Bank of China (Hong Kong) Ltd. v. Albert Hwang, David Chung & Co., A Firm
Read the full judgment text of HCA 1114/1999 on BabelCite. This High Court CFI judgment was delivered on 6 June 2002.
1. "The ordinary man in the street would not pay money without obtaining that for which he was paying." This was the submission of Peter Millett Q C (as he then was) in Edward Wong Finance Co. Ltd v. Johnson, Stokes and Master [1984] 1 AC 296. That sentiment was echoed by Lord Brightman in his judgment at p.303H to 304A:
Cited by 3 cases · Cites 3 cases
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HCA 1114/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 1114 OF 1999 ____________
____________ Coram: Deputy High Court Judge Lam in Court Dates of Hearing: 4-7 February 2002 & 6 May 2002 Date of Judgment: 6 June 2002 _________________ J U D G M E N T _________________ 1."The ordinary man in the street would not pay money without obtaining that for which he was paying." This was the submission of Peter Millett Q C (as he then was) in Edward Wong Finance Co. Ltd v. Johnson, Stokes and Master [1984] 1 AC 296. That sentiment was echoed by Lord Brightman in his judgment at p.303H to 304A:
Lord Brightman described this as a common sense principle. 2.As the case of Edward Wong Finance Co. Ltd v. Johnson, Stokes and Master [1984] 1 AC 296 demonstrated, this common sense principle was not always observed by those engaged by clients to protect their interest. The solicitor in that case was held to be negligent in a conveyancing transaction by releasing the purchase money to the solicitor acting for the vendor on the strength of an undertaking by the latter. Loss accrued to the client in that case due to the decampment of the solicitor for the vendor. It was held by the Privy Council that the Hong Kong style completion involved an element of foreseeable risk which could have been avoided. Since then, some changes in the conveyancing practice were introduced in Hong Kong to provide further safeguards to purchasers and mortgagees. However, there are still cases in which fraud committed by a solicitor caused loss to others in conveyancing transactions. The present case is one of them. Background 3.The Plaintiff in this action was the mortgagee who provided finance in respect of five transactions for the purchase of uncompleted units in a development which was ironically named the Lucky Mansion at 128 Wan Fung Street, Kowloon. The registered owner of the property and the developer was Keep Point Development Limited ["Keep Point"]. In about May 1998, the building was still under construction. Five purchasers entered into provisional sale and purchase agreements with a person who held out to be a director and the authorized representative of Keep Point. That person was Cheng Kwok Fai. The solicitor who purported to act on behalf of the vendor was Chan Kwok Yim of Messrs Ho & Chan. After the signing of those agreements, the purchasers applied to the Plaintiff bank for mortgage finance. Their applications were approved. The Defendants were partners of a solicitors firm in Hong Kong. The firm was engaged by the purchasers to act for them with regard to the purchase. The Plaintiff also instructed the Defendant to act for them in respect of the mortgage. 4.Since the building was under construction, the sale and purchase agreements were in respect of uncompleted units. Two schemes were in place in Hong Kong to protect the interest of purchasers of uncompleted units: the Consent Scheme in respect of new development at new lots granted by the Government to developers and the Non-Consent Scheme in respect of re-development by demolition of old buildings and erection of new building on old lots acquired by developers from existing owners. The development of Lucky Mansion fell within the scope of the Non-Consent Scheme because it took place on old lots. Although the case was not governed by Rule 5C(3) of the Solicitors Practice Rules Cap.159 which made it mandatory for solicitors acting for both vendors and purchasers to adopt the standard form Sale and Purchase Agreement under the Non-Consent Scheme, the situation was covered by Practice Direction No.17 issued by the Law Society on 31 January 1983. By that Practice Direction, solicitors were required to furnish their clients a written advice if the standard form for Non-Consent Scheme was not adopted in full and explained to the clients the prejudice they might suffer by reason of the non-conformity. 5.Under the standard form Non-Consent Scheme Sale and Purchase Agreement, the purchase price can be paid to the solicitors for the vendor before completion. That solicitor will hold the money as stakeholder pending completion for specified purposes. Hence, the common sense principle set out in paragraph 1 above cannot be applied to its full rigour when a purchaser decides to purchase an uncompleted unit and makes payment in advance. But a purchaser cannot blame his solicitors for that. It is an inherent risk he agrees to take when he decides to enter into such a transaction. This, however, does not mean that such principle needs not be observed regarding other aspects of the transaction. 6.I shall not recite the relevant provision concerning the term of the stakeholding which could be found in Clause 25 of the five Sale and Purchase Agreements featured in the present case. Suffice it to say that the purpose was to enable the purchase money to be utilized for construction of the building and only the balance over and above the money required to cover the outstanding balance of construction costs and repayment of all liabilities under any building mortgage could be released to the developer. Such provision would give some protection to the purchaser who had to pay the whole of the purchase price before the building was completed. But it was not full protection. 7.Whilst it provided for the money being used for construction of the building, it could not guarantee that construction could be completed. If the developer encountered financial difficulties, there was always a potential risk that the building could not be completed. The purchaser would be left with a claim against the developer. Although he might also have some security in the land by reason of his equitable interest as purchaser, as a matter of priority, his interest would usually be subordinated to the bank which advanced money to the developer on the strength of a building mortgage. 8.More pertinent in the context of the present case, the protection offered by the clause depended on the integrity of the solicitor for the vendor. As a result of Edward Wong Finance, there is a safeguard for the purchaser against the fraud of the solicitor. Clause 3(2) of the agreement stipulated as follows:
Hence, if the solicitor absconded with the money, the loss will fall on the doorstep of the developer rather than the purchaser. The purchaser could still enforce his right over the property and seek specific performance against the developer as envisaged by Lord Brightman (see p.308B of the report). However, such provision could only provide protection if the person who signed the Sale and Purchase Agreement and received the purchase money was the authorized representative of the genuine developer. Otherwise, the agreement would not even be worth the paper it was written on. It was therefore important for the purchaser to ensure that the person he dealt with and who signed the agreement on behalf of the vendor was an authorized representative of the developer. 9.In the instant case, all the purchase monies were paid to the solicitors for the purported vendor when the Sale and Purchase Agreements were signed. Three agreements were signed on 30 June 1998 whilst the other two were signed on 20 and 21 July 1998 respectively. Part of the purchase monies were provided by the Plaintiff as mortgage proceeds. The monies were released by the Plaintiff to the Defendants on the understanding that there would be good security for the same by way of Equitable Mortgage. But an Equitable Mortgage would only be good security if the Sale and Purchase Agreement was a valid and binding agreement on the developer. This is because an Equitable Mortgage is in substance a charge over the purchaser's interest under the Sale and Purchase Agreement. Hence, it was equally important to the mortgagee to ensure that the person who signed the agreements on behalf of the vendor was an authorized representative of the genuine developer. 10.Subsequently, it was discovered that Cheng Kwok Fai ["Cheng"] was neither a director nor an authorized representative of Keep Point. Further, Chan Kwok Yim ["Chan"] and Messrs Ho & Chan were not retained by Keep Point. It was a fraudulent scheme. Chan released the monies to Cheng who absconded with the same. The Sale and Purchase Agreements and Equitable Mortgages were therefore worthless. They did not bind Keep Point and neither the purchasers nor the Plaintiff derived any interest over the property by virtue of those documents. 11.The Plaintiff now seeks to recover its loss from the Defendants on the ground that the Defendants were in breach of the duty as solicitors acting for the Plaintiff in respect of the mortgages. The loss claimed by the Plaintiff was the non-recovered portion of the mortgage loans. I shall go further into the details regarding these claims when I deal with quantum. Five grounds were advanced on behalf of the Plaintiff:
12.Bearing in mind how the loss arose, Mr Chow counsel for the Plaintiff quite properly accepted that the last two grounds did not have any causal connection with such loss. As stated in paragraph 9 above, the monies were paid over to Messrs Ho & Chan when the agreements were executed, hence whatever happened afterwards could not have brought about the loss. Moreover, bearing in mind the nature of the fraud, the ground which has the most direct relationship with the loss must be ground (b) set out above. I shall therefore deal with this ground first. Liability: failure to check the authority of the signatory The defence case 13.There is very little dispute of facts in the present case. Regarding this ground, it is not disputed that the Defendants did not check whether Cheng was authorized to sign the agreements on behalf of Keep Point. The evidence showed that the Defendants did not even do a company search in respect of Keep Point before the release of the monies. Had that been done, the search would have readily revealed that Cheng was not a director of Keep Point. No enquiry had been made by the Defendants with Messrs Ho & Chan as to Cheng's authority. The Defendants' principal argument was that the fraud was so carefully planned that it could not be guarded against. Mr Cheung, counsel representing the Defendants from 4 to 7 February 2002, emphasized that the fraud only succeeded by virtue of the conspiracy between Chan and Cheng. Chan had caused Messrs Ho & Chan to cloak the transaction with an apparent genuineness by purporting to act for Keep Point and by furnishing relevant architect plans for attachment to the agreements. Certified copies title deeds were supplied. Mr Cheung submitted that in the normal course of event, the Plaintiff would have been adequately protected by the stakeholding provision and Clause 3(2) of the agreements. In the present case, it was only because of the complicity of both the solicitor and the purported vendor that these safety measures failed. The Defendants took the stance that they were entitled to rely on the solicitors for the vendor, viz Messrs Ho & Chan to verify the authority of Cheng in acting for Keep Point. 14.The Defendants also relied on the fact that Cheng was a well-known developer and a person of some social standing, being a director of the Yan Chai Hospital. Mr David Chung ["Chung"], the partner who handled these transactions on behalf of the Defendant firm, gave evidence before me as to how he came to be involved in these transactions. He was first approached, neither by the purchasers nor the Plaintiff, but by Cheng. In a meeting in about May 1998 at a cafe, his conveyancing clerk Paul Chiang ["Chiang"] introduced Cheng to him. Chiang joined the Defendant firm in 1998 and prior to that he had about 10 years' experience in conveyancing matters. In that meeting, Cheng said he could introduce business to the Defendant firm. Shortly after that, instructions regarding these transactions were received and, for reasons not very clear to me, Chung somehow laboured under the misapprehension that Cheng was the developer. Chung checked against the land search regarding the property before the release of the monies and ascertained that the registered owner of the property was Keep Point. Yet he did not do anything to verify the relationship between Cheng and Keep Point. Under cross-examination, Chung admitted that he had no personal knowledge as to the relationship between Cheng and Keep Point and he had no reason to believe Cheng was connected with Keep Point in any way. He accepted he had no basis to believe Cheng was representing Keep Point apart from what he was told by Chiang. 15.It would appear from Chung's evidence that he delegated substantial parts of the works relating to these transactions to Chiang. He left it to Chiang to approve the draft agreements prepared by Messrs Ho & Chan. He did not even look at the title documents allegedly sent to his firm (a matter which I would come back to later). He left it to Chiang to examine those in June. In July, the Defendants employed an assistant solicitor Mak Ka Ming ["Mak"] and he was instructed to check the title as well. By that time, the monies in respect of three out of the five transactions had been released to Messrs Ho & Chan. 16.Chung said in evidence that it was not his normal practice to do a company search regarding the vendor before the execution of the sale and purchase agreement. He explained that since the agreement need not be executed under seal, it was not necessary to check the Memorandum and Articles of Association of the company because the Turquand's rule applied. He did not think there was any need to know who the directors and shareholders of Keep Point were before the execution of the agreements. The instructions of the Plaintiff and the duty of the Defendants 17.Before I turn to the law, I should refer to the instructions given by the Plaintiff to the Defendants. The standard form written instruction from the Plaintiff to the Defendants contained the following:
Mr Chow submitted that the words in italics meant that the approval of title was a precondition for the grant of the facilities and the Defendants should have approved title before advising the Plaintiff to release the mortgage money. 18.Before the Plaintiff released the mortgage monies to the Defendants, the Defendants had to issue a confirmation letter. In that letter, the Defendants had to confirm that the Equitable Mortgage had been prepared in accordance with instructions of the Plaintiff. Regarding the confirmation, Chung said the following in paragraph 9 of his witness statement of 1 March 2000 (which was adopted as his evidence at the trial),
19.Hence, Chung himself appreciated that before he could ask the Plaintiff to release the mortgage money, he should be satisfied that the purchasers would obtain good equitable titles to the properties under the sale and purchase agreements and the Plaintiff's interest would be secured over those equitable titles by the equitable mortgages. This accords with common sense. Before the Plaintiff parted with its monies, it was entitled to assume that the solicitor had exercised reasonable care to ensure that there would be good securities for the same. That was just an application of the common sense principle set out in paragraph 1 above. The Plaintiff relied upon the Defendants as its solicitors to take care of that. I therefore hold that the Defendants owed the Plaintiff a duty to exercise reasonable care and skill in seeing to the effectiveness of the equitable mortgages before advising the Plaintiff to release the monies. The clause in the instruction letter only served to emphasize this aspect of the duty. However, I am of the view that the instruction did not impose an absolute duty on the solicitor to make them responsible for loss occasioned to the Plaintiff due to title defects even if there was no negligence on their part. This conclusion is supported by the decision of the English Court of Appeal in Barclays Bank v. Weeks Legg & Dean [1999] QB 309. That case dealt with the effect of the undertaking given by a solicitor to a bank regarding monies provided by the bank to facilitate the completion of purchase of properties by the clients of the solicitor. Although the instruction and the confirmation letter in the present case were not described as "undertaking", I do not see any material difference. Having regard to what I said in paragraphs 17 and 18 above and earlier in this paragraph, I am of the view that those documents achieved the same effect as the undertaking in Barclays Bank. Millett LJ (as he then was) said at p.324A to B,
Millett LJ construed the undertaking as an undertaking by the solicitor to obtain in exchange for the money what a reasonably competent solicitor acting with proper skill and care would accept as a good marketable title (see p.327G to 328F). The reference to good marketable title instead of good title was due to the facts of that case. At p.332 B, Pill LJ highlighted the point that the duty imposed on the solicitor is to take reasonable care as to title before parting with the money but not to make the solicitor the bank's insurer. To the same effect is our Court of Appeal's decision in Ying Ho Co. Ltd v. David K L Man & Co. [2000] 3 HKC 2092. I respectfully adopt the same approach in the present case. 20.Whilst he accepted that the Defendants were under a duty to approve title, Mr Cheung however argued that the instruction did not spell out the time for that to be done. He submitted that because the vendor was only obliged to answer all requisitions satisfactorily at a reasonable time before completion, approval of title in the strict sense could take place quite some time after the signing of the agreements. Completion under the Agreements were to take place within 14 days after the purchasers is notified in writing that the Occupation Permit has been issued and the vendor is in a position validly to assign the property (see Clause 5 of the Agreements). Under Clause 4(1)(c), the vendor undertook to complete the development (viz to secure the issue of Occupation Permit, see Clause 4(6)) by 30 December 1998, subject to extensions of time granted by Authorized Person. Mr Cheung submitted that approval of title for the purpose of the Equitable Mortgage could only be understood in a loose sense of that expression. He formulated that duty as a duty to be satisfied that there was no title problem which could not be resolved in the absence of requisitions. He further submitted that the Defendants had fulfilled such duty in the instant case. 21.This raises an issue which could have important ramifications for conveyancing practice in Hong Kong as to sale of uncompleted units. Although no admissible evidence has been adduced at the trial with regard to the general conveyancing practice, the standard form agreement under the Non-consent Scheme suggests that requisitions could be raised after the signing of the sale and purchase agreement. Clause 12 imposes a duty on the vendor to show good title and to produce certified copies of title deeds. Clause 8 provides for the right of the vendor to annul the sale in the event that the purchaser insists on any objection or requisition in respect of title which the vendor is unable or unwilling to remove. These clauses would not be necessary if title has been approved by solicitors for the purchaser and accepted by the purchaser before the signing of the agreement. 