Equal Property Management Ltd v. The Incorporated Owners of San Po Kong Mansions
Read the full judgment text of DCCJ 14835/2000 on BabelCite. This District Court judgment was delivered on 17 September 2001.
1. The plaintiff in this case ("Equal") claimed in the Statement of Claim to be a property management company. The defendant ("the Corporation") as its name suggests and without doubt in law is the Incorporated Owners of San Po Kong Mansion. The dispute between the parties, briefly, is that Equal contends that the chairman of the Corporation signed a management contract ("Management Contract") on behalf of the Corporation on 13 December 1999 to engage Equal to undertake the management of San Po
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DCCJ014835X/2000 FOR REFERENCE DCCJ 14835/2000 Multi-Storey Buildings ----- Incorporated Owners ----- Chairman of Corporation ----- Actual Authority ----- Ostensible Authority ----- Management Contract ----- Contract ----- Agent ----- Building Management Ordinance The plaintiff, a property management company, had sent its senior staff to attend the meetings of the Management Committee of the Incorporated Owners of a multi-storey building on many occasions. As revealed in the meetings of the Management Committee, the general meeting delegated full authority to the Management Committee to deal with matters in relation to the "renewal" of the management contract. The Management Committee decided to terminate the contract, invite tenders and recommend a new management company to the general meeting. The plaintiff submitted a tender. The chairman of the Incorporated Owners indicated by a letter, which bore the corporation's letterhead and its rubber chop, to the plaintiff's company that it had been resolved by the Management Committee that the plaintiff would be engaged to take over the management of the building. The chairman in his capacity as the chairman of the corporation signed a management contract with the plaintiff on the day of the letter and the contract in question involved an amount in excess of $200,000. The defendant, the Incorporated Owners, did not accept the management contract signed by the chairman. The plaintiff claims against the defendant for breach of contract. Held: (1) Under Sections 14, 18 and 29 of the Building Management Ordinance, the system of decision-making for an incorporated owners is that the general meeting shall be the highest decision-making body and the power of decision can be delegated to the Management Committee. (2) Under Sections 14, 18 and 29, and also the Second and Third Schedules of the Building Management Ordinance, neither the Management Committee nor its individual members, including the chairman of an incorporated owners, are executives of the incorporated owners and therefore they are not the equivalent of directors of a limited company. (3) It is also inappropriate as a matter of legal policy for a member of the management committee or the chairman of an incorporated owners to be deemed as having the same operational functions as a director of a limited company. (4) Therefore, the chairman of an incorporated owners does not possess actual authority or ostensible authority to enter into or sign a contract that is binding on the corporation, unless he has been validly authorized. (5) The Plaintiff ought to be familiar with the Building Management Ordinance and therefore must have knowledge that the chairman of a corporation does not have actual or ostensible authority to sign contracts. (6) In any event, senior staff of the Plaintiff company attended the meetings of the Management Committee and so the Plaintiff had full knowledge that neither the Management Committee nor the chairman of the Incorporated Owners had authority to decide to enter into or sign the management contract with the Plaintiff. It is self-deceiving for the plaintiff to contend that it had been misled by representation from the Incorporated Owners or its chairman. (7) Accordingly the management contract which the plaintiff relied upon is null and void and of no effect. FOR REFERENCE DCCJ 14835/2000 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 14835 OF 2000 _____________________
_____________________ Coram: H.H. Judge Li Date of Trial: 23 August 2001 Date of handing down judgment: 17 September 2001 ________________ JUDGMENT ________________ 1.The plaintiff in this case ("Equal") claimed in the Statement of Claim to be a property management company. The defendant ("the Corporation") as its name suggests and without doubt in law is the Incorporated Owners of San Po Kong Mansion. The dispute between the parties, briefly, is that Equal contends that the chairman of the Corporation signed a management contract ("Management Contract") on behalf of the Corporation on 13 December 1999 to engage Equal to undertake the management of San Po Kong Mansion on behalf of the Corporation for a term of one year (i.e. from 1 January 2000 to 31 December 2000). The terms and conditions of the Management Contract includes (1) the manager's remuneration of $8,000 a month; (2) salary for the team of management staff not in excess of $68,000 a month; and (3) reimbursement for other expenses. However, the Corporation in the end did not abide by the Management Contract and instead hired another management company to manage San Po Kong Mansion. Hence, Equal now brings this action against the defendant to recover the manager's remuneration totalling $96,000 for a period of twelve months, at $8,000 per month. Originally there were other claims in the Statement of