FU SAU KIN DE YAU v. TANG FU HONG AND ANOTHER

HCA 380/2016

[2019] HKCFI 540

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 380 OF 2016

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J U D G M E N T

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1.  This action concerns an outstanding loan given by the Plaintiff (“Fu”) to the 1^st Defendant (“Tang”) pursuant to a written agreement dated 18 October 2011 (“Agreement”). On the same day, the 2^nd Defendant (“Leung”), Tang’s wife, executed a guarantee in respect of the due performance of the Agreement by her husband (“Gaurantee”).

Background

2.  The following facts are not in dispute save indicated otherwise.  Tang is an indigenous villager of Fanling.  In 2010, he took advantage of the Government’s Small House Policy and obtained a New Grant of Lease for Lot 2498 in DD 83 (“Land”) dated 13 December 2010 at a concessionary premium of HK$31,070.  However, Tang did not have sufficient funds to build a small house (typically a 3-storey structure) on the Land.

3.  Fu and Tang used to work for a construction company and were friends.  Fu worked as a clerk whilst Tang was doing the quantification work for that company.  Tang approached Fu for assistance to finance the building of the house.  Subsequently, the Agreement was made under which Fu would lend Tang the money to build the house.  It was a simple 3-page document in Chinese prepared by a solicitor, Mr Ko (“Ko”).  There is disagreement between the parties whether Ko was representing only Fu (the Defendants’ contention) or both sides (Fu’s case).  However, Ko’s fees were paid by Fu and Tang in equal shares.

4.  Pursuant to the terms of the Agreement, instead of repaying the construction loan, Tang might assign to Fu or her nominee the 2/F and the Roof of the house upon completion and after payment of additional premium to the Government to remove the non-alienation clause in the Lease (“NA Clause”).  The additional premium would be paid by Fu and Tang respectively in the proportions of 1/3 and 2/3.  In the event of default by Tang, the construction loan would have to be repaid with interest at 60% p.a. or the highest rate allowed under Hong Kong law, whichever would be the lower. 

5.  The Agreement expressly stated that the parties should forthwith pay the additional premium upon receiving the demand note from the Government (Clause 9) and that the Title Deed (the New Grant) should be kept by Fu for her protection (“保障”) (Clause 3).

6.  The Guarantee was a 1-page Chinese document in simple terms and also prepared by Ko.  

7.  Pursuant to the Agreement, Fu had provided Tang with the money for the construction of the house.  Altogether, Fu provided HK$1,446,495 in accordance with Tang’s instructions by way of 9 payments made from October 2011 to January 2013.  It is uncontroversial that the lion share of that sum, HK$1.4 million was used to meet the construction cost.  As for the balance of HK$46,495 (“Balance”), Tang says that the money was used to furnish the 2/F of the house.  In her evidence, Fu agreed that the furnishing of the 2/F should be borne by her.

8.  The house was completed in January 2013 (“House”).  On 27 January 2013, Tang’s family and the family of one of his elder brothers (“Brother”) moved into the G/F and 1/F of the House respectively.  In May 2013, Fu, her daughter (“Yau”) and Yau’s boyfriend together with his family moved into the 2/F and Roof of the House.  

9.  In September 2013, Tang applied for removal of the NA Clause after the Certificate of Compliance was granted by the District Lands Office the previous month.  By a Demand Note dated 26 March 2014, the Lands Department agreed with the application on the condition of payment of additional premium of HK$ 3,832,000 on or before 22 April 2014 (“1^st DN”).  However, Tang was unable to obtain funding for his share of the premium from the Brother as he had hoped or expected.  Consequently, the 1^st DN was not paid.

10.  There is a note signed by Tang (“Note”) which acknowledged his failure to meet the 1^st DN.  There is disagreement on when the document was signed.  I do not believe that this is an important issue.  However, much has been said about the dating of this document as an attack on the credibility of Fu and Yau.   

11.  It is common ground that the parties did not put an end to the Agreement.  Instead, they agreed orally that Tang should apply again for the removal of the NA Clause, but Fu’s responsibility over the additional premium would be limited to HK$1,277,600, being 1/3 of the sum demanded under the 1^st DN.

12.  Tang re-applied in June 2014.  Before he did so, he reached an oral agreement with a friend, Mrs Lau, on a loan of HK$3 million to him for the payment of premium.  By a Demand Note dated 30 October 2014, the additional premium required was increased to HK$4,697,000 payable on or before 26 November 2014 (“2^nd DN”).

