BANK OF CHINA (HONG KONG) LTD v. WONG TANG AND OTHERS

HCMP4222/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4222 OF 2003

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J U D G M E N T

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1.  This trial is to determine the liability of the 4^th defendant under a second mortgage of a property jointly owned by the 3^rd and 4^th defendants.  The plaintiff’s claim is contested on the sole basis that the transaction was brought about by undue influence exerted on the 4^th defendant by the 3^rd defendant and the bank was put on inquiry. 

Background

2.  The 3^rd and 4^th defendants are husband and wife.  They were married in 1987.  They have two children, who were born in 1989 and 1991.

3.  By an assignment dated 2 January 1996, the 3^rd and 4^th defendants became the owners as joint tenants of a property situate at Flat 308 on Ground Floor, Kin Yuen Mansion, Caine Road, Hong Kong (“the Property”). 

4.  The purchase of the Property was partly financed by a loan of $1.2 million from The China and South Sea Bank (“the Bank”), to be repaid by 180 monthly instalments of $11,000.  The loan was secured by a charge over the Property, the terms of which are set out in a Charge dated 2 January 1996 signed by the 3^rd and 4^th defendants as mortgagor.

5.  The Property has been occupied by the 3^rd and 4^th defendants and their children as their residence.

6.  By a Second Mortgage dated 19 June 1996 (“the Second Mortgage”), the 3^rd and 4^th defendants charged the Property and the 1^st defendant charged his property, both by way of second legal charge, to the Bank as securities for the grant of general banking facilities to a company called Balin (H.K.) Co (“Balin”), the 7^th defendant in these proceedings.  The 1^st defendant was registered as the sole proprietor of Balin.  However, the evidence shows that the 3^rd defendant was also involved and had an interest in the business of Balin.

7.  Under the Second Mortgage, which is the subject matter of the present trial, the 3^rd and 4^th defendants as the 1^st mortgagor and the 1^st defendant as the 2^nd mortgagor covenanted jointly and severally to pay on demand, inter alia, all present and future indebtedness of Balin, including the plaintiff’s legal costs for enforcing the securities on a solicitor and own client basis. 

8.  Since 1 October 2001, the Bank has merged with the Bank of China Group and has been carrying on business under the name of the plaintiff.

9.  By separate letters dated 23 June 2003, the plaintiff demanded the 1^st, 3^rd  and 4^th defendants and Balin to repay the indebtedness due under the Second Mortgage.   The demand was not met.

10.  On 25 September 2003, the plaintiff commenced these proceedings by way of originating summons pursuant to Order 88 rule 1 of Rules of the High Court.  Apart from the Second Mortgage, the plaintiff also claimed under other mortgages, which are not relevant for the present purpose. 

11.  As at 23 October 2003, Balin was indebted to the plaintiff in the aggregate sum of HK$71,058,905.35 with further interest continue to accrue.

12.  By the Order of Master Hui dated 25 May 2004, judgment was entered for the plaintiff against the 1^st to 3^rd, 5^th to 7^th defendants as claimed together with interest and costs.  The 3^rd defendant was absent at the hearing.

13.  In respect of the claim against the 4^th defendant, Master Levy ordered on 16 March 2004 that the proceedings be continued as if the matter was begun by writ and the affidavits filed shall stand as pleadings.

The defence

14.  The 4^th defendant does not dispute that she had executed the Second Mortgage.  There is also no dispute about the indebtedness of Balin.  Initially, the 4^th defendant defended the claim on two grounds, namely, undue influence and misrepresentation by her husband, the 3^rd defendant.  At the commencement of the trial, Mr Wong who appeared for her indicated that only the defence of undue influence would be relied upon.

15.  The defence case on undue influence, as set out in the Further and Better Particulars of the 4^th defendant’s affirmation, is that the 3^rd defendant concealed from her the risks involved in the Second Mortgage and the fact that it was to secure the banking facilities granted to Balin.

16.  It is also the 4^th defendant’s case that the Bank was fixed with constructive notice of the undue influence in that:

(1)	The Bank was aware of the husband and wife relationship between the 3rd and 4th defendants,
(2)	The 4th defendant did not appear to hold any interest in Balin, and
(3)	The transaction was apparently disadvantageous to the 4th defendant.
(4)	Accordingly, the Bank was put on inquiry.
(5)	However, the solicitors acting for the Bank had failed to advise her on her legal position or to advise her to seek independent legal advice.

