ALLIED SUCCESS CREATION LTD v. CHEUNG HON KUEN ALSO KNOWN AS MICHAEL CHEUNG AND OTHERS

HCA 451/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 451 OF 2010

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J U D G M E N T
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1. The plaintiff complains that it had been induced by the fraudulent scheme of its estate agent to sell its property to a purchaser which, unbeknown to the plaintiff, was set up by the agent for its own profits. The plaintiff now claims for loss and damage against the estate agent and the related parties. The agent denies the allegation and counterclaims for unpaid estate agent’s commission.

BACKGROUND

2. Lei Im Va (“Lei”) is known to be a seasoned investor in shop premises in the local real estate market.  He is the majority shareholder and director of the plaintiff (“Allied Success”).

3. In April 2008, Allied Success purchased a series of adjoining shop premises at Chung On Building, Sha Tsui Road, Tsuen Wan, New Territories at HK$123,000,000.  Amongst them was Shop No 3 on the Ground Floor, which Allied Success partitioned into Portions A and B.  As confirmor, Allied Success soon sold the shop premises earning profits exceeding HK$44,000,000.  Portion B of Shop No 3 (“the Property”) remained in hands.

4. The 4^th defendant (“Keyfortune”) was incorporated in Hong Kong in 2006 and was at the material time carrying on a licensed estate agency business. The 1^st defendant (“Cheung”) and the 2^nd defendant (“Tse”) were at the material time estate agents licensed under the Estates Agents Ordinance, Cap 511 (“EAO”).  They were the only directors and shareholders of Keyfortune.

5. In March 2009, Allied Success by facsimile invited various estate agents including Keyfortune to introduce suitable buyer of or tenant for the Property.  The brief was to sell the Property at the asking price of HK$30,800,000 or to let it at the asking monthly rental of HK$125,000.  Such asking price and rental had been reduced from those previously offered in the market.  Keyfortune accepted the instruction.

6. In early July 2009, Tse asked to borrow the keys to the Property for the purpose of arranging viewing of the Property by a prospective tenant in the food and beverage business.

7. In the morning of 14 July 2009, Tse attended the office of Allied Success with a provisional sale and purchase agreement already signed by the 5^th defendant (“Join Forces”) as the intended purchaser, which offered to buy the Property at HK$19,800,000.  Lei counter-offered to sell at HK$20,500,000.

8. Eventually on 15 July 2009, Lei signed the provisional agreement to sell the Property to Join Forces at HK$20,500,000 (“the Provisional Agreement”) and accepted the initial deposit in the sum of HK$300,000 in the form of a cashier order.

9. As usual, the Provisional Agreement provided for the payment of a further deposit upon the signing of the formal agreement, and the payment of the balance of the purchase price upon completion.  Completion would take place on or before 16 October 2009.

10. The Provisional Agreement also contained the following terms added by hand:

(1) Completion could be brought forward upon Join Forces’ 7-day advanced written notice.

(2) After the signing of the formal agreement, Join Forces or its authorised representative might enter the Property for the purpose of decoration work.

(3) After the signing of the Provisional Agreement, Join Forces might enter into tenancy agreement with a view to letting the Property to take effect and for a term to commence upon completion of the sale and purchase.

11. Keyfortune acted as the agent for both parties to the deal; but the Provisional Agreement entitles Keyfortune to commission from Allied Success in the sum of HK$205,000 and nil from Join Forces.

12. On 6 August 2009, the parties to the deal entered into the formal sale and purchase agreement (“the Formal Agreement”), when the further deposit was paid through solicitors.

13. Completion took place on 16 October 2009, when Allied Success received the balance of the purchase price again through solicitors.

14. In March 2010, Allied Success filed complaint to the Estate Agents’ Authority and commenced the present action.

15. The above background is undisputed.

CASE OF ALLIED SUCCESS

16. Allied Success claims that in about late August 2009, Lei gathered rumours that Cheung and Tse of Keyfortune were behind the purchaser of the Property, and made a profit from the sale of the same onward to a third party shortly.  Lei confronted Tse and Cheung but they categorically denied the rumours.

17. After investigation, Lei came to learn in January 2010 about the following arrangements behind the scene:

(1) Prior to the Provisional Agreement, Cheung, Tse and Keyfortune had actually secured a prospective tenant, Tse Wan Biu (“the Tenant”), who was willing to rent the Property at HK$100,000 per month for a term of 3 years with option to renew for another 3 years subject to agreement.

(2) Join Forces had entered into a provisional tenancy agreement with the Tenant, which was to take effect conditional upon completion of its purchase of the Property from Allied Success. The agreement was later dated the same date as the Provisional Agreement, 15 July 2009 (“the Provisional Tenancy Agreement”).

(3) On 20 July 2009, Join Forces entered into a provisional sale and purchase agreement to sub-sell the Property with such tenancy to a third party Henmax Investment Limited (“the Sub-buyer”) at HK$25,000,000.

(4) Join Forces then synchronised the timing of the signing of the Formal Agreement and completion in respect of the Property with those for the sub-sale.

(5) Join Forces stood to gain an immediate profit of HK$4,500,000 from the deal.  As the estate agent, Keyfortune also received from the Sub-Buyer commission in the sum of HK$175,000.

18. Allied Success complains that Cheung, Tse and Keyfortune, whom Lei trusted were acting in good faith, had not only concealed from him the truth but had also made positive misrepresentation with a view to inducing it to agree to sell to Join Forces at the price it did.

19. Tse allegedly concealed from Allied Success the tenancy secured with the Tenant. He allegedly further misrepresented that despite efforts, Keyfortune had been unsuccessful in securing offer to purchase at the asking price or to rent the Property at the asking rental, and that there would be very low prospect of achieving that.  Meanwhile the offer from Join Forces was very attractive in the light of the market conditions; and Tse advised that Allied Success ought to give serious consideration to it.

