FANG MENG SUNG, JOHN v. LUK MAN LOK ROCKY AND OTHERS

HCMP 1959/2009

[2019] HKCFI 1283

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1959 OF 2009

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J U D G M E N T

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A. INTRODUCTION

1.  The Plaintiff’s firm acted as solicitor for D1 when D1 acquired the subject property. Due to the firm’s negligence, there was defect in the title. The title defect was discovered when D1 purported to sell the property to D2 and D3.  Pending rectification of the title defect, the Plaintiff advanced a loan; and the Defendants’ side executed an undated assignment and undated legal charge, both in escrow.

2.  It took 3 years for the title defect to be remedied.  In the meantime, the Defendants purported to cancel the sale among themselves. 

3.  The Plaintiff claims that, about 6 years after the loan was first advanced, D1 had allegedly created an equitable mortgage by deposit of title deeds in favour of the Plaintiff as security for the loan.

4.  The loan has not been paid in full, so the Plaintiff dated the legal charge. He initially enforced the loan and the equitable mortgage against all the Defendants. He had since withdrawn his claims against D2 and D3 and limits his claim against D1 only.

5.  D1, however, counterclaims for return of the title deeds.  D2 and D3 counterclaim for rescission of the legal charge and repayment of monies paid to the Plaintiff in respect of the loan.

6.  The disputes are about who the borrowers of the loan were, whether or not the equitable mortgage exists, whether the claim or the counterclaim has been time-barred and whether or not the Plaintiff had the authority of D2 and D3 to date the legal charge. 

B.   UNDISPUTED FACTS

7.  The Plaintiff was formerly the sole proprietor of a solicitor’s firm known as J Fang & Co (“JFC”) until he ceased business on about 15 January 1995.  The Defendants were his ex-clients.

8.  On 20 July 1989, D1 acquired the subject property at Flat 6 on 22^nd floor, Block A, Yee Tsui Court, No. 1 Yee Shing Street, Chai Wan, Hong Kong (“the Property”), on the strength of a mortgage (“the Citibank mortgage”). 

9.  JFC acted on behalf of D1 and Citibank.  Due to JFC’s negligence, D1’s title was defective in that the assignment to the Plaintiff was within the 5-year period of restriction against sale: section 17B of the Housing Ordinance, Cap 283. 

10.  The title defect was discovered in October 1991 when D1 purported to sell to D2 (his sister) and D3 (D2’s husband).  As a result, D2 and D3 could not raise a mortgage.

11.  The parties had a meeting on 22 October 1991 (“the 1991 Meeting”). Pending rectification of the title defect (“the rectification”)[1], the Plaintiff provided a loan of $950,000(“the Loan”).  He required the Defendants to execute, in escrow:

(a)   An Undated Assignment by D1 in favour of D2 and D3 as joint tenants; and

(b)   An Undated Legal Charge executed by D2 and D3 jointly as mortgagors in favour of the Plaintiff as security for the Loan, with interest at $8,000 per month.

12.  The Loan was advanced by 2 cheques:

(a)   A cashier order dated 23 October 1991 arranged by JFC in the sum of $591,003.23 payable to Citibank to redeem the Citibank mortgage; and

(b)   A cheque dated 22 October 1991 in the sum of $358,996.77 payable to D2 and D3.

13.  On 22 October 1991, D1 acknowledged in writing receipt of “all purchase price of [the Property] from the purchaser [D2 and D3]”.

14.  D2 and D3 had paid the Plaintiff some legal fees in relation to the Undated Assignment and Undated Legal Charge. 

15.  The Plaintiff had received some repayments in respect of the Loan.

16.  The defect in title was remediedby a Confirmatory Assignment dated 28 August 1994 executed by D1 and the vendor who sold the Property to him.

17.  As the Defendants have not repaid the Plaintiff in full after the rectification, the Plaintiff dated the Undated Legal Charge 3 October 1997.  Wong Fung & Co presented it for registration on 23 February 2009, but the registration had since been pending even till the trial.  The Plaintiff had not registered the Undated Assignment because he once thought it was lost.

18.  On 2 October 2009, the Plaintiff issued the present originating summons (“the OS”) as a mortgagee action.  He originally claimed for repayment of the Loan and interest against all 3 Defendants, and sought vacant possession and an order for sale pursuant to the Legal Charge and/or D1’s Equitable Mortgage.  The OS was later, by the order of Master Ho dated 18 May 2011, continued as if it were commenced by writ.

19.  On 7 September 2015, the Plaintiff discontinued the action against D2 and D3.  This claim is thus entirely directed against D1 under the Equitable Mortgage. 

20.  The title deeds are still with the Plaintiff as of the date of the trial.

21.  Shortly after the trial, the Plaintiff vacated registration of the Legal Charge from the Land Registry.

C.   THE PLAINTIFF’S CASE

22.  The Plaintiff’s case was that the Loan was advanced to all 3 Defendants with interest at $8,000 per month.  Repayment was to be 3 years after the defect in title was rectified, ie 27 August 1997.

23.  D1 was notified of the rectification in title.  D1 then purportedly sold the Property for $2,000,000 in December 1996 (“the 1996 Purported Sale”). Michael N Hwang & Co (“MNH”) was instructed to act on behalf of D1 as vendor and the Plaintiff as mortgagee.  That sale fell through. The Plaintiff got back all the title deeds though.

24.  On about 30 September 1997, 3 years after the Confirmatory Assignment, a meeting allegedly took place at the office of MNH with all the Defendants.  It was agreed amongst the parties that the Undated Assignment and Undated Legal Charge would take effect such that D1 would transfer the Property to D2 and D3, and D2 and D3 would charge the Property to the Plaintiff to secure the Loan and the overdue interest.

25.  On 3 October 1997, D1 formally acknowledged execution of the Assignment; and D2 and D3 acknowledged execution of the Legal Charge. 

26.  On 4 October 1997, D1 alone requested the Plaintiff not to register the Undated Assignment and the Undated Legal Charge, otherwise it would impede further attempts to sell or mortgage the Property as soon as possible.  The Plaintiff acceded to the request.

27.  On about 10 October 1997, in order to maintain the Plaintiff’s security which should have been provided by the Undated Legal Charge but which was rendered vulnerable by reason of its non-registration, the Plaintiff allegedly “orally confirmed” with D1 that all the title deeds already deposited with the Plaintiff would be kept as security for the Loan.  The Equitable Mortgage which the Plaintiff now seeks to enforce was thus created.

28.  A letter of demand was sent from Wong Fung & Co on behalf of the Plaintiff to the Defendants on 11 September 2009.

29.  Not having received payment, the Plaintiff filed the OS on 2 October 2009.

30.  On about 29 December 2009, D1 met with the Plaintiff.  Allegedly, D1 requested the Plaintiff to withhold the action and give him time to sell or mortgage the Property, which the Plaintiff agreed.  At that meeting, D1 also allegedly paid $100 in cash upon the Plaintiff’s request, as partial repayment of the Loan.  D1 was allegedly given a receipt for this.  Also at that meeting, the Plaintiff turned down D1’s request to be a guarantor of D1’s intended loan from a bank.

31.  Sometime in 2010, D1 telephoned the Plaintiff and requested the latter to contact a Mr Chu of Wing Hang Bank regarding D1’s application for a loan. Mr Chu subsequently informed the Plaintiff that D1’s request for a loan was declined for undisclosed reasons.

32.  The Plaintiff admitted receiving some payments from the Defendants in the total amount of $104,000 between November 1991 and end of December 1999 plus $100 on 29 or 30 December 2009. 

33.  So the Plaintiff is suing D1 on an oral loan agreement made in 1991 and an unwritten Equitable Mortgage.  In his opening submission, Mr Vaughan (counsel for the Plaintiff) confirms, as all parties agreed at the pre-trial review, that the title in the Property has always remained with D1.  The limitation period is 12 years for suing under the Equitable Mortgage. 

D.   THE DEFENDANTS’ CASE

34.  Save for the question of compensation among themselves (paragraph 188(5) below), there was not much conflict between D1’s case on the one hand and D2 and D3’s case on the other. I summarize their cases in this section.

35.  The title deeds were placed with the Plaintiff for the purpose of rectification but not an equitable mortgage.  The Plaintiff had told the Defendants that it would only take 3-4 months to rectify the title.  (D2-D3 said 2-3 months but the difference was not material.)

