BANK OF CHINA (HONG KONG) LTD v. FUNG CHIN KAN AND ANOTHER

FACV No. 16 of 2001

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 16 OF 2001 (CIVIL)

(ON APPEAL FROM CACV NO. 178 OF 2000)

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J U D G M E N T

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Mr Justice Bokhary PJ:

1. I agree with the conclusion to which Mr Justice Litton NPJ has come, and I think that it is a conclusion which can be reached by the route which he has taken, namely collateral contract. But as Lord Moulton famously said in Heilbut, Symons & Co. v. Buckleton [1913] AC 30 at p.47 and the Privy Council repeated in Universal Dockyard Ltd v. Trinity General Insurance Co. Ltd [1989] 2 HKLR 160 at p.164, collateral contracts are "viewed with suspicion by the law". I have therefore applied my mind to whether the same conclusion can be reached on the basis of a single composite agreement. In my view, it can. I would allow this appeal in the terms proposed by Mr Justice Litton NPJ.

Mr Justice Chan PJ:

2. I have had the advantage of reading Mr Justice Litton NPJ's judgment in draft. I agree that this appeal should be allowed in part as indicated in his judgment. I also agree with the order for costs which he proposes.

3. The difficulties in this unusual case arose largely from the way in which this action was constituted and proceeded. It was commenced by way of an originating summons as a mortgagee action under Order 88 of the Rules of the High Court. It sought to enforce not only the legal charge on Mr and Mrs Fung's flat but also the legal charges against 3 other properties. These 4 properties were separately charged to the bank to secure the total facilities which the bank might grant to System Management Consultancy Ltd (SMC). Apart from Mr and Mrs Fung, two other individuals and their company were also defendants. The bank's claim was against each of the defendants not for different sums of money, but for over $16.2m which was the total outstanding indebtedness arising from the general banking facilities granted by the bank to SMC. Default judgment was obtained against the other defendants and the matter proceeded against Mr and Mrs Fung before a Master. No filing of pleadings was ordered. Hence, the issues between the parties were not clearly defined.

4. Be that as it may, the evidence in this case clearly shows that there was an agreement in broad terms between the parties, namely, the bank, SMC, and Mr and Mrs Fung to the effect that Mr and Mrs Fung agreed to charge their flat to the bank to secure the indebtedness of SMC due to the bank in consideration of the bank agreeing to grant general banking facilities to SMC and that the extent of Mr and Mrs Fung's liability to the bank would be limited to $3.3m only.

5. Mr and Mrs Fung clearly intended to be liable only to this extent and would only agree to charge their flat to secure the indebtedness of SMC on this basis:

(a) Mr Fung, Mr Ngan and Mr Lau had a meeting on 8 April, 1997 with Mr Lo, the solicitor. They discussed the matter with him and instructed him to prepare the necessary documentation to implement the commercial agreement between them;

(b) Mr Lo faxed 4 documents to Mr Fung on the following day. These documents included a draft letter of undertaking to be executed by SMC in favour of Mr and Mrs Fung to indemnify them for charging their flat to secure the indebtedness of SMC to the bank; and

(c) Mr Fung was so concerned with the extent of his liability that he asked Mr Lo to correct the figure from $3.5m to $3.3m in the draft letter of undertaking.

6. Mr and Mrs Fung's intention was known to the bank. The bank must have discussed the matter with Mr Ngan and Mr Lau with regard to the granting of general banking facilities to SMC before agreeing to grant such facilities to them. Such discussion would inevitably have included requiring Mr and Mrs Fung to charge their flat to secure SMC's indebtedness under the general banking facilities, the value of the flat and the liability of Mr and Mrs Fung. In any event, the bank would also be aware of Mr and Mrs Fung's intention through its solicitor, Mr Lo.

7. The bank must have agreed to the limit of Mr and Mrs Fung's liability and to accept a security from them to such extent, otherwise it would not have given instruction to Mr Lo asking him to prepare a legal charge to be executed by Mr and Mrs Fung to secure the general banking facilities to the extent of $ 3.3m. Its instruction was communicated by fax to Mr and Mrs Fung through SMC.

8. On this basis, the parties proceeded with the transaction: the Wing Hang Bank mortgage was redeemed; the bank provided general banking facilities to SMC; a document - the Legal Charge - was prepared by Mr Lo and was subsequently executed by the parties on 14 May 1997. A Deed of Indemnity was also executed by Mr Ngan and Mr Lau in favour of Mr and Mrs Fung pursuant to their underlying commercial agreement which formed the basis of Mr and Mrs Fung's agreement to charge their flat to the bank as security.

9. Thus the relationship between the bank and Mr and Mrs Fung could be considered as either one of two alternatives. First, there was an agreement between the bank and Mr and Mrs Fung as evidenced by the Legal Charge and in addition thereto, a collateral contract between them whereby Mr and Mrs Fung only agreed to sign the Legal Charge on condition that the bank agreed to limit their liability to $3.3m. This is the analysis adopted by Mr Justice Litton NPJ in coming to his conclusion and I agree that there is sufficient evidence in this case to support this analysis.

10. Alternatively, the agreement between the parties was a composite agreement consisting partly of the Legal Charge and partly of the agreement as evidenced by the bank's instruction to Mr Lo which was faxed to Mr Fung. I take the view that this analysis is also supported by the evidence.