Amendment to the Originating Summons

17.  On 14 February 2006, the Originating Summons was amended by consent.  A new paragraph 2(a) was inserted. It adds an alternative claim against the 3^rd and 4^th defendants for severance and partition of their interests in the Property and for an order of sale of the Property under the Partition Ordinance, in the event the Court were to set aside the Second Mortgage or hold it to be void on account of undue influence. 

18.  The plaintiff and the 4^th defendant further consented to have this added alternative claim stayed and be tried separately after the trial to determine whether the Second Mortgage should be set aside or was void by reason of undue influence.

The issues at the trial

19.  The issues at the trial are therefore:

(1)	Whether the 4th defendant executed the Second Mortgage under the undue influence of the 3rd defendant.
(2)	Whether the Bank was affixed with constructive notice of the undue influence.

The evidence

20.  There are three witnesses for the plaintiff.  They are Mr Ng Chi Wai, Mr Ismail Ma and Miss Lo Man Yin.  Mr Ng is a clerk of the plaintiff.  Mr Ma is a solicitor. He was a partner of Messrs CC Lee & Co (“CCL”), who acted for the Bank in relation to the preparation and execution of the Second Mortgage.  He retired in January 1999 and is now a consultant of CCL.  Miss Lo was at the time of the execution of the Second Mortgage employed by CCL as a conveyancing clerk.

21.  The affirmations of Mr Ng and Mr Ma were admitted into evidence by agreement and their attendance at the trial was dispensed with. 

22.  Mr Ng’s affirmations, insofar as they are relevant to the 4^th defendant’s trial, set out the terms of the Second Mortgage, the indebtedness of Balin and the calculations and breakdown for it as well as the demand for payment.  They are not disputed and no issue turns on them.

23.  As for Mr Ma’s affirmation, it stated that since its establishment in 1962, the main business of CCL has been the preparation of security documents for banks and financial institutions.  In attending execution of security documents such as mortgages and guarantees, the firm’s practice has always been to inform the mortgagor, guarantor or borrower that the firm only acts for the lender and to advise the individual to seek independent legal advice on the transaction.  It has also been the firm’s practice that the attesting solicitor or clerk will explain all the material terms and covenants of the document, including the nature and extent of liabilities of the parties.  All conveyancing clerks who join the firm are informed of these practices.

24.  Mr Ma’s affirmation referred to a letter dated 11 June 1996, by which the Bank instructed CCL to prepare a second mortgage covering two properties, namely, the Property and the 1^st defendant’s property at University Heights.  By the same letter, CCL was also instructed to witness the execution of a deed of guarantee by a Mr Wong Hin and a Mr Ting Sui Sing.  Mr Wong is the 1^st defendant’s brother.  It appears from the evidence at the trial that the 1^st defendant, his brother, Mr Ting and the 3^rd defendant were at the time business partners. Mr Ma, assisted by Miss Lo, was assigned by CCL to be the handling solicitor.

25.  Mr Ma said he did not personally attended to the execution of the Second Mortgage.  It was dealt with by Miss Lo.  Afterwards, the Second Mortgage and a drawdown letter, which was also signed by the 1^st, 3^rd and 4^th defendants, were forwarded to him for perusal and signature.  After confirming with Miss Lo that she had explained the documents to the 1^st, 3^rd and 4^th defendants, Mr Ma signed on them and returned them to Miss Lo for registration and further handling.

26.  Miss Lo gave oral evidence at the trial.  She joined CCL on 1 July 1993.  She left the firm on 5 November 1999 and is now working with another firm of solicitors.  Before joining CCL, she had already worked as a conveyancing clerk for six years.  Accordingly, when she was assigned to deal with the Second Mortgage under Mr Ma’s supervision, she had some nine years of experience handling conveyancing and security transactions.

27.  Miss Lo echoed Mr Ma’s evidence that it was her practice to go through the major terms and explain the nature, effect and extent of liabilities to the parties, and to ask whether they understand the same before asking them to sign the documents.

28.  Given that it happened in 1996, Miss Lo understandably cannot recall the details relating to the execution of the Second Mortgage, or the exact conversations exchanged on the occasion.  However, based on her usual practice, she believed she would have asked the 1^st, 3^rd and 4^th defendants to come and attend to the execution on the same occasion.  She had obtained copies of their identity cards at the beginning of the meeting.  It is also her belief that in accordance with her usual practice, she would have proceeded to go through and explain the Second Mortgage to the 1^st, 3^rd and 4^th defendants, and ascertain their understanding of the transaction and documents they were about to execute.  It is her evidence that although she did not explain all the terms of the Second Mortgage, she had explained the major terms as well as the First Schedule that contained the particulars of the parties involved, the extent of facilities granted and the interest rate.  She said she did not recall any of the parties present had raised any query or protest. 

