THE GRANDE PROPERTIES MANAGEMENT LIMITED (Plaintiff) v SUN WAH ORNAMENT MANUFACTORY LIMITED (Defendant)

FACV No. 2 of 2006

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 2 OF 2006 (CIVIL)

(ON APPEAL FROM CACV NO. 316 OF 2004)

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Between

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Court: Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Mortimer NPJ and Sir Gerard Brennan NPJ

Date of Hearing: 22 June 2006

Date of Judgment: 13 July 2006

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J U D G M E N T

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Mr Justice Bokhary PJ:

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

Mr Justice Chan PJ:

Introduction

2.  The rights and obligations of the owners and the manager of a multi-storey building are usually defined and governed by a deed of mutual covenant in respect of the building.  This deed is a contract which runs so as to bind all owners and their assignees and the manager.  Some of these rights and obligations are modified by the Building Management Ordinance, Cap 344 (“the Ordinance”). The provisions of the deed and the Ordinance are usually aimed at facilitating the management of the building by reducing conflicts among co-owners on the one hand and preventing abuse by the manager and the majority owner on the other.  It is fair to say that most disputes are resolved by a purposive construction and common sense application of the relevant provisions of the deed and the Ordinance. 

3.  The present appeal involves the construction of the provisions of the Deed of Mutual Covenant executed on 14 May 1982 (“the DMC”) in respect of an industrial building in Kwun Tong known as the Grande Building and the validity of certain resolutions passed at an owners meeting held pursuant to the DMC requiring the owners to make contributions for the purpose of funding renovation works carried out in the building.

The facts

4.  The appellant, a subsidiary of the Grande Group of companies, is the Manager appointed under the DMC (“the Manager”).  No owners incorporation has been formed and the rights and obligations of the owners and the Manager are defined and governed by the DMC and a Supplemental Deed of Mutual Covenant.

5.  In April 1997, members of the Grande Group owned various units in the building and together they held 302 out of the 622 undivided shares therein. The respondent (“Sun Wah”) was the owner of a number of units representing another 197 shares.  The remaining shares were held by other smaller owners.

6.  On 28 April 1997, an owners meeting was held pursuant to a notice given by the Manager.  However, Sun Wah did not attend.  At the meeting, it was decided that certain renovation works (“the 1997/1998 works”) were to be carried out in the building and it was also unanimously resolved by those who were present that all the owners had to contribute $2,500,000 for the 1997 works and $2,000,000 for the 1998 works according to their respective shares in the building (“the 1997 resolution”).

7.  After the renovation works had been completed, Sun Wah was the only owner which did not pay its share of the contributions pursuant to this resolution.  Legal proceedings were instituted against Sun Wah for the recovery of such contribution, but they were subsequently discontinued for reasons which are not material to this appeal. 

8.  Between 1999 and 2001, the Manager proceeded with further renovation and repair works (“the 1999/2000 works and the 2001 works”) without first obtaining the approval of the owners at an owners meeting. After the works had been completed, a deficit appeared in the accounts of the building.

9.  By August 2001, the Grande Group became the owner of 363 shares in the building and thus its majority owner.  An owners meeting was convened by the Manager and subsequently held on 26 September 2001.  It was attended by all the owners, the Manager and the lawyers respectively representing Sun Wah and the Manager.  A total of 10 resolutions were passed by a majority of 367 to 255 (“the 2001 resolutions”).  The following resolutions are relevant in the present appeal:

(1) That all owners do pay the Manager of the building their respective shares (determined in accordance with the Deed of Mutual Covenant and Supplemental Deed of Mutual Covenant of the Building) in the total sum of HK$4,499,924.00 being the total amount called for by the Manager in respect of the renovation works carried out in respect of the building in 1997 and 1998, the particulars of the respective shares and the total sum are set out in Column A-1 of Appendix A annexed to the Agenda;

(2) That credit shall be given to those owners of the building who have made advance payments to the Manager for their respective shares in the total sum already in the sum of HK$2,951,825.00, the particulars of which are set out in Columns A-2 and A-3 of Appendix A annexed to the Agenda;

(3) That Sun Wah (being the only owners who have not made any advance payment to the Manager in respect of the respective shares of the total sum called for by the Manager) do pay the Manager within 14 days from the date of the meeting the sum of HK$2,581,481.67, the particulars of which are set out in Appendix B annexed to the Agenda;

…

…

(10) That the raising of funds for HK$2,800,000 to recoup the deficit of the Building be approved.

The Manager’s claims

10.  Sun Wah refused to comply with these resolutions.  In exercise of its powers under clause 6(a) of Schedule 4 to the DMC, the Manager then commenced two actions against it for its share of contribution. In the first action (HCA 4741 of 2001), the claim is for the sum of $2,581,481.67, or alternatively $1,548,099.00 with interest.  It is based on the 1997 resolution and resolutions (1), (2) and (3) of 2001 as mentioned above.  The Manager has subsequently abandoned reliance on resolution (3), acknowledging that this might be contrary to the DMC and the lesser amount is now being claimed. In the second action (HCA 5207 of 2001), the Manager relies on resolution (10) and claims for the sum of $886,817.17 being Sun Wah’s share of the deficit in the building’s accounts.

11.  These two actions were consolidated and heard together before Deputy Judge To who dismissed both actions.  The Manager’s appeal was dismissed by a majority of the Court of Appeal (Rogers VP and Le Pichon JA, Reyes J dissenting).

The trial judge’s decision

12.  In the first action, Sun Wah pleaded that the 1997 resolution was invalid on three grounds: (1) no proper notice of the meeting was served; (2) the notice of meeting was defective in that it did not set out the intention to pass the resolution in question; and (3) the 1997 resolution which was retrospective in effect was not empowered by the DMC or the Ordinance.  The trial judge found that proper notice had been given to the owners in accordance with the DMC but held that the 1997 resolution was invalid on grounds (2) and (3).  The Manager did not appeal against this part of the decision.

13.  In respect of the 2001 resolutions, Mr Kenneth Chan, leading Mr Chow Hung Fat, for Sun Wah informed the Court that similar grounds were raised although they were not pleaded.  The judge held “for similar reasons” that the 2001 resolutions were also retrospective and had no effect since they were contrary to the DMC.  He relied on the Court of Appeal’s decision in So Chun Man Paul v Incorporated Owners of Chee On Building [2000] 1 HKC 732, saying that the present case was on all fours with that decision.

14.  In the second action (HCA 5207 of 2001), Sun Wah alleged that the deficit was incurred unreasonably and improperly and that the 2001 resolutions were retrospective in effect and hence “void and ineffective”. The judge held that insofar as the deficit arose from the 1999/2000 works, the 2001 resolutions were retrospective in nature and had no effect; and insofar as the deficit arose from the 2001 works, while he would not query the propriety of such works, he did not think it appropriate to order Sun Wah to pay contribution.  However, he added that “in any event, the [Manager] is entitled to recover from the owners the costs of such works which are within the power given to the [Manager] as manager under the DMC to incur on behalf of the owners.”

The Court of Appeal’s decision

15.  The majority did not express any view on the retrospectivity issue which was apparently the only ground relied on by the judge in rejecting the claim under the 2001 resolutions.  It is to be noted that Le Pichon JA, contrary to the judge, considered that the case of So Chun Man Paul was of no assistance in the determination of the issues before the court.

16.  In upholding the judge’s conclusion that the 2001 resolutions could not impose liability on Sun Wah, the majority of the Court of Appeal held that these resolutions could not be passed for two main reasons:

(1) they only required the owners to make contributions for the costs of renovation works which were carried out between 1997 and 2001 without prior authorization, but did not sanction the unauthorized works. Since there was no power under the DMC to levy contributions for the costs of unauthorized works, these resolutions fell outside the purpose and purview of the DMC; and

(2) even if the 2001 resolutions were to be read or framed as giving sanction for carrying out the unauthorized renovation works, such resolutions had violated Sun Wah’s rights in that it had lost the opportunity, before the works were carried out, to persuade other owners not to approve such works or to reduce the amount of works involved.  The Manager having previously failed to pass a proper resolution could not be put in a better position after the Grande Group had acquired a majority interest in the building and be allowed to obtain a retroactive sanction of what it could not obtain earlier.

17.  Reyes J who dissented in the Court of Appeal held that the trial judge was wrong to rely on the case of So Chun Man Paul to come to his conclusion because retrospectivity did not arise in the present case and that in any event, the resolutions in question were valid under clause 10 of the Fifth Schedule in the DMC notwithstanding any retrospectivity. Having considered So Chun Man Paul in detail, Reyes J expressed reservations as to the correctness of that decision.

Arguments in this appeal

18.  In this appeal, Mr Ambrose Ho SC leading Ms Joyce Leung for the Manager argues that the reasoning of the majority of the Court of Appeal was erroneous; that the 2001 resolutions did not have retrospective effect and that even if they had such effect, that provided no basis for invalidating them. It is further submitted that the resolutions in question were valid under clause 10 of the Fifth Schedule of the DMC.

19.  Mr Kenneth Chan for Sun Wah submits that the 2001 resolutions are retrospective in effect and that the Manager, having accepted that neither the DMC nor the Ordinance empowers the passing of resolutions with any retrospective effect, cannot now be heard to argue that the resolutions in questions are valid. Counsel relies on Clause 10(iii) of the Fifth Schedule and argues that the resolutions were contrary to the DMC.  He also relies on the case of So Chun Man Paul which he submits was rightly decided.

Approval/sanction rather than “ratification”

20.  Before I proceed to deal with the substantive issues, I should point out that during the submissions before this Court and indeed in some parts of the judgments in the courts below, reference has been made to “ratification” or “ratifying” the unauthorized works in question.  This is somewhat misleading and has caused confusion in the discussion on the retrospectivity issue.

21.  Ratification is usually used in the context of an agent purporting to act on behalf of his principal to create a contractual relationship between his principal and a third party without his principal’s authority.  The existence of the principal’s ratification of what the agent has done is necessary in order to fix liability either on the principal or the third party. This is not the case here.  We are dealing with the relationship between the agent (the Manager) and the principal (the owners).  What was sought to be done at the owners meetings was to approve or sanction what the Manager had previously done without the owners’ authority for the purpose of obtaining contributions from them. It is not appropriate to describe it as ratification.

Clause 10 of the Fifth Schedule in the DMC

22.  The DMC has expressly made provision with regard to the validity of resolutions passed by the owners. Clause 10 of the Fifth Schedule provides as follows:

“Any resolution on any matter concerning the said premises and the said building passed by a majority of the owners present in person or by proxy and voting at a duly convened meeting shall be binding on all the owners provided as follows:-

(i) the notice convening the meeting shall have specified the intention to propose a resolution concerning such matter.

(ii) Any resolution purported to be passed at such meeting concerning any other matters shall not be invalid.

(iii) No resolution shall be valid if it is contrary to the provisions of this Deed.”

23.  The effect of clause 10 is this.  Any resolution relating to any matter concerning the building is binding on all the owners provided that the following requirements are satisfied:

(1) the meeting at which the resolution was passed must have been a properly convened meeting, that is pursuant to a notice convening the meeting having been properly served on all the owners in accordance with the provisions of the DMC;

(2) the notice convening the meeting must also have specified the intention to propose such a resolution at the meeting; and

(3) the resolution must have been passed by a majority of the owners present in person or by proxy and voting at the meeting.

24.  Apart from the above procedural requirements, there is also a requirement on the substance of the resolution, that is, it must not be contrary to the provisions of the DMC.  If it is, then it shall not be valid.

25.  The trial judge apparently had some difficulty with the meaning of clause 10(ii).  But this sub-clause is not relevant in the present appeal since it deals with the circumstances under which a resolution would not be regarded as invalid.  No reliance is placed on this sub-clause by the parties.

