LI SAU YING v. BANK OF CHINA (HONG KONG) LTD

FACV No. 9 of 2004

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 9 OF 2004 (CIVIL)

(ON APPEAL FROM CACV NO. 309 OF 2002)

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J U D G M E N T

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Mr Justice Bokhary PJ :

1.  At the conclusion of the hearing we dismissed the appeal with costs (the respondent asking for costs and the appellant not resisting them).  We said that we would hand down our reasons later, and now do so.  Our reasons are those given by Lord Scott of Foscote NPJ. 

Lord Scott of Foscote NPJ :

2.  In 1996 the appellant, Catherine Li Sau Ying, granted a mortgage over a flat she owned (“the Property”) to Kincheng Banking Corporation.  Kincheng Banking Corporation subsequently became (or was taken over by) Bank of China (Hong Kong) Ltd.  Nothing turns on this and it is convenient simply to refer to the mortgagee as “the Bank”.  The 1996 mortgage was granted by the appellant as security for the indebtedness to the Bank of Sunny Tech Ltd (“Sunny”), a company in which the appellant had no interest.  Sunny was substantially owned and controlled by a Mr Ip.  He and his sister were the sole directors and shareholders.  The appellant had granted the mortgage at the suggestion of a friend of hers, Mr Li Hung Hon, the second defendant, who appears to have been in some respects a business associate or, perhaps, partner of Mr Ip.  In these proceedings the appellant is seeking, as against the Bank, to set aside the 1996 mortgage. 

3.  The 1996 mortgage and the appellant’s role as surety for Sunny’s indebtedness to the Bank must be viewed in the context of her dealings with Mr Li over the previous three or four years.  The 1996 mortgage had followed, and replaced, previous mortgages of the Property that the appellant had granted at the suggestion of Mr Li and cannot sensibly be considered otherwise than in the context of those previous dealings.  In 1998 the appellant granted the Bank a second mortgage over the Property.  This mortgage was granted as security for the indebtedness to the Bank of Keland Ltd.  Keland Ltd (formerly Fairwealth Industries Ltd) was a company with the same address as that of Sunny.  It, too, appears to have been substantially owned and controlled by Mr Ip.  Mr Li was a director and company secretary of Keland. 

4.  In December 1999 the appellant instituted these proceedings against the Bank and Mr Li.  The main relief she sought against the Bank was rescission of the 1996 mortgage and the 1998 mortgage.  The main relief she sought against Mr Li was repayment of a loan of $3,300,000 odd that she had made to him in 1994.  The ground on which she claimed to be entitled to rescind the mortgages was that she had been procured to enter into them either by misrepresentations made by Mr Li or by the undue influence of Mr Li over her.  The Bank, it was said, had actual or constructive notice of these improprieties. 

5.  It appears that the appellant’s action was not registered as a lis pendens and on 31 May (or perhaps 2 June) 2000 the Bank, as mortgagee, sold the Property for $7,500,000.00.  No suggestion has been made that, subject to the appellant’s rescission claim, this was otherwise than an unexceptionable mortgagee’s sale at a proper price.  So, whatever the validity of the appellant’s rescission claim, the purchasers from the Bank obtained an unimpeachable title.  Amendments were accordingly made to the appellant’s pleadings in order to concentrate on monetary compensation. 

6.  The case was tried by Deputy High Court Judge Bunting SC who handed down his judgment on 30 May 2002.  He held

(1)	that the appellant had made a loan to Mr Li of $3,301,960.27 in December 1994, that he had not repaid the loan and that she was entitled to judgment against him for that sum;
(2)	that all her misrepresentations claims, whether for fraudulent or for negligent misrepresentation, failed;
(3)	that because she had had “trust and confidence” in Mr Li and because the 1996 mortgage, and her role as surety, did not appear to be a normal commercial transaction, a presumption that the 1996 mortgage had been procured by undue influence arose;
(4)	that the presumption had not been rebutted and a finding that the 1996 mortgage had been procured by Mr Li’s undue influence over the appellant had to follow;
(5)	that, in consequence, the Bank had “the burden ... to establish that it brought home to [the appellant] the risks she would be running if she granted the proposed mortgage” (para. 137) and that, although the Bank had proved “that the salient terms of the 1996 mortgage” were explained to the appellant by the Bank’s solicitors (para. 130), that had not been enough to bring home to the appellant the risks she was running in granting the mortgage (para. 138);
(6)	that, accordingly, the Bank must be deemed to have had notice that the 1996 mortgage had been procured by Mr Li’s undue influence (para. 142); and
(7)	that the appellant was entitled to be paid by the Bank equitable compensation of $3.5 million.

