WING HANG BANK LTD v. KWOK LAI SIM AND ANOTHER

CACV 94/2008 & CACV 96/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 94 AND 96 OF 2008

(ON APPEAL FROM HCMP NO. 4362 OF 2003)

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J U D G M E N T

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Hon Tang VP:

Introduction

1.  The defendants (“the sisters”) are the sisters of Kwok Wing Chiu (“the brother”).  The brother’s company, Forkids Toys Limited (“Forkids”), was in the toy manufacturing business.  The sisters lived with their mother who was 85 years old in the property referred to in para. 3(i) below.  The 1^st defendant was educated up to secondary school level and employed as a 2^nd class private secretary in the Housing Department.  The 2^nd defendant was a factory worker but had not worked for a number of years. 

2.  In 2003, Forkids wished to obtain banking facilities from the plaintiff (“the bank”) which it was willing to provide on the terms stated in the facilities letter of 13 June 2003.  The banking facilities included overdraft facilities of $500,000 as well as $2,200,000 for the opening of irrevocable letters of credit and other general banking facilities.

3.  The facilities were required to be secured by:

(i)  a first legal charge for all monies on Flat A, 25th Floor, Tower 1, Sau Ming Court, Yue Xiu Plaza, No.9 Ning Yuen Street, San Po Kong (the property), which was owned by the sisters.

(ii)  a joint and several guarantee to be executed by the brother and his wife in favour of the bank also for all monies.

Background

4.  An all monies first legal charge (subsequently dated 24 June 2003) was executed by the sisters on 20 June 2003.  By the legal charge the sisters also undertook unlimited personal liabilities to the bank.  The bank was represented by Messrs. Tony Kan & Company (the 3^rd party) in the transaction.  The 3^rd party admitted that it also acted as the sisters’ solicitors.  In that latter capacity the 3^rd party was concerned only with their interests, per Lord Nicholls of Birkenhead in Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773 at para. 74.

5.  In this action, the bank claimed against the sisters the sums of HK$2,400,040.02 and USD 31,125.30, interest thereon and vacant possession of the property.

6.  The sisters claimed that they had been induced by the misrepresentation of the brother to charge this property as security for his company and sought by counterclaim to set aside the legal charge as against the bank.  The misrepresentation relied on was that the sisters would incur no personal liability and that their liability would be limited to the property.  The sisters also sought to set aside the legal charge for similar misrepresentation by the bank or the 3^rd party as the bank’s agent.  In 3^rd party proceedings against the 3^rd party the sisters claimed that the 3^rd party was in breach of their duty of care as their solicitors and claimed as against them a declaration that they were entitled to be indemnified as against the bank’s claim.

7.  Yam J held after trial:

“99.   (i)    Both the Bank and the solicitor had misrepresented to the sisters and had given them the wrong impression that their liability would only be limited to the property only.

(ii)   Those misrepresentations were made in the documents presented to the sisters just before their execution thereon and they included :

(a) the Facility Letter of the Bank to the borrower;

(b) the instructions letter of the Bank to the solicitors together with the document purporting to furnish information to the solicitors for the purpose of advising and discussing the same with the sureties;

(c) the warning notice;

(d) the ‘Advice to seek independent legal advice by the surety’;

(e) the 2 confirmation letters ‘確認信’ signed by the surety to the Bank and the solicitors respectively;

(f)  the confirmation letter signed by the guarantors to the solicitors respectively; and

(g) the title of the deed ‘Legal Charge’.”

The learned judge was of the view that the legal charge should be renamed “a legal charge and a personal guarantee”.

8.  In para. 92, he found that when the sisters signed the security documents on 20 June 2003:

“92.   …the misrepresentation made by the brother beforehand were all still operating on the minds of the sisters.”

9.  Yam J dismissed the bank’s claim, set aside the legal charge, and entered judgment for the sisters against the 3^rd party.

The appeal

10.  This is the appeal by the bank and the 3^rd party.

11.  The appeal is principally concerned with the brother’s misrepresentation and its consequence as well as the 3^rd party’s duty to the sisters as their solicitors.  Although in para. 81 of the judgment the learned judge has not included misrepresentation by the brother as one of the issues relied on by the sisters, it is clear, from other passages in the judgment and the parties’ written submissions below, that it was a live issue.  Indeed, ground 5 of the bank’s Amended Notice of Appeal is predicated on the learned judge having found that the sisters had been misled by the misrepresentation of the brother. 

12.  Given the finding of misrepresentation by the brother, it is necessary to consider whether the misrepresentation had been dispelled by advice given to the sisters by the 3^rd party.  This is independent of whether or not there were similar misrepresentations by the bank or the 3^rd party.  It was the 3^rd party’s case that Ms Seatwo, a partner, had clearly explained to the sisters that they would incur unlimited personal liability under the legal charge.  However, as will be discussed below, the 3^rd party’s liability to the sisters will depend on whether it was in breach of its duty of care to the sisters.

13.  I say at the outset that I regard the claim for misrepresentation against the bank as misconceived.  It is common ground that the sisters were represented by the 3^rd party in the transaction.  It was the duty of the 3^rd party as the sisters’ solicitors to explain those documents to the sisters.  If the 3^rd party had misrepresented the true effect of any of these documents to the sisters, the sisters’ redress would be against the 3^rd party for breach of their duty of care towards them.  I also say at the outset that it is clear from the content of the legal charge that the sisters were undertaking unlimited personal liabilities in respect of Forkid’s liability to the bank.  The legal charge also expressly provided that (18.02(i)):

“as between the Mortgagor and the Lender, the Mortgagor shall be deemed a principal debtor in respect of the Secured Indebtedness;”

It would be misleading to rename the document, as suggested, “a legal charge and a personal guarantee”.

14.  By letter dated 18 June 2003, the bank requested the 3^rd party:

“… to carry out the necessary investigation and prepare a First Legal Charge and a Personal Guarantee in favour of (the) bank”. 

15.  The 3^rd party was also requested to:

“…… provide the necessary information and advice to (the sisters) and follow the relevant procedures to ensure that the security provided by (them) is not liable to be set aside on grounds of undue influence. Accordingly you are hereby requested to act for the potentially unduly influenced party in addition to acting for the bank.”

