WING HANG BANK LTD v. CRYSTAL JET INTERNATIONAL LTD AND OTHERS

CACV255/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 255 OF 2002

(ON APPEAL FROM HCMP NO.5014 OF 1999)

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REASONS FOR JUDGMENT

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Hon Ma CJHC :

1. After hearing submissions from counsel for the 1st Defendant, this Court dismissed its appeal with costs on a solicitor and own client basis (the contractually stipulated basis) without calling on the Plaintiff’s counsel.  I agree with the reasons for dismissing the appeal contained in the judgment of Lam J but wish just to say a few words about the need to make clear in pleadings issues that a party wishes to advance.

2. In the present case, the Plaintiff’s claim against the 1st Defendant was put on the simple basis of liability arising under a legal charge over the 1st Defendant’s property (“ the Legal Charge”), under which the Plaintiff was the mortgagee and the 1st Defendant the mortgagor.  The Charge took the form of an assignment dated 21 May 1997 in which the 1st Defendant’s property was charged to the Plaintiff as security for the whole of any indebtedness owed by the 2nd Defendant to the Plaintiff (respectively as borrower and lender under banking facilities granted to the 2nd Defendant).

3. There being no dispute that the 1st Defendant signed the Legal Charge nor as to the fact that the 2nd Defendant owed money to the Plaintiff, liability was inevitable unless the 1st Defendant was somehow able to show that its consent to the Charge was lacking or that for some other reason no liability thereunder should accrue.  Here, the burden was squarely on the 1st Defendant.

4. Where a party to what otherwise is a valid contract wishes to advance a case based on lack of consent, so that what appears at first sight to be an enforceable contract is somehow not, he must make this abundantly clear in his pleadings.  O.18 r.12(1)(a) of the RHC specifically requires to be pleaded any defence based on misrepresentation, fraud, breach of trust, wilful default or undue influence.  In my view, this is the clearest possible indication of the importance of setting out (and doing so clearly) defences such as misrepresentation and undue influence.

5. In the present appeal, Mr Chong (who appears for the 1st Defendant) relied on misrepresentation and undue influence to escape liability under the Legal Charge, selecting here and there those parts of the evidence that purportedly supported these defences.  Notwithstanding the fact that neither defence was pleaded, and even worse that undue influence was actually abandoned by counsel for the 1st Defendant in the Court below, it was thought appropriate to run these defences on appeal.  The relevant parts of the 1st Defendant’s Defence and Counterclaim stated as follows : -

“The Legal Charge

7.    Paragraph 13 is denied.  The 1st Defendant denies that the ‘Legal Charge’ was executed pursuant to the 2nd Facility and the Plaintiff making available HK$40,000,000.00 to enable the 1st Defendant to purchase the Property.  The 1st Defendant avers that on or about 20th or 21st of May 1997 the directors of the 1st Defendant were asked by Ms. M.L. Ko to go up to the solicitors firm of Messrs. Siao, Wen & Leung to sign on formal documents for the assignment of the Property and the Legal Charge.  The 1st Defendant had always used the services of Messrs. Siao, Wen & Leung in respect of its property transactions.  The 1st Defendant further avers that a Mr. Charles K.P. Yeung of Messrs. Siao, Wen & Leung only told the directors of the 1st Defendant i.e. Mr. Ko and Madam Mable Maxwell (‘Ms. Maxwell’) that they were to sign documents relating to the purchase and mortgage of the Property.  They were not told and had no inkling that the 1st Defendant would be liable for all the 2nd Defendants’ debts to the Plaintiff and their understanding was that the Property mortgaged was for the security for repayment of the $20,000,000.00 loan advanced to the 2nd Defendant by the Plaintiff.  The 1st Defendant avers that Mr. Yeung did not explain the contents of the said mortgage to them and he had never informed the 1st Defendant that Messrs. Siao, Wen & Leung also acted for the Plaintiff and asked the 1st Defendant to seek independent legal advice.

8.      The 1st Defendant also avers that before the signing of the said assignment of the Property and the Legal Charge they were not approached by any staff of the Plaintiff to explain the details and arrangement of the Legal Charge to them.  The 1st Defendant further avers that it was the ‘duty’ of the Plaintiff to disclose such information to them.  In the circumstances the 1st Defendant denied that they are liable under the Legal Charge or at all for the matters as pleaded hereinabove.

