Esquire (Electronics) Ltd v. The Hong Kong and Shanghai Banking Corporation Ltd and Another
Read the full judgment text of HCA 11077/1994 on BabelCite. This High Court CFI judgment was delivered on 19 July 2005.
1. This exceptionally difficult Action is concerned with whether the sale, against the wishes of the Plaintiff, Esquire (Electronics) Ltd. (“Esquire”) of its crown jewel of a building in May 1987 at the insistence of the Defendant, its banker, The Hong Kong And Shanghai Banking Corporation Limited (“the Bank”) to a close associate of the Bank, was such as amount to sufficient improper crossing of line in the behaviour of a bank so as to impose a liability on the bank to its former customer, Esqu
Cited by 3 cases · Cites 3 cases
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HCA11077/1994 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO.11077 OF 1994 ----------------------- BETWEEN
----------------------- AND BETWEEN
(by original writ and order to carry on) ----------------------- Before : Hon Waung J in Court Dates of Hearing : 2 - 6, 9, 11 - 13, 16, 19 - 20, 23 - 27 February, 1 - 2, 5, 8 and 10 - 12 March 2004 Date of Handing Down of Judgment : 19 July 2005 ------------------------- JUDGMENT ------------------------- 1.This exceptionally difficult Action is concerned with whether the sale, against the wishes of the Plaintiff, Esquire (Electronics) Ltd. (“Esquire”) of its crown jewel of a building in May 1987 at the insistence of the Defendant, its banker, The Hong Kong And Shanghai Banking Corporation Limited (“the Bank”) to a close associate of the Bank, was such as amount to sufficient improper crossing of line in the behaviour of a bank so as to impose a liability on the bank to its former customer, Esquire. The compliant of Esquire consists of the behaviour of the Bank amounting to:-
The complaint is met by Defences of:-
MATERIAL FACTS 2.This is a case where a proper and correct understanding of the material facts is essential to the analysis of the legal consequences of the actions of the parties. 3.The main company of the Esquire Group, Esquire was first founded by Sabahagchand Choithramanni Gurdas (“Gurdas”) in 1965. Gurdas was the 50% shareholder of Esquire and the other 50% of Esquire was held by his brother Sabahagchand Choithramani Arajan (“Arjan”). The business of Esquire was in consumer electronics products. From 1970 onwards, the business grew quickly so that by the early mid ninety-eighties the Esquire Group with Esquire as its head enjoyed an annual turnover in excess of HK$500 million and was well-known in Asia and Middle East as one of the largest traders of electronics products. 4.The banking relationship between the Esquire Group and the Bank went back to the seventies. By the late seventies, the Bank was the main banker of the Esquire Group, although by the time the Esquire got into difficulties, the Esquire Group was also maintaining banking relationship, but on a much smaller scale, with other banks. 5.In the late seventies the Esquire Group with the encouragement and support of the Bank expanded rapidly, but not only in its core business of electronics products. It expanded also into properties. In October 1981, the Bank financed 100%, (with one third of the financing on a 2 year short-term basis) Esquire’s purchase of the property Li Fung House (“the Property”) at the price of $180 Million. The Property was mortgaged to the Bank and charged with $300 Million, the banking facility granted. The Bank of course enjoyed the usual rights of a mortgagee and the material Charge and Mortgage and the material Debenture and Mortgage contained amongst others, the usual right to require payment from Esquire of all sums outstanding upon demand in writing, the right and power of sale, the right and power to appoint receiver. 6.This purchase at the top of the market and at the very very high price of $180 Million, when Esquire Group was only able to use itself 4 of the 16 floors of the Property, turned out to be what eventually sank the Esquire Group. This unwise financing of the purchase of the Property by the Bank (when prime was 20% and Bank’s loan was at 2.25% above prime [1/47]), was what led to the Restructuring by all the bank creditors of the Esquire Group, less than 2 years after the purchase. The fact that this purchase was made at the very top of the market could be seen from Exhibit P2, which shows the valuation of the Property moving from $170 Million in October 1981, then down in February 1983 to $105 Million, then further down to $80 Million in January 1985, before it started moving up in July 1985 to $115 Million, in June 1986 to $130 Million, in December 1986 to $135 Million, and then rapidly up to $157 Million on 6th March 1987 and to $161 Million on 25th March 1987. The approval of the financing of the purchase was made by officers at the top of the Bank. The subsequent actions by the Bank to cause the sale of the Property (complained by Esquire) might suggest that the senior management of the Bank wished to see that this mistake of Bank’s finance and exposure be corrected. Whether this was done improperly by the Bank is the crucial question in this case. 7.The loan taken out by Esquire for the purchase of the Property required a heavy debt servicing of $31 million per year which the Esquire Group could not meet from its trading activities. By mid 1983, the Esquire Group found that it was necessary to seek restructuring of its loans from its bankers. A restructuring agreement was therefore entered into between the Esquire Group (including Gurdas and Arjan as Guarantors) and some five creditor banks. This restructuring agreement dated 22nd February 1984 [1/93-133] (“1984 Restructuring Agreement”) was to be effective from 13th September 1983 and was to expire on 31st December 1984. Five Banks were parties to this 1984 Restructuring Agreement, namely the Bank, Bank of America (“BA”), Banque Nationale de Paris (“BNP”), BCCI Finance International Ltd. (“BCCI”) and Indian Overseas Bank. The Lead Bank in this Restructuring was naturally the Bank, as the largest amount owing by the Esquire Group was to the Bank, to which was mortgaged the most valuable asset of Esquire namely the Property. The loans outstanding to the Bank by the Esquire Group as stated in the 1984 Restructuring Agreement totaled some $309 Million, whereas the loans outstanding to the other banks were $24 Million (BA), $23 Million (BCCI), $14 Million (BNP) and $15 Million (Indian Overseas Bank), a total of only $76 Million. 8.Contemporaneous with the 1984 Restructuring Agreement, as amongst the five banks, they signed an Inter-Bank Agreement [2/79-92] dated 22nd February 1984 (“1984 Inter-Bank Agreement”) which provided the rights and limitations of the five banks, as to who and what could be done or not done vis-à-vis:
9.The following are some of the central features of the 1984 Restructuring Agreement:-
10.The following are some of the central features of the 1984 Inter-Bank Agreement:-
11.Pursuant to the 1984 Restructuring Agreement and the 1984 Inter-Bank Agreement, the three Accounts specifically provided for in the 1984 Restructuring Agreement (the Working, Property and Escrow Account) became the vital means of Esquire’s operation, business and survival. And in terms of the Indebtedness of Esquire to the Bank which becomes the vital focusing point in this Action, the Non-Property Portion came to be known as the Hardcore Frozen Debt. 12.The 1984 Restructuring Agreement was extended (except for BA) for 7 months from January 1985 to end of July 1985 as evidenced by letters from other banks to the Bank [4/1083, 1086, 1088] and the Minutes of the Meeting on 29/3/85 [2/173]. The reason for the delay in extending the 1984 Restructuring Agreement was because of the difficulties encountered towards the end of 1984. BA did not have confidence in continuing with the Restructuring and wanted out, or in other words BA wanted to be bought out. This eventually did happen, with BA being bought out by the Bank in April 1985 [2/189]. With BA debt bought out by the Bank, the Bank imposed even greater control on the Restructuring and over the affairs of the Esquire Group. A system of tight financial control by Peats (acting as the accounting watch-dog of the Bank) was in place and improved and Esquire was required in late 1984 to take on Mr. Ratnam as the new Group General Manager, so as to better administer its business. The reason why there was no formal 1985 restructuring agreement was because it took time for the Bank to negotiate with BA to buy out BA but at the time of the buy out, the Bank did not tell the other banks of the terms of buy out. 13.Earlier in September 1983, the supervision of the Esquire Group accounts was given to the Bank’s centre under the department of Credit Control Division (“CCD”). The customer Esquire was however in Mongkok and the relationship was with Mongkok Branch. The accounts of Esquire were therefore still being kept and managed at the Mongkok Branch. So although CCD had taken up the supervising control at the cetnre, because Esquire was still actively trading from Mongkok and the Mongkok Branch was very much involved in the activities of Esquire, there was to a certain extent, a large amount of overlap between the Mongkok Branch and CCD. This management overlap explained the considerable conflicts between CCD and Mongkok Branch as could be seen from the sizable documentation created internally. The Memo of Selway-Swift to Bamford of Mongkok dated 23rd September 1985 [288-9] suggesting that the one central point of control and discussion should rest with CCD and not with Mongkok, was a prime example of this turf tussle. 14.The personnel of CCD involved with Esquire were as follows:-
15.The 1985 Restructuring Agreement was further extended from August 1985 to end of 1985 by subsequent meeting minutes and letters. These were followed by the Heads of Agreement [4/1221(1)-(2) &1223-5] which was effective from December 1985 to 29th September 1986. Clause 4 of Heads of Agreement is material as it provides:-
By this Clause, it confirmed the arrangement made in 1985, whereby the property debt of the Bank (Property Portion) was taken out of the Lender’s Portion of the 1984 Restructuring where there was no interest payable and put into an interest bearing property loan. 16.In April 1986 somewhat at a cross-road, Selway-Swfit wrote a Memorandum dated 19th April 1986 [355-357] to the Chief Executive reviewing the Bank’s Esquire Account and giving a review of the options open to the Bank. He proposed that the Esquire not be liquidated (with realization of security) and that Esquire be allowed to continue to trade. He also referred to the Bank in respect of the Hardcore Frozen Debt, making provision for an additional $50 Million during the first half of 1986 ($40 Million having being provided by the Bank at end of 1985) and thereby leaving after the second provision only $60 Million of the Hardcore Frozen Debt not provided [357]. 17.The above strategy was followed up by Pullen with his Memo dated 28th May 1986 [367-8] where he asked for senior management’s decision as to whether (1) to allow Esquire to trade and in the meantime continue with the policy of making further provisions for the Hardcore Frozen Debt ($40 Million provided end December 1985 and $50 Million to be provided June 1986) and (2) to transfer the whole Esquire Accounts from Mongkok to the Head Office at CCD. The top management of the Bank apparently accepted the recommendation of Selway-Swift and Pullen and the Esquire Accounts were moved from Mongkok to CCD and thereby giving the total freedom to CCD to effect the momentous actions which gave rise to this Action. 18.On 30th October 1986, Esquire and the Bank entered into a Restructuring Agreement (“1986 Restructuring Agreement”) dated 30th October 1986 [2/442] covering the period from 30th September 1986 to 30th September 1987. The Bank also entered into at the same time the corresponding Inter-Bank Agreement [2/447] (“1986 Inter-Bank Agreement”). 19.The 1986 Restructuring Agreement and the 1986 Inter-Bank Agreement (collectively referred to as the “1986 Agreements”) contained virtually identical provisions as those in the 1984 Restructuring Agreement and the 1984 Inter-Bank Agreement with the following exceptions:-
20.It was already seen that under the Restructuring Agreements, Esquire was allowed to have, only three controlled accounts, namely the Working Account, the Property Account and the Escrow Account. It was a central feature of the Restructuring Agreements that net profits in the Working Account earned by Esquire from its frantic trading was to be paid out of the Working Account every month to the Escrow Account, from which distribution would be made to each of the Lender Banks in reduction of their debts under the Lender’s Portion (the Hardcore Frozen Debt in the case of the Bank). The new facility granted by the Bank was to enable Esquire to trade but the price was that Esquire had to pay for such facility at the current commerical rate. The problem encountered was that the (Non-Property) Hardcore Frozen Debt was not being seriously reduced as that debt was “the result of serving those loans from trading lines” [232]. That is why if one compares the (Non-Property) Hardcore Frozen Debt stated in the 1984 Restructuring Agreement at $127 Million and the figure of $190 Million for the same (Non-Property) Hardcore Frozen Debt stated in the Memo dated 15th July 1985 [232], a little more than one year later, that Hardcore Frozen Debt had gone up. Esquire contends that this figure was swelled because of wrongful charging of interest and wrongful non-crediting the Hardcore Frozen Account for amounts received by the Bank from the Escrow Account as will be seen later. 21.Much of the time in 1985 to 1986 was taken up with three questions, the first being whether to sell or not to sell the Property and at what price; the second being the state of the accounts and their management and their accuracy; and third being the poor state of the trading activities resulting in “blocked” lines under the trading facilities so that Esquire could not trade. So far as sale of Property was concerned, the problem was that the market was still low in 1985 to mid 1986 and a sale of the Property would not even cover the Property Loan, let alone the (Non-Property) Hardcore Frozen Debt. So far as the state of the accounts was concerned, there were a great deal of disagreement between CCD and Mongkok in particular as to the way Mongkok had debited the (Non-Property) Hardcore Frozen Account. 22.From as early as 1985, internally in the Bank between CCD and Mongkok they were discussing the correctness of charging interest on the (Non-Property) Hardcore Frozen Account. Esquire also from 1985 to early 1986 was quietly investigating the correctness of the (Non-Property) Hardcore Frozen Debt. In October 1986 Esquire first queried about the correctness of the Hardcore Frozen Debt figure of the Bank and suggested that Esquire was overcharged by some $30 Million and this is what came to be known as the $30 Million Overcharge. The Bank’s Internal Memo of October acknowledged there was overcharge [430]. 23.The series of discussions in respect of the $30 Million Overcharge eventually resulted in two meetings on 12th March 1987 when Sommerfield stated that the Hardcore Frozen Debt was $201 Million being $189 Million Hardcover Frozen Debt plus another $12 Million being the Bank of America Buyout benefit of the Bank. Sommerfield demanded the sale of the Property and it is alleged by Esquire that Sommerfield threatened that unless Esquire agreed to the sale, the Bank would make the demand on Esquire and would sell the Property and finish off and liquidate the Esquire Group. That same night of the 12th March, Gurdas of Esquire surrendered to the Bank and agreed to the sale of the Property. Thereafter the Bank required Esquire to sign the Power of Attorney giving the Bank and its subsidiary, Management, the total power to sell the Property. 24.The Property was sold to Bethlehem Management Ltd. (“Bethlehem”) at $180 Million. It was not known to Esquire at the time that the Property was sold to a close associate of the Bank nor that it was sold, what it subsequently found out to be, in alleged undue haste. As a reward for Esquire’s agreement to the sale of the Property, the Bank “forgave” the $30 Million Overcharge from the Hardcore Frozen Debt and also did not insist on the $12 Million BA Buyout benefit. A number of further restructuring agreements also followed Esquire’s agreement to sell. 25.By accident, Esquire found out in June 1994 the close relationship between the Bank and Bethlehem, the buyer and Esquire complained about the sale to amongst others, Miss Emily Lau the Legislator who took the matter up with the Chairman of the Bank and also with senior Government officials. The Bank reacted very quickly and negatively to such complaint. Demand for immediate repayment of all loans and facilities was made by the Bank and shortly thereafter Esquire was put into liquidation. This Action was brought by Esquire and continued (in liquidation) with the approval of the Company Court against the Bank in respect of the sale of the Property. The complaint made in this Action is that the Sale was as result of, firstly the breach of fiduciary duty, secondly of economic duress, thirdly undue influence and fourthly intimidation. ISSUES ON TRIAL OF LIABILITY 26.The Trial took up some 24 days and was limited to Trial on Liability. The question of what relief or remedy, following upon liability being established, was expressly hived off so that the Trial could be more manageable and it might result in saving of costs and time should the Plaintiff fail on Liability in whole or in part. 27.The Issues on the Trial on Liability, covering a very large area of dispute, are the following:-