16.  The bank’s action was prompted by the decision of Etridge (No 2), where the House of Lords held that in any case where the relationship between the surety and the debtor is non-commercial, unless the creditor takes reasonable steps to bring home to the surety the risks involved, the creditor may be held to have constructive notice if the surety had been induced by the undue influence, misrepresentation or other wrong doing of the debtor to stand as surety.  However, ordinarily the bank should be able to rely upon confirmation from a solicitor, acting for the surety, that he has advised the surety appropriately.  Furthermore, unless there is any real risk of conflict of interest, the solicitors acting for the surety may be the solicitors acting for the bank as well as the debtor. 

17.  As noted, the protection extended beyond undue influence and included other wrongdoings such as misrepresentation.  Lord Nicholls explained (unless otherwise stated, all citations are from Etridge (No.2)):

“42 … The protection had to extend also to any misrepresentations made by a husband to his wife. In a situation where there is a substantial risk the husband may exercise his influence improperly regarding the provision of security for his business debts, there is an increased risk that explanations of the transaction given by him to his wife may be misleadingly incomplete or even inaccurate.”

18.  Lord Nicholls said if a bank wishes to be protected against constructive notice of circumstances giving rise to a claim for rescission by the surety, it should:

“50  … insist(s) that the wife attend a private meeting with a representative of the bank at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice. In exceptional cases the bank, to be safe, has to insist that the wife is separately advised.”

However,

“56  … a bank should be able to rely upon confirmation from a solicitor, acting for the wife, that he has advised the wife appropriately.

57   The position will be otherwise if the bank knows that the solicitor has not duly advised the wife or, I would add, if the bank knows facts from which it ought to have realised that the wife has not received the appropriate advice. In such circumstances the bank will proceed at its own risk.”

19.  The bank’s request followed the advice of the Hong Kong Association of Banks in its circular to members dated 28 April 2003.  The circular advised that in the event a bank wishes the solicitors to also advise the wife, the bank should supply the solicitors with information regarding the borrowers’ accounts to enable the solicitors to pass the necessary information onto the potentially unduly influenced party.  The circular went on to say:

“Members should also note that the Law Society has now issued detailed Guidelines to solicitors dealing with how to handle transactions where the possibility of undue influence may arise. These Guidelines broadly require either that (i) the solicitor has received a duly signed warning notice from the bank; or (ii) the solicitor has arranged for a warning notice to be duly signed by the potentially unduly influenced party.

In cases where the solicitor is acting for both the bank and the potentially unduly influenced party, the bank shall ensure that the warning notice is received by the solicitor at least one working day prior to the execution of the loan and security documentation by the potentially unduly influenced party.

In order to avoid the risk that the potentially unduly influenced persons may challenge the validity of the security on the basis that the relevant persons did not have sufficient time to seek independent advice, members are encouraged to arrange for the relevant warning notices to be signed at the earliest possible time and to have the duly signed warning notices sent to the solicitor together with the instructions letter. Alternatively members may arrange for their solicitors to handle execution of the warning notice. There are two forms, respectively for (i) when solicitor is acting for lender only (Appendix B) and (ii) when solicitor is acting for lender and the potentially unduly influenced party (Appendix C). Specimens of the forms of warning notices (both in English and Chinese) (which can be varied to reflect the particular circumstance of the case) are annexed for members' information.”

20.  In this case the warning notice Appendix C was used.  It reads:

“1. The Mortgagor/ the Borrower have applied to the Lender for banking facilities/mortgage loan to an extent of HK$2,700,000.00 to be granted to the Mortgagor/and the Borrower on the security of a mortgage to be taken out on the Property.

2.  Before you sign the mortgage and the other security documents which you have to sign if you go on with the transaction you should instruct a solicitor to protect your interests and to ensure that your rights and liabilities under the security documents are properly protected.

3.  YOU ARE RECOMMENDED TO INSTRUCT YOUR OWN SOLICITOR who will be able at every stage of the transaction to protect your interest and to give you independent legal advice.

4.  You may also instruct the Lender's solicitors to advise you in this transaction. But if a conflict arises between you and the Lender and the other party to the transaction, the Lender's solicitors will not be able to protect your interests and you will then have to instruct your own solicitor, in which case the total fees you will have to pay may be higher than the fees which you would have paid had you instructed your own solicitor in the first place.

5.  Although the Lender's solicitors will be providing you with the financial information of the Borrower, the Mortgagor, the Guarantor and any co-Borrower, co-Mortgagor and co-Guarantor provided by the Lender, YOU ARE STRONGLY ADVISED to obtain the financial information of the Borrower, the Mortgagor, the Guarantor and any co-Borrower, co-Mortgagor and co-Guarantor and engage your own financial adviser to advise you on such financial information before signing and executing the security documents.

6.  Your liability under the Mortgage will be unlimited if you decide to go on with the transaction by signing and executing the Mortgage.

7.  You also have the choice not to proceed with the transaction in connection with the banking facilities/mortgage loan to be granted to the Mortgagor/Borrower.

8.  Please think carefully before deciding whether to instruct your own independent solicitor, or the Lender's solicitors to protect your interests and whether to proceed with the transaction. You are free to choose whichever option you prefer.

I/We acknowledge receipt of a copy of this warning and fully understand the contents thereof.”

21.  The request to the 3^rd party envisaged that the 3^rd party might act for the sisters as well as for the bank.  It is the 3^rd party’s case that it also acted for the sisters.

22.  The scope of the duties of the 3^rd parties’ towards the sisters can be gathered from the following passages in Lord Nicholls’ speech:

“64    I turn to consider the scope of the responsibilities of a solicitor who is advising the wife. In identifying what are the solicitor's responsibilities the starting point must always be the solicitor's retainer. What has he been retained to do? As a general proposition, the scope of a solicitor's duties is dictated by the terms, whether express or implied, of his retainer. In the type of case now under consideration the relevant retainer stems from the bank's concern to receive confirmation from the solicitor that, in short, the solicitor has brought home to the wife the risks involved in the proposed transaction. As a first step the solicitor will need to explain to the wife the purpose for which he has become involved at all. He should explain that, should it ever become necessary, the bank will rely upon his involvement to counter any suggestion that the wife was overborne by her husband or that she did not properly understand the implications of the transaction. The solicitor will need to obtain confirmation from the wife that she wishes him to act for her in the matter and to advise her on the legal and practical implications of the proposed transaction.

