LAU MUI FUN AND OTHERS v. K.C. CHAN CO. AND OTHERS

1992 No. MP572

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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REASONS FOR ORDER

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1. By an agreement for sale and purchase dated 23rd July 1991 made between one Lo Yiu Man ("the Head Vendor") as vendor and one Lau Mui Fun ("the Confirmor") as purchaser, the Confirmor agreed to purchase the property known as Flat No. 1704, 17th Floor, Block U of Telford Gardens ("the Property") for a price of $1,398,000.00. By a further agreement for sale and purchase dated 28th August 1991, the Confirmor agreed to sell the property to Liu Tai Cheong and Siu Chung Man ("the Purchasers") for the price of S1,560,000.00. Completion of the sub-sale was to take place at 4:00 p.m. on 30th September 1991, one hour before the completion of the sale between the Confirmor and the Head Vendor. In the event, none of the two sales was completed. In H.C. Action No. A20 of 1992, the Confirmor and the Purchasers disputed as to who was in breach of the sub-sale agreement. Details of that dispute are not relevant to the present issues before me. There is no proceedings at foot between the Head Vendor and the Confirmor. I was given to understand by Mr. Yu appearing for the Confirmor that whilst he has no instruction to put on record that his client would not make any claim against the Head Vendor in future, it is unlikely to happen in view of the lack of action by his client up to the time of this hearing, almost eight months after the sale had fallen through. The Purchasers are claiming for a refund of the deposit and damages only, and not for specific performance. Likewise, it is unrealistic to believe that the Confirmor can still seek specific performance against the Head Vendor now after such a substantial lapse of time. That sets the stage for the consideration of the various applications before me.

2. By the originating summons in M.P. No. 572 of 1992, the Confirmor claims against the former solicitors of the Purchasers, Messrs. K.C. Chan & Co., for the return of the title deeds to the Property pursuant to an undertaking given by the said solicitors, as well as for a declaration for an indemnity for the loss and damage brought about by their breach of such an undertaking. The Purchasers are not parties to the originating summons.proceedings. By a summons dated 3rd April 1992, the said solicitors interpleaded asking the Confirmor and the Purchasers to state their respective claims to the said title deeds. That brought about a further summons dated 15th May 1992 by the Purchasers for joinder as a defendant in the originating summoins proceedings as well as stay of such proceedings pending the determination of the High Court action, or alternatively for a consolidation of both proceedings. After some initial difference of views, it was ultimately agreed that I should deal with all three applications at the same time.

3. The present dispute between the parties arose out of an undertaking given by the said solicitors to the Confirmor's solicitors under a letter dated 20th August 1991 sent by the Confirmor's solicitors to the said solicitors. The relevant part of the letter reads:-

" To enable you to approve the said draft Agreement, we sent you herewith the relevant title deeds and/or documents as set out in the annexed sheet. Kindly acknowledge receipt.

The said title deeds and documents are sent to you subject to your strict undertaking to return the same to us on demand." (my emphasis)

Though there is no evidence of any express written undertaking on those terms being given by the said solicitors, it is not in dispute that an undertaking in those terms was taken to have been given when the said solicitors accepted the title deeds without any qualification or objection to those terms. Not surprisingly, after the sub-sale fell through, the Confirmor's solicitors immediately demanded the return of the title deeds on the same day, i.e. 30th September 1991. That was refused by the said solicitors, initially on the ground as set out in a letter dated 8th October 1991 that:

"We are of the view that upon delivery of the completion money by us and acceptance of the same by your goodself the undertaking given by us to return the title deeds on demand has lapsed (my emphasis). As our client has not accepted the wrongful repudiation of the contract by your client and insist to complete the transaction and to claim damages against your goodself or your client we shall keep the title deeds until the cause is determined."

As events developed, the Purchasers ultimately changed their mind and abandoned their claim for specific performance by the issuance of the writ in the High' Court Action on 2nd January 1992. A complaint was made to the Law Society by the Confirmor's solicitors in December 1991 alleging a breach of the undertaking by the said solicitors. In January 1992, the Law Society declined jurisdiction as it was of the view that it has no power to procure specific performance of the undertaking. (As a matter of interest, it is open to the Law Society to require a solicitor to honour his undertaking with the censure that a failure to do so would attract disciplinary actions, per Balcombe L.J. in Udall v. Capri Lighting Ltd. [1988] 1 Q.B. 907, at 916).

