TANG HING KWONG AND ANOTHER v. JOHN DAVID ANDREW IP AND ANOTHER

HCA 7927/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 7927 OF 2000

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1. I have before me two appeals lodged by the defendants against two orders of Master S Kwang both dated 17 February 2014 granting in each instance leave to the plaintiffs to amend the Statement of Claim. The basic facts and the nature of the amendments in the two actions are materially the same. For the sake of convenience, in what follows, I shall focus on the amendments of the Statement of Claim in HCA 7927 of 2000. However, my reasoning and conclusion apply mutatis mutandis to the amendments of the Statement of Claim in HCA 7928 of 2000.

Summary of facts in HCA 7927 of 2000

2. The following brief summary of facts is taken from the plaintiffs’ Amended Statement of Claim.  They do not represent any findings by the court.  Whether they can eventually be proved by the plaintiff can only be determined at the trial.

3. The defendants were at all material times a firm of practising solicitors in Hong Kong.

4. The plaintiffs were the purchasers of a property known as the Ground Floor, 280A Wang Toi Shan, Wing Ning Lei, Toi Shan Wing Ling Li Lot Nos 36 and 37 in Demarcation District No 111, Yuen Long, New Territories (“the Property”).  The vendor of the Property was a company known as Endenne Development Limited (“the Vendor”).

5. At all material times the Vendor was under the control of a person known as Fung Ping Yan (“Fung”), who was also a clerk employed by the defendants and his responsibilities included generating business for the defendants.

6. By a provisional sale and purchase agreement dated 29 May 1997 (“the Provisional Agreement”), the Vendor agreed to sell and the plaintiffs agreed to purchase the Property at the price of HK$1,250,000.

7. It was expressly provided in the Provisional Agreement that the Vendor and the plaintiffs would separately instruct the defendants to act in the sale and purchase of the Property.

8. As a matter of fact, the Vendor and the plaintiffs did instruct the defendants to act, and the defendants did act, for both of them in the sale and purchase of the Property, including the drafting and execution of the formal sale and purchase agreement dated 11 June 1997 and the assignment dated 21 July 1997.

9. The plaintiffs were not aware of the relationship between Fung and the Vendor and between Fung and the defendants, and the defendants did not inform the plaintiffs of such relationship while acting for them in the purchase of the Property.

10. Subsequently, the plaintiffs discovered that the title of the Property was defective, in that a number of title deeds and documents, namely, a “No‑Objection” letter, an approval letter for authorising redevelopment, a certificate of exemption in relation to building works, a certificate of exemption in relation to site formation works, and a certificate of exemption in relation to drainage works (hereinafter collectively referred to as “the Documents”), all purportedly issued by the District Lands Officer, Yuen Long, were forged documents.

11. The Documents were provided by Fung on behalf of the Vendor to the defendants as proof of title to the Property.

12. As a result of the defective title, the plaintiffs have not been able to re‑sell the Property and have suffered loss and damage, including loss of the purchase price of the Property, costs and expenses incurred in the purchase of the Property, loss of the use of the sale proceeds of the Property (had the plaintiffs been able to re‑sell the Property), and interests paid to the mortgagee bank.

Nature of proposed amendments

13. In the original Statement of Claim dated 8 August 2000, the plaintiffs’ claims against the defendants were based on breach of contract and breach of the duty of care at common law.  In particular, it was alleged in paragraph 5 thereof that the defendants failed to:

“… perform due diligence and/or to discover and/or to advise the Plaintiffs that the subject property had been built without proper authority and therefore was and is an unauthorised building work at all material times subject to an Order for Demolition pursuant to Section 24 of the Building[s] Ordinance, Cap.123”.

Some particulars of the alleged breach of contract and negligence were given under paragraph 5.  It is of note that in the original Statement of Claim, there was no reference to the relationship between Fung and the Vendor, or between Fung and the defendants, and there was no claim raised for breach of fiduciary duty owed by the defendants to the plaintiffs.

14. The amendments introduced by the plaintiffs in the Amended Statement of Claim are substantial.  In particular, the plaintiffs have:

(i) pleaded the relationship between Fung and the Vendor, and between Fung and the defendants;

(ii) alleged that they had no knowledge, and the defendants had failed to inform them, of such relationship;

(iii) raised a case against the defendants for breach of fiduciary duty;

(iv) expanded on the particulars of breach of duties (contractual, tortuous and/or fiduciary); and

(v) included further heads of loss and damage.

Defendants’ objections to the amendments

15. The defendants rely on the following grounds in opposition to the amendments of the Statement of Claim:

(1) the substantial nature of the amendments;

(2) the lateness of the amendments and absence of any explanation for the delay;

(3) the proposed amendments do not disclose any case of breach of fiduciary duty on the part of the defendants;

(4) the plaintiffs have suffered no loss and damage as a result of the alleged breach of fiduciary duty;

(5) some of the amendments are not material facts upon which the plaintiffs rely for their claims;

(6) the proposed amendments attempt to add a new cause of action which was time barred as at the date of the application to amend;

(7) the proposed amendments do not fall within the exceptive provisions of Order 20, rule 5(5) of the Rules of the High Court; and

(8) the defendants would suffer prejudice if the amendments were to be allowed.

16. At the hearing of the appeals, Mr Leo Remedios (for the defendants) made it clear that his main ground of objection to the amendments proposed by the plaintiff is that they do not disclose any case of breach of fiduciary duty on the part of the defendants, ie ground (3) above, but that if the court is against him on this ground the defendants will contend that the new cause of action based on breach of fiduciary duty is time barred and should not be allowed to be raised. 

17. In what follows, I shall first consider whether the proposed amendments disclose any reasonable cause of action for breach of fiduciary duty on the part of the defendants and whether the plaintiffs have suffered any loss or damage as a result of the alleged breach of fiduciary duty (grounds (3) and (4) together).  After that, I shall consider the question of time bar (grounds (6) and (7) together).  Lastly, I shall consider the remaining grounds of objection advanced by the defendants.

Whether the amendments disclose any reasonable cause of action for breach of fiduciary duty and whether the plaintiffs have suffered any loss or damage as a result of the alleged breach of fiduciary duty

18. As I understand it, Mr Remedios’ arguments are based on two propositions.  First, it is said that there was no “actual” conflict of interest on the part of the defendants in acting for both the Vendor and the plaintiffs in this case because the plaintiffs knew, and agreed, that the defendants would act for both parties.  Second, in so far as any “potential” conflict of interest is concerned, it is said that the plaintiffs can no longer complain about such potential conflict of interest because the transaction has been completed.  It is argued by Mr Remedios that in the case of a “potential” conflict of interest (as opposed to an “actual” conflict of interest), the client may, in appropriate circumstances, seek an injunction to restrain the solicitor from continuing to act during the currency of the retainer, but once the retainer has come to an end there can no longer be a potential conflict of interest.

19. For the purpose of deciding whether the proposed amendments ought to be refused because they do not disclose any reasonable cause of action for breach of fiduciary duty and/or the plaintiffs have suffered no loss or damage as a result of the alleged breach of fiduciary duty, the test is whether the claim based on the proposed amendments is bound to fail.  While the court is entitled to have regard to the merits of the case, it should do so only when the merits are readily apparent, and are so apparent as not to require prolonged investigation: see Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at paragraph 25, per Cheung JA.

20. In so far as actual conflict of interest is concerned, it is true that, under the Provisional Agreement, the plaintiffs knew, and agreed, that the defendants would act for both the Vendor and the plaintiffs in the sale and purchase of the Property.  However, according to the plaintiffs, they were not informed by the defendants, and did not know, that the Vendor was owned and controlled by a staff of the defendants, ie Fung.  It seems to me at least arguable that the plaintiffs’ consent to the defendants acting for both the Vendor and them was not an informed one such that the defendants would be absolved from their obligation not to act in circumstances where there was a conflict of interest on their part.

21. In so far as potential conflict of interest is concerned, I do not consider that it is relevant only during the currency of the retainer, but becomes irrelevant once the retainer has come to an end.  It is certainly open to the plaintiffs to contend, as they have done in paragraph 4F of the Amended Statement of Claim, that the existence of a potential conflict of interest affected the conduct of the defendants while acting for them in the purchase of the Property leading to a breach of fiduciary duty owed to the plaintiffs.  Whether the defendants did act in a manner in breach of fiduciary duty is a matter which can only be determined at the trial after the court has received all relevant evidence adduced by the parties.

22. In relation to both matters, Mr Lin (for the plaintiffs) relies heavily on certain observations made by Rogers VP and Barma J (as he then was) in Ngo Tai Hong v John David Andrew Ip and Andrew Patrick Willis trading under the style or firm name of Ip and Willis, Solicitors, CACV 12/2006 (30 March 2007).  The Court of Appeal overturned the judgment of Reyes J given in HCA 7929/2000 after the trial of (inter alia) an action brought by Ngo Tai Hong, the purchaser of another property in the same development (namely, the second floor of the building in question) from the Vendor, against the defendants raising allegations similar to those raised by the plaintiffs in the present action.  Reyes J found that the defendants were not liable to the purchaser in negligence.  The Court of Appeal ordered a re‑trial of the purchaser’s claim against the defendants.

23. In the course of giving the leading judgment of the Court of Appeal, Rogers VP stated that following:

“22. In looking at the matter as a question of whether there was a loss by reason of the failure to advise on a potential conflict of interest, it appears to me that the importance and significance of the conflict of interest has been entirely overlooked. Quite apart from the fact that Rule 5C is of no assistance in this matter, there was clearly a very strong conflict of interest by reason of the fact that the defendant firm was acting for a member of the staff of its own firm. The notes in Chapter 7 of the Hong Kong Solicitor’s Guide to Professional Conduct, 1995 edition, made that abundantly clear. When it is considered that Fung was not simply an office worker but somebody engaged to generate business the matter takes on a further dimension. In the context of a case like this it appears to me futile to suggest that there was any real distinction between a company which was owned by the member of the staff and his wife and the staff himself. The fact that the plaintiff might have been aware on the date that the Sale and Purchase Agreement was signed that Fung was a member of the staff of the defendant is insufficient to render the situation as not being one of conflict.

23. The notion that there was no conflict of interest because the contract had already been concluded by the time the plaintiff approached the defendant firm to act on his behalf is so aberrant that it merits little comment. It is the solicitor’s function to protect a purchaser and make sure the purchaser obtains what he has contracted to obtain. There is inevitably a close relationship between the solicitor and a member of his staff. That is clearly demonstrated in this case by the answer given by Willis to his own counsel. By acting for both parties in the transaction the defendant firm put itself in a position where it was highly likely that it would not protect the purchaser in the manner it should. Would the defendant, for example, make the requisitions as to title which should be made? Would it scrutinise the documents in the way it should? Would it scrutinise and verify what the vendor was saying in the way that it should?

24. It is clear from Willis’ own evidence and that of the defendant firm’s clerk, Chan, that the plaintiff was not advised as to the conflict which clearly existed. The plaintiff’s knowledge that Fung was employed by the defendant firm and that the defendant firm acted for the vendor was in no way sufficient to put the plaintiff on notice of the difficulties and dangers involved in such a situation. It was the defendant firm’s duty to advise the plaintiff of the difficulties that may arise particularly in the situation where the defendant firm was taking instructions from a person who was employed to bring in business and thus to whom the firm was beholden, at least to some extent and whose word Willis was prepared to accept without even making a note of what was said.

25. In my view it is not a question of advice which should have been given to the plaintiff that he might seek separate representation, it was a question of advice that he should seek separate representation and that was not given. In the absence of proper advice it was thus a case where the defendant firm had no business acting for the plaintiff. It was not a simple case of negligence: it is a case of breach of contractual and fiduciary duty in failing to advise the plaintiff that he should seek independent advice.

26. Following on that, the question then arises as to what would have been the position had the defendant firm not acted for the plaintiff but told the plaintiff that he had to seek representation elsewhere. On the findings of fact by the judge it appears to me to be impossible for this court to reach a concluded view….

28. The question that falls for consideration is what are the chances that if the plaintiff had been represented by independent solicitors that the documents would have been revealed to be forgeries.  That is a question which this court cannot answer on the facts found by the judge.  In my view this court has no option but to set aside the judgment of the court below and remit the matter for retrial in the light of the judgment of this court.”

