ALL LINK INTERNATIONAL LTD v. HA KAI CHEONG, ANDREW AND OTHERS

 HCA 756/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 756 OF 2002

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J U D G M E N T

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1.  In this action, the plaintiff claims against the defendants for damages in breach of contract and breach of duty of care in tort, and/or for the return of funds in constructive and/or resulting trust.

Background

2.  Much of the facts in the case are not in dispute.  They are set out below.

3.  Until the intervention by the Law Society on 4 February 2002, Fung, Wong & Ha (“FWH”) was a firm of solicitors practising in Hong Kong.  It had a head office in Central and a branch office in Tsuen Wan.  At all material times, the 1^st named 1^st defendant, Mr Ha Kai Cheong Andrew (“AH”) was a partner of FWH, working in the Central office.

4.  The 2^nd defendant is a practising solicitor. He joined FWH on 1 September 2000 as an assistant solicitor.  He worked in the Tsuen Wan branch office and was the only qualified practitioner in the office.  By a letter dated 30 May 2001 (“the Letter of Appointment”), the 2^nd defendant was appointed a salaried partner of FWH on the terms set out therein.  On the same day as the signing of the Letter of Appointment, the 2^nd defendant and AH signed a partnership agreement (“the Partnership Agreement”) for the purpose of governing the relationship between them.  On 2 February 2002, the 2^nd defendant resigned as a salaried partner and became a consultant of the firm.   

5.  The actual position of the 2^nd defendant in FWH as from 30 May 2001 is one of the main issues in this action.  It is the plaintiff’s case that the 2^nd defendant was a partner of the firm between 30 May 2001 and 2 February 2002.  The 2^nd defendant’s case, on the other hand, is that he was at all material times an employee of the firm.

6.  There is, however, no dispute that it was recorded in the Business Registration records that the 2^nd defendant became a partner of FWH on 30 May 2001. What is also not in dispute is that on the headed stationary of FWH, the 2^nd defendant’s name appeared as a partner without distinction.  Further, the 2^nd defendant was described as a partner on his name cards.    

7.  The plaintiff is a company incorporated in Hong Kong.  Miss Joyce Tsang (“JT”) and her mother, Madam Cheung Miu Yuen, are its directors.   JT was the registered owner of a property situated at No. 47 Stanley Village Road, Stanley, Hong Kong (“the Property”).  In May 2001, it was intended that the plaintiff would acquire the property from JT at the consideration of HK$80 million. The sale was subject to tenancy.

8.  By a written instruction dated 18 May 2001, the plaintiff retained FWH to act as its solicitors in relation to the purchase of the Property.  The costs of FWH, inclusive of disbursement but exclusive of stamp duty, was agreed at HK$18,000. 

9.  The 2^nd defendant was throughout the handling solicitor and he dealt with JT and the plaintiff personally.  He was recommended to the plaintiff by Peter Tso (“Tso”), who in May 2001 was the legal adviser of Modern Beauty Salon, a business in which JT has an interest.  It is the 2^nd defendant’s case that he did not know Tso personally and he was approached to take up the work by two of his former classmates, one of whom was with the solicitors firm, Ko & Chow. 

10.  Ko & Chow was initially the solicitors acting for the vendor, JT.  It was originally intended that the sale and purchase agreement would be signed on 28 June 2001, but because of outstanding requisitions raised by FWH, the plaintiff decided to put it off to a later date.  By then, Tso had left Modern Beauty Salon and set up his own legal practice under the name of Tso & Associates.  On about 4 July 2001, JT, not satisfied with Ko & Chow, decided to replace it by Tso & Associates.

11.  By a letter dated 21 June 2001, FWH requested the plaintiff to let it have upon execution of the SP Agreement, a cheque of $3,005,000 payable to the firm, of which $3 million was for payment of stamp duty and $5,000 was its costs on account.

12.   On 31 July 2001, the sale and purchase agreement for the Property (“SP Agreement”) was executed.  The execution took place at the office of the plaintiff and was attended by, among others, JT and her solicitor, Tso, Cheung Miu Yuen and the 2^nd defendant.  On the same day, the plaintiff issued a cheque to FWH in the amount of HK$3,005,000 as requested.  The cheque was handed to the 2^nd defendant who wrote out a temporary receipt to the plaintiff.  On 1 August 2001, FWH issued a formal receipt acknowledging receipt of $ 3million for payment of stamp duty and $5,000 for its costs on account.

13.  On 22 August 2001, the plaintiff and JT executed the assignment for the Property (“the Assignment”).  On 4 September 2001, the plaintiff paid a further sum of HK$13,000 to FWH in settlement of the balance of the agreed costs.  FWH had issued a receipt for the payment.

14.  By a facsimile dated 27 November 2001 addressed to the 2^nd defendant, the plaintiff requested to collect the title deeds of the property.  It was not responded to.  On 5 January 2002, the plaintiff re-faxed it to the 2^nd defendant.  It appears that on both occasions, the fax was sent to the Central office instead of the Tsuen Wan office.  It is the 2^nd defendant’s case that he had not read the facsimile. 

15.  Unknown to the plaintiff, FWH did not pay the stamp duty to the Stamp Duty Office (“SDO”).  According to the 2^nd defendant, the executed SP Agreement and the plaintiff’s cheque for $3,005,000 were sent to the Central office.  The evidence shows that the 2^nd defendant had written out a note to the stamping clerk called Kenny, requesting him to stamp the SP Agreement.  The executed Assignment and the plaintiff’s cheque for $13,000 were also sent to the Central office.

16.  The evidence is unclear as to what happened after the SP Agreement, Assignment and the cheques were sent to the Central office.  It appears that at some stage the Questionnaire to be submitted together with the SP Agreement for stamping was made out and signed.  The Questionnaire was dated 7 August 2001, but it is not known who signed the solicitor’s certification on it.  It also appears that a cheque drawn on FWH’s client account for the payment of the stamp duty was issued and signed.  It was dated 8 August 2001.   

