Bank of China (Hong Kong) Ltd v. Leong Mei Yong and Another

HCA4588/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4588 OF 2002

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BETWEEN

Before : Hon Sakhrani J in Chambers

Date of Hearing : 7 March 2008

Date of Judgment :19 March 2008

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JUDGEMENT

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1.By its summons dated 16 November 2007 the plaintiff applies to amend the statement of claim.  The application is opposed on the basis that new causes of action are raised which are time barred.

Background

2.On 5 December 2002 the plaintiff commenced these proceedings against the defendants by issuing the writ of summons with a statement of claim (“the SC”).

3.With effect from 1 October 2001 Bank of China (Hong Kong) Ltd. became the successor of all the undertakings of Kincheng Banking Corporation by virtue of the Bank of China (Hong Kong) Limited (Merger) Ordinance Cap. 1167.  There is no dispute that the proper plaintiff is Bank of China (Hong Kong) Ltd.  As a matter of convenience and as Counsel have done so in their submissions, I shall also refer to the Bank of China (Hong Kong) Ltd. as well as Kincheng Banking Corporation as the plaintiff.

4.By an assignment dated 27 May 1982 (“the assignment”) the Hong Kong Housing Authority (“the Authority”) assigned to Fu Kit Keung (“Mr Fu”) and Lai Mei Lin (“Madam Lai”), who were husband and wife, a property known as Flat No. 6, 12^th Floor, Block B, On Kay Court, Ngau Tau Kok, Kowloon (“the property”).

5.The plaintiff granted banking facilities to MrFu trading as Jan Speed Auto Service (“Jan Speed”) in 1993.  In or about January 1993 in consideration of the plaintiff granting or continuing to grant banking facilities to Jan Speed, Mr Fu and Madam Lai agreed to mortgage the property to secure Jan Speed’s indebtedness to the plaintiff.

6.The defendants were practicing as solicitors in partnership at the material time in the firm name of Leong, Lam & Co.

7.By a letter of instructions dated 3 December 1992 the defendants were instructed by the plaintiff to prepare a legal charge over the property to secure general banking facilities to Jan Speed to an unlimited extent.

8.Pursuant thereto, the defendants prepared a mortgage dated 5 January 1993 (“the Mortgage”) on behalf of the plaintiff.  The Mortgage was executed by Mr Fu and Madam Lai on or before 7 January 1993.

9.As is pleaded in paragraph 10 of the SC, by letter dated 7 January 1993 the defendants represented to the plaintiff that the Mortgage had been duly executed and that it was valid and enforceable.  The defendants did not inform the plaintiff of any fact or circumstance which might affect the validity of the Mortgage.

10.The plaintiff’s case is that in reliance on the Mortgage by a facility letter dated 1 April 1997 the plaintiff increased the overdraft facility extended to Jan Speed to $1,600,000.  Thus monies were advanced by the plaintiff to Mr Fu on the basis that the Mortgage was valid and unenforceable.

11.It is asserted by paragraph 11 of the SC that the defendants owed a duty of care to the plaintiff.  Paragraph 11 pleads:

“ In the premises, the [defendant] (sic) owed to [the plaintiff] a duty of care to:
(1)	exercise reasonable care so as to ensure that the Mortgage would be valid and enforceable upon execution; and
(2)	take such steps as were necessary to protect [the plaintiff’s] interest in the security under the Mortgage.”

12.As is pleaded in the SC, the Mortgage was in respect of a Home Ownership Scheme flat.  Paragraph 12 of the SC pleads:

“   Section 17B of the Housing Ordinance (Cap. 283) (“the Ordinance”) at the time of the Mortgage provided that:
“Where-
(a)	any land in any estate is sold under section 17A to any person …
any alienation or conveyance or purported alienation or conveyance or any agreement to alienate or convey such land -
(i)	by that person in breach of any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to such land…
shall be void.”

13.It is also pleaded that the covenants in the assignment included those as contained in paragraph 1 of the Schedule to the Housing Ordinance. 