65   When an instruction to this effect is forthcoming, the content of the advice required from a solicitor before giving the confirmation sought by the bank will, inevitably, depend upon the circumstances of the case. Typically, the advice a solicitor can be expected to give should cover the following matters as the core minimum. (1) He will need to explain the nature of the documents and the practical consequences these will have for the wife if she signs them. She could lose her home if her husband's business does not prosper. Her home may be her only substantial asset, as well as the family's home. She could be made bankrupt. (2) He will need to point out the seriousness of the risks involved. The wife should be told the purpose of the proposed new facility, the amount and principal terms of the new facility, and that the bank might increase the amount of the facility, or change its terms, or grant a new facility, without reference to her. She should be told the amount of her liability under her guarantee. The solicitor should discuss the wife's financial means, including her understanding of the value of the property being charged. The solicitor should discuss whether the wife or her husband has any other assets out of which repayment could be made if the husband's business should fail. These matters are relevant to the seriousness of the risks involved. (3) The solicitor will need to state clearly that the wife has a choice. The decision is hers and hers alone. Explanation of the choice facing the wife will call for some discussion of the present financial position, including the amount of the husband's present indebtedness, and the amount of his current overdraft facility. (4) The solicitor should check whether the wife wishes to proceed. She should be asked whether she is content that the solicitor should write to the bank confirming he has explained to her the nature of the documents and the practical implications they may have for her, or whether, for instance, she would prefer him to negotiate with the bank on the terms of the transaction. Matters for negotiation could include the sequence in which the various securities will be called upon or a specific or lower limit to her liabilities. The solicitor should not give any confirmation to the bank without the wife's authority.

  66   The solicitor's discussion with the wife should take place at a face-to-face meeting, in the absence of the husband. It goes without saying that the solicitor's explanations should be couched in suitably non-technical language. It also goes without saying that the solicitor's task is an important one. It is not a formality.

67   The solicitor should obtain from the bank any information he needs. If the bank fails for any reason to provide information requested by the solicitor, the solicitor should decline to provide the confirmation sought by the bank.

68   As already noted, the advice which a solicitor can be expected to give must depend on the particular facts of the case. But I have set out this 'core minimum' in some detail, because the quality of the legal advice is the most disturbing feature of some of the present appeals. The perfunctory nature of the advice may well be largely due to a failure by some solicitors to understand what is required in these cases.”

23.  The critical issue between the bank and the sisters on appeal is whether there was a confirmation from the 3^rd party to the bank that the 3^rd party had advised the sisters appropriately.  If there was no confirmation or the confirmation was not sufficiently unequivocal such that the bank is deemed to have constructive notice of the wrongdoing of the brother, the legal charge may be rescinded.  In such event, although the bank might have redress against the 3^rd party, for example, for failing to advise the bank against accepting or acting on the legal charge, Mr Khaw, counsel for the 3^rd party has reminded us, no claim has been made by the bank against the 3^rd party in the present proceedings.  I express no view on any possible claim which the bank may have against the 3^rd party in separate proceedings. 

24.  By the letter of 18 June 2003, the bank also provided the 3^rd party financial information of the borrowers for the purpose of advising the sisters.  The information showed that the bank was proposing to provide a new facility to Forkids.  Presumably, because the borrower was a new customer, it was not then currently indebted to the bank.  So the indebtedness of the borrower was stated to be nil.  The bank also stated that it has no

“… belief or suspicion that the surety has been misled by the borrower or is not entering into the transaction of his own free will”.

25.  At that time the property was under mortgage to another mortgagee with approximately $53,000 remaining unpaid.  That had to be repaid before the sisters could give a first legal charge to the bank.  Thus, the brother paid off the earlier mortgage.  This was the basis of an argument faintly advanced on behalf of the bank that the provision of the security by the sisters was made in consideration of this payment and that it was a commercial arrangement.  There is no factual basis for this.  It is clear the discharge of the mortgage was made so that the property could be charged to the bank by way of first charge and not as inducement to or consideration for the sisters’ agreement to charge the property.  Moreover, the sisters regarded themselves liable to repay the brother although no repayment had been made.  I have no doubt that the bank was right to have treated the sisters as potential victims of wrongdoings by the brother and sought the protection of the prescribed procedure in Etridge (No.2).  Indeed, it was also the 3^rd party’s case that it had sought to comply with the requirements of Etridge (No.2).

26.  Following Etridge (No.2) the Law Society issued guidelines for its members; the revised version of the Law Society’s Guidelines (“the Guidelines”) is dated 19 May 2003.  There, the Law Society:

“3. … highlighted … the criticism by the House of Lords in (Etridge (No.2)) that the potentially unduly influenced parties have not been given sufficient time to consider their legal representation arrangements before executing the documents:”

so that

“b. when acting for both the lender and the potentially unduly influenced party, a solicitor should only proceed with execution of the documents if he has received a warning notice containing terms similar to the one attached to the Guidelines as Appendix C or has arranged for one to be signed at least one working day before execution of the documents.”

27.  After reminding the members of Lord Nicholls’ “core minimum”, the Guidelines went on:

“Proper attendance note

37.    The solicitor must make and keep a sufficiently comprehensive and contemporaneous note of the face-to-face meeting so that if the need should arise, he may use the note to refresh his memory of the meeting and the advice which he in fact gave. Where the solicitor is satisfied that the signed written confirmation by the surety on the advice given is a sufficiently comprehensive and contemporaneous note of the face-to-face meeting, he may adopt it as his attendance note. Where the solicitor makes and keeps an attendance note, he must check the note with the signed written confirmation by the surety on the advice given for accuracy and consistency.

Signed written confirmation by the surety on the advice given

38.    The solicitor should obtain written confirmation, in the appropriate language, signed by the surety on the detailed advice given. A sample written confirmation letter is attached to these Guidelines at Appendix D. The sample is not intended to be exhaustive and a solicitor is required to apply his professional judgment having regard to the facts and the documentation in each case in preparing the written confirmation by the surety.