29.  Miss Lo testified that in her presence, the 1^st, 3^rd and 4^th defendants signed and executed the Second Mortgage, and followed by the drawdown letter.  The 1^st defendant signed in the capacity of the 2^nd mortgagor as well as on behalf of Balin, who was the principal (or borrower) under the Second Mortgage.  The drawdown letter was in fact a short letter from CCL to the Bank reporting on the due execution of the Second Mortgage.  At the bottom of the letter was the specimen signatures of the executing parties.  Again, the 1^st defendant signed both as the 2^nd mortgagor and on behalf of Balin, which was described as the requesting party.  The chop of Balin was also applied on the letter.

30.  After the execution, Miss Lo reported to Mr Ma and passed the executed documents to him for examination and signature.  When Mr Ma returned the documents to her, she attended to the registration procedures and sent the letter to the bank.

31.  In cross-examination, Miss Lo said she had told the parties that CCL only represented the Bank, and it was up to them to seek independent legal advice.  She accepted that she had not made a note of this in the file as the Law Society’s circular requiring the making of a written record was only introduced in recent years.   Miss Lo further said she had told the parties it was an “All Monies” second mortgage of the properties involved.  She disagreed with counsel’s suggestion that the 1^st defendant was not present when the 3^rd and 4^th defendants executed the documents.  She also disagreed that she had not explained that the mortgage was to secure the indebtedness of Balin.                           

32.  The 4^th defendant is the only defence witness.  By consent, she did not adopt her affirmations as her evidence-in-chief.

33.  The 4^th defendant gave evidence that after she completed secondary school education, she worked with various travel agencies for some ten odd years until 1998, initially as a tourist guide and later as tour co-ordinator.  She was the shareholder and director of a travel agency called Airways Travel Limited since its incorporation in 1985.  According to her, this was her sister’s business and she only played a minor role in it.  She also claimed that until it ceased business two or three years ago, the company never made any profits.   

34.  Between 6 September 1996 and 19 June 2000, the 4^th defendant was registered as the sole proprietor of a business called Winful Trading Co.  According to the 4^th defendant, this was done at the 3^rd defendant’s request and everything was arranged by him.  She accepted that the address initially reported in the Business Registration record was the office address of Airways Trading Limited.  She explained it was out of convenience that this address was used as her residential address and the business address of Winful Trading Co.  She said she was not aware of the change of the business address and the addition of new partners in May 2000.  One of the incoming partners, Wong Tat, was known to her as the son of the 1^st defendant.

35.  The 4^th defendant also testified that the 3^rd defendant used to be a tourist guide.  He started to do business in about 1991.  The 4^th defendant stated in examination-in-chief that she was not clear with whom her husband did his business.  However, she accepted in the latter part of her evidence that she knew that the 3^rd defendant did business together with the 1^st defendant, his brother and Mr Ting, and that he was involved in the business of Balin.  She also accepted that she had been to the office of Balin and it appeared that she also knew the telephone number of Balin.  She had also met the 1^st defendant and his wife and brother socially for a few times, but she said she did not know them well.

36.  In respect of the execution of the Second Mortgage, the 4^th defendant’s evidence is that around mid-1996, the 3^rd defendant told her the Bank was going to withdraw his banking facilities and to terminate the existing mortgage.  He further told her that it was necessary to undergo a restructuring of his financial commitment and to re-execute a mortgage in order to avoid the Property from being re-possessed by the Bank.  He, however, assured her it was nothing but mere formality.  Several days later, the 3^rd defendant called her at her office and asked her to go to the solicitors’ office to sign the documents.  When she asked whether it was possible not to sign, he replied in the negative.  He further told her that her refusal to sign would affect the amount of his credit facilities and would result in the family having no place to live in. 

37.  The 4^th defendant said the 1^st defendant was not present when she and the 3^rd defendant went to CCL to execute the Second Mortgage.  Prior to  this occasion in 1996, she had been to CCL’s office before in connection with the purchase and the first mortgage of the Property.

38.  It is the 4^th defendant’s evidence that she did not want to execute any mortgage.  Even when they were waiting at CCL, she had a quarrel with the 3^rd defendant over whether to execute the Second Mortgage.  During the argument, the 3^rd defendant reiterated that if she refused to sign, the bank would withdraw the banking facilities of his business, in which case he would have no money to feed the family, the Property would be re-possessed and the family would have no place to live in. 

