RAIDER LTD. v. SECRETARY FOR JUSTICE

FACV No. 4 of 2000

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 4 OF 2000 (CIVIL)

(ON APPEAL FROM CACV NO. 115 OF 1999)

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J U D G M E N T

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Chief Justice Li:

1. I agree with the judgment of Mr Justice Bokhary PJ.

Mr Justice Bokhary PJ:

Introduction

2. Raider Ltd owns and occupies premises consisting of one floor of a multi-storey factory building standing on land held from the Government. There is a dispute over one of the uses to which Raider is putting its premises. Raider contends that such use is within the permitted user of the land. On the Government's behalf, the Secretary for Justice contends to the contrary. This issue was resolved in Raider's favour at first instance but in the Secretary for Justice favour on appeal to the Court of Appeal. Now the issue has reached us, with Raider as the appellant and the Secretary for Justice as the respondent.

3. The land is Kwun Tong Inland Lot No. 415 ("the Lot") held from the Government under Conditions of Sale dated 14 January 1963 ("the Conditions of Sale").

4. In 1963, by the Conditions of Sale, the Lot was granted to General Bottling Co. Ltd. The Conditions of Sale contained a building covenant. General condition 10(a) required that the Lot be developed by the erection thereon of a building or buildings complying with the special conditions contained in the Conditions of Sale. Special condition 2(a) reads:

"The lot shall be used only for industrial purposes excluding any trade which is now or may hereafter be declared to be an offensive trade under the Public Health and Urban Services Ordinance, 1960, or any enactment amending the same or substituted therefor."

And special condition 2(b) reads:

"No building shall be erected on the lot except a factory, ancillary offices and quarters for persons essential to the safety and security of the building, the number of such quarters and persons to be subject to the special approval of the Commissioner of Labour."

5. A factory building was duly erected on the Lot in conformity with the building convenant and the other provisions of the Conditions of Sale. Eventually that building was demolished. And there was erected in its place the factory building which now stands on the Lot ("the Building"). The Building too was erected in conformity with the Conditions of Sale. On 12 August 1994 the Building received an occupation permit which describes it as a "33-storey industrial building", and permits its use for the following purposes:

"Ground Floor: Entrance hall, carparking, loading/unloading area, workshops and ancillary accommodation for non-domestic use.

1st Floor: Carparking and ancillary accommodation for non-domestic use.

2nd Floor: Workshops and ancillary accommodation for non-domestic use.

3rd Floor: Carparking for non-domestic use.

5th - 36th floor (inclusive)*: Workshops and ancillary accommodation for non-domestic use.

37th Floor: Workshops, fan rooms and ancillary accommodation for non-domestic use.

* There are no 4th Floor, 13th Floor, 14th Floor, 24th Floor and 34th Floor in this building."

6. Raider owns and occupies the 22nd floor of the Building, having acquired all the units on that floor in late 1994 and early 1995. Following its acquisition of the premises on that floor ("the Premises"), Raider started to use the Premises to manufacture pagers and to operate a paging service. Between 80 and 90 percent of the pagers which Raider manufactures on the Premises are sold outside Hong Kong and use paging services operated outside Hong Kong. The paging service operated on the Premises are for Raider's pagers sold in Hong Kong, which make up only 10 to 20 percent of the total number of pagers manufactured on the Premises. Something in the region of 13 percent of the total area of the Premises are used for this Hong Kong paging service.

7. Later that year, 1995, the Lease Enforcement Unit of the Kowloon East District Land Office inspected the Premises, and thus came to know that Raider was operating a paging service there. The Government then objected to the operation of a paging service on the Lot as something beyond the permitted user of the Lot. Saying that such operation contravened special condition 2(a), the Government threatened re-entry unless either the operation ceased or a lease modification to accommodate it were obtained following Town Planning Board approval. Such a modification would of course cost a considerable sum of money. Raider replied to the effect that its paging service operation was within the permitted user of the Lot and did not contravene any provision of the Conditions of Sale.

8. It was established by the decision of the Privy Council on appeal from Hong Kong in Hang Wah Chong Investment Co. Ltd v. Attorney General [1981] HKLR 336 that the Government as lessor of Government land is just as entitled as a private landlord to name its price for any modification of the conditions on which land is held from it. Raider does not dispute that proposition. Rather its stance is quite simply that, contrary to the Government's stance, no modification is needed in the present case.

Neither side was able to persuade the other to its point of view. And litigation ensued, taking the form of originating summons proceedings which Raider commenced on 4 June 1998, seeking a declaration (i) that its use of the Premises did not breach and had not breached special condition No. 2(a); (ii) alternatively, that its primary use of the Premises was, and had at all times been, industrial; and (iii) in the further alternative, that its use of the Premises was and had been for industrial purposes.

The judgments of the courts below

9. On 2 March 1999 Findlay J declared that Raider had demonstrated that its use of the Premises was not in breach of special condition 2(a) or, at least, that the Government had failed to show that there had been any such breach. He awarded Raider its costs.

10. The Government appealed to the Court of Appeal. On 7 December 1999 the Court of Appeal (Godfrey and Rogers JJA and Ribeiro J) allowed the Government's appeal; set aside the judge's declaration and order as to costs; declared instead that the use of the Premises or any part thereof for the purposes of a paging service operation would be a breach of special condition 2; and awarded the Government its costs before the Court of Appeal and the judge.

11. On 19 January 2000 the Court of Appeal granted Raider leave to appeal to this Court. Such leave was granted pursuant to s.22(1)(a) of the Hong Kong Court of Final Appeal Ordinance, Cap. 484, which provides that an appeal shall lie to this Court in any civil cause or matter "as of right, from any final judgment of the Court of Appeal, where the matter in dispute on the appeal amounts to or is of the value of $1,000,000 or more, or where the appeal involves, directly or indirectly, some claim or question to or respecting property or some civil right amounting to or of the value of $1,000,000 or more" .

$4.45 million paid

12. Relevant to that and more generally too, I should mention this. Raider has paid $4,454,659.10 to the Government for the period 6 February 1996 to 14 June 1999 in consideration of the Government waiving or purporting to waive its right to take action based on Raider's breach or alleged breach of special condition 2(a). (The Government says "waiving" and "breach" while Raider says "purporting to waive" and "alleged breach".) On 25 June 1999, after the judge had given his judgment and before the Court of Appeal gave its judgment, Raider commenced an action seeking recovery from the Government of that sum of $4,454,659.10 with interest and costs. That action fell into abeyance after the Court of Appeal's judgment. Raider proposes to revive that action if it is successful in the present appeal.

The Court of Appeal's reasons

13. Godfrey JA's reasons for deciding against Raider are contained in a single paragraph of his judgment, in which paragraph he begins by saying:

"The new building cannot, consistently with special condition 2(b), serve any purpose other than of 'a factory, ancillary offices and quarters ...' A building used as a 'factory' is obviously a building used 'for industrial purposes'. This 'factory' (for that is what it has to be) can be used consistently with special condition 2(a) only for industrial purposes. Insofar as [Raider] uses its premises for the manufacture of pagers, no difficulty arises. But those parts of the premises which [Raider] uses for the operation of its paging service are clearly not being used as a 'factory'; and, for that matter, they are not being used for 'industrial purposes'. It so happens that the pagers supplied to customers of [Raider's] paging service are pagers manufactured by [Raider] in other parts of the premises. But this is irrelevant. [Raider] could perfectly well decide instead to supply for the use of the customers of its paging service pagers manufactured by [Raider], or for [Raider], in other premises, whether in Hong Kong or anywhere else; or even pagers manufactured by a different manufacturer. Yet the purpose for which the parts of the premises dedicated to the operation of the paging service was being used would be exactly the same purpose as it is now".

He then continues by saying:

"The use of parts of the premises for the manufacture of pagers, and of other parts of the premises for the purposes of the paging service operation, are discrete uses. Neither one is 'ancillary' to the other. And the use of part of the premises for the purposes of the paging service operation cannot, by any stretch of the imagination, be described as use as a 'factory' (which, in my judgment, as to its true construction, special condition 2 requires) nor even as a use 'for industrial purposes'. Only a use for manufacturing purposes (and uses genuinely ancillary thereto), will qualify as a permitted use, and the use of parts of the premises for the purposes of a paging service operation is not such a use."

14. Rogers JA agreed with Godfrey JA's judgment, and continued thus:

"I wish to add that, in my view, the error in the judgment below arose from an attempt to try to categorise one or other of the uses to which [Raider] was putting the premises as ancillary to the other. In my view, they were quite separate.

Furthermore, the argument attractively put by Mr Scott SC on behalf of [Raider], with some encouragement from the Court, that the function of providing a paging service could be equated to a manufacturing process in that the end result was the production of a stream of electrons must be wrong. The same argument might apply to any office using computers or word processors, particularly where those are connected to and communicate with outside agencies. The fact must be that the conduct of a paging service is not an industrial process nor does the operation of such a business dictate that the premises in which it is conducted is a factory."

15. Ribeiro J agreed with Godfrey and Rogers JJA.

The "any non-offensive trade" argument

16. Raider advances three alternative arguments for reversing the Court of Appeal's decision and reinstating the judge's decision. The first of these three arguments does not appear in Raider's printed case. It is one to which I will refer as the "any non-offensive trade" argument. For it is that Raider is entitled to carry on any trade on the Premises provided that such trade is not an offensive trade. Shortly stated, it runs thus. By excluding offensive trades, special condition 2(a) is to be read as permitting all other trades.

17. In my view, the "any non-offensive trade" argument does not begin to get off the ground. This is because it wholly ignores the opening words of special condition 2(a) that the Lot "shall be used only for industrial purposes".

The "any non-offensive trade of an industrial nature" argument

18. In the alternative to the "any non-offensive trade" argument, Raider advances what I will refer to as the "any non-offensive trade of an industrial nature" argument. I so refer to it because it is that Raider is entitled to carry on any trade on the Premises provided that it is a non-offensive trade of an industrial nature. This argument runs along the lines of the preceding one subject to the inclusion of the requirement that the non-offensive trade be of an industrial nature.

19. It is true that although dictionaries tend to give manufacture as the primary meaning of industry, they do not strictly confine the meaning of industry to manufacture or the other activities which are carried on in a factory. But as Steyn LJ said in Arbuthnott v. Fagan [1996] Lloyd's Reinsurance Law Reports 135 at p.140, 2nd column: "Dictionaries never solve concrete problems of construction. The meaning of words cannot be ascertained divorced from their context". (Arbuthnott v. Fagan was decided in 1993 but not reported until 1996 after being cited by Neill LJ in The Fina Samco [1995] 2 Lloyd's Rep. 344 at p.350, 2nd column).

20. As it seems to me, the word "industrial" as used in special condition 2(a) refers to the sort of activities which are carried on in a factory. As one sees from general condition 10(a) and special condition 2(b), the context in which the word "industrial" is used in special condition 2(a) is that of a contract under which a factory had to be erected on the Lot and which forbade the erection thereon of any building except a factory, ancillary offices and quarters for persons essential to the safety of the building.

21. While the definition of "factory" in the Factories and Industrial Undertakings Ordinance, Cap. 59, has no direct application to the Conditions of Sale, that definition is nevertheless instructive for present purposes. It provides that factory

"means any premises or place, (other than a mine or quarry), in which articles are manufactured, altered, cleansed, repaired, ornamented, finished, adapted for sale, broken up or demolished or in which materials are transformed, and within the close or curtilage or precincts of which ?

(a) any machinery other than machinery worked entirely by hand is used; or

(b) 20 or more persons are employed in manual labour."

Plainly the paging service provided by Raider is not one by which articles are manufactured, altered, cleansed, repaired, ornamented, finished, adapted for sale, broken up, demolished or transformed.

22. Having regard to the meaning which I attribute to the word "industrial" in the present context, I do not think that the "any non-offensive trade of an industrial nature" argument assists Raider.

