CHAN WAI KEUNG LAWRENCE v. AU CHI MAN ALBERT AND OTHERS

HCA 418/2020

[2021] HKCFI 2096

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 418 OF 2020

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BETWEEN

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D E C I S I O N

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A. INTRODUCTION

1.  This is the Plaintiff’s appeal against a Master’s decision striking out his claim on lawful means conspiracy against D5.  The key issue is whether the Plaintiff has pleaded a case that D5 was a co-conspirator whose predominant intention was to injure the Plaintiff economically, and not a mere bona fide purchaser for value, who simply did a bad business deal and was otherwise ignorant of whatever conspiracy that might be afloat.

B.  BACKGROUND

2.  The Plaintiff and D1 were business partners.  D2 and D3 are (i) the wife and son, respectively, of D1; and (ii) the shareholders of D4.  D5 was a purchaser of the subject properties from the Plaintiff.

3.  On 23 November 2015, at a consideration of $1,980,000, the Plaintiff became the owner of Lot Nos. 1475, 1485 and Section B of Lot No. 1504 in DD 118, Yuen Long and the buildings, messuages and erections thereon, if any (“the Properties”). 

4.  On 19 May 2016, the Plaintiff entered into an “all-monies” mortgage charging the Properties to D4 as security for a loan of $2,000,000 from D4 (“the Mortgage”).  D4 was introduced by D1.  The Plaintiff says that D1 did not disclose the “conflict of interest” (ie his relationship to D2-D4).  The Plaintiff disputes the validity of the loan and Mortgage.

5.  On 27 February 2019, the Plaintiff executed a Power of Attorney appointing D1 as his agent to dispose of the Properties.

6.  D5 (as purchaser) entered into a preliminary sale and purchase agreement (“PSPA”) to purchase the Properties from the Plaintiff (with D1 acting pursuant to the Power of Attorney).  The consideration was $568,000.  D5 paid a 10% deposit by cheque, which was stakeheld by the Plaintiff’s then solicitor, Wong Fung & Co (“WF”).  The date of completion was to be 31 July 2019.

7.  The Plaintiff claims that the PSPA was entered into without his knowledge.  The then market value of the Properties was $3,000,000.

8.  The PSPA provided as follows:

(1) In Clause 2: The deposits shall be stakeheld by the vendor’s solicitors who may release the same to the vendor provided that the balance of the purchase price is sufficient to discharge the existing legal charge/mortgage; and

(2) In Clause 3: the Properties were to be sold to D5 free from encumbrances.

9.  The Power of Attorney was subsequently revoked by the Plaintiff on 11 June 2019 by a letter (“the Revocation”) issued by his then solicitors, Ka Lok Lawyers (“KLL”) to WF.

10.  The Revocation was not made known to D5 until 13 July 2019, when WF replied to D5’s solicitors, Peter WK Lo & Co (“PWKL”), after repeated requests by PWKL for delivery of title deeds for inspection purpose.

11.  In the light of the Revocation, WF told PWKL that WF had no authority to deal with further matters in relation to the transaction under the PSPA, not even to return the deposit to D5.

12.  Completion did not take place.  Two months later, on 30 September 2019, D5 commenced action in the District Court (DCCJ 5334/2019) for specific performance of the PSPA.  On 1 November 2019, D5 obtained default judgment with an order for specific performance against the Plaintiff (“Nov 1 Order”).

13.  In the minutes of judgment attached to D5’s summons for specific performance, D5 sought an order that the purchase price be applied to satisfy, not only (i) all outstanding liabilities or encumbrances relating to the Properties, but also (ii) the outstanding tax of the Plaintiff in the sum of $136,167; (iii) outstanding costs of the action and other necessary costs; and (iv) the residual balance, if any, be paid to the Plaintiff.

14.  There is no dispute that D5 did not know the outstanding Mortgage amount until he acquired the status to make enquiries thereof after the Nov 1 Order was granted.

