SHIH PHILIP v. LI WAI KEUNG

CACV 77/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE

COURT OF APPEAL

CIVIL APPEAL NO. 77 OF 2009

(ON APPEAL FROM DCCJ NO. 2901 OF 2006)

----------------------

----------------------

-------------------------------------

REASONS FOR JUDGMENT

-------------------------------------

Hon Rogers VP:

1.  This was an appeal from a judgment of Her Honour Judge Mimmie Chan given on 9 October 2008.  The matter before the judge was a claim by the plaintiff that the defendant should convey his interest in a flat, namely 208 on the first floor of Block B of I-Feng Mansions, 237A To Kwa Wan Road, Kowloon (“the property”).  The plaintiff also claimed equitable damages.  There was a counterclaim by the defendant for various declarations and also for an order that the plaintiff should assign his title in that property.

2.  The judge made an order that the defendant should assign his interest in that property and ordered that, although the counterclaim should be dismissed, the plaintiff should pay the defendant HK$9,800.

3.  On this appeal the defendant sought an order that the judgment be set aside and that the counterclaim be allowed in whole or in part, without specifying which relief this court should grant the defendant.  At the conclusion of the hearing of this appeal, the appeal was dismissed with costs to the plaintiff and an order for legal aid taxation of the defendant’s costs.  Reasons for the judgment were to be given in writing, which we now do.

Background

4.  The history behind the case is important because, although the plaintiff’s case is based upon a written agreement in Chinese, it is common to the arguments of both sides that that agreement has to be interpreted in the light of the factual matrix which surrounds this case.  The judge carefully set out the facts and made clear findings.  Reference can be made to the judgment and there was no appeal against any of the findings of primary fact by the judge.  The brief facts that are relevant to the conclusion to which this court came are set out below.

5.  The defendant and Madam Wong Wai Sum (“Mdm Wong”) acquired the property as joint tenants in 1991.  According to the Land Registry records they paid $560,000.  Although there were previous charges, the property was mortgaged to Hong Kong Housing Loan Limited in November 2000.  Sometime in the next year, Mdm Wong met Madam Woo Chiu Lin (“Mdm Woo”).  Mdm Woo apparently had an interest in playing mahjong and also was prepared to make loans to people she knew.  In January 2002 the mortgage to Hong Kong Housing Loan Limited was transferred to Viewcon Hong Kong Limited (“Viewcon”).  In late 2002, the outstanding mortgage loan on the property was approximately $300,000 and the defendant and Mdm Wong were some 10 months late with the instalment payments.  At that stage Mdm Wong approached Mdm Woo for a loan.  According to Mdm Woo she borrowed $20,000 but there is a dispute between the parties as to whether that was borrowed in late 2002 or whether there was a loan borrowed in early 2002.

6.  As the judge recorded, there was discussion between Mdm Woo and Mdm Wong as to whether the property should be sold for $480,000.  Mdm Woo had apparently introduced a buyer who was prepared to purchase the property with a completion date 2 months ahead.  The judge appears to have accepted that Mdm Wong was very reluctant to part with the property and wished to delay the sale and so she persuaded Mdm Woo to purchase the property from her at a slightly lower price of $410,000 with a completion date 6 months ahead and a buy back provision.

7.  For some reason Mdm Woo did not wish to take the property herself but she arranged that the transaction would be carried out in the name of one of her sons, Allan Lee (“Allan”).  On 5 October 2002, a provisional sale and purchase agreement of the property was signed between Allan as purchaser, and Mdm Wong and the defendant as vendors for a price of $410,000.  The purchase price was to be paid in 3 instalments.  $16,000 plus $4,000, was to be paid on signing of the provisional agreement.  $80,000 was to be paid on or before 7 October 2002, upon the signing of a formal sale and purchase agreement, and $310,000 was to be paid on or before completion 6 months later, on 7 April 2003.  The provisional agreement included clause 13 which provided that the agreement “may be cancelled and the deposit will be returned by giving one month’s prior notice that vacant possession will not be delivered”.  There was a separate handwritten document signed by Allan, confirming that if Mdm Wong and the defendant gave one month’s notice before completion, the deposit of $100,000 could be returned with interest and legal costs as compensation.

