Hondon Development Ltd and Another v. Powerise Investments Ltd and Others

HCA 1208/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1208 OF 1998

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Coram: Deputy High Court Judge To in Court

Dates of Hearing: 28-30 April, 2, 5-7, 9 and 12-16 May 2003

Date of Judgment: 1 September 2003

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J U D G M E N T

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INTRODUCTION

1.The 1st Plaintiff and the 1st Defendant were respectively the purchaser and vendor of shop premises identified as Shop 1A in Ka Wing Building in Nathan Road (the "Shop"). The 2nd Plaintiff is an associated company of the 1st Plaintiff nominated by the 1st Plaintiff to complete the purchase of the Shop. The sale and purchase was completed on 15 September 1997 with vacant possession of the Shop without partition notionally delivered to the Plaintiffs on the same day, but actual delivery of possession with partition was deferred a month to 15 October 1997. On 11 October 1997, upon discovering that the Shop as partitioned was much smaller than what the Plaintiffs had bargained for, the Plaintiffs refused to take possession and instituted this action against the 1st Defendant for rescission of the provisional sale and purchase agreement (the "Provisional Agreement"), the formal sale and purchase agreement (the "Formal Agreement") and the assignment (the "Assignment") or damages for breach of the Provisional Agreement and for misrepresentation. The Plaintiffs also sued their then solicitors who represented them in the sale and purchase, namely the 2nd Defendant, for damages for breach of the contract of retainer and for negligence. In turn, the 1st Defendant issued a Third Party Notice against the 1st and 2nd Third Parties for contribution, who respectively were the estate agency ("Centaline") and its employee ("Lau") acting as estate agents for the Plaintiffs and the 1st Defendant in the sale and purchase.

2.The 1st Defendant denied having made any of the representations relied upon by the Plaintiffs and denied that the Third Parties were its agents. Further and in the alternative, if there were any misrepresentation, the 1st Defendant says that it had reasonable grounds to believe they were true. In any event, it says the misrepresentations were spent when the 2nd Plaintiff took the conveyance of the Shop in place of the 1st Plaintiff. It also relied on the exemption clauses in the Formal Agreement and on the doctrine of merger.

3.The 2nd Defendant's case is that none of the representations relied upon by the Plaintiffs had been related to the 2nd Defendant, that it had not been negligent in that the difference between the plan attached to the Provisional Agreement and the Formal Agreement and the Assignment (respectively the "Provisional Agreement Plan", the "Formal Agreement Plan" and the "Assignment Plan") had been expressly drawn to the Plaintiffs' attention and that the Plaintiffs were contributory negligent.

4.The Third Parties' defence against the 1st Defendant's claim is that they were agents of the 1st Defendant and the representations were made with the authority of the 1st Defendant.

5.Though the actions between the parties arose out of the same transaction, the issues between them are vastly different. I consider it convenient to firstly deal with the case as between the Plaintiffs and the 1st Defendant, then the third party action as between the 1st Defendant and the Third Parties and lastly the case as between the Plaintiffs and the 2nd Defendant.

The Background

6.The ground to third floors of Cheung Hing Building, Wing Kiu Building and Ka Wing Building where the Shop is located together made up the former premises of Chung Kiu Chinese Department Store (the "Premises" or later called "In's Point"). The Premises were first assigned by Lee Sang Estates Limited to Wing Kiu Enterprises Limited ("Wing Kiu") by two assignments dated 16 January 1974 (the "1974 Assignments"). When Chung Kiu Chinese Department Store ceased business in 1996, the Premises and some other properties were sold to Staric Limited ("Staric") for $1,055.40 million by an agreement dated 12 November 1996 for completion on 15 September 1997 (the "Wing Kiu/Staric Agreement"). Three days later, on 15 November 1996, Staric as confirmor sold the Premises to the 1st Defendant for $360 million for completion on 15 September 1997 (the "Staric/Powerise Agreement").

7.Initially, the 1st Defendant intended to sell the entire Premises as confirmor but was unable to find any suitable buyer. At the suggestion of its estate agent, Everbright Property Consultants ("Everbright"), it decided to convert the Premises into a shopping mall by sub-dividing the first to third floors into small retail units. The ground floors of Ka Wing Building and Wing Kiu Building were to be partitioned into shops by Staric in accordance with the Staric/Powerise Agreement. It appointed Everbright and Alexander Realty ("Alexander") as its sole agents in the sale of the sub-divided units on the first to third floors. A brochure for the purpose of marketing the Premises, then re-named "In's Point" was printed in February or March 1997 (the "Brochure"). It was under this setting, the Plaintiffs and the two Third Parties entered into the scene.

8.At the material time, Fung Kok Po ("Fung") was the promoter and person in charge of the 1st Defendant company. He was an active and very experienced property investor well known among estate agents. Lau came to know Fung through a cold call made to Fung's office by telephone. Since 15 March 1996 he had been maintaining frequent telephone contacts with Fung. In November 1996, Lau came to know about the Staric/Powerise Agreement.

9.On 5 August 1997, Lau and his colleague, Jacky Pang, had a meeting with Fung during which Fung asked Lau to find a head tenant for the food court on the second floor of In's Point. They also had a discussion about the Shop when Fung gave certain information or representations about the Shop. The contents of these representations are in dispute. But according to Lau, Fung gave him the Brochure and an architect's plan of the ground floor (the "Architect Plan") and said that the Shop was about 8 feet by 9 feet, that it would be partitioned in accordance with the plan as shown in the Brochure (the "Brochure Plan"), that there would be two lifts in the lift lobby immediately adjacent to the Shop and that the Shop could be partitioned off from the lobby by glass or roller shutter if the purchaser so required. On the same day, Lau informed Chan Chi Hin of the Plaintiffs ("Chan") of the availability of the Shop. He faxed Chan the Brochure Plan on the following day. Lau and Chan met in the afternoon of 7 August 1997 at In's Point to view the Shop. But what they saw was the external wall of In's Point enclosing the Shop. They could not gain access behind the wall. Lau told Chan what was represented to him by Fung. Chan offered $12 million for the Shop.

10.The offer was rejected by Fung. As a result of a number of telephone negotiations through Lau, Chan increased his offer to $14.5 million upon Lau's confirmation that the 1st Defendant would partition the Shop from the lift lobby by glass partition. Lau went to Chan's office where he prepared the Provisional Agreement using the standard form of Centaline. Lau also prepared a plan of the Shop from the Architect Plan given to him by Fung. As the plan did not delineate the Shop from the lift lobby, Lau obtained direction from Fung over the telephone to draw a vertical line extending from the long side of the storeroom to identify the boundary of the Shop. He annexed this plan (the "Provisional Agreement Plan") to the Provisional Agreement. Chan then signed the Provisional Agreement which was presented to Fung later that evening. Fung accepted the offer and signed on the Provisional Agreement.

11.On the following day, the Plaintiffs forwarded the Provisional Agreement with the Provisional Agreement Plan to Chau Hing of the 2nd Defendant. Chan instructed the 2nd Defendant to act for the Plaintiffs in the sale and purchase. Subsequently Chan signed the Formal Agreement at Chau's office on 9 September 1997. On 12 September 1997, Chan signed the Assignment and the Deed of Mutual Covenant. The balance of the purchase price was paid on 13 September 1997.

12.On or about 11 October 1997, Chan went to the Shop to check the progress of the partition work. To his surprise, he found the Shop was much smaller than what he had expected and the partition between the Shop and the lift lobby was not made of glass but of concrete. He complained to Lau.

13.In the evening of 14 October 1997, Chan had a meeting with Fung and Lau at the coffee shop at The Charterhouse Hotel. What happened at the meeting was in dispute. According to Chan and Lau, Fung explained that as a result of the architect's mistake, the size of the Shop became smaller than what had been agreed, i.e. 8 feet by 9 feet and he had discussed with his shareholders and offered to settle the matter with Chan by way of a re-purchase of the Shop at $12.5 million. To avoid the trouble and hassle of litigation, Chan agreed. Fung disputed that he had admitted any mistake by the architect or made any offer to re-purchase. He said it was Chan who offered to sell the Shop back for $12.5 million. With a view to settle the dispute amicably, he agreed to consider the re-purchase on a without admission of liability basis but no agreement had been reached on the re-purchase. Then following a decline in the property market, Fung's other shareholders refused to re-purchase the Shop and the negotiation was called off.

CREDIBILITY OF WITNESSES

14.This case stands or falls on my finding of credibility of the witnesses. Apart from the expert witnesses and Jacky Pang, all witnesses were personally interested in the outcome of these proceedings. I shall set out the background of these witnesses and give my overall view of their credibility. I shall later fortify those views as I proceed with my analysis of the evidence.

Chan Chi Hin

15.Chan Chi Hin ("Chan") is the beneficial owner and person in control of the 1st and 2nd Plaintiffs. He was in control of four other companies and had vast experience in property trading. Between 1996 and August 1997, one of his six companies, namely Markos Investment Limited, engaged in 13 property transactions with a total value of over $178 million. He appeared to have a working knowledge of the English language. Yet he tried to play down both his knowledge of English and experience in property trading. His evidence as to how the purchase of the Shop was negotiated is corroborated by the evidence of Lau. To that extent, I find him credible. But I have serious reservation as to the reliability of his evidence about the dealing between him and Chau of the 2nd Defendant. He was selective in telling the truth.