11. Although it is clear that the parties had agreed that the liability of Mr and Mrs Fung was to be limited to $3.3m only, the Legal Charge did not expressly contain this as a term of the agreement. The question is whether Mr and Mrs Fung are precluded from relying on this limit by the parole evidence rule. I do not think so.

12. Recital (2) of the Legal Charge states as follows:

(1) the bank agreed to provide general banking facilities "to such extent and upon and subject to such terms and conditions as shall from time to time be mutually agreed or be stipulated by the bank";

(2) Mr and Mrs Fung agreed to furnish security for the same and for all moneys payable or which may at any time or from time to time become payable by SMC to the bank or which may be or become payable by SMC or Mr and Mrs Fung under any of the agreements, covenants and conditions contained in the document.

13. Clause 1 provides that Mr and Mrs Fung covenant to pay to the bank on demand:

(1) all present and future indebtedness of SMC according to the bank's books; and

(2) all other liabilities of SMC to the bank according to the bank's books.

14. Clause 2 provides that Mr and Mrs Fung charge their property to the bank as security for the repayment of the facilities and all other moneys which may at any time and from time to time be due from SMC and/or Mr and Mrs Fung to the bank.

15. Clause 9(h) provides that if the value of the charged property is not at least one third more than the amount of the moneys then due and owing to the bank from SMC, then and in every such case, Mr and Mrs Fung and/or SMC shall forthwith on demand by the bank furnish the bank with such further security as shall in the opinion of the bank be equal in value to one third more than the amount of the moneys so due and owing as aforesaid.

16. While the Legal Charge does not expressly provide any limit on Mr and Mrs Fung's liability, it is also silent on how much the bank is prepared to advance to SMC by way of general banking facilities. But, as there was an agreed limit on Mr and Mrs Fung's liability, there must certainly have been an agreement between the bank and Mr Ngan and Mr Lau as to the ceiling of the facilities to be granted. There is no evidence that Mr and Mrs Fung were aware of such a ceiling.

17. At the time of execution of this document, the parties had agreed that Mr and Mrs Fung's liability would be limited to $3.3m. However, there is also no evidence to the effect that they had, subsequently or at any time, agreed to any increase in the general banking facilities to be granted by the bank to SMC which might result in an increase of their liability in excess of $3.3m.

18. The facilities granted by the bank to SMC ultimately ran to $16.2m which far exceeded the limit of the security agreed to be provided by Mr and Mrs Fung and the value of the flat was, as such facilities increased, not at least one third more than the amount of moneys due and owing. Yet they were not asked to provide further security, as the bank was entitled to ask under Clause 9(h), as and when the facilities increased and the amount due and owing under the facilities far exceeded $3.3m.

19. Nor had Mr and Mrs Fung been notified of any stipulation by the bank of any increase in the facilities granted to SMC. By virtue of Clause 9(dd), the bank was of course under no obligation to notify Mr and Mrs Fung or obtain their consent when it decided to increase or enlarge or restrict the extent of facility to SMC. But this is far from saying that notwithstanding the parties' initial agreement as to the limit of Mr and Mrs Fung's liability and the provision in Recital (2), if the bank should choose to increase or enlarge, as it did, the extent of its facilities to SMC, Mr and Mrs Fung's covenant to pay and their limit of exposure under the security could be unilaterally altered without their consent or at least notice to them. Not only were they never asked to provide further security, they were not given the opportunity to pay off the existing indebtedness in order to release the charge over their flat (if this was acceptable) or to seek a greater indemnity from Mr Ngan and Mr Lau to protect themselves from further liability.

20. The lack of mutual agreement on the increase of banking facilities and the absence of notice of any such stipulation by the bank strongly supports the contention that the bank not only was aware of and had agreed to the limit on Mr and Mrs Fung's liability, but was also prepared not to resile from such agreement.

21. The conclusion one can reasonably reach is that there is nothing in the Legal Charge which had overridden the parties' agreement that the liability of Mr and Mrs Fung was limited to $3.3m. It does not offend the parole evidence rule by giving effect to this part of the transaction to which the parties had actually agreed and acted on. Both the bank and Mr and Mrs Fung are in my view bound by such term.

Mr Justice Litton NPJ:

Introduction

22. The respondents Fung Chin Kan and Lee Yuen Wah, a married couple, owned a flat in the Mid-Levels: Flat D on the 11th floor of Block A of Greenland Garden, 67 Lyttleton Road, Hong Kong. For convenience they will be referred to as Mr and Mrs Fung, or the respondents. On 14 May 1997 they executed a document called a legal charge by which they mortgaged their flat to the appellant China State Bank Limited as security for general banking facilities given by the bank to a company called System Management Consultancy Limited ("SMC") : But the instrument, on its face, did more than that : It operated also as an unlimited guarantee. It was prepared by the firm of solicitors Messrs. Lai, Chan, Lo and Partners, under the supervisor of a solicitor Mr Lo Hang Fong (also known as Hank Lo) who figures prominently in this case. By this instrument not only did Mr and Mrs Fung charge their flat to secure SMC's indebtedness to the bank upon the facilities granted by the bank; they also covenanted to pay on demand to the bank all present and future indebtedness of SMC according to the bank's books, together with all costs charges and expenses incurred by the bank, and interest on such indebtedness.

