XCHRX CHENG CHAU YIN ANN v. CHENG KWOK FAI SIMON AND OTHERS

HCA 3839/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3839 OF 1999

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J U D G M E N T

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1. This is a summons brought under Order 14 Rules of High Court for summary judgment. It derives from an action for damages for loss suffered by the purchaser of a flat when the transaction failed.

Background

2. The plaintiff, called Ann Cheng (Ann Cheng) came to know the 1st defendant, a property developer called Simon Cheng (Simon Cheng). They became friends and she entrusted him with sums of money for the purpose of real estate investment.

3. In 1997 Simon Cheng represented to her that a company which he controlled call Full Country Development Limited (Full Country) was the registered owner and developer of a building under construction in Wan Fung Street Kowloon (the Wan Fung project). When complete it would comprise a number of residential flats.

4. In reliance on these representations Ann Cheng agreed to purchase one of the units off the plan (the unit) for $4m. $1,010,000.00 out of the funds held on her behalf by Simon Cheng was earmarked for the down payment. It was agreed between them that the balance of her contribution (about $700,000.00) would be settled between them privately. She entered into a provisional agreement for sale and purchase of the unit (the provisional agreement) between herself as purchaser on the one part and a company called Keep Point Development Limited (Keep Point) as vendor on the other part. Simon Cheng represented that Keep Point was acting in the capacity of agent of Full Country, and he signed on its behalf. Ann Cheng employed the 2nd defendant, Messrs Albert Hwang, David Chung & Co (Albert Hwang) solicitors, to act for her in the transaction. Simon Cheng employed the 3rd defendant, Joseph Chan trading as Ho & Chan (Ho & Chan) to act for the vendor. Ho & Chan prepared the agreement for sale and purchase (the formal agreement) which was signed by Ann Cheng as purchaser and by Simon Cheng beneath the chop of Keep Point as vendor.

5. Following her approach for finance the National Commercial Bank Limited (the Bank) agreed to lend Ann Cheng the sum of $2.3m towards the purchase price of the unit on the security of an equitable mortgage of the unit. The Bank disbursed this amount to Albert Hwang who deducted their costs and disbursements of $102,660.00 and paid the balance of $2,197,340.00 to Ho & Chan to be held as a stakeholder for the parties pending completion of construction of the Wan Fung project when the settlement of the transaction could be completed. But Ho & Chan paid out this money as part of a larger total sum in accordance with instructions of Simon Cheng to a third party.

6. The sale of the unit to Ann Cheng failed. Keep Point was not, as represented by Simon Cheng, the agent of Full Country but the sole proprietor and developer of the Wan Fung project. There was no authority given or vested in Simon Cheng to execute the provisional and formal agreements for and on behalf of Keep Point, the vendor named in the agreements. Although on at least one copy of the formal agreement Simon Cheng was described as director, he held no such office. Keep Point had not agreed to sell the unit, had no knowledge of any purported sale, had received no money for or on account of any sale, and declined to complete the transaction. Albert Hwang registered the formal agreement. Keep Point then sued Ann Cheng for a declaration that it be declared null and void, and the registration be cancelled. By consent the Court made an order to that effect. The Bank demanded a refund of the amount advanced to Ann Cheng of $2.3m plus interest and in compliance with that demand Ann Cheng paid in settlement a total of $2,442,673.27.

7. Ann Cheng then issued proceedings for the recovery of the said sums of $1,010,000.00 and $2,442,673.27 from Simon Cheng whom she named as 1st defendant and $2,442,673.27 from Albert Hwang and Ho & Chan named as 2nd and 3rd defendants. She obtained judgment by default against Simon Cheng for the full amount claimed, interest and costs. That judgment has not been satisfied in whole or in part. Simon Cheng cannot be found and is sought by the Commercial Crime Bureau to assist in enquiries concerning possible fraud.

The plaintiff's claims against the 2nd and 3rd defendants

8. Ann Cheng alleges that Albert Hwang were in breach of the contract to provide professional services to her and, or in the alternative, were negligent and in breach of a duty of care owed to her, thereby causing the loss she has suffered. She further alleges Ho & Chan were in breach of a duty of care owed to her thereby causing the loss she has suffered.

9. Albert Hwang deny they were in breach of contract or that they were negligent and in breach of a duty of care owed to Ann Cheng. Ho & Chan deny they owed Ann Cheng a duty of care or that they were negligent as to give rise to a breach of duty of care.

