STANDARD CHARTERED BANK v. SHEM YIN FUN AND ANOTHER

HCMP3289/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3289 OF 1998

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J U D G M E N T

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1. This judgment is divided into the following sections for easy reference :

BACKGROUND

2. Mr Tang Chun and his wife Madam Shem Yin Fun ("Mr Tang" and "Madam Shem" respectively and "the Tangs" collectively) are and were at all material times the registered owners of Flat A, 15/F, Celeste Court, Nos.10-12 Fung Fai Terrace, Hong Kong ("the Celeste Court Property"). By a power of attorney dated 13 January 1995 ("the 1995 Power"), they appointed their daughter-in-law, Ms Chow Sin Ho ("Ms Chow") to be their attorney in accordance with section 7 of the Powers of Attorney Ordinance ("POAO"). On 25 April 1996, armed with the 1995 Power, Ms Chow executed a mortgage subsequently dated 2 May 1996 ("the Mortgage") purportedly on behalf of her parents-in-law in favour of the plaintiff, with the Celeste Court Property as part of the security for the banking facilities of $39 million the plaintiff advanced to the borrowers, Delight Enterprises Limited, Delight Industrial Company Limited, Legend Trading Company Limited and Lung Cheung Photo Supply Limited (collectively "the Delight Group" or "the Borrowers"). One of the directors of the Delight Group was Ms Angelica Chan Siu Ping ("Ms Chan"), a friend of Ms Chow's. The Mortgage was prepared by the plaintiff's solicitors, Messrs Deacons and executed by Ms Chow in the presence of the handling solicitor, Ms Lydia Wu ("Ms Wu").

3. The Borrowers subsequently defaulted. As at July 1998, the outstanding indebtedness exceeded $10 million.

4. By an originating summons dated 13 July 1998, the plaintiff commenced the present proceedings against the Tangs for money judgment and vacant possession of the Celeste Court Property. On 27 November 1998, Registrar Chu (as she then was) adjourned the originating summons for argument before a judge in open court. On 5 March 1999, Cheung J (as he then was) ordered that the deponents of the affirmations be tendered for cross-examination at the hearing and their evidence in the affidavits do stand as evidence-in-chief. He also gave directions for filing of further affidavits and discovery. However, when the matter came up for hearing before Deputy Judge Z.E. Li (as he then was) on 1 and 2 September 1999, he declined to receive any oral evidence. In the end, he entered judgment for the plaintiff on 16 September 1999. Dissatisfied, the defendants appealed. On 17 March 2000, the Court of Appeal allowed the appeal and set aside the order of the deputy judge on the ground that there remained factual issues which had not been decided and ought to be tried if justice was to be done. The proceedings were then ordered to continue as if begun by writ, that pleadings be filed and served, and that the matter be set down for trial within 14 days after close of pleadings.

5. On 16 July 2000, Mr Tang passed away. The action was ordered by Waung J on 15 May 2001 to continue with the appointment of Madam Shem as the administratrix of Mr Tang's estate. Eventually, more than three years after its commencement, the action came before me for trial on 17 September 2001. It took 13 days to finish whereupon I reserved judgment. In March 2002, counsel made further submissions in writing concerning some authorities that were available only after the conclusion of the trial.

THE PLAINTIFF'S CLAIM

6. The plaintiff's claim is straightforward. It sought to rely on various terms of the Mortgage. The Mortgage was an "all monies" security of the banking facilities granted to the Borrowers : clauses 2 and 3. Upon the Borrowers' failure to discharge the indebtedness under the facility, the plaintiff is entitled to enforce the security by claiming vacant possession of the Celeste Court Property : clauses 7.1(a) and (b), 8.1 and 8.2. The claim for money judgment against the defendants has now been dropped. The plaintiff accepts that under clause 4 of the Mortgage, only the Borrowers are liable to discharge the indebtedness.

7. I will later return to some of the more important clauses of the Mortgage in greater detail when discussing the Unconscionable Bargain Defence.

A SUMMARY OF DEFENCE

8. While not disputing that Ms Chow did execute the Mortgage purportedly on behalf of the Tangs, the defendants denied liability on a number of grounds :

(1) The 1995 Power was given for the sole purpose of letting the Celeste Court Property, which was spent after the Celeste Court Property was let out under a tenancy agreement dated 27 January 1995 ("the Purpose Defence").

(2) Madam Shem had verbally revoked the 1995 Power in about January or February 1995 ("the Revocation Defence").

(3) The 1995 Power was not a valid and effective instrument ("the Validity Defence").

(4) The Mortgage was not validly executed ("the Execution Defence").

(5) The Mortgage was an unconscionable bargain ("the Unconscionable Bargain Defence"). In brief, the defendants aver that the plaintiff as bankers to the Borrowers required additional security or collateral in the form of unencumbered real property to be provided before it would extend or grant new banking facilities. The plaintiff therefore asked the directors of the Borrowers to provide further security in such form. The plaintiff well knew that the Tangs were neither shareholders nor directors of the Borrowers. Ostensibly the Tangs were providing the Celeste Court Property to secure additional banking facilities for the unrelated Borrowers by way of security to the plaintiff, who well knew that neither they nor Ms Chow received any financial benefit out of the transaction. Neither the plaintiff nor its solicitors had prior to the execution of the Mortgage took any step or effective step to contact the Tangs or Ms Chow and to ensure that each of them had appropriate independent legal advice before entering into the Mortgage.

(6) The plaintiff and its solicitors had constructive notice of fraud practised on the Tangs ("the Constructive Notice Defence"). Fraud in this context, as confirmed by Mr Pirie who appeared for the defendants, means the misuse of the 1995 Power by Ms Chow in executing the Mortgage upon the persuasion to do so by one of the directors of the Borrowers, Ms Chan. Before the execution of the Mortgage, the plaintiff had failed to make enquiry with the Tangs or to advise them that they should take independent advice.

9. The defendants accordingly counterclaimed for a declaration that the Mortgage should be set aside.

AGREED ISSUES

10. Pursuant to the order of Waung J, the parties filed a joint list of issues on 19 July 1999 setting out the agreed issues that the court needs to determine. They are :

(1) Whether the plaintiff, before and up to the time when the Mortgage was executed by Ms Chow was informed by Ms Chan of the fact that the Tangs were in Canada and were not aware of the intended Mortgage.

(2) Is the 1995 Power a valid general power of attorney made in statutory form in accordance with section 7 of the POAO?

(3) If the answer to (2) is negative, is the 1995 Power qualified in any way a general power of attorney which purports to take effect under section 7?

(4) If there is more than one donor, should each donor create a separate deed of power of attorney in order to take effect under section 7 in view of the wording "I" and "my" are set out in the Schedule of the POAO?

(5) If the answer to (4) is negative, then should the 1995 Power at least spell out whether the Tangs JOINTLY AND SEVERALLY appoint Ms Chow to be their attorney?

(6) If the answer to (5) is positive, is the 1995 Power a valid power of attorney in view of the absence of the words i.e. JOINTLY AND SEVERALLY?

(7) If the answer to (6) is positive, is the purported execution of the Mortgage by Ms Chow for and on behalf of the Tangs a valid execution under section 6 of the POAO?

(8)	(a) If the answer to (7) is negative, in what manner should Ms Chow execute the Mortgage?
	(b) Should Ms Chow not sign her name twice on the mortgage deed since she was acting jointly and severally for and on behalf of the Tangs?
	(c) Alternatively should Ms Chow not sign on the mortgage deed both the names of the Tangs?

(9) Should the plaintiff, in view of the fact that the transaction was not effected within 12 months of the date on which the power came into operation, take any steps to ascertain and/or make any enquiries with Ms Chow as to whether the power had been revoked?

(10) Should the plaintiff, in view of the fact that the power was not exercised in the interests of the Tangs, take any steps to ascertain and/or make any enquiries with Ms Chow as to the purported scope of her power?

(11) Was Madam Shem's verbal revocation of the power in or about January or February 1995 a valid revocation?

(12) If the answer to (11) is positive, was the Mortgage validly executed by Ms Chow?

(13) Can the Tangs attribute liability to the plaintiff if the plaintiff fails to take any steps to ascertain and/or make any enquiries as to the matters referred to in paragraphs (9) and (10) hereinabove?

(14) If the answer to (13) is positive, should the court not set aside the Mortgage under its inherent jurisdiction?

11. Generally speaking, the 1st issue relates partly to the Purpose defence and partly to the Unconscionable Bargain defence and the Constructive Notice defence. The 2nd to 6th issues relate to the Validity defence. The 7th and 8th issues relate to the Execution defence. The 11th and 12th issues relate to the Revocation defence. The 9th, 10th, 13th and 14th issues relate to both the Unconscionable Bargain defence and Constructive Notice defence. Mr Pirie referred to other issues that the parties have not agreed. Some of them relate to findings of facts. Some are further elaboration of the agreed issues. Some are questions of law. I will not set them out in full. They will all be covered in the rest of this judgment.

EVIDENCE

12. To substantiate its claim, the plaintiff called five witnesses. Two of them were the handling solicitors responsible for the preparation of the Mortgage and incidental matters, Mr Jimmy Wu ("Mr Wu") and Ms Wu. Mr Wu is a partner of Deacons. He was admitted in 1981 and had over 20 years of experience in conveyancing practice, including matters pertaining to mortgages. Ms Wu was admitted in 1991. She had more than 10 years experience in conveyancing practice. She worked in Deacons between April 1995 and January 2001. She assisted Mr Wu in dealing with the investigation of title, preparation and execution of the documents relating to the three mortgages involved in the transaction including the Mortgage. The other three witnesses were the plaintiff's officers, Mr Patrick Lee ("Mr Lee"), Ms Phyllis Ma ("Ms Ma") and Ms Ivy Au Yeung ("Ms Au Yeung"). They were all members of the footwear team of the plaintiff's corporate banking group, which dealt with, inter alia, the application for banking facilities by the Borrowers, instructions to Deacons to prepare the Mortgage and the subsequent supervision of the Borrowers' accounts. Mr Lee was at all material times the senior relationship manager of the team. He left the plaintiff in October 1996. Ms Ma was the assistant relationship manager. She left in about January 1998 whereupon Ms Au Yeung took over from her the supervision of the Borrowers' accounts.

13. Madam Shem herself and Ms Chow gave evidence for the defendants.

14. Although some factual issues are hotly contested, a considerable portion of the evidence is not seriously in dispute. Some aspects of the oral testimony are also supported by contemporaneous documentation. For clarity, I will summarize below the evidence adduced by the parties chronologically under various headings and highlight the factual disputes.

(1) Dealings in properties by the Tangs

15. The Tangs worked in Chinese Arts & Crafts (HK) Ltd before their retirement in the early 1990s. Mr Tang was then the general manager and Madam Shem, an account manager. After their retirement, they migrated to Canada.

16. The Celeste Property is not the first property the Tangs purchased. In the course of cross-examination, Madam Shem admitted that other properties had been bought in the past although she could not recall all the particulars. In about 1985, a flat with tenancy in Pokfulam Garden, Pokfulam was bought, which was sold in 1987 after the tenant failed to renew the tenancy upon expiry. A flat in Whompoa Garden, Hunghom was then bought. The couple intended to live there but later changed their mind. The flat was then sold. In 1989, they bought Room 2402, Block A, Kornhill ("Unit 2402"). According to land search record, in October 1989, the couple bought Room 2608, Block A, Kornhill ("Unit 2608") and sold it in January 1991. They then bought Room 2503, Block E, Kornhill ("Unit 2503") whereupon Unit 2402 was sold.

17. In April 1991, the Tangs purchased the Celeste Court Property by way of a pre-sale agreement with an equitable mortgage created in favour of the Bank of East Asia ("BEA"). On 16 November 1992, they acquired the title by virtue of an assignment with a legal mortgage executed in favour of BEA.

(2) The 1995 Power & its alleged revocation

18. In late 1994, the Tangs returned to Hong Kong from Canada. They desired to let out the Celeste Court Property. As they were about to return to Canada, they decided to execute a power of attorney authorizing Ms Chow to rent out the property, sign a tenancy agreement with a suitable tenant and issue rental receipts on their behalf. On or about 13 January 1995, they attended the office of Messrs K.C. Tsang & Company and executed the 1995 Power, which was couched in the following terms :

"THIS GENERAL POWER OF ATTORNEY is made the 13th day of January One thousand nine hundred and ninety-five.

By TANG CHUN (唐群) (Holder of Hong Kong I.D. Card No.A305696(4)) and SHEM YIN FUN (沈燕芬) (Holder of Hong Kong I.D. Card No.A305695(6)) both of [Unit 2608].

We appoint CHOW SIN HO (周倩荷) (Holder of Hong Kong I.D. Card No.D536400(1)) of [Unit 2608] to be our attorney in accordance with Section 7 of the Powers of Attorney Ordinance Chapter 31 of the laws of Hong Kong.

IN WITNESS whereof we have hereunto set our hands and seals the day and year first above written.

SIGNED SEALED AND DELIVERED	)
	)
by the said TANG CHUN and SHEM YIN	)
	)
FUN in the presence of :-	)	"

The witness was a clerk to Messrs K.C. Tsang & Co., Mr Nam Ka Po. Unit 2608 was stated to be address of the Tangs and Ms Chow. It was a mistake as Unit 2608 had already been sold by then. Both Madam Shem and Ms Chow had no idea why a wrong address was given. However, nothing of significance arose out of it.

19. It is Madam Shem's evidence that it was all along the couple's intention that the 1995 Power was to enable Ms Chow only to deal with the renting of the Celeste Court Property and signing of a tenancy agreement in their absence. A clerk of Messrs K.C. Tsang & Co. (presumably, Mr Nam) explained to them that by executing the 1995 Power, Ms Chow would then have the necessary authority to handle the tenancy in their absence. They did not know that it could be used for other purposes.

20. Ms Chow corroborated Madam Shem, saying that the 1995 Power only authorized her to sign tenancy agreements and collect rent in respect of the Celeste Property. She disagreed with the suggestion that she knew that it was not limited to that purpose. She went on to say that she did not pay much attention to that point at the time.

21. On 14 January 1995, the Tangs returned to Canada. Three days later on 17 January, Ms Chow signed for and on their behalf a tenancy with one Takgai Securities (HK) Ltd for a term of two years from 1 February 1995 to 31 January 1997 at the monthly rent of $35,000. Subsequently, Ms Chow collected from the tenant cheques for rent and deposited the same in Mr Tang's bank account in Hong Kong.

22. It is Madam Shem's evidence that she had verbally revoked the 1995 Power during a long distance telephone conversation with Ms Chow in about February 1995. She mentioned in passing to Ms Chow that as the tenancy had been executed, the power had served its intended purpose and should therefore be treated as cancelled or revoked.