I will deal with each Issue but not necessarily in the order I have set out above. 28.But before I proceed to consider each complaint individually, I wish first to make clear that I accept the submission of Mr. Fok that in a case such as this, where the complaint against the Bank is serious, an appropriate high standard of proof should be applied. Therefore in deciding on whether the actions of the Bank and its officers are acceptable or not acceptable in respect of each of the complaints made, I will adopt a high standard appropriate to the seriousness of that particular complaint. INTIMIDATION 29.The Claim in Intimidation can be disposed of quickly and immediately. There is no dispute that Intimidation is a tort and that as such, it is governed by the 6 year time bar under the Limitation Ordinance. There is no escape by the Plaintiff from such time bar on the tort of Intimidation and therefore the Plaintiff’s Claim in Intimidation must fail and this was obvious at the Trial and for that reason, Intimidation was really off the menu at the Trial and certainly at the time of Final Submission. I hold that the Plaintiff fails on Intimidation. BREACH OF FIDUCIARY DUTY 30.I propose to start by a consideration of the claim for breach of Fiduciary Duty as it involves the least factual examination and the law on which is sufficiently well established and free of controversy. 31.The complaint under the head of Fiduciary Duty is that the Bank (and in this context the Bank also include Management), having taken on the role under the Power of Attorney of selling the Property as agent of the Plaintiff, owed to the Plaintiff a fiduciary duty of loyalty and that in breach of that fiduciary duty, the Bank caused the Property to be sold to its close associate, the Ho Family. The Law of Fiduciary Duty 32.The abuse of fiduciary relationship has always been a prime concern of the Chancery Court which sought to prevent a man from acting against the dictates of conscience as defined by the Chancery Court. Breach of fiduciary duty is considered in equity a form of equitable fraud. (“In Chancery the term “fraud” thus came to be used to describe what fell short of deceit, but imported breach of a duty to which equity had attached its sanction” per Nocton v Ashburton [1914] A.C. at 953) The reason for equity holding the principle so high is given by Lord Hershell in Bray v Ford [1896] A.C. 44 at page 51-2:-
And the highest standard required from a person in fiduciary relation is described thus by Cardozo J in Meinhard v Salmon (1928) 164 N.E. 545 at 546:-
33.The classic statement on fiduciary relationship is to be found in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 where Mason J. said at pages 96 to 97:-
34.In Bristol and West Building Society v. Mothew (1998) Ch. 1 Lord Millett described the core of fiduciary duty this way at page 18A:-
35.In Kao Lee & Yip v Kao Hoi Yan [2003] 3 HKLRD 296, Ma J (as he then was) said at paragraph 46:-
36.That this core obligation of not allowing the loyalty duty to be in anyway compromised by other interest was again emphasized by the Privy Council in New Zealand Netherlands Society v Kuys [1973] 1 W.L.R. 1126 where at page 1129H, Lord Wilberforce said:-
37.The existence and the scope of the fiduciary duty is of importance and they are to be ascertained by an examination of the relationship of the parties including often a contractual relationship. The well-known passage in Hospital Products of Mason, J. at page 97 is here worth repeating:-
38.Lord Browne-Wilkinson said to the same effect in Henderson v Merrett Syndicates Ltd [1995] 2 A.C. 145 at 206 A-D:-
39.The factual relationship is relevant to the existence and scope of the fiduciary duty. What is equally important is the factual circumstances bearing on the alleged breach of such fiduciary duty. While circumstances can often easily identify a breach of the Not to Profit Duty, in respect of alleged breach of the Non-Conflict Duty (using that expression of Ma J. in the Kao Lee case), it is often controversial. It is therefore necessary first to examine what is the basis of the Non-Conflict Duty. 40.Lord Upjohn in Phipps v Boardman at page 123 referred to the wider rule, said:-
Then Lord Upjohn quoted the celebrated passage of Lord Cransworth in Aberdeen Railways v Blaikie 1 Macq. 461, 471:-
and said at page 124:-
41.What then is the interest which might conflict with the duty of loyalty. Ma J. in the case of Kao Lee made it clear when he said:-
The interest which might come into conflict with the duty is not only the personal interest of the person in the fiduciary position but anyone else’s interest which might conflict with the duty. What equity is seeking to prevent is the dilution of the loyalty obligation and the purpose of the prohibition against conflict is, like all equity rules against equitable fraud, to prevent possible abuse. The two key concerns of equity are prevention of abuse and appropriate remedy to deal with abuse having taken place. 42.The test therefore of a breach of a fiduciary duty is really two fold, firstly is there an interest either of the person in the fiduciary position or of another person connected with that person in fiduciary position which will conflict with the duty and secondly will a reasonable person regard there is a real sensible possibility of conflict between such interest and the duty or in the words of Deane J. in Chan v Zacharia (1984) 154 CLR 178 “significant possibility of conflict” (page 198-9). 43.In Newgate Stud Co. v Penfold [2004] EWHC 2993 this was said about fair dealing at paragraph 242:-
44.The long history of equity’s protection of the interest of the principal/beneficiary by the rule of fiduciary duty is no more than to ensure that the loyalty owed to the principal/beneficiary by the fiduciary is in no way diminished. The insistence of the rule on non-conflict is because human nature being what it is, the rule is necessary to prevent a man from being swayed by interest thereby overcoming or even diluting his duty of loyalty. Applying the Law on Fiduciary Duty 45.The contest at the trial between the parties on the Issue of Fiduciary Duty is whether firstly there was the existence of the fiduciary duty alleged by the plaintiff and secondly whether there was a breach of such a fiduciary duty. In respect of the alleged breach of the fiduciary duty, there was a further dispute as to whether the breach was a breach of the self-dealing rule or whether it was a breach of the fair-dealing rule. 46.It is in the context of the aforesaid disputes on fiduciary duty that consideration of facts is essential and in particular, the contractual relationship of the parties in so far as such contractual relationship might have an impact on the existence and scope of the alleged fiduciary duty. 47.The first relevant contractual relationship between the parties is that of mortgagor and mortgagee. The Property was mortgaged to the Bank and under the Mortgage there is clearly the contractual power of the Bank to sell the Property itself but such sale would be by the Bank in its capacity as mortgagee and for the mortgagee’s own interest with its attendant right and liability as mortgagee selling a property. Such sale by the Bank would not be in a representative capacity. There is nothing in the Mortgage contract which precludes the Plaintiff owner from selling the Property or engaging an agent (including the Bank) to sell the Property, always of course subject to the consent of the Bank mortgagee. The subsequent de-facto arrangement (after the March 1987 meetings) whereby the Property was sold by the Bank acting as agent of the Plaintiff sat comfortably with the Mortgage. The alleged fiduciary duty of the Bank was therefore in no way inconsistent with the Mortgage contract. 48.The second relevant contractual relationship between the parties is that under relevant Restructuring Agreement, various rights and restrictions were imposed. At the hearing, neither the Bank nor Esquire pointed to any contractual provision in the Restructuring Agreements and in particular the 1986 Restructuring Agreement which is in conflict with the existence of the alleged fiduciary duty. 49.The third relevant contractual relationship between the parties is that under the Power of Attorney dated the 14th April 1987. By that Power of Attorney the Plaintiff appointed the Bank and 2nd Defendant, Management, the wholly owned subsidiary of the Bank, to be its Attorneys to do the following acts:-
50.Although the power conferred on the Bank under the Power of Attorney was in very wide terms, this does not in any way detract from the alleged fiduciary duty arising from the confidential relationship “giving “special opportunity”, referred to by Mason, J. in the Hospital case. Paragraph 1 of the Power of Attorney in fact suggests the existence of the fiduciary duty because of the following matters:-
51.It seems to me that the Power of Attorney confirms and is strong evidence of the existence of the fiduciary duty and not disaffirmative of or inconsistent with the existence of the fiduciary duty. I therefore reject the first line of defence mounted by the Bank under this Issue of Fiduciary Duty, namely that there was no fiduciary duty owed by the Bank to the Plaintiff. 52.Having established the existence of the fiduciary duty, it is then necessary to ascertain, firstly what was the scope of the fiduciary duty and secondly whether in the circumstances, the Bank breached that fiduciary duty. 53.It is common ground that at the fateful late night telephone conversation on the 12th March 1987, Mr. Gurdas on behalf of the Plaintiff agreed to the sale of the Property insisted upon by the Bank. A week later, the Plaintiff as demanded by the Bank gave the authority to Management to market the Property. 54.The Marketing Proposal dated 19th March of Management [525-6] referred to the “strong demand for investment properties of this nature” and said that Management had requested an independent valuation from Knight Frank Kan & Baillieu. The Marketing Proposal then proposed the marketing time scale with a two stage of press advertising marketing, the first stage from 13th April to 15th April (3 days) and the second stage from 22nd April to 20th May (29 days). 55.By letter dated 21st March 1987 from Esquire to the Bank, Esquire authorised Management to market the Property “at the best prices that could be obtained” and asked to be advised of the prices etc. before sale [531]. 56.The ensuing correspondence then showed that Sommerfield to be in charge of the sale, acting purportedly on behalf of the Plaintiff, the owner of the Property. The Bank in the form of Sommerfield, on behalf of Esquire the owner (not in any way in the capacity as mortgagee) was giving instructions and approval to Management on all aspects of the proposed sale. The marketing proposal of Management as well as the agency appointment of Management were accepted by Sommerfield, on behalf of Esquire. [533]. 57.The Valuation Report of Knight Frank Kan & Baillieu dated 25th March 1987 [537-9] was even more bullish than the Marketing Proposal of Management. It valued the Property at $161M and then said:-
It will be noted that the independent expert’s strong advice, that to achieve the best possible price, the Property be given full exposure in the market prior to disposal, was not eventually followed by the Bank. 58.The advertisement for the sale of the Property appeared in the newspaper in the second week of April 1987, apparently pursuant to a revised first stage of press advertisement from 7th to 15th April [564] and the Sales Brochures also started going out to selected potential buyers at around that time [636-691]. The revised marketing was to push the original marketing timetable forward by one week. 59.At the time of such sales activity, the Bank also put down quickly and strictly an attempt by Plaintiff not to sign the required Power of Attorney [577]. By letter dated 14th April 1987 [605] the Plaintiff made one last attempt to qualify the required Power of Attorney but that failed immediately and miserably. With no card left to play, the Power of Attorney was signed by Esquire on the 14th April 1987 [608-611]. 60.By letter dated 23rd April 1987 to the Bank [692-4], Management made its first report on the actions taken by Management on the proposed sale and the responses received. Two offers were received one at $130 Million and another at $158 Million and both were considered too low. It is to be noted that the mailing list [636-691] attached to the aforesaid report (“1st Report”) shows a total of 445 potential buyers to be sent the brochures and that up to 23rd April 1987, sales brochures went out up to No. 287 on that list. In other words there were at least another 150 potential buyers yet to be sent the sale brochures. 61.That 1st Report, under Action to be Taken, referred to an advertisement of half a page to be placed on the 1st of May so as to enhance exposure of the property. It further referred to a second stage of the advertising campaign which would commence on 23rd April. This date of 23rd April is of course the planned start of the second stage of press advertisement (22nd April to 20th May) set out in the Marketing Proposal of Management. 62.It would appear that as part of the second stage of press advertisement, instructions for 4 sets of advertisements in the Chinese and English papers were given by Management [724] and these were to appear on 23rd April, 27th April, 29th April, 30th April, 4th May and 5th May. 63.The Ho Family of the Hang Seng Bank which became the Purchaser of the Property was already making tentative offer for the Property as least as early as 28th April 1987, because by letter dated 29th April 1987 [723] from Management to Mr. Leung of Hang Mow Investment Co. Ltd. (Hang Mow being a property company of the Ho Family) there was reference to the letter dated 28th April 1987 (copy of which is not before the Court). In Management’s letter dated 29th April 1987 [723] to the Ho Family, Management informed the Ho Family that offer in the region of $175-180 would be seriously considered by the vendor, which in this context meant Esquire, the owner of the Property, on whose behalf both Management and the Bank were carrying the sale. 64.By letter dated 30th April 1987 to the Bank [726] Management made its second report to the Bank (“2nd Report”) on the marketing progress of the Property. First it reported that the marketing campaign was continuing and the press advertising would end on the 5th May. Secondly it reported the marketing received good response from a large number of companies. Thirdly it referred in particular to three parties out of the large number, namely the Canadian interest, Koon Wah Mirror Co. and Hang Mow Development Co. Ltd. Fourthly, it referred to a written reply by Management to the interest of Hang Mow and enclosed a copy of that written reply which was the letter dated 29th April [723]. Fifthly it referred to the further actions still to be taken by Management. 65.30th April (the date of that letter at 726) was a Thursday. There was no written reply by the Ho Family to that 29th April 1987 [723] letter of Management, according to the documents placed before the Court. Remarkably for a deal of this size and importance, there was according to the documents placed before the Court, no written offer to buy the Property by Hang Mow or by the Ho family or any company purporting to represent the Ho Family. No document of a written offer to Management of 29th or 30th April or 1st or 2nd or 3rd or 4th May was shown to the Court. There was also no explanation offered to the Court as to whether such document did exist but was no longer in the possession of the Bank, Management or the Ho Family. 66.The press advertisement according to the advertising plan of Management was to appear on the 30th April, 4th and 5th May. There is no evidence placed before the Court as to whether these advertisements in fact appeared or some of them were cancelled as result of the Bank deciding to sell to the Ho Family and if so when they were cancelled. It is however clear that the sale to the Ho Family was decided upon before the planned sales campaign had run its full course. With the last press advertising to appear on 4th and 5th May, one would normally expect that at least a week to two weeks should be given for the appropriate responses to come in, followed by discussions with the interested buyers. 67.That the Bank and the Ho Family were anxious to quickly formalize the agreed sale and not wait for the marketing sale to run its full course, was clear. By letter dated 5th of May 1987 [729-731], Messrs C. Y. Kwan for the Ho Family was writing to solicitors for the Bank, Messrs Johnson Stokes & Master setting out all the terms agreed and enclosing a cheque of $1 million and asking for the conveyancing documents and the draft Sale and Purchase Agreement. The following points appear from this C.Y. Kwan letter dated 5th May:-
68.The 5th May letter of C.Y. Kwan received a very fast response as by letter dated 6th May [731], Management was asking for instruction from Sommerfield to proceed so that Johnson Stokes and Master could be instructed to prepare the Sales and Purchase Agreement to be signed within 14 calendar days of 5th May. 69.Sommerfield responded immediately to Management’s letter dated 6th May and by its letter dated the same day (6th May) to Management [732] it gave approval to proceed. The last sentence of that letter was revealing. It reads “Please inform us if Esquire creates any problem.” which suggest that Sommerfield had feelings that the sale to the Ho Family by the Bank was not straight-forward and might encounter difficulties from Esquire. 70.That feeling of the sale to the Ho Family by the Bank was not straight-forward was confirmed by the letter of the next day, Friday dated 8th May 1987 [739-741] from Messrs. C.Y. Kwan to Messrs Johnson Stokes & Master whereby the following matters were referred to:-
71.This letter of 8th May from C.Y. Kwan is important as it shows not only that the Ho Family for the Buyer wanted to close the deal very fast but that the two persons at the very high level of Hong Kong Bank and Hang Seng Bank were so intimately involved with this special fast sale (Wrangham for the seller and Lee for the buyer) that they were specially copied in on this important letter. 72.Following upon this letter of 8th May, the sale took place in less than the 14 days proposed in the 8th May letter. Completion took place on 21st May with the formal Sales and Purchase Agreement signed on 16th May 1987. The parties signing the Agreement was Bethlehem Management Ltd. of the Purchaser and Esquire (Electronics) Ltd. as the Vendor. The almost lightning speed at which this sale of the Property (an investment property and not a unique house) by the Bank (on behalf of Esquire) to the Ho Family (Bethlehem Management Ltd. being a Ho Family company) took place was to say the least most unusual. 73.At the Trial, it was agreed that:-
74.The two questions which arose from the above factual account of the sale of the Property by the Bank on behalf of Esquire are, firstly what is the scope of the fiduciary duty and secondly what was the breach if any of the fiduciary duty. 75.So far as the scope of Fiduciary Duty owing by the Bank to Esquire is concerned, there is nothing in the factual circumstances which might suggest that the extent of the Fiduciary Duty should be less than the full duty of loyalty and good faith normally owing by an agent to the principal. The sale under the Power of Attorney was of course by the Bank not as mortgagee but in a representative capacity as I have referred to earlier in my analysis by reference to the Hospital case. I therefore do not see that the scope of fiduciary duty of loyalty and good faith owing by the Bank to Esquire is in any way diluted or less complete than would be in any other caser of an owner asking an agent to sell his property and the fact that the Bank was also the mortgagee did not in any way change or diminish the fiduciary duty. An owner was entitled to expect the agent to do the best and sell the property at the best possible price realizable, having regard to the then market condition. 76.The then market condition is most relevant in the consideration of the breach of fiduciary duty and in my view Esquire has rightly stressed the importance of the strong rising market. After the property market hit the bottom in early 1985, it started climbing at first steadily from mid 1985 to late 1986. The market then started taking off in early 1987 so that by 14th April 1987 when the Power of Attorney was given to the Bank, it was a strong rising market and was just at the late beginning of a long bull market which did not hit the peak until 1994. The expert called in for the valuation Knight Frank was of that opinion (“current bullish market sentiments” [541]) and the BI Appraisals property graphs [1/350 & 1/368 as revised] confirm that it was a strong rising market in April and May 1987 (which did not hit the peak until 1994 rising from an index of 40 in 1987 to index of 240 in 1994 for office and from 57 in 1987 to 382 in 1997 for retail premises) when the Bank made the decision abruptly to sell at $180M to the Ho Family. I accept of course the point made by Mr. Fok that one could not use hindsight and that the Bank did not know that the market would continue to rise so strongly. But on the other hand the Bank must also be under a fiduciary duty, doing the best for the principal owner of the Property not to be blind to the commercial reality which suggested that the market was very strong and gaining strength and that there was nothing to be lost by taking its full and proper time to realize the Property, specially when a buyer was practically offering to pay the asking price, a sign as I suggested to Mr. Fok in the final closing submission hearing that the asking price was set too low. 77.The relevant question on breach of fiduciary duty in this case is whether the manner, the person of the purchaser and its relation with the Bank, and the price of the sale by the Bank amount to a breach of the fiduciary duty of loyalty and good faith. The conflict of interest and duty alleged by Esquire is of two categories, the Not to Profit Duty and Non-Conflict Duty. 78.In a series of submissions by lawyers for Esquire (not noted for either their learning or good judgment or helpfulness to the Court) Esquire’s case on breach of fiduciary duty was cast unrealistically high. I will first dispose of some of the bad points before I proceed to consider what is really the heart of this part of the case. 79.The submission was repeatedly made that there should be no sale during that time in 1987 at all and that because of the rising market therefore the Bank should refrain from selling or should delay the selling in a substantial way (by say at least a few months if not longer). I of course accept that there was at that time from early 1987 a rising market which was called bullish. But once Esquire accepted that there should be a sale (albeit under pressure and/or undue influence) and signed the Power of Attorney appointing the Bank and Management to sell the Property then, the Bank could not be faulted for taking appropriate steps from April onwards to effect the appropriate sale. The real question for me is whether the Bank effected an inappropriate sale, namely with undue haste and to a close friend. 80.On the other hand, I equally reject the suggestion that because the Bank was a mortgagee therefore the Bank was entitled to sell at any time of its choosing and in any manner of its choosing as mortgagee. The fact is that the Bank did not sell as mortgagee and did not exercise its power as mortgagee to sell (which would involve having regard to the Restructuring Agreement and the Inter-Bank Agreement, nice and probably some messy questions as to whether the Bank was entitled, without notice to the other banks and without the formalities required under these Agreements, to unilaterally sell the Property at a time of its choosing and in a manner of its choosing). Not only did the Bank not wish to sell as mortgagee, but the Bank went to considerable trouble to disguise to the fellow banks in the Restructuring, that it was Esquire which wished to sell the Property and that is why the Bank instructed Esquire in its letter dated 27th March [562] on what Esquire should say to the other banks on the sale of the Property and to make no mention of the negotiations (namely Esquire’s resistance to sale). The Bank chose not to sell as mortgagee but instead for its own good reason relied on the Power of Attorney (to ensure that it had total control and could dictate the sale absolutely) and that is why the Power of Attorney was required from Esquire. The sale therefore by the Bank was not pursuant to the mortgagee power but in its representative capacity as agent for Esquire, with its attendant fiduciary duty. 81.It was suggested by Counsel for Esquire that there was a breach of self-dealing rule in that under highly technical Listing Rules, the Ho Family company, Bethlehem Management Ltd. could be said to be either an associate party or a connected party of the Bank and therefore the sale by the Bank was to a party connected with the Bank. The self-dealing rule is to prohibit a person in a fiduciary position from himself dealing in the transaction and thereby gain an advantage. The agent therefore cannot buy himself or through a company in which he was interested because he stands thereby to profit from it. There is no evidence that the Bank itself has any interest in Bethlehem Management Ltd. This is simply the private company of the Ho Family, which was of course a junior partner in the Hang Seng Bank with the Bank being the senior partner. Such partnership was of long history dating to the time when the Ho Family sold its controlling interest in Hang Seng Bank to the Bank. The relationship between the Bank and the Ho Family was admitted to be very close. Their partnership in the Hang Seng Bank and the fact that the Ho Family members as well as the senior management of the Bank have been sitting on the Board of Hang Seng Bank was merely evidence of such close association. But in my view, that does not mean there was a breach of the self-dealing rule as the Bank was not the buyer and could not in any shape or form be said to have a personal financial interest in the buyer. I regret that the Plaintiff had made the elaborate but unnecessary argument set out in Chapter 15 of the Closing Submissions of the Plaintiff’s legal team relating to breach of self-dealing rule and in my view this submission was made based on a misplaced understanding of the true function of the self-dealing rule. 82.The real complaint which can be made against the Bank is the breach of the fair-dealing rule or what I prefer to call the Breach of the Non-Conflict Duty. Mr. Fok seeks to dilute this Non-Conflict Duty by suggesting that it is necessary for the agent or trustee to have some personal interest in the purchase itself and asked the question of what interest did the agent have in the transaction. But as I have attempted to show earlier, what is important is the non-dilution of the duty by the agent and a conflict with some other person’s interest will result in a dilution of the duty of loyalty and in that situation, there is a breach of the fiduciary duty. The use of the words “or anyone else’s interest” in the passage cited earlier in the Kao Lee case and “or for the benefit of a third person” in the passage cited earlier in the Mothew case must not be overlooked. If Mr. Fok is correct in his submission, then it does not matter how much the loyalty duty is affected or diluted, an agent can sell to his own sister or wife. 83.The core complaint in this case can be summarized in my view by one short statement, namely a senior partner has no business selling his principal’s property to his junior partner in a private sale. The partners can be partners in a law firm or a business or a bank such as the Hang Seng Bank. Selling in a private sale to a junior partner by a senior partner who is selling as agent is no better than the agent selling his principal’s property to the agent’s family, whether wife, children or sister. All such sales give rise to a real sensible possibility of conflict between the interest of the agent’s partner or family and the duty of the agent to his principal. Any objective third party will regard such sale as not appropriate. 84.The unusualness or inappropriateness of the sale by the Bank to the Ho Family was in fact not unknown to the Bank. What is in my view extraordinary in this whole business of the Bank selling as agent, this very valuable asset (belonging to a principal) in a rising market to a junior partner is the speed with which the parties wished to close the deal (obviously seen to a be a most beneficial deal for the Ho Family) so that the Bank did not even bother to allow the market to absorb the second round of press advertisements and Sales Brochures which Management in its letter dated 30th April said would be done. There was no evidence placed before the Court whether this in fact took place, namely the sending of the Sales Brochures to the 150 prospective buyers and the appearing of the press advertisement on the 4th and 5th May. If they were cancelled, then even a worse inference must be drawn suggesting that no further marketing was to be done because the Bank did not wish any other prospective buyer to appear on the scene, for in such case, the Bank might be forced to sell to someone else at a higher price or the Ho Family would be forced to pay a higher price than $180 Million. 85.Mr. Fok would like me to read nothing sinister or unusual into the unseemly haste to close the purchase. I regret I must retain my good common sense and commercial sense. The unseemly haste and the copying of the letter of 8th May by C.Y. Kwan to Mr. Wrangham and Mr. Q.W, Lee for me is the most powerful evidence that the two partners (as Seller’s agent and Buyer) knew that this good deal for the Ho Family had to be closed quickly, at the expense of course of Esquire. The great risk of not closing the deal very quickly was obvious. Not only would there be the strong possibility of potential buyers from the second round of marketing making a higher bid but there was considerable risk that existing potential buyer or even new buyer (who got to hear about the Property) would come in to bid against the Ho Family and thereby either possibly depriving the Ho Family of buying this good Property or at least forcing the Ho Family into paying a much higher price for the Property. A fast closing of the deal will preclude in a bullish rising market, all possibility of a higher price being realized for the Property. The conflict which was not only real but was acute was therefore resolved against the principal by the Bank and the fiduciary duty of the Bank of total loyalty was regrettably sacrificed. This for me is a most unhappy page in the history of the Bank. I hold and I find that there was a breach of the fiduciary duty by the Bank in that it sold the Property to the Ho Family in the way it did. The unseemly haste with which the Bank sold the Property to the Ho Family was merely an aspect of the inappropriate sale by the Bank to the Ho Family. 86.Esquire was ignorant throughout of the breach of the fiduciary duty because the Bank which was under a duty to disclose to Esquire that it was selling the Property to its junior partner (the buyer Bethlehem Mangement Ltd. being the family company of its junior partner, the Ho Family) and that the sale to the junior partner was done at undue haste. Appropriate and full disclosure was necessary so that Esquire might give its informed consent. No such disclosure was made which thereby made the breach of fiduciary duty complete. In Finn on Fiduciary Obligations at page 242 this was said:-
As will be seen later this failure to make the material and full disclosure was a fact material to Esquire’s right of action which was concealed by the Bank from Esquire in circumstances where the Bank knew that the selling of the Property to Bethlehem was inappropriate and when the breach of fiduciary duty was such that it was unlikely to be discovered for some time (in the absence of material and full disclosure by the Bank to Esquire). Contractual Waiver or Release 87.The waiver and release term and condition in the Bank’s facility letters dated 25th September 1992 [849] and 31st January 1994 [854] provides:-
88.The aforesaid Waiver Clause is a standard Hong Kong Bank waiver term and condition to be found in the Bank’s facility letters and is not specifically written for any misdeed by the Bank in respect of the sale of the Property. The narrow question in respect of the Waiver defence is whether the Waiver Clause is sufficiently wide as to cover the present complaint of breach of fiduciary duty. 89.It is firstly to be noticed that there was no reference in that Waiver Clause to either the Power of Attorney of 14th April 1987 or to the sale of the Property. The subject matter of the Waiver Clause or purported release is credit facilities or financial accommodation. The scope of the purported release is any action taken or omitted to be taken by the Bank in relation to the subject matter. 90.The short answer to the Waiver Clause defence is that neither the subject matter nor the scope of the purported release is sufficiently wide or clear as to operate upon the present claim for breach of fiduciary duty. The Waiver Clause being an exclusion clause must be construed strictly and I accept therefore the submission of Esquire that the Bank falls far short of satisfying this Court that the present claim for breach of fiduciary duty is barred by the Waiver Clause. 91.Putting the waiver defence in the form of waiver by election or estoppel by representation will not assist the Bank in this defence. There was, simply in my view, no clear representation or wavier that Esquire was giving up or would not be pursuing its claim for breach of fiduciary duty arising out of the sale of the Property. Limitation Defence 92.The breach of fiduciary duty took place in May 1987 and the Writ in this Action was issued on 3rd November 1994 and therefore more than 6 years after the alleged breach. The Bank relies on section 4 of the Limitation Ordinance as its limitation defence. The Plaintiff disputes that the statutory limitation defence applies and contends further that it will be unjust to apply it in the circumstances because Esquire throughout was under the thumb of the Bank which had concealed the breach. In addition to the above contentions, Esquire has a formidable reply to the limitation defence, namely that even if limitation can and should be applied by analogy, limitation time is extended because of concealment. 93.I will first consider the Plaintiff’s ”knockout” reply to the limitation defence, namely that limitation time is postponed under section 26 of the Ordinance because of concealment by the Bank. 94.Section 26 reads as follows:-
95.In Cave v Robinson Jarvis [2003] 1 AC 384 Lord Millett said of the equivalent of our Section 26 thus at page 394E:-
96.Lord Scott on the other hand expressed his view on the statutory provision somewhat differently thus at page 403C:-
97.In the more recent judgment of Williams v Fanshaw Porter [2004] 1 WLR 3185, the Court of Appeal threw further light on the proper construction of that section 32(1) (the equivalent of our section 26). Park J. said at page 3193G this:-
98.In an elaborate analysis, Mance L.J. described at paragraph 37 on page 3201, the two possible interpretations of the mental element required under section 32(1)(b): a more limited reading of deliberate concealment of a fact in circumstances where the defendant realises that the fact has some relevance to an actual or potential claim against him and a wider reading where any deliberate concealment should carry the consequence attributed by section 32(1)(b), even though the defendant did not realise that the fact concealed had any relevance to any actual or potential wrong doing. 99.The questions therefore under Section 26 are, firstly what are the facts which are material to the right of action which had been concealed and secondly was the concealment of these facts deliberate or alternatively was the commission of the breach of duty deliberate in circumstances in which it was unlikely to be discovered for some time. 100.Applying the above law to the facts of the case, I find as a fact that the following facts are material to the right of action (breach of fiduciary duty by the Bank):-