Vincey Lau

16.Vincey Lau ("Lau") was Centaline's estate agent responsible for this transaction. He has now resigned from Centaline. He gave evidence in a very mechanical manner. He was obviously uneasy in the witness box, but I have no difficulties accepting his evidence. His evidence of his meetings with Fung is supported by his Prospect Cards, which are contemporaneous documents. His evidence is also corroborated by Jacky Pang. Both he and Pang had left Centaline. I consider Lau credible and accept his evidence.

Jacky Pang

17.Jacky Pang ("Pang") was another estate agent of Centaline. He has now left Centaline. He maintained contact with Lau. He can be regarded as a dis-interested witness. Apart from some minor discrepancies which could be attributed to failure of memory due to lapse of time or that at the time his attention was directed to other matters, his evidence corroborates Lau's. I find him credible.

Fung Kok Po

18.Fung Kok Po ("Fung") was an active and very experienced property investor. Obviously, he was more experienced than Chan and dealt in property of much more substantial value. He was a wealthy businessman with good exposure. He used to have substantial shareholding in the 1st Defendant, but has already sold all but one share in the 1st Defendant. It could also be said that he has no personal interest in this litigation. Fung was very much at ease in the witness box. He was articulate but well guarded in his evidence. There are lots of gaps in his evidence in which his answers were that he could not recall. It could be said that for a man of his substance, a transaction of $14.5 million six years ago is of no significance to him and he could reasonably be excused for not being able to recall details of the events. However, complaints were raised by the Plaintiffs before actual delivery of possession and a meeting was held between him, Lau and Chan a few days later on 14 October 1997. Legal proceedings were promptly instituted. Because of the complaint, the meeting on 14 October 1997 and the need to give instruction to his solicitors in preparation of the statement of defence shortly thereafter, Fung must have then recalled in his mind the details of the events which took place two months ago when his memory was still fresh. I think Fung was being evasive and insincere in his evidence. I do not find him credible.

Chau Hing

19.Chau Hing ("Chau") is a conveyancing clerk of the 2nd Defendant. He had 12 years experience as a conveyancing clerk and had worked with the 2nd Defendant for seven years. He came to know Chan in mid 1989 when he was working with Messrs John Fang & Co. When he joined the 2nd Defendant, Chan started to retain the 2nd Defendant through Chau in connection with his property trading. Chau's performance in the witness box was utterly disappointing. His demeanour was unsatisfactory. Apart from insisting that he had shown the Formal Agreement Plan and Assignment Plan to Chan and drawn his attention to the difference between those plans and the Provisional Agreement Plan, he seems to have no recollection of anything. He was evasive and selective in telling the truth. I do not find him credible and reject his evidence.

THE SUBJECT MATTER OF THE SALE AND PURCHASE

20.The major dispute between the Plaintiffs and the 1st Defendant is what was the subject matter of the sale and purchase agreement, i.e. whether it was the space as shown in the Provisional Agreement Plan or the space as delineated in the Formal Agreement Plan. It can be seen from the Provisional Agreement Plan that the Shop is a rectangular space bounded by the common wall with the storeroom at the back, the boundary with Nathan Road at the front, the common wall between the Shop and the foyer to the residential units on one side and a line extending from the right corner of the storeroom perpendicular to Nathan Road on the other. These boundaries could be easily ascertained. It is important to note that as shown in this plan, the rear boundary of the Shop is at the top step next to the lobby landing of the residential units and is some distance away from the pillar near the bottom step. On the other hand, the Shop as shown in the Formal Agreement Plan is an irregular pentagonal space in the shape of rectangle with a small bell out at the right corner. What is significantly different is that the rear boundary of the Shop as shown in this plan is at the bottom step of the foyer, resulting in a much smaller shop.

21.The parcels clause of the Provisional Agreement described the subject matter of the sale and purchase as "Shop 1A". This throws little light on the boundary or dimension of the Shop. It is therefore permissible to look at other provisions of the Provisional Agreement as well as the surrounding circumstances, including the Provisional Agreement Plan, to find out what was being sold: see Green Park Properties Ltd v Dorku Ltd [2001] 1 HKLRD 139.

22.The Provisional Agreement Plan was signed by the 1st Plaintiff, 1st Defendant and Centaline at the time the Provisional Agreement was entered into. It must have been impliedly incorporated into the Provisional Agreement. The plan was indeed an enlarged copy of the relevant section of the Architect Plan given to Lau by Fung on 5 August 1997. The Architect Plan was drawn to scale. However, as the copy was made on Centaline's standard form containing the statement "not to scale, for identification only", it must be read subject to those words. Those words have been judicially interpreted to mean no more than identifying the location where the property is situated and a plan bearing those words cannot be relied upon as delineating the precise boundaries of the property: see Alan Wibberley Building Ltd v Insley [1999] 1 WLR 894, at 896A-B, per Lord Hoffman.

23.On the other hand, Clause 4 of the Provisional Agreement provides:

"The Vendor is selling as confirmor and this agreement is subject to the terms and conditions of the principal agreement made between the Vendor and the Head vendor."

As the 1st Defendant was expressly selling as confirmor, it must be the parties' intention that the 1st Defendant was selling what its immediate vendor, i.e. Staric, had contracted to purchase from the earlier vendor, namely the head vendor, Wing Kiu. As the Provisional Agreement was subject to the terms and conditions of the principal agreement made between the 1st Defendant and the head vendor, the Wing Kiu/Staric Agreement may be referred to for ascertaining the subject matter of the sale and purchase under the Provisional Agreement.

24.According to Part II of the First Schedule to the Wing Kiu/Staric Agreement, the property being sold to Staric include Portions A, B and C on the Ground Floor as shown on the plans annexed to the two 1974 Assignments. On the 1974 Assignments, the property conveyed was described as the space "more particularly delineated" on the floor plans annexed thereto. These words not only identify the location, but defines the boundary of the property. It is thus clear that this plan, incorporated into the Provisional Agreement by implication was to prevail: see Neilson v Poole (1969) 20 P & CR 909, 916. According to this plan, the common wall between the storeroom and the space which now formed the Shop was at the bottom step of the foyer. As the 1st Defendant was selling as confirmor and the Provisional Agreement was subject to the terms and conditions of the principal agreement, the subject matter of the sale and purchase between the Plaintiffs and the 1st Defendant must therefore be the area delineated by the common wall with the foyer to the residential units of Ka Wing Building, the common wall with the storeroom at the bottom step of the foyer, the boundary with Nathan Road and a straight line drawn from the right corner of the storeroom perpendicular to the boundary with Nathan Road. This is precisely the space as shown in the Formal Agreement Plan.

25.While the Provisional Agreement Plan may be looked to for elucidation, it may not be used to contradict or override the written terms of the agreement, especially as the plan was marked "not to scale, for identification purposes only". A plan said to be for the purpose of identification only cannot override the express term that the Provisional Agreement is subject to the principal agreement between the 1st Defendant and the head vendor. To allow the Provisional Agreement Plan to delineate the boundary of the Shop would be to defeat the intention of the parties as expressed in Clause 4 of the Provisional Agreement. The Provisional Agreement Plan must yield to Clause 4 of the Provisional Agreement. The plans annexed to the 1974 Assignments so far as they indicate the position of the rear boundary of the Shop must prevail over the Provisional Agreement Plan. Accordingly, I find that the rear boundary of the Shop is the common wall with the storeroom at the position of the bottom step of the foyer. The parties have no dispute as to how the other three boundaries are to be ascertained. On this construction of the Provisional Agreement, the subject matter of the Provisional Agreement is that space as delineated in the Formal Agreement Plan.

CASE BETWEEN PLAINTIFFS AND 1ST DEFENDANT

26.As between the Plaintiffs and the 1st Defendant, the issues are (1) what representations were made by Fung to Lau and then passed onto Chan; (2) whether Centaline and Lau were the 1st Defendant's agents for the purpose of passing on the representations; (3) whether the Plaintiffs relied on the representations; (4) what was the subject matter of the sale and purchase; (5) whether the representations made to the 1st Plaintiff were spent when the 2nd Plaintiff took up the assignment of the Shop; (6) whether the Plaintiffs' solicitors' knowledge of the plan annexed to the Formal Agreement is imputed to the Plaintiffs; (7) whether the 1st Defendant can rely on the exemption clauses in the Formal Agreement; (8) whether the 1st Defendant can rely on the doctrine of merger; and (9) what are the proper remedies for the Plaintiffs.

