MILLION (FAR EAST) LTD v. MANLEY BEST (INTERNATIONAL) FOOD LTD AND ANOTHER

HCA 2429/2017

[2018] HKCFI 2193

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2429 OF 2017

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JUDGMENT

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A. THE APPLICATIONS

1.  I have before me the following two summonses:

(1)  the Plaintiff’s summons dated 13 November 2017 for summary judgment against the 1^st and 2^ndDefendants pursuant to Order 14, rule 1 of the Rules of the High Court (“RHC”) for HK$11,138,251.37 (“Price Claim”), or alternatively damages for breach of agreement for HK$11,138,251.37 or an amount to be assessed (“Breach of Agreement Claim”), or further or in the alternative for interim payment under Order 29, rules 10 to 12 of the RHC for HK$11,138,251.37 or an amount thatthe Court shall consider appropriate (“Plaintiff’s Summons”);and

(2)  the 2^ndDefendant’s summons dated 2 January 2018 for summary judgment on her counterclaim against the Plaintiff (“Counterclaim for Title Deeds”) pursuant to Order 14, rule 1 and Order 14A of the RHC for the delivery up of title deeds by the Plaintiff to the 2^nd Defendant (“2^nd Defendant’s Summons”).

B.   BACKGROUND

B1.   Parties

2.  At all material times, the Plaintiff was a supplier of frozen meat.  The 1^st Defendant was a purchaser of the Plaintiff’s frozen meat.  The 2^nd Defendant was a director and majority shareholder of the 1^st Defendant. 

3.  The 2^nd Defendant was at all material times and still is the beneficial owner of a property situated at Flat G, 20/F, Block 8, No 1124, King’s Road, Kornhill Gardens, Hong Kong (“Property”). It is common ground that the Property is under the Home Ownership Scheme operated by the Hong Kong Housing Authority.

B2.   Plaintiff’s case

4.  The Price Claim is solely against the 1^stDefendant.  The PriceClaim is for the sum of HK$11,138,251.37 (“Debt”) being the outstandingprice of frozen meat sold and delivered by the Plaintiff to the 1^stDefendant between 3 January 2017 and 8 May 2017.[1]

5.  The Breach of Agreement Claim is against both the 1^st and 2^ndDefendants.  The events leading to the Breach of Agreement Claim startedwith a meeting in around late January 2017 or early February 2017 between the 2^ndDefendant and the Plaintiff to discuss the amount then due from the 1^stDefendant to the Plaintiff for the frozen meat supplied.[2]  On the Plaintiff’s pleaded case,[3] at that meeting, the 2^nd Defendant:

“ (i) requested the Plaintiff to extend credit to 1^stDefendant and to give her more time to make payment of the amounts then outstanding and due to the Plaintiff;

(ii) suggested using [the Property] to secure credit with the Plaintiff and extension for payment of amounts due to the Plaintiff, and

(iii) informed the Plaintiff that she will come into substantial sums of money as she was planning to sell her shareholding in the 1^stDefendant to some third party buyer.”

6.  It appears not in dispute that on or around 10 March 2017, the 2^nd Defendant repaid the remaining balance of the mortgage loan for discharge of the then mortgage of the Property (“Existing Mortgage”).[4]  The Plaintiff arranged its solicitors Messrs C L Chow & Macksion Chan to assist the 2^nd Defendant in the discharge of the Existing Mortgage, and to collect and pass the title deeds of the Property (“Title Deeds”) to the Plaintiff.[5]

7.  The Breach of Agreement Claim is based on a tripartite agreement in Chinese dated 29 May 2017 (the “Repayment Agreement”) made between the Plaintiff, the 1^st Defendant and the 2^nd Defendant.

8.  The main part of the Repayment Agreement is set out in full (and in the original language) below (with the “債權人” and “債務人” therein being the Plaintiff and the 1^stDefendant respectively):

「 鑒於：

(A) 截至簽署本協議當天，債權人與債務人雙方在此相互確認由於生意上的往來，債務人尚欠債權人金額為港幣 11,138,251.37元正 (“該債務”)。池麗嬋女士 (“池女士”) 為該物業 (以下定義) 的業主。

(B) 基於以上所述，各方經發好協商，就債務人向債權人償還港幣11,138,251.37元款項事宜，達成本協議如下：

1. 債務人同意於2017年9月18日或之前支付債權人港幣11,138,251.37元。

2. 雙方同意以以下方式清還港幣11,138,251.37元：-

2a) 債務人公司現已進行股權轉讓形式，將池女士股份60% 轉售予第三方，作價為港幣7000萬元。是次股權轉讓將於2017年6月8日成交，池女士將收到港幣2500萬，並於2017年7月14日收到第二期款項4500萬元