14.Paragraph 18 of the SC pleads:

“At the time of the Mortgage, paragraph 1 of the Schedule to the Ordinance provided that:   ­
	“Subject to paragraph 4 [which is irrelevant for present purposes], the purchaser shall not at any time alienate or convey, purport to alienate or convey, part with possession or enter into any agreement to alienate, conveyor part with possession of, the land sold other than to the Authority, or such person as the Authority may nominate, unless
	(a)	either­ -
		(i)	a period of 10 years has elapsed from the date of the assignment to the purchaser; or
		(ii)	before that period has elapsed, the purchaser has offered to assign the land to the Authority and the Authority or its nominee has declined to accept the assignment; and
	(b)		the purchaser has first paid to the Crown an amount equal to that proportion of the full market value, as assessed by the Director of Housing, of the land at the time of that payment which is the same proportion of the full market value, as specified in the deed of assignment, of the land at the time of the  sale to the purchaser which was not paid by the purchaser at the time of the assignment to him.”

15.Paragraph 19 of the SC pleads:

“None of the exceptions set out in the then paragraph 1 of the Schedule to the Ordinance (pleaded above) applied to the Mortgage.  Consequently, paragraph 1 of the Schedule to the Ordinance (which was a covenant of the Assignment by virtue of the then section 17AA of the Ordinance) had been breached.”

16.The plaintiff’s case is that by purporting to mortgage the property Mr Fu and Madam Lai were acting in breach of a covenant in the assignment and by section 17B of the Housing Ordinance the Mortgage was void when it was entered into (paragraphs 20 and 21 of the SC).

17.The plaintiff’s complaint against the defendants is that they were in breach of duty.

18.Paragraph 22 of the SC pleads:

“ In the premises, the Defendants were in breach of duty owed to [the plaintiff].
PARTICULARS
(1)		They failed to ensure that the Mortgage was valid and enforceable upon execution.
(2)		They failed to ensure that none of the covenants of the Assignment had been breached.
(3)		They failed, at all material times, to advise [the plaintiff] of circumstances pleaded in paragraph 14 to 23 [sic] above.
(4)		They failed, at all material times, to advise [the plaintiff] of the possibility or the fact that the Mortgage was not valid and enforceable.
(5)		They failed, at all material times, to advise [the plaintiff] to take such steps as might be necessary to protect its interest under the security, including:
		(a)		to obtain a valid and enforceable mortgage on the Property from Mr Fu and Madam Lai; or
		(b)		to take further security from Mr Fu, Madam Lai or any other persons.”

19.I would observe that the opening words of paragraph 22 are “in the premises”.  This clearly refers to what had already been asserted prior to this paragraph namely, that the mortgage was void by reason of the provisions of section 17B of the Housing Ordinance.  Hence it is clear that the allegation of breach of duty was premised on one basis only namely, that the Mortgage was void for the reasons already pleaded and for no other reason.

20.Mr Fu passed away in September 1999.  In early 2002 Jan Speed defaulted in repayment to the plaintiff.

21.The defendants filed their defence on 17 January 2003.

HCA 1153 of 2003

22.On 28 March 2003 the plaintiff commenced HCA 1153 of 2003 against the estate of Mr Fu and Madam Lai to recover the outstanding indebtedness to the plaintiff and to enforce the Mortgage and two guarantees signed by Madam Lai.

23.On 30 April 2003 Madam Lai filed her defence and counterclaim in HCA 1153.  She alleged, inter alia, that the Mortgage was void by virtue of the Housing Ordinance.

24.She also alleged that the Mortgage was voidable because of misrepresentation by a clerk in the defendants’ firm.  She further alleged that the Mortgage was also voidable because she had executed the Mortgage whilst acting under the undue influence of Mr Fu, that the plaintiff had constructive knowledge of the same and had failed to take steps to dispel such constructive notice.

The amendments

25.There are some minor amendments to which there is no objection by the defendants.  Leave to amend can be given in respect of those.

26.I am only concerned with the amendments which are opposed by the defendants and which are contained in paragraphs 21A and 22A of the proposed amended statement of claim.  I shall refer to these as “the amendments”. 