23. However, despite the restriction in the 1995 Power and the subsequent revocation in February 1995 as alleged, Ms Chow did execute a mortgage in respect of Unit 2503 as the Tangs' attorney on the strength of the 1995 Power on 8 May 1995 at the office of Messrs K.C. Tsang & Co. ("the Unit 2503 Mortgage"). This mortgage was an all monies mortgage in favour of Dao Heng Finance Limited for facilities granted to the borrower, City Motors Company, a family business of the Tangs engaged in trading of taxi and taxi licenses, of which Madam Shem was one of the four partners. Madam Shem said she was not aware of the Unit 2503 Mortgage although Mr Tang might be. Ms Chow said she had not informed her parents-in-law before signing the Unite 2503 Mortgage. She did not know if they were aware of its execution. She was asked by her husband to sign the mortgage, which was for the benefit of City Motor Company. She did not tell her husband that she was only authorized by the 1995 Power to deal with tenancy matters of the Celeste Court Property. She said she could sign the Unit 2503 Mortgage for the Tangs because it was for the use of City Motor Company. She was also advised by Messrs K.C. Tsang & Co. that she could sign it.

24. Nothing before me suggests that the Tangs had ever denied liability under the Unit 2503 Mortgage or taken any action to set it aside.

(3) Ms Chan approaching Ms Chow

25. On 5 January 1996, the legal mortgage on the Celeste Court Property in favour of BEA was fully discharged. Madam Shem said the legal charge was paid off by the Tangs' pension/provident fund. According to Ms Chow, Ms Chan at about the same time began pressing her to re-mortgage the Celeste Court Property to secure the banking facilities to be granted to the Borrowers. Her evidence in this respect ran as follows.

26. Ms Chow had known Ms Chan for over 20 years. They were good friends. Ms Chow told Ms Chan that her parents-in-law had migrated to Canada, that they had executed the 1995 Power to enable her to sign tenancy agreements and to collect rent for their behalf and that the mortgage on Celeste Court Property had been fully discharged. In early 1996, Ms Chan told Ms Chow that she was rearranging the banking facilities of her companies and requested her to use the 1995 Power to mortgage the Celeste Court Property as security for a few months. Ms Chow refused, saying that her parents-in-law did not know her personally and they would not agree. However, Ms Chan kept on persuading Ms Chow, saying that her family had a lot of assets and their companies were doing all sort of businesses. She further promised that the arrangement would not cause any trouble to Ms Chow or her family and that the mortgage would be redeemed within a few months. Ms Chan also allowed Ms Chow and her husband to use a company membership with the Guangzhou Luhu Golf & Country Club owned by one of her companies. Ms Chow finally agreed to her request.

27. However, Ms Chow raised her concerns if the 1995 Power could do. First, she did not know if the 1995 Power would enable her to do anything else other than rental matters in relation to the Celeste Court Property. Under cross-examination, Ms Chow said although by that time she had already used the 1995 Power to execute the Unit 2503 Mortgage in May 1995, she still thought that the power was limited to tenancy and rental matters. Secondly, her parents-in-law had intended the power to be valid for one year only and it was already over one year old. Under cross-examination, Ms Chow admitted that she was still collecting rent on behalf of her parents-in-law although the power was already more than one year old. Ms Chan then told Ms Chow to fax a copy of the 1995 Power to Deacons and copies of the Hong Kong Identity Cards of her parents-in-law to see if it was within her power to mortgage the Celeste Court Property, which Ms Chow did subsequently. Both Mr Wu and Ms Wu denied that a copy of the 1995 Power had been faxed to their firm at all. According to Ms Wu, copies of the identity cards were faxed to her sometime in May 1996 after the execution of the Mortgage : see paragraph 61 below.

(4) The Borrowers applying for facilities

28. Mr Lee first met with Ms Chan on or about 2 February 1996 through the introduction of another client of the plaintiff's. In the afternoon of the same day, Ms Chan introduced Ms Chow to him. According to the information then available to Mr Lee, Delight Group banked with other banks including Belgian Bank and the China & South Sea Bank. Mr Lee discussed with Ms Chan the facilities the plaintiff could offer, which provided more flexibility. At the end of February, Ms Chan indicated to Mr Lee that she would transfer the Delight Group's facilities with other banks to the plaintiff. The plaintiff agreed in principle and subject to satisfactory security to grant facilities up to HK$39 million. The particulars of the intended facilities were contained in an application form dated 28 February 1996 prepared in the course of discussion between Mr Lee and Ms Chan. According to this form, the facilities were made up of HK$36 million trading facilities and three 5-year term loans of HK$1 million each granted to three different companies in the Delight Group. The facilities were to be secured by mortgage on three properties, a charge on HK$5 million deposit, corporate guarantees by various companies in the Delight Group and personal guarantees by the directors including Ms Chan. One of the three properties offered as security was situated at Tai Tam Road with an estimated market value and forced sale value at HK$13 million and HK10.14 million respectively ("the Tai Tam Road Property"). The other two properties were on Conduit Road ("the Conduit Road Properties").

29. In his oral testimony, Mr Lee explained how he dealt with the Borrowers' application for facilities in detail. Following the bank's procedures and standard practice, he prepared an analysis on the financial performance of each of the companies in the Delight Group to assess the risk involved. This involved a customer profile, a financial performance analysis (an assessment by a standard computer software of positive and negative aspects); projections as to future performance, a small business scorecard and enquiries of other banks. There were some negative indicators on the financial position of some of companies in the group but most of them were actively trading with stable income. Indebtedness owed to other banking institutions was all secured by mortgages over landed properties. Mr Lee did not find the Delight Group in a poor financial position, as suggested by Mr Pirie in cross-examination. He took into account the history and nature of the Borrowers' business, the value and nature of the security, the risks and the account performance. All in all, Mr Lee found the risk involved in granting facilities to the Delight Group acceptable. He therefore made a recommendation of approving the application to his immediate superior, Mr Stephen Lee, who then approved it. On 1 March 1996, instructions together with a copy facility letter of the same date were sent to Deacons to prepare the requisite security documents.

30. According to Mr Lee, the original intention of Ms Chan was that the Delight Group would switch entirely to the plaintiff. However, on or about 12 March 1996, Ms Chan called Mr Lee. As recorded in a contemporaneous short call report prepared by Mr Lee, Ms Chan told him that she had agreed with Belgian Bank that it would retain the mortgage on the Tai Tam Road Property. The total amount of security to be granted by the plaintiff remained at HK$39 million. She would provide an alternative commercial property of about HK$7 million as security and an additional cash deposit to make up the balance. Mr Lee immediately gave instruction to Mr Wu of Deacons to withhold the preparation of the security documents pending further instructions. By a letter dated 12 March 1996 sent to the plaintiff, Mr Wu confirmed Mr Lee's instruction to withhold.

31. On 15 March 1996, Mr Lee sent a further instruction letter to Mr Wu. One of the documents enclosed with this instruction letter was a copy facility letter dated 15 March 1996 of the plaintiff to Delight Enterprises replacing the facility letter of 1 March 1996. Deacons was instructed to prepare, among other things, a first tripartite mortgage of the Celeste Court Property to be executed in favour of the plaintiff in place of the Tai Tam Road property. Mr Lee could not recall when Ms Chan confirmed that the Celeste Court Property would be used. But according to the sequence of events as described above, it must have been sometime between 12 and 15 March 1996. Mr Lee did not remember if Ms Chan had specifically mentioned that the Celeste Court Property belonged to Ms Chow and the Tangs.

32. Mr Lee denied the suggestion that the plaintiff was looking for property without any encumbrance as security. Security was only one of the considerations the plaintiff took into account when granting facilities, he explained. Whether the property proposed as security was mortgaged or not did not affect his decision to accept or refuse the application. Any encumbrance by way of mortgage was immaterial because the mortgage would have to be discharged or redeemed first. The plaintiff would have a first legal charge on the property as security any way.

33. Mr Lee also denied the suggestion that it was the plaintiff who sought for the Celeste Court Property, which was at the time free of any encumbrance, as security. He pointed out that the Delight Group's application was approved and instructions were sent to Deacons on 1 March 1996. That was well before 15 March 1996 when Ms Chan confirmed that the Celeste Court Property was to be used as a substitute.

34. Though not stated in his witness statement, Mr Lee said in his oral testimony that in or about February or March 1994, Ms Chow discussed with him the possibility of the plaintiff granting facility to City Motor Limited, a family business of her husband, on the security of the Celeste Court Property. He gave evidence to this effect when he was cross-examined about an undated handwritten note ("the Note") bearing the reference to City Motor Limited, which set out the particulars of the forced sale value and market value of the Celeste Court Property and Unit 2503 in three columns with reference "JLW dd 5/2/96" and "13/3/16" and "Vigers dd 5/2/96" for each of the column. The particulars were in fact valuation given by the various valuation reports by Jones Lane Wootton and Vigers. For Celeste Court Property, further figures of HK$7.8 million for market value and HK$6.084 million were written down without any reference to any valuation report. But these figures were contained in JLW's valuation report dated 29 March 1996 that Mr Lee saw on 3 April 1996. He could not recall if it was he who put down the additional figures on the Note. He did not mention it in his statement which dealt with the Delight Group facility because nobody had asked him to do so and he was not aware of its importance. He further added that if the Note was in connection with the banking facilities for the Delight Group, it should bear its name instead of City Motors Limited. Mr Lee denied the suggestion that after the Tai Tam Road Property which was worth about HK$13 million was no longer available, he was then looking for properties of approximately the same value as substitute. He pointed out that according to the JLW's valuation dated 5 February 1996 (that is, before the approval of the Delight Group facility on 1 March 1996) as recorded on the Note, the market value of the Celeste Court Property and Unit 2503 (HK$7.75 million and HK$3.4 million respectively and HK$11.05 million totally) did not add up to HK$13 million or close to that.

35. Mr Lee had no recollection as to whether Ms Chan in fact told him the Mortgagors then lived in Canada. However, even if she had, it would probably be after 25 April 1996, as at that date Ms Wu, was still enquiring with the Delight Group whether the mortgage of the Celeste Court Property would be executed by the Tangs themselves or Ms Chow, their attorney. Had Ms Chan told Mr Lee that the Tangs were in Canada, he would most certainly have related this information to Deacons. Similarly, Mr Lee doubted if Ms Chan told him that the Tangs were not aware of the intended mortgage of the Celeste Court Property. Had she done so, it would certainly raise suspicions as to whether the Celeste Court Property might be used as a security to the Facilities and he would most certainly seek Deacons' advice.

36. Mr Lee finally pointed out that back in 1996, it was not the policy of the plaintiff or the banking field to send the loan documents of a borrower to a mortgagor of the security for the loan. He confirmed that the plaintiff had not sent any loan documents of Delight Group to Ms Chow or the Tangs or taken any step to inform them the nature of the facility. He said he first knew from Deacons that Ms Chow would sign the Mortgage as the Tangs' attorney on or about 25 April 1996.

37. According to the plaintiff's record, before the execution of the Mortgage, a company search had been conducted on the Delight Group to see if Ms Chow had any related interest. The search showed that she was neither a shareholder nor a director of any of the companies in the group.

(5) Deacons preparing the Mortgage

38. Deacons all along only acted for the plaintiff in the preparation of the security documents concerning the Delight Group facilities including the Mortgage. As noted, the handling solicitors were Mr Wu and his associate, Ms Wu.

39. The instructions Mr Wu received from the plaintiff on 1 March 1996 were to prepare security documents including three all monies first tripartite legal mortgages over the properties, that is, the Tai Tam Road property and the Conduit Road properties. In Mr Wu's experience, tripartite mortgages were quite common and the plaintiff's instructions to prepare such mortgages were normal and standard. Following his usual practice, after acknowledging the instructions, Mr Wu on 5 March 1996 instructed his staff to conduct full land and company search in respect of the three properties to be mortgaged to the plaintiff, the corporate mortgagors and the Borrowers.

40. On 7 March 1996, Mr Wu sent a letter and fax to the Loans Department of the Belgian Bank requesting title deeds and documents in respect of the three properties, which were then mortgaged to Belgian Bank. On 15 March 1996, Mr Wu received a letter of the same date from the plaintiff containing new instructions and enclosing a copy of the facility letter dated 15 March 1996 of the plaintiff, replacing the facility letter of 1 March 1996. This letter also contained the particulars of the Celeste Court Property. The mortgagors were stated to be Mr Tang and Madam Shem. Deacons were instructed to prepare, inter alia, a first tripartite mortgage of the Celeste Court Property to be executed in favour of the plaintiff in place of the Tai Tam Road Property. The plaintiff's instructions regarding the Conduit Road Properties and other security documents remained unchanged. Mr Wu then passed these documents to Ms Wu. That same day, Mr Wu sent a letter and a fax to the Belgian Bank informing them that his previous request for title documents contained in their letter of 7 March 1996 was varied in that the title documents regarding the Tai Tam Property were no longer required. Mr Wu also instructed his staff to conduct a full land search of the Celeste Court Property, which according to Ms Wu was done on 16 March 1996. On about 22 March 1996, Mr Wu received from the plaintiff the facility letters signed by the Borrowers. He passed them to Ms Wu.

41. The result of the company searches of the Borrowers and the land search of the Celeste Court Property showed that Delight Group and the Tangs had no apparent connection. According to Mr Wu, there was nothing suspicious about the borrower not being related to the mortgagor. It would give rise to more cause for concern if they were. Many more documents might have to be prepared and enquiries would have to be made if the transaction involved related parties because of the legal requirements about disclosure and fiduciary duties owed by an agent to his principal. Where the borrower and the mortgagor were unconnected, the preparation of the relevant tripartite mortgages was relatively straightforward, Mr Wu explained.

42. Sometime towards the end of March 1996, Deacons received a bundle of documents including title documents in respect of the Celeste Court Property which were :

(a) Certified copy of Statutory Declaration Memorial No.4661445 and re-registered by Memorial No.4766569;

(b) Agreement for Sale and Purchase Memorial No.4779415;

(c) Certified copy of Statutory Declaration Memorial No.4840290;

(d) Equitable Mortgage Memorial No.4848818;

(e) Certified copy of Statutory Declaration Memorial No.5142755;

(f) Certified copy of Occupation Permit Memorial No.5465398;

(g) Certified copy of Deed of Mutual Covenant and Management Agreement Memorial No.5501750;

(h) Assignment Memorial No.5535078;

(i) Receipt on Discharge of a Charge Memorial No.6496496 annexed to Mortgage Memorial No.5535079; and

(j) The 1995 Power.

Mr Wu did not know who supplied these but normally his secretary would telephone the contact person named in the plaintiff's instruction letter (in this instance, it was Ms Chan) Mr Lee faxed and sent a copy of the valuation report of Jones Lang Wootton dated 29 March 1996 in respect of the Celeste Court Property to Mr Wu.

43. As the documents referred to above were not a complete set of title documents, on 1 April 1996, Mr Wu wrote to Messrs William K.W. Leung & Co., the solicitors who had acted for the Mortgagors (as purchaser) in their purchase of the Celeste Court Property in 1992. He enclosed a photocopy of an assignment and requested production of the Government Grant and all the relevant title documents covering the past 15 years to enable Deacons to approve the title of the Celeste Court Property. After that Mr Wu then exchanged further correspondence with Messrs William K.W. Leung & Co. regarding the missing title deeds of the Celeste Court Property.

44. On 1 April 1996, Mr Wu received by fax a copy receipt bearing the letter head of Messrs Hong Lee & Co. dated 1 March 1996 for nine items of title deeds signed by Ms Chow in respect of the Celeste Court Property ("the Receipt"), after enquiry had been made in locating the missing title deeds of the Celeste Court Property. According to the header, it was faxed to Mr Wu from City Motors Limited. After receiving the fax, Mr Wu's secretary made some additions to the list there in her own handwriting in pencil. Ms Wu also recognized the secretary's handwriting. According to Ms Wu, the secretary appeared to have ticked off the documents, which was something she would do when she received title deeds and documents. Ms Wu went on to say that although the 1995 Power had been added to the list by the secretary, its existence did not necessarily mean that Ms Chow, the donee, was to execute the Mortgage on behalf of the Mortgagors. I will come back to this part of her evidence in greater detail under the heading "Execution of the Mortgage".

45. On 19 April 1996, Mr Wu with the assistance of Ms Wu caused two letters to be issued, one addressed to the Tangs by name and the other to all occupiers of the Celeste Court Property informing them that Deacons acted for the plaintiff regarding the proposed tripartite mortgage over the Celeste Court Property to be executed by the Tangs and Borrowers in favour of the plaintiff. These two letters were both sent by registered post and by ordinary post to the address of the Celeste Court Property. These letters were standard letters.

46. The letter to the Tangs advised them as to the proposed "all monies mortgage" and urged them to consult independent legal advice before attending the appointment at Deacons' office for execution of the mortgage. The purpose of this letter was to make sure that the Tangs were aware that Deacons acted for the plaintiff, not for them and that their property was being used to secure a loan to someone else. The letter was sent by registered post as well as ordinary post and was not returned so apparently was received. Ms Wu added that standard letters to mortgagors would be sent in transactions where the mortgagors and the borrowers were different entities. In the present case as was the usual practice, the letter was sent to the property to be mortgaged. She was not sure if she had seen the 1995 Power be then. She did not think that at that stage she was aware that an attorney would execute the Mortgage. This point can be readily confirmed by the contents of this letter which indicated that Deacons were not then aware that the Tangs would be executing the Mortgage by an attorney. Both Madam Shem and Ms Chow denied that they had ever received this letter at all.

47. The letter to occupants informed them about the proposed mortgage and advised them to seek independent legal advice. A copy of a standard form "Consent to Mortgage" was enclosed with the letter to occupants. This letter was not returned in the ordinary course of post or at all. It had been the practice of Deacons to send such a letter to the intended mortgaged property ever since the case of Wong Chim Ying v. Cheng Kam Wing [1991] 2 HKLR 253. On 23 April 1996, Ms Wu received a telephone call from a Mr Ho who said that he represented the tenants of the Celeste Court Property. He informed her that they had received the letter of 19 April 1996 to the occupiers and that they did not have any interest in the Celeste Court Property. Ms Wu told him that if they did not have any interest, they could ignore their letter. She made a note of this after the call.

48. On 23 April 1996, Mr Wu issued a letter addressed to the Borrowers enclosing the draft documents to be executed in respect of the three tripartite mortgages over the Celeste Court Property and the Conduit Road Properties and items to be brought to Deacons' office for the execution of the relevant documents. The letter was sent by hand to the Borrowers. Ms Wu also assisted in the preparation of this letter. On 24 April 1996 Mr Wu wrote to Messrs Hong Lee & Co. concerning a title matter. They replied on 2 May 1996. (Their letter is mistakenly dated 2 April 1996.)

49. On 25 April 1996, Ms Wu returned a telephone call from Ms Chan. Ms Wu told her which persons should attend the office of Deacons for the execution of the Mortgage and other security documents and what these persons should bring along (company chops and so on). Among other things, Ms Wu also asked Ms Chan to let her know beforehand whether the Tangs or their attorney Ms Chow would attend the office of Deacons for execution of the Mortgage. She made a note of this conversation. Obviously she was aware that there was an attorney by then but she really could not remember whether she had yet seen the 1995 Power or not but it is more probable than not that she had already seen it. Later on the same day, Ms Chan told Ms Wu over another telephone conversation that the attorney Ms Chow would attend their office to execute the Mortgage on behalf of the Tangs in respect of the Celeste Court Property.

(6) Execution of the Mortgage and thereafter

50. In her witness statement, Ms Wu described how the security documents and the Mortgage were executed thus. On 25 April 1996, Ms Chow attended the office of Deacons and executed the Mortgage in Ms Wu's presence. Ms Wu explained the contents of thereof to her prior to her execution of it. A copy of Ms Chow's identity card was taken and Ms Wu wrote the date in the bottom right hand corner of the copy. The same was done for the directors of the Borrowers when they attended the office of Deacons. Two directors of the Borrowers attended their office separately on 25 April 1996 and 26 April 1996, and executed the Mortgage and other security documents in Ms Wu's presence. Ms Wu explained to them the contents of the documents including the Mortgage prior to their execution of the same.

51. In her oral testimony, Ms Wu said she had no particular recollection of the Mortgage or Ms Chow because of the long lapse of time. She had met many mortgagors at the time (1996) and there was nothing special about the meeting with Ms Chow. She would only speak from her experience and practice while working for Deacons (between April 1995 and January 2001). It was then her practice all along that whenever she met a mortgagor in connection with his mortgage, she would inform him that she represented the bank and advise him to seek independent advice. Following her usual practice, she would have explained to Ms Chow that the Mortgage would enable banking facilities to be granted to the Borrowers and that she signed the Mortgage as the mortgagors' attorney. She did not explain the Mortgage word by word or paragraph by paragraph. She would have, however, explained the most important part of the Mortgage, e.g., the parts affecting the Tangs. She believed she had also explained to Ms Chow that the Mortgage was an all monies mortgage, the liability of the mortgagors being unlimited. If the Borrowers did not repay the bank, the bank was entitled not to release the Celeste Court Property. Ms Chow had not said that the Mortgage was for a short period of time. Nor did she raise the point that she thought the extent of the Mortgage was up to the value of the Celeste Court Property. Ms Wu would have advised Ms Chow that she represented the bank and Ms Chow had the right to seek independent legal advice before execution. In the past, such request had been made whereupon the mortgagor would be given a copy of the mortgage for him to take away to obtain advice. Sometimes, the mortgagor requested for time to read the mortgage before signing. Ms Chow did not mention that she wanted to seek independent legal advice before signing the Mortgage. Ms Wu did not give a copy of the Mortgage to Ms Chow after execution. She explained that it was not her practice to provide a copy to the mortgagor unless requested.

52. Under cross-examination, Ms Wu was criticised for not keeping a proper attendance record of the execution meeting. She explained in effect that as execution of mortgages was routine matters, keeping full attendance notes was not a must.

53. Ms Chow gave a different version on how the Mortgage was executed. She began by referring to her personal background. She attained an education level of junior secondary (Form 3). She was conversant with the Chinese language but could speak and write very little English. She was primarily a housewife but also assisted her husband in his taxi business.

54. Prior to her attendance at the office of Deacons for execution of the Mortgage, she was not asked by either the plaintiff or Deacons why she was given the 1995 Power and whether the purpose for which it was given had been achieved. Nor was she ever asked or told by Deacons there might be a problem about its validity.

55. She had never received any advance documentation from the plaintiff or Deacons concerning the facilities or the Mortgage. At all material times, she did not know the nature and extent of the facilities to be granted to the Delight Group; that the Mortgage was an "all monies mortgage"; that the indebtedness could be as high as HK30 million or more; or that the Celeste Court Property could be sold if there was any shortfall in the repayments. Had she been explained the nature and extent of the Mortgage, she would not have signed it. She had never been advised to seek independent legal advice prior to signing the Mortgage. At no time was she made aware that it would be desirable for her to obtain independent legal advice. Thus she did not consult any other lawyer for independent legal advice.

56. She attended Deacons' office for execution of the Mortgage at the request of Ms Chan. When she arrived there, Ms Chan's father and one of her brothers were already there. They were then received by Ms Wu. During the meeting they had with Ms Wu which did not last more than 15 minutes, Ms Wu mentioned to them very briefly the contents of the Mortgage in Chinese, saying that the Mortgage would enable banking facilities to be granted by the plaintiff to the Delight Group. Ms Chow was then asked to sign the Mortgage as attorney for the Mortgagors. Immediately afterwards, Ms Chow left Deacons' office before the Chans did.

57. It is Ms Chow's evidence that Ms Wu did not give her any explanation as to the extent of the Mortgagors' liability in the event of the Borrowers' default under the Mortgage. Nor did Ms Wu tell her that the Mortgagors' liability would be unlimited in time or amount. She was never given a copy of the facility letter or the Mortgage. Further, Ms Wu did not ask her if the 1995 Power was still valid and subsisting; whether its purposes had been achieved or whether the Mortgagors had been made aware of and consented to the Mortgage. Now that the contents had been explained to her by her own solicitors, Ms Chow realized for the very first time that the Mortgage contained various onerous and unfavourable terms prejudicial to the Mortgagors' interests. In particular she referred to clauses 2 and 15.2 which according to her in substance provided that the Mortgage was in fact a continuing mortgage-guarantee to an unlimited extent in respect of all monies which the Borrowers might owe the plaintiff.

58. Ms Chow stressed that she had all along understood that the Mortgage was to operate as a simple charge on the Celeste Court Property for a short period of time and to a limited extent up to the value of the property only. Had she been told that the liability was unlimited and for an indefinite period, she would definitely not have signed the Mortgage. Thus, Ms Chow contended that had she been fully and properly explained by Deacons, she would not have agreed to execute the Mortgage.

59. Madam Shem gave evidence to the effect that Ms Chow had not told her husband and her in advance about the Mortgage, let alone obtaining their consent to it. This Ms Chow did not dispute.

60. After the execution of the security documents including the Mortgage on 25 April 1996, Ms Wu prepared a draft sign-off fax and Certificate of Title relating to the three properties for signing by Mr Wu on the following day. She also requested the search clerk to do an updated land search in preparation for reporting to the plaintiff. There was some delay in the drawing down of the loan from the plaintiff. Because of the delay Ms Wu had to obtain another updated land search on 2 May 1996, the day on which the loan was actually drawn down. The Mortgage was then dated 2 May 1996. Mr Wu reported to the plaintiff with the sign-off fax and the Certificate of Title sent out on the same day.

61. When Ms Wu was doing following-up work on the Mortgage sometime in or about mid-May 1996, she asked Ms Chow to send her the copies of the identity card of the Tangs as she needed to include their identity card numbers in the Memorial for registration of the Mortgage deed. Ms Chow faxed to Deacons the copies of the Mortgagors' identity cards on 16 May 1996. She did not think that the power had been faxed to Deacons together with copies of the identity cards of the Mortgagors prior to execution as alleged. If they had been, they would have been together in Deacons' file, but they were not. The copies of identity cards were faxed to Deacons more than two weeks after the execution of the Mortgage by Ms Chow, at which time the 1995 Power must have been in the possession of Deacons and it would not make any sense asking Ms Chow to fax a copy of the power to Deacons again.

(7) Other major points

62. At this juncture, I digress from the chronology and deal with some major points arising from the evidence of Mr Wu and Ms Wu concerning, inter alia, the validity of the 1995 Power, the effective manner of execution of the Mortgage, the need to contact the Mortgagors to obtain their consent to execute the Mortgage by Ms Chow, whether the Mortgage was onerous, and the advice Deacons should give to Ms Chow. I will deal with these points in turn.

(1) Deacons were not aware of the circumstances leading to replacing the Tai Tam Road Property by the Celeste Court Property. Neither Mr Wu nor Ms Wu had been told about the relationship between Ms Chow and Ms Chan.

(2) At all material times, Deacons had not been told that the Mortgagors were living in Canada or that they were not aware of the intended mortgage in respect of the Celeste Court Property.

(3) According to Mr Wu, in a joint owners situation, it is up to the donors to decide whether to execute separate powers or one single joint power.

(4) Deacons had not been told that the 1995 Power had been cancelled or revoked. Mr Wu said that Deacons had never been approached for advice as to the scope of Ms Chow's power under the 1995 Power to execute the Mortgage. He emphasized that Deacons only acted for the plaintiff. Deacons sent documents to the Tangs and advised them to seek independent legal advice. But whether or not they would do so was a matter for them. Deacons would not have checked with them that they had sought independent legal advice before the transaction. He would not advise the Tangs or Ms Chow about the financial status of the Delight Group even if he had known about it. He did not represent them and he would advise them to seek their own legal and financial advice. Ms Wu had no recollection of being asked if Ms Chow had power under the 1995 Power to enter into the Mortgage. She did not think that she had been asked because it would have been an unusual request and she would have recorded this in an attendance note. There was no such attendance note in the file.

(5) Responding to the suggestion that it was unusual and suspicious that the Tangs were providing security for companies in which they had no apparent interest, Mr Wu said it was not uncommon and not at all suspicious. He would estimate that in two or three out of every 10 cases of tripartite mortgages which he had handled the mortgagor and the borrower have had no apparent connection. The Mortgagor may have commercial or personal reasons, which he wished not to disclose, for supporting the borrower. For instance, the ultimate beneficial owner of the borrowing company might be the mortgagor, or the borrower and the mortgagor might have reached a financial arrangement privately. Mr Wu further said he did not know the arrangement between Ms Chow and the Delight Group and if Ms Chow obtained any benefit out of it. Ms Wu gave evidence to similar effect. She said that it was not at all unusual for a mortgagor to provide security for a borrower with whom the mortgagor had no apparent connection. There might be personal or confidential reasons for a mortgagor to support a borrower. It was not Ms Wu's business to pry into that. Nor was it unusual for an attorney to have no apparent interest in or involvement in the borrower. It would be different if the borrower was a company and the attorney was in some way involved with the company for then there would be an indication that the attorney might be misusing the power of attorney. In the present case, company searches had been carried out at the time the Mortgage was prepared and they showed that Ms Chow was neither a director nor a shareholder of any of the Borrowers. The land search records and the title deeds of the Celeste Court Property also revealed nothing suspicious. Deacons did an updated companies search on 25 April 1996. This was to check that no change in the directors, memorandum and articles of association and other particulars of the company has been filed. This is normal procedure carried shortly before execution of the documents.

(6) Prior to execution of the Mortgage, Deacons did not contact Mr Tang or Madam Shem to see if the 1995 Power was still valid. According to Mr Wu, there was no need to because of the provisions of section 5(2) of the POAO. If Deacons had been obliged to check with them, it would have defeated the purpose of the section 5(2) and the giving of a general power of attorney. Ms Wu shared his view.

(7) Ms Wu further noted that the 1995 Power was a common, statutory general power. It appeared to have been executed by Mr Tang and Madam Shem at a law firm in the presence of a clerk who had interpreted it to them. The signature of the clerk was verified by a solicitor. There was nothing to suggest that it had been revoked. The fact that it was more than 12 months' old did not make it invalid. She did not ask Ms Chow about the purpose of the 1995 Power as there was in it to indicate that its purpose was limited as alleged. Further, she did not see the need of asking Ms Chow to confirm if the donors were aware of the Mortgage and had consented to it because they had signed the 1995 Power in favour of Ms Chow, who would then have the right to execute the Mortgage.

(8) Responding to the suggestion that the Tangs had given the 1995 Power to Ms Chow for purposes of renting the Celeste Court Property only, Ms Wu said that the power was a general power of attorney created pursuant to section 7 to the POAO and by its very nature, no restrictions could be imposed in a general power of attorney made pursuant to section 7 because its form is prescribed by the Ordinance. If the Tangs had wished to impose any restriction on Ms Chow's power, a section 7 power of attorney should not have been executed in the first place. A specific power of attorney should have been made instead. Also, the fact that the title deeds of the Celeste Court Property had been in the possession of Ms Chow did not seem to be consistent with the Tangs' allegation.

(9) Ms Wu was asked if she considered the transaction onerous to the Mortgagors. She said whether it was onerous depended on one's view.

(10) Ms Wu also disagreed that there was every reason for her to ask Ms Chow why she agreed to use the Celeste Court Property as security. She said everyone had his own reason for mortgaging his property. She did not see the need of asking Ms Chow. Further, Ms Wu reiterated that she had explained to Ms Chow in full the consequences of signing the Mortgage. Thus, Ms Chow knew that the Celeste Court Property would be mortgaged but the loan was not advanced to her. Ms Wu did not see the need of keeping a note in both Chinese and English advising Ms Chow to take independent legal advice and it was an onerous transaction. She considered what she told Ms Chow in the meeting was already sufficient. Ms Wu disagreed with the suggestion that it was her duty to advise Ms Chow the amount of facility to be extended to the Borrowers for her to decide if she wanted to execute the Mortgage. She further said that the Mortgage would cover all the debts incurred after execution, it would be misleading to state any figure; and that Ms Chow, as an adult, should have made her own assessment before execution. Lastly, she said the issue whether it was her duty to inform Ms Chow about the creditworthiness of the Delight Group did not arise.

(11) Mr Wu disagreed with the suggestion that in order to have the Mortgage validly executed, Ms Chow should sign on it twice.

63. It is apparent that there was a marked difference between Mr Wu and Ms Wu on one hand and Mr Pirie on the other on the interpretation of the relevant sections of POAO. I do not propose to go into detail their evidence in these respects. In my view, it is a matter of law and submissions, to which I will come to consider in due course.

64. I now return to and continue with the chronology.

(8) Proposed second mortgage

65. In May 1997, problems began to emerge with the Delight Group's accounts. In July 1997, Ms Chow called Deacons and wanted to know her liability under the Mortgage. It would appear that the Delight Group was then facing financial problems. Ms Chow was advised that Deacons did not act for her and she should seek independent legal advice.

66. By October 1997 the position became worse. On 3 October 1997 there was a meeting between Ms Ma and Mr Stephen Lee, representing the plaintiff, and Ms Chow. According to Ms Chow, she was told at the meeting that the Borrowers had defaulted and the outstanding indebtedness amounted to almost HK$10 million; that the Mortgagors were liable to repay the same under the Mortgage; and that the plaintiff wanted to exercise its power under the Mortgage and sell the Celeste Court Property. Ms Chow told them that she did not want to sell it because the Mortgagors were not aware of the Mortgage. Ms Chow did attempt to arrange finance with other banks so as to redeem the Mortgage but to no avail. In the end, Ms Ma proposed that she should take out a second mortgage over the Celeste Court Property. Later, Ms Ma faxed to Ms Chow two letters to be signed by the Mortgagors personally confirming, inter alia, their consent to the execution of the second Mortgage in Ms Chow's favour and their confirmation that the 1995 Power was still valid. Eventually, Ms Chow decided not to proceed with the proposed second mortgage.

67. Ms Ma gave a slightly different but fuller version. At the meeting, Ms Chow had told her that she was the beneficial owner of the Celeste Court Property although the defendants, her parents-in-law, had been registered as the legal owners for tax purposes. Ms Chow explained that she had no interest in the companies and provided the security merely because she was a very good friend of Ms Chan and wanted to assist her. Ms Chow acknowledged that she was fully aware that the Celeste Court Property was being used to secure of facilities for the companies. At the meeting she asked for information about the extent of the liabilities and said that she did not want the plaintiff to sell the Celeste Court Property. Instead she was going to arrange finance with another bank so as to pay off the outstanding amounts although, she said, in fact she had adequate cash to settle the outstanding amounts. She said that her solicitor would contact the plaintiff the following week to arrange for release of the title deeds. After that meeting, Ms Ma sent an email to Mr Graham Tench, who was then the head of Group Special Asset Management (North East Asia), with a copy to Mr Stephen Lee. Under cross-examination, Ms Ma said that the only formal record she had about the meeting was this email and she regarded it as sufficient.

68. Ms Chow was however unable to arrange the substitute finance and in November 1997 she telephoned Ms Ma to ask if it would be possible to arrange a further loan so that she could use the proceeds to clear the then outstanding amounts owed by the companies. Ms Ma told Mr Stephen Lee of the same by another email dated 20 November 1997. In this email, she described Ms Chow as the "mortgagor". It was because Ms Chow claimed to be the beneficial owner of the property, she explained. Consequently it was proposed that Ms Chow would enter into a second mortgage of the Celeste Court Property to secure a loan to herself as borrower. According to Ms Ma, it was Ms Chow who made the proposal after her attempt to obtain facility from other banks failed.

69. The relevant documents for the proposed second mortgage were prepared by Deacons and sent to Ms Chow by Ms Ma, including a letter to be signed by the Tangs confirming that they were agreeable to the execution of the proposed second mortgage over the Celeste Court Property, that the 1995 Power was still subsisting and that Ms Chow had power to execute the second mortgage notwithstanding that it was for her own benefit. The plaintiff was aware and had been advised by its lawyers that the donee of a power of attorney may not use that power for his own personal benefit unless the donor of the power has approved that. The purpose of the letter to be signed by the Tangs was therefore to seek that approval and an acknowledgement that that the power had not been revoked.

70. The above letter to be signed by the Mortgagors was prepared by Ms Wu under the instruction of Mr Wu. It was necessary as Ms Chow wished to create a second mortgage as security for a loan to herself. Mr Wu explained that there was a conflict of interest and a potential breach of fiduciary duty so consent of the donors and their confirmation that the 1995 Power was still subsisting had to be obtained. There was no need to write a similar letter in connection with the Mortgage because the loan then was not a loan to the attorney.

71. Part of the arrangement with Ms Chow was that she would deposit HK$500,000.00 with the bank on 29 December 1997. This was not done, so the second mortgage did not proceed. Ms Chow informed Ms Ma that, as the result of the downturn in the property market, she did not wish to take responsibility for the whole of the amounts outstanding from the companies (which then exceeded HK$9,000,000.00) and that she had been unable to sell the Celeste Court Property herself. She therefore wished the bank to sell the Celeste Court Property instead but she did not want her parents-in-law to know about this. She also proposed that the plaintiff released the Celeste Court Property from the mortgage against payment of a sum lower than the outstanding debts.

72. Ms Ma denied the suggestion under cross-examination that she proposed the second mortgage because she knew that there were problems with the Mortgage in that she knew from the outset that she need to but did not obtain the prior consent from the Tangs for the Mortgage and that she wanted to rectify the defect by the second mortgage. She also denied that she let the matter drift in October and November 1997. She said she was then waiting for Ms Chow to produce income proof and to make the application for the loan. Ms Ma agreed that if the second mortgage were made, the proceeds of the loan would only involve an internal transfer of money without going to Ms Chow. However, she disagreed with the suggestion that Ms Chow would not benefit from the transaction as she could get the Celeste Court Property back.

73. Ms Au Yeung took over the matter from Ms Ma after the latter's departure. She met Ms Chow in February 1998 who came to her office in Tsimshatsui with Mr Wong, the husband of Ms Chan. They promised that they would work out something in order to pay off the indebtedness of the companies. The plaintiff was holding bills of lading concerning amounts of coffee, tea and beer owned by the companies. They said that they would pay in money to the bank in order to release these goods and that they could find buyers on the Mainland. However, this did not happen and she heard no more from them. Ms Au Yeung attempted to reach Mr Wong by telephone but was constantly told that he was in the Mainland. The plaintiff tried to locate the goods through the shipping company. However they found that it had the same office address as that of Delight Enterprises Limited and when they visited the office it was closed and locked.

74. Deacons sent demand letters to the Delight Group on 25 June 1998. Ms Chan then appeared and arranged a meeting with Ms Au Yeung and two colleagues. At that meeting she said that Mr Albert Li of the shipping company would know where the goods were. She promised to locate the goods and also to pay them. Later they discovered that she had previously been one of the shareholders in that shipping company. Attempts to locate Mr Li were unsuccessful. Ms Chan said that he owed other people a lot of money and had fled to China. Ms Au Yeung's latest contact with Ms Chan was on 18 September 1998. She told Ms Au Yeung that she was still working on finding the goods and on locating Mr Li and also on collecting debts from persons in China.

75. Ms Au Yeung had had no recent contact with Ms Chow. Ms Chan told her at the meeting on 18 September 1998 that Ms Chow was in Canada. Ms Au Yeung had never met or spoken to the Tangs and therefore had no way of knowing whether they were aware of the activities of Ms Chow or whether they knew what she had told the plaintiff.

76. Ms Au Yeung denied the suggestion that when she took over the file from Ms Ma, she should be aware that there were problems with the Mortgage; or that the proposed second mortgage over Celeste Court Property would give the plaintiff double security. Finally, Ms Au Yeung pointed out that her contact with Ms Chow gave her the impression that Ms Chow was fully aware of what had happened.

77. Having set out the evidence, I now turn to the various defence raised. Although in the order as they appear in the defence, the Unconscionable Bargain Defence comes before the Constructive Notice Defence, I will deal with the former at the end. For all the defence relating to the 1995 Power and the Constructive Notice Defence address one common issue, namely, the act of Ms Chow in signing the Mortgage is for one reason or another not binding on the Tangs. The Unconscionable Bargain Defence presupposes, on the other hand, that the act of Ms Chow is binding on them. I will explain this further when I come to discuss the defence. It is therefore, I believe, more logical to discuss the defence in the order that I propose. I now examine the defence relating to the 1995 Power, the first of which is the Validity Defence.

THE VALIDITY DEFENCE

78. Section 7(1) of POAO provides:

"Subject to subsection (2), a general power of attorney in the form set out in the Schedule, or in a form to the like effect but expressed to be made under this Ordinance, shall operate to confer -

(a) on the donee of the power;

(b) if there is more than one donee, on the donees acting jointly or acting jointly or severally, as the case may be,

authority to do on behalf of the donor anything which he can lawfully do by an attorney."

Subsection (2) is irrelevant for present purposes. The form set out in the Schedule reads:

"FORM OF GENERAL POWER OF ATTORNEY FOR PURPOSES OF SECTION 7

THIS GENERAL POWER OF ATTORNEY is made this day of

19 by AB of (address)

I appoint CD of (address) [or CD of (address) and EF of (address)

jointly or jointly and severally] to be my attorney(s) in accordance with section 7 of the Powers of Attorney Ordinance.

In WITNESS whereof I have hereunto set my hand and seal."

79. The terms of the 1995 Power are set out in paragraph 18 above. It is substantially identical to the statutory form. The only significant difference is that it was a power made by Mr Tang and Madam Shem together. Thus, the plural "We" was used instead of the singular "I" in the statutory form. It is the plaintiff's case that it is in a form to the like effect but expressed to be made under POAO. It is thus a statutory power within the meaning of section 7(1). Contending that the plaintiff is wrong, Mr Pirie in essence took two points.

80. He first contended that the statutory form used the singular "I". The legislature thus intended the donor to be in the singular, following the English legislation. The 1995 Power which used the plural "We" is thus not in statutory form. Mr Tang and Madam Shem should have made a power of attorney each in favour of Ms Chow. Mr Merry relied on sections 2(1) and 7(2) of the Interpretation and General Clauses Ordinance, Cap.1, and submitted words and expressions in the singular in the statutory form include the plural and no contrary intention appears either from POAO itself or from its context. Mr Pirie disagreed. He submitted that when construing a statue one cannot use the Interpretation and General Clauses Ordinance to change or pre-suppose a different legislative policy. It is a mere drafting convenience : Blue Metal Industries Ltd v. RW Davies [1970] AC 827. When, as in the statutory form, one part of a sentence uses the singular for the subject, and the other part the plural the object, this cannot be ignored. He further submitted that the English practice has always been in co-ownership cases for each donor to give a power of attorney separately to completely vest all authority in the donee of all legal and equitable rights which each donor possesses. He cited Green v. Whitehead [1930] 1 Ch 38 in support. Hence the reference to "donor" in the singular in the English Power of Attorney Act and in POAO. Finally, Mr Pirie submitted the point probably has not arisen before as solicitors in the past in Hong Kong have generally followed the English practice and had separate powers under section 7 of POAO executed in case like the present.

81. The defendants had not adduced any evidence on the so-called English practice referred to by Mr Pirie. The case of Green v. Whitehead relied on by Mr Pirie simply does not support his proposition. That case involved a wide power though not given under the statute, where the donor was a joint tenant of property. His attorney and the other joint tenant contracted to sell the property. They did so not as joint tenants but as statutory trustees. (In 1926 in England, all joint tenancies were abolished at law and converted to be held on statutory trust for sale.) The power was held to constitute an impermissible delegation of a trustee's duties. The power was not wide enough to cover the land. The case thus turned on a construction of the particular power. The trustee point does not apply to Hong Kong because there has been no abolition of joint tenancy and replacement by a statutory trust for sale. Other than Green v. Whitehead, Mr Pirie had not been able to cite any authority to support his assertion of the so-called English practice. In the absence of evidence and authority, I do not accept that is the case in England. Mr Pirie's submission on the so-called Hong Kong practice is not supported by evidence or authority either. Likewise, I do not accept that is the position in Hong Kong. In any event, I do not consider the so-called practice in England or in Hong Kong an useful aid in construing POAO : see Multi-More Industries Ltd v. Tung Hoo Fai [1991] 2 HKC 261 at p.269D. The answer to the question that I have to decide, in my view, lies not in the practice of the legal profession, whatever it might be, but in the policy and purpose of POAO.

82. Modelled on the English Power of Attorney Act 1971, POAO was enacted in October 1972 to make new provision in relation to powers of attorney and for matters connected therewith : see its preamble. In certain aspects, POAO simply restates the common law rule : see e.g. section 4(1). For present purposes, the new provisions that are pertinent are sections 7, 4 and 5. Section 7 created for the first time a statutory general power of attorney : see Clauss v. Pir [1987] 2 All ER 752 at p.755a-b. On a plain reading, it provides for two types of general powers of attorney : (1) a power of attorney in the form set out in the Schedule; and (2) a power of attorney in some other form to the like effect but expressed to be made under the Ordinance. Both operate to confer on the donee authority to do on behalf of the donor anything which he can lawfully do by an attorney. Both are an exhaustive grant of power : see Multi-More Industries Ltd v. Tung Hoo Fai, at pp.267H-268B. Section 4 provides an alternative procedure for the donee of a power of attorney to act on behalf of the donor. Apart from section 4, the correct mode at law in which the donee should act is to express himself to be acting in the name of his principal and to sign, where signing is required, not the donee's name but the donor's name. Under section 4, where the act requires the execution of an instrument, the donee is empowered to use his own signature and his own seal, as opposed to the donor's : Clauss v. Pir, at p.756b-d. Section 5 gives protection to the party dealing with the donee directly and subsequent purchasers when the power of attorney is revoked if certain requirements are satisfied. It should be noted that section 5 of POAO closely followed section 5 of the English Power of Attorney Act 1971, replacing those provisions of the Law of Property Act 1925 which were directed towards achieving the same sort of protection, but which were notoriously obscure and unsatisfactory.

