Risks created by Tortious Claims on Unit Owners of Multi-Storey Buildings in Hong Kong

Transcription

1 Risks created by Tortious Claims on Unit Owners of Multi-Storey Buildings in Hong Kong By: Mr. H.F. Leung and Dr. K.C. Wong, both Associate Professors, Department of Real Estate and Construction, The University of Hong Kong, Pokfulam Road, Hong Kong Introduction It was the case in the nineties that property price in Hong Kong soared tremendously such that both investment and speculation on property, be it long term or short term, in ordinary people s minds, were games which would definitely result in huge amount of profit. This is particularly the case for small residential property. The situation has changed in recent years and property price in Hong Kong has dropped significantly. The following table shows the price trend for private domestic property price of small units (less than 40 square metres) at Kowloon Region from 1990 to 1999: Private Domestic (area less than 40 square metres) - Average Price for Kowloon Region ($/square metre) 2 nd Quarter ,641 4 th Quarter ,906 2 nd Quarter ,306 4 th Quarter ,315 2 nd Quarter ,367 4 th Quarter ,192 2 nd Quarter ,299 4 th Quarter ,697 2 nd Quarter ,860 4 th Quarter ,784 2 nd Quarter ,334 4 th Quarter ,383 2 nd Quarter ,311 4 th Quarter ,217 2 nd Quarter ,694 4 th Quarter ,439 2 nd Quarter ,686 4 th Quarter ,115 2 nd Quarter ,420 4 th Quarter ,898 Source: Hong Kong property Review, Monthly Supplement, April Rating and valuation Department, Hong Kong Government 1

2 The following table shows the price trend for private retail property prices at Kowloon Region from 1990 to 1999: Private Retail - Average Price for Kowloon Region ($/square metre) 2 nd Quarter ,334 4 th Quarter ,752 2 nd Quarter ,668 4 th Quarter ,588 2 nd Quarter ,143 4 th Quarter ,351 2 nd Quarter ,804 4 th Quarter ,963 2 nd Quarter ,386 4 th Quarter ,866 2 nd Quarter ,528 4 th Quarter ,907 2 nd Quarter ,838 4 th Quarter ,775 2 nd Quarter ,054 4 th Quarter ,287 2 nd Quarter ,884 4 th Quarter ,570 2 nd Quarter ,794 4 th Quarter ,140 Source: Hong Kong property Review, Monthly Supplement, April With the downturn of the market, people have been more cautious in property investment. A recent court case involving personal injuries as a result of an accident occurred in a multi-storey building actually has added a further risk to property owners and investors. The damages, for which individual unit owners in the multi-storey building concerned have to bear, amounted to a significant portion of their property prices. The relevant case to be referred to is Ta Xuong v The Incorporated Owners of Sun Hing Building [1998] HKLRD A36 ( Ta Xuong ), in which the Court of First Instance of Hong Kong held that the plaintiff, who suffered from severe injury as a result of falling from outside a window of the building, was entitled to an amount of damages of approximately HK$25 million. Here we are talking about units each worth no more than HK$1 million on average in the building. At the time the plaintiff was instructed by his employer, who was a plumbing and electrical worker of routine maintenance, who in turn was employed by the 2 Rating and valuation Department, Hong Kong Government 2

