CITIC KA WAH BANK LTD v. LAU KAM LUEN AND ANOTHER

HCMP 1592/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1592 OF 2000

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REASONS FOR JUDGMENT

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1. By an order of Master Hui made on 7 May 2007 it was ordered that judgment be entered under O. 14, r. 3 of the RHC in the plaintiff’s favour against the 1^st defendant for the sum of HK$3 m together with interest and costs. 

2. The 1^st defendant lodged a notice of appeal against the order of the master by a notice of appeal dated 16 May 2007.

3. The hearing of the appeal came before me on 24 September 2007.  After hearing submissions, I allowed the 1^st defendant’s appeal and set aside the master’s order.  I gave the 1^st defendant unconditional leave to defend the proceedings.  I also made an order that the costs below be costs in the cause and that the costs of the appeal be costs to the 1^st defendant such costs to be taxed if not agreed.  I indicated at the time that written reasons would be provided.  This I now do.

4. The plaintiff commenced these proceedings as a mortgage action under O. 88 by way of originating summons issued on 27 March 2000 (“the OS”).

5. The plaintiff’s claim was for the payment of all moneys due and owing from the 1^st and 2^nd defendants under the covenant contained in a legal charge dated 2 February 1994 made between the 1^st defendant as the mortgagor of the first part, the 2^nd defendant as the borrower of the second part and the plaintiff as mortgagee of the third part and registered in the Land Registry by Memorial No. 5914297 (“the mortgage”).

6. The 1^st defendant was the registered owner of the property known as ALL THOSE ten equal undivided 7,473^rd parts or shares of and in ALL THAT piece or parcel of ground registered in the Land Registry as THE REMAINING PORTION OF INLAND LOT NO. 8209 And of and in the messuages erections and buildings thereon known as “FU BON COURT” “FU WAI COURT” and “FU DAT COURT” of FORTRESS GARDEN together with the sole and exclusive right and privilege to hold use occupy and enjoy ALL THAT FLAT “B” on the TWENTY FIRST FLOOR of the said FU DAT COURT (“the property”).  The property was mortgaged to the plaintiff to secure repayment to the plaintiff of all moneys payable by the 2^nd defendant to the plaintiff in respect of general banking facilities granted by the plaintiff to the 2^nd defendant.

7. The OS was supported by an affirmation of Kan Kwok Wai (“Kan”) of the plaintiff filed on 13 May 2000 confirming that by the mortgage the 1^st defendant mortgaged the property to the plaintiff to secure repayment to the plaintiff of all sums becoming payable by the 1^st and 2^nd defendants to the plaintiff in respect of general banking facilities granted by the plaintiff to the 2^nd defendant and interest thereon.

8. Kan also affirmed that the state of the account between the plaintiff and the 1^st and 2^nd defendants showed the sum of HK$132,833,993.79 being principal and interest owing by them to the plaintiff with daily interest accruing from 13 May 2000 until payment.

9. In opposing the OS the 1^st defendant filed his affirmation on 23 August 2000 where he set out his defence.  He explained that Ko Mi Lun, a director of the 2^nd defendant, was a distant relative of his.  In or around January 1994 she told him that the 2^nd defendant was short of cash and needed his help.  The 1^st defendant informed her that he had the property which was not subject to any mortgage and that it could be used to raise a loan from the bank.  At that time the value of the property was about HK$3 m.  Subsequently she told him that she had negotiated with the plaintiff to raise a loan of HK$3 m by mortgaging the property and he agreed to help her out.  She told him that she would redeem the mortgage within 30 months.

10. On or about 2 February 1994 Ko Mi Lun asked the 1^st defendant to attend the offices of Messrs Iu, Lai and Li to sign on the relevant mortgage documents.  The 1^st defendant went there with his wife, Ko Mi Lun and her sister.  A male staff member of the solicitor’s firm told them that the upper limit of the mortgage loan in respect of the property was HK$3 m. The 1^st defendant’s understanding was that in the event that the mortgage would not be redeemed his liability under the mortgage loan would not exceed HK$3 m.

11. The 1^st defendant’s evidence was supported by affirmations from Ko Mi Lun and her sister Winnie Ko Mee Wah.

12. As there was a substantial dispute of fact between the parties an order was made by Master Hui on 16 September 2005 that the proceedings do continue as if the same had been commenced by writ and he gave directions for the filing of pleadings.  I have not been informed as to the reason why it took about 5 years to obtain this order from the master.

13. In the amended statement of claim the plaintiff claims the sum of HK$132,833,993.79 being the sum said to be owing by the 1^st and 2^nd defendants as at 12 May 2000 under the mortgage.

