THE DAIWA BANK, LTD v. FOCO WOOLLEN YARNS CO. LTD & ANOTHER

HCMP4193/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4193 OF 1999

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J U D G M E N T

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1. By an Originating Summons issued on 15 July 1999 the plaintiff seeks to enforce against the defendants an "all monies" first legal charge dated 30 November 1989 (the "Mortgage") over a residential property at Flat D, 6th Floor, 16 Nassau Street, Mei Foo Sun Chuen, Kowloon ("the Property"), of which the 2nd defendant is the registered owner.

2. The 1st defendant is a limited company of which Mr Ho Yiu Kwong ("Mr Ho") is a shareholder and director. The company was formed to carry on Mr Ho's woollen yarns business. The plaintiff, which was already providing credit facilities to the 1st defendant made a real estate loan to the 1st defendant $696,000 for the purchase of the Property.

3. The business failed and in about 1998 the 1st defendant became unable to repay its debts to the plaintiff. The plaintiff has obtained a monetary judgment against the 1st defendant and now claims against the 2nd defendant for payment of all monies due and vacant possession of the Property.

4. The 2nd defendant's defence is that she was induced to sign the legal charge by misrepresentation or undue influence on the part of her husband, of which the plaintiff had actual or constructive notice and should therefore be set aside; and further that the legal charge is void for unconscionability. A further issue was raised at trial namely that the agreement between the parties is void at common law for mistake as to the identity of the mortgagor, and further that the parties were not ad idem as to the nature of the security to be offered, i.e. whether it was to be an "all monies" mortgage or a restricted mortgage to secure only the real estate loan.

5. The plaintiff denies having actual or constructive notice of any misrepresentation or undue influence, and further denies any unconscionable conduct on its part. It further contends that the Mortgage ought not to be challenged, on the ground of laches on the part of the 2nd defendant.

Background

6. The following facts are not in dispute, and/or are apparent from the documents.

7. The 2nd defendant and Mr Ho were married on 6 March 1977. They have two daughters. In April 1983 they separated; Mr Ho moved out of the matrimonial home. He went to live with a Ms Tam Fung Ying. At first the children stayed with the 2nd defendant but later it was agreed that they should stay with Mr Ho and his cohabitee. Mr Ho and the 2nd defendant were eventually divorced in May 1994.

8. Mr Ho was in the woollen yarn business. At all material times he carried on that business through the 1st defendant. He and Ms Tam Fung Ying were its shareholders and directors.

9. In 1988 the 2nd defendant went to Australia to take a secretarial course. She returned in late 1989. By then, Mr Ho had sold the matrimonial home. He offered to buy a flat for her to live in. They agreed that he should buy the Property. He was to pay the deposit and any mortgage repayments. Mr Ho entered into a sale and purchase agreement dated 30 October 1989, to buy the Property at a price of $915,000. Originally he wanted to keep the Property in his own name but the 2nd defendant insisted that it be put in her name so he executed a nomination in her favour on 4 November 1989.

10. At that time the 1st defendant had banking facilities provided by the plaintiff. It first applied for such facilities to the Rainier Bank in 1988, which bank was subsequently taken over by the plaintiff. By May 1989 it had credit facilities for a total of $4,200,000. From the documents it appears that Mr Ho and Ms Tam were guarantors for the company and that the plaintiff's understanding was that they were husband and wife.

11. On 25 October 1989 Mr Ho on behalf of the 1st defendant applied to the plaintiff for a real estate loan of $696,000 to finance the purchase of the Property. He dealt with Mr Joseph Luk who was the manager of the Tsimshatsui sub-branch. There does not seem to have been any written application at that stage but a number of documents came into being and were sent to the plaintiff's Credit Administration Department. In particular there was a form entitled "Application for Credit Facility", a form entitled "Collateral List", a list of borrowing arrangements and collaterals, a typed statement headed "General Comments" and a form entitled "Appraisal of Mortgaged Property". From these documents it appears that the mortgagor would be Mr Ho himself, and he would be buying the property for his own occupation. However on the original of the Collateral List, it appears that Mr Ho's name has been painted over with correcting fluid and overtyped with the name of Tang Mei Wah.

12. The loan was approved by the plaintiff's Credit Administration Department on about 13 November 1989 and it appears that the relevant documents then went back to Mr Luk. The formal application for mortgage loan, signed by Mr Ho for the 1st defendant is dated 14 November 1989. It bears to be approved by Joseph Luk on behalf of the plaintiff. Joseph Luk issued an undated facility letter to the 1st defendant extending general banking facilities in the form of a real estate loan up to $690,000, on terms and conditions set out, the first of which reads :

"As security we require a first legal mortgage on the above property to be executed in our favour for general banking facilities up to HK$696,000."

This was accepted by Mr Ho on behalf of the 1st defendant.

13. Notwithstanding the terms of the above agreement, on 14 November 1989 the plaintiff in the person of Joseph Luk sent to Mr Ho's solicitors, Albert Leung & Co., a letter of instruction to prepare a first legal charge in its favour, the borrower being the 1st defendant and the chargor being Mr Ho himself. The amount of legal charge was shown to be "all monies", which had appeared on the forms originally put forward by Mr Luk to the Credit Administration Department.

14. Pursuant to the agreement that the Property should be put in the name of the 2nd defendant, Mr Ho had on 3 November faxed instructions to that effect to his solicitors. They drew up the Mortgage, for execution by the 1st defendant as borrower and the 2nd defendant as chargor. It is dated 30 November 1989, as is a resolution of the 1st defendant authorising Mr Ho to enter into an "all monies" mortgage, though the dates on both documents have obviously been added after the documents had been drawn up.

15. Some time on or before 21 November 1989, Mr Ho and the 2nd defendant attended at the office of Albert Leung & Co. and executed the legal charge in escrow. The deed bears to have been interpreted to the mortgagor by a clerk named Sandy Tang. A solicitor, Leon Lai Ah Ming, witnessed the 2nd defendant's signature.

16. On 21 November 1989 the solicitors reported to the plaintiff that the mortgagor and borrower had executed the legal charge in escrow and asked for credit of the loan to their account. The name of the mortgagor was shown in the heading of the letter as Tang Mei Wah. There is no documentary evidence to show that the plaintiff had any notice of the existence of the 2nd defendant before the receipt of this letter.

17. The funds were duly credited to the solicitors and the purchase completed. The plaintiff continued to provide credit facilities to the 1st defendant, varying them from time to time. It appears from a document of the plaintiff showing a history of credit facility granted to the 1st defendant that the general banking facilities granted to the 1st defendant in May 1989 were $4,200,000. In November 1989 the legal charge is shown as included in the list of collaterals, but there was no increase in the general banking facilities. The real estate loan itself was paid off on 16 April 1992, though the loan agreement was for repayment by 120 instalments, but the Mortgage was still used as collateral for the credit facilities.

18. According to the 2nd defendant she heard from Mr Ho in early 1998 that he had debts to the plaintiff of about $2.2 million which might affect the Property. She then wrote to the plaintiff to the effect that her understanding was that the loan to buy the Property had been "a one-time loan and the amount should not have been over $1,000,000". She also enclosed a copy of the consent order for ancillary relief made in her divorce proceedings on 4 May 1994. She had a meeting with Mr Wu, who has appeared as a witness for the plaintiff, and various correspondence ensued between the plaintiff's solicitors and the Director of Legal Aid on the 2nd defendant's behalf.

19. In fact the 1st defendant had been defaulting in its payments to the plaintiff since early 1998. A repayment schedule was agreed but the 1st defendant did not keep to it; accordingly the plaintiff decided to issue proceedings, and did so on 15 July 1999.

The Issues

20. At first this case was concerned primarily with whether the 2nd defendant had been induced to execute the Mortgage by the misrepresentation or undue influence of her husband Mr Ho, and whether the plaintiff had actual or constructive notice thereof. In the course of the trial the contractual issues took some prominence. It is necessary first to consider whether or not there is a binding legal contract as between the plaintiff and the 2nd defendant. If there is not then there is no need to consider whether the 2nd defendant has equitable remedies which will defeat the plaintiff's claim as well as the question of laches.

The Witnesses

21. The plaintiffs have been able to call Mr Lai, the solicitor who witnessed the execution of the Mortgage, but not the clerk who interpreted it to the 2nd defendant. They have also called Mr Wu Ching Tin, the deputy manager of the plaintiff, and Mr Ng Wing Kin, who was at the relevant time the pro-manager of the operations section of the Tsimshatsui sub-branch. They have not called, and indeed do not seem to have made any great attempt to find the one bank officer who might have thrown some light on the transaction namely Mr Joseph Luk. On the defence side the only witness is the 2nd defendant. No evidence has been heard from Mr Ho. I will not rehearse the evidence at this stage but will deal with relevant parts of it where necessary.

The Contract

22. I deal first with the 2nd defendant's argument that the Mortgage is void for mistake as to the identity of the mortgagor and the further argument that the parties were not ad idem as to the nature of the mortgage.

23. It is clear from the various internal bank documents that Mr Joseph Luk put forward Mr Ho's application on 25 October 1989 on the basis that the Property would be in Mr Ho's name, he would reside in it, and he would execute an "all monies" mortgage over it. Mr Wu says that the bank and the borrower would have discussed terms before the application was put forward. At some point, the Collateral List was amended to show the name of Tang Mei Wah but neither Mr Wu nor Mr Ng from the plaintiff can say when this was done. Given that it is inconsistent with the rest of the documentation which would have accompanied it, it seems most likely that the Collateral List was not amended until after the Credit Administration Department approved the loan on 13 November 1989. At that stage obviously the plaintiff's Credit Administration Department thought that the Mortgage was to be to secure "all monies" owed by the 1st defendant. It is however not clear, in the absence of any evidence from Mr Luk or Mr Ho, what was at that stage agreed between the parties. No doubt as Mr Wu says they would have discussed terms but whether they discussed that particular term is not clear.