83. The use of powers of attorney is essentially a matter of convenience. It empowers the donee to act on behalf of the donor in his absence or when he is otherwise inconvenienced. As I see it, the policy and purpose of enacting POAO is generally (1) to restate in statute some common law rules pertaining to powers of attorney and to (2) make new provisions to further facilitate the use of powers of attorney.

84. At common law, two or more persons can give authority to an agent to act for their behalf. The general rule is that unless a contrary intention appears from the nature of the terms of the authority or from the circumstances of the particular case, it is presumed that the authority given is for their joint interest only : see Bowstead & Reynolds on Agency (16th edn), para.2-044 and 2-025 at pp.60 and 61. In other words, a single power to attorney by two joint owners to a donee in respect of their joint and several interest is permissible at common law. If Mr Pirie's submission is correct, the statute would then prohibit the making of a joint power of attorney in the statutory form. This is contrary to the general policy and purpose of POAO to further facilitate the use of powers of attorney. Such a power is clearly permissible under the statute, as is the case at common law.

85. It is true that in a particular instance, the policy and purpose of an ordinance indicates that the singular does not include the plural, as demonstrated by Blue Metal Industries Ltd v. RW Davies. But as pointed out by Lord Morris at p.846 of the judgment when he dealt with section 21 of the New Zealand Interpretation Act, which in substance is similar to section 7(2) of the Interpretation and General Clauses Ordinance, Cap.1 :

"Such a provision is of manifest advantage. It assists the legislature to avoid cumbersome and over-elaborate wording. Prima facie it can be assumed that in the processes which lead to an enactment both draughtsman and legislators have such a provision in mind. It follows that the mere fact that the reading of words in a section suggests an emphasis on singularity as opposed to plurality is not enough to exclude plurality. Words in the singular will include the plural unless the contrary intention appears. But in considering whether a contrary intention appears there need be no confinement of attention to any particular section of an Act. It must be appropriate to consider the section in its setting in the legislation and furthermore to consider the substance and tenor of the legislation as a whole."

When the statutory form and the substance and tenor of POAO as a whole is considered, I do not find any contrary intention to displace the prima facie rule that singular includes plural.

86. Accordingly, on a proper interpretation of POAO, it is in my view perfectly legitimate for two joint owners to make a single statutory general power in favour of a donee provided that it is in a form to the like effect of the statutory form but expressed to be made under POAO. Here, the 1995 Power is substantial identical to the form in the Schedule and expressed to be made under section 7 of POAO. Thus, I hold that the 1995 Power is a statutory general power within the meaning of POAO.

87. Mr Pirie next contended that there was no indication in the 1995 Power that it was a joint power or a several power or a joint and several power. It must fail as an exhaustive grant in respect of all the Tangs' interests, both joint and several, in any property both real and personal. To support his contention, Mr Pirie relied on Harper v. Godsell [1870] LR 5 QB 422 and Green v. Whitehead [1930] 1 Ch 38. However, both cases were concerned not with statutory power of attorney but specific power. Harper v. Godsell does not touch upon the issue at all. It concerned the interpretation of the particular power where wide, general powers were held to be qualified by a preceding, narrower, purposive provision. I have dealt with Green v. Whitehead in paragraph 81 above. The two cases simply do not support Mr Pirie's submission at all. They only illustrate the well-known proposition that powers which are spelt out in a non-statutory power of attorney are construed strictly. I have already ruled that the 1995 Power is a statutory general power within the meaning of POAO. It operates as an exhaustive grant of power by the Tangs to Ms Chow for their joint and several interests. I accordingly reject Mr Pirie's submission.

88. Mr Pirie referred to a number of authorities to support his submission that the 1995 Power should be strictly construed. In order not to overburden this judgment, I do not propose to deal with them in detail. Suffice it to note, as Mr Merry did, these cases are distinguishable as they concerned not with a general statutory power but specific powers. Those powers are strictly construed. A general statutory power is different. It is an exhaustive grant that enables the donee to do on behalf of the donor anything which he can lawfully do by an attorney, with the main exception that the donee may not act for his own benefit without the informed consent of the donor. I will come back to this point when I consider the Constructive Notice Defence.

89. For the above reasons, I reject the Validity Defence. I next consider the Purpose Defence.

THE PURPOSE DEFENCE

90. The evidence in support of the Purpose Defence can be found at paragraphs 18-24 above and I will not repeat them here. In my view, the evidence relied on by the defendants is unreliable for three main reasons. First, if the Tangs had intended to grant a limited power as alleged, they could have done so without difficulty at all. No explanation had been offered why the 1995 Power was given instead. Second, just four months after its grant, Ms Chow used the 1995 Power in connection with the Unit 2503 Mortgage in May 1995. Ms Chow's explanation why she did it is incredible if the allegation about the purpose were true and I have no hesitation in rejecting it. I see no reason why the Mortgagors did not complain about the Unit 2503 Mortgage. Third, it is not seriously disputed that Ms Chow used the 1995 Power to collect the title deeds of Celeste Court Property on 1 March 1996.

91. Mr Merry submitted that the timing of Unit 2503 Mortgage and the fact that it was signed in the same firm of solicitors which prepared the 1995 Power suggested that the power was made with mortgages as well as tenancies in mind. I accept this submission insofar it demonstrates the fallacy in the defendants' contention that the 1995 Power was only for the limited purpose of Celeste Court Property's tenancy matters. As I have ruled in paragraph 86 above, the 1995 Power is a general power within the meaning of section 7 of POAO. Thus it is not limited to either tenancy or mortgage.

92. In my view, the Purpose Defence must fail.

THE REVOCATION DEFENCE

93. The Revocation Defence must fail as well. Madam Shem's oral revocation in about February 1995 is inconsistent with the subsequent use by Ms Chow of the 1995 Power in collecting rentals from the tenant, executing the Unit 2503 Mortgage in May 1995, and collecting the title deeds in March 1996. There is no explanation why Ms Chow would continue to use it despite the revocation. In any event, I agree with Mr Merry's submission that the revocation would have been effective against the plaintiff only if it had been communicated : section 5(2) of POAO. A person dealing with a donee with an apparently valid and unrestricted power cannot be expected to go behind the power. I accept the handling solicitors' evidence that they were not made aware of the alleged revocation. I also accept their evidence that prior to the execution of the Mortgage, a copy of the 1995 Power had not been faxed to Deacons by Ms Chow for advice. In any event, Deacons all along acted for the plaintiff, they would not have given any advice to Ms Chow or the Borrowers on the power.

THE EXECUTION DEFENCE

94. Mr Pirie argued that the Mortgage was not binding upon the Mortgagors because it was not duly executed by Ms Chow on their behalf in that she only signed the deed without stating her capacity and signed only once. She should have signed twice, once for each of Mr Tang and Madam Shem. She should not have signed in her own name.

95. In my view, this argument is untenable. First, contrary to the defendants' contention, the execution clause of the Mortgage did mention that the deed was executed by Ms Chow as an attorney of the Tangs in these terms : "SIGNED SEALED and DELIVERED by CHOW SIN HO, the lawful attorney of the Mortgagor". Her identity card number was given. Opposite to that was her signature in Chinese characters. "Mortgagor" was defined in the Mortgage as Mr Tang and Madam Shem. Thus on a proper reading of the execution clause and the definition of the term "Mortgagor", there is little doubt that Ms Chow's capacity as their attorney had been clearly stated.

96. Second, by virtue of the definition of the term "Mortgagor", Mr Tang and Madam Shem, though two people, were contracting as one entity or in one capacity. And that would explain why there was only one signature of Ms Chow and why one signature was sufficient. Mr Pirie pointed to the Unit 2503 Mortgage where Ms Chow signed twice. Mr Merry submitted that it might be that certain solicitors as a precaution would require an attorney to sign twice in order to remove all possible arguments but that does not follow that one signature is insufficient. I agree.

97. Third, I fail to understand Mr Pirie's argument that Ms Chow should not have signed in her own name. As noted above, her capacity as an attorney of the Mortgagors was clearly stated. She was signing the deed for and on behalf of them. In any event, as rightly pointed out by Mr Merry, section 6(1) of POAO empowers an agent to execute a document in his own name with his own signature; and as an statutory and exhaustive grant, the 1995 Power entitled Ms Chow to execute an instrument under her own name and signature.

98. For the above reasons, the Execution Defence fails.

THE CONSTRUCTIVE NOTICE DEFENCE

99. I have so far disposed of all the defence relating to the 1995 Power. I now come to the crux of the case. As noted, the plaintiff is alleged to have constructive notice of the fraud practised on the Mortgagors. Fraud in the present context means the misuse of the 1995 Power by Ms Chow to execute the Mortgage without the prior consent or knowledge of the Tangs.

100. It is the evidence of both Madam Shem and Ms Chow that Ms Chow had not informed the Tangs about the Mortgage before its execution, let alone obtaining their consent. But I do not find either of them a truthful or honest witness. As demonstrated above, the quality of their evidence on the Purpose Defence and the Revocation Defence is highly questionable. Raising them is nothing but a desperate, futile attempt to escape liability. They are obviously liable to make up a further and arguably stronger defence of lack of knowledge and consent.

101. Ms Chow's evidence on why she agreed to mortgage the Celeste Court Property is summarized in paragraph 26 above. It is the effect of her evidence that she was initially reluctant to agree to mortgage the property. It was after repeated persuasions by Ms Chan that she finally agreed. It should however be noted that there is no allegation that Ms Chan had exercised any undue influence over Ms Chow. Why was Ms Chow persuaded? Apparently, there were three reasons put forward. First, Ms Chan's family was doing all sorts of businesses and they had a lot of assets. It begs the question why Ms Chan had to ask Ms Chow for assistance by making use of the Celeste Court Property. Second, the arrangement would not cause any trouble to Ms Chow or her family as the Celeste Court Property would be redeemed within a few months. I do not believe that Ms Chow, who was a company director herself and had experience in dealing with properties as demonstrated by the Unit 2503 Mortgage would be so na?ve to have accepted this. The arrangement, like any other mortgage, obviously involved risks. Third, Ms Chow and her husband could use the golf membership owned by one of Ms Chan's companies. It is however not a transfer of the membership. If anything, it is convenience. I have great doubt if this offer was so weighty or attractive that Ms Chow would see it fit to betray the trust her parents-in-law reposed in her.

102. In paragraph 27 above, I summarized Ms Chow's evidence on how she took steps to ensure that the 1995 Power would enable her to execute the Mortgage. She was concerned that the 1995 Power might not enable her to execute the intended mortgage, thinking that it was limited to tenancy matters of the Celeste Court Property only. She was obviously lying as she had used the 1995 Power to execute the Unit 2503 Mortgage in May 1995. She then said the Tangs only intended the power to be valid for one year. This must be untrue as well as she had continued to use it to collect rents and collect the title deeds of the Celeste Court Property in March 1996, well after the expiry of the 1 year period. I do not accept that she had faxed a copy of the 1995 Power and copies of the Tang's identity cards to Deacons for them to advise if it was within her power to execute the intended mortgage. In my view, she fabricated this in order to paint a picture that Deacons had all along known that she, as the donee under the 1995 Power, would execute the Mortgage for and on behalf of the Tangs. This reinforces my earlier observation that Ms Chow is liable to make up evidence to help her parents-in-law escape liability.

103. Madam Shem portrayed herself as an old, ignorant woman with little experience in dealing with properties. That is not true. As revealed under cross-examination, she had considerable relevant experience in the past : see paragraph 16 above. Her family ran a taxi business. In fact, she was one of the partners in the company concerned. I do not accept her evidence that she had no knowledge of the Unit 2503 Mortgage, which was made over her property for the benefit of her family business.

104. As I do not find either Madam Shem or Ms Chow truthful, I do not accept their evidence that the Mortgage was made without the prior knowledge or consent of the Tangs. On the contrary, given the significance of the Mortgage, it is more likely than not, and I so infer, that Ms Chow had informed her parents-in-law of the Mortgage and obtained their prior consent before execution. It is true that in about October 1997 after the Borrowers began to default, Ms Chow told Ms Ma that her parents-in-law were not aware of the Mortgage. She also said she was the real beneficial owner of the Celeste Court Property. In my view, it was only an attempt on her part to delay the plaintiff's possible action of possessing the Celeste Court Property.

105. Even if I were wrong on my above findings and the Mortgage was indeed executed without the Tangs' prior knowledge and consent, the Constructive Notice defence is still untenable. I will explain why below.

106. The question arose in this context is whether the Tangs, the principals who were assumed for present purposes to have had no knowledge of and given no prior consent to the Mortgage, are entitled to set it aside as against the plaintiff, a third party dealing with their agent Ms Chow on the strength of the 1995 Power, a statutory general power. Mr Pirie prayed in aid the principle derived from the series of cases ranging from Barclays Bank Plc v. O'Brien [1994] 1 AC 180 to Royal Bank of Scotland Plc v. Estridge (No.2) [2001] 3 WLR 1021. In the rest of this judgment, I will refer to this principle as the O'Brien principle. I will come to deal with Mr Pirie's submission in this regard in a moment. In my view, the starting point of enquiry is not the O'Brien principle but the following principles in the law of agency.

107. The authority of an agent may be (1) actual (express or implied) where it results from a manifestation of consent that he should represent or act for the principal expressly or impliedly made by the principal to the agent himself; or (2) apparent, where it results from such a manifestation made by the principal to third parties : Bowstead on Agency (17th edn) para.3-001 at p.89. In the case of a power of attorney, "the apparent authority is the real (actual) authority" : Byrant, Powis, and Byrant Limited v. The Quebec Bank [1893] AC 170, (PC), at p.180.

108. No act done by an agent in excess of his actual or apparent authority is binding on the principal with respect to persons having notice that in doing the act the agent is exceeding his authority : Bowstead on Agency, paras.8-051 - 8-052 at pp.332 - 333. When an agent acts in excess of the authority conferred on him and the third party knows of or ought to know of it, the principal will be entitled to have the transaction set aside : Reckitt v. Barnett, Pembroke and Slater Limited [1929] AC 176; Tai Che Ching & Others v. Overseas Trust Bank [1989] 2 HKC 104.

109. The law draws a clear distinction between want of authority and abuse of authority. An act of an agent within the scope of his actual or apparent authority does not cease to bind his principal merely because the agent was acting fraudulently and in furtherance of his own interests : Bowstead on Agency, paras.8-064 and 3-009 at pp.337 and 95. In Hambro v. Burnand [1904] 2 KB 10, Collins MR said at p.20 :

"...where a written authority given to an agent covers the thing done by him on behalf of his principal, no inquiry is admissible into the motives which the agent acted. It would be impossible, as it seems to me, for the business of a mercantile community to be carried on, if a person dealing with an agent was bound to go behind the authority of the agent in each case, and inquiry whether his motives did or did not involve the application of the authority for his own private purposes."

The third party dealing with the agent is thus entitled to rely on the power of attorney and need not go behind it, provided he acted in good faith. In Byrant, Powis and Byrant Limited v. The Quebec Bank [1893] AC 170, PC, Lord Macnaghten said :

"Whenever the very act of the agent is authorised by the terms of the power, that is whenever, by comparing the act done by the agent with the words of the power, the act is in itself warranted by the terms used, such act is binding on the constituent, as to all persons dealing in good faith with the agent; such persons are not bound to inquire into facts aliunde. The apparent authority is the real authority."