9.    The 1st Defendant also avers that the Plaintiff has made a report to the Commercial Crime Bureau that the 2nd Defendant has obtained money by deception from the Plaintiff through the use of its banking facilities, and it is averred that even if the 1st Defendant is to be held liable for the 2nd Defendant’s borrowing which is denied, the 1st Defendant should only be liable for legitimate and legal borrowing by the Plaintiff to the 2nd Defendant and the 1st Defendant should not be held liable for any crimes committed by the 2nd Defendant or its Directors.”

This was not a proper pleading if what was sought to be raised was either misrepresentation or undue influence.

6. If I may, I take this opportunity to reiterate some basic principles : -

(1)     The purpose of pleadings is fairly and precisely to inform the other side of the stance of the pleading party so that proper preparation is made possible, and time and effort are not expended unnecessarily on other issues.  The passage at paragraph 18/12/1 of Hong Kong Civil Procedure 2004 Volume I sets out the rationale for proper pleadings.

(2)     In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the live issues.  Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained.  It will simply not do for unpleaded issues to be ‘slipped in’ when evidence is being given in the hope that the other side is not sufficiently alert to object.  Much testimony given in the course of a trial may in truth relate to a number of possible aspects or may simply be background information.  Obviously, counsel must be astute to object when necessary but the primary responsibility of ensuring that any issue is properly before the Court is on the party seeking to advance that issue.  He must do so clearly and not ambiguously, and the usual way of doing so is through the pleadings.  Care must be taken to plead issues clearly, and not draft pleadings either vaguely or ambiguously perhaps in the hope that the other side might not readily or easily understand a party’s real case.  While vaguely or ambiguously drawn pleadings may enable a party to escape a strike out application (since striking out is only for plain and obvious cases), this is not to say that where a court has to decide whether or not an issue is to be permitted to be run, it will smile kindly on such types of pleading.

(3)     On appeal, it will be extremely rare for the Court of Appeal to allow unpleaded issues of fact to be run for the first time.  Save in exceptional circumstances (such as where documents can safely be assumed to speak for themselves), the Court will often not be in a position to take the view confidently that the other side has not been prejudiced.

7. What has just been set out is not to be construed as an encouragement to take ‘pleading points’ by which I mean pedantic, small or quite insignificant points of pleadings.  Nor will objections as to pleadings have much force where the parties have chosen to disregard the pleadings and conduct the hearing on some unpleaded basis.  As Isaacs and  Rich JJ said in Gould v Mount Oxide Mines Limited (1916) 22 CLR 490, at 517 : -

“But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly thought out, it is impossible for them to hark back to the pleadings and treat them as governing the area of contest.”

Ultimately, a court is to be guided by what is fair and just in the circumstances, not just to the party seeking to rely on the unpleaded case but to all the parties before it.  The Court ought also to bear in mind the following passage at paragraph 18/12/1 of Hong Kong Civil Procedure 2004 Volume 1 : -

“The purpose of pleadings is not to play a game at the expense of the litigants but to enable the opposing party to know the case against him”.

8. What is set out above as representing acceptable practice will be all the more emphasized when the      Civil Justice Reforms in Hong Kong take shape.  The object is not to invite prolixity in pleadings but to achieve what has always been the position : to fairly inform the other side and the Court of a party’s case, identifying the issues and the true extent of the dispute between the parties.

9. In the present case, the 1st Defendant’s attempted reliance on misrepresentation and undue influence was impermissible.  It was up to the 1st Defendant to raise these issues in the proper way.  It did not.

Hon Suffiad J :

10.  I have had the privilege of reading in draft the reasons given by the Chief Judge of the High Court and also Lam J.  I agree with all that has been said by them and have nothing to add.

Hon Lam J :

Background

11.  In this appeal, the 1^st Defendant seeks to set aside the judgment of Deputy Judge Saunders in favour of the Plaintiff dated 30 April 2002. As far as the claim against the 1^st Defendant is concerned, the Plaintiff sued as mortgagee under a Legal Charge dated 21 May 1997 and the 1^st Defendant was the mortgagor. The property involved is Town House L and two car parking spaces at Kellett View Town Houses, Mount Kellett Road [“the Property”]. The judge declared that the Plaintiff has since 30 November 1998 been entitled to possession of the Property and was entitled to exercise the power of sale under the Legal Charge. The 1^st Defendant was also ordered to pay the Plaintiff the secured indebtedness in the sum of $175,498,522.16 with interest. After hearing submissions, this court dismissed the appeal with costs. These are my reasons for the dismissal of the appeal.

