XCHRX EASTFAITH FINANCE LTD. v. LAU WAN FU JOHN

1998 HCA No. 8633

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Introduction

1. This is an application by the Defendant to strike out the Plaintiff's claim under Ord. 18 r. 19 of the Rules of the High Court or under the inherent jurisdiction of the court. It is said that these proceedings are frivolous, vexatious and an abuse of the court's process. The basis of that assertion is that the issue raised in these proceedings could be litigated in other proceedings brought by the Plaintiff which are currently before the court. All dates in this judgment are in 1995, unless otherwise stated.

The earlier proceedings

2. The proceedings which the Plaintiff, Eastfaith Finance Ltd. ("EFL"), has brought are HCA 205/96. Its claim in that action is as follows. Chung King Investment Ltd. ("CKIL") owned a flat in Ap Lei Chau. On 8th September, EFL agreed to lend the sum of $4.55m. to CKIL to be secured by a mortgage over the flat. Following the execution of the loan agreement and the mortgage, EFL's solicitors drew a number of cheques totalling $4.55m., less legal fees, an administration fee and interest. Two of the cheques were drawn in favour of a finance company and its solicitors in connection with the redemption of an earlier mortgage over the flat. The other two cheques were drawn in favour of the Defendant, John Lau, who was CKIL's solicitor. One cheque represented his disbursements and costs. The other cheque represented the balance of the loan. Those cheques were sent to Mr. Lau on 11th September. They were sent subject to Mr. Lau's undertaking to send various documents relating to the discharge of the earlier mortgage over the flat to EFL's solicitors within three days of Mr. Lau receiving them from the Land Registry, or by 11th November, whichever was the earlier.

3. Those four cheques were presented for payment on 11th and 12th September. However, the documents which Mr. Lau had undertaken to send to EFL's solicitors were not with the Land Registry. They were with the earlier mortgagee's solicitors. They did not send them to Mr. Lau. The result was that he was not able to send them to EFL's solicitors. In the circumstances, he was (albeit perhaps innocently) in breach of the undertaking which he had given to EFL's solicitors, and summary judgment under Ord. 14 was entered against him for breach of that undertaking for damages to be assessed.

4. The breach of that undertaking was not the only cause of action pleaded against Mr. Lau in the earlier proceedings. It was also pleaded that Mr. Lau was in breach of a duty which he owed to EFL not to forward the first two cheques to the earlier mortgagee's solicitors, and not to present the second two cheques for payment himself, until he had already sent to EFL's solicitors the documents which he had undertaken to send them. That duty is said to have arisen either because Mr. Lau was under a duty of care to EFL or because the sending of the cheques to him had been subject to a condition to that effect. Mr. Lau was given unconditional leave to defend EFL's claim based on that cause of action. The relief which is sought, apart from damages for breach of the undertaking which EFL has already been awarded subject to assessment, is the payment to EFL of the aggregate of the four cheques - though it may be said that EFL's true remedy for this cause of action is damages, the loss of the aggregate of the four cheques representing the measure of those damages. For present purposes, though, the significant feature about the two causes of action pleaded in the earlier proceedings is that they raise relatively short points concerning a solicitor's professional duty.

The problems with the earlier proceedings

5. However, the two causes of action in the earlier proceedings may not give EFL the relief which it wants, which is its $4.55m. back. The problem with the breach by Mr. Lau of his undertaking is that the consequence of that breach is simply that EFL's loan is unsecured. When EFL's damages for breach of the undertaking come to be assessed, it will be argued

(a) that the fact that EFL's loan is unsecured has caused EFL either no loss or only minimal loss of a kind which has not been pleaded, and

(b) that such loss as EFL may have incurred as a result of the loan being unsecured was caused, not so much by the breach by Mr. Lau of his undertaking, but by a fraud on the part of the directors of CKIL, or at any rate on the part of persons who purported to be the directors of CKIL.

And the problem with EFL's other pleaded cause of action is that it may be difficult for EFL to establish that Mr. Lau was indeed under a duty not to forward the first two cheques to the earlier mortgagee and its solicitors, and not to present the second two cheques for payment himself, until he had complied with his undertaking.