4. After the commencement of the originating summons proceedings on 27th February 1992, and in an affirmation by Mr. K.C. Chan of solicitors made on 2nd April 1992, it was alleged on the papers before me, for the first time, that the Purchasers are entitled to a lien on the title-deeds for the deposit which should be refunded. A letter dated one day before that affirmation, i.e. 1st April 1992, was exhibited as showing the Purchasers' instruction to retain the title deeds. It now appears that the only ground for the retention of the title deeds is the alleged existence of a lien.

Position prior to the High Court Action

5. Though this point does not fall to be determined by me in the order sought, I should mention that it appears to me to stand to reason for the said solicitors to refuse to return the title deeds at a time when his clients, the Purchasers, were seeking specific performance against the Confirmor. And when there is a possibility they could require the Confirmor to complete the sale with the Head Vendor. Though the undertaking would not have "lapsed" as alleged by the said solicitors, it would certainly become unenforceable as long as the claim for specific performance subsists. However, such a possible excuse would fall to the wayside with the Purchasers' issuance of the writ in the High Court Action claiming a return of the deposit.

The Undertaking

6. It has been contended on behalf of the said solicitors' that the said undertaking is ambiguous, involving fine and subtle construction; or that there is real scope for genuine misunderstanding as discussed in John Fox v. Bannister [1988] 1 Q.B. 925. Mr. Cheung for the said solicitors submitted that the ambiguity lies' in the fact that such an undertaking clearly could not apply to some circumstances, e.g. after completion of sale, or when the purchaser is seeking specific performance pursuant to the vendor's breach, or when the "vendor" has no right to the title deeds, e.g. when he had stolen them from the true owner. In other words, he submits that the demand must be a lawful one. I am afraid he is confusing the construction of the meaning of an undertaking with the enforcement of the same. The terms of the undertaking is both clear and unequivocal. The only criterion to bring it into operation is the making of a demand. The demand need not even be in writing. The occurrence or existence of the factual circumstances referred to by Mr. Cheung would render an operative demand unenforceable in a court of law, i.e. affording the obligor of the undertaking a good excuse or defence in law to refuse performance. Such factual circumstances do not, and could not cast any doubt on the clear meaning of the terms of the undertaking. I find no merits in his submission. I am satisfied that the terms of the undertaking are clear and simple, and the said solicitors are obliged to return the title deeds upon demand by the Confirmor's solicitors, unless there exist other grounds affording them an excuse for non-performance of that obligation.

Excuses for non-performance

7. The only excuse put up by the said solicitors is their reliance on the discretionary nature of the court's jurisdiction over a claim for enforcement of a solicitor's undertaking: In this respect they urged the court to consider the Confirmor's conduct, the instruction of the Purchasers claiming a lien, the possible existence of a lien, and the predicament and difficulties facing them.

8. It will be helpful if the nature of this rather unusual jurisdiction of the court is to be outlined first. The nature of this summary jurisdiction is explained in the speech of Lord Wright in Myers v. Elman [1940] A.C. 282, at 319 -

"The underlying principle is that the court has a right and a duty to supervise the conduct of its solicitors, and visit with penalties any conduct of a solicitor which is of such a nature as to tend to defeat justice in the very cause in which he is engaged professionally, as was said by Abinger C.B. in Stephens v. Hill (1842) 10 M.&W. 28. The matter complained of need not be criminal. It need not involve peculation or dishonesty. A mere mistake or error of judgment is not generally sufficient, but a gross neglect or inaccuracy in a matter which it is a solicitor's duty to ascertain with accuracy may suffice .... It need not involve personal obliquity. The term professional misconduct has often been used to describe the ground on which the court acts. It would perhaps be more accurate to describe it as conduct which involves a failure on the part of a solicitor to fulfil his duty to the court and to realise his duty to aid in promoting in his own sphere the cause of justice. This summary procedure may often be invoked to save the expense of an action .... The jurisdiction is not merely punitive but compensatory."

