HAPPYFACE LTD. v. LAU SHUI KING t/a FU KING PROPERTY AGENCY

HCA 4110/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4110 OF 1996

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J U D G M E N T

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1. The Plaintiff claims against the Defendant for breach of fiduciary duties as agent. It claims for an account for profits of $1,280,000 or alternatively damages.

Matters not in dispute

2. It is not in dispute that the Defendant was at all material times an estate agent.

3. The Plaintiff owned Flat B, 7th Floor, Block 1 and car parking space No. 61 at Level CP2 of Pacific View, 38 Tai Tam Road, Hong Kong ("the Property"). Following some dealings between a Ms Lai of the Plaintiff and the Defendant herself, the Plaintiff entered into a written provisional agreement dated 4th January 1996 to sell the property to one Golden Ample Ltd. for HK$8,720,000. This was followed by a formal sale and purchase agreement dated 22nd January 1996.

4. Then by a written agreement for sub-sale and purchase dated 16th February 1996, Golden Ample Ltd. sub-sold the Property to one Wise Tycoon Ltd., and by a written assignment dated 18th March 1996, the Property was assigned to Wise Tycoon Ltd.

5. In fact, Golden Ample Ltd. is owned by the Defendant herself and Lo King Fun, her husband. They each owns one of the two shares in the company and they are its two directors.

6. Lo King Fun is the sole proprietor of a Kai Cheung Shipping Company. This company put up the cheque for the initial deposit on the Property and paid a further deposit and the stamp duty.

7. Then on 10th February 1996, Golden Ample Ltd. entered into a provisional agreement for sub-sale and purchase with Wise Tycoon Ltd. A formal agreement followed on 16th February. The Property was assigned to Wise Tycoon Ltd. on 18th March 1996, with Golden Ample Ltd. as confirmor. The price paid by Wise Tycoon Ltd. was $10,000,000. Ultimately, a figure of $1,150,000 was transferred from Golden Ample Ltd.'s bank account to Kai Cheung Shipping Company's account.

8. It is the Plaintiff's case that the Defendant acted as its agent and therefore owed it fiduciary duties. It is the Defendant's case that she did not act for the Plaintiff at all but only for Kai Cheung Shipping Company and therefore did not owe the Plaintiff any fiduciary duties.

Evidence

9. PW1, Lai King Fong Connie, also known as Mrs Yang or Yeung, gave evidence that she was a shareholder and director of the Plaintiff, which owned the Property. A lease of the Property had come to an end. The Plaintiff had not decided whether to sell it or lease it again, so advertised it on 3rd January 1996 for sale or lease. On the same day, her secretary, Miss Ng, reported that there was a Fu King Estate Agent which had managed to get hold of a purchaser who was offering $8.6 million. She instructed Miss Ng to reply that the price was too low.

10. On 4th January, she spoke on the telephone to Madam Lau, the Defendant, and told her that the offer was too low. The latter said that she would make some more efforts for Ms Lai to speak to the purchaser and negotiate on the price. She asked Madam Lau what sort of commission she would charge and Madam Lau said it would be 1%. Ms Lai offered 0.5% and Madam Lau agreed. Then she said she would come back to her after speaking to the purchaser. Then on the same day in the afternoon, there was another phone conversation between them.

11. Ms Lai said that she raised the question of commission because it was a rule that an estate agent would charge commission, and she wanted to have the matter clarified at the outset. She said that there was some talk of price and of Madam Lau looking for purchasers for her, so that they would come up with a better price.

12. She did not know the relationship between Madam Lau and the proposed purchaser and did not ask.

13. There was a further conversation on the same afternoon. Madam Lau said she was going to get the initial deposit from the potential buyer. She did not tell Ms Lai the price, and when Ms Lai asked, she said it would be to her satisfaction.

14. Shortly after 6 p.m. on 4th January, Madam Lau came to Ms Lai's office with the provisional agreement for purchase and sale. All the handwritten information on it, including the commission, was already filled in and the agreement had been signed on behalf of the purchaser. Madam Lau signed as agent, either beforehand or during the meeting.

