EARNEST PROPERTY AGENCY LTD v. LIM CHEE KEONG AND ANOTHER

DCCJ 3039/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3039 OF 2006

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JUDGMENT

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1.          The Plaintiff is an estate agency.  The Defendants are a married couple who were the registered owners of a property known as Unit C, 10/F, Block 7, Aqua Blue, 28 Tsing Tat Street, Tuen Mun, New Territories (“the property”).

2.          In or about early March 2006, one of the Plaintiff’s agent Mr. Kenneth Chang Chau (“Kenneth”) contacted the Defendant, Mr. Lim Chee Keong (“Mr. Lim”), to find out if the Defendants were willing to sell the property to an interested prospective purchaser.  As a result of negotiations conducted between Kenneth and Mr. Lim, Mr. Lim agreed to sell the property at $7,480,000.

3.          On 11 March 2006, Mr. Lim was persuaded to put his signatures on a provisional sale and purchase agreement (“the agreement”) drafted by the Plaintiff.  Because the purchaser’s name and identity were left blank on the agreement and not disclosed by Kenneth, at Mr. Lim’s request, an extra clause was added as clause 21 which stated that the provisional sale and purchase agreement would be valid up to 11 p.m. on 13 March 2006 pending the signature and deposit payment by the purchaser.

4.          It is not disputed that at the time Mr. Lim signed the agreement on 11 March 2006, Kenneth had left out the name, address and ID card number of the purchaser.  Mr. Lim was requested to sign the receipt clause on the right bottom part of the draft agreement even though the purchaser’s identity and cheque number of the deposit were also left blank.  No deposit was paid to Mr. Lim until a cheque was handed over to him on 13 March 2006 together with a copy of the agreement after the purchaser placed his signature on the agreement.

5.          After Mr. Lim was asked to sign the draft agreement on 11 March 2006, he was further asked to sign a EAA Form 3 (the estate agreement for sale of residential property in Hong Kong in Chinese) (p. 1 of documents bundle) and a declaration that he had the authority from his wife (the 2^nd Defendant co-owner) attached to the provision sale and purchase agreement (p. 3).

6.          The purchaser signed the provision sale and purchase agreement on the evening of 12 March 2006 upon his return to Hong Kong.  After signing the agreement, he handed over a cheque for the payment of the 5% deposit of $374,000 to a staff of the Plaintiff, Mr. Wu, who had delivered the agreement for his signature.

7.          On the next day, 13 March 2006, Kenneth delivered a copy of the duly signed agreement together with the cheque for payment of the 5% purchase price deposit to Mr. Lim.

8.          Upon receipt of a copy of the signed agreement, Mr. Lim discovered the identity of the purchaser was one Ko Sik Ka whom he suspected was Kelvin Ko, the owner of unit 11C.  After making inquiries and confirming the information, he called Kenneth and questioned him about his knowledge of the purchaser who had turned out to be the owner of 11C.

9.          Eventually, the parties duly completed the sale at the agreed completion date.  However, Mr. Lim refused to pay the commission of $74,800 to the Plaintiff under the estate agent agreement.

The dispute

10.          Mr. Lim claimed that prior to agreeing to the sale of the property, he had laid down the condition that his sale offer was subject to the purchaser not being the registered owner of Unit 11C, Mr. Kelvin Ko.  At the time, Kenneth had assured him the purchaser was not the owner of Unit 11C even though he claimed ignorance of the identity of the purchaser and had taken instructions solely through the purchaser’s office staff.

11.          The Plaintiff agreed that Mr. Lim did ask for the identity of the purchaser, but claimed Kenneth did not tell Mr. Lim the purchaser was not the owner of Unit 11C.  Kenneth claimed he did not know the identity of the purchaser until 13 March 2006 when he saw Mr. Ko’s signature on the agreement.

12.          As the sales manager of the Plaintiff, Kenneth claimed he had no idea the purchaser was Mr. Ko for whom he had acted in a number of property transactions on Castle Peak Road previously because on this occasion he was contacted by telephone by Mr. Chan whose full name was not known to him.

13.          The Plaintiff claimed it had acted with full propriety and denied Kenneth had misrepresented to Mr. Lim the purchaser was not the owner of Unit 11C.

The Issues

14.          Mr. Lim appeared in person on his wife and his own behalf.  His Defence consisted of a pleading of facts.  Upon the amendment of the Defence at the trial, the issues in this action can be summed up as follows:-

I.    Did the Plaintiff through Kenