Kowloon Development Finance Ltd v. Pendex Industries Ltd Ltd

CACV 156/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 156 OF 2011

(ON APPEAL FROM HCA NO 813 OF 2006)

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BETWEEN

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Before: Hon Tang VP, Yuen JA and Lam J in Court

Date of Hearing: 2 May 2012

Date of Judgment: 18 May 2012

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J U D G M E N T

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Hon Lam J (giving the judgment of the court):

1.When a lawyer chooses an inapt mechanism to settle a piece of litigation, it may create serious problems for his client. This was what happened in this case.

2.The former solicitors for the Plaintiff used a Tomlin Order (dated 8 January 2004) to settle a mortgagee action (HCMP 4679 of 2003) in which the Plaintiff, as mortgagee, sued the 1^st Defendant as debtor and the 2^nd and 3^rd Defendants as guarantors of a mortgage loan.  The outstanding loan amount as at 18 December 2003 was $21,591,264.12.  The background leading to the mortgagee action has been succinctly summarized by Mr Sussex SC in paras 1 and 2 of his skeleton submissions as follows,

“The Plaintiff, a moneylender, advanced loans to the 1^st Defendant by six facilities letters dated between 11 December 1997 and 7 August 2002. The remaining principal was consolidated at some HK$20 million as at 7 August 2002. It was secured by a first legal mortgage dated 13 January 1998. The 2^nd and 3^rd Defendants were the guarantors of the debt. The Defendants defaulted in repayment following the financial crisis in 2003.”

3.The material parts of the Schedule to the Tomlin Order [“the 2004 Order”] was in the following terms,

“ SCHEDULE

1. All the Defendants do pay the Plaintiff the sums of money upon signing this summons as follows :-

(i) HK$340,000.00 being part of the outstanding loan and interests accurred;

(ii) HK.$28,000.00 being the agreed legal costs and disbursements incurred by the Plaintiff in this action save this application; and

(iii) HK$9,600.00 being outstanding insurance premium of the Property.

2. All the Defendants do pay the Plaintiff 12 monthly mortgage instalments commencing on 21^st January 2004 by 24 post dated cheques and presented the same to the Plaintiff upon signing of this summons as follows :-

Item No.	Date of the Cheque	Amount
1.	21-01-2004	HK$80,000.00
2.	21-01-2004	HK$90,000.00
3.	21-02-2004	HK$80,000.00
4.	21-02-2004	HK$90,000.00
5.	21-03-2004	HK$80,000.00
6.	21-03-2004	HK$90,000.00
7.	21-04-2004	HK$80,000.00
8.	21-04-2004	HK$90,000.00
9.	21-05-2004	HK$80,000.00
10.	21-05-2004	HK$90,000.00
11.	21-06-2004	HK$80,000.00
12.	21-06-2004	HK$90,000.00
13.	21-07-2004	HK$100,000.00
14.	21-07-2004	HK$90,000.00
15.	21-08-2004	HK$100,000.00
16.	21-08-2004	HK$90,000.00
17.	21-09-2004	HK$100,000.00
18.	21-09-2004	HK$90,000.00
19.	21-10-2004	HK$100,000.00
20.	21-10-2004	HK$90,000.00
21.	21-11-2004	HK$100,000.00
22.	21-11-2004	HK$90,000.00
23.	21-12-2004	HK$100,000.00
24.	21-12-2004	HK$90,000.00

3.    All the Defendants do pay the Plaintiff interests on the outstanding loan in the sum of HK$21,591,264.12 at the rate of 10 percent per annum from the date of arrears up to 18^th December 2003 and at the rate of 8 percent per annum thereafter;

4.    All the Defendants do assist the Plaintiff to collect rent of the Property in the sum of HK$90,000.00 each month direct from the Tenant thereof and such rent will be used to set off the same amount of money stated in the aforesaid post dated cheques accordingly;

…

6.    This arrangement will be commenced from the date of this Summons till 21^st December 2004.  If all the Defendants do pay the plaintiff the total sum of HK$2,537,600.00 (i.e., HK.$2,500,000.00 representing the outstanding loan and interests as stated in sub-paragraph (i) of paragraph 1 and paragraph 2 aforesaid; plus HK$28,000.00 representing the agreed legal costs as stated in the sub-paragraph (ii) of the paragraph 1 aforesaid; and HK$9,600.00 representing the outstanding insurance premium of the Property as stated in the sub-paragraph (iii) of the paragraph 1 aforesaid) during the aforesaid period, the Plaintiff will review the amount of repayment of Mortgage instalments annually thereafter.”

