SHUM KONG AND ANOTHER v. CHUI TING LIN TERESA AND ANOTHER

HCA16227/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.16227 OF 1999

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(By Counterclaim)

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J U D G M E N T

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1. On the hillside above Pak Sha Wan, Sai Kung, there stands a 3-storey village house with a floor area of about 700 square feet, which at the relevant time belonged to Mr and Mrs Shum, the plaintiffs in the original action, and the 1st defendant by counterclaim, whom for simplicity I will call the Vendors. The house stands on a concreted terrace and at the back of the house and terrace there is a concreted slope. There is a fence round the three open sides of the terrace and above the slope at the back. The area thus enclosed - which has been referred to in evidence as the garden - is about 3,500 square feet. From the front of the house there is a sea-view over Hebe Haven.

2. Access to the house is gained by steps going up from the road outside to a gate in the fence. Next to these steps is a two-car garage with a roller shutter. The garage is built in such a way that two sides of it are against the hillside below the house, and part of the concrete terrace forms its roof. Effectively it is under part of the garden.

3. Anyone looking at the property, especially with a view to purchase, will naturally assume that it consists of the house and garden, with the garage underneath, because all are contained in the same enclosure. In fact this is not the case. The house is built on Lot No.1130 in DD 217. The surrounding area of the terrace and slope was at the relevant time the subject of a short term tenancy by Government to the Vendors dated 2 November 1998. There was a rental of $54,780 per annum. The tenancy was personal to the Vendors and provided for termination, inter alia, on assignment of the ground floor of Lot No.1130. The effect was that the Vendors could sell the house, but not the garden; any purchaser of the house would have to obtain a fresh short term tenancy of that.

4. Mr & Mrs Chui, the defendants and plaintiffs by counterclaim ("the Purchasers"), wanted to buy a house in the Sai Kung area. Mrs Chui had a friend whose brother, Mr Jacky Tang, was working for Centaline Property Agency Ltd., the 2nd defendant by counterclaim ("the Agency") at one of their branches in Shatin. She made inquiries of him and he contacted his colleague Mr Jacky Mok who worked for the Agency at its Clearwater Bay branch. Mr Mok found out that the property was for sale through another firm of estate agents, but managed to contact the Vendors, or one of them; which one is in dispute. An inspection was arranged for 15 August 1999, and on that day the Purchasers, Mrs Shum and Mr Mok were all present.

5. There was a further inspection on 18 August, when the same persons, as well as the Purchasers' daughter and two colleagues from the Agency were present. On this occasion Mr Mok obtained Mr Chui's signature on a provisional sale and purchase agreement. The subject of the agreement was shown as Lot No.1130 and the purchase price was $7,800,000. There was to be an initial deposit of $350,000 payable on the signing of the agreement, and a further $430,000 was to be paid on the signing of a formal agreement on or before 6 September 1999. Mr Mok also gave Mr Chui a copies of the land registry search and the Conditions of Grant dated 13 August 1977 in respect of Lot 1130. The next day Mr Chui arranged for a cheque for $350,000 to be passed to Mr Mok, who took it to Mr Shum and obtained his signature on the provisional agreement.

6. The parties' solicitors communicated in early September regarding the conveyance. On 6 September the Purchasers through their solicitors claimed that the provisional agreement was void for misrepresentation or mistake, on the ground that the Vendors had through their agent represented that the property included the house and the garden. The Vendors through their solicitors on 14 September 1999 purported to accept the Purchasers' breach of the agreement and demanded payment of $430,000 in addition to the $350,000 which they had received and had earlier purported to forfeit.

7. The Vendors are now claiming payment of $430,000, and various declarations and indemnities. The Purchasers are claiming against both the Vendors and the Agency for payment of $350,000 and other reliefs.

The Purchasers' Case

8. The Purchasers' pleaded case, in brief, is that at both inspections the Agency was acting as estate agent for both the Vendors and the Purchasers. At the inspections, the 2nd named plaintiff and employees of the Agency represented by words and conduct that the whole of the property belonged to the Vendors and could be assigned by them. Acting on the faith of these representations, the Purchasers entered into the provisional agreement and paid over the initial deposit.

9. The representations were untrue and were made negligently. Insofar as the 2nd named plaintiff made them she made them for herself and her husband; insofar at the Agency's employees made them, they made them on behalf of the Vendors.

10. The Purchasers were entitled to rescind on the ground of misrepresentation.

11. Alternatively the Purchasers acted under a mistake, and on that ground they were entitled to rescind. They are entitled to repayment of their deposit of $350,000 from the Vendors.

12. In addition the Agency through its employees was negligent and/or in breach of contractual duty to the Purchasers as their agent and as a result they have suffered loss and damage.