2b) 債務人及池女士同意於2017年6月8日或之前在上述收到港幣2500萬當中支付債權人金額港幣400萬元

2c) 債務人及池女士同意於2017年7月14日或之前在上述收到港幣4500萬當中支付債權人金額港幣7,138,251.37元

3.   如債務人於2017年9月18日未能向債權人清還該債務，池麗嬋女士同意於當天售賣位於英皇道1110–1128號康山花園8座20樓G室的物業(“該物業”) ，並給予周卓立陳啓球陳一理律師事務所不可撤銷的指示將該物業出售的收益在扣除所有有關銀行貸款 (如有) 之後全數交付予債權人，以作償還該債務的一部份。」

9.  It is the Plaintiff’s case[6] that:

(1)  by Recital (A) of the Repayment Agreement, the 1^stDefendant acknowledged the liability to pay the Debt to the Plaintiff;

(2)  by Clause 1 of the Repayment Agreement, the 1^stDefendant agreed to repay the Debt to the Plaintiff on or before 18 September 2017;

(3)  by Clauses 2(b) and 2(c) of the Repayment Agreement, the 2^ndDefendant[7] agreed to repay the Plaintiff the Debt in two tranches with the first tranche of HK$4,000,000 to be paid on or before 8 June 2017 and the second tranche of HK$7,138,251.37 to be paid on or before 14 July 2017; and

(4)  by Clause 3 of the Repayment Agreement, the 2^ndDefendant warranted that if the 1^stDefendant fails to repay the Debt to the Plaintiff by 18 September 2017, then she would sell the Property and pay the entire sales proceeds, less bank loans if any, to the Plaintiff as part repayment of the Debt.

10.  On 29 May 2017, the 2^ndDefendant also signed an authorization in English to authorize the Plaintiff’s solicitors to release the proceeds of sale of the Property in favour of the Plaintiff upon sale of the Property (the “Authorization”).

11.  The Authorization is set out in full (and in the original language) below:

“ Re: Flat G, 20^thFloor, Block 8, No.1124 King’s Road, Kornhill,Hong Kong

I, the undersigned, being the Vendor in respect of the sale of the above property, hereby irrevocably direct, request and authorise Messrs.C.L.Chow&Macksion Chan,or other solicitors concerned, to release the initial and further deposits, the net proceeds of thebalance of purchase price and the amount receivable by me under the apportionment account in respect of the above property by issuing cheques in favour of ‘Million (Far East) Limited’.

I further agree that I will not hold you responsible for any damages, losses and claims which I may suffer as a result of the said release under my direction and request.”

12.  The Plaintiff’s claims may be summed up as follows:

(1)  As against the 1^stDefendant[8]:

(i) the Price Claim for the Debt, based on frozen meat sold and delivered to the 1^stDefendant; or alternatively

(ii) the Breach of Agreement Claim, based on breach of Clause 1 of the Repayment Agreement, for damages equivalent to the Debt.

(2)  As against the 2^ndDefendant[9]:

the breach of Agreement Claim, based on breach of Clauses 2(b) and 2(c), and breach of Clause 3, for damages equivalent to the Debt or damages to be assessed. 

13.  In defence of the Counterclaim for Title Deeds, the Plaintiff contends that it did not intend the creation of any charge or mortgage of the Property.[10] The Plaintiff further contends that its possession of the Title Deeds constitutes a contractual lien to ensure the performance of the terms of the Repayment Agreement, in particular Clause 3 thereof (“Contractual Lien Defence”).[11]

B3.   Defendants’ case

14.  The Defendants:

(1)  deny the Price Claim and put the Plaintiff to strict proof of the frozen meat delivered (“Non-delivery Defence”);[12] and

(2)  deny the Breach of Agreement Claim on the ground that they had entered into the Repayment Agreement under the mistaken belief that the Debt is indeed the amount owed by the 1^stDefendant to the Plaintiff under the Price Claim (“Mistake Defence”).[13]

15.  The Defendants further contend[14] that:

(1)  the 2^nd Defendant’s obligation, if any, to pay the Plaintiff under Clauses 2(b) and 2(c) of the Repayment Agreement only arises if and only if the 2^nd Defendant was able to sell her shareholding in the 1^stDefendant which condition however did not materialize (“Conditional Agreement Defence”); and

(2)  Clause 3 of the Repayment Agreement amounts to an equitable mortgage over the Property which is in contravention of the Housing Ordinance (Cap 283) and is thus void and unenforceable (“Equitable Mortgage Contention”).

16.  The Defendants further rely on the Authorization and the Plaintiff’s possession of the Title Deeds in support of the Equitable Mortgage Contention and the Counterclaim for Title Deeds.[15]

17.  The Defendants deny the Contractual Lien Contention on the ground that the Title Deeds were delivered to the Plaintiff for the purpose of security.  They contend that even if the Plaintiff is allowed to artificiallylabel it as a lien, such a lien created by deposit of deeds in the case of land is however in the nature of a mortgage.[16]

C.   THE APPLICABLE PRINCIPLES

18.  The principles applicable on an application for summary judgment are clear and not in dispute:

(1) Once the plaintiff raises a prima facie sustainable case, the onus is then on the defendant to show that there is a triable issue or an arguable defence.[17]