4.A second Consent Order was made subsequently on 20 January 2005 [“the 2005 Order”].  That order was in the following terms,

“BY CONSENT IT IS ORDERED THAT :-

1. The Defendants do pay the Plaintiff HK$9,600.00 being the Fire Insurance Premium of the property at Ground Floor, 1^st Floor & 2^nd Floor and Car Parking spaces Nos. 1, 3, 5, 8, 11, 15, and 16 Canberra Villa, Section B of Lot No. 767 in Demarcation District No. 179, Shatin, New Territories, Hong Kong;

2. The Defendants do pay the Plaintiff HK$325,000.00 in 12 equal monthly installments, by way of 12 post-dated cheques commencing from 21^st January 2005;

3. Notwithstanding the order of Master Lung dated 8^th January 2004, all further proceedings in this action be stayed, save that the Plaintiff be at liberty to apply for the purposes of carrying into effect of this Order; and

4.   The Defendants do pay the Plaintiff HK$8,000.00 as the costs of this application.”

5.Upon default of the Defendants in complying with the 2005 Order, the Plaintiff sought to recover the entire loan.  To its surprise, it was met with an allegation that the entire loan had been compromised by the terms of the 2005 Order.  By the time of the Plaintiff’s attempt to recover the entire loan, the Defendants had belatedly paid up the 12 monthly instalments of $325,000 mentioned at para 2 of the 2005 Order.

6.After an unsuccessful attempt before a master to amend or to set aside the 2005 Order, the Plaintiff commenced a fresh action to seek, inter alia, the rectification of the 2004 Order and the 2005 Order and to recover the balance of the loan and enforce the mortgage in respect of the mortgaged property.  The action was tried before Deputy Judge Mayo.  The learned judge granted judgment in favour of the Plaintiff.

7.The Defendants appealed against that judgment.  After hearing the submissions of the parties, this court dismissed the appeal.  Here are the reasons for our decision.

The judgment and the grounds of appeal

8.The learned judge found in favour of the Plaintiff and granted rectification for the following reasons,

(a) He accepted the evidence of the witnesses of the Plaintiff: Ms Yu and Ms Wai and rejected the evidence of the 2^nd Defendant who was the only witness called by the Defendants;

(b) On the basis of the evidence of the Plaintiff’s witnesses, he found that there was no agreement between the parties that the Defendants would be absolved from further obligations under the mortgage loan upon compliance with the terms of the two consent orders (paras 128, 171 and 178 of the judgment);

(c) He further found that all along the negotiations and discussions between the parties were conducted “on the basis that what was being agreed was the amount of the instalments which would be payable for the following year” and “it was not contemplated that any order should embrace the complete settlement of the indebtedness” (para 173);

(d) His conclusion was that there was a mistake in the consent orders.  His primary finding was that there was a common mistake (paras 171, 174 and 176);

(e) By way of alternative ground, the learned judge was satisfied that even if the mistake was unilateral (on the part of the Plaintiff) rectification could still be granted on the basis of the Defendants’ knowledge and taking of advantage of the mistake (paras 176, 177 and 179);

(f) Applying the principles set out in Foskett, The Law and Practice of Compromise 7^th Edn and the judgment of Steyn LJ in Islam v Askar The Times 20 October 1994, the learned judge held that the relief of rectification could be granted in respect of the two Consent Orders;

(g) He also rejected the plea by the Defendants based on delay and laches.  He held that they did not suffer any prejudice by the delay and it was not inequitable to grant the relief.