101.I find as a fact the Bank knew that Esquire did not know the above Facts (1)(3)(4) above. I find further as a fact that the Bank knew that the sale of the Property to Bethlehem Management Ltd. was inappropriate and was in conflict with its duty of loyalty and good faith to its principal Esquire. I find that the Bank deliberately did not reveal to Esquire Facts (1)(3)(4) above, even though it was the Bank’s duty to disclose the aforesaid facts to Esquire and to obtain its informed consent. Finally I find as a fact that the Bank knew that the breach of fiduciary duty in circumstances described earlier was unlikely to be discovered for some time and this was in fact the reason for the Bank’s concealment. Subsequent events in fact confirmed that Esquire did not have any idea of what had happened or that its trusted Bank had committed breach of fiduciary duty. It was entirely by a fortuitous accident that Mr. Ratnam read about Bethlehem Management Ltd. in 1994 and thereafter made the connection with the Ho Family and the Bank’s connection to the Ho Family. Subsequent discovery brought out more of Facts (1)(2)(3)(4). 102.My conclusion is therefore that section 26 of the Limitation Ordinance has been established by the Plaintiff. Having decided that the limitation defence fails in any event, because of the concealment, it becomes unnecessary to decide the difficult legal question of the applicability of section 4(7), namely applying limitation by analogy. 103.If I had not decided the section 26 concealment issue in favour of the Plaintiff, I would have deferred the matter of application of section 4(7) to the Trial on Remedy and Relief. Elaborate argument had been dressed to the Court on the impact of the learned judgment of Cia de Seguros Imperio v. Heath (REBX) Ltd [2001] 1 WLR 112 and Gwembe Valley Development Co. Ltd. v. Koshy [2004] WTLR 97. The claim for breach of fiduciary duty is not a claim in contract or tort, not even in substance and therefore the question is whether the claim comes within section 4(7) and whether the Court should exercise its discretion to apply the statute by analogy. 104.The claim which was held to be time-barred by analogy in the Seguos Imperior case was a claim for equitable damages or equitable compensation whereas the claim in Gwembe was a claim for an account. The application of limitation by analogy is a matter of great technical complexity requiring the full understanding of not only the equitable remedy or relief sought but also the history of equitable jurisdiction and its exercise and its relationship with the exercise of common law remedy and relief (see for example the 2001 Hochelaga Lecture by Professor Burrows on “Fusing Common Law and Equity: Remedies, Restitution and Reform). The learned article on Limitation by William Swadling (Chapter 11) in Breach of Trust at page 319 to 351 and the textbook by Brunyate on Limitation of Actions in Equity (Cambridge University Press, 1929) show the extent of the learning in this area, not to speak of Pomeroy on Equity Jurisprudence 3rd edition and other textbooks referred to by Megarry VC at page 249 of Tito v Waddell (No. 2) [1977] 1 Ch. 106 (see also 250A). As relief and remedy has been hived off from this Trial, I have found it impossible, in justice to the parties, to decide on this aspect of the defence of the application of limitation by analogy, which in my judgment should be decided (if necessary) together with the decision on relief and remedy. 105.In the circumstances, I conclude the Bank is not entitled to the limitation defence under section 4(7) and it follows that on the claim for breach of fiduciary duty, I find it established. ECONOMIC DURESS 106.Economic Duress is the second complaint of the Plaintiff. Economic Duress is a serious complaint against a major bank and therefore this requires the most careful scrutiny. I will first deal with what I understand to be the law on economic duress before I go on to consider the application of the law. The Law of Economic Duress 107.Although duress was known to the common law from very early days, economic duress was recognized not so very long ago. In a series of cases starting with Barton v Armstrong [1976] A.C. 104, through The Siboen & The Sibotre [1976] 1 Lloyd’s Rep. 293, North Ocean Shipping v Hyundai Co. [1979] 1 Q.B. 705, The Universal Sentinel [1983] 1 A.C. 366, The Evia Luck [1992] 2 A.C. 152, the analytical judgment of Huyton v Cremer [1999] 1 Lloyd’s Rep. 620 to the latest case of Attorney-General v R. [2003] E.M.L.R. 24, the law of economic duress was developed. The important textbooks of Chitty on Contract, 28th edition (2001) Volume 1 Ch. 7, Goff & Jones on The Law of Restitution, 5th edition (2002) Chapter 10, Meagher Gummow & Lehane on Equity, Doctrines & Remedies, 4th edition Chapter 12, Hadley on Restitution (2001) 185, Virgo on Restitution (1999) Chapter 9, Burrows on Restitution (2002) Chapter 5, Mason on Restitution in Australia (1995) 153 and learned articles such as Finn on Essays on Restitution (1990) Chapter 5: Compulsion in Commercial Dealings, Sindone on Doctrine of Economic Duress Parts 1 and 2 (1996) Australian Bar Review, all threw light on this development of the law on economic duress.. 108.My understanding of the present law of economic duress is that there are three basic requirements to establish economic duress:-
This is the way (with slight modification of the 1st Requirement) that Goff & Jones at page 317 has formulated the principle of economic duress and it seems to me that it is a good and workable formulation. There are of course many other ways to state the requirements or essentials or principle of economic duress but it seems to me that the three questions above encompass all the essential ingredients necessary to constitute economic duress. Illegitimate Pressure 109.The most notorious difficult problem in economic duress is to ascertain what is illegitimate pressure amounting to compulsion [1st Requirement”]. This is where a close reading of the authorities is required. 110.Barton v Armstrong [1976] A.C. 104 is a case largely turning on the 2nd Requirement. At page 121D, this was said by Lord Wilberforce and Lord Simon for the Dissent, on the 1st Requirement:-
Then at page 121F, their Lordships said:-
111.In Pao On v Lau Yiu Long [1980] A.C. 635 the Privy Council was at the pioneer stage of developing the English law of economic duress. This was said by Lord Scarman at page 635-6:-
It will be seen that subsequent decisions analysed the elements of economic duress (coercion of will which vitiates consent) somewhat differently. 112.The Universal Sentinel [1983] A.C. 367 is important not only because it is one of the few authorities where the plaintiff victim was seeking to recover a benefit extracted from him but because both Lord Diplock and Lord Scarman expressed their views on the various important aspects relating to economic duress. 113.Lord Diplock first pointed out at page 377 D & E that the novel aspect of The Universal Sentinel is that there the action was brought by ITF not in tort, but as money had and received. He explained at page 385B-C why economic duress is not a tort per se but gave rise to the remedy for restitution of property or money exacted under such duress and he said that:-
114.Lord Scarman at page 400 said:-
115.Then at page 401 Lord Scarman made the following well-known statement:
116.In Crescendo Management v Westpac (1988) 19 NSWLR at page 46A, McHugh JA said this about illegitimate pressure:-
117.The Evia Luck [1992] 2 A.C. 152 is of particular relevance late when I come to consider the restitutional character of economic duress. There the plaintiff shipowner made a restitutional claim against ITF (independently of the claim in tort, which was lost at first instance and not pursued on appeal). On the 1st and 2nd Requirements, Lord Goff said at page 165G:
118.Lord Goff went on to consider the conflict of laws aspect of the case and it was in relation to such consideration that Lord Goff observed the restitutional character of economic duress. He said at page 169B:-
119.Kirby, P. sitting as President of the Court of Appeal said at page 106E of Equiticorp Finance v Bank of New Zealand (1993) 32 NSWLR 50 in his dissenting judgment that:-
120.Then at page 107B-D, his reservation to economic duress was expressed thus:-
121.Steyn, J. (as he then was) shared the same reservation on the general applicability of economic duress to purely commercial relations in CTT Cash and Carry v Gallaher [1994] 4 AER 714 and at page 719d he ventured the view that:-
122.I regard the judgment of Mance, J. (as he then was) in Huyton v Cremer [1999] 1 Lloyd’s Rep. 620 as a significant decision because it contained much perceptive analysis of the law of economic duress. He discussed mala fides or the lack of belief in the position adopted in applying pressure. This is directly related to the quality assessment of whether the pressure applied is illegitimate an example of which is when it is known by the victim that the pressure is illegitimate and also known by the oppressor as being illegitimate. The more both parties appreciate that the pressure is illegitimate, the greater is the compulsion and oppression and more unjust is the succumbing by the victim when both the oppressor and the victim knew that the victim had no practical option or choice but to surrender to the victimisation or economic duress. 123.The Judge after elaborating on the nature of the 2nd Requirement at page 636, turned at page 637-8 to the question of illegitimate pressure (1st Requirement) and the question of significant cause (2nd Requirement) and the inter-relationship between the 1st Requirement and 2nd Requirement. After referring at page 635 to the relevance of bona fides and to the relevance of the reasonableness of the position adopted by the alleged oppressor to the legitimacy of the pressure, he said:-
Then he said towards the end of the page 636 that the description by Lord Goff in non absolute terms in The Evia Luck:-
124.At page 638, the Judge said:-
125.The textbook writers on Economic Duress have not given us much illumination on what analytically should be considered the essential elements constituting illegitimate pressure. In Mason & Carter on Restitution Law in Australia (1995) at paragraph 534 it was said:-
126.At paragraph 542 Mason & Carter the following factors were suggested as being helpful to focus a claim of economic duress:-
127.The very elaborate two part article of The Doctrine of Economic Duress by Sindone in (1996) 14 Australian Bar Review 34 and 114 did not substantially assist in our understanding of where is the dividing line between the illegitimate pressure and legitimate pressure (specially of the extreme commercial kind). 128.In both Chitty on Contract, 28th edition, Chapter 7 and Goff & Jones on The Law of Restitution, 6th edition, Chapter 10, examples of illegitimate pressures were given but there was no cogent or analytical criteria or description or principle of the essential elements constituting illegitimate pressure. 129.In my view, what caused the law on economic duress to make little progress over the last 100 years, as Kirby J. put it in the Equiticorp, is that the law had focused too much on the result of the pressure (e.g. whether it vitiates the will or gives no choice) rather than to concentrate on analyzing the quality of the oppressor’s action, the condition of the oppressor and the condition of the victim and the impact of the oppressor’s action on the victim’s condition, producing thereby a result which a civilized society considers unacceptable and against the conscience of the Court. 130.What seems to me important is therefore to examine:-
It seems to me that when critically so examined, a more coherent set of principles will emerge as to guide the determination of whether the action in question was illegitimate pressure or merely acceptable commercial pressure. 131.In the significant case of Huyton, Mance J. (as he then was) referred to the “Court’s assessment of the qualitative impact of the illegitimate pressure objectively assessed”. I would prefer to reformulate the critical assessment a little bit differently and to concentrate on the objective qualitative assessment of the action (normally it would be the pressure/threat) and then together with the other two factors (condition of the oppressor and condition of the victim) so as to be able to arrive objectively at a qualitative assessment of the impact of these three factors on the victim and on the victim’s action (generally speaking surrender). 132.I say surrender because generally that is the result of the pressure, whether legitimate or illegitimate. It is not the quality of the result which informs us whether it is economic duress but it is the quality of the pressure which should provide the key. The more outrageous the pressure or threat, the more likely such pressure/threat is illegitimate. A reference to the decided cases will tell us that pressure/threat such as murder (Barton case) and ITF blacking of ships (Universal Sentinel and Evia Luck) are considered illegitimate. 133.Often threat is the constituent of the oppressor’s action which the Court should examine. This is because unlike unconscionable conduct (conduct of the stronger party over the weaker party) or undue influence (quality of assent of the weaker party under undue influence) [see Commercial Bank of Australia v Amadio (1983) 151 CLR 447 at 461 per Mason, J and at 474 per Deane, J], threat as a form of undue pressure is normally the basis of economic duress. Undue pressure is applied because there would otherwise be resistance to the demand of the oppressor and resistance must be overcome by undue pressure. But threat, whether express or implied, is not the only form of undue pressure to qualify as illegitimate pressure. Deliberate misstatement, deliberate concealment or omission such as to create undue pressure on the victim can all qualify as illegitimate pressure. It is essentially the quality of the pressure knowingly applied improperly by the oppressor on the victim which is important. When the pressure is applied mala fide or without genuine belief in its validity or unconscionably, such pressure is often illegitimate. Undue pressure applied improperly (to overcome resistance to demand) is therefore for me the hallmark of economic duress and the quality of undue pressure knowingly applied (to overcome resistance) should be the centre of focus to ascertain whether there has been economic duress. Translated into common parlance, it is the character of “the stick” that is required to be closely examined, and not the character of “the carrot”. 134.In the light of the aforesaid considerations, it seems to me that it is possible to delineate certain types of situations which will give high indicia (not conclusive) of economic duress. A tentative list could include the following:-
135.The law on the 2nd Requirement (pressure is significant cause of victim’s action) and the law on the 3rd Requirement (pressure gave victim no real choice) is each sufficiently clear. Having regard to the facts of this case, it is unlikely that the law on the 2nd Requirement and the law on the 3rd Requirement will give rise to any disagreement between the parties on these two Requirements. The major dispute is in respect of the legal scope of the 1st Requirement and whether the facts of this case comes within the proper legal scope of the 1st Requirement. Application of the Law: Did the Bank exert Economic Duress 136.At the Trial, whether economic duress was exerted by the Bank was rightly focused on the occasion of the meetings in March 1987 (“March Meetings”) and that night’s telephone calls. Esquire concentrated on one principal pressure/threat and reference was also made to two subsidiary pressure/threats (which were not pleaded) made by Sommerfield at the March Meetings. The principal pressure/threat was that the Bank insisted (at the March Meetings and in the night telephone call with Gurdas) that Esquire was owing $30 Million Overcharge (Interest Overcharge and Escrow Payment Overpayment) and threatened that Bank would make demand including this $30 Million Overcharge and the Bank would liquidate/finish off Esquire as result. The two subsidiary pressure/threats were that the Bank would add on to the total debt of Esquire the extra $12 Million written-off debt of BA and that the Bank threatened to liquate the home of Arjan. For ease of reference I will refer to these three threats as respectively, “the $30 Million Overcharge Threat”, “the BA Extra Debt Threat” and “the Arjan Home Threat”. 137.On Esquire claim of economic duress, this court is only concerned with the $30 Million Overcharge Threat and not with the BA Extra Debt Threat or the Arjan Home Threat. But in order to properly appreciate the significance and the effect of the $30 Million Overcharge Threat, it is necessary to first recount the history relating to all these 3 threats. $30 Million Overcharge Threat 138.The 30 Million Overcharge Threat is really a shorthand for threats in respect of two separate overcharge, one overcharge of the Hardcore Frozen Debt (also referred to Hardcore Frozen Account) of some $15 Million in relation to interest (hereinafter referred to as “Interest Overcharge”) and one overcharge of the Hardcore Frozen Debt or Account of $15 Million in respect of repayment from the Escrow Account which should have been credited to the Hardcore Frozen Account from money received by the Bank from the Escrow Account (hereinafter referred to as “Escrow Payment Overcharge”). Together they make up a total of roughly $30 Million and for convenience this two overcharge items had been referred to collectively as the $30 Million Overcharge. At the Trial, Mr. Fok suggested that it was inappropriate to call it $30 Million Overcharge and that it might be more appropriately called $30 Million Over-statement or $30 Million Over-claim. In my view, there is nothing wrong with the label Overcharge because the Hardcore Frozen Account was charged already with the wrong figures which Bank was refusing to correct or even to acknowledge were wrong and to be corrected. 139.The exact figures of the Interest Overcharge $14,883,815.85 and of the Escrow Payment Overcharge $15,423,632.77 can be seen in the Internal Memo of the Bank [496-8] dated 15th December 1986 from Wheeler, Deputy Manager of the Bank’s Mongkok Office to Sommerfield, the Account Manager of the Credit Control at the Head office. This Memo was sent as result of the internal inquiry made by the Bank to ascertain exactly how much Esquire was overcharged by the Bank. (The Memo also made reference to the sum of $15,423,632.77 being transferred from Hardcore Frozen Debt to Working Account but that was without the knowledge and approval of Esquire and the other banks, nor did that make it less of an overcharge by the Bank of the Hardcore Frozen Debt under the Escrow Payment Overcharge, specially when the Bank did not see fit to tell Esquire of this Memo and its contents.) The internal inquiry started back in 1985 by the Bank but assumed urgency when Esquire complained in October 1986 that there was a $30 Million Overcharge [409 and 411]. 140.There was the Interest Overcharge by the Bank in the Hardcore Frozen Debt because under the Restructuring Agreement no interest was supposed to be charged for that relevant period and this Interest Overcharge was recognized by the Bank as early as August 1985 [270]. There was the Escrow Payment Overcharge because total repayment of some $15 Million was made by Esquire from the Escrow Account but the Bank having initially credited these repayments to the Hardcore Frozen Account then unilaterally and without knowledge or consent of Esquire debited the Hardcore Frozen Account $15 Million (moving the sum to the Working Account) and therefore failed to properly reduce the debt in that Hardcore Frozen Account. In the letter dated 18th October 1986 [423] from Esquire to the Bank addressed to Wallis (the predecessor of Sommerfield in Credit Control of the Bank) both the Interest Overcharge and the Escrow Payment Overcharge were explained to the Bank. 141.The Mongkok Branch was involved with this internal inquiry and Esquire’s complaint of the two Overcharges, because the Overcharges were effected at the Mongkok Branch where the accounts were maintained. As a result of the examination by Wallis on the aforesaid complaint letter of Esquire, he wrote an Internal Memo dated 23rd October 1986 [429-431] to Wheeler of Mongkok Branch. On Interest Overcharge he wrote:
On the Escrow Repayment Overcharge he wrote:-
142.The reference to refund was of course a figure of speech, because what was complained was that the Hardcore Frozen Account showed a debt which was $30 Million too high, and ought to be $158 Million instead of $188 Million. This Memo was copied also to the boss of Wallis, J. Diccon Pullen. Pullen at page 431 wrote these important words:-
Pullen did not give evidence at the Trial but what he said in the Memo about “a special negotiating giveaway to press Gurdas” will turn out, by reference to subsequent events, to be central to the whole question of illegitimate pressure. I read Pullen to mean, by his words a special negotiating giveaway as a means or weapon to press Gurdas to sell. That faced with the legal necessity to correct and refund to the Hardcore Frozen Account, the Interest Overcharge and the Escrow Repayment Overcharge, the Bank was not to admit or reveal to Esquire the true position but the Bank was to deliberately misstate or misrepresent to Esquire that the Bank was entitled to the $30M Overcharge and on that basis the Bank was to use the non-entitled $30 Million Overcharge as negotiation giveaway in exerting pressure on Gurdas to agree to the sale of the Property. It seems to me that when this important manuscript note is viewed with the benefit of subsequent documents and events, my above reading of the Memo is a cogent and fair reading and will lead to my eventual conclusion that Pullen was the dark hand which moved this economic duress business. Certainly by this Memo on page 431 Pullen had laid down the road-map for the Bank as to the substance and the manner of the pressure which should be applied on Esquire to force Esquire to sell the Property. Subsequent events would show that this road-map was followed by Sommerfield. The important question is whether what Pullen had devised and what Sommerfield executed was illegitimate as having crossed the line, for a banker and by the Bank. The BA Extra Debt Threat 143.In the Memo dated 23rd October there was a reference [430] to the Bank of America debt and linking that to the $30 Million Overcharge. What happened was that Bank of America was bought out in 1985 by the Bank as Bank of America wanted out of the Restructuring and was threatening trouble with the Restructuring, which was against the Bank’s interest as the Bank at that time was hugely overexposed with the Esquire indebtedness. The Bank wanted Esquire, to work hard under the Restructuring, so as to pay off the debt owing by Esquire. The original debt of $22 Million owing by Esquire to the Bank of America was largely written off by Bank of America accepting a payment of $8 Million from the Bank. The buyout by the Bank from the Bank of America was at 36% of the original debt. The Bank however wished to appear to the other creditors as having bought out the Bank of America at a lower price of 20% [see Notes of Meeting with other banks on 28th May 1985 at page 222]. The reason for this is so that if and when necessary the Bank could negotiate to buy out the other banks also at 20% or lower. 144.As the Bank only paid $8 Million for a debt which was originally $22 Million, the question arose in 1985 immediately after the buy-out as to how the Bank would like to book that debt. In the Internal Memo dated 24th April 1985 [190], Hamilton of Credit Operations was asking Budd of Credit Control about how to book the BA debt. He said that “if the debt of $14 Million is to be forgiven the entries would simply be the HK$8M loan and payment to Bank of America.” This was what happened because the books of the Bank in respect of Esquire thereafter showed the debt of BA owing by Esquire at $8 Million and not at $22 Million (if $14 Million was not to be forgiven to Esquire). In the Internal Memo dated 7th August 1985 [247], the BA debt of Esquire to the Bank was shown at $8 Million not $22 Million. The same was also shown in Memo dated 23rd August 1985 [265], Memo dated 27th February 1986 [347]. 145.In a letter dated 12th August 1986 from Wallis to Esquire, the account of the debt of Esquire was stated to be $8 Million under Frozen Debt Account (“004”) in respect of the BA Debt, and not $22 Million [384]. This was therefore the clearest statement from the Bank to Esquire which was relied upon by Esquire that the BA Debt due from Esquire to the Bank was $8 Million. It was simply a confirmation by the Bank to Esquire that it had agreed to the request by Esquire that the benefit of the buy-out be passed to Esquire as referred to by Esquire in its letter to the Bank dated 24th October 1986 [432]. There could be no going back by the Bank from this position openly stated to Esquire by the Bank. 146.Esquire therefore was rightly surprised when the Bank raised for the first time in October 1986 the argument that the BA Debt was not $8 Million but another $14 Million more. This was at the time when the Bank realized that it had to repay some $30 Million to Esquire on the $30 Million Overcharge or at least the $15 Million of the Interest Overcharge. The letter dated 21st October 1986 [428] was the first time that the Bank raised the argument that the BA Debt was not $8 Million but $22-3 Million and it coincided exactly with the time when the Bank found that it had no answer to the $30 Million Overcharge. The BA Extra Debt of $12 Million was an invention created by the Bank to defend the hopeless position of $30 Million Overcharge. 147.That there was in reality no substance to this BA Extra Debt can be seen from what happened after Esquire surrendered and agreed to sell. There was not even any write-off of the BA Extra Debt (which the Bank threatened earlier to use as set-off). There was nothing to write off as in the books of the Bank it was never taken on. The Restructuring Agreement of April 1987 made no mention whatsoever of the BA Extra Debt or its write-off (see Clause 2.05 on page 698 and Schedule 3 on page 702). The Arjan Home Threat 148.Arjan the brother of Gurdas owned a flat which was mortgaged to the Bank. That mortgage was part of a number of securities held by the Bank, but not connected to the loan by the Bank to Esquire or to the mortgage of the Property. It is a minor security in terms of value but it has the strategic value of giving the Bank a great deal of leverage in forcing Esquire and in particular Gurdas to do what the Bank desired should be done. A forced taking away of Arjan flat by itself made no sense and was not expressly within, or permitted by, the Restructuring Agreement. A threat to liquidate Arjan’s flat is therefore a resort by the Bank to an inappropriate or illegitimate method. Sommerfield regarded the Arjan flat as of great strategic value because of its psychological impact on the will of Esquire to resist demand of the Bank. In Sommerfield’s handover instructions to his successor dated 12th May 1987 (“Sommerfield Handover Instructions”), he singled out the Arjan flat as being of great leverage value and boasted how he succeeded with pressing Gurdas to agree to sell “after I told his negotiating team I would make demand and start “picking off” properties starting with Arjan’s flat” [744]. It will be noted that this important matter was not recorded in the March meeting Notes of Sommerfield at [509-510, 518-9] and its absence can only be explained by the appreciation of Sommerfield that such action in respect of Arjan’s flat constituted illegitimate pressure. 149.The scene is now almost set for the Bank to increase the pressure to force Esquire to sell. But before I do that, I should first describe the condition of Esquire, followed by a description of the condition of the Bank. Condition of Esquire/Protective Relationship & Esquire Witnesses 150.Esquire which was once a strong growing company went downhill steadily after the purchase of the Property. The Restructuring for a company when debts were owing to many banks was like putting the company into a straight jacket. The Restructuring Agreements took all freedom away from Esquire. There was very little ability to move because all actions were dictated and had to be approved by the Lead Bank which in this case was the Bank. In the case of a Restructuring such as this in Hong Kong, with the Lead Bank being the Hong Kong and Shanghai Bank, there was realistically not even a possibility of finding alternative finance to replace the Lead Bank in the middle of a restructuring. Not only were trading and other financial activities dictated and restricted by the Bank but there was a system of tight control placed so that money could only go in and out of designated controlled special accounts. Accountants like Peats were there to regularly monitor the activities. Targets had to be met and regular minimum sums had to be paid and the overall control was handled by the special department of Credit Control. Esquire was not only in hospital as a patient (“nursed back to health” in the words of Sommerfield in his Witness Statement para. 6) but was for a long time including the critical period under our inquiry at the Trial, in the quasi Intensive Care Unit of Credit Control to make sure it would not expire. Esquire therefore in 1986/1987 was not only weak but uniquely weak and under the financial care of the Bank and was dependant on the Bank. This was much more of a case of a bank given confidential trust because of “combination of status, goodwill and knowledge” in the Lloyd’s Bank v Bundy sense. Esquire was in this case, so dependant on the Bank that it was wholly vulnerable to all adverse actions taken by the Bank, its carer. 151.It may be convenient at this stage also to indicate my view of the key players of Esquire (and later of the Bank) who gave evidence at the Trial. I do it in the context of a Trial taking place some 17 years after the events in 1987 with all the handicap such lapse of time entails. But in my view, the considerable documentation (even though some such as the critical important Meeting Notes and Phone Call Notes of Sommerfield of 12th March, are not complete or accurate records e.g.:-
put before the Court and the context of the differences between the parties, renders the assessment of evidence, in this very unique case, less a matter of assessing whether someone could or could not recollect the particular details of a conversation than the overall assessment of the character of the persons involved and in the light of such assessment, to make determination of what truly happened. And the character of persons, specially someone like Sommerfield or Ratnam or Gurdas, does not change with the years. 152.I start with Mr. Ratnam as a witness. For me, he was undoubtedly, an honest and reliable witness. He was an outside man who was called in to assist Esquire when Esquire got into serious difficulty and he was a man approved by the Bank. I find his evidence totally credible if not, time and again, much too generous to the Bank, specially when he was pressed in cross-examination. Whenever there is any difference between his evidence and that of Sommerfield, I have no doubt I prefer the evidence of Ratnam. 153.Gurdas the big boss and proprietor of Esquire also gave evidence at the Trial. Gurdas was accused of being completely unethical. I do not find this to be the case. He could be mistaken on the minor detail for example on the matter of the sequence of telephone calls that night of 12th March. He could be graphic sometimes as for example in his describing Sommerfield in the March telephone call thrusting a shotgun’s barrel down the mouth of Gurdas when Gurdas was still trying to resist the sale of the Property. But on the whole, I accept his evidence and I believe what he said largely represented what happened. The evidence of Gurdas is of course important, specially as to his resistance and his surrender, because it was his resistance to sale which must be overcome and not that of Ratnam who was after all merely a hired-hand (albeit a senior hand). There is no doubt that Gurdas could be vocal and could also be persistent, as demonstrated when he subsequently made complaint representations about the sale of the Property to Eldon and to Emily Lau. But this perhaps illustrates that he genuinely believed Esquire was wronged by the Bank (Robertson said he “whined” in 1988 about being forced to sell) and that what he complained at the time and what he subsequently told the Court, was the truth. Condition of the Bank & Bank’s Witnesses 154.The Bank on the other hand was not only strong but mighty. It had been for a long long time the premier bank in Hong Kong and was also the quasi-Government Bank. In Hong Kong, there could be few position more influential or powerful or prestigious than being Chairman of the Hong Kong Bank. No business or businessman dared to cross the Hong Kong Bank and even fellow bankers in Hong Kong had to give away to this top bank. 155.Vis-à-vis Esquire, the Bank was not only all powerful but almost god-like in 1986/87. Esquire being financially sick required the financial IC Unit care of Credit Control. The Bank was effectively Esquire’s only lifeline and it was unrealistic to think that Esquire could ever find another bank or group of banks to replace the lifeline of the Bank. Without the Bank, Esquire would simply sink and die. 156.The god-like position of the Bank of course did not come unearned. The Bank was well organized in its structure. In terms of the power structure of the Bank in its dealings with the affairs of Esquire, the document Exhibit P1 entitled Names and Ranks (hereinafter referred to as “the Bank’s Ranks”) shows the two divisions in the Bank dealing with Esquire. On the Mongkok Branch side, the relevant persons were Wheeler (Deputy Manager, Mongkok) and his boss Bamford (District Manager, Mongkok). On the Head Office side, there was Wallis and his successor Sommerfield (Account Manger, CCD). Then above Account Manger, CCD there was Robertson and his successor Budd as Assistant Manager, CCD. Pullen as Manager, CCD was above them and was in a critical position as he was the link to Selway-Swift the Assistant Manger, Corporate Banking. Above Selway-Swift there was the Wrangham the General Manager. 157.I should also at this stage indicate my assessment of the two officers of the Bank who gave evidence at the Trial. Sommerfield was an American banker who joined the Bank quite young and he was a junior officer at the relevant time. His shrewdness and intelligence came through not only in the documents he wrote at the time but throughout the Trial. He gave his evidence carefully, cleverly, calmly and well thought-out. He ranks amongst one of the most formidable witnesses that I have ever seen in all my 35 years in the law. He is a man who thinks hard about problems and thinks far ahead. The subtlety of his mind and of his character can only start to be appreciated, the longer one is exposed to him, to his words on paper and to him in person giving evidence. Where it is critical, his evidence must be scrutinized carefully and often when necessary, rejected. The style and the contents of the Sommerfield Handover Instructions reveal a great deal about the character and quality of Sommerfield and his mind. This and his contemporaneous notes (often not wholly reliable as with the March meetings Notes and the Night Calls Note) are to be contrasted with the low-key and often calm mild-manner evidence he gave orally in Court. I regret that in the critical areas in this case, his oral evidence cannot be accepted. His intelligence and shrewdness makes his ruthlessness even more formidable. Unfortunately Sommerfield did not put his intelligence to the beneficial use of morality. His amorality which he advanced with his superior intelligence and subtle character made his threats that much more formidable, intimidating and deadly. Where his evidence conflicts with that of Gurdas and Ratnam, I prefer the evidence of Esquire’s witnesses. 158.Selway-Swift is a totally different kind of witness and person. He was of course a senior and important banker and even in 1987 he was already a very experienced and influential banker in Hong Kong. He is capable and he is clever, but he does not have the critical intelligence or the subtlety of Sommerfield and he was made of rougher stuff. He was more blunt and under pressure he gave more away. For me he was the ugly face of capitalism and I regret that much of what he said was not acceptable to me, whether in terms of what happened or in terms of what he represented to the Court as legitimate or normal behaviour for a banker in Hong Kong. 159.Pullen did not give evidence nor did Wrangham. There was no Pullen answer to Interrogatories (see paragrtaph 11-12 of 2nd Affidavit of Susan Sayers sworn on 29th October 2003 [251]). Both of them played important roles in this saga and in the case of Pullen very significant role. What I say therefore in this judgment about them could only be from inferences fairly drawn from all the documents and the surrounding circumstances. I am not sure either of them came out well. Pullen as I will say later is the Machiavellian who behind the scene was amorally dictating the course of action for young Sommerfield who was the executioner. “Special giveaway” is the euphemism used by Pullen to describe deliberately telling a lie to the other side and then using that lie as the pressure to force the other side to surrender. The technique is to say to Esquire I will forgive your sin if you will sell, when the other side had never sinned in the first place. Wrangham allowed himself to be involved in a sale of the Property to a junior partner of the Bank which like his subordinates he must have known was quite inappropriate. The Making of the Threats, the Quality of the Threats and its effect on Esquire 160.Having set out the conditions of the parties and the subject matter of the principal threat and the two subsidiary threats, it is now possible to proceed with describing the events from late 1986 which led to the exercise of the pressure by the Bank on Esquire to sell the Property. 161.In a meeting of the 28th October 1986 between the Bank (Wallis) and Esquire (Gurdas), Wallis of the Bank (who was handing over to Sommerfield) admitted that Esquire might be right about the Interest Overcharge and that the Bank was still investigating about the Escrow Overcharge [435]. 162.Pursuant to the “special negotiation giveaway” road-map of Pullen on 23rd October, the Bank wrote on 28th October [438] to Esquire giving notice that if necessary the Bank would offset the BA Extra Debt against the $30 Million Overcharge. This was written when the Bank knew that there was no valid basis to the $30 Million Overcharge or at the very least to the Interest Overcharge in the $30 Million Overcharge. Instead of directly admitting that the error on the $30 Million Overcharge, the Bank said that it was still investigating. 163.In the meeting between Sommerfield and Gurdas on 25th November 1986, the question of the $30 Million Overcharge and the BA Extra Debt were directly raised by Gurdas who wanted the Bank to acknowledge that there was the $30 Million Overcharge and that there was no BA Extra Debt. In the Memo of Sommerfield [476] Sommerfield described the correction of the $30 Million Overcharge and the BA Extra Debt as euphemistically “forgiveness”. If there was no sin, there was nothing to forgive. Sin, like the $30 Million Overcharge and the BA Extra Debt, was invented by the Bank to provide a scope for forcing Esquire to agree to the Bank’s demand. 164.It is to be noted that Sommerfield had fully followed the road-map of Pullen and under option 2, Sommerfield said “Gurdas could agree to sell. We might offer some concessions on the money issues in return.” [476] The “giveaway” card of Pullen was already played by Sommerfield in his first meeting as Account Manager. From them on, it was merely the increasing of the pressure by the Bank until Esquire put up their hands in surrender. 165.The next Memo of Sommerfield to the higher ups in the Bank dated 25th November 1986 [484] is important. I will set out the relevant parts as follows:-
166.Pullen wrote in his own hand [484] in answer to the above Memo the following:-
167.As can be seen at each step of the way, Pullen was the dark hand which guided Sommerfield forward and in his written Note, Pullen was giving instructions to Sommerfield, not only to press Gurdas to sell but in so pressing, to assert that the Bank was entitled to the $42 Million ($30 Million Overcharge and $12 Million for BA Extra Debt) and then use the $30 Million Overcharge to negotiate for Gurdas’ agreement to sell and to give as little away of that $30 Million Overcharge as possible. 168.The Memo dated 15th December 1986 [496-7] which I have referred to earlier (with figures of Interest Overcharge and Escrow Payment Overcharge) was sent by Wheeler of Mongkok Branch to Sommerfield. This Memo made it clear that Esquire was right both on the Interest Overcharge as well as on the Escrow Overcharge. Sommerfield however with knowledge of this Memo did not inform Esquire that the Bank would be correcting the $30 Million Overcharge mistakes or at least the Interest Overcharge mistake or even that the Bank has received the result of investigation on the $30 Million Overcharge. Sommerfield simply buried that Memo. 169.In the letter to Esquire from Sommerfield dated 28th January 1987 no mention was made about the Bank knowing that Esquire was correct about the $30 Million Overcharge or at least about the Interest Overcharge or about the result of investigation. 170.On 26th February 1987, Pullen had lunch with Gurdas according to the handwritten note of Pullen on [503] at which meeting apparently Gurdas was still asking for the “forgiveness” presumably referring to $30 Million Overcharge correction whereas Pullen wanted the property to be sold. Then sinisterly, Pullen wrote “Suggest this suitable situation for Oliner to come up with deal”. The “deal” was of course sale of property in exchange for “forgiveness” or Bank’s agreeing to some part or all of $30 Million Overcharge being corrected or “forgiven”. Oliner was an American lawyer who was supposed to be working for Esquire but who the Bank regarded as being a lawyer who could be manipulated by the Bank and probably at important moments might have divided loyalty and might speak favourably of the Bank’s proposals. At the Trial, Oliner was labeled by Esquire of being an enemy disguised as a foreign lawyer, planted by the Bank inside Esquire. Oliner was in fact made a defendant in an abortive High Court Action brought in 1994 by Esquire (see Exhibit D2). Although I would not go as far as agreeing with Esquire that Oliner was deliberately planted by the Bank inside Esquire, I believe that the Bank did have a close relationship with Oliner and certainly had not been harmed in any way by Oliner sitting on the other side of the table. 171.> The shrewd idea of Oliner coming up with the deal proposed by Pullen in his Memo was in fact implemented as Oliner was at the March meetings sitting across the table from the Bank. As again, Pullen succeeded in manipulating for events to move forward according to his road-map. 172.Gurdas left Hong Kong sometime before the 12th March Meeting and he was therefore absent at that Meeting on 12th March 1987. There were altogether three Meetings and two night telephone calls. There was consensus between the parties that the 1st Meeting took place in the morning of the Thursday the 12th of March [509-510]. The second meeting also took place on Thursday (12th March) but in the afternoon [518-519]. There were then two telephone calls that night of 12th March, one between Ratnam and Sommerfield and one between Sommerfield and Gurdas calling from India [511] when Gurdas surrendered. Then finally there was the 3rd meeting on Monday the 16th of March [520-521] when the concession to sell was formally made. 173.I accept the evidence of Gurdas that his departure from Hong Kong was well known to the Bank but the Bank did not tell him that it was going to insist on the sale of the Building at the 12th March meeting. Esquire suggested that the Bank deliberately chose to spring on the insistence of the Sale of the Property when Gurdas was away to put maximum pressure on Esquire and Gurdas, whereas the Bank said that it was quite plain to Esquire that at the planned 12th March Meeting the sale was to be the topic of discussion and not just future restructuring and that Gurdas deliberately stayed away. 174.I must say that I prefer Esquire’s version. In terms of sophistication, I have no doubt forward-thinking and the craftiness were all in the Bank’s camp and in the person of Sommerfield and Pullen. Ratnam was straight and Gurdas was too rough and emotional to have the sort of cunning to deliberately stay away when the crucial meeting to decide on the sale would be held in his absence. I read Gurdas to be the sort of person who would want to be there to resist as much as he could and in fact his objection to the sale was well known to Pullen to Sommerfield which made it even more tempting for the Bank to hold the March meeting in his absence. In my view, it is ridiculous to think as Sommerfield said that Gurdas would keep away deliberately in the hope that it might give him more time to think about his response or as an indication that Gurdas did not take this concern of the Bank seriously. As events turned out, the Bank gained from Gurdas’ absence which suggest that there is more substance in Esquire’s contention (not withstanding what Sommerfield stated in his Memo at 518 (“G left … at exactly the time he should have stayed”). I find as a fact that the Bank knowing of Gurdas’ planned business trip, scheduled the meeting on the 12th March when the Bank could spring on Ratnam the insistence for sale and execute the road-map of Pullen. It worked brilliantly because Ratnam could never resist like Gurdas. Ratnam is a calm and quiet gentleman who would cave in much more easily than Gurdas. In my judgment, 12th March meeting was planned by the Bank to give itself the maximum leverage and it did. 175.The 12th March morning meeting was attended by Khan of Arthur Young, Oliner the American lawyer and Ratnam on the Esquire side while the Bank’s side was represented by Robertson, Assistant Manager of CCD, Carruthers (who was going to take over from Sommerfield) and Sommerfield both of CCD. The subject matter of the Meeting was the restructuring of the debt. The figure presented by Esquire for the restructuring was $86 Million for Property Loan (no dispute), $125 Million for Trading Lines (no dispute) and $159 Million for Hardcore Frozen Debt (inclusive of BA Debt of $8 Million). Whereas the Bank stated that the Hardcore Frozen Debt of Esquire was $188 Million or $201 Million if inclusive of BA Debt. The difference between the $201 Million and $159 Million is $42 Million which is made up of $30 Million Overcharge and $12 Million for Extra BA Debt. In other words, the Bank was stating and representing that under the Hardcore Frozen Debt, $30 Million Overcharge was rightly owing by Esquire (and therefore not to be corrected) and that in addition the Bank also stated and represented that under the Hardcore Frozen Debt, the BA Debt of Esquire to the Bank was not $8 Million but $20 Million, thereby creating an extra $12/13 Million to make up the $201 Million of Sommerfield’s stated Hardcore Frozen Debt. Sommerfield’s Note of the Meeting then showed the following:-
176.The statement or representation made by the Bank that under the Hardcore Frozen Debt, $30 Million Overcharge was correctly owing by Esquire to the Bank and that in addition another some $12 Million was also correctly owing in respect of the Extra BA Debt were clearly deliberate misstatements. The Bank went beyond what was commercially acceptable when it deliberately made misstatement and misrepresentation. The Bank did not care about truth or legality. It was making its stand on both the $30 Million Overcharge and the $12 Million BA Extra Debt ($201M). The Bank did not and could not have a genuine and bona fide belief in the accuracy or correctness of the statement of the Hardcore Frozen Debt being $201 Million. 177.The Hardcore Frozen Debt of $201 Million of Sommerfield included the $15 Million Interest Overcharge. In relation to the Interest Overcharge, such statement and representation of $201 Million being the Hardcore Frozen Debt was both deliberately incorrect and wrong and known by the Bank to be so. Sommerfield admitted that he knew it was wrong (Transcript Day 25 page 89). In the contemporaneous notes of the Bank, there were repeated written admissions by the Bank that the Bank had overcharged the Hardcore Frozen Account the $15 Million Interest Overcharge [270, 429-431, 435, 484, 496-7, 529]. Even in his Memo dated 16th March, Sommerfield said at 513:-
Knowing of the incorrectness of the Interest Overcharge by the Bank, Sommerfield still saw fit to make the statement and representation of the correctness of the $30 Million Overcharge (“our hardcore ….. $201M) [509]. In relation to at least the Interest Overcharge, Selway-Swift also admitted in evidence that it was dishonest. But he not only condoned it, he approved of the misrepresentation so as to provide a basis for the “special giveaway”. 178.The only reason such statement of correctness of $30 Million Overcharge was made was for the purpose of forcing Esquire to agree to the sale of the Property and “the carrot” offered by the Bank was to “forgive” this imaginary debt of $30 Million. The Demand made was clearly to sell and the pressure/threat used was otherwise the Bank was to maintain that Esquire owed the $30 Million in the Hardcore Frozen Debt which both the Bank and Esquire knew that Esquire did not owe to the Bank. It is a paradox of this case and the devil’s work that “the stick” of $30 Million Overcharge is also “the carrot” of forgiveness of $30 Million Overcharge. 179.The morning meeting of 12th March was adjourned to enable Esquire to take instructions from Gurdas who was away. But it was adjourned with only breathing space given by Sommerfield to Ratnam, as Sommerfield scheduled the second meeting to be held that same afternoon. There was no necessity for such urgency except to apply more pressure. By insisting on the meeting that same afternoon, Sommerfield kept the pressure up. 180.The second meeting took place the same afternoon of Thursday the 12th March with only Ratnam and Oliner attending for Esquire and Carruthers and Sommerfield for the Bank. Ratnam informed the Bank that Gurdas did not want to sell whereas the Bank not only insisted that the Property must be sold but said no time was to be given, not even to try to do a re-finance. When the Esquire team came back after a 15 minute break repeating the Gurdas further instructions of no sale, the impasse prompted Sommerfield to issue the threat, namely either agreement to sell within 24 hours or else the Bank would make the full demand on all loans and sell everything and called the Restructuring into default and liquidate Esquire. 181.The evidence of Ratnam at the Trial is that he was shivering in his pants [T7/140] when the threat and Demand were made by Sommerfield and he was genuinely fearful. I believe him. I also believe that the word such as “finish off” or “liquidate” must have been used by Sommerfield. It is totally in keeping with the character of Sommerfield, whose style of business operation was revealed in his contemporaneous Memos. Ratnam did not know Sommerfield or the Bank or Pullen as we have now come to know them. Sommerfield was there to execute the “road-map” of Pullen and this “road-map” involved unfortunately the creation of a fictional $42 Million ($30 Million Overcharge plus $12 Million BA Extra Debt), a fictional $30 Million ($30 Million Overcharge), a fictional $15 Million (Interest Overcharge) and linking them with the threat of liquidation on a total of $201 Million Hardcore Frozen Debt stated by the Bank. The Bank let it be known to Esquire that the Bank was prepared to go through with that threat which I believe, as Ratnam did, it was not an empty threat. Sommerfield I find also made the threat about Arjan’s home being taken away. As Sommerfield admitted in his evidence [TRS 16/66], the sale of the Property was the “deal point” and all his pressure and effort at the meeting was directed towards achieving the “deal” of Esquire agreeing to sell. It is to be noticed that the same word “deal” was used by Pullen in his manuscript February Lunch Note [503]. 182.Sommerfield’s Note of that 2nd Meeting at [519] reads:-
Making demand is of course referring to making demand for repayment and repayment meant in this context repayment on all debts which for the Bank was debt on trading line, the Property Loan, and the $201 Million on the Hardcore Frozen Debt which included the $30 Million Overcharge. That is of course how making demand was understood by Gurdas when Sommerfield referred to it on the 12th March and how Sommerfield wanted it to be understood, notwithstanding the admission of Ratnam that Sommerfield did not mention the figure of $201 Million when he said he would issue the demand. Sommerfield certainly did not at the Meetings and in his telephone conversation that night with Gurdas confined his threatened demand to any specific debt, such as for example the Property Loan. This would defeat the whole purpose of the exercise as he was there to secure the agreement to sell and it was only by the threat of $30 Million Overcharge which he was using as “the stick” that he could maximize his pressure. To refer to $201 Million for Hardcore Frozen Debt and then to switch to a threatened demand confined to the Property Loan would make no sense. Further, in the context of threatened liquidation and finish off of Esquire as uttered by Sommerfield (which I find established as a fact), a threat of a demand for a limited sum (a fraction of the total amounts outstanding) was not what was understood at that time by Esquire (in particular by Gurdas) or what was said and conveyed by Sommerfield. The Bank could of course stagger the demands just as it could stagger the properties it would repossess as indicated in the Arajan flat boast of Sommerfield’s Handover Instructions. But the threat made by Sommerfield and understood by Esquire was that demands were to cover all loans. For me this scenario which Mr. Fok painted of Sommerfield’s threatened demand confined to only the Property Loan is not real. In my assessment, Sommerfield was a master in what he did. He used the word “escalate” in this Memo. It is the vocabulary of someone who had thought hard about pressure and was prepared to maximize pressure until the demand to sell was met. I have no doubt, despite the repeated protestation of no wrong-doing by Sommerfield, that he did apply the illegitimate pressure alleged by Esquire, knowing that he was not justified in relying on the figure of $201 Million Hardcore Frozen Debt (which included the $30 Million Overcharge) and with knowledge that with such unfair pressure, Gurdas will eventually succumb which was what happened. 