12.  In his judgment, the judge clearly set out the factual background of the case and, subject to a point raised by Mr Chong in the course of his oral submissions, there is no challenge to the judge’s finding of primary facts. For the purpose of this judgment, it is sufficient to highlight the salient facts. The borrower under the Legal Charge is the 2^nd Defendant. Its shareholders and directors were Winnie Ko and M L Ko [“ML”]. They were also the shareholders and directors of the 3^rd Defendant. The Legal Charge is an all monies legal charge, viz. the secured indebtedness comprises of all sums from time to time advanced by the Plaintiff to the 2^nd Defendant.

13.  The shareholders and directors of the 1^st Defendant are C H Ko [“CH”] and his wife. CH is the brother of Winnie and ML. As far as the evidence shows, neither CH nor his wife held any shares in the 2^nd Defendant. CH worked in the 3^rd Defendant, a company operated at the same office premises as that of the 2^nd Defendant. He is neither a director nor a shareholder of the 3^rd Defendant. The judge found that the business of the two companies were closely allied and CH and ML were often together as they worked in the same office.

14.  Before 19 May 1997, the 2^nd Defendant operated on banking facilities from the Plaintiff up to $44 million. The facilities were secured partly by a time deposit in the name of ML in the sum of $20,100,000.

15.  In April 1997, the 1^st Defendant entered into an agreement to purchase the Property at the price of $68 million. Completion was scheduled to take place on 21 May 1997. To finance the purchase CH and ML agreed that CH could have the $20 million time deposit placed with the Plaintiff. The basis on which the 1^st Defendant obtained the use of the $20 million is not entirely clear. The judge put it this way,

“…it appears that [CH and his wife] had cash invested somehow in [the 2^nd Defendant] because they asked ML to let them have $20 million.”

Of course, before the 1^st Defendant could use the $20 million deposit, it had to obtain the Plaintiff’s agreement to release the same by replacing it with other property acceptable to the Plaintiff as security for the banking facilities granted to the 2^nd Defendant.

16.  In addition, the 1^st Defendant needed a mortgage loan in the sum of $20 million from a bank to finance the purchase.

17.  Around the same time, ML was negotiating with the Plaintiff for an increase in banking facilities. She suggested to CH that she could get a good mortgage rate from the Plaintiff. CH left it to ML to deal with the Plaintiff. The negotiations culminated in revision of the banking facilities of the 2^nd Defendant to $117 million (including the $20 million mortgage loan) on terms set out in a facility letter dated 19 May 1997 [“the Facility Letter”]. One of the securities required by the Plaintiff was an all-monies legal charge on the Property executed by the 1^st Defendant. On the other hand, the $20 million time deposit was released. CH signed on the Facility Letter on behalf of the 1^st Defendant to confirm the acceptance of the terms set out therein.

18.  The Legal Charge was executed at the office of Messrs.Siao Wen and Leung [“the Solicitors”] on 21 May 1997. The Solicitors acted for the 1^st Defendant in the conveyancing transaction regarding the purchase of the Property. In respect of the Legal Charge, based on evidence of Charles Yeung the solicitor clerk, the judge found that the Solicitors acted for both the Plaintiff and the 1^st Defendant.  Mr Chong invited this court to hold that the judge was wrong in that regard by reason of Clause 21 of the Legal Charge. That contention is clearly unsustainable. Clause 21 only informed the 1^st Defendant that the Solicitors were acting for the Plaintiff and reminded them of their right to seek independent legal advice. It was neutral on the question whether the Solicitors were acting for the 1^st Defendant at the same time.

19.  Upon execution of the Legal Charge, the facilities were granted and the 1^st Defendant through the 2^nd Defendant got $40 million from the Plaintiff ($20 million from the time deposit and $20 million by way of mortgage loan) to complete the purchase.

20.  Apart from the $20 million mortgage loan, the other banking facilities under the Facility Letter were utilized by the 2^nd Defendant for its own purposes. By 10 June 1999, the amount owing (including interest) ran up to $130 million odd.

