Johnson Stokers & Master (A Firm) v. Edward Wong Finance Co Ltd and Others
Read the full judgment text of CACV 197/1980 on BabelCite. This Court of Appeal judgment.
1. This is an appeal by the five defendants in the court below against a judgment of Penlington, J. who awarded $1,295,000 plus compound interest, to the plaintiff against them. He also ruled that the five defendants were entitled to be indemnified by the third party (also D.5) a firm of solicitors, Johnson, Stokes and Master, against his award.
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CACV000197/1980 Case No.: Civil Appeal No. 184 of 1980 and Civil Appeal No. 197 of 1980 Dates of hearing: 18th, 19th, 20th, 21st, 22nd, 25th & 26th May, 1981. Date when judgment was delivered: 4th June, 1981. ORDER: Appeal allowed. Cases cited by Counsel in agrument:
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Coram: Roberts, C.J., Li, J.A. and Silke, J. Date of Judgment: 4th June, 1981. ----------------- JUDGMENT -----------------
BACKGROUND 1. This is an appeal by the five defendants in the court below against a judgment of Penlington, J. who awarded $1,295,000 plus compound interest, to the plaintiff against them. He also ruled that the five defendants were entitled to be indemnified by the third party (also D.5) a firm of solicitors, Johnson, Stokes and Master, against his award. 2. It is not necessary, for the purposes of this appeal, to deal with the previous transactions which had affected the property concerned, the ground floor of a factory building at 76 Hung To Road, Kwun Tong ('the premises'). 3. It is sufficient to say that Mr. Shum Ka Ching (D.3) had agreed in January 1976 to purchase the ground floor of this building from its previous owners, Lucky Time, on behalf of Po Fung, a company of which he was a director. The ground floor was to be transferred to a new company of which Mr. Shum, Mr. David Ma Pok Shun (D.2) and Mr. TSANG Hing Wan (D.4) were to be directors. 4. This new company, which was a shelf company formed by Miss Leung, an assistant solicitor in the firm of Johnson, Stokes & Master (J.S.M.) (D.5) was called Bovill Investments Limited (Bovill), though its name was later changed to Pomay Investments Limited (D.1). FINANCING OF PURCHASE 5. D.3 paid deposits of $185,000 on behalf of Po Fung towards the purchase price of $1,850,000, leaving a balance due from Bovill of $1,665,000. To raise this money, D.3 approached the plaintiff, Mr. Edward Wong, a licensed moneylender, who carried on business as Edward Wong Finance Company Limited. 6. Mr. Wong agreed to finance the purchase. He and Mr. Shum (D.3) went to see Miss Leung on 21st January, 1976. At this meeting, Miss Leung was told that D.3 had agreed to purchase the premises and that arrangements had been made between D.3 and the plaintiff for the mortgage of the property to the plaintiff, who would lend sufficient money to D.3's new company to finance its purchase of the premises. Miss Leung was asked to complete the legal formalities for them, being informed that the solicitor acting for the vendors was Danny Yiu and Company, a one-man firm. 7. Miss Leung was told, at that meeting, that security for the loan should be effected by a legal mortgage of the property, secured by a debenture charged on the assets of the new company and by personal guarantees to be given by D.2, D.3 and D.4. Miss Leung later advised the plaintiff that the debenture should be charged on the premises to be purchased, rather than on all the assets of Bovill, and her advice was accepted. She was told that the amount to be lent would be about $1.3 Million, but that she would be advised later of the exact sum. 8. Miss Leung wrote to Danny Yiu, the vendor's solicitor, asking for the necessary deeds to be sent to her so that the mortgage could be prepared. In reply, she received a letter from him enclosing copies of various documents. It was arranged between her and Danny Yiu that completion should take place on the 27th January, 1976, in what is generally known as the "Hong Kong style". 9. In a letter dated 27th January, addressed to Danny Yiu, Miss Leung stated that she would ask the plaintiff, her client, to put her in funds to the amount of $1,355,000 and would forward a cheque for that amount to Danny Yiu, on his undertaking to send to her within 10 days all the relevant documents duly executed, including the assignment of the premises to D.1, and to arrange for the registration of other documents, including the reassignment of the premises to the vendor by the Hang Seng Bank, the previous mortgagees, so that she could register the assignment to Bovill (D.1) and the debenture to be drawn in favour of Mr. Wong (plaintiff). She added that, if Danny Yiu was not in a position to send the documents within that time, he was not to release the money to his clients. 10. On the same day, Miss Leung drafted a letter, which was to be signed by D.1 and sent to the plaintiff, asking the plaintiff, on the execution of the necessary debenture, to forward $1,355,000 to Danny Yiu. D.1 signed the letter which was sent to the plaintiff. She also wrote to the latter herself, reporting that the mortgage of the premises had been duly secured (D.2, D.3 and D.4 having come to her office and executed the debenture and guarantee) and asked the plaintiff to let her have a cheque for $1,355,000, payable to Danny Yiu, to be used in payment of the purchase price. 