The $3.5 million figure was arrived at by taking $10 million to be the value of the property in 1996 when the mortgage was granted and deducting $6.5 million, the sum advanced to Sunny and applied in redeeming an existing mortgage that had been granted by the appellant in 1995. 

7.  The Deputy Judge made no comparable findings regarding the 1998 mortgage.  The explanation for this appears to be that counsel for the appellant had conceded in his final submissions that the 1998 mortgage had not made the appellant’s financial position any worse, as compared with her position under the 1996 mortgage, and that consequently there was no need for the appellant’s claim in respect of the 1998 mortgage to be pursued (see para. 5 of the judgment).  This reasoning was, unfortunately, fallacious.  The sum of money secured under the 1998 mortgage was at least the $7.5 million for which the Property was sold by the Bank as mortgagee.  So unless the 1998 mortgage could be successfully challenged, a successful challenge to the 1996 mortgage would not enable the appellant to reclaim the Property or to claim any interest in its proceeds of sale.  I must return to this point. 

8.  The Bank appealed against the decision of the Deputy Judge.  The Court of Appeal allowed the appeal.  The judgment of Le Pichon JA, with whom Rogers VP and Cheung JA agreed, was handed down on 11 April 2003.  She held

(1)	that the evidence on which the Deputy Judge had relied did not give rise to any presumption that the 1996 mortgage had been procured by Mr Li’s undue influence over the appellant and that, on the evidence, the appellant’s undue influence claim should have been held to fail;
(2)	that even if the undue influence claim had been made good, there was nothing that should have put the Bank on inquiry and, therefore, no case for attributing constructive notice of that undue influence to the Bank;
(3)	and, finally, that even if there had been undue influence of which the Bank had had constructive notice, that would not have provided a sufficient basis for an order that the Bank pay equitable compensation to the appellant.

9.  The appellant, pursuant to leave given by the Appeal Committee on 17 August 2004, has appealed.  There are two main issues; first, whether the judge’s finding that the appellant’s grant of the 1996 mortgage to the Bank was procured by the undue influence of Mr Li can be justified; second, if the grant was so procured, whether the Bank is affected by Mr Li’s impropriety.  It is convenient, however, first, to get out of the way the equitable compensation issue. 

10.  It is certainly correct that as a general proposition, equitable compensation can be ordered to be paid by a wrongdoer against whom some equitable wrong has been established.  But no equitable wrong – or common law wrong for that matter – was established against the Bank.  The appellant’s misrepresentation claims all failed and no one has suggested that the Bank was complicit in the undue influence said to have been exerted by Mr Li over the appellant.  What is said against the Bank is no more than that the Bank ought to have taken steps which, if taken, would or might have protected the appellant against that undue influence.  The omission to take these steps does not constitute the Bank a wrongdoer against whom an order for payment of equitable compensation can be made.  Le Pichon JA so held (see para. 46 of her judgment) and I am in full agreement.  It does not, however, follow that even if the appellant succeeds on the two issues above mentioned there is no relief she can obtain against the Bank.  At the time the appellant commenced her action seeking rescission of the two mortgages, rescission was still possible.  The Bank still held the Property as mortgagee.  When the Bank sold the Property the purchasers acquired a title free from the appellant’s claim but the appellant’s rights against the Bank did not simply disappear.  Her rights became transferred to the $7.5 million proceeds of sale which, after the sale, represented the Property.  So, if the appellant’s claim against the Bank to rescind the mortgages were otherwise a good claim, she would be entitled, prima facie in my opinion, to the $7.5 million.  But since $6.5 million of the money provided by the Bank under the 1996 mortgage had gone to redeem the prior mortgage, the Bank would have been entitled, by subrogation, to treat that $6.5 million as secured on the Property and, later, on the $7.5 million proceeds of sale.  Accordingly, if the findings of the Deputy Judge were to be upheld the appellant would be entitled, in my opinion, to payment by the Bank of $1 million, not as equitable compensation but as the proprietary consequences of the findings.  I now turn to the two main issues. 

The facts

11.  The relevant facts have been fully set out in the judgments of Deputy Judge Bunting SC and Le Pichon JA and need not all be repeated in this judgment.  Since, however, all cases of this sort are fact-sensitive, some details should be added to the skeletal details I have so far provided in order to enable the views I have formed on the two issues to have some context and coherence. 

12.  The nature of the relationship between the appellant and Mr Li is relevant.  They were not related but had met one another in 1992 and had become friends.  There is no suggestion that their friendship had ever become intimate in the sexual sense.  By 1992 the appellant had been for some years engaged in business affairs.  Since 1974 she, her husband and sister had been conducting a building materials supply business via a company, Chung Ying Building Materials Co. Ltd (“Chung Ying”).  She owned 25% of the shareholding in Chung Ying and had administrative responsibilities in relation to it and its business.  She owned all the shares in another company, Perfect Target Investment Co. Ltd (“Perfect Target”), and had used Perfect Target as a vehicle for property investments.  She accepted she had some familiarity with conveyancing documents. 