36.  Upon the Plaintiff’s request and to save another visit to the Plaintiff’s office when the title defect became rectified, the Defendants signed the Undated Assignment in advance.  D2 and D3 executed the Undated Legal Charge thinking that the charge would be made in future to a bank when the title was rectified.  That was the only occasion when any document was signed by the Defendants. 

37.  The Loan was advanced to D2 and D3 only and they were the ones repaying the Plaintiff for about 2 years.   The $8,000 per month was not for interest but for capital.  Up until November 1993, they still had not received notice that the defect in title was remedied.  As they felt that continued repayment was not secure, so they ceased repayment.  They had told D1 about this.

38.  In about 1995, due to the Plaintiff’s failure to rectify the title defects “within the prescribed time”, the Defendants agreed among themselves that D1 would not transfer the Property to D2 and D3. 

39.  D1 emigrated to Canada in 1993.  He learnt that the Plaintiff had ceased business in about mid-1995 through the management office of Swire House.

40.  In about 1998, D2 and D3’s application to the Housing Authority to purchase a unit was successful.  D1 lent $80,000 to D2 and D3 as deposit.

41.  The Defendants denied that they had been informed about the execution of the Confirmatory Assignment.  D1 denied that the 1996 Purported Sale (which appeared to be at undervalue) existed.

42.  The Defendants maintained that they had only met the Plaintiff once before issue of the OS.  D1 met the Plaintiff once afterwards.  In the interim, the Plaintiff had never demanded for repayment.

43.  They also denied the occurrence of the alleged meetings or conversations with the Plaintiff in 1997; or that they had agreed in any way for the Undated Assignment and Undated Legal Charge to take effect. 

44.  D1 only came to know about the Confirmatory Assignment or the Legal Charge, whether in its dated or undated form, until he applied to strike-out the Plaintiff’s OS in around January 2011.

45.  On the money claim, the borrowers were D2 and D3.  The claim was time-barred, whether the last repayment was in 1993 (on D2 and D3’s case) or December 1999 (on the Plaintiff’s case).  The amount repaid by D2 and D3 was $192,000.

46.  As regards the Legal Charge, D1 was not a party to it.  Since the Property was never validly assigned to D2 and D3, no valid security interest could have been conferred on the Plaintiff through execution of the Undated Legal Charge.  D1 counterclaims for return of the title deeds to him.

47.  D2 and D3 assert that the Legal Charge was voidable at their instance and they seek to avoid it on the grounds of:

(1)   The lack of interpretation of the Undated Assignment and Undated Legal Charge to them (“Ground 1”);

(2)   The Plaintiff’s breach of fiduciary duties to them as a solicitor by inducing them to sign on several sheets of blank paper, which were later unilaterally converted by the Plaintiff into the Legal Charge without their knowledge and approval (“Ground 2”);

(3)   The Plaintiff’s abuse of confidence in that they were in total lack of informed consent and the Plaintiff failed to advise them to seek independent legal advice (“Ground 3”);

(4)   The Plaintiff’s breach of his professional duty as a solicitor in entering into the Loan transaction and asking D2 and D3 to execute the Undated Assignment and Undated Legal Charge (“Ground 4”); and

(5)   The material change to the contents of the 2 documents by deletion of the name of JFC, replacing it with Wong, Fung & Co when D2 and D3 had never instructed Wong, Fung & Co as their solicitors (“Ground 5”).

48.  D2 and D3 thus counterclaim for:

(1)   Rescission of the Legal Charge;

(2)   Return of legal fees that they had paid JFC in the sum of $28,000; and

(3)   Return of a total of 24 consecutive monthly payments of $8,000 each in the total sum of $192,000.  This amount is disputed and the Plaintiff says he had only received $104,100.

49.  D2 and D3 say that they were not barred by the 6-year limitation period or laches because of the breach of fiduciary duty in the context of a solicitor-client relationship.

E.   THE ISSUES

50.  Counsel have helpfully agreed upon the following list of issues:

(1)   Whether “the Loan” existed and, if so, whether it was advanced to all the Defendants or to D2 and D3 only;

(2)   Whether the Plaintiff’s right to recover the Loan (if it existed) against the Defendants is time-barred;

(3)   Whether the Loan (if it existed) was secured by the Equitable Mortgage;

(4)   If the Loan was in fact secured by such an Equitable Mortgage, whether the Plaintiff’s claim to enforce it against D1 is time-barred;

(5)   Whether D1 is entitled to the return of the title deeds;

(6)   Whether there had been any breaches of duty as claimed by D2 and D3, as a result of the Plaintiff (in his then capacity of a solicitor) acting for both the vendor (D1) and the purchasers (D2 and D3);

(7)   Whether D2 and D3 had made repayments of the Loan in the aggregate amount of HK$192,000;

(8)   If the answer to (6) is in the affirmative, whether D2 and D3 are entitled to their claim for the return of their alleged repayments by reason of the Loan being void and illegal; and

(9)   Whether D2 and D3’s counterclaim is time-barred under the Limitation Ordinance or barred by the equitable doctrine of laches.

F.   CREDIBILITY OF WITNESSES

51.  There are serious disputes of facts on almost every issue and credibility is important.  The court has to consider the inherent probabilities of a witness’s evidence and the contemporaneous documents available.

52.  The events dated as far back as 27 years.  It is therefore expected that memory of witnesses would not be exact.  Some documents are no longer available, such as parties’ bank records and immigration records of entry and exit of Hong Kong of D1.  The Plaintiff himself admits that some documents had been lost when JFC moved office or ceased business.

53.  However, as would be demonstrated below, the Plaintiff often gave inconsistent answers.  He blamed it on his old-age and the fact that the small details were simply “not a big deal”.

54.  Having heard the Plaintiff, I have to say that, using his own words, he was not a “nasty person”.  Having virtually accepted his liability in negligence towards D1 in 1991, he bent over backwards to assist the Defendants by “stepping into the shoes” of a mortgagee.  He had wanted to avoid trouble to D2 and D3 who had decided to buy another property from the Housing Authority.  He patiently waited for repayment.  He would not accede to the Defendants’ request to tear up the Undated Assignment and Undated Legal Charge thinking it was not lawful to do it that way.

55.  The Plaintiff plainly wanted protection for himself in terms of repayment of the Loan but the Defendants decided to back out of the sale and purchase without full repayment.

56.  The Plaintiff held back litigation process to wait for repayment.  He assisted D1 to apply for a loan from Wing Hang Bank.  In desperation, after a long wait, he dated the Undated Legal Charge as 3 October 2009 and had it registered.  He deliberately made some mistake in the Legal Charge, knowing that the Land Registry would raise requisition and the Legal Charge could remain “pending registration” for an indefinite period of time.  He did not want to release all 3 Defendants “so easily”.

57.  Unfortunately, his lack of proper documentation, imprecise evidence and sometimes wrong concepts of the law, have led him into this piece of litigation.  His evidence was not entirely reliable and I shall demonstrate it under the respective issue.

58.  On the other hand, if the court is to believe D1, it means that apart from calling the Plaintiff before JFC ceased business, D1 had done nothing to pursue the rectification and did not seek out the Plaintiff.  He was content to leave the Property vacant for over 20 years before he let it out.  Such inaction lacked common sense, to say the least. 

59.  D1 claimed that it was to assist D2 and D3 that he applied to Wing Hang Bank post-OS for a mortgage to assist D2 and D3 in repayment of the Loan and redeem the title deeds (§35 of D1-2^nd SWS)[2]. It at least reflected a belief in D1 that the title deeds would not be returned until full repayment of the Loan.

60.  As for D2 and D3, I accept that they did not understand English. They had to rely on D1 for his assistance in purchasing a property, both financially and otherwise.  However, D2 was pretentious enough to say that she did not know if the Loan was to her and D3 when, on her own evidence, they had been repaying the Plaintiff by depositing into the Plaintiff’s bank account.  Her and D1’s evidence as to how they treated the Loan between themselves when the sale and purchase was cancelled was unreliable to say the least.  I do not find her to be entirely truthful.

61.  I am of the view that none of the parties have an inherently logical story.  The truth probably lay somewhere in between.