3 incorporated owners, to trace a leak in a water pipe. He climbed out of a window on to some scaffolding, which owner could not be traced, and which cracked and he fell as a result. Individual unit owners had no knowledge of who owned the scaffolding. They did not know the victim or the fact that he was working in their building. They had not even instructed the employer of the victim to start work and it was only at an investigation stage of the leakage. Yet none of the unit owners could escape from the liability to bear a portion of the damages. The decision certainly led one to more hesitation before making a decision in property investment, particularly in old buildings where maintenance problems tend to be eminent. With this example in mind, the paper intends to: (1) identify the potential financial risks created as a result of tortuous claims on property investors and (2) investigate into the possible quantum that a unit owner may have to bear. It is expected that the paper could provide an insight to the possible risks that may have been overlooked by investors in local property market. Key words: Occupiers Liability; General and Special Damages; Equal Undivided Shares; Incorporated Owners The Subject Building The subject building was named Sun Hing Building and was situated at No , Nathan Road, Kowloon, Hong Kong ( the Building ). The Building comprises a theatre from the ground to podium level and there are 2 levels of basement below and 26 storeys above. It was completed in 1962 and is therefore a development of almost 40 years old. It was at a state of lack of repair and maintenance at the time of the case and the accident was as a result of some prospective repair or maintenance work to be done. With hind sight, if there was no attempt to do the repair or maintenance work, the accident may not have occurred. The Case of Ta Xuong v The Incorporated Owners of Sun Hing Building [1998] HKLRD A36 (PI No 496 of 1995, 30 October 1997) In this case the plaintiff was employed by an electrical and plumbing business operating from commercial premises in the Building. On a number of occasions, this business was asked to quote for electrical and plumbing work in the Building by the incorporated owners through their management committee. The owners also employed another plumbing and electrical worker ( the Worker ) for routine maintenance and repair. On 21 February 1991, the 3

4 Worker approached the Plaintiff and his co-worker for help in tracing a leak in a water pipe. The plaintiff climbed out of a window on to some scaffolding. The scaffolding was old and had been abandoned but the building owners had not caused it to be removed by the contractors responsible for its erection. The scaffolding cracked and the plaintiff fell. As a result he was rendered quadriplegic. The plaintiff was only 31 at the date of the accident. It was held by the Court of First Instance of Hong Kong that the incorporate owners were liable for damages of $25,878,372 to the plaintiff. The damages comprised a long list as follows: HK$ (1) General damages for pain, suffering and loss of amenities ( PSLA ) 2,000,000 (2) Pre-trial loss of earnings (net of tax) 1,316,608 (3) Future loss of earnings 4,231,248 (4) Loss of retirement benefits under the mandatory provident scheme 211,856 (5) Medical expenses to date 3,828 (6) Transport costs 71,023 (7) Miscellaneous expenses 206,776 (8) Care and services of wife (for the near-year period P was in hospital) 88,125 (9) Ditto for the 68 months from his discharge for hospital to trial 1,020,000 (10) Cost of future nursing, medical care and equipment 11,065,672 (11) Domestic help and related expenses 472,530 (12) Do-it-yourself costs 27,000 (13) Future transport costs 914,800 (14) Future aids and equipment 3,300,203 4

5 (15) Future recurring miscellaneous costs 359,172 (16) Accommodation, adaptation and removal expenses 1,176,566 (17) Additional cost of holidays for carers to accompany the Plaintiff 200,000 (18) Services of a fund manager 224,471 Total damages: HK$25,878,372 The largest items amongst the above are PSLA ($2,000,000), future loss of earnings ($4,231,248), cost of future nursing, medical care and equipment ($11,065,672) and future aids and equipment ($3,300,203). The award for PSLA is governed by the guideline set out in the case of Chan Pui Ki v Leung On and Kowloon Motor Bus 3. The latter two items are due to the fact that the plaintiff was relatively young (31 years old) at the time of accident and thus a large multiplier (16) was used in the calculation of his future losses. Quantification of Damages in Personal Injuries Cases In order to consider to what extent the amount of damages may affect the return on investment, one ought to look at the way in which damages are quantified at law. The claim for damages in personal injuries cases is governed by the common law and statutes in Hong Kong. Depending on the relationship between the plaintiff and the defendant, the liabilities usually arise at common law, such as negligence, or statutes, such as the Occupiers Liability Ordinance 4 and the Construction Sites (Safety) Regulations 5. The quantum is a matter generally governed by common law, although there are statutory interventions on some occasions, such as when the case is one between an employee and his employer 6. At common law, claims for personal injuries can be divided into the following heads: (1) General damages These are damages which cannot be precisely quantified in pleadings. They are usually sub-divided into: 3 HCA No.A2006 of Cap 341, Laws of Hong Kong 5 Cap 59I, Laws of Hong Kong 6 See the Employees Compensation Ordinance, Cap 282, Laws of Hong Kong 5