22.On the other hand, the full purchase price had to be paid shortly after the signing of the agreements. By way of example, in respect of the Agreement dated 30 June 1998 made with Ng Kai Kin as purchaser, the entire balance of the purchase price had to be paid by 2 July 1998. Thus the mortgage loan had to be fully released by the Plaintiff well in advance of the completion of the sale. If the solicitor for the purchaser (and mortgagee) were not required to approve the title of the property before the monies were released, the purchaser and the mortgagee would be parting with their monies with a risk that there might be some defects in the title of the vendor. The monies would have been expended on the construction of the building and in the case of a small developer, there could be real risk where the vendor did not have enough money to repay the purchaser and mortgagee. Whilst they might have an equitable lien or interest in the property to secure their monies, that may not be sufficient protection if the defect in title is serious. The property may not be saleable or may not be sold at a price which was adequate to repay all the purchasers who did not complete. When the property price has fallen substantially, the proceeds on sale might again be inadequate to repay all the non-completing purchasers. This risk could be avoided if the solicitor acting for purchaser and mortgagee approved title before parting with the money. 23.There is also a risk of default by the developer as mentioned by me in paragraph 7 above. But as I said, that is a risk inherent in the transaction. The purchaser and the mortgagee paid their monies with their eyes open to the fact that the transaction involved the purchase of an uncompleted unit and the unit would not be completed until some time in the future. They therefore knew that they depended on the covenant of the developer to continue with the construction of the building and to complete the same in accordance with approved plans. Should such expectation fail to materialize, they could not blame their solicitors. 24.However, I do not think the same could be said with regard to defects in the title of the property. The subject matters of the transaction from the standpoint of the purchaser and the mortgagee are the property and security interest therein. If title were not approved before all the payments were made, that would mean that they paid over the full purchase price against a promise by the vendor to prove good title as to the property in the future. In other words, if I find that such arrangement were in line with their real intention, the necessary implication is that they agreed to take upon themselves the risk I outlined in paragraph 22 above. In the absence of clear and cogent evidence as to the explanation of such risk by the Defendants to the Plaintiff, I am reluctant to conclude that the Plaintiff had agreed to take such risk. On the facts of the present case, such a finding would also be against the express provision in the instructions. I reject the suggestion that the reference to approval of title in the instruction letter was referable to the approval of title after the signing of the agreement. The instruction referred to the preparation of the Equitable Mortgage subject to approval of title. It did not refer to the preparation of the Legal Charge subject to approval of title. Thus, the approval of title was plainly a precondition for the Equitable Mortgage. As stated in paragraph 19 above, this construction of the instructions accord with common sense and also accord with the understanding of Chung himself. Moreover, since the title to be approved was the mortgagor's title, this required the solicitor to be satisfied that the Sale and Purchase Agreement (from which the mortgagor derived his title) was validly executed. If the Agreement were not validly executed, the mortgagor simply has no title, whether equitable or otherwise, in respect of the property. 25.With regard to the provisions as to requisition and proof of title in the standard form agreement alluded to in paragraph 21 above, they only governed the position as between the purchaser and the vendor. Whether that would affect the duty of a solicitor towards the purchaser, I prefer not to express a concluded view on the matter. The point has not been fully explored before me in the absence of evidence as to the general conveyancing practice under the Non-Consent Scheme in Hong Kong and it is unnecessary for me to reach a conclusion thereon. In any event, I cannot see how the terms in the agreement (which was approved by the Defendants on behalf of the purchaser) could prejudice the rights of the Plaintiff who was not a party to the agreement. Suffice for me to confine myself to a decision on the evidence in the present case which, for reasons given above, clearly calls for a conclusion that the Defendants owed a duty to the Plaintiff to approve the title before advising the Plaintiff to release the mortgage monies. 26.I shall have to come back to the point raised by Mr Cheung as to the extent to which title should be approved. But it follows from my above analysis that the Defendants must owe a duty towards the Plaintiff to be satisfied with the effectiveness of the Equitable Mortgage before the release of money. It is trite law that in order to be effective, the Equitable Mortgage must impose a charge upon the purchaser's interest under an effective Sale and Purchase Agreement. In order to be effective, the Sale and Purchase Agreement must be signed by an authorized representative of the registered owner, Keep Point (see paragraphs 8 and 9 above). Hence, it is plain that the Defendants owed the Plaintiff a duty to use reasonable care and skill as solicitors to verify that Cheng was an authorized representative of Keep Point. Given what I have said in paragraph 24 above, if the Defendants failed to verify the authority of the signatory who executed the Sale and Purchase Agreements, the Defendants would also be in breach of the duty in terms of approval of the title of the mortgagor. Breach of duty 27.In Edward Wong Finance Co. Ltd v. Johnson Stokes & Master [1984] 1 AC 296 at p.306E to F, Lord Brightman put forward the test for professional negligence as follows:
28.That was said in respect of a practice generally adopted by the profession at the material time. Edward Wong Finance has recently been applied by the English Court of Appeal in the case of Patel v. Daybells, 27 July 2001. At paragraph 59 of the judgment, Robert Walker LJ said:
29.In the present case, there was no admissible evidence as to the commonly adopted conveyancing practice in Hong Kong. Although directions have been given for such evidence to be adduced, the Defendants chose not to call any evidence from any conveyancing expert. Given the limited experience of Chung and his assistant Mak and the tenor of some of their evidence as to the practice adopted by the Defendant firm (some of which, if I may say so, were rather shocking, e.g. evidence as to their practice regarding custody and keeping of records of title deeds received from solicitors for the vendor, approval of Agreement without advising client as to non-conformity with the standard form agreement which seems to be a blatant breach of the Practice Direction No.17), I do not find them to be reliable witnesses as to the general conveyancing practice adopted in Hong Kong. In fact, Mr Cheung expressly disavowed any reliance on any defence based on general conveyancing practice in Hong Kong. 30.Notwithstanding that, I am still obliged to consider the three questions posed by Lord Brightman. In the context of the failure to verify the authority of Cheng, the three points could be stated as follows:
For reasons already canvassed in paragraphs 8 and 9 above, it is plain that if the monies were released against the signing of the agreement by a person who was not authorized to represent Keep Point, the Equitable Mortgage would not be effective. Was that a foreseeable risk in June and July 1998? In my judgment, the answer must be "yes". I do not think it is a good answer to say that the Defendants relied on the representation from Messrs Ho & Chan that they were acting on behalf of Keep Point. The case of Edward Wong Finance showed that the risk of fraud committed by a solicitor in a conveyancing transaction could not be regarded as unforeseeable. I am sad to say that such a risk is by no means less prevalent nowadays. The fact that Messrs Ho & Chan sent certified copies of title deeds and architect plans did not take the matter further. Neither did the terms of the agreement have any bearing on this risk. If the agreements were executed by an unauthorized person, their provisions were of little comfort to the Plaintiff. 31.Neither is it a good answer to say that Cheng was a well-known developer. In my judgment, a solicitor who dealt with a well-known person on behalf of his client in a conveyancing transaction should conduct the same degree of investigation to protect his client's interest as in other cases. The client's objective is to acquire a property, not a lawsuit against whoever he is dealing with. His lawyer should take reasonable care to ensure that such objective is achieved. 32.Reference was made by the Defendants to the fact that the provisional agreements described the sales as a private sales. I fail to see how that affected the foreseeability as to the risk of the vendor being an imposter. In any event, as far as the Plaintiff is concerned, there was no evidence to suggest that the Plaintiff had any insider knowledge regarding Cheng's relationship with Keep Point or relied on any such knowledge. 33.Mr Cheung submitted that it was a fraud involving a conspiracy between Cheng and Chan and tried to distinguish Edward Wong Finance on that basis. I do not accept that as a valid distinction. Fraud could take many forms. Once it is accepted that fraud by solicitor is a foreseeable risk, it does not matter that in the instant case, the fraud involves the complicity of Cheng. In fact, it does not matter whether the agreement was executed by Cheng or by the solicitor poising as someone else. I hold that the risk that someone not properly authorized would execute the agreement was foreseeable in the circumstances prevalent in June and July 1998. 34.Could that risk be avoided? Mr Cheung argued that prior to the return of the Sale and Purchase Agreements from Messrs Ho & Chan, the Defendants had no means of knowing who would be signing them on behalf of Keep Point. This was echoed in paragraphs 22 and 23 of the witness statement of Chung. I do not agree. The obvious things that the Defendants could have done were to conduct a company search in respect of Keep Point, to enquire with Messrs Ho & Chan as to the identity of the person who would sign the Agreements on behalf of Keep Point and to ask for evidence, e.g. a board minute, that such person was properly authorized by Keep Point to execute the Agreements on its behalf. I do not think such enquiries should be considered as breach of professional etiquette. After all, the purchasers and mortgagee would have to part with substantial sums on the strength of the Agreements. It is only right that their solicitors should protect their interests by making the necessary enquiries to satisfy themselves that the Agreements would be binding on Keep Point. The Defendants had no right to impose on the Plaintiff the risk adverted to in paragraph 30 above. As Lord Brightman pointed out at p.307E in Edward Wong Finance, it would not be unethical for a solicitor to insist on a certain course of action notwithstanding the possible implication that the solicitor so requesting was not trusting his colleague if such course of action was necessary to deal with a foreseeable risk. Had a company search been made, the Defendants would learn that Cheng was not a director of Keep Point. If Messrs Ho & Chan declined to give the information requested, that would serve as another warning bell. The Defendants should relay the same to the Plaintiff with an advice as to the risk pertaining thereto. It would be up to the Plaintiff to decide whether such risk was acceptable. Since the Defendants did not take any of these steps, it does not lie in its mouth to say that the firm has done everything which it reasonably could have done to protect the interests of its clients. Mr Cheung also submitted that even if those steps were taken, Chan and Cheng could still be successful in their plot by producing a forged board minute of Keep Point. In my judgment, that is a question pertinent to the measure of damages instead of the question of casual connection between the breach and the loss (see the distinction set out in the dicta of Millett LJ cited in paragraph 43 below) and it has no bearing on the question of breach of duty. I shall discuss that later. 35.Mr Cheung argued that it was not the practice in Hong Kong to enquire about the identity of the person executing the agreements. As I said, there was no admissible evidence before me as to the prevailing practice in Hong Kong. In any event, even if that were the prevalent practice, as decided by Edward Wong Finance, I am still obliged to ask whether the practice was reasonable given the foreseeable risk involved. Mr Cheung also referred to the judgment of the Court of Appeal in Cheng Chau Yin Ann v. Cheng Kwok Fai, CACV 333 of 99, 24.2.2000 which was an interlocutory appeal against a summary judgment granted against the 2nd defendants in that case who were the Defendants in the present action. That was a claim brought by one of the five purchasers. That purchaser had paid off the mortgage after the discovery of the fraud. She sued the Defendants for damages. The Court of Appeal allowed the appeal and granted unconditional leave to the Defendants to defend the claim. Bearing in mind the interlocutory nature of that appeal, perhaps one should not read too much into that decision. No reference was made in that judgment to Edward Wong Finance or the risk pertaining to the release of the monies without verification as to the authority of the signatory of the agreements. 36.Further, that was a claim by a purchaser whilst in the present case, the Plaintiff was the mortgagee. By the time the purchaser retained the Defendants, she had already signed the provisional agreement which obliged her to make full payment by a particular date without any reference to approval of title. On the other hand, the mortgagee was not obliged to advance the loan and in the facility letter to the purchaser as well as the instructions to the Defendants, the Plaintiff made it clear that its agreement to grant the facility was subject to approval of title. This may have a bearing on the crucial question identified at p.7 of that judgment, viz when was it appropriate to make enquiries and searches regarding Keep Point's title. Granted at p.6 of the judgment, Mayo VP did raise some doubt as to the criticism leveled against the failure of the Defendants to conduct company searches and to rely on the representation of Messrs Ho & Chan. But as I said, no reference was made to the judgment of Edward Wong Finance and this suggests that the matters had not been fully argued in the interlocutory context. I therefore did not read that judgment of the Court of Appeal as an authority against my above analysis. 37.I come to the question whether the Defendants were negligent in failing to avoid the risk. The Privy Council held in Edward Wong Finance that because the risk was foreseeable, and readily avoidable, there could only be an affirmative answer to this question (see p.308G). It was no answer to say that the defendant was only following the prevailing practice on Hong Kong. Their Lordships also expressed agreement with the judgment of Li JA in that case. Part of the judgment of Li JA are apposite in the present context:
38.In the present case, the Defendants took a foreseeable risk on behalf of the Plaintiff when the mortgage monies were released without any verification by the Defendants as to the authority of the person who would execute the Agreements. In such circumstances, there was also a foreseeable risk to act in reliance on the stakeholding provision in the Agreements. Such risk could be minimized by taking the steps outlined by me. I hold that the Defendants were negligent in failing to take such steps, which a reasonably competent solicitor should have undertaken before the release of his clients' monies. 39.Before I leave this topic, I would briefly deal with the purported reliance on the Turquand's rule by Chung and Mak. Both of them referred to this as the reason for not checking the identity and authority of the person executing the Agreements. Turquand's rule, also known as the indoor management rule has recently been considered by the Court of Appeal in the case of Grand Trade Development Ltd v. Bonance International Ltd. [2001] 2 HKLRD 759. Le Pichon JA referred to the formulation of the rule as follows:
40.In the present instance, it is not necessary for me to consider the rule at great length. Before the rule is applicable, there must be some acts on the part of the company which suggest to the other party that he is dealing with the company. One example is the use of the company seal. Brennan J explained the rule as follows in Northside Developments v. Registrar General [1990] 93 ALR 385,