G.   ISSUE 1: WHETHER THE LOAN EXISTED AND, IF SO, WHETHER IT WAS ADVANCED TO ALL THE DEFENDANTS OR TO D2 AND D3 ONLY

62.  D2 and D3 had been living in the Property for some time before they decided to purchase the Property from D1.  The Defendants first went to Yung, Yu & Yuen (“YYY”), not JFC, to process the legal documents.  When solicitors for Hang Seng Bank (the intended mortgagee) discovered the defect in title, YYY referred the Defendants to the Plaintiff.

63.  At the 1991 Meeting, the Plaintiff claimed that he had explained to the Defendants that they could sue him for negligence but it would take time for the claim to be processed by the insurer.  He gave them 3 options:

(a)   That he would buy the Property (not mentioned in his first witness statement);

(b)   That the Defendants could sue the Plaintiff; and

(c)   That the Plaintiff could lend them money and they were to pay interest only until the Property was sold after the rectification.  The interest was based on the rate of 10.75% offered by Hang Seng Bank and rounded down to $8,000 per month.

He said that the Defendants chose option (c). 

64.  He also said that the Defendants were told that the Loan had to be repaid as soon as possible but in any case within 3 years of the rectification (“the Repayment Date”). 

65.  The issues are the identity of the borrowers, whether interest was payable and the Repayment Date.

G1.  Identity of the borrower(s)

66.  The Plaintiff’s evidence was not entirely reliable.  He vacillated between all Defendants being expressly told that all of them would be liable for repayment on the one hand (in written evidence); and only D1 being liable for interest and all Defendants being liable for the principal on the other (under cross-examination).

67.  In deciding the truth, I have taken into account the following:

68.  Firstly, I find that D1 was in need of money for his business, whether to salvage it or for decoration purpose.  This is because the Plaintiff knew that D1 had a business and its business address, something which he did not have to know if it was just a matter of rectification.  D1’s restaurant was to be opened in November 1991.

69.  Further, on the Defendants’ case, the Plaintiff had promised them that the title would be rectified within a few months.  Thus, there was simply no reason why the Defendants could not have waited for rectification and take out of a bank loan instead of obtaining a loan from the Plaintiff.  Since D2 and D3 were already living there, there was no urgency to sell or to buy but for the fact that D1 needed money.

70.  However, D1 had no incentive to borrow because by selling the Property, he would receive net proceeds for his business.  It was D2 and D3 who needed to borrow, as evidenced by a prior facility letter from Hang Seng Bank. 

71.  Mr Vaughan refers to the pleaded defence that D1 had intended to simply “give away” the Property to D2 and D3 but it was subsequently amended to refer to a “transfer”.  He queries the purpose of the “sale” to D2 and D3.  I fail to see how this could help any party’s case.  If D1 was in need of money, giving the Property away would not have advanced his purpose.

72.  Secondly, the Plaintiff’s oral evidence was that he was content with having the Unsigned Agreement and the Undated Legal Charge exactly the same if the Defendants had been with YYY, except that he was to substitute himself for Hang Seng Bank.  That was consistent with D2 and D3 being the only borrowers named in the Undated Legal Charge.

73.  Thirdly, the Plaintiff would have motive to hold as many Defendants liable as possible.  There was nothing secret about a loan.  Any documentation need not be shown to third parties. Documents were all prepared by the Plaintiff or his staff, and yet none of the documents that emerged at the 1991 Meeting named D1 as a borrower.  The Plaintiff produced nothing that ever named D1 as a borrower.

74.  Fourthly, the untitled document on page B440 was consistent with D2 and D3 being the borrowers. 

75.  B440 was carefully split into 2 parts.  The first part was only signed by D1 as an acknowledgement of receipt of all purchase price of the Property from D2 and D3.  D1 was not asked to acknowledge receipt of any money from the Plaintiff.

76.  The second part of B440 was only signed by D2 and D3 in the following terms:

“We, [D2 and D3], the Purchaser of the above property hereby authorize Messrs. J. Fang & Co. to utilize any sum of money raised from the subsequent Mortgage to redeem the outstanding account due and owing by the Vendor, Luk Man Lok Rocky to Citibank, N.A. under an existing Mortgage Memorial No. 4188872. We confirm that any sum utilized as aforesaid will [be] deemed to have been paid to us.”

77.  The cashier order for $591,003.23 must have been pursuant to the second part of B440.

78.  The whole course of conduct reflected by B440 was consistent with the practice of a vendor’s solicitor in splitting cheques upon receipt of purchase money or mortgage money.  One cheque would be to the outgoing mortgagee bank. Another cheque would be to pay the vendor the balance of the purchase price. See A Guide to Hong Kong Conveyancing, 7^th ed, 2014, §14.127. D1 benefitted from the $591,003.23 as a vendor, not as a borrower. 

79.  The Plaintiff, however, explained that the reason for asking D2 and D3 to sign B440 was that he wanted to protect himself and “in the meantime” the transaction would appear as a normal conveyancing transaction on the record. D2 and D3 would not be questioned if and when they were to sell the Property subsequently.  He also wanted to ensure that the money was for the purpose of discharging the mortgage as he also owed a duty to Citibank back then.

80.  With respect, this raised more issues.  He/his staff drafted the documentation.  What would D2 and D3 be questioned on? How long did “in the meantime” mean?  The Plaintiff never explained.

81.  Fifthly, D2 and D3 admitted in §17 of their defence and counterclaim that a sum of $358,996.77 was paid by the Plaintiff to them. They were the ones who had been repaying the Plaintiff.

82.  Sixthly, D1 admitted, for the first time in the witness box, that he had received a further $300,000 from D2 and D3 a short period after the 1991 Meeting.  (D2 and D3 said they had paid over the full $358,996.77 to him, but this difference in amount was not material in the context of this case.)  Again, D1 benefitted as a vendor, not as a borrower.

83.  These 6 factors pointed to D2 and D3 being the borrowers of the Loan.

84.  I have not overlooked the conduct of D1 after the Loan was made:

(a)   D1 had given the Plaintiff 2 cheques for $15,000 and $8,000 respectively.  They were both dated 12 November 1991, ie less than one month from the 1991 Meeting.  None of the parties could recall what the cheques were for.  The receipts from JFC did not refer to the Loan.  The 2 cheques had little probative value.

(b)   According to the Plaintiff, D1 was the person passing on money in repayment all along.  This was supported by the evidence of Wong Sze Yuen who allegedly collected money from D1 at the latter’s restaurant 4-5 times from November 1991 till 1992.  Understandably, Wong did not know how much money was in the envelopes addressed to the Plaintiff.  Wong has had a long and good relationship with the Plaintiff, both on a personal and official level. He had left JFC before it ceased business.  He had worked at 3 of the firms which were mentioned in these proceedings but there was no evidence that he had an interest in the present case or that he had any motive to lie to the court. He was a straightforward and prompt witness, not shaken in cross-examination.  I find him to be a truthful witness and I accept his evidence in this respect.

(c)   For 14 years since 1995 (even on the most benevolent view that he was not aware of the existence of the Confirmatory Assignment), D1 had made no attempt to seek return of the title deeds.  He claimed that was because the Plaintiff had ceased business in 1995 and he did not have the contact number of the Plaintiff.  I find it incredible that D1 never reported to the police or the Law Society on such a significant matter as not getting back his title deeds or possible abscondment of a solicitor. 

(d)   When D1 received the OS, he contacted the Plaintiff to try and discuss amicable settlement.  D1 admittedly tried to get a loan himself from Wing Hang Bank.  He said he wanted to assist D2 and D3 when he simply had no obligation to do so.

(e)   On day 2 of his evidence, the Plaintiff suddenly referred to §35 of D1-2^nd SWS.  He explained that D1 had requested the Plaintiff to deduct from the outstanding Loan the amount of legal costs paid to JFC in 1991.  At the request of the Plaintiff, D1 faxed the Fee Note to the Plaintiff on 29/12/2009 (B441).  Though the Plaintiff did not believe he had been paid in accordance with the fee note, he reached an agreement with D1 that the Plaintiff was to cease all proceedings and give D1 a chance to obtain a mortgage or sale of the Property within 6 months (later extended to 12) to repay the Plaintiff.  The Plaintiff would credit the amount on the Fee Note as repayment of interest for the Loan if D1 repaid within a year （你可搣搣下當俾利息用）.  That was why D1 had no lawyer for one year until about 2010 and the Plaintiff had not progressed with the action for a year.  D1 had no logical reason to fax the Fee Note to the Plaintiff and had no logical reason for mentioning that the loan due in 2009 was $900,000 instead of $950,000 except for the reasons described by the Plaintiff. I accept the Plaintiff’s evidence in this sub-paragraph.