17.   By a letter from FWH dated 21 January 2002 to SDO, the SP Agreement was submitted for stamping together with the Questionnaire and the $3 million cheque.  It is unclear who signed the letter.  In the letter, FWH requested for a waiver of penalty for late stamping and explained that the delay “was due to a mislay [sic] of the file and a pure oversight”.  Requisitions were raised by the SDO and the SP Agreement was rejected for stamping.  FWH was required to supply the tenancy agreement of the Property and to amend the certifying clause in the Questionnaire and to re-submit the SP Agreement for stamping before 7 February 2002.    

18.  On 2 February 2002, Messrs Wilkinson & Grist were appointed receiver of FWH.  On 4 February 2002, the Law Society intervened in the practice of FWH under section 26A of the Legal Practitioners Ordinance.  On about 6 February 2002, upon being alerted by Messrs Wilkinson & Grist, the plaintiff discovered that the stamp duty for the purchase of Property had not been paid.  There was insufficient fund in FWH’s client account to meet the stamp duty payment.

19.  The plaintiff through another firm of solicitors conducted a search at the Lands Office on 7 February 2002.  The results revealed that the SP Agreement and the Assignment had not been registered in the Lands Office.  On 8 February 2002, the plaintiff made a report to the police.

20.  On 26 February 2002, the plaintiff paid $3 million to SDO for the stamp duty of the Property.

21.  AH was prosecuted in the District Court under case no. DCC 685/2003 for two charges of theft.  One of the charges was in relation to the $3 million received from the plaintiff for the stamp duty of the Property.  On 23 June 2004, he was convicted of both charges on his own  guilty plea.

22.  On 25 July 2003, the plaintiff received $332,160 from the Law Society as dividend for the unsecured creditors of FWH’s client account.  The plaintiff is prepared to give credit for the sum in the present claim against the defendants.

The claim and the defence

23.  On 23 February 2002, the plaintiff commenced these proceedings against the defendants. 

24.  The plaintiff’s claim is twofold.  Firstly, the plaintiff says that the defendants had received and held the $3 million to the use of the plaintiff and upon a resulting or constructive trust.  Accordingly, they are liable as trustees to account for and to return the money to the plaintiff.  Secondly, the plaintiff contends that the defendants owe to it a fiduciary duty and a duty of care both in contract and in tort, and they have been in breach of the duties. They are therefore liable to the plaintiff for damages and an indemnity.  After giving credit for the dividend received from the Law Society, the plaintiff’s claim is for the balance of $2,667,840.

25.  In respect of the 2^nd defendant, the plaintiff’s case is that he is liable on two basis.  The first is in his capacity as a partner of FWH.  The second is in negligence in his personal capacity as a practising solicitor. 

26.  Judgment in default of defence was entered against AH on 2 April 2003, for, inter alia, the return of the $3 million and/or damages for breach of contract and/or fiduciary duty.

27.  The 2^nd defendant denies liability on both claims.  His case is that he was never a principal, but was only a salaried partner of FWH.  He was therefore in truth only an employee of the firm.  The 2^nd defendant relies on the Employment Letter, the indemnity clause in the Partnership Agreement and also a letter of indemnity given by AH to him dated 23 November 2001 (“the Letter of Indemnity”). The plaintiff does not accept that the 2^nd defendant was not a partner of FWH and puts him to strict proof of it.  Alternatively, the plaintiff says that the 2^nd defendant is nevertheless liable by reason of his representation and holding out to be a partner of the firm.

28.  As to the claim in professional negligence, the 2^nd defendant’s case is that he had complied with the office procedure and the instructions of AH in connection with the $3 million received and the payment of stamp duty for the Property.  It is said that there is no breach of duty of care on his part.                      

The issues

29.  There is no real dispute between the parties that the $3 million paid by the plaintiff to FWH for payment of stamp duty was trust money and had been misappropriated by AH.  The bone of contention between the parties is whether the 2^nd defendant should be liable to the plaintiff for the loss of the money in trust as a partner of FWH or in breach of duties in his personal capacity as a solicitor.

30.  Sections 8, 11 and 13 of the Partnership Ordinance, cap. 38 provide as follows:

8.   Partners bound by acts on behalf of firm

An act or instrument relating to the business of the firm and done or executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person thereto authorized, whether a partner or not, is binding on the firm and all the partners: …

11.  Liability of partners

Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied but subject to the prior payment of his separate debts.

13.  Misapplication of money or property received for or in custody of firm

In the following cases, namely-

(a)	where one partner, acting within the scope of his apparent authority, receives the money or property of a third person and misapplies it; and
(b)	where a firm in the course of its business receives the money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm,

the firm is liable to make good the loss.

31.  Accordingly, the issues for determination at this trial are:

(1) Whether the 2^nd defendant was in truth a partner of FWH jointly with AH;

(2) If the 2^nd defendant was not a true partner, whether he is liable as a partner by holding out; and

(3) Whether the 2^nd defendant is liable on account of breach of duties in contract and/or tort.    

The witnesses and their evidence

32.    On the facts and evidence of the case, the main dispute between the parties relate to what took place at the execution of the SP Agreement on 31 July 2001, and in particular, what had been said between the 2^nd defendant and JT in relation to FWH and the 2^nd defendant’s position in the firm.   The plaintiff also put the 2^nd defendant to strict proof of his relationship with AH with regard to FWH.

33.  The plaintiff had called three witnesses. They are JT, Mr Chan Chit Ming (“Chan”) and Miss Yeung Ching Yu (“Yeung”). Chan is the accountant of Modern Beauty Salon, and Yeung is JT’s secretary. The 2^nd defendant had also testified.  He called no defence witness.

