HAU CHAT TONG v. HAU CHAK LAM

DCCJ4772/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4772 OF 2005

(FORMERLY HIGH COURT ACTION NO. 3778 OF 2003)

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JUDGMENT

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1.  This action is a claim for a loan of $1 million which the Plaintiff made to the Defendant in about November 1997.  The defence is that the loan has been extinguished under a full and final settlement agreement by the Defendant’s assigning his 1/3 interest in a piece of land.

Background

2.  The Plaintiff, the Defendant and one Hau For Wan are full-blood brothers (the 3 brothers).  The Defendant is the eldest one.  The Plaintiff and Hau For Wan have migrated to and are now residents in the Netherlands.

3.  In or about mid-1997, the Defendant urgently required a large sum of money to comply with the order for maintenance in a matrimonial case between the Defendant and his divorced wife.  He approached the Plaintiff and Hau For Wan for assistance.

4.  The Plaintiff and Hau For Wan agreed to help the Defendant by selling a property known as Lot No. 2023 in DD No. 90 (the 1^st property) jointly owned by the 3 brothers and to allow the Defendant to take as much from the proceed of the sale as he needed to settle the maintenance order. 

5.  The Sale and Purchase agreement for the 1^st property was signed on 16 September 1997 for a consideration of $5,945,940.  The Sale and Purchase was completed on 10 November 2006.  Out of the sale proceed of the 1^st property, $3,385,443 was used to settle the outstanding maintenance order,  and $300,000 was used to pay costs of the Defendant’s ex-wife’s solicitors in her matrimonial case.  

6.  The 3 brothers also jointly owned another piece of land, namely, Lot No. 2159 in DD No. 92, which is a non-residential property of a total area of 1,122 sq. ft. (the 2^nd property).

7.  On 14 November 1997, the Defendant transferred his  share in the 2^nd property to the Plaintiff and Hau For Wan purportedly for a consideration of $250,000.  The Defendant signed a document to acknowledge receipt of the money.  However he did not actually receive the money.

8.  The core issue of this action is whether the assignment of interest in the 2^nd property by the Defendant to the Plaintiff and Hau For Wan, as the Defendant pleads, has extinguished the loan under a full and final settlement agreement between the Plaintiff and the Defendant. 

9.  This action was previously listed in the Court of First Instance under the Action Number HCA 3778/2003.  The Plaintiff filed an Order 14 Application and judgment was entered  in favour of the Plaintiff.

10.  The Defendant lodged an appeal to a judge of the Court of First Instance.  The appeal was heard and allowed on 10 August 2005.  The action was subsequently transferred to the District Court because the jurisdiction of the District Court by then had been increased to $1 million. 

11.  I need to mention the Order 14 proceedings because at the present  hearing, Mr. Hui, Counsel for the Defendant, has made reference to the Order 14 proceedings criticising that the Plaintiff has changed his case. 

12.  Before the trial starts, the Plaintiff made an application for leave to file a supplementary witness statement of PW2, Mr Hau Yiu Nam.  The Defendant objected to the application. 

13.  I was of the view that, while the introduction of a new witness is unsatisfactory, the evidence of Hau Yin Nam would be relevant and would not prejudice the Defendant.  I therefore gave leave to the Plaintiff to file witness statement of Hau Yin Nam and to call him as witness. 

14.  I also refused the Defendant’s application for adjournment of the trial to a new date.  In my view, the additional Plaintiff’s witness would testify mainly on a very narrow factual issue, i.e. whether the Defendant admitted to him he still owed the Plaintiff the loan.  A short adjournment would be sufficient for the Defendant to prepare his case for the new evidence.  I therefore only adjourned the trial to the afternoon of the first trial day.  And I allowed the Defendant to file witness statement of his wife and to call her to give evidence to deal with the Plaintiff’s new witness.  I also ordered the Plaintiff to pay the Defendant the wasted costs in any event. 

The Plaintiff’s Case

15.  The Plaintiff says in about August 1997, the Defendant asked him and Hau For Wan to lend him a large sum of money for settling the maintenance order in favour of his ex-wife issued by a court in the U.K.  The Plaintiff agreed that the 1^st property was to be sold and the share of the Plaintiff and Hau For Wan from the sale proceed would be lent to the Defendant.  They gave instructions to Messrs. Kenneth Woo & Co.  to act for them as vendors in this sale transaction. 