85.  However, evidence of conduct in paragraph 84 was not admissible under the parol evidence rule to identify the parties to the loan agreement when the undated Legal Charge and B440 already identified them:

“Although evidence is admissible to identify the parties to a contract, where the parties are specifically named in a written contract evidence is not admissible for the purpose of showing that others (who were not named) were also parties to the contract.” Lewison on the Interpretation of Contracts, 6^th ed, 2015, §3.11, p 137

86.  Even if such evidence was admissible, sub-paragraphs 84(b) to (e) could not in themselves irresistibly point to D1 as a borrower.  D1 might have been a conduit or financial provider for D2 and D3 only.

87.  Taking matters in section G1 into account, I find that the borrowers were D2 and D3.

G2.  Whether interest was payable

88.  The Plaintiff’s oral evidence was that at the 1991 Meeting, it was agreed that D1 would bear the monthly interest whilst all 3 Defendants would bear the principal.  The Defendants denied and claimed that the $8,000 was for repayment of principal only.

89.  The reason given by the Plaintiff as to why they should pay interest was that he could not insist on repayment of the principal before the title had been rectified.  Without disrespect, if he could not recover the principal, it followed that he could not recover interest either.  This was an example of the Plaintiff’s wrong concept of law.

90.  Further, without disrespect, at least D2 and D3 were not people of great wealth.  I find it hard to accept that the Defendants, in the light of the Plaintiff’s virtual admission of negligence, would have agreed to pay interest, and for an indefinite period.

91.  I also find it inherently improbable that only D1 would be liable for the monthly interest when:

(1)   The Undated Legal Charge required D2 and D3 to pay interest but no document required D1 to do so;

(2)   The Plaintiff said multiple times under cross-examination that he would not let go of any Defendant and he bound all of the Defendants at the 1991 Meeting; and

(3)   He sought interest against all Defendants in the OS and the Statement of Claim.

92.  I find it more probable than not that the $8,000 was for repayment of capital and that the Defendants had not agreed to pay interest.

93.  However, there was a term in the Undated Legal Charge for D2 and D3 to pay $8,000 interest per month.  D2 and D3’s case was not non est factum but solicitor’s abuse of confidence.  I will come back to this point under Issue 6 below.

G3.  Repayment Date

94.  The Plaintiff said that the principal was to be repaid within 3 years of rectification but he accepted that it was only “a matter of saying”; “if the Defendants did not pay him, he would not shoot them”; it was more an informal understanding or “figure of speech”.  He agreed under cross-examination that there was no hard and fast repayment date. 

95.  The Plaintiff has changed his evidence from stating that he knew during the 1991 Meeting that a confirmatory assignment had to be signed to rectify the title defect (§11 of P-WS); to that he did not know how to rectify the title defect at the time of the 1991 Meeting in his oral evidence.  His evidence was not reliable.

96.  Moreover, once the title was rectified, D2 and D3 could then apply for a bank mortgage.  There was no need for the Plaintiff to wait for another 3 years for repayment.

97.  I find the Defendants’ version to be more probable, ie the Plaintiff had told them that it would only take 3-4 months to rectify the title; and that that there was no agreement as to the repayment date.

G4.  Summary of findings on Issue 1

98.  I find that the Loan was advanced to D2 and D3 and not D1. There was no agreed time for repayment.  The Defendants were told that rectification would take 3-4 months. The $8,000 per month was to be in repayment of the principal. However, the Undated Legal Charge required D2 and D3 to pay $8,000 per month as interest.  On these findings, the Plaintiff’s claim for repayment against D1 must fail.

H.   ISSUE 2: WHETHER THE PLAINTIFF’S RIGHT TO RECOVER THE LOAN (IF IT EXISTED) AGAINST THE DEFENDANTS IS TIME-BARRED

99.  Mr Vaughan rightly conceded in his opening submission that if the limitation period were 6 years, the Plaintiff would have been time barred.  The Loan was under a simple contract.  The OS was only issued 10 years after the last repayment (in December 1999 according to the Plaintiff).

I.    ISSUE 3 – WHETHER THE LOAN (IF IT EXISTED) WAS SECURED BY THE EQUITABLE MORTGAGE

I1.  Legal principles on equitable mortgage

100.  The principles are not in dispute and are extracted from counsel’s submissions.  Good security may be provided by deposit of title deeds notwithstanding that:

(a)   It was to secure the debt of a third person, D2 and D3 in this case: Halsbury’s Law of Hong Kong, §230.654; or

(b)   Such security was not created in writing: De Monsa Investments Ltd v Whole Win Management Fund Ltd [2011] 4 HKLRD 478, §67, Tang VP (as he then was).

101.  The intention to create a security should be clearly established, as later action might well dispute the existence of the security where the “chargor” claims that the title deeds were simply deposited for safekeeping but not by way of security: Hong Kong Conveyancing: Law and Practice, Vol 1(B) §754; citing National Provincial and Union Bank of England v Charnley [1924] 1 KB 431, 440 (Bankes LJ).

102.  An equitable mortgage by deposit of title deeds may be of the deeds alone, or may be accompanied by a memorandum of the terms of the deposit or by an agreement to give a mortgage: Halsbury’s Laws of Hong Kong, §230.655.

103.  Where the deposit was accompanied by a written document, the document must be referred to in order to ascertain the exact nature of the charge, and oral evidence will not be admitted to contradict the writing, although oral evidence of a subsequent oral agreement may be given:  Halsbury’s Laws of Hong Kong, §230.655.

I2.  The Plaintiff’s case

104.  The Plaintiff’s case has undergone material changes.

(a)   The pleaded case is that the Equitable Mortgage was created by deposit of title deeds on 10 October 1997.  It is this version that the Plaintiff relied on at the trial.

(b)   In §12 of P-WS, the Plaintiff claimed that the Loan was advanced to the Defendants “on the security of the deposit of the title deeds” with him.  This meant that the security was created at the 1991 Meeting.

105.  The changes cast doubt on the Plaintiff’s credibility.  The probabilities were what D1 asserted – that the title deeds were placed with the Plaintiff in 1991 for him to make good D1’s title and not to create an equitable mortgage. 

106.  Leaving that aside, existence of the series of post-1991 events (paragraphs 23-27 above under the Plaintiff’s case) was hotly disputed.  It cast doubt on the Plaintiff’s case

I3.  Execution of the Confirmatory Assignment

107.  The burden was on the Plaintiff to prove D1’s execution of the Confirmatory Assignment.  Yet the Plaintiff’s witness statement was completely silent on the circumstances leading to D1’s execution.  The Plaintiff’s oral evidence was that D1 executed the Confirmatory Assignment at JFC’s office some 2-3 months prior to 28 August 1994.  He had informed D1 at once after the rectification.  D1’s reaction was that the Undated Assignment should be torn up.

108.  The Defendants denied being ever told that the title had been rectified. Whilst D1 did not deny his signature on the Confirmatory Assignment, he suggested that it might have been put on one of the sheets of paper signed in blank at the 1991 Meeting.

109.  I accept the Plaintiff’s evidence that he had no previous experience of resolving such a title defect.  At the 1991 Meeting, he had no idea how to actually rectify the title defect.  I do not accept that he had asked D1 to sign sheets of paper in blank.  The Unsigned Agreement and Undated Legal Charge were undated but by no means signed in blank.  I accept that the Plaintiff had delegated the task of rectification to his staff.

110.  Mr Justin Ho, counsel for D1, queried, if any of the Defendants had been informed of the rectification, the transaction amongst them would have been completed because their constant fear of the Housing Authority seizing the Property would disappear. There was simply no reason why D2 and D3 had to move out in 1995.

111.  I am skeptical that the Defendants only agreed to cancel the deal and D2 and D3 moved out in 1995 when they had already stopped repayment in 1993.

112.  I have examined the original Confirmatory Assignment.  It had sheets of paper in distinct colours with an apostille.  It was in a form that a person who had executed it would not have forgotten even if he had no idea of the contents.

113.  Judging from the contents and the form of the Confirmatory Assignment, it was impossible for the Plaintiff to anticipate at the 1991 Meeting what contents there would be to fill up 5 sheets of paper and how much space to allow for attaching the apostille and notary’s certificates in the middle pages, with the previous vendor’s signature immediately following on the 5^th page.