34.  The gist of JT’s evidence is that in about May 2001, she asked Tso to find solicitors to act for the plaintiff and herself in the sale and purchase of the Property.  Subsequently in an internal meeting of the plaintiff attended by Tso, Chan, Yeung and herself, Tso recommended the 2^nd defendant to act as the solicitor for the plaintiff.  Tso told JT that the 2^nd defendant was the boss of FWH and he would personally attend the execution of the documents at her office.  Tso also said FWH was a large firm with a number of branch offices and had a substantial insurance coverage.  Tso at the same time recommended Ko & Chow to act as the vendor’s solicitors.  JT was impressed by what Tso told her about FWH.  She found it most attractive that the boss of the solicitors firm would personally come to her office to attend to the execution.

35.  Then in the afternoon of 31 July 2001, the 2^nd defendant and Tso came to the plaintiff’s office.  Also present at the execution of the SP Agreement were JT, Cheung Miu Yuen, Chan, Yeung and Cleo Au, who succeeded Tso as the legal adviser of Modern Beauty Salon.  On the occasion, the 2^nd defendant presented his business card to JT.  JT complemented the 2^nd defendant, saying that he had done well in becoming a partner at a young age.  Tso then interjected to say that the 2^nd defendant was very competent and had dealt with a number of large transactions.  The 2^nd defendant also talked about some of the cases he had handled.  He appeared to JT to be confident and well regarded. Thereafter, the SP Agreement was executed.  JT handed to the 2^nd defendant the plaintiff’s cheque for $3,005,000 made payable to FWH. The 2^nd defendant then made out a temporary receipt for the plaintiff and gave it to JT. 

36.  On 22 August 2001, the 2^nd defendant again went to the plaintiff’s office to attend to the execution of the Assignment. After the execution, the plaintiff issued a cheque to FWH for $13,000 to settle the balance of the legal fees as per the debit note dated 22 August 2001. 

37.  JT disagreed that the 2^nd defendant had on 31 July 2001 told her he was merely employed by FWH.  JT said that had he said so, she would not have carried through the transaction on that day or entrusted FWH with the stamp duty money.   She explained that she would seriously doubt the 2^nd defendant’s credibility if he claimed to be a mere employee of the firm while at the same time handed out a business card that described him as a partner.          

38.  Chan and Yeung also gave evidence on the internal meeting in May 2001 and the executions of the SP Agreement and Assignment.  Their testimonies are largely the same as that of JT.

39.  The 2^nd defendant gave evidence that he was admitted as a solicitor in 1998.  He joined FWH as an assistant solicitor in 2000 and worked at its Tsuen Wan office.  He was paid a monthly salary together with commissions on his own files. His main duty was to assist a legal clerk on the documentations. 

40.  About four weeks before 30 May 2001, AH through a colleague invited him to be a salaried partner of FWH.  Having deliberated on the matter and after discussing the terms with AH, he agreed to become a salaried partner.  According to the 2^nd defendant, there was no discussion on whether he would share in the profits or loss of the firm or whether he had any managerial role in the firm.  He signed the Letter of Appointment before the Partnership Agreement on the same day.   Thereafter, the 2^nd defendant’s name was shown on the letterhead of FWH and his own business cards as a partner of the firm. 

41.  The 2^nd defendant stated that as a salaried partner, he received an increase in the salary.  Otherwise, his terms of work and duties remained unchanged.  He did not have authority to sign cheques for the firm and had no access to the books and accounts of the firm.  He testified that after he became a salaried partner, some clients mistakenly thought he was one of the former founding partners of the firm as he is also surnamed “Wong”.  Some of his former classmates also on occasions reminded him of the responsibilities he might come under as a salaried partner.  After several months, he felt he was shouldering more responsibilities, but the benefits he received as a salaried partner was not much.  At the same time, the payment of his commission was not punctual.  He therefore spoke to AH about his concerns.  As a result, AH gave him the Letter of Indemnity, which stated that: “For the avoidance of doubt, you, as a salaried partner, will not be responsible for any liability of our firm (other than that due to your default) and we will keep you indemnified against all claims in respect thereof.”

42.  As to the transaction in question, the 2^nd defendant’s evidence is that two of his classmates approached him asking if he was interested in representing the purchaser in the conveyancing transaction at an agreed fee of $18,000.  It was his understanding that it was not an attractive fee, but because the parties were related and no mortgage was involved, he was prepared to accept the retainer.  Afterwards, he had contact with Tso, but he never told Tso that he was a partner in FWH or that the firm had indemnity insurance of up to several hundred millions of dollars.  As far as he knew, FWH was only insured for a liability of $100 million.  The 2^nd defendant said he first went to the plaintiff’s office on 28 June 2001 to attend to the execution of the SP Agreement, but it was aborted.  Prior to that, he had spoken to Cleo Au, who requested a receipt be given at execution.  He therefore asked for the cheque to be made out to FWH as stated in the letter dated 21 June 2001.

43.  On 31 July 2001, the 2^nd defendant went to the plaintiff’s office again for the execution of the SP Agreement.  He could not remember whether Chan and Yeung were present inside JT’s office.  He accepted that after he gave his business card to JT, JT commented that he became a partner at a young age.  According to the 2^nd defendant, he responded that he was merely an employee.  He denied having bragged or talked about cases he had handled.  There was no mention of FWH being a large firm and had taken out substantial indemnity insurance policy.  The occasion lasted for about half an hour. 

44.  The 2^nd defendant agreed that the plaintiff could have issued a cheque in favour of the government for the stamp duty payment.  He explained that it had always been his practice to have the stamp duty money and the costs on account included in one cheque and payable to FWH.  In this way, he could issue a temporary receipt to the plaintiff whereas if the stamp duty money was made payable to the government, he would not be in a position to give a receipt of the firm for it.   He also said that he could only issue a temporary receipt because only the accounts department in the Central office could issue the formal receipt.  When being cross-examined, he said it was common practice at the time for clients to pay the stamp duty money to the solicitors and it was only recently with more instances of misappropriation of client’s money that the clients would issue cheques payable to the government directly.  He added that he had not been told that the plaintiff would not pay the stamp duty money to FWH if he were not a partner of the firm. 