13.  It seems plain that Mr Li, after meeting the appellant in 1992, succeeded in impressing her.  The Deputy Judge records that she thought he was “wealthy, generous, kind, dutiful to his mother and resourceful in business”.  On the evidence of his dealings with the appellant over the period 1994 to 1998 it is dubious whether he deserved any of the first three descriptions but he may well have deserved the final attribute.  He had building development interests on the mainland and in 1994 began to use the appellant’s connections to order building materials for delivery to Zhuhai.  It might have been natural for him to order these materials from Chung Ying but instead he ordered them from Perfect Target.  He and the appellant agreed that he would be allowed one month’s credit for the deliveries but by the end of the year he had run up a debt to Perfect Target of over $1 million.  The appellant pressed him for payment, Perfect Target was experiencing cash flow problems, but he said that although he had plenty of assets he was short of ready cash.  Creditors through the ages will have listened to that excuse.  But Mr Li took the age-old excuse a little further.  He asked the appellant for a loan not only of sufficient to enable him to pay the debt he owed to Perfect Target but also of an additional sum to assist him in his enterprises generally.  He ascertained that the appellant owned the Property and that it was mortgaged to the Nanyang Commercial Bank (“NCB”) to secure the appellant’s debt to NCB of about $3.2 million.  He proposed he use his contacts to find a lender prepared to provide the finance to pay off NCB and to enable a loan of $3 million odd to be made to himself.  He said he would be able to repay the $3 million loan in six months.  The appellant agreed to go along with this scheme.  Mr Li produced two mortgagees.  One was Yu Tai Hing Co. Ltd (“Yu Tai”) which was to lend $5 million to Fairwealth Industries Ltd (which later became Keland).  The loan was to be secured by a 1st mortgage over the Property.  The other was Sinohill Holdings Ltd which was to grant general credit facilities to Fairwealth secured by a 2nd mortgage over the Property.  The appellant was to become jointly liable to Yu Tai and to Sinohill for the repayment of the sums advanced to Fairwealth.  The two mortgages were signed on 23 December 1994.  $6.5 million, of which $5 million came from Yu Tai and $1.5 million from Sinohill, was advanced to Fairwealth.  From this money the NCB mortgage was redeemed at a cost of $3,225,173 odd, various items of cost were paid and $3,092,313 odd was paid to the appellant.  The appellant applied this sum in discharging the debt owed by Mr Li to Perfect Target and in making a $2 million loan in cash to Mr Li.  He and she agreed that the result of these dealings was that he owed her $3,301,960.27. 

14.  These 1994 mortgages and the use to which the $6.5 million was put represent a remarkable coup for Mr Li.  He had used his professed inability to discharge his trade debt of over $1 million to Perfect Target in order to persuade the appellant to substitute for that debt a personal debt of the same amount to herself, to lend him an additional $2 million all unsecured and interest free, and to make herself personally liable not only to the two mortgagees for the $6.5 million they had advanced but also to Sinohill for any additional sum it might advance to Fairwealth by way of general credit facility.  The appellant agreed to this in reliance on Mr Li’s assurance that he would repay the $3.3 million in six months.  Any objective assessment of Mr Li’s attributes would at this point have included somewhere or other the colloquialism “con”. 

15.  That objective assessment would have been reinforced by Mr Li’s earlier success in persuading the appellant and a number of other investors to invest in a property development he was proposing to embark upon in Hillwood Road, Kowloon.  He needed to raise $12 million to pay the deposit and the appellant agreed to put up $750,000.00.  Her brother in law agreed to put up $250,000.00 and the appellant gave Mr Li cheques or cash for $1 million.  She thought that she and her brother in law – and, presumably the other investors – would be issued with shares in a company or companies which would be the owner or owners of the developed property.  It suffices for present purposes to say that the $1 million vanished into a black hole.  No shares in any company were issued or transferred to the appellant.  If the development was ever commenced it soon failed.  Exactly what became of the $1 million is not known.  The story of the appellant’s investment in this nebulous development is relevant for present purposes only for the light it casts on the relationship between the appellant and Mr Li (for a more detailed account, see para. 78 of the Deputy Judge’s judgment). 