114.  There was no reason why the Plaintiff had to keep D1 in the dark about the rectification, for it was in the Plaintiff’s interest to receive repayment of the Loan as soon as possible.  Even on the Defendants’ own evidence, there were means of contact between the Plaintiff and D1.

115.  In my view, the actual date when the Plaintiff informed D1 about the rectification was not important.  What was important was that D1 had signed on the Confirmatory Assignment and it must have been after the date of the Housing Authority’s letter dated 14 June 1992.  On balance, I find that D1 did know about the existence of the Confirmatory Assignment between that date of that letter and the date of this document.

I4.  The 1996 Purported Sale which fell through

116.  P-WS only contained one sentence about the Purported Sale.  The evidence was expanded in the witness box.  The Plaintiff claimed that D1 found the purchaser and purported to sell the Property at $2 million in December 1996 in order to repay the Loan.  The Plaintiff introduced MNH to D1.  The purchaser instructed Fred Kan & Co.  The Plaintiff asked Wong Sze Yuen to deliver the title deeds to Fred Kan & Co.  When the sale fell through, Wong Sze Yuen collected the title deeds and returned them to the Plaintiff.  The Plaintiff was adamant that the 1996 Purported Sale had taken place.  He said that whenever he pressed D1 for repayment, D1 would do something, which D1 now denied.

117.  D1 claimed that he had no knowledge of the 1996 Purported Sale and he was not in Hong Kong at the relevant time.  However, he could not produce documentary proof of his absence in Hong Kong due to the long lapse of time.

118.  Wong Sze Yuen frankly admitted that he did not know if D1 had been to MNH’s office.  He admitted that someone told him that D1 was the intended vendor in the 1996 Purported Sale.

119.  Michael Huang of MNH is a cousin of the Plaintiff.  There was some evidence to show that Michael Huang had engaged in serious fraudulent conduct and had absconded.  Even if one suspected (and I can put no higher than that) that the Plaintiff and Michael Huang colluded in faking a sale of the Property, there was absolutely nothing to show that Fred Kan & Co took part in it. Likewise, despite being a faithful and grateful ex‑employee, I could see no reason why Wong Sze Yuen had to lie to this court about delivery and collection of the title deeds.

120.  Strangely, the file of MNH in respect of the 1996 Purported Sale was in the Plaintiff’s possession.  To the contrary, there was not a trace of D1’s “presence” in that file.  There was no provisional sale and purchase agreement signed by D1. There were no contact details to enable MNH to contact D1. There was no note showing that D1 had consented to retaining MNH.  Rather, as pointed out by Mr Justin Ho, the Plaintiff accepted that he was the one who “requested” the file to be opened.

121.  The Plaintiff was not able to explain how and why the 1996 Purported Sale fell through, particularly since the sale price was $1,000,000 below the then market price of $3,000,000 to $3,300,000.  D1 had no reason to sell at undervalue however keen he was to repay the Loan.

122.  A hint of why there was the 1996 Purported Sale could be found in §§19 and 20 of P-WS:

“19. After the intended sale of the Property had fallen through in 1997 the 1^st Defendant and myself then agreed that, in order to provide comfort to me, the 1^st Defendant orally acknowledged to me that in spite of the existence of a Legal Charge dated 3^rd October 1997 on the Property in my favour, the keeping of all the title deeds already deposited with me since 1991 in respect of the Property would also be treated as a form of security (which created an equitable mortgage) by way of deposit of title deeds, as a convenient way to offer me maximum and alternate/further security on my loan to the Defendants until such time as he could secure a genuine sale of the Property at a price sufficient to cover the principal of HK$950,000 together with accrued interest.

20. Thus, after the falling through of the sale of the Property by the 1^st Defendant in 1997, at my suggestion, the 1^st Defendant officially ‘re-deposited’ with me after all the title deeds relating to the Property as per Schedule of Title Deeds produced as exhibit “FMSJ-8’ in my 1^st Affidavit after the same were received back from Fred Kan & Co after the abortive sale of the Property in 1997, thus formally and by operation of law created an equitable mortgage against the Property in my favour. The keeping of the title deeds by me was as standard and proper security for the loan. There was no need for me to keep the title deeds otherwise, eg for the purposes of arranging for the Confirmatory Assignment to be executed.” (underline added)

123.  This assertion of “re-deposit” of title deeds was never pleaded.  The inference was that the Plaintiff plainly knew that the title deeds were not deposited with him as security in the first place in 1991.  The 1996 Purported Sale was not a genuine transaction but MNH’s file was possibly created by the Plaintiff as a smoke screen to later create a “re-deposit” of title deeds after the “sale” fell through.

124.  I am not satisfied on balance of probabilities that the 1996 Purported Sale did occur, or occurred with D1’s consent.

125.  This finding has adverse impact on the Plaintiff’s credibility.  His evidence about the subsequent meetings in 1997 and why they were held could not be taken at face value.

I5.  Meeting on 30 September 1997 during which the parties agreed for the Undated Assignment and Undated Legal Charge to take effect

I6.  Formal acknowledgements by the Defendants on 3 October 1997 that the Undated Assignment and Undated Legal Charge had been executed

126.  These 2 events shall be considered together.  The Plaintiff’s evidence on where the meeting took place, who had attended and who had agreed what was inconsistent, illogical and unreliable.

127.  As regards the meeting place, the Plaintiff had stated unequivocally that it was at the office of MNH (§16 of P-WS).  Yet in the witness box, he said he could not recall the venue and the parties could have gone down for coffee at a teahouse in Swire House. 

128.  As regards the attendees, the Plaintiff asserted that all the Defendants attended both meetings on 30 September and 3 October 1997 (§§16 and 17 of P-WS). However, in the witness box, he vacillated between all Defendants being present, to not being sure whether D3 was there.  At best, the Plaintiff had only received D2’s instructions to let D1 “entirely handle” “the matter” (§18 of PWS).

129.  What was agreed at the meeting on 30 September?  The Plaintiff’s pleaded case and witness statement stated that the parties agreed that the Undated Assignment and the Undated Legal Charge “would be effective” and no further documentation would be necessary.  When this court asked what the Defendants said or did to indicate their agreement, the Plaintiff said that the Defendants responded with something like “I know, I know” (“知道，知道”).  The Plaintiff seemed to suggest that there had been no cast iron decision.  Under cross-examination, the Plaintiff said that only D1 did the talking and he did not think that D2 even said a word.  The Plaintiff was not sure if D3 attended the 30 September 1997 Meeting.

130.  All the parties shared the view that 2 conditions had to be satisfied for the Undated Assignment and Undated Legal Charge to take effect.  Condition (i) was rectification of title.  Condition (ii) was a further agreement by the parties for those 2 documents to take effect.

131.  Condition (ii) was not met even on the Plaintiff’s own case because:

(a)   When he informed D1 (presumably in 1994) that the title had been rectified, D1’s reaction was that the Undated Assignment should be torn up.

(b)   It was inherently improbable that, having decided not to complete the Assignment (be it in 1994 or 1995), the Defendants would have readily agreed to the Undated Assignment and Undated Legal Charge taking effect in 1997.

(c)   There was no evidence that D3 had personally agreed or authorized D1 to agree on his behalf.

132.  Alternatively, if Condition (ii) had been met, as the Plaintiff alleged, the Plaintiff could not explain why he had not dated the Undated Assignment and Legal Charge 30 September 1997 there and then.

133.  One possibility was that he had then misplaced the Undated Assignment.  He waited for almost 12 years before dating and presenting the Legal Charge for registration on 23 February 2009 to beat the limitation time.  As he described, the purported registration was made “for its nuisance value” to ensure that the Defendants repaid him.  Wong Sze Yuen was able to explain quickly, just by looking at the land search record, that registration had been pending for the last 10 years because the chargors were not the owners of the Property. It appeared that the Plaintiff only found the Undated Assignment “recently”, ie on a date close to the date of his witness statement dated 6 June 2016 (§23 of P-WS).

134.  Further, if Condition (ii) had been satisfied on 30 September, the Plaintiff could not explain why was it necessary to hold the 3 October 1997 Meeting just to make another formal acknowledgement, when D2 and D3 were not present anyway.