20. Relying on the alleged representations, Allied Success agreed to sell the Property to Join Forces at the price it did.  Allied Success says that with the tenancy secured, the Property sold with such tenancy could have fetched a higher price in the market at the time of the Provisional Agreement.  The Property, with the tenancy to the Tenant, was sold by Join Forces to the Sub-Buyer at HK$25,000,000 in just 5 days after the Provisional Agreement.

21. Allied Success also discovered the following about Join Forces:

(1) Join Forces was only being incorporated at the time of the Provisional Agreement and did not come into existence until 21 July 2009.

(2) The Provisional Agreement was signed for and on behalf of Join Forces by Ho On Kin (“Ho”), who was at the material time an account clerk of Keyfortune and personal assistant of Cheung.

(3) The 3^rd defendant (“Yeung”), sole director and shareholder of Join Forces, is a relative of Cheung and came to be formally employed by Keyfortune as a marketing assistant on the same day when the Provisional Agreement was signed.

(6) The company secretary of Join Forces was a Mr Chu Cho Kin, who was at the time a part-time account clerk of or otherwise working for Keyfortune.

(7) Join Forces kept a bank account of which Cheung and Tse were the authorised signatories.  The payments for the purchase of the Property were funded by Cheung and Tse, who sourced the funds from Keyfortune.

22. Allied Success contends that had it known the truth, it would not have agreed to sell the Property to Join Forces at HK$20,500,000 or at all.  It  pleads the following causes of action and, as clarified during the trial, against the following defendants:

(1) equitable compensation for breach of fiduciary duties on the part of Keyfortune, and for dishonest assistance of such breach on the part of Cheung, Tse, Yeung and Join Forces;

(2) account of secret profits made in relation to the Property, including the profit of HK$4,500,000 from sub-sale, by Join Forces as the constructive trustee;

(3) damages for deceit (fraudulent misrepresentation) on the part of Tse, Cheung and Keyfortune; alternatively, damages pursuant to section 3 of the Misrepresentation Ordinance, Cap 284 (“MO”);

(4) damages for conspiracy to injure/defraud on the part of all the defendants;

(5) damages or compensation for non-compliance with section 36 of the Estate Agents Ordinance, Cap 511 (“EAO”);

(6) damages for breach of the implied contractual duty on the part of Keyfortune;

(7) and estate agent’s commission in the sum of HK$175,000, as well as order for payment;

(8) all necessary and consequential assessments, accounts and enquiries.

CASE OF THE DEFENDANTS

23. The defendants deny the allegations and any impropriety.  In essence, they contend that Lei had been informed of the offer from the Tenant to rent the Property. It had also been disclosed repeatedly, and therefore Lei knew, that Cheung and Tse, through Join Forces, were purchasing the Property to let to the Tenant upon completion.

24. According to the defendants, Tse informed Lei of the prospective tenant’s offer to rent the Property at HK$100,000 per month for operating a restaurant on as early as 10 July 2009.  It was Lei who rejected such offer and, for reasons then unknown to them, expressed that the Property would not be let for operating food and beverage business; and he would rather sell the Property at a lower price.

25. It was allegedly only afterwards that Cheung and Tse conceived the idea of purchasing the Property with a view to letting it to the Tenant as their own investment. To minimise the risk of litigation, they decided to set up a corporate vehicle and nominated Yeung to become the sole shareholder and director.  Hence the formation of Join Forces.

26. Against this background, Cheung and Tse proceeded to secure the prospective tenancy, and prepared the Provisional Tenancy Agreement with the term that the tenancy would take effect conditional upon the successful acquisition of the Property by Join Forces.  The Tenant agreed to that and signed the Provisional Tenancy Agreement.

27. Armed with that, Tse allegedly telephoned Lei on the following day, 14 July 2009. Tse informed Lei of his intention to purchase the Property together with his associates, and sought to bargain for a better price.  Further negotiation allegedly ensued.

28. In the afternoon of the same day, 14 July 2009, Tse met with Lei, armed with a provisional agreement already signed in the name of Join Forces offering to buy the Property at HK$19,800,000 together with a cashier order for HK$300,000 as initial deposit.  Lei rejected that and made a counter-offer to sell at HK$20,500,000, which was only open to acceptance by 2 pm of the following day, 15 July 2009.  For such purpose, Lei signed the provisional agreement engrossed with such amended terms for and on behalf of Allied Success.

29. Further negotiation allegedly took place over the telephone later that day.  Tse and Lei finally met again late at night on the same day, when the terms of the deal were finalised as those contained in the Provisional Agreement.  In doing so, Lei allegedly represented that Allied Success was willing to sell at that price because it had earned enough from the sale of the others in the same series of properties purchased as mentioned above.

30. According to the defendants, soon after the signing of the Formal Agreement in August 2009, it was discovered that the Property suffered from suspected unauthorised structure problem, which could render it impossible for the Tenant to obtain a restaurant licence for operating business there.  Lei was alerted of this discovery.  Not only did Lei reacted by allegedly threatening to forfeit the deposit, if JFD sought to repudiate the deal, but he also called upon Cheung and Tse to meet him twice for the purpose of allegedly threatening them to share their profits from the sub-sale of the Property.  The defendants suspect that Allied Success knew about the unauthorised structure problem and hence its reluctance to let the Property for food and beverage business in the first place.

31. However nothing further developed from that; and the sale and purchase of the Property was also completed in October 2009 as agreed.

32. In late October 2009, Tse on behalf of Keyfortune sought to collect the estate agent’s commission from Allied Success pursuant to the Provisional Agreement, but met with Lei’s refusal.  Hence the counterclaim in the present action.

