HANG SENG BANK LTD v. LEUNG SHUI CHUNG AND ANOTHER

CACV 43/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 43 OF 2010

(ON APPEAL FROM HCMP NO. 1784 OF 2008)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons for judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal from an order of Deputy High Court Judge Carlson dated 28 January 2010 dismissing the first defendant’s appeal from an order of Master Ko of 20 July 2009.  The master had entered judgment under Order 88 of the Rules of the High Court in favour of the plaintiff (“the bank”) in the amount of $17,534,785.54.  At the conclusion of the hearing the appeal was dismissed.  The reasons appear below.

3.  The first defendant (“Madam Leung”) is the owner of a property which she mortgaged to the bank to secure the indebtedness of the second defendant, a company owned by Mr Chui Chi Ming and his wife, Madam Chum.  When the second defendant defaulted, the bank sought to enforce its security and effectively obtained summary judgment.  The appeal was brought on the basis that summary judgment ought not to have been entered in that the evidence had disclosed triable issues.  As will become apparent, Madam Leung’s case is that she is not liable under the mortgage.

Background

4.  The facts, derived principally from the affirmations of Madam Leung, may be summarised as follows.  The property which is a small ground floor shop in Wanchai was purchased by Madam Leung’s mother in their joint names in 1974 for $430,000 and let to tenants.  When the property fell vacant in 1986, it was let by Madam Leung and her mother to Mr Lai (who had managed the former tenant’s business) and Mr Chui under a written tenancy agreement for a term of 3 years.  When that tenancy expired, it was renewed in Mr Chui’s name alone.  There were further renewals.  However, in 1998, the tenancy became an oral monthly tenancy for $30,000 a month (inclusive of rates).  By then, Madam Leung and her mother had become friends with Mr Chui and trusted him to the extent that they did not see any need for a written tenancy agreement.

5.  Their friendship had developed over time.  Madam Leung had been a guest at Mr Chui’s wedding to Madam Chum in the early ’90s and when Mr Chui and his family returned from Canada in 1997, Madam Leung had agreed to take care of their second son who was then an infant.  For about five years, the child would stay with Madam Leung during weekdays and his parents at weekends.  In return, Madam Leung would receive a monthly payment.

6.  Madam Leung was educated up to Form 2 and cannot read English.  The only job she has had since leaving school at 15 and before becoming a full-time housewife when she was about 30 was as an assistant at a Chinese herbalist shop run by her uncle.  She worked there for about 15 years.  Madam Leung has no business experience.

7.  When Madam Leung’s mother passed away in July 2002, Madam Leung inherited the other half of the property.  She became the sole registered owner after the grant of probate in March 2003.

8.  Meanwhile, in early 2002, Mr Chui had fallen into arrears with the rent because of cash-flow problems following the expansion of his business on the Mainland.  He needed to raise money for his business and at that time he had asked Madam Leung if she would be willing to use her matrimonial home at Hang Fa Chuen which Madam Leung owned jointly with her husband as security for Mr Chui’s borrowings but she had refused his request.

9.  A few months after the death of Madam Leung’s mother, in October 2002, Mr Chui approached Madam Leung again.  On this occasion, he asked if she would be willing to let him have the property instead of her home as security against which he could raise finance for his business.  He told her that it would be a four-year loan agreement secured on the property and that he was confident he could meet the instalment payments.  Madam Leung replied to the effect that probate was still in progress, that the property was not worth very much given its price when it was purchased in 1974 and that, in her view, it was unlikely that it would enable Mr Chui to obtain a very big loan from the bank.

10.  By late March 2003, on becoming the sole registered owner, Madam Leung informed Mr Chui of that fact.  It immediately prompted a renewed request from Mr Chui that he be allowed to use the property as security for bank borrowings which he said could be arranged swiftly.  Madam Leung expressed her willingness to do so.

11.  A day or two later, on or about 1 April 2003, Mr Chui informed Madam Leung that his loan application to the bank had been approved.  She did not enquire as to the size of the loan, believing that Mr Chui “would not be able to obtain a big loan from the bank” but advised Mr Chui that the title deeds were in the possession of the probate solicitors, Messrs. Kong & Tang.  Mr Chui told her to notify the solicitors that the bank would be sending a letter of instructions to them relating to the mortgage of the property.  In § 16 her affirmation, Madam Leung stated that “as told by Mr Chui, the security would only be the amount of worth of the mortgaged property” although she had no idea what it was worth at the time.

12.  Madam Leung contacted Mr Ho of Kong & Tang and advised him that the bank would be granting a loan to Mr Chui’s company to be secured by a mortgage on the property and that the bank would be sending his firm a letter of instructions to prepare the mortgage.  Madam Leung added that the amount of the loan to be secured by the mortgage would be lent to Mr Chui’s company “as he had financial difficulties” and requested Mr Ho to process the matter on an urgent basis as Mr Chui “was in need of money”.