11. Miss Leung, after telephoning Danny Yiu to confirm the amount due, sent another letter to him, enclosing $1,665,000 in the form of three cashier's orders payable to Danny Yiu, on the same day. This larger sum was sent, because Mr. Wong had given last minute information to Miss Leung to the effect that he had agreed with Mr. Shum (D.3) to lend the latter a further $310,000 on the security of some post-dated cheques and had brought the cashier orders for the enhanced total to her office. 12. It is not in dispute that, a few days' later, Danny Yiu fled from Hong Kong, without honouring the undertaking which he had given and taking with him a large amount of money, among which was the sum which he had received from the plaintiff, in respect of the purchase of the premises. 13. The plaintiff claimed that D.1-D.4 were liable to repay the outstanding amount of the loan ($1,295,000) and that D.5 as the solicitor for the plaintiff, was liable for negligence. D.1-D.4 resisted the claim, on the ground that they did not owe the plaintiff anything because he had not paid the purchase price of the premises on their behalf to the vendor. HONG KONG STYLE OF COMPLETION 14. There were two main points argued in the appeal before us. The first was concerned with the duty which a solicitor owes to his client; this has involved a scrutiny of the methods by which conveyances of property take place in Hong Kong. The second was whether or not D.5 was acting as solicitor for D.1-D.4 in the purchase and mortgage of the premises. 15. According to the evidence of Mr. Edmund Cheung, who was at that time President of the Hong Kong Law Society and was called by the plaintiff as an expert witness, and of Mr. McElney, the senior partner in D.5, virtually every conveyance and mortgage completed in Hong Kong within living memory has been effected by what has become known as the "Hong Kong style" of completion; I shall refer to it as such. 16. The essence of the Hong Kong style is that the solicitor who is acting for the purchaser/mortgagor forwards the purchase price to the vendor's solicitors (whether by cash, cashier's order, certified cheque or ordinary cheque) in return for an undertaking by the latter to forward the necessary documents of title, duly executed, to the purchaser's solicitor within a stated period. 17. The evidence, which was not disputed, was that this was the first occasion on which the use of the Hong Kong style had ever resulted in loss to a purchaser, by reason of the dishonesty of a solicitor acting for the vendor. 18. In England, by contrast, the customary method of completion of a conveyance has required a simultaneous handing over by the purchaser's solicitors of the purchase price, in return for the receipt from the vendor's solicitors of the necessary documents of title. (Though this practice has itself recently been modified by the recognition by the English Law Society of the propriety of a system of postal completion). 19. The existence of a Hong Kong style and its widespread use are not challenged. The substance of it and the degree of risk involved in it are. It will thus be necessary to consider the following questions -
DISCHARGE OF DUTY OF CARE OWED BY A SOLICITOR 20. The main principle is that a solicitor must display the standard of care and skill of a reasonably competent and diligent solicitor. Thus his duty to his client is discharged if he does what a prudent member of his profession would do in the circumstances. 21. It was argued for the appellant that it must therefore follow that, if there is an established general practice within the profession applicable to the appropriate function, a solicitor performs his duty by applying that practice in every case, though it was conceded that where there are special factors ("warning bells") such as ought to put the prudent solicitor on his guard, he must, before adopting the general practice, consider whether these involve special risks such as should dispose him not to follow it. 22. In Vancouver General Hospital v. McDaniel (1) it was ruled, in an action for negligence against a hospital, that it was a good defence to show that the defendants had acted in accordance with a general practice. Lord Alness observed, at p.57 -
23. This passage would seem to suggest, as indeed was Mr. Price's main submission, that a professional man who follows such a practice is invulnerable to claims for negligence. 24. Their Lordships, however, did not in terms consider whether a professional man is entitled to follow a general practice blindly, if such a practice holds either a substantial degree of general risk or if it would be dangerous to adopt it if there are warning bells. 25. The following passage from Charlesworth on Negligence (6th Ed. para. 202) seems to me to summarize accurately the law which governs a professional man who adheres to a general practice -