23. Pursuant to this arrangement, banking facilities were provided by the bank to SMC. But, before long, SMC defaulted on its obligations to the bank and owed to the bank considerable sums of money which it was unable to repay. In July 1998 the bank issued proceedings to enforce the guarantee in the legal charge and to recover from Mr and Mrs Fung all the sums owing to the bank by SMC. The bank succeeded at first instance and obtained judgment from Master H C Wong in the sum of $16,211,786.34 together with interest at the rate of $5,648.91 per day. The bank also obtained from the Master an order for possession of the flat, and costs.

24. Mr and Mrs Fung appealed against this judgment to the Court of Appeal (Rogers VP and Keith and Le Pichon JJA). Their case, from beginning to end, was that in mortgaging their flat as security for banking facilities granted by the appellant bank to SMC, the agreed limit of their own liability was $3.3 million. At trial their primary contention was that both Mr Lo and his clerk Mr Tse Sai Kwong had assured them that was the position, prior to their signing the legal charge on 14 May 1997. Additionally, Mrs Fung averred that in entering into the transaction she was induced by undue influence exerted by her husband. The Court of Appeal, by their judgment of 4 July 2001, allowed the appeal and discharged the Master's judgment, with costs to Mr and Mrs Fung : The Court of Appeal so held despite the Master's finding of fact that neither Mr Lo nor his clerk Mr Tse had given any assurance that the personal liability under the legal charge was limited to $3.3 million as the respondents had averred. Additionally the Court of Appeal reversed the Master on the issue of undue influence. The bank now appeals to this Court.

Background facts

25. In order to understand the issues involved in this appeal it is necessary to review the background facts. This is not an easy exercise as there were no pleadings in the court of first instance, the matter having proceeded to trial on an originating summons, based upon affidavit evidence. At the trial the two principal deponents to affidavits for the bank testified before the Master, and the respondents were cross-examined upon their affidavits, then re-examined. The whole story does not emerge easily from the judgments of the courts below : It is necessary to supplement the picture by resorting to the transcript of evidence for what appears to be uncontradicted testimony at the trial court. What comes out is this.

26. Mr and Mrs Fung ran a decoration business which they owned. Mr Fung has a history of business dealings with SMC and its directors and shareholders which went back to 1996. These dealings were mainly between Mr Fung, a Mr Simon Ngan Man Wai (husband of one of SMC's directors), and a Mr Paul Lau Kai Hing. In early 1997 an arrangement was entered into by Mr Fung whereby the flat was mortgaged to Wing Hang Bank as security for a $4 million loan by that bank to SMC for 6 months. The loan was due to be repaid in August 1997. As part of the arrangement Mr Fung was promised a 10% share in one of Mr Ngan's companies.

27. In early April 1997 Mr Ngan approached Mr Fung and told him that the mortgage interest rate at the appellant bank was lower than the interest charged by Wing Hang Bank and suggested that the Wing Hang Bank mortgage be redeemed and replaced by one with the appellant bank. The repayment of the new loan was to take place in September 1997. Although Mr Fung's exposure under the new arrangement was to be longer, the amount of his risk was to be less, as the proposed borrowing from the appellant bank, on the security of the flat, was to be $3.3 million. There followed discussion between Mr Fung and Mr Ngan over several days. At that time Mr Fung thought that the flat was worth, without decoration, over $4 million but being richly decorated some $5 million. Ultimately, as part of the arrangement, Mr Ngan agreed (1) to repay to Mr Fung a loan of $1 million which Mr Fung had previously made; (2) to enter into some form of "commercial agreement" with Mr Fung (the precise terms of which were never discussed) to protect his interest; (3) to give to Mr Fung a post-dated cheque for $5 million by way of security and (4) to implement the promise to give to Mr Fung a 10% share in one of Mr Ngan's companies. On this basis Mr Fung agreed to re-mortgage the flat to the appellant bank for borrowings by SMC up to $3.3 million, the loans to be repaid by 30 September 1997, and the mortgage discharged.

28. To give effect to those arrangements Mr Ngan went to solicitors and consulted Mr Lo the solicitor. Nothing is known about that consultation as Mr Ngan did not testify and Mr Lo's recollection of events was extremely hazy : At no time did he keep any notes of interviews. On 8 April 1997 Mr Ngan, Mr Paul Lau together with Mr Fung went to see Mr Lo. The matter was discussed. At that time, Mr Lo had not yet received instructions to act for the bank. Hence the discussion could only have centred around the proposal to re-mortgage the flat for $3.3 million, and the documents to be prepared to implement the arrangements generally. Mr Lo said in evidence that, at that meeting, Mr Fung wanted to have a copy of the blank form of mortgage deed which might eventually be used, so that he could consult his own solicitor : An assertion that Mr Fung denied. Mr Lo also said that he then asked his clerk Mr Tse Sai Kwong to make a photocopy of the form, which Mr Tse did, and Mr Fung later took that away. The Master resolved these two contested items of evidence in the bank's favour. There was no evidence, however, to indicate that Mr Fung consulted anyone regarding the form. Mr Lo also said that another copy of the blank form was left in his firm's reception desk for Mrs Fung to collect and take away.