In that case, at p.504-5, Diplock LJ said:
Brennan J regarded the general principles of estoppel provided the framework within which the indoor management rule operated. Dawson, Toohey and Gaudron JJ also expressed similar views. The rule could not be applied in cases involving counterfeit signature or seal. As Dawson J put it:
41.Plainly, in a situation like the present case, the purchasers and the mortgagee cannot rely on the indoor management rule to bind Keep Point in respect of the Agreements. Keep Point did nothing to suggest to the Defendants that Messrs Ho & Chan was its solicitors or that Cheng was authorized by the company to enter into the Agreements on its behalf. This serves to highlight the need to verify the identity and authority of the person executing the Agreements by the Defendants in order to properly safeguard the interest of the Plaintiff. Damages caused by the breach 42.Although there were some disagreements between the parties as to whether the loss of the Plaintiff was attributable to the breaches of the Defendants under other heads, Mr Cheung did not put forward that argument with specific reference to this head of claim. Under this head, Mr Cheung submitted that the cause of the loss was the fraud of Cheng and Chan and it was a sophisticated plot. 43.In Bristol & West Building Society v. Mothew [1998] Ch 1, a case referred to by Mr Cheung, the English Court of Appeal considered the liability of a solicitor who acted for purchasers in a conveyancing transaction. The plaintiff was the mortgagee who advanced money to finance the purchase on the express condition that the balance of the purchase price was provided by the purchasers without resort to further borrowing. The solicitor was required to report to the plaintiff before completion any proposal that the purchasers might create a second mortgage or otherwise further borrow in order to finance the purchase. The solicitor knew that there would be a second charge regarding an existing bank debt in the sum of ￡3,350 but due to oversight, failed to inform the plaintiff. The solicitor reported to the plaintiff that the balance of the purchase price was provided by the purchasers without resort to further borrowing. Subsequently, the purchasers defaulted on mortgage repayments. The house was sold at a loss. The plaintiff sought to recover their loss (being the difference between the loan advanced by the plaintiff and the net proceeds recovered on sale of the house, that difference exceeded ￡3,350, see p.8D and 9B) against the solicitors. Hence the question whether such loss was attributable to the breach arose. At p.10C to D, Millett LJ (as he then was) identified two different questions of causation:
44.In respect of the first question, based on Downs v. Chappell [1997] 1 WLR 426, Millett LJ held that it was necessary to distinguish between two different kinds of case. At p.11B to F:
It is the distinction between nonfeasance and misfeasance. On the facts, there were complaints of both kinds (see p.11F to H). 45.In the present case, as far as this head of claim is concerned, the complaint is the omission on the part of the Defendants to verify the authority of Cheng. Mr Chow accepted that it is a case of nonfeasance. Hence, the question is if proper steps were taken and proper advice given, whether the Plaintiff would have entered into the transactions in question. I have outlined the steps that should have been taken in paragraph 34 above. Had those steps been taken, it was likely that the Defendants would discover that Cheng was neither a director nor shareholder of Keep Point. Had the Plaintiff been told about the situation and the risk involved, it was likely that it would not advance the loans unless it was fully satisfied as to the authority of the signatory. I am satisfied that had there been proper advice from the Defendants, the Plaintiff would not authorize the release of the mortgage loans without any inkling as to the identity of the person who executed the Sale and Purchase Agreements and without any evidence as to his authority to represent Keep Point, the registered owner. The casual connection between the breach and the advances made by the Plaintiff is therefore established. Mr Cheung's reference to the fraud as the real cause is a non sequitur. Fraud was one of the contingencies that the Defendants should have taken reasonable steps to guard against in order to discharge their duties to the Plaintiff. It does not lie in their mouth to say that because the damages were caused by fraud, they would not be liable for their negligence. 46.Turning to the second question, viz measure of damages, Mr Cheung urged upon me that the test was whether the damages were attributable to the negligence. That was an argument based on the SAAMCO principle laid down by Lord Hoffmann in Banque Bruxelles Lambert SA v. Eagle Star Insurance [1997] AC 191. It was established in that case that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. On the other hand, in case of a person under a duty to advise someone as to what course of action he should take, the adviser must take reasonable care to consider all the potential consequences of that course of action. Hence, if he is negligent, he will be responsible for all the foreseeable loss which is a consequence of that course of action having been taken (see p.214C to F). Two separate requirements have to be satisfied by the plaintiff: first, he has to prove that he suffered loss, and second, he has to establish that the loss fell within the scope of the duty he was owed (see p.220A). This two-stage test was subsequently applied by the House of Lords in the context of loss in terms of security in Nykredit Bank v. Edward Erdman Group [1998] 1 All ER 305 (see in particular the judgment of Lord Nicholls at p.309c to j). See also the judgment of Lord Hobhouse in Platform Home Loans v. Oyston Shipways Ltd [2000] 2 AC 190 at p.208 to 210 where the relationship between the SAAMCO principle and the concepts of remoteness of damages, causation and contributory negligence was examined. Lord Hobhouse, with the concurrence of Lord Lloyd and Lord Hope, regarded this principle as an application of the reasoning in The Wagon Mound to the quantification of damage instead of kinds or categories of damages (see p.209G). 47.Lord Hoffmann was dealing with a negligent valuer and the duty concerned was a duty to provide information. In respect of a solicitor in a conveyancing transaction, it has been held in several English cases that they fell within the same category. In those cases, solicitors were negligent in providing a report to the mortgagee before the release of mortgage monies (see Bristol & West Building Society v. Mothew [1998] Ch 1 at 12G, Bristol & West Building Society v. Fancy & Jackson [1997] 4 All ER 582 at 621h to j). Although an argument was raised in Portman Building Society v. Bevan Ashford [2000] PNLR 344 at 358C that the solicitor also fell into the other category, viz under a duty to give advice instead of a duty merely to give information, the Court of Appeal did not find it necessary to consider the point in view of its decision on another point (see p.359C). 48.However, in Fancy & Jackson, in applying that test to one of the case before the court (the case of Steggles Palmer), Chadwick J (as he then was) held that the solicitor was responsible for the whole loss of the mortgagee because it was found that if the mortgagee was correctly informed about the situation, it would have decided that it would not wish to lend to that particular borrower (p.622e). Hence, the loss was wholly attributable to the negligence. This approach was endorsed by the Court of Appeal in Portman Building Society v. Bevan Ashford [2000] PNLR 344 at 359A to C, Otton LJ stated the principle as follows at p.359B:
This principle was applied by the Court of Appeal in Lloyds Bank plc v. Crosse & Crosse [2001] PNLR 830 at p.851-855 although on the facts, the court held that the case fell into the other category. Fancy & Jackson was also applied in the Scottish cases of Leeds & Holbeck Building Society v. Alex Morison (No.2) [2001] PNLR 346 at 370 and Newcastle Building Society v. Paterson Robertson [2001] PNLR 870 at 880. 49.In the recent decision of the House of Lords in Aneco Reinsurance Underwriting v. Johnson & Higgins [2002] 1 Ll Rep 157, after referring to cases on remoteness of damages including the Wagon Mound, Lord Lloyd (with whom Lord Slynn and Lord Browne-Wilkinson agreed) observed at p.181 that the SAAMCO principle is nothing new and it was only a manifestation of the long established principle that a defendant is not liable in damages in respect of losses of a kind which fall outside the scope of his duty of care. His Lordship further explained that SAAMCO was an example of a special class of case where the scope of the defendant's duty is confined to the giving of specific information. Lord Steyn (with whom Lord Slynn, Lord Browne-Wilkinson and Lord Lloyd agreed) identified the issue as the characterization of the duty undertaken by the defendant. At p.186, his Lordship agreed with the reasoning of Evans LJ in the Court of Appeal that the defendant undertook to advise the plaintiff upon risks which were central to the plaintiff's decision on a course of action. It was held that the defendant should be liable for the full loss of the plaintiff. 