(2) The defendant’s affidavit must condescend upon particulars, and state clearly and concisely what the defence is and what facts are relied on to support it.[18]

(3) A mere general denial that the defendant is indebted will not suffice unless the grounds on which the defendant relies as showing that he is not indebted are stated.[19]

(4) It is not appropriate for the Court to embark on a mini trial on affidavits and Order 14 is for clear cases, that is, cases in which there is no serious material factual dispute.[20]

(5) Should the Court grant the defendant conditional leave to defend, it also has power under Order 29, rule 10 to order the defendant to make an interim payment to the plaintiff.[21]

(6) If the question of law is clear and the Court is satisfied that it is really unarguable, leave to defend will be refused.[22]

(7) Where the Court is satisfied that there are no issues of fact between the parties, it would be pointless to give leave to defend on the basis that there is a triable issue of law, and thisis so even if the issue of law is complex and highly arguable.[23]

(8) It is otherwise if the issue of law is not decisive of all the issues between the parties or if the answer to the question of law is in any way dependent on undecided issues of fact.[24]

(9) Whether to order interim payment is an exercise of the court’sdiscretion. The test is essentially the same as that for grantingconditional leave to defend, namely whether the defence and/or counterclaim raised can be said to be shadowy.[25]

D.   THE ISSUES

19.  The issues before the Court are whether:

(1)  the Non-delivery Defence provides a triable issue or an arguable defence to the Price Claim in favour of the 1^stDefendant.

(2)  the Mistake Defence provides a triable issue or an arguable defence to the Breach of Agreement Claim:

(i) in favour of the 1^stDefendant, for breach of Clause 1 in failing to repay the Debt;

(ii) in favour of the 2^ndDefendant, for breach of Clauses 2(b) and 2(c) in failing to repay the Debt; and

(iii) in favour of the 2^ndDefendant, for breach of Clause 3 in failing to sell the Property to repay the Debt.

(3)  the Conditional Agreement Defence provides a triable issue or an arguable defence to the Breach of Agreement Claim, in favour of the 2^nd Defendant, for breach of Clauses 2(b) and 2(c) in failing to repay the Debt.

(4)  the Equitable Mortgage Contention provides a triable issue or an arguable defence to the Breach of Agreement Claim, in favour of the 2^ndDefendant, for breach of Clause 3 in failing to sell the Property to repay the Debt, and the basis in support of the Counterclaim for Title Deeds.

(5)  the Contractual Lien Defence provides a triable issue or an arguable defence to the Counterclaim for Title Deeds, in favour of the Plaintiff.

E.   DISCUSSION

E1.   The Non-delivery Defence

20.  The 1^stDefendant denies delivery of the frozen meat.  However, the 1^stDefendant has not even identified what frozen meat set out in the Plaintiff’s invoices has not been delivered but simply put the Plaintiff to strict proof.  I accept that it is a bare denial.

21.  On the other hand, the Plaintiff has only produced the relevantinvoices in support of the Price Claim.  It has not produced any documentary evidence, such as delivery notes or receipts, to prove delivery.

22.  Some of the invoices produced in fact bear a printed request for the 1^st Defendant to sign on the invoice to acknowledge receipt and fax it back to the Plaintiff within 3 days.  However, the Plaintiff has not produced any receipted invoice in support of the Price Claim.

23.  I accept that the 1^st Defendant has acknowledged the liability to pay the Debt to the Plaintiff under the Repayment Agreement (“Acknowledgement”). I also accept that the Acknowledgement directly supports the Breach of Agreement Claim.  However, the Price Claim is a different cause of action.  The Acknowledgement is not sufficient evidence in support of delivery under the Price Claim.

24.  I have also noted that the Defendants’ own evidence referred to:

(1)  various discussions between them and the Plaintiff since late January 2017 to extend the time for payment of the amount due from the 1^st Defendant to the Plaintiff for frozen meat sold and delivered to the 1^st Defendant (“Discussions”);[26]

(2)  various payments of the amount due from the 1^stDefendant to the Plaintiff for frozen meat sold and delivered to the 1^stDefendant by post-dated cheques issued by the 2^ndDefendant and an interim payment pursuant to the Discussions (“Payments”).[27]

25.  The Plaintiff submitted that in view of the Acknowledgement, the Discussions and the Payments, the Plaintiff does not have the additional burden to prove delivery of the frozen meat sold.[28]  The Plaintiff relies on the observation of DHCJ To in Asparouh Ianev Dimitrov v Dominic Tak Ming Lau HCA 1079/2015 (unreported, 25 October 2017), at paragraph 34, that the “onus on the plaintiff is only to discharge the burden of proof to a degree which is commensurate with the circumstances of the case” in support of its submission.

26.  However, the context of Asparouh is different. There, the proposition is basically that as against the transferor of funds, the transferee cannot dispute that the transferor is the owner of the funds, unless he can produce some evidence showing the contrary.  Similarly, a tenant who was led into possession of rented property cannot dispute his landlord’s title in the absence of some contrary evidence.  Here, the dispute is not about whether the Plaintiff is the owner of the frozen meat sold and delivered, but whether such frozen meat has been delivered at all.