9.On behalf of the defendants, Mr Sussex advanced the following grounds in challenging the judgment,

(a) There was no evidence to support any prior common intention between the parties in respect of the terms sought to be added to the Consent Orders by way of rectification.  In the judgment, the Judge made no such finding;

(b) The Judge only made finding in negative terms (by rejecting the defence evidence and defence case) which is not sufficient to support the Plaintiff’s claim for rectification;

(c) There was no outward expression of accord which supported the new terms to be added to the Consent Orders;

(d) The Judge erred in the application of the test for rectification for unilateral mistake as stated by Peter Gibson LJ in George Wimpey UK Ltd v VI Construction Ltd [2005] BLR 135;

(e) The Judge failed to exercise his discretion to consider whether relief of rectification should be granted even if mistake is established;

(f) The Judge erred in the exercise of his discretion in ordering indemnity costs against the Plaintiff.

10.Counsel sought to amend the pleadings to add a counterclaim for the discharge of the mortgage.  That was not sought at the court below.

11.Other grounds were raised in the Notice of Appeal and Supplementary Notice of Appeal.  Since they were not pursued in the skeleton submissions nor in the oral submissions, and in light of our analysis of the main issues below, it is not necessary to deal with them.

12.There is also a cross-appeal by the Plaintiff which seeks to uphold the judgment on alternative bases.  Again, in light of what we said below, it is not necessary to deal with such cross-appeal.

13.It is convenient to set out the terms added to the Consent Orders by way of rectification as ordered by the Judge.  The same term was added to both orders,

“that the Defendants were to pay the installment loan of HK$10,000,000.00 and the revolving loan of HK$10,000,000.00 (“the said loans”) according to the annual review undertaken by the Plaintiff and in case the Defendants failed to make payment according to the result of the review and/or failing such a review, then the Plaintiff would be at liberty to take action against the Defendants for payment of the outstanding balance of the said loans and the interest thereon.”

Common mistake

14.In our view, the crucial issues in this appeal are whether the Judge had made a finding of common mistake and whether he was correct in such finding in light of the evidence he accepted.  It should be noted at the outset that at the hearing before us Mr Sussex did not challenge the Judge’s acceptance of the evidence of the Plaintiff’s witnesses and the rejection of the evidence of the Defendant’s witness.

15.Instead, counsel submitted that the Judge did not make any finding as to common mistake.  With reference to para 171 of the judgment, he contended that the Judge only rejected the defence case as to the existence of an agreement to discharge the liabilities after compliance with the scheduled payments set out in the consent orders.  In that paragraph, the Judge said,

“I find as a fact that D2 was fully aware when both Consent Orders were made there was no intention of there being an agreement between the parties that the plaintiff would be unable to recover all of the outstanding principal and interest. That being the case there was a fundamental mistake in connection with these orders.”

16.But that paragraph should not be read in isolation.  The Judge continued, at para 173 of the judgment,

“It is clear from Ms Yu’s evidence which I accept that the negotiations and discussions which she had with D2 were all considered upon the basis that what was being agreed was the amount of the instalments which would be payable for the following year. It was not contemplated that any order should embrace the complete settlement of the indebtedness.”

17.At para 174, the Judge made it clear that his finding of mistake was based on his finding of facts made earlier.  What are those finding of facts? One needs to go back to his discussion of the evidence.  In particular, we find the following paragraphs to be pertinent in this regard when the Judge dealt with the evidence of Ms Yu,

“125. I accept her evidence concerning the office procedures which were adopted to maintain a record of what transpired and also that the Action Sheets almost entirely support the plaintiff’s case.

…

127. Equally important I accept her evidence that she did not have any discussion with D2 to the effect that if he complied with the two Consent Orders this would discharge him from any further liability to the plaintiff.

128. I also accept her evidence that she was entirely satisfied that D2 knew perfectly well that the parties had not agreed that D1 would be absolved in the manner he claimed.

129.  I accept her evidence that for all practical purposes the Action Sheets accurately record the discussions she had with D2 and that there was no matters of any importance in regard to the present litigation which were not included.”

18.At para 163, the Judge said the following in the context of considering the evidence of the defence witness,

“… from a commercial point of view, it was highly improbable that the plaintiff would agree to conclude a settlement or settlements so obviously to their disadvantage.”