15. Ms Lai complained that the offer was too low. Madam Lau told her that the intended buyer was to leave Hong Kong and it would be difficult to get another buyer. She said that the market might get considerably worse. Ms Lai became concerned about this, and so she accepted the price and signed the agreement.

16. She noticed that the deposit cheque was not drawn by the purchaser, so she drafted a letter of confirmation and asked Madam Lau to have it signed by the drawer of the cheque. Madam Lau returned next day with the letter duly typed and signed.

17. Ms Lai said that some time later, Madam Lau telephoned and asked to be allowed to take the purchaser's wife to see the flat. The management office was instructed to let her have the keys.

18. Then just before the completion date, Ms Lai found that there had been a sub-sale for $10,000,000. She became suspicious but did not have time to do anything before the completion date. The flat was duly assigned to the sub-purchaser on 18th March 1996. After that, she found out the ownership of Golden Ample Ltd. and instructed her solicitors to issue a demand letter.

19. Ms Lai also identified a debit note from the Defendant to her, demanding payment of the commission charged according to the provisional agreement. She did not pay it because she found that Madam Lau and her husband were the directors and shareholders of Golden Ample Ltd.

20. Ms Lai said that she was not in a hurry to sell the Property, and that if she had known that Madam Lau was closely related to the purchaser she would not have sold.

21. Cross-examined, Ms Lai insisted that she had first spoken to Madam Lau on 4th and not 3rd January, though her witness statement appeared to show that it had been on 3rd January. She said that this was a matter of drafting by her lawyer.

22. She also insisted that Madam Lau had first told her "I have found a purchaser for you". It is clear that both in her affirmation, prepared for the O.14 proceedings in this case, and in her witness statement, she said that Madam Lau had said that she had a client, or customer, who was interested in buying. She insisted that she had told her solicitor, in Chinese, that the words were "I have found a purchaser for you", and that she had not corrected the affirmation or the statement because in her view, it made no difference.

23. She denied having changed her evidence to counter the arguments put forward by Counsel at the 0.14 hearing, at which she was present, that the Defendant was not, and could not be, her agent but was only the agent of the purchaser. She said that she had thought of the case more thoroughly and had been more careful in the small details than when she made her statement.

24. She accepted that the natural inference was that the Defendant was representing the purchaser, but she said that estate agents always represented buyer and seller. The Defendant had never said that she was representing the buyer and not the seller here.

25. Ms Lai insisted that from the terms of the written provisional agreement as well as the conduct of the negotiations, she had taken Madam Lau to be acting for both parties. She said that Madam Lau had promised to go back and negotiate further for her when she said that the first offer of $8,600,000 was too low.

26. She denied that the discussion of the commission figure had taken place in her office, or that the figure had only then been inserted in the written agreement.

27. The Defendant, Madam Lau, confirmed that she was the wife of Mr Lo who owns Kai Cheung Shipping Co. and that they were both shareholders of Golden Ample Ltd. She said that she had herself been an estate agent since 1991. As such, she would sometimes act for both the vendor and the purchaser, and sometimes for one or the other.

28. She said that on the morning of 4th January 1996, Mr Lo had come to her office and shown her Ms Lai's newspaper advertisement. He asked her to make arrangements for him to see it, because he was interested in buying it. She herself had no interest in buying it; it was an investment of his own.

29. Accordingly, she made arrangements with Ms Lai's secretary, and she and Mr Lo viewed the flat at lunchtime that day. Mr Lo said that the flat was in quite good condition and that if he leased it out there would be no need to redecorate. However, the usable area was rather small. He told her to go back to the vendor and see what price would be accepted. Later, she spoke to Ms Lai and said that she had a customer who was interested in the flat. She asked what her price was. Ms Lai said it was $9,000,000 as advertised. She told Ms Lai that it would be difficult for her to negotiate a deal with the customer; it would be difficult to talk him into paying that. In another sense , she was asking if Ms Lai would take less. She said she would go back to the customer.