21.  In late 1998, the Plaintiff discovered that the 1^st Defendant had, acting in breach of the Legal Charge, leased out the Property to a tenant without the consent of the Plaintiff. Also there were problems in servicing the facilities and the Plaintiff demanded repayment on 26 November 1998. In the wake of that, in order to appease the Plaintiff, the 1^st Defendant executed a surrender letter (with a board resolution authorizing the same) in favour of the Plaintiff without any protest as to its liability for the total amount outstanding under the facilities granted to the 2^nd Defendant.

The action and the pleadings

22.  In June 1999, the Plaintiff again demanded repayment. The failure on the part of the Defendants to comply with the demand led to the issue of the Originating Summons in the mortgage action. Subsequently, the court directed pleadings to be filed and the action to proceed as if begun by writ.

23.  On 24 October 2000, a Defence and Counterclaim was filed on behalf of the 1^st Defendant. That document was signed by the solicitors for the 1^st Defendant. It is not the function of the court to tell a party how his pleadings should be drafted. Rather it is the duty of a litigant and those acting for him to plead his case properly to ensure the issues are clearly identified by the pleadings. A pleading must comply with the requirements set out in the Rules of the High Court. One must remember that the parameters of a trial are defined by the pleadings. In an ordinary civil action, generally speaking, an issue that has not been pleaded is not an issue before the court and subject to the exception alluded to by the Court of Final Appeal in Poon Hau Kei v Hsin Chong Construction Co Ltd [2004] 2 HKLRD 442, the court should not consider such issue. Plainly, we are not dealing with a situation falling within that exception.  I have the benefit of reading the judgment of the Chief Judge in draft and I wholly agree with what he said therein.

24.  The Defence and Counterclaim does not plead explicitly that the Legal Charge was voidable by reason of mistake, misrepresentation or undue influence. The main gist of the defence case was pleaded in paragraphs 4, 6, 7 and 8. Paragraph 8 alleged that there was a duty on the part of the Plaintiff to disclose to the 1^st Defendant “the details and arrangement of the Legal Charge”. It went on to aver that the Plaintiff failed to do so and therefore the 1^st Defendant was not liable under the Legal Charge. It is not clear how the alleged duty arose and what exactly were the details that the Plaintiff should have been disclose to the 1^st Defendant. If it is said to be a duty stemming from the matters pleaded in the earlier paragraphs, it is wholly unclear as to the basis on which those matters could be relied upon to render the 1^st Defendant not liable. Basically, those paragraphs pleaded that ML told CH that she would negotiate the $20 million mortgage with the Plaintiff and the 1^st Defendant would sign a “guarantee” for $20 million. It also pleaded that CH was ignorant of the terms of the Facility Letter although he had signed it when ML told him it related to the $20 million. Paragraph 7 pleaded that the 1^st Defendant was told by ML to go to the Solicitors to execute the Legal Charge as one of the documents relating to the purchase and mortgage of the Property. The complaint was pleaded as follows,

“[CH and his wife] were not told and had no inkling that the 1^st defendant would be liable for all the 2^nd Defendants’ debts to the Plaintiff and their understanding was that the Property mortgaged was for the security for repayment of the $20 million loan advanced to the 2^nd Defendant by the Plaintiff.”

25.  Those paragraphs in the Defence and Counterclaim can in no way be read as raising a case of undue influence. That much was accepted by Mr Chong. He however argued that the pleadings implicitly raised a plea of misrepresentation by ML as to the effect of the Legal Charge. The judge apparently regarded the prime defence to be non est factum and dealt with it accordingly. Given the unsatisfactory state of the pleadings, I could quite understand why the judge laboured under that impression. In any event, it does not matter very much because, as I shall explain below, the judge did make the relevant findings.

The conduct of the trial on behalf of the 1^st Defendant

26.  The 1^st Defendant was not represented by Mr Chong at the court below. At the trial, counsel for the 1^st Defendant had assured counsel for the Plaintiff that the 1^st Defendant did not rely on undue influence. This was made known to the judge in the course of opening. Hence, the evidence was led on the basis that undue influence was not an issue before the court. Counsel for the Plaintiff conducted his cross-examination accordingly.