24. On 14 November 1989 the 1st defendant in the person of Mr Ho made the formal written application to the plaintiff for the loan. The plaintiff issued the facility letter referred to above, and Mr Ho accepted its terms. Presumably this facility letter is in response to the written application for there is no other. They are the only two documents passing between the parties in connection with the loan. The plaintiff invites me to write the facility letter off as a mere administrative mistake but given that it is signed on behalf of the plaintiff and the 1st defendant and is the only evidence of what they agreed before the Mortgage came into existence, I do not see how this can be done. The documents show an agreement by the plaintiff to lend the 1st defendant $696,000 against a mortgage restricted to that figure though the mortgagor is not specified. Notwithstanding this agreement, on 14 November 1989 Mr Luk wrote to Albert Leung & Co. instructing an "all monies" mortgage to be executed by Mr Ho.

25. On the face of the documents the first inkling the plaintiff had of the 2nd defendant's existence was when it received Albert Leung's letter of 21 November which showed that the Mortgage had been executed in escrow with Tang Mei Wah as the mortgagor. The only witness who can tell us anything about that letter is Mr Ng (PW3), who then worked under Mr Luk and whose job it was to release the funds. He has identified the original faxed document and his handwritten notes on it though he had no clear memory of it. He also produced a checklist of documents which were supposed to be on the file. He identified Mr Luk's signature and date on the letter. He could not say whether the mark highlighting the name of Tang Mei Wah was on the letter when he saw it.

26. From cross-examination it appears that Mr Ng paid out the money on 21 November. He had to have Mr Luk's approval to do that. At that stage he should have had before him the documents in the checklist including Mr Ho's application for mortgage and the facility letter; but he is not now clear whether he had all the documents or would have had them by that time. He would not have received the Mortgage, but he would have expected it to be security for $696,000, because that is what the bank had agreed on the facility letter. He could not remember if he had noticed the mortgagor's name or that that was different from the name on other documents in the file. From re-examination it appears that he could have paid out the money without receiving all the documents, but would not have done so without seeing the solicitor's letter initialled by Mr Luk. It follows that when the plaintiff paid out the money to the solicitors, i.e. accepted the Mortgage executed in escrow, Mr Luk must have already initialled the solicitors' letter to approve that payment.

27. The 2nd defendant argues that where a party to a transaction is mistaken as to the identity of the party with whom he is dealing the transaction is void ab initio; see Cundy v. Lindsay (1878) 3 App. Cas. 459. The plaintiff argues that the signature of Mr Luk coupled with the evidence of Mr Ng shows that the plaintiff did know and accept the change of mortgagor; it was entitled to do this because the Mortgage was only executed in escrow. The change was a counter-offer or variation which the plaintiff accepted, as it was entitled to do, and released the funds.

28. However the 2nd defendant says that there is no evidence that Mr Luk, or any bank officer, ever noticed the variation. Mr Ng was not concerned with it; as far as he was concerned the heading on the letter was only there to identify the file to which it related. In any event what he needed to see was Mr Luk's initials. But it seems to me that if Mr Luk had noticed it, some record would have been made. As appears from other bank documents and from Mr Wu, when the 2nd defendant first made contact with the plaintiff in early 1998 a search was made and no record found.

29. Mr Wu says that the identity of the mortgagor would be seen as less important than the identity of the security mortgaged, and that the decision whether or not to accept a change of mortgagor would be a "credit decision" for the bank manager dealing with the case, i.e. Mr Luk. There is no evidence as to what a such a decision would involve. Given that the Mortgage as executed imposes a joint and several liability on both borrower and mortgagor for repayment on demand of "all monies" it seems reasonable to expect that it would involve some inquiry as to creditworthiness on the part of the mortgagor. If all that mattered was the property mortgaged it would at the very least be necessary for the bank to satisfy itself that the mortgagor was or would become the owner of the property, i.e. have the right to mortgage it in the first place. At the very least one would expect Mr Luk to have telephoned the plaintiff's solicitors to make some inquiry about the discrepancy. However there is no evidence that any inquiry was made.

30. It seems to me if the Mortgage had not been executed in escrow, it would have been void for mistake of identity. If the 1st defendant accepted the Mortgage in escrow by releasing the funds without noticing the change of identity that would also render it void because the bank never intended to accept Tang Mei Wah as mortgagor. Of course Mr Luk's initials are on the received letter so he must have at least glanced at it. The name of Tang Mei Wah in the heading might be missed but there is on the second page a specimen of the 2nd defendant's signature which would be hard to miss, at least if Mr Luk turned the page. However the fact that Mr Luk made no inquiry suggests that there was an oversight. Further when one considers that he had managed to sign both the facility letter for a restricted mortgage and the letter of instruction to the solicitors to prepare an "all monies" mortgage the impression is that he was either totally confused or playing some devious game of his own.