16.  The $3.3 million owed by Mr Li to the appellant was not repaid within six months - or, indeed, at all – but in August 1995 the two 1994 mortgages were replaced by a mortgage to Luk Fai Investment Ltd to secure a loan to the appellant of $6.5 million to be repaid on 4 February 1996.  Under the Luk Fai mortgage, the appellant was named as the borrower of the $6.5 million.  The $6.5 million was used to redeem the two 1994 mortgages.  The Luk Fai mortgage in place of the 1994 mortgages was the suggestion of Mr Li.  He said that Luk Fai would charge less interest.  The appellant pressed him to repay the $3.3 million but he said he had no money with which to do so.  Two features of this redemption figure of $6.5 million need to be noticed.  First, although the Sinohill mortgage had been expressed to secure any sum additional to the $1.5 million that Sinohill might advance to Fairwealth, no such additional sum was in fact advanced.  Second, the interest payable on the $5 million advance from Yu Tai and on the $1.5 million advance from Sinohill must have been paid.  Otherwise the redemption figure would have exceeded $6.5 million.  There was no evidence as to who paid this interest, which would have included interest on the $3.2 million, part of the $6.5 million, that represented the appellant’s own indebtedness. 

17.  The 1996 mortgage, dated 4 September 1996 but apparently executed on 29 August 1996, replaced the Luk Fai mortgage, with the Bank replacing Luk Fai as the mortgagee/lender and Sunny replacing the appellant as the nominal borrower.  The appellant’s role reverted to that of mortgagor/surety, the same role she had filled under the 1994 mortgages.  The mortgage documents were signed at the office of the Bank’s solicitors, Tsang, Chan & Wong.  The appellant and Mr Li went to the office together.  Winnie Chan, an experienced conveyancing clerk who had been trained to explain conveyancing documents, went through the mortgage with the appellant, explaining its contents to her.  The Deputy Judge said that he was “favourably impressed” by Winnie Chan’s evidence and held, in terms, that the Bank had proved that the salient terms of the 1996 mortgage had been explained to the appellant.

18.  There is some uncertainty as to exactly what indebtedness the 1996 mortgage was intended to secure.  It has been the linchpin of the appellant’s case in this Court that the circumstances attending the grant by the appellant of the 1996 mortgage ought to have made the Bank suspect that she was being taken advantage of and ought to have led the Bank to take steps to ensure that in granting the mortgage she knew what she was doing and wanted to do it.  It is therefore necessary to refer in some detail to those circumstances.  First, it is important to emphasise that the Property stood charged under the Luk Fai mortgage with the repayment to Luk Fai of the $6.5 million that had been advanced by Luk Fai to the appellant.  It has rightly not been suggested that the Bank had any reason to look behind the Luk Fai mortgage or to ask itself why the appellant had wanted the $6.5 million from Luk Fai or what she had done with it.  There is no evidence that the Bank knew anything much about the 1994 mortgages or about Mr Li or knew anything at all about the appellant’s relationship with him. 

19.  In July 1996 Sunny made an application to the Bank for credit facilities.  The Bank knew that Mr Ip and his sister were Sunny’s directors.  Mr Ip had been a client of the Bank for some two years and was regarded by the Bank as a person of financial ability who “should have no problem with repayment”.  On an application form dated 15 July 1996 the credit facility being requested was noted as “Fixed 4.5 million, L/C 3 million, T/R (90 days) 2 million”.  The appellant’s name “Li Sau Ying” was given as “the owner of mortgaged property”.  A Bank document dated 16 July 1996 addressed to Tsang, Chan & Wong, the Bank’s solicitors, referred to the appellant as the mortgagor, identified the Property as the property proposed to be mortgaged and referred to $4.5 million as the “instalment loan” and to “Banking Facilities” of $2 million.  Sunny was referred to as the “Principal Party”.  The document was attached to a printed list of conditions.  These included the following:

“(B)     The Mortgagor(s) and the Principal (if any) are requested to acknowledge in writing that the banking facilities available to it/them shall be limited to the extent of HKD 6,500,000 only.”

Mr Ip and his sister were named as guarantors of Sunny’s indebtedness to the Bank. 

20.  On 3 September 1996 Luk Fai’s solicitors wrote to Tsang, Chan & Wong stating that $6.5 million would be needed to redeem the Luk Fai mortgage.  On the same date an Extraordinary General Meeting (“EGM”) of Sunny passed a resolution authorising Tsang, Chan & Wong “to pay the sum of $6.5 million being the mortgage money granted by the Bank” to Luk Fai in redemption of the Luk Fai mortgage.  On the same date the appellant and Sunny sent a note to the Bank acknowledging that the general banking facilities granted to Sunny by the Bank were limited to $6.5 million “despite the fact that we have executed an ‘all money’ legal charge in your favour …”  This note satisfied the Condition B referred to above. 