13.  Later the same day, Mr Ho telephoned Madam Leung to advise her that he had received instructions to act for the bank as lender and to prepare an “all monies” mortgage of the property to secure banking facilities to the second defendant to the extent of $1,860,000.  Mr Ho told Madam Leungto be cautious about the transaction and that, since he was acting for the bank, she had the right to seek independent legal advice to protect her own interests before proceeding with the transaction.

14.  Madam Leung did not heed that advice and refused to seek independent legal advice.  She informed Mr Ho that she had known Mr Chui for quite a long time and opined that he was a trustworthy person.  According to Madam Leung, at that time she believed that her liabilities under the charge would be the worth of the property and no more.

15.  On 3 April 2003, Madam Leung together with Mr Chui and Madam Chum met with Mr Ho at his office to execute the mortgage.  Madam Leung was shown two letters of instruction from the bank, the later letter superseding the earlier.  The need for the second letter had arisen because of an error in the name of the mortgagor in the earlier letter.  Otherwise, the terms were identical.  The letter stated, inter alia: “AMOUNT SECURED: The extent of the facility to be granted currently is $1,860,000”.

16.  Mr Ho repeated his earlier advice to Madam Leung to seek independent legal advice before signing the mortgage documents but Madam Leung again declined his invitation.

17.  A number of documents accompanied the mortgage.  First, there was a statement in the form of a notice to the mortgagor from the bank relating to the mortgage to be executed in favour of the bank.  This statement, inter alia, highlighted the salient features of the mortgage.  It read:

“ 1.   By executing the Mortgage, each Mortgagor may become liable to the Lender instead of or as well as the Borrower.

  2.   The Mortgage contains an “all-monies” clause.  Each Mortgagor will be liable for all the actual and contingent liabilities of the Borrower under the terms of the Mortgage, whether now or in future, as specified in Clause 2 of the Mortgage.

  3.   The Lender may from time to time, without consent or knowledge of the Mortgagor:-

(i) renew, vary or modify the terms or conditions relating to any facilities granted or to be granted by the Lender to the Borrower; or

(ii)    increase or decrease the banking facilities or grant any further credit or other facilities to the Borrower or;

…

and no such act on the part of the Lender shall in any way discharge or diminish the validity of the Mortgage or affect the liabilities of the Mortgagor under the Mortgage.

4.   Upon the Mortgagor’s request and subject to the Lender having obtained the prior consent of the Borrower, copies of any facility letters issued by the Lender to the Borrower may be obtained from the Lender and until such request by the Mortgagor and the Lender has obtained the prior consent of the Borrower, it is not necessary for the Lender to send to the Mortgagor copies of any facility letters relating to the Borrower’s account with the Lender.

5.   Each Mortgagor should seek independent legal advice before executing this Notice and the Mortgage.”

18.  Madam Leung signed the statement which contained the following acknowledgement:

“I/We hereby acknowledge and confirm our understanding of the contents of this Notice.  I/We hereby acknowledge that Messrs KONG & TANG have advised me/us that though the contents of the Mortgage have been interpreted and explained to me/us by Messrs KONG & TANG they are the Solicitors acting for the Lender only.  Further, although Messrs KONG & TANG have invited me/us to seek independent legal advice on this Notice as well as on the Mortgage, yet I/we confirm that I/we do not see the need for independent legal advice.”

19.  Next, there was a warning notice.  As the judge rightly recognised, this was an important document.  It read:

“ 1.   The Mortgagor have applied to the Lender for banking facilities/mortgage loan to an extent of HK$1,860,000.00 to be granted to the Borrower on the security of a mortgage to be taken out on the Property.

  2.   Before you sign the mortgage and the other security documents which you have to sign if you go on with the transaction you should instruct a solicitor to protect your interests and to ensure that your rights and liabilities under the security documents are properly protected.

  3.   YOU ARE RECOMMENDED TO INSTRUCT YOUR OWN SOLICITOR  who will be able at every stage of the transaction to protect your interest and to give you independent legal advice.

  4.   If you do not instruct your own solicitor, you will be required to attend the office of the solicitors acting for the lender solely to sign and execute the security documents and the solicitors will only be instructed by the Lender to explain and to witness your signing and execution of the security documents.  They do not act as your solicitor and will not be giving you any legal advice regarding the security documents.

  5.   YOU ARE STRONGLY ADVISED  to obtain the financial information of the Borrower and engage your own financial adviser to give you advice on such financial information before signing and executing the security documents.

  6.   Your liability under the Mortgage will be unlimited if you decide to go on with the transaction and sign and execute the Mortgage.