8.  The formal sale and purchase agreement was signed on 8 October 2002.  The $80,000 balance of the deposit was paid in the following manner, $40,000 was paid directly to Viewcon and the remaining $40,000 was paid in cash to Mdm Wong and the defendant.  A number of matters may be noted here.  In the first place there was nothing in the formal sale and purchase agreement which corresponded to the handwritten note which permitted Mdm Wong and the defendant to cancel the sale, although there was a corresponding provision to clause 13 of the provisional sale and purchase agreement.  In the second place, as time went by, Mdm Wong and the defendant requested Allan to extend the completion date from 7 April 2003 to 6 June 2003.  In the third place Allan did not wish to go ahead with the purchase but, as confirmor sold the property to the plaintiff, (“Philip”), who was another son of Mdm Woo.

9.  When the date for completion came, on 6 June 2003, Mdm Wong and the defendant failed to attend to execute the assignment.  Mdm Wong’s explanation was that she was concerned that if she sold the property, which would have been caused by the debts which she had incurred, the defendant, who was her close friend but not her husband, might leave her and would not see her again.  It thus came about that Mdm Wong persuaded Mdm Woo to agree to retain the defendant named as a 50% owner of the property.  The judge accepted that Mdm Woo agreed to oblige Mdm Wong by giving her and the defendant more time to buy back the property as a compromise.

10.  As the judge recorded in paragraph 20 of the judgment, by early June, Mdm Woo, by herself or through her sons, had paid about $180,000 which included the deposit under the provisional agreement, the sale and purchase agreement and the legal and other fees.  Mdm Woo also claimed that there was a separate loan of $20,000 that had been lent previously.  The outstanding amount due under the mortgage to Viewcon was $338,023.01.  The judge referred to Mdm Woo’s version of the agreement that was reached in paragraph 20 of the judgment, the essence of which was that Mdm Wong and the defendant could buy the property back by paying Mdm Woo a total of $200,000 in 2 instalments within a period of 3 years.  In effect, they could purchase back both Mdm Wong’s half share of the property as well as the defendant’s.  In the meantime a mortgage loan of $287,000 would be obtained by Philip and the defendant from Wing Lung Bank and that would be used to finance the purchase of the property at the price of $410,000 and in the process the Viewcon mortgage would be paid off.  The Wing Lung Bank mortgage would be serviced by the defendant and Mdm Wong, on the one part and Philip and Mdm Woo, on the other part, in equal shares.  The buy back option was to be subject to a timetable for payment of the sum of $200,000.

11.  It thus came about that there was a cancellation agreement signed by the defendant, Mdm Wong and Allan and on the same day a sale and purchase agreement was signed between the defendant and Mdm Wong as vendors on the one part and the defendant and Philip as purchasers.  The purchase price was, again, $410,000.  The Wing Lung Bank mortgage loan of $287,000 was taken out on 23 June 2003 and the Viewcon mortgage was paid off.  The instalments under the mortgage were $3,000 per month for a total of 110 monthly instalments.