16.  In or about September 1997, the 3 brothers had some conversations.  The Defendant proposed, in appreciation of the assistance from the Plaintiff and Hau For Wan, to assign his share in the 2^nd property to them.  The Plaintiff and Hau For Wan accepted the Defendant’s proposal.  They agreed the consideration for the transfer of interest at $250,000, having taken consideration of the prevailing price of the 2^nd property.  The 3 brothers also gave instruction to Kenneth Woo & Co. to prepare the assignment of the Defendant’s share in the 2^nd property to the Plaintiff and Hau For Wan. 

17.  The Plaintiff and Hau For Wan initially proposed to pay the sum of $250,000 by bank transfer.  The Defendant told them that he was very grateful for their help and was to waive the payment of $250,000.  A final agreement was reached that the Defendant’s indebtedness would be rounded up to $1million only to each of the Plaintiff and Hau For Wan.  On the other hand, the Plaintiff and Hau For Wan would not charge the Defendant any interest.

18.  The Plaintiff further says the 2^nd property is a “grain hall（麥堂）”, an open space in the middle of houses, originally used for drying crops under sunshine.  It is still unused. 

19.  The Plaintiff also says $180,000 was paid as compensation to the tenant occupying the 1^st property in order to sell that property.  In addition, $150,000 was paid to PW2 as commission for introducing the purchaser of the 1^st property.  

20.  Under cross-examination, the Plaintiff says that part of the consideration of the Defendant’s transfer of his interest in the 2^nd property was to cover 3 years’ interest of the loan.  As regards the Order 14 proceedings, he does not know that his lawyers had suggested on his behalf that the $250,000 had been paid to the Defendant.  He disagrees that he has changed his case.

21.  PW2, Mr. Hau Yin Nam, gives evidence that he had helped to persuade the Plaintiff and Hau For Wan to lend money to the Defendant.  The Defendant told him that as a token of appreciation to his 2 brothers, he would assign his 1/3 interest in the 2^nd property.  On many occasions in 2000, 2002, 2003 and 2006, he met with the Defendant and his wife in MacDonald’s Restaurant at Sheung Shui.  On these occasions, the Defendant told him that he did not have enough cash to repay the loan and he still owed to the Plaintiff and Hau For Wan the money.

22.  PW2 also says that he was the middleman in the sale of the 1^st property.  Since the 1^st property was leased to a tenant, $180,000 was paid to the tenant as compensation to obtain vacant possession of the 1^st property.  As a middleman in the transaction, he received $150,000 as “tea money”. 

23.  Under cross-examination, he agrees that he had acted as a middleman helping to sell a few properties of the Defendant.  He disagrees with the suggestion that he had dishonestly concealed from the Defendant the true offer made by a potential purchaser. 

24.  In my judgment, PW2’s evidence should be considered as suspicious.  He has received $150,000 commission in the sale of the 1^st property and has been involved as a middleman to sell the Defendant’s other properties for remuneration.  He also agrees that he had an argument with the Defendant’s wife.  I find that he might not be impartial and it is unsafe to rely on his evidence.  I therefore attach no weight to his evidence. 

25.  PW3, Mr. Kenneth Woo, is the solicitor acting for the 3 brothers in the sale of the 2 properties.  He adopts his affirmation dated 29 July 2005 as his evidence.  He says the acknowledgment document for the consideration of the 2^nd property (page 108 of the bundle of trial) is a standard document of his solicitor’s firm. The form was used for the protection of his firm because both parties in the transfer of the 2^nd property gave him instructions that the $250,000 needed not be paid via his firm. 

The Valuation Report

26.  The Plaintiff has instructed a Property Surveyor to carry out a valuation of the price of the 2^nd property (page 129 to 140 of the agreed bundle of trial).  In the opinion of the property surveyor, after making references to some land sale transactions, the market value of the 2^nd property was, as at 14 November 1997, $215,000.

The Defendant’s Case

27.  The Defendant’s case is very simple.

28.  The Defendant says that he had borrowed from each of the Plaintiff and Hau For Wan about $800,000 to $900,000.  The loan was already extinguished under a full and final settlement agreement in or about November 1997 by the Defendant’s transferring his interest in the 2^nd property.  He denies ever making any admissions to PW2 that the debt has not been settled. 

29.  In cross-examination, the Plaintiff says only $140,000 was paid to the tenant of the 1^st property as compensation.  He agrees that PW2 was a middleman  in the sale of the 1^st property, but he does not know whether PW2 received any commission from the Plaintiff. 