29. The next day (9 April) in order to implement the agreement to give to Mr Fung a 10% share in one of Mr Ngan's companies and to indemnify him and his wife, Mr Lo sent to Mr Fung by fax the draft of various documents. These were instruments relating to the transfer of shares in one of Mr Ngan's companies. There was also a draft undertaking by SMC to Mr and Mrs Fung in these terms:

"In consideration of your execution of an all monies legal charge in favour of The China State Bank, Limited in respect of General Banking Facilities (for the time being agreed at HK$3,500,000.00) granted to our company, we hereby undertake that we shall be responsible for the payment of all interest and other expenses arising out of and in connection with the said legal charge and for the repayment of the said general banking facilities and the discharge of the said legal charge on or before 30 September 1997."

30. Mr Lo had, in this draft, made a mistake as regards the figure : The amount agreed to be lent - and hence the limit of Mr and Mrs Fung's exposure - was to be $3.3 million, not $3.5 million. Although Mr Fung's command of English was poor, he spotted the mistake in the figures and phoned Mr Lo asking him to correct it. Clearly, the draft undertaking strongly corroborates the respondents' case that there was an agreed limit of $3.3 million to their risk exposure, and that the solicitor knew about it. The inherent probabilities arising from the background facts also favour their case : There is no suggestion that the Wing Hang Bank mortgage contained an unlimited guarantee - beyond the personal covenant to be found in most mortgages which, in the case of the Wing Hang Bank mortgage, would have been limited to $4 million : It would be extremely odd that, upon their being asked to be a party to the discharge of that mortgage and to re-mortgage their flat to the appellant bank, the respondents would have agreed to assume unlimited liability for SMC's borrowings.

31. A fact, given little weight by the trial court but featured prominently in the Court of Appeal's judgment, is this: On 21 April 1997 Mr Fung received by fax a copy of the written instructions which the appellant bank had sent to Mr Lo's firm. This came from SMC. That document (dated 10 April 1997) is headed : "Instruction to prepare a charge". It started off by saying :

"Please prepare a first Legal Charge in favour of our Bank on the following terms subject to approval of the Chargor's title".

It then identified the flat in question, named Mr and Mrs Fung as "the chargor" with their address at the flat, and indicated SMC as the "principal party". Two items in those instructions of particular relevance are these : Under the heading "type of charge" (item 3) one sees:

"All monies in respect of General Banking Facilities (including facilities granted against trust receipts) (for the time being agreed at HK$3,300,000.00) together with interest at 14.25% per annum (subject to fluctuation) with monthly rests. Repayable on demand."

Under "remarks" (item 14) was the following:

"We inform you that the caption facilities also guaranteed by Mr Lau Ka Hing Paul and Mr Ngan Man Wai under a letter of guarantee for HK$16,500,000.00 which will be delivered to them for execution by us later."

32. The bank could only have given those instructions after preliminary discussions with Mr Ngan and Mr Lau and, as a matter of necessary inference, the matter of the respondents' limit of liability must have then been agreed. Mr Lo said that those were the only instructions he had received from the bank. There were none orally conveyed, before the form for the legal charge was prepared and executed. What is clear from those instructions is that the bank (consistent with its discussions with Mr Ngan and Mr Lau) was looking for security from Mr and Mrs Fung in the form of a charge on their flat : Not, in addition to that, a guarantee to answer for SMC's indebtedness to an indefinite amount. This is strikingly obvious when one contrasts the position of the respondents with that of Mr Paul Lau and Mr Ngan : In their regard, the solicitors were told that the bank had prepared a letter of guarantee for their execution and that this letter of guarantee had a limit of $16.5 million. Mr Lau and Mr Ngan, the guarantors, were the persons behind SMC, the borrower; the material before the Court indicates that, on the day Mr and Mrs Fung signed the legal charge in respect of their flat, there were similar documents executed by others in favour of the bank, charging three other properties to the bank by way of security for borrowings by SMC; thus, the various lines of credit which the bank was proposing to advance to SMC, on the security of the four properties, amounted to a total of $16.5 million; and the bank required a global guarantee from the principals of the company for an amount up to the limit of the bank's proposed lendings. But as far as the line of credit secured on Mr and Mrs Fung's flat was concerned, the bank was proposing to advance $3.3 million to SMC. It was not seeking an unlimited guarantee from the respondents.

33. Amongst the material before the Court is a deed dated 30 April 1997 which appears to be the "commercial agreement" referred to earlier. It was prepared by another firm of solicitors - not Mr Lo's. It recited the history of the dealings between the parties. It then stated that Mr Ngan and Mr Paul Lau had asked Mr Fung to "pledge his property with China State Bank Ltd as first charge for better terms of General Banking Facilities in place of Wing Hang Bank at rate of 14.25 p.a. in sum of HK$3,300,000 for a period until 30 September 1997". The bank was not a party to this deed : Hence, its evidential weight is slight. Nevertheless, it is wholly consistent with the respondents' case that, from beginning to end, their agreed limit of exposure was $3.3 million.

34. On 14 May 1997, as mentioned earlier, Mr and Mrs Fung executed in Mr Lo's office the legal charge which gave rise to the present proceedings.

The legal charge

35. The Court of Appeal described the legal charge as a "complicated 33- page document" : That was no exaggeration. The solicitor Mr Lo called it an "all-monies legal charge" : He did not use the label "mortgage guarantee" which might have described the instrument more accurately in terms of the effect for which he ultimately contended (see Commercial Bank of Australia Ltd v. Amadio 151 CLR 447 for an instrument with similar effect, described throughout Mason J's judgment as a "mortgage guarantee"). Although prepared by Mr Lo's firm, there was evidence to the effect that it was in fact in a standard form used by the bank.