Whether Lau and Centaline were agents of the 1st Defendant for the purpose of making the representations

27.It is the Plaintiffs' as well as the Third Parties' case that the 1st Defendant appointed Centaline during Lau's visit on 5 August 1997 as its agent in marketing the food court and to look for a purchaser for the Shop. On the other hand, it is the 1st Defendant's case that Lau or Centaline were not its agents but agents of the Plaintiffs only negotiating with the 1st Defendant on behalf of the Plaintiffs for the purchase of the Shop. While Centaline was in the business of an estate agency, it is important to note that the issue here is not whether the Third Parties were estate agents of the 1st Defendant, but whether they were agents of the 1st Defendant for the purpose of passing on the representations to the Plaintiffs. It is trite law that agency can be created expressly or by implication when it is reasonable to infer that an agency relationship has resulted: Freeman and Lockyer v Buckhurst Park [1964] 2 QB 480. It is a question of fact in each case whether an estate agent is an agent authorised by his principal in providing information relating to a property to another party. The authority may be express or implied.

28.According to Fung, Lau approached him saying that he had a client wishing to purchase the Shop. He said he never intended to sell the Shop and had rejected offers of up to $12 million from estate agents. I do not find that credible. It was Fung's intention to sell the entire Premises as confirmor so as to finance the purchase and he had not raised any mortgage. He had no long term development or investment plan in respect of the Premises. It must have been his intention to sell whatever space that could be sold to pay the purchase price, harvest the profit and quit. That was what he did as he subsequently sold all his shareholdings in the 1st Defendant, save for one share. Furthermore, with a significant proportion of the Premises remaining unsold by August 1997 and completion just a month ahead, the 1st Defendant must be very eager to sell whatever it could so as to contribute to the purchase price to be paid on completion. Fung said $14.5 million was of no significance for his investment of that magnitude. I find he was exaggerating. The proceeds of sale of the Shop amounted to 4% of the price to be paid by the 1st Defendant upon completion which cannot be considered as insignificant in the light of the above circumstance. I think Fung was trying to play down the significance of the sale of the Shop so as to support his case that it was Lau who approached him on behalf of the Plaintiffs offering to buy the Shop.

29.Fung's evidence is inherently incredible. The Shop at the time was an inconspicuous and inaccessible small space behind the walls. According to Fung, he never intended to sell the Shop and the Shop had not been put on the market. If so, it is inexplicable how the Shop could have attracted the attention of any prospective buyer or estate agents in the market, such as Chan or Lau. Furthermore, if any prospective buyer had knowledge of the Shop through the Brochure, he would have approached either of the two exclusive agents, namely Everbright and Alexander, as stated in the Brochure rather than Centaline. On Fung's account, it is incredible that all out of the blue Chan could have become aware of the Shop and instructed Centaline instead of Everbright and Alexander to negotiate with the 1st Defendant. On the other hand, according to Chan, it was Lau who approached him and informed him that the Shop was available in the market. The sequence of events according to Lau is logical and tallies with Chan's evidence. Lau came to know about the Shop during his meeting with Fung on 5 August 1997, introduced it to Chan and then negotiated with Fung on 7 August 1997. I find that Fung was concocting evidence to hide the fact that he had instructed Centaline to market the Shop so as to fit the 1st Defendant's defence that Lau was only acting as the purchaser's agent in the transaction and not as agent for both vendor and purchaser.

30.Fung said that Lau never rendered any services to the 1st Defendant which an estate agent would provide to its vendor client, such as checking the correctness of the plan and doing property search. I think such allegations clearly demonstrate the lack of good faith in his defence. It is absurd to expect that an agent should verify the accuracy of the architect plan and brochure provided to the agent by his principal. The agent is entitled to assume that they are correct. Indeed Lau provided the services of a go-between passing on information from Fung to Chan, negotiating for the price, preparing the Provisional Agreement and collecting deposit.

31.Ms Yiu, counsel for the 1st Defendant, referred to the set of Prospect Cards kept by Lau in respect of Fung, which is a contemporaneous record of Lau's dealings with Fung. She submitted that the absence of any record of appointment of Centaline as the 1st Defendant's agent for the Shop suggested there was no agency at all. I accept Lau's evidence that he only kept record of appointment as exclusive agent in the Record Cards and as Centaline was not appointed as an exclusive agent for the Shop the appointment was not recorded. In my view, the presence or absence of any record of appointment in the Prospect Cards is not conclusive, one way or the other.

32.Furthermore, upon reaching agreement as to the purchase price, the 1st Plaintiff, the 1st Defendant and Centaline entered into the Provisional Agreement. As stated in the preamble, the Provisional Agreement was a tripartite agreement between the 1st Plaintiff, the 1st Defendant and Centaline. In addition, Clauses 1 and 7 of the Provisional Agreement read as follows:

"1. The Vendor shall sell and the Purchaser shall purchase all that Shop 1A on the ground floor, Ka Wing Building, Nos. 534-538 Nathan Road Kowloon (hereinafter called "The said premises") through the Agent subject to the terms and conditions herein contained.

...

7. In consideration of the services rendered by the Agent, the Agent shall after this agreement be entitled to receive HK$72,500.00 from the Vendor and HK$100,000.00 from the Purchaser as commission such commission shall be paid not later than ..."

33.This agreement evinces the pre-existence of an agency relationship between the 1st Defendant and Centaline under which Centaline offered certain services in connection with the sale and purchase of the Shop and was entitled to commission. Alternatively, this agreement could be treated as a ratification of such an agency even if Centaline had not been so appointed on 5 August 1997. I am conscious of the fact that unlike estate agents in the United Kingdom, an estate agent in Hong Kong acts as a broker, usually though not always, taking commission from both vendor and purchaser: see Cheng Kwok-fai v Mok Yiu-wah, Peter and Another [1990] HKLR 440. Hence, payment of commission by the 1st Defendant to Centaline is not conclusive evidence that Centaline or Lau was its agent for the purpose of passing on information to the Plaintiffs.

34.Accepting the evidence of Lau, as I do, the services requested by the 1st Defendant and provided by Centaline was looking for a purchaser and assisting in the completion of the sale and purchase of the Shop. This was what Lau did. He contacted Chan, related the information about the Shop to Chan, liaised with Fung on the offers which resulted in the conclusion of the Provisional Agreement. For those purposes, Fung showed Lau the Brochure, the Architect Plan and made certain representations to him. All these information are provided for the purpose of marketing the Shop. The Shop at the time was not an identifiable unit or an ordinary "finished product", like a residential unit in an apartment building. It was a unit to be partitioned from the Premises and not available for inspection. The only inference that could be drawn from these circumstances is that the information was given to Lau as agent for the 1st Defendant for the purpose of passing onto prospective purchasers, i.e. the Plaintiffs. Accordingly, I find as a fact that Lau and Centaline were acting as agents of the 1st Defendant in passing on the representations to Chan. It is untenable for Fung to say that Lau or Centaline were agents for the Plaintiffs only.

35.Assuming that Centaline was an agent of the 1st Defendant, Ms Yiu submitted that as Lau had not obtained the 1st Defendant's consent to act for a second principal, Centaline may not act for the Plaintiffs under the principle established in Fullwood v Hurley [1928] 1 KB 498. In my view, the principle is not relevant to the legal issue raised in this case and inapplicable to the facts. The Fullwood principle is that a party plainly acting as agent to the vendor is not entitled to enter into another contract with the purchaser and collect commission without the fullest disclosure to both the vendor and purchaser. The legal issue in this case is not whether a vendor's agent may enter into a second agency contract with the purchaser, but whether the vendor's agent has authority to make representations to the purchaser binding on the vendor. On the facts, there is ample evidence from which the vendor's consent for the agent to act concurrently for the purchaser may be inferred, such as Fung's request to Lau to look for a purchaser and the tripartite Provisional Agreement referred to above.

Fung's representations to Lau

36.Before considering the representations made to Chan by Lau as agent of the 1st Defendant, it is necessary to consider what transpired between Fung and Lau during the meeting on 5 August 1997 and what Fung had represented to Lau. According to Lau, Fung asked for his opinion as to the price the Shop could fetch in the market. Fung gave him the Brochure and said, pointing at the Brochure Plan, that the ground floor would be partitioned in accordance with the Brochure Plan to form the Shop with a shop front facing Nathan Road. He said there would be two lifts in the lobby entrance immediately next to the Shop and that the Shop would be partitioned off from the lift lobby by a glass partition or roller shutter. He also gave Lau the Architect Plan showing the relevant parts of the ground floor of Ka Wing Building where the Shop was located but the space for the Shop was not actually delineated on the plan. Lau opined that the market price of the Shop was between $10 million and $20 million, on the basis that the market price could go over $200,000 per square foot. Then Fung asked Lau to look for a prospective purchaser for the Shop.

37.Fung denied making these representations. He said he told Lau that he had no idea about the area and dimension of the Shop and that Lau could measure the dimension of the pump room and deduce the length, depth and size of the Shop. He also raised for the first time that the Shop was shown within an area marked "area for approval" in the Architect Plan. Hence, he said no representation was made as to the area, dimension and location of the Shop. This issue has not been mentioned in any of his witness statements or pleaded in the defence.