31. Further there was not simply a change of identity of the proposed mortgagor but also of the security itself. Mr Luk had by the facility letter held out to the 1st defendant that the plaintiff would lend money against a restricted mortgage and Mr Ho had signed it to accept that on behalf of the 1st defendant. Again one would have expected, at the very least, a telephone call to the solicitors but there is no evidence of that.

32. In the circumstances it seems to me more likely than not that there never was any conscious decision on the part of the plaintiff, in the person of Mr Luk, to accept either the change of mortgagor, or the change of the term as to the security to be covered. It follows that there was never any binding contract between the plaintiff and the 2nd defendant.

33. In case I am wrong in this, and Mr Luk did make a conscious decision on the plaintiff's behalf to accept the new mortgage, I will go on to consider the plaintiff's position with regard to undue influence, misrepresentation and unconscionability. Before doing so, however, it is necessary to point out that if Mr Luk did make such conscious decision, there is no evidence that he knew who Tang Mei Wah was, or what relationship, if any, that person had to the 1st defendant or Mr Ho. The name could, according to Mr Wu, have been that of a man or a woman. The plaintiff's internal documents already showed Tam Fung Ying, not Tang Mei Wah, as Mr Ho's wife. Unless Mr Ho actually told Mr Luk that Tang Mei Wah was his wife, and there is no evidence that he did, then as far as the plaintiff was concerned she could have been anyone.

Undue Influence and Misrepresentation

34. In this case the 2nd defendant alleges both misrepresentation and undue influence. It is for her to prove them. Her evidence is that she always thought, for her husband had told her so, that she was to sign a simple mortgage to cover only the real estate loan. She says that Mr Ho told her not to say anything when they went to the solicitor's office. She sat in a room with her husband and a female clerk, who went through the documents before her, but neither interpreted nor explained them. The clerk asked her if she knew what documents she had to sign; Mr Ho said that he had already explained to her. Another man came in, and sat at the desk. He greeted Mr Ho. He never asked the 2nd defendant if she understood the documents. The documents were simply signed; after she had signed, Mr Ho himself signed. No one gave her any independent advice; indeed she did not know of the need for independent legal advice or where to get it.

35. The only other evidence of what happened came from Mr Lai. At the time he was an assistant solicitor in Albert Leung & Co. and had been admitted to practice for about a year and a half. According to his statement he had no independent recollection of the details of what happened. He could only speak to what he called the invariable practice of his firm, which was that a solicitor or legal executive or clerk would explain to the mortgagor the provisions of a mortgage before asking the mortgagor to sign it. If he did not explain the mortgage himself, he would invariably ask the clerk if it had been explained and then ask the mortgagor if he fully understood what he was about to sign.

36. Mr Lai was cross-examined at length, though mainly as to what advice he might have given if he had known the full position, and what advice the instructing bank might have expected him to give. I leave that aside here. All he can say as to what actually happened is that it appears from the Mortgage itself that the clerk had interpreted it, and he had witnessed the signature. If that had been done he would not explain further unless the client said that he did not understand what had been explained. He could not remember Madam Tang having said that. Indeed he could not say whether he had asked her if she did understand, though that would be his normal practice. Nor indeed is it clear whether or not he ever knew of any relationship between Madam Tang and Mr Ho.

37. Effectively, therefore, there is nothing to contradict the evidence of the 2nd defendant as to what happened when she signed the Mortgage. At best we have Mr Lai's evidence of his firm's "invariable practice". That is all very well but it is a fact of life that people do not invariably follow a so-called invariable practice.

38. It is argued that the 2nd defendant is unlikely to have been subject to undue influence by her husband. Their relationship was far from the genuine husband and wife relationship with which most of the authorities are concerned.

39. This is not a situation where the 2nd defendant seeks to prove the de facto existence of a relationship under which she generally reposed trust and confidence in Mr Ho so as to rely on an evidentiary presumption of undue influence on his part. She says it actually happened.

40. My impression of the 2nd defendant from her lengthy evidence both in her statement and under cross-examination of the history of her marriage is that she is a rather easy-going and indefinite person who does not ask too much of life. Having in 1983 made a definite decision, and thrown her husband out into the arms of another woman there was no question of a clean break. She accepted his support. She had him and the children to stay for dinner and overnight. I need not go into detail but it is clear that a reasonably amicable relationship continued between them. When she was in Australia, he bought her a return ticket home for Christmas. After she came back in 1989 he agreed to buy her a flat; he gave her a budget and she came up with two options; the one Mr Ho chose, i.e. the property, he chose on the basis that he thought she would be safer there and she accepted that. It seems to me just the kind of situation where an estranged wife, still on pretty good terms with her husband, could be expected to continue to trust him and to carry on an earlier pattern of dealing by which she signed without question whatever documents he put in front of her.