Claim but Mr. Man, Counsel for Equal, indicated at the late stage of the trial that all other claims except the claims for the manager's remuneration, interest and costs had been abandoned. The defence put forward by the Corporation, in short, was that the Management Contract was of no effect and hence not binding on the Corporation because the chairman of the Corporation had no authority to enter into the said contract on behalf of the Corporation, and Equal was well aware that the Corporation had not authorized the chairman to do so either. Equal contends, however, that the chairman of the Corporation had the "usual authority" as well as "ostensible authority" to enter into contracts on behalf of the Corporation. Equal also argued that the Management Contract signed by the chairman had been affirmed by the Corporation. I should note at this point that it is the Corporation's position in the event that the court finds the chairman had authority to enter into contracts on behalf of the Corporation, that the Corporation does not admit that the Management Contract was in fact signed by the chairman referred to by Equal. 2.It follows from the aforesaid that whether the chairman of the Corporation had the "usual authority" or the "ostensible authority" to enter into contracts on behalf of Corporation is the key legal issue of this case. Subject to the court's ruling on this point, the case may be disposed of easily. Thus, with the consent of both parties, I decided that no witnesses should be called at this stage until the legal issue has been dealt with. Nevertheless, so far as the legal issue is concerned, both parties agreed that contents in the undisputed documents produced by both parties be treated as facts. The Management Contract 3.So far as the Management Contract is concerned, there was no dispute that in view of the terms and conditions provided in the contract, the amount involved is certainly in excess of $200,000. I therefore find that when considering the legal issue of contracting authority, the court should focus on the authority to enter into contracts involving substantial amounts, instead of generally considering contracts involving payment for goods of just a few dollars or payment of a few hundred dollars or so for services provided by a craftsman to undertake repair works. Contract of Substantial Amounts 4.It is common ground that the Code of Practice ("Code of Practice") made pursuant to Section 44 Building Management Ordinance deals with contracts of substantial amount, which reads as follows: Section 44 of the Building Management Ordinance (Chapter 344) Code of Practice on Procurement of Supplies, Goods and Services
5.There can be no doubt that paragraph 8 of the Code of Practice applies to the Management Contract in this case. Counsel for both parties also agreed that there are authorities which held that non-compliance with the said Code of Practice does not necessarily render the contracts in question invalid. Nevertheless, these authorities, in my judgment, do not assist Equal's case as they do not involve contracts entered into or signed without authority. Authority to Enter into Contracts 6.It is necessary to draw a distinction between two different concepts before diving into the legal issue. Authority to enter into contract, in contract law, means the right to decide to agree or accept the making of contracts. Generally, authority to contract rests with the party concerned who is also the contracting party. Nevertheless, if the contracting party acts through an agent or representative, the right of decision is vested in the decision-making body. For example, in the case of a limited company, the memorandum and articles of association of the company usually provide that the board of directors has authority to decide whether to enter into a contract. In other words, the board of directors has the actual contracting authority. A director is also deemed to have actual authority to decide on his own whether to enter into a contract if he is authorized by the board through lawful and valid procedure. A limited company of course needs a human being to sign a written agreement on its behalf, therefore there arises the existence of signatory representatives. A signatory representative may either be a director, a manager, or a number of joint signatories authorized by the board of directors. It is not difficult to imagine that the agent with contracting authority may not be the same person or group as the signatory representative. An agent authorized to enter into a contract may not be authorized at the same time to act as the signatory representative, whilst a person authorized to sign a contract may not have been authorized to decide to enter into or accept a contract. However, when one does not have knowledge of the delegation of authority inside a limited company, one may be inclined to believe that the person authorized to sign a contract on behalf of the company also has authority to decide to enter into the contract. If a decision-making body such as the board of directors has not expressly delegated to a particular party authority to enter into a contract but a person finally signs the contract with that party and the decision-making body does not accept the contract, questions arise at two levels, i.e. whether that party has authority to decide to enter into the contract and whether the person has authority to sign it on behalf of the company. 