27.Paragraph 21A pleads:

“Madam Lai's claim of undue influence
21A.		By her Defence and Counterclaim filed in HCA 1153 of 2003, Madam Lai alleged, among other things, that:
		(1)	In the way pleaded in paragraph 14 of her Defence and Counterclaim filed in HCA 1153 of 2003, Madam Lai was induced to sign the Mortgage by the misrepresentation of Mr Peter K W Sze of Leong, Lam & Co that the Mortgage was proper and lawful when in fact it was unlawful by virtue of the Housing Ordinance.
		(2)	In the way pleaded in paragraph 16 of her Defence and Counterclaim filed in HCA 1153 of 2003, the relationship between Madam Lai and Mr Fu was non-commercial; the Mortgage was manifestly disadvantageous to Madam Lai; and Madam Lam executed the Mortgage upon the undue influence of Mr Fu.  Further, Leong, Lam & Co had not taken any or any reasonable steps on behalf of the Plaintiff to avoid constructive notice of such undue influence.  In particular, the contents of the Mortgage had never been explained to Madam Lai and she did not know the contents of the Mortgage; no private meeting with Madam Lai in the absence of Mr Fu was held; and she was never advised to take independent advice.”

28.And paragraph 22A pleads :

“22A.		If, which is not admitted, the purported charge of the Property or the personal covenant to repay (or both) contained in the Mortgage is not enforceable against Madam Lai on one or more of the grounds pleaded in paragraph 21A above, it is averred that the Defendants were in breach of duty owed to [the plaintiff].
		PARTICULARS
		(1)		They allowed, permitted, suffered to be made, or made, the misrepresentation pleaded in paragraph 21A above.
		(2)		They failed to take reasonable steps on behalf of the Plaintiff to avoid constructive notice of any undue influence exerted by Mr Fu on Madam Lai.
		(3)		They failed, at all material times, to advise [the plaintiff] of the circumstances pleaded in paragraph 21A above.
		(4)		They failed, at all material times, to advise [the plaintiff] of the possibility or the fact that the Mortgage was not valid and enforceable.
		(5)		They failed, at all material times, to advise [the plaintiff] to take such steps as may be necessary to protect its interest under the security, including:
				(a)	to obtain a valid and enforceable mortgage on the Property from Mr Fu and Madam Lai; or
				(b)	to take further security from Mr Fu, Madam Lai or any other persons.”

(1) that the matters raised by the amendments do not introduce a new cause of action.  They serve only to supply particulars of an existing pleaded cause of action;

(2) if it is held that a new cause of action is being introduced by the amendments, then it is a new cause of action arising out of  substantially the same facts as a cause of action in respect of which relief has already been claimed by the plaintiff in the action and leave to amend should be given under section 35(6)(a) of the Limitation Ordinance Cap. 347 and O.20;r.5(5) RHC.

30.Mr Man fairly accepted that if he failed on the two matters relied on by him then he would fail in the application for the amendments.  He accepted that if the Court held that a new cause of action was being introduced by the amendments then the same would be statute barred.

New cause of action?

31.In considering whether a new cause of action is being introduced by the amendments, it is important to bear in mind what a cause of action is.

32.Lord Esher MR in Coburn v Colledge [1897] 1 QB 702 at page 706 said:

“The definition of “cause of action” which I gave in Read v Brown has been cited.  I there said that it is “every fact which it would be necessary for the plaintiff to prove, if traversed, in order to support his right to the judgment of the Court.”  The language I used obviously means this: the plaintiff in order to make out a cause of action must assert certain facts which, if traversed, he would be put to prove.  It is well known, of course, that any of those facts ­which is not traversed is taken to be admitted.  The words “if traversed” were inserted to make it clear that the facts spokenof were those which the plaintiff must allege in his statement of claim as it is now called, or his declaration as it used to be called.  In former times, if he failed to assert any of those facts, his declaration was demurrable as shewing no cause of action.  If he asserted those facts, and they were traversed, it lay upon him to prove them.  If any of them were not traversed, he need not of course prove them.  I adhere to the definition of “cause of action” which I then gave, and which was assented to by Fry and Lopes L.JJ.  It has been suggested that it is incon­sistent with the effect of what was said by Lindley L.J., in Reeves v. Butcher.  But I do not think there is really any such inconsistency as was suggested.  If the plaintiff alleges the facts which, if not traversed, would primâ facie entitle him to recover, then I think he makes out a cause of action.” 

33.And in Paragon Finance plc v DB Thakerar & Co. (a firm), Paragon Finance plc and another v. Thimbleby & Co. (a firm) [1999] 1 All ER 400 Millet LJ (as he then was) said at page 405:

“ The classic definition of a cause of action was given by Brett J in Cooke v Gill (1873) LR 8 CP 107 at 116: ‘ “Cause of action” has been held from the earliest time to mean every fact which is material to be proved to entitle the plaintiff to succeed,─every fact which the defendant would have a right to traverse.’  (My emphasis.)  In the Thakerar case Chadwick J cited the more recent definition offered by Diplock LJ in Letang v Cooper [1964] 2 All ER 929 at 934, [1965] 1 QB 232 at 242─243, and approved in Steamship Mutual Underwriting Association Ltd v Trollope & Colls Ltd (1986) 6 ConLR 11 at 30: ‘A cause of action is simply a factual situation the existence of which entitles one person to obtain from the court a remedy against another person.’  I do not think that Diplock LJ was intending a different definition from that of Brett J.  However it is formulated, only those facts which are material to be proved are to be taken into account.  The  pleading of unnecessary allegations or the addition or further instances or better particulars do not amount to a distinct cause of action.  The selection of the material facts to define the cause of action must be made at the highest level of abstraction.”

34.Mr Man relied on what Sir Ian Glidewell said in Darlington Building Society, Abbey National Plc v O’Rourke James Scourfield & McCarthy [1999] Lloyd’s Rep. PN 33 at page 36:

“Where as in this case the claim is based on a breach of duty, whether arising from contract or in tort, the question whether an amendment pleads a new cause of action requires comparison of the unamended pleading with the amendment proposed in order to determine:
(a)		whether a different duty is pleaded;
(b)		whether the breaches pleaded differ substan­tially; and where appropriate
(c)		the nature and extent of the damage of which complaint is made.
See the judgment of May LJ in Steamship Mutual Underwriting Association v Trollope & Colls (City) Ltd (1986) 33 BLR 77 at pages 97 and 98.
In my view where an amendment pleads a duty which differs from that pleaded in the original statement of claim it will, or certainly will usually, raise a new cause of action.  If there is no allegation of a different duty but different facts are alleged to constitute a breach of the duty it is more difficult to decide whether a new cause of action is pleaded.”

35.Both counsel referred me to a number of authorities.  However, each case turns on its own facts.  The cases cited were distinguishable on their own facts.

36.Whether a new cause of action is being raised must be a question of degree in each case (per Holroyd Pearce LJ in Dornan v J. W. Ellis & Co. Ltd [1962] 1 QB 583 at page 592).

37.The plaintiff’s case as pleaded in the SC is on one basis only namely, that the mortgage was void for the reasons pleaded.  This is clearly said to be the breach of duty relied on in the SC and the opening words “in the premises” of paragraph 22 make this clear.  There was no suggestion of any other breach of duty.

38.In my view it is clear that by the amendments a further breach of duty is relied on.  I am unable to accept that what is provided are particulars of a breach of duty already pleaded in the existing SC.

39.It seems to me to be reasonably clear, as submitted by Mr Bullett, for the defendants, that if the Mortgage is void the personal covenants by both Mr Fu and Madam Lai survive and the plaintiff can enforce those covenants.  However, if the mortgage is voidable and is avoided by Madam Lai, then only Mr Fu’s personal covenants survive.  Mr Man did not dispute this for the purpose of this application.

40.Even though it may be said that the duty of care relied on is the same as in the existing SC, it is clear in my judgment that the breach of duty asserted by the amendments is a different breach of duty. 

41.It seems to me that the result of the breach of duty is also different.  By the amendments it is asserted that the mortgage is not void but voidable by Madam Lai alone both as to her beneficial share in the property and as to her personal covenant.  However, as correctly submitted by Mr Bullett for the defendants, until avoided it remains valid.  Even if the Mortgage is avoided by Madam Lai, it remains valid as against Mr Fu in respect of his share in the property and in respect of his personal covenant.  