41. It is also suggested that she must have known that what she was signing was not simply a mortgage to cover the real estate loan because Mr Ho told her that if she signed, the plaintiff would allow a letter of credit facility. I note that the 2nd defendant never tried to conceal this. It is not something which came out in cross-examination; it was in her statement. She says that she did not at the time understand fully what "LC" were about, and further that Mr Ho told her that her signing the documents would somehow facilitate or help his business.

42. In fact I am no clearer as to why Mr Ho should have said this than is the 2nd defendant herself. It is clear from the bank's own facility history table that his letter of credit facility was not changed; the borrowing arrangements remained the same after the mortgage was entered into.

43. The point is, I think, there is a great difference between being told that what she was to sign would in some unexplained way help her husband's relationship with his bank, when in fact it was quite irrelevant to that relationship, and knowing that what she was doing was taking on a guarantee, unlimited as to time and quantity, of his company's indebtedness to the bank.

44. It is also argued that there is no evidence from the 2nd defendant as to why Mr Ho should have deceived her. It is said that if he had required her to provide the Property as general security she was not in a position to refuse. That is no doubt so. However, she had insisted, and Mr Ho had accepted, that the Property be put in her name. That would mean to her that she would have the Property to herself, free and clear, once the mortgage was paid off. If she had known that the Property would be encumbered indefinitely, there would be no point in insisting on its being in her own name. It would never truly be hers; she would always be at risk of losing it if anything went wrong with the business. Practically she would have been no better than a licensee, albeit rent-free. Mr Ho may have known that the mortgage was to be an "all risks" one; he passed a company resolution to that effect dated 30 November 1989 though when it was actually passed is not clear; if he knew, it seems to me that in the situation where his company was doing well enough, as it then presumably was, there might well have been a temptation to gloss over this fact in dealings with his wife. To make it clear would just have provoked argument.

45. In fact it seems unlikely that there was any intentional deception on Mr Ho's part. He had signed on 14 November 1989 the facility letter which purported to offer the 1st defendant a loan which was to be secured by a mortgage for banking facilities up to $696,000. I will deal with this in more detail below. On the 2nd defendant's evidence the Mortgage was no more read over to Mr Ho than it was to her. Mr Ho may himself have thought that that was the extent of the security required.

46. Finally there is the matter of the $1,000,000 figure she mentioned in correspondence and meetings with the bank in 1998. The 2nd defendant's explanation is that this was calculated on the basis of the principal of about $700,000, with interest over nine years, but allowing for some repayment over the years by Mr Ho. She also said that she had relied on this figure in her later dealings with the bank in an attempt to arrive at a settlement; she would have been prepared to take on that debt rather than to lose the flat.

47. It is perhaps difficult to understand how the 2nd defendant arrived at this figure. She said that she did not know how to do compound interest calculations; we do not know what interest rate she was using or how much she expected Mr Ho to have paid. But in her original letter to the plaintiff dated 6 February 1998 she said :

"... I was not given any notice by any party, including Mr Ho and your bank, to mortgage my flat for an amount larger than $1,000,000 and for sure, no floating or unlimited type of mortgage."

48. She was certainly denying the existence of any kind of "all monies" mortgage and to that extent she is not inconsistent. Further she says that she made the calculations after her husband had told her to work the figure out for herself.

49. Looking at the evidence overall I am left in no doubt that the 2nd defendant was the victim of misrepresentation and undue influence. Her husband either deliberately or innocently held out to her that she was to sign a mortgage to secure only the real estate loan. She signed it without making any inquiries because she was still married to him, if only in name, and still trusted him. The next issue is, what is the effect of that misrepresentation and undue influence?

The Law

50. The question whether a bank is entitled to enforce against a wife an obligation to secure a debt owed by her husband to a bank, where she has been induced to stand as surety for her husband's debt by his misrepresentation or undue influence was considered in detail by the House of Lords in Barclay's Bank plc v. O'Brien [1993] 1 AC 180. Lord Browne-Wilkinson set out to clarify the law. He summarised his views thus, at page 188G :

"Summary

I can therefore summarise my views as follows. Where one cohabitee has entered into an obligation to stand as surety for the debts of the other cohabitee and the creditor is aware that they are cohabitees : (1) the surety obligation will be valid and enforceable by the creditor unless the suretyship was procured by the undue influence, misrepresentation or other legal wrong of the principal debtor; (2) if there has been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the creditor has taken reasonable steps to satisfy himself that the surety entered into the obligation freely and in knowledge of the true facts, the creditor will be unable to enforce the surety obligation because he will be fixed with constructive notice of the surety's right to set aside the transaction; (3) unless there are special exceptional circumstances, a creditor will have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warns the surety (at a meeting not attended by the principal debtor) of the amount of her potential liability and of the risks involved and advises the surety to take independent legal advice.

I should make it clear that in referring to the husband's debts I include the debts of a company in which the husband (but not the wife) has a direct financial interest."