39.  Later on, a female staff of CCL took them into a room, asked their names and obtained their identity cards.  She also handed a document to the 4^th defendant and asked whether she knew what she was going to sign.  The 4^th defendant said she nodded in response because the 3^rd defendant was staring at her and she also felt that the female staff was in a hurry.   The 4^th defendant said no one had ever explained to her the liabilities involved.  Neither was she asked whether she wanted to see a solicitor or advised to seek independent legal advice.  Although she was aware it was a mortgage document, she did not know the purpose was to secure credit facilities to Balin and that the liability was unlimited.  It is also her evidence that she signed the drawdown letter without knowing the contents.  She accepted she had not raised any question about the transaction or the documents she was asked to sign.  She said it was because she was angry at the time.

The credibility of the witnesses and the findings

40.  I consider Miss Lo a candid and fair witness and she had given evidence to the best of her recollection.  She frankly accepted that with the lapse of time, she could no longer recall the exact events and details surrounding the execution of the Second Mortgage.  Indeed, given that the execution took place some ten years ago and it is common ground that the occasion was uneventful, it is only natural that Miss Lo would not have any specific memory of it, including what were the exact words said by her and the defendants. 

41.  In cross-examination, when she was referred to the instruction letter from the Bank, she agreed that the reference to $3 million in it was a reference to the limit of the facilities to be secured by the Second Mortgage.  This was a mistake as the amount of $3 million was only for the purpose of calculating the solicitors’ costs for the second Mortgage.  When she was asked in re-examination to look at the letter again, she readily accepted that she had been mistaken.  This shows that she is not a sophisticated or aggressive witness as she made no attempt to explain away or cover up her mistake.  It also reinforces her point that she no longer had independent recollection of the details of the transaction.  Her candidness is further demonstrated by her acknowledgement that her witness statement was not entirely correct in saying that she drafted the Second Mortgage because she only drafted the schedules and the rest of document was drafted by Mr Ma. 

42.  In cross-examination, Miss Lo was asked to demonstrate how she had explained and interpreted the Second Mortgage to the 3^rd and 4^th defendants.  She was also asked to explain in Chinese what general banking facilities and all monies mortgage meant.  Mr Wong commented that she did not appear to be familiar with these common conveyancing terms and she only gave a literal explanation without explaining the legal effect and consequences involved.  Mr Wong further made the point that Miss Lo did not appear to know the details of the loan to be advanced by the Bank to Balin, hence she was not in a position to advise the parties on this.  It was submitted that Miss Lo could not be a competent person to advise the 4^th defendant on her legal position as a mortgagor.

43.  In my view, these submissions are misplaced.  Firstly, it is evident from her answers and demeanour that Miss Lo is not an articulate person and she was a bit shy and embarrassed when asked to demonstrate how she would have explained the Second Mortgage to the signing parties.  The fact that she did not give a fluent or eloquent demonstration is no indication of her competence as a conveyancing clerk.  Secondly, she admittedly no longer had independent recollection of the transaction; this must include the contents of the documents as well as the lending involved.  Hence, there is nothing surprising that she did not appear to know the details of the facilities to be extended to Balin.  In any event, neither the instruction letter from the Bank nor the Second Mortgage contained details of the banking facilities involved.  Thirdly and most importantly, Miss Lo is not a qualified lawyer and CCL was acting for the Bank.  She had no duty and cannot be expected to give legal advice to the signing parties, including the 4^th defendant.  It was not for her to advise the mortgagees of the legal effect and consequences of the Second Mortgage.  Mr Wong accepted that neither the Bank nor CCL, as the Bank’s solicitors, came under a general duty to advise the 4^th defendant of her legal position under the Second Mortgage.

44.  Mr Wong submitted that Miss Lo could not assume that the 4^th defendant should have known her liabilities as a mortgagor and that she had given inadequate advice to the 4^th defendant.  However, even according to the 4^th defendant, she had indicated positively by nodding her head when Miss Lo asked whether she was aware what the transaction was about and what she was going to sign.         

45.  It is true that Miss Lo said she believed she had advised the 4^th defendant to seek independent legal advice because that was invariably her practice when the firm only acted for the mortgagee banks.  This is the most she can say having regard to the fact that she had dealt with so many mortgage transactions in her work and this was some ten years ago.   Apart from the 4^th defendant’s oral testimony, which I shall come to later, there is nothing before the court to question Miss Lo’s belief or to suggest that Miss Lo had departed from her practice on the occasion in question.      