9. It has also been said that such a jurisdiction is only available where the conduct of the solicitor is inexcusable and such as to merit reproof, per Lord Russell in Marsh v. Joseph [1897] 1 Ch. 213 at 244-245.

10. However, in the context of a solicitor's undertaking, Balcombe L.J. said that a "failure to implement a solicitor's undertaking is prima facie to be regarded as misconduct on his part, and this is so even though he has not been guilty of dishonourable conduct: see United Mining and Finance Corporation Ltd v. Becher [1910] 2 K.B. 296, and in particular the argument of the successful applicants, at p. 301; John Fox v. Bannister, King & Rigbeys, post, p. 925. However, exceptionally, the solicitor may be able to give an explanation for his failure to honour his undertaking which may enable the court to say that there has been no misconduct in the particular case: see Fox's case, post, p. 930 D-G."

11. The special nature of a solicitor's undertaking has been well explained by Hamilton J. in the United Mining case at p. 307 "when a solicitor in the course of business which he is conducting for clients with third parties in the way of his profession, gives an undertaking to those third parties incidental to these negotiations, that undertaking is one which is given in his capacity as a solicitor and not as a mere layman undertaking the office of stakeholder or guaranteeing the payment of money. It seems to me that the part which solicitors are nowadays well-known to play in elaborate negotiations, which constantly have to be embodied at various stages in legal forms of a highly technical character, constantly involves for the purpose of facilitating the business the giving of subsidiary undertakings for the payment of money and of a similar character, and that those undertakings are given in their capacity as solicitors, and money is entrusted to them under those undertakings largely because they are solicitors and are deemed therefore, and found to be, especially worthy of trust." That comment applies with much greater force to the ever more complex commercial settings 80 years later in the 1990s.

12. The special and unquestioned trust one solicitor reposes on another in respect of custody of title deeds in conveyancing transaction is a cornerstone in the conveyancing practice established in Hong Kong. The exchange of contract and delivery of an abstract of title have little application in Hong Kong in the past when in almost all normal transactions both parties would be represented by the same solicitor. In the past, as well as at present, when separate representation is involved there has developed a practice of delivery of original title deeds for examination against an usual absolute undertaking to return on demand instead of the delivery of an abstract of title. Such a practice has been developed to suit the convenience of solicitors as well as to cut down unnecessary paperwork. If no undertaking upon which the vendor's solicitor can repose absolute confidence for a return of the title deeds is forthcoming, he would never have been agreeable to the parting to the purchaser's solicitor the most vital piece of document founding the root of his client's title. Lost of client's title deeds would be a matter unimaginable to a vendor's solicitor. It would be a matter of disaster to any professional man. If the purchaser's solicitor is not prepared to give such an absolute and unqualified undertaking, he could only expect being allowed access to such title deeds at the vendor's solicitor's office for examination, and if necessary, photocopying after paying reasonable expenses thereof. He could hardly hope to obtain custody of such vital documents without an undertaking of such an absolute nature. This explains why the present undertaking, which is in the usual form, is in such simple, clear, unequivocally absolute and unqualified terms. To put any other construction on such an undertaking would be a violation of common sense and the long established practice in conveyancing.

13. This important background to a solicitor's undertaking in conveyancing matter explains the strong, perhaps one may say unsympathetic, decision of the Privy Council in Damodaran v. Choe Kuan Him [1980] A.C. 497. In and that case, the solicitor for the purchaser gave an undertaking to the vendor in a sale of land in Malaysia to pay over the balance of the purchase price he was holding upon the registration of the transfer of the land. The vendor duly obtained the registration of the transfer as required. However, the solicitor refused to pay over the money as undertook contending that a claimant had registered a lis pendens over the land in the meantime claiming an interest in the land transferred. Overruling the decision of the Federal Court to order payment of the money into court, their Lordships ruled that:-

        (a)     The claimant was a stranger to the proceedings between the vendor and the solicitor. The protection of the interests of the claimant was not a ground on which the judge could properly exercise a discretion to order payment into court.

        (b)     The purchaser, like the claimant, was a stranger to the proceedings between the vendor and the solicitors. The possibility of claims being made in the future by a stranger to the proceedings, even where those claims arose out of the transaction in relation to which the undertaking was given, is a matter which the court is not entitled to take into consideration as a ground for ordering payment into court instead of to the vendor.