Written confirmation to the lender

39.    The solicitor must not give any confirmation to the lender without the surety's authority.

40.    The solicitor's confirmation to the lender will depend on the terms of his retainer but should generally include:

·    the surety instructs him to advise on the transaction;

·    he has fully explained the nature and effect of the documents and the practical implications they will have for the surety;

·    he has also explained that the confirmation would have the effect that the surety should not be able to dispute the surety's binding obligation under the document; and

·    he has authority from the surety to issue the confirmation to the lender.

41.    A solicitor should not accept instructions to confirm to the lender that the solicitor has satisfied himself that the surety's consent has not been procured by undue influence (Etridge at paragraph 53).”

28.  Appendix D is the “Model letter by surety to solicitor where charging property to secure loan to borrower or his/her business”.  Appendix D reads:

“Before I/we executed the mortgage of the Property [and ] (‘the Security Document(s)’) to secure a loan/facility from [name of the mortgagee bank] (‘the Lender’) to [name of the borrower] (the ‘Borrower’), I/we attended a meeting with [name of the solicitor/solicitor's representative] at the offices of the Solicitors' Firm. The Solicitors' Firm has acted as my/our solicitors in connection with the Security Document(s). The only persons present at the meeting were [name of the solicitor/solicitor's representative] and myself/ourselves. The Borrower was not present at the meeting. At the meeting [name of the solicitor/solicitor's representative] confirmed the following things to me/us:

(1) The Lender requires that I am/we are given the advice as stated below so that, if I/we sign the Security Document(s) I/we will not be able to claim afterwards that I am/we are not legally bound by the Security Document(s).

(2) The main purpose of the meeting was to explain to me/us my/our liability under the Security Document(s) and to obtain my/our confirmation that I/we instruct the Solicitors' Firm to act for me/us in connection with the Security Document(s). I/We have been told that I/we did not have to instruct the Solicitors' Firm to act for me/us. I was/We were free to instruct another firm of solicitors if I/we wished.

(3) The Property is owned /will on completion of the sale and purchase be owned [in my/our sole name(s)] [in the Borrower's sole name] [in the joint names of myself/ourselves and [names of the other owners]] and I am/we are required to sign the Security Document(s) in favour of the Lender.

(4) The Lender had given to the Solicitors' Firm the following information:-

(a) The Lender has extended a [loan/ facility or facilities to the Borrower amounting to [HK$ ]. This means that the Borrower can borrow up to this amount from the Lender upon execution of the Security Document(s).

(b) The purpose of the loan / facility or facilities is [ ].

(c) [On [ ], the Borrower was indebted to the Lender in the amount of [HK$ ] [As at the date of the meeting, the Borrower did not owe any money to the Lender].

(d) The market value of the Property as at [ ] was [HK$ ].

The Solicitors' Firm had not independently verified the information. If I/we had any doubts or further enquiries about the information, I/we should approach the Lender directly or through the Solicitors' Firm

(5) A copy of the Security Document(s) was produced at the meeting. I/We have been asked to read them carefully and to ask any questions that I/we may have. [Name of solicitor/solicitor's representative] has explained that the following is a summary of the main provisions and implications of the mortgage, but does not cover everything:-

(a) The mortgage is [initially] required to give the Lender security for the loan/facility or facilities mentioned in Clause (4)(a) above to be provided to the Borrower.

However, [the mortgage will be on ‘all monies’ terms and my/our liability under the Security Document(s) will be unlimited and] the mortgage will also give the Lender security over the Property for:

(i)  any further loan or increased facility that the Borrower (individually or jointly with me/us or anyone else) may in future obtain from the Lender while the mortgage remains in existence, even if this is done without my/our knowledge or consent;

(ii)  any existing loans from the Lender to the Borrower (individually or jointly with me/us or anyone else), even if I/we do not know about them;

(iii) any existing or future loans that I/we may obtain (individually or jointly with anyone else) from the Lender while the mortgage remains in existence;

(iv) any sums owing to the Lender, at any time while the mortgage remains in existence, by any other person or company if I/we or the Borrower has already given, or shall in future give, a guarantee for those sums to the Lender, and even if the Borrower has given or shall give such a guarantee without my/our knowledge and consent;

(v) interest on all such sums as charged by the Lender;

(vi) [anything else]

(b) According to the terms of the loan / facility or facilities, the Lender can demand repayment at [any time,] [on fixed dates,] [by instalments,] [set out repayment requirements].

(c) During the subsistence of the mortgage, [I/we] [the Borrower] must:

(i)  keep the Property insured in accordance with the Lender's requirements;

(ii)  keep the Property in good repair;

(iii)    not make any structural alterations or changes of use without the Lender's consent;

(iv) not let the Property or take in lodgers without the Lender's consent;

(v) comply with all covenants and restrictions affecting the Property;

(vi) [anything else].

(d) The mortgage will give the Lender a [first] charge over the Property as security for all the sums mentioned in paragraph 5(a) above. [In addition, the mortgage will contain a covenant by me/us to pay all sums [without limit/up to a maximum of HK$[ ] plus interest charged by the Lender] falling within paragraph (a) above if the Borrower fails to pay them. This means that [without limit/up to the level referred to in paragraph (a) above] I/we will be a guarantor for the liabilities of the Borrower to the Lender, I/we will be personally liable for those sums, and I/we could be sued by the Lender for them. I/We could lose the Property [if the Borrower's business does not prosper], or if the Borrower fails to repay the Lender or if the borrowing is increased. This is because, if any loan repayment or interest charge is not paid on time, the Lender would be entitled to enforce the mortgage by taking court proceedings to evict me/us and any other occupiers from the Property and sell the Property in order to obtain repayment. If the value of the Property and my/our other assets is insufficient to meet those sums, I/we could be made bankrupt as well as losing the Property. The Lender could also appoint a receiver to take possession of the Property from me/us and any other occupiers.

(e) [The Lender reserves the right to transfer the benefit of the mortgage to another lender.]

(f)  [Any other features of the mortgage needing comment?]

(6) I/We can only be released from our obligations if the Lender consents.

(7) It is not advisable for me/us to make myself/ourselves liable for an unlimited amount as described in Clause (5)(a) above.

(8) I/We shall consider whether I/we have the financial ability to repay the Lender taking into account all relevant matters including my/our assets, liabilities and cash flow.