51. Various cases followed, mainly because of problems which arose with the question of what steps a bank should take to avoid being fixed with constructive notice, and to what extent it could rely on the involvement of a solicitor. The most recent case in the series is Royal Bank of Scotland v. Etridge (No 2) and other appeals [2001] 4 All ER 449 ("Etridge (HL)"). It was made clear that while O'Brien's case departed from conventional concepts, it did not "lead the law astray". Per Lord Nicholls :

"[40] The traditional view of equity in this tripartite situation seems to be that a person in the position of the wife will only be relieved of her bargain if the other party to the transaction (the bank, in the present instance) was privy to the conduct which led to the wife's entry into the transaction. Knowledge is required (see Cobbett v. Brock (1855) 20 Beav 524 at 528, 531, 52 ER 706 at 707, 708, per Romilly MR, Kempson v. Ashbee (1874) LR 10 Ch App 15 at 21, per James LJ, and Bainbrigge v. Browne (1881) 18 Ch D 188 at 197, per Fry J). The law imposes no obligation on one party to a transaction to check whether the other party's concurrence was obtained by undue influence. But O'Brien's case has introduced into the law the concept that, in certain circumstances, a party to a contract may lose the benefit of his contract, entered into in good faith, if he ought to have known that the other's concurrence had been procured by the misconduct of a third party.

[41] There is a further respect in which O'Brien's case departed from conventional concepts. Traditionally, a person is deemed to have notice (that is, he has 'constructive' notice) of a prior right when he does not actually know of it but would have learned of it had he made the requisite inquiries. A purchaser will be treated as having constructive notice of all that a reasonably prudent purchaser would have discovered. In the present type of case, the steps a bank is required to take, lest it have constructive notice that the wife's concurrence was procured improperly by her husband, do not consist of making inquiries. Rather, O'Brien's case envisages that the steps taken by the bank will reduce, or even eliminate, the risk of the wife entering into the transaction under any misapprehension or as a result of undue influence by her husband. The steps are not concerned to discover whether the wife has been wronged by her husband in this way. The steps are concerned to minimise the risk that such a wrong may be committed.

[42] These novelties do not point to the conclusion that the decision of this House in O'Brien's case is leading the law astray. Lord Browne-Wilkinson ([1993] 4 All ER 417 at 430, [1994] 1 AC 180 at 197) acknowledged he might be extending the law. Some development was sorely needed. The law had to find a way of giving wives a reasonable measure of protection, without adding unreasonably to the expense involved in entering into guarantee transactions of the type under consideration. The protection had to extend also to any misrepresentations made by a husband to his wife."

52. His Lordship went on to affirm that that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts. The House agreed with him. It also held, contrary to the view of the Court of Appeal in the same case, that there is no need for proof of manifest disadvantage and that it was not necessary for the bank to be aware that the parties were cohabiting or that the particular surety placed implicit trust and confidence in the principal debtor in relation to her financial affairs.

53. The basic position arrived at in O'Brien therefore remains the same following Etridge (HL). It was further explained that the onus remains on the wife, seeking to set aside the guarantee, to prove misrepresentation or undue influence though in doing so she may rely on the rebuttable evidential presumption of undue influence arising from the relationship. The position of the bank which relies on a solicitor was also considered in detail, as indeed it had been considered in various earlier cases.

54. There is I think no doubt, and certainly no dispute between the parties that the general principles set out in O'Brien and followed in Etridge (HL), namely that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts and will be fixed with constructive notice of wrongdoing unless it takes reasonable steps to satisfy itself that the wife has entered into the obligation freely and in knowledge of the true facts, apply in Hong Kong and this case. While Lord Browne-Wilkinson in O'Brien was mainly concerned with what should be done in future cases, he also dealt with past cases as follows at page 196 G-H :

"But in my judgment the creditor, in order to avoid being fixed with constructive notice, can reasonably be expected to take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test."

55. As Hirst LJ put it in Bank of Baroda v. Rayarel [1995] 2 FLR 376, another past case in which the mortgage had been executed long before the decision, at page 634 E-F :

"However, this was in fact a past transaction: as already noted it took place in 1986, whereas the House of Lords judgment in Barclays Bank plc v. O'Brien was not handed down until 21 October 1993. As Lord Browne-Wilkinson said, with past transactions it will depend on the facts of each case whether the steps taken by the creditor satisfy this test, and his ruling specifically related, as he said, to the future. None the less it seems to me that in the present case the right course is to apply the same principles as were laid down in Barclays Bank plc v. O'Brien as if they stood at the time of the present transaction."

Actual or Constructive Notice

56. Here Mr Ho was acting as the agent of his company but there is no evidence that he acted as the plaintiff's agent in procuring the mortgage. Actual notice could not have been given by that route. However it is argued that the plaintiff must have had actual notice of the misrepresentation, because it was itself responsible for it; the misrepresentation is contained in the facility letter of 14 November. This is probably right but it is prudent to consider the position regarding constructive notice.