        (c)     The main purpose and value of a solicitor's undertaking in transactions for the sale of land is that it is enforceable against the solicitor independently of any claims against one another by the parties to the contract of sale.

14. Admittedly, the Privy Council case is not on all fours with the present case in respect of certain factual circumstances. The sale was completed in that case and the purchaser could have no direct claim over the balance of the money held by the solicitor even if title could be defective; unless he is entitled to annul the sale which is not apparent from the report. The Purchasers in the present case is claiming a lien, a direct interest over the title deeds. The purchaser, or indeed the claimant, were not before the court in the Malaysian case, whereas the Purchasers are before the court in the present case. But it would appear that such distinguishing features would not affect the basis of their lordship's decision in view of their views on the independent nature of the solicitor's undertaking from the disputes between the clients.

15. If the Privy Council decision is to be applied literally to the present case, my conclusion would have to be that the existence of the.lien claimed by the Purchasers would not be a valid excuse in law in the said solicitors' failure to honour their undertaking. But, I do not think that was what their lordships meant. I do not take it to be their lordships' views that their general statement should be taken in absolute terms admitting no exceptions. I can hardly envisage their lordships enforcing an undertaking if the obligee was clearly, or admittedly, not entitled to the payment of the money, e.g. if he had no title at all to convey or was guilty of fraud towards the purchaser. Generally, such an undertaking ought to be viewed independently of the dispute between the vendor and purchaser unless justice of the case demands otherwise. However, it must be borne in mind that in the exercise of such summary jurisdiction the court is primarily considering the position vis-a-vis the obligee and obligor of the undertaking and not the dispute between the vendor and purchaser. The relevance of the dispute is to the manner as to how the discretion should be exercised, and whether injustice could result from performance of the undertaking. Thus, if the undertaking becomes incapable of being performed, the court would only order the solicitor to compensate the obligee of the undertaking for any loss he may suffer as a result of the breach of undertaking: see Udall's case at pp. 917-918.

16. If the Purchasers or the said solicitors managed to persuade me that a valid lien could exist over the title deeds, I would have to consider what order I should make against the title deeds. Whether the documents should be deposited with the court pending the resolution of the dispute between the Confirmor and the Purchasers? Or whether the title deeds should be returned to the Confirmor but either the Confirmor or the said solicitors should put up adequate security in substitution thereof? In the event, it was not necessary for me to consider such alternatives as I was not satisfied that a case for a lien has been validly made out by the Purchasers.

Lien

17. In Whitbread & Co. Ltd. v. Watt, [1901] 1 Ch. 835, and on appeal at 911, it was held that a purchaser has a lien on the land for the deposit he paid the owner in a sale that fell through. In Aberaman Ironworks v. Wickens [1868] 4 Ch. App. 101, the court went further and held that a sub-purchaser has a lien over the deposit recovered by the purchaser from the vendor, when the sales were not completed, for the repayment of his deposit by the purchaser. It was said that "the lien which a purchaser has for his deposit is not the result of any express contract; it is a right which may be said to have been invented for the purpose of doing justice. It is a fiction of a kind which is sometimes resorted to at law as well as in equity." per Vaughan Williams L.J. in Whitbread's case at p. 838 in the appeal.

18. Dart's "Treatise on the Law and Practice relating to Vendors and Purchasers of Real Estate", 8th ed., stated the law to be:-

"If the contract be rescinded through want of title or other default on the part of the vendor, or under a condition enabling the purchaser to rescind, or through any other circumstance not the fault of the purchaser, the purchaser,. if he has paid all or any part of the purchase-money, will have a lien for the same, with interest, on the land and title deeds ... If before completion the purchaser has resold, the sub-purchaser (upon recission taking place) will have a lien for any money paid by him upon whatever interest the purchaser may possess in the property." (my emphasis)