(9) The above legal advice relates to the effect of the proposed Security Document(s) and the types of risks that may arise. [However, the Solicitors' Firm is not qualified to assess the likelihood of those risks actually materialising. That depends largely on the financial standing and prospects of the Borrower [and his business], although I/we should also consider whether the sums secured could be repaid from the sale value of the Property and my/our other assets. Therefore, before I/we decide whether to agree to sign, [the Security Document(s)], I/we should get help on assessing the risks by taking advice on those important financial aspects from a certified public accountant or other qualified professional financial adviser who should be independent of the Borrower].

(10)   I/We do not have to agree to these arrangements at all if I/we consider that the risks are too great or if I/we think that these arrangements are of no advantage to me/us. If I am/we are generally willing but find particular terms unacceptable, it may be possible to negotiate variations of those terms with the Lender in order to make them acceptable to me/us. These decisions are mine/ours and mine/ours alone.

(11)   The Solicitors' Firm is also acting for the [Borrower] [and also for the Lender in an administrative capacity] but the Solicitors' Firm has given me/us this advice independently. Nevertheless I/we should consider whether I/we want further legal advice from a completely separate solicitor before I/we make a final decision in connection with the Security Document(s).

I/We in signing this letter

(a) acknowledge that I/we have been given, and have understood, this advice.

(b) confirm that I/we have decided, of my/our own free will, to enter into the mortgage and to execute the Security Document(s), I/we do not require the Lender to vary any of the terms, [I/we do not require any further legal advice], and I/we agree that the Lender may be told that I/we have received the advice in this letter, and

(c) confirm to the Lender that I/we have received this advice.

Countersigned by person giving the advice

I confirm that the above contains a comprehensive, correct and contemporaneous record of the meeting which took place between myself and [name of mortgagor[s]].

Signed

[Name of solicitor/solicitor's representative]

at [address of the Solicitors' Firm]”

20 June 2003

29.  The defendants were seen by Ms Seatwo of the 3^rd party in the evening of 20 June 2003 together with the brother and his wife.  According to Ms Seatwo, although she had arranged for a separate meeting with the 1^st and 2^nd defendants to be held on 20 June 2003 at 6.30 pm and with the brother and his wife at 6.45 pm, all four of them came to her office at about 7.15 to 7.30 pm.  She saw them together.  In her oral evidence Ms Seatwo said she did not see the need for her to see them separately.  (Transcript 197T) 

30.  At that meeting, the 1^st and 2^nd defendants signed:

1)   the facility letter, under the following words: 

“I/We acknowledge that the Bank have invited me/us to seek independent legal advice on this Facility Letter.  I/We confirm that I/we have taken such advice or I/we do not wish to seek independent legal advice despite every chance having been offered to me/us to do so.”;

2)   the warning notice (see para. 20 above); and

3)   the legal charge.

31.  As well as the following letters:

(a)  the letter addressed to the 3^rd party:

「致簡松年律師行：

關於： Flat A, 25th Floor, Tower 1 (Sau Ming Court),

Yue Xiu Plaza. No.9 Ning Yuen Street. Kowloon.

   本人 Kwok Lai Sim & Kwok Yuen Ping 現簽字確認 貴行已知會本人貴行亦同時是按揭銀行之代表律師。

   貴行已將按揭合同內容（包括本人作為按揭人的法律責任）向本人解釋清楚，雖然 貴行已積極勸籲本人對於有關之按揭合同之內容及作為按揭人之法律責任應尋求獨立法律意見以保障本人作為按揭人的權益，及已給予本人在簽署按揭合同前充足機會尋求獨立法律意見，本人仍認為沒有此必要，決定簽署上述文件。

按揭人 ：(the sisters’ signature)

日期    ：20 JUN 2003」

(i)  This letter stated incorrectly that the sisters had been given:

“… sufficient chance to seek independent legal advice before I signed the Mortgage”. 

(ii)  Contrary to para. 38 of the Guidelines, this letter is not a:

“… written confirmation, … signed by the surety on the detailed advice given.” 

(iii) The letter compares poorly with Appendix D.  It merely states that the 3^rd party has clearly explained the content of the legal charge including the surety’s legal obligation as surety, which is insufficient in situations covered by Etridge (No. 2).

(b) The confirmation letter addressed to the bank:

「    致：永亨銀行

有關： 物業：  Flat A, 25th Floor, Tower 1 (Sau Ming Court)

Yue Xiu Plaza, No.9 Ning Yuen Street, Kowloon.

按揭人：Kwok Lai Sim & Kwok Yuen Ping

借款人：Forkids Toys Limited

1. 本人 / 我們 Kwok Lai Sim & Kwok Yuen Ping，茲同意將上述物業以法定押記／按揭抵押給 貴銀行,作為 貴銀行向上述借款人所提供或將提供的一般銀行授信的所有款項及債務的擔保。

2. 本人／我們聲明及確認，上述物業現時由本人／我們居住／佔用。

3. 本人／我們並聲明及確認，本人／我們為上述物業的唯一法定及實益擁有人；除本人／我們外,並無任何其他人擁有上述物業的任何權益。

4. 本人／我們確認，簡松年律師行為 貴銀行的代表律師，本人／我們在簽署本確認信前應就本信徵詢獨立法律意見，本人／我們清楚明白本確認信內容及法律效果,並同意確認簽署如下。

5. 本確認信以契約形式簽立。

按揭人簽署、蓋章及交付 ）

）

）(the sisters’ signature)」

It is relevant to note that para. 1 of this letter stated that the sisters agreed to charge their property as security for all the facilities provided or to be provided to the borrower.  It is silent on the sisters’ personal liability under the legal charge.  Para 4 states that the sisters acknowledged that the 3^rd party were the solicitors for the bank.  It does not say that the 3^rd party was also acting for the sisters.  Ms Seatwo has made two witness statements for the trial.  In neither of them did she say that she had told the sisters that the 3^rd party was their solicitors or that in that capacity the 3^rd party was concerned only with their interests.  Nor did she say so in her oral evidence.

32.  The sisters had not seen any of the documents before the meeting.  The meeting took place at about 7.15 pm-7.30 pm on a Friday.  It was a short meeting.  According to the learned judge the meeting

“78.   … took only 20 and at the most 30 minutes.”