57. If the plaintiff knew by 21 November 1989 that the 2nd defendant was Mr Ho's wife then, on the authorities, it was put on inquiry. It would not in my view make any difference if it knew that she was his separated wife. The House of Lords held in Etridge (HL) that whether the bank was put on inquiry did not depend on its state of knowledge of the parties' marriage, or of the degree of trust and confidence the particular wife placed in her husband in relation to her financial affairs. Cohabitation was not essential. In this the House affirmed the decision in Massey v. Midland Bank plc [1995] 1 All ER 929 at 933, per Steyn LJ. (See the judgment of Lord Millett in Etridge (HL) at paragraphs 44-47).

58. If the plaintiff here knew of the relationship then unless it took reasonable steps to satisfy itself that she had entered into the obligation freely and in knowledge of the true facts, it would be fixed with constructive notice of the undue influence. Now, quite simply, there is no evidence that it made any inquiries whatever. There is no evidence that it ever knew that the 2nd defendant was Mr Ho's wife or indeed anything else about her. It seems to have taken the view that so long as it had a mortgage over the property it did not care who the mortgagor was. That is the evidence of Mr Wu. At best, the plaintiff relied on the fact that the Mortgage had been drawn up and attested by Mr Ho's solicitors. Was this enough?

59. Disregarding meantime the involvement of a solicitor it seems to me that a bank could not in any event take on a totally unknown mortgagor or guarantor, without making any inquiries and then expect its own inaction to shield itself from the consequences arising from the relationship between the mortgagor or guarantor and the borrower. There are various relationships where the law presumes undue influence, e.g. solicitor and client, medical advisor and patient or guardian and ward. There have been many cases where an evidential presumption has arisen from the relationship between the parties e.g. Bainbrigge v. Browne (1881) 18 Ch D 188. A bank taking on a totally unknown mortgagor or guarantor would be running a risk of problems arising from whatever relationship there might be between the mortgagor or guarantor and the principal debtor and could not rely on its own wilful blindness to that risk.

Can the plaintiff rely on the involvement of the solicitors Albert Leung & Co.?

60. There is no doubt that that in England the creditor is regarded as being entitled to assume that if the wife has a solicitor, that solicitor will give her the advice which she requires, and will address the question of whether there is a conflict of interest which makes it necessary to advise her to seek separate advice. See Bank of Baroda v. Rayarel [1995] 2 FLR 376; Massey v. Midland Bank plc [1995] 1 All ER 929 and Banco Exterior Internacional v. Mann [1995] 1 All ER 936. Etridge (HL) did not depart from this position. As Lord Nicholls put it at paragraph 78,

"The bank is entitled to proceed on the assumption that a solicitor advising the wife has done his job properly."

61. In Etridge (HL) Lord Nicholls explained the responsibilities of the solicitor at (paragraph 64). He said :

"In identifying what are the solicitor's responsibilities the starting point must always be the solicitor's retainer. What has he been retained to do? As a general proposition, the scope of a solicitor's duties is dictated by the terms, whether express or implied, of his retainer. In the type of case now under consideration the relevant retainer stems from the bank's concern to receive confirmation from the solicitor that, in short, the solicitor has brought home to the wife the risks involved in the proposed transaction."

62. Here Albert Leung & Co. were retained by the plaintiff to prepare a first legal charge, the chargor being Mr Ho. There was no retainer by the plaintiff to give independent advice to Madam Tang. Mr Lai accepted that in cross-examination. There was obviously no retainer which stemmed from bank's concern that the risks involved in the proposed transaction should be brought home to the wife. Here it seems to me that the plaintiff might have been able to rely on an implied retainer if it had instructed the solicitor to prepare a legal charge to be executed by Mr Ho's wife; but it did not.

63. Could the plaintiffs rely on the retainer given to the solicitors by Mr Ho since it was he who had instructed Albert Leung & Co. in the first place? I think the answer is, if it knew that the retainer was to act for the wife as well as the husband, then it might; provided, as I have indicated above, that it had made inquiries and itself knew of the relationship. In Rayarel and the other the various cases cited above as authority that the creditor is entitled to assume that if the wife has a solicitor, that solicitor will give her the advice which she requires, the creditor knew that the wife had a solicitor even if that solicitor was also acting for the husband or his company.

64. It is argued for the plaintiff that there must have been an implied retainer from Mr Ho to advise the 2nd defendant. Mr Lai said that the firm took upon itself the duty to explain the key provisions to the mortgagor. He regarded D2 as his firm's client. A bank would expect a solicitor in circumstances such as applied here to explain the full effect of the document rather than just witnessing the signature. If the solicitor perceived a conflict of interest it would be up to him to cease to act. Further Mr Wu said that he understood what a solicitor should do as his professional duty. So, in effect, the plaintiff was entitled to assume, because a solicitor was involved, that everything had been done properly.

65. This is all very well, but if a bank is put on inquiry by its knowledge of a relationship then before it can be treated as having relied on a solicitor to have given the necessary advice to the mortgagor, it must know that the solicitor acts for the mortgagor. Further it seems to me that it must know that the solicitor itself knows of the relationship. Otherwise there is no way that it can assume that the necessary advice has been given.