38.As I have found above, the overall impression I have of Fung's evidence is that he was trying to play down the significance of the sale of the Shop, firstly to support his case that it was Lau who approached him as the Plaintiffs' agent offering to buy the Shop and now seemingly to explain why he had no idea about the area and dimension of the Shop. He admitted showing Lau the Architect Plan but denied showing or giving him the Brochure during that meeting. He said the Brochure was given to Lau on a later occasion for the purpose of marketing the food court. Fung did not dispute that the meeting on 5 August 1997 was about marketing the food court. If so there is no reason why he did not give Lau the Brochure for the purpose of showing to potential tenants the layout of the food court. I do not find Fung credible. On the other hand, according to Chan, Lau faxed him the Brochure Plan on 6 August 1997 before he went to view the Shop on the following day. Chan had in mind to view and purchase a property worth more than $12 million. His recollection about having seen a faxed copy of the Brochure Plan before going to view the Shop must be reliable. More importantly, it is unlikely that Lau and Chan could have put their minds together over such a fine point of fact. I consider Lau's evidence more reliable. While little significance turned on when the Brochure was given to Lau, the above shows that Fung was not credible and was obviously trying to dissociate the 1st Defendant by whatever means he could from the representations he made to Lau about the layout of the Shop and how the Shop was to be partitioned.

39.It was Fung who sought Lau's opinion as to the price the Shop could fetch in the market. It is only natural that Lau must have then asked him about the area of the Shop and he must have made representations to that effect to Lau so that Lau could give his opinion. It is plainly incredible that Fung had not given Lau even a rough indication of the area of the Shop and told Lau to work out the dimension of the Shop by deduction or from the Architect Plan. Fung said that area was illusory as the percentage of usable area in commercial units varies tremendously and people would just buy by looking at the property. Even if that were the case, the truth of the matter is that the Shop was not open to inspection at the time and neither Lau nor Chan could view the Shop and form any opinion as to the price. I do not find Fung credible.

40.Ms Yiu attacked Lau's credibility on the basis that this dimension was not disclosed in Lau's first witness statement dated 15 February 2000 but in his second statement two years later. Lau explained that he had told the Plaintiffs' then solicitors but what he said had not been recorded in his first witness statement. I accept Lau's explanation.

41.As for the provision of the lifts, Lau agreed that Fung had not made any representations as to when the lifts would be installed.

42.As for the glass partition, there was no dispute that during the discussion on 5 August 1997, Fung said that the glass partition could be arranged on the request of the purchaser. Nothing turned on this representation. What is in dispute is whether Lau had subsequently related such a request to Fung.

43.I do not find it necessary to consider the issue of "area for approval" raised by Fung as the issue has not been pleaded. It appears both counsel for the Plaintiffs and for the 1st Defendant have missed this issue. In any event, the issue cannot assist the 1st Defendant. If the Provisional Agreement were made on the basis that what was to be purchased was subject to approval, then by keeping silent when approval was not forthcoming or when no application for approval was made, that would also amount to misrepresentation. In fact, Fung admitted that no application had ever been made to the authorities or the manager of the building for approval to alter the layout of the ground floor.

44.Having regard to the totality of the evidence, I accept the evidence of Lau that Fung did represent to Lau that the Shop was about 8 feet by 9 feet and would be partitioned as shown in the Brochure Plan and Architect Plan, that the partition between the Shop and the lift lobby would be made of glass if the purchaser so requested and that two lifts would be installed in the lift lobby though no mention was made as to the date of installation.

Representations made by Lau to Chan

45.Chan's evidence is that Lau passed on the above representations to him. This is corroborated by Lau. Likewise, Ms Yiu criticised Chan that he had never mentioned in his witness statement that Lau told him that the dimension of the Shop was about 8 feet by 9 feet but suddenly volunteered this information in his evidence in chief by way of supplement. She suggested that Chan, Lau and Pang were making up evidence by trying to fill in the gaps in their statements.

46.Ms Yiu also referred to paragraph 3 of the statement of claim in which a dimension of 90 inches by 107 inches was pleaded to booster her attack on the credibility of Chan. Chan could not offer any explanation for the dimension which appeared on the pleading. Probably the dimension referred to in the pleading was based on a scale measurement from the Provisional Agreement Plan. I think this was probably the choice of counsel settling the pleading and should not be treated as a previous inconsistent statement impeaching Chan's credibility. But I do recognise the force of Ms Yiu's argument that the allegation is not contained in Chan's witness statement. Despite that, having regard to the totality of the evidence, I find Chan, Jacky Pang and Lau credible on this issue. I reject the evidence of Fung. I accept Lau's evidence that Fung had told him that the dimension of the Shop was about 8 feet by 9 feet and he passed that information to Chan.

47.Fung denied having given instructions to Lau to draw the boundary line of the Shop on the Provisional Agreement Plan and having been informed by Lau that the 1st Plaintiff's nominee might take over the Assignment. These denials are inconsistent with the Provisional Agreement and the Provisional Agreement Plan. By signing his name on the Provisional Agreement Plan, Fung must be taken to have adopted the line drawn by Lau as the boundary and the area coloured yellow on the plan as the space of the Shop he was selling to the Plaintiffs. That supports Lau's evidence that the boundary line was drawn by Lau at the instruction of Fung over the telephone and that Fung represented to Lau that the Shop would be partitioned as shown in the Brochure Plan and Architect Plan.

48.Fung denied having agreed to use glass partition. Ms Yiu submitted that if the glass partition was so important to Chan, there was no reason why it was not specified in the Provisional Agreement or in the Formal Agreement. Chan explained that this was left out from the Provisional Agreement as Lau was in a hurry. As for the Formal Agreement, he said it would be difficult to tell the lawyers about that. That may not be very logical, but human behaviours are not always capable of logical explanation. In view of the very small size of the Shop, the glass partition must be very important to Chan in enhancing the display area and accessibility of the Shop. There is no dispute that Fung had already said on 5 August 1997 that the partition would be made of glass if the purchaser so requested before construction work commenced. There is also no dispute that Lau telephoned Fung about using glass partition before Chan increased his offer to $14.5 million. Lau's further discussion with Fung on this occasion would achieve no purpose if it was merely to seek Fung's repetition of what he had said on 5 August 1997. Thus, despite the non-inclusion of this requirement in the Provisional Agreement and the Formal Agreement, I am satisfied on a balance of probability that Lau obtained Fung's confirmation during that telephone conversation that the partition would be made of glass, that he related that confirmation to Chan and that it was upon that confirmation that Chan increased his offer to $14.5 million. As it was Staric which was responsible for building the partitions under the Wing Kiu/Staric Agreement, it may well be that the concrete partition was built by Staric in ignorance of the agreement between the 1st Defendant and the Plaintiffs.

49.Ms Yiu submitted that there was some confusion among the witnesses as to whether the frontage of the Shop with Nathan Road was to be partitioned by glass as well. I do not consider that discrepancy significant. The discrepancy was obviously due to a difference in apprehension of counsel's questions by the witnesses. In any event, whether the frontage of the Shop was to be partitioned by glass is not a material issue.

50.Save for the representation about the installation of the lifts, there is no dispute that the representations were false. As for the representation about the lifts, it was only Chan's assumption that the lifts would be installed by the mid October 1997 when he was to take actual possession of the Shop. There was no dispute that Fung had not represented that the lifts would be installed by the time of actual delivery of possession of the Shop. I have no doubt that the 1st Defendant intended at some future time that two lifts would be installed for the use of the restaurant on the third floor. So far as that representation was a representation of fact, it amounted to a statement of intention which was nevertheless true at the time it was made and was realised at a later stage.

51.I am satisfied that Lau faithfully repeated the representations to Chan. On my finding that Lau was the 1st Defendant's agent for the purpose of passing on the representations, I am satisfied that these representations were made to Chan by Lau with the authority of the 1st Defendant. It was on the basis of the representations as to the dimension of the Shop and the assurance that the partition between the Shop and the lift lobby would be made of glass that Chan increased his offer to $14.5 million. Given the small size of the Shop, it would not be difficult to appreciate the importance of the glass partition in increasing the frontage, the display area and the usable area of the Shop. A glass partition of less than an inch thick as compared to a concrete wall of four and half inches would substantially increase the net usable area of this very small Shop. Hence, notwithstanding that the Plaintiffs failed to prove the representation about the lifts, I have no difficulties in finding that the other representations were material and false and that Chan was induced to enter into the Provisional Agreement with the 1st Defendant by those misrepresentations.

Whether the 2nd Defendant's knowledge of the Formal Agreement Plan was imputed to the Plaintiffs

52.Ms Yiu argued that the 2nd Defendant had knowledge of the Formal Agreement Plan in the course of preparing the Formal Agreement and their knowledge of the plan was imputed to the Plaintiffs so that the Plaintiffs were taken to have agreed to the change in subject matter of the sale and purchase. The 2nd Defendant had no knowledge of the representations and did not know the Formal Agreement Plan amounted to a change in the subject matter of the sale and purchase. On the other hand, the change had not been brought to the attention of the Plaintiffs. In my view, neither the Plaintiffs nor the 2nd Defendant could not be taken to have agreed to the change in subject matter of the sale and purchase.

Whether the representations were spent upon making of Formal Agreement: effect of exemption clauses

53.Ms Yiu submitted that even if the representations were proven, the 1st Defendant is entitled to rely on the exclusion clauses in the Formal Agreement and be relieved of liability. She referred to Clauses 14, 25 and 32, which provide as follows:

"14. The Purchaser purchase the Property with full knowledge of its physical condition. No warranty is given by the Vendor on any of the following matters, namely ... (vi) the floor area of the Property.

...

25. The Vendor is selling the Property as confirmor and will only be required to give in the subsequent Assignment the usual limited covenant that the Vendor has not encumbered the Property.

...

32. This Agreement sets out the full agreement between the parties. No warranties or representations express or implied of any kind other than those set out above are or have been made or given by the Vendor or by anybody on their behalf and if such warranties or representations express or implied has been made, the same is withdrawn or deemed to have been withdrawn immediately before the execution of this Agreement."

54.These are exemption clauses. If they satisfy the requirement of reasonableness under section 3(1) of the Control of Exemption Clauses Ordinance, Cap. 71, they may relieve the 1st Defendant of liability for the misrepresentations. The burden is on the 1st Defendant to prove they are fair and reasonable having regard to the circumstances which were or ought reasonably to have been known to or in the contemplation of the parties when the contract was made.

55.Ms Yiu referred to Clause 20 in the agreement in Cheng Kwok-fai v Mok Yiu-wah [1990] HKLR 440 which is in identical terms as Clause 32 of the Formal Agreement. In dismissing the purchaser's claim for misrepresentation, Godfrey J, as he then was, held the exemption clause was fair and reasonable. Quite apart from the fact that the agreement in that case was made before the Control of Exemption Clauses Ordinance came into effect, the facts in that case are distinguishable from those of the present case. In Cheng Kwok-fai v Mok Yiu-wah, the purchaser entered into a provisional sale and purchase agreement after a misrepresentation as to the floor area of the flat was made to him and subsequently entered into a formal agreement containing the exemption clause. The flat was a partitioned unit. Despite the representations, the purchaser had the opportunity to inspect and did inspect the flat. He bought what he saw. In the circumstances, the exemption clause was fair and reasonable.

56.In the present case, when the Provisional Agreement was made, the Shop was still to be partitioned and not available for inspection. The full purchase price was paid before the Shop was partitioned and actual possession delivered. Representations were made to Chan by Lau as agent of the 1st Defendant. Chan was shown the Brochure Plan depicting the Shop approximately the size of the foyer to the domestic units in Ka Wing Building. He was also shown the Provisional Agreement Plan which supported the Brochure Plan. Both plans show the Shop as a small but usable unit with the rear boundary near the top step at the foyer to the domestic units, a good distance from the pillar. Lau's representations and the representations by way of the Brochure Plan and Architect Plan were the only information available to Chan on the basis of which the decision to purchase was made. Without being afforded the opportunity of an inspection, a purchaser could only rely on the representations or warranty made to him by the vendor or his agent. The vendor is in the position to know if the representations were true or if the warranty could be met. These circumstances were known or ought reasonably to have been known to Fung. Furthermore, as the full purchase price had to be paid without being afforded an opportunity to inspect, the remedy available to the purchaser is very much reduced. In the circumstances, it would be extremely unfair that the vendor should be allowed to escape liability for any representation he made which induced the purchaser to part with the purchase money. Having regard to these circumstances, I cannot be satisfied that the terms excluding liability for representations contained in these clauses were fair and reasonable so far as they relate to the misrepresentations I referred to above. This finding is not made with the slightest disrespect to the very eminent judgment of Godfrey J. It is a finding of fact based on wholly different factual circumstances. The lack of opportunity to inspect before the full purchase price was paid in this case is a very important feature which distinguishes it from Cheng Kwok-fai v Mok Yiu-wah.

57.For precisely the same reason, the 1st Defendant may not avail itself of Clause 14 to exclude liability for warranty as to the floor area of the Shop.

58.Clause 25 protects the 1st Defendant to the extent that it is only required to give the usual limited covenant that as confirmor it has not encumbered the property. I do not think this clause could have the effect of excluding the 1st Defendant from liability for representation or warranty. This clause only protects the 1st Defendant in respect of defects in title of the property sold by Staric or its predecessor in title. It could not be interpreted to cover the total lack of title over property not included under the original sale by Wing Kiu Enterprises Limited to Staric. The dispute in the present case, as I shall show, arose out of the 1st Defendant's representation that the Shop included part of the area occupied by the storeroom. That part of the storeroom had never been in the physical possession of Wing Kiu and did not form part of the original sale to Staric. Even if this clause were applicable, the lack of opportunity for the Plaintiffs to inspect the Shop must, for reasons as explained above, render the clause inoperative as being unfair and unreasonable in the circumstances.

59.Accordingly, I hold that all these clauses are ineffective to relieve the 1st Defendant of liability for misrepresentation or breach of warranty.

Whether representations spent upon making of Formal Agreement: effect of nomination

60.Ms Yiu submitted that the representations to the 1st Plaintiff were spent when the 2nd Plaintiff who took up the Assignment as the two Plaintiffs have distinct and separate legal personality. That I respectfully disagree. Chan was the person in control of the two Plaintiffs. He was their corporate mind and executive arm of the two Plaintiffs. When negotiating for the purchase, he indicated that he might have a nominee to take over the assignment. That was known to Fung as the Provisional Agreement clearly showed that the purchaser was either the 1st Plaintiff or its nominee. Whether the 1st Plaintiff, through Chan, was acting as principal in its own right or as an agent of the 2nd Plaintiff, whatever representations intended for the 1st Plaintiff must also be intended for the 2nd Plaintiff. It is impossible to argue that Chan as the corporate mind of the 2nd Plaintiff has no knowledge of the representations made to him as representative of the 1st Plaintiff and that the representations were not operative on the corporate mind of the 2nd Plaintiff. The representations were not spent by reason of the nomination.

Merger

61.The 1st Defendant's ultimate defence is based on the doctrine of merger. The effect of this doctrine is that where an executory contract is intended to be carried out by a deed of conveyance, on completion of the transaction the contract is merged in the conveyance. The final contract is that contained in the deed of conveyance and the executory contract cannot be used for the purpose of enlarging, diminishing or modifying what is contained in the deed and the purchaser cannot bring an action on the contract. His only remedy is to sue on the covenants for title. However, this doctrine of merger is not absolute. The doctrine has no application in two general types of circumstances. Firstly, if there are valid grounds for setting aside the underlying contract for sale and purchase, the conveyance which is the product of that contract is also liable to be set aside. Secondly, where the contractual obligation is of such a kind that it cannot have been the parties' intention that it should be extinguished by the conveyance, such obligation survives completion and the purchaser may sue on the agreement for sale and purchase. Hence, the learned authors of Barnsley's Conveyancing Law and Practice (4th ed) wrote at p. 468:

"On completion of the transaction the contract is said to merge in the conveyance. The conveyance puts an end to the contractual obligations which are thereby satisfied. After completion the purchaser cannot bring an action on the contract. Unless he is able to establish grounds for rescission or rectification, or prove the existence of some collateral warranty, his only remedy is to sue on the covenants for title.

This important doctrine of merger is not absolute. It does not apply where the contractual obligation is of such a kind that it cannot have been the parties' intention that it should be extinguished by the conveyance."

Thus, if the Plaintiffs are entitled to rescission, the doctrine of merger has no application. This post completion remedy is well known to the law, though a court order is required to set aside an executed transaction.

Rescission

62.The thrust of the Plaintiffs' claim is misrepresentation as to the area of the Shop, its layout and the glass partition. The area of the Shop as represented to the Plaintiffs was about 76 square feet, while the area to be conveyed under the Assignment was 47.8 square feet. The Shop as partitioned was only 28.5 square feet, which is only 37.5 % of the area as represented to the Plaintiffs or 59.6 % of the area to be conveyed under the Formal Agreement and the Assignment. Even on my finding, which is most favourable to the 1st Defendant, that the subject matter of the sale and purchase was the area as shown in the Formal Agreement Plan and the Assignment Plan, a reduction in area of 40% was very substantial. The Shop to be conveyed is a very small shop. The use to which such a small shop could be put is very limited. Its usefulness is further reduced by the presence of an L-shape fire service inlet pipe and hose reel lying horizontally at the mid-level of the left hand side-wall. The substantial reduction in area under the circumstances results in a shop which has little, if not no practical, use as a shop at all, except for example, as a newspaper stall with the newspaper vendor standing on the pavement. It would even be inhumane to keep an employee working under the confines of such a small space. In my view, the reduction in area was so substantial in the circumstances as to amount to a fundamental change in the nature of the transaction, such that damages are not an adequate remedy. Also, because of the fire service inlet pipe and hose reel, the Plaintiffs cannot enjoy exclusive or quiet possession of the Shop which must be kept open at all time to allow access to the hose reel in case of emergency. In the circumstances, the one and only appropriate remedy is rescission.