THE PRINCIPLES

Fiduciary duty

33. By pleading, Keyfortune admits that it was under a fiduciary duty to Allied Success; but that it had duly and properly discharged such duty.  What such duty entailed, which is said to have been duly and properly discharged, is not set out.  Yet in the context of this case, I can only take it to be referring to the disclosure of all those that it had allegedly disclosed to Allied Success prior to the Provisional Agreement.

34. In his submission, Mr G Lam goes further.  He argues that in the circumstances of this case, Keyfortune was under no such fiduciary duty to disclose to Allied Success its interest or that of its staff in the deal.  This is at variance with the evidence of Tse and Cheung, by statement and in court, that they accept that they should disclose their interest as the purchaser to Lei in the circumstances of the case.  What Tse and Cheung acknowledged as experienced estate agents speaks loudly.  Considering the matter objectively, I come to no different conclusion either.

35. Counsel are ad idem as to the starting point, namely, whether the relationship between the client and the estate agent was one of fiduciary nature depends on the facts of each case.  The discussion in Ewan McKendrick, Commercial Aspects of Trusts and Fiduciary Obligations (at pp.37-39) is helpful:

“Put simply (and slightly inaccurately) a person becomes a fiduciary, not because of his status, but because of what he assumes or is taken as having assumed to do in a particular relationship. To the extent, and only to the extent, that in that role the beneficiary is entitled to expect he will act in the beneficiary’s interests, will he be that beneficiary’s fiduciary……

The ‘fair-dealing’ rule is commonly expressed in terms which prohibit a purchase or sale by an agent even where the price is set by the principal. As a generalisation this may be a fair representation of how the rule ordinarily applies. But consider the following three examples:

(1) An estate agent is engaged to sell his principal’s house, the principal specifying the sale price.

(2) An agent is instructed to sell shares in a traded company at a designated price in circumstances where advice has been sought or received on the sale, or else could be expected (where appropriate) because of past dealings or because of the particular circumstances in which the agent is engaged.

(3) An agent is instructed to sell shares in a traded company at a designated price in circumstances where advice is not sought, received, or expected.

Save in truly exceptional circumstances, the agent in example 1 would be a fiduciary for the purposes of the ‘fair-dealing’ rule because of the advisory and negotiating role expected of such an agent, as also because of the necessarily speculative nature of prices so set.  Likewise in example 2, the ‘reliance factor’ stemming from the advisory function would attract a fiduciary responsibility in the sale.  But what of example 3? The agent-client relationship in the effecting of the sale here is not, in my opinion, as fiduciary one.  The agent’s function is purely ministerial, the client assuming responsibility to the exclusion of the agent as to how the client’s interests are best to be served.  The agent is not expected to put at his client’s disposal such knowledge, information, or judgment as the agent may have about the wisdom etc of the sale: it is not a ‘reliance relationship’. Nor can it be said that a purchase by the agent would ‘result in any realistic way in a conflict of duty and interest’.”

36. Mr G Lam argues that in the local context, an estate agent, as Keyfortune in the present case, is an agent for both sides of the deal and takes commission from both sides for acting as a broker introducing the property.  He got that from what Godfrey J said Cheng Kwok Fai v Mok Yiu Wah & Anor [1990] 2 HKLR 440 (at 445F), which was endorsed in Tai Sang Kung Ltd v Paraking Ltd & Anor [2001] 4 HKC 61.

37. In Cheng Kwok Fai, the issue was whether certain (mis)representation was made by the estate agent for and on behalf of the vendor.  The context was not ‘self-dealing’.  However in saying what he did, Godfrey J did make clear that whether an estate agent is and acts as an agent of either party to the deal is effectively a matter of fact even in the local context (see 445F).

38. Tai Sang Kung Ltd was about ‘self-dealing’.  Chung J found that the estate agent had disclosed all the relevant facts about the property offered for sale to the purchaser, save and except the mere fact that the vendor and the estate agent had common shareholders and directors.  As to whether to purchase the property, it was entirely a matter for the purchaser, irrespective of the alleged non-disclosure.

39. Mr D Lam refers to Happyface Ltd v Lau Shui King t/a Fu King Property Agency, HCA 4110/1996 (4 August 1999), per DHCJ Muttrie.  There the plaintiff agreed to sell its property to the purchaser, which was owned by the estate agent (the defendant) and her husband, something that was withheld from the plaintiff. The learned deputy judge considered that what Godfrey J said in Cheng Kwok Fai did not suggest that an estate agent or a broker is not an agent or cannot be under fiduciary duty.  Such duty included that of disclosure of all the material circumstances and the nature and extent of the agent’s interest, before the agent may enter into a transaction in which his personal interest (or duty to another principal) may conflict with that of his principal.  He reiterated that agency is a question of fact; when in that case, the facts showed clearly that the plaintiff engaged the estate agent to act for her in the negotiations and agreed to pay her commission.  The estate agent was indeed a broker but no less an agent for that, and thus owed the plaintiff the duty of full disclosure.

40. Happyface Ltd was not referred to in Tai Sang Kung.  Nor was the case of Yili Concepts (HKG) Limited v Lee Wai Chuen & Anor, HCA 12911/1997 (29 September 2000), where DHCJ Kwan (as she then was) observed that what Godfrey J said in Cheng Kwok Fai above was not meant to be generally applicable proposition of law.

41. All these, in my view, align with the discussion in the passage in Commercial Aspects of Trusts and Fiduciary Obligations cited above.  Even in the local context as a broker in the normal course of events, whether the estate agent owes fiduciary duty, including that to make full disclosure of his interest in the purchaser, depends on what he did and thus the responsibilities that he is taken to have assumed.

Dishonest assistance

42. The case against Cheung, Tse, Yeung and Join Forces is one of dishonest assistance in Keyfortune’s breach of its fiduciary duty owed to Allied Success.