7.In this case, the chairman of the Corporation signed, in the name of the Corporation, the Management Contract with Equal. The Corporation, however, did not accept the contract. The questions mentioned above thus arise, i.e. (1) Did the chairman of the Corporation have actual authority to make decision on his own to enter into the Management Contract with Equal? (2) If the chairman did not have actual decision-making authority, can he be deemed by an outsider to have usual authority to make decisions and enter into contracts in view of his capacity as the chairman of the Corporation and having regard to the relevant circumstances, thus rendering his act of making the contract binding on the Corporation, despite the absence of actual decision-making authority? (3) Even if no actual or usual authority had been delegated to the chairman of the Corporation, can he be deemed by an outsider to have ostensible authority as if authorized by the decision-making body to sign the Management Contract on behalf of the Corporation in view of his capacity as the chairman of the Corporation and having regard to the relevant circumstances, in spite of the fact that in reality the decision-making body had never delegated such authority to him? According to Mr Man for the plaintiff Equal, Equal does not contend that the chairman of the Corporation had actual authority to enter into or sign the Management Contract. Therefore, the answer to question (1) is confirmed to be negative and only questions (2) and (3) require decision. Usual Authority 8.In considering whether the chairman of an incorporated owners can be deemed by an outsider to have usual authority to decide for the corporation to enter into contracts, reference should first be made to the law relating to the organization of incorporated owners. In this respect, I note the Building Management Ordinance provides that: ---
It is also provided in Paragraph 10(2) of the Second Schedule to the Building Management Ordinance that: ---
9.The Second and the Third Schedules to the Building Management Ordinance, when read together, expressly provide that the powers and duties of the chairman of an incorporated owners are the convening and chairing of meetings, exercising a casting vote when necessary and signing minutes of meetings. In other words, the powers and duties of the chairman of an incorporated owners are limited to matters concerning meetings. 10.When all the above provisions are read together, I believe the highest authority of decision-making of an incorporated owners is vested in the general meeting of the owners, and next in the management committee. Individuals including the chairman of an incorporated owners do not have any authority to make decisions. Section 29 of the Building Management Ordinance provides that the powers and duties of an incorporated owners "shall be" exercised and performed on behalf of the incorporated owners by the management committee. The meaning could not be clearer. It means that an incorporated owners is under collective leadership, and the chairman is merely the chairman of meetings and not the leader or chief executive of a corporation. 11.Any person who enters into dealings with an incorporated owners has the legal obligation to acquaint himself with all the provisions in the Building Management Ordinance. Any person with good knowledge of the Building Management Ordinance must therefore be fully aware that the chairman of an incorporated owners in his individual capacity as chairman does not have the power of decision and execution. Decision-making and execution follow resolutions passed by the management committee or the general meeting of the incorporated owners. Therefore, nobody, including Equal, can say that the chairman of the Corporation had usual authority to decide to enter into contracts for the Corporation. In other words, the answer to question (2) is doubtless a negative one. 12.Mr Man submitted that, as observed by his client's witness, the relevant circumstances such as the conduct of the chairman of the Corporation at the meetings, the fact that the letters he sent bore the Corporation's letterhead, that there was the Corporation's rubber stamp on the letters, and also the fact that he negotiated with Equal on the Management Contract, all amounted to a representation made by the Corporation that induced the public, for instance, Equal, to believe that the chairman of the Corporation had authority to decide to enter into contracts. This in effect means that the chairman had implied authority. I shall return to the alleged representation in more details later. For the moment, it suffices to say that among the documentary evidence relied upon by Equal, there is a letter issued by the chairman of the Corporation to Equal on 9 December 1999 which reads in full as follows: --
Whether the Corporation or the chairman of the Corporation ever made any misrepresentation to Equal before 9 December 1999 (the Corporation strongly denied any representation by them), it was expressly shown in the letter issued by the chairman of Corporation that the decision was a matter of the Management Committee, not his. In fact, Equal did not sign the Management Contract with the chairman of the Corporation until they had received this letter. So when Equal claimed that they believed the chairman of the Corporation had authority or been given authority by the Corporation to decide to enter into contracts, they were deceiving themselves as well as others. Ostensible Authority 13.Mr Man's submission on ostensible authority in fact relied on the Turquand Rule. This is an important principle of company law and has been applied and expounded in a large number of cases. Of the four authorities upon which Mr Man relied is the decision of the Court of Appeal in England in British Thomson-Hauston Company, Limited v. Federated European Bank, Limited [1932] 2 K.B. 176, which repeatedly cited what Atkin LJ said: --