6 (i) Pain, Suffering and Loss of Amenity (usually referred to as PSLA) This is a head depending on the degree of injury and the effect of PSLA on the plaintiff. The case of Chan Pui Ki v Leung On and Kowloon Motor Bus 7 gave the levels for the awards of PSLA as follows: Serious injury $400,000 to 540,000 Substantial injury $540,000 to 660,000 Gross disability $660,000 to 1,000,000 Disaster $1,000,000 upwards The amount can be huge in cases of serious injury and it is the practice of the Court that these figures may be adjusted with inflation. It can be seen that the law is fair in a way that for this head, it is independent of whether the plaintiff is rich or poor: they are presumed to suffer to the same degree! Moreover, from a defendant s point of view, a fatal accident appears to be less harmful than one which causes severe injury, as in the former case, PSLA and future losses to cover continuous medical treatment are less likely to be significant, if any. (ii) Future loss of earnings and expenses This head usually form the bulk of large award of damages. They are estimated by the trial judge based on a formula such that: multiplier x multiplicand = damages for future losses The product is a lump sum representing the current value of the plaintiff s future losses. The purpose is to take it as the amount needed to buy an annuity yielding the amount of the plaintiff s annual loss (the multiplicand) for the period fixed by the court (the multiplier). The multiplier is always less than the life expectancy of the plaintiff s life because of the uncertainties of life and also because of the benefit that the plaintiff receives the amount in a lump sum. It is the case that the younger the plaintiff, the higher will be the multiplier. In Ta Xuong, for example, the plaintiff was 31 at the time of accident and the multiplier used was 16. It is also the case that the higher the annual income at the time of the accident, the higher the multiplicand. The amount also depends 7 HCA No.A2006 of

7 on the future expenses on matters such as continuous treatment and the facilities to be provided. (iii) Loss of earning capacities This is a head to provide compensation for situations where the plaintiff is disadvantaged in the labour market because of his disability as a result of the accident. The amount of award under this head is usually in the form of a lump sum and is always uncertain. It may vary from a nominal amount to a substantial amount of two years loss of earnings or even more, depending on evidence 8. (2) Special Damages These are to cover earnings and expenses already incurred at the time of the trial. The usual heads are: (i) (ii) Past lost earnings Expenses incurred as a result of the accident, such as medical expenses (3) Interest on Damages Apart from the above, the plaintiff is also entitled to interest as compensation for having to wait for the money. The usual heads are: (i) (ii) (iii) for special damages, interest is awarded at half of the judgment debt rate 9, which at the moment stands at 8.72% per annum 10 for damages for future loss of earnings and expenses, there is no interests as they have not yet been incurred damages for PSLA will carry interest at a rate of 2% per annum from the date of service of writ of summons to the date of trial 11. The Property Prices of Units in the Building At the time of the accident, the Building was nearly 40 years old, which by Hong Kong standard is a very old building. The Building is therefore not very popular in the property market as reflected in its transaction records. Transaction was scarce and only a few records of transaction can be found in recent year. The following are some recent samples: 8 See for example page 15 of Exall, G., Personal Injury, Longman Pickett v British Railway Engineering [1980] AC See for example Circular No. 109/01 of Hong Kong Bar Association 11 Wright v British Railway Board [1983] 2 All ER 698, HL 7

