NETWELL PROPERTIES LTD v. JCG FINANCE CO LTD

CACV 201/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 201 OF 2002

(ON APPEAL FROM HCA NO. 1330 OF 1999)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This was an appeal from a judgment of Deputy High Court Judge Poon given on 6 March 2002. The matter before the Deputy Judge was a hearing in respect of an Order 14A application on behalf of the defendant that had been introduced into an Order 14 application that had been made on its behalf some months earlier. The judgment that had been entered by the Deputy Judge was that the "plaintiff should pay the defendant the loan amount (including principal and interest) which is enforceable by the defendant under the subrogated rights of ACBL ("Asia Commercial Bank Limited") under the ACBL Mortgage ("the Quantum") and its costs of the application to be taxed if not agreed". The parties were ordered to agree the quantum, failing agreement there was liberty to apply. At the conclusion of the hearing of this appeal, this court allowed the appeal and remitted the matter back to the Court of First Instance for consideration of the Order 14 application.

Background

2. In this action the plaintiff seeks rescission of a mortgage that it executed in favour of the defendant in November 1996. The grounds on which rescission is sought are that the mortgage was executed following misrepresentation by the defendant. The misrepresentation is alleged to have been fraudulent and in the alternative negligent. The plaintiff also claims damages for breach of contract as well as, and in the alternative, damages for breach of fiduciary duties. It is unnecessary to consider the exact nature of the alleged misrepresentation. It suffices to say that the plaintiff alleges that the mortgage was entered as part of a larger transaction to finance the redevelopment of a property in Beijing. According to the pleading, other parties should have provided other security and there was, at the least, a failure to see that that was done. In the amended defence the defendant joins issue with the plaintiff on its case. In the counterclaim the defendant claims more than $66 million said to arise from breaches of the larger transaction. Again, the details of this are unnecessary for this application. Significantly however, introduced in November 2001, as part of a re-amendment to the counterclaim was paragraph 31A. There, the defendant raised the issue that it was entitled to be subrogated to the rights of ACBL under the previous mortgage of the property to ACBL. It was pleaded that a total of $14,077,256.59 from the money provided by the defendant was paid directly to ACBL. There was then an alternative plea that by reason of that payment the plaintiff obtained a substantial benefit at the defendant's expense and would be unjustly enriched unless the defendant were entitled to recover that sum, together with interest, out of the property.

3. Prior to that, in January 2001 a summons had been issued seeking final judgment under Order 14 and under Order 18 rule 19 in respect of the whole sum claimed by the defendant in the counterclaim. As a matter of procedure this seems to have been a summons supplemental to an earlier summons of the same nature issued in July 1999. Obviously, no reference had been made in either summons to any claim in respect of subrogation or unjust enrichment. The January 2001 summons was later amended to add a prayer to dismiss the plaintiff's entire claim. In November 2001, a summons was issued on behalf of the defendant seeking to add a further paragraph to the original summons in the following terms

"(2A) a declaration that the Defendant is entitled to be subrogated with the rights of Asia Commercial Bank Limited ('ACBL') to a first legal charge dated 29 April 1996 over the Property referred to in paragraph 1(3) below and/or to claim against the Property for the recovery of the sum of HK$14,777,256.59 together with interest accrued thereon."

4. There was then a subsequent summons in January 2002 wherein the defendant applied for an order that "the questions of law for determination by the Court be as set out in the Schedule hereto".

5. The questions set out in the schedule were:

"1. Is the Defendant entitled to be abrogated to the rights of the Asia Commercial Bank under its former mortgage over the Silver Crest property in the circumstances of the present case?

2. If the Defendant is so entitled, what is the loan amount (including principal and interest) which his enforceable by the Defendant under such subrogated rights?"

Despite the obvious typographical error, a consent order was made in those terms.

Was the procedure of Order 14A open to the defendant at this stage?

6. The first observation which should be made is that the Order 14A procedure is one to determine a question of law or construction of a document which arises in an action where the question is suitable for determination without a full trial of the action and the determination would finally determine the entire cause or matter of the claim. If there is a dispute as to the facts, it is difficult to see how judgment can be entered in favour of a claimant. Where a claimant seeks judgment under Order 14A the facts would have to be based on either established facts or agreed facts. As set out in the Hong Kong Civil Procedure at paragraph 14A/2/5, there should be no hypothetical facts and where the issues of fact are interwoven with the legal issues raised, it will be undesirable for the court to split the legal and factual determination, for to do so would in effect be to give legal rulings in vacuo or on a hypothetical ruling, which the court will not do.

7. In this case, there has been no determination of the allegations made by the plaintiff in respect of misrepresentation. The defendant's defence and counterclaim, which is based upon the validity of the mortgage executed in its favour, has yet to be determined. If those issues are determined in the defendant's favour there is no ground for subrogation nor is there any ground for the defendant to claim on the basis that the plaintiff has been unjustly enriched. In order to avoid this difficulty Mr Mok, on behalf of the defendant, suggested that the defendant would have elected to abandon its defence and counterclaim based upon the mortgage in its favour. There are two difficulties with this approach. In the first place, that would involve the plaintiff's claim succeeding but it still would not be known whether the claim would succeed on the basis of negligent misrepresentation or fraudulent misrepresentation. It would not be known whether the plaintiff would be entitled to damages based on its claim. In the second place, when the matter was explored, Mr Mok, quite understandably, was unable to commit his client to abandon its defence and concede the plaintiff's claim.

8. In my view, therefore, the procedure adopted in this case was fundamentally flawed. It would not be possible for a court to determine whether the defendant would be entitled to claim subrogation, or on the basis of unjust enrichment, until the facts were known. Moreover, this is all the more important in the present circumstances because consideration of the defendant's right to such relief would only arise if the plaintiff were to succeed in its claim.

9. In those circumstances, this court had no option but to allow the appeal and remit the matter back to the Court of First Instance for determination of the Order 14 proceedings.

Hon Le Pichon JA:

10. I agree with the judgment of the Vice-President.

Hon Stone J:

11. I agree with the reasons given by Rogers VP for allowing this appeal.

12. Pending a decision at trial as to the enforceability of the JCG mortgage, no scope whatever existed to embark upon an Order 14A determination in terms of the questions framed, far less actually to found a judgment for payment of a sum to be ascertained consequent upon answers to what, at this stage, were and could be no more than hypothetical questions.

13. It is no part of the court's function to proffer what, in effect, was an advisory opinion as to an asserted right of subrogation by the defendant to the ACBL mortgage on the assumed basis that the plaintiff's misrepresentation allegations are established, and the JCG mortgage thus rescinded. Any such conclusion (and I express no view on the point) ultimately must fall within the sole purview of the trial judge, who is not to be fettered in any way in his evaluation of the issues before him at trial.

14. If I may say so, this case provides an object-lesson in how not to utilize the provisions of Order 14A. Delay and considerable wasted costs are the inevitable by-products absent compliance with the tried and tested rules which have been developed for the appropriate use of the summary procedure available under Order 14A. I venture to suggest that, in practice, there are few cases which are sufficiently 'fact insensitive' to justify the invocation of Order 14A, as to the use of which, of course, there is no requirement for leave.