19.It has to be borne in mind that the main issue before the Judge was what the real bargain agreed upon between the parties.  The Plaintiff said the bargain was to give the Defendants some indulgence in terms of not calling in the whole loan at that stage but to reach agreement on the instalments to be payable in 2004 and 2005 and there would be annual review of future instalments.  The Action Sheet for 6/12/04 shows that Ms Yu spoke to the 2^nd Defendant not only about the amount of the instalments payable in 2005, but also about “renewal” for “one year”, from which there was no demur.  On the other hand, the Defendants said the bargain was that the entire loan would be discharged upon payment of these instalments.  Reading the judgment as a whole, and in light of the Plaintiff’s evidence which was accepted by the Judge, it is as plain as a pikestaff that the Judge accepted the Plaintiff’s version.  We do not think the Judge confined himself to a negative finding that there was no agreement as alleged by the Defendant.  The Judge specifically made a finding of fact that the 2^nd Defendant knew that the Consent Orders would not absolve the Defendants from the liabilities under the loan after the payment of the instalments set out in the Consent Orders.  Bearing in mind the history of the transaction, that the Defendants were indebted to the Plaintiff under the existing loan and mortgage documents, it is apparent that the Judge found as a fact that the common intention of the parties was that the loan was not to be discharged simply upon payment of the instalments set out in the schedules to the Consent Orders.

20.Mr Sussex prayed in aid the Judge’s consideration of unilateral mistake. But it is plain from what the Judge said in paras 176 and 177 that he only proceeded to consider that by way of alternative.

21.Counsel also tried to refer to the Judge’s remark in the application for stay of execution to support his contention.  As held in Happy Dragon Restaurant Ltd v Director of Lands [2010] 2 HKLRD 727 at paras 19 and 20, such a course is not permissible.

22.Coming then to the submission that the evidence did not support a finding of common mistake, we do not agree with Mr Sussex that there has to be an agreement on a term negativing the general effect of the stay (precluding further action to recover the loan) to be included in the Consent Orders.

23.Counsel said it is not enough for the parties to have a common intention as to the continuation of the loan arrangement beyond the instalment payments in the two Consent Orders, they must also have a specific common intention to upset the general effect of the stay under those orders.  He submitted that once the parties adopted the form of such orders to settle, they were bound by their effect under general law.  Counsel further said it was a case of the parties failing to address their minds to the legal effect of a Tomlin order.

24.Building on that premise, counsel said there was no evidence to show that parties reached such specific agreement and therefore there was no common mistake to support a claim for rectification.

25.The legal requirements for rectification for common mistake can be taken from the judgment of Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71 at 74,

“The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention.”

26.The following additional remarks of Peter Gibson LJ after this passage are also relevant,

“I would add the following points derived from the authorities:

…(2) While it must be shown what was the common intention, the exact form of words in which the common intention is to be expressed is immaterial if, in substance and in detail, the common intention can be ascertained: Co-operative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 53 at p.54 per Dillon LJ with whom Kerr and Eveleigh LJJ agreed

(3) The fact that a party intends a particular form of words in the mistaken belief that it is achieving its intention does not prevent the court from giving effect to the true common intention: see Centremoor at p.55A-B and Re Butlin’s Settlement Trusts (Rectification) [1976] Ch 251 at p.260 per Brightman J.”

27.Swainland Builders Ltd v Freehold Properties Ltd concerned a sale of a block of flats and the vendor intended to retain interests in two flats within the block.  However, the transfer of the freehold failed to reserve any rights and the vendor sought rectification.  For our purposes, the following finding of the judge (Neuberger J) in that case is of interest (see p 73),

“I believe it is clear that the claimant and defendant intended and envisaged that the claimant would transfer the freehold of the property to the defendant on the basis that each of the 39 flats was subject to 99 year leases … the benefit of the two leases being vested in the claimant. How this was to be achieved was not discussed, and it should have been. The claimant and the defendant left the machinery to their respective solicitors, each of whom overlooked the need to deal with the matter.” (My emphasis)

“If I am extending the principle, then I do so without qualms. Where parties have concluded their negotiations on a clear, common, communicated and continuing assumption and/or with a clear, common, communicated and continuing intention and through an oversight on the part of their respective solicitors the ultimate contract does not reflect that assumption and/or intention to the manifest unfair disadvantage of one party and to the manifest unfair advantage of the other, then, unless there is some good reason to the contrary, a court of equity must be able to remedy the situation at the suit of the former party. The obvious remedy, again in the absence of good reason to the contrary, is to refashion, or rectify, the contract so it reflects the assumption and/or intention. …”