(1) (1935) 152 L.T. 56. 26. Thus, compliance by a member of a profession with a general practice of his profession is strong evidence that he has exercised reasonable care, but it is not conclusive. A solicitor cannot excuse a failure to take an obvious precaution, or to avoid a substantial risk, merely by showing that other solicitors would act, and almost always did act, in the same way. 27. To take a simple example, it may be the general practice to treat a disease with a certain drug. If, however, it is known that a patient suffers an acute reaction to it, it would be unwise to administer it to him. If a solicitor, to whom another solicitor proposes to hand cash, is known by the latter to be heavily in debt and about to leave Hong Kong, this would amount to warning bells, to which a prudent man must listen. 28. Thus, as a matter of law and of common-sense, it remains open to a court to hold that a general practice is imprudent, or makes inadequate provision for a known risk, and that a prudent solicitor should not have followed it, even if all solicitors have done so for a long time. WOULD A PRUDENT SOLICITOR HAVE FOLLOWED THE HONG KONG STYLE IN 1976 ? 29. It is important to remind ourselves that we must not judge the reasonableness of the use of the Hong Kong style in 1976 with knowledge of Danny Yiu's defalcations. We must consider whether a prudent solicitor would have followed such a practice in 1976. 30. Miss Leung did what virtually every Hong Kong solicitor then did and had done within living memory. Her action was unquestionably supported by common practice and by what was, at the very least, the implicit approval of the Law Society, contained in a circular dated 30th March, 1966. 31. This circular draws the attention of the members of the Hong Kong Law Society to the practice of sending a cheque, or executed deed, to another solicitor, against the latter's undertaking, and informs them that it is unethical to refuse to complete in the English manner if another solicitor requires this "for reasons of greater security". 32. It reminds members that "the present practice of sending the consideration money against an undertaking is a practice of courtesy and convenience only." 33. The terms of this circular appear to me to imply that the Law Society takes no objection to "the present practice" (which was the Hong Kong style) though it draws attention to the fact that the English practice is safer. 34. It should be noted, in passing, that it was the 1966 circular which is relevant. The 1965 Law Society circular was no more than a working paper circulated for comment. The 1966 circular contains the considered views of the Society. 35. It is to be expected that a professional man will normally follow the directions or advice of his governing professional body. Indeed, a failure to comply will often involve the risk of disciplinary proceedings being launched against him. 36. I have no doubt that a prudent Hong Kong solicitor would, in 1976, have regarded the circular as authorising him to use the Hong Kong style; that he knew it to be in general use; and that he would have adopted it unless there were warning bells. 37. There were no warning bells here. Miss Leung knew of nothing to Danny Yiu's detriment and had conducted similar transactions with him before, without mishap. I thus see no factors which should have warned Miss Leung that such degree of risk as was always present in the Hong Kong style was enhanced in this instance. SHOULD A PRUDENT SOLICITOR HAVE FOLLOWED THE HONG KONG STYLE IN JANUARY 1976 ? 38. As I have already said, it is strong evidence that a solicitor has acted with prudence if he is able to show that he followed a general practice; all the more so if this practice had received the seal of approval of the governing body of his profession. 39. But this is not sufficient to relieve him of liability for negligence, if that practice involves a substantial risk and ought not to have been adopted by a prudent solicitor in 1976. This involves an assessment of the foreseeability at that time of disaster flowing from the adopting of the practice. 40. Many procedures adopted by solicitors, and members of other professions, depend to some degree on mutual trust between them and their colleagues and are capable of fraudulent manipulation. 41. Under the Hong Kong style, the vendor's solicitor can pocket the purchase price and disappear. Under the English style of completion, involving the simultaneous exchange of cash for documents, there remains a risk (lesser though it may be) of forgery of documents by the vendor's solicitor. 42. So I do not regard the possibility of abuse of a practice as showing that it is improvident of a solicitor to follow it, unless the practice involves a substantial degree of risk in theory or has been shown to be dangerous in practice. 43. Although the Hong Kong style depends upon the honesty of the solicitor for the vendor, and of his willingness to honour an undertaking, I do not find it unreasonable, in general terms, for a solicitor to assume that a fellow solicitor will honour his promise, bearing in mind the certainty that the latter's failure to do so will mean the end of his professional career. 44. If a prudent solicitor had been asked, in 1976, whether he thought that it was unwise to adopt the Hong Kong style, he would surely have replied that its adoption carried more of a risk than the English style, that the risk was of negligible size, that it had never been known to go wrong and that he, and all his colleagues, had no hesitation in following it. I take the same view and find that there was no reason why a prudent solicitor should not have adopted the Hong Kong style in 1976. 45. With the benefit of hindsight, however, the risks appear more real than they did before Danny Yiu left Hong Kong in a hurry. 