43. Mr D Lam acknowledges that dishonest assistance is a concept founded on breach of trustee’ duty in relation to property.  At the material time, namely when the sale and purchase of the Property was negotiated and concluded, Keyfortune was not in a position to assume fiduciary duty in relation to the Property. However he submits that the question of whether liability of a third party for dishonest assistance of breach of fiduciary duty exists in the absence of tampering or disposal of trust property has become very much an open question. He borrows support from what was said in Lewin on Trust (18^th ed) at §§40-15; 40-16 and the recent local decision of Hecny Shipping Limited & Ors v Huang Chun Jen Jerry & Ors, HCA 1126/2007 (3 November 2011), per Recorder H Wong SC.  In his submissions, Mr G Lam accepted that as a matter of principle.

Constructive trust

44. This is directed against Join Forces.  The contention is that Join Forces obtained the Property as a result of fraud and breach of fiduciary on the part of Keyfortune and proceeded to profit from it by way of the sub-sale.  Join Forces is therefore said to be the constructive trustee of the secret profits, which it is allegedly liable to account.

Tort of deceit

45. The law relating to fraudulent misrepresentation is trite.  To be condemned, the defendant must have knowingly or recklessly made false representation of fact or law with a view that the representation would be relied on by the plaintiff. The plaintiff did rely on it and suffer loss, and becomes entitled to sue.

46. If the misrepresentation by Tse to Lei of Allied Success, be it the positive representation or material non-disclosure as alleged, indeed took place, it would have undoubtedly been made knowingly and thus fraudulent in nature.  Tse had the necessary knowledge, which, in the circumstances of this case, was imputed to Keyfortune.

47. It is not alleged that Cheung was present when the alleged misrepresentation was made.  However Cheung and Tse do not run any separate defence which would have raised any issue of whether Cheung endorsed what Tse did or said.  They were at all material times the controlling mind of both Keyfortune and Join Force, the latter being set up by them as the purchaser of the Property.  By pleading, Allied Success indeed asks the court to lift the corporate veil of Join Forces.

Conspiracy

48. Conspiracy to defraud by unlawful means is committed where two or more persons combine and take action which is unlawful in itself with the intention of causing damage to a third party who does incur the intended damage.  It is not necessary for the injured party to prove that causing him damage was the main or predominant purpose of the combination: see Clerk & Lindsell on Torts at §24-95.

49. The requisite intention to injure can be evidenced by the fact that loss to the plaintiff is reasonably foreseen as a result of the concerted action: see She Tsu Yi v Tsui Ki Ting & Ors, HCA 1684/2004 & HCMP 3290/2004 (5 November 2007) at §154.

50. If the alleged fraudulent scheme is established, it is inconceivable that either Cheung or Tse should be allowed to disassociate himself from Keyfortune or Join Force.

Implied contractual duty

51. Section 5 of the Supply of Services (Implied Terms) Ordinance, Cap 457 (“SS(IT)O”) provides that the supplier of service in the course of business is under an implied contractual duty of reasonable care and skill.  Allied Success contends that if the alleged fraud and conspiracy is not established, Keyfortune nevertheless failed its reasonable duty to disclose the existence of the prospective tenant of the Property and the higher market price of the Property with such tenancy.

Statutory duty

52. Section 36(1)(a) of the EAO provides that:

“Subject to section 38(3), every licensed estate agent shall, as regards every property (whether situated in Hong Kong or elsewhere) in relation to which he has entered into an estate agency agreement-

……

(v) inform a client who is a vendor of each offer received as regards the property concerned at any time prior to that at which the client expressly instructs him not to do so, or that at which under or pursuant to any provision of the estate agency agreement with the client the requirement to do so no longer applies to him, whichever is the earlier;

(vi) disclose to a client full particulars of any pecuniary or other beneficial interest which such agent has in the property concerned, together with particulars of any benefit, including any commission or any interest of any kind whatever in such property, whether monetary or otherwise, which will accrue to such agent should the property be disposed of……”

Section 36(3) provides that:

“…… where a licensee who is not a licensed estate agent to which subsection (1) applies but who in the course of his employment or appointment as a salesperson by an estate agent does estate agency work in relation to a particular property, the following provisions shall apply-

(a) in so far as he does such work, the obligations imposed by subparagraphs (v), (vi) and (vii) of subsection (1)(a) are hereby imposed on him;

(b) if as regards the particular property he fails to discharge an obligation imposed on him by paragraph (a) and because of any such failure the relevant vendor or purchaser suffers loss or damage, the failure shall constitute a cause of action described in subsection (4).”

Section 36(4) provides that:

“Where as regards a particular property a licensed estate agent fails to comply with a requirement of subsection (1) which applies to him and because of any such failure the relevant client suffers loss or damage, the failure shall constitute a cause of action whereby damages or any other relief or remedy may be recovered or obtained in legal proceedings.”

53. By pleading, Keyfortune denies such statutory duty.  Despite changes in position in the course of the trial, Keyfortune eventually maintains the denial of such statutory duty.

54. The above statutory duty is premised on an estate agent agreement as defined in section 2 of the EAO, which requires one or more written documents embodying the terms between the parties.  There is no dispute that Allied Success’ instruction and Keyfortune’s undertaking did not take such form.  More importantly, the EAO makes it clear that section 36 applies to properties used wholly or primarily for human habitation or, put it simply, residential properties.

55. Both counsel refer to various District Court cases.  Advanced Pacific Investments Ltd v Zen Hei Hayley & Ors, DCCJ 5975/2005 (29 June 2009) at §95 and Sound Industrial Ltd v Kim Yi Property Agency Ltd [2010] 5 HKLRD 676 at §36 are instances against Mr D Lam on this.  Mr D Lam cited Sunion Development Limited v Nam Hoi Bus Services Company Limited, DCCJ 4935/2009 (29 March 2012), which involved non-residential property, but it was found that the estate agent concerned was in breach of the statutory duty under section 36. However, the inapplicability of the section did not cross the mind of counsel and the court in that case and hence no discussion of that.  I am confident that had their attention been drawn to that, the decision in this respect would have been otherwise.