10. Both defendants deny liability in the sum claimed or at all.

The Order 14 Summons

11. Ann Cheng seeks summary judgment from Albert Hwang and Ho & Chan upon the grounds that neither has any defence to her claim. Both defendants say that in each case they have an arguable defence and her suit should proceed to trial. They seek a dismissal or alternatively unconditional leave to defend.

12. These are the matters I am required to resolve.

The plaintiff's case against the defendants

13. Counsel for Ann Cheng Mr Chan argues that Albert Hwang as her solicitors to represent her in the purchase of real estate in Hong Kong owed her a clear and uncontrovertable duty to protect her interests in the transaction. She suffered loss because they clearly failed to discharge that duty in a number of ways, namely:-

(a) by failing to check the authenticity of the signatory to the provisional agreement and formal agreement by not carrying out the customary searches and enquiries;

(b) having made to Ho & Chan the standard request for the documents of title did not follow that up when the request was ignored, and thereby failed to establish the authenticity of the vendors title and, after that, whether or not there was any defect in that title;

(c) having received from the Bank the mortgage advance paid that out without ensuring that their client's interests were protected by applying the safeguards already referred to or obtaining her authority to release the same.

14. Mr Chan further argues that Ho & Chan had a duty of care to their client's ostensible purchaser because there was proximity between themselves and the purchaser and it was reasonably foreseeable that a failure by them to conduct themselves professionally would be likely to cause her loss. Ho & Chan were in clear breach of that duty when they paid out money paid to them conditionally without establishing that they were doing so in compliance with those conditions. Further and in any event, having within the body of a statutory declaration undertaken to Ann Chen not to release funds except in accordance with the formal agreement failed to comply and were thereby in breach of that undertaking.

The defendants' defences

15. Mr Chong for Albert Hwang has not sought to contest the existence of a contractual duty and duty of care owed by them to the client they represented, but argues they were not in any event in breach. Ho & Chan represented that they acted for the registered owner of the Wan Fung project and thus the flat, and there was no cause to suspect they did not. For the same reason there was no cause to suspect the signatory was not, as he appeared on the face of the provisional and formal agreements, authorized to commit the registered owner to the transaction. There being apparently no query as to Keep Point's status, Keep Point being in fact the registered owner of the Wan Fung project and the vendor as recorded in the provisional and formal agreements there was no further obligation to establish the vendor had good title. And completion being some time away given the stage of construction reached, there was no urgency in examining title for the purpose of ascertaining any defect and requisitioning for its removal. That could and would come later. Indeed it would have been premature to do so any earlier given that an essential ingredient, the occupation permit, would not have then been available.

16. Whether their client Ann Cheng expressly gave authority or not there was no question but she was contractually committed to pay the money released by the Bank to Ho & Chan, and in doing so on her behalf they were doing no more than fulfilling their responsibility to her.

17. In all respects they complied with the terms of a scheme devised and approved by the Law Society which laid down the procedures and steps in a conveyancing transaction where the flat in question is part of a building still in the course of construction. The money was paid upon receipt of and in reliance on Ho & Chan's undertaking to hold and not release except in accordance with the terms of the formal agreement and the Law Society's scheme. That the funds were not in fact channelled in compliance with the undertaking was not a matter over which they had control as to establish a breach of contractual or fiduciary duty.

18. Mr Chong says that Ann Cheng's unfortunate loss was not caused by Albert Hwang's negligence and failure to perform but by Simon Cheng's fraud or Ho & Chan's breach of their undertaking or a combination of these.

19. Ho & Chan elected not to attend the hearing before me. As a consequence I have not had the benefit of any argument on their behalf. Their principal Joseph Chan filed an affidavit in which he set out the history of a relationship between Full Country and Keep Point. With respect to him I do not see how this is relevant or otherwise provides assistance. He does not address what is an important issue, namely, how it came to be that Ho & Chan disbursed the funds received from Albert Hwang at the direction of Simon Cheng and in apparent contravention of their undertaking, beyond that he said in paragraph 20:- "At all material times I believed that [Simon Cheng] had authority to sell flats in [the Wan Fung project] ........ The monies (sic) received from [Ann Cheng] were distributed according to [Simon Cheng's] instructions."