14. There is no dispute that under the mortgage the 1^st and 2^nd defendants jointly and severally covenanted that they would pay the plaintiff all sums of money which at the date of demand may be outstanding and according to the books of the plaintiff, payable by the 2^nd defendant in respect of any account whatsoever between the 2^nd defendant and the plaintiff.  (Clause 2(1)(a) ).

15. By his defence and counterclaim the 1^st defendant averred that he was induced by the plaintiff or its agents to enter into the mortgage.  

16. Paragraph 7 of the counterclaim pleads that on or about 2 February 1994 at the offices of the solicitor’s firm, Messrs Iu, Lai and Li, a staff member misrepresented to him that the limit of the liability of the mortgage was HK$3 m instead of an unlimited amount.  It is also pleaded that the staff failed to inform him of the arrangement the plaintiff had with the 2^nd defendant and the indebtedness of the 2^nd defendant with the plaintiff.  The staff also failed to inform him that he had the right to seek separate legal advice. Relying on the misrepresentation of the staff member of the solicitor’s firm he executed the mortgage.  Although the prayer asks for a declaration that the mortgage was void and of no effect, Mr Lau, for the 1^st defendant, confirmed that the 1^st defendant was seeking an order that the mortgage be set aside for misrepresentation.  That being so, the mortgage was voidable and not void and if the matter were to proceed further, the 1^st defendant would need to amend the prayer of the counterclaim.

17. The plaintiff’s summons for summary judgment under O. 14 r. 3 seeks judgment against the 1^st defendant for the sum of HK$3 m with interest although in the amended statement of claim the plaintiff’s claim is for the sum of HK$132,833,993.79 with interest.

18. I would observe that in Kan’s affirmation filed on 28 November 2006 in support of the O.14 application he re-iterated the plaintiff’s case that the indebtedness of the 1^st and 2^nd defendants under the mortgage stood at HK$132,833,993.79 as at 12 May 2000.  Despite this, he says that he is advised that there is no defence to the claim for HK$3 m.

19. Ms Lan, for the plaintiff, made it plain that the only basis for seeking summary judgment in the sum of HK$3 m is on a collateral agreement between the plaintiff and the 1^st defendant that the limit of his liability under the mortgage was HK$3 m.  She submitted that a collateral agreement was found to exist in Bank of China (Hong Kong ) Ltd v Fung Chin Kan & another [2003] 1 HKLRD 181 and for the purposes of the summary judgment application she urged the court to also find the existence of a collateral agreement.

20. I am unable to accept Ms Lan’s submission.  Fung Chin Kan provides no assistance to the plaintiff and is clearly distinguishable on its facts.  On the facts of that case although there was a covenant in the mortgage in effect guaranteeing the borrower’s debts to an unlimited amount, the court came to the view that on the evidence of written instructions given by the bank to the solicitor’s firm, a copy of which was faxed to Mr Fung, the bank never intended to impose that liability on the mortgagor but only to the extent of the agreed liability of HK$3.3 m.

21. At paragraph 40 of his judgment Litton NPJ said:

“	Plainly, what had happened was that, in preparing the deed for execution, a mistake had been made in the solicitor’s office.”

22. It was because of this mistake made in the solicitor’s office that the mortgagor’s liability was for an unlimited amount instead of the agreed limit of HK$3.3 m.  It was on this basis that the court found that there was a collateral agreement.

23. This is clear from what Litton NPJ said at paragraphs 57 and 58 of his judgment as follows:

“	57.	A collateral agreement, like any other contract, must be objectively viewed, so the test must be this: On the totality of the evidence, must the parties be taken to have intended that the representation made by one of them should form part of the basis of the legal relationship between them?
	58.	Here, the position was simply this:  In consideration of Mr and Mrs Fung executing the bank’s standard form of legal charge to be prepared by the solicitors, charging their flat to the bank as security for facilities to be granted to SMC, the bank agreed that their exposure to financial risk should be limited to $3.3 million, unless agreed otherwise.  The bank was, in law, bound by that agreement and could not rely on the solicitor’s mistake in failing to put a limit of $3.3 million in the written instrument to saddle the respondents with SMC’s total liability.”

24. In the present case there is no evidence that the plaintiff ever instructed its solicitors to limit the liability of the 1^st defendant to HK$3 m in the mortgage.  There is no evidence to suggest that any mistake was made by the solicitors in preparing the mortgage.