56. In my view, the statutory duty pursuant to section 36 of the EAO does not apply.

THE WITNESSES

57. Besides himself, Lei called Cheung Chiu Wah (“Cheung”), property manager of Allied Success, to testify.  Allied Success also called several witnesses who used to be related to Keyfortune.  They are Ho who, as mentioned, signed the Provisional Agreement and the Provisional Tenancy Agreement for and on behalf of Join Forces; and Chan Dan Sum Renata (“Chan”), who was the agent of Keyfortune responsible for introducing the Sub-Buyer of the Property to Join Forces.  Chan Yau Fat Andrew, one of the founders of Keyfortune, was not called, and his statement is accordingly disregarded.

58. Allied Success also relies on the report prepared by Memfus Wong Surveyors Limited (“the Valuation Report”).  It provides the valuation of the Property as at the date of the Provisional Agreement on the bases of vacant possession and subject to the tenancy with the Tenant respectively.  The valuation evidence is not challenged.

59. On the defendants’ side, Cheung, Tse, Yeung testified.  They also called the Tenant as a witness.  The statements of Wong Chi Leung, the consultant engaged by Tse to apply for the food and beverage licence at the Property (“the Consultant”), and Lo Yee Tak, surveyor and business acquaintance of Cheung, were received as agreed evidence.

DISCUSSION

60. In their submissions, Mr D Lam, appearing with Ms Ling, for Allied Success and Mr G Lam, appearing for the defendants, enter into great details in their respective discussion of the testimony of the witnesses.  I do not propose to repeat all those, but would make observations and draw conclusions after considering all the evidence and their submissions.

61. The versions of events put forward by the two sides in respect of the alleged misrepresentation and non-disclosure are mutually exclusive.  On the basis of the state of knowledge of the parties alleged respectively, there is no room in between, let alone plea of alternative case, such as mistake or misunderstanding.  If Allied Success’ case is believed and accepted, the defendants’ case on the facts must be rejected.  However if the defendants’ case is accepted, Allied Success would be accusing the defendants both falsely and knowingly.  It is therefore more a question of assessment of their relative credibility of the parties than mere cogency of the evidence of Allied Success as the party bearing the burden to prove fraud.

62. As mentioned, if the defendants’ case is true, this would mean that the complaint by Allied Success to the EAO and the claim in the present action is based on accusations that it, through Lei, knows are false.  One may ask what could have caused Allied Success to take such an initiative.

63. It is also pointed out that the Property was really the last of the series of properties purchased by Allied Success, from which it had gained tens of millions in profits.  Relative to that, the amount involved in the present action is insubstantial.  Allied Success, it is suggested, decided to take action primarily due to the misconduct of the defendants.

64. These may be part of the overview of the matter, but it is more important to consider the specifics in the evidence.

The Tenant

65. As mentioned, Allied Success actually refers by pleading to Tse’s mention of a prospective tenant who would be interested in the Property.  It also refers to Keyfortune’s obtaining the key to the Property for the purpose of viewing by the prospective tenant.  The difference between the parties lies in what happened afterwards. Lei says there was no follow-up on that, and Cheung confirmed that in his evidence.  Tse says that he telephoned to inform Tse of the Tenant’s offer in the presence of the Tenant on 10 July 2009, but Lei rejected that.

66. Lei denies that Tse had informed him of the offer of tenancy from the Tenant and that Lei had rejected the offer upon being informed that the Tenant intended to use the Property to operate food and beverage business.  Considering the Tenant’s evidence according to his statement and what he managed to say in court, I am not impressed that he manages to corroborate Tse’s evidence in this respect.

67. The evidence shows that the Property was used for operating a restaurant at the time when Allied Success purchased it.  Lei testified that he held nothing against letting the properties of Allied Success to restaurant operators.  He actually preferred restaurant tenants, as they tended to be reluctant to terminate tenancy too easily, in view of the heavy overhead investment into the renovation and the licence.

68. Cheung confirmed a similar understanding.  Cheung is the property manager of Allied Success and was the person in charge of preparing the facsimile invitation to estate agents to market the Property.  There is no suggestion that he had ever received instruction that the Property would be marketed for letting but not to operator of food and beverage business.  Nor is there suggestion that such was spelt out as a restriction in the invitations to the estate agents for marketing the Property.

69. This is also where the issue of alleged unauthorised structure inside the Property came about.  According to the Consultant (whose statement, as mentioned, is received as agreed evidence), the Tenant was informed of the suspected unauthorised structure problem.  According to the Tenant and Tse, the latter was informed of the discovery.  Lei confirmed that prior to the signing of the Formal Agreement, Tse informed him of the discovery of the suspected unauthorised structure problem (by Join Forces).  However, the Consultant also stated he had since obtained confirmation from the Buildings Department as well as the alteration and addition plan from the Department, which verified that there was in fact no problem.  The restaurant licence was indeed granted to the Tenant.

70. The theory of the defendants is that until such verification by the alteration and addition plan, to which Allied Success could not have had access, Allied Success must have suspected the unauthorised structure problem and was thus reluctant to let the Property for operating food and beverage business.  Hence the alleged rejection of the offer of tenant by the Tenant.

71. In my view, the theory of the defendants is problematic.  As mentioned, Allied Success purchased the Property when the same was being used to operate a restaurant.  According to Lei, at all times until Shop No 3 was partitioned into Portions A and B by way of deed poll, he had received no report about the unauthorised structure problem.