36. The recitals to the deed are of some interest : Having in paragraph 1 stated the fact that the respondents are the beneficial owners of the flat and in possession of it, paragraph 2 went on to say :

"[SMC] has through [Mr and Mrs Fung] requested [the bank] to provide general banking facilities to [SMC] and [the bank] had agreed to provide the same to such extent and upon and subject to such terms and conditions as shall from time to time be mutually agreed or be stipulated by [the bank] ..." (emphasis added).

This suggests that banking facilities to a certain extent had been agreed, and any change would require mutual agreement between the parties to the charge.

37. Further, it will be recalled that at the time of the deed, the flat was worth approximately $4 million. In this regard, Clause 9(h) is of interest. It says that if at any time during the continuance of the charge the bank should obtain a certificate stating that the value of the flat was not at least one third more than "the amount of the moneys then due and owing to the [bank]" then the respondents as chargors must forthwith on demand furnish further security : With the flat then worth approximately $4 million, this would make sense if, under the line of credit covered by this deed, the respondents' liability was limited to $3.3 million, at the time of execution.

38. So far so good. But, by clause 1 of the deed, SMC and the respondents jointly and severally covenanted to pay on demand to the bank all present and future indebtedness of SMC according to the bank's books, together with all costs charges and expenses, and interest on such indebtedness : A perfectly normal covenant as far as the borrower was concerned; but, as regards the chargors, they became in effect guarantors of SMC's debts to an unlimited amount : A liability which, it is plain from the written instructions dated 10 April 1997, the bank never intended to impose : And likewise at the time of execution, since those were the only instructions the solicitors ever received. And, as for Mr and Mrs Fung, it would have been extraordinary if they had, with their eyes open, accepted such a liability, since all they were doing was to re-mortgage their flat : As they thought, on better terms.

39. Whilst, as mentioned earlier, there are provisions in the charge deed which adumbrate a limit to the chargors' liability, it is not possible to arrive at a limit of $3.3 million as a matter of construction : For the simple reason that such figure does not appear anywhere in the instrument. Rogers VP commented, in the course of his judgment, that it might well have been the case that Mr Lo had forgotten the details of his meeting on 8 April (when, as a matter of inference, the re-mortgage of the flat to secure lendings up to $3.3 million must have been mentioned) by the time the deed came to be signed over a month later : Mr Lo was unaided by any notes, since none were kept. Possibly, Mr Lo had also forgotten about the draft undertaking with the mistaken figure of $3.5 million.

40. Plainly, what had happened was that, in preparing the deed for execution, a mistake had been made in the solicitor's office. The respondents say that, on the day of execution, the contents of the complicated 33- page document were not explained to them : A matter to which I shall revert later. And when the time came for the bank to assert their legal rights under the deed it must have been then realized that clause 1, on its face, had no financial limit and, in commencing legal proceedings against Mr and Mrs Fung, the bank took advantage of that fortuitous happening, and obtained judgment for over $16.2 million from the trial court. It is worth observing that in allowing SMC's debts to run eventually to over $16.2 million - far in excess of the margin referred to in clause 9(b) of the charge deed - the bank had never asked the Fungs to provide more security.

41. The Master had, in her judgment, expressly absolved Mr Lo and Mr Tse of any intent to deceive, but the question still remains : Does the true legal basis of the transaction lead to this unjust result?

The proceedings in the courts below

42. At first instance, the defence as put on behalf of Mr and Mrs Fung was, in the first place, misrepresentation : That, on the day the deed was executed, both Mr Lo and his clerk Mr Tse told them (on separate occasions, as they had attended at the solicitor's office separately) that there was a limit of $3.3 million to their liability : That was why they signed the document. This was rejected by the Master. A separate defence based upon undue influence was put on Mrs Fung's behalf and was likewise rejected by the Master : Hence, the judgment in the bank's favour.

43. In setting aside the Master's judgment on the first issue the Court of Appeal focused primarily on three matters : (1) The circumstances indicating the agreed limit of $3.3 million arising from the re-mortgage and in particular the bank's instructions to the solicitors dated 10 April 1997; (2) the way the deed was explained and interpreted to Mr and Mrs Fung; (3) the absence of independence legal advice. As the trial court had failed, in the opinion of the Court of Appeal, to consider relevant matters in arriving at its conclusion in the bank's favour, the Court of Appeal felt entitled to look at the whole case afresh, despite the trial court's finding of fact that no oral misrepresentation had been made.

44. I will now look at the three matters enumerated above in turn.

Agreed limit of $3.3 million

45. In Rogers VP's judgment (with which the other two Justices of Appeal agreed) he said :

"Hence on the facts of this case it is clear that [the bank] informed Mr Fung through SMC that its instructions to the solicitor were to prepare a charge, not a guarantee, limited to $3,300,000. In my view, a representation had been made by [the bank] as to the effect of the document, which [the Fungs] would be signing. That representation had been made by faxing the instructions which relate to [the Fungs] to SMC".