50.Lord Millett was the dissenting judge in Aneco. The disagreement was in respect of the scope of duty of the insurance brokers. On the facts of the case, the plaintiff was seeking damages against the brokers in respect of the latter's negligence in the representation as to reinsurance cover. However, the plaintiff's claim was not confined to the loss due to the avoidance loss reinsurance cover in the sum of US$10 million. In addition, the plaintiff also claimed for its entire loss arising from the transaction called the Bullen treaty in the additional sum of US$24 million. This was based on the argument that had the brokers performed their duty, they would have reported on the assessment by the market of the risks inherent in the Bullen treaty showing that the treaty was not commercially viable. The majority's view was that it was artificial and unreal to distinguish between reporting on the availability of reinsurance in the market and reporting on the assessment by the market of the risks inherent in the Bullen treaty (see Lord Steyn at paragraph 41 at p.186-7; and Lord Lloyd at paragraphs 16 to 17 at p.181-2). Lord Millett held otherwise (see paragraph 100 at p.197 and paragraph 109 at p.198). 51.In his judgment, Lord Millett undertook an analysis of the SAAMCO principle and at the hearing of 6 May 2002, both counsel for the Plaintiff and counsel for the Defendant referred to the relevant parts of his speech discussing the law. At paragraph 62 at p.190, Lord Millett elaborated on the distinction made by Lord Hoffmann:
52.At paragraph 66 at p.191, Lord Millett summarized the law:
53.After analyzing the responsibility assumed by the broker in that case, Lord Millett considered the proper measure of damages in the light of that. In paragraphs 106 to 111 at p.198, Lord Millett explained why he rejected the claim of the plaintiff as to the US$24 million. Putting aside reasons stemming from the facts of the case in paragraphs 108 and 109, the other reasons given by Lord Millett highlighted his dissent from the majority in the application of the SAAMCO principle. Lord Millett referred back to the approach adopted by Lord Hoffmann in SAAMCO [1997] AC 191 at p.223E to H in dealing with the arguments of Nykredit. In paragraphs 63 and 64 at p.190 and paragraphs 107, 110 and 111 at p.198, Lord Millett explained the inconsistency between the US$24 million claim with the approach of Lord Hoffmann. In paragraph 111, Lord Millett observed:
This echoed what His Lordship said by way of sub-paragraph 3 in his summary of the law as set out above. 54.On the other hand, the view of the majority was expressed by Lord Lloyd at paragraph 13 at p.181. A submission was made on behalf of the brokers that the question is not what would have happened if a correct report had been made, but what would have happened if the report actually made had been correct. As indicated in the above paragraphs, this was also the view of Lord Millett. However, this submission was rejected by Lord Lloyd. Lord Lloyd regarded the SAAMCO case as an exception rather than laying down a general exclusionary rule. The general rule remained that a defendant is liable for the foreseeable consequences of his negligence, including the adverse consequences of entering into a transaction with a third party, provided such consequences can fairly be held to fall within the scope of the defendant's duty of care. 55.In these state of authorities, there are rooms for further development in the law. In a decision subsequent to Anneco, Michael Gerson v. Haines Watts, 14.12.2001, Rimer J observed that there were suggestions that Lord Millett's approach amount to a reformulation of the relevant principle. Whatever one may say in respect of the analysis of Lord Millett, the decision in Anneco reminded us that in assessing the correct measure of damages, the first thing to consider is the scope of duty of the defendant. The majority agreed with Evans LJ and took a broad view as to the scope of duty of the brokers. In paragraph 17 at p.182, Lord Lloyd classified the duty undertook by the broker as a duty to advise on what course to take rather than a simple duty to inform. 56.With regard to the distinction in the scope of duty, Lord Lloyd further observed in paragraph 17 :
Notwithstanding the difference between them in the application of the principle to the facts of the case, it seems to me in this respect Lord Lloyd's approach was not that different from that of Lord Millett at set out in paragraph 62 of the judgment (cited in paragraph 51 above). 57.In assessing the scope of duty of the brokers, both Lord Lloyd and Lord Steyn referred to the conclusion of Evans LJ that the market assessment of the reinsurance risks was central to the plaintiff's decision to undertake those risks and the defendant took it upon himself to advise the plaintiff with regard to the same. 58.On the facts of the present case, there is ample evidence before me to justify a finding that had the Plaintiff been informed about the lack of verification as to the authority of the signatory of the Sale and Purchase agreements, it would not regard it as prudent to finance the transactions without further inquiries. PW1 said so in paragraph 78 in her witness statement which was adopted as her evidence in chief. Her evidence in this aspect was not challenged in cross-examination. Although the Plaintiff had checked the ability of the borrowers to meet the mortgage repayments, it would offend common sense to suggest that a bank would advance a loan even if there were doubts about the validity of the security. I am wholly satisfied that had the Plaintiff been properly advised by the Defendants, it would not regard the transactions as viable due to the doubts as to the effectiveness of the Equitable Mortgages. In the circumstances, given the understanding of Chung as to his obligation as stated in paragraphs 18 and 19 above, the Defendants plainly undertook a duty towards the Plaintiff to advise them whether the mortgage money should be released in view of the effectiveness of the security. Applying the test of Otton LJ in Portman Building Society and Evans LJ in Anneco (endorsed by the majority in the House of Lords), the Defendants should be liable to the Plaintiff for the whole loss arising from the release of the mortgage monies in these transactions. Such loss fell within the scope of the duty undertaken by the Defendants. This conclusion is reinforced by the Scottish case of Bristol & West Building Society v. Rollo Steven & Bond [1998] SLT 9 in which Lord Maclean held that a solicitor in a similar position as the Defendants were not simply providing advice, it was in effect advising the plaintiff to take a certain course of action, namely to lend a certain sum to the borrower on the security of the property. To the same effect is the decision of Rimer J in the case of Michael Gerson. Liability : other heads of claim 59.In view of my aforesaid conclusion under ground (b) set out in paragraph 11, it is not necessary for me to consider the other heads of claim at length. In view of the concession made by Mr Chow as stated in paragraph 12, I would not delve further into grounds (d) and (e). As to ground (c), the alleged discrepancies referred to the following defects in the Agreements:
60.Mr Cheung did not dispute these. The Defendants were clearly not up to the standard of a reasonably competent solicitor in approving the draft agreements. The task was left to the clerk and no satisfactory explanation has been offered by Chung as to why these defects were approved by the Defendants without any advice given to the Plaintiff. Chung merely assumed the rules would be followed and the prescribed form would be used. In the course of his evidence, he testified that even up to the time of giving evidence, he did not know whether the terms in the Agreements conformed to the prescribed form. Mr Cheung's point was basically that these had nothing to do with the loss of the Plaintiff. Whilst I agree with Mr Cheung that the loss of the Plaintiff could not be attributable to these defects, I am of the view that a reasonably competent solicitor should advise his client about such defects and the risks pertaining thereto before the release of monies. I also agree with Mr Chow that they should serve as "warning bells" about the bona fide of Chan. 61.Turning to ground (a), parties have spent most of the time on this ground at the trial. Chung accepted in his evidence under cross-examination that title ought to be checked before they made drawdown of money from the bank and released the same3. He also said that requisition could be raised if there were problems with the title. There is however dispute as to whether the Defendants checked the title of the property before the monies were released. I have outlined Chung's evidence in paragraph 15 above. He said the clerk, Chiang, had confirmed with him that the title was in order. Although he said that one set of title deeds were sent by Messrs Ho & Chan to the Defendants in late June 1998, he could not recall the exact date because he was unable to trace any covering letter from Messrs Ho & Chan in the files. He was not present when the title deeds were delivered to his firm. He was only told by Chiang that two cartons of documents in Chiang's room were documents in respect of Luck Mansion. Chung did not examine the title deeds personally. Chung was however able to say that those documents were there before Mak joined the Defendants in early July. From that, he deduced that the title deeds were sent in late June 1998. He agreed that the Defendants had a log book recording the receipts of documents4. Yet he could not tell the court whether the log book recorded the date of receipt of this set of title deeds. Further, despite reference to the log book was made during cross-examination, the Defendants chose not to produce the same throughout the trial and no explanation whatsoever has been given to the court as to why this material document was neither disclosed before trial nor brought to court after reference was made to it. Chung said that the log book was in the possession of the other partner, Albert Hwang, who was a defendant in this action all along. 