XCHRX MICHAEL CHEUK, WONG & KEE (a firm) AND ANOTHER v. LAU WAN FU, JOHN t/a JOHN W.F. LAU & CO.

HCA 205/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 205 OF 1996

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REASONS FOR DECISION

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1. This is an application by the Plaintiffs to re-amend their Statement of Claim. The 1st Plaintiff chooses not to pursue the application and I need only deal with the application by the 2nd Plaintiff.

2. It is perhaps necessary to set out the facts and the history of the case.

3. In July 1995, Chung King Investment Ltd ("Chung King") purchased a flat in Ap Lei Chau. It then mortgaged it to Wide Profit Finance Ltd ("Wide Profit") on 30 August 1995.

4. The next day on 31 August 1995 Chung King instructed the Defendant, its solicitor to redeem the mortgage and to re-mortgage the same flat to the 2nd Plaintiff, Eastfaith Finance Ltd ("Eastfaith").

5. The aforesaid re-mortgage was handled by the 1st Plaintiff Michael Cheuk, Wong & Kee ("MWK") as solicitors for Eastfaith.

6. On 8 September 1995, the first mortgage in favour of Wide Profit was redeemed. The re-mortgage to Eastfaith and an agreement for the loan to Chung King by Eastfaith were also executed.

7. MWK then drew out 4 cheques for the total sum of $4,418,487.67 as follows:-

(i) for $4.26 million in favour of Wide Profit to redeem the first mortgage;

(ii) for $2,620 in favour of Wide Profit's solicitor for their disbursements and costs.

(iii) for $12,000 in favour of the Defendant being his disbursements and costs; and

(iv) for $143,867.67 in favour of the Defendant, being the balance of the loan to Chung King secured by the second mortgage after deduction of the necessary solicitors' fees, administration fee and interest.

8. The 4 cheques were sent to the Defendant on his undertaking to send the title deeds to MWK within 3 days of the Defendant receiving them from the Land Registry or by 11 November 1995, whichever was earlier.

9. The Defendant gave such undertaking because when he forwarded the cheques for $4.26 million and $2,620 to the solicitors of Wide Profit, they also undertook to send the title deeds to him by 28 September 1995.

10. The solicitors for Wide Profit did not comply with the undertaking. The Defendant never received the title deeds and was therefore unable to comply with his undertaking to MWK.

11. In connection with the aforesaid transactions, there are a number of proceedings.

12. In HCA No. 11754 of 1995, Super Value Investment Ltd, Morning Glory International Ltd and Chung King claim against two of Chung King's directors and Eastfaith for fraud in connection with the re-mortgage.

13. In HCMP No. 3711 of 1995, Eastfaith seeks to enforce the mortgage against Chung King.

14. In the present action in accordance with the Amended Statement of Claim the Plaintiffs, MWK and Eastfaith claim against the Defendant for damages for breach of the undertaking.

15. MWK further claims for a declaration that the Defendant should indemnify them against all liability in connection with the execution of the re-mortgage on 8 September 1995 between Eastfaith and Chung King.

16. Eastfaith also claims for the sum of $4,418,487.67 being the amount of the 4 cheques.

17. On an order 14 application which eventually went before Keith J as he then was. Summary judgment was granted in favour of Eastfaith for damages to be assessed for breach of the undertaking by the Defendant. In respect of the rest of the claim by MWK and Eastfaith, the Defendant was granted unconditional leave to defend.

18. Keith J was of the view that it is arguable that the undertaking in question was given to MWK as solicitors for, and as agent of Eastfaith and therefore MWK might not have an independent right to pursue a claim for breach of the undertaking.

19. Keith J was also of the view that the loss to Eastfaith as a result of the breach of the undertaking could not be ascertained until the fraud action and the mortgage action (i.e. HCA No. 11754 of 1995 and HCMP No. 3711 of 1995) were finally determined by the court.

20. It was recognised by Eastfaith that its attempt to recover the $4.4 million from the Defendant might be challenged on the basis that the consequence of the breach of the undertaking by the Defendant was simply that Eastfaith's loan was unsecured.

21. At the assessment of damages for breach of the undertaking, it could be argued by the Defendant:

"(a) that the fact that Eastfaith's loan is unsecured has caused Eastfaith either no loss or only minimal loss of a kind which has not been pleaded, and

(b) that such loss as Eastfaith may have incurred as a result of the loan being unsecured was caused, not so much by the breach by the Defendant of his undertaking, but by a fraud on the part of the directors of Chung King, or at any rate on the part of persons who purported to be the directors of Chung King."

22. In HCA 11754/95, Chung King claims that the loan agreement and the re-mortgage were executed without its authority, and that the persons who purported to be the directors of Chung King for the purpose of authorising the loan agreement and the re-mortgage had never been validly appointed. Chung King thus seeks a declaration that the loan agreement and the re-mortgage are void and not binding on it.