46. While I have concluded that D.5 was not negligent in 1976, this does not mean that I would reach the same result if a similar misfortune befell another purchaser today. 47. I suggest that the Law Society should readress itself to the possibility of surrounding the Hong Kong style, if it is thought advisable to continue to use it, with precautions which will reduce or negative the chances of misappropriation by a dishonest solicitor acting for a vendor, rare though such a man will, I hope, always be. WHAT IS THE TRUE HONG KONG STYLE? DOES IT CONTAIN PRECONDITIONS? 48. The trial judge did not in terms rule as to whether or not it is a sufficient defence to a claim against him for negligence, for a solicitor to show merely that he adopted a general practice. However, the implication that this was his view must be derived from his ruling that, although it was a general practice to follow the Hong Kong style, Miss Leung did not do so; and that because she failed to do so, and damage to the plaintiff ensued, D.5, her employers, should be held liable in negligence. 49. His conclusion that Miss Leung failed to apply the true Hong Kong style is based on his conclusion that that style requires more than blind adherence to a system under which there is an exchange of cash in return for an undertaking. In his opinion, the purchaser's solicitor must show, before he follows the system, that he has taken certain precautions, which are part of the Hong Kong style and a precondition to the adoption of the cash for undertaking procedure. 50. As the judge puts it, while in the great majority of cases an undertaking could be accepted, a solicitor "should be aware of the dangers and must give thought to the factors involved". He decides that Miss Leung failed to be so aware or to give such thought and that she was therefore guilty of negligence by virtue of the breach of the duty of care which she owed to D.1-D.4. 51. The judge bases his conclusion that the Hong Kong style contains its own built-in preconditions mainly on the evidence of Mr. Edmund Cheung, who testified that he would have taken special precautions in this instance, because the sum involved was large, the mortgage was considerable in relation to the purchase price and the purchaser was a shelf company. Mr. Cheung also said that he kept a list of some solicitors with whom he thought it prudent to take special precautions. 52. The respondents have argued that the Hong Kong style requires that a prudent purchaser's solicitor must ask himself a number of questions. For example "How many partners are there in the vendor's solicitor's firm?" "How much money is involved?" "Can my clients afford to lose what is involved?", "Have I heard anything to suggest that the vendor's solicitor is dishonest?", "Does my client agree to the Hong Kong style being adopted?" (This last question will be considered separately). 53. Mr. Cheung said, in 1980, that he would have adopted some such procedure even in 1976, though he was unable to give any instance in which he had himself not adopted the English style. Even if Mr. Cheung was not affected by hindsight, there is no evidence that the precautions which he thought desirable were adopted by any other solicitors in 1976. They were not by D.5, one of the largest firms in Hong Kong, as might have been expected if they were then a matter of general practice. 54. The Law Society circular of 1966 refers to the possibility that the adoption of the Hong Kong style may leave solicitors more vulnerable than the English practice. Nowhere does it suggest that it would not be prudent for the local form to be followed, nor that, before it is adopted, the solicitor for the purchaser should take steps to enquire as to the honesty and reliability of the vendor's solicitor. 55. Accepting that Mr. Cheung would have asked himself the questions which the judge finds D.5 should have posed, I can find no evidence that Mr. Cheung was typical of the prudent Hong Kong solicitor of 1976. I think he was more careful than the latter would have been and that the latter would have followed the guidance of his own society, which did not superimpose on the Hong Kong style the preconditions which Mr. Cheung says he then required of himself. 56. It was further argued by the respondents, though not so found by the judge, that, as one of the preconditions to the adoption of the Hong Kong style, it was incumbent upon a solicitor to explain to his client the risks which were involved in the Hong Kong style. 57. If a client asks for an explanation of the procedure to be followed and of the risks which may be involved in it, a duty lies upon the solicitor to give it; but unless the client so asks, I do not think that any such duty arises. To impose a positive duty of this nature, would in most cases serve no useful purpose, since the client would generally follow whatever advice his solicitor gave him. 58. In the circumstances under review, I have no doubt that, if the plaintiff had sought an explanation from Miss Leung, he would have been told that the practice which she proposed to follow had been adopted in virtually every Hong Kong conveyance within living memory; that no purchaser had ever lost as a result of it; and that she had had similar dealings with Danny Yiu without mishap. 