  7.   You also have the choice not to proceed with the transaction in connection with the banking facilities/mortgage loan to be granted to the Borrower.

  8.   Please think carefully before deciding whether to proceed with the transaction.  You are free to choose whichever option you prefer.

  I acknowledge receipt of a copy of this warning and fully understand the contents thereof.”

20.  Notwithstanding the clear admonitions of the bank and the counsel it proffered in the statement and the warning notice, Madam Leung did not ask to be supplied with copies of facility letters.  Nor did she make a request for the borrower’s financial information.  She also declined to seek independent legal advice as to her exposure under the mortgage before signing it.  Instead, she signed a bilingual letter addressed to Kong & Tang in the following terms:

“We, the undersigned, hereby expressly acknowledge and confirm that the First Legal Charge/Mortgage in respect of the above property prepared/to be prepared by your firm (as Solicitors acting for the Lender) is to secure “all moneys” in respect of general banking facilities granted/to be granted by the Lender to the Borrower and that you have invited us to seek independent legal advice of our liabilities thereunder so far as our interests are concerned on this transaction as well as on this First Legal Charge/Mortgage.  Notwithstanding that every chance having been offered to us to do so, we do not wish to seek independent legal advice and have decided to execute the said First Legal Charge/Mortgage and/or the relevant document(s) in your firm at our own risks and responsibilities.”

The mortgage and related documents signed by Madam Leung at the meeting with Mr Ho were dated 3 April 2003.

21.  In their drawdown letter to the bank of even date, the bank’s solicitors made specific reference to the statement signed by Madam Leung “admitting awareness” of her right to seek independent legal advice.

22.  Madam Leung stated in § 19 of her affirmation that the mortgage as well as the documents mentioned above had been “duly explained” to her by Mr Ho.  After referring to the release of the loan of $1.86 million by the bank to the second defendant on 7 April 2003, Madam Leung went on to say this:

“… Mr. Chui had repeatedly assured me that this loan was a short-term one for dealing with his immediate cashflow problem.  He further said that no bank would grant him further facilities based on one Mortgaged Property.  Unless I had other assets to be charged, Mr. Chui said, the bank would not lend him further monies.  I believed that these all made sense.  As a result it never occurred to me that Mr. Chui would obtain further loans and facilities from the bank.  Therefore, it never occurred to me that the bank would subsequently further advance additional sums of money or credit facilities to Mr. Chui based on the same Mortgaged Property.”

23.  Some two and a half years later, by a letter dated 13 November 2006, the bank granted the second defendant facilities up to $19.7 million.  Between 13 November 2006 and 4 January 2008, the bank issued no less than five such letters to the second defendant, marked for the attention of Mr Chui.  They were in English and each of them was signed not only by the authorised signatories of the second defendant but also by Mr Chui, Madam Chum and Madam Leung in their personal capacity.

24.  According to Madam Leung, she came to sign them in the following circumstances.  She received a telephone call from Mr Chui in about mid-November 2006 informing her that he wanted to apply to extend his repayment term from the original four years.  The reason he gave was that he was having difficulties continuing monthly repayments of $40,000.  Madam Leung, believing that by then a very substantial part of the loan should have been repaid, agreed.  That evening, after having closed his shop, Mr Chui drove to Madam Leung’s residence.  She met him in his car when she was shown a single page bearing her name in Chinese which Mr Chui represented was an application letter to the bank for an extension of the repayment period.  Madam Leung was asked to sign as a matter of formality to show that she endorsed his application.  The other four letters were executed in similar circumstances.

25.  It should be mentioned that in the second to fifth facility letters (but not the first), immediately above the signatures of Mr Chui, Madam Chum and Madam Leung, was an endorsement which confirmed the agreement of the signatories to act as “guarantor/security provider” of the facilities.

26.  Madam Leung received a demand letter from the bank dated 15 May 2008 advising her of the borrower’s default and seeking repayment of $16,890,076.45.  Since the execution of the mortgageand prior to receiving that letter, there had been no direct communication between Madam Leung and the bank.

27.  The judge considered the bank’s position to be unassailable on the documents and that Madam Leung’s liability to the bank was governed by the mortgage itself and not the letters of facility.  For those reasons, he upheld the master who had given summary judgment in favour of the bank.

The appeal

28.  Madam Leung’s case is that she is not liable under the mortgage because the bank had failed in its duty to take reasonable steps to ensure that the mortgage and its implications had been properly explained to her.  To that end, Mr Cooney SC (who appeared for Madam Leung) made submissions directed at the scope of that duty.  Mr Cooney accepted that the bank’s claim is based exclusively on the mortgage and not on the letters of facility.