28.The court granted rectification (and this was upheld on appeal) even though the parties did not get down to the details as to how their common intention was to be effected.  As stated in the headnotes, although there had never been any common intention that the transfer should contain specific provisions for the grant of long leases back to the vendor, that did not prevent rectification in a manner appropriate to give effect to the common intention.  At p 75, Peter Gibson LJ dealt with the argument that the precise manner in which the common intention was to be effected had not been agreed by reference to Whiteside v Whiteside [1950] Ch 65,

“I find helpful the way in which Sir Raymond Evershed MR in Whiteside v Whiteside [1950] Ch 65 at p 75 and 76, formulated the appropriate principle, that is to say, where a document has been executed that does not carry out the intention of the parties, each party has the right against the other to have the document reformed in such manner that the document will place each other in the same position vis-à-vis each other as they intended. I emphasize that formulation, as it seems to me that it correctly distinguishes between the common intention, to which effect has not been given by the unrectified document, and the remedy that the court can order. The court can grant relief by putting the parties in the same position vis-à-vis each other as they intended.

No doubt in most cases it will be possible to see from the material that the parties have considered, and about which they have reached a common intention, the precise wording to be included in the document to be rectified.  In the unusual case, such as the present, there may be more than one way of achieving the common intention. … I see no reason, in principle, why equity should be prevented from giving relief merely because the parties had not agreed on the mechanics by which effect should be given to a clear and simple common intention.”

29.Thus, it does not matter that the parties did not reach consensus on a specific mode or mechanism in achieving their common objective.  So long as the evidence shows that there was a continuing common intention in terms of the bargain between them and such intention is not accurately reflected in the instrument adopted for the transaction, the court can grant the relief of rectification to put their common intention into effect.  Neither does it matter that it was due to the oversight of the lawyers in failing to reflect the common intention properly in the instrument or mechanism adopted.

30.A more recent case in which rectification was sought in respect of a mistake arising from the oversight of a solicitor in preparing the contract after the parties had reached a prior accord is Daventry District Council v Daventry & District Housing [2011] EWCA Civ 1153.  The Master of the Rolls said at paras 211 and 212,

“… it is self-evidently insufficient for a defendant to defeat a rectification claim simply by establishing that the terms of the provision which he put forward clearly departed from the prior accord. Rectification is often sought, and granted, in relation to contractual terms which are perfectly clear. … Many, possibly most, rectification claims involve the claimant seeking to rectify a provision in an agreement whose terms are clear …

Inevitably, the question whether the proposal of such a provision should be treated as a resiling from the prior accord will depend on all the circumstances of the particular case.  As with virtually any issue involving the effect of the contents of a document, the question has to be assessed not merely by reference to the words of the document, but also to the factual and commercial context in which the document is produced. …”

31.On the facts, despite the clear wording in the document, the majority of the Court of Appeal granted rectification on the basis of common mistake.  In coming to that decision, the Master of the Rolls referred to the prior accord reached by the parties after full negotiation and then said at para 214,

“The carriage of the matter was then given over to the parties’ respective solicitors … on the basis that they would sort out the drafting of a contract which reflected those negotiated terms, Accordingly, a proposal between those solicitors, a couple of days before execution of the contract, to include a new clause in the contract would, at least on the face of it, have been unlikely to have been intended to represent a variation of those terms, or a re-opening of the negotiations, unless of course, such an intention was explained in clear terms in an accompanying letter or email.”

32.Likewise, in the present case, after Ms Yu and the 2^nd Defendant agreed how the loan was to be continued, the Plaintiff left it to the solicitor to sort out how the common intention was to be implemented by way of legal formalities.  The oversight on the part of the solicitor in the drafting of the Consent Orders cannot be a bar to the Plaintiff’s plea for rectification if the prior common intention is established by evidence.