59. In the face of such an explanation, it is highly improbable that the plaintiff would nevertheless have insisted on an alternative form of procedure being adopted. 60. I am satisfied that the Hong Kong style of completion does not contain any automatic general precondition though, as I have already said, if there are warning bells a prudent solicitor must listen to them and take special precautions before adopting it. In this case, there were no warning bells, and consequently no obligation upon Miss Leung to take such precautions. 61. It is worth observing, to avoid misunderstanding, that if there is no general practice, in relation to some aspect of a solicitor's work, different considerations arise. It is then incumbent upon a solicitor to consider all the factors and to decide what is the prudent course to take in the circumstances before him. CONCLUSION 62. I therefore reach the conclusion that -
63. These findings make it unnecessary to rule on the question of whether or not the judge was correct in finding that, although there was no contractual relationship of solicitor and client between D.1-D.4 and D.5, D.5 was nevertheless liable in tort to them. 64. Counsel for D.1, D.2, D.3 and D.4 abandoned their appeals against that part of the judgment which ordered those defendants to pay the sum of $1,295,000. This part of the judgment therefore stands. 65. In the result, the appeal of D.5 succeeds, both as D.5 and as Third Party. The judgment stands as against D.1, D.2, D.3 and D.4, but their right to be indemnified by D.5 disappears. Representation: Mr. L. Price, Q.C., Mr. R. Mills-Owens, Q.C. (Slaughter & May) for Johnson, Stokes & Master. Mr. O.V. Cheung, Q.C., Mr. Patrick Fung (Deacons) for Edward Wong Finance Co., Ltd. Mr. Robert Tang (Philip K.H. Wong) for Pomay Investment Co. Ltd. and Others. (1) (1935) 152 L.T. 56. Li, J.A.: 66. My lord the President has set out the facts and general background so succinctly that a further attempt on my part will be redundant. I shall use also the same description of the parties as he does so. However, I have the misfortune of having to differ from his conclusion vis-a-vis the appeal by the D5 (the 3rd party). 67. The first question is whether D5, by following the general practice in Hong Kong i.e. to part with the purchase money for an undertaking by solicitors for the vendor, was negligent. It is contended on behalf of D5 that once Miss Leung followed the general practice in Hong Kong she had a complete answer, (or clear feet) from negligent provided that this practice had no special features to call for caution: Bolam v. Friern Hospital Management Committee (1957) 1 W.L.R. 582; Vancouver General Hospital v. McDaniel and another (1935) 152 L.T. 56 and Simmons v. Pennington (1955) 1 W.L.R. 183. Counsel for the plaintiff and the other defendants, however, contend that the test goes much further. They argue that the test is that of a reasonable, diligent and competent solicitor namely, an objective test - 28 Halsbury's 3rd edition para. 9 p.12. They suggest that a mechanical following of the general practice is not a conclusive answer. 68. Having considered the authorities cited, I am of the opinion that the test is an objective test namely that of a reasonable, diligent and competent solicitor. In Bolam's case the question was whether a doctor giving what was called the ECT treatment in unmodified form to a mental patient was negligent. The evidence before the Court was that there were at least two schools of thought. However, whatever forms of modification applied would in themselves attract certain risks to the patient albeit in different ways. Unmodified forms of treatment entailed certain risks. Such risks were no higher than any other modified treatment. Directing the jury McNair, J. said at p.586:-
The consideration in that case was whether the doctor discharge his duty with a reasonable skill of his profession. There were two schools of thought. He followed one of them. 69. In Vancouver General Hospital's case the question was whether the appellant hospital, acting on advice of medical experts in maintaining a mixed ward for infectious diseases, was negligent when one of its patients admitted for diphtheria contracted smallpox. Personal negligence of the doctor and nurses attending to this patient was not in issue. That again was a question of professional technique. The old school of thought was one of isolation wards for smallpox patients. The new school was that of sterilisation in substitution for isolation. In his judgment Lord Alness said at p.57:-
Later he said:-
And lastly he said at p.58:-
70. In view of the aforesaid my understanding of the ratio is that the appellant was vindicated by a preponderence of medical opinion who felt that sterilisation was sufficient safeguard in lieu of isolation. Again it was a question of professional technique or skill which was put to test rather than the conduct of a reasonable person. Even if human prudence indicated that one form of the safety factor was isolation the same safety factor, in medical opinion, could be achieved by sterilisation. 71. In Simmons v. Pennington & Son where a solicitor's clerk was absolved from negligence when he gave a "stock form" answer to a "stock requisition" the foreseeability test was applied - not the compliance with the general practice test. At p.186 Denning, L.J. as he then was, said:-