110. When the third party has actual notice that the agent had misused the power for his own benefit, he is not acting in good faith. The principal in those circumstances is entitled to set aside the transaction. Mr Merry submitted that it is debatable if constructive notice of the abuse of power is sufficient. Reckitt v. Barnett, Pembroke and Slater Limited and Tai Che Ching & Others v. Overseas Trust Bank were concerned with actual notice, counsel submitted. For present purposes, I am prepared to accept that a principal can avail himself of constructive notice of abuse against a third party. If a third party who has actual notice of abuse cannot prevail against the principal, I do not see any justification in principle why he can merely because the notice that he had is not actual but constructive.

111. Given the width of the 1995 Power, the signing of the Mortgage is within the terms of the power. As noted above, the complaint in this connection is not the lack of but rather the abuse of authority. The question is then : when all the circumstances are examined, is the plaintiff fixed with any notice that Ms Chow had misused the 1995 Power? There is no suggestion that the plaintiff had actual notice of abuse. The alleged notice is constructive notice.

112. Mr Pirie referred to a number of factors which he said reasonably gave rise to suspicion that Ms Chow had misused her authority. They are examined in turn.

113. First, the age of the Tangs. They were at the material times well over 60. But the plaintiff did not know this. No one from the plaintiff or Deacons had met the Tangs. I accept Ms Wu's evidence that copies of their identity cards were only supplied to Deacons after the signing of the Mortgage. There was no need or obligation to see their identity cards earlier. Further, I accept Mr Merry's submission that had the plaintiff known that the Tangs were elderly and retired, this would have explained why Ms Chow was appointed their donee under the 1995 Power. Far from sounding a warning bell, it would have provided reassurance.

114. Second, the Tangs were not living at the Celeste Court Property. The property was let out. Mr Lee did not recall if he had been told that the Tangs were living in Canada. Even if he had been so informed, it would probably after the signing of the Mortgage as Ms Wu was still making enquiry if the Tangs or Ms Chow would sign the Mortgage : see paragraphs 35 and 49 above. I accept the evidence of Mr Lee and Ms Wu. I also accept Mr Merry's submission that had the plaintiff known that they were living in Canada, it would have explained the grant of the power to Ms Chow, instead of arousing suspicion. The fact that the property was let out coupled with the grant of the power allayed suspicion : the Tangs wanted their daughter-in-law to look after and deal with the property.

115. Third, the friendship between Ms Chow and Ms Chan. Mr Lee knew that Ms Chan and Ms Chow were friends. But I accept that he did not know that Ms Chow was to sign the Mortgage. Likewise, I accept Ms Wu's evidence that it was until the very day of execution that she came to know that Ms Chow would sign the Mortgage. There is no allegation of any wrongdoings against Ms Chan. There is no evidence that the plaintiff was aware of the alleged inducement offered to Ms Chow by Ms Chan either. In the circumstances, I fail to see why the relationship between Ms Chow and Ms Chan would give rise to any suspicion.

116. Fourth, the Tangs derived no apparent benefit from the transaction. They had no ostensible reason for securing the facilities for the Borrowers. However, as explained out by Mr Wu and Ms Wu, in their experience, in a significant proportion of tripartite mortgages, that is the case. Mortgagors have their own personal and sometimes confidential reasons for supporting borrowers. It is not the business of banks or solicitors acting for them to pry into these reasons. I accept their evidence. In my view, it would constitute an unacceptable hindrance to the smooth operation of commercial activity if banks or their solicitors were required to make enquiry whenever a mortgagor in a tripartite mortgage derived no apparent benefit from the transaction.

117. Fifth, the age of the 1995 Power. It was about 15 months old at the time of the signing of the Mortgage. It should have raised concerns if it might have been revoked or spent, Mr Pirie argued. I have already rejected the Purpose Defence and the Revocation Defence. The alleged concerns were academic. I also accept Mr Merry's submission that unless so provided on its face, a power of attorney doe not expire or lapse or become spent by passage of time. Mr Merry, like Mr Wu and Ms Wu, sought to rely on the protection afforded to the plaintiff by section 5(2) of POAO. Mr Pirie contended that the plaintiff was not so entitled. Section 5(2) provides :

" (2) Where a power of attorney has been revoked and a person, without knowledge of the revocation, deals with the donee of the power, the transaction between them shall, in favour of that person, be as valid as if the power had then been in existence."

Section 5(2) gives protection to the person who deals with the donee of a power which, unknown to that person, has been revoked. The plaintiff who had no knowledge of the alleged revocation by Madam Shem is clearly entitled to rely on it.

118. Mr Pirie submitted that section 5(4) of POAO applied. With respect, it must be wrong. That subsection provides :

" (4) Where the interest of a purchaser depends on whether a transaction between the donee of a power of attorney and another person was valid by virtue of subsection (2), it shall be conclusively presumed in favour of the purchaser that that person did not at the material time know of the revocation of the power if -

(a) the transaction between that person and the donee was completed within twelve months of the date on which the power came into operation; or

(b) that person makes a statutory declaration, before or within three months after the completion of the purchase, that he did not at the material time know of the revocation of the power."

It gives protection to a subsequent purchaser or mortgagee. Where the interest of the purchaser or mortgagee depends on whether a transaction between the donee of a power and another person was valid by virtue of section 5(2), there is a conclusive presumption in favour of the purchaser or mortgagee that that person did not at the material time know of the revocation of the power if the matters listed are satisfied. The matters are either that the earlier transaction between that person and the donee was completed within 12 months of the power coming into operation, or (2) that that person makes a statutory declaration, before or within 3 months after completion of the purchase, that he did not at the time of his dealing with the donee know of the revocation of the power. Here, the plaintiff's interest does not depend on whether the transaction between Ms Chow and another person is valid. It depends on whether the transaction between Ms Chow and the plaintiff is valid. Section 5(4) does not apply.

119. I respectfully agree with Mr Merry's observation that the defendants are seeking to elevate a presumption in favour of successors-in-title into a rule that a power which is more than 12 months' old is stale and thus an indication of misuse of the power. That is clearly not permissible.

120. Mr Pirie then submitted that it was not a question of revocation at all. He contended that if on the face of the proposed transaction, the donee of the power is purporting to grant security over the donor's property for a third party's benefit, this automatically called into consideration whether the transaction had been authorized. With respect, his submission blurred the distinction between lack of authority and abuse of authority. The 1995 Power is a statutory general grant. Its terms are wide enough to empower Ms Chow to sign the Mortgage. The defendants' real complaint is Ms Chow's abuse of her authority, which is a separate and distinct issue. Even if what Mr Pirie meant was that it would call into consideration the possible abuse of power, his submission cannot stand. His submission boiled down to this : whenever there is a tripartite mortgage, the mortgagor had no apparent connection with the borrower and the mortgagor's donee signed the mortgage on the strength of a statutory general power, it would give rise to suspicion of abuse of power. In my view, such a proposition would defeat the whole purpose and commercial sense of granting a statutory general power, which is to permit a principal for his own convenience to act through his chosen agent without those with whom the agent deals having to go behind the power. Granting a statutory general power, the principal trusted his agent. He also represented to parties dealing with the agent that he trusted his agent. The principal cannot say "you must be suspicious of my attorney, though you see that I am not" : per Scrutton LJ in Reckitt v. Barnett, Pembroke and Slater Limited [1928] 2 KB 244 (CA) at p.256.

121. The defence refers to three additional factors, namely, the risk of default, the value of the Celeste Court Property being much less than the maximum amount of the facilities, and the Mortgage was for all monies. I agree with Mr Merry's submission that these factors have no relevance to whether Ms Chow had misused her power. Thus they cannot contribute to notice of misuse.

122. For the above reasons, none of the factors relied on by the defendants, whether considered individually or collectively, gives rise to any constructive notice of abuse of power on the part of Ms Chow as alleged.

123. I now return to Mr Pirie's submission and reliance on the O'Brien principle. In brief, the principle is this. A surety is able to set aside the transaction as against the creditor bank if it had constructive notice of the undue influence, actual or presumed, or misrepresentation practised on the surety that brought about the transaction and had failed to take reasonable steps to satisfy itself that the surety's agreement had been properly obtained. For reasons that will become apparent in a moment, I do not propose to go into detail the principle and the authorities concerned. (In this regard, interested readers may wish to consult Bank of China (Hong Kong) Ltd v. Wong King Sing [2002] 1 HKC 83 where the latest position was summarised by Recorder Ma, SC (as he then was) and Bank of China (Hong Kong) Ltd v. Wong Yuk Ping Caroline, HCMP 2017 of 1995, 8 May 2002, a decision of mine.)

124. In my view, the O'Brien principle would become relevant when an agent is involved in the transaction in either of these scenarios :

(1) The principal himself was subject to undue influence or misrepresentation by his agent or a third party. He then instructed or allowed the agent to enter into the transaction with the creditor bank.

(2) The agent was subject to undue influence or misrepresentation by a third party. He then entered into the transaction with the creditor bank, which was valid and binding on the principal.

In both cases, the lending bank is put on enquiry if the prerequisites are proved. But there is an important distinction. In the former, it is the position of the principal that matters. In the latter, it is the agent's.

125. The instant case does not fall within the first scenario. The Tangs were not subject to any undue influence or misrepresentation by Ms Chow or the Borrowers. On their case, they were not even aware of the Mortgage. It does not fall within the second scenario either. There is simply no allegation or evidence that Ms Chow was subject to undue influence or misrepresentation by the Borrowers through Ms Chan. In the circumstances, I do not find the O'Brien principle as further explained in Estrdige is applicable here.

126. Mr Pirie referred to a recent decision of Deputy Judge Muttrie in The Hong Kong Chinese Bank Ltd v. Onlink Invesment Ltd & Others, HCMP No.1448 of 1998, 8 March 2002. The facts essential to the decision are these. A mother granted a statutory general of attorney in favour of her daughter who, without her mother's consent, subsequently used it to mortgage a property jointly owned by them to secure the indebtedness of her company in which the mother had no interest. It would appear that the learned deputy judge decided the case primarily on the basis that the daughter was acting in breach of her duty as agent by obtaining a personal benefit without her mother's consent and the plaintiff bank had notice of it : see para.54 of the judgment. This is of course well supported by authorities : see Reckitt v. Barnett, Pembroke and Slater Limited. The learned deputy judge, however, went on to discuss the "the conflict" between some of the agency principles that I have referred to above and the O'Brien principle. Counsel had made their submissions in writing. In the circumstance, I have to address some of the points raised by the learned deputy judge, although strictly they are obiter dictum.

127. First, the learned deputy judge took the view that for a statutory general power, the apparent authority may not be the real authority and that a person dealing with the donee of such a power is put on enquiry as to the scope of the real authority. But for a power of attorney, the apparent authority is the real authority : see Byrant, Powis, and Byrant Limited v. The Quebec Bank in paragraph 107 above. As I have sought to demonstrate, the point in issue is not the scope of the authority but good faith : see paragraphs 109 and 110 above.

128. Second, the learned deputy judge was of the view that leaving aside the existence of the power, the case was exactly the situation covered by the O'Brien principle. I must confess I have reservation if it was really necessary to invoke the O'Brien principle to the facts of the case. The learned deputy judge found that the mother did sign the power of attorney with full knowledge of what she was doing and what it meant but she was not approached for her consent for the mortgage in question and did not in fact consent to it. It is not a case of undue influence or misrepresentation at all. Applying the agency principles would be enough to dispose of the case. It would appear that the learned deputy judge thought that the O'Brien principle was applicable because of two factors : (1) the mother and daughter relationship and (2) the transaction was manifestly disadvantageous to the mother who had no interest in the borrower company. But there existed an important feature that could not be ignored. It was the daughter (and not the mother) who signed the mortgage as an agent for and on behalf of her mother. And she did it without the latter's consent. It is not a case where the daughter exerted undue influence over or made misrepresentation to the mother who then signed or allowed the daughter to sign the mortgage in favour of the bank. The O'Brien principle is thus not applicable : see paragraph 124 above. On such analysis, no conflict between the O'Brien principle and the agency principles arose from the facts of the case.

129. In my view, when an agent is involved, depending on the allegations, the matter can be approached thus :

(1) If the agent acted without authority or abused his authority, the normal agency principles would apply : see paragraphs 107 to 110 above.

(2) If the agent exerted undue influence on or made misrepresentation to the principal, the O'Brien principle would come into play if :

(a) the principal signed the agreement in question. In this scenario, agency strictly does not arise as it is the principal who signed the agreement himself.

(b) the principal instructed or allowed the agent to and the agent did enter into the transaction on his behalf. The question of lack or abuse of authority does not arise as the principal had knowledge of and gave apparent consent to the transaction.

(3) If it was a third party who exerted undue influence or made misrepresentation, the O'Brien principle also applies : see paragraph 124 above.

For my part, on the footing of the above analysis, I do not see any conflict between the O'Brien principle and the agency principles.

130. The learned deputy judge also seemed to have suggested that constructive notice might be sufficient in sections 5(2) and 5(4) of POAO. I wonder if that is the case in light of the use of the words "knowledge" and "know" in the subsections. In any event, the learned deputy judge recognized that his observations were academic. Accordingly, I do not propose to deal with them any further.

131. In the circumstances, I do not think any useful assistance can be derived from The Hong Kong Chinese Bank Ltd v. Onlink Investment Ltd & Others.

132. For the above reasons, I reject the Constructive Notice Defence.

THE UNCONSCIONABLE BARGAIN DEFENCE

133.I now come to the Unconscionable Bargain Defence, which according to Mr Pirie is the central defence. Before dealing with the evidence and submission in this regard, I think it is convenient to first set out the law.

(1) The Law

134. One starts with the well and firmly established principles of freedom of contract. The law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of his own property as he chooses. However improvident, unreasonable, or unjust such bargains or dispositions may be, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognized invalidating circumstances where the court will intervene in equity, such as fraud, misrepresentation, undue influence and unconscionable bargain : see Brusewitz v. Brown (1922) 42 NZLR 1106, per Sir John Salmond at pp.1109-1110, referred to by Millet LJ (as he then was) in Credit Lyonnais v. Burch [1997] 1 All ER 144 at p.153d-f, Chekiang First Ban v. Fong Siu Kin & another [1997] 2 HKC 302, per Godfrey JA at p.310B-E, and Commercial Bank of Australia v. Amadio (1983) 151 CLR 447 per Mason J (as he then was) at p.461.

135. Equity's jurisdiction to relieve against unconscionable bargain is of great antiquity. It developed from the jurisdiction of the Court of Chancery to set aside catching bargains with expectants : see e.g. Earl of Chesterfield v. Janssen (1751) 2 Ves Sen 125, Earl of Aylesford v. Morris (1873) 8 LR Ch 484, Fry v. Lane (1888) 40 Ch D 312, Burch, per Nourse LJ at p.151b-c. In Fry v. Lane, Kay J after reviewing the earlier authorities said :

"The result of the decision is that where a purchase is made from a poor and ignorant man at a considerable undervalue, the vendor having no independent advice, a Court of Equity will set aside the transaction...The circumstances of poverty and ignorance of the vendor, and the absence of independent advice, throw upon the purchaser, when the transaction is impeached, the onus of proving, in Lord Selborne's words, that the purchase was 'fair, just, and reasonable'."

