XCHRX MICHAEL CHEUK, WONG & KEE and Another v. LAU WAN FU JOHN

1996 No. A205

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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INTRODUCTION

In this action, the Plaintiffs claim various forms of relief against the Defendant. They issued a summons for summary judgment under Ord.14. The master gave the Defendant unconditional leave to defend the action. The Plaintiffs now appeal against that order. All dates in this judgment are in 1995, unless otherwise stated.

THE FACTS

2. The primary facts are not in dispute. On 18th July, Chung King Investment Ltd. ("CKIL") purchased a flat in Ap Lei Chau. A few weeks later, it mortgaged the flat to Wide Profit Finance Ltd. ("WPFL"). On the following day, 31st August, CKIL instructed the Defendant, its solicitor, to redeem that mortgage and to re-mortgage the flat to Eastfaith Finance Ltd. ("EFL"), the 2nd Plaintiff, to secure a loan of $4.55m. The 1st Plaintiff, a firm of solicitors, acted for EFL on the re-mortgage of the flat. On 8th September, the first mortgage in favour of WPFL was redeemed, and the second mortgage in favour of EFL and an agreement for the loan to CKIL by EFL were executed.

3. Following the execution of the second mortgage in favour of EFL and the loan agreement, EFL's solicitors drew a number of cheques: (i) a cheque for $4.26m. in favour WPFL to redeem the first mortgage; (ii) a cheque for $2,620.00 in favour of WPFL's solicitors, being their disbursements and costs; (iii) a cheque for $12,000.00 in favour of the Defendant, being his disbursements and costs; and (iv) a cheque for $143,867.67 in favour of the Defendant, being the balance of the loan to CKIL secured by the second mortgage (less EFL's solicitors' fees, an administration fee and interest).

4. These four cheques were sent to the Defendant on 11th September. They were sent subject to the Defendant's undertaking to send the title deeds to EFL's solicitors within three days of the Defendant receiving them from the Land Registry, or by 11th November, whichever was the earlier. The Defendant was willing to give that undertaking, because when he sent the cheques for $4.26m. and $2,620.00 to WPFL's solicitors also on 11th September, he did so subject to WPFL's solicitors' undertaking to send the title deeds to him by 28th September.

5. As it turned out, the Defendant was unable to comply with his undertaking to EFL's solicitors. That was because he did not get the title deeds from WPFL's solicitors. Accordingly, he could not send them to EFL's solicitors.

BREACH OF UNDERTAKING

6. On these facts, the Defendant was in breach (albeit innocently) of the undertaking he gave to EFL's solicitors. Mr. Rimsky Yuen for the Defendant does not contend otherwise. However, it is to be noted that both EFL and its solicitors are Plaintiffs, and the cause of action for breach of the undertaking is said to be a cause of action which they both have against the Defendant. It is strongly arguable that that is not correct. The probability, I should have thought, is that the undertaking was given by the Defendant to EFL's solicitors in their capacity as solicitors for, and as agents of, EFL. Accordingly, the Defendant must have unconditional leave to defend the claim for breach of the undertaking to the extent that the claim is brought against the Defendant by EFL's solicitors.

7. But what is the Defendant's defence to EFL's claim for breach of the undertaking? Two defences are advanced, and I must deal with them separately. The first is that EFL has not suffered any loss as a result of the breach of the undertaking given to EFL's solicitors. Mr. Kenneth Chan for the Plaintiffs contended in his skeleton argument that the loss was the amount of the four cheques which were all presented for payment. In my view, it is strongly arguable that that loss was not the result of the Defendant's failure subsequently to provide the documents. Mr. Chan's argument presupposes that the Defendant was under a duty not to forward the first two cheques to WPFL or its solicitors, and not to present the second two cheques for payment himself, until he had complied with his own undertaking. At present, I see no basis for asserting that the Defendant was under a duty of that kind. Moreover, Mr. Yuen has advanced a number of reasons (a) why the fact that EFL has not received the title deeds resulted in either no loss, or only minimal loss (of a kind which has not been pleaded), and (b) why such loss as EFL may have incurred could have been caused by fraud on the part of the directors of CKIL, or at any rate on the part of persons who purported to be directors of CKIL. I do not propose to spell out those reasons in this judgment. They are clearly set out in paras. 15-22 of Mr. Yuen's skeleton argument.