15.  Upon learning that the purchase price was insufficient to cover the outstanding Mortgage, D5 took the view that it no longer accorded with common sense to execute the Nov 1 Order and take the Properties subject to the Mortgage.

16.  In the meantime, the Plaintiff had applied to set aside the Nov 1 Order (“Set Aside Application”), which D5 consented to on 4 May 2020.  The PSPA was cancelled and D5’s claim was discontinued.

17.  Despite the lengthy negotiation that took place in respect of the Set Aside Application, the Plaintiff never disclosed, and D5 or PWKL did not know, that the Plaintiff had commenced the present action on 20 April 2020, before D5 consented to the Set Aside Application. 

18.  It is the Plaintiff’s case that “the overt acts of D5 led to a strong inference that D5 was not advancing its own interests as a purchaser of the Properties unless D5 acted in combination with one or all of the other Defendants with a predominant intention to injure the Plaintiff economically by obtaining the Properties from the Plaintiff at extreme undervalue” (§§4 & 22 of the written submission of Mr Zhu, counsel for the Plaintiff).

19.  Upon D5’s application and after hearing the parties, the Master struck out the Plaintiff’s claim against D5 on the grounds that it disclosed no reasonable cause of action, was frivolous and vexatious and an abuse of process.  The claim against D5 was dismissed.

20.  This is the Plaintiff’s appeal.

C.  LEGAL PRINCIPLES

C1.  Appeal against a Master’s decision

21.  An appeal against a Master’s decision proceeds by way of rehearing.  The Judge considers the application afresh.

C2.  Striking-out application

22.   It is only in plain and obvious cases that the Court would consider striking out a claim.  Disputed facts are taken in favour of the party whose pleading is sought to be struck out.  The claim under attack must be obviously unsustainable, the pleadings must be unarguably bad and it must be impossible, not improbable, for the claim to succeed.  Even if a case only has a slim chance of success, this is not sufficient for striking out.  See Hong Kong Civil Procedure 2021, Vol 1, §18/19/4.

23.  A proceeding is frivolous when it is not capable of reasoned argument, without foundation or cannot possibly succeed.  A proceeding is vexatious when it is oppressive and/or lacks bona fides.  Vexatious implies the doing of something over and above that which is necessary for the conduct of the litigation, and suggests the existence of some spite, or desire to harass the other side to the litigation, or some other improper motive.  To decide that the litigant has been frivolous or vexatious and thus abused the process of the court is a serious finding to make, for it will generally involve bad faith on his part and one would expect the discretion to be sparingly exercised.  See Yifung Properties Ltd v Manchester Securities Corp, HCA 1341 &1359/2014, 19 October 2015, §§12-14, Au-Yeung J.

24.  A party should know his case and be in a position to identify the relevant evidence when he starts a claim.  It is an abuse of process for a party to start a case without a solid foundation hoping that evidence will turn up during the course of the proceedings, whether by discovery or otherwise. See Falcon Private Bank Ltd v Borry Bernard Edouard Charles Limited, HCA 1934/2011, 9 July 2012, §212, To J.

C3.  Pleading conspiracy

25.  Four elements must be pleaded to sustain a case of conspiracy: Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537, per Ma CJHC (as he then was) at §17:

(1) The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(2) The intention to injure the plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(3) The acts that were carried out pursuant to the agreement and the stated intention.

(4) The damage caused to the plaintiff.

26.  In relation to the 1^st element, conspiracies are usually concealed, so the existence of an agreed mechanism can only be inferred from overt acts.  Nevertheless, the formulation of a party’s cause of action should clearly and cogently be made in the pleadings.  It should not be left to an exercise of drawing inferences: Pido v Compass Technology, §25.

27.  In relation to the 2^nd element, intention to injure must be pleaded.  Although intention could be a matter of inference, the facts and circumstances must be examined to see what inferences could be drawn.  Jackson Xu Zhao Ze v Tsai Tim Yuen, CACV 117/2013, 10 April 2014, §5.