27.  As held by the Court of Appeal in Ju Yan Di Emperor Genesisy v Yau Wai Han [2015] 1 HKLRD 822, at paragraphs 14 and 15, in a summary judgment application, the starting point is that the plaintiff must first demonstrate that the defendant has no defence.  There, in an action for repayment of loan, it was held that, for a start, the plaintiff must demonstrate that he had indeed lent the money to the defendant.  Here, in an action for the price of goods sold and delivered, for a start, the Plaintiff must demonstrate that it had indeed sold and delivered the frozen meat set out in the invoices to the 1^stDefendant.

28.  As the Plaintiff has not produced sufficient evidence in support of delivery, the Non-delivery Defence is sufficient in resisting summary judgment of the Price Claim from being entered.

29.  On the other hand, it is clear that the Non-delivery Defence is merely a shadowy defence in view of the following matters:

(1)  the finding that it is merely a bare denial;

(2)  the Acknowledgement;

(3)  the Discussions;

(4)  the Payments;

(5)  the Defendants’ failure to identify what frozen meat has not been delivered despite being informed by the Plaintiff as early as late January 2017 that the 1^st Defendant was owing about HK$10 million to the Plaintiff for frozen meat supplied by the Plaintiff;[29] and

(6)  the 1^st Defendant’s contention[30] that it has been victim of a fraud perpetrated by a third party known as Ms Lam Wing Shan (“Lam”) who caused the 1^st Defendant to sub-sell frozen meat at an undervalue to other parties is no defence to the Price Claim.  It is not the Defendants’ pleaded case that the Plaintiff colluded with Lam in the alleged fraud.  Although the 2^ndDefendant made a bare assertion in her affirmation that she “could not rule out the possibility that the Plaintiff was acting in collusion with [Lam][31] ”, it is trite that a mere vaguegeneral allegation of fraud without particulars is not sufficient in resisting an application for summary judgment.[32]

30.  Since the Non-delivery Defence is merely a shadowy defence, but for my decision in paragraph 43 below to award summary judgment against the 1^stDefendant under the alternative Breach of Agreement Claim for its breach of Clause 1 of the Repayment Agreement, I would have ordered the 1^stDefendant to make an interim payment in the sum of HK$10 million to the Plaintiff under the Price Claim.  Such payment appears sensible and desirable.[33]

E2.   The Mistake Defence

31.  As pointed out above,[34] the Mistake Defence is made on the basis that the Defendants had entered into the Repayment Agreement under the mistaken belief that the Debt is indeed the amount owed by the 1^st Defendant to the Plaintiff under the Price Claim (“Mistake”).

32.  It is the Defendants’ case that by reason of the Mistake:

(1)  the 1^st Defendant agreed to repay the Debt under Clause 1 of the Repayment Agreement;

(2)  the 2^nd Defendant agreed to repay the Debt in two tranches under Clauses 2(b) and 2(c) of the Repayment Agreement; and

(3)  the 2^ndDefendant agreed to sell the Property to repay the Debt under Clause 3 of the Repayment Agreement.

33.  It is the Defendants’ case that they were misled by Lam into making the Mistake.[35]  The Defendants have not suggested that the Plaintiff has also made the Mistake.  The Mistake is therefore a unilateral mistake.

34.  In my view, as a starting point, the Defendants have failed to condescend upon particulars to prove the Mistake. They have not identifiedwhich amounts in the invoices were mistaken.  Moreover, since the Mistakeis based on the assumption that the Debt exceeds the amount of frozen meat actually sold and delivered, the Mistake Defence is subject to the same matters set out in paragraph 29 above which render the Non-delivery Defence shadowy.

35.  Moreover, as the Defendants have signed the Repayment Agreement, they have to show that the Mistake entitles them to avoid the Repayment Agreement.

36.  As Ribeiro PJ stated in Ming Shiu Chung & Others v Ming Shiu Sum & Others (2006) 9 HKCFAR 334, at paragraph 84:

“ 84. …Reliance is universally placed on signatures appended todocuments by persons of full age and understanding as signifying the signatory’s assent or adherence to what the document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it enough to show that he signed without knowing its contents for the document to be disavowed … they are held to the documents which they havechosen to sign unless there is shown to be a recognized legal basisfor concluding that their apparent consent has been in some way vitiated or that the reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity.”

37.  There is however no equitable jurisdiction to set aside a contractwhere one party has made a unilateral mistake as to a fact or state of affairswhich is the basis upon which the terms of the contract are agreed, but that assumption itself does not become a term of the contract.[36]

38.  In Statoil ASA v Louis Dreyfus Energy Services LP (The Harriette N) [2008] EWHC 2257 (Comm), the parties had reached a compromise over the amount of demurrage due.  One party had made an offer, basing its calculations on a mistaken assumption as to the date the ship had completed its unloading.  The mistaken party was not entitled to relief even though the other party was aware of the mistake when it accepted the offer and decided to say nothing.  It is because the mistake was not a term of the contract.[37]

39.  In the present case, the assumption that the Debt is indeed the amount owed by the 1^st Defendant to the Plaintiff under the Price Claim is contained in Recital (A) of the Repayment Agreement. It is a recital rather than a term of the Repayment Agreement.