30.  DW2, Ms. Wu Yuet Heung, is the wife of the Defendant.  She says PW2 was angry with them because she had scolded him for his dishonesty when he acted as a middleman in the sale of a piece of land for the Defendant.  Ms. Wu further says that she was present in the meetings of PW2 and the Defendant at MacDonald.  She did not hear the Defendant making any admissions of the outstanding loan. 

The Issues

31.  There are 2 simple issues in the case:-

(1)     What was the amount of the loan?

(2)     Was the loan extinguished by the Defendant’s assignment of his interest in the 2^nd property?

What was the amount of the loan?

32.  Initially, the loan of $1 million was not disputed by the Defendant.  It was only at the trial that the Defendant re-amended his defence to admit that the loan was “about” $1 million.  The last minute amendment hence put the Plaintiff to strictly prove the amount and circumstances of the loan.  The Defendant says in his evidence that the loan was only about $800,000 to $900,000.  However he also says he is not clear about it because the sale of the 1^st property was handled by the Plaintiff. 

33.  There is no dispute that the 1^st property was sold at $5,945,940. Out of the proceed of sale, $3,385,443 was paid to settle the Defendant’s outstanding maintenance; $300,000 was paid to solicitors for the Defendant’s ex-wife as legal costs.  The legal costs of the 3 brothers in the sale of the 1^st property was $25,375.

34.  While there is a dispute as to the amount of compensation to the tenant of the 1^st property, it would only create a difference of $13,333 ($40,000 ÷ 3). 

35.  Insofar as the commission fee of $150,000 is concerned, the Defendant does not deny it. He only says he did not know whether the money was paid.  In fact, in his evidence, he says he himself has paid PW2 commission fee when PW2 helped him as a middleman in the sale of another piece of land for him.  It supports the Plaintiff’s case that PW2 would take commission for his introduction.  On balance, I find that $180,000 was paid to the tenant of the 1^st property as compensation, and $150,000 was paid to PW2 as commission fee.

36.  There is no evidence from either party as to who should bear the costs for the sale of the 1^st property.  There is also no evidence as to the terms for the Defendant using the proceed of sale to settle his outstanding maintenance.  Given that the Plaintiff and Hau For Wan were selling the 1^st property out of brotherhood to help their eldest brother, the Defendant, it is only understandable that they did not discuss on the detailed terms of the loan.  But one thing is obvious and it is not in dispute: the money has to be repaid.  One would expect that the 3 brothers would in due course discuss about the repayment of the money.  There was therefore a subsequent discussion as to the repayment of money by the Defendant.

37.  The 1^st property was sold at the request of the Defendant for the purpose of helping him.  In my findings of fact, all the incidental costs for the sale must have been intended and agreed to be borne solely by the Defendant.  At the time the Defendant transferred his share in the 2^nd property, the money he had borrowed from the Plaintiff and Hau For Wan would be: $3,385,443 (outstanding maintenance) + $300,000 (legal costs paid for matrimonial case) + $180,000 (compensation to tenant) + $150,000 (commission) + $25,375 (legal costs for sale of the 1^st property) - $1,981,980 (Defendant’s own share of proceed from sale) = $2,058,838.

Was the loan extinguished by the Defendant’s assignment of his interest in the 2^nd property?

38.  In answering this question, I think one must take into consideration, among others, one important factor: the Plaintiff, the Defendant and Hau For Wan are full-blood brothers. The loan was not a commercial deal.  Another important factor is the value of the Defendant’s share in the 2^nd property in the mind of the 3 brothers.  However, given their relationship, the issue should not be considered on a purely commercial perspective and quid pro quo basis.

39.  The Defendant says the market value of the 2^nd property “should be” not less than $1.5 million.  Apart from the Defendant’s bare assertion, no evidence has been adduced to support his claim.  The Defendant himself provides no evidence as to the basis of his belief.  The suggestion that the value of the 2^nd property could be much higher than market value, because of the possibility of building a “ding house” and the uniqueness of the land to the Plaintiff, is not supported by any evidence.  The evidence is that the 2^nd property is a very small piece of land situated between houses and is being used for drying of clothes.  Moreover, if the value of that particular plot of land in his mind was that high, why did the Defendant transfer his share for a consideration of $250,000 only?