13. The Purchasers accordingly claim against the Vendors for the return of their deposit, interest and a declaration that they have a purchaser's lien over the property. Against the Agency they claim $350,000 as damages and an order for indemnity for any sums for which they may be held liable to the Vendors, as well as their own costs in defending the Vendors' claim.

The Vendors' Case

14. The Vendors say that the Purchasers are in breach of contract, so they are entitled to retain the $350,000 deposit. They also claim the agreed further deposit of $430,000. They deny misrepresentation. They aver that the Agency acted as the Purchasers' agent only, and not as their agent. Before the first inspection, they had informed the Agency that the garage and garden were rented from Government. Any misrepresentation made by the Agency was made on its own account and was not authorised by the Vendors.

15. They further aver that both the Purchasers and the Agency knew or ought to have known the extent of the property from the land search and the Conditions of Grant. The Purchasers are not entitled to rely on any representation. Alternatively, any loss was caused or contributed to by their own negligence or that of the Agency as their agents.

The Agency's Case

16. The Agency denies misrepresentation by its employees and says that the defendants in any event sought and relied on the advice of their solicitors rather than any representations made. It denies negligence and breach of contractual duty to the Purchasers and says that the copies of the land search record and the Conditions of Grant were the only information it had and that Mr Chui accepted these and indicated that he would consult his solicitors about them.

17. It further says that if the Vendors are liable to the Purchasers for the return of the deposit and the Agency is also found liable, the Purchasers have failed to mitigate their loss by failing to register their Counterclaim in the Land Registry against the property to secure their claim of lien. The Purchasers' loss must be calculated by taking into account any sum they are reasonably expected to have recovered from the Vendors.

Evidence

18. Mr Chui, the male Purchaser, said that in about July or August 1999 he and his wife were looking for a property in Sai Kung. Mr Tang, of Centaline's office in Shatin, who was the brother of a friend of his wife, introduced him to staff of Centaline's Sai Kung office. Through Mr Tang, it was arranged that he and his wife should inspect properties in Pak Sha Wan on 15 August.

19. On that day they went with Mr Tang and Messrs Jacky Mok and K.K. Law of Centaline's Sai Kung office to view property. They looked at one house which did not interest them and then they left to go to the subject property. Mr Mok told them that it was a village type house with a garden of 2,000 or more square feet and a covered car park for two cars. On arrival the other agents looked after the cars and he and his wife and Mr Mok went to the property.

20. When they approached, they saw the garage, of which the shutter was closed, and two cars parked right in front of it. Mrs Chui asked Mr Mok if they would be able to use their car park in future if cars blocked at the way in. Mr Mok said that the cars were parked illegally and that the land right in front of the entrance belonged to the house. Mrs Shum, whom they had met at the foot of the stairs leading up to the house added that the cars were parked their by neighbours because the house had been empty for some time, but once the house was occupied they would not park there.

21. They all went up the stairs to the house. Mr Chui was concerned about the slope at the back of the house, because there was news of the Government talking about the maintenance of slopes. He asked Mr Mok if the slope formed part of the property and Mr Mok said that it did, and that he could confirm that up to the date of inspections the caller had not received any order to maintain it.

22. In the course of the viewing, Mr Mok mentioned the possibility of building at some kind of structure at the back of the house, possibly for domestic helpers to live in.

23. Mrs Shum was the main introducer of the house, and she showed them round it. At the end, she went down to the garage with them, and opened the electric shutter. Mr Mok said that the garage was big enough for two cars or even three small ones. If need be, they could dig in the back of the garage to make room for four cars.

24. Mr Chui said that nobody told him in the course of that viewing that the garden and the slope did not form part of the property to be sold. As an ordinary citizen, he did not know that such things could happen.

25. After they left the house, Mr Mok asked Mr Chui if he was prepared to make an offer. They had some discussion of the possible price but no decision was made. Mr Mok told him that whatever offer he made should be accompanied by a cheque to show that he was really interested. The next day Mr Mok called Mr Chui to see if he had made up his mind. Mr Chui asked him to arrange another inspection. He called up his bank and one of the staff called back later and told him that the house should be worth about $7 million. This was on the basis of having made no inspection.

26. On 18 August 1999 they went for the second inspection. This time Mr and Mrs Chui and their daughter went together. The same three estate agents were to meet them but Mr Mok was a little late. Mr Chui was handed some photocopy documents and told by Mr Jacky Tang that his colleagues had checked the property and confirmed that there was no problem with the ownership of it. Because Mr Tang was the brother of his wife's friend, Mr Chui trusted him so he did not pay much attention to the details on the documents. He remembered seeing a plan, with part of the marked in colour. It appeared to have two boxes, and he thought that one of them represented the house and the other the garden. He thought that his lawyer and the estate agent would take care of the papers.