42.I am satisfied that the amendments neither seek to clarify issues already in dispute between the parties nor do they seek to provide particulars of an already existing pleaded cause of action.  In my judgment the amendments clearly add a new cause of action.

Substantially the same facts?                         

43.The second point relied on by the plaintiff is that the amendments seek to introduce a new cause of action which arises out of the substantially the same facts as a cause of action in respect of which relief has already been claimed in the SC.

44.O.20; r 5(5) RHC provides as follows:       

“(5) An amendment may be allowed under paragraph (2) notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment.”

45.In Leung Kin Fook & Others v. Eastern Worldwide Co. Ltd. (No. 2) [1997] 1 HKC 524 it was held that the words in O.20;r.5(5) should be given a broad and liberal interpretation in order to attain the objective of the rules.

46.Whether or not the new cause of action arises out of the same or substantially the same facts as that already pleaded is substantially a matter of impression (Welsh Development Agency v Redpath Dorman Long 1409 at page 1418; Leung Kin Fook at pages 529, 530).

47.In his oral submissions Mr Man relied also on what the defendants pleaded in paragraph 16 of the defence.  Paragraph 16 pleads:

“Further or alternatively (and without prejudice to the Defendants’ primary contention that the Plaintiff’s claim is statue barred) the Defendant will say that if, which is denied, the Defendants were in breach of contract or duty the Plaintiffs are obliged to mitigate their loss by taking whatever steps are necessary and appropriate to recover any advances (which are not admitted) from Jan Speed and/or Mr. Fu and/or Madam Lai, and that the Plaintiff’s damages herein (which are denied) are limited to such sums as may be unrecoverable as aforesaid.”

48.He submitted that on the existing pleadings the court would have to go into the question of the undue influence on Madam Lai and the matters relied on by the amendments.  That being so, Mr Man submitted that the new cause of action was based on substantially the same facts that would have to be relied on at a trial on the existing pleadings.

49.I am unable to accept Mr Man’s submission.                  

50.O.20;r.5(5) permits an amendment where the new cause of action arises out of the same or substantially the same facts as the cause of action in respect of which relief has already been claimed.  I do not see how the allegations of misrepresentation, the undue influence on Madam Lai, the constructive notice on the part of the plaintiff and the other matters relied on by the amendments are substantially the same facts as the cause of action based on breach of duty solely on the basis that the mortgage was void because of section 17B of the Housing Ordinance.  My clear impression is that the new cause of action does not arise out of substantially the same facts as the cause of action in respect of which relief has already been claimed in the action by the SC.

51.Paragraph 16 of the defence does not, in my view, assist the plaintiff.  Paragraph 16 simply pleads that the plaintiff has a duty to mitigate its loss and damage so that any failure to reasonably mitigate its loss has the result that damages might be reduced.  I am unable to accept that in considering the question of the mitigation of damages the Court would be concerned with the allegations of misrepresentation, the undue influence on Madam Lai and constructive notice on the part of the plaintiff and the other matters relied on by the amendments.

52.As I have found that the amendments do raise a new cause of action and that it does not arise out of substantially the same facts as a cause of action in respect of which relief has already been claimed in the SC, I have no jurisdiction to allow the amendments.  The question of the exercise of a discretion does not arise.

Conclusion

53.I refuse the application in so far as it relates to the amendments. 

54.The uncontroversial minor amendments namely, by paragraphs 2A and paragraph 9A and in paragraphs 20, 21 and 23 have not been opposed.  I therefore give leave to the plaintiff to amend the SC to incorporate these by filing and serving an amended SC within 14 days from to-day.  I also give leave to the defendants to file and serve an amended defence within 14 days thereafter and leave to the plaintiff to file and serve an amended reply within 14 days thereafter.

55.I also make an order nisi that the costs of the application be costs to the defendant.

Mr Bernard Man, instructed by M/s Gallant Y. T. Ho & Co., for the Plaintiff

Mr Andrew Bullett, instructed by M/s Stephenson Harwood & Lo, for the 1^st and 2^nd Defendants