8 Address Agreement for Sale and Purchase Consideration Office 302, Sun Hing Building 30 th March, 2001 HK$750, Apartment 1408, Sun Hing Building 4 th May, 2001 HK$680, Apartment 1312, Sun Hing Building 26 th February, 2001 HK$750, Source: Transaction Records at 12 It must be noted that for a building as old as such, the restriction in the government lease as to whether it can be used as commercial or residential premises is usually very loose. As a result, there are mixed uses in the Building, meaning that some units are residential, some are commercial and some are mixed in use. A mixed use in such a large building as such has created more difficulty in management and affected the property price. According to the deed of mutual covenant of the Building 13 ( the DMC ), the legal estate of the Building is divided up into equal undivided shares, in which the theatre is assigned 6093 shares while the units in the multi-storey part are assigned shares. There are 489 units 14 in the Building and therefore, on average, each unit represents shares. According to the above transaction records in 2001, the average price per unit is about HK$726, The Financial Burden Created by the Accident on Each Unit Under the Building Management Ordinance 15 ( the Ordinance ) in Hong Kong, individual owners in a multi-storey buildings may form incorporated owners, which are legal persons created under the Ordinance. Other than the fact that the incorporated owners are given a right to enforce the deed of mutual covenants if so provided in it, it is also given powers by the Ordinance in many aspects in terms of the management of the building. In particular, it is given a right to collect funds to deal with emergency cases and therefore, no doubt, the damages in Ta Xuong awarded against the incorporated owners of the Building were to be shared amongst individual owners. As the inflation rates from 1998 to 2001 are so small that they can be neglected, I do not adjust the monetary value for the damages here for the sake of simplicity. There are 489 units in the Building, excluding the theatre, the average amount to be shared by each unit owner is therefore: HK$25,878,372 x /62639 = HK$47, per unit 12 By Centaline Property Agency Limited, Hong Kong 13 The deed of mutual covenant dated 12 th August, 1966 and registered at the Land Office of the Hong Kong Government on 17 th August, Including the shops, offices and residential units 15 Cap 344, Laws of Hong Kong 8

9 Compared to the average property price per unit of HK$ 726,700, this is a very substantial percentage (6.57%). Another way of looking at this is that the amount of damages is equivalent to the average price of approximately 36 units! The theatre alone would have to bear an amount of: HK$25,878,372 x 6093/62639 = HK$2,517,232.00, which is a huge figure, having regard to the income one may expect from a theatre of such an age and at such a state of repair. The Legal Issues In Ta Xuong, Mr. Justice Seagroatt said 16, On the occasion of my own visit to the premises it was clear that there were still sections of bamboo scaffolding in position. Most of it, possibly all of it, was old. There were broken sections, gaps and what appeared might be renewed sections. As a whole it served no useful purpose. Once the incorporated owners had left the scaffolding in situ they were responsible for its maintenance and repair. It was foreseeable that anyone seeking to carry out any external work, or simply an inspection, would feel the scaffolding was there to enable him to do so. It was equally foreseeable that there was a risk of fall, collapse and injury on scaffolding that was not maintained or complete. The incorporated owners liability under the Occupier Liability Ordinance was clear. They owed a duty of care to the Plaintiff. They were in breach of that duty and negligent. It must be noted that the judgment has no regard to the knowledge of individual unit owners of the broken scaffolding. From the judgment it also transpires that the incorporated owners was responsible for the scaffolding because it was situated at a common area as defined in the DMC. The practical question is that as the incorporated owners would unlikely have a financial capability to bear the damages, and it was unusual for incorporated owners to cover the risk by third party insurance, because of the age of the building and most owners are not well off generally, the incorporated owners would have no choice but to collect the fund required from individual owners after the judgment. The situation will be disastrous if there are large amount of absentee owners or where there are large number of individual owners who cannot afford their 16 On page 8 of the judgment delivered on 30 th October,