135.  I find that the Plaintiff has failed to prove on a balance of probabilities that the 2 meetings on 30 September and 3 October 1997 had occurred or in the manner described by him.

I7.  Request by D1 on 4 October 1997 for the Plaintiff not to register the Undated Assignment and Undated Legal Charge in the Land Registry

136.  I am unable to see why D1 had not made this request on or before 30 September 1997.  But even if he had really done so, again, there was nothing to show that he had the authority of D2 and D3 to do so.  The Plaintiff has failed to establish the occurrence of this event on the balance of probabilities.

I8.  Creation of the Equitable Mortgage on 10 October 1997 by the Oral Confirmation

137.  There was no evidence that D1 had done anything on or after 4 October 1997 to source for repayment money.  There was no logical reason why D1 had to come back 6 days later to make the Oral Confirmation.  Moreover, the Plaintiff had already obtained security earlier than 10 October 1997.  See §§19 & 20 of P-WS cited in paragraph 122 above.

138.  The Plaintiff’s case in §20 of the Statement of Claim is this:

“Since the 1^st Defendant requested the Plaintiff not to register the Legal Charge, and in order to maintain the security in the event that the Legal Charge would be void against any third parties or otherwise unenforceable by reason of non-registration, the Plaintiff orally confirmed with the 1^st Defendant on or about 10^th October 1997 that all the title deeds already deposited with the Plaintiff at J. Fang & Co since 1991 when the 1^st Defendant first purchased the Property, would be kept by the Plaintiff as security on the Loan, thereby creating an equitable mortgage by way of deposit of the title deeds …”

139.  There was no reason given why the Legal Charge would be void against any third party.  Non-registration (as opposed to lack of title) would not make the Legal Charge unenforceable as between the Plaintiff and D2 and D3 as direct parties.  The deposit with JFC in 1991 was plainly for rectification purpose and not as security.  If the security was not created earlier, there was nothing to orally confirm on 10 October 1997.  I am not satisfied on balance of probabilities that the event on 10 October 1997 occurred.

I9.  Overall view of the post 1991 events

140.  There may be some truth in the Plaintiff’s version.  He knew by 1997 that D2 and D3 were then in the course of applying for another unit under the Housing Unit; and that they had no intention to complete the deal with D1.  D2 and D3 might fall into trouble if the Housing Authority discovered that they had interest in the Property.  These were matters which the Plaintiff would not have known unless one or more of the Defendants had told him. 

141.  I also believe that, at some stage, the Plaintiff had said that if the Defendants repaid him, he would return the Unsigned Agreement and Undated Legal Charge to them for disposal. 

142.  It was just that the Plaintiff’s evidence was so imprecise and unreliable that I am unable to know when he got to know or say all of these and what was really agreed amongst the parties on which date.

143.  However, even if the court were to accept the pleaded post-1991 events as true, the Plaintiff’s case would still fail as a matter of law for the following reasons.

144.  Firstly, taking about 3 years to fulfil Condition (i) was too long and, even on the Plaintiff’s own case, the Defendants had backed out before the Undated Assignment and Undated Legal Charge took effect.

145.  In Alan Estates Ltd v W. G. Stores Ltd. [1982] 1 Ch 511, at pp 520E-521E, Lord Denning MR summarized the doctrine of escrow as follows:

“… what is the effect of an escrow before the conditions are fulfilled? One thing is clear. Whilst the conditions are in suspense, the maker of the escrow cannot recall it. He cannot dispose of the land or mortgage it in derogation of the grant which he has made. He is bound to adhere to the grant for a reasonable time so as to see whether the conditions are to be fulfilled or not. If the conditions are not fulfilled at all, or not fulfilled within a reasonable time, he can renounce it. On his doing so, the transaction fails altogether. It has no effect at all. But if the conditions are fulfilled within a reasonable time, then the conveyance or other disposition is binding on him absolutely. It becomes effective to pass the title to the land or other interest in the land from the grantor to the grantee. The title is then said to “relate back” to the time when the document was executed and delivered as an escrow. But this only means that no further deed or act is necessary in order to perfect the title of the grantee. As between grantor and grantee, it must be regarded as a valid transaction which was effective to pass the title to the grantee as at the date of the escrow …” (underline added)

146.  Secondly, on 30 September 1997, at least D3 was absent and so any agreement reached or acknowledgement made was not “complete”.  There was no plea or evidence that D3 was represented by D1 or D2. 

147.  Thirdly, if Condition (ii) was fulfilled by the Defendants’ agreement (through D1) on 30 September 1997, D1 had then divested himself of all legal and beneficial title in favour of D2 and D3.  There was nothing left for D1 to mortgage to the Plaintiff.

148.  If the Equitable Mortgage could be treated as arising on this date (which was not the Plaintiff’s case), more than 12 years had elapsed by the time of the OS and the Plaintiff was time-barred.

149.  Fourthly, the formal acknowledgement on 3 October 1997 would not have deferred the effective date of the Assignment and Legal Charge. 

150.  Fifthly, D1’s request not to register would not have affected the effective date of the 2 documents.  It is well-established that registration has no effect on the creation of interests in land.  It does not enhance the title of the owner; nor will non-registration detract from that title, for title comes from execution of the deed.  Rather, registration gives priority to those interests which can be registered and acts as a notice to those dealing with the land: A Guide to Hong Kong Conveyancing §14.178.

151.  Sixthly, Mr Justin Ho submits that there was no alternative plea that the transfer of title to D2 and D3 on 30 September 1997 was invalid (“the Pleading Point”) to enable D1 to create a mortgage on 10 October 1997.  The Plaintiff’s case of there being an equitable mortgage arising simply could not get off the ground.

152.  Mr Vaughan acknowledges the importance of pleadings to ensure that the real dispute between the parties can be defined: Hong Kong Civil Procedure 2019, Vol 1, §18/0/2; Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663, at §§21-23, Ma CJ.  However, he submits that there are often cases where the pleadings have assumed a less significant role where the parties have chosen to conduct the case on a particular basis. 

153.  Mr Vaughan further submits that no prejudice is being caused to D1 and it would be unfair to the Plaintiff if he is now sought to be bound by the effect of his pleading on this particular issue of title.  He relies on Loveridge v Healey [2004] EWCA Civ 173, §23, Lord Philips:

“Where one party advances a case that is inconsistent with his pleadings, it often happens that the other party takes no point on this. Where the departure from the pleadings causes no prejudice, or where for some other reason it is obvious that the court, if asked, will give permission to amend the pleading, the other party may be sensible to take no pleading point. Where, however, departure from a pleading will cause prejudice, it is in the interest of justice that the other party should be entitled to insist that it is not permitted unless the pleading is appropriately amended.”

154.  Similarly, in Wing Hang Bank Ltd v Crystal Jet International Ltd [2005] 2 HKLRD 795 (adopted in Kwok Chin Wing), §7, Ma CJHC (as he then was) stated as follows:

“What has just been set out is not to be construed as an encouragement to take ‘pleading points’ by which I mean pedantic, small or quite insignificant points of pleadings. Nor will objections as to pleadings have much force where the parties have chosen to disregard the pleadings and conduct the hearing on some unpleaded basis. As Isaacs and Rich JJ said in Gould & others v Mount Oxide Mines Ltd & others (1916) 22 CLR 490 at p.517:

‘But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly thought out, it is impossible for them to hark back to the pleadings and treat them as governing the area of contest.’

Ultimately, a court is to be guided by what is fair and just in the circumstances, not just to the party seeking to rely on the unpleaded case but to all the parties before it. The Court ought also to bear in mind the following passage at p.297 para.18/12/1 of Hong Kong Civil Procedure 2004, Vol.1:

‘The purpose of pleadings is not to play a game at the expense of the litigants but to enable the opposing party to know the case against him.’ ”

155.  Anyway, Mr Vaughan refers this court to Poon Hau Kei v Hsin Chong Construction Co Ltd [2004] 2 HKLRD 442 where the Court of Final Appeal held that a court is entitled to decide in favour of the plaintiff on the basis of a scenario that he has not pleaded but which the defendant has. 

156.  In the present case, the parties have all conceded that title to the Property has never passed and remains to date with D1.  Mr Vaughan confirms in his closing submission that “this is exactly the basis, and the only basis, upon which D1 is claiming for the return of the title deeds, ie in his capacity as owner of the Property.”  He submits that the Pleading Point was technical and artificial.