28.  In JSC BTA Bank v Ablyazov (No. 14) [2020] AC 727, §6, Lord Sumption and Lord Lloyd-Jones JJSC stress that the 4 established economic torts[1] have been carefully defined to avoid “trespassing on legitimate business activities or imposing any wider liability than can be justified in principle”.  In respect of lawful means conspiracy, a distinction is drawn between deliberately injuring the plaintiff in the “absence of just cause” or “legitimate interest”, and exercising of a right to advance one’s own interest by lawful means albeit the foreseeable consequence of which is to damage the interest of others:

“10. What is it that makes the conspiracy actionable as such? To say that a predominant purpose of injuring the claimant in the one case and the use of unlawful means in the other supply the element of unlawfulness required to make a conspiracy tortious simply restates the proposition in other words. A more useful concept is the absence of just cause or excuse, … A person has a right to advance his own interests by lawful means even if the foreseeable consequence is to damage the interests of others. The existence of that right affords a just cause or excuse. Where, on the other hand, he seeks to advance his interests by unlawful means he has no such right. The position is the same way and the means used are lawful but the predominant intention of the defendant was to injure the claimant rather than to further some legitimate interest of his own. This is because in that case it cannot be an answer to say that he was simply exercising a legal right. He had no interest recognised by the law in exercising his legal right for the predominant purpose not of advancing his own interests but of injuring the claimant. In either case, there is no just cause or excuse for the combination.” (underline added)

29.  In relation to the 3^rd element, the gist of the tort of conspiracy is not the conspiratorial agreement alone, but that agreement plus the overt act causing damage.  An overt act is one which shows that the conspiratorial agreement has already been made.  Allegations of knowledge, common purpose and intention (which are not acts) cannot alter the lack of a proper plea of overt act with the aforesaid characteristics.  Such allegations also have to be viewed with some caution, because, when the mass of particulars pertaining to them are examined, it can be seen that they involve piling one layer of inference on top of another in order to obtain the end product.  See Jackson Xu Zhao Ze, HCA 902/2011, 22 May 2013, §§12-13, DHCJ Winnie Tam SC, following Aktieselskabet Dansk Skinsfinansiering v Wheelock Marden & Co. Ltd [1994] 2 HKC 264, 272C-G, 273B-C.

30.  There are no acts or means that are in themselves unlawful, so dishonesty is not an element of lawful means conspiracy.  Accordingly, the reliance of Mr Jevons Chan (counsel for D5) on Take Point Investment Ltd v Ngai Lok Kei [2020] HKCFI 1709, at §104; and ADS v Wheelock Marden (cases of unlawful means conspiracy), which require fraud or dishonesty to be pleaded with utmost particularity, is not necessary.

31.  The origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made, or when or where other conspirators were recruited.  It is not necessary that every overt act is done by every conspirator, but the act must be done pursuant to the conspiracy.  Nor is it necessary for the conspirators to join the conspiracy at the same time, but the parties to it must be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the act complained of. In most cases, it will be necessary to scrutinise the acts relied upon in order to see what inferences can be drawn as to the existence or otherwise of the alleged conspiracy.  Pak Win Investment Ltd v Chung Yuet Sheung Lorrain (unrep, HCA 419/2011, 9 February 2012), at §15, DHCJ Au-Yeung (as she then was), following Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271 (CA).  Pak Win was a case on unlawful means conspiracy but the principle should equally apply.

32.  The pleader has to plead at least one overt act which is the act of all the alleged conspirators or, failing that, a number of overt acts which include at least one act on the part of each conspirator.  If the pleader fails to do that, the plea is liable to be struck out altogether or as against some or one of the defendants.  See ADS v Wheelock Marden, p272B-D, Bokhary JA (as he then was).