25. As I have said, Fung Chin Kan provides no assistance to the plaintiff.

26. Further, in the absence of pleading a collateral agreement I fail to see how the plaintiff can even allege that there was a collateral agreement between the plaintiff and the 1^st defendant that the limit of his liability under the mortgage was HK$3 m.  Unlike the situation in Fung Chin Kan where no pleadings were ordered to be filed and served and there was a trial of the Originating Summons without pleadings, in this case pleadings have been ordered to be filed and served.  There is no plea of a collateral agreement in either the amended statement of claim or the reply and defence to counterclaim.  On the contrary, paragraph 7 of the reply and defence to counterclaim pleads that save that it is admitted that the 1^st defendant duly executed the mortgage at the office of Messrs Iu, Lai and Li, the entire paragraph 7 of the defence and counterclaim is denied.  Paragraph 7 of the defence and counterclaim pleads that:

“

On or about the 2nd of February 1994 Madam Ko asked the 1st Defendant to go to the solicitors firm of Messrs. Iu, Lai and Li to sign on the mortgage document.  A staff of the said Messrs. Iu, Lai and Lai firstly misrepresented to the 1st Defendant that the limit of the liability of the Mortgage was HK$3 million instead of an unlimited amount.  Secondly the said staff failed to inform the 1st Defendant the arrangement the Plaintiff had with the 2nd Defendant and the indebtedness of the 2nd Defendant with the Plaintiff and thirdly the said staff had failed to inform the 1st Defendant that he had the right to seek separate legal advice.  Relying on the said misrepresentation by the said staff of Messrs. Iu, Lai and Li the 1st Defendant duly executed on the Mortgage.  The 1st Defendant will refer to the terms and effect of the Mortgage at trial.”

27. Thus, there is a clear issue of fact raised between the parties as to, inter alia, whether there was a misrepresentation by the staff of the solicitor’s firm that the limit of liability under the mortgage was HK$3 m instead of an unlimited amount.  

28. Ms Lan submitted that there was no triable issue of fact in view of the stance taken by the plaintiff in the summary judgment application.  She relied on the affirmation of Vincent Hau Wing Shing (“Hau”) and the 2^nd affirmation of Kan.  Paragraph 6 of the affirmation of Vincent Hau states:

“

For the purpose of this application but not otherwise, I am instructed that insofar as the facts are concerned, the Plaintiff would not dispute the 1st Defendant’s allegation as set out hereinabove.  In particular, the Plaintiff would not, for the present application, adduce evidence to challenge the making of representation on the limit of liability by the Plaintiff’s agent as alleged by the 1st Defendant.”  (emphasis supplied)

29. Paragraph 3 of the 2^nd affirmation of Kan states:

“	The Plaintiff only claims against the 1st Defendant for, inter alia, final judgment for the sum of HK$3,000,000.00 and interest for the purpose of the summary judgment application.”   (emphasis supplied)

30. I do not regard the said passages as set out above as amounting to an unequivocal admission by the plaintiff of all the material factual allegations of the 1^st defendant.  What they amount to is simply that for the purpose of the O.14 application but not otherwise, the plaintiff does not challenge the evidence of the 1^st defendant.  But if the matter should proceed to trial, then the plaintiff maintains its position as pleaded in the plaintiff’s pleadings namely, the amended statement of claim and the reply and defence to counterclaim.  That being so, it cannot, in my view, be said that there is no triable issue of fact raised by the 1^st defendant.

31. In my view, the 1^st defendant has clearly shown that there is a triable issue of fact as to whether there was a misrepresentation by the plaintiff or its agent Messrs Iu Lai and Li.  This issue cannot be resolved at the summary stage without a trial.

32. Ms Lan further submitted that even if there were no collateral agreement between the plaintiff and the 1^st defendant to limit his liability under the mortgage to HK$3 m, the court can and should give summary judgment to the plaintiff in the sum of HK$3 m.

33. In my view there is a further triable issue in law raised by the 1^st defendant.   As Mr Lau submitted, correctly in my view, whether or not there is to be a partial rescission is not a matter to be determined summarily on an O. 14 application.

34. In Bank of China (Hong Kong) Limited v Well Lok Prining Limited and others HCMP 3925 of 2002, Mr Recorder A Chan SC, 5 September 2006, the Recorder helpfully reviewed the authorities on the question of whether there can be partial rescission and came to the conclusion that the English view was to be preferred to the Australian view.  He said at paragraphs 73 and 74 of his judgment as follows:

“	73.	As to the law, Mr Ng has pointed out to me the conflicting authorities on the question of "partial rescission".  The English authorities are to the effect that rescission is an "all or nothing" remedy. TSB Bank v Camfield, CA, [1995] 1 WLR 430 is the leading English authority in this area.  In that case there was an innocent misrepresentation that the wife’s liability was limited to £15,000 when in fact it was unlimited.  The Court of Appeal rejected the bank’s contention that the mortgage be enforced to the extent of £15,000 [see pp.435E-437F and 438G-439E].  On the other hand, the High Court of Australia in Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) ALR 570 held that there could be partial rescission.  In that case the defendant complained that there was a misrepresentation that the guarantee was limited to the future indebtedness of the debtor.  The Court held that the lender could enforce the guarantee limited to the future indebtedness [see pp.576-579].  The Court held that Camfield should not be followed [p.579].  Mr Ng invites me to follow the High Court of Australia given the weight of the legal commentaries in support of the Australian decision.
	74.	I respectfully decline Mr Ng's invitation for two reasons.  Firstly, the Australian decision contradicts with the English law which has been applied in Hong Kong.  I respectfully rely upon the analysis of Colman J in De Molestina v Ponton [2002] 1 LIoyd's Rep 271 at 286 to 288.  In para. 6.7 at p.288, Colman J stated his conclusion after reviewing the law in this area as follows:
		“	I conclude that on this issue the present state of English law is not in any doubt at all and nothing in Vadasz renders it doubtful, whatever may be the position in Australia.  By reference to the state of English law as so far developed at House of Lords level that case was wrongly decided.  Unless and until the House of Lords overrules the analysis by Lord Browne­ Wilkinson in Barclays Bank v O’Brien and its particular application in TSB Bank v Camfield, the principles binding on this Court are well settled.  The scope of the equitable discretion in a rescission claim is confined to adjustments to achieve substantial restitution to accommodate events that have occurred after the contract has come into force and does not extend to the general reconstruction of the bargain to achieve an objectively overall fair result.” ”

35. In Re: Lam Lam CACV 396 of 2002, 4 April 2003, Rogers VP pointed out that there was conflicting authority on the question of whether rescission is an “all or nothing process”.  He said at paragraph 7 of his judgment :

“	In argument before us, Mr Wong, on behalf of the petitioner, sought to argue that even if the judgment debtor’s allegations were true, she would still be liable to the petitioner to an extent which would render her insolvent.  That argument turns on the question as to whether the petitioner can recover anything.  That in turn depends upon whether rescission is an “all or nothing process”.  In the case of TSB Bank plc v Camfield [1995] All E.R. 951, the Court of Appeal in England so held.  There is conflicting authority, in particular, that of the High Court in Australia in the case of Vadasz v Pioneer Concrete (SA) Pty Limited [1995] 184 CLR 102.  The position was summarised in The Law of Restitution 6th Ed. by Lord Goff of Chieveley and Jones at page 357-8 where it is said:
	"	It is to be hoped that the House of Lords will follow the High Court of Australia which has said that the view that 'setting aside' is an 'all or nothing process' should not be accepted..." ”

36. Rogers VP also said at paragraph 8:

“

Applications for bankruptcy orders are not proceedings in which complicated questions of fact or law should be decided. They are proceedings which should be brought where the petitioner’s claim to a monetary sum is clear.  House of Lords points should be left to mature consideration at trial.  In the present case, when summary judgment was sought, the judge came to the conclusion, on the affirmation evidence, that there was a triable issue as to fact, if not also law as well.”

37. I respectfully agree with Rogers VP that House of Lords points should be left to mature consideration at trial.  In my judgment, there is also a triable issue in law raised by the defendant.

38. It is also useful to bear in mind what Godfrey J (as he then was) said in Unic Co v Centus Development Ltd [1988] HKC 643 at 647:

“

The power to give summary judgment under Order 14 is intended to apply only to cases where there is no reasonable doubt that the Plaintiff is entitled to judgment and where therefore it is inexpedient to allow the Defendant to defend for mere purposes of delay: see Jones v. Stone [1894] AC 122.

As a general principle, where a Defendant shows that he has a fair case for defence or reasonable grounds for setting up a defence, or even a fair probability that he has a bona fide defence, he ought to have unconditional leave to defend.  Leave to defend must be given unless it is clear that there is no real substantial question to be tried, or that there is no dispute as to the facts or law which raises a reasonable doubt that the Plaintiff is entitled to judgment.  Order 14 is not intended to shut out a Defendant who can show that there is a triable issue applicable to the claim as a whole from laying his defence before the court, nor to make him liable in such a case to be put on terms of paying into court as a condition of leave to defend.”

39. In my view, the 1^st defendant has clearly shown triable issues of fact and of law and should be given unconditional leave to defend.

40. For the above reasons, I allowed the appeal, set aside the order of the master and gave unconditional leave to the 1^st defendant to defend the proceedings.  It seemed appropriate to me to order costs in the cause for the costs below and as costs normally follow the event it seemed appropriate to me to order that the costs of the appeal be costs to the 1^st defendant to be taxed if not agreed.   I so ordered.