In other words, ostensible authority is that certain managerial personnel in a limited company are deemed to have been authorized to act on behalf of the company although in reality there is no authorization. 14.In my understanding, if the purported representative occupies the position of a director, and the board of directors is permitted by the company memorandum and articles of association to delegate authority to a director, one can say the director has ostensible authority and no representation from the company is required in support. If the purported representative does not occupy the position of a director but is merely one of the employees, it cannot be presumed that that employee of the company has been authorized. In such case, evidence showing representation from the company that makes others believe the employee has been authorized to act is required. 15.Mr Man argued that in this case the chairman of the Corporation was equivalent to a director or the chairman of the board of directors of a limited company and therefore possessed ostensible authority. Besides, the chairman had represented to Equal that he had the authority to act on behalf of the Corporation. Hence, Mr Man submitted that it was beyond doubt that ostensible authority existed in this case. 16.I consider that the Turquand Rule does not apply to incorporated owners on two grounds. First, the Turquand Rule was laid down by the courts in the context of limited companies. Generally speaking, limited companies are commercial or business organizations with frequent daily dealings with the external world, and on top of that, the directors of a limited company, some of whom being majority shareholders, often have a close personal interest in the profit and loss of the company. An incorporated owners is a collective organization to carry out management of its own property with little external dealings and hence it is rarely pressed for time. Individual members in the management committee of an incorporated owners, and even all members of the committee together, do not own majority interest in the building. 17.It is well-known that the articles of association of a limited company usually provide that the board of directors may delegate authority to individual directors to act for the company. Such provision is in Table A of the Companies Ordinance. That individual directors have ostensible authority is a system of operation recognized by law. On the other hand, there is no provision for such delegation of authority in the Building Management Ordinance and the Schedules thereto. The stipulation that the duties of the incorporated owners "shall be" exercised by the management committee on its behalf means a system of collective decision-making shall be adopted by the incorporated owners and no individual is permitted to make decision or act on its behalf. The Fourth Schedule to the Building Management Ordinance permits the granting of allowances to members of the management committee. Such allowances are, however, of little value and not intended to be a salary to the members of the committee for daily administrative and management work. According to the Second Schedule to the Ordinance, a meeting may be held by the management committee once every three months. These provisions point to the fact that a management committee is an organ for collective deliberation and decision-making, not necessarily an organ for daily administration and management. In summary, a limited company and an incorporated owners are different in nature, purpose of establishment and mode of operation. The function of a director in a limited company is not equivalent to that of a management committee member either. In the premises, it is not appropriate to apply to an incorporated owners the Turquand Rule which was laid down for the purposes of limited companies. As a matter of fact, no judge has ever suggested that the Rule may be applied to other incorporated bodies. I dare not hastily set a precedent now. 18.Secondly, for practical purposes, so far as legal policy is concerned, I do not think it is appropriate to sanction that the management committee of an incorporated owners, including the chairman, have ostensible authority to enter into a contract of substantial amount that will be binding on the corporation. Just consider a scenario where the chairman of an incorporated owners has ostensible authority to enter into contracts. Once he signs a contract, all the owners of the building would be burdened with contractual liability in millions of dollars. Leaving aside the possibility of a corrupt chairman, if a chairman acts a little rashly, all the owners of the building will be trapped in a predicament. I therefore consider that, for assurance, collective decision-making must be insisted upon for a contract to have any binding effect, at least in the case of contracts for substantial amount referred to in the aforesaid Code of Practice made by the authority concerned. 19.Should my observations in the above be correct, Equal having failed to prove that the Management Contract had not been accepted by a collective resolution of the Corporation, the Turquand Rule not being applicable, the Management Contract signed by the chairman being practically a document of no value, Equal must fail. Representation 20.Even if the Turquand Rule applies to incorporated owners, Equal is still required to convince the court that this is indeed an appropriate case to apply the Rule in the circumstances. 