27. They all went up to the house together, and Mr Chui took some photographs. There was one car parked in front of the garage. Mrs Shum had not yet arrived. Mr Mok said that the neighbours parked there for convenience, and if the Purchasers bought the house they could put up a barrier to stop this. Then Mrs Chui arrived, with another woman whom they did not know.

28. This time Mr Chui it went round the property with Mr Tang and K.K. Law. Mr Mok and Mrs Shum stayed in the garden chatting. No one told him anything about the garden and garage not being part of the property.

29. At the end of the inspection, he and Mr Mok had a discussion in his car about the price. Mr Mok said that he would write two offers, one for $7.68 and another for $7.8 million, and that Chui should show sincerity by writing a cheque as an initial deposit. Eventually they agreed on a figure of $350,000. That evening he arranged for a cheque to be given to Mr Mok through Mr Tang. The next day, he was told that the offer of $7.8 million had been accepted. He discussed renovation of the property with a designer. He put the matter in the hands of his solicitor. Later, the solicitor's clerk told him that something was wrong with the deeds and the garden did not formed part of the property. He therefore decided not to go ahead with the purchase. He said that if he had known this he would never have signed the provisional agreement and paid the deposit.

30. Mr Chui was cross-examined at length. It appears that the plan which he was shown is the original and unamended plan attached to the Conditions of Grant. He could not find the document that he was given. He did not know whether he had handed it to his solicitor, or sent it by fax or what he had done with it.

31. It was suggested to him that he should have seen from the plan, which obviously does not appear to show a house surrounded by a large garden, that what he was getting did not include the garden. He said that for this he had relied on his agent. The legend on the plan says "colour pink area 700 square feet" but he said that he did not ask any details because he assumed that his agent had done his work. He said that if he had read it he would certainly have asked his agent why it only should 700 square feet if it was to include a 2,000 square foot garden. He had simply trusted his agent, because he was dealing through the brother of his wife's friend.

32. About the ground in front of the garage he maintained that Mr Mok had told him that this belonged to the house. He maintained that he was certainly not told on the first inspection that the garden did not go with the house.

33. In answer to questions by counsel for the Agent, he said that he had the impression that Mr Mok had not been to the house before. Nevertheless he was sure that he had said that the cars were parked illegally. Mrs Shum had said something about the garden, he could not remember what, but he was quite sure that she had never said that it was rented from the Government. He maintained that Mrs Shum had opened the garage shutter. He was sure that he had been given the documents before the second inspection rather than after it, during the discussion in the car.

Evidence for the Vendors

34. This came primarily from Mrs Shum. She said that she had emigrated to the US day in 1998 but usually came back to Hong Kong in the summer. Her husband was still living and working in Hong Kong. Her husband had entrusted the job of selling the house to Centaline; he told her that an agent wanted to see the property. She waited at the house for the agent on 15 August. She was in the garden at the top of the stairs that when the three persons came. She just stood in the garden while Mr Mok took the Purchasers round the house.

35. She heard the Purchasers ask the agent about the cars parked in front of the garage. She told the agent that since the house was vacant other people parked in front of the garage. She went on to say that the terrace and garage belonged to her and her husband, and that they had rented them from the Government for $50,000 per annum. The vehicles were parked illegally. She believed that the that Purchasers, who were within earshot as they were all standing together on the terrace, would have heard this. She said that that every time prospective buyers came they would ask about the garden and the garage, and she made it clear to be agent that they were lawful and rented from the Government, so that she was not trespassing.

36. She said that they did look at the garage but she did not hear anyone talk about enlarging it to hold more vehicles. She did hear the agent say something about a land search, including in the rental matters.

37. There was another inspection on 18 August. Her husband also told her about this beforehand. This time she arrived alone, to find that the Purchasers and agents were all there already. This time she just stood in the garden while the others looked around. At the end, Mrs Chui mentioned to her that it would cost a lot of money to decorate.

38. Under cross-examination by Counsel for the Agency, Mrs Shum said that when the Mrs Chui was asking about the car park, she had interrupted and told Mr Mok that the car park belonged to her and was rented from the government. Nothing was asked about the duration of the tenancy. She said that very often people would raise the question that since so many cars parked outside the garage, the garage was unlawful or gained by illegal means. There was no discussion about the terms of the tenancy, or any deposit that she had had to pay for it, or whether she could assign it. She was not clear whether a new buyer would replace her as the tenant. She had only mentioned it on this one occasion. However, she said that each time an agent took anyone to fuel the house she had made it clear to the agent that the garden was leased. Two or three other people had already seen the house before the Purchasers did.

39. She maintained that she had shown the prospective purchasers and the agent the inside of the garage. She said that she had been able to open shutter.

40. Cross-examined for the Purchasers, Mrs Shum said that she knew that the tenancy of the garden and garage could not be assigned or given to any other person. She did not however know that it would be terminated if she sold the house. She had actually left Hong Kong in late August. Her husband had told her that the sale was not proceeding but she did not really know why. The she only found out about the case when she had come back to Hong Kong this year. It seems that she did not really bother about what was happening in Hong Kong while she was in the United States.

41. She agreed that she had had some casual chat with Mrs Chui about renovating the garden. She had agreed that it was necessary to put a lot of money because the garden was old.

42. Mr Shum also gave evidence. He adopted his two witness statements. The salient point of them was that he had had a telephone call from Mr Mok on 14 August 1999 who said that he had a client who wanted to see the property. There was also matter concerning his receipt of the deposit which I need to repeat. In the first statement he said that Mr Mok had asked him if there were two car parking spaces and he had told him that there were, and they were rented from the Government for $50,000 per annum. In the second, he amended this to say that he had told Mr Mok that the garden and the garage were rented for this sum. There was also matter concerning his receipt of the deposit which I need not repeat.

43. In oral evidence he said that he had bought the house to live in, but his feng shui master had told him that the house number was unlucky for him. He had tried to get the number changed, but unsuccessfully, so had decided to sell the house and had put it on the market in May 1999.

44. He said that on 14 August he had had a call from Mr Mok, whom he did not know. Mr Mok told him that he had a client who wanted to see the property and asked if it had a car park. He said the car park was beneath the garden and they had to rent the garden from the Government for $50,000 per annum.

45. Cross-examined on behalf of the Agency he said that he had not told Mr Mok the size of the garden; he had not given him any copy of the tenancy agreement and he had not told him any other terms of the lease. He had not been asked about this.

46. Cross-examined on behalf of the Purchasers, he said that it was his case that he had never engaged Centaline as his agent, though he accepted that he had agreed to pay commission when he signed the provisional agreement later, because that was the "rule of the game". He accepted that the Agency had done him a service.

47. He had not, it appeared from earlier cross-examination, told Mr Mok that the tenancy was not assignable. He agreed that he knew this. When asked if he had told Mr Mok this, he appeared to evade the question. I myself asked him in clear terms if he had told Mr Mok that he could not sell the tenancy and that the new buyer would have to take his own tenancy; and he said that he had. This of course did not appear in his statements.

48. He also said that his wife had told him later that she had told Mr Mok that both the garden and the garage were rented from Government for $50,000 per annum, although this never appeared in correspondence between the solicitors nor in the statements. He agreed that it was a very important fact to support his case and said "There is some worry on our part that people may say that we got that piece of land by illegal means."

Evidence for the Agency

49. Evidence for Centaline came from Mr Mok. He said that he had arranged the first inspections with Mrs Shum. He had taken the Purchasers to another property first, but on leaving the property he did not tell them that he was going to take them to see a village property with a 2,000 square feet garden and covered car parks.

50. According to him they met Mrs Shum inside the fence at the top of the steps. He and Mr Chui went into the house together and the ladies stayed outside. After they came out, Mr Chui asked him about the slope. Then Mrs Shum said that the terrace was 2,000 square feet in size and was included in the title deeds.

51. He then told Mr Chui that he would search in respect of the slope to see if there was any order for maintenance or any illegal structure. Mrs Shum escorted them off the property. As they were leaving, there was a conversation about the cars which were parked in front of the garage. Mrs Shum said that they belonged to neighbours who parked without authorisation and suggested that once the Purchasers had bought the property they could put up a chain or bollards so that others would not dare to parked there any more. Mrs Shum what was asked to open the garage but she could not open the shutter.

52. On 17 August he telephoned Mrs Shum and told her that the Purchasers would come for another inspection the next day. He went there and found the Purchasers and Mr Tang already there. Mrs Chui asked about a car which was parked outside the garage and he said something on the lines of what Mrs Shum had said before, and that they should not worry because they could put up a chain to stop the villagers from parking the. After Mrs Shum arrived, Mrs Chui asked her as well and she also said that a chain could be put up and also that they could dig under the terrace to enlarge the garage to accommodate more cars.

53. They all went up to the house, but Mr Mok did not show the Purchasers round. He spoke to Mrs Shum about the property market and what she might be prepared to accent. After the inspection Mrs Chui and Mrs Shum talked about decorating including weeding of the slope, and renewing the fence.

54. After the inspection, he had a discussion with Mr Chui in his car. There, he gave Mr Chui the documents which he had obtained namely the land search and the conditions of grant. He found that the D.D. and lot numbers and pointed to the plan with his pen to show where the lot was located. There was no coloured marking on the plan. He obtained Mr Chui's signature on two agreements and they talked about the cheque. Then Mr Chui was a hurry to get away so he went away, taking the land search and the new grant with him.