27.  In his closing submissions, counsel for the 1^st Defendant put at the forefront the contention that ML acted as the agent for the Plaintiff and he emphasized her evidence that just before they went to the Solicitors on 21 May 1997, she told CH there was a $20 million liability and CH thought the Legal Charge was for a mortgage loan of $20 million. Counsel then focused on the lack of explanation by the solicitor clerk as to full impact of the Legal Charge. Based on those, he submitted that CH and his wife were misled into believing that the Legal Charge was limited to $20 million.

28.  I note that it was not part of the submissions by counsel that even if ML was not acting as agent for the Plaintiff, the Plaintiff was still affected by her wrongful conducts because it was put on inquiry by reason of the manifestly disadvantageous nature of the transaction from the 1^st Defendant’s point of view. It was also not the case as pleaded in the Defence and Counterclaim.

29.  The nub of the complaint by the 1^st Defendant, as it was presented to the judge in terms of closing submissions, was that it was misled by ML acting as agent for the Plaintiff and the failure to explain on the part of the solicitor clerk. The result was that the 1^st Defendant executed documents (the Legal Charge and the Facility Letter) on the mistaken basis that its exposure was limited to $20 million.

Essential findings by the judge on the 1^st Defendant’s case

30.  Although the judge did not analyse the defence from the angle of misrepresentation, he summed up the defence case quite accurately and succinctly in Paragraphs 27 to 29 of his judgment. Further, and more importantly, he made findings relevant to the complaints of the 1^st Defendant. In Paragraph 37 of the judgment, the judge said,

“…Mr Ko is ML Ko’s brother. He was employed in the family business. They work in the same office suite, and although, technically, for different companies, they were often together. It was his evidence that she often brought him pages of documents to sign. The businesses of the two companies were plainly closely allied. He took advantage of the terms that were negotiated by ML Ko on his behalf, with the Bank lending in conjunction with the Mazlo re-financing. Even if he knew nothing of the Mazlo refinancing, and in the circumstances that is simply not believable, there is simply no sufficient basis to say that in the circumstances, his sister and employer, ML Ko was acting as agent for the Bank in arranging the loan.” (my emphasis)

Then at Paragraph 44,

“… When Mr Ko and Winnie Ko received the demand from the Bank in November 1998, neither then contended that the sums included in the demand were sums for which they did not believe they had any liability. If, as Mr Ko now contends, he believed that Crystal Jet’s liability to the Bank was for $20 million only, he would certainly then, upon receipt of the demand for a sum in excess of $124 million, have taken the matter up with the Bank. That he did not demonstrates clearly that he knew and understood the extent of the liability…” (my emphasis)

31.  In the general discussion on credibility, the judge said the following regarding ML and CH in Paragraph 22,

“I did not find Mr Ko, Winnie Ko or ML Ko to be believable witnesses. Where there has been a difference between the witnesses I prefer the evidence of the plaintiff. All three defence witnesses were inconsistent in their evidence with their witness statements. When faced with these inconsistencies in cross examination they were quite unable to explain them. Both Mr Ko and Winnie Ko collapsed in confusion when asked to explain why, if as they alleged during evidence, they did not know that the second facility was for $117 million, they took no steps at all nor raised any complaint with the Bank when they received demands for a sum in excess of $124 million in November 1998.”

32.  There is not a shadow of a doubt in my mind that the judge rejected the evidence of CH and ML on their assertions that CH was ignorant about the terms of the Facility Letter or was misled as to the effect of the Legal Charge.

33.  In Paragraphs 42 to 44 of the judgment, the judge accepted the evidence of the solicitors clerk and found that “all that was required to be explained was explained” when CH and his wife executed the Legal Charge on behalf of the 1^st Defendant.  The clerk had said in his evidence that “he fully explained the documents [which included the Legal Charge]”.

34.  In a nutshell, the judge rejected the complaint of the 1^st Defendant as to CH and his wife being misled and they executed the Legal Charge in ignorance of the terms contained of the facilities as contained in the Facility Letter on point of facts. In the Amended Notice of Appeal, Mr Chong did not challenge such finding of facts. 