The new proceedings

6. It is because of these possible problems with the two causes of action pleaded in the earlier proceedings that EFL now wants to raise an altogether new allegation. That new allegation arises as a result of yet another set of proceedings which forms the backdrop to the new proceedings. CKIL claims that the loan agreement and the mortgage were executed without its authority, and that the persons who purported to be the directors of CKIL for the purpose of authorising the loan agreement and the mortgage had never been validly appointed directors of CKIL. Accordingly, in HCA 11754/95 ("the mortgage proceedings"), CKIL seeks, inter alia, a declaration that the loan agreement and the mortgage are void and not binding on it.

7. The new case which EFL wants to argue against Mr. Lau is that Mr. Lau induced EFL to enter the loan agreement and the mortgage by representing that CKIL's application for a loan had been approved by the duly appointed directors of CKIL. It is said that Mr. Lau had made that representation by sending to EFL's solicitors various documents which purported to show that that was the case. Accordingly, if it is found in the mortgage proceedings that the persons who purported to be the directors of CKIL had not been validly appointed the directors of CKIL, Mr. Lau's representation would have been false. In those circumstances, EFL seeks to be put into the position in which it would have been if the representation had not been made, i.e. if EFL had not entered into the loan agreement or the mortgage in the first place. The only relief which it seeks in the new proceedings, therefore, is an order that Mr. Lau indemnifies it for all its losses in the event of the mortgage being declared void and not binding on EFL. That is the allegation which is raised in the new proceedings.

8. This is not spelt out as clearly as it might be in the Statement of Claim in the new proceedings. But Mr. Kenneth Chan for EFL has confirmed that what I have set out is an accurate summary of the new case which EFL wishes to mount. It goes without saying that this new allegation considerably expands upon the issues which arise in the earlier proceedings.

Abuse of process

9. Mr. Chan argues that, because the new proceedings raise a claim of a wholly different nature to that in the earlier proceedings, the issue of the new proceedings can hardly be said to be an abuse of the court's process. It would, he says, be quite wrong to deny EFL the opportunity to obtain the new relief which it now seeks. However, that argument does not meet the real sting of the complaint. Mr. Russell Coleman for Mr. Lau accepts that the new proceedings raises a wholly new case, and makes a wholly new allegation which does not arise in the earlier proceedings. The thrust of his argument is that the new allegation could have been made in the earlier proceedings. Accordingly, those proceedings should be struck out because, to use the words of Lord Kilbrandon in Yat Tung Investment Co. Ltd. v. Dao Heng Bank Ltd. [1975] A.C. 581 at p.590A, it is

"..... an abuse of process to raise in subsequent proceedings matters which could and therefore should have been litigated in earlier proceedings."

10. It is plain, I think, that the new allegation could have been made in the earlier proceedings. After all, the mortgage proceedings had been commenced prior to January 1996 when EFL commenced the earlier proceedings. However, as to whether the new allegation should have been made in the earlier proceedings, I have reached two conclusions:

(i) It was reasonably open to EFL's solicitors to limit the earlier proceedings to the two causes of action which related to Mr. Lau's professional duties. If those causes of action had resulted in EFL getting its $4.55m. back, there would have been no point in muddying the legal waters by raising the new allegation at the same time, especially as that allegation would have significantly expanded the factual and legal issues.

(ii) However, once the difficulties to which the two original causes of action were subject had become apparent, and once it had been decided that the new allegation had to be raised, an attempt should have been made to raise the new allegation in the earlier proceedings. Unless it was apparent that, for one reason or another, an application for leave to re-amend the Statement of Claim in the earlier proceedings would not have succeeded, it was inappropriate to commence fresh proceedings. I see no reason why EFL should be treated as justified in commencing new proceedings against Mr. Lau if its new allegation could have been made by amendment in the earlier proceedings.

11. The course which I have decided to take to give effect to these conclusions is to stay the new proceedings, pending an application for leave to re-amend the Statement of Claim in the earlier proceedings so as to plead, and plead properly, the new allegation. In the event of that application for leave to re-amend the Statement of Claim being granted, the writ and Statement of Claim in the new proceedings will be struck out. However, I agree with Mr. Coleman that it does not automatically follow that if the application for leave to re-amend is refused, the new proceedings should necessarily continue. That will depend on what the reasons for the refusal of leave to re-amend are. Accordingly, in the event of the application for leave to re-amend being refused, I give the parties liberty to restore the present summons. That summons must be treated as part heard, and I therefore reserve the hearing of that restored summons to myself.