21.  But the mortgage (dated 4 September 1996) purported to secure “… all sums of money now or hereafter owing …” to the Bank by Sunny and purported to afford Sunny “general banking facilities to whatever extent [the Bank] may at its absolute discretion determine from time to time”.  And a document dated 5 September 1996 signed both by the appellant and by the Ips on behalf of Sunny was expressed to agree (inter alia) to the mortgage securing facilities to Sunny of up to $7.5 million. 

22.  After the 1996 mortgage had been executed the Bank made available $6.5 million to redeem the Luk Fai mortgage and that was duly done.  Here, too, it should be noted that the redemption figure of $6.5 million showed that the interest on the $6.5 million advance from Luk Fai must have been paid.  The evidence does not disclose who paid it.  If it was not the appellant it must have been Mr Li.  The appellant and Sunny acknowledged receipt from the Bank of $4.5 million to be repaid by 240 monthly instalments (inclusive of interest) and that the additional $2 million would be repayable on demand and would carry interest at the Bank’s current rate for the time being.  The evidence suggests that, as between the appellant and Mr Li, it was Mr Li who was to pay the instalments in reduction of the $4.5 million loan.  But there is no evidence that the Bank knew anything about Mr Li’s involvement.  There is no evidence as to who was to be responsible for keeping down the interest on the $2 million.  It should be noted, however, that logically the obligation to pay the interest on $3.2 million of the $6.5 million should have been the appellant’s.  In the event it seems that none of the 240 instalments were paid and no interest on the $2 million was paid.  By 31 December 1998, when the 1998 mortgage was granted, the state of account, according to para. 33 of the witness statement dated 19 September 2000 made by Mr Wong Lau Ping, the manager of the branch of the Bank where the account was held, was that $8,212,768 odd was the outstanding principal owing to the Bank and the accrued interest owing was $1,249,592 odd. 

23.  The implications of the figures referred to in Mr Wong’s para. 33 are not easy to follow.  The original indebtedness secured by the 1996 mortgage was $6.5 million.  Two years and four months interest (i.e. interest up to 31 December 1998) on that sum at, say, 10 percent compounded with monthly rests would have been substantially more than $1,250,000.00.  But how the principal sum outstanding increased from $6.5 million to $8.2 million or thereabouts is not explained.  Mr Sarony SC, for the appellant, suggested that the explanation must be that Sunny had been permitted by the Bank to make additional drawings on the general credit facility.  But the 5 September 1996 document only authorised an extension up to $7.5 million.  The Deputy Judge found himself unable to understand the implications of the 5 September 1996 document (see para. 54 of his judgment) and I have sympathy with him.  He proceeded to consider the issues without any further reference to that document and, in effect, on the footing that the 1996 mortgage secured simply the $6.5 million and the interest thereon.  I think the Deputy Judge was justified in taking that approach.  There is a lack of any evidential explanation of the figures mentioned in para. 33 of Mr Wong’s witness statement.  That there were additional advances to Sunny is a possible explanation.  Another possible explanation is that the $8,212,768.00 figure resulted from the capitalisation of some part of the interest on all or some part of the $6.5 million.  Moreover, there is no evidential explanation of how the 5 September 1996 document came to be signed by the appellant.  In these circumstances, I propose to take the same course as the Deputy Judge and to treat the 1996 mortgage as a mortgage to secure the $6.5 million and the interest thereon. 

24.  As to the 1998 mortgage, executed on 31 December 1998, the Deputy Judge accepted Winnie Chan’s evidence that she had explained the document to the appellant before the appellant signed it.  There were no other relevant findings regarding the 1998 mortgage.  I have explained the reason for this in para. 7 above.  The 1998 mortgage, a second mortgage, was part of a general restructuring of banking facilities to be made available to Keland Ltd (formerly Fairwealth Ltd).  A letter dated 31 December 1998 from Tsang, Chan & Wong to their client, the Bank, said that the 1998 mortgage was to secure banking facilities to the extent of $9,350,000.00 and interest thereon.  And in a letter of the same date to the appellant, countersigned by her, the Bank said that her maximum liability under the mortgage was to be limited to $9,350,000.00.  The 1998 mortgage itself was expressed to secure whatever sums might be owing by Keland to the Bank but the width of that language would, unless the limit of $9,350,000.00 were subsequently extended by the appellant, have been subject to that limit.  And in the event of a sale of the Property, the liability of the appellant was limited to the amount of the net proceeds of sale. 

25.  It seems likely that the $9,350,000.00 to be secured under the 1998 mortgage was intended to be applied to redeem the 1996 mortgage.  But nothing turns on that for it is not clear what, if any, part of the $9,350,000.00 was ever drawn down or, if it was drawn down, what it was used for. 

26.  As already stated (see para. 5 above) the Bank, as mortgagee, sold the Property for $7,500,000.00 in May (or June) 2000.  It purported to do so in exercise of the power of sale conferred by the 1996 mortgage and the 1998 mortgage.  I must now turn to the two issues. 