26.  There is no dispute that the 2001 resolutions satisfied the procedural requirements as specified in clause 10.  Both parties rely on this clause but the issue between them is whether these resolutions were contrary to the DMC.  The trial judge took the view that since they had retrospective effect, they were contrary to the DMC.  The majority of the Court of Appeal apparently held that they were contrary to the DMC since they were outside the purview of the DMC and in any event, had adversely affected Sun Wah’s rights.

What was the effect of the 2001 resolutions?

27.  Resolution (1) referred to in paragraph 9 above required the owners to make contributions for the costs of the 1997/1998 works and resolution (10) required them to contribute towards the deficit arising out of the 1999/2000 works and the 2001 works.  The majority of the Court of Appeal considered that these resolutions did not authorize or sanction the renovation works which had already been carried out without the owners’ prior approval.

28.  However, the purpose of having these resolutions was to require the owners to pay for the costs of the renovation works which had not been previously authorized. The agenda and the resolutions specifically referred to such works and all the owners must be aware of the intention and purpose of having these resolutions.  Passing such resolutions must necessarily mean that those who agreed to make contributions (the majority in this case) accepted that the works in question were necessary and had to be carried out. It makes no sense to say that the resolutions only required contributions towards the costs of the works, but did not at the same time sanction such works.  If the majority of the owners did not approve of such works, there was absolutely no point in requiring contributions.  In fact, it would be wrong to do so.  The prerequisite to approving a payment must be the sanctioning of what is to be paid for.

29.  In my view, the 2001 resolutions, in approving contributions for the previously unauthorized renovation works, necessarily also had the effect of sanctioning such works.

Were the 2001 resolutions retrospective?

30.  Since these resolutions had the effect of sanctioning the unauthorized renovation works carried out between 1997 and 2001, they had retrospective effect in the sense that they adopted and validated what was previously done without authority. Without sanctioning the unauthorized renovation works, the Manager might be held personally liable for the costs of such works if they were outside the powers conferred on it by the DMC.  But as far as the owners are concerned, their liability to pay for the costs by way of contributions only arose prospectively upon the passing of the 2001 resolutions requiring them to pay.

31.  It is to be noted that resolution (3) required Sun Wah to pay its share of contribution together with interest within 14 days from the date of the meeting, not the date of the commencement or completion of the works. Although this resolution was conceded to be of no effect (because it purported to charge Sun Wah interest at an excessive rate which is contrary to the DMC), this demonstrates that the intention was that the resolutions were to take effect from the date of the meeting at which the resolution was passed.

32.  In my view, there is no question of the owners including Sun Wah being liable before the resolutions in question were passed.  The 2001 resolutions cannot be said to operate with retrospective effect.  The trial judge’s conclusion that they were contrary to the DMC because they had retrospective effect was therefore wrong.

Are retrospective resolutions contrary to the DMC?

33.  But even if the 2001 resolutions were retrospective, I do not think the judge was right to hold that they were contrary to the provisions of the DMC.  A resolution is contrary to the provisions of the DMC under clause 10 (iii) if it contradicts or is opposed to or inconsistent with any provision in the DMC.  Resolution (3) of the 2001 resolutions which purported to charge interest in excess of that allowed under clause 16 of the DMC is such an example.  There is nothing in the DMC which in any way prohibits the owners from passing any resolution which takes retrospective effect. Such a resolution cannot be regarded as contradicting or opposed to or inconsistent with any provision in the DMC.

34.  In the management of multi-storey buildings, it is important that the Manager and the owners are entitled to make appropriate decisions unless such decisions are prohibited by the DMC.  Numerous matters, whether trivial or important, may surface from time to time and on very short notice.  They need to be attended to.  Things need to be done very quickly.  However, there are procedural requirements for convening an owners meeting where approval can be obtained before action can be taken. That is why the Manager is given wide powers by the DMC.  But however detailed and comprehensive the DMC may be, it cannot cover all exigencies.  There must be occasions when it is necessary to sanction what has been done before the owners can meet, discuss and approve it. Subsequent sanction or approval is also necessary to correct mistakes, cure defects or remedy oversight.  Resolutions for such purposes are very often retrospective in effect.  If resolutions which take retrospective effect are to be regarded as invalid simply because they deal with matters which are not expressly empowered by the DMC, it would hinder the efficient management of the building. 