33.  In reality, conspiracy is by its nature clandestine and difficult to uncover, so quite often proof is not readily obtained.  Hence, the averments of conspiracy cannot be too precise.  In an application to strike out a conspiracy claim, the court will look upon such an application with care, but at the same time bear in mind that those allegations that are not properly particularized will be oppressive to the defendant when the case goes to trial. The broad question for the court is whether, from the pleaded facts, it can be argued that the defendant sufficiently knows the plaintiff’s case on the conspiracy that they have to meet.  See Chan Shu Chun and anor v Dr Kung Yan Sum and ors (unrep, HCA 832/2014, 18 May 2017), DHCJ Marlene Ng (as she then was), at §107.

C4.  Reliance on inference

34.  Inferences are matters of evidence and cannot substitute material facts in pleading.  Speculations and conjectures are impermissible in pleadings as the bases upon which inferences are invited to be drawn: Jackson Xu Zhao Ze (CA), §3.11.

D.  THE AGREEMENT BETWEEN 2 OR MORE PERSONS

35.  It takes at least two to conspire.  However, just on the issue of an “agreement”, the Plaintiff is unable to point to the relationship between D5 on the one hand and D1-D4 on the other, hence only reserving the right to plead further after discovery (amended statement of claim “asoc”, §21A).  All that Mr Zhu can say is that “as long as it is probable that D5 conspired with anyone from D1-D4, (for example, D1), the Plaintiff should have a valid claim against D5”.  Such a stance violates all rules on pleading conspiracy.

36.  The asoc pleaded that D1-D4 joined in the conspiracy at the time of the PSPA.  Why it was at that point and what the role of each of D1-D4 was in establishing or carrying out that conspiracy are not pleaded.

37.  Similarly, the Plaintiff reserves his right to plead more “acts and means” carried out by D1-D5 “pursuant to and in furtherance of the conspiracy after discovery” (asoc, §29C).

38.  The allegation of conspiracy cannot get off the ground.

E.  THE INTENTION TO INJURE

39.  According to D5, the intention to injure could only be inferred from D5’s overt acts.

F.  THE OVERT ACTS OF D5 AS PLEADED

40.  D5 signed the PSPA as the purchaser, with D1 signing on the PSPA on behalf of the Plaintiff and WF being appointed as vendor’s solicitors (“Overt Act 1”).

41.  The PSPA expressly included Clauses 2 and 3, both of which were confirmed by D5 by its signature on the PSPA (“Overt Act 2”).

42.  Between the signing of the PSPA and the order for specific performance, D5 never by itself or through its solicitors made specific inquiry as to whether the balance of the purchase price was sufficient to discharge the Mortgage (“Overt Act 3”). (asoc, §23C)

43.  D5 applied for an order for specific performance of the PSPA in DCCJ 5334/2019 (“Overt Act 4”). (asoc, §24)

44.  D5 did not inform the Court in DCCJ 5334/2019 about the exact outstanding amount of principal and interest payable for redemption of the Mortgage while making the specific performance application (“Overt Act 5”). (asoc, §27)

45.  D5 did not inform the Court whether WF received or stakeheld the 10% deposit that D5 had paid (“Overt Act 6”). (asoc, §28)

46.  When the Plaintiff applied to set aside the order for specific performance, without explaining how D5 discovered that the purchase price was not sufficient to discharge the Mortgage, D5 agreed to set aside the order for specific performance and discontinued all of its claim against the Plaintiff with regard to the Properties, without claiming any costs (“Overt Act 7”). (asoc, §28B)

47.  With regard to Overt Act 1, I am unable to draw any negative inference of any kind.

48.  With regard to Overt Acts 2 and 3, as a matter of law, there is no legal principle or conveyancing practice which requires the purchase price of a property to be sufficient to discharge the existing mortgage.  A vendor may sell at a loss and make up any outstanding mortgage with his own money.