8. However, I believe that these arguments are beside the point. To establish liability for breach of contract, loss need not be proved. If no loss can be proved, EFL will recover nominal damages only. Even if it be the case that no loss can be proved, that does not mean that EFL has not succeeded in establishing liability for breach of the undertaking against the Defendant.

9. The second defence advanced by Mr. Yuen is that there was no consideration for the Defendant's undertaking. That argument is spelt out in Mr. Yuen's skeleton argument as follows:

"... the consideration for the advance of the loan was not the Defendant's undertaking. Instead, the consideration lies in [CKIL's] promise to repay the [mortgage] loan with interest ... in any event, by the time the undertaking was given by the Defendant, [EFL] had already agreed to advance the loan to [CKIL] by entering into the Loan Agreement. Thus, even if there was any consideration for the undertaking (which is denied), such consideration must necessarily be past consideration."

I cannot accept this argument. The issue is not what the consideration for the advance of the loan was. The issue is whether there was consideration for the Defendant's undertaking. There clearly was, namely the sending of the four cheques under cover of the letter in which the Defendant's undertaking was deemed to have been given. That consideration was not past consideration.

10. It follows that there must, at the very least, be judgment for EFL against the Defendant for damages to be assessed for the breach by the Defendant of his undertaking, unless there is, to use the words of Ord. 14 r. 3(1), "some other reason" for there to be a trial of the action.

SOME OTHER REASON

11. On that issue, Mr. Yuen relies on two related sets of proceedings. The first is HCA 11754/95, in which CKIL is alleging fraud against two of its directors and EFL in connection with the second mortgage. The second is HCMP 3711/95, in which EFL is seeking to enforce the mortgage. Accordingly, in para. 31 of his skeleton argument, Mr. Yuen argues:

"The existence of the Fraud Action and the Mortgage Proceedings are highly relevant to this Ord. 14 appeal. First, unless and until the Fraud Action and the Mortgage Proceedings are finally determined by this Court, the Plaintiffs cannot establish the loss that they are now apparently claiming. Second, both the Fraud Action and the Mortgage Proceedings are also relevant to the issue of causation. Thus, it is highly undesirable to determine this Action at the present stage without waiting to see the result of both the Fraud Action and the Mortgage Proceedings. Third, the existence of both the present Action and the Mortgage Proceedings may mean double recovery for at least [EFL]."

However, all these considerations relate, not to whether the Defendant is liable to EFL for breach of his undertaking, but to whether EFL has suffered any loss as a result of that breach. That affects only the question of the assessment of EFL's damages. It does not the affect the Defendant's liability to EFL. It may be that these considerations would persuade the master to defer the assessment of damages until after these actions have been heard and determined, but that must be a matter for him.

12. A new point was taken by Mr. Yuen in the course of argument.

"Where there are unexplained features of both the claim and the defence which are disturbing because they bear the appearance of falsity and disreputable business dealings and questionable conduct, the Court should not make tentative assessments of the respective chances of success of the parties or the relative strengths of their good or bad faith, and should not on such an examination grant the defendant conditional leave to defend, but should give unconditional leave to defend": The Supreme Court Practice 1997, Vol. 1, para. 14/3-4/8.

There are a number of strange features in this case. First, CKIL's previous solicitors "lent" some of the title deeds to another firm of solicitors. No explanation for that has ever been given. Secondly, a director of the company which sold the flat to CKIL was claiming later in 1995 to be the beneficial owner of the flat, and in 1996 he became a director of CKIL himself. These curious features, coupled with the claim that fraud was involved in connection with the second mortgage, may result in HCA 11754/95 concluding with the second mortgage being set aside. Mr. Yuen argues that an undertaking cannot be enforced if it was given in connection with a transaction which itself may be set aside for illegality. Mr. Yuen advanced no authority in support of that proposition: he simply relied by analogy on the law of guarantees. I do not see why the undertaking cannot be enforced in these circumstances. It is not as if the innocent party who gave the undertaking is without a remedy. He has a remedy against the persons who by the fraud induced him to give the undertaking in the first place. If Mr. Yuen was correct, the innocent party to whom the undertaking was given would itself be without a remedy.