35.  In the present case, even if the 2001 resolutions could be regarded as having retrospective effect, it cannot be said that they contradicted or were opposed to or inconsistent with any provisions of the DMC. They cannot be regarded as invalid on this ground.

36.  The trial judge relied on So Chun Man Paul as authority to support his conclusion that the 2001 resolutions were invalid on the ground that they had retrospective effect.  As Le Pichon JA and Reyes J pointed out, that decision is distinguishable from the present case.  But since this was the sole ground upon which the judge rejected the Manager’s claims and this reasoning, if it is accepted as correct, may affect how managers or owners of multi-storey buildings are to conduct their business in future, I shall proceed to consider that decision.

37.  In So Chun Man Paul, the management committee of an owners incorporation passed a resolution in April 1997 to increase the management fee from $600 to $660.  All the owners paid the new fee.  A year later, it was discovered that the 1997 resolution was invalid since it was not set out in the notice of meeting.  Another meeting was then convened in November 1998 for the purpose of confirming the increase in fees resolved in April 1997 and a resolution was passed to that effect.  In a challenge to both resolutions, it was accepted that the 1997 resolution was invalid.  The Lands Tribunal held that the 1998 resolution had retrospective effect and was thus also invalid since the Ordinance (which contains provisions in its Third Schedule that are similar to clause 10 (iii)) did not empower the passing of resolutions with retrospective effect.  This was upheld by the Court of Appeal which said that it agreed with the reasons given by the Lands Tribunal.  The reasons given by the judge in the Lands Tribunal which were accepted by the Court of Appeal included: that a retrospective resolution may cause the owners to lose the rights which they had already obtained; that it may change a legal action into an illegal action; that it may bring about unstable factors; and that it may affect owners who had transferred their property rights to new owners.

38.  With respect, I do not think these reasons are sound or can stand up to close scrutiny.  For the reasons given by Reyes J, I respectfully agree that there is no good ground for holding that a resolution is invalid simply because it takes retrospective effect. I see no reason why resolutions with retrospective effect should be any different from those with prospective effect unless by their retrospectivity, they are against the law or contrary to the provisions of the DMC or so unfair as to amount to minority oppression.

39.  Clause 10 of the DMC expressly provides that majority resolutions are a means through which owners make decisions concerning the management of the building.  All resolutions, whether prospective or retrospective, are bound to affect the existing rights of the owners in one way or another, some adversely and others beneficially.  There is no basis for saying that retrospective resolutions are invalid because they affect the owners’ rights or “bring about unstable factors”. 

40.  As to the situation after a transfer of ownership, I also do not see any difficulty. Former owners are not bound by resolutions passed after they have ceased to be owners of the building (see the sections 39, 40 and 41 of the Conveyancing and Property Ordinance, Cap 219 and clause 18 of the DMC).  New owners can always make provision for indemnity or compensation against former owners for any liability which former owners would have been responsible for had they continued to be owners of the building.  In any event, there is nothing unfair in new owners sharing with other co-owners of the building any burden for prior works which runs with the land if they are also entitled to any benefit which may arise from the works carried out in the building.  It must be borne in mind that decisions have to be made from time to time for the better and more efficient management of the building and that all owners have accepted this mode of management by agreeing to be bound by the DMC.

41.  In my view, insofar as the Court of Appeal in So Chun Man Paul had held that in law, no retrospective resolution can be valid, this was erroneous and should not be followed.

Were the 2001 resolutions outside the purview of the DMC?

42.  In the present case, Rogers VP took the view that since there was no power under the DMC to levy contributions for the costs of unauthorized works, the 2001 resolutions were outside the purview of the DMC.  Le Pichon JA agreed with him and added that these resolutions were for this reason also contrary to the DMC.