45.  The 2^nd defendant said he then sent the SP Agreement together with the plaintiff’s cheque to the Central office with a cover note requesting the stamping clerk, who was called Kenny, to stamp the agreement.  It was usual office procedure for the stamping and registration of documents to be handled by the Central office.  He stated that he knew the SP Agreement had to be submitted for stamping within one month.   In his experience, the stamping procedure would normally be accomplished within days.  He did not prepare the Questionnaire required for stamping, which, the 2nd defendant said, was usually prepared by the stamping clerk.  He also did not know who sign the solicitor’s certification in the Questionnaire.

46.  On 22 August 2001, the 2^nd defendant went to the plaintiff’s office to attend to the execution of the Assignment.  The 2^nd defendant accepted that he had not checked whether the SP Agreement had been stamped or conducted a final search on the Property.  When he was questioned on this, he said in cases where the vendor and purchaser were not related parties, the purchaser would need to show to the vendor that the stamp duty had been paid.  On the day in question, however, neither JT nor the plaintiff had raised the question of stamp duty.  After the execution, he gave a debit note to the plaintiff and was given the cheque for the balance of the legal fees.  He later passed on the Assignment and the cheque to the Central office for dealing with the registration and issue of formal receipt. 

47.  The 2^nd defendant said that because it was a large transaction, he had personally informed AH of it.  In about September or October 2001, he enquired with AH and was told the cheque had been issued and the document had been sent for stamping. 

48.  The 2^nd defendant said that shortly after the execution of the Assignment, he had personally delivered the title deeds of the Property to Modern Beauty Salon.  He agreed that subsequently Cleo Au had telephoned and left messages for him, but he was busy and had forgotten to return her calls.  He said he had not received or read the plaintiff’s facsimile dated 27 November 2001.  The 2^nd defendant said that he was not aware that the SP Agreement and the Assignment had not been returned to the plaintiff.  He also did not know that the stamp duty had not been paid and the documents had not been registered.  It was in mid February 2002 when the plaintiff’s solicitors contacted him that he came to know that the stamp duty had not been paid.

49.  Under cross-examination, the 2^nd defendant agreed that in giving JT his name card, he expected JT to regard him as a partner of FWH.  He also agreed that he had always wanted others to take him as a partner.  He accepted that ordinarily, clients as well as JT would not be able to differentiate between salaried partner and equity partner.  He recognized what he did in the transaction was consistent with the role of a partner and JT had no cause to suspect he was not a partner.  He accepted, too, that JT would not have thought he had no liability as a partner.

50.  As to the stamping of the SP Agreement, the 2^nd defendant admitted in cross-examination that there was a mistake in the certification clause and it was due to his negligence that the stamping clerk was not given a copy of the tenancy agreement.  He also agreed that in January 2002 when the SP Agreement was submitted for stamping, FWH would have sufficient funds in its client account to meet the cheque issued for the stamp duty.  The 2^nd defendant, however, disagreed that it was his mistake and negligence that had caused the plaintiff’s loss. He explained that there was division of labour within the firm, and the stamping and registration of documents were the responsibilities of the clerk.  He considered that the responsibility for the loss of the $3 million should not fall entirely on him because the stamping clerk should have told him that the documents had not yet been stamped and the accounts staff should also have told him that the money had not been paid. 

51.  Looking at the evidence as a whole, there is no doubt that JT is a cautious, assertive and demanding person.  Although it was a sale of her property to the plaintiff, in which she is a director, she would not agree to execute the SP Agreement before the requisitions on title were cleared.  She took this decision notwithstanding the 2^nd defendant’s advice that the usual practice was, and it would be in order, to deal with the requisitions after the execution of the SP Agreement.  She even went so far as to terminate the retainer of Ko & Chow when she was not satisfied with the way it deal with the requisitions on the title.  Clearly, JT is not a person who will readily trust and rely on others, including professional advisers.

52.  Although Tso was not called to testify, JT had given a logical and convincing account of the internal meeting in May and the reasons Tso gave for recommending Ko & Chow to act for the vendor, and the 2^nd defendant and FWH to act for the purchaser.  Given her cautious and strong character, it is unlikely that she would readily accept Tso’s recommendation to retain FWH without knowing something about the 2^nd defendant and the firm.  In my view, her evidence that she found it most attractive that the boss of the firm would personally serve her and attend to execution at her office has a ring of truth.

53.  JT’s account of the execution of the SP Agreement on 31 July 2001 is also natural and convincing.  Her evidence that she would find it odd and suspicious if, right after handing out his business card, the 2^nd defendant were to say he was a mere employee of the firm, is both credible and consistent with her cautious approach to the whole transaction.  When JT gave her first statement to the police on 16 May 2002, she already mentioned that at the execution of the SP Agreement, the 2^nd defendant had claimed to be a partner of FWH and had said the firm had huge business, many branch offices and was insured up to $3,000 millions.

54.  By contrast, the 2^nd defendant’s account that he told JT he was merely an employee when JT complemented him for becoming a partner at a young age appears to be rather unnatural.  Admittedly, the 2^nd defendant had wanted people to regard him as a partner, which was also the purpose of stating on the business card that he was a partner.  Up to July 2001, this was the largest conveyancing transaction he had ever handled. There is no convincing reason why the 2^nd defendant would wish to impress upon JT that he was not a partner after all.  It is also the 2^nd defendant’s evidence that ordinarily people could not understand the difference between a salaried partner and an equity partner, and he did not expect JT to know the difference.  There is therefore no point in telling JT, who was not an unimportant client, that he was only an employee on their very first encounter, and almost at the same time when he presented her with his business card.  As Mr Chan for the plaintiff puts it, even if the 2^nd defendant had mentioned he was a mere employee, he would not have been taken seriously by JT or the others who were present.  They would simply think he was being modest. 