55. Mr Mok said that he only had contact with Mr Shum on 19 August. On that day he told Mr Shum that he had an agreement and the cheque with him and discussed how much Mr Shum would take. He went to his office in the afternoon.

56. He said that Mr Shum never told him that the garden and the garage were leased under a short-term tenancy. He said that if he had known that there was a short-term tenancy covering the garden and the garage he would asked about it, and in particular about the period of tenancy and the rental. He would have informed the buyer. He was sure that Mrs Shum never told him that the garden and garage were rented.

57. He was cross-examined at great length as to how he came into contact with Mrs Shum. He said that he had found out from other estate agents that Mrs Shum had another house on the market, and he had got her telephone number in this way. He did not know what the property consisted of before 15 August though it appears he had seen it from the road before that date. He was shown a letter from his firm which said that he had only represented that the purchaser could use the garden and the garage. He said that this had been included in the letter because Mrs Shum had told him that these were included in the title deeds and also because they had a fence around them.

58. He was asked what he knew about New Territories indigenous village or "ting" houses. He did not know much. He had had very little training from his company but he had heard about "ting" houses from colleagues. He knew that such a house could not be more than 700 square feet.

59. He was also cross-examined about what he had seen, or should have seen on the plan. He said that he was not paying very much attention to it. In effect Mr Chui wanted to get away and was going to give it to his solicitor anyway.

60. He accepted that the boundary line on what he saw was not include a 2,000 square feet garden. His attention was drawn to the entry in respect of the Rectification Agreement on the land search and he said that he had not investigated this incumbrance.

61. The next witness was Mr Tang. He added very little to the evidence. He mentioned his own dealings with the Purchasers and confirmed that Mr Mok had given Mr Chui the documents in the car after the second inspection.

Evaluation

62. The major issue in this case is whether Mr Chui knew what he was getting when he signed the preliminary sale and purchase agreement. In effect, there are three different stories of what happened at the first inspection. He says that no one told him anything about the garden and garage being subject to a tenancy. Mrs Shum for her part says that she told Mr Mok in Mr Chui's hearing that the garden was subject to a tenancy and she had to pay $50,000 per year for it. Mr Mok says that Mrs Shum said to him and Mr Chui that the garden and the slope were included in the title deeds. All are agreed that nothing was said about the tenancy or what was included in the title deeds at the second inspection.

63. I found Mr Chui to be a believable witness. I did not form such a favourable impression of Mrs Shum. The same applies even more strongly to Mr Shum. I got the impression that both of them would say exactly what they thought was necessary to support their case. My impression of Mr Mok was more favourable. These impressions are, of necessity, intuitive and fallible. One can never place too much reliance on a witness's demeanour. A more reliable approach is to consider the inherent probability or improbability of what he says.

64. It is also to be noted that the Vendors and the Agency are running what are essentially "cut-throat" defences. Each blames the other. That is to be taken into account when considering the evidence of their witnesses. Mr Chui on the other hand simply wants his money back and I do not suppose he cares who is found liable for it so long as he gets it.

65. Mr Chui says that Mr Mok told him that he was to see a house with a garden of more than 2,000 square feet and a garage and that all was included in the title deeds. Mr Mok denies saying this. Under cross-examination he said that all he knew from Mrs Shum was the price and the time for inspection. He knew that the potential buyer wanted a good view from the house. He had however already seen the property from the road. He accepted that it was necessary to tell a potential buyer the main characteristics of a property, or the buyer might not even want to look at it. It is obviously highly probable that any estate agent taking a customer to see a house will at least give him some idea of what it is that he is to see.

66. Mr Chui says that when he viewed the house, nobody told him anything about the garden that being subject to a tenancy. Now it is significant that both the other witnesses, although they differ widely as to what was said, do not speak to any further discussion of what the property included. One can see from photographs that the house is built on a concrete terrace which is surrounded by a fence. The garage it is underneath part of the terrace. Any normal person looking at this will naturally assume that it all goes together. He might not think that of a house standing in a village, with no fence round it; he might not think that of a fenced enclosure adjoining a house, which might for instance belong to the next door neighbour; but if he sees a fence all round the house he will expect that the whole thing is one property. An experienced conveyancing solicitor might know that this would not necessarily be the case; so might an experienced estate agent; but here I am talking about the ordinary layman, even a layman who has spent his life in a housing estate in Hong Kong. In fact Mr Chui himself said that as an ordinary citizen, he did not know that such things could happen.