46.  I turn now to deal with the 4^th defendant and her evidence.  In my view, she is an alert and sophisticated witness, but had not been forthcoming and entirely frank in her evidence. 

47.  Right from the beginning of these proceedings, the 4^th defendant was at pains to show that she had no business experience and knew very little about the 3^rd defendant’s business.  For instance, she claimed in her affirmation that she did not know English and that she was a mere housewife who had never been in any gainful employment and had no financial ability.  All these are clearly contradicted by her oral testimony or other evidence before the court.  Though she claimed she failed in English in the school certificate examination, she graduated from an English secondary school.  She also signed the Second Mortgage, the drawdown letter, bank and company registration documents as well as the affirmations and witness statement in English.  Her statement under oath that she did not know English is simply incapable of belief. 

48.  It is also wrong for the 4^th defendant to say that she had never been in any gainful employment.  Quite the contrary, she had considerable working experience and she was still working in 1996.  It is her evidence that in her work, she had to make travel and hotel reservations for customers. She was also involved in office administration. All these duties would require her to have some command of English.  She had also been a company director for many years.  She is clearly not a mere housewife.  Indeed, as early as December 1995, it was stated in the application form for the home mortgage for the Property that she had been in “business/ trade” for ten years.  Both the 3^rd and 4^th defendants had signed this form. Plainly, when she executed the Second Mortgage, she was not someone who was ignorant or had no experience of the business world.  Neither would she be left with any doubt that a mortgage document, which was what she knew she was signing, was something that carried serious legal consequences for her as a mortgagee.  It is improbable that she would believe the 3^rd defendant’s words that it was no more than a formality.  

49.  Both in her affirmations  and her oral evidence, she claimed to know very little about the 3^rd defendant’s business and his business associates.  She even said in her sworn answers to interrogatories that she did not know the name of the business run by the 3^rd defendant jointly with the 1^st defendant and whether he was engaged in any other business.  It transpired from cross-examinations that she was not as uninformed as she hoped to portrait.  Among other matters, she knew of Balin and was further aware of the 3^rd defendant’s involvement and interest in it.  Not only had she and her children been to the office of Balin, but she was also able to remember and recognize the telephone number of Balin.  

50.  In this connection, her evidence that she did not know that the Second Mortgage was to secure Balin’s indebtedness to the Bank is open to doubt.  In the caption of the drawdown letter were these words “Requesting Party: Balin (H.K.) Co.”  The letter was a short letter of one page.  It could not have escaped the attention of the 4^th defendant when she signed on it that the Second Mortgage was in relation to Balin.

51.  Additionally, before signing the Second Mortgage, the 4^th defendant jointly with the 3^rd defendant had signed a Chinese loan application form (客户申請房地產貸款表) dated 5 June 1996.  The form clearly stated that Balin was the applicant.  There was also a declaration by the 3^rd and 4^th defendants that they agreed to offer their property as security for the credit facilities to be advanced to the applicant and for an unlimited amount.  There was no satisfactory explanation from the 4^th defendant as to how it was that she did not know that the Second Mortgage was to secure the indebtedness of Balin and for an unlimited amount, despite having signed this document.  

52.  It is the 4^th defendant’s testimony in court that the 1^st defendant was not present when she and the 3^rd defendant went to CCL to execute the Second Mortgage.  However, she had never raised this in her affirmations or witness statement, notwithstanding that Mr Ma’s affirmation indicated that the 1^st, 3^rd and 4^th defendants attended the execution of the Second Mortgage together.  The 4^th defendant must have realized that her assertion that she did not know the Second Mortgage was to secure facilities for Balin would be untenable if the 1^st defendant executed the document at the same time as she and the 3^rd defendant did.  It is most unlikely that she would omit to mention in her previous affirmations and witness statement that she and the 1^st defendant did not execute the documents at the same time, if indeed this was the case.

53.  There are other aspects of the 4^th defendant’s evidence that are inherently improbable and incapable of belief.  A clear instance is her assertion that it was all the 3^rd defendant’s idea and arrangement that she was registered as the sole proprietor of Winful Trading Co, and that the subsequent change from sole proprietorship to partnership, the change of address and the addition of partners in May 2000 were all done without her knowledge.  However, when the Business Registration record was first amended on 30 May 2000, the 4^th defendant was the only registered proprietor of the firm.  She would have to sign the notification to the Inland Revenue Department to effect the amendment.  It is improbable that she had no knowledge at all that the 1^st defendant’s son was added as a partner and the business had become a partnership business.      

