DBS BANK (HONG KONG) LTD v. MORE FAIR PROPERTIES LTD AND OTHERS

cacv 82/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 82 of 2005

(on appeal from HCMP NO. 3101 of 2001)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1.  This was an appeal by the 3^rd defendant from the judgment dated 8 February 2005 of Deputy High Court Judge Carlson whereby he was ordered to pay the sum of $11,569,195.52 to the plaintiff bank with interest.  At the conclusion of the appeal hearing, the appeal was dismissed.  The reasons appear below.

The judgment below

2.  The proceedings were brought by the bank against the defendants in respect of a loan of $26 million that had been advanced to the 1^st defendant to enable it to acquire shop premises from the then owners which was a company owned and controlled by the 3^rd defendant.  Each of the 2^nd and 3^rd defendants had a 50% interest, directly or indirectly, in the 1^st defendant.  The loan was advanced on the security of a legal charge over the premises and personal guarantees from the 2^nd and 3^rd defendants.  The 1^st defendant began to default under the loan in October 2000.  The bank exercised its powers of sale as mortgagee and the amount claimed represents the shortfall between the amount due under the advance and the amount so far recovered by the bank.  The 2^nd defendant has absconded and, not unnaturally, the bank looked to the 3^rd defendant for repayment and sued on the guarantee.

3.  The premises were acquired in 1985 for $3.55 million by a company controlled by the 3^rd defendant.  In July 1997, the premises were sold for $40 million to the 1^st defendant which was the vehicle set up by the 2^nd and 3^rd defendants to purchase the premises and through which a restaurant business was to be operated.  The 2^nd defendant was a practising solicitor and the sole proprietor of the firm that bore his name, Messrs S.H. Chan and Co.  That firm had been on the bank’s list of approved solicitors for some time and from time to time had been appointed to do conveyancing work including mortgage loans for the bank.  At the same time, the 2^nd defendant was associated with the 3^rd defendant.  Their relationship was pleaded in paragraph 6(ii) of the amended defence and counterclaim as follows:

“a close personal friend of the 3^rd Defendant to whom the 3^rd Defendant had reposed his trust and confidence and had handled various personal matters for the 3^rd Defendant personally and through Messrs. S.H. Chan & Co. as well as advising the 3^rd Defendant on various personal and legal matters;”

4.  The 3^rd defendant sought to avoid liability under the guarantee on the basis that the 2^nd defendant had acted as the plaintiff’s agent throughout the negotiations that had preceded the signing of the guarantee, that as such agent, he had made a number of false representations and that the 3^rd defendant had been induced to enter into the guarantee by those representations. 

5.  The thrust of the 3^rd defendant’s case below was that the bank had told the 2^nd defendant and the 2^nd defendant had told the 3^rd defendant that the guarantee was a mere formality and that “it would not look to [the 3^rd defendant], in the event of default, to make good his promise under the guarantee”.  As the judge noted that submission was grounded on the fact that the 2^nd defendant and the 3^rd defendant had entered into a shareholders’ agreement between themselves in relation to the 1^st defendant whereby the 2^nd defendant would have the use of $20 million of the loan of $26 million and the 3^rd defendant the remaining $6 million and that the bank was agreeable to the 3^rddefendant not being responsible for more than $6 million of the entire loan.  It was said that immediately upon the signing of the shareholders’ agreement, that had been passed to the bank who was therefore aware of the arrangements between the two shareholders.

Findings of fact

6.  The judge made the following findings of fact:

(1)	The 3rd defendant respected the 2nd defendant “as a solicitor and as someone whose judgment he could trust”.
(2)	The 3rd defendant was himself “an experienced businessman” who “knew all about the ins and outs of commercial life”, that he had “more than a working knowledge” of property transactions, banker’s guarantees etc. and “would have been aware of what was required of him and what was involved.”  The judge also observed that the 3rd defendant “was clearly no innocent abroad”.
(3)	The banking documents, namely the legal charge, the loan agreement and the guarantee were all standard banking documents.
(4)	The loan application was processed on an entirely arm’s length basis and that the bank extended no favour to the applicants.
(5)	Ms Janice To, one of the 2nd defendant’s partners at Messrs S.H. Chan and Co. and not the 2nd defendant had arranged for the execution of the guarantee by the 3rd defendant and also witnessed his signature.
(6)	The defence put forward by the 3rd defendant (see paragraph 5 above) was “frankly moonshine” and simply could not “stand up to any proper scrutiny”.  It did not make sense and lacked “any sense of realism”.  The bank would not have been interested in accepting anything other than joint and several liability under the guarantee.
(7)	The only authority the bank gave the 2nd defendant and his firm was to see to it that the 3rd defendant “properly executed the guarantee and loan agreement”; that the 3rd defendant would have known that and did in fact know it.
(8)	The 3rd defendant realised that he was entering into a normal commercial transaction with the bank and fully appreciated that it was nothing more than a routine transaction for the bank and in lending the 1st defendant a substantial amount of money, it would have wanted to protect itself as best it could.

The 3^rd defendant’s defence was roundly rejected by the judge who resolved the case entirely as a question of fact.