63.I am unable to find any bars to the Plaintiffs' right to rescind. Part of the Shop space as represented in the Provisional Agreement Plan or in the Formal Agreement Plan is being used as common area of In's Point. Despite the change in ownership of the shareholdings in the 1st Defendant, it remains as the owner of the common area of In's Point and is under an obligation to provide common area as a service area to its tenants or other co-owners. The Plaintiffs never affirmed the conveyance. Indeed, it raised objection as soon as it had the opportunity to inspect the Shop. There was no delay in instituting action by the Plaintiffs and no third party interest would be affected by rescission. The market value of the Shop may have reduced dramatically, but that is not a bar to rescission. Indeed the 1st Defendant only had itself to blame for not agreeing to purchase back the Shop and resell it (if it could) when it could still have taken advantage of the then market. I think restitutio in integrum is possible and the parties could and should be restored to their respective positions before the Provisional Agreement was made. Hence, the Plaintiffs are entitled under section 2 of the Misrepresentation Ordinance, Cap 284, to rescind the Provisional Agreement, the Formal Agreement and the Assignment without alleging fraud and the doctrine of merger has no application.

THE CASE BETWEEN THE 1ST DEFENDANT AND THE THIRD PARTIES

64.As between the 1st Defendant and the two Third Parties, the issues which I have to determine are (1) whether the two Third Parties were acting as agents of the 1st Defendant in making the representations and (2) if yes, whether they were in breach of their duties as agents or whether they acted in excess of their authority when making the representations. I have resolved the first issue in the affirmative in favour of the Third Parties.

65.As for the second issue, the 1st Defendant never pleaded what the duties of the Third Parties were and what acts of the Third Parties constituted such breach of duty. It was the 1st Defendant's case that Fung made none of the representations and hence any representations made by Lau to Chan were made for want of authority from the 1st Defendant. On this issue, I have found against the 1st Defendant. I have found that Fung did give Lau the Brochure and the Architect Plan on 5 August 1997 and represented to him about the size of the Shop, the layout and the glass partition. I have found that on 7 August 1997, Fung confirmed to Lau that glass partition would be used and instructed Lau to draw the boundary of the Shop on the Provisional Agreement Plan. The representations were given to Lau for the purpose of passing them onto prospective buyers for the Shop. Hence in passing these representations onto Chan, Lau was not acting in excess of his authority or in breach of duty. Accordingly, the 1st Defendant's claim for contribution against the Third Parties must fail.

THE CASE BETWEEN THE PLAINTIFFS AND THE 2ND DEFENDANT

66.The issues as between the Plaintiffs and the 2nd Defendant are (1) so far as the 2nd Defendant was concerned, what was the subject matter the Plaintiffs contracted to purchase according to the Provisional Agreement; (2) whether the 2nd Defendant was negligent or acted in breach of the retainer contract when acting for the Plaintiffs in the purchase of the property and, if so, in what respects; (3) if the 2nd Defendant was negligent or in breach of duty, was there any actionable loss thereby caused to the Plaintiffs; (4) if the 2nd Defendant was negligent or in breach of duty, were the Plaintiffs guilty of contributory negligence; and (5) whether, if the Plaintiffs suffered loss, such loss was caused by the 1st Defendant rather than by the 2nd Defendant.

67.The Plaintiffs' causes of action against the 2nd Defendant are in breach of the retainer and in professional negligence. Their case against the 2nd Defendant is founded upon a different set of facts. It began with Chan instructing the 2nd Defendant, through Chau, to act in the sale and purchase on behalf of the Plaintiffs on 9 August 1997, followed by Madam Fung forwarding the Provisional Agreement with the Provisional Agreement Plan to Chau's assistant. There is no dispute that Chan had not informed Chau or the 2nd Defendant of any of the representations made to him by Lau and that Chau did not seek any specific instruction from Chan. The transaction was apparently treated by the parties as a run of the mill type of conveyancing transaction.

68.Correspondence was exchanged between the 2nd Defendant and the 1st Defendant's solicitors, Messrs K C Ho & Fong. Nothing eventful occurred. The architect's certificate from Quattros (P&A) Architect Ltd was sent to the 2nd Defendant on 29 August 1997 certifying that the partition wall between the Shop and the lift lobby was non-load bearing and "do not constitute any structural alterations and/or additions and are exempted works under section 41(3) of the Building Ordinance and therefore do not require any application to or approval from the Building Authority". The certificate enclosed a plan showing the Shop. That plan is similar to the subsequent Formal Agreement Plan and Assignment Plan but different from the Provisional Agreement Plan. The Staric/Powerise Agreement was also forwarded to the 2nd Defendant at their request. Presumably the 2nd Defendant had examined the principal agreement referred to in Clause 4 of the Provisional Agreement. On 8 September 1997, Messrs K C Ho & Fong sent a copy of Assignment Plan to the 2nd Defendant. On 9 September 1997, Chan signed the Formal Agreement at the office of the 2nd Defendant which was then sent to Messrs K C Ho & Fong. The Formal Agreement was later returned to the 2nd Defendant duly executed by the 1st Defendant and dated 11 September 1997. It was then registered in the Land Office, but without the Formal Agreement Plan. On 13 September 1997, Chan signed the Assignment Plan and four copies of Deed of Mutual Covenant and paid the balance of the purchase price.

69.According to Chan, between 20 August and 13 September 1997 he repeatedly demanded to be shown the Formal Agreement Plan, but Chau told him that the plan was not ready. He said the plan was not ready even when he signed the Nomination and Assignment on 11 September 1997. On the objective evidence, the Assignment Plan was indeed available to the 2nd Defendant on 8 September 1997 and a further plan was available on 12 September 1997.

70.On the other hand, it was Chau's evidence that on 9 September 1997 he placed the Formal Agreement Plan and the Provisional Agreement Plan side by side and told Chan to look and consider them carefully because there was an obvious difference but Chan told him to proceed as it was his purpose to make profit by a quick sale. On 11 September 1997 before signing the Assignment, he again showed Chan the Assignment Plan and pointed out to Chan that it was different from the Provisional Agreement Plan.

71.Chau impressed me as an extremely irresponsible and unreliable witness. At the beginning of his evidence, when his attention was drawn to certain features of the Formal Agreement Plan, he said he was not a professional and could not read the plan. If so, his evidence that he noticed the difference between the Formal Agreement Plan or Assignment Plan and the Provisional Agreement Plan and drew that to Chan's attention must be rejected. Had he been so observant and noticed the difference, he should and would in the first place have made inquiries with the 1st Defendant's solicitors. Had he been so observant, he would also have noticed the words "area for approval" and raised requisitions as to whether approval had been obtained, or drawn that to the attention of his supervising solicitor so that provisions could be inserted into the Formal Agreement making the agreement conditional upon the grant of such approval. He was a demonstrably careless conveyancing clerk. There were numerous careless mistakes in the various draft conveyancing documents for which he was responsible. Though he attributed those mistakes to his supervising solicitor, he could not explain why the Formal Agreement Plan was not annexed to the Formal Agreement filed with the Land Registry. In view of his attitude, it is impossible to believe that he had advised Chan that as the Provisional Agreement did not indicate the exact size of the Shop it would put Chan in a disadvantageous position and that it was a risky purchase. I find Chau an exaggerating and unreliable witness. He was concocting evidence for his self-interest. I reject his evidence that he has drawn Chan's attention to the difference between the Provisional Agreement Plan and Formal Agreement Plan on 9 September 1997 and between the Provisional Agreement Plan and the Assignment Plan on 11 September 1997.

72.On the other hand, Chan's evidence is not wholly to be believed. Chan supplied business to Chau after Chau had left Messrs John Fang & Co to join the 2nd Defendant. At the time when scale costs were still applicable, the retainer was a very profitable one. In view of his activities in property speculation, Chan must be an important client whom Chau must be eager to please. If Chan had repeatedly asked for the plan, there was no reason why Chau would ignore him when in fact he had the plan on 8 September 1997.

73.I do not think Chan and Chau were telling me the whole truth. Indeed, the truth lies somewhere in between their evidence. As Chau had the plan on 8 September 1997, there was no reason why he would not have done the very minimal of showing Chan the plan when explaining the Formal Agreement or the Assignment or Deed of Mutual Covenant to him. On the other hand, Chan was an experienced and active speculator in commercial property. The property market at the time was, as the experts said, extremely buoyant and even hyperactive. It was very much a vendor's market. Chan was in the market making quick money. He bought without inspecting the Shop. Given his cavalier attitude and the then condition of the market on the one hand and his reliance on the representations on the other, the plan was not of such concern to him that he would repeatedly ask to be shown the plan. I reject Chan's evidence that Chau had repeatedly ignored his demand to be shown the plan. In addition, Chan was an experienced property trader. I do not think he would sign a sale and purchase agreement without having been shown a plan of the property he was purchasing. I think Chan was concocting evidence to put the blame for his misfortune on his solicitor in order to secure an alternative remedy. I do not believe in his evidence.

74.As I find both Chan and Chau incredible. I have to resolve the dispute of fact on the basis of the burden of proof. The Plaintiffs bear the burden of proving negligence on the part of the 2nd Defendant. For reasons as I have explained above, I cannot be satisfied that Chau had not shown Chan the various plans attached to the Formal Agreement, Assignment and Deed of Mutual Covenant, though I reject Chau's evidence that he has drawn the difference between the Formal Agreement Plan or Assignment Plan and the Provisional Agreement Plan to Chan.