The "final stage of/ancillary to/so closely linked to manufacture" argument

23. I turn now to Raider's third and last argument, which I will refer to as the "final stage of/ancillary to/so closely linked to manufacture" argument.

24. This argument consists of two limbs. The first is that on the correct view of its business operations at the Premises, the supply of information was the final stage in the process of manufacture of the pagers, or in any event ancillary to it. I will call this the "final stage of/ancillary to" limb. The second limb is that, in any event, the paging service operation was an industrial service so closely linked to the manufacture of the pagers that use of part of the Premises for that purpose should properly be regarded as use for an industrial purpose. I will call this the "so closely linked to" limb.

Raider's activities

25. For the factual context in which Raider advances the "final stage of/ancillary to/so closely linked to manufacture" argument, I turn first to how it describes its activities on the Premises. This, to quote from its printed case, is how Raider describes those activities:

"(a) Manufacture of pagers. This manufacturing operation takes up the largest physical area at the Premises and includes the design of pagers; the sourcing and acquisition of raw materials; the production process (i.e. assembly, bonding and treating of components using robots and advanced technological equipment, as well as manual labour; testing/quality control; research and design of pagers and the software they contain);

(b) the repair of pagers (located in a customer service area);

(c) finance and administration;

(d) the control of robots used in the production of pagers as well as the dissemination of "public'" information to pager users, through a computer control room;

(e) the relay of messages ("private" information) to pager users through a paging centre;

(f) storage of raw materials used subsequently for the manufacture and packaging of pagers;

(g) the receipt of raw materials through a combined reception/goods delivery area;

(h) Miscellaneous e.g. rest areas for staff engaged in manufacturing and the operation of the paging centre, toilets etc."

26. That description is short on detail as far as the paging centre is concerned. The Government's printed case describes the paging centre as "a self contained purposely fitted out room on the 22nd Floor manned around the clock, whose personnel by use of computer technology and telecommunication receive and disseminate private messages and public information to customers who are owners of [Raider's] pagers".

Final stage?

27. In arguing that the paging service is the final stage of the pager manufacturing process, Raider places reliance on the decision of the Scottish Lands Valuation Appeal Court in Assessor for Renfrewshire v. John McGregor & Sons Ltd 1974 SLT 17. I do not doubt the correctness of that decision. But I do not see how it helps Raider. The circumstances and holding there may be taken from the headnote which reads:

"A company owned two factory blocks (Block 1 and Block 2). These blocks were situated in the same industrial estate, but on opposite sides of a road and some 240 yards apart. The making of three-piece furniture suites was carried out in Block 1. The suites were made to individual order. Thereafter, the furniture was transferred to Block 2 where the component parts were checked and inspected to ensure that there were no differences in colour shading. The ratepayers contended that Block 2 should be given the benefit of industrial derating. The valuation appeal committee sustained the ratepayers' contention. The assessor appealed.

Held that the inspection which was carried out in Block 2 was a normal part of the process of manufacture; that the committee was right in holding that the subjects of appeal were industrial lands and heritages entitled to derating, and that the appeal should be refused."

What was there regarded as the final stage of the manufacturing process was the checking and inspection of the manufactured articles to see if they were fit to be supplied to customers. That is of a different nature from a service provided to customers after they have been supplied with the articles - even where the service is provided in connection with the use of the articles supplied.

28. In my view, the "final stage of" aspect of the "final stage of/ancillary to" limb fails.

Ancillary?

29. That leaves the "ancillary to" aspect of that limb.

30. Even though they are not a stage of the manufacturing process because they come either before or after the manufactured articles have been made and inspected to see that they are fit to be supplied to customers, certain activities may nevertheless be ancillary to the manufacturing process and therefore industrial in the manufacturing sense. This is well illustrated by Deputy Judge Cruden's decision in Mexx Consolidated (Far East) Ltd v. Attorney General [1987] HKLR 1211. The circumstances there may be taken from the headnote which reads:

"The second defendant was the current lessee under a Crown lease and deed of variation of certain premises forming part of the Hing Wah Centre, Kowloon. The plaintiff was a tenant of certain floors of that building. The user covenant in the deed of variation restricted the use of the premises to industrial and godown purposes. The plaintiff set up and operated 11 different departments in the suit premises which departments were responsible for the design, research, and testing of samples and also the making of patterns for the manufacture of clothing. The premises also contained textile machinery and large quantities of materials. Manual labour was also used on the premises for the purposes of packaging. Prototype samples and other samples were made on the premises but the majority of samples present on the premises were made elsewhere. All the samples were checked and packaged on the premises and exported therefrom to countries overseas.