72. More importantly, if Allied Success had had in mind the suspected problem in the Property, ruling out tenancy to food and beverage business operators would not have addressed such problem.  As an unauthorised structure problem, it would remain as a potential title problem, even in case of sale of the Property irrespective of a high or low price.  As seasoned investors, Lei and Allied Success must be taken to have realised that.  Any concern about suspected unauthorised structure could be addressed by incorporating appropriate terms in the contractual documents for the sale of the Property.  Again, as seasoned investors, Lei and Allied Success must be taken to have realised that.  The lack of such specific terms in the contractual documents by Allied Success in relation to the Property tends to suggest otherwise.

73. It is interesting to note that according to Lei, Tse informed him of the suspected unauthorised structure on 19 or 20 July 2009.  On 20 July 2009, Join Forces signed the provisional agreement to sub-sell the Property to Henmax.  In that agreement, Join Forces incorporated additional terms in the annex for, among other things, prohibiting repudiation by Henmax on the ground of unauthorised structure problem.  Yet according to the Consultant, he had already obtained confirmation and verifying plan from the Buildings Department that served to negate the suspected unauthorised structure problem by 17 July 2009.

74. The defendants also refer to the additional term written by hand into clause 15 of the Provisional Agreement, authorising Join Forces to enter into a tenancy agreement to take effect and for a term to commence conditional upon completion of the sale and purchase of the Property.  That, they argue, reflects that Lei and Allied Success knew that Join Forces was purchasing the Property with a view to letting it to the Tenant.

75. However, such circumstantial evidence has to be considered against Lei’s case that Tse represented to him that the Property was purchased by a father who would then let to his son and business associates to run a restaurant there.  That formed the pretext for Lei’s agreeing to such additional term.  That was not reflective of the understanding that the term was added to accommodate a prospective tenancy with an independent tenant secured by the purchaser.

Join Forces

76. As to whether Tse had disclosed to Lei that Join Forces was the corporate vehicle of Tse and Cheung in purchasing the Property, the overview of the evidence is that the arrangement of Tse and Cheung was such that an outsider probably could not detect that Join Forces was in fact connected with Keyfortune.

77. Ho was at the material time an accounting clerk of Keyfortune and the personal assistant of Cheung.  He resigned in November 2010 and is now working for a law firm.  There is no suggestion that he stands to gain anything out of this litigation.  According to him, it was in as early as June 2009 when Cheung mentioned to him the idea of putting part of the cash of Keyfortune into investment through another company to be formed.  That was 3 months after Allied Success had sent out invitations to estate agents to market the Property.

78. As mentioned, Ho signed the Provisional Agreement for and on behalf of Join Forces as the purchaser and the Provisional Tenancy Agreement for and on behalf of Join Forces as the landlord.  Whether or not this happened on 11 July 2009 as he said in his statement, he was adamant that this happened prior to 15 July 2009, which was the date of the two agreements mentioned.  Whilst Ho was questioned as to the accuracy of his recollection in this respect, the defendants’ case put to him also underwent change in the course of his cross examination.

79. Ho was also responsible for arranging the cashier order for the payment of the HK$300,000 initial deposit for Join Forces’ purchase of the Property.  According to him, Tse and Cheung had the fund transferred from Keyfortune to the joint bank account of Tse and Cheung beforehand.

80. According to Ho, Cheung mentioned that his personal interest in the purchase had to be kept secret or else he might be unable to purchase the Property at such favourable price.  Therefore Ho was asked to sign for and on behalf of Join Forces.  Cheung denied that; and his explanation in court was that he simply allowed Ho to ‘play the boss’ to sign the agreement.  This is near absurd.

81. Whilst Tse and Cheung had allegedly made known from the outset that they were negotiating for the purchase of the Property for themselves from Allied Success, the Provisional Agreement nevertheless contained features which reflect otherwise.

82. There is no dispute that when Tse first brought the Provisional Agreement to Lei on 14 July 2009, Join Forces’ offer was to purchase the Property at HK$19,800,000.  In rejecting that, Lei crossed out the price and replaced it by the price of HK$20,500,000 as his counter-offer to sell the Property.  Further he specified in the document that such counter-offer would be open to acceptance until 2 pm of 15 July 2009, as if the estate agent was supposed to convey the same to the intended purchaser for consideration.  If what the defendants say was true, the parties, through Lei and Tse respectively, were already negotiating face to face by then.  One wonders why Lei found it necessary to do what he did to the Provisional Agreement for the purpose of making the counter-offer.

83. In the Provisional Agreement, Keyfortune as the estate agent was maintained as a party.  Notwithstanding the effectively direct negotiation between the parties to the deal, the Provisional Agreement provided for the payment of commission to Keyfortune by Allied Success.  In court, Cheung and Tse somehow expressed different views as to whether that was reasonable in the circumstances.  One also wonders whether Lei would be prepared to pay such commission equivalent to 1% of the purchase price, if at all, in the circumstances.  On the one hand, Tse alleged that he had suggested Lei to appoint another estate agent.  On the other hand, Tse maintained that the commission provision had to be retained.

84. Tse signed the Provisional Agreement for and on behalf of Keyfortune.  As mentioned, Ho had previously signed the document at the instruction of Cheung. However unlike Lei who stated his name and identity card number under the composite signature of Allied Success, the spaces for such personal particulars under Ho’s signature were left blank.  As to that, Cheung and Tse gave different explanations in court.  Neither explanation is impressive.  The fact was that the identity of the person who signed for and on behalf of Join Forces was unknown.  The fact was also that Cheung and Tse had chosen not to sign any of the contractual documents for and on behalf of Join Forces.

85. Then there was the making of Yeung as the sole shareholder and director of Join Forces.  Yeung is Cheung’s niece and working at Keyfortune was her first employment upon her graduation just months ago in 2009.  As mentioned, there is no dispute that Yeung was a mere nominee of Cheung and Tse.  As to why it was arranged that way, Cheung and Tse were silent in their statements.  They gave various different reasons in court; but none in my view constituted convincing positive reason.  What remains is the fact that both of them would not be seen to be connected with Join Forces.