19. I accept the above principles to be good statements of the law. Mr. Yu for the Confirmor informed the court that his client is not claiming specific performance nor is there any litigation ongoing between him and the vendor. He confirmed that no lien is claimed by the Confirmor over the title deeds against the Head Vendor, and that the title deeds were required by the Confirmor for onward return to the Head Vendor. That is perhaps not surprising, as I am not made aware of any valid grounds upon which the Confirmor could claim that the Head Vendor was in breach in not completing the sale. In particular, the Confirmor pleaded in his counterclaim in the High Action that "By reason of the (Purchasers') breach of Sub-sale Agreement, the (Confirmor) was unable to complete the Head Agreement and the deposit paid by the (Confirmor) in the sum of HK$139,800.00 under the Head Agreement had been forfeited by the Head Vendor" (para. 29). It is obvious that when the sale fell through by the Confirmor to the Head Vendor was forfeited and the Confirmor is not disputing such right to forfeit. In the premise, upon the determination of the agreements for sale and purchase and the forfeiture of the Confirmor's deposit, the Confirmor can no longer claim any lien or any other interest over the title deeds or the Property itself. As the Confirmor has herself no interest in the title deeds, there is nothing upon which the Purchasers could claim a lien or any other interest. Thus, any claim of a lien by the Purchasers on the title deeds, properties belonging not to the Confirmor but to the Head Vendor, must necessarily fail.

20. Furthermore, such a claim of lien would also fail as the title deeds were delivered against a specific, unqualified and absolute undertaking to return. The said solicitors and the Purchasers do not dispute the validity of the statement of law that no lien can arise if the chattel was delivered for a special purpose. Clauses 31 and 32 of the sub-sale agreement clearly spelt out that the Confirmor was selling as a Confirmor and not as owner. There can be no misunderstanding on the part of the Purchasers that the Confirmor only have a limited interest in equity over the land, and perhaps also on the title deeds, before completion. There can also be no misunderstanding that the title deeds were given to the said solicitors for investigation of title and no other purpose, and was to be return upon demand. No lien can arise under such circumstances.

21. It is thus not necessary for any inquiry into who, as between the Confirmor and the Purchasers, was at fault in the termination of the sale. I would add that, on one view, the present state of law pertaining to a purchaser's lien over title deeds/land may seem to some to be unsatisfactory. But, in fact, it is not. A purchaser's entitlement to a lien would appear to depend on the conduct of the confirmor. If the confirmor is in breach of his agreement with the vendor, the purchaser will lose his lien. He will enjoy such a lien if, not only he himself, but also the confirmor, is free of blame for the termination of the sale. There can be no unfairness vis-a-vis the purchaser and the vendor as the purchaser is claiming through the title of the Confirmor. The purchaser can hardly complain. Vis-a-vis the confirmor, it is perhaps strange that a culpable confirmor can be allowed to rely on his own breach against the vendor to defeat any claim of lien by an innocent purchaser over the title deed or land. However, it has to be borne in mind that the title deeds/land do not belong to him but are properties of the owner. It highlights. perhaps the special care a purchaser has to take when dealing with a confirmor, especially with the parting of any sum of money to him rather than a solicitor as stakeholder.

Conduct of Confirmor

22. That brings me to the next issue raised by the said solicitors, i.e. is the Confirmor guilty of any conduct which should deprive her of the right to enforce the said undertaking. I do not accept the Confirmor was to be blamed for loosing her right of a lien over the title deeds by failing to complete with the Head Vendor. Her Defence and Counterclaim suggested she required the money from the Purchasers to finance such a completion. The reasons for the termination of the sale between the Confirmor and the Purchasers are in dispute in the High Court Action. No fault can be attributed to them at this stage prior to the resolution of that dispute.

23. Even if the Confirmor is in breach of the agreement and is to be blamed for the failure to complete, I do not find such conduct to be sufficient justification to deprive her of the benefit of the undertaking. This is because I have already concluded earlier that the said solicitors, and thus their client the Purchasers, could not be labouring under any misunderstanding as to the specific purpose for which the title deeds were placed in their custody, and the absolute and unqualified nature of the undertaking to return upon demand. The Purchasers ought to realise, had they been properly advised by the said solicitors, that such an undertaking is absolute and unqualified and they would not be entitled to claim any lien even if the Confirmor is in breach of the agreement and fail to complete. Furthermore, the impossibility for them to have any right of a lien in law ought to become apparent when the Confirmor lost her right of any lien over the title deeds herself when she failed to complete with the Head Vendor. Any further contention of a possible right of the Confirmor herself for a lien in the circumstances of this case is unrealistic and fanciful.