55.  I accept, on balance of probabilities, JT’s evidence as to what took place at the execution of the SP Agreement on 31 July 2001.  I find as a fact that the 2^nd defendant had not told JT he was a mere employee of FWH.  I also accept JT’s evidence that had she known the 2^nd defendant was not a partner, but was a mere employee, she would not have paid the $3 million stamp duty to FWH, but would have issued a cheque payable to the government.

56.  Turning to the 2^nd defendant, other than what was said immediately before the execution of the SP Agreement on 31 July 2001, on which I prefer JT’s version to his, most of his evidence is not controversial.  He was cross-examined at length on the arrangement and relationship between him and AH with regard to FWH and the circumstances surrounding the making out of the Letter of Appointment, Partnership Agreement and the Letter of Indemnity.  I am of the view that on the whole, he had given a candid account of the events surrounding these issues. 

57.  Clearly, by May 2001 when AH invited him to be a salaried partner, the 2^nd defendant did not have a great deal of exposure as a solicitor, and there was nothing extraordinary about his legal practice.  His income at FWH before 30 May 2001 was far from attractive.  The salary for being a salaried partner, though not by itself very attractive, represented a twofold increase.  It is therefore not surprising that he accepted the invitation to be a salaried partner and signed the Letter of Appointment and Partnership Agreement without looking at the contents in depth.   I accept his evidence that when agreeing to be a salaried partner of FWH, he had no intention to form a partnership with AH.  I also accept his evidence that he had no management rights in the firm, had no access to the books and accounts of the firm, could not operate the firm’s accounts and was generally not aware of what happened in the Central office.   As he said, he was made a salaried partner simply because of AH’s desire to maintain the firm as a partnership after the resignation of the other partner Mr Bruce Ko.  And on his part, he was contented to be regarded as a partner by those who dealt with the firm. 

58.  As to the transaction in question, I accept his evidence that he had entrusted the stamping and registration of the documents to the clerk in the Central office.  He did not sign the Questionnaire for stamping and the letter dated 21 January 2002 to the SDO.  I also accept his evidence that he accepted what AH had told him about the progress upon his enquiry and had not considered it necessary to check that the stamping and registration had been completed. 

Issue 1: Was the 2^nd defendant in truth a partner of FWH?

59.  The first issue for determination is whether the 2^nd defendant was at the material time a true partner of FWH.  If he was, he will be liable to the plaintiff jointly with AH for the loss of the stamp duty money.

60.  Section 3(1) of the Partnership Ordinance defines a partnership as “the relationship which subsists between persons carrying on a business in common with a view of profits”.  Whether an individual is or is not a partner is a question of fact and is not dependent upon the label the parties chose to apply to themselves: Willie Co v. Lo Man and Welfare Co. [1957] HKLR 512 at 529. 

61.  It is common ground between the parties that there may be a distinction in law between a true partner and a salaried partner.  In Stekel v. Ellice [1973] 1 WLR 191 at 198 D-F & 191G-H, Megarry J observed that:

“The term ‘salaried partner’ is not a term of art, and to some extent it may be said to be a contradiction in terms.  However, it is a convenient expression which is widely used to denote a person who is held out to the world as being a partner, with his name appearing as partner on the notepaper of the firm and so on.  At the same time, he receives a salary as remuneration, rather than a share of the profits, though he may, in addition to his salary, receives some bonus or other sum of money dependent on the profits.

… …

It seems to me impossible to say that as a matter of law a salaried partner is or is not necessarily a partner in the true sense.  He may or may not be a partner, depending on the facts.  What must be done, I think, is to look at the substance of the relationship between the parties; and there is ample authority for saying that the question whether or not there is a partnership depends on what the true relationship is, and not any mere label attached to that relationship.  A relationship that is plainly not a partnership is no more made into a partnership by calling it one than a relationship which is plainly a partnership is prevented from being one by a clause negativing partnership.”   

62.  The 2^nd defendant says, and I accept, it is common in solicitors firm to offer salaried partners to assistant solicitors, without admitting the solicitors as true partners to the firm.  In determining whether the 2^nd defendant was or was not a true partner of FWH at the material time, the important issue is to ascertain the true relationship between AH and the 2^nd defendant by reference to the documents they had executed and also the actual dealings and arrangements between them.

63.  In this regard, it is evident from the 2^nd defendant’s testimony that FWH was controlled and managed by AH from the Central office.  The 2^nd defendant was subject to AH’s instructions on matters relating to work.   He also had no involvement in and could not make decisions on matters of staff and accounts, which are important aspects of a solicitors’ practice.   These objective circumstances are consistent with the 2^nd defendant’s version that he remained an employee after being appointed as a salaried partner.      

64.  As the documentary evidence, three documents are relevant.  The first is the Letter of Appointment. It was issued in the name of FWH and set out the basic terms underlying the 2^nd defendant’s appointment as a salaried partner.   It cannot be doubted that the letter and the terms it contained bear all the hallmarks of an employment letter.  In particular, it provided that the firm might summarily dismiss the 2^nd defendant.  Clause 9 further required that the 2^nd defendant to sign a formal employment contract with the firm on the terms and conditions mentioned in the letter.

65.  The Partnership Agreement was signed on the same day as but subsequent to the signing of the Letter of Appointment.  It is an important document on which both parties place heavily reliance.  It is therefore worth examining in details.

66.  As appears from the preamble, the Partnership Agreement was intended to be an agreement between the present Equity Partners whose names appear in the First Schedule and future equity partners, on the one hand, and the 2^nd defendant who was described as “the Salaried Partner”, on the other hand.  Although the agreement contemplates more than one Equity Partners, only AH’s name appeared in the First Schedule.  The fact that the agreement was intended to be a multi-parties agreement involving more than one equity partner is a crucial point to bear in mind when reading the Partnership Agreement as it will explain some of the apparent oddities.  