13. For these reasons, I have not discerned a sufficient basis for denying EFL judgment now on the footing that there is some other reason for there to be a trial of the action.

MISCELLANEOUS MATTERS

14. In the interests of completeness, there are four other matters I should mention:

(i) EFL's solicitors claim a declaration against the Defendant that the Defendant is entitled to indemnify them against any liability which they may incur in connection with the execution of the second mortgage. Mr. Chan did not seek to obtain summary judgment for such a declaration, and the Defendant must therefore have unconditional leave to defend that claim.

(ii) EFL claims the return of the four sums represented by the four cheques. Mr. Chan did not abandon that claim for summary judgment, but he chose not to address any submissions in support of the claim. In my view, he was right to adopt that stance. It is, I think, strongly arguable that that claim is misconceived for the same reason that the amount of the four cheques cannot constitute EFL's loss as a result of the breach of the undertaking. Accordingly, the Defendant must have unconditional leave to defend that claim as well.

(iii) Mr. Yuen took a technical point on the Ord.14 summons. The summons seeks "final judgment", whereas a judgment for damages to be assessed is conventionally called an interlocutory judgment. He claims that the language of the summons, unless it is amended, prevents EFL from getting even judgment for damages to be assessed. There is nothing in the Rules of the Supreme Court which supports Mr. Yuen's claim. All he can rely on is the description in the headings of two of the forms in Appendix A to the Rules. Form 43 is headed: "Final judgment after assessment of damages". Form 44 is headed "Judgment under Order 14". However, the fact that the word "final" is excluded from Form 44 is not something which requires the court to conclude that a claim for final judgment does not include a claim for damages to be assessed.

(iv) As Mr. Yuen pointed out in his skeleton argument, there are number of ways in which a party who is seeking to enforce a professional undertaking given by a solicitor can proceed: by an action in law (if there is a cause of action), by an application to the court to exercise its inherent supervisory jurisdiction over solicitors, or by an application to the Law Society. Mr. Yuen's skeleton argument sets out the principles on which the court exercises its supervisory jurisdiction. He argues that compensation under that jurisdiction would only be awarded if the solicitor's conduct is inexcusable and such as to merit reproof. It may be that there was nothing which the Defendant had done which would have justified the award of compensation against him, but that is beside the point. The court's supervisory jurisdiction has simply not been engaged in this case. Although the Plaintiffs at one stage may have appeared to be relying upon it, the Plaintiffs could only have done so by issuing an originating motion invoking the court's supervisory jurisdiction in a proper way. They cannot rely on the court's supervisory jurisdiction by a sidewind in an action against the solicitor begun by writ.

CONCLUSION

15. For these reasons, this appeal must be allowed to a limited extent only. There will be judgment for EFL against the Defendant for damages to be assessed for breach by the Defendant of the undertaking deemed to have been given by him in the letter of 11th September. But with that exception, I confirm the master's order that the Defendant must have unconditional leave to defend the Plaintiffs' other claims against him. The allowing of this appeal implies no criticism whatever of the master, because the thrust of the arguments before him related not to whether there was a breach of the undertaking, but to whether, having regard to the court's supervisory jurisdiction, the Defendant's conduct was inexcusable.

16. Finally, it may be helpful if I say what my provisional view, subject to argument, is as to costs. I think that the costs of this appeal and of the Ord.14 summons itself should be reserved to the judge who tries the remainder of the Plaintiffs' claim. Only one of the Plaintiffs, EFL, has succeeded today. The other Plaintiff, EFL's solicitors, has failed. The success of EFL may prove to be a pyrrhic victory if EFL is held to have suffered no loss. That will only be known once the assessment has taken place. I do not think that costs should be in the assessment because that would make all the costs of the summons and the appeal dependent on whether the Plaintiffs will prove loss, and will not reflect the Plaintiffs' failure to obtain summary judgment for the other forms of relief which they claim.

(After further argument)

17. I now confirm my provisional view that the costs of and occasioned by this appeal, and the costs of and occasioned by the Ord.14 summons, be reserved to the judge who tries the remainder of the Plaintiffs' claim. In the event that no trial takes place, I give the parties liberty to apply so that the court can, in the absence of agreement, determine what the correct order for costs should be.