CHAN CHAK HUNG v. CHENG SHU KEUNG AND ANOTHER

HCA 2064/1993

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2064 OF 1993

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J U D G M E N T

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1. The plaintiffs in these consolidated proceedings claim the sums of $500,000.00 and $100,000.00 against the defendants under two loan agreements dated 6 November 1991 and 6 January 1992 respectively. In the first action, both plaintiffs claim against the 1st defendant as borrower, and the 2nd defendant as surety, for the sum of $500,000.00. In the second, Mr Chan Chak Hung (the 2nd plaintiff ), is the sole claimant against the defendants in the same capacity, for the sum of $100,000.00. The relevant terms of each agreement were that the principal sums loaned should be repaid by 31 December 1992, with interest thereon at 10 per cent per annum.

2. The defence of both defendants is that, while they admit executing the loan documents, they contend that they are sham documents, and that the sums referred to therein were in fact a deposit in respect of an agreement by the plaintiffs to purchase from the 1st defendant a village house to be built in Kak Tin Village, Shatin, Lot No. 986 in D.D. 182, and in the 1st defendant's defence and counterclaim, re-amended with my leave in the course of this hearing, he claims damages for breach of that agreement.

3. The plaintiffs and the defendants came to know each other through a series of personal relationships in the late 1980's and early 1990's. Since 1988 the 1st plaintiff, Tan Kuan, had been cohabiting with a Ms Leung Mei Chun, Elsa (Elsa), in a flat he owned in Discovery Bay, and later in Tin Sum Village, Tai Wai, Shatin. He and Elsa later married in Switzerland in December 1992. Elsa's sister, Leung Mai Wah, Betty (Betty) was at the same time living with the 2nd plaintiff, and through them the plaintiffs became friends and the families regularly met. Betty had previously cohabited with a Mr Yuen Ming Biu who has since died. Mr Yuen had a sister, Yuen Lai Sum, Connie (Connie), who is the wife of the 2nd defendant, and who became very good friends with Elsa and Betty, and the 2nd defendant became acquainted with the plaintiffs. The 1st defendant is the brother of the 2nd defendant.

4. The events which gave rise to this action start in 1991. The plaintiffs' account is that in about October of that year they learnt via Elsa, Betty and Connie, that the 1st defendant wished to borrow a sum of $600,000.00. The plaintiffs and their witnesses, Elsa and Betty, seemed vague as to the reason for the loan, but believed it to be to invest in property. However, although the plaintiffs said that they were not very keen, as they did not know the 1st defendant well, they were persuaded by Elsa and Betty, and agreed to lend $400,000.00 and $200,000.00 respectively. They said that there were then meetings between the plaintiffs with Elsa and Betty, and the defendants and their wives, in Shatin, and at one of these the terms of the loan were agreed and they went to find a solicitor's firm to draw up the agreement. The plaintiffs Elsa and Betty said that they first of all went to a firm which did not do that sort of work, and then found the firm of Edmond H. C. Wong & Co. where they saw a solicitor called Mr Wong Hak Man (Mr Wong), who drew up the agreement while they waited. It was then signed by the plaintiffs as lenders, the 1st defendant as borrower, and the 2nd defendant as guarantor, and the plaintiffs handed cheques to the 1st defendant for $400,000.00 and $100,000.00 respectively. The 1st plaintiff paid the solicitor's fee of $2,000.00.

5. I note at this stage that this part of the evidence of the plaintiffs is clearly inaccurate. Mr Wong, who gave evidence about the transaction, said that the 1st plaintiff at least came to his office three times. The first time was to arrange an appointment with him through his clerk, after telling the clerk that it was to prepare a promissory note, the second to give instructions to Mr Wong as to the terms of the loan agreement, and the third on 6 November 1991, when the parties, with their wives and partners, came to sign the agreement. Mr Wong produced the handwritten draft that he had made after taking the 1st plaintiff's instructions.

6. It is not in dispute that the 2nd plaintiff paid to the 1st defendant a further cheque for $100,000.00 in January 1992 when a further agreement, in the same terms but copied by the 1st plaintiff from Mr Wong's original agreement, was signed.