67.  Clause 1 of the agreement defined “the Partnership” as “the business carried on by the Partners in partnership under the Business Name” of FWH.  “The Partners” is a reference to the Equity Partners and the Salaried Partners.  Clause 2.1 stipulated that “This agreement will govern the relationship between the Equity Partners and the Salaried Partner” and “any former agreement subsisting between the parties shall cease to have effect … save for the continuance of those terms set out in the Employment Particulars.”   The Second Schedule to the agreement set out the Employment Particulars, which are similar to those in the Letter of Appointment.  Clause 13.1 stated that the provisions of the agreement shall prevail in the event they are in conflict with the Employment Particulars. 

68.  The 2^nd defendant’s duties and obligations as the Salaried Partner are set out in clauses 2 and 3.  In general, he is under a duty of fidelity and is obliged to serve the Equity Partners faithfully and diligently. Clauses 6 and 9 contained restrictions on the 2^nd defendant in relation to the funds, assets, information and clients of the firm.  Clause 7 further stipulated that the Equity Partners could terminate the “employment” of the 2^nd defendant by notice and in circumstances specified in clause 7.2, without notice.   Clause 8 empowered the Equity Partners to suspend the 2^nd defendant and exclude him from attending to the business and affairs of the firm. 

69.  On the management and control of the firm, Clause10 provided that the legal and practical control of the firm and its affairs remained at all times with the Equity Partners, though the 2^nd defendant might be consulted on matters affecting the general welfare of the firm.  Clause 4.1 further provided that only the Equity Partners could decide on the admission and dismissal of Equity and Salaried partners.  Under Clause 4.2, it was provided that “The Partnership shall not be dissolved as regards the other Partners if any Partner ceases to be a Partner”.  Plainly, this clause contemplated more than one Equity partners and is in the circumstances inapt.

70.  Clause 11 provided that the name of the 2^nd defendant should be shown on all notepaper of the firm.  The Equity Partners agreed to keep the 2^nd defendant indemnified against claims and liabilities of the firm other than those arising from the act or fault of the 2^nd defendant.

71.  In looking at the provisions in the Partnership Agreement, an important aspect is the functions and interests of the 2^nd defendant in the firm as agreed between him and AH.  There is no doubt that AH, as the only equity partner, assumed a dominant position in the firm.  Effectively, he controlled and made management decisions for the firm.  Other than the 2^nd defendant’s own files on which he received a 50% commission, the 2^nd defendant had no entitlement to the income or profits and did not share in the loss of the firm. 

72.  In terms of the relationship between the 2^nd defendant and AH, while the 2^nd defendant was under a duty of good faith and was obliged to obey AH’s lawful directions and orders, AH was not similarly obliged under the terms of the Partnership Agreement.  Likewise, the Partnership Agreement only enabled AH to terminate the 2^nd defendant’s employment and to suspend and exclude him from attending to the affairs of the firm.  The 2^nd defendant had no such power vis-à-vis AH.        

73.  Mr Chan submits that some parts of the Partnership Agreement are inconsistent with the 2^nd defendant being a mere employee.  He referred to Clause 7.2.1 which provided that the Salaried Partner shall act, inter alia, with the good faith between Partners, Clause 8.4 which stated that the Salaried Partner was entitled to attend and vote at meetings of Partners and Clause 8.5 which provided that during suspension, the Salaried Partner shall continue to be entitled to his salary and other rights of a Partner.  There is also Clause 4.2, which I had said was inapt in the circumstances of the case.  In my view, plainly the Partnership Agreement was not a well drafted document, and there are inconsistencies among the provisions.  It is also apparent that no thoughts had been given to the applicability of some of the provisions given that there was only one equity partner.  Looking at the document as a whole, it is not difficult to come to the view that the 2^nd defendant’s position thereunder is more consistent with his being an employee than as a full partner.  It would also appear that the relationship between him and AH is more akin to that of an employer-employee than that of partners with equal rights. 

74.  The Letter of Indemnity does not add much to the Partnership Agreement.  It essentially reproduces the indemnity under Clause 11.  It is by itself not determinative of the issue of the 2^nd defendant’s position in FWH.  However, when taken together with the other documents and the oral evidence, it will lend weight to the 2^nd defendant’s case that he was not a true partner.

75.  Taking the evidence in totality, I am of the view that the relationship between the 2^nd defendant and AH was such that it cannot be said that they were carrying on business in common with a view of profit.  I find on balance of probabilities that the 2^nd defendant was not a true partner of FWH.

Issue 2: Is the 2^nd defendant liable as a partner by holding out?

76.  I turn to the next issue of whether the 2^nd defendant is liable as a partner by holding out.   Section 16 of the Partnership Ordinance provides: 

16.  Persons liable by "holding out"

Every one who, by words spoken or written or by conduct, represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm is liable as a partner to any one who has, on the faith of any such representation, given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made: …

The questions for determination are: (i) whether the 2^nd defendant had represented himself or suffered himself to be held out as a partner of FWH, and (ii) whether the plaintiff had relied on the representation in giving credit to FWH.  It is not in dispute that the payment to FWH of the stamp duty money amounts to a giving credit by the plaintiff.

77.  On the first question of representation or holding out, the evidence of what Tso told JT about the 2^nd defendant and FWH during the plaintiff’s internal meeting in May 2001 is irrelevant.  Not only is it a piece of hearsay evidence, there is also no indication as to the source of Tso’s information.  The 2^nd defendant had denied telling Tso about his forthcoming promotion in the firm.  More importantly, there is no evidence to show that the 2^nd defendant knew or in some way encouraged or consented to Tso making the representation.  It cannot be said that he had knowingly suffered himself to be held out by Tso as a partner of the firm.

78.  That said, however, I agree with Mr Chan that there is ample evidence of the 2^nd defendant holding out or allowing himself to be held out as a partner of the firm.  The evidence consists of:

(1) The description of the 2^nd defendant as a partner of FWH on his business card,

(2) The 2^nd defendant handing over his business card to JT at the execution of the SP Agreement,

(3) The description of the 2^nd defendant as a partner on the letterhead of FWH after 30 May 2001,

(4) The 2^nd defendant communicating with the plaintiff under the letterhead that described him as a partner of FWH,  

(5) The listing of the 2^nd defendant as a partner of the firm in the records of the Law Society, and

(6) The 2^nd defendant allowing himself to be entered as a partner of the firm in the records of the Business Registration Office.