136. The law naturally developed in the progress of time and the equitable jurisdiction had been adapted to different transactions entered into in changing circumstances : see Burch, per Nourse LJ at p.151f. For example, in Cresswell v. Potter [1978] 1 WLR 255, Megarry J at p.257 suggested that the modern equivalent of "poor and ignorant" might be " a member of the lower income group ... less highly educated". In Burch itself, the defendant, a young junior employee with modest income had given a guarantee and charged her flat to secure the borrowings of her employer's company in circumstances in which the transaction was manifestly disadvantageous to her. The case was decided on the ground that the plaintiff bank had constructive notice of undue influence by the employer. But both Nourse and Millett LJJ said, obiter, that it might have been argued that she had a direct right as against the bank to set the aside transaction on the grounds of unconscionability.

137. It is obviously impossible to describe definitely all the situations where the equitable jurisdiction may be invoked : Amadio, per Mason J at p.561 and per Deane J at p.474. Thus Fullagar J in Blomley v. Ryan (1956) 99 CLR 362 said at p.405 :

"The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other."

These are examples of an underlying general principle which may be invoked whenever one party by reason of some condition of circumstances is placed at a special disadvantage vis-à-vis another and unfair and unconscientious advantage is then taken of the opportunity thereby created : Amadio, per Mason J at p.462.

138. After reviewing the authorities, I respectfully agree with the observation by Millet QC when he sat as a deputy judge in Alec Lobb (Garages) Ltd v. Total Oil Great Britain Ltd [1983] 1 WLR 87 at pp.94H-95D :

"It is probably not possible to reconcile all the authorities, some of which are of great antiquity, on this head of equitable relief, which came into greater prominence with the repeal of the usury laws in the 19th century. But if the cases are examined, it will be seen that three elements have almost invariably been present before the court has interfered. First, one party has been at a serious disadvantage to the other, whether through poverty, or ignorance, or lack of advice, or otherwise, so that circumstances existed of which unfair advantage could be taken : see for example, Blomley v Ryan (1954) 99 CLR 362, where, to the knowledge of one party, the other was by reason of his intoxication in no condition to negotiate intelligently; secondly, this weakness of the one party has been exploited by the other in some morally culpable manner : see, for example, Clark v Malpas (1862) 4 De GF & J 401, where a poor and illiterate man was induced to enter into a transaction of an unusual nature, without proper independent advice, and in great haste; and thirdly, the resulting transaction has been, not merely hard or improvident, but overreaching and oppressive...In short, there must, in my judgment, be some impropriety, both in conduct of the stronger party and in the terms of the transaction itself (though the former may often be inferred from the latter in the absence of an innocent explanation) which in the traditional phrase "shocks the conscience of the court", and makes it against equity and good conscience of the stronger party to retain the benefit of a transaction he has unfairly obtained."

In this judgment, I will refer to the three elements identified by Millet QC in short form as (a) the complaint's disabling circumstances, (b) the stronger party's unconscionable conduct and (c) an oppressive bargain. (I note that Wuang J in Lo Wo & Others v. Cheung Chan Ka & Another [2000] 2 HKLRD 370 at p.381 discerned similar factors relevant to the court's consideration of whether to set aside for unconscionable bargain. The learned editors of Chitty on Contracts (28th edn) also adopt a similar approach : see para.7-078 at p.452.) These elements are further examined in turn below.

(a) The complaint's disabling circumstances

139. As noted, the personal circumstances that a complainant seeks to rely on are infinitely various and thus cannot be listed exhaustively. The common feature in different factual situations is that the complainant in his particular circumstances was seriously disadvantaged to the other party such that unfair advantage could be taken. In approaching the question whether the complainant suffers any disabling circumstances in dealing with the party alleged to have been guilty of unconscionable conduct, the best approach is very often by a comparison of their relative positions : Amadio, per Deane J at pp.475-476. But the existence of any relationship of confidence and trust between the parties or proof of any influence by the other party over the complainant is not essential. (This is one of the mark distinctions between unconscionable bargains and undue influence cases.)

140. A caveat is necessary. Mere inequality of bargaining power between the parties is not enough : Alec Lobb (Garages) Ltd v. Total Oil Great Britain Ltd (CA) [1985] 1 WLR 173. Dillion LJ explained at p.183 :

"Inequality of bargaining power must anyhow be a relative concept. It is seldom in any negotiation that the bargaining powers of the parties are absolutely the same. Any individual wanting to borrow money from a bank, building society or other financial institution in order to pay his liabilities or buy some property he urgently wants to acquire will have virtually no bargaining power; he will have to take or leave the terms offered to him. So, with house property in a seller's market, the purchaser will not have equal bargaining power with the vendor...The courts would only interfere in exceptional cases where as a matter of common fairness it was not right that the strong should be allowed to push the weak to the wall. The concepts of unconscionable conduct and of the exercise by the stronger of coercive power are thus brought in..."

See also Amadio, per Mason J at p.461 where he used the word "special" in connection with the disadvantage suffered by the complainant in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the powers of the parties and in order to emphasize that the disabling condition or circumstances is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party. It is a victimization, which can consist of either of the active extortion of a benefit or the passive acceptance of a benefit in unconscionable circumstances : see Earl of Aylesford v. Morris (1873) LR 8 Ch App 484 and Hart v. O'Connor [1985] 1 WLR 1001, per Lord Brightman at p.1024. In other words, the complainant must also prove the other two elements before the transaction can be successfully impeached on unconscionability.

(b) The stronger party's unconscionable conduct

141. Unlike undue influence cases, the court here is not concerned with the quality of the weaker party's consent, but with the stronger party's conduct : Alec Lobb (Garages) Ltd v. Total Oil Great Britain Ltd, per Millet QC at p.94G, Amadio, per Deane J at p.474.

142. A contract will not be set aside merely because the aggrieved party did not have independent advice and the consideration was inadequate. It must also be shown that the other party engaged in unconscionable conduct or an unconscientious use of power. He must have behaved in a morally reprehensible manner which affects his conscience : see generally Chitty on Contracts, para.7-081 at pp.453-454. If there has been no equitable fraud, victimization, taking advantage, overreaching or other unconscionable conduct, relief will not be granted : see e.g., Hart v. O'Connor where the Privy Council held that that the contract could not be set aside as unconscionable because the purchaser had acted with complete innocence.

143. Unconscionable bargain may be inferred from the terms of the transaction itself in the absence of any innocent explanation : Burch, per Millett LJ at p.153b.

144. In a surety situation, like the present case, the following points are pertinent :

(1) In the ordinary case of principal and surety the creditor owes no duty of care to the surety. It is for the surety to satisfy himself as to the nature and extent of the obligations he is assuming : Barclays Bank v. O'Brien [1994] 1 AC 180, per Lord Browne-Wilkinson at p.193D.

(2) The creditor is only bound to disclose to the intending surety anything which has taken place between the bank and the principal debtor which was not naturally to be expected. The necessity for disclosure only goes to the extent of requiring it where there are some unusual features in the particular case relating to the particular account which is to be guaranteed : Amadio, per Gibbs CJ at p.455. This duty to disclose does not require a bank to give information as to matters affecting the credit of the debtor or of any circumstances connected with the transaction in which he is about to engage which will render his position more hazardous : Wythes v. Labouchere (1859) e De G & J 593, per Lord Chelmsford LC at p.609. No surety is entitled to assume that the debtor has not been overdrawing, the proper presumption being in most instances that he has been doing so and wishes to do so again : London General Omnibus Co. Ltd v. Holloway [1912] 2 KB 72.

(3) But the fact that a bank's duty to make disclosure to its intending surety, arising from the mere relationship between principal creditor and surety, is so limited has no bearing on the availability of equitable relief on the ground of unconscionable conduct. A bank, though not guilty of any breach of its limited duty to make disclosure to the intending surety, may nonetheless be considered to have engaged in unconscionable conduct in procuring the surety's entry into the transaction : Amadio, per Mason J at p.463. There, two elderly migrants who were unfamiliar with written English were asked by their son to execute a mortgage in favour of a bank over land which they owned to secure the overdraft of a company which the son controlled. The son had told his parents that the mortgage was to be limited to $50,000.00 and to be for six months. The bank and the company had been selectively dishonouring the company's cheques to preserve the company's appearance of solvency. The bank and the company agreed that the overdraft the mortgage was to secure should be reduced and cleared within a short time, but these matters were not disclosed to the prospective mortgagors. The mortgage instrument which the bank submitted for execution contained a guarantee. The mortgage and the guarantee secured all amounts owing or which might be owing to the bank on the company's account. The mortgagors executed the deed mistakenly believing it to be limited to $50,000 and to be for six months. The bank was aware that they had misinformed about the contents of the instrument they were executing. Gibbs CJ decided the case on the ground of material non-disclosure whereas the majority held that it was an unconscionable bargain. It would appear that the bank's failure to disclose the material facts was relevant to the majority's determination of the bank's conduct.

(c) An oppressive bargain

145. The modern cases in which relief has been granted or said to be available have all involved transactions which were substantively unfair in that the complainant was parting with property for much less than it was worth, or getting nothing out of the transaction. The resulting transaction has been, not merely hard or improvident, but overreaching and oppressive so that its terms, together with the conduct of the stronger party, shock the conscience of the court : Chitty on Contracts, para.7-079 at p.452.

146. It is however not essential that there has been an inadequacy of consideration moving from the stronger party. Notwithstanding that adequate consideration may have moved from the stronger party, a transaction may still be unfair, unreasonable and unjust from the point of view of the weaker party. An obvious example of circumstances in which that may be so, which is pertinent here, is the case where the benefit of the consideration does not move to the party under the disability but moves to some third party involved in the transaction. Thus, it is established that the jurisdiction extends, in an appropriate case, to relieve a guarantor of the burden of a guarantee of existing and future indebtedness : see Owen and Gutch v. Homan (1853) 4 HC LC 997 at pp.1034-1035, ). In Amadio, Deane J explained at p.475 thus :

"Such a guarantee is properly to be viewed in the terms enunciated by Cussen J in Bank of Victoria v Mueller [1925] VLR 642 at p.649 :

'In the first place, it is obvious that a large benefit is conferred both on the creditor and the debtor, which, so far as any advantage to the guarantor is concerned, is voluntary, though no doubt "consideration" exists so far as the creditor is concerned, so soon as forebearance is in fact given or advances are in fact made. It is, I think, to some extent by reference to the rule or to an extension of the rule that, in the case of a large voluntary donation, a gift may be set aside in equity if it appears that the donor did not really understand the transaction, that such a guarantee may be treated as voidable as between the husband and wife.'

Cussen J's above analysis was made in the context of a guarantee procured by a husband from his wife in favour of the husband's bank. There is, however, no basis in principle or in policy for confining the process of reasoning therein contained to cases of the relief of female spouses. It is appropriate to the circumstances of the present case."

147. Once the conditions for relief are met, the burden shifts to the stronger party to show that the transactions are fair, just and reasonable. In practice, this will mean showing either that, in the particular circumstances, the transaction was not in fact oppressive; or that the complainant was fully aware of what he was doing. This will normally come back to the question of whether he had received proper independent advice : Chitty on Contracts, para.7-084 at p.455.

(2) Further points arising out of agency

148. What I have set out above are the general principles derived from authorities. However, an unusual matter, which did not appear in the authorities cited to me, features in the instant case. Normally, as the authorities demonstrated, the weaker party seeking to set aside the transaction on the ground of unconscionability usually acted on his own. Here, there is this intermediary, Ms Chow, who had allegedly acted without the consent of her principals, the Tangs. Two points arise.

149. The first concerns agency. In my view, the appointment of an agent and the particular circumstances relating to that agent may have a significant bearing on the question whether the principal was under any disabling circumstances. Take for example an old couple with little education appointed a professional agent to look after their properties. Obviously, without the agent, the couple might find themselves in a much weaker position via-s-via, say, a bank. But their position might well be markedly different with a professional agent acting for their behalf in dealing with the bank. Thus, the particular circumstances relating to the agent should be taken into account when the disabling circumstances of the principal are considered.

150. The second point relates to the allegation of lack of consent on the part of the principals, the Tangs. It seems that lack of consent does not sit well with the concept of unconscionable bargains. To recap, the court in addressing the issue of unconscionability is not concerned with the quality of the weaker party's consent but with the stronger party's conduct : see paragraph 141 above. When invoking the court's equitable jurisdiction in this regard, the weaker party is not asserting that he did not enter into the transaction without an independent and voluntary will. (If that is his case, other remedies are available.) He is contending that his will, though independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position : see Amadio, per Mason J at p.461. In an agency situation, the necessary implication is that the principal consented to the transaction. In any event, I have already ruled that the Tangs had given prior consent to the Mortgage : see paragraph 104 above. For present purposes, I will therefore leave aside the allegation of lack of consent when discussing the Conscionable Bargain Defence.

151. Mr Pirie submitted that the notion of constructive notice is part of the modern law in both unconscionable bargain and undue influence cases. Logically, it must be so, as the basis of the setting aside of the transaction is on facts which should put the financial institution on inquiry. In this regard, he relied on Barclays Bank plc v. Boulter [1999] 1 WLR 1919.

152. With respect, I fail to see how the Boulter case supports counsel's contention. It was a case about undue influence and misrepresentation. It was not about unconscionable bargain. The bank claimed possession as mortgagee of a property jointly owned by the husband and his wife. In her defence, the wife alleged that the bank had procured her signature through her husband who had therefore acted as the bank's agent, that she had signed the charge in reliance on her husband's representation to her that it was to secure a single sum borrowed from the bank to purchase the property, that no explanation had been given to her as to the meaning and effect of the charge and that since the charge purported to charge the property with all monies owed to the bank by her husband, the representation was false. At the start of the hearing of the action, the judge ruled that the wife could not argue that the bank had constructive notice of the misrepresentation and undue influence since she had failed to plead that fact. The Court of Appeal allowed the wife's appeal on the grounds that the burden was not on the wife to plead and prove that the bank had constructive notice but on the bank to plead and prove that it did not have such notice and that in any event the facts already pleaded by the wife were sufficient to raise the issue of constructive notice without being expressly alleged. The bank appealed to the House of Lords. While holding that it was for the wife to plead and prove why the acts of her husband should make the charge invalid as against the bank, the House dismissed the appeal on the grounds that the wife's defence alleged facts which could, if known to the bank, give rise to constructive notice; that although the pleading did not allege that those facts were known to the bank it did refer to the legal charge to which the bank had been a party and which would have put the bank on notice of the relevant facts; that, in the circumstances of the case, the bank could have been in no doubt that the wife was relying on the defence of constructive notice; and that, accordingly, the pleading did not require amendment to raise the issue of constructive notice. Unconscionable bargain is simply not a subject matter of their Lordships' discussion.