23. Relying to the aforesaid allegation by Chung King, Eastfaith had tried to bring in the Defendant as a third party in HCA 11754 of 1995. The application was dismissed by Master Cannon. Eastfaith then commenced a new proceeding, namely HCA No. 8633 of 1998 against the Defendant.

24. Eastfaith suggested that it had been induced to execute the loan agreement and the re-mortgage by false representation from the Defendant. The false representation was that Chung King's application for the loan had been approved by the duly appointed directors of Chung King.

25. Eastfaith prayed for an order that the Defendant was to indemnify it for all its losses in the event of the mortgage being declared void and not binding on Eastfaith.

26. By an order of Keith J on 12 April 1999, HCA No. 8633 of 1998 was stayed pending an application to re-amend the Statement of Claim in the present action. Keith J was of the view that the new allegation could and should have been made in the present action and not in a new action.

27. In his judgment, Keith J made the following observation at p. 6 of his unreported judgment.

"It is plain, I think, that the new allegation could have been made in the earlier proceedings. After all, the mortgage proceedings had been commenced prior to January 1996 when EFL (Eastfaith) commenced the earlier proceedings. However, as to whether the new allegation should have been made in the earlier proceedings, I have reached two conclusions:-

(i) It was reasonably open to EFL's solicitors to limit the earlier proceedings to the two causes of action which related to Mr Lau's (the Defendant's) professional duties. If those causes of action had resulted in EFL getting its $4.5 m. back, there would have been no point in muddying the legal water by raising the new allegation at the same time, especially as that allegation would have significantly expanded the factual and legal issues;

(ii) However, once the difficulties to which the two original causes of action were subject had become apparent, and once it had been decided that the new allegation had to be raised, an attempt should have been made to raise the new allegation in the earlier proceedings. Unless it was apparent that, for one reason or another, an application for leave to re-amend the Statement of Claim in the earlier proceedings would not have succeeded, it was inappropriate to commence fresh proceedings. I see no reason why EFL should be treated as justified in commencing new proceedings against Mr Lau if its new allegation could have been made by amendment in the earlier proceedings.

The course which I have decided to take to give effect to these conclusion is to stay the new proceedings, pending an application for leave to re-amend the Statement of Claim in the earlier proceedings so as to plead, and plead properly, the new allegation. In the event of that application for leave to re-amend the Statement of Claim being granted, the writ and Statement of Claim in the new proceedings will be struck out. However, I agree with Mr Coleman that it does not automatically follow that if the application for leave to re-amend is refused, the new proceedings should necessarily continue. That will depend on what the reasons for the refusal of leave to re-amend are. Accordingly, in the event of the application for leave to re-amend being refused, I give the parties liberty to restore the present summons."

28. I find it necessary to set out the facts and the history of the case because obviously the present application to re-amend the Statement of Claim was made pursuant to the comment of Keith J.

29. By the proposed re-amendment, Eastfaith seeks to introduce an alternative claim of misrepresentation against the Defendant. It is suggested that the Defendant owed a duty to care to ascertain that the borrower had good title to the property and that whoever executed the documents had been properly authorised.

30. It is also suggested that in order to induce the Plaintiffs to enter into the Loan Agreement and to send the 4 cheques to the Defendant, the Defendant had made certain representation which will or likely to be untrue.

31. The alleged misrepresentation are as follows:

"(i) That the Borrower (Chung King) was the beneficial owner of the new property.

(ii) One Billy Ng Kin Shing ("Ng") and Lo Wing Cheung ("Lo") were the new shareholders of the Borrower in place of Super Value Investment Limited and Morning Glory International Limited respectively.

(iii) Ng and Lo were appointed directors of the Borrower.

(iv) Ng and Lo attended a Board Meeting of Chung King approving the mortgage and two directors of the Borrowers were 'authorized' to sign the said mortgage."

32. As can be readily seen, the aforesaid 'misrepresentations' are the subject matter of HCA No. 11754 of 1995 and the falsity or otherwise of such misrepresentation can only be established after the final disposal of HCA No. 11754 of 1995.

33. Mr Ng, on behalf of the Defendant, raises a number of objections to the proposed re-amendment.

1. The representations were only made by "Ng" and "Lo" as the documents which purport to show that they were the new shareholders and directors of Chung King and that they had approved the mortgage were signed by them. The Defendant was only acting as solicitors for Chung King in forwarding the documents to the Plaintiffs.

2. There is no indication as to whether the alleged misrepresentation is one of fraudulent, negligent or innocent and there is no particulars.

3. The plea that the alleged representations were likely to be untrue is bad at law.

4. The Plaintiff could have introduced the allegation when the writ was issued. The delay has caused prejudice to the Defendant as he has ceased practice. The relevant files cannot be located and the witness no longer recollects the event.