157.  With respect to Mr Vaughan, the Plaintiff is not departing from his pleading.  His concession as to title being with D1 is at odds with his own case, but the Defendants’ concession is consistent with theirs.  The Pleading Point is not a pedantic one but a legal issue highlighting the illogicality of the Plaintiff’s own case. I do not see how the above authorities on pleadings could assist the Plaintiff.

158.  In summary, I am not satisfied as to the existence of the Equitable Mortgage and the circumstances under which it had arisen.

J.   ISSUE 4: WAS ENFORCEMENT OF THE EQUITABLE MORTGAGE TIME-BARRED?

159.  D1 only pleaded a limitation defence as regards the Loan made at the 1991 Meeting.  Mr Justin Ho accepts that there is no plea of limitation as regards the Equitable Mortgage.  Had I found the Equitable Mortgage to have existed, it would have been enforceable.

K.   ISSUE 5: WHETHER D1 IS ENTITLED TO THE RETURN OF THE TITLE DEEDS

160.  No Equitable Mortgage exists.  The title has remained with D1.  There is no cause for the Plaintiff to retain the title deeds.  D1 is entitled to the return of the title deeds.

L.   ISSUE 6: WHETHER THERE HAD BEEN ANY BREACHES OF DUTY AS CLAIMED BY D2 AND D3 AS A RESULT OF THE PLAINTIFF ACTING FOR BOTH THE VENDOR (D1) AND THE PURCHASERS (D2 AND D3)

161.  I turn to the individual Grounds for avoidance of the Legal Charge set out in paragraph 47 above.

162.  The Defendants asserted that at the 1991 Meeting, the only other person present was the Plaintiff.  Nobody had interpreted the Undated Assignment and Undated Legal Charge to the Defendants.  They had no idea what they had signed.  They had never agreed to pay $8,000 per month as interest.  They had no intention of charging the Property to the Plaintiff, but only to a bank after the title was rectified.

163.  According to the Plaintiff, Magdalene Au had explained the Undated Assignment and Undated Legal Charge to the Defendants.  However, his evidence on interest vacillated between (i) the documents coming to him fully prepared by YYY and all that his firm had done was to change the backsheet; and (ii) that he had instructed an identified staff member of JFC to insert the figure of $8,000 interest per month into the Undated Legal Charge.  The Plaintiff could not remember if that figure was there when D2 and D3 executed the Undated Legal Charge. 

164.  Magdalene Au gave oral evidence but it would not be reasonable for her to remember, years after the event, who D2 and D3 was, the date of execution and what she had explained to them.  One could only go by what was stated on the face of documents.  Unfortunately, Au-WS said nothing about the fact and usual practice of her interpretation. 

165.  When asked by the court as to her practice of interpretation (解契), Magdalene Au said that she would explain the property, party and consideration for the transaction.  She said that if the interest of $8,000 per month was there, she would have explained it to D2 and D3.

166.  A few questions later, she admitted that she did not notice who the chargee on the Undated Legal Charge was.  It appeared that the Plaintiff had failed to draw to her attention that he was to be the chargee.  This failure was material as it was D2 and D3’s evidence that they had only wanted to charge to a bank. 

167.  Under cross-examination, it was established that the Plaintiff and Magdalene Au were ignorant of the important provisions of the Legal Charge (which was prepared by YYY, ready to be signed):

(1)   Interest rate which could be determined by the chargee;

(2)   Appropriation right of the chargee in respect of the payments to be made by the chargors; and

(3)   Penalty clause on interest in respect of pre-payments.

168.  Though Magdalene Au had interpreted the Undated Assignment and Undated Legal Charge, on the evidence before me, I cannot be satisfied that, the provision on monthly interest and provisions in the preceding paragraph had been brought to D2 and D3’s attention.  Ground 1 is substantially established.

169.  I am not satisfied that D2 and D3 had been induced to sign on several sheets of blank paper.  However, I have alluded to the lack of authority of D1 to bind at least D3 in the 1997 Meetings/conversation.  The Plaintiff thus inserted the date of 3 October 1997 into the Legal Charge without the approval of D2 and D3.  Ground 2 is substantially established.

170.  A solicitor must not, without informed consent of his client, stand to make any profit or receive any benefit other than his professional remuneration from the transaction which he is retained to carry through: Farrington v. Rowe McBride & Partners [1985] 1 NZLR 83, at 89, line 45, Richardson J.

171.  Where this doctrine of abuse of confidence applies, the fiduciary is (a) bound to disclose to his client everything that is or may be material before the transaction is completed, and (b) must prove that the transaction was a fair one having regard to all the circumstances: Johnson v EBS Pensioner Trustees Ltd [2002] Lloyds’ Law Reports, 309, Dyson LJ, §68.

172.  Mere explanation to the client of the documents executed was not sufficient.  Asking the client to get independent legal advice was the only antidote to resolve the conflict of interest between a solicitor and his client.  See Willis v Barron [1902] AC 271, 282.

173.  A solicitor ought to have refused to act for a person in a transaction in which the solicitor was himself a party with an adverse interest; and even if he was pressed to act after his refusal, he should persist in that refusal. See Spector v Ageda [1973] Ch 30, at 47F-G, Megarry J.

174.  In the present case, the Plaintiff acted as a solicitor for the vendor, purchasers and himself as chargee.  He also stood to gain $8,000 per month as interest for an indefinite term.  He admitted that being a party benefiting under the Undated Legal Charge, he had asked Magdalene Au to explain the document to D2 and D3.  Accordingly, he was fully aware of the potential conflict of interest.

175.  The Plaintiff had never asked the Defendants to seek independent legal advice.  Magdalene Au was not legally qualified.  Her interpretation was not sufficient. She was not independent anyway.

176.  There was abuse of confidence.  I am not satisfied that D2 and D3 had given their informed consent to the Plaintiff being the chargee and his charging of interest.  Grounds 3 and 4 are established.

177.  Material alteration to a deed will cause it and the underlying transaction to be void and vulnerable to the equitable relief of rescission. An example could be found in Spector v Ageda [1973] Ch 30, 49D-E (adding a provision for monthly interest after the memorandum of loan was signed); Goss v Chilcott [1996] AC 788, per Lord Goff (extending the repayment date and amending the interest dates in the mortgage instrument).

178.  The pleaded material alteration was not about interest but that the Plaintiff deleted the name of JFC, replacing it with Wong, Fung & Co as the solicitors presenting the Legal Charge for registration.  I accept that D2 and D3 had never instructed Wong Fung & Co as solicitors.  This was a material alteration because, if something had gone wrong, should D2 and D3 seek to hold JFC or Wong Fung & Co liable?  Ground 5 is established.

179.  I find that the Plaintiff was in breach of duty as a solicitor as against D2 and D3.  The Legal Charge was voidable.

M.  ISSUE 7: WHETHER D2 AND D3 HAD MADE REPAYMENTS OF THE LOAN IN THE AGGREGATE AMOUNT OF HK$192,000

180.  The burden was on D2 and D3 to prove that they had made repayments in the sum of $192,000.  They said it was by deposits. 

181.  They claimed, for the first time when D2 went into the witness box, to have documents kept in a goods van to prove payment but those documents were lost.  There was no opportunity for the Plaintiff to investigate this assertion.  It was more probably a recent invention of D2 and I reject it.

182.  On the other hand, the Plaintiff had produced some records of his bank passbook for 1993-1994 which covered part of the relevant period.  There were no deposits of $8,000 per month.  The Plaintiff has not produced records of other bank accounts. 

183.  The Plaintiff stated that “one of the 1^st Defendant’s sisters by the name of Stella … also contacted me from time to time” (§22 of P-WS). This statement was made in the context of the period from 1997 (after the creation of the alleged Equitable Mortgage) to 1999 (when the Plaintiff said that the last monthly payment of HK$8,000 was made to him). However, the Defendants have no sister by the name of Stella.  I am not satisfied that the last repayment by D2 and D3 was in 1999 as alleged by the Plaintiff.

184.  In summary, neither party’s evidence was satisfactory.  D2 and D3 has failed to discharge their burden of proof.  On the Plaintiff’s own admission, I find that he was only paid $104,100.