13.  Unfortunately, Mrs Lau reneged on her agreement over the loan.  Tang did not have the means to pay his share of the premium. With the assistance of his niece, Ms Chan (who gave evidence in this trial), Tang managed to secure an agreement by a finance company called Yi Fu to provide him with a loan to cover his share of the premium on the condition that the Title Deed be kept by Yi Fu.  Ms Chan (“Chan”) attempted to secure Fu’s agreement to provide the Title Deed kept by her.  Fu did not agree to give up her protection over the loan and the arrangement with Yi Fu felt through. 

14.  Before the deadline for the payment of premium (26 November 2014) Tang had another agreement with a finance company, Wing Lun, for a loan to pay his share of the premium.  That loan would also be subject to the production of the Title Deed.  Fu again refused to provide the document and that arrangement was met with the same faith.  It is contended by Tang that Fu was in breach of the “Implied Financial Terms” of the Agreement pursuant to which she should release the Title Deed to enable him to obtain finance for the premium.  The alleged implied terms are one of the key issues in this case.

15.  Ultimately, the 2^nd DN was again not met, but the parties agreed that Tang should make yet another application as long as Fu’s share of the premium would be capped at HK$1,277,600.

16.  Tang made a 3^rd application on 4 February 2015.  By a Demand Note dated 21 May 2015, the additional premium was further increased to HK$6,597,000 payable on or before 17 June 2015 (“3^rd DN”).

17.  On about 27 May 2015, there were discussions between Tang, Leung and Yau about Tang’s need to have the Title Deed to raise finance to pay his share of the premium.  There is dispute as to what was discussed or agreed (if anything).

18.  In any case, Fu did not provide the Title Deed and the 3^rd DN was again not met.  It is Tang’s case that such failure was attributable to Fu’s refusal to release the document. 

19.  On 21 June 2015, there was a meeting attended by, inter alia, Fu, Yau, Tang and Leung.  In that meeting, Fu asked the Defendants for her money back.  Her demand was not met. 

20.  On 20 January 2016, Fu’s solicitors wrote to Leung to demand performance of the Guarantee.  Tang was aware of this letter at the time. 

Issues

21.  There is no dispute that Tang could not pay his share of additional premium to satisfy any of the 3 DNs.  Fu’s case that she was at all material times able, willing and ready to pay her share of the premium is not controversial.  Three issues have been raised by the Defendants to defend this action. 

22.  Firstly, it is contended that Tang’s failure to honour the Agreement was caused by Fu’s breach of the Implied Financial Terms. If so, Fu cannot rely upon Tang’s breach of the Agreement by reason of the Prevention Principle[1]. There is therefore an issue whether the Financial Terms were implied into the Agreement.

23.  Secondly, there is an issue on the interest rate under the Agreement – whether it is to be reopened by the court by reason of its extortionate nature. 

24.  Thirdly, there are arguments over whether the Balance was part of the loan which should be repaid by Tang under the Agreement.

25.  Mr Ah-Weng, who appeared with Mr Lee for the Defendants, had confirmed that the claim against Leung, based on the Guarantee, rise and fall with that against Tang.

Evidence

26.  Apart from giving evidence herself, Fu called Yau as a witness.  Both the Defendants gave evidence and Chan was called as their witness.

27.  Given the uncontroversial facts (see above) and the nature of the 3 issues, there was little relevant evidence adduced from the witnesses.  Save for 2 matters, there was no serious challenge on credibility. In my view, much of the differences in evidence were attributable to variations in recollection over matters which took place years ago, and the different perspectives held by parties.

28.  I have no difficulty accepting that both Fu and Leung were truthful and reliable witnesses.  Fu’s case is inherently probable and supported by contemporaneous documents. 

29.  I find Tang less reliable as a witness insofar as his evidence concerning the discussions with Yau on 27 May 2015 is concerned, which is one of the matters on which credibility is in issue.  It is, however, accepted by Mr Ah-Weng that it is not an important issue in this case.  Tang’s evidence in this regard is inconsistent with a contemporaneous letter from Yau recording the discussions.  There is no convincing explanation for his failure to respond to the letter if he disagreed with its contents.