The Appeal

35.  The grounds set out in the Amended Notice of Appeal focused on the duty of the Plaintiff and the alleged failure on the part of the Plaintiff to discharge the same. It was contended that the Plaintiff was somehow put on inquiry and owed a duty to the 1^st Defendant to take reasonable steps to advise the latter as to the practical implications of the transaction.  It is confusing to talk about duty owed by the Plaintiff towards the 1^st Defendant as Mr Chong did. In his written submissions, Mr Chong also referred to the duty of the Plaintiff to protect the interest of the 1^st Defendant. In my view, that is not an accurate analysis of the issue. The correct question should be whether the Plaintiff was affected by constructive notice of an equity to set aside the transaction by reason of its failure to take reasonable steps to satisfy itself that the 1^st Defendant understood the nature and effect of the transaction.

36.  Hence, it could be misleading to start off by considering the duty of the Plaintiff. In my judgment, the starting point should be whether the 1^st Defendant had any equity to set aside the transaction in the first place.  Without such an equity (such as one created by for example misrepresentation or undue influence), there was no need for the banks to take any steps to satisfy itself as aforesaid.

37.  In his oral submissions, after some wavering at the beginning, Mr Chong confirmed that the duty of the Plaintiff relied upon by the 1^st Defendant was not a free standing one. It was predicated upon some wrongs having been committed upon the 1^st Defendant that would give rise to an equity to set aside the transaction. The wrongdoer could have been someone other than the Plaintiff, and in the present context, it was alleged to be ML. However, the Plaintiff could be affected by the equity only if it had notice of the same. In other words, the duty to take steps on the Plaintiff cannot be considered in a vacuum.

38.  I respectfully adopt the test set out in Paragraph 20 of the judgment of Scott Baker LJ in Chater v Mortgage Agency Services Number Two Ltd [2004] 1 P&CR 28 at p.32 as containing the correct approach,

“Following the decision in Etridge (No.2) in the House of Lords the appellant has to show,

(1)       (i)      that she was unduly influenced to enter into the mortgage; or

           (ii)      that she was induced to enter into it by a misrepresentation;

(2)       That the respondent was put on inquiry as to some equitable wrong; and

(3)       That the respondent did not take reasonable steps and as a result was fixed with notice of the undue influence and/or misrepresentation.”

On the facts of Chater, the alleged wrongs committed were undue influence and misrepresentation. In other cases, stage one of the inquiry could cover other grounds giving rise to a claim to set aside the transaction like mistake or duress. 

39.  Hence, one does not come to the second stage until one has established some equitable wrong. At stage one, the bank’s position does not fall for consideration if the alleged wrongdoer is not the bank. What has to be examined is the position as between the wrongdoer and the party who seeks to set aside the transaction (see Chater at Para.26).

40.  Applying that approach, it can readily be seen that the 1^st Defendant’s appeal is bound to fail. None of the grounds in the Amended Notice of Appeal touches upon stage one of the inquiry. From his submissions (both oral and written), I gathered that Mr Chong sought to rely on undue influence and misrepresentation by ML to contend that the 1^st Defendant had an equity to set aside the transaction. In the light of the pleadings, the manner in which the case had been conducted on behalf of the 1^st Defendant at the court below and the findings by the judge, these were very bold submissions.

41.  As explained above, not only had undue influence never been pleaded, it was also expressly disavowed by counsel at the trial. It was simply not open to the 1^st Defendant at this late stage to run for the first time a case based on undue influence.

42.  This is not a mere technical point. A plea of undue influence is highly fact sensitive. We are not dealing with a Class 2A situation. In accordance with the judgment of the Court of Final Appeal in Li Sau Ying v Bank of China [2004] 3 HKLRD 106, one must examine through the evidence whether the impugned transaction was procured by an abuse by the allegedly dominant party of the trust and confidence reposed in him by the allegedly subservient party (see Paras.33 and 34). Until the plea has been properly raised, the other party cannot be expected to deal with it in the evidence.

43.  In the present context, based on the materials currently before the court, I can see that at least the following issues need to be further explored before any conclusion could be reached on undue influence,

(a)     the economic relationship between CH and ML and CH’s involvement in the two trading companies;

(b)    the circumstances leading to ML’s agreement to let CH have the $20 million deposit for the purchase of the Property;

(c)     the personality of CH, his wife and ML and their relationship with one another (here it should be remembered that the 1^st Defendant is a company with CH and his wife as the shareholders);

(d)    the overall relationship between CH and ML;

(e)     the means by which ML is alleged to exercise influence on CH and his wife in entering into the transaction;

(f)     the options open to CH if he could not have the $20 million deposit and the $20 million mortgage loan;

(g)     the advice available to the 1^st Defendant before decision was made to execute the Legal Charge.