62.Mak also gave evidence regarding the checking of title. He was not involved with regard to the transactions dated 30 June 1998 because he had not yet joined the Defendants at that time. He said he believed the title deeds were at the Defendants' office when he joined the Defendants in early July 1998. He was asked to review the title of the property. He worked on that since about 10 July 1998. He discovered there were some missing documents. He concluded that there was no major problem with the title. He made notes in the course of checking title by way of drawing "title trees". He gave those working records to Chiang to be put into the files. In those "title trees", he made notes as to requisitions as to title. However, he agreed that no requisition had been raised by the Defendants. He said that the set of title deeds were only sent for investigation of title for Equitable Mortgage purposes and requisitions should be raised at a later stage after one set of title deeds was supplied for each unit. On the other hand, he agreed that it is the duty of a solicitor to be satisfied with the title before money were released and he had been satisfied as to that before the money was released in respect of the two transactions dated 20 and 21 July 1998 respectively. 63.Pausing here, it is convenient at this juncture to deal with the submission of the Defendants that there is a different standard for approving title in the context of an Equitable Mortgage. I have alluded to Mr Cheung's submission in paragraph 20 above. He did not cite any authority to support his proposition. He simply based his argument on the fact that there was no time limit for raising requisition under the Sale and Purchase Agreements and the vendor was only obliged under those agreements to prove good title at a reasonable time prior to completion. As a matter of principle, since a mortgagee would be parting with its money on the strength of the Equitable Mortgage, I see no justification for the application of a looser standard in terms of approval of title. Further, the formulation of the standard by Mr Cheung is simply unworkable. It is not clear to me what he meant by "being satisfied that there was no title problem which could not be resolved in the absence of requisitions". Very often, the full nature and extent of a title problem could not be appreciated until a requisition has been raised and answered. Answers to requisitions could deal with such queries on title which a solicitor for purchaser might raise. Before a requisition has been answered, it is difficult to tell whether a problem could or could not be resolved. If Mr Cheung's test is read as requiring the solicitors to be satisfied that there was no title problem which merits any requisition to be raised, that seems to suggest a higher standard than the usual standard as to proof of title. In any event, that test could not help the Defendants. Mak admitted that there were intermediary title documents between 1986 to 1998 which were missing and he had not seen those before he was "satisfied with title". Without actually perusing those documents, it would be impossible for Mak to be satisfied that no title problems would emerge from the same. Further, Mak himself said that he had noted down some requisitions in his "title trees". If that was true, the necessary implications were that there were something which merited requisitions to be raised and Mak simply did not know at that stage whether those requisitions could be resolved or not. 64.Whatever the position might be as between the vendor and the purchaser, a solicitor who acts for a mortgagee on specific instructions that title is to be approved as a condition for preparation of Equitable Mortgage is, in my judgment, under a duty to approve the title in accordance with the usual standard before advising the mortgagee to release the mortgage money. 65.It follows from this analysis that I do not agree with the suggestion of Mak that requisitions should be raised at a later stage. Taking the evidence of the defence at its highest, with the admission by Mak that there were missing documents which he had not seen, the Defendants would still be in breach of its duty to exercise reasonable care and skill in approving title prior to the Equitable Mortgage. 66.For the sake of completeness, I would also resolve the dispute of fact, viz whether the Defendants did investigate title, albeit in an inadequate manner, prior to the release of the monies to Messrs Ho & Chan. Pitched against the evidence of Chung and Mak, the Plaintiff relied on the following matters and evidence to show that the Defendants could not have approve title prior to the release of the monies,
67.Bearing in mind these evidence and the evidence of Mak and Chung, I find Mak and Chung to be unreliable witnesses and I disbelieve what they said with regard to investigation as to title. I reject Mak's explanation as to the letter of 16 October 1998. That was obviously untrue. Further, even Chung agreed that conveyancers were anxious about safe custody and proper records regarding title deeds. I do not believe that Messrs Ho & Chan could have sent over title deeds in late June without any documentation to record that. The withholding of the log book by the Defendants is also indicative. Chiang, the person whom Chung relied upon to check the title prior to July, was not called as a witness. However, I acknowledged the force of the submission of Mr Cheung as to the unlikelihood of title deeds being sent after 30 October 1998. On the balance of probabilities I find that,
68.It follows from what I said that I hold the Defendants liable to the Plaintiff in respect of the breach of duty as to approval of title prior to the release of the monies. I would not repeat what I have said with regard to causation and measure of damages. In the context of breach of duty in respect of approval of title, it could be classified as a case of misfeasance. In the confirmation letter, the Defendants informed the Plaintiff that the Equitable Mortgage had been prepared in accordance with the Plaintiff's instructions. It was a representation by the Defendants to the Plaintiff that title had been approved because that was a precondition for the Equitable Mortgage in the Plaintiff's instructions. There is no doubt that the Plaintiff released monies to the Defendants as a result of that confirmation letter. Further, even if one were to classify the tort as a nonfeasance, I find that the Plaintiff would probably withhold the release of the monies if the Defendants informed it that the title had not been approved. Causation is therefore established. 69.As to measure of damages, Mr Cheung submitted that there was no suggestion that there was problem with the title. Hence, it was submitted that the loss of the Plaintiff was not attributable to this breach. This may be so if one confines oneself to the title of Keep Point over the properties. However, if a wide meaning is applied to the expression "title" to include the title of the security under the Equitable Mortgage, for reasons given in paragraphs 24 and 26 above, this would not be correct. The verification as to the effectiveness of the Sale and Purchase Agreement was part of the duty to verify the title of the borrower. In that respect, I would not repeat what I have already said when I dealt with ground (b). Quantum 70.In the present case, there is no doubt that by conducting the basic comparison referred to by Lord Nicholls in Nykredit Bank (at p.309c to e), the Plaintiff did suffer loss. Had the Defendants fulfilled their duty towards the Plaintiff, the Plaintiff would not advance the loans on the security of an ineffective Equitable Mortgage. Comparing that with the actual position of the Plaintiff, of the five transactions, the Plaintiff had recovered the loan and interest in full from one of the borrower. Hence, the Plaintiff did not suffer any loss regarding that transaction. Regarding three other transactions, the Plaintiff did not recover anything from the borrowers despite judgment being entered against them and they were made bankrupts. The total amount of the principal regarding these three transactions are $4,614,739.78. Regarding the remaining transaction, after judgment was entered against the borrower, the Plaintiff reached a settlement with him and the loan is to be repaid by 120 equal monthly instalments of $13,767.63 each starting from 29 January 2001. According to the reckoning of the Plaintiff, the outstanding principal amount as at 7 February 2002 for this loan was $981,209.17. For repayment of this sum, the Plaintiff had the personal covenant of the borrower to repay but without any security. The Plaintiff further said that it has suffered loss in terms of interest. The Plaintiff did not pursue any claims regarding expenses and legal costs. 71.The second stage of the test is to ask whether such losses were within the scope of the duty of the Defendants. I have dealt with this issue in the section discussing measure of damages. As to the actual quantification, Mr Hon, who appeared on behalf of the Defendants on 6 May 2002, accepted that the loss regarding the principal sums in respect of the unrecovered loans fall within the scope of duty of the Defendants. However, he submitted that in respect of interest, there must be an enquiry instead of adopting the interest payable by the borrowers under the loan agreements. He relied on the what was said by Lord Maclean in Bristol & West Building Society v. Rollo Steven & Bond [1998] SLT 9 at p.12,