79.  In all these situations, there was no qualification that the 2^nd defendant was a salaried partner as opposed to a full or equity partner.  In Hong Kong Solicitors’ Guide to Professional Conduct published by the Law Society of Hong Kong, Commentary 3 to Principle 2.01 states:

“If a salaried partner’s name appears on the headed notepaper of affirm without distinction from the equity partners’ names, he will be treated by the Law Society as if he were a full partner and as holding or receiving client’s money irrespective of whether he can operate the firm’s client accounts.  A printed line separating the names of the equity partners from those of salaried partners is insufficient distinction for these purposes.  If a salaried partner is held out as a partner, he must accept responsibility for the books of the firm and for any breach of the Solicitors’ Accounts Rules.  This is so even if he is not permitted access to the books.”

80.   It is the 2^nd defendant’s evidence under cross-examination that he was aware of the above statement in the Guide.  He was therefore fully aware of the importance of distinguishing himself as a salaried partner and the implications and consequences of not doing so, at least with regard to the Solicitors’ Accounts Rules.  It is no answer to say that it was not customary in the profession to make a distinction between salaried partner and full or equity partner on the firm’s letterhead or his own business card when the Guide had drawn solicitors’ attention to the risks of not making the distinction

81.  Notwithstanding his appreciation of the risks and implications involved, the 2^nd defendant had allowed himself to be described as a partner without qualification on the firm’s letters and his business card and had used and presented them in the course of dealing with the plaintiff.  The 2^nd defendant frankly admitted in cross-examination that he had wanted others, including clients, to view and regard him as a partner of FWH and he did not expect layman, including JT, to be able to tell the difference, at least in terms of liability, between a salaried partner and a full partner.  

82.  The same can also be said about the records in the Business Registration Office and the Law Society.  No doubt, the 2^nd defendant as a practising solicitor knew that these are public records open for search and inspection by members of the public, including those who dealt with FWH.  It is not his evidence that these entries were made without his knowledge or consent. As Mr Chan submits, this shows the 2^nd defendant had consciously chosen to treat himself as a partner of the firm and serves to illustrate his desire to be perceived as a partner of the firm.  

83.  In my view, the 2^nd defendant had, on the facts, clearly represented himself and knowingly allowed himself to be held out as a partner of the firm.  The 2^nd defendant emphasised in his evidence that he had not become a salaried partner when he accepted the retainer on about 21 May 2001.  Mr Hui made the same point in the closing submission and submitted that it was after the 2^nd defendant had been retained that he gave his business card to JT and was described as a partner on the firm’s letterhead and business registration record.   All these miss the point that the critical date is not when the 2^nd defendant was retained, but when the cheque covering the $3 million stamp duty money was given to him on behalf of FWH. 

84.  On the second question of reliance, it was held in Nationwide Building Society v. Lewis [1998] 3 All ER 143 that as a general rule, in order to make the defendant liable on the basis that he was held out as a partner, a plaintiff had to establish actual reliance on the holding out by means of direct evidence. 

85.   An important feature in this case is that the plaintiff was the 2^nd defendant’s own client and throughout the transaction, he was the plaintiff’s only point of contact in FWH. The retainer and the subsequent correspondence were all marked for the attention of the 2^nd defendant.  On top of that, the 2^nd defendant had presented to JT his business card describing him as a partner of the firm.   The present case is therefore different from the Nationwide Building Society case.  There, the plaintiff had no dealings with the salaried partner and was not even aware of his existence in the firm.  The Court of Appeal held that although the salaried partner, by agreeing to his name appearing on the firm’s notepaper as a partner, had agreed to be held out as a partner, the evidence was insufficient to show that the plaintiff had acted in reliance of the representation: see p.152.

86.  In the present case, the 2^nd defendant personally handled the transaction and he was presented and known to JT as the partner of the firm.  It is JT’s evidence that the 2^nd defendant’s position as a partner was an important factor in her agreeing to retain FWH.  She was attracted by the idea of being served by a partner, who was prepared to come to her office to attend to the execution of the documents. It is also JT’s evidence that she knew she could issue a cheque for the stamp duty payable to the government, but she went along with the 2^nd defendant’s request and issued the cheque in favour of FWH, in the belief that the 2^nd defendant was the “boss” or partner of the firm.  It is to be noted, too, that the cheque to FWH was not prepared in advance before the meeting on 31 July 2001, but was only made out and signed after the execution had taken place.  Not only does this reflect on JT’s cautious attitude, but it also lends credence to her assertion that she would not have made out the cheque to FWH and given it to the 2^nd defendant, but for the fact that the 2^nd defendant was the boss or partner of the firm.

87.  Mr Hui argues that the evidence suggests that no one of the plaintiff, including JT, had any query about the 2^nd defendant’s status and was throughout happy to retain the 2^nd defendant and FWH.  At the same time, the evidence does not show what benefit did the 2^nd defendant or FWH gain in having the cheque made out to the firm.  It is therefore said that there is no or insufficient evidence of actual reliance.  In my view, these are irrelevant considerations.  The fact that the plaintiff had a good or smooth relationship with the 2^nd defendant does not mean that JT would not terminate the retainer or disagree to entrusting FWH with the stamp duty money if she were to know or find out that the 2^nd defendant was not a partner of the firm.  The fact that there is no apparent advantage to the 2^nd defendant or FWH in having the cheque made payable to FWH has no bearing on whether the plaintiff had relied upon the holding out of the 2^nd defendant as a partner.

88.  I am satisfied on the evidence that the plaintiff had relied on the holding out of the 2^nd defendant as the partner of FWH in continuing to retain the firm and, most importantly, in entrusting the stamp duty money with the firm.

Issue 3: Is the 2^nd defendant liable for breach of duties in contract or tort?