29.  Mr Cooney submitted that Madam Leung is not liable because she had been misled by Mr Chui into believing that the loan was a short term loan to deal with immediate cash flow problems, that her exposure was limited to the amount of the loan of $1.86 million and interest and that the bank would not lend further monies on the security of the property.  It was said that as this was her understanding all along, even after the execution of the mortgage, the adequacy of the explanation given on behalf of the bank required close consideration and the true state of affairs could not be established without a trial.

30.  Given the unambiguous and clear terms of the statement and warning notice (and there is no suggestion that these did not accurately encapsulate the mortgagor’s liabilities under the mortgage) and Madam Leung’s acknowledgement that all the documents had been “duly explained” by Mr Ho, Mr Cooney’s contention that the bank had not done enough can only succeed if the duty to bring the surety to an understanding of the mortgage required the bank actually to succeed in doing so.  But that proposition has been rejected by the Court of Final Appeal in Li Sau Ying v Bank of China (Hong Kong) Ltd (2004) 7 HKCFAR 579.  The trial judge’s approach in Li Sau Ying appears from the following passage from his judgment which can conveniently be found in § 38 of the CFA judgment:

“… I do not think that merely explaining the salient terms of the mortgage was enough to bring home to the Plaintiff the risks she was running.  The risk was that the people behind Sunny would make additional borrowings behind her back for which she would be liable and for which her property would be charged.  A mere explanation of the terms does not necessarily bring home the risks which flow from those terms.”

Lord Scott considered that that went beyond the duty to take “reasonable steps” to bring the mortgagor to an understanding of the implications of the mortgage “because it appeared to require the bank actually to succeed in doing so”.

31.  Mr Cooney then addressed another aspect of the bank’s duty.  Relying on the observations of Lord Nicholls in Royal Bank of Scotland Plc v Etridge (No. 2) [2002] 2 AC 773, Mr Cooney submitted that the duty to take “reasonable steps” required the bank to provide “financial information” to the surety and, in the present case, no such information had been provided.  The “financial information” was said to include

“the purpose for which the proposed new facility has been requested, the current amount of the husband’s indebtedness, the amount of the current overdraft facility, and the amount and terms of any new facility.”

(See § 79(2) of Etridge)

32.  It is to be noted that in that passage Lord Nicholls was addressing the situation of a surety wife.  Lord Scott agreed with those observations insofar as they related to a surety wife.  But he drew a distinction between a surety wife and any other surety.  He stated (at § 189) that under the general law, the financial details that might have to be disclosed to a wife who is offering to stand as surety for her husband's, or his company’s debts, would not have to be disclosed by a creditor to the would-be surety.

33.  But whether or not there is a divergence of view as to the duty to disclose financial information in cases not involving a surety wife, is irrelevant in the present case given the facts.  § 4 of the statement (set out in § 17 above) made it clear that the bank was willing provide the mortgagor with copies of any facility letters issued by the bank to the borrower upon the mortgagor’s request, subject only to the prior consent of the borrower having been obtained.  Then § 5 of the warning notice (which bears repetition) stated as follows:

“YOU ARE STRONGLY ADVISED to obtain the financial information of the Borrower and engage your own financial adviser to give you advice on such financial information before signing and executing the security documents.”

The bank’s admonition to Madam Leung to obtain the borrower’s financial information could not have been clearer.  She chose toignore it and went ahead, regardless of the consequences.

34.  In my view, the points taken by Mr Cooney in relation to the scope of the bank’s duty to take reasonable steps have no merit.

35.  Finally, it should be mentioned that in the course of the appeal hearing, it was mooted whether it could be argued that the bank was under a continuing obligation to give the mortgagor notice of ‘extraordinary increases’ in borrowings or, viewing it from the mortgagor’s perspective, in exposure or liability by way of an implied term.  This was prompted by the large disparity between the amount advanced at the time of the mortgage and the amount outstanding at the time of the demand letter.  Madam Leung’s exposure had increased more than eight-fold, from under $2 million to over $16 million in the interim.

36.  Leaving aside the difficulty in deciding where the line falls to be drawn when what would qualify as ‘extraordinary’ has to be determined, the notion of an implied term cannot get off the ground because, in the present case, it would directly contradict the express contractual obligation Madam Leung assumed by executing the mortgage.  It is trite law that no term can be implied into a contract which contradicts an express contractual provision.

37.  It is stated in § 3 of the statement (set out in § 17 above), that the bank does not require the prior consent or knowledge of Madam Leung before granting further banking and other credit facilities to the second defendant and no such further credit or other facility granted in the future would affect the validity of the mortgage or Madam Leung’s liability under it.  It has not been suggested that that summary does not accurately reflect one of the key features of the mortgage.  Plainly, as a matter of law, no term could be implied to contradict or undermine the express provisions of the mortgage.

Hon Stone J:

38.  I respectfully agree with the Reasons for Judgment of Le Pichon JA.