20. A rather extraordinary admission in the pleadings is that Ho & Chan in their statement of defence confess never to have acted for Keep Point, yet were purportedly their solicitors handling their conveyancing in the sale of the unit and undertaking on their behalf.

The Outcome

21. First, the claim against Albert Hwang.

22. It is trite law but nonetheless worth repeating verbatim from Sihombing v Wilkinson's Hong Kong Conveyancing Law & Practice at Chapter VI paragraph [305]:

"Although the vendor may have a duty to show and give good title, the solicitor acting for the purchaser has a duty to check the title offered for the protection of his client, and the mere fact that the vendor's solicitor maintains that he has shown and given good title does not exonerate the purchaser's solicitor from responsibility for forming his own independent judgment and raising all necessary requisitions."

23. Commonsense dictates that this includes but is not necessarily limited to a search of the Land Registry records, a request for and careful perusal of the documents of title and, where the vendor is an incorporated company, a search of the company records and an enquiry (not of the company itself but its nominated solicitors) to satisfy himself that the company is authorized to sell the property in question and the signatory has power to bind the company.

24. There is little or no indication that any of this was done. In particular, having asked for the documents of title, Albert Hwang did not follow up their request when it was apparently ignored. And there was no enquiry as to the signatory's authority or authenticity. A little more persistence on their part would surely have uncovered the leading role Simon Cheng was playing, without authority. As it was Simon Cheng's fraud (and there can be no other reasonable explanation but that he committed a fraud) went undetected. It is, as I find, no argument to say that a solicitor's obligations do not require him to insure against his client's loss against fraud. Quite so, but the whole purpose of the enquiry that must be undertaken is to minimize any actual or potential loss including that occasioned by criminal conduct. Non compliance with a standard request to supply documents of title for perusal should have set alarm bells ringing, but apparently did not. Had steps been taken to pursue this it is very likely the fraud would have been uncovered before Miss Cheng was to suffer the loss associated with the disbursement of the Bank advance, which she now seeks to recover.

25. Although there are other areas of complaint raised and argued, on this fundamental issue alone I am satisfied there was a clear dereliction of contractual and tortious duty on the part of Albert Hwang, who have failed on the evidence adduced to satisfy me that there are triable issues which should be dealt with at trial. There is, as I find, no defence to their liability.

26. Secondly, Ho & Chan.

27. In the case White and Another v. Jones and Others [1993] 3 All ER 481 the Court of Appeal in UK considered whether or not a solicitor could be in breach of a professional duty and liable to a party with whom he has no contractual relationship, in this particular case, beneficiaries in the estate of a former client whose instructions to write a new will were not carried out in time before he died.

28. The Court said the test was threefold, namely:-

(a) was it foreseeable that the affected party would suffer financial loss;

(b) was there a sufficient degree of proximity between the solicitor and the affected party;

(c) was it just and reasonable that notwithstanding the absence of a contractual relationship liability should be imposed in negligence?

29. In this case it is difficult to see how an argument against any of these propositions would be sustainable. And none was mounted.

30. In his affidavit at paragraph 13 (speaking of Simon Cheng's instructions to him) Joseph Chan said:-

"He instructed me that as part of the settlement agreement he had been authorized to sell units in [the Wan Fung project] as agent for Keep Point. Under the agreement he was to discharge the mortgages on the respective units (from the sale proceeds) and, after a certain period of time, forward the balance of the sale proceeds to Keep Point. [Simon Cheng] instructed me that he was authorized to use the sale proceeds as he pleased in the interval and that any profit earned during this period was to his account.

31. No solicitor worth his salt would accept such an unlikely proposition as that underlined above without at least checking first. As it was, by apparently complying with those instructions, he put his firm in clear breach of the undertaking given to Ann Cheng, on the strength of which the Bank funds were paid out on her behalf. She suffered the loss she now seeks to recover as a direct result of that.

32. So, Ho & Chan also have failed on the evidence adduced to satisfy me that there are triable issues which should be dealt with at trial. There is, as I find, no defence to their liability either.

Damages

33. There is no argument before me against the quantum of Ann Cheng's calculated loss, and I find that to be the amount to which she shall be entitled.

Orders

34. There will be judgment in favour of the plaintiff against the 2nd and 3rd defendants in the sum of $2,442,673.27, interest thereon at 12.86% per annum from 8th March 1999 to this date and thereafter at the judgment rate.

35. Costs, nisi at first instance, shall be to the plaintiff, taxed if not agreed.