30.  The other issue on credibility, concerning the date of the Note, is hardly a material point.  The evidence of Fu and Yau on this matter was simply used to attack their credibility so as to booster Tang’s case on the discussions which took place on 27 May 2015.  I see nothing sinister in the inconsistencies in the evidence of Fu and Yau in question, which were attributable to fragilities of recollection or simply carelessness in respect of the suggestion that the date of the Note was written by Tang when the handwriting was plainly that of Yau.

Implied Financial Terms

31.  The Defendants contend that there were Implied Financing Terms in the Agreement that: (i) Fu should release the Title Deed to Tang to enable him to obtain finance for his share of the additional premium and (ii) Fu should not unreasonably withhold its release.

32.  To begin with, it is difficult to see how the alleged implied terms may constitute a defence to the repayment of the loan with such interest as may be allowed by the court, bearing in mind the terms of Clause 12 of the Agreement (the translations had been agreed by the parties) :

“If [Tang] breaches the Agreement by not assigning 2/F and Roof to [Fu] or [Fu]’s designated agents, or if, under any circumstances, after (or any time before) the payment of additional premium, [Fu] cannot obtain the 2/F and Roof or the right to sell the same, or the obtaining of the 2/F and Roof or the right to sell the same is not performed, or if there is/are other factor(s) making [Fu] unable to take the 2/F and the Roof as repayment of construction expenses and interests, [Tang] shall within 14 days of [Fu]’s notice that [Fu] is unable to take the 2/F & the Roof as repayment of construction expenses and interests, repay [Fu] the construction expenses and interests under this Agreement, at 60% p.a. or the maximum rate permitted under the laws of Hong Kong, whichever is lower.”

33.  Pursuant to the terms of Clause 12, Fu was entitled to demand the repayment of the loan at any time if she could not obtain the 2/F and Roof.  Indeed, para 25 of the Re-Amended Defence and Counterclaim contains the following admission: “… Subject to the counterclaim herein the defendants consent to judgment of $1.4 million being building loans repayable under the Agreement with interest on such rates as the honourable court may find fit”.

34.  Insofar as the notice under Clause 12 is concerned, Mr Tang (appeared with Mr Lai for Fu), relies on Fu’s oral demand on 21 June 2015, the letter of demand to Leung and Tang’s knowledge of that letter (see paras 19 and 20 above).  I am inclined to agree with Mr Tang’s submission given the lack of prescribed manner for the notice.

35.  The state of affairs which triggered Clause 12 existed at the time of Fu’s demand on 21 June 2015.  I am unable to agree with Mr Ah-Weng that the terms of Clause 12 were ambiguous. 

36.  In any case, the alleged implied terms clearly have no leg to stand on.

Law

37.  The principles applicable for implied terms are trite :

(1)  A term may be implied to deal with contingencies: “The problem of the implication of terms is one which frequently arises in the law of contract.  In certain instances, the parties to a contract may have been content to express only the most important terms of their agreement, leaving the remaining details to be understood.  The court will then be asked to imply a term or terms to remedy the alleged deficiency.  More often, however, a subsequent disagreement reveals that there are contingencies for which the parties have not provided in their express contract.  The question is then whether the court can imply a term to cover the contingency which has unexpectedly emerged.” (Chitty on Contracts, 33^rd edn , vol.1, [14-002])

(2)  A terms may be implied as a matter of fact “if there arises from the language of the contract itself, and the circumstances under which it is entered into, an inference that the parties must have intended the stipulation in question.  Traditionally, an implication of this nature may be made in two situations: first, where it is necessary to give business efficacy to the contract, and, secondly, where the term implied represents the obvious, but unexpressed, intention of the parties.” (Chitty, [14-006])

(3)  “Reasonableness may be a necessary requirement before a term will be implied but it is not sufficient of itself to lead to implication of a term into the contract.” (Chitty, [14-012])

(4)  A term may be implied where “the court is simply concerned to establish what the contract is, the parties not having themselves fully stated the terms: “[i]n this sense the court is searching for what must be implied”.”  (Chitty, [14-016])

(5)  A term sought to be implied “must be capable of being formulated with sufficient clarity and precision.” (Chitty, [14-017])

(6)  Implied term must not be inconsistent with an express term. (Chitty, [14-018])

Analysis

38.  It is Tang’s own evidence that he did not at the time of the Agreement envisage that he would need the Title Deed or the whole House as security for a mortgage to pay the additional premium.  In my view, such evidence is fatal to the alleged implied terms.  There is no scope for suggesting that it was an obvious but unexpressed intention of the parties that Fu should produce the Title Deed to Tang for him to raise funds, not to mention that she would be giving up her protection in so doing.