72. The emphasis was in the phrase "could reasonably have been anticipated to flow from the answer to the requisition". What made it even clearer is in the judgment of Hodson, L.J., who said at p.188:-
73. If two prominent counsel of the Chancery Bar could not foresee the ill result of the "stock answer" until judgment of the Court of Appeal had been delivered it was indeed too much to expect a solicitor's clerk, however experienced, to foresee the same. 74. On the other hand in Charlesworth on Negligence para. 202 at p.137 the author wrote:-
It is said in 28 Halsbury's Law 3rd edition para. 9 page 12:-
75. The test for negligence or otherwise in this case means whether a reasonable, diligent and competent solicitor could foresee in January 1976 that damage could result by adopting the Hong Kong practice of completion. What, then, is a reasonable, diligent and competent solicitor in the present case? The answer, in my opinion, is that he is a reasonable man of ordinary prudence coupled with the basic skill and knowledge in the law of conveyancing. It is the same as a reasonable, competent and diligent doctor. He is a man of ordinary prudence coupled with knowledge and skill in medicine or surgery. But possession of legal knowledge and exercise of legal skill alone would not absolve a solicitor from the requirement of acting with prudence of an ordinary man. 76. Applying this test to the present case I find Miss Leung, as a solicitor when adopting the Hong Kong practice for completion in January, 1976, she complied with the general practice which had been practised for years without ill result of the form of damage as in this case flowing from it. That goes a long way to show that she was not negligent. 77. However, that is not conclusive. The further question to be asked is: could she foresee the risk or ill result at the material time as an ordinary, reasonable prudent person? I am afraid the answer must be in the affirmative. 78. As a solicitor, even in January, 1976 she should know that her client, the plaintiff would not obtain what it lent its money for unless and until the vendor had executed the assignment and delivered the title deeds. If she part with the money without such delivery she did not receive what her client had paid for apart from an undertaking or a promise by a fellow member of her profession. As a reasonable person of ordinary prudence she should or ought to have foreseen the risk of parting with the money before obtaining the property one bought in any ordinary transaction. It was not her skill that was put to test. It was her common sense, her prudence of any ordinary person that is put to test. The so called Hong Kong practice has an inherent risk in the ordinary sense. The fact that practically all her fellow solicitors adopted this practice is not conclusive evidence that it is prudent. If two wrongs do not make one right then a million similar practice of imprudence adopted for a long time without ill result do not make such practice an act or prudence. Parting with money before obtaining what one pays for has an inherent risk. Acting in accordance with the general practice she took a foreseeable risk for her client while there was no necessity to do so. The fact that other solicitor did the same did not make the risk less apparent or unreal. 79. What she did, in effect, was to put her trust on a fellow member of her profession by taking a risk for which no professional skill could find a remedy. This is different from sterilisation being substituted for isolation or impossibility of foreseeing that ill result flowing from a "stock answer". 80. The risk taken involved not only that of a dishonest solicitor. The solicitor might have a dishonest accounting clerk who defrauded him and he might not have the means to compensate for failing to honour his undertaking. 81. Furthermore dishonest solicitors, fortunately very few in Hong Kong, did come to the surface from time to time even before 1976 albeit in a different form. It is true that up to the Danny Yiu episode dishonesty of solicitors manifested in the form of defrauding their own clients only. Danny Yiu simply took advantage of the Hong Kong practice by inducing a fellow solicitor to part with the purchase money against his own undertaking without having to induce his own client to execute any document. Whatever form of dishonesty practised the risk of a dishonest solicitor was there prior to 1976 or after. To foresee that is not beyond the ordinary prudence of an ordinary person. That is not being wise after the events. 82. Miss Leung should know or ought to have known the contents of the Circular issued by the Law Society in 1966. That Circular told her that the so called Hong Kong practice was for the convenience and courtesy of lawyers. It might incidentally be convenient for the banks. This Circular told her that for greater security if she requested for an English completion on behalf of her client it would be unethical for another solicitor to refuse her. But what baffles me is that one poassage in this Circular which read:-