30. Madam Lau went back to Mr Lo who told her he would pay around $8.7 to $8.8 million. She telephoned Ms Lai again. This time, she formed the view that Ms Lai might take $8.8 million. They talked about what would be left in the flat in the way of curtains and air-conditioners.

31. Madam Lau then went back to Mr Lo who told her to offer $8.72 million. She telephoned Ms Lai again and told her that her customer would make a firm offer very close to what she wanted, and arranged to come back later with a deposit. She did not say what the offer was. She prepared the provisional sale and purchase agreement for Mr Lo to sign. She asked whose name he would buy it in; he instructed her that it would be in the name of Golden Ample Ltd. He agreed to pay $65,000 commission. She filled in all the details including this, but excluding the commission payable by the vendor under Clause 8 and the total commission payable by a defaulting party under Clause 5. Mr Lo gave her a cheque for $500,000 and signed the agreement. She took it to Ms Lai's office, and she and Ms Lai both signed it there. In the course of the meeting, Ms Lai raised the question of commission and said that she would only pay 0.5%; and so Madam Lau filled in the commission figures accordingly.

32. She also denied that there had been any later arrangement for a further viewing to let the purchaser's wife see the flat.

33. Cross-examined, Madam Lau accepted that she would charge commission to both parties if she was acting for both, but insisted that in this case she had only been acting for the purchaser. She said in effect that she had not been expecting commission from the vendor. Ms Lai had raised it; she had agreed 0.5% because she was in a hurry to get away; and only then had she written in the commission figures. She accepted it because sometimes parties for whom she did not act would give her a bonus or gift. As to why, if she had thought the money was supposed to be a gift, she had sent out the debit note for commission, she said that this was a standard form and procedure. Her accountant prepared the debit notes and she just signed them.

34. As to advice, she denied there was any given; but she did say that she had told Ms Lai that the purchaser would be leaving Hong Kong soon.

35. Mr Lo also gave evidence. He said that he had told his wife to arrange for him to see the flat. He had viewed it at lunch time on 4th January. He decided to buy it as an investment. Later that day, he told Madam Lau to see how much the vendor would come down. Madam Lau had mentioned a price of $8.6 to $8.8 million. He had decided to offer $8.72 million. She had drafted the provisional sale agreement at that figure. He had agreed to pay her commission of $65,000. He signed the agreement and the cheque and told Madam Lau to buy the flat if the figure was accepted. At about 7 p.m., she told him that the vendor had confirmed and had signed the agreement.

36. Mr Lo was quite frank that he had applied for a mortgage for Golden Ample Ltd. to buy the Property, citing as the reason for doing so the provision of living quarters for the directors. This was not so. The Property was bought only for investment. But the interest rate would be more favourable if the company was buying living quarters, so he gave that reason.

37. He was asked if, when he signed the agreement, the commission payable by the vendor had been filled in. He said that he had not noticed.

38. As to the sub-sale, he said that someone from Centaline, a large property agency, had approached him on 10th February to see if he would sell it. He had quoted a price of $10 million as a sort of joke because he was not prepared to sell. However, when he came back from the races that evening, he found the Centaline employee waiting for him with a provisional agreement for sale at $10 million and a deposit cheque, so he had decided to accept. He did not know how Centaline had come to know that he had the Property so as to make the offer to him.

Evaluation

39. Ms Lai's evidence was not entirely consistent with her earlier statement and affirmation. However, as to the date of the original telephone conversations, this is not of any great importance, and I can see that she may well not have bothered to correct a written statement put in front of her for signature.

40. As to the question of whether Madam Lau told her that she had a client interested in buying, or had found a purchaser, this is a rather subtle distinction. Her explanation of telling her solicitor something in Chinese, finding it different in the English translation (her command of English being perfect) but disregarding it as of no importance is at first glance not particularly incredible, because to a layman, no doubt it is of no importance. Whether the difference in the wording is important depends very much on the legal arguments put forward by Defence Counsel. To change her evidence to counter those arguments after the O.14 hearing Ms Lai would have had both to grasp those arguments and to find them sufficiently powerful that she would need to lie to get round them. No matter how sophisticated she may be she is still a lay person, and it is somewhat hard to imagine that she would both grasp the arguments and find them powerful. Nevertheless, it is a discrepancy and in the circumstances I have to look at the rest of her evidence carefully.