40.  On the other hand, the Plaintiff has produced an independent surveyor’s valuation report which indicates that the Plaintiff had paid 3 times the value of the Defendant’s interest in the 2^nd property.  While I notice that the comparables which have been taken in the surveyor’s report are not in the village itself, I accept that the comparables can still provide assistance in giving the unit price of the land in the vicinity in the region of $150 to $200 per sq. ft.  The 2^nd property is of 1122 sq. ft. and the Defendant’s share would be 374 sq. ft.  If the 2^nd property was worth $1.5 million, it would give a unit price of $1337/sq. ft.  Such price , taking into consideration of the price of land in the vicinity and the 1^st property, in my judgment, is highly unlikely for a non-residential property in a village in Sheung Shui.

41.  Taking also into account the evidence that the consideration for the transfer of the Defendant’s interest was agreed by the 3 brothers as $250,000, I find that the market value of the Defendant’s share in the 2^nd property, in the mind of the 3 brothers, was $250,000 at the time of the assignment. 

Fallacy of the Defendant’s argument

42.  It is trite law that consideration needs not be adequate, it only needs to be sufficient.  And one must not ignore the fact that the Plaintiff and the Defendant are full-blood brothers.  The loan was not made as a commercial bargain.  That said, it would be ludicrous to suggest that the Plaintiff and Hau For Wan would accept the Defendant’s share of about $250,000 in value in the 2^nd property as full and final settlement of the Defendant’s indebtedness to them for more than $2 million.  Even if the value of the 2^nd property was $1.5 million as the Defendant suggests, it is still highly unlikely that the Plaintiff and Hau For Wan would accept $500,000 to settle their loan of over $2 million.

43.  Counsel for the Defendant has made criticisms about the Plaintiff’s pleadings that he was a bona-fide purchaser for value in the 2^nd property and his previous counsel proceeded with the Order 14 application on the basis that $250,000 had been received by the Defendant.  However, the Defendant never said in his affirmations in the Order 14 application that the $250,000 was received by the Defendant.

44.  The Plaintiff has explained in court that he has all along given the same instructions to his lawyers.  However, he cannot understand the English language used in his affirmations and witness statements.  He does not know how his lawyer presented the case.

45.  In my judgment the term “bona fide purchaser” is apparently a legal term chosen, not by him, but by his lawyers.  The Order 14 application was at the very beginning stage of the proceedings and focus was naturally placed on the narrow issue in the application.  I find that it was merely a misunderstanding of the Plaintiff’s case on the part of the Plaintiff’s lawyers. The Defendant’s admission of $1 million loan has also misled the Plaintiff’s solicitor to focus only on the issue of full and final settlement.  In any event, the transfer of the Defendant’s share in the 2^nd property is not in dispute.  The Defendant has never suggested that the consideration for the transfer has not been received.  Whether the money was actually received by the Defendant is neither here nor there. 

46.  Criticism has been made that the Plaintiff only gives details of computation and circumstances of the $1 million loan at trial, and not in his pleadings.  I think the criticism is unfair because the Plaintiff had been led to believe that the loan of $1 million is undisputed until the first day of trial.  The claim was therefore proceeded on this basis.  When the loan was admitted, the pleadings as to computation and circumstances of the loan was superfluous.

47.  Insofar as demeanour is concerned, the Plaintiff impresses me as a straightforward and frank witness.  Mr Hui has criticised that the Plaintiff is inconsistent in his evidence as to whether the transfer of 2^nd property was an agreement collateral to the loan agreement. I do not think that the Plaintiff is lying.  The inconsistency only reflects his failure to understand the legal relationship between the two transactions.

48.  On the other hand, the Defendant impresses me as an evasive and unreliable witness. 

49.  Having considered all the evidence and the submissions made by Counsel for the parties, I find the Plaintiff’s evidence more reasonable and reliable than the Defendant’s evidence.  I accept the Plaintiff’s evidence as facts of the case.

50.  I find that when the 1^st property was sold to settle the Defendant’s matrimonial case, the Defendant was indebted to the Plaintiff and Hau For Wan in the sum of $2,058,838.  Subsequently, the 3 brothers had discussion about the loan and reached an agreement that the Defendant would transfer his share in the 2^nd property, and in return the Plaintiff and Hau For Wan would reduce the loan to $1million each and would not charge the Defendant interest of the loan.

51.  I find that the Defendant’s transfer of his share in the 2^nd property was not a full and final settlement of his indebtedness to the Plaintiff and Hau For Wan arising from the sale of the 1^st property.

Judgment

52.  I therefore give judgment to the Plaintiff for the sum of $1 million.  I also order interest at the judgment rate to accrue from the issue of the writ in the Court of First Instance up to today.  There is costs order nisi that costs of this action be paid by the Defendant to the Plaintiff.  The costs nisi shall be made absolute after 14 days of this judgment.