24. In view of the absence of any right to retain the title deeds, for both reasons supra, any possible breach of the sub-sale agreement by the Confirmor would not affect her right to the return of the title deeds.

Instructions of Client/Predicament of Solicitors

25. It is not an answer to a breach of an undertaking by a solicitor to allege that he has instructions to the contrary from his client. A solicitor is an officer of court and he owes a duty as such to "aid in promoting in his own sphere the cause of justice" per Lord Wright in Myer's case, supra. A solicitor is under no duty to assist his client to further any wrong. It is the duty of a solicitor, before he gives such an undertaking, to advise his client as to the nature and effect of such an undertaking. He ought to have advised his client as to the special risk and care in dealing with a confirmor; and in particular, in paying any deposit to the confirmor rather than to a solicitor as stakeholder pending completion. If that was done in this case, the Purchasers ought not to have any false hope of a lien. Any unreasonable instruction from client subsequently in blantant breach of such an undertaking ought to be resisted by the solicitor. If he has not properly advised his client prior to the giving of his undertaking, he has only himself to blame to be placed in such a predicament if things went wrong subsequently. He would have to honour the undertaking and face any suit from his own client for doing so.

26. It has been held that if the undertaking has not become impossible to perform, the court will require its performance even if it would involve the solicitor in paying money out of his own pocket to obtain a release of the lease from the bank to honour his undertaking to hold the lease: see Re A Solicitor [1966) 1 WLR 1604. In the Damodaran case, supra, their lordships did not find the probability of the solicitor facing a claim from his own client, the purchaser (the solicitor acting for both the vendor and purchaser), if the undertaking was to be honoured to have any effect on his obligation as officer of the court to honour such undertaking. If a solicitor unwisely gave an undertaking without adequately advising his clients as to the effect and nature of it, he can hardly be heard to complain later. And if he had adequately advise his client, and his client unreasonable demanded a breach of such undertaking by him, it is no excuse for him to say he is bound to obey such instructions of such a client. I am not satisfied that the Purchasers' instructions can be an excuse for the said solicitors not to honour their undertaking. Nor am I satisfied that they have been placed in an impossible predicament through no fault at all on their part. If proper and adequate advice had been given to the Purchasers by the said solicitors, they should have resisted the unreasonable instructions of the Purchasers and honour their undertaking. They should not have harboured any phantom fear of possible claims from such clients. I was not made aware by the said solicitors nor the Purchasers as to what, if any, advice on the undertaking and in general about a confirmor's sale was given by the said solicitors to the Purchasers prior or subsequent to the transaction: or what, if any, instructions were obtained from the Purchasers prior to the giving of the undertaking. I do not propose to speculate, and have set out my views on the alternative basis of proper advice and instructions being given and obtained, and that when that was not done. In either case, I could find no reasonable excuse. The solicitors had plainly acted wrongly in not honouring their undertaking.

27. In the event, there was no need to make any order under the summons for interpleader relief and joinder, and no order was made, save costs reserved. However, despite the passing comment by Hamilton J. in United Mining, supra at 307, that the solicitor might have taken out interpleader summons, I am not convinced that interpleader relief ought to be available to a solicitor, at least not after the obligee of the undertaking has already taken out an originating summons invoking the court's summary jurisdiction which is of a disciplinary nature. It would make a mockery of solicitors' undertakings if they be allowed to come to the court to interplead whenever clients instructed them not to honour such an undertaking. The solicitor cannot be heard to say that he has no interest in the subject matter of the relief, as his own conduct is in issue in a breach of undertaking. The complaint is against the solicitor personally. In such circumstance, it is not open to a solicitor to deposit the money or document into court and ask the respective parties to fight out the dispute amongst themselves. The court's supervisory jurisdiction over its own officers can never be eroded away by its officers in such a manner.

28. In the premises, I have at the end of the hearing ordered the immediate return of the title deeds to the Confirmor and an indemnity against the said solicitors for any loss that the Confirmor may have suffered consequential upon the breach of the undertaking. Reasons were reserved, which I now deliver. Costs were reserved until delivery of the reasons, and I shall hear counsel on the question of costs.

Dated the 10th day of June 1992.