183.The Note of Sommerfield of that 2nd Meeting showed that there were many stops to that meeting, first when Ratnam and Oliner left the room for 15 minutes and then 20 minutes after the meeting ended Ratnam asked Sommerfield to return to ask for grace period until Monday as they were not sure if they could contact Gurdas within the 24 hours allowed by Sommerfield. Sommerfield’s reply shows the quality of the man and the way he could turn the screw tighter and tighter. He said he would issue the demand (for repayment) tomorrow (meaning Friday 13th) but would take no further action (meaning liquidation) until Monday the 16th. This arrangement gave the company time to contact Gurdas while the Bank “loaded our gun” in the language of Sommerfield. The methodical way that Sommerfield turned a lie of the $201 Million Hardcore owing ($30 Million Overcharge plus $12 Million BA Extra Debt) into a threat of liquidation based on those debts was calculated to have the maximum psychological effect and when coupled with the 24 hours deadline in the absence of Gurdas caused not only panic in the hearts of Ratnam and Gurdas but such fear that compelled Ratnam and Gurdas not even to wait until the next morning to respond to the final threat of Sommerfield. 184.That same Thursday night of the 12th March Ratnam telephoned Sommerfield at 10 p.m. to inform him that Gurdas would agree to sell. Gurda telephoned Sommerfield from India late that night and at the end of that long telephone conversation with Sommerfield, after resistance failed, agreed to sell. Sommerfield liked to underplay that telephone call with Gurdas (both in his Night Calls Note and in his evidence) but I believe what Gurdas said about the call and it must have been an unpleasant call. It is to be noticed that the capitulation was total as there was not even any attempt by Gurdas in his telephone call to negotiate the amount of the forgiveness of the $42 Million which the Bank said was still due. 185.It is only through careful analysis which I have attempted to carry out above, that the very high quality of the pressure applied can be fully understood and appreciated. It was the devil’s work and commands what I can only call awe and horror for the total lack of morality or legality. It was pressure calculated to achieve not only the objective of Gurdas agreeing to sell but also the objective of the Bank giving the least away (per Pullen). Imagine what would have happened if Sommerfield was honest with Esquire and acknowledged that the total Hardcore Frozen Debt including the BA Debt was $159 Million and that the Bank wanted Esquire to sell the Property. It is perfectly possible then Esquire would refuse to sell or would require, if pressure of liquidation is applied, a forgiveness by the Bank of say $15 Million to $25 Million (say combination of front-end and back-end) from the $159 Million Hardcore Frozen Debt. The difference in the outcome even if Esquire agreed to sell would have been very different but Sommerfield would then be doing it the legitimate way with fair commercial pressure. But that would be outside the road-map of Pullen. 186.It was argued by Mr. Fok that the Bank in any event had the right both under the Mortgage and the Restructuring Agreements to sell the Property and that therefore either no economic duress was applied or that even if it was applied it has no consequence. I have considerable doubt that the Bank had on the 12th March 1987 an absolute right to sell the Property without reference to the other Lenders. If the other banks had been properly informed I believe that the Bank would find it very difficult to carry out the sale in the manner it did to Bethlehem. But assuming that the Bank did have such a right to sell, the important part to remember is that the Bank for good reason preferred not to use that right but instead wished to persuade Esquire to agree to sell and the Bank had been thinking long and hard about how to “convince” Gurdas to agree to sell. As Sommerfield said in his Memo dated 16th March [512], there were only two options open to the Bank, Bank enter into possession and sell as mortgagee or Bank persuade Esquire to sell. A sale by a mortgagee is a forced sale and would always be less attractive to a buyer and generally speaking would also fetch a lower price as well as much more fraught with problems. All the internal Bank memoranda in 1985 and 1986 about persuading Esquire to sell suggest that the Bank preferred that Esquire agreed to a sale. That is why the Bank’s senior officers went to so much trouble from late 1986 onwards to plan this “Convince” Guardas to sell. I therefore reject any notion that because the Bank had the power of sale under the Mortgage therefore it did not use economic duress. 187.If the Bank did use economic duress, then notwithstanding that it also had the right to sell under the Mortgage (but did not exercise it), there must be a liability in law for such economic duress. What the Bank and Sommerfield did was in my view, way outside what was permissible or ordinary commercial pressure. It was wrongful, inequitable, against the conscience and not bona fide. It was what in chancery court called fraud or equitable fraud and this was particularly objectionable when Esquire was under the Bank’s protection and care, being in a vulnerable position. This is where the Court of equity would always extend its protection to prevent abuse by an oppressor and when the oppressor is as high as the Bank, the necessity for protection is more, not less. 188.What Sommerfield did was to follow a policy of CCD headed by Selfway-Swift who was well aware of what was being done as he had admitted in his Interrogatory [1/268] but unfortunately which he seemed to forget when he was giving oral evidence. The misrepresentation in relation to the $30 Million Overcharge Threat was part of a larger pattern of standard of behaviour of CCD. Selway-Swift said that it was acceptable and almost everyday practice for banker to make misrepresentations to fellow bankers. I do not accept that is factually correct. For me the statement is so outrageous that I will not accept it unless a large number of bankers in Hong Kong swear to me (which I believe is unlikely ever to happen) that this is so and even then, this does not make it right. Bankers like all professionals are supposed to hold to certain standards. They are likely to be breaking the law, if they make deliberate misstatements, whether to fellow bankers or to customers or to third parties. To customers, it is even worse, for reasons too obvious to elaborate. I believe that this aspect of the evidence of Selway-Swift is the maverick statement of a banker and all the more regrettable coming from a former senior banker. This is exactly the sort of conduct which is answered by the expression “against the conscience” of the court. The Court’s duty in such circumstances, is to ensure that no victim of such conduct will go away without remedy. 189.It was argued by Mr. Fok that the Bank was entitled to make demand on the trading line or the Property loan and that was what caused fear in the heart of Esquire and made Esquire agreed to the sale. But that was not what happened. The Bank did not confine itself only to a threat of cutting the trading line or making demand only on the Property loan. The Bank relied on the $201 Million Hardcore Frozen Debt knowing how unfair and outrageous it was and knowing that was how it was perceived by Esquire. This is what made pressure worse in the sense discussed by Mance J. in the Huyton case and made the pressure more illegitimate. 190.It was also argued by Mr. Fok that the lack of protest and the positive steps taken by Esquire, after the March Meetings and agreement to sell suggests that there was no illegitimate pressure. Strictly it is not entirely accurate to say that Esquire did not protest. The file note of Robertson dated 24th November 1988 certainly indicated that Gurdas “whined” about the Bank “forcing” him to sell [834]. Furthermore, the so-called no protest or positive actions seems to ignore the reality of the wholly vulnerable position Esquire was in. The Bank had shown its hand in what it was capable of doing. Esquire was dependent on the Bank both for continued restructuring as well as for continued granting of trading line. Esquire was in no position to protest on the illegitimate sale forced upon Esquire or hoped to achieve anything by protesting at that stage. It was after all still under the influence and control of the Bank. It was dependent on the Bank for the continued support in many ways, including the continuation of trading lines and the entering into renewed restructuring in 1987 and in 1988. Sommerfield said of the sale “the method and price of which are to be dictated by” the Bank. The Bank did dictate totally and completely the sale. 191.In fact, subsequent events showed the risk involved in protest. In 1994 as soon as Esquire raised with Emily Lau the propriety of the sale to the Ho Family, the Bank took action to demand repayment of all loans which was then followed by liquidation of Esquire. The reprisal by the Bank was swift and deadly. The Bank demonstrated that Esquire lived at “the grace” of the Bank. I therefore do not regard any lack of protest as indication that there was no economic duress. In fact, the silence in the circumstances could be said to strengthen the case of economic duress. I therefore conclude that on the 1st Requirement that illegitimate pressure amounting to compulsion was applied by the Bank, which led to the sale of the Property. 192.As for the 2nd Requirement of Economic Duress, I am of the judgment, having regard to the fact that Gurdas resisted for a long time Bank’s wish to have the Property sold) that but for the illegitimate pressure, Esquire would not have agreed to the sale of the Property. Mr. Fok however argued that it was really the threat of the Bank that it would exercise its power of sale as mortgagee which caused Gurdas to agree to the sale and not the pressure or threat relating to the $30 Million Overcharge. But in my view, this was not really what happened. I do not accept after the Bank had tried for so long that the agreement of sale was achieved merely by the Bank threatening that it would use its power of sale as mortgagee. The Bank always had that power and could require Gurdas to agree to sell by threatening to use that power of the mortgagee and this was well known to Gurdas. The Bank chose for a long time not to use that route for a number of reasons. In my view, although at the back of the mind of everyone in the March meetings that this would be the nuclear weapon which the Bank could employ, what caused the resistance of Gurdas to crumble was the unreasonable, intimidating and deliberately capricious manner of Sommerfield’s illegitimate pressure, namely the $30 Million Overcharge Threat. 193.If the March Meetings had taken a different form, with the Bank coming out openly that there was at least no $15 Million Interest Overcharge but the Bank still wanted a sale and with a threat of using the power of Mortgagee, I am not sure that the outcome would be the same. There would certainly be no same night surrender. In my view, what has substantially caused even someone as robust as Gurdas (not the mild Ratnam, the employee in this context) to crumble is to see the Bank in the position of Sommerfield taking up the extreme, unreasonable and intimidatingly capricious position of insisting on $15 Million Interest Overcharge. Mr. Fok submitted that there was no evidence or cogent evidence that the $30 Million Overcharge was causative of the surrender. The evidence of Gurdas which I accept contradicts that submission. Mr. Gurdas on Day 9 at Transcript page 111 after the purported admission relied upon by Mr. Fok in his final submission at line 15-16, then said the following (line 17-25):-
Notwithstanding the very firm submissions on this made to me by the Bank, I am satisfied that the illegitimate pressure applied by the Bank was a significant cause of Esquire’s agreement to sell the Property. 194.The 3rd Requirement of Economic Duress is that the illegitimate pressure applied did not give the innocent party any real choice. Again the facts speak for themselves. In the controlled and protected position of Esquire and given the deadline of 24 hours, there was really nothing Esquire could do but to surrender. There was no realistic possibility of finding an alternative finance to take over from the Bank. Sommerfield had played his cards so well that all exits were blocked and there was no realistic alternative open to Esquire except to agree to the demand of the Bank. In this respect, I do not regard liquidation as an acceptable alternative for Esquire. It is like accepting the bullet in the case of duress of person. 195.For all the above reasons, I am of the judgment that economic duress by the Bank has been established. Waiver of Economic Duress 196.Earlier I have given my reasons why the contractual waiver and release term did not provide any defence to the claim of Esquire in breach of fiduciary duty. In my view, the contractual waiver and release term equally provides no defence to the claim in Economic Duress. Economic Duress or any breach of duty is nowhere referred to in the Waiver clause and it would indeed be against all principle, to construe the Waiver Clause as being sufficiently wide to cover the claim in Economic Duress. 197.Equally there was no representation in the Waiver Clause that Esquire would not make any claim for Economic Duress in compelling Esquire to sell the Property. There could be no basis for any estoppel. Is Economic Duress a Cause of Action other than Tort and is it time barred (if tort) 198.It is clear having carefully re-read the papers and in particular the Opening Skeleton of Mr. Fok and Mr. Fung dated 19th February 2004 (where there was only reference to limitation in relation to Fiduciary Duty and in relation to economic duress being a tort) and the Final Skeleton Argument of Mr. Fok and Mr. Fung dated 5th March 2004 (limitation defence confined to economic duress if tort, para. 9 and para. 120) that the limitation defence of the Defendant in respect of the claim for Economic Duress was limited to the defence that if it was a tort such cause of action in tort was barred under section 4(1) of the Ordinance. 199.The way that the limitation defence was run gave rise to the three related questions under this Heading. The three questions are:-
There is no disagreement between the parties that if economic duress is only a tort, then it is time barred under section 4(1) of the Ordinance. The real question is whether economic duress is anything other than tort or in the words of Mr. Fok, does it give rise to any cause of action at all. Question (2) if properly answered will also cover Question (1). 200.What then is economic duress and what causes of action does it give rise to? In the leading text book Clerk & Lindsell on Torts, 18th edition, the Contents page shows that there was Chapter 24 on Economic Torts but it only includes Intimation and not economic duress. There was in fact no specific section in Clerk and Linsell dealing with economic duress. In Halsbury’s Laws of England, 4th edition, economic duress is considered under the heading of Restitution in Volume 40(2) and not in the volume under Tort. 201.There is of course no dispute that duress in its very early days was a creation of common law although very limited in its scope, which explains the remarks of many judges in many of the cited cases referring to “duress at common law” (e,g. per Lord Hoffman in Attorney-General v R). 202.What is important is whether the early form of duress when it subsequently became economic duress took on a different colour and if so what colour. The origin of how the court came to give remedy for duress is illuminating in informing us of what is the real nature of economic duress. In Barton v Armstrong [1976] A.C. 104, Lord Cross said this at page 118D-E”:-
203.It has been well recognized that suits for remedy arising out of duress had been entertained by the equity jurisdiction. Meager Gummow & Lehane on Equity, 4th edition said this at page 5:-
204.In Barton v Armstrong, Lord Wilberforce and Lord Simon said this at page 121D:-
The juxtaposition of fraud, abuse of relation of confidence, undue influence, duress or coercion suggest that these are all matters enjoying the protection of the equity court or rather which the equity court generally considers as various species of fraud known to equity. 205.Lord Goff in The Evia Luck at page 169B referred to:
206.Professor Cope in his book on Duress, Undue Influence and Unconscionable Bargains even suggested at page 61 thus:-
Professor Phang in a learned 2003 article in the Restitutional Law Review made a similar suggestion. Professor Birks in his article “On the Nature of Undue Influence” in Beatson & Friedmann on Good Faith and Fault in Contract Law, however argued that undue influence should be subsumed and treated as duress. The difference between duress and undue influence was in fact explained in Mutual Finance Ltd. v Wetton [1937] 2 K.B. 389. The diversity of academic views simply highlights the closeness of the two rules, economic duress and undue influence. 207.In Royal Bank of Scotland v. Etridge (No.2) [2002] 2 AC 773 Lord Nichollas said at 795C:-
208.In my opinion, equity does regard economic duress as being similar to undue influence (being essentially unconscionable conduct) and would hold both to be within the province of equity’s protection. 209.Economic Duress as a breach of duty giving rise to need for remedy is dealt with in all the leading textbooks on Restitution:-
210.That a claim in restitution can often be made to recover for benefit conferred on the defendant as a result of economic duress is seen repeatedly in all cases, such as The Universal Sentinel. Indeed in this case, it might well be possible for Esquire to argue that the proceeds of sale of the Property which the Defendant pocketed was money had and received of the Plaintiff which is recoverable in restitution. That is of course a matter to be decided when it comes to Remedies and Reliefs. What is indisputable is that economic duress is now a permanent feature on the landscape of restitution and equity. This being the case, the argument of the Bank seems to be that either economic duress, if anything at all, gives rise exclusively to a cause of action in tort or alternatively that economic duress gives rise to no cause of action and therefore being incapable to be the subject matter of any remedy. 211.So far as the second possible argument is concerned, I will say that it is not tenable today in 2005, having regard to the development of the law and I will dignify such argument if any, with the following quotation from the judgment of Eveleigh J in B & S Contracts and Design Ltd. v Victor Green Publications Ltd. [1984] ICR 419 at page 423-4:
212.In relation to the first argument, the matter is not totally virgin territory. In The Universal Sentinel, Lord Diplock recognized that economic duress was not a tort per se. He said at page 385B:-
Lord Scarman however held that economic duress was actionable as a tort, if it caused damage or loss [400]. 213.In The Evia Luck, Lord Goff said this:-
214.It seems to me therefore that even if a conduct might be tortuous, the claim made for relief arising out of economic duress does not have to be necessarily framed in tort and often is not. I have earlier come to the conclusion that I found established economic duress. The Remedies and Reliefs arising out of this still has to be determined. It is not my understanding that the claim of Economic Duress in this Action was made in tort. Even if some of conduct of the Bank was tortuous, there was also a breach of duty in the form of Economic Duress, for which the Court has the power and the duty to grant the appropriate Remedy, not based on tort. I find that there is no substance in this defence. UNDUE INFLUENCE The Law on Undue Influence 215.Going to first principles:-
This was said by Lord Nicholls in Royal Bank of Scotland v Etridge ( No. 2) [2002] 2 AC 773 at 794G-795C. 216.In the light of chancery court’s concern that acts or relationship amounting to undue influence must not be permitted (being against the conscience of the court) it is only natural that undue influence has always been considered as constructive fraud by equity, in the same way as taking advantage of weakness or necessity, catching bargains with expectant heirs or breach of fiduciary duty. (see page 674 of Pettit on Equity and Law of Trusts and ) 217.The claim advanced by Esquire in relation to the Sale of the Property is stated to be actual undue influence or what is called Class 1 Undue Influence (but see Note 56 at page 205 of Snell’s Equity, 31st ed. on classfication of actual undue influence) and not Class 2A or 2B Undue Influence, involving presumption. 218.The best modern summary of actual undue influence can be found at page 967E of the Judgment of Slade L.J. in Bank of Credit & Commerce v Aboody [1989] 1 Q.B. 923:-
The correctness of the above statement has not been affected by the overruling by Pitt, on the part of the Aboody judgment dealing with necessity to show manifest disadvantage. In the recent case of Bank of China v Wong King Sing [2002] 1 HKLRD 358 Ma J (as he then was) applied the above principle stated in Aboody. 219.In the case of actual undue influence, it is not necessary for the claimant to establish manifest disadvantage. Lord Browne-Wilkinson said in CIBC Mortgages v Pitt [1994] 1 A.C. 200 at page 209B this:-
220.A much more succinct statement of what is required for a successful claim of actual undue influence is to be found in the Judgment in Langton v Langton [1995] 3 F.C.R. 521 where at page 536C the Judge said:-
221.In Attorney General v R, Lord Hoffman said at page 508 that:-
222.In Allcard this was said by Lindley, L.J. at page 181:-
Applying the Law on Undue Influence 223.Was there actual undue influence by the Bank on Esquire which caused the Property to be sold. I start first with the what has always been accepted and emphasized in Goldworthy v Brickell [1987] 1 Ch 378 at 405 that relation of banker and customer is not one which ordinarily gives rise to the presumption of undue influence. But this is not a case of presumption of undue influence. This is a case of actual undue influence and for that it is necessary to go to the particular relationship and the actions of the Bank on Esquire. Unlike economic duress where the events could be confined to a narrow compass around the 12th March, the claim of undue influence covered a longer period, from an earlier time and extended to beyond 12th March, beyond the 14th April when the Power of Attorney was signed, and extended all the way up to the actual sale taking place as all the events during that period throw light on whether actual undue influence was exercised by the Bank. 224.To understand what led to the sale taking place, it is first necessary to examine in somewhat greater detail of what the Bank was doing when Esquire debts were required to be restructured. The Bank had overlent to Esquire and the security in the hands of Esquire was obviously insufficient to cover the outstanding loans. Restructuring was agreed amongst the bank creditors so that given time, some of the debts of Esquire could be repaid (by Esquire earning profits from its trading) and the value of the securities could improve with the recovery of the property market. This was preferable to all the banks than taking the pain of liquidation at that time when everything was down. The reason why the Bank extended trading line to Esquire during the Restructuring is for purely selfish reason, namely firstly so that Esquire could earn profits from which repayment of debts could be made and secondly so that the Bank could also make profit from the facilities given under the trading lines. This in fact happened, at least during certain periods of the Restructuring. But the price Esquire had to pay for the Restructuring was a total loss of freedom. The Lead Bank was the Doctor in total control and the further watch-dog employed was the Controller Peats (subsequently Arthur Young). 225.From the Bank’s perspective, it had to salvage itself from a horrible position. First, the Bank was not willing to take a huge hit at one go by pushing Esquire to immediate liquidation in 1983 and that is why the Bank agreed to the Restructuring. The Bank therefore required time to make provisions for the debt of Esquire which was likely to be unrecoverable, namely the Hardcore Frozen Debt. (Apparently, provisions was made by the Bank in the sum of $40 Million at end of 1985, $50 Million in mid 1986 and further provisions later [357]) Secondly, the Bank needed time for the property market to recover so that the value of the securities could rise sufficiently to enable realization of sufficient high values at least relative to the loans outstanding. This is the reason why the Bank did reject possible sales in 1984 and 1985. By late 1986 when the market has started seriously to recover that was also the time when the Bank pushed hard for sale. Thirdly, the Bank relied upon the trading of Esquire to generate profits both to enable some repayments to be made but also to generate to the Bank the banking profits from the trading lines being granted on commercial terms (namely Bank was earning very good money on the interests from the trading lines). Fourthly, the Bank must ensure that a constant monitoring was taking place so that Esquire was made to work hard to earn trading profits and to create banking profits for the Bank and so that Esquire would not get into trouble on the trading. The property side also had to be looked at constantly both in terms of valuations and possible sales as well as on the current property income and expenditure. Fifthly, the Bank must have a system of control and supervision so that Esquire could be constantly put in line and be told what to do and this is where the CCD came in. Patients under CCD care must behave and the documentation from 1984 to 1987 clearly show how time and again CCD had dictated to Esquire what to do and what not to do. In the period when there was much shared control between Mongkok Branch and CCD, Bank’s control at times might not be not so tight. But when CCD persuaded the top in mid 1986 to allow CCD to be the exclusive central control (per Pullen Memo of 28th May 1986 [367-8]) and that combined with the Sommerfield assuming his job at the CCD in or around September/October 1986, the picture changed radically. With Sommerfield as the Account Manager, CCD in direct charge and with Pullen giving directions in the background in CCD, the control and supervision of Esquire took on a different dimension and it was total and complete. It is against this background of the Bank’s tight control and Esquire’s total dependence on the Bank that one can now examine the question of Actual Undue Influence. Bank’s Capacity to Influence 226.My earlier account of the superior position of the Bank made it clear that the Bank in the context of Hong Kong and vis-à-vis Esquire was almost god-like. It was not only the premier bank in Hong Kong, it was not only the banker for a long time of Esquire, it was the Lead Bank in the Restructuring and therefore it had the power of financial life and death over Esquire. I have no doubt, that the Bank did have the capacity to influence. I would go further. In my view, the Bank also had the capacity in the circumstances to dominate Esquire. Ratnam described how every cheque of Esquire had to be endorsed by the Bank. Selway-Swift described the “straight day to day control” of the Bank [357]. The Bank immediately put down any attempt of Esquire not to sign the Power of Attorney. Events show that Esquire was dependent on the Bank and time and again had to rely on the Bank to do the right thing by its patient/customer. What Esquire did not know is that confidence in the Bank was misplayed and that the Bank not only had no qualm about deceiving its customer such as Esquire but also had no qualm about deceiving its fellow banks in the Restructuring, to whom it also owed different fiduciary duties. The examples of the Bank instructing Esquire not to tell the other banks about the threat (“recent negotiations) and telling the other Banks about buyout at 20% (instead of 36%) and under what is called “the Robertson letter dispute” [802, 816 and evidence of Selway-Swfit/Transcript Day 18] misrepresenting to the other banks on the January 1988 Restructuring that there was no $30 Million write-off (which is untrue), all these simply illustrate the extent that the Bank could dictate to Esquire what to say or not to say or what to do or not to do. I hold that the Bank did have the capacity to influence. Was Influence Exercised 227.In the previous analysis of the facts relating to Economic Duress I described the events leading up to the fateful telephone calls the evening of 12th March when Esquire surrendered to the demand of the Bank. In another part of the Judgment relating to Breach of Fiduciary Duty, I also analyzed the events leading up from the meeting of the 16th March (the Monday after the Thursday night calls) up to the actual Sale of the Property. These events and the documents placed before the Court show repeatedly, clearly and methodically how the Bank controlled, directed and required Esquire to do what the Bank desired. 228.The use of the euphemistic word “Convince” by Pullen in his handwritten note on [484] is one of the many indications that the Bank was exerting its maximum to influence Esquire in the sale desired. The case of the Plaintiff is of course that the Bank went beyond mere persuasion but resorted to economic duress. This is not a case where a transaction carried out apparently without resistance such as gift to charity was impeached. This is a case where the transaction was carried out with resistance and is now being impeached. There is no doubt that the Bank exercised influence (in addition to overt illegitimate pressure). 229.For me one of the most convincing manifestation of actual undue influence was how the Bank could impose upon Esquire to sign the Power of Attorney and gave to the Bank carte blanche to enable the Bank to dictate the sale absolutely and in such a way that enabled the Bank to keep Esquire ignorant afterwards that the sale effected in Esquire’s name by the Bank was a sale to the Bank’s partner and in undue haste. I hold therefore that Influence was used by the Bank on Esquire. Was Influence Undue 230.The critical question on claim of actual Undue Influence is whether the influence was Undue. Unfortunately, there is very little analysis or discussion in the decided case or even in the textbook as to what is meant by Undue and what is the scope of Undue. Undue is the opposite of due. Due means proper, appropriate or what ought to be done. Undue suggests improper, inappropriate, or what ought not to be done and these are all qualities in equity relating to use of undue influence which is against the conscience of the court. 231.As I see it what, equity as a court of conscience, seeks to protect is the abuse of relationship where one party has the capacity to influence the other party to enter into a transaction which is not the result of free exercise of independent and informed judgment and in situation where the transaction is not what the other party wanted to do but did it unwillingly and because of the dominant party. The essence of Undue Influence is the unfair exploitation of the ascendancy in the language of Lord Hoffman in Attorney-General v R. Once ascendancy is established, the key words are unfair exploitation. 232.Was there exploitation and was it unfair. Unfairness generally comes with exploitation and what therefore it is necessary in my judgment to concentrate on is whether in influencing or “convincing” Esquire to sell, there was unfair exploitation by the Bank over its ascendancy so that the actual agreement to sell was secured by an inequitable means. 233.Another way of looking at it is to ask, as said by Lindley in the famous Allcard case, was there some unfair and improper conduct, some coercion from outside, some overreaching, some form of cheating. 234.A review of the events from mid 1986 up to the actual date of sale will undoubtedly show that the Bank, taking advantage of its ascendancy and dominion over Esquire, by unfair and improper means, coercive and overreaching and deceiving, secured the sale of the Property. Misrepresentations were made by the Bank. Lies were told by the Bank. Threats were uttered by the Bank. Unilateral actions were taken by the Bank. In fact the Bank was aware of the impropriety of what it was doing and that is why the Bank asked Esquire to tell the other banks, if asked, an untruth namely that it was Esquire itself which wanted to sell and not to tell the other banks about “the recent negotiations” which is of course Sommerfield euphemism for the threats forcing Esquire to sell. (see letter dated 27th March 1987 [562] from Sommerfield to Esquire at paragraph “d)”). In my mind, there is no question that the actions of the Bank were Undue or that the Influence it exercised was Undue. The Conscience of Court of Equity is aroused by the Undue Influence of the Bank. Did Exercise of Undue Influence bring about the Sale 235.This is not a case where there might be any doubt as to whether it was the Undue Influence which was the significant cause of the transaction. Without the Undue Influence, there would be no sale of the Property. 236.I am therefore satisfied that on the totality of the evidence, much of which is not even capable of being challenged, notwithstanding that there was the banker and customer relationship, the Bank exercised Undue Influence on Esquire, the patient under its care thereby causing the Property belonging to Esquire to be sold. Is Undue Influence a Cause of Action 237.The challenge by the Bank to Undue influence not being a cause of action is half-hearted. No authority was cited in support. Undue influence lies at the heart of the equitable jurisdiction of the court and because it is considered a species of fraud, setting aside of transaction was a matter of right and when such is not possible, then question of remedy has to be carefully considered. Remedy for Undue Influence is yet to be decided. But I do not understand how it could be said that proven exercise of Undue Influence could not give rise to a cause of action. 238.If authority is required, I look no further than to firstly Lord Browne-Wilkinson in Pitt where he said at page 208H:-
and then to Lord Nicholls in Etridge at page 796A:-
There is no merit in this argument of the Bank. Waiver of Undue Influence 239.The last defence of Waiver of Undue Influence can similarly be briefly dismissed. I have said earlier in relation to both Breach of Fiduciary Duty and to Economic Duress that the Waiver Clause provides no defence to these claims. By the same reasoning, I am also of the view that the Waiver Clause provides no defence to the claim in Undue Influence. Undue Influence – Limitation 240.Finally, for the sake of completeness and to avoid any possible misunderstanding, I also like to state under the part of my Judgment dealing with Undue Influence, that in my view the case presented to me at the Trial by the Defendant did not rely on a defence of statutory limitation in respect of undue influence. That this was so, was made clear:-
241.As result of my misunderstanding, confusion was caused by questions being asked by the Court on statutory limitation on Undue Influence. In fact statutory limitation did not arise, as the case of the Bank ran at the Trial was not based on Undue Influence being barred by statutory limitation. CONCLUSIONS 242.The conclusion reached by this Court on the Trial of Liability is that the Court is satisfied that liability has been established by Esquire against the Bank for its claim in respect of (1) Breach of Fiduciary Duty, (2) Economic Duress and (3) Undue Influence. 243.There must therefore be a Trial on Remedies and Reliefs. I direct that the parties do, within 3 weeks of the Handing Down of this Judgment, make arrange for a hearing after the Summer Vacation when directions would be given on the further steps to be taken leading to the Trial on Remedies and Reliefs including the extent that Management should take part in such Trial. At that hearing, the parties can also address the Court if necessary on the matter of costs, the precise order to be made against Management and the question of deferring any appeal from this Judgment until after the Trial on Remedies and Reliefs.
Mr Martin Lee SC, Mr Erik Shum, Mr Paul Harris and Mr Jeremy Chan, instructed by Messrs Ho Tse Wai & Partners, for the Plaintiffs Mr Joseph Fok SC and Mr Eugene Fung, instructed by Messrs Johnson Stokes & Master, for the Defendants Appeal allowed:see CACV312/2005 dated 12 October 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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