Undue influence

27.  In my respectful opinion both the Deputy Judge and Le Pichon JA over-complicated the undue influence issue.  The pleaded allegation was that both the 1996 mortgage and the 1998 mortgage had been procured by the undue influence of the Bank and/or Mr Li (see paras 7A and 12A of the Re-amended Statement of Claim).  There was no possible case for alleging undue influence on the part of the Bank and both at trial and on appeal the appellant sought to establish undue influence on the part only of Mr Li.  The Deputy Judge thought that because the appellant reposed trust and confidence in Mr Li a rebuttable evidential presumption arose that the 1996 mortgage had been procured by Mr Li’s undue influence.  The evidence, he held, had not rebutted that presumption.  Le Pichon JA, on the other hand, concluded that the evidence did not justify the conclusion that the relationship between the appellant and Mr Li was such that she reposed trust and confidence in him.  So she disagreed that any presumption of undue influence arose and concluded that the evidence had failed to establish the existence of influence or of its misuse. 

28.  This is not a case in which the relationship between the appellant and Mr Li was one of the well established categories of relationship where the relationship as such would lead the court to presume that undue influence had been exerted unless evidence was adduced proving the contrary (see Slade LJ in Bank of Credit and Commerce International v Aboody [1990] 1 QB 923 at 953).  It was not, using Slade LJ’s categorisation, a Class 2A case.  Both the Deputy Judge and Le Pichon JA asked themselves whether the case was a Class 2B case, i.e. a case in which on its particular facts a relationship not falling within the Class 2A category had been shown to have become such as to justify the court in applying the same presumption (Slade LJ at p.953).  Lord Browne-Wilkinson in Barclays Bank plc v O’Brien [1994] 1 AC 180 adopted Slade LJ’s categorisation of Class 2A and Class 2B cases and said that:

“… In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.”  (p.189)

29.  Lord Browne-Wilkinson’s approach in O’Brien was broadly endorsed and built upon by the House of Lords in Royal Bank of Scotland plc v Etridge (No. 2) [2002] 2 AC 773 but the use of the expression “presumed undue influence” and, in particular, its use in connection with Class 2B cases was deprecated.  Lord Nicholls of Birkenhead at paras 16 and 17 made clear that the expression connoted no more than a shift in the evidential burden of proof, “the equitable counterpart of common law cases where the principle of res ipsa loquitur is invoked”.  Lord Hobhouse of Woodborough said, at para. 98 that the Class 2A and Class 2B categorisation derived from the Aboody case had been “the source of much of the confusion which has ensued” and, at para. 105, that “the language of presumption is likely to confuse rather than assist”  He said that:

“… If at the end of the trial the wife succeeds on the issue of undue influence, it will be because that is the right conclusion of fact on the state of the evidence at the end of the trial, not because of some artificial legal presumption that there must have been undue influence.”  (para. 106)

Lord Hobhouse concluded that:

“… the so-called Class 2(B) presumption should not be adopted.  It is not a useful forensic tool.”  (para. 107)

And I expressed similar views at para. 161:

“For my part, I doubt the utility of the Class 2B classification …  The presumption in Class 2B cases, … is doing no more than recognising that evidence of the relationship between the dominant and subservient parties, coupled with whatever other evidence is for the time being available, may be sufficient to justify a finding of undue influence on the balance of probabilities …”

30.  The strong message from Etridge therefore is that, particularly in Class 2B cases, concentration on a so-called presumption of undue influence is likely to detract from the real issue, namely, whether the evidence justifies a conclusion that the impugned transaction was procured by undue influence.  The present case is a very good example of the need for that message.  I would have no difficulty in accepting, on the totality of the evidence in this case, that by 1994 the appellant had been brought to a high degree of trust and confidence in Mr Li’s financial judgment and business acumen.  The consequence of that trust and confidence was that she allowed him to run up a trade debt in excess of $1 million, lent him a further $2 million and entrusted him with $750,000.00 to invest.  The 1994 mortgages, whereby she charged her property with the repayment to the mortgagees of advances of $6.5 million, some $3.3 million of which represented the unsecured interest free loan by her to Mr Li, might very well be regarded as procured by Mr Li’s undue influence.  Similarly the appellant’s agreement to entrust $750,000.00 of her money to Mr Li for use in his Hillwood Road development on vague and, in the event, unrealised promises about the issue to her of shares might be regarded as procured by his undue influence.  It is clear, however, that she could not have set aside the 1994 mortgages without first returning to the mortgagees the advances that, via Fairweath, they paid to her, i.e. the $3.2 million expended in redeeming the NCB mortgage and the $3.3 million less costs that they paid directly to her.  She, not Mr Li, was the effective borrower. 