40.  The Mistake is not a mistake as to the terms of the Repayment Agreement.  The terms stated did not differ from what the Defendants intended.  There was merely a mistake as to facts which formed the basis upon which the terms were agreed.

41.  Hence, the Repayment agreement remains binding on the Defendants even if the Plaintiff was aware of the Mistake made by the Defendants.

42.  The Mistake Defence per se does not provide a triable issue or an arguable defence to the Breach of Agreement Claim.

43.  I find it appropriate to award summary judgment in favour of the Plaintiffagainst the 1^stDefendant under the alternative Breach of Agreement Claim for an amount equivalent to the Debt for its breach of Clause 1 of the Repayment Agreement.

44.  I now turn to consider whether the Conditional Agreement Defence and the Equitable Mortgage Contention may provide a triable issue or an arguable defence to the Breach of Agreement Claim in favour of the 2^nd Defendant.

E3.   The Conditional Agreement Defence

45.  This defence mainly turns on the construction of Clauses 2(b) and 2(c) of the Repayment Agreement, as quoted above and re-quoted below for ease of reference:

「 2b) 債務人及池女士同意於2017年6月8日或之前在上述收到港幣2500萬當中支付債權人金額港幣400萬元

2c) 債務人及池女士同意於2017年7月14日或之前在上述收到港幣4500萬當中支付債權人金額港幣7,138,251.37元」

46.  In gist, the 2^ndDefendant contends that she is only liable to make payment under Clauses 2(b) and 2(c) if and only if she has received the Share Sale Proceeds.

47.  The whole Agreement is to be considered since every contract is to be construed with reference to its object and the whole of its terms.[38]

48.  Before construing Clauses 2(b) and 2(c) of the Repayment Agreement, I take note that terms of the 2^ndDefendant’s sale of her shares in the 1^stDefendant (“Share Sale”) were also briefly set out in Clause 2(a) of the Repayment Agreement. 

49.  I accept that Clause 2(a) may not create a separate payment obligation on the 2^ndDefendant.  It may simply be in the nature of a preamble to the 2^ndDefendant’s payment obligation under Clauses 2(b) and 2(c).  It also may not create a separate obligation on the 2^ndDefendant to sell her shares. The suggestion in paragraph 16 of the Plaintiff’s Reply Points/Speaking Notes that the 2^nd Defendant has a separate obligation to sell her shares under Clause 2(a) is not expressly pleaded.  It also conflicts with the position taken by the Plaintiff in paragraph 30 of the Plaintiff’s Skeleton.

50.  The key words in both Clauses 2(b) and 2(c) are “在上述收到”(upon receipt of the abovementioned) and “當中支付” (to pay out of which).  The words “在上述收到” and “當中支付” quite clearly refer to the sale proceeds of the Share Sale (“Share Sale Proceeds”).  Such construction is supported by the payment schedule in Clauses 2(b) and 2(c), which tallies exactly with the payment schedule of the Share Sale, ie 8 June 2017 (in respect of HK$25 million) and 14 July 2017 (in respect of HK$45 million).

51.  Although receipt of the Share Sale Proceeds is not expressly made a condition precedent in the Repayment Agreement, it does not appear to be necessary.  In Astrazeneca UK Ltd v Albemarle International Corp[2011] EWHC 1574 (Comm), Flaux J observed at paragraphs 249 and 250:

“ 249. Whilst it is clear that, for performance of a provision in acontract to be a condition precedent to the performance of another provision, it is not necessary for the relevant provision to use the express words ‘condition precedent’ or something similar, nonetheless the court has to consider whether on the proper construction of the contract that is the effect of the provisions: see DRC Distribution Ltd v Ulva Ltd [2007] EWHC 1716 (QB) paragraph 39.

250.  … in the absence of an express term, performance of one obligation will only be a condition precedent to another obligation where … the first obligation must for practical reasons clearly be performed before the second obligation can arise ….”

52.  In Hong Jing Co Ltd v Zhuhai Kwok Yuen Investment Co Ltd [2013] 1 HKLRD 441, Cheung JA at paragraph 39.2 adopted the test for condition precedents as follows:

“ 39.2 The applicable test is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean ….”

53.  The Plaintiff submitted[39] that courts are generally reluctant to classify terms as condition precedent, and that clear words are required to be used if a term is to be construed as a condition precedent: Heritage Oil and Gas Ltd & Anor v Tullow Uganda Ltd[2014]2 CLC 61, at paragraph 33.  However, as mentioned in the same paragraph, the reason for the courts’ reluctance is to avoid depriving a party of a contractual right just because of a trivial breach which has little or no prejudicial effect on the other.  Here, the condition does not appear to be trivial.  It also has practical significance which is directly linked with the 2^ndDefendant’s ability to make payment.  Without receipt of the Share Sale Proceeds, the 2^ndDefendant did not appear to have the means to pay.

54.  The Plaintiff also submitted^[40] that receipt of the Share Sale Proceeds is not a condition precedent because it is not of such fundamentalimportance that the Repayment Agreement will never come into being if it does not materialize.  The Plaintiff cited Total Gas Marketing Ltd v Arco British Ltd & Others [1998] 2 Lloyd’s Rep 209 at page 215 in support of the above submission.  However, as mentioned on that same page, the effectof the failure of a condition precedent depends on the proper construction of the contract.  The only effect can be simply the suspension of the parties’ obligations.  Such proposition is trite: see Chitty on Contracts (32^nd ed) at paragraph 13-028.

55.  In the present case, it is at least arguable that the receipt of the Share Sale Proceeds must for all practical reasons materialize, otherwise the obligation to repay upon receipt of the sale proceeds and out of the sale proceeds cannot be fulfilled and hence cannot arise.

56.  There is no dispute that the Share Sale did not materialize and the 2^nd Defendant did not receive the Share Sale Proceeds.  Therefore, the obligation of the 2^nd Defendant to repay the Debt may not arise.

57.  In short, the Conditional Agreement Defence provides a triable issue or an arguable defence to the Breach of Agreement Claim, in favour of the 2^ndDefendant, for breach of Clauses 2(b) and 2(c) in failing to repay the Debt.

E4.   Equitable Mortgage Contention and Contractual Lien Defence

58.  The Equitable Mortgage Contention and the Contractual Lien Defence are closely connected. The Equitable Mortgage Contention is both a defence to the Breach of Agreement Claim, in favour of the 2^nd Defendant for breach of Clause 3, and the basis in support of the Counterclaim for Title Deeds. On the other hand, the Contractual Lien Defence is relied upon by the Plaintiff as a defence to the Counterclaim for Title Deeds.

59.  The matters set out in paragraphs 60 to 62 below are not in dispute.

60.  The Property is a property under the Home Ownership Schemeoperated by the Housing Authority.  As such, the conveyance and alienationof the Property is subject to the provisions of the Housing Ordinance.  Since the Director of Housing has not given prior approval, any mortgage or charge or other alienation of the Property, including any equitable mortgageor charge of the Property but excluding a contractual lien of the Title Deeds,shall be void by virtue of section 17B of the Housing Ordinance.

61.  The Plaintiff arranged its solicitors, Messrs C L Chow & Macksion Chan to assist the 2^ndDefendant in the discharge of the Existing Mortgage, and to collect and pass the Title Deeds to the Plaintiff (“Deposit of the Title Deeds”).[41]

62.  The Existing Mortgage was discharged on 10 March 2017, which is evidenced by a land search.[42]

63.  However, the following matters are hotly disputed by the parties:

(1)  the circumstances leading to the Deposit of the Title Deeds; and

(2)  the purpose of the Deposit of the Title Deeds.

64.  According to the 2^nd Defendant[43], in about late January or early February 2017, before she talked to the Plaintiff to ask for time for payment, Lam told her that she had already discussed with the Plaintiff and that they had come to an agreement that the Plaintiff would not press for payment if she was to mortgage the Property with the Plaintiff.

65.  On the other hand, according to the Plaintiff[44], before it talked to the 2^nd Defendant, its solicitors had advised it that as the Property fell under the Home Ownership Scheme operated by the Housing Authority, a charge or mortgage in favour of the Plaintiff without the consent of the Director of Housing would be void.  The Plaintiff was advised that it might be more viable for the 2^ndDefendant to guarantee that she would sell the Property and thereafter use the proceeds to pay the Debt.  The Plaintiff also denies that there was any discussion with Lam about using the Property as a security.[45]

66.  According to the 2^ndDefendant, thereafter, the 2^ndDefendant talked to Mr Wong Shek Bun (“Wong”), a director of the Plaintiff, on the phone. According to the 2^ndDefendant, he was told by Wong to mortgage the Property to the Plaintiff and not to sell it at the moment (按係我度，唔會賣住).[46]  Wong told the 2^ndDefendant he would “refer his solicitors” to her to discharge the Existing Mortgage so that the Property could be mortgaged with the Plaintiff.[47]

67.  On the other hand, according to the Plaintiff, Wong expressly told the 2^ndDefendant on the phone that the usual mortgage could not be made but she could guarantee to ensure that the proceeds of the sale of the Property would be used to pay the Debt.[48]

68.  The 2^ndDefendant relies on her WhatsApp message of 3 February 2017 which referred to her conversation with Wong about mortgage of the Property.  The Plaintiff seeks to explain it by saying that the 2^ndDefendant’s use of the word “mortgage” was due to her being a lay person and being ignorant.[49]