24. In his separate, concurring, judgment, Barma J stated the following:

“30. … I would add that, apart from not having been shown the relevant form of agreement required by Rule 5C(4), the judge was also not referred to paragraph 7.01 of the Hong Kong Solicitor’s Guide to Professional Conduct, which states that a solicitor must not act where his own interests conflict or are likely to conflict with the interests of a client or potential client. As paragraph 1 of the commentary makes clear this principle applies equally where a partner or a member of the solicitor’s staff is so interested. In the circumstance therefore, there was no basis on which Mr Willis should have acted for the plaintiff. Had Mr Willis acted in accordance with his obligations he would have been bound to decline to act for the plaintiff. What would have followed had he taken that course is, as my Lord the Vice President points out, not capable of being answered on the findings of fact made.

31. I would also add that even if Mr Willis could, in principle, have acted for both parties, it remained his duty, in my view, to draw the plaintiff’s attention to the potential conflict of interest between himself and the vendor, which was controlled by Fung.  Simply to include a term in the sale & purchase agreement to the effect that the plaintiff was free to employ his own solicitors, without any further explanation of the potential for a conflict of interest to arise, fell far short of what was required.”

25. Mr Remedios argues that the above observations of the Court of Appeal are not binding on me, in light of what was said by Ribeiro PJ in FAMV 40/2007 dismissing the defendants’ application for leave to appeal to the Court of Final Appeal against the said judgment of the Court of Appeal. At paragraph 5 of the Determination, Ribeiro PJ stated as follows:

“It is important to note that the Court of Appeal ordered a new trial of the entire action to take place before a different court. Thus, while it is true that the Court of Appeal expressed its views relating to liability for breach of fiduciary duty in apparently uncompromising language, it is apparent, as will no doubt be appreciated by the Judge at the re-trial, that such comments were intended to be merely interlocutory and that the retrial is to proceed de novo and independent of any views previously expressed. A judgment will be reached on the evidence and submissions there presented.”

26. If the aforesaid observations of the Court of Appeal are not binding on the trial judge hearing the re‑trial of the action in HCA 7929/2000, it stands to reason that they are also not be binding on the trial judge in another action where the facts and evidence would necessarily not be the same.  Be that as it may, I am concerned with the question of amendments only, not the trial of the action.  Whatever may be the strict legal position, the strong observations expressed by the Court of Appeal are obviously matters to which I can have regard.  Moreover, the plaintiffs’ claims herein may be stronger than those of the purchaser in HCA 7929/2000 in one respect, in that the plaintiffs here say that they were unaware of the relationship between the defendants and Fung at all material times, whereas the purchaser in HCA 7929/2000 was apparently aware of such relationship at the time of the signing of the sale and purchase agreement.

27. Since I am only dealing with the question of amendments, it would not be appropriate for me to express any firm view regarding the merits of the plaintiffs’ claim.  Overall, I do not consider that the proposed amendments can be objected to on the basis that they do not disclose a reasonable cause of action for breach of fiduciary duty against the defendants, or that the plaintiffs have suffered no loss or damage as a result of the alleged breach of fiduciary duty.

Limitation

28. It is not in dispute that generally speaking, a statement of claim may not be amended to add a new cause of action after the relevant period of limitation current at the date of issue of the writ has expired, subject to (inter alia) an exception that such amendment may be allowed “if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment” under Order 20, rule 5(5) of the Rules of the High Court.

29. There is some debate before me as to whether the plaintiffs’ proposed amendments will be to add a new cause of action (namely, breach of fiduciary duty).  It is not necessary for me to reach any conclusion on this issue, because I consider it to be reasonably clear that any new cause of action for breach of fiduciary duty raised by the plaintiffs in the Amended Statement of Claim arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action. In passing, I ought to add that both parties have proceeded on the assumption or basis that the cause of action for breach of fiduciary duty, if it is to be regarded as a new cause of action, is now time barred, subject to the court’s power to allow such new cause of action to be raised under Order 20, rule 5(5) of the Rules of the High Court.

30. It is well established that the words of Order 20, rule 5(5) of the Rules of the High Court are not to be narrowly construed and they should be given a broad and liberal interpretation in order to attain the objective of the rules: see Leung King Fook v Eastern Worldwide Co Ltd (No 2) [1997] 1 HKC 524 at 528 per Litton VP (as he then was).  In particular, as demonstrated by the judgment of the Court of Appeal in that case, it would be a wrong approach to focus on the additional averments which the plaintiffs need to make to establish the new cause of action.  Instead, one should look at the matter broadly, and apply a degree of common sense in judging whether the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action.