N.   ISSUE 8: WHETHER D2 AND D3 ARE ENTITLED TO THEIR CLAIM FOR THE RETURN OF THEIR ALLEGED REPAYMENTS BY REASON OF THE LOAN BEING VOID AND ILLEGAL

185.  Rescission properly so-called involves the extinction of a contract and the restoration of the parties to their original positions.  The basis for the remedy is the election of a party whose consent to the formation of the contract was vitiated in one way or another, for example by misrepresentation. See Snell’s Equity, 33^rd ed, §15-001.

186.  A contract tainted by abuse of confidence is not illegal, nor is it analogous to an illegal contract.  Until it has been set aside, it remains in being for the benefit of, and is enforceable by, both parties.  The court has a discretion to grant rescission.  It would consider what fairness requires in the light of all the circumstances, not only when addressing the question of the precise form of relief, but also whether the remedy should be granted at all: Johnson v EBS, §77 -79, Dyson LJ (as he then was). 

187.  Johnson v EBS was a case of abuse of confidence.  The solicitors’ firm arranged a loan provided by its private lending clients and the solicitors’ firm charged a service fee on the loan.  The service fee was not disclosed to the solicitor’s client, O’Shea or O’Shea’s company.  O’Shea was a party to a legal charge as a surety.  He was not under undue influence or pressure when he entered into the surety covenant and would still have proceeded with the legal charge and surety had he been made aware of the service charge.  Dyson LJ still found the non-disclosure of the service charge to be material because the client was deprived of the opportunity of seeking to negotiate a different deal from the one that, being ignorant of the service charge, he was content to accept (at §71).  The court did not order rescission of the surety covenant but only ordered an account of the service charge.

188.  In the present case, I see no reason for exercising the discretion to grant rescission:

(1)   The Legal Charge had never been enforceable as a matter of law because D2 and D3 never had title in the Property, on whoever’s case. It is a document with no legal effect or consequence.

(2)   Latest by September 2015 when the Plaintiff withdrew the claim against D2 and D3, D2 and D3 would have no fear about enforcement of the Legal Charge against them, as res judicata would apply to protect them for the future.

(3)   On 11 October 2018, pending closing submission, the Plaintiff had withdrawn the Legal Charge from registration at the Land Registry and the parties have been informed.

(4)   D2 and D3 have not suffered any loss. They had indisputably received $358,996.77 from the Plaintiff.  The Loan was not illegal.  Whether or not the Assignment had gone ahead, they had to repay the Plaintiff. On their own case, they had been repaying capital, not interest. They still owe the Plaintiff $254,896.77 (ie $358,996.77–$104,100).  D2 and D3 are now in effect saying to the Plaintiff, “Give us back your money.”  That is wholly unconscionable.

(5)   This case is distinguishable from cases where, owing to a solicitor’s breach of fiduciary duty, a client entered into a transaction involving a stranger (like a bank).  In this case, there was no stranger.  D1 (as vendor) has always been traceable.  Upon cancellation of the sale and purchase by consent, D2 and D3 could have recovered the part payments of purchase price from D1.  In fact, D1 testified under cross-examination that he had paid $80,000 for D2 to pay the premium for a new unit that D2 and D3 had purchased in 1998.  He treated that $80,000 as “compensation” to D2 (although D2 said she had no recollection of this amount).  He also repaid the balance of what he received ($300,000 as opposed to $358,996.77) by giving away his shares purchased under D2’s name.  However, he was unable to tell the nature or value of the shares as at 1995 or 1998.  D2 was not able to remember whether D1 had repaid her anything.  The evidence of the Defendants was wholly unreliable in this respect.  I am thus not satisfied that D2 and D3 had suffered any loss that had not already been compensated for by D1.

189.  Even if I were to order rescission, it would only apply to the interest provision.  D2 and D3 would still not have suffered any loss because, on their own case, they had never paid interest. 

O.  WHETHER D2 AND D3’S COUNTERCLAIM IS TIME-BARRED UNDER THE LIMITATION ORDINANCE OR BARRED BY THE EQUITABLE DOCTRINE OF LACHES

190.  D2 and D3 had allegedly paid the Fee Note of JFC for $49,775, broken down as follows:

Preparing & completing an Assignment from D1 to D2 and D3 in consideration of HK$1,350,000	$11,750
Preparing & completing a Legal Charge/(Equitable) Mortgage of the above premises from you to secure a sum of HK$950,000	9,625
		$21,375
Search fee and copying charges	200
Stamp duty on Assignment	27,000
Registration fee on Assignment	500
Registration fee on Legal Charge/mortgage	500
Travelling and incidental expenses	200
		$28,400
		$49,775 ======

191.  JFC had issued a receipt for $28,940 only.  D2 and D3 no longer pursued $21,375 in their closing submission.

192.  Stamp duty of $27,000 is recoverable by D2 and D3 because the Undated Assignment has never been stamped.

193.  Registration fee of $500 as regards the Assignment is recoverable by D2 and D3 because it has never been registered.

194.  Registration fee of $500 as regards the Legal Charge are recoverable by D2 and D3 because Condition (ii) was not fulfilled and the Legal Charge was registered without the consent of D2 and D3.

195.  The Plaintiff should in principle repay $28,000 to D2 and D3.

196.  The Loan existed independently of the Undated Legal Charge.  D2 and D3 ceased repaying the Loan in 1993 due to the Plaintiff’s breach of promise to rectify the title in time.  The right to seek recovery of the stamp duty and registration fees would have arisen, latest, by 1995 when the Defendants cancelled the sale and purchase.  The counterclaim was only filed in 2013, well beyond 6 years for an action in tort.

197.  Mr Frederick Chan, counsel for D2 and D3, relies heavily on the case of Nocton v Lord Ashburton [1914] AC 932, at 956-957, Viscount Haldane LC, as if there is no limitation period for cases involving a solicitor’s breach of fiduciary duties in handling financial transactions with his client with personal gain to the solicitor.  With respect, what Nocton v Lord Ashburton decided was that it was not necessary to establish fraud or negligence against a solicitor in such a claim: Swindler v Harrison [1997] 4 All ER 705, 732a-f, Mummery LJ.

198.  Abuse of confidence, as a stand-alone cause of action in tort, has the same limitation period of 6 years.  The Limitation Ordinance does not give special treatment to claims against a solicitor.

199.  If I am wrong, at best, it is the cause of action in rescission that was not time-barred as D2 and D3 were not aware of the wrongful dating of the Legal Charge until service of the OS on them.  The counterclaim was lodged within 6 years of the wrongful dating.  However, I repeat paragraph 188 as to why rescission would be refused.  Even if it was granted, it would only have ended in refund of the registration fee of $500 for the Legal Charge.

200.  The counterclaim of D2 and D3 must be dismissed.

O.   CONCLUSION

201.  I order as follows:

(1)   I dismiss the Plaintiff’s claim against D1;

(2)   On D1’s counterclaim, I order the Plaintiff to return the title deeds to D1; and

(3)   D2 and D3’s counterclaim is dismissed.

202.  I thank counsel for their assistance.

P.   COSTS

203.  Costs should follow the event and, on a nisi basis, be paid by the Plaintiff to D1 as regards the claim; and paid by D2 and D3 to the Plaintiff as regards the counterclaim.  I make an order nisi accordingly.

204.  The counterclaim was, in my view, a wholly academic exercise after the Plaintiff has withdrawn the claim against D2 and D3 in 7 September 2015. Even on their best case, the Plaintiff could only recover $192,000 + $49,775.

205.  At the pre-trial review, I have posed this question to Mr Frederick Chan: D2 and D3 had received money from the Plaintiff which they had to repay; what loss had D2 and D3 suffered?  After trial, it was confirmed that D2 and D3 received more from the Plaintiff than any loss they have suffered.

206.  Regrettably, about 2½ days of the trial was spent for the unmeritorious counterclaim.  In any case, the small amount at stake simply did not warrant the engagement of such a senior barrister, although this court is most grateful to Mr Frederick Chan for his assistance. 

207.  I require D2 and D3 to show cause within 21 days from the date of handling down of this judgment, as to why they should not personally bear costs since 8 September 2015 and on indemnity basis after the PTR.  The Director of Legal Aid is of course at liberty to make submission in response within 14 days thereafter.  Each set of written submission should not exceed 5 pages, all inclusive.  Unless I direct an oral hearing, the issue shall be disposed of on the papers.

208.  I warn parties to bear in mind proportionality of the costs to be incurred when they seek to justify what appeared to be costs unnecessarily or improperly incurred.