83. I would think that when the English legal system was applied to the Colony in the 1840's all the solicitors in Hong Kong had been trained, qualified and practised in England where the English practice of completion was then the universal practice as it is still practised today. Why the English practice should be labelled with the term 'pilot scheme' is quite beyond my comprehension. After all, an English oak even planted in Hong Kong is not called a new species of "China fir". 84. For these reasons I am of the opinion that, despite the general practice in Hong Kong, the adoption of such practice entails an inherent risk. To adopt such practice amounts to failing to exercixe due care and the ordinary prudence of a reasonable man. It means giving a fellow solicitor more trust than is necessary with the money of one's own client. 85. Mr. Edmond Cheung who gave evidence said that mentally he would have a white list. He would trust those whom he thought he could trust not because he was a solicitor but because by previous experience he found a particular solicitor to be trustworthy. In any event he gave the impression that he would accept the risk as one of his own rather than that he could pass on to his client. Once he is prepared to accept the risk no question need be asked. If the risk is to be passed on to his client I feel that a solicitor must assume a higher duty of care and be less trusting. For these reasons I find that D5, in their particular conduct in this case, were negligent. 86. What then is the extent of D5's liability to the plaintiff. It is argued for D5 that this was a technical breach. It is contended that even if Miss Leung were to warn herself she would have proceeded the same way because she had previous dealings with Danny Yiu without ill result. It is further contended that even if Mr. Edward Wong of the plaintiff were told of the Hong Kong practice to be adopted he would have authorised Miss Leung to proceed the same way. As such the plaintiff is not entitled to more than nominal damage - Sykes v. Midland Bank Executor Co. (1971) 1 Q.B. 113. That was the case where the trial judge, despite a very good try, never obtained from the plaintiff an answer that he (the plaintiff) would instruct his solicitor to act otherwise had he known the full details. In the present case, after a lengthy cross-examination by counsel for D5 and a few questions from the Bench, the gist of Edward Wong's evidence can be summarised as follows:
87. It is however interesting to repeat his answers to certain questions in cross-examination as follows:-
To this he later add:
88. At no time did Mr. Wong say that he knew of a safer method of completion - the English practice. What happened if he knew of this practice is a matter of conjecture. To impute such knowledge to him would mean putting him in the position of being in possession of legal knowledge as his solicitor. He accepted the Hong Kong practice as a matter of course. He did not know he had a choice. In short he took a risk without knowing that there was any other procedure whereby he could avoid it or at least minimise it. For these reasons I am of the opinion that he is entitled to a full measure of compensatory damage as awarded by the trial judge and not nominal damage. 89. I now come to the other defendants namely: D1 - D4. In this connection I assume that there was no contractual relationship between D5 and these other defendants apart from that of purchasing a shelf company. According to Miss Leung, D5 did not act for these other defendants in respect of the mortgage between them and the plaintiff or for the purchase of the property. However, in the course of her acting in respect of the mortgage for the plaintiff, Miss Leung drafted a series of documents. One of these was a letter she drafted for Mr. Shum (the 3rd defendant) and his fellow directors to sign on behalf of D1 and addressed to the plaintiff. Another was her own letter addressed to Danny Yiu. In the letter she drafted on behalf of the 1st defendant to be signed by its directors she used the following terms:
90. This meant a direction and authorisation that the plaintiff should forward the money to Danny Yiu on their behalf. In another letter which Miss Leung addressed to Danny Yiu she adopted the following terms:
91. Having regard to the terms of these documents I am of the opinion that in the course of discharging her duty to the plaintiff (the new mortgagee) she adopted an advisory role vis-vis D1 - D4 in the purchase of the property. D2 - D4 would be justified to rely on her advice. She knew that D1 - D4 had to act in accordance with her suggestions in signing that letter to the plaintiff in order to obtain the loan from the plaintiff. She had not ascertained that Danny Yiu was acting as solicitor of the D1 - D4 in respect of the purchase. The other defendants acted in accordance with her advice to their detriment. Miss Leung knew and ought to have known that by suggesting such a course of action to the other defendants they (the other defendants) would be involved in a similar risk that was taken by the plaintiff. That is sufficient, in my opinion, to attract to her the tortious liability towards D1 - D4. If one adopts the proximity test as applied in Hedley Byrne v. Heller (1964) A.C. 465 D1 - D4 must be regarded as persons to whom Miss Leung owed a duty of care in her practice as a solicitor. As I am of the opinion that D5 is liable to the plaintiff, D5 is similarly liable to D1 - D4 for negligence. For these reasons I am of the opinion that the appeal ought to be dismissed and the judgment of the Court below confirmed.