69.  On the other hand, the Plaintiff relies on the WhatsApp messages of its employee Ah Fung of 28 June 2017 and 3 July 2017 in which Ah Fung urged the 2^ndDefendant to sell the Property to support its contention that the Plaintiff has only acquired a contractual lien by the Deposit of the Title Deeds without any power of sale.[50]

70.  Consistent with its Contractual Lien Defence, the Plaintiff demanded the 2^ndDefendant to sell the Property on her own and release the net sale proceeds pursuant to the Repayment Agreement in its very first demand letter dated 19 September 2017.  However, according to the 2^ndDefendant, the Plaintiff did not seek to enforce its power of sale as a mortgagee because it knows that the mortgage created by the Deposit of the Title Deeds is void and unenforceable.[51]

71.  According to the Plaintiff, in order not to create any charge ormortgage in the Property, the Agreement and the Authorization were drafted to the effect that the 2^ndDefendant, not the Plaintiff, would be the vendor when the Property is realized.[52] However, the 2^ndDefendant questioned why the word “lien” does not appear in the Repayment Agreement or the Authorization at all if it was the intention of the Plaintiff to create a contractual lien.[53]

72.  The Plaintiff also relies on the fact that the Agreement has notbeen registered in the Land Registry to support its contention that there is no intention to create a mortgage, charge or any interest against the Property apart from acquiring a contractual lien over the Title Deeds.[54]

73.  Last but not least, inconsistent with the Equitable Mortgage Contention, in a letter dated 24 October 2017 from the 2^ndDefendant’s own solicitors, it was stated that the 2^ndDefendant had deposited the Title Deeds with the Plaintiff for the purpose of selling the Property. No assertion of mortgage or charge was made in that letter.  The 2^ndDefendant seeks to explain by saying that at the time “there was a confusion as to the arrangement of depositing the title deeds with the Plaintiff”.[55]

74.  From the wealth of authorities referred to me by the parties, the following propositions may be deduced:

(1)  Whether a document has the effect of creating a charge or mortgage is essentially a matter of construction of the relevant terms of the document.  The question is one of intention of the parties: Pine Enterprises Limited v Cyber Strategy Limited & Others HCA 1221/2006 (unreported, 14 March 2008), paragraph 151.

(2)  The deposit of title deeds as security creates an inference in favour of an equitable charge of the land.  That inference is however rebuttable.  If parties wish to do so, it is possible to make sure that a deposit of title deeds does not create a charge on the land: In re Wallis & Simmonds [1974] 1 WLR 391 at 398A and 399E.

(3)  That inference is not displaced if the deposit is accompanied by a document containing a written charge.  If the document contains no charge or is silent on that point, the inference must be weighed along with all other circumstances of the transaction rather than as a firm presumption of law requiring significant contrary evidence to disprove: North West Trust Co v West (1990) 62 DLR (4^th) 749 at page 7.

(4)  To determine intent, one must examine not only the terms of the transaction document but also all other circumstances including those before and after the transaction (filing a caveat after the transaction was held to be evidence of claiming an interest in land as contrasted to a mere interest in the certificate of title): North West Trustat page 7.

75.  Arguably at least, the Agreement and the Authorization contain no charge or are silent on the point.  Hence, whether the Deposit of the Title Deeds, the Agreement and the Authorization amount to an equitable mortgage or charge is fact-sensitive though the inference is in favour of an equitable charge rather than a lien.

76.  The Defendants apparently disagree that the deposit of title deeds as security merely creates an inference in favour of an equitable charge of the land.  They rely on the following proposition in paragraph 230.651 of Halsbury’s Laws of Hong Kong (2^nd ed):

“ The lien created by deposit of deeds in the case of land is, however, in the nature of a mortgage or charge”.

77.  The above proposition is also contained in paragraph 280.007 of Halsbury’s Laws of Hong Kong.  The footnote there contains the following helpful explanation on what “the lien created by the deposit of deeds” in that proposition in fact refers to:

“ This implied right of the mortgagee under an equitable mortgage created by the deposit of title deeds to retain the deeds is not a separate legal or common law lien: Re Molton Finance Ltd [1968] Ch 325, [1967] 3 All ER 843, CA (Eng).”

78.  Hence, it is quite clear that “the lien created by the deposit of deeds” contained in the proposition is not referring to the sort of contractuallien asserted by the Plaintiff but merely the implied right of the mortgagee under an equitable mortgage created by the deposit of title deeds to retain the title deeds.

79.  Thus in Re Molton Finance Ltd, Lord Denning MR opined at paragraphs 332 – 333 that:

“ It seems to me that when an equitable mortgage or charge is created by deposit of title deeds, there is an implied contract that the mortgagee or chargee may retain the deeds until he is paid. This implied contract is part and parcel of the equitable mortgage or charge. It is not a separable legal or common law lien. It has no independent existence apart from the equitable mortgage or charge.”