12.  On 2 July 2003 Mdm Wong and the defendant executed an assignment of the property in favour of the defendant and Philip as tenants in common.  It was at this stage that the agreement which is central to this case was signed.  The first point to be noted about this agreement is that although the sale and purchase agreements and the assignment were prepared by solicitors, the agreement was prepared by a Mr Kwan, who had been an acquaintance of Mdm Wong’s sister and who was said to have been in the “dispatch” department of a solicitors’ firm.  Whatever else can be said about this agreement it is clear, as has already been noted, that it is something which has to be read in the context of the events which led up to it.  For convenience I set out the English translation of that agreement (“the agreement”):

“ AGREEMENT

In respect of the debt owed by Madam Wong Wai Sum ID No. B590878(2) and Mr Li Wai Keung ID No. E785074(7) to Shih Philip ID No. K677398(2) in the sum of HKD200,000, now Shih Philip and Li Wai Keung each owns 50% interest in the unit at Flat B, 1/F, 237A, To Kwa Wan Road.  Upon repaying HKD200,000 to Shih Philip within 3 years, Shih Philip shall return 50% interest in the unit to Li Wai Keung.

Repayment method: in the first phase $100,000 is to be repaid in full (by-18 instalments) commencing July 2003 up to December 2004.  If he breaches the abovementioned agreement, Li Wai Keung will at the same time lose his 50% interest in the abovementioned unit, and all interest in that unit shall be owned by Shih Philip.  In the second phase, $100,000 is to be repaid in full (by 18 instalments) commencing January 2005 up to June 2006.  From July of that year, the interest in the abovementioned unit will also be fully owned by Li Wai Keung, and Shih Philip will lose his 50% interest in that unit, and neither party owes the other anything.

Now, the front portion of the abovementioned unit is owned by Shih Philip, while the rear portion is owned by Li Wai Keung and Shih Philip.  Starting from July 2003, each of the parties (Li Wai Keung and Shih Philip) pays half of the expenses, including the unit’s bank mortgage repayments totalling HK$287,000, rates and the common building management expenses.  It is sincerely hoped that both parties will abide by this agreement.

(1)    Shih Philip owns the right to collect rent of the front portion of the abovementioned unit as compensation for interest on the HK$100,000.  Upon the receipt of HK$100,000 in full, Shih Philip and Li Wai Keung will jointly own all interest in the unit.

(2)    If Li Wai Keung is unable to repay HK$100,000 within 18 months, all monies received shall be returned to Li Wai Keung and at the same time 50% interest in the unit will be returned to Shih Philip.

(3)    The repayment method for the second phase is the same as that for the first phase, that is to say, upon-repayment of HK$100,000 in full within 18 months, Shih Philip will return 50% interest of the abovementioned unit to Li Wai Keung.

Party A: Li Wai Keung (signed)

Party B: Shih Philip (signed)

Witness to Party A: illegible E732028(4)

Witness to Party B: illegible B907991(8)

  Li Wai Keung

  (signed)  ”

13.  The judge construed the agreement against the background of the relevant facts.  Her judgment was directed to discerning the real intention of the parties.  Her conclusions in respect of the agreement were summarised in paragraph 34 of the judgment where she said:

“34.  On the evidence adduced in this case, I am satisfied that the intention of Madam Woo, Madam Wong and Mr. Li when they made the Provisional Agreement and when they signed the Agreement was to enter into a sale and purchase of the Property, with a right given, first to Madam Wong and Mr. Li in October 2002 to repurchase the Property before June 2003, and then to Mr. Li in July 2003 to repurchase the Property before June 2006.  Madam Wong’s acknowledgment that there was a genuine assignment of her interest in the Property in July 2003 strengthens the case of the parties’ intention to enter into a genuine sale with an option of repurchase.  I am satisfied that at all material times, Madam Wong and Mr. Li fully appreciated that they had the right to buy back the Property by payment of the sum of $200,000, but they had to do so by June 2006 at the latest.  The option was in their hands, and was obviously to their advantage.  In the interim, Madam Woo and Philip took possession of the front portion of the Property, was at liberty to lease it out and keep the rents, and importantly, assumed the obligations and liabilities of a co-owner of the Property to discharge the mortgage installments and payment of the management fees and outgoings.  I do not accept that the substance of the transactions constitutes a mortgage.”

14.  On the basis that the arrangement arrived at was not a mortgage, as the judge said in paragraph 36 of the judgment, the question as to whether there was a clog on the equity of redemption simply did not arise.