49.  There is nothing sinister in a purchaser’s knowledge that there is an existing mortgage because existence of a mortgage can usually be ascertained from a land search.

50.  The purchaser has no positive obligation to raise requisitions or to inquire about the outstanding amount to be paid to discharge the Mortgage; the legal burden is on the vendor to show and give a good title: Strong & Associate Ltd v Flywin Co. Ltd [2002] 1 HKC 54, 60F-G.  If the vendor cannot give good title, the purchaser can refuse to complete and claim for return of deposit or damages.

51.  As far as mortgage payments are concerned, the standing conveyancing practice is for payment of purchase price to be split between the vendor and the encumbrancers to discharge all encumbrances: Kensland Realty Ltd v Whaleview Investment & anor [2002] 1 HKC 243, 248E-H.

52.  D5 was merely adopting the standard conveyancing practice in relation to discharge of the Mortgage.  There is nothing in the asoc to show that such behaviour fell within the realm of absence of just cause or outside the realm of legitimate interest as described in JSC BTA Bank.

53.  Further, even if D5 had wanted to ask about the outstanding Mortgage, he would not have been able to get the answer.  D5 had been trying to contact the vendor through WF, yet there had been no reply. 

54.  Worse still, as reflected in a letter issued by KLL (then solicitors of the Plaintiff) dated 28 December 2019, the Plaintiff had prohibited disclosure of information relating to the Mortgage. 

55.  The fact remained that D5 only acquired knowledge of the outstanding Mortgage after the Nov 1 Order was granted. 

56.  Overt facts 2 and 3 could not give rise to an inference that D5 had a predominant intention (and an agreement with one or more of D1-D4) to injure the Plaintiff.

57.  Mr Zhu relies on “evidence outside the asoc” to reinforce the inference that D5 was engaged in a conspiratorial scheme.  I need not be bothered about the evidence that related solely to D1.  The evidence relating to D5 was that D5 had not inspected the Properties after signing the PSPA, made haphazard requisitions through its solicitors, did nothing to prepare for the completion and did not seek return of the deposit.

58.  With respect, taken at the highest, such evidence outside the asoc is far from suggesting that there was a conspiracy or any intention to injure the Plaintiff.

59.  The other piece of evidence was that the purchase was at an undervalue, with an intention to resell for profit (“the Scheme”).  Nevertheless, at §22 of the asoc, the Plaintiff only pleaded that D1 (not D5) must have known that the price of $568,000 was an extremely low price.  Mr Zhu frankly admitted to the Master that the Plaintiff could not plead D5’s knowledge of the undervalue as it was not a material fact accessible to the Plaintiff.

60.  Mr Zhu also contended before the Master that D5’s knowledge as to undervalue “can only be proved in trial when all the evidence is presented and under cross-examination”.

61.  With respect, the 2 preceding paragraphs show that the Plaintiff has started a case without solid foundation, hoping that evidence will turn up during the course of the proceedings.  It is a clear example of abuse of process: Falcon Private Bank, §212.

62.  Further, the intention of resale, not being pleaded, is an assumption and mere speculation which should be disregarded.

63.  In any case, the Scheme was illogical and incomprehensible:

(1) Mr Zhu invites the Court to draw the inference that “D5 was not concerned that the sale might fall through”.  However, that was directly contradicted by the fact that D5 applied for specific performance “promptly” (using the vocabulary of Mr Zhu) within 2 months of the due date of completion.

(2) If D5 had intended to reap a profit on re-sale, why did he give up specific performance despite getting a court order already?

(3) Why would D1-D4 need to sell the Properties at “extremely low price” to D5 first and then re-sell it at high “market value”? D1-D4 could have simply sold at high “market value” and profited therefrom. That would at least spare the need to pay legal costs and stamp duty twice, or to share “profit” with D5.  There was no suggestion that D5 would share the profits on resale with other Defendants either.