44.  Whilst evidence related to some of these issues might have been led in the trial, I have no doubt that counsel for the Plaintiff would have tackled the same quite differently if he was told that he had to meet a case of undue influence as well.

45.  In my judgment, it would be wholly wrong to allow the 1^st Defendant to rely on undue influence in this appeal.

46.  As regards misrepresentation, quite apart from the problems with the pleadings, the judge’s finding of facts as mentioned above is fatal to the 1^st Defendant’s case. Without applying for further amendment of the Notice of Appeal, Mr Chong argued for the first time in the course of his oral submissions that the finding of the judge was wrong as it was coloured by an incorrect finding that the transaction was to the advantage of the 1^st Defendant. Mr Chong also contended that the transaction was manifestly disadvantageous to the 1^st Defendant as it would subject the 1^st Defendant to the liabilities incurred towards the Plaintiff by the 2^nd Defendant.

47.  I fail to see how it could be suggested that the judge’s finding as to CH’s knowledge about the terms of the Facility Letter and the effect of the Legal Charge was tainted by what he said in Paragraph 67 of the judgment. The advantage to the 1^st Defendant referred to by the judge was the securing of necessary finance to enable it to complete the purchase of the Property. It is quite clear to me that the judge was trying to distinguish the present case from Royal Bank of Scotland v Etridge (No.2) [2002] 2 AC 773 which he discussed in Paragraph 64. It was a discussion on whether the bank is put on enquiry, viz. a stage two question. It is not necessary for us to consider whether that distinction is a valid one because the 1^st Defendant had not even gone past stage one.

48.  I do not think it is appropriate for this court to examine whether the transaction was manifestly disadvantageous to the 1^st Defendant since this is not an issue pleaded and as a result, there was insufficient investigation into that matter at the trial. I can see arguments on both sides and certainly the transaction is not as one-sided as Mr Chong put it. 

49.  I am not convinced that this court has sufficient reasons to disturb the judge’s finding of facts as mentioned above. Hence, misrepresentation cannot be established, even if the issue can be run in the first place.

50.  That being the case, it is futile to examine the “duty” of the Plaintiff and whether it had discharged the same. I will only deal with it briefly. In Royal Bank of Scotland v Etridge (No.2) [2002] 2 AC 773 Para.147, Lord Scott commented on the extent of the inquiry by the bank,

“In these circumstances the bank would be ‘put on inquiry’, as Lord Browne-Wilkinson put it. But ‘on inquiry’ about what? Not about the existence of undue influence, for how could any inquiry reasonably to be expected of a bank satisfy the bank that there was no undue influence? ‘On inquiry’, in my opinion, as to whether the wife understood the nature and effect of the transaction she was entering into. This is not an ‘inquiry’ in the traditional constructive notice sense. The bank would not have to carry out any investigation or to ask any questions about the reasons why the wife was agreeing to the transaction or about her relationship with her husband. The bank would not, unless it had notice of additional facts pointing to undue influence or misrepresentation, be on notice that undue influence or misrepresentation was to be presumed. What Lord Browne-Wilkinson had in mind was that the bank should be expected to take reasonable steps to satisfy itself that she understood the transaction she was entering into. If the bank did so, no longer could constructive notice of any impropriety by the husband in procuring his wife’s consent be imputed to it.”   

51.  In Li Sau Ying v Bank of China [2004] 3 HKLRD 106, Para.41, Lord Scott said further,

“It must be borne in mind, however, that the relationship between the surety and the principal debtor must be looked at with the eyes of the bank. … It is certainly not necessary for a proposed mortgagee to make inquiries about the relationship between its principal debtor and the proposed surety/mortgagor before deciding on the steps it should take to satisfy itself that the surety understands the transaction he or she is entering into. …And for a bank/mortgagor to make inquiries of that character would in most cases be an unwarrantable impertinence.”

52.  Given the findings of fact by the judge as to the knowledge of CH as to the nature and effect of the transaction and that the solicitors clerk had explained all that needed to be explained to CH and his wife before the Legal Charge was executed, the 1^st Defendant would in any event have great difficulties in persuading this court that the Plaintiff was subject to any constructive notice of any impropriety on the part of ML.

53.  The appeal is utterly devoid of merit and was dismissed accordingly.