Representation: Silke J. 92. I have had the benefit of reading in draft the judgment of My Lord President and with deference agree with its conclusions and for the reason therein given. 93. The "Hong Kong Style" of conveyancing emerged many years ago when Hong Kong was a "sleepy place" with a small number of practising solicitors each known one to the other. 94. It has obvious practicalities in the present day in the light of the property dealings current in this city. A large number of conveyances relate to multi-story buildings or involve a number of confirmors intervening as between the original vendor and the ultimate purchaser. The gathering together of all the parties general to the English style completion is difficult; though I note that the advanced style of completion used here is being introduced, though the post box so to speak, in England today. 95. In 1975 and early 1976 whatever risk there may have been in the use of the "Hong Kong Style" was so remote as to be virtually non-existent. It was a practice sanctioned by usage, and by the governing body of the profession, over a considerable period of time. It had been used by the appellants in completions with Danny Yiu & Co. on prior occasion. It had never miscarried through default upon an undertaking. 96. It was not shown to be an imprudent practice and, on the evidence there were no "warning bells" - G + K Ladenbau Ltd. v. Crawley & DeReya [1978] 1 W.L.R. 266 - sounding their toscin generally to the profession in respect of further similar dealings with Danny Yiu. For a solicitor to dishonour his undertaking would mean the end of his professional life. It is difficult in the extreme to erect two, or even three, classes of solicitor within the profession, wherein its members are Officers of the Court, and one member is, in the absence of any warning bell, entitled in my view to rely on the integrity of another. 97. However the "Hong Kong Style" basically remains a matter of "courtesy and convenience" - that is courtesy as between brother solicitors and convenience as between those solicitors, the banks who are frequently prior mortgagees and the public. Solicitors in the post Yiu Era are and should be aware that the unthinkable has happened and can happen again. Solicitors in practice today in Hong Kong are no longer known each to the other and the real interests of clients should not be allowed to be overridden by other factors. I would agree with My Lord President that the time has come for the Law Society to reassess the practice with somewhat greater emphasis upon the possibility, rare though it may be, of risk to the client's money. No one, in my view, can be said to afford to lose part of his assets however large those assets may be. 98. As these dealings are solicitor to solicitor, and a dishonest solicitor is a fellow member of the profession and it is he who causes the loss, I would have thought it highly desirable that all solicitors as between themselves should create a fund of ample proportions to absorb any loss created by default of one of their own. And it is to be hoped that consideration of the issues raised here will take a somewhat shorter time than did the Circular issued in 1966 on the Hong Kong style, the matter first being raised in 1959. 99. It was argued that Johnson Stokes & Master, in failing to ascertain the amount of the prior mortgage before it arranged the mortgage here by Mr. Wong to the other defendants in order to facilitate the purchase of the premises and before they paid over the money thus raised to Danny Yiu, were negligent and that their negligence resulted in the loss which gives rise to this claim. 100. While it is the duty of the vendor to give good title I would have thought it prudent for the new mortgagees solicitor, in the interest of seeing that his client would get good title, to ascertain the amount due under that prior mortgage and whether or not, as in this instance, the prior mortgagee would be prepared to discharge its interest on the ground floor portion of the building whatever its view might have as to the remaining portions. But, be that as it may, I do not think such enquiry or any action arising from it would, other than by a side wind, have guarded against the dishonesty of Danny Yiu. 101. While I agree with My Lord President that the issue as to whether or not Johnson Stokes & Master were acting for Mr. Shum and his group of defendants including Pomay, on the mortgage and the actual purchase does not now fall for decision in the light of the conclusions reached, for my part I would incline to uphold of the judgment of the judge on this point. I accept that there was no contractual relationship - no retainer no direct instructions received - but nevertheless I have no doubt that Mr. Shum, and through him the other defendants in that group, was under the firm impression engendered in his mind by the instructions given to him by Miss Leung that Johnson Stokes & Master were so acting. And that, acting upon that impression, he placed such reliance upon Johnson Stokes & Master so to give rise to the possibility of tortious liability. 102. But that having been said I too would allow the appeal. Representation: Mr. Price Q.C. & Mr. Mills Owens Q.C. (Slaughter & May) for Johnson Stokes & Master Appellant Mr. D.V. Cheung Q.C. & Mr. Patrick Fung (Deacons) for Edward Wong Finance Co. Ltd. 1st Respondents Mr. Robert Tang (Philip K.K. Wong & Co.) for Pomay Investments Ltd. (formerly known as Bovill Investments Ltd.) 2nd Respondents, David Ma Pok Shum 3rd Respondent, Shum Ka Ching 4th Respondent and Tsiang Hung Wen 5th Respondent. |