64.  In addition, the conspirators (whoever they might be) had put a lot of hurdles in their own path:

(1) The conspirators would have known from the outset that the purchase price was insufficient to discharge the existing Mortgage.  Hence there could never be completion because Clauses 2 and 3 of the PSPA could never be complied with.

(2) D5 included in the minutes of judgment in DCCJ 5334/2019 detailed provisions on priorities in the application of the balance of the purchase price, which did not only involve the Mortgage, but also payment of outstanding taxes of the Plaintiff.

65.  The analyses of Overt Acts 2 and 3 illustrate that the Plaintiff’s case on conspiracy is based on assumptions and layers of inferences piled one on top of another which cannot reasonably be drawn.  There is nothing to tip the balance in favour of an intention to injure the Plaintiff, let alone a predominant one.

66.  With regard to Overt Act 4, D5 (like any bona fide purchaser) was entitled to seek specific performance when the Plaintiff failed to complete.

67.  With regard to Overt Acts 5 and 6,

(1) As D5 indisputably acquired knowledge of the outstanding Mortgage sum only after the Nov 1 Order was obtained, D5 could not have informed the District Court in advance.

(2) It is difficult to see why D5 needed to inform the District Court whether or not WF was stakeholding the deposit. It is never the Plaintiff’s case that WF was part of the alleged conspiracy.

68.  With regard to Overt Act 7, it is difficult to understand how D5’s abandonment of DCCJ 5334/2019 had evinced an intention to injure the Plaintiff (not to mention a predominant one) because:

(1) It is never the Plaintiff’s case that litigation in the District Court was part of the conspiratorial agreement. 

(2) D5’s abandonment of the District Court claim was entirely consistent with what a bona fide purchaser would do when it found out that it was not in its commercial interest to pay the outstanding Mortgage on top of the purchase price.  To the contrary, it would be way more in line with an intention to injure the Plaintiff if D5 had elected to resist the Plaintiff’s Set Aside Application, when it made no commercial sense to do so.

69.  In summary, none of the Overt Acts, taken individually or together, could give rise to an inference of an agreement to injure the Plaintiff.

G.  DAMAGE TO THE PLAINTIFF

70.  The Plaintiff has not lost the Properties and remains the registered owner after DCCJ 5334/2019 was settled.  

71.  The only damage suffered is pleaded in §30A of the asoc, namely, that “the Plaintiff was forced to spend time and cost, as well as having to suffer mental distress, to deal with the proceedings in DCCJ 5334/2019 and to apply to set aside the Nov 1 Order.  The amount of the loss and damage is subject to Court assessment.”

72.  At this hearing, Mr Zhu abandoned the claim arising out of “mental distress”.

73.  What is left is thus time and cost relating to DCCJ 5334/2019 and the Set-Aside Summons.  Such damage ought to have been dealt with by an order for costs in the DCCJ 5334/2019.  The Plaintiff made no such claim for damages when negotiating the settlement in the District Court proceedings.  In fact, the Plaintiff deliberately failed to serve the writ in this case at the time of the negotiation.  To make this head of claim now by a separate action in the Court of First Instance is an abuse of process.

H.  CONCLUSION

74.  The statement of claim was amended once after the strike-out summons was issued.  There is still no reasonable cause of action disclosed as the Plaintiff is unable to show what the conspiracy was, who were involved, how inferences as to intention could be drawn from the Overt Acts, or what the damage was.  To say that D5 sufficiently knows the Plaintiff’s case on conspiracy is far from the truth.

75.  The claim against D5 is frivolous as it has no foundation and cannot possibly succeed.  It was drafted with the hope of evidence coming up in the course of the proceedings and claims for damages which could have been sought in the District Court proceedings.  It is an abuse of process.

76.  I therefore dismiss the appeal.  On a nisi basis, costs of the appeal should be to D5, summarily assessed at $61,759.

77.  I thank counsel for their assistance.