in the DMC that the ferry service should be separately accounted for. As to the increased fares it is quite apparent that the $200 previously charged was wholly inadequate to achieve that. The Plaintiff then wrote to the residents setting out the nature of the problem and explaining what needed to be done. Even with the increase to $820 this still produced a small deficit. One of the residents' complaints has been that Pana Ocean's (the ferry operators) charges were too high. As to that I am satisfied that these charges were very reasonable when they were originally negotiated. A proper tendering process had been gone through by the Plaintiff and Pana Ocean was selected as giving the best value and service then available. I am satisfied that the fare rise, although dramatic, was a justified one and in accordance with what was required of the Plaintiff and so on this issue they must also succeed.

The post termination ferry service charges

13. This has proved the most controversial part of the claim. The evidence of Miss Mo the principal of Pana Ocean is helpful. Originally when she bid for the contract she required a 3 year contract. One of the motives, from her point of view, was that her company commissioned a brand new vessel as one of the two that were to be employed on this service. That involved a considerable capital outlay which could only be re-couped if she was guaranteed a minimum term. This contract was then renewed for a further 3 years without complaint from the residents and certain refurbishments were carried out to the vessels to keep them up to standard. When the Plaintiffs management term came to an end the IO's engaged A.G. Wilkinson and Associates to be the Management Company who found another ferry service provider who was and is able to put on a much cheaper service. The point here is that the Plaintiff's contract with Pana Ocean was one without a break clause. It could only be terminated by mutual agreement. Pana Ocean were owed and are still owed a great deal of arrears by the Plaintiff who has been unable to discharge them because of lack of funds. Miss Mo has made some efforts to get the arrears reduced by the threat of litigation and this has produced some payment from the Plaintiff but despite this large arrears still exist. I asked Miss Mo why she did not suspend the service, certainly after December 1999 when the Plaintiff had ceased to have the management contract and she said that she felt compelled go on with this loss making venture because the route had been licensed by the government and she felt under an obligation to the government to continue providing such a service. I can understand her point of view. Nevertheless, the real issue here is between the Plaintiff on the one hand and the Defendants on the other. Under Clause 7(d) the Plaintiff is entitled to an indemnity from the Defendant for its liabilities under its ferry contract with Pana Ocean. Mr. Yuen submits that this 3 year contract was an unreasonable one for which the Plaintiff will have to bear the consequences. Firstly, a three year contract was too long, and certainly one without a break-clause was unwise to the point of being unreasonable. AG Wilkinson has been able to engage a ferry service provider more cheaply and with a contract determinable on one month's notice on either side.

14. What is the answer? It needs to be remembered that when this second contract with Pana Ocean was negotiated for a further 3 years it was one that followed a successful first three year term. Secondly, the Plaintiff was still well and truly ensconsed as manager of the development with no sign at that stage that this was to be brought to an abrupt end. It should also be remembered that a three year term does provide a certain continuity especially where the service provider has already demonstrated a good track record. I have not heard evidence that when this contract was originally entered into break clauses were usual or even, at least, fairly common. It really does not help me to resolve this issue to know that today one can get a ferry service determinable on one month's notice and that ferry services are nowadays readily available. Economic times change and affect market conditions. 2003 and 1997/8 are different times.

15. I am disposed to say that this second contract with Pana Ocean was a perfectly reasonable one to enter into at the time when the matter was concluded. It is easy to criticise 4 or 5 years later with the benefit of hindsight and in a different economic climate.

16. That being so this leaves over the point of law as to the status of this contract after the Plaintiff's management contract had been determined. Mr. Lau says that he can get home on two bases. Firstly, under the indemnity clause, because the contract was entered into when the Plaintiff was still the manager of Sea Ranch, and provided that the contract was not so hazardous or unreasonable so that the Plaintiff should take consequences of its contractual foolishness then the indemnity clause must avail then. I agree that this must be the correct approach. I have already found that this contract with Pana Ocean was a perfectly reasonable one to enter into at the time and so I am content to hold that the indemnity clause must bite and on this ground alone the Plaintiff must succeed for the post termination ferry charges. Mr. Lau has also bravely sought to contend as an alternative that the covenant relating to the provision of ferry services was one which touched and concerned the land and therefore ran with the land and bound all assigns and successors in title. This in support of a submission that the termination of the management contract did not terminate the Plaintiff's right to provide a ferry service and therefore, presumably, to be paid for the provision of that service. That simply cannot be right. The provision of a ferry service cannot create a covenant of this type. It does not touch and concern the land in the accepted sense of that term. This limb, although academic because the Plaintiff 's have succeeded on the indemnity point, must therefore fail.

Collection Charges and Interest

17. I can take this point shortly. I have found default by the Defendants in paying their management charges. In such circumstances they are liable under Clause 8(d)(1) and (2) of the DMC to pay these charges [see B19].

Mr. George Chong's evidence

18. I have had regard to everything that Mr. Chong has had to say. Clearly he is much involved and agitated by these matters, now and as he has been for a number of years. If I may say so he has allowed his no doubt honestly held view that the Plaintiffs were doing a bad job at Sea Ranch to cloud any objective judgment about the merits of the Plaintiff's case under the DMC. One hopes that now that the backlog of litigation involving these parties is being cleared that he and the other residents of a like mind can resume enjoying the amenities at Sea Ranch. Suffice it to say that the evidence which Mr. Chong has given, with great wit and charm, cannot change the legal realities of this action and neither does the evidence of Mr. Ng Che Ping and Mr. Lau Ching For whose evidence I have considered and dealt with, albeit inferentially, in the course of covering the issues that they have been called by the Defendants to speak to.

Judgment

19. Subject to one adjustment in respect of outstanding ferry service fares in the case of Mr. George Chong and his family, to which I will make specific reference presently, my findings on the various issues to which I have referred must result in there being judgment to the Plaintiff against each of the Defendants in the amounts claimed in the prayers to the statements of claim together with interest on those amounts at the rate pleaded in the prayers of the statements of claim, together with costs to the Plaintiff in each case on a solicitor and own clients basis. The order for costs and the basis of taxation will be an order nisi. I will also give liberty to the parties to apply as to the form of the judgments - but I would have thought this should be clear enough as I have given judgment in terms of the prayers to the statements of claim.

20. As to Mr. Chong's situation in relation to his ferry charges I accept his evidence at D764 and 765 as to the amounts spent by him, supported as they are by cash receipts. Accordingly, I direct that the claims in respect of the ferry charges in his case should be reduced to reflect his evidence about these charges and I enter judgment against him in terms of the statements of claim subject to that reduction.