89.  The third and final issue relates to the 2^nd defendant’s personal capacity as a solicitor. There can be no dispute that the 2^nd defendant and the plaintiff stood in a solicitor/client relationship.  As such, the 2^nd defendant owed duties to the plaintiff in both contract and tort.  The duties include a duty to exercise all proper care, skill, diligence and competence as solicitor in the conduct of the purchase and conveyance of the Property and a duty to take all reasonable and proper steps to protect the interest of the plaintiff.  Given it is common ground that the SP Agreement and the Assignment had to be stamped and registered at the Lands Office within one month of their execution, the duties of the 2^nd defendant extend to ensuring that the stamping and registration were promptly and duly accomplished.  The questions that arise for determination are whether the 2^nd defendant was in breach of his duties and if so, whether the plaintiff’s loss was caused by the 2^nd defendant’s breach.   

90.  It is the 2^nd defendant’s case that there was a division of work within FWH and he was following the firm’s practice and procedure in entrusting the stamping and registration work to the clerk in the Central office, including the preparation of the Questionnaire for stamping.  As summarized by Mr Hui, the 2^nd defendant basically relied on his colleagues to deal with the stamping and registration procedure and on AH to follow up on the case.   He expected his colleagues to report any problem to him and he had not received any such report.  He also did not see any problem with the firm until well into January 2002.

91.  The starting point in considering this issue is to note the 2^nd defendant’s status as a qualified person.  By contrast, the stamping and registration clerk and the accounts staff in the firm are not.  The clerks and accounts staff worked under his and AH’s supervision.  The fact that he was not a true partner does not absolve him from the duty to supervise and monitor them in respect of tasks that he had delegated to them.  The 2^nd defendant cannot say that he had discharged the duty he owed to his client by simply delegating or entrusting the work to his lay colleagues.  It is no defence to say that he expected the clerk or accounts staff to report any problem and that they were at fault in not telling him the documents had not been stamped and the cheque had not been presented or sent to the SDO.

92.  On the evidence, the SP Agreement and the Assignments remained unstamped and not registered more than five months after their execution.  The period far exceeded the time normally needed to complete the procedures.  Admittedly, the 2^nd defendant had no actual knowledge that the stamping and registration had been completed.  He also could not have any basis for assuming or believing that the procedures had been completed.  He accepted that the documents would be returned to him after stamping and it would be his duty to return them to the plaintiff.   Not only had he not received the documents, but also he was aware that Cleo Au had telephoned and left messages for him.  In the circumstances, he could not have reasonably acted on AH’s words that the cheque had been issued and the documents were in the process of being stamped.  The fact that the documents were not returned to him duly stamped and registered is prima facie indication of some problems.  It is incumbent upon him, in the exercise of his duty to protect the interest of the plaintiff, to find out for himself what was the situation.   He should have, to say the least, taken the simple step of conducting a land search on the Property, which would reveal that the documents had not been registered, and/or calling for an explanation from the stamping and registration clerk.  This is particularly so having regard to the substantial amount involved and his evidence that his own commissions were not paid punctually.  The 2^nd defendant had clearly not exhibited the standard of care, skill and diligence expected of a reasonably competent conveyancing solicitor.

93.  In addition, as he had admitted, it was a handling solicitor’s duty to ensure that the certification clause in the Questionnaire was accurately filled out and to supply the clerk with the necessary documentation for stamping.  Although he knew the sale was subject to tenancy, he had not supplied the clerk with the tenancy agreement, which is a necessary document.  It is irrelevant that it was permissible for the stamping clerk to fill out the Questionnaire and for another solicitor to sign on the Questionnaire.  The failing in duty is his personally.

94.  On the 2^nd defendant’s evidence, there should be sufficient funds in FWH to meet the cheque for stamp duty in January 2002.  Accordingly, but for the error in the certification clause in the Questionnaire and the omission to send the tenancy agreement to the SDO, which caused the SP Agreement to be rejected for stamping, the stamping of the SP Agreement would have been accomplished and the plaintiff would not suffer the loss of the $3 million stamp duty money. 

95.  Mr Hui argues that the plaintiff’s loss was caused by AH’s misdeed and the misappropriation of the funds by AH could not be foreseen such that the plaintiff’s loss was not a foreseeable damage.  I do not agree.  Firstly, the act of misappropriation by AH cannot be said to be an intervening act that breaks the chain of causation.  The duty to take care and to protect the plaintiff’s interest must extend to ensuring the plaintiff’s money in the client’s account was applied only for the purpose for which it was given to the firm.  Secondly, misappropriation of client’s funds by solicitors or solicitors’ clerks, though does not often happen, is not unheard of.  Nor is it unlikely to happen when substantial sums are involved.  It must be reasonably foreseeable that failure to monitor or follow through the stamping procedure could give rise to occasions for misapplication of the funds.    

Conclusion

96.   For the above reasons, the 2^nd defendant is liable to the plaintiff both on the basis of his being held out as a partner of FWH and also for breach of duties in contract and tort. There will be judgment for the plaintiff against him for the declaratory relief and the sum of $3 million less the $332,160 dividend received on 25 July 2003 together with interest.  As to the other relief sought in the Re-Amended Statement of Claim, they are either no longer necessary or relevant.  There is also no evidence of the Inland Revenue Department imposing any penalty for the late stamping. 

97.  Accordingly, I order judgment be entered for the plaintiff against the 2^nd named 1^st defendant and the 2^nd defendant as follows:

(1)	A declaration that the 1st and 2nd defendants hold the sum of HK$3,000,000 as trustees for the plaintiff.
(2)	Return and payment of the sum of HK$2,667,840.
(3)	Interest at judgment rate on the sum of HK$3,000,000 from the date of Writ to 25 July 2003 and on thereafter on the sum of HK$2,667,840 until full payment.

98. Costs should follow event.  I therefore make an order nisi that the 2^nd named defendant and 2^nd defendant pay the plaintiff the costs of the action to be taxed if not agreed.