39.  Further, Mr Tang submitted that the alleged implied terms were fundamentally inconsistent with Clauses 3, 9 and 10 of the Agreement :

Clause 3

“[Tang] shall, on signing this Agreement, hand over all title deeds of the House to [Fu] for custody and sign a power of attorney, will, etc.[2] at a law firm designated by [Fu]. The parties agree to instruct the law firm to hand over the executed power of attorney, will, etc. to [Fu] immediately as [Fu]’s reassurance[3] after executing the power of attorney, will, etc. The parties agree to jointly and severally instruct the law firm not to keep any relevant copies or records.”

Clause 9

“Upon receiving the Certificate of Compliance issued by the District Lands Office, the parties shall forthwith make application for payment of additional premium in respect of the House. [Tang] shall be responsible for two-thirds of such additional premium and shall pay it forthwith upon the issuance of demand note by the Government, and [Fu] shall be responsible for the remainder one-third and shall pay it forthwith upon the issuance of demand note by the Government.”

Clause 10

“On the date of payment of the additional premium, [Tang] shall, forthwith and unconditionally, assign 2/F and Roof to [Fu] or [Fu]’s designated agent or purchaser. [Fu] shall be responsible for all legal fees, stamp duties and relevant expenses in relation to the said assignment and [Tang] shall not be responsible for the same.”

40.  I agree with Mr Tang that the agreement that the Title Deed was to be kept by Fu for her protection (and that no copy of that document was to be kept by the solicitors) militates strongly against the suggestion that the parties had impliedly agreed that Tang would have the right to ask Fu for that document for the purpose of raising finance to pay the additional premium.  Obviously, the document would be used by Tang as a form of security for the loan and such use is contrary to Fu’s interest and inconsistent with Clause 3.

41.  However, I do not believe that the agreement that the parties should pay the additional premium forthwith (Clause 9) and that the 2/F and Roof should be assigned to Fu or her nominee on the day when the additional premium was paid (Clause 10) add much to Mr Tang’s submission because: (i) it is conceivable that the arrangement for finance might be made prior to the receipt of demand by the Government and (ii) time was not of the essence of the Agreement. 

42.  Mr Ah-Weng argued that it was plain to Fu at the time the Agreement was made that Tang did not have the means to pay the additional premium and therefore the need to raise finance was envisaged. There are a number of difficulties with the argument.  Firstly, on Tang’s own case, he was able to secure the agreement of Mrs Lau to lend him HK$3 million without the need for the Title Deed.  Hence, the availability of the document was not a prerequisite for raising finance. 

43.  Secondly, the NA Clause prohibited against mortgaging or charging the Land.  An exception was made for a mortgage or charge of the Land as a whole, ie, not a part thereof, but only for the purpose of developing the Land.  At least arguably, this exception did not apply to raising funds to pay the additional premium.  Hence, the use of the Title Deed to secure a loan to pay the premium might contravene the NA Clause.

44.  Thirdly, the proposition that Tang was entitled to mortgage or charge the 2/F and the Roof together with the rest of the House for the purpose of his borrowing is quite unreasonable, and again militates against the Implied Financial Terms. 

45.  For these reasons, I have no hesitation in rejecting Tang’s case on the implied terms.

Interest

46.  Pursuant to the provisions of s.25 of the Money Lenders Ordinance, Cap 163 (“Ordinance”), there is a presumption that the Agreement is an extortionate transaction, and may be reopened by the court :

“Reopening of certain transactions

(1) Subject to section 24(2), where—

(a) proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan; and

(b) subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate,

the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit.

(2) For the purposes of this section, a transaction is extortionate if—

(a) it requires the debtor or a relative of his to make payments (whether unconditionally or on certain contingencies) which are grossly exorbitant; or

(b) it otherwise grossly contravenes ordinary principles of fair-dealing.

(3) Any agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds 48 per cent per annum shall, having regard to that fact alone, be presumed for the purposes of this section to be a transaction which is extortionate; but except where such rate exceeds the rate specified in section 24(1), the court may declare that any such agreement is not extortionate for the purposes of this section if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair.