67. Any normal person, looking at a house and garden with garage underneath with a view to purchase, on being told that what he was buying was the house only, and nothing else, would be surprised, to say the least. He would want to know how he could get possession of the garden, and how much it would cost him. He might want to know why the asking price was so high, if the garden was not included. If he was told that there was a lease, he would want some details of it. If he was told the rental, the next most important detail would obviously be whether the lease automatically went with the title to the property, so that it would be assigned to him, or whether some other arrangement would have to be made.

68. What I cannot imagine, in these circumstances, is that any potential purchaser, on being told that he was buying the house only, and that the garden was leased, would let that pass without making any inquiries at all. That is what Mrs Shum says. No questions were asked and there was no discussion of the matter. She also says that every time a prospective buyer would ask about the garden and the garage, she would make it clear to the agent that they were lawfully rented from the government, so that she was not trespassing. This seems to me a very strange thing to say, because no ordinary person would expect a householder to be trespassing in the surrounding garden for the very reason that no normal person would expect the garden not to go with the house. Curiously enough her husband said something similar.

69. I do not believe what Mrs Shum says about this. I do not believe that she ever mentioned any lease. The remaining question is whether as Mr Chui says, nothing was said about the matter at all, or whether, as Mr Mok has it, she said that the terrace was 2,000 square feet and was included in the title deeds. Again this is unlikely. It is difficult to imagine why anybody would volunteer that this is so. It is so normal and expectable that it does not need to be said. It only needs a mention if the garden or terrace is not included in the title deeds.

Findings of Fact

70. I therefore accept the evidence of Mr Chui, and reject that of Mrs Shum and Mr Mok on this point. I find as a fact that Mr Chui, having been told that he was to see a house with a 2,000 square feet garden and a garage, was shown exactly that, and that no one told him anything about a lease, or that the terrace was included in the title deeds. I also accept his evidence that if he had known it he would never have signed the provisional agreement.

71. As to the other pleaded instances of oral representation, I accept that Mr Mok told Mr Chui in the presence of Mrs Shum that the cars were illegally parked on land in front of the garage which belonged to the property. He also said at the second inspection, before Mrs Shum arrived, that a barrier could be put up there. Of course we now know that this area did not belong to the property; it was not even included in the leased area. That appears from the plan attached to the lease.

72. I also accept that Mr Mok told Mr Chui, though not in Mrs Shum's presence, that he could build at the back of the house. He said in her presence that the garage could be extended by digging.

73. I turn to the question of who knew, or should have known what about the house.

74. As to Mr Shum's evidence of his telephone call from Mr Mok on 14 August, I do not believe this at all. As I have indicated he was a poor witness and seemed willing to say whatever would help him. He seems to have got much of what he said from his wife after the event; no doubt that is why he had to amend the date of the telephone call in his second witness statement. But the most unbelievable part is that he should have told Mr Mok about the lease and that Mr Mok should have accepted that without asking for any details of it. That just does not make sense any more than it makes sense that Mr Chui would not have asked about it, if he had been told of it at the inspection. Any sensible agent would have to know the full details because it is relevant to the title of what is being sold. If the agent gets it wrong he may be liable as indeed the Purchasers are holding the Agency liable now.

75. It seems to me quite obvious that Mr Mok did not know anything about any lease, by the time he got Mr Chui to sign the provisional agreement. If he had he would not have told him that the land in front of the garage belonged to the property. I am not inclined to think that he did know, and deliberately misrepresented the position to make the sale. There would be no point in that because he would have known that he would never get away with it; there would be bound to be some repercussions against his employer later. It is much more likely that he was simply ignorant.

76. As to Mrs Shum, whether she knew and concealed the true position, or whether she was simply ignorant of it, I know not. It may be that she was ignorant. She spent most of her time in the USA and says that after the event she was not much interested in what happened. She did not sign the short term lease; Mr Shum signed it as her attorney. In any event intention is irrelevant here. See Green Park Properties Ltd v. Dorku Ltd [2001] 1 HKLRD 139, C.A.

77. I have already found that Mr Chui had not the remotest idea that he was buying the house only and not the garden.

Misrepresentation by Conduct

78. The purpose of showing a prospective purchaser a property is to tell the purchaser that this is the property to be sold. See Green Park Properties Ltd v. Dorku Ltd [2000] 2 HKLRD 400, CFI. In that case a yard, which was part of the common area of a building, appeared to be part of the property to be sold. It was held reasonable for the purchaser to conclude at the first inspection that the yard was part of the property for sale.

79. Here by showing him the property without telling him that it comprised the house only, both Mrs Shum and Mr Mok made a misrepresentation by conduct. From merely looking at the property it was entirely reasonable for Mr Chui to conclude at both inspections that what was being offered to him, and what he was paying a deposit for, was the house, garden and garage beneath. In my view it was reasonable to conclude this from the viewing alone. The various oral representations merely served to reinforce the impression given by the sight of the property itself.