33.In Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, Lord Hoffmann placed emphasis on the objective nature in the inquiry as to the existence of continuing common intention.  At para 60, His Lordship said,

“… rectification is also available when there was no binding antecedent agreement but the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified … the authorities suggest that in both cases the question is what an objective observer would have thought the intentions of the parties to be …”

34.Even though the approach is that of a reasonable objective observer, there are still differences in the consideration of evidence between a claim for rectification and a case based on interpretation.  The Master of the Rolls alluded to three differences in Daventry District Council v Daventry & District Housing at para 198,

“However, the court will, inevitably, not adopt precisely the same approach to a rectification claim as it adopts to an interpretation issue. Three differences are relevant for present purposes. First, in a rectification claim, the antecedent negotiations are admissible: indeed they are normally of central relevance. Secondly, even in relation to written contracts, some subjective evidence of intention or understanding is not merely admissible, but is normally required in a rectification claim: the party seeking rectification must show that he indeed made the relevant mistake when he entered into the contract. Thirdly, as Etherton LJ points out in para 83 above, rectification is an equitable remedy and therefore is subject to somewhat different rules from interpretation.”

35.In the same case, Etherton LJ observed at para 80 that the requirements of “an outward expression of accord” and “common continuing intention” are not separate conditions, but two sides of the same coin.

36.Thus, one should examine the evidence (and in the context of this appeal, the evidence of the Plaintiff accepted by the Judge) to see whether to a reasonable objective observer the parties had a continuing common intention that the Defendants would continue to be liable for the loan after the payment of the instalments in 2004 and 2005.  If such continuing common intention existed, it would not matter that the parties gave no thought as to what term was to be inserted in the Consent Orders.

37.Mr Sussex accepted that in the light of clauses 3 and 6 of the 2004 Order, it would be difficult to argue that the 2004 Order had the effect of precluding the recovery of the balance of the loan after the full payment of instalments in 2004.  This must be correct.  Clause 3 clearly stipulated the outstanding loan amount as $21,591,264.12 and interest was to be charged on that principal.  Clause 6 envisaged annual review of the monthly instalments on condition that the Defendants duly paid the 2004 instalments and the agreed legal costs.  By necessary implication, the parties had a common intention that the mortgage loan would continue to be serviced after 2004.

38.However, Mr Sussex said the 2005 Order had the effect of extinguishing the loan upon full payment of the 2005 instalments.  This stemmed from the fact that instead of adopting a similar order as per the 2004 Order, the parties had chosen the form and wording of the 2005 Order.  Counsel laid particular emphasis on clause 3 of the 2005 Order.  And there was no equivalent of Clauses 3 and 6 of the 2004 Order.

39.This may be correct if one is concerned with the interpretation of the 2005 Order.  However, we are dealing with the question of rectification.  One cannot confine oneself to the wording of the instrument which is being sought to be rectified.  As explained by the Master of the Rolls, even though one is to approach the matter by reference to the reasonable objective observer, the approach for rectification is different.

40.It is not the role of this court to make findings of fact based on the evidence.  That is the role of the trial judge.  Rather, the question before us is whether the Judge was entitled to come to his finding on common intention on the evidence presented at the trial.  Having particular regard to the following matters, we are of the view that there is ample support for the Judge’s conclusion,

(a) The pre-existing relationship between the parties as lender and borrower and the subsistence of the mortgage;

(b) The evidence of the Plaintiff’s witnesses on the negotiation, including the contemporaneous records in the Action Sheets kept by Ms Yu;

(c) As explained above, the 2004 Order itself indicated that there was an antecedent common intention that the loan would continue to be subject to annual review and that the full payment of the 2004 instalments were not intended to be in full discharge of the loan;

(d) Ms Yu’s evidence as to the negotiation leading to the 2005 Order;

(e) The rejection of the Defendants’ evidence of an agreement for the discharge of the loan upon full payment of the 2005 instalments.