72.Mr Hon submitted that there was no evidence as to whether the Plaintiff could have successfully lend the same monies to other borrowers at the same interest rates had those monies not been lent in respect of these transactions. 73.On the other hand, Mr Chow submitted that the Plaintiff's loss was quantified in terms of judgments entered against the borrowers. I do not agree. The judgments were only determinations of the borrowers' liabilities towards the Plaintiff under the loan agreements. In deciding that question, the court did not have to examine the Defendants' liabilities and whether losses in terms of interest were attributable to the Defendants' breach of duty. 74.Mr Chow further submitted that since the Plaintiff conducted business as a bank, the monies must have been lent to other borrowers if they were not utilized for these transactions. He said that the interest rates charged under these loan agreements were the usual rates charged by the Plaintiff. 75.Although I accept that it is likely that the monies would be lent to other borrowers, there is no evidence before me as to the calculation of the interest and it is likely that the Plaintiff's figures included interest calculated at default rates. In these circumstances, I can see that there might be injustice to the Defendants if I simply adopt the figures on interests put forward by the Plaintiff. 76.On the other hand, in principle, the Plaintiff must be entitled to interest on the basis that it has been deprived of the use of the monies. Lord Nicholls referred to interest as one of the element in the basic comparison in Nykredit at p.309e. Interest was also awarded by Chadwick J in Steggles Palmer although it was reduced by reason of the plaintiff's failure to mitigate (see p.624a). In that case, as in Nykredit, interest was awarded by reference to LIBOR, viz the cost of fund of the plaintiffs instead of the interest rates under loan transactions (see Steggles Palmer at p.616e to f; Nykredit at p.312j and 317c). In a commercial setting, interest is usually awarded at 1% over prime and no evidence is required to support such an award (see Komala Deccof & Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) [1984] HKLR 219 and Determination of the Court of Final Appeal in Polyset Limited v. Panhandat Limited, FACV No.28 of 2000, 25.4.2002). I see no reason why this practice should not be applied in the present case and Mr Hon was unable to argue otherwise. I will therefore award interest in favour of the Plaintiff accordingly. 77.Regarding the three transactions in respect of which the borrowers were made bankrupts, it is obvious that the personal covenants of the borrowers are worthless. Regarding the fifth transaction, the following dicta from Nykredit Bank v. Edward Erdman Group [1998] 1 All ER 305 are relevant: At p.309e, Lord Nicholls highlighted the need to make a comparison with the value of the rights acquired by the lender including the borrower's covenant. At p.310 b to d, His Lordship referred to the valuation of such a right:
Further, at p.311f:
Lord Hoffmann made the same observations at p.316h to 317a:
78.On the facts of the fifth transaction, the Plaintiff has obtained a default judgment against the borrower before the making of the Deed of Settlement. However, it seems that the judgment was based on a claim founded on a letter of demand dated 21 December 1998. In the letter, repayment of the whole loan was demanded by the Plaintiff. No evidence has been adduced before me to prove failure on the part of that borrower to service the loan prior to that demand. Whilst I can understand why the Plaintiff would demand repayment of the whole loan after discovery of the defect of the security, I must bear this in mind in assessing the value of the borrower's covenant. PW1 gave evidence that although this borrower had been late in paying some of the instalments under the Deed of Settlement, there was no overdue payment at the time when she testified. 79.According to Nykredit, the question is whether the Plaintiff showed that it has suffered a relevant loss despite the fact that the borrower continued to honour his personal covenant under the Deed of Settlement. Default is only one way to establish the loss. There could be other ways by which the Plaintiff could show that the borrower's covenant is worth less than the full value of the loan as in the case of shelf company referred to by Lord Nicholls. If a loss can be shown, the cause of action has accrued even though the quantification of the loss cannot be precise (see Lord Nicholls in Nykredit at p.311b to f). I note that under the Deed of Settlement, the borrower agreed to pay 120 instalments of $13,767.63 each. On the other hand, under the original loan agreement as evidenced by the facility letter of 20 July 1998, the original loan was to be repaid by 240 instalments of $11,010.86 each. Other things being equal, the larger the monthly instalment, the higher the risk of default. Further, we are dealing with a situation where the borrower did not obtain any title nor use or occupation of the property. The property was sold by Keep Point to someone else. Hence, as far as I am aware, the borrower is paying the instalment without getting any real benefit. According to the Salaries Tax assessment of the borrower for 1996 to 1997, his annual income was $299,703. In a letter dated 23 December 1997, his employer increased his salary to $30,000.00 per month starting from 1 January 1998. As at 9 May 1998, his bank account has a balance of $200,194.83. These are not up-to-date information but I have no other information regarding the background of the borrower. On the balance of probabilities, having regard to the economic situation in Hong Kong since 1998, the borrower is unlikely to be earning a lot more than what he earned in 1998. $13,767.63 is a heavy burden on him. Taking all these matters into account, I am satisfied that even though the borrower has been making payments under the Deed of Settlement, there is a real risk that he would default in the future. Hence, the value of the personal covenant of the borrower is less than the full value of the loan and the Plaintiff did suffer a loss attributable to the negligence of the Defendants regarding this transaction. 80.On the quantification of this loss, obviously I can only do the best I can on the material before me (see the approach of the Court of Appeal in Ka Da Watch v. Skyworld Air Express [1991] 1 HKC 184 in which the value of the security interest was assessed as 90% of the price of the goods). I would assess the value of the covenant of the borrower to be 20% of the value of the loan. The loss suffered by the Plaintiff is therefore 80% of $981,209.17, viz $784,967.34. Obviously, the Plaintiff cannot recover twice. It must give credit to the borrower upon payment being obtained pursuant to the judgment entered herein in the same way as it should have done upon the realisation of other security by sale thereof. Conclusions 81.For these reasons, I assess the damages payable by the Defendants to the Plaintiff and give judgment against the Defendants as follows:
82.I also make an order nisi that the Defendants do pay the Plaintiff's costs of this action, such costs to be taxed if not agreed.
Representation: Mr Anderson Chow, instructed by Tsang, Chan & Wong, for the Plaintiff Bank of China (Hong Kong) Limited Mr Anthony P W Cheung, instructed by Tsang & Co., for the Defendant (4-7 February 2002) Mr Kevin Hon, instructed by Tsang & Co., for the Defendant (6 May 2002) 1 With regard to the observations as to breach of trust, it is necessary to read this dicta together with what Millett LJ said in Bristol & West Building Society v. Mothew [1998] Ch 1 at p.22-24. 2 See also Midland Bank v. Cox McQueen [1999] PNLR 593; UCB Corporate Services v. Clyde & Co. [2000] PNLR 841 3 Evidence of Chung on 5 February 2002 at 12: 48 and at 12:52 4 Evidence of Chung on 5 February 2002 from 12:43 to 12:45 | ||||||||||||||||||||||||||||||||||||||
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