(4) In determining whether a transaction is extortionate for the purposes of this section, regard shall be had to such evidence as is adduced concerning—

(a) interest rate prevailing at the time it was made;

(b) the factors mentioned in subsections (5) and (6); and

(c) any other relevant considerations.

(5) Factors applicable under subsection (4)(b) in relation to the debtor include—

(a) his age, experience, business capacity and state of health; and

(b) the degree to which, at the time of entering into the transaction, he was under financial pressure, and the nature of that pressure.

(6) Factors applicable under subsection (4)(b) in relation to the lender or other person by whom the proceedings are taken include—

(a) the degree of risk accepted by the lender, having regard to the nature and value of any security provided;

(b) his relationship to the debtor;

(c) whether or not a specious cash price was quoted for any goods or services included in the transaction; and

(d) where one or more other transactions are to be taken into account, the question how far any such other transaction was reasonably required for the protection of the debtor or the lender, or was in the interest of the debtor.

…”

[emphasis added]

47.  It is common ground that the stipulated interest rate of 60% p.a. was not the subject matter of negotiation between Fu and Tang.  Instead, it was suggested by Ko and was simply accepted by the parties.

48.  The stipulated interest is presumed to be extortionate under s.25(3) of the Ordinance.  Indeed, it exceeded the 48% p.a. threshold by a significant margin.  In light of the evidence that the interest was not discussed between the parties, it is very difficult to see why the court should not interfere in the matter to do justice between the parties. 

49.  There is no evidence of the prevailing interest rate (see s.25(4)).  Apart from the facts set out above, and that the parties were not very sophisticated middle-aged individuals, there is little evidence of the matters identified in s.25(5) and (6).

50.  Mr Tang argued that it was a very risky venture for Fu and that such risk reflected in the high interest rate.  On the other hand, Fu stood to obtain a valuable property with a total investment of about HK$2.68 million.  Regrettably, there is no evidence of the interest rate offered by Yi Fu or Wing Lun which might serve as references.

51.  Further, Mr Tang’s argument about the risk assumed by Fu is not premised on any evidence from her.  The court has no information concerning her financial circumstances or the alternative use in which she might have put her funds.  The argument is therefore of limited assistance. 

52.  I have no difficulty accepting Mr Ah-Weng’s submission that Tang was not a person of means and ill afford to pay 60% interest on the loan.  This is self-evident from the circumstances of the case.

53.  Despite these difficulty circumstances, I am persuaded that the transaction should be reopened.  I accept Mr Ah-Weng’s proposal to adopt the commercial interest of prime plus 1%, which in the low interest rate environment which has prevailed for many years is not an ungenerous rate.

Set off

54.  Quite fairly, Mr Tang had agreed to a set off between the loan and the rental value of the 2/F and the Roof.  Such value had been agreed at HK$9,000 per month.

The amount of loan

55.  It is surprising that, in light of Fu’s evidence, the claim that she is entitled to repayment of the entire HK$1,446,495 remains on foot (see para 7 above).  The claim over the Balance is entirely unmeritorious.  I am unable to see how the furnishing cost (including the acquisition of electrical appliances) for the 2/F can be regarded as “construction expenses” as contended by Mr Tang.  I reject this claim.

Disposal[4]

56.  In the premises, I give judgment in favour of Fu against Tang and Leung jointly and severally in the sum of HK$1.4 million with interest at prime rate(s) plus 1% calculated from the following start dates until today and thereafter at judgment rate(s) until payment, subject to the deduction of rental value of the 2/F and Roof at HK$9,000 per month from 15 May 2013 to the date Fu delivered vacant possession thereof to Tang.

Date	Amount (HKD)
19 October 2011	300,000
8 February 2012	300,000
3 May 2012	200,000
7 August 2012	200,000
11 October 2012	200,000
10 December 2012	100,000
7 January 2013	100,000
	Total: 1,400,000

57.  Fu do return to Tang the Title Deed upon full payment of the judgment sum with interest.

58.  The Counterclaim (not pursued by Tang) is dismissed.

59.  The costs of this action (including the Counterclaim and any costs previously reserved) be paid by the Defendants to Fu, to be taxed if not agreed.  I declined to grant a certificate for 2 counsel given the simplicity of these matters. 

60.  Last but not least, I am grateful to counsel for their assistance.