10 individual share of the damages. If the plaintiff is to enforce the judgment, the incorporated owners may be wound up, rendering the management of the Building to a even worse situation. Other Similar Cases Ta Xuong is certainly not a unique case of its kind. A glance at Hong Kong Law Report and Digest would lead one to find the following cases, which all result from personal injuries claims against incorporated owners. The most remarkable one is a case involving 8 plaintiffs as a result of the collapse of a canopy: Cases Award (HK$) Tse Lai Yin & Others v Incorporated Owners of Albert House and Others 17 2,212, (8 plaintiffs, as a result of the collapse of a canopy) + 800, , ,955, ,650, ,000, , ,859, Total: HK$15,357, Hsu Li Yun, the administratrix of the estate of Lee On, Deceased v Incorporated Owners of Yuen Fat Building 18 (Deceased electrocuted when carrying out maintenance work, award at 75% of contributory negligence) 389, Buaphan Wanlayaphol (deceased) & Another v Incorporated Owners of Foremost Building 19 (as a result of falling concrete) 3,997, It can thus be seen that a single claim could easily reach several millions or even tens of millions of dollars and this is something which should not be overlooked. The situation will be worse where as a result of an accident many people are injured and, cynically, they suffer severe injury instead of die, and this will have a multiplying effect on the amount of damages. 17 [2001] HKLRD J13 18 Court of First Instance Personal Injuries Action No. 786 of Court of First Instance Personal Injuries Action No. 366 of

11 Conclusion The original purpose of the Ordinance was to empower a group of representatives of individual owners in a multi-storey building to be able to form incorporated owners and be given certain powers under the statute to facilitate management of buildings. In doing that they have taken on themselves liabilities which they may not be able to foresee or afford when they are formed. For old buildings in Hong Kong, the risk for an accident to occur there is very high, having regard to the general lack of management in those buildings. When such accidents bring about huge amount of damages, the incorporated owners will be at a position to bear the responsibility. Individual owners are at a vulnerable position as they have no choice but to contribute because of the power of the incorporated owners under the Ordinance. The accident may be one totally out of individual owner s control or even knowledge as it may occur anywhere in a large block like the Building, or in even larger development. On the one hand it is generally thought that old building would attract better returns compared to new ones 20, the increased risks in terms of the repair and maintenance and any possible tortuous claims arising from occupiers liability is something that one must not overlook. The dilemma is that the cases in which incorporated owners were held to be liable were all in which the accident occurred at common areas as defined under the deed of mutual covenants. The reason is that it is commonly provided in deed of mutual covenants that the management of these common areas are under the control of incorporated owners, while areas within units remain in the hands of individual unit owners. These common areas are usually those which individual unit owners would not pay attention to or may never access to. Even if one may think that such additional risks may be covered by insurance against third party risks. The difficulty is that for old buildings insurance may mean extremely high premium, which together with the higher maintenance and repair costs may render long term investment in those buildings totally unviable. 20 See for example, according to the Hong Kong Property Review, Monthly Supplement, April, 2001, published by the Rating and Valuation Department, Hong Kong Government, the Private Property Market Yield for Grade B (older) Offices in 1998 ranges from 6.0 to 7.6, which is quite attractive 11

12 References: 1. Butterworths Hong Kong Personal Injury Service, Butterworths, Exall, G., Personal Injury, Longman Kemp, D., Damages for Person Injury and Death, Sweet & Maxwell, Percy & Walton, Charlesworth & Percy on Negligence, Sweet & Maxwell, Yelton, M., Fatal Accidents: A Practical Guide to Compensation, Sweet & Maxwell, Circular to members of Hong Kong Bar Association 7. Rating and valuation Department, Hong Kong Government, Hong Kong property Review, Monthly Supplement 8. Construction Sites (Safety) Regulations, Cap 59I, Laws of Hong Kong 9. Employees Compensation Ordinance, Cap 282, Laws of Hong Kong 10. Occupiers Liability Ordinance, Cap 341, Laws of Hong Kong 11. Buaphan Wanlayaphol (deceased) & Another v Incorporated Owners of Foremost Building, Court of First Instance Personal Injuries Action No. 366 of Chan Pui Ki v Leung On and Kowloon Motor Bus, HCA No.A2006 of Hsu Li Yun, the administratrix of the estate of Lee On, Deceased v Incorporated Owners of Yuen Fat Building, Court of First Instance Personal Injuries Action No. 786 of Pickett v British Railway Engineering [1980] AC Tse Lai Yin & Others v Incorporated Owners of Albert House and Others, [2001] HKLRD J Wright v British Railway Board [1983] 2 All ER 698, HL 12