15.  The judge then considered whether the option to repurchase had been exercised and came to the conclusion that it had not been.  In doing so the judge did not accept Mdm Wong’s evidence.  Finally the judge considered the question as to whether the agreement was unconscionable and as to whether it was penal.  In respect of both matters the judge held in the plaintiff’s favour that the agreement was not unconscionable and was only prepared to go so far in the defendant’s favour as putting a value on the property as at October 2002 and July 2003 of $480,000.  On that basis and taking into consideration the amount which the plaintiff had paid in respect of the property and the discharge of the Viewcon mortgage the agreement was not unconscionable.

This Appeal

16.  On this appeal Mr Ling, who appeared on behalf of the defendant, took three main points.  The first was that the agreement should be construed as a mortgage.  The second was dependent on that; it was that there was a clog on the equity of redemption.  In default of those two arguments succeeding he argued that the provisions of the agreement constituted a penalty.

17.  In respect of the first point counsel approached the case, as did the judge below, on the basis that the court had to determine the proper characterisation of the transaction and to do so had to take into account all the relevant surroundings circumstances as part of the process of construing the relevant documents.  Having said that, however, the argument as to the nature of the transaction was based largely upon the wording of the agreement itself.

18.  In my view, the starting point must be to assess what it was that the parties were concerned to achieve.  The beginning must be the position of the defendant and Mdm Wong.  It is clear that by late 2002 they were in considerable financial difficulties with regard to the property.  There was a large amount owing on the mortgage and Mdm Wong was in the position of having to borrow money.  With regard to the dealings with the property, the first suggestion which had been made and was followed up to the extent of introducing Mdm Wong to a potential buyer, was that the property should be sold for $480,000.  Then, because Mdm Wong and, probably also, the defendant were reluctant to part with the property unless it were inevitable, the provisional sale and purchase agreement came into existence.  Two matters are relevant here.  The first is that there was a specific clause which enabled the purchaser to refuse to complete if vacant possession could not be given.  The second was that there was a clause in what appears to have been a side agreement which would permit Mdm Wong and the defendant to abort the sale provided she returned the deposit.  Both those factors appear to me to point clearly in the direction that there was to be a sale of the property and it was not a matter of a mortgage.  The corresponding sale and purchase agreement also contained a clause allowing the purchaser to avoid purchasing the property if vacant possession could not be given, but importantly there was no clause permitting Mdm Wong and the defendant to abort the sale.

19.  Completion was postponed by agreement and then, after that, Mdm Wong and the defendant failed to convey the property because they did not attend when the assignment was due to be signed.  That fact, again, demonstrates that at least up to that stage Mdm Wong and the defendant did regard the arrangement as a sale.  That is confirmed by the fact that new negotiations were entered into.  Those new negotiations resulted in the property being conveyed to Philip and the defendant as tenants in common.  As part of that process the mortgage to Viewcon was repaid and a new mortgage was taken out in Philip and the defendant’s name.  The amount of the new mortgage was some $50,000 less than the liability which was repaid to Viewcon.  It would appear accepted that the difference must have been paid by Mdm Woo or Philip.  It might also be added that in view of the amount outstanding on the mortgage to Viewcon, the fact that the instalments under that mortgage were substantially, if not dangerously, in arrears and the estimated value of the property in July 2003 which the judge put at $480,000 would have left Mdm Wong and the defendant with an excess value of the property over and above what was due on the Viewcon mortgage of little more than $60,000 each.  That would not take into account and ignore the deposit of $100,000 that had been paid nor the claimed $20,000 loan.  At least as far as the $40,000 that had been paid to Viewcon, that money had been used up.  In reality, therefore, the defendant and Mdm Wong had little or no equity left in the property.  The judge recorded that Mdm Wong did not dispute that she had agreed to a genuine assignment of her half share of the property in 2003.