The legal charge alone is 31 pages long.  While Ms Seatwo was intoning her explanation, the sisters were presented with the documents for the first time.  It was natural that their attention would be directed to the Chinese documents.  As noted the confirmation letter addressed to the bank (para. 31(b) above) merely stated that the property was charged for all monies and did not mention their personal liability.  In such circumstances, the 3^rd party cannot complain about the judge’s finding that the sisters had not understood everything being said.  

33.  Ms Seatwo’s evidence was that she had read the Guidelines before 20 June 2003.  (Transcript 225E)  However, the model letter Appendix D was not used.  There was no private meeting with the sisters where the brother was not present.  For this purpose, one can take the brother as the borrower although it was his company that was the actual borrower.  The warning notice was not signed one working day before the execution of the security document.  Nor does it appear that the sisters had been told that the bank required that they be given the advice so that if they signed the security documents, they would not be able to claim afterwards that they were not legally bound by them.  Nor did the 3^rd party seek authorisation from the sisters to give written confirmation to the bank.  Nor were the sisters advised that it was not advisable for them to make themselves liable for an unlimited amount.  Nor were they asked to consider whether they have the financial ability to repay the lender. 

34.  As Lord Hobhouse of Woodborough said in Etridge (No. 2) an essential feature of the  scheme where:

“… the bank requests the solicitor to give a certificate which the bank then treats as conclusive evidence that it has no notice of any undue influence which has occurred.”

……

116.    … is that the wife has to be aware of what is going on, that the bank is asking for the certificate and why, that she is being asked to instruct a solicitor to advise her and that she is being asked to authorise the solicitor to provide the certificate.”

35.  Mr Khaw for the 3^rd party relied on the fact that the learned judge found that:

“62.   … all witnesses did not deliberately lie to this court. …”

He submitted the learned judge ought to have accepted Ms Seatwo’s evidence that she had properly explained the effect of the legal charge to the sisters.  Ms Seatwo said in her witness statement (which stood as part of her evidence-in-chief):

“… Furthermore, I distinctly recall putting each of the documents I was explaining (in Cantonese) in front of the 1^st and 2^nd Defendants facing them so that they could read each document at the same time if they wished to.  I confirm that I filled out and completed the Attendance Note during the 20 June 2003 Meeting as and when I had explained each of the numbered points to the 1^st and 2^nd Defendants and after I was satisfied that they had understood me.”

Ms Seatwo described the attendance note as:

“… a comprehensive detailed and contemporaneous attendance note.”

She confirmed:

“… that I explained each of the points listed in paragraphs 1-12 of the Attendance Note …”

to the sisters.

No separate attendance note was kept of the meeting with the brother and the wife which took place at the same time.

36.  The numbered points in the attendance note included:

(a)  the surety’s liability was unlimited;

(b) financial information of borrower was provided by the lender;

(c) surety to independently verify financial information of the borrower;

(d) surety has free choice whether to provide security; and

(e)  surety confirms understanding of the matters covered.

The attendance note does not state that the sisters either wanted or consented to the 3^rd party acting for them as their solicitors.  I note the obvious good sense of para. 26 of the Guidelines which requires:

“… the surety must be given at least one working day after the signing of the Warning Notice at the solicitor’s office to consider the matter, including whether to instruct his own solicitor, before the face-to-face meeting.”

37.  It is true that the learned judge has said:

“62.   … all witnesses did not deliberately lie to this court. …”

However, the learned judge went on to say:

“62.   … However each one made his/her own emphasis on his/her own evidence.”

38.  The sisters’ evidence was that they had not been told that they would incur personal liability under the legal charge.  The learned judge said Ms Seatwo was just paying lip service to the Guidelines and that she:

“78.   … just rushed through the meeting in which there was just a gist explanation of all documents in one go …”

39.  There is also the clear finding at para. 92 of the judgment that when the sisters signed the document:

“92.   … the misrepresentation made by the brother beforehand were all still operating on the minds of the sisters.”

40.  Criticisms were made of the sisters’ credibility including the fact that when they first received the bank’s demand, they had not raised the question of misrepresentation in their replies.  That is so.  But the learned judge accepted the sisters’ evidence.  In any event, I cannot accept this is a sufficient reason for rejecting their evidence.

41.  I believe it was implicit in the judgment that the learned judge preferred the evidence of the sisters that they were not aware when they executed the legal charge that they would become personally liable.  I am of the view that that was because of the perfunctory way in which Ms Seatwo sought to discharge her Etridge (No. 2) duties.  I have set out in some length the various documents which the sisters were required to sign, none of which they had seen before, to show how inadequate was the 3^rd party’s attempt to comply with its responsibilities as solicitor of the sisters.  In my view, the 3^rd party was in breach of its duty to the sisters.

Financial information

42.  Prior to the meeting on 20 June 2003, as was her practice, Ms Seatwo had done a target on-line financial information search (target search) on the brother, the wife and Forkids.  The 3^rd party accepts that it was free to disclose the search result to the sisters.  Indeed, the costs of the search were charged to the sisters.  According to Ms Seatwo, the target searches were done principally to find out whether there were relevant bankruptcy proceedings or winding-up proceedings.  It appeared that from the searches ordered by her on 18 June 2003 that Forkids was the defendant in two High Court actions, four District Court actions and two Small Claim actions.  According to Ms Seatwo she could have obtained details about the High Court actions within half a day.  Had she done so, she would have discovered that not only was Forkids sued in one action for goods sold and delivered, it was being sued by its landlord for unpaid rent since 1 February 2003 amounting to $169,996.80.

43.  Ms Seatwo said she would have told the sisters had the search revealed that there were winding-up proceedings against Forkids or bankruptcy proceedings against the brother because they showed their inability to repay “beyond doubt”. 

44.  Ms Seatwo said in reply to a question put by the learned judge that even if she had known about the nature of the High Court actions, she would not have revealed them because she felt she was under no duty to do so.  (Transcript 240G)  (The transcript recorded her as saying she felt she was under a duty to disclose such information.  On listening to the recording it is clear she said she was under no duty to do so).

45.  Para. 31 of the Guidelines reminded solicitors that where they had financial information regarding the borrower from acting for the borrower, they may not disclose them to the surety without the permission of the borrower and that if there is a real risk of conflict of interest the solicitors must cease to act for the surety.  It is obvious that such financial information is relevant to the surety’s decision whether to provide the security. 