66. Here there is simply no indication on the correspondence that the solicitors acted for anyone but Mr Ho. There is no correspondence other than the letter of 21 November which might have indicated that the solicitors acted for both Mr Ho and Madam Tang. In Bank of Baroda v. Shah [1988] 3 All ER 24 CA, the lender was held entitled to rely on a clear representation by the borrower's solicitors that they acted for the mortgagors, even though in fact they did give them any independent advice. There is no such clear indication here. I do not see that the mere fact that Tang Mei Wah was named as mortgagor would entitle the plaintiff to assume that the solicitors had advised her of anything, let alone her position as the wife of the borrower.

67. The plaintiff's position seems to be that because the Mortgage was drawn up by a solicitor, it had no need to make any further inquiries. That in my view is quite wrong. On any reckoning, if Mr Luk noticed the change of mortgagor at all he should have made inquiries as to who this person was. If he came to know that it was Mr Ho's wife he should have asked the solicitors if they knew that and if they also acted for her. There was no reason why Mr Luk should not make those inquiries and only if they were made could the plaintiffs be safe. As it is there is no evidence that any inquiries were made.

Unconscionability

68. The 2nd defendant also argues that in any event the transaction cannot be allowed to stand on the ground of unconscionability. In doing so, counsel places strong reliance on various dicta, particularly those of Lord Millett, in Credit Lyonnais Bank Nederland NV v. Burch, [1997] 1 All ER 144, CA. In fact the decision in that case did not rest on unconscionable bargain but rather on an extension of the principles in O'Brien though it was said that the unconscionability of the bargain as between borrower and mortgagor was directly material to her case based on undue influence.

69. The basis for setting aside an unconscionable bargain is however to be found in the judgment of Nourse LJ in Burch at page 151B :

"Equity's jurisdiction to relieve against such transactions, although more rarely exercised in modern times, is at least as venerable as its jurisdiction to relieve against those procured by undue influence. In Fry v. Lane, re Fry, Whittet v. Bush (1889) 40 Ch D 312 at 322, [1886-90] All ER Rep 1084 at 1089, where sales of reversionary interests at considerable undervalues by poor and ignorant persons were set aside, Kay J, having reviewed the earlier authorities, said : 'The result of the decisions is that where a purchase is made from a poor and ignorant man at a considerable undervalue, the vendor having no independent advice, a Court of Equity will set aside the transaction. This will be done even in the case of property in possession, and a fortiori if the interest be reversionary. The circumstances of poverty and ignorance of the vendor, and absence of independent advice, throw upon the purchaser, when the transaction is impeached, the onus of proving, in Lord Selborne's words, that the purchase was "fair, just, and reasonable".' Lord Selborne LC's words will be found in Earl of Aylesford v Morris (1873) LR 8 Ch App 484 at 491, [1861-73] All ER Rep 300 at 303. The decision of Megarry J in Cresswell v Potter [1978] 1 WLR 255 at 257 where he suggested that the modern equivalent of 'poor and ignorant' might be 'a member of the lower income group ... less highly educated', demonstrates that the jurisdiction is in good heart and capable of adaptation to different transactions entered into in changing circumstances."

70. In the instant case the 2nd defendant is relatively speaking, on the facts as I have found them, poor and ignorant, or the modern equivalent of that. She was induced to enter into a transaction which was vastly to her disadvantage and vastly to the advantage of the plaintiff in that it got an "all monies" mortgage when all it needed was a restricted mortgage to cover its loan. In fact that loan has been paid off. She did not have independent advice. The plaintiff's action in accepting a totally unknown mortgagor without inquiry and then seeking to take advantage of its failure to make any kind of inquiries is to my mind morally reprehensible. It seems to me that on any reckoning this is an unconscionable bargain and it cannot be allowed to stand.

Laches

71. The plaintiff's argument on this point seems to be that once the 2nd defendant obtained her divorce in 1994 she should have immediately notified the bank of the terms of the Mr Ho's undertakings contained in the consent order. These were to continue to pay off the Mortgage until fully paid, to return to her all authorisation documents, if any signed by her regarding the property, to waive any right or interest, if any, that he may have in it and not to further encumber it. The 2nd defendant says that Mr Ho told her before the divorce that the loan would be paid off in September 1997. Leaving aside any argument as to whether laches can be used as a sword rather than a shield, or whether the plaintiff was put at a disadvantage, I do not see how the 2nd defendant, believing as she did that the Mortgage was restricted to cover the real estate loan, could have been expected to anything at that stage but wait for the loan to be paid off. There is nothing in this point.

Judgment

72. The plaintiff's claims against the 2nd defendant are dismissed with costs (nisi) to the 2nd defendant to be taxed if not agreed.

73. There is no counterclaim for the setting aside or discharge of the Mortgage as against the 2nd defendant. If some order or any consequential needs to be made in this connection the 2nd defendant will have liberty to apply for it.