41. Madam Lau was found less than convincing in her demeanour. She showed some tendency to evasiveness. Also her story of thinking that the commission was a gift is massively incredible. She filled in the form for commission. She sent out a later debit note for commission. She knew perfectly well that she was charging commission.

42. No matter what her initial words were, it is quite clear that Madam Lau, on her own evidence, held herself out as taking part in the negotiations on Ms Lai's behalf. I note in particular that she said that it would be difficult for her to negotiate a deal with the customer and difficult to talk him into paying the full $9 million.

43. Ms Lai said that she raised the question of commission during this telephone call. There is no inconsistent, or apparently inconsistent, prior statement on this. Given that Ms Lai advertised for a private sale involving neither agents nor commission, it would be inherently probable that if she found herself approached by an estate agent, commission would be uppermost in her mind and she would raise it there and then. Having heard her evidence and that of Madam Lau on this point, I believe Ms Lai. I find that the matter of commission was discussed on the telephone. I also believe Ms Lai that when she first saw the provisional agreement, the whole of it was filled in, including Clause 8, relating to the commission payable by the vendor.

44. It follows that Madam Lau held herself out as taking part in the negotiations on behalf of Ms Lai for a commission. She accepted instructions to act as Ms Lai's agent, as well as Mr Lo's, in the negotiations. There was an oral agreement between them which was later reduced to writing in the provisional sale and purchase agreement.

Liability

45. Mr Allen Lam, for the Defendant, argues that on the pleadings and the evidence, if Madam Lau did act for the Plaintiff she acted as "estate agent". An estate agent is not an agent in the true legal sense. He relies on the dictum of Godfrey J (as he then was) in Cheng Kwok Fai v. Mok Yiu Wah, Peter and Anor., [1990] 2 HKLR 440 as authority for this.

46. That case dealt with misrepresentation by an estate agent. What Godfrey J said was :

"An agent in the property market in Hong Kong is not, as it seems to me, in quite the same position as an estate agent in England and Wales (as to this, in relation to misrepresentation by an estate agent, see Mullens v Miller, (1882) 22 Ch D 194). An agent in Hong Kong acts as a broker, usually, though not always, taking 'commission' from both vendor and purchaser."

Of course there may be situations where someone called an "agent" is not really an agent in the full legal sense. The learned authors of Bowstead and Reynolds on Agency refer to the relationship of estate agent or broker to principal as "incomplete agency", because the agent's powers to alter his principal's legal relations are limited; see 16th Edition, para. 1-017; but of such incomplete agents it is said :

"They do, however, act for their principals in a capacity which may involve the repose of trust and confidence, and hence are subject in some respects to the fiduciary duties of agents towards their principals".

47. There is no suggestion in the above judgment that an estate agent or a broker is not an agent. There was no suggestion in the Hong Kong cases of double agency which were cited to me that an estate agent, by reason of acting only as a broker, is not subject to the fiduciary duties of an agent. Indeed those cases proceeded on the very basis that the duty of disclosure applied.

48. The duty to disclose is set out in Bowstead and Reynolds (16th Ed. at page 217) as follows :

"An agent may not enter into a transaction in which his personal interest, or his duty to another principal, may conflice with his duty to his principal, unless his principal, with full knowledge of all the material circumstances and of the nature and event of the agent's interest, consents."

This point that the Defendant, in acting as estate agent, did not act as true agent and did not owe any fiduciary duty to the Plaintiff is in my view quite untenable. Agency is a question of fact. In this case, the facts show clearly that Ms Lai engaged the Defendant as agent to act for her in the negotiations, and agreed to pay her commission. The Defendant was indeed a broker but she was no less an agent for that, and she certainly owed the fiduciary duty of full disclosure.