21.First, it should be pointed out that the representation referred to by Mr Man that allegedly induced Equal to believe that the chairman of the Corporation had authority was not raised in Equal's pleadings. According to litigation practice, arguments and grounds in support cannot be relied on in a trial unless they have been pleaded. For instances, Equal referred to various representations that the chairman of the Corporation made in the meetings, and to other people present at the meetings echoing the representations should have been set out in the pleadings so that the Corporation is allowed a chance to adduce evidence in rebuttal. But Equal did not aver in its pleadings that it was influenced by any specific representation. Therefore, strictly speaking, the court does not have to consider this argument advanced by Equal. In any event, since counsel for the Corporation had no objection, I might as well try my best to deal with this point. 22.In relation to the issue of ostensible authority caused by misrepresentation, Mr Man cited the case of Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. [1964] Q.B. 480, where Diplock LJ said, --
In essence, the decision of Diplock LJ can be summarised into the following points:
23.On the first and second points, Mr Man did not set out act by act the conduct alleged to have constituted representation. He only spoke of the conduct of the chairman of the Corporation at meetings, the chairman's negotiation with Equal and also the representations made by the chairman in letters using the Corporation's letterhead. It is beyond me why such conduct of the chairman could amount to the Corporation's representation. The fact that the chairman wrote to Equal by using the Corporation's letter paper, to put it to the highest, merely shows that the Corporation permitted its Chairman to issue letters on its behalf. In practice, the chairman has frequent need to issue notices in the name of the Corporation using the Corporation's letterhead to all owners of the building. It would be impossible for the Corporation to require the chairman to obtain prior approval from it before the chairman can use the Corporation's letterhead. Nevertheless, does permission to the chairman by the Corporation to use its letterhead amount to representation as observed by Diplock LJ whereby the agent had the authority to enter on behalf of the corporation into a contract of the kind (or a contract of any kind) made with the contractor? I must say that one cannot extend permission to use the Corporation's letterhead paper to include permission to enter into any contract. 24.Furthermore, a representation must be made by a person or persons who have actual authority to manage business. Given that the chairman of the Corporation does not possess any actual authority, how can his conduct be deemed as representation by a person who has actual authority to manage business? 25.In relation to the third point, if there is already clear indication to the contractor that the agent referred to has never been delegated with authority, it is difficult to accept the contractor's contention that the representation made to him induces him to believe that the agent has authority to act. As already pointed out, it was expressly stated in the letter dated 9 December issued by the chairman of the Corporation that Equal was retained upon the decision of the Management Committee. This is obviously a representation to negate the idea that the chairman had the authority to decide to enter into contracts. It may be said that Equal was thereby induced to believe that the chairman had delegated authority from the Management Committee to sign the contract on its behalf. However, the Code of Practice issued by the Authority provides that the power of decision-making vests in the owners' general meeting instead of the management committee. Having regard to this, how can Equal as a property management company claim ignorance of such provisions as stated in the Code of Practice and be reckless enough to fall into the belief that the Management Committee could make its own decision to delegate authority to the chairman of the Corporation to sign the contract on its behalf? 26.Or it may be suggested that the general Meeting had delegated authority to the Management Committee who in turn further delegated such authority to the chairman of the Corporation entitling him to sign contracts. But there are two pieces of documentary evidence agreed by both parties in this case. One is the minutes of meeting of the Management Committee dated 28 September 1999. The material parts of the minutes read as follows: --
In addition, there is another minutes of meeting of the Management Committee dated 28 October 1999. The relevant part is excerpted as follows: --