5. The alternative claim is inconsistent with the earlier position on which summary judgment against the Defendant was obtained by Eastfaith. The initial suggestion is that the undertaking of the Defendant was given on the basis of a valid Loan Agreement. The alternative claim suggests that the Loan Agreement is void because of the misrepresentation. Mr Ng argues that having obtained judgment on one basis, Eastfaith should not be allowed to bring in an alternative claim on a different basis.

34. I do not accept the suggestion that summary judgment in favour of Eastfaith was granted on the basis of a valid Loan Agreement. The Plaintiffs' case on the breach of undertaking was simple, namely that the 4 cheques were sent on the Defendant's undertaking to supply the title deed. The Defendant was in breach of the undertaking by failing to supply the title deed. The validity or otherwise of the Loan Agreement had no bearing on the undertaking.

35. There is also no basis for the suggestion that the Defendant had been unduly prejudiced by the alternative claim.

36. There can be no dispute that there has been delay on the part of the Plaintiffs in introducing the new alternative claim. But it is not difficult to understand why the Plaintiffs took the steps they did. Indeed Keith J in his judgment staying HCA No. 8633 of 1998 commented that it was reasonable for Eastfaith to limit the causes of action to avoid unnecessary expanding the factual and legal issues involved in the dispute.

37. The delay in question is not inordinate and there is no suggestion that the delay had caused the difficulties that the Defendant faces.

38. Mr Ng seeks to rely on the cases of The Albert (1895) 72 LT 124 and Steward v. The North Metropolitan Tramways Company (1885) 16 QBD 178.

39. With respect, those cases dealt with situations whereby the delay in making an amendment to the pleading had caused injury or a change in the position of the other party to the extent that he could not get justice.

40. The President in The Albert case (supra) said at p. 126:-

"The second proposition appears to me to be equally clear - viz., that if the judge funds that owing to the mistake, or whatever it may have been, of the plaintiff, in not having put his pleadings right originally, there has been such an injury, or such a change in the position of the defendant that he cannot get justice done, then, of course, it is equally clear that such an amendment ought not to be allowed."

41. Pollock B in the Steward case (supra) made similar observations at p. 180:-

"..... if a defendant chooses to conduct his defence to a certain point on certain lines, and lead the plaintiff on into a certain position, the defendant has no right to change his front. That is only acting on the well-known doctrine of estoppel, and I think, in common fairness and equity, the defendants are estopped from saying they are not the proper defendants ....."

42. The aforesaid observations do not support the Defendant's contention at all. The Defendant's difficulties are not the result of Eastfaith's mistake. Eastfaith has not led the Defendant into any difficult position.

43. The Defendant has been aware of Eastfaith's intention to bring in the alternative claim as early as 1998, less than 3 years after that cause of action arose.

44. In any event, as Mr Ng has conceded, the limitation period in respect of the cause of action arising out of the alleged misrepresentation has not expired. The difficulties that the Defendant faces in not being able to rely or the relevant files are not the making of the Plaintiffs and they should not be held responsible.

45. I agree that the way in which the alleged misrepresentations were pleaded is not entirely satisfactory.

46. There is no firm assertion that the representations are untrue and if so whether they are the result of fraud or negligence. There is of course a lack of full particulars.

47. On the other hand, it must be borne in mind that the Plaintiffs are not privy to the internal management of Chung King. Chung King and its shareholders are alleging that Ng and Lo were not the shareholders and directors of Chung King when they purported to mortgage the property on behalf of Chung King.

48. It may well be that the present action or part of it may have to be stayed pending the outcome of HCA No. 11754 of 1995. The Defendant may well be entitled to further and better particulars at a later stage. But in the light of the background of the case, those matters are not adequate reasons to prevent the Plaintiff from pleading the alternative cause of action at this stage.

49. The Defendant is well aware of the stance of the Plaintiff. He is also well versed with the reasons for the Eastfaith take the stance as it does.

50. I have considered the background of the case and Counsel's submission carefully.

51. None of the matters put forward by the Defendant, either individually or collectively are adequate to deprive the 2nd Plaintiff the chance to present to the court the question in controversy between the parties in the proper exercise of my discretion and the proper application of the principles established in Kwan Shiu Cheong Charles v. Ferrari Spa & Another [1994] 2 HKC 179.

52. In the circumstances, the application to re-amend the Statement of Claim must be allowed.

53. I note that the proposed re-amendment attached to the summons may need to be fine-tuned. I therefore grant leave to the 2nd Plaintiff to re-amend the Statement of Claim within 14 days of this order in accordance with the decision of the court. The Defendant be at liberty to amend its Amended Defence and Counterclaim within a further 14 days and that the amended Reply and Defence to Counterclaim, if any, is to be filed and served within a further 14 days.

54. In accordance with the indications of the parties, I order that the Plaintiffs are to bear the costs of and occasioned by the re-amendment to their Statement of Claim but the Defendant is to bear the 2nd Plaintiff's costs of the application, including the costs of the hearing before Master Poon on 14 September 1999.

55. I grant parties liberty to apply should there be any difficulties in carrying out the order of the court.