31.  The Luk Fai mortgage provided the money to redeem the 1994 mortgages.  It is irrelevant to ask whether her grant of that mortgage was procured by undue influence.  Even if it was, she could not have rescinded it without repaying Luk Fai the $6.5 million they had advanced to her.  In any event, whatever the degree of trust and confidence that by 1995 the appellant retained in Mr Li, the shift from Yu Tai and Sinohill as mortgagee/lenders to Luk Fai has no signs of being a shift that represented an unconscionable abuse by Mr Li of that trust and confidence. 

32.  Nor is the 1996 mortgage, accompanied as it was by an express limitation of the facility to the sum of $6.5 million, any more indicative of undue influence than was the Luk Fai mortgage.  The whole of the $6.5 million was applied in the discharge of the Luk Fai mortgage.  The rate of interest under the 1996 mortgage was less than that payable under the Luk Fai mortgage.  So, whatever influence Mr Li may have had over the appellant, it is, in my opinion, impossible to regard the use of that influence in persuading her to switch from Luk Fai to the Bank as undue. 

33.  The concentration in the courts below on whether there was trust and confidence reposed by the appellant in Mr Li sufficient to give rise to a Class 2B presumption of undue influence has, in my opinion, served to distract attention from the real issue, namely, whether in advising, or persuading, the appellant to enter into the 1996 mortgage in place of the Luk Fai mortgage Mr Li was unconscionably abusing the trust and confidence she had in him.  On any objective view of the circumstances pertaining in 1996 and a comparison of her position under the 1996 mortgage with her position under the Luk Fai mortgage, he was not.  This is a case in which the evidence does not justify a finding that the 1996 mortgage was procured by Mr Li’s undue influence. 

34.  I do not wish to leave this issue without expressing the hope that in future cases, where undue influence has to be proved but where the relationship between the parties is not a relationship that falls within Slade LJ’s Class 2A category, the parties will concentrate on whether the evidence justifies the inference that, on a balance of probabilities, the impugned transaction was procured by undue influence, that is to say, by an abuse by the allegedly dominant party of the trust and confidence reposed in him by the allegedly subservient party.  References in such cases to, and attempts to invoke the assistance of, an alleged evidential presumption of undue influence are, in my opinion, likely to be, as they have been in this case, a source of confusion and an impediment to the evaluation of the available evidence. 

The steps the Bank should have taken

35.  References to a bank or other mortgagee being “put on inquiry” should be used or treated with caution.  Where the issue is whether the title of a purchaser, including a mortgagee, is subject to some prior equitable interest of which the purchaser was unaware when he acquired his title, the question will be whether the purchaser had “constructive” notice of that equitable interest.  The answer to that question will, or may, depend on whether the purchaser was “put on inquiry”.  If the purchaser was “put on inquiry”, notice may be attributed to him of whatever interest he would have found out about if he had made proper inquiries.  But this meaning of “put on inquiry” is inappropriate where the question is not whether a purchaser had notice of the equitable interest of some third party but is whether a purchaser can safely rely on the vendor’s, or mortgagor’s, apparent consent to the transaction.  There is always a conceptual possibility that an apparent contractual consent may have been procured by an impropriety, such as misrepresentation or undue influence, for which a third party is responsible.  If the purchaser or mortgagee knows that the consent has been thus improperly procured, the vendor/mortgagor may be entitled to rescind.  But what if the purchaser/mortgagee does not know of the impropriety?  Are there any circumstances, and if so what circumstances, in which knowledge of the impropriety can be attributed to the purchaser/mortgagee?

36.  This was the question sought to be answered in O’Brien and in Etridge.  In O’Brien Lord Browne-Wilkinson spoke of the mortgagee being “put on inquiry”.  In Etridge Lord Nicholls of Birkenhead described that as a “misnomer” (see para. 44).  He said:

“… In the present type of case, the steps a bank is required to take, lest it have constructive notice that the wife’s concurrence was procured improperly by her husband, do not consist of making inquiries.  Rather, O’Brien envisages that the steps taken by the bank will reduce, or even eliminate, the risk of the wife entering into the transaction under any misapprehension or as a result of undue influence by her husband.  The steps are not concerned to discover whether the wife has been wronged by her husband in this way.  The steps are concerned to minimise the risk that such a wrong may be committed.”  (para. 41)

Lord Nicholls then went on to consider what steps a mortgagee bank ought to take in order to minimise the risk to which he had referred.  He gave the answer in para. 54:

“The furthest a bank can be expected to go is to take reasonable steps to satisfy itself that the wife has had brought home to her, in a meaningful way, the practical implications of the proposed transaction.  This does not wholly eliminate the risk of undue influence or misrepresentation.  But it does mean that a wife enters into a transaction with her eyes open so far as the basic elements of the transaction are concerned.”