27.It should be noted that it is recorded in the aforesaid two minutes of meetings that the General Manager of Equal, Mr LEUNG Kwun-ming (transliteration), attended the two meetings of the Management Committee. It follows that Mr LEUNG and Equal must had knowledge that full authority had been delegated to the Management Committee by the Owners' meeting to deal with the matter of "renewal of contract" only. In other words, the general meeting had not delegated authority to the Management Committee to enter into a new contract with a new management company. As the Management Committee decided to terminate the contract with the existing management company and to invite tenders, the power of decision as to whether to accept the tender from any particular contractor automatically reverted to the owners in general meeting. Should ambiguity still exists, clarification may be sought from the minutes of meeting of the Management Committee dated 28 October where it is stated in express and clear terms, "to recommend to the owners of the building the appropriate management company". Thus, Equal through Mr LEUNG Kwun-ming who attended the meeting of the Management Committee undeniably had knowledge of the fact that the Management Committee had no authority to deal with "new contract", but would "make recommendation to the owners of the building". In the premises, Equal's contention that it was induced by the letter dated 9 December issued by the chairman of the Corporation which said that the Management Committee had already decided to retain Equal is tantamount to an ostrich burying its head in the sands. 28.Furthermore, among the agreed documentary evidence, it is recorded that Mr LEUNG from Equal did attend the meetings of the Management Committee on a few occasions, namely, 28 September, 28 October and 14 December 1999. There was another meeting of the Management Committee on 25 November. It was not recorded in the minutes of that meeting whether Mr LEUNG was in attendance, but the Corporation contended that the attendance register proved otherwise. Presently Equal denied that Mr LEUNG attended the meeting of 25 November. Leaving aside the meeting of 25 November which is in dispute, it is abundantly clear from the documentary evidence that a senior executive Mr LEUNG from Equal indeed attended a minimum of two meetings of the Management Committee before the chairman of the Corporation signed the Management Contract and at least one more meeting thereafter. What was the purpose of Mr LEUNG's attendance at the meetings? As was revealed in the minutes of the meetings, the function of a person who was not an owner but attended the meetings, for instance, solicitor Mr P.L. CHUNG, was to answer questions. However, no record shows that Mr LEUNG had ever said anything in any meeting and therefore, apparently, he was present merely as an observer. If Equal relied upon the chairman of the Corporation as agent of the Corporation to deal with the making of the Management Contract on behalf of the Corporation, the only thing that Mr LEUNG was required to do was to negotiate with the chairman face-to-face alone, what was the need to attend the meetings of the Management Committee as an observer? For that reason, I can easily draw the inference that Equal never relied on the conduct and representation of the chairman of the Corporation but on its senior staff Mr LEUNG who was sent to attend the meetings of the Management Committee to understand the real situation. As I have mentioned, at the meeting of 28 October at which Mr LEUNG was present, the Management Committee had already declared its position that it would "recommend a management company" to "the owners of the building". As at that date, which management company would be recommended was still unknown! 29.In relation to the fourth point, as I have already held, in law an incorporated owner cannot delegate to any person authority to enter into such kind of management contract involving substantial amount of money. In theory, delegation of authority can reach down to the level of the management committee. However, all parties in this case had full knowledge that such authority had not been delegated to the Management Committee at the time. 30.In relation to the fifth point, I have no doubt that a management contract is a kind of "abnormal" contract. Even if the Turquand Rule can be applied to incorporated owners, it in any event does not assist given the fact that a management contract comes under the category of "abnormal" contract and no individual can be deemed to have any ostensible authority to enter into such contract on behalf of an incorporated owners. 31.It is not the case of Equal that the Management Contract has been ratified by the Management Committee or the general meeting. In reality, the contract has been vetoed by a general meeting. The Management Committee did not have the authority, and in fact it had expressly indicated to the representative of Equal that it did not have the authority, to make decisions, not to mention to ratify it retrospectively. Conclusion 32.On the basis that the chairman of the Corporation did not have authority to sign the Management Contract, that Equal had full knowledge that neither the chairman nor the Management Committee had the authority to enter into or ratify on behalf of the Corporation a management contract, and that in reality Equal had not relied and acted upon any representation as the basis of authority to enter into the contract, I accordingly find that the Management Contract signed by the chairman of the Corporation on 9 December 1999 without lawful delegated authority is invalid and unenforceable against the Corporation. 33.For the reasons given, I give judgment against the plaintiff and there is an order nisi that the plaintiff pays the defendant's costs, to be taxed if not agreed. In the absence of further dispute, the order nisi becomes absolute 21 days after this judgment is handed down.
Representation: Mr. Bernard man instructed by Messrs. C.L. Chow & Mocksion Chan for the Plaintiff Mr. Dickson Pang of Messrs. Y.C. Lee, Pang & Kwok for the Defendant |
Cases cited in this judgment
Further hearings and rulings under DCCJ 14835/2000