80. The representations were material and I have found on Mr Chui's evidence that he relied on them. It has been pleaded that he did not rely on them because he relied on his solicitor's advice rather than any representation by Mr Mok but it does not appear that he consulted a solicitor before sending Mr Mok the cheque. He says, and I believe him that he did not know the truth before his solicitor's clerk told him some time in early September. In any event if he did not rely on the representations he would not have signed the provisional agreement.

81. The Vendors say that Mr Chui should have known, or realised from the plan attached to the Conditions of Grant, that he was only buying only a 700 square feet house. In fact this was a latent defect. It was something which could not reasonably have been discovered by the Purchasers on inspection. There was nothing visible to the eye; rather what was visible appeared to be one property. It was the duty of the Vendors (and their agent, if Mr Mok was their agent) to disclose that this was not so. See Yandle & Sons v. Sutton, [1922] 2 Ch 199. It was not something that the Purchasers should have inquired about.

82. As to what was shown on the plan which Mr Chui saw I do not think he could be expected to have deduced from this that what he was buying was only the house. The plan itself is not clear; it shows two overlapping boxes inside a larger box. He is a layman, not a conveyancing lawyer or an estate agent. He says he did not pay much attention to the plan. As he put it the plan did not mean a lot to him, and he was relying on his agent. He does not appear, on his evidence to have paid any particular attention to the reference to 700 square feet, which would obviously refer to the floor area of the house but I cannot see why he as a layman could be expected to draw from that that he was not getting the garden and slope and everything else that he had seen attached to the house as well.

83. In any event, where a representee does not know that the representation is false, it is no defence to an action for rescission that he might have discovered the falsity by exercise of reasonable care: see Chitty on Contracts, 28th Edn, para.6-036.

84. The Vendors further argue that the Agency had actual or constructive knowledge of the truth and that such knowledge should be imputed to the Purchasers. On my finding, Mr Mok did not have actual knowledge. It is difficult to see how, if it is no defence to an action for rescission that the representee might have discovered the falsity by exercise of reasonable care, the same should not apply to his agent. The Vendors also claim that the Purchasers relied on the estate agent rather than any representation made by them, by asking the agent to inquire into the title. I do not see that there is any merit in this argument because what Mr Chui wanted Mr Mok to look into was the slope with particular reference to whether there was any maintenance or other order in respect of it. What he relied on primarily was his visual observation and hence the representation by conduct made by both Mrs Shum and Mr Mok.

85. The Purchasers claim that the Agency are liable also because Mr Mok was acting as the Vendors' agent in showing them the property. I am not sure that this is right. Agency in this situation is a question of fact. On my finding, Mr Mok was not engaged beforehand by Mr Shum. It was he who approached Mrs Shum because he, or more particularly his colleague had a potential buyer.

86. Overall, however, I do not think this matters in the question of liability of the Agency to the Purchasers because the Agency was under a contractual duty by Clause 1 of the Engagement Agreement of Property Agent, to "make reasonable inquiries" and to "assist in entering into a formal "Sale and Purchase agreement". By Clause 2, there was a duty to "act bona fide in performing its services" and "use its best endeavours to ensure that all representations it makes are accurate".

87. Mr Mok did not himself sign this agreement but it was on his company's standard form and he must be taken to know what it contained. In any event, there would be an implied term in the agreement that the Agency would exercise reasonable care, skill and diligence in acting for the Purchasers.

88. Reasonable inquiries should, I think, have included investigation of the Rectification Agreement shown on the land search. This, as I have indicated, shows properly the relationship of the house, garden and slope. It would have put him on his inquiry if he had seen it.

89. Ultimately therefore, even if Mr Mok is not liable as the Vendors' agent he is certainly liable to the Purchasers as their agent.

90. The Vendors further seek to rely on Clause 12 of the Provisional Agreement which reads :

"This agreement superseded ass prior negotiations, representation, understanding and agreements of the parties hereto."

However, section 4 of the Misrepresentation Ordinance, Cap.284, applies here. It provides that :

"4. If a contract contains a term which would exclude or restrict:

a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made, or

b) any remedy available to another party to the contract by reason of such a misrepresentation,

that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in s. 3(1) of the Control of Exemption Clauses Ordinance (Cap.71); and it is for the person claiming that the term satisfied that requirement to show that it does.

Section 3(1) of the Control of Exemption Clauses Ordinance (Cap.71) provides:

"(1) In relation to a contact term the requirement of reasonableness....is satisfied only if the court or arbitrator determines that the term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been known to or in contemplation of the parties when the contract was made."