20.  It is in the light of this that the agreement has to be considered.  It was clearly not drafted by anyone with legal skills.  It can also be said that there is no unambiguous interpretation which can be put upon the document if it is read in isolation.  The judge considered that for the most part, at least, where it made reference to the defendant it was making reference to the defendant and/or Mdm Wong.  Clearly, for example, in the final paragraph, numbered (3), the reference to Philip returning 50% interest in the property to the defendant is an example where such a construction is necessary.

21.  When one takes into consideration, first of all, the position of the defendant, the conclusion is arrived at that as of July 2003 the defendant’s interest in the property was worth almost nothing.  On the basis that he were to pay $100,000 to Philip, he would then be entitled to half the value of the property.  Taking July 2003 figures the value of the property would have been $480,000 less what would have been outstanding on the Wing Lung Bank mortgage which at the inception was $287,000.  Although it might be said that the parties would have been considering the likely position 18 months ahead, the only predictable difference would have been that the mortgage would have been reduced but, had everything gone according to plan, each of the defendant and Philip would have contributed to that in equal shares.  Hence on a rough basis, looking at it as of July 2003, he would gain an interest in the property worth, perhaps, slightly more than $100,000 and would have paid $100,000.  Looking forward 18 months he would have paid about $27,000 in his share of mortgage repayments, but then the equity in the property would have correspondingly increased.

22.  It is noteworthy that the penultimate clause, numbered (2) provided that if the defendant was unable to repay $100,000 within 18 months any money that he had paid would be returned to him.  That would clearly not be the way a mortgage would normally operate.  Furthermore, whilst one cannot read too much into the expression “returned to Shih Philip”, such expression would be consistent with the parties having approached the matter on the basis that the property had been sold to Philip and that it should have been so conveyed but that Philip had agreed to a conveyance of half the interest in the property to the defendant pending the final conclusion.

23.  As regards the second phase payment of the second tranche of $100,000 to be paid prior to June 2006, that would result in Philip being paid almost exactly the amount which had been paid by Mdm Woo through herself and her sons.  There would certainly be no profit made by them on the transaction.  It is true that Philip would have had exclusive use, probably in the form of rent, of the front portion, but then if he conveyed the whole interest in the property to the defendant, he would in the intervening 3 years have paid out a further $54,000 as his share of the mortgage payments in the interim.  As was referred to in the course of argument the reference in the final paragraph, numbered (3), to the repayment method for the second phase being the same as that for the first phase is likely to have been a reference to the previous paragraph, numbered (2), with the result that if some payments were made but the full payment were not made those payments which had been made would be returned to the payer.

24.  In my view, therefore, the judge was correct in looking at the transaction as being a buy back arrangement, the property having been sold to Philip for $410,000 with an opportunity to the defendant together with, or at least possibly, on behalf of Mdm Wong to buyback their interests in the property.  Looked at as a whole, I cannot see that this transaction was in any way unfair.  It may well be that the defendant and Mdm Wong would not have been in a position to raise the necessary funds and any thought that they might do so would have been no more than wishful thinking, but that would have been wishful thinking on their part and not any oppression on the part of Philip or Mdm Woo.  For their part, Philip and Mdm Woo had not only paid a great deal of money but in the case of Philip, he had committed himself to a mortgage with a co-mortgagor whose financial standing was less than certain.

25.  Finally, I would add that I have not ignored the various authorities that were cited by Mr Ling as to the difference between a mortgage and a sale with buy back provisions.  It is clear that even with arrangements that have been carefully drafted by lawyers, there can be difficulties in discerning which has been arrived at.  In this case, it appears to me that the crucial matter is ascertaining the intention of the parties and I consider the judge came to the correct conclusion after taking into account all factors, including the oral evidence of the parties in relation to the surrounding circumstances and events.

Hon Le Pichon JA:

26.  I agree.

Hon Sakhrani J:

27.  I also agree.