80.  Equitable mortgage or charge by deposit of title deeds and contractual lien are in fact mutually exclusive: see paragraph 280.027 of Halsbury’s Laws of Hong Kong and paragraph 22.61 of Goode on Commercial Law (5^th ed).  The Court will have to make a finding of either one or the other, but not both.

81.  The apparent absence of provisions in the Agreement and the Authorization enabling the Plaintiff to sell the Property also appears relevant.In Goode on Commercial Law cited by the Defendants themselves, it is stated at paragraph 22.20:

“ The legal effect of a contractual lien differs from that of a pledgein that the latter carries with it an implied power of sale upon thedebtor’s default, whereas a lien is in principle a right of detention only, so that the power of sale would have to be agreed.”

82.  The Defendants further raised a slightly different point in support of the Equitable Mortgage Contention, namely, that if the debtor agrees to segregate a particular fund and to pay the debt out of that fund, then an “inference may be drawn, in the absence of any contra indication”[56]that it was the parties’ intention that the creditor should have a proprietary interest in the segregated fund.  The Defendants submitted that this is exactly the situation of the Agreement and the Authorization.  Clause 3 of the Repayment Agreement provides for a guarantee by the 2^ndDefendant to sell the Property and use the proceeds to repay the Debt.[57]

83.  However, in the present case, there is contra indication.  It is the Plaintiff’s case that it wanted to avoid a charge or mortgage.

84.  Moreover, the above quoted passage in Swiss Bank was considered in Pine Enterprises, where DHCJ To stated, at paragraph 151, that ultimately the real test is to ascertain the intention of the parties to see whether a charge is created.

85.  As observed in Goode on Commercial Law:

“ 22.63 There are dicta which on a superficial reading suggest that an obligation on the debtor to apply the proceeds of his asset towards discharge of the debt, and not for any other purpose, creates an equitable charge not merely over the proceeds but over the asset itself. But the dicta must be taken in context and are not, it is submitted, intended to lay down any such rule, which would leadto great confusion. A security interest in an asset carries forwardto proceeds; a security interest in proceeds does not run backwards to the asset from which they derive. If it did, a creditor taking charge over book debts would automatically acquire a security interest in the trading stock the sale of which produced the book debts ….”

86.  Further, it is not entirely clear whether the Repayment Agreement, even coupled with the Authorization and the Deposit of the Title Deeds, does have the effect of segregating the proceeds of sale.

Conclusion on E4

87.  Despite the submissions from the Defendants, it remains quite clear that there are serious factual and legal issues to be determined under the 2^ndDefendant’s Summons on the Counterclaim for Title Deeds.  The 2^ndDefendant’s Summons is not suitable for resolution under Order 14 of the RHC.

88.  Despite the reference to Order 14A of the RHC in the 2^ndDefendant’s Summons, no reliance on Order 14A of the RHC was placed by the 2^ndDefendant in the course of submissions, whether written or oral.  No question of law has been formulated by the 2^ndDefendant for the Court’s determination pursuant to Order 14A of the RHC.  Moreover, inthe present case, as there are conflicting allegations of fact, the Order 14A procedure is not appropriate: Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co Ltd and Another (2003) 6 HKCRAR 222.

89.  It is clear that the outcome of the Counterclaim for Title Deeds would not affect the Breach of Agreement Claim.  The security component and the repayment component (including any agreement to sell the Property for making repayment) are two separate components in the Repayment Agreement.  Even if the Counterclaim for Title Deeds were upheld, avoidance of the security would not avoid the Defendants’ payment obligations under the Repayment Agreement: Yip Lau Yan Vinton v Tsang Wing Lam HCA 10967/1995 (unreported, 9 December 2010).

90.  On the other hand, the Equitable Mortgage Contention, though insufficient in supporting summary judgment on the Counterclaim for Title Deeds, does provide a triable issue or an arguable defence to the Breach of Agreement Claim, in favour of the 2^ndDefendant, for breach of Clause 3 in failing to sell the Property to repay the Debt.

91.  The Contractual Lien Defence provides a triable issue or an arguable defence to the Counterclaim for Title Deeds, in favour of the Plaintiff.

F.   DISPOSITION

92.  For the foregoing reasons, I make the following orders in respect of the Plaintiff’s Summons and the 2^ndDefendant’s Summons:

(1)  for the Plaintiff’s Summons:

(a) there be final judgment in favour of the Plaintiff against the 1^stDefendant for damages in the sum of HK$11,138,251.37 with interest at prime rate plus 1% from 19 September 2017 (first day of breach) until judgment, and thereafter at the judgment rate until payment;[58] and

(b) the Plaintiff’s Summons be dismissed as against the 2^ndDefendant; and

(c) the parties are directed to lodge with the Court and exchange their written submissions on costs within 21 days, to be dealt with on papers; and

(2)  for the 2^ndDefendant’s Summons:

(a) the 2^ndDefendant’s Summons be dismissed; and

(b) the parties are directed to lodge with the Court and exchange their written submissions on costs within 21 days, to be dealt with on papers.

93.  Lastly, it remains for me to thank Counsel for their assistance.