46. It will be noted that, by the time the case reached the Court of Appeal, the whole focus of the case had changed : It was no longer whether, at the time of execution of the deed, there had been misrepresentations as to its terms : It was the effect of representations made by the bank prior to its execution which became the main focus.

Explaining the deed to the respondents

47. Rogers VP then went on to say that it was, in the circumstances of the case, the bank's duty (either by itself or through its solicitors) to make clear to Mr and Mrs Fung that the document they were signing exposed them to liability far in excess of $3.3 million and was not simply a charge on their flat but also a guarantee of an unlimited amount. Rogers VP analysed the transcript of evidence concerning the execution of the deed on 14 May 1997 and concluded that there was simply no evidence upon which the Master could have concluded that either the solicitor Mr Lo or his clerk Mr Tse had explained to the respondents that the deed constituted a guarantee and not simply a charge on their property. The learned Vice-President attributed this failure to the bank itself, as the solicitors were acting as the bank's agent for the purposes of the transaction.

Independent legal advice

48. Earlier in this judgment mention has been made of the Master's finding that Mr Fung had, on 8 April 1997, taken away a photocopy of a blank form, and another one had been left at the reception desk for Mrs Fung; but whether the respondents had in fact received independent advice on the effect of the deed remained, as the Court of Appeal concluded, a matter of speculation.

The Court of Appeal's approach

49. On the basis of the matters as summarized above, the Court of Appeal concluded that the transaction should be set aside. That court did not, however, spell out the juridical basis upon which it reached its conclusion, though the language used in Rogers VP's judgment has shades of what are called in the books unconscionable bargains : Transactions which are manifestly unfair, where the advantages are all on the one side and there is ignorance and infirmity on the other side : A burden may well then be thrown on the dominant party of showing that the other party has entered into the transaction aware of all its legal implications, having had the benefit of independent legal advice and, where necessary, a proper translation or interpretation of the document concerned : A burden which, in the Court of Appeal's view, the bank had failed to discharge.

50. Speaking generally, and without attempting to summarize the vast array of authorities on the subject, the law can be stated thus : Transactions which might be impugned are ones that "shock the conscience of the court" and thus invite Equity's intervention. As summarized by Lord Brightman in Hart v. O'Connor [1985] AC 1000 at 1024 :

"... historically a court of equity did not restrain a suit at law on the ground of 'unfairness' unless the conscience of the plaintiff was in some way affected. This might be because of actual fraud ... or constructive fraud, i.e. conduct which falls below the standards demanded by equity, traditionally considered under its more common manifestations of undue influence, abuse of confidence, unconscionable bargains and frauds on a power ... An unconscionable bargain in this context would be a bargain of an improvident character made by a poor or ignorant person acting without independent advice which cannot be shown to be a fair and reasonable transaction. 'Fraud' in its equitable context does not mean, or is not confined to, deceit; 'it means an unconscientious use of the power arising out of these circumstances and conditions' of the contracting parties : Earl of Aylsford v. Morris (1873) LR8 Ch. App. 484, 491. It is victimisation, which can consist either of the active extortion of a benefit or the passive acceptance of a benefit in unconscionable circumstances."

51. In reaching, as the Court of Appeal did, the conclusion that the transaction here must be set aside, that court was in no way disturbing the fundamental principle that, generally speaking, when a person signs a legal document, he or she is bound by the act of signature : As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood. But there are special circumstances where the burden is thrown on the other party, under the principles of what are broadly called equitable fraud. In concluding, as the Court of Appeal did, that it was the bank's duty to make it clear to the respondents that the deed exposed them to liability far in excess of $3.3 million, being an unlimited guarantee for SMC's debts, that court did not say what aspect of equitable fraud was involved in this case.

Analysis

52. Upon analysis, there can be none. On the Court of Appeal's own findings the bank was, in giving instructions to the solicitors on 10 April 1997, acting fairly towards the respondents. As Rogers VP said, it was a representation as to the true effect of the deed which the solicitors were instructed to prepare for the respondents' signature, not a misrepresentation. Any suggestion of oppression or victimization on the part of the bank fails at the threshold : With it, the Court of Appeal's finding that a duty fell on that bank to ensure that Mr and Mrs Fung properly understood the terms of the instrument before they signed on 14 May 1997. What, then, is the proper legal approach arising from the unusual facts of this case?

Proper legal approach

53. Although the respondents and the bank, on the facts of this case, never met, they were in fact entering into a tripartite contractual arrangement through the agency of SMC and its principals, to provide security for credit to be advanced to SMC.

54. The facts are not dissimilar from those of Walker Property Investments (Brighton) Ltd v. Walker (1947) 177 LT 204 where the defendant, in discussions regarding taking a tenancy of a flat in a house belonging to the plaintiff company, was told that if he took the flat he would have the use of two basement rooms for storing his goods and the use of the garden. He took possession of the flat and began using the storage rooms and the garden. Later a tenancy agreement was signed. It was in a standard form and did not refer to the right to use the storage rooms and the garden. Some years later the company, relying on the written agreement, took out proceedings to restrain the defendant from using the storage rooms and the garden. The application was dismissed. On appeal, the trial court's judgment was upheld on two bases, of which only one is relevant for the purposes of this case. It was this : That there was a collateral agreement (described by Somervell LJ as "of the familiar kind") whereby, in consideration of the defendant entering into the tenancy agreement and becoming the tenant, the plaintiff company agreed that he should have the use of the storerooms and the garden : The plaintiff company therefore could not resile from its bargain and rely on the omission of those rights in the written instrument to defeat defendant's claim.