54.  A key aspect of the 4^th defendant’s case and testimony is that she was pressurized into agreeing to sign the Second Mortgage.  She repeatedly said the 3^rd defendant told her if she refused to sign, the Bank would withdraw credit facilities to his business and re-possess the Property, in which case the family would have no food and no home.  It is her evidence that she agreed to sign the Second Mortgage in order to save the Property.  There are two difficulties with this part of her case. 

55.  Firstly, she never explained why it was and under what circumstances that she agreed to sign and did sign the loan application form that preceded the Second Mortgage.  When she was cross-examined on this document, the 4^th defendant said she did not remember or was not clear whether she had signed it. She also said she had not seen it before.  However, this is a document disclosed by her in discovery. 

56.  Secondly, the 4^th defendant was unable to explain how the execution of a new mortgage document in favour of the Bank would avoid the Property from being re-possessed by the Bank. Prima facie, with the execution of the Second Mortgage, the Property became subject to two charges.  The risks of re-possession by the Bank would be increased rather than removed or reduced.  It is further an undisputed fact that after the execution of the Second Mortgage, the 3^rd and 4^th defendants had continued to make payments under the home mortgage until it was fully discharged. 

57.  According to the 4^th defendant, no one had told her what would happen to the existing home mortgage and their payment obligations under it.  When further asked, she said she had not thought about how the signing of a new mortgage document could enable them to continue living in the Property.  As noted above, the 4^th defendant was not an ignorant person who had no experience of mortgage and financial matters.  She also does not impress me as a naive and compliant person who would readily believe what her husband told her with regard to the family’s financial matters, especially in relation to the matrimonial home.  On her case, she was fully aware that the Property was already subject to a mortgage.  If as she said, she was unwilling to go along with the 3^rd defendant’s request to sign another mortgage document, it was only natural and logical for her to ask for the details, including the effect of the new mortgage and how it could help to preserve their matrimonial home.  She would surely want also to know what was going to happen to the existing mortgage and their payment obligations under it.  In the circumstances, her evidence that she simply accepted the words of the 3^rd defendant without question and readily believed that the signing of the new mortgage would save the Property is incredible.

58.  The evidence and credibility of the 4^th defendant is further weakened by the fact that she did not call the 3^rd defendant to testify for her at the trial.  The two of them are still residing together at the Property as husband and wife.  At the early stage of the proceedings, the 4^th defendant’s solicitors herein also represented the 3^rd defendant.  He had also provided documents to the 4^th defendant for the purpose of defending the case.  On the other hand, he had allowed judgment to be entered against him by default. 

59.  No doubt, the 3^rd defendant will be able to give evidence on some material aspects of the case, including whether the 1st defendant was present when the 4^th defendant executed the Second Mortgage, whether he had exerted pressure on the 4^th defendant to sign the Second Mortgage and whether Miss Lo had properly explained the documents to them.     However, he was not called and there is no explanation for it.  It is not said that he was unavailable or unwilling to testify.

60.  In the circumstances, it is open to the court to draw adverse inference against the 4^th defendant, including that the 3^rd defendant’s evidence would not be supportive of the 4^th defendant’s evidence and case:  Wisnewski v. Central Manchester Health Authority [1998] PIOR 324, 340; O’Donnell v. Reichard [1975] VR 916, 921. See also Australia & new Zealand Banking Group Limited v. Pham & Others [1999] VSC 503, paras.85-87 per Warren J, and [2002] VSCA 206, paras.12, 37-39 per Charles JA.              

61.  In short, I do not accept the evidence of the 4^th defendant.  I reject her evidence that she did not know the purpose and effect of the Second Mortgage, including that the Property would be charged to the Bank to secure the indebtedness of Balin. I also reject her evidence that when she nodded in response to Miss Lo’s question whether she knew what she was signing, she was only pretending as she did not want to agitate the 3^rd defendant and because Miss Lo appeared to be ferocious. 

62.  I find as a fact that when the 4^th defendant attended the execution of the Second Mortgage, she was aware that a second charge was to be created on the Property for the purpose of securing banking facilities for Balin, a business in which the 3^rd defendant was involved.  I also find that Miss Lo had informed her that the Second Mortgage was an all monies mortgage to secure banking facilities advanced by the Bank to Balin.  I accept Miss Lo’s evidence that she had followed her usual practice and had told the 4^th defendant that CCL only acted for the Bank and that it was up to her to seek independent legal advice.