43.  In my view, once it is accepted, for the reasons discussed above, that the 2001 resolutions had validly sanctioned the unauthorized works, this objection falls away.  The renovation works in question are no longer unauthorized and resolutions requiring contributions among the owners must take effect.  As a matter of fact, under clause (1)(q) of the Second Schedule in the DMC, all owners are obliged to pay for all charges which the owners may resolve by a resolution as necessary or requisite for the proper management, operation and maintenance of the building or for the improvement or maintenance of the services, amenities or facilities thereof.

44.  The majority of the Court of Appeal also held that sanctioning the unauthorized renovation works after the event was not permissible since Sun Wah would have been deprived of an opportunity to address the meeting with a view to persuade the owners to vote against the proposed resolutions.  This is all the more so when there had been a change in the shareholding in the building resulting in the Grande Group now having a majority.  With respect, I do not think this objection can be sustained.

45.  The owners meeting on 26 September 2001 was held for the express purpose of passing the 2001 resolutions.  Proper notice of the meeting was given to all owners who were well aware of the agenda and the purpose of the meeting in advance.  Discussions were held (in fact arguments were made) at the meeting.  There is nothing to show that any owner was not permitted to challenge the renovation works or any part thereof or to persuade other owners not to approve them or to reduce the amount incurred.  I do not see how it can be said that Sun Wah or indeed any owner had lost the opportunity to raise objections if he or it had so wished.  From the minutes, they did raise objections.  On the contrary, while some owners did not attend the 1997 meeting (probably because of the defective agenda), all the owners were present at the 2001 meeting to hear any dissenting voice.

46.  I also do not see how the fact that the Grande Group had in 2001 acquired a majority in the shares of the building which it did not have in 1997 had adversely affected the rights of Sun Wah as a co-owner to disagree or to persuade other owners to disagree with the majority owner or to vote according to their own preference at the 2001 meeting.

47.  There is no provision in the DMC which prohibits the passing of a resolution authorizing works already executed after a change in the shareholding of the building.  So long as it is not contrary to the DMC, there is nothing to prevent the owners from passing such a resolution.

48.  The only possible complaint is that the Grande Group could at the 2001 meeting take advantage of their majority shareholding to out-vote Sun Wah and the minority co-owners when they could not have done so at the 1997 meeting.  But I cannot see any objection in abiding by the majority rule unless this is against the law or any provision of the DMC or unless this amounts to minority oppression.  After all, all owners had agreed to be bound by the terms of the DMC including clause 10 which allows for a majority decision.  There is no evidence of any breach against the law or minority oppression.

49.  I am therefore of the view that the 2001 resolutions cannot be held to be invalid for the reasons given by the Court of Appeal.  There being nothing to suggest that they were contrary to any provision of the DMC, they shall be binding on all owners.

Conclusion

50.  For the reasons discussed above, I am of the opinion that the 2001 resolutions were valid and binding on all owners, including Sun Wah. This appeal must be allowed and that the orders made by the trial judge and the Court of Appeal must be set aside.  There shall be judgment for the Manager for the following:

(1)     the sum of $1,548,099 together interest at judgment rate from 10 October 2001 to the date of payment;

(2)    the sum of $886,817.17 together with interest at judgment rate from 26 October 2001 until date of payment; and

(3)     the Manager’s costs in this Court and in the courts below.

Mr Justice Ribeiro PJ:

51.  I agree with the judgment of Mr Justice Chan PJ.

Mr Justice Mortimer NPJ:

52.  I agree with the judgment of Mr Justice Chan PJ.

Sir Gerard Brennan NPJ:

53.  I agree with the judgment of Mr Justice Chan PJ.

Mr Justice Bokhary PJ:

54.  The court unanimously allows the appeal and makes the orders as referred to in paragraph 50 in the judgment of Mr Justice Chan PJ.  Insofar as the Court of Appeal in So Chun Man Paul v Incorporated Owners of Chee On Building [2000] 1 HKC 732had held that in law, no retrospective resolution can be valid, this was erroneous and should not be followed.

Mr Ambrose Ho, SC and Ms Joyce Leung (instructed by Messrs Kennedys) for the appellant

Mr Kenneth C.L. Chan and Mr Chow Hung Fat (instructed by Messrs Tai, Tang & Chong) for the respondent