86. The secrecy apparently persisted in other aspects of the entire transaction.  Chan was the agent of Keyfortune until she moved to another estate agency company in February 2010.  As mentioned, it was she who introduced the Sub-buyer to the Property.  Like the case of Ho, there is no suggestion that she stands to gain anything out of this litigation.  According to her, that Tse and Cheung were behind Join Forces in purchasing the Property was also withheld from her.  When Cheung asked her to market the Property to the Sub-Buyer, he represented that it was owned by Tse’s father.

87. According to Cheung in court, he told Chan that Tse’s father had interest in the Property.  Yet that was clearly not true, in the absence of any evidence of the alleged interest at any stage whether directly or indirectly.  How such evidence would assist Cheung is unclear, as the fact that he and Tse were behind Join Forces was indeed withheld from Chan.

88. Mr D Lam submits that if anything, all the above arrangements were engineered to create the façade that Join Forces and them, and thus Keyfortune, were unconnected.  I agree.

The sub-sale

89. There is no dispute that on the same day when the Provisional Agreement was entered into, Cheung proceeded to ask Chan to market the Property with tenancy to the Sub-buyer.  He could not wait for Chan to return from her overseas vacation in 2 days.  Special bonus was offered to Chan for that assignment.  The asking price of HK$25,000,000 was very favourable, compared to the bank’s valuation obtained by Tse on 15 July 2009 and the market value of a comparable advertised in the newspaper subsequently.

90. That Cheung and Tse wasted no time in seeking to sub-sell the Property was at variance with their alleged plan to hold the Property as a long term investment.  The fact was that they had not made enquiry with the bank for mortgage financing.  They explained that certain acquaintance who allegedly runs a finance company had indicated his readiness to assist or, worst come to worst, their family members would be prepared to put up the necessary funds for them to complete the purchase of the Property.  In view of the substantial investment, the alleged possible financial arrangements are unnecessarily clumsy and neither of their explanations is impressive.

91. As mentioned, Join Forces in fact sub-sold the Property at a profit of HK$4,500,000 within days after the Provisional Agreement.  According to her, it was on 21 July 2009 when she learned from Ho that Join Forces was in fact the company of Tse and Cheung, and that Ho signed the Provisional Agreement and the Provisional Tenancy Agreement as instructed by Cheung.  She then came to realise the true nature of the entire transaction.  For that, she had confronted Cheung.

Post-contract

92. Two sets of post-contractual events are worth mentioning.  Both happened in about September 2009.

93. Lei had met with Tse and Cheung in August and September 2009.  But the parties have different versions of what happened during the meetings.  According to Cheung and Tse, Lei wanted to share their profits from the sub-sale of the Property because of his business partner’s complaint.  To this end, Lei was said to have gathered men in his office to exert illegitimate pressure on them.  Yet Lei was said to have come back to senses and allowed them to leave unharmed.  Lei denies all that; and Cheung, who was present in one of these meetings, corroborated Lei.

94. According to Lei, what he did during the meeting was to demand Tse and Cheung for clarification of the rumours that he had heard about them being behind the purchaser of the Property from Allied Success.  Tse and Cheung were said to have categorically denied that.  Lei explained that by then, he had no real evidence in verification of the rumours.  Allied Success proceeded to complete the sale and purchase, as it was contractually obliged to do so.

95. The evidence shows that at about similar time, Yeung was admittedly told by Cheung not to go back to work.  Whilst she still received her salaries, she was somehow omitted from Keyfortune’s staff salary list.  In the subsequent MPF application, Yeung’s commencement date of MPF was stated to be November 2009, though she formally started employment in September 2009.  Mr D Lam sees those as steps taken by Cheung to avoid exposure of Yeung to suspicion or investigation that she, as shareholder and director of Join Forces, was connected with Keyfortune.

FINDINGS

96. Considering the evidence and the analysis by counsel, including those specifically discussed above, I prefer the evidence adduced on behalf of Allied Success.  In particular, I find that Tse made the representations as alleged by Allied Success, whilst withholding the fact that a prospective tenancy had been secured with the Tenant as well as the fact that he and Cheung were purchasing the Property through Join Forces.  There is no doubt that Tse, Cheung and, through them, Keyfortune as well as Join Forces knew that the representations were false as alleged.  The misrepresentations were made with a view to inducing Lei to agree to sell the Property to them at the price they offered.

97. It may be said Allied Success and Lei were seasoned enough to form their own idea about the price of the Property at the material time.  It was indeed up to Lei to decide whether and, if yes, at what price the Property would be sold. However, I accept his evidence and find that that the tenancy secured with the Tenant had bearing on the price that he could have fixed.  He formed the view that Allied Success could strike the deal of only selling the Property at HK$20,500,000 at the time because of the misrepresentation and non-disclosure on the part of Tse.  I find that Lei would not have agreed to sell the Property at such price to Join Forces or at all, had he known the truth.

98. All the circumstances considered, I find that Tse and Cheung, and thus Keyfortune and Join Forces, by way of the misrepresentations and non-disclosure as mentioned, sought to purchase the Property from Allied Success at the lowest price that they were prepared to afford, with a view to quick sub-sale for their own profits.  This was the scheme involving Tse, Cheung, Keyfortune and Join Forces.

Breach of fiduciary duty

99. What distinguishes the present case from Cheng Kwok Fai and Tai Sang Kung was the fact that Tse did not merely act as a broker going between the two negotiating sides, relaying offer and counter-offer.  Tse made positive representations to Lei as to the prospect of sale or letting of the Property at close to Allied Success’ asking price or rental as well as any price higher than HK$20,500,000 would be unrealistic at the time.  Such representation was made with a view that Lei would seriously consider selling the Property at the price, and was made for his own interest as the purchaser.  Contrary to what Mr G Lam argues, this places his client outside example 3 set out in the text of Commercial Aspects of Trusts and Fiduciary Obligations cited above.