The Crown contended that the real nature of the activities carried on at the suit premises was commercial and not industrial and that the primary use of the premises was a research and design office and that the limited manufacturing and packing activities were subsidiary to that primary use. The Crown demanded a forebearance fee for the alleged breach of covenant. The plaintiff sought a declaration that the suit premises were and had been used for industrial and godown purposes or alternatively a declaration that the plaintiff's use of the suit premises fell within the provision of the deed of variation.

The second defendant was represented throughout the hearing but made no submissions or took any part in the dispute between the plaintiff and the first defendant."

31. What Deputy Judge Cruden decided may also be taken from the headnote. As it says, he held:

"1. The primary user of the premises must be industrial before compliance with the user covenant can be achieved and the cumulative effect of all the plaintiff's activities on the premises must be taken into account.

2. The primary use of the majority of the plaintiff's departments was industrial and the remaining departments necessarily and reasonably incidental to the major departments.

Alternative declaration granted to the effect that plaintiff's use of suit premises was not in breach of the deed of variation of the Crown lease."

32. At p.1219 A-C Deputy Judge Cruden said:

"... I accept that the primary user of the premises must be for industrial purposes, before compliance with the user covenant can be achieved. I accept that if the research and development work carried out at the premises is considered in isolation, some parts of that work could equally well be carried out in non-industrial premises such as commercial offices. But I am satisfied that it is an entirely wrong approach to consider those, or any elements of the plaintiff's overall activities, in isolation. All of the plaintiff's activities within the suit premises must be considered as a whole. Where it is technically possible to break down those activities into separate elements, it is still their cumulative effect and not their individual characteristics, which is more important.

When this broader approach is adopted, it is clear that the research, design and testing functions are merely successive stages in one continuous industrial process, resulting in the creation of manufactured garments, which are finally packed and exported overseas from the suit premises."

33. Research, design and testing prior to the process by which articles are actually made and then inspected are, I think, properly to be regarded as ancillary to that process. So are, I think, the packing and despatch from the factory of articles after they have been made and inspected. Research, design, testing, making, inspection, packing and despatch form a chain of activities pertaining to bringing the articles into existence, seeing that they are fit to be supplied to customers and getting them to customers. The paging service does not pertain to any of that. It is an activity distinct from manufacture and is not ancillary thereto. In my view, the "ancillary to" aspect of the "final stage of/ancillary to" limb also fails.

34. So the "final stage of/ancillary to" limb of the "final stage of/ancillary to/so closely linked to manufacture" argument fails.

So closely linked?

35. That leaves only the "so closely linked to" limb of the argument. As it seems to me, the "so closely linked to" limb and the "final stage of/ancillary to" limb merge as merely two different ways of saying the same thing. For I do not see how any link between the paging service and the process by which the pagers are manufactured can be considered so close as to render the paging service itself industrial within the meaning of special conditions 2(a) unless such service is the final stage of that manufacturing process or at least ancillary to it. So the "so closely linked to" limb falls with the "final stage of/ancillary to" limb. Accordingly Raider's third and last argument fails along with its first two arguments.

Result

36. In the result, therefore, I would dismiss this appeal with costs (both sides having accepted at the hearing that costs must follow the event).

Mr Justice Chan PJ:

37. I agree with the judgment of Mr Justice Bokhary PJ.

Sir Denys Roberts NPJ:

38. I agree with the judgment of Mr Justice Bokhary PJ.

Lord Nicholls of Birkenhead NPJ:

39. I agree with the judgment of Mr Justice Bokhary PJ.

Chief Justice Li:

40. The Court unanimously dismisses the appeal with costs.