Solicitor's duty of care

75.There can hardly be any doubt that a solicitor owes a duty of care towards his client the moment he begins communication with his client or prospective client in his professional capacity as a solicitor in tort or upon being engaged under his retainer in contract. In general, the content of his duty is as follows. His foremost and basic duty is to understand the terms of his retainer and the purpose for which he is retained. If in doubt, he should seek clarification or instruction from his client. He shall act in accordance with his retainer. He shall advise his client on all matters relevant to his retainer, so far as may be reasonably necessary. He shall carry out his instructions by all proper means. He shall consult with his client on all questions of doubts which do not fall within the express or implied discretion given to him under his retainer. He shall keep his client informed to such an extent as may be reasonably necessary. He shall generally protect his client's interest. He is under a duty to exercise the care and skill to be expected from a normally competent and careful practitioner.

76.In the context of a solicitor acting for the purchaser in a conveyancing transaction, the content of a solicitor's duty includes the following specific duties. Firstly, in order to understand the terms of his retainer and the purpose for which he was retained, a solicitor is under a duty to ascertain what is the subject matter of the sale and purchase in the mind of his client and, if in doubt, to seek clarification or instruction from his client. He has to ensure the parcels clause of the formal agreement or assignment adequately describes the property to be purchased. He has to scrutinise plans closely to ensure that the limits of the property accord with what is supposed to be purchased and conveyed. If there are discrepancies between the plans used in the course of the negotiation, for example, plans annexed to the provisional agreement on the one hand and the plans annexed to the formal agreement or the assignment on the other as to suggest that the latter plans may not adequately reflect the understanding of his client as to the subject matter of the purchase, he should draw that to his client's attention. In case of doubt, he should consult with his client. Any plan identifying or describing the property to be purchased in the Formal Agreement, the Assignment and the Deed of Mutual Covenant must be shown to the client. Secondly, his duty to protect his client's interest is specifically extended to protect his client's interest in the transaction and to protect his client against possible future hazards. Thus, a solicitor has to protect his client's interest by duly registering the provisional sale and purchase agreement so that his client's interest will not be deferred to any later competing interest over the property. He has to ensure that the vendor can show a good legal title free from adverse interests of the property to be conveyed. For that purpose, he is obliged to make the customary enquiries and searches and to do so with care. He shall not hand over the purchase money unless satisfied that his client will acquire a good title. Also, he has a duty to warn his client of risks which are obvious to the solicitor but which are not so to the lay client. He has a duty to explain the documents which give effect to the transaction and make sure that his client understands their content before appending his signature to the documents.

77.The standard of care in conveyancing is high, but it is not absolute. A solicitor is not expected to be faultless nor is he to be taken as his client's insurer of any risk which the skill and care of a normally competent and careful practitioner cannot avoid. That a mistake was made by the solicitor is not conclusive of negligence. In determining whether a solicitor is guilty of negligence, the court has to apply what it perceives to be the standard of the normally competent solicitor. This is a finding of fact based on the particular circumstances of the case and authorities are unlikely to be decisive or helpful. Usually a solicitor will not be regarded as negligent if he makes a mistake as a result of acting in accordance with the general practice of the profession: see for example, Simmons v Pennington [1955] 1 WLR 183.

Breach of duty

78.Having set out the law, I now turn to consider whether, on the facts of the present case as I found them, the 2nd Defendant was negligent in having failed to discharge the duty of care required of a normally competent solicitor. In essence, the Plaintiffs' complaint against the 2nd Defendant is that they failed to discover the discrepancies between the Provisional Agreement Plan and the Formal Agreement Plan and that the 1st Defendant did not have title over the entire subject matter intended to be sold under the Provisional Agreement and negligently advised the Plaintiffs to sign the Formal Agreement. It was not alleged in the particulars of negligence that the 2nd Defendant was negligent in failing to enquire if approval for partitioning of the Shop in accordance with the Provisional Agreement Plan had been obtained. Had the Plaintiffs' case been run along that line, their case would have been more formidable. Despite the issue has been raised by Fung in evidence, the Plaintiffs did not see fit to amend their pleadings. I consider I am bound by the pleadings and shall not take those words into account when considering the case against the 2nd Defendant.

79.The 2nd Defendant was not a party to the negotiation for the sale and purchase of the Shop and had not been informed by the Plaintiffs of any of the representations made to Chan by Lau. The 2nd Defendant had no knowledge whatever of the subjective intention of the Plaintiffs or of the representations. The 2nd Defendant was given the Provisional Agreement Plan which was stated to be not to scale and for identification purpose only and the Provisional Agreement which was expressly subject to the principal agreement between the 1st Defendant and the head vendor. For reasons as I have explained, in view of the Wing Kiu/Staric Agreement, Staric/Powerise Agreement and the two 1974 Assignments, I find on a true construction of the Provisional Agreement that the subject matter of the Provisional Agreement was that space as delineated in the Formal Agreement Plan. How the 2nd Defendant conducted the conveyancing transaction has to be understood against the above background.

80.If one compares the Provisional Agreement Plan with the Formal Agreement Plan carefully, one has no difficulty in identifying a number of striking and significant differences. Firstly, the shape of the storeroom adjacent to the Shop as shown in the Provisional Agreement Plan or the water tank room as it was described in the Formal Agreement Plan is different. The former is in the shape of a rectangle, while the latter is in the shape of an irregular pentagon with a bell out at one corner. More importantly, the length of the Shop as shown in the Provisional Agreement Plan is about the same as the length of the storeroom but is only about half the length of the water tank room as shown in the Formal Agreement Plan.

81.In addition, there are certain landmark features which suggest that the area of the Shop as shown in the two plans is very much different. As mentioned earlier, the position of common wall between the Shop and the storeroom relative to steps in the foyer is different. More significantly, the location of the pillar inside the Shop relative to the common wall as shown in the two plans is obviously different. These features suggest that the Shop as shown in the Formal Agreement Plan is about one third to one quarter smaller than that as shown in the Provisional Agreement Plan. Though the Provisional Agreement Plan is expressed to be not to scale and that on my interpretation the subject matter of the purchase was that space as shown in the Formal Agreement Plan, the significant differences by reference to these landmark features must suggest that there was a real risk that the Plaintiffs were not getting from the Formal Agreement what they had bargained for. A solicitor is not an expert in reading architectural plans. But these features are so obvious to the eye that it does not need an expert to appreciate the differences. Applying the test of the normally competent solicitor, I find that a normally competent solicitor must be able to identify the differences between the plans and appreciate the risk that the Plaintiffs were operating under some mistake or misunderstanding and were not getting what they bargained for.

82.Though I agree with Mr Whitehead SC, counsel for the 2nd Defendant, that on a true interpretation of the Provisional Agreement the subject matter of the sale and purchase was the space as delineated in the Formal Agreement Plan, that does not absolve their solicitor from his duty of ascertaining what was the subject matter of the sale and purchase in the mind of his client if the circumstances are such as to suggest that his client might be operating under some mistake or misunderstanding. The test to be applied in determining the parties' intention in a contract is the objective test. But that is not the test to be applied by a solicitor in ascertaining what was his client's understanding or intention under the contract. A solicitor is under a duty to ascertain the subject matter of the sale and purchase in the mind of his client and to seek clarification if in doubt. If there is a risk that the Formal Agreement does not adequately express his client's intention and understanding as to the subject matter, he should consult with or seek further instructions from his client. He has to find out what is in the mind of his client and assist his client to reach that objective and protect his interest. That is not a very onerous obligation. What the solicitor has to do is to ask a few questions of his client. None of that has been done.

83.Mr Whitehead SC submitted that the standard of duty of the 2nd Defendant has to be assessed with reference to the circumstances of the case and in particular, the level of sophistication and experience of Chan in property trading as distinguished from that of an ordinary consumer in purchasing premises for his own residence or business. That is correct as a legal proposition: see Carradine Properties Ltd v DJ Freeman & Co (1982) 126 SJ 157, Virgin Management Ltd v De Morgan Group plc (unreported, 24 January 1996) and National Home Loans Corporation plc v Griffin Couch & Archer [1998] 1 WLR 207. However, on the facts, there was a total failure on the part of the 2nd Defendant in discharging the duty to seek clarification or instruction or to consult with the Plaintiffs. The question whether what the 2nd Defendant did was sufficient to discharge their duty to the required standard does not arise. On the facts, I am satisfied that the 2nd Defendant had failed to discharge their duty to the standard of a normally competent solicitor.

Damage suffered by the Plaintiffs

84.Mr Whitehead SC ingenuously argued that even the 2nd Defendant was in breach of duty, there was no damage suffered by the Plaintiffs as result of that breach of duty. In brief, his argument is as follows. Chan had deleted clause 6 from the Provisional Agreement which would have limited the Plaintiffs' liability for failure to complete to forfeiture of deposit and the Plaintiffs could be compelled to complete the purchase at the instance of the 1st Defendant. Even if the 2nd Defendant had drawn the Plaintiffs' attention to the discrepancy between the plans, that could not have saved the Plaintiffs from the obligation of having to complete the purchase. Hence, Mr Whitehead SC submitted, any damage suffered by the Plaintiffs did not flow from the 2nd Defendant's breach of duty of care.