91. In similar circumstances in the Green Park case at first instance, Cheung J held that an identical clause did not pass the reasonableness test because the vendor, knowing that the yard did not form part of the property, allowed his agent to show it to the prospective purchaser without informing him of this fact. Here as I have indicated there was a latent defect; it was known to the Vendors; they did nothing to bring it to the attention of the Purchasers. In my view Clause 12 fails to pass the reasonableness test and is of no effect.

92. The Purchasers were entitled to rescind on the basis of the Vendors' misrepresentation under section 3 of the Misrepresentation Ordinance. The Purchasers have also established liability against the Agency in contract and tort.

93. The Vendors argue contributory negligence on the part of the Purchasers. This is misconceived. There was no negligence on the part of Mr Chui. In any event, contributory negligence serves to reduce damages payable. See section 21(1) of the Law Amendment and Reform (Consolidation) Ordinance, Cap.23. The Purchasers are not claiming damages. They are claiming return of their deposit.

94. The Agency claims failure to mitigate because the Purchasers did not register their defence and counterclaim in the Land Registry with the result that the subsequent purchaser could take the property free of the Purchasers' lien.

95. The Purchasers' primary claim is against the Vendors for the return of their deposit. The Agency has been sued in case the Purchasers cannot recover from the Vendors. The only other claim is for indemnity against any sum for which the Purchasers may be liable to the Vendors, and for the Purchasers' own costs. The Purchasers are only required to act reasonably to mitigate their damages. Reasonableness is a question of fact.

96. Here the Purchasers argue that they could simply have sued the Agency. If they had done so the Agency could not complain that they did not counterclaim against the Vendors. See McGregor on Damages, 16th Edn 1997, para.329 :

"A plaintiff need not take steps to recover compensation for his loss from parties who in the addition to the defendant, are liable to him. This is an undoubted principle; indeed without such a principle it would have been unnecessary for the legislature to make provision for contribution and indemnity between joint and several tortfeasors."

97. A fortiori, they say, the Agency cannot say that the Purchasers have failed to mitigate their loss because although they had counterclaimed against the Vendors they did not take steps to enhance their chance of obtaining judgment from them. In any event there is no suggestion that the Purchasers will not be able to enforce the judgment.

98. This may well be right but I also think one must look further at the purpose of registration.

99. Normally registration is done in order to preserve a party's right to specific performance. That did not apply here because the Purchasers were not seeking specific performance but the return of their deposit. If the Purchasers had registered their defence and counterclaim it would have had no direct effect to enhance the chance of the Purchasers obtaining a judgment on their counterclaim. It would merely have put pressure on the Vendors, by impeding the sale of the property to another buyer. This may or may not have had the effect of making them settle their action against the Purchasers, thereby at least putting a cap on the costs which the Agency might ultimately have to pay, but it is by no means certain. Perhaps the Vendors would have simply held on to the house in the hope of better market conditions in future, or perhaps they could have obtained the discharge of the registration by paying the deposit into court or something of that sort, without prejudice to the continuation of their action to its conclusion.

100. It is therefore not possible to say with any certainty that registration would have operated to reduce the amount ultimately payable by the Agency. In the circumstances, I do not see that it would have been reasonable, in a question between the Purchasers and the Agency, to expect them to have registered their defence and counterclaim.

101. In sum the Purchasers are entitled to recover from the Vendors the initial deposit of $350,000 plus interest. They are entitled to recover from the Agency, as damages, that sum or any part of it which cannot be recovered from the Vendors, plus any other losses which came about as a result of Mr Mok's negligence and breach of duty. This includes their own costs of the action.

102. The Purchasers are also claiming and are entitled to an indemnity against any claim by the Stamp Duty Office for ad valorem stamp duty and any penalty on the provisional agreement or a declaration to that effect.

103. The judgment must be against both the Vendors and the Agency. Any apportionment will be a matter for them. There is no claim by the one against the other in these proceedings.

Judgment

(1) in favour of the plaintiffs by counterclaim (the Purchasers) against the 1st defendant by counterclaim (the Vendors) for a declaration that the provisional agreement was lawfully rescinded by them;

(2) in favour of the plaintiffs by counterclaim (the Purchasers) against the defendants by counterclaim (the Vendors and the Agency) for $350,000 with interest thereon from 6 September 1999 to the date hereof at the judgment rate and for an indemnity against any claim by the Stamp Duty Office for ad valorem stamp duty and any penalty on the provisional agreement;

(3) in favour of the defendants in the original action against the 2nd defendant by counterclaim, for their solicitor and own client costs incurred in defending the original action.

(4) The claim of the plaintiffs by original action (the Vendors) against the defendants by original action (The Purchasers) be dismissed.

104. The costs of the action be awarded to the plaintiffs by counterclaim against the defendants by counterclaim, to be taxed if not agreed.

105. The costs orders are nisi.