63.  It follows that I do not accept the 4^th defendant’s case that she signed the Second Mortgage without knowing the full circumstances and the extent of her liabilities.  I also do not accept her evidence that it was because of what the 3^rd defendant said about the Bank’s intended action to withdraw banking facilities and to re-possess the Property that she was pressurized into executing the Second Mortgage.  

The defence of undue influence

64.  There is no disagreement between counsel as to the law on undue influence.  It will suffice to summarize the relevant legal principles.

65.  The essence of the equitable doctrine of undue influence is that one party has acted unconscionably by exploiting the influence to direct the conduct of another which he has obtained from the relationship between them: National Commercial bank (Jamaica) Limited v. Raymond Hew & Others (unreported) [2003] UKPC 51, 30.6.2003 per Lord Millett at p.6.  

66.  Whether a transaction was brought about by the exercise of undue influence is a question of fact.  Generally, the burden of proof is on the person claiming to have been wrong.  The evidence required to discharge the burden of proof depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case: Royal Bank of Scotland plc v. Etridge (No.2) [2002] AC 773, 796 at para.13.

67.  In Etridge (No.2), the House of Lords criticized the previous approach of classifying undue influences into actual undue influence (class 1) and presumed undue influence (class 2(A) and class 2(B), depending on the relationship between the parties).  The present position of the law, as summarized in Chitty on Contract (29^th edition) vol.1 para.7-050 is that:

“The question is one of proof. The claimant may prove undue influence directly.  Even if he does not do this, if nonetheless he shows that he placed trust and confidence in the other party in relation to the management of affairs, and that the transaction in question is one that calls for explanation, that will normally be sufficient, failing satisfactory evidence to the contrary to discharge the burden of proof, and the transaction will be liable to be set aside.”

68.  Where a third party is affected, it is not enough merely to prove that the transaction has been affected by undue influence.  In cases where a wife acts as surety for the debts of the husband or his business, the bank will be put on inquiry if it is shown that: (1) the bank has knowledge of the relationship between the borrower and the surety, and (2) the nature of the transaction is not readily explicable in terms of their relationship: Etridge (No.2) 799 at para.29, 1037-8 paras.44-49, 1056-8 paras.108-110, 1072-3 at paras.145-147, 853, at para.220.

69.  In the present case, the 4^th defendant has failed to prove as a matter of evidence that the 3^rd defendant had exercised undue influence on her that resulted in her signing the Second Mortgage.  There is no credible evidence that she did not give her informed consent to the transaction and that the 3^rd defendant had abused her trust and confidence to get her to sign the Second Mortgage without proper explanation or consideration.

70.  As between husband and wife, the House of Lords emphasized in Etridge (No.2) that the courts should not be too ready to find undue influence.  In Lord Scott’s judgment, the relationship of trust and confidence is a part of every healthy marriage:

“The proposition that if a wife, agrees to become surety to support his debts or his business enterprises a presumption of undue influence arises is one that I am unable to accept.  To regard the husband in such case as a presumed “wrongdoer” does not seem to me consistent with the relationship of trust and confidence that is a part of every healthy marriage.” (842-3 at para.159)

71.  I consider these remarks equally apt for the present case.  It is perhaps true that the 3^rd defendant was the main breadwinner of the family and was largely responsible for the financial mattes of the family.  There might also be certain degree of mutual trust and confidence between them as husband and wife.  That does not readily provide a basis for finding undue influence. The 4^th defendant had in her evidence endeavoured to suggest she would readily sign whatever documents put before her by the 3^rd defendant.  As the analysis of her evidence in the earlier part of this judgment shows, this is not credible having regard to the circumstances of the case.  In fact, as far as the Second Mortgage is concerned, she did not readily yield to the 3^rd defendant’s request to sign it.  On her case, on the day of the execution of the documents, she ignored the 3^rd defendant when he spoke to her as she was leaving home for work, and even when they were at CCL, they argued about whether to sign the Second Mortgage.      