31. In this regard, one should also have regard to whether the effect of the proposed amendment, if allowed, will be to oblige the defendant, after expiration of the relevant limitation period, to investigate facts and obtain evidence of matters which are completely outside the ambit of, and unrelated to those facts he could reasonably be assumed to have investigated for the purpose of the unamended claim, or to embark upon investigating a new claim which arises out of facts which he would not previously have been concerned to investigate: see BP plc v Aon Ltd [2006] 1 Lloyd’s Rep 549 at paragraphs 52 to 55 per Colman J.

32. In the present case, the plaintiffs in the original Writ of Summons, specially indorsed with the Statement of Claim, advanced a case of breach of contract and negligence against their former solicitors while acting form them in the purchase of the Property.  The crux of the complaint was that the defendants failed to properly investigate the title of the Property and advise the plaintiffs accordingly.  In the Amended Statement of Claims, the plaintiffs allege, in addition, that by reason of the relationship between the defendants and Vendor (through an employee of the defendants, ie Fung) the defendants were in a conflict or potential conflict of interest situation and the defendants acted in breach of fiduciary duty owed to the plaintiffs by acting for both the Vendor and the plaintiffs in such situation.  New particulars of (inter alia) breach of fiduciary duty have been pleaded in paragraph 4F of the Amended Statement of Claim which are based on those additional allegations.

33. In my view, the new cause of action in the present case arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action.  Also, it does not seem to me that the effect of the amendments in the present case will be to require the defendants to investigate facts or matters which are completely outside the ambit of, and unrelated to those facts they could reasonably be assumed to have investigated for the purpose of the original claims, or to investigate a new claim which arises out of facts which they would not previously have been concerned to investigate.

34. Accordingly, I consider that I have a discretion to grant leave to the plaintiffs to make the proposed amendments under Order 20, rule 5(5) of the Rules of the High Court notwithstanding that the effect of the amendments will be to add a new cause of action after the relevant period of limitation current at the date of issue of the writ has expired.

Other objections

35. The defendants have raised other objections to the proposed amendments, namely, the substantial nature of the amendments, the amendments are not material facts upon which the plaintiffs rely for their claims, delay and prejudice.

36. It is true that the proposed amendments are substantial, but that of itself is not a sufficient reason to refuse to grant leave to the plaintiffs to amend.

37. The defendants’ objection that the proposed amendments are not material facts upon which the plaintiffs rely for their claims is, it would seem, based on the same considerations in support of the objection that the amendments do not disclose any reasonable cause of action for breach of fiduciary duty and/or the plaintiffs have not suffered any loss or damage as a result of the alleged breach of fiduciary duty.  In this connection, the defendants also argue that the plaintiffs’ allegation of conflict or potential conflict of interest on the defendants’ part requires one to go behind the veil of incorporation of Endenne Development Limited.  That seems to me to be too narrow a view of the matter, and I can do no better than referred to the observations of Rogers VP at paragraph 22 of the judgment of the Court of Appeal in Ngo Tai Hong v John David Andrew Ip and Andrew Patrick Willis trading under the style or firm name of Ip and Willis quoted above.

38. I bear in mind the defendants’ complaints of delay and prejudice which the defendants may suffer in consequence of the plaintiffs’ proposed amendments being allowed, as mentioned in paragraphs 81 to 93 of Mr Remedios’ skeleton submissions.

39. However, I am not persuaded that any or all of the matters relied on by the defendants are sufficient to cause me to deny the plaintiffs the opportunity to have the real question in controversy between the parties being properly determined at the trial.  In all the circumstances, I consider that the master was correct, in the exercise of his discretion, to grant leave to the plaintiffs to amend the Statement of Claim, and I would exercise discretion in the same way.

Disposition

40. For the foregoing reasons, I dismiss the defendants’ two Notices of Appeal dated 3 March 2014 with costs to the plaintiffs, to be taxed if not agreed.

41. Lastly, it remains for me to thank counsel for their helpful submissions to the court.