46.  Also para. 30 of the Guidelines provides that if the lender:

“… fails for any reason to provide information requested by the solicitor, the solicitor must decline to provide the confirmation sought by the lender.”

This also shows that financial information is highly relevant to the surety’s decision whether or not to provide the security.

47.  Here the bank was not aware of the proceedings against Forkids, but I believe had it known about them it would have to disclose them to the 3^rd party for disclosure to the sisters, as part of the requirement that the lender should provide relevant financial information. 

48.  Ms Seatwo said she would have told the sisters if there were bankruptcy proceedings against the brother or the wife or winding-up proceedings against Forkids.  She would have informed the bank too.  That must be right because such financial information is highly relevant to the risk of the transaction to the bank as well as to the sisters.  Indeed, Lord Nicholls’ core minimum is clear about the importance of the financial position of the borrower.  I cannot accept that Ms Seatwo was under no obligation to inform the sisters of the result of the target search.  Ms Seatwo’s duty was not confined to disclosure of information of winding-up or bankruptcy proceedings.

49.  The evidence of the sisters was that they were confident in the financial situation of their brother because he was living in a big flat and driving an expensive car.  In para. 9 of the 1^st defendant’s witness statement she said had she known that the brother was in debt and proceedings been brought against it, she and the 2^nd defendant would not have agreed to provide the security. 

50.  Ms Seatwo should have informed the sisters what she had obtained as a result of the target search.  She should have advised them that she could obtain relevant financial information of Forkids by simply searching the court files about the claims which had been brought against it.  In the circumstances of this case, had the true financial situation of Forkids been known, I am of the view, on balance of probabilities, that the sisters would not have agreed to provide a charge over the property.

51.  As noted, Ms Seatwo had not advised the sisters that it was against their interest to agree to an unlimited charge or that it was unwise of them to provide a personal undertaking to repay.  Had she done so, then it is unlikely they would not have understood that they would incur personal liability.

52.  To the extent that the solicitors have failed to discharge their duties to the sisters, they are liable to the sisters.  I will return to discuss the extent of the 3^rd party’s liability towards the sisters.

Constructive notice

53.  I turn to consider whether the bank could be said to have constructive notice of the misrepresentation by the brother.  That would depend on whether there was:

  “56  … confirmation from a solicitor, acting for the wife, that he has advised the wife appropriately.”  Per Lord Nicholls.

54.  It will be recalled that in the instruction letter of 18 June 2008, the bank requested the 3^rd party to:

“… provide the necessary information and advice to (the sisters) and follow the relevant procedures to ensure that the security provided by (the sisters) is not liable to be set aside on grounds of undue influence. Accordingly you are hereby requested to act for the potentially unduly influenced party in addition to acting for the bank.”

55.  By letter dated 24 June 2003, the 3^rd party wrote to the bank saying that they:

“… would like to confirm to you that the First Legal Charge of the above property has been duly executed by the Mortgagor and the Borrower at our office to our satisfaction.”

56.  Mr Chan submitted that the words quoted in para. 55 above is confirmation that the solicitors had properly advised the sisters. I am unable to agree.  The 3^rd party has stated that the documents had been “duly executed” to their satisfaction.  That relates to the execution of the document.  It is silent on whether the solicitors had given appropriate advice to the sisters.  So this letter on its own is not sufficient.  The 3^rd party did not inform the bank that the sisters had instructed them to advise them on the transaction.  Nor was any of the matters in para. 40 of the Guidelines covered.

57.  As noted, by the letter of 24 June 2003, the 3^rd party also returned the warning notice “duly signed” bearing the date of 20 June 0203.  The facility letter (referred to as the commitment letter) was also signed and returned.  However, neither document amounted to a confirmation that the 3^rd party had provided:

“……the necessary information and advice to (the sisters) and follow the relevant procedures to ensure that the security provided by (them) is not liable to be set aside …”

58.  I hold that the bank had constructive notice of the misrepresentation by the brother. 

Rescission

59.  In the circumstances of this case, I am of the view that the sisters are entitled to a rescission of the legal charge. 

60.  This is not a case where section 3 of the Misrepresentation Ordinance, Cap. 284 applies, because an award of damages against the brother would have been an empty remedy, and no court could have formed the opinion that it would have been equitable to exercise its power under section 3(2).  See per Roch LJ in TSB Bank plc. v Camfield & Anor [1995] 1 WLR 430 at 439. 

61.  Mr Chan relied on Bank of China (Hong Kong ) Ltd v Fung Chin Kan & Anor [2002] 5 HKCFAR 515 and submitted that in any event, the legal charge should be enforced to the extent of the value of the property, since the misrepresentation related only to the personal liability of the sisters.  In Fung Chin Kan, the property was under mortgage to one bank (Wing Hang Bank) but to obtain better terms, a new mortgage was sought from Bank of China.  It seems that the proceeds (or part of it) from the Bank of China mortgage was used to repay the Wing Hang Bank.  Bank of China and the surety had agreed that the mortgage should be limited to $3.3 million.  Bank of China instructed its solicitors accordingly.  Despite the instructions the solicitor prepared the legal charge under which the mortgagors were liable to the bank for an unlimited account.  Bank of China sued the mortgagors for $16.2 million and obtained judgment.  The mortgagors appealed, contending that their liabilities should be limited to $3.3 million.  The Court of Appeal allowed the appeal on the ground, inter alia, of misrepresentation and on a finding that the bank had failed in its duty to ensure that the mortgagors properly understood the terms of the legal charge.  On appeal, the Court of Final Appeal held that there was a collateral agreement or composite agreement under which the bank had agreed that the mortgagor’s exposure to financial risk should be limited to $3.3 million. 

62.  Litton NPJ said obiter that even if the Court of Appeal was correct about misrepresentation, they were wrong to have ordered rescission without

“62.   ‘… restitutio in integrum by repayment of $4 million to the bank’, since the bank had, by the transaction, relieved the respondents of their liability under the Wing Hang Bank mortgage.”

Since:

“63.   … On the respondents’ own case they are liable to the bank for $3.3 million. …”

he would give judgment to the bank for $3.3 million. 