72.  Further, even if the 4^th defendant’s evidence is to be accepted, namely, she signed the Second Mortgage because she believed the 3^rd defendant’s statement that if she refused to sign, the Bank would withdraw credit facilities for his business, enforce the mortgage and the family would have no food and no home since his business would be closed down, that does not support a case of undue influence.  Firstly, what the 3^rd defendant had said, as accepted by the 4^th defendant, was his personal views and forecast of what would have happened if the Second Mortgage did not materialize.  Secondly, in abandoning the defence of misrepresentation, it is no longer the 4^th defendant’s position that what the 3^rd defendant said was misleading or false.  On the contrary, the available evidence suggests that Balin was in need of funds and had applied to the Bank for further facilities on the basis of additional securities.

73.  The position is as what Lord Nicolls pointed out in Etridge (No.2), 800 at para.32 :

“Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence. Similarly, when a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of hyperbole may be only natural.  Courts should not too readily treat such exaggerations as misstatements.”

74.  Mr Wong argued that not only was there a confidential relationship between the 3^rd and 4^th defendants, the Second Mortgage was one which was not readily explicable by their relationship, such as to raise an evidential presumption and to put the Bank on inquiry.

75.  In considering this submission about the inexplicable nature of the Second Mortgage, it will be apt to note Lord Nicolls judgment’s on this in Etridge (No.2), 799 at paras.28 & 30:  

“	28.	In a narrow sense, such a transaction plainly (“manifestly”) is disadvantageous to the wife.  She undertakes a serious financial obligation, and in return she personally receives nothing.  But that would be to take an unrealistically blinkered view of such a transaction.  Unlike the relationship of solicitor and client or medical adviser and patient, in the case of husband and wife there are inherent reasons why such a transaction may well be for her benefit. Ordinarily, the fortunes of husband and wife are bound up together.  If the husband’s business is the source of the family income, the wife has a lively interest I doing what she can do to support the business.  A wife’s affection and self-interest run hand-in-hand in inclining her to join with her husband in charging the matrimonial home, usually a jointly-owned asset, to obtain the financial facilities needed by the business.  The finance may be needed to start a new business, or expand a promising business, or rescue an ailing business.
	29.	…
	30.	I return to husband and wife cases.  I do not think that, in the ordinary course, a guarantee of the character I have mentioned is to be regarded as a transaction which, failing proof to the contrary, is explicable only on the basis it has been procured by the exercise of undue influence by the husband.  Wives frequently enter into such transactions.  There are good and sufficient reasons why they are willing to do so, despite the risks involved for them and their families.  They may be enthusiastic.  They may not.  They may be less optimistic than heir husbands about the prospects of the husband’s businesses.  They may be anxious, perhaps exceedingly so.  But this is a far cry from saying that such transactions as a class are to regarded as prima facie evidence of the exercise of undue influence by husbands.”

76.  What Lord Nicolls said applies to the present case with full force.  Balin was a source of the 3^rd defendant’s income, from which he maintained the family and paid the mortgage payments of the Property.  Although the 4^th defendant was also working in 1996, her income could not be sufficient to meet the expenses of the family and the mortgage payments.  The sustainability of Balin and the 3^rd defendant’s source of income were clearly of benefit to the 4^th defendant.  It is a matter of importance to her in as much as it was to the 3^rd defendant. 

77.  Thus viewed, the Second Mortgage was not a transaction disadvantageous to the 4^th defendant by the test outlined in by Lindley LJ in Allcard v. Skinner 36 Ch D 145. Neither was it a transaction that was only explicable on the basis of undue influence.  It should also be noted that the 4^th defendant’s liability under the first mortgage was not confined to the $1,200,000 mortgage loan.  The first mortgage was also to secure all monies owed to the Bank on account of, inter alia, banking and credit facilities granted to the mortgagors, i.e. the 3^rd and 4^th defendants.  In this regard, it is not open to the 4^th defendant to argue that the Second Mortgage was a transaction not readily explicable in that the 4^th defendant’s liability had become an unlimited one.

78.  For the reasons above, the 4^th defendant has failed to make good her defence of undue influence and the plaintiff is entitled to judgment against the 4^th defendant as claimed in paragraphs 2 and 7of the Amended Originating Summons.           

Conclusion

79.  Accordingly, there will be judgment for the plaintiff against the 4^th defendant for: (1) Vacant possession of the Property to be delivered up  within 28 days from the date of service of the sealed order, and (2) Payment of all money due under the Second Mortgage together with interest at contractual rate until the date of judgment and thereafter at judgment rate until full payment.

80.  Applying the rule of costs follow event, there will also be an order nisi that the 4^th defendant pays the plaintiff the costs of these proceedings to be taxed if not agreed.  In accordance with the covenant in the Second Mortgage, the costs are to be taxed on solicitor-own-client basis.