85.With respect, I do not think deletion of clause 6 from the Provisional Agreement would have such an effect. The effect of such a clause, if it had been made part of the agreement, was to limit the purchaser's liability to the amount of deposit paid. Likewise, the effect of clause 7 which had also been deleted from the Provisional Agreement was to limit the vendor's liability upon his failure to complete the sale to return of deposit and payment of a like amount to the purchaser as liquidated damages. The effect of the absence of these clauses, even if taken together, is that the parties are left to their usual remedies. The injured party has to prove damage instead of claiming liquidated damages. They are not entitled to specific performance as a matter of course without having to prove that damages are inadequate. As misrepresentation is a good defence to the equitable remedy of specific performance, had the 2nd Defendant properly sought clarification or further instruction from or consulted with the Plaintiffs, they would have advised the Plaintiffs not to complete and to seek rescission of the Provisional Agreement for misrepresentation and return of deposit. Had the 2nd Defendant done so, the Plaintiffs would not have paid the further deposit and balance of the purchase price totalling $14,000,000. Thus, the Plaintiffs did suffer damage as a result of the 2nd Defendant's breach of duty.

86.However, I agree with Mr Whitehead SC's submission that even if the 2nd Defendant was negligent, the quantum of liability should be reduced by matters which cannot be attributed to the 2nd Defendant's negligence but to the 1st Defendant's deliberate breach of contract which was not reasonably foreseeable. Thus, the drop in the value of the Shop due to the 1st Defendant failing to partition the Shop with glass, the installation of the hose reel and water pipes inside the Shop and the fact that the Shop as partitioned was even smaller than what was to be conveyed under the Assignment cannot be attributed to the 2nd Defendant's breach of duty. The damages suffered by the Plaintiffs as a result of the 2nd Defendant's breach of duty should be assessed as the difference between the $14,000,000 which the Plaintiff would not have paid but for the 2nd Defendant's breach of duty and the value of the notional shop of the area as shown in the Formal Agreement as at the date of actual delivery of possession subject to deduction for contributory negligence on the part of the Plaintiffs.

Contributory negligence

87.The burden of proving contributory negligence lies with the 2nd Defendant: see Caswell v Powell Duffryn Associated Collieries Ltd [1940] AC 152 and Lewis v Denye [1939] 1 KB 540 at 554. The 2nd Defendant has to establish that the Plaintiffs failed to take such care as a reasonable man would take in protecting his interest in the transaction and that his failure to take such care was a substantial or material co-operating cause leading to the damage they suffered. A professional holds himself out as being in possession of the competence and expertise in areas of specialties in which he claims he is a professional. It is for that reason a lay client seeks the expert service of a professional, be him a solicitor, an architect, an accountant or an expert of any discipline. As a professional is remunerated for his services and it is the professional's duty to advise his lay client and to protect his interest, public policy requires that the plea of contributory negligence by a professional against his lay client may only be successfully raised in very limited circumstances. The learned authors of Jackson & Powell on Professional Negligence, 5th edition, para 5-115, have rightly identified two such circumstances. These are, firstly, where the lay client is particularly well placed to spot or correct the professional's mistake and secondly, where the lay client has done something quite separate which aggravates the consequences of the professional's breach of duty.

88.In the course of cross-examination of Chan, Mr Whitehead SC sought to establish that since Chan was an experienced property speculator and had made numerous property transactions, he ought to have checked the principal agreements, namely the Wing Kiu/Staric Agreement and the Staric/Powerise Agreement and realised the subject matter of the purchase. Technical as that may be to a lay client, it is besides the point. The breach of duty here is the 2nd Defendant's failure to seek clarification or instructions from and consult with his client under circumstances when it was obvious that the client might be operating under some kind of mistake or misunderstanding. Had there been no misrepresentation, these principal agreements would have completely absolved the 2nd Defendant. But this is not the case here. On the facts of the present case, the only act which the Plaintiffs were guilty of was their failure to give full and proper instructions to the 2nd Defendant. However, on the facts as I found, Chan was shown the Formal Agreement Plan and the Assignment Plan. Had he examined the plans with some care, it would not have been difficult for him to realise that the Shop to be conveyed was much smaller or at least different from the Shop he had in mind to purchase. He was particularly well placed to spot or correct the 2nd Defendant's mistake. He did not inform the 2nd Defendant at the time of signing the Formal Agreement or the Assignment of any of the representations. I find as a fact that his inaction or silence in the circumstances was a substantial cause to the damage he suffered. I consider that a serious neglect and assess his contributory negligence to be 50%.

Quantum

89.Though the experts of the Plaintiffs and the 2nd Defendant reached agreement as to the area of the Shop as partitioned, as shown on the Formal Agreement Plan and as shown in the Provisional Agreement Plan, they could not reach agreement as to what would have been the market value of the Shop of the above different area. I think the differences between the experts are academic. It is impossible to refer to comparables as no true comparables actually exist in terms of area and location. The parties entered into the sale and purchase at arms length and for valuable consideration. The purchase price under the agreement provides the best indication of the market value of the Shop. Both experts have no dispute in principle that when the area of the Shop was reduced to that under the Formal Agreement Plan or that as partitioned, its value per square foot would also be reduced substantially due to its reduced usage and marketability. I shall approach the question on quantum bearing in mind these principles.

90.Based on the purchase price of $14,500,000 and the area of 76 square feet, the market value of the Shop as represented by the 1st Defendant at the time of contract or delivery was $190,789 per square foot. The area of the Shop under the Formal Agreement Plan was 47.8 square feet. The Plaintiffs' expert suggested a discount of 30% for reduced usage and marketability as a result of the reduced area of the Shop to 28.5 square feet. I consider a discount of 20% appropriate for a less substantial reduction to 47.8 square feet. Using these data, I assess the value of a notional Shop of the area of as shown in the Formal Agreement to be $7,295,771 ($190,789 x 47.8 x 80%). I ignore the fact that the value of the Shop was further reduced due to the lack of glass partition, the presence of the hose reel and water pipe as these reductions in value should not be attributed to the 2nd Defendant. Had the 2nd Defendant properly advised the Plaintiffs, the Plaintiffs would not have paid the further deposit and balance of the purchase price totalling $14,000,000. Had it not been for the breach of contract on the part of the 1st Defendant, the Plaintiffs would have obtained a shop of 47.8 square feet of the value of $7,295,771 on 15 October 1997. Discounting for the Plaintiffs' contributory negligence, I assess the Plaintiffs' damages to be $3,352,114.50 ( ($14,000,000 $7,295,771) x 50% ).

91.I reject Mr Whitehead SC's submission that damages should not carry interest in view of the collapse in the price of property generally and that had the Plaintiffs invested in other properties instead they would have suffered considerable loss. I think whether the Plaintiffs would invest in other properties is highly speculative. I know of no principle of law which would justify depriving a successful plaintiff of interest for being kept out of the money which he is entitled. To create such a precedent would only encourage litigants to speculate not only in the merit of their litigation but in other economic and market factors which they should not have taken into consideration in any event.

92.As the Plaintiffs' principal remedy is rescission against the 1st Defendant, the remedy against the 2nd Defendant is in the nature of an indemnity in the event that the purchase price is not fully recoverable against the 1st Defendant for whatever reason. Hence, I make an order that the Plaintiffs may not execute on the judgment without leave of the court.

CONCLUSION

93.Accordingly, as between the Plaintiffs and the 1st Defendant, I order that the Provisional Agreement, the Formal Agreement and Assignment be rescinded. The 1st Defendant shall pay the Plaintiffs the purchase price of the Shop in the amount $14,500,000 and damages in the amount of $525,645, being the estate agency commission of $100,000 paid to the Third Parties, legal costs and disbursements of $26,875 paid to the 2nd Defendant and stamp duty of $398,770 in respect of the sale and purchase. The 1st Defendant shall also pay interest on the above amount of $15,025,645 at judgment rate from the date of issue of the writ until payment. The Plaintiffs shall have costs of this action against the 1st Defendant, such costs are to be taxed if not agreed.

94.As between the Plaintiffs and the 2nd Defendant, I enter judgment in favour of the Plaintiffs in the amount of $3,352,114.50 together with interest at judgment rate from the date of issue of the writ until payment and costs. Such costs are to be taxed if not agreed. Except for costs, the Plaintiffs may not execute on the judgment without leave of the court.

95.The 1st Defendant's Third Party Notice is dismissed with costs to the 1st and 2nd Third Parties, to be taxed if not agreed.

Representation:

Mr Valentine Yim, instructed by Messrs Tang, Wong & Cheung, for the Plaintiff

Ms Eliza Yiu, instructed by Messrs Kelvin Cheung & Co., for the 1st Defendant

Mr Robert Whitehead, SC and Miss Puja Kapai, instructed by Messrs Wilkinson & Grist, for the 2nd Defendant

Mr Colin Shipp, instructed by Messrs Cheung & Choy, for the 1st and 2nd Third Party