41.In particular, at paras 14 to 16 of her witness statement, Ms Yu gave the specific evidence of her discussion with the 2^nd Defendant over the telephone as to how the loan was to be serviced in 2005.  There was discussion as to how the total indebtedness should be amortized: the 2^nd Defendant proposed 12 years whilst the Plaintiff initially was only agreeable to 5 years.  Repayment proposals based on 5 years, 6 years and 7 years were worked out.  Finally, the Defendants agreed upon a proposal based on 7 years and the monthly sum was worked out to be $325,000.  At para 16, Ms Yu said,

“Then on 8 December 2004, the 2^nd Defendant told me that the Defendants accepted the monthly sum of $325,000 and I told him again that the Defendants had to make payment according to the review exercise which would continue until the entire amount of the said loan and the interest thereon were repaid and if the Defendants failed to pay or to undertake the review then the Plaintiff would take action to make recovery. The 2^nd Defendant told me that he understood and he could not disagree. …”

42.In other words, the 2^nd Defendant (and through him the 1^st Defendant) had agreed on a schedule based on repayment of the entire loan in 5 years’ time. It meant that the loan was not fully repaid after payment of the 2005 instalments. 

43.This was adopted as her evidence at the trial and accepted by the Judge as truthful.  This is a piece of direct evidence on the common intention of the parties that the full payment of the 2005 instalment would not discharge the entire loan (which had to be serviced for another 4 years and the instalments would be subject to annual review).  With the rejection of the evidence of the 2^nd Defendant, this must be the continuing common intention up to the making of the 2005 Order.  The conversation between Ms Yu and the 2^nd Defendant was the outward expression of the accord.

44.Therefore the Judge’s finding of common intention is perfectly warranted by the evidence before him.  With respect, Mr Sussex’s attempts to challenge such finding are without merit.

45.There was no suggestion that the parties had changed their common intention and it is perfectly clear that the 2005 Order was a mistake insofar as it had the effect of precluding the Plaintiff from recovering the balance of the loan after the full payment of the 2005 instalments.  We are satisfied that the Judge was correct in holding that this was a case of common mistake.

46.It is therefore not necessary to consider the case of unilateral mistake though we see some force in Mr Sussex’s challenge in that regard.

47.Though there were grounds raised in the Supplementary Notice of Appeal in respect of the exercise of the discretion by the Judge in granting rectification, those grounds appeared to be focusing on the exercise of the discretion (at paras 178 and 179 of the judgment) in the context of unilateral mistake.  In the context of common mistake, the Judge considered the question of laches and delay in his exercise of discretion.  Having regard to the facts of the case, we do not see any ground for complaint as to such exercise of discretion.  In our view, none of the matters raised in the Supplementary Notice of Appeal constituted good grounds to withhold such remedy.

The Judge’s order on indemnity costs

48.The Judge ordered the Defendants to pay the Plaintiff’s costs of the action on an indemnity basis.  Mr Sussex contended that the Judge failed to exercise his discretion in accordance with principles.  Whilst counsel accepted that there was a contractual provision in the loan documentation for indemnity costs and that normally the court would grant indemnity costs in accordance with the contract between the parties, Mr Sussex submitted there were exceptional circumstances warranting the departure from such course.

49.Counsel referred to matters set out in paras 6(D), 6A and 10 of the Supplementary Notice of Appeal as the exceptional circumstances.  Most of those matters are only relevant if rectification was granted on the basis of unilateral mistake.  In the context of common mistake, the argument appeared to be that since it was due to the mistake of the solicitor of the Plaintiff that rectification was necessary the Defendants should not be penalized by indemnity costs.

50.We do not accept this argument.  As illustrated by the cases we have discussed above, the law permits rectification even if the mistake was caused by the plaintiff’s lawyers.  Given our conclusion on common mistake, the Defendants should not have resisted the claim for rectification.  Further, the Defendants should not have advanced a case of reaching an agreement with the Plaintiff on the discharge of the loan upon full payment of the 2005 instalments.  We do not think the mere fact that the solicitor for the Plaintiff was responsible for the mistake was a sufficient ground for departing from the contractual provision on the facts of this case.

51.We therefore do not see sufficient ground for intervening with the Judge’s order as to costs.

52.As for the costs of the appeal, we gave the costs of the appeal to the Plaintiff.  The Plaintiff did not ask us to order costs on any basis other than the usual party to party basis.  That was the order we made.

Mr Anthony Houghton, SC and Mr C Y Li, instructed by Vincent T K Cheung, Yap & Co for the Plaintiff (Respondent)

Mr Charles Sussex, SC and Ms Frances Lok, instructed by Robertsons, for the Defendants (Appellants)

Please refer to FACV21/2012 for the relevant appeal(s) to the Court of Final Appeal.