153. The doctrine of constructive notice comes into play when there is an intermediary through whose impropriety the complainant entered into the transaction in question with a third party. The complainant then sought to set aside the transaction against the third party. As I have demonstrated above, unconscionable bargains normally do not involve such an intermediary. The complainant does not need to invoke the doctrine of constructive notice. However, when the transaction was an unconscionable bargain and is obtained through the undue influence of the intermediary, as in Burch, the position may be different. There, Mr Pelosi provided the bank with an unlimited all monies guarantee given by Miss Burch at his request. She was a junior employee of Mr Pelosi's company employed at a modest wage. She was not a director of the company or shareholder in it. Her guarantee was supported by a second charge on her home, a small flat of suitably modest value. She understood that the guarantee and charge were unlimited in time and amount, but she had not taken independent legal advice. The bank was aware of all these facts when it accepted the security. The Court of Appeal was of the view that the transaction was an unconscionable bargain and could be set aside on that ground alone. Millet LJ said at p.153b-d :

"In the present case, the bank did not obtain the guarantee directly from Miss Burch. It was provided to the bank by Mr Pelosi, who obtained it from Miss Burch by the exercise of undue influence. In such a context, the two equitable jurisdictions to set aside harsh and unconscionable bargains and to set aside transactions obtained by undue influence have many similarities. In either case it is necessary to show that the conscience of the party who seeks to uphold the transaction was affected by notice, actual or constructive, of the impropriety by which it was obtained by the intermediary, and in either case the court may in a proper case infer the presence of the impropriety from the terms of the transaction itself."

154. The remarks by Millet LJ, I think, are confined to the facts in Burch. If the complainant, as in Burch, is able to show constructive notice of the intermediary's undue influence, he will be able to set aside the transaction on that ground alone. The constructive notice of undue influence on the part of the third party is relevant to the question of unconscionability because it adds weight to the contention that the third party's conduct was unconscionable. I doubt if Mr Pirie's very general proposition in paragraph 151 is correct. The instant case does not concern undue influence. In this respect, I do not think any useful assistance can be derived from Burch.

155. Having discussed the law, I now turn to the relating evidence and submissions to see if the Unconscionable Bargain Defence is made out.

(3) Submissions

156. Mr Pirie submitted that it is an obvious case of unconscionable bargain. He asked : why would anyone who has just paid off a mortgage with part of their pension/provident fund, allow their attorney to enter into a transaction which on the face of it, made them incur a potential liability of HK$32 million on an "all monies mortgage", which they would have to clear off in order to get their title deeds released? He contended that in a potentially unconscionable bargain situation, a bank has to ensure that the providers of security should obtain independent legal advice, before the execution of the security, to avoid the security from being set aside. When the providers of security nor their agent will benefit from the transaction, the duty of the bank is to see that the providers do seek and actually obtain independent legal advice. Further, the mere grant of a statutory general power of attorney did not absolve the bank from informing the agent the true nature and extent of the independent obligations. The transaction was patently to the disadvantage of the Tangs. Deacons as the plaintiff's agent did not take any step to ensure that they knew what the relevant facts of the unconscionable bargain were.

157. It is apparent that Mr Pirie did not follow the approach that I have outlined in paragraph 138 above in addressing the three main elements identified, although he had cited quite a number of cases in support of his contention. As I understand his submissions, he essentially took four points : (1) the Mortgage was manifestly disadvantageous to the Tangs and both the plaintiff and Deacons knew it; (2) the plaintiff failed to advise the Tangs about the true extent of indebtedness of the Borrowers; (3) that the plaintiff failed to ensure Ms Chow to obtain independent legal advice; (4) that the plaintiff failed to contact and advise the Tangs the relevant facts of the unconscionable bargain. It is also suggested by him during cross-examination that it was the plaintiff who sought after the Celeste Court Property as security for the loan. I propose to follow the approach that I have outlined above by addressing the three essential elements of the defence. In the course, I will deal with Mr Pirie's points when they arise.

(a) The Tangs' circumstances

158. There is no evidence that either Ms Chow or the Tangs were under any personal disability. The plaintiff dealt only with Ms Chow. She was in my view a mature person with experience in property and business. Her standard of education and knowledge of English was unexceptional but not unusually low and would have been more than compensated for by her knowledge and experience. The Tangs were not ignorant. Their age was not a disability - there is no suggestion that either was senile. I infer from their occupation and their family business that they were experienced business people. They also had experience in dealing with properties. When cross-examined, Madam Shem demonstrated in the witness box that she could energetically defend her own interests.

159. The Tangs and Ms Chow had no apparent connection with the Borrowers. They did not have any particular interest in procuring the facility to be granted to the Borrowers. They were simply not obliged by the circumstances to mortgage the Celeste Court Property. Thus, I do not find that they were suffering any disabling circumstances which would seriously affect their ability to make a judgment as to their own best interest.

(b) Conduct of the plaintiff and Deacons

160. In this regard, the defendants first complain that the plaintiff did not disclose the extent of the Borrowers' liability, financial position and risk of default. A bank's duty to disclose is discussed in paragraph 144 above. To recap, a bank is generally not required to make disclosure to a surety of matters affecting the credit of a debtor or of any circumstances which will make the surety's position more hazardous. No surety is entitled to assume that the debtor has not been over-drawing or even that the bank is satisfied with the customer's credit. It is only if there is something which is not naturally to be expected, some unusual feature in the particular case relating to the particular account which is to be guaranteed, that the bank is bound to inform the surety. I accept that a failure to warn of the risk of default by the borrower is relevant but only if the risk is extraordinary in the sense of default being imminent or highly likely. Risk is indeed inherent and obvious in the giving of security for the very purpose of the lender requiring security is to guard against risk. The mortgagor and his attorney do not need to be told that there is such a risk. They must be aware of it. If, however, the borrower is in grave financial difficulty (e.g., insolvent or persistently overdrawn beyond limits) at the time of creation of the mortgage, that is not normal and an omission to tell the mortgagor of this would reflect badly on the bank's conduct.

161. Having carefully considered the evidence, I do not see any extraordinary risk or circumstances in the present case which required the plaintiff to go beyond the very limited duty of disclosure. The fact that the Borrowers defaulted in little more than a year is in my view immaterial. What is pertinent is the position at the time of the creation of the facility and Mortgage. The plaintiff, through Mr Lee, performed their usual and thorough credit check : see paragraph 29 above. Mr Lee concluded that the risk was acceptable. The recommendation was independently checked and then independently approved by his superior. Mr Lee was not shaken under cross-examination. The defendants had adduced no evidence to contradict him. I accept his evidence accordingly. Indeed, it defies common sense to suggest that a bank would lend even if the risks are unacceptable. I agree with Mr Merry that it is quite unrealistic to suggest that the information available from the credit check should have been revealed to Ms Chow. She would not have been interested in such detail. The information was in any event confidential. Any reasonable surety would have concluded, correctly, that the bank had considered the risks and found them acceptable. I am unable to accept that Ms Chow was completely ignorant about the extent of the Borrowers' facility and the risk involved. The first question that any sensible surety would ask the borrower is surely the extent of the loan and the risk the surety would face in the event of default. I agree with Mr Merry's submission that when dealing with, Ms Chow, a mature adult who was under no apparent disability, the plaintiff and its solicitors were entitled to assume that she had taken steps to inform herself of the obligations she was undertaking and of the extent of any loan she was supporting by asking the borrower. Ms Chow evidently understood from her own experience with her family companies the nature and use of facilities to finance business and the securing of those loans by mortgage.

162. I accept Mr Merry's submission that it would have been misleading for the plaintiff or Deacons to tell Ms Chow simply that the loan or the risk was for up to $36 million because the actual amount outstanding at any one time would have been less than that, would have fluctuated daily and was also secured by other mortgages, charges and guarantees.

163. The defendants next complain that Deacons had not given any legal advice or explanation before Ms Chow signed the Mortgage. In this regard, I accept Ms Wu's evidence that she had told Ms Chow that she could seek independent legal advice and that all the salient terms of the Mortgage and their effect were adequately explained. It was her usual practice to do so and it is only reasonable to expect that a conveyancing lawyer would have a routine for dealing with mortgagors and would follow it. Her evidence is also consistent with Deacons' letter of 19 April 1996 addressed to the Tangs asking them to seek independent legal advice. In respect of this letter, I find that it must have reached the Celeste Court Property, that Ms Chow must be aware of it as I see no reason why the tenant would not pass it on to her. Whether the Tangs received the letter is immaterial for present purposes as Ms Chow's knowledge was to be imputed to them. Further, I accept Mr Merry's that the desirability of independent advice had only been emphasised in the O'Brien case and would have been well known to Ms Wu. The failure to keep attendance notes for the execution of the Mortgage in my view is insignificant. I accept Ms Wu's evidence in this regard.

164. I do not find Ms Chow's evidence on the execution of the Mortgage satisfactory. It was evident from her answers in cross-examination that she understood what a mortgage was, i.e. a security over property; appreciated the connection between the mortgage and the loan; understood that companies used mortgage loans to finance their business; was aware that there would be an upper limit upon and range for the lending and that the borrowing companies could use that range within that limit; believed that Ms Chan would pay off the mortgage within a few months and thought that the risk was small because of the high property market. Ms Chow said under cross-examination that Ms Wu explained to her that she was signing as attorney for the defendants; told her that liability would be limited to the property itself. She also understood that if the Borrowers could not repay the indebtedness, the plaintiff would sell the Celeste Court Property. In short, despite all her allegations, she after all accepted that she understood the risk involved, leaving aside whether she knew the Mortgage was an all monies mortgage. On the last issue, I accept Ms Wu's evidence that she had advised Ms Chow that it was an all monies mortgage and Ms Chow understood the meaning of it. I also accept the evidence of Ms Ma and Ms Au Yeung on Ms Chow's conduct after the Borrowers defaulted. It clearly shows that Ms Chow was fully aware of the effect and consequences of the Mortgage.

165. The defendants also complain that no copy of the Mortgage and facility letter had been given to them and Ms Chow so that if desired, they could in advance obtain advice. Mr Merry submitted and I agree that the purpose of an advance copy is to give the surety an opportunity to read it and to take advice. Accordingly the "failure" to supply a copy is inconsequential if the surety is advised of and given the opportunity to take advice but declines it and if the mortgage is sufficiently explained. I accept Ms Wu's evidence that Ms Chow was given the opportunity to take advice and did not take it and had she done so, a copy of the mortgage would have been supplied. The essence of the deed was then explained to her.

166. The Tangs or Ms Chow might have, on the face of the transaction, derived no apparent benefit. But as pointed out by Mr Wu and Ms Wu, it was not uncommon in a tripartite mortgage. The plaintiff or its solicitors would not be in a position to know if the mortgagor did in fact reach any financial agreement with a borrower behind the scene : see paragraph 62(5) above. Accordingly, even if the Tangs and Ms Chow apparently did not receive any benefit, I do not think any adverse inference can be made against the plaintiff merely because of that.

167. I reject the defendants' contention that the plaintiff should in the circumstances of the present case contact the Tangs before the execution of the Mortgage. The circumstances did not give rise to such a need. If the plaintiff were so required, it would defeat the whole purpose of the 1995 Power. The position was entirely different when Ms Chow proposed to have a second mortgage over the Celeste Court Property in October 1997. As the proposed second mortgage would benefit Ms Chow, consent from the Tangs was required. Accordingly, Deacons wrote to them for consent.

168. I also reject the defendants' contention that it was the plaintiff who sought after the Celeste Court Property to replace the Tai Tam Road Property. I accept Mr Lee's evidence that it was Ms Chan who suggested using Celeste Court Property; that such suggestion came after the facility had been approved by the plaintiff; and that whether the property offered as security was encumbered did not affect his decision to approve or reject the application for facility. The defendants' contention is plainly inconsistent with the fact that the total value of the Celeste Court Property and Unit 2503 was far less than that of the Tai Tam Road Property. I also accept Mr Lee's evidence on the Note that it related to an intended application for facility by Ms Chow in connection with City Motor: see paragraph 34 above.

169. For the above reasons, I do not find the plaintiff's conduct unconscionable or morally reprehensible.

(c) Terms of the Mortgage

170. The Mortgage was an all monies mortgage. Mr Pirie submitted that it contained various onerous and unfavourable terms prejudicial to the interests of the defendants. In particular, Clause 2 of the Mortgage provides that :

"'In consideration of the Lender agreeing to make available to the Borrower the Facilities upon the terms and subject to the conditions contained in the Facility Letter, the Borrower covenants to pay on demand all Obligations to the Lender.'

Whereas the word 'Obligations' was defined in Clause 1.1 of the Mortgage as 'All principal, interest and other amounts from time to time owing by the Borrower to the Lender on any current and/or other account and all other liabilities whatsoever of the Borrower to the Lender whether present, future, actual and/or contingent.'

Clause 15.2 of the Mortgage further provides that :

'The security created herein shall be a continuing security and shall be available to secure whatever may be the balance at any time or from time to time due by the Borrower or the Mortgage to the Lender pursuant to this Mortgage.'"

He contended that it was in fact a continuing mortgage-guarantee to an unlimited extent in respect of all sums which the Borrowers might owe the plaintiff.

171. Having considered the Mortgage as a whole, I do not find it oppressive. It contained terms commonly found in any ordinary tripartite mortgage. There was no unusual or excessive burdensome obligation like repayment by the Tangs in case of default by the Borrowers. All that was at risk was the Celeste Court Property, which is all that the plaintiff now seeks.

172. The defendants were unable to prove a unconscionable bargain. The Unconscionable Bargain Defence therefore fails.

ANSWERS TO THE AGREED ISSUES

173. I now return to the Agreed issues. My answers are as follows :

Issue (1)

Ms Wu was told shortly before the execution of the Mortgage on 25 April 1996 that Ms Chow would be signing it. Prior to execution, the plaintiff was not aware of the fact that the Tangs lived in Canada. Nor was it told that the Tangs were not aware of the Mortgage. My finding is the Tangs were aware of and gave consent to the Mortgage before its execution.

Issue (2)

Yes.

Issue (3)

This question does not arise.

Issue (4)

No.

Issue (5)

No. It is not necessary to do so.

Issue (6)

This question does not arise.

Issue (7)

This question couched in its terms does not arise. The execution of the Mortgage by Ms Chow on behalf of the Tangs was a valid execution under section 6 of POAO.

Issue (8)(a)

This question does not arise.

Issue (8)(b)

Ms Chow need not do so.

Issue (8)(c)

Ms Chow need not do so.

Issue (9)

No. It is not necessary to do so.

Issue (10)

No. It is not necessary to do so in the circumstances of the present case.

Issue (11)

There was no revocation by Madam Shem as alleged. This question does not arise.

Issue (12)

The question does not arise.

Issue (13)

No.

Issue (14)

This question does not arise. In any event, there is no proper basis for the court to set aside the Mortgage.

RELIEF

As none of the defence succeeds, the Mortgage is valid and binding on the Tangs. Accordingly, I will enter judgment for the plaintiff for vacant possession of the Celeste Court Property and dismiss the counterclaim.

COSTS

The defendants are on legal aid. Pursuant to section 16 of the Legal Aid Ordinance, Cap.91, they are only liable for the costs of the counterclaim but not the costs of the plaintiff's claim. I will make an order nisi that in respect of the costs inter parte there shall be no order as to costs save that the costs of the counterclaim be to the plaintiff, to be taxed if not agreed. The defendants' own costs shall be taxed in accordance with Legal Aid Regulations. The order nisi shall be made absolute after 14 days of handing down of this judgment.