37.  To the same effect, at para. 147, I said:

“In these circumstances the bank would be ‘put on inquiry’, as Lord Browne-Wilkinson put it.  But ‘on inquiry’ about what?  Not about the existence of undue influence, for how could any inquiry reasonably to be expected of a bank satisfy the bank that there was no undue influence?  ‘On inquiry’, in my opinion, as to whether the wife understood the nature and effect of the transaction she was entering into … What Lord Browne-Wilkinson had in mind was that the bank should be expected to take reasonable steps to satisfy itself that she understood the transaction she was entering into.” 

And Lord Hobhouse of Woodborough, at para. 111, referred to “the reasonable steps to be taken by a lender who had been put on inquiry” (emphasis added). 

38.  The Deputy Judge, in my opinion, misdirected himself as to the steps to be taken by the judge.  In para. 137 he said that:

“The burden is on the Bank to establish that it brought home to the Plaintiff the risks she would be running if she granted the proposed mortgage.” 

and in para. 141, that:

“… I do not think that merely explaining the salient terms of the mortgage was enough to bring home to the Plaintiff the risks she was running.  The risk was that the people behind Sunny would make additional borrowings behind her back for which she would be liable and for which her property would be charged.  A mere explanation of the terms does not necessarily bring home the risks which flow from those terms.” 

These passages go beyond requiring the Bank to take “reasonable steps” to bring the appellant to an understanding of the implications of the mortgage.  They appear to require the Bank actually to succeed in doing so. 

39.  In my opinion, on the authority of Etridge, the standard required of a mortgagee placed “on inquiry” is to take “reasonable steps”.  What are “reasonable steps” must depend on the facts of each case.  In the present case it is of importance that the facility granted to Sunny by the 1996 mortgage was limited by the 3 September 1996 side letter to $6.5 million, a sum that to the knowledge both of the appellant and of the Bank was to be applied in redeeming the Luk Fai mortgage.  The Deputy Judge was wrong in referring to a “risk” that Sunny would make additional borrowings behind the appellant’s back.  Even if the 5 September 1996 side letter is treated as contemporaneous, the additional drawings could not exceed the $6.5 million by more than $1 million.  And the appellant had consented to that addition. 

40.  The Deputy Judge found that Winnie Chan had explained to the appellant the salient features of the 1996 mortgage.  She had done so on behalf of the Bank and her doing so constituted, in my opinion, “reasonable steps” in the circumstances of this case to satisfy the Bank that the appellant understood the implications of the transaction. 

41.  In Etridge Lord Nicholls said that a bank would be “put on inquiry” not only in a case where a wife was becoming a surety for her husband, or his company, but in every case in which the relationship between the surety/mortgagor and the principal debtor was “non-commercial” (see paras 49 and 87).  It must be borne in mind, however, that the relationship between the surety and the principal debtor must be looked at with the eyes of the bank.  The bank would generally, but not always, know whether the surety was the wife of the principal debtor, its customer.  Some wives, however, do not take their husbands’ surnames and the concept of a “non-commercial” relationship is inherently imprecise.  It is certainly not necessary for a proposed mortgagee to make inquiries about the relationship between its principal debtor and the proposed surety/mortgagor before deciding on the steps it should take to satisfy itself that the surety understands the transaction he or she is entering into.  Nothing Lord Nicholls said in Etridge suggests the contrary.  And for a bank/mortgagee to make inquiries of that character would in most cases be an unwarrantable impertinence. 

42.  In the present case there was nothing sufficient, in my opinion, to put the Bank “on inquiry”.  The 1996 mortgage, with the side letter limitation of $6.5 million, simply replaced the Luk Fai mortgage.  The 5 September 1996 side letter limitation of $7.5 million, apparently allowing Sunny to draw on the facility for a further $1 million, might have raised an eye-brow or two, but nothing seems to have been made of this at trial or in the Court of Appeal.  Whatever the explanation for or implications of that side letter, it cannot be prayed in aid for the first time in this Court in order to repudiate an otherwise unexceptionable transaction. 

43.  In my opinion Le Pichon JA and the Court of Appeal came to the correct conclusion in this case although I would not have drawn the inference from the resolution passed at the EGM of Sunny held on 3 September 1996 that Mr Li was necessarily a director of Sunny.  It is not particularly unusual for company resolutions to be passed that were strictly unnecessary.  Speculation about the reasons for the resolution are not, in my opinion, necessary for the purpose of reaching the conclusion that the Bank was not “put on inquiry” as to whether the appellant’s entry into the 1996 mortgage had been procured by some impropriety. 

44.  For these reasons I would dismiss this appeal.