63.  On the facts, Fung Chin Kan is clearly distinguishable.

64.  In Allied Irish Bank Plc v. Byrne [1995] 2 FLR 325, the wife was induced to mortgage her house as security for her husband's indebtedness by a false representation made by him that her liability, in reality unlimited, was limited to £35,000.  Ferris J held that the wife had the right in equity to set the charge aside as against her husband and that the bank had had constructive notice of her right.  Ferris J rejected the bank’s argument that the mortgage ought to be treated as good to the extent of £35,000, where:

“… a party who complains of having entered into a transaction on the basis of a misrepresentation is saying that if he had been aware of the truth, he would not have entered into the transaction. If this claim is upheld, the court seeks to put that party into the position in which he would have been if the representation had not been made. This involves ascertaining what the position would have been if the transaction had not taken place. It does not involve reforming the transaction to accord with the representation. The position might be different if Mrs Byrne had herself received the £35,000, but she did not, except as part of the conduit pipe through which this sum went to BCM Leisure Ventures Ltd. The equity which she asserts against the bank is the equity which, in my judgment, she had against Mr Byrne. It is difficult to see on what basis Mr Byrne could have required that, notwithstanding his misrepresentation, Mrs Byrne must accept liability for £35,000 even though she had, in the event, acquired no interest in the wine bar. The bank is, in my judgment, in no better position than Mr Byrne would have been and the transaction is therefore to be set aside against it in its entirety.”  At 354.

65.  Byrne was approved by the English Court of Appeal in TSB Bank plc..  There, the wife was induced to stand surety with her husband and to join in giving such security because of her husband's innocent misrepresentation that their maximum liability in respect of loans to his business was limited to £15,000, when in fact it was unlimited.  The bank advanced £30,000 to the partnership and subsequently made further advances.  The business venture failed and the bank claimed possession of the matrimonial home and repayment of the sums advanced.  The judge gave judgment for the bank against the husband in the sum of £47,315 and, having found that the wife had been induced to stand surety by her husband's innocent misrepresentation, gave judgment against her for £15,000.  The wife appealed.

66.  Nourse LJ said at 437:

“… I am of a clear opinion that, as the law must be applied in this court, the view of Ferris J. is to be preferred. In particular I think he was right, in a case where it is found, as here, that the wife would not have executed the legal charge if a limit higher than £15,000 had been proposed to her, to reject the suggestion that cases such as O'Sullivan v. Management Agency and Music Ltd [1985] Q.B. 428. (Mr. Blair relies also on Spence v. Crawford [1939] 3 All E.R. 271 and Cheese v. Thomas [1994] 1 W.L.R. 129) are authority for the proposition that the mortgage may be set aside on terms. I agree with Mr. Cherryman that those cases go nowhere near so far. The wife's right to have the transaction set aside in toto as against the husband is no less enforceable against the mortgagee.”

67.  I do not agree that the legal charge should be enforced to the extent of the value of the property.  From the authorities referred to, it is clear that if a misrepresentation is found, the court would put the parties in the position if the misrepresentation had not been made (i.e. the sisters were aware that they would have unlimited personal liability), not the position if the misrepresentation had been true (i.e. the sisters’ liability was restricted to the property).  There was no evidence that the bank would have agreed to a charge without personal liabilities.  The evidence suggests the contrary.  The sisters’ evidence which the judge accepted was that they would not have charged the property if they would have unlimited personal liability (Transcript page 21). In any event, in a case where the relationship between the borrower and surety is uncommercial, one should be slow to hold that the surety would have entered into the transaction had they been aware of the true position.

68.  In case I am wrong that the rescission should be unconditional, I go on to consider the separate liability of the 3^rd party to the sisters. In my view, had the 3^rd party properly advised the sisters on the financial risks of the transaction, including disclosing the proceedings against Forkids, on balance of probabilities, I believe the sisters would not have executed the legal charge at all.  So I am of the view that the 3^rd party would be liable to indemnify the sisters for breach of its duty of care.  This is so, even if, vis-à-vis, the bank, the legal charge could be enforced to the extent of the value of the property.

69.  Indeed, that is so, even if, contrary to my view, the sisters’ case on misrepresentation by the brother fails.  I am of the view that the sisters should nevertheless be able to recover from the 3^rd party on the basis that had they been properly advised about Forkids’ financial position in accordance with the 3^rd party’s duties under Etridge (No 2), on the balance of probabilities, they would not have executed the legal charge at all.

Misrepresentation

70.  I turn to consider the misrepresentations which the learned judge have found in the documents.  I have already said in para. 13 above that the claim against the bank based on the supposed misrepresentations in the documents must fail.

71.  In para. 98 of the judgment, the learned judge said:

“98.   In the end I also find that the Bank had misrepresented to the sisters by way of the banking facilities letter, the financial information of the borrower, and the Chinese and English documents.  They would give the sisters the impression that their liability would be on the property only, and these misrepresentations were still operating on the minds of the sisters when they executed the legal charge.”

72.  I have set out the documents with the exception of the legal charge and the facility letter in full.  With respect to the learned judge, I do not believe any of the documents is misleading in any way.  It is true as I have said the confirmation letter to the bank does not say in terms that the sisters were undertaking personal liabilities.  But the warning notice (para. 6) says so in terms.  The legal charge also is clear on the point.

73.  Moreover, as Mr Chan submitted it was the evidence of the sisters which the learned judge had accepted that there had not been the opportunity to read any of these documents before the meeting.  Nor it seems at the meeting itself.  So even if these documents were misleading, it is difficult to see how they could have operated on the mind of the sisters.

Disposition

74.  The order I would make is to set aside the legal charge and to dismiss the bank’s claim.  As for the 3^rd party, in case we are wrong about the sisters’ liability to the bank, I would make an order declaring that the sisters are entitled to be indemnified by the 3^rd party in respect of any claim by the bank against them under the legal charge. 

75.  I dismiss the appeals and make an order nisi that the bank and the 3^rd party pay the costs of the appeals.  The sisters’ own costs be taxed in accordance with the Legal Aid Regulations.

Hon Yeung JA:

76.  I agree with the judgment of Tang VP and have nothing else to add.

Hon Yuen JA:

77.  I agree.