This appeal

7.  Mr Chan who appeared for the 3^rd appellant had advanced 12 grounds of appeal in his amended notice of appeal.  He frankly acknowledged that the appeal was really an appeal on fact and that unless he succeeded in persuading this court to reverse the judge’s finding as to the role of the 2^nd defendant in relation to the execution of the legal charge and guarantee, he could not succeed.

8.  The evidence of Mr Tong, the officer in charge of the loan transaction, was that the bank chose Messrs S.H. Chan and Co. to act for them in the transaction.  In cross-examination, he was asked about the 2^nd defendant’s role in the execution of the banking documents:

Q.	And I think it’s undisputed in the present case the bank chose to put it in the sole hands of the solicitor to see to the execution and/or preparation of all these three documents.
A.	Well, I can answer this in two parts.  The documents were prepared by our legal department and our loan department and then they were handed to Messrs S H Chan for handling.
court:	You mean execution.  Is that what you mean when you say “for handling”?
A.	For them, for the firm, to attest to the execution.
Q.	Interpretation?
A.	Yes, it is also included.
(Tr. pp. 91Q-92A)

9.  Mr Tong agreed that when guarantees were involved, it might be necessary to ask the guarantor to seek independent legal advice and when a solicitor was entrusted to do with the execution work or witnessing he would expect the solicitor to know what to do.  He further agreed that once the papers had been passed to the solicitor it became effectively agents for the bank in relation to those matters.

10.  Mr Chan then referred to the bank’s letter of instructions to the 2^nd defendant’s firm dated 27 August 1997.  It was a printed form with certain particulars typed in.  It read:

“Upon delivery of the relative legal documentations and satisfactory title investigation and genuineness, please prepare an Unlimited Legal Charge in our favour in the following terms by using our Standard Form and by making amendment(s) where or if necessary:-”

The terms set out concerned the property, borrower, charge amount, interest rate, service charges, special notice and availability.

11.  Mr Chan argued that those instructions conferred on the 2^nd defendant a discretion to negotiate and set the terms of the loan as he thought fit and that these would be binding on the bank.  I cannot see that such a reading is permissible.  In the first place, the amendment(s) contemplated by that paragraph must, in the context, be confined to matters of grammar, typographical errors etc., matters that would not alter the substantive provisions of the bank’s Standard Form.  Secondly, that authority, if more extensive, would be limited to the legal charge only.  Thirdly, the letter of instructions contained the following:

“P.S.   Please arrange with M/s. Chan Suk Hung & Yung Soong Yee Larry [the 2^nd & 3^rd defendants] to sign the enclosed Guarantee and return the same to us after your witness together with your confirmation of execution.”

Fourthly, the authority was given to the firm rather than the 2^nd defendant.  Whilst it was indeed Mr Tong’s evidence that where a guarantor owns only 50% of the property, “a guarantee [of] less than the total sum loaned” could be considered by the bank, that is of little assistance to the 3^rd defendant since no request to that effect was ever made to the bank and, in any event, cannot enlarge the ambit or scope of authority given to the 2^nd defendant and his firm.

12.  It is common ground that the banking documents were witnessed by the 2^nd defendant’s partner, albeit a salaried partner, Ms Janice To.  As Mr Tong explained when it was put to him that the 2^nd defendant was agent of the bank in relation to the execution of the banking documents:

A.   Because when we entrust a solicitors firm to handle it, the solicitors firm itself should know clearly that it is a professional body.  They know clearly as to how to avoid a situation which we call “conflict of interest”.  So, in this matter, the attesting solicitor certainly cannot be Mr S H Chan himself.  In many situations if a solicitor of a solicitors firm wants to purchase a property, he can get another solicitor of the same firm to attest to it.  In such circumstances, the solicitor becomes a client and the attesting solicitor represents the solicitors firm.

(Tr. p. 94K-N)

13.  Quite simply, there was no evidence to substantiate the assertion that the 2^nd defendant was given authority to negotiate the contents and terms of the banking documents including the guarantee and that the bank would be bound by any representation made in respect of those documents. 

14.  Quite apart from the absence of actual authority on the part of the 2^nd defendant to negotiate the contents and terms of the banking documents, or to make representations binding on the bank, there can be no question of his having had ostensible authority to do so either.  So far as the 3^rd defendant was concerned, the 2^nd defendant was his co-venturer in the proposed restaurant business, and they both stood in the same position (shareholders in the borrower, and individually guarantors of the facility to be granted to it) as far as the bank was concerned.  In these circumstances, it is inconceivable that a person in the position of the 3^rd defendant could think, or could be justified, in thinking that his co-venturer was cloaked with authority to make changes to terms being put forward by the bank, or to make representations on its behalf.

15.  So it is not even a case of the judge having misunderstood or overlooked crucial evidence such as would warrant this court to interfere with the findings of fact made.  Accordingly, I see no basis for disturbing judge’s finding that the authority (whether actual or ostensible) given to the 2^nd defendant and his firm by the bank was limited to seeing to it that the banking documents were duly executed by the 3^rd defendant and the appeal must fail.

Hon Suffiad J:

16.  I agree.

Hon Barma J:

17.  I agree.