100. I find that Keyfortune, through Cheung and Tse, was under the fiduciary duty not to misrepresent the truth state of the secured tenancy in respect of the Property, which would have a bearing on the price.  It was also under the fiduciary duty to disclose the fact that Cheung and Tse were behind the purchaser negotiating for the deal for their benefit.

101. On the facts found above, I find that Keyfortune was in breach of such fiduciary duty.

Dishonest assistance

102. In view of the facts found, the assistance on the part of these parties involved was apparent.  The element of dishonesty is undeniable in the case of Cheung, Tse and Join Forces.  Only Yeung’s case causes me to think twice.

103. Honesty includes acting in reckless disregard of others’ rights or possible rights. The circumstances known to the person will dictate which one or more of the possible courses a honest person should take.  It is said that in most cases, an honest person should have little difficulty in knowing whether a proposed transaction or his participation in it would offend the normally acceptable standards of honest conduct.  The test is objective: see Grupo Torras SA v Al-Sabah [2001] CLC 221 at 249.

104. Yeung is Cheung’s niece and the work at Keyfortune was her first employment upon her graduation in 2009.  As mentioned, her employment formally started on 15 July 2009.  Mr D Lam is fair to observe that she was inexperienced in estate agency business or company matters at the material time.  Her involvement was no more than complying with the instruction of Cheung and, according to her, Cheung’s wife as well.  That was how she came to be the shareholder and director of Join Forces undisputedly as a mere nominee.  As such, she was instructed to sign the contractual documents on behalf of Join Forces with Henmax and the Tenant.

105. Much is said about the curiosity arising out of her not going back to work in September 2009, her being removed from the salary list of Keyfortune and the falsification of her date of commencement of employment mentioned above. Whilst the evidence shows that Cheung and hence Keyfortune were behind all these, which affords the basis for inferring that he was trying to keep concealed the fact that Yeung was connected with Keyfortune, I am not impressed that the circumstances known to Yeung by then were such that they would strike a person in her shoes that she knew that what she did was dishonest or in reckless disregard of other’s rights.  Whilst what she did in fact assisted the other defendants, I am not satisfied that Yeung should be condemned as being dishonest.

Constructive trust

106. On the basis of the facts found, I find that Join Forces is liable as the constructive trustee of the secret profits made from the sub-sale of the Property.

Tort of deceit

107. On the basis of the facts found, Keyfortune and Join Forces, as well as Cheung and Tse behind them, are liable for the tort of deceit.  Insofar as necessary, the corporate veils are lifted to exposed Cheung and Tse to such liability.

Conspiracy

108. On the basis of the facts found, Tse, Cheung, Keyfortune and Join Forces were parties to the scheme to conceal dishonestly the true purchaser and to make misrepresentation inducing Allied Success to agree to sell the Property at the price of their reach with a view to quick sub-sale for their own profits.  The common enterprise and the requisite intent of a conspiracy existed.  Damage to Allied Success is undoubtedly reasonably foreseen.

109. For the reasons explained above, I repeat the same observations in respect of Yeung’s involvement.

Breach of implied contractual duty

110. On the basis of the facts found, Keyfortune was in breach of its contractual duty owed to Allied Success as alleged.

LOSS AND REMEDIES

111. Allied Success claims that damages for the tort of deceit, misrepresentation and conspiracy in the context of the present case should represent the difference between the sale price and the market value of the Property as at the time of the Provisional Agreement: see Clerk & Lindsell on Torts at §§18-41; 18-42 and 18-44.  It proposes the same measure of equitable compensation for breach of fiduciary duty on the part of Keyfortune and dishonest assistance: see Target Holdings Ltd v Redferns (a firm) & Anor [1996] AC 421 at 437-8.  There is no submission to the contrary.

112. It is now established that the price at which the Property was sub-sold to Henmax was still a very favourable price at the time in the market.  The bank valuation obtained by Tse by the time of the Provisional Agreement, though he sought to dispute its accuracy at the trial, suggested that the Property was valued at about HK$30,000,000.  Allied Success relies on the report of valuation of the Property prepared by Memfus Wong Surveyors Ltd in March 2011.  According to that, the market for shop premises was on the rise particularly in the 2^nd and the 3^rd quarter of 2009; and the market value of the Property with the tenancy to the Tenant was HK$28,900,000 as at date of the Provisional Agreement.

113. On the basis of the above evidence, the price difference was HK$8,400,000.

114. Join Forces is liable to account for the profits made out of the sub-sale; and so are Cheung and Tse as the mastermind behind the corporate veil set up precisely to make such profits.  However this is subject to the principle against doubt recovery, in view of the above.

COUNTERCLAIM

115. In view of the breach on the part of Keyfortune, which was no less than fundamental, it cannot be entitled to its claim for estate agent’s commission. On this basis, Mr G Lam does not submit otherwise.

ORDER

116. Judgment in the sum of HK$8,400,000 is entered against Cheung, Tse, Keyfortune and Join Forces jointly and severally with interest at HSBC prime rate plus 1% from the date of writ until today.  Interest thereafter runs at the judgment rate until full payment.

117. The claim against Yeung is dismissed.

118. The counterclaim is dismissed.

119. Save that Yeung shall have her costs of defending this action, Allied Success shall have the costs of this action against the other defendants, including the costs of the defending the counterclaim against Keyfortune.  Costs shall be taxed, if not agreed.  In the absence of application in 14 days to vary, the costs order shall become absolute.

120. I thank counsel for their assistance.