49. Mr Lam also argued that the Defendant could not be the agent of the Plaintiff, because an agent may not act for two opposing parties without the informed consent of both of them. See Richard Ellis Ltd. v. Van Hong Tuon [1988] 1 HKLR 169 and Fullwood v. Hurley [1928] 1 KB 498. In this case, Mr Lo had never known that the Defendant would act for the Plaintiff or consented to her so acting.

50. Mr Lo does indeed say that he did not know that the Defendant would act for the Plaintiff. Indeed it does not seem to have crossed his mind. He was asked about his signature on the provisional agreement and he said that he had signed it after the Defendant had prepared it. She says that she had not filled in the commission payable by the vendor in Clause 8 at that stage. He says that he simply did not notice whether that part had been filled in.

51. I do not believe the Defendant's evidence on this. She was obviously acting all along on the basis of a standard form, followed by a standard debit note, which would enable her to take commission from the vendor. She filled in everything else on the form. There was no reason for her not to fill in Clauses 5 and 8.

52. I do not believe Mr Lo's evidence that he did not notice. His agent was after all his wife. It would be normal for him to take an interest in what she was making on the deal in addition to the $65,000 he was to pay her. He is quite capable of departing from the truth in order to get a better mortgage interest rate, and he is quite capable of departing from the truth to support his wife. In any event, he signed the agreement, the terms of which provide quite clearly for double agency. Even if the commission to be taken from the vendor was not filled in, his signature on the form would signify advance permission to his agent to deal as she liked with the other party, including agreeing double agency.

53. In any event, even where an agent for one principal acts for a second principal without the first principal's knowledge and consent, I cannot see that he can rely on this lack of consent to escape his fiduciary duty to the second principal who has reposed trust in him. The fiduciary duty depends on the repose of trust by the principal in the agent. Trust is reposed by the second principal and the agent cannot rely on his own failure to honour that trust in order to escape his liabilities.

54. I conclude that the Defendant owed the fiduciary duty to the Plaintiff to disclose her own interest in the Property to the Plaintiff.

55. It follows that the Defendant must disgorge to the Plaintiff any profit she made. There is here no evidence that there was any advance plan to buy cheap and sell at a profit. Mr Lo could have been lucky, although the fact that he got an offer of $10 million, out of the blue and without any advertising only about three weeks after the formal sale and purchase agreement, looks more than a little suspicious. But this does not matter. The evidence is that if Ms Lai had known the true position she would not have sold. She was led into selling by the lack of disclosure and so even a windfall profit must be disgorged.

Quantum

56. The difference between the two sales prices is $1.28 million. The evidence is that Mr Lo, through Kai Cheung Shipping Company, put up the money for the deposit and stamp duty. He says that Golden Ample Ltd. would have a tax liability of about $200,000 on the profit and that there were legal expenses of $38,000. A figure of $1.15 million was paid back from Golden Ample Ltd. to the account of Kai Cheung Shipping Company. He estimates the net profit made by him at about $500,000. There is no other evidence from which profit might be calculated.

57. Golden Ample Ltd. was a shell company of which the Defendant owned half the shares. It seems that it was merely used as a vehicle for the transactions. Counsel for the Defendant argues that there is no evidence of any secret profit to the Defendant. But to say that the Defendant made no profit would be unrealistic. Golden Ample Ltd. made a net profit after deducting what, in effect, Kai Cheung Shipping Co. lent it. The directors of Golden Ample Ltd., Madam Lau and Mr Lo, could have decided to keep the profit in the company's account rather than to pay it out to Kai Cheung Shipping Co. We do not know what other arrangements there were or might have been between them.

58. It seems that I have to accept the evidence of Mr Lo as to the net profit. Madam Lau as owner of half of the shares in Golden Ample Ltd. would in effect have been entitled to half of that net profit. That is what she must now disgorge. I think it is proper that she should pay interest at the commercial rate on that profit from the date when it was made.

59. Judgment in favour of the Plaintiff for $250,000 with interest thereon at prime rate plus 1% from 18th March 1996 to the date hereof and thereafter at the judgment rate, and costs nisi to be taxed if not agreed.