7. The defendants' version of these events is very different and concerns the way in which indigenous villagers in the New Territories are made a grant of land to build a small village house, and then wish to transfer their interest. These grants are made by the government to protect the interests of certain male descendants of indigenous people in the New Territories according to Chinese customary law. The grants being made for this particular purpose, it was, until the case of Sung Wai Kiu & anor v Wong Mei Yin [1997] 1 HKC 288, generally considered against public policy and illegal to attempt to circumvent the conditions of the grant by transferring the property to another within three years. After this period it could be transferred upon payment to the government of a premium. However, at the time of the events with which I am concerned here, it was clearly not unusual for arrangements to be made for such transfers otherwise than by agreements for sale and purchase, which would not be enforceable, and which usually, as between the grantee and a purchaser, took the form of a either a development agreement, a power of attorney or a will, or a combination of these. Mr Wong admitted however that a solicitor who drew up such documents then might find that a rather dim view of his conduct would be taken by the Law Society, and said that he would not do it himself. Indeed, at the time of the first agreement, he had only been admitted a few months.

8. As between a purchaser from a grantee and a sub-purchaser, this method of protection for the purchaser's interest was not available, as the vendor had no formal title or interest himself to transfer. The evidence of Mr Wong was that a common practice in those days, to protect a sub-purchaser who had paid part or all of the purchase price for a village house, was to enter into a loan agreement so that the purchaser could recover his money if the sale did not proceed or the house was not built, and which became null and void if the sale was completed. Indeed, he said that he could think of no other way to protect the interest of such a purchaser then.

9. The evidence of the defendants is that this was such an arrangement with the 1st defendant as vendor and the plaintiffs as sub-purchasers, and the $600,000.00 was the deposit for the purchase of the house to be built at Kak Tin Village for the sum of $2,400,000.00.

10. The 1st defendant agreed in 1991 to purchase two village houses from Mr Tsang Yuk Chee (Tsang) for $1,800,000.00 each, with a deposit of $500,000.00 each and the balance payable upon completion of construction. Tsang, who describes himself as a property developer specializing in small houses in Shatin and the New Territories, was acting under powers of attorney or similar arrangements to deal in sites the subject of grants to indigenous villagers. The two sites sold to the 1st defendant had been granted to a Mr Tsang Chi Kei and a Mr Tsang Chi Ming respectively, for whom Tsang acted. The site the subject of these proceedings was that of the former, and the 1st defendant entered into a sale and purchase agreement with Tsang in respect of it. In the light of the law as it then stood, it is unlikely that this could ever have been enforced by either party, and the 1st defendant's evidence is that other documents, in the form of an I.O.U. and a will, which he called "concealed documents", were drawn up by a solicitor. Tsang denies that any other documents were signed, but I am satisfied that either his memory has failed him after all this time, or he some other reason for not admitting it. He agrees that the usual way of transferring such properties was by the development agreement, power of attorney and will, and I see no reason why this sale should have been any different. It is unlikely in my view that such documents were not also used here.

11. The 1st defendant said that his original plan was to use one of the houses for himself and sell the other for a profit. He accordingly let it be known that he had a house to sell, although at this stage no building had been commenced and it was a bare site. His brother the 2nd defendant told Betty about the houses, and shortly thereafter he says he was telephoned by Elsa who said that she was interested in buying one of the houses. This was followed, the defendants say, by the first meeting in the restaurant when the houses were discussed. They say that there was no discussion of a loan. Further meetings followed when the purchase was agreed at $2,400,000.00, being $800,000.00 for each floor, these houses customarily being divided into three flats, with a deposit of $200,000.00 for each floor. It was understood that the 1st plaintiff would pay the deposit for two floors and the 2nd plaintiff for one. Both defendants also said that all parties had visited the site to see where it was and it was agreed that a loan agreement should be entered into to protect the interests of the plaintiffs after they had paid their deposit to the 1st defendant. It was for this reason alone, they said, that they visited the solicitor and signed the agreement

12. All this is, of course, denied by the plaintiffs and their witnesses, who say that they never visited the site with the defendants or anyone else at that time, having passed by it only by coincidence on a walk after a meal. However, both Elsa in her evidence, and Betty in her witness statement, admitted to having an interest in buying a village house, although they say that this was some months after the loan, and they did not pursue it and never agreed to buy the house.

13. For a number of reasons I reject this evidence and accept that of the defendants. On her own evidence Elsa admits making several visits to the District Lands Office to try to check the status of the land, which she says were unsuccessful. This is in itself more the behaviour of a purchaser, or potential purchaser, rather than someone just displaying an interest. But more than this, is the evidence of instructions given by Elsa to the developer for substantial changes in the design and layout of the house, and meetings between herself, Tsang and Mr Leung Kam Wah (Leung), a decoration contractor, both with and without her husband, the 1st plaintiff. The defendants, Tsang and Leung gave evidence of meetings and visits to the site with the 1st plaintiff and Elsa. In particular they gave convincing and similar evidence of a meeting in a carpark on 22 August 1992 when Tsang produced plans drawn to Elsa's specifications as to the alterations to the original, and standard, design that she required, and which she signed and dated on each page. This document was also signed by the 1st defendant, as it changed the timing of payments to Tsang under their agreement, and I accept the evidence of the 1st defendant that it effectively varied the agreement as to payments between him and the plaintiffs. Following this, evidence was given of subsequent visits to the site by the plaintiffs, Elsa and Betty to check progress.

14. This is in my view clearly the conduct of a purchaser. The evidence of Elsa that she discussed the layout and signed on the plans only to indicate what she would have liked, had she been interested, does not accord with common sense. I accept the evidence of the defendants and their witnesses, Tsang and Leung, who have no apparent interest in this matter or reason to invent their account, that the plaintiffs were the purchasers of the house and Elsa was giving instructions as to its construction, instructions which were clearly carried out. Mr Cheung for the plaintiffs has pointed out that the majority of these events were said to have occurred in 1992, some time after the loan agreement was signed, and belatedly sought to proffer an explanation that perhaps there was a suggestion that the loan could be converted to a deposit for the house which was not pursued. This is not, however, the evidence of his clients, who have steadfastly denied throughout any agreement to purchase.

15. Neither do I accept the suggestion that, if there was an agreement to purchase, it was Elsa who was the purchaser, not the plaintiffs. Apart from the fact that Elsa has consistently denied being a purchaser, there is no evidence of any payment from her, or indeed any of those involved, except the plaintiffs. She may well have been the driving force behind the transaction, and in charge of giving instructions as to the design and layout, but the evidence does not reveal her to be anything but at most the agent of those who were paying for the property, the plaintiffs.

16. I am satisfied on the evidence that there was an oral agreement to buy the 1st defendant's house, that the payments by the plaintiffs were the deposit for that house and not a loan, and the plaintiffs and, in particular, Elsa were closely concerned in the construction and design of the building as it progressed.

17. My view that this was not a loan is further supported by a number of other factors. The first of these is that it is clear from the evidence that the 1st defendant was not then short of money and needing to raise capital for this or any other project. He had made payments for his own deposits and still had in the bank a considerable sum. The second is that the plaintiffs did not know the 1st defendant at all, and had no reason to trust either of the defendants sufficiently to make such a loan without security, and lending as they did the maximum each could then make available. Even then the 2nd plaintiff was not able to raise the balance for two months. The third is that the 1st plaintiff is clearly an experienced businessman. He has a degree in electrical engineering from a university in Canada and has worked with international companies and been a consultant to other bodies. He holds a Swiss passport and is presently living in Singapore. The 1st defendant is a fireman whose education extended only to primary 6. The 2nd defendant, who education was similar, is a small part actor with TVB. The reasons given by the plaintiffs for entering into this arrangement with the defendants, by the persuasion of their wives and the good rate of interest, does not ring true and I have no hesitation in rejecting it. A fourth factor is the behaviour of the 1st plaintiff in late 1992, just before the alleged debt became due for payment, when he and Elsa left their residence in Tin Sum Village and moved to Singapore. They left no forwarding address and their telephone was disconnected, and there is no evidence of any serious attempt to recover the debt when it fell due. It was not until after the defendants had written to the solicitor Mr Wong on 5 January 1993, asking his advice as to what they should do about the agreement to purchase and the failure of the plaintiffs to make the further payment due of $650,000.00, and his reply denying any knowledge of the agreement for sale and purchase, that they received a letter from solicitors for the 2nd plaintiff, even then only claiming the $100,000.00 under the second alleged loan agreement. This appears to have crossed in the post with the defendants' letters to the plaintiffs demanding damages for the cost of restoring the house to the previously planned layout, and forfeiting the deposit for that purpose.

18. Taking the evidence as a whole, and bearing in mind the inaccuracies which are bound to occur when, as a result of delays in bringing the matter to trial some 7 years after proceedings were commenced, and nearly 9 years after the events to which they relate, I am satisfied that it is more likely than not that all the dealings between these parties arose out of an agreement for sale and purchase, and that the loan agreements are indeed a sham and of no effect.

19. It follows that the plaintiffs' claims on those agreements must fail. Their only claim is on the loan agreements. Mr Cheung's application to amend the statement of claim to insert an alternative claim to the $600,000.00 as a deposit in his closing submission came far too late to be entertained seriously and must be rejected.

20. What then of the counterclaim? The 1st defendant claims that, notwithstanding the lack of a written contract, there was a binding agreement as a result of the part performance by the 1st defendant at the request of the plaintiffs in making substantial alterations to the house. On the evidence this must be right. The 1st defendant gave evidence not only of the extra $30,000.00 he had to pay to Tsang as consideration for changing the plans for the house, but also of the extensive changes required by Elsa, including changing the balconies of the 2nd and 3rd floors to the opposite side from the original plans. Mr Cheung did not seek to seriously challenge the allegation of part performance and I am accordingly satisfied that there is a binding contract upon which the 1st defendant can claim. It is also clear that the plaintiffs made no further payments under the contract and are therefore in breach of it.

21. But what is it that he can claim? The only loss and damage pleaded in the counterclaim is the loss of bargain, namely the profit of $600,000.00 he would have made from the plaintiffs had the sale gone ahead. There are two factors which I cannot, however, ignore. One is the fact that he has since sold two units in the property, and, although there is no specific evidence of the profit made, the prices obtained seem at least as much as that the plaintiffs would have paid, and I have no evidence of any loss over his dealings with this property. Another factor is that the 1st defendant still has the $600,000.00 paid to him by the plaintiffs. There is no evidence of any part of the contract between the parties as to forfeiture of deposit, and none is pleaded. Indeed, had it been, there would no doubt have been considerable further argument as to the terms of the contract, and the matter of the size of the deposit in relation to the purchase price. I am left with no evidence at all of any loss suffered by the 1st defendant.

22. To his credit, Mr Chong for the defendants now claims only nominal damages, having abandoned that pleaded. But I find that I cannot even award that in the face of the lack of evidence of loss. I find that there was a contract, and that the plaintiffs were in breach of it, but no loss flowing therefrom being established, I cannot award even nominal damages, and the counterclaim too must be dismissed.

23. The only other matter which perhaps should be mentioned before leaving this is the question of the solicitor Mr Wong and whether he was aware of the nature of the transaction of which he was a part. The defendants maintain that he was told what was behind the agreement, while the plaintiffs, in support of their contention that it was a straightforward loan, deny this. It is not necessary for me, in deciding the issues here, to come to a firm conclusion either way, and his knowledge, or lack of it, has not assisted me in arriving at my decision and I decline therefore to make a finding either way.

24. In considering the matter of costs, I am conscious of the fact that principal issues here are the same in both the plaintiffs' claim and the counterclaim. On those issues the defendants have been successful. I have only dismissed the counterclaim on the basis that no damage was proved by the 1st defendant. Although both defendants must have their costs of the claim against them, it would not in my view be right to deny the 1st defendant all the costs of the counterclaim. There will accordingly be an order nisi that the plaintiffs pay the costs of the defendants on the claim, and 75% of the costs of the 1st defendant on the counterclaim.