55. Whilst it is true that, a century ago, courts leaned against finding the existence of collateral warranties or collateral contracts : see for example, Heilbut, Symons & Co v. Buckleton [1913] AC 30 at 37 where Viscount Haldane L.C. said : "It is contrary to the general policy of the law of England to presume the making of such a collateral contract in the absence of language expressing or implying it ...", the modern tendency is to take a far less restrictive view : To the extent that Lord Denning M.R. in J. Evans and Son (Portsmouth) Ltd v. Andrea Merzario Ltd [1976] 1 WLR 1078 at 1081 D said that much of what was said in Heilbut, Symons & Co was "entirely out of date". Thus, in Chitty on Contracts (28 Ed.) Vol.1 para.12.005 one finds this statement :

"It is undoubtedly true that the courts are nowadays much more willing to accept that a pre-contractual assurance gives rise to a collateral contract, so that such collateral contracts are no longer rare ..."

56. In Heilbut, Symons & Co itself, there is the well-known statement of principle by Lord Moulton at p.47 which comfortably fits the circumstances of the present case :

"It is evident, both on principle and on authority, that there may be a contract the consideration for which is the making of some other contract. 'If you will make such and such a contract I will give you ￡100', is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, and they do not differ in respect of their possessing to the full the character and status of a contract ..."

57. A collateral agreement, like any other contract, must be objectively viewed, so the test must be this : On the totality of the evidence, must the parties be taken to have intended that the representation made by one of them should form part of the basis of the legal relationship between them?

58. Here, the position was simply this : In consideration of Mr and Mrs Fung executing the bank's standard form of legal charge to be prepared by the solicitors, charging their flat to the bank as security for facilities to be granted to SMC, the bank agreed that their exposure to financial risk should be limited to $3.3 million, unless agreed otherwise. The bank was, in law, bound by that agreement and could not rely on the solicitor's mistake in failing to put a limit of $3.3 million in the written instrument to saddle the respondents with SMC's total liability.

59. A conclusion thus arrived at is in accordance with well-established legal principles and requires no straining of the frontiers of Equity : But, to be fair to the learned Justices of Appeal in this case, it is worth mentioning that their approach was based upon the submissions of counsel. Further, nowhere in the printed cases lodged in this Court by the parties do we see reference to the concept of a collateral agreement. It was only in the course of argument that shades of these principles first emerged : mixed, it might be said, with adumbrations of what Lord Hoffmann said in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896 at 912F to 913E concerning the interpretation of commercial documents : That all the old intellectual baggage of "legal" interpretation has been discarded for the more modern approach, where the courts seek the true meaning of contracts by resort not only to the words used but also through the matrix of facts giving rise to the transaction. However, counsel never submitted at any time that the terms of the legal charge were ambiguous and that the words in clause 1(a) which fixed the respondents with liability - "all present and future indebtedness of the Principal" - were to be qualified in some way by reference to the matrix of facts : This is surprising, perhaps, since Lord Hoffmann's proposition in Investors Compensation Scheme v. West Bromwich as referred to above (with which Lord Goff of Chieveley, Lord Hope of Craighead and Lord Clyde agreed) goes a long way to loosening the shackles of words found in commercial instruments : Whilst, as Lord Hoffmann said at 913D, one does not easily accept that people have made linguistic mistakes, particularly in formal documents, nevertheless if one concludes "from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had". Here, the intention of all the parties plainly was that the respondents as chargors should be answerable for SMC's default up to $3.3 million for which their flat was security : Can the deed of 14 May 1997 be construed in such a way as to give effect to this intention, having regard in particular to the instructions to the solicitors dated 10 April 1997? Whilst, of course, in construing a written instrument, intention is objectively viewed, nevertheless when the party to whom such intention might be attributed never himself advanced such a case, it would transcend the frontiers of judicial boldness for the court to attempt to do so. In my judgment the approach as adopted earlier, by applying the principles of law concerning collateral contracts and by analogy with the case of Walker Property Investment v. Walker, puts the case on a much sounder legal footing.

Undue influence

60. Very little needs to be said on undue influence. It is common ground that the relationship of husband and wife does not as such give rise to a presumption of undue influence : Halsbury's Laws of Hong Kong Vol.11 para.165.018. As regards undue influence, the only thing relied upon by Mrs Fung was this : She said in an affirmation filed somewhat belatedly (almost as an afterthought) that on one occasion before the deed was signed - she did not say when - her husband "behaved violently by hitting on the table with a remote control and looked fierce"; she then said that she had "no alternative" but to "concede to his request" as she did not want to impair the marriage.

61. In my judgment such material does not begin to raise a case of undue influence : Further, the interests of Mr Fung and Mrs Fung in the present transaction were, to an extent, identical : They mortgaged together their matrimonial home to secure the debts of SMC in which the husband had no interest (though he was to get a 10% share in another company), thereby discharging their joint liability under the Wing Hang Bank mortgage. This case is therefore somewhat removed from the facts of cases such as Barclays Bank v. O'Brien [1994] 1 AC 180 where the facilities were extended to a company in which the husband, but not the wife, had an interest. In addition to all this, there is also the point that the bank was never using the husband as its agent to procure Mrs Fung's signature and could not therefore have been fixed as his principal with his act. I would reverse the Court of Appeal's judgment on this issue.

Conclusion

62. What the Court of Appeal did, as earlier mentioned, was to discharge the Master's judgment, thus leaving the bank empty-handed. The bank was also saddled with liability for all the costs. In the bank's printed case before this Court, and for the first time, counsel argued thus : Even if the Court of Appeal were right "in finding misrepresentation against [the respondents] and undue influence against Mrs Fung, it erred in setting aside the legal charge without requiring [the respondents] to make restitutio in integrum by repayment of $4 million to the bank", since the bank had, by the transaction, relieved the respondents of their liability under the Wing Hang Bank mortgage.

63. In the way I would resolve the appeal - a way wholly different from that of the Court of Appeal - this point largely falls away. But not entirely. On the respondents' own case they are liable to the bank for $3.3 million. Had the bank, in commencing proceedings in July 1998, limited its claim against them for $3.3 million, they would have had no defence. The mere fact that the bank had, in its originating summons, claimed considerably more than $3.3 million does not mean that, at the end of the day, it should go away empty-handed. On the other hand, it would be unjust to treat the position as if the bank had confined its claim to $3.3 million at the beginning, and to order interest on that sum to run from 31 July 1998, as the Master had done : If the bank had so confined its claim then, as counsel argued, the respondents might well have satisfied that claim by selling the flat which was worth then much more than it is worth now.

64. Mindful of the fact that this Court's paramount function is to administer practical justice in accordance with legal principles, the proper orders to make in the circumstances of this case are, in my view, as follows :

(1) The judgments in the two lower courts be discharged : With this would go not only the judgment for $16,211,786.34 plus interest but also the order for possession of the flat.

(2) Judgment be entered for the bank in the sum of $3.3 million : This would, of course, carry interest at the published judgment rate as provided for in s.49(1)(b) of the High Court Ordinance, Cap.4, from the date of this judgment.

(3) A declaration that the flat stands charged with the above judgment debt, until the debt is discharged.

Costs

65. Having regard to the way this matter has finally been resolved, I would make no order as to costs, leaving each party to pay its own costs. Mrs Fung's costs must be taxed under the legal aid rules. This would be an order nisi, to be made absolute within 14 days unless, before that time, the parties should submit in writing (with copies to the opposing parties) that there be a different order, in which event this Court would determine the issue on those submissions without hearing the parties further.

Mr Justice Mortimer NPJ:

66. I would allow this appeal for the reasons given by Mr Justice Litton NPJ. I agree with the orders he proposes as well as the direction on costs.

67. This is an unusual case. Its difficulties have been increased by a failure to ensure that the issues were identified in pleadings at the outset and by piecemeal hearings at first instance described in the Vice-President's judgment in the Court of Appeal.

68. It is useful therefore to recognize that the dealings between Mr and Mrs Fung and the bank also bear sound legal analysis as a single composite agreement as set out in the judgment of Lord Cooke of Thorndon NPJ. In either event the legal charge on the chargors is limited to $3.3 million.

Lord Cooke of Thorndon NPJ:

69. I agree with the judgment of Mr Justice Litton NPJ. He disposes of the case by applying the principles concerning collateral contracts, attaching particular importance to the bank's instructions to the solicitors, which were relayed, with implied authority from the bank, to the chargors. That analysis is open. Collateral contracts are certainly a familiar concept, as I have been acutely aware since Lord Denning's Privy Council judgment in Mouat v. Betts Motors Ltd [1959] AC 71, 81, described by a learned commentator as ".... the most extreme modern case in which what looks like one bargain has been divided into two ..." K. W. Wedderburn (now Lord Wedderburn of Charlton) Collateral Contracts [1959] CLJ 58, 74.

70. An alternative analysis, leading to the same result, is that there was a single composite agreement, of which the legal charge was one component and the instructions another, imposing liability on the chargors in the terms detailed in the charge but limiting it to $3.3 million specified in the instructions. Perhaps this approach is a more straightforward reflection of the true bargain between the bank and the chargors. This, too, is an application of a familiar concept and is not excluded by the parol evidence rule. See Chitty on Contracts, 28th ed. (1999), vol. 1, paras.12-094 to 12-096.

71. In my view both approaches are valid. It does not matter in this case which is to be preferred. An interesting parallel is J. Evans and Son (Portsmouth) Ltd v. Andrea Merzario Ltd [1976] 1 WLR 1078. There a condition previously agreed orally was held to limit widely-expressed printed conditions relating to the shipment of goods. Lord Denning MR analysed the case as one of a collateral contract, whereas Roskill and Geoffrey Lane LJJ saw it as one of a single contract of carriage on terms to be collected and reconciled from the dealings of the parties as a whole.

72. The circumstances of the present case are unusual. The decision poses no new threat to the sanctity of written contracts in Hong Kong.

Mr Justice Bokhary PJ :

73. The Court unanimously allows the appeal so as to make the orders and directions set out in the last two paragraphs of Mr Justice Litton NPJ's judgment. We are indebted to all counsel for their assistance, and particular thanks are due to Mr McCoy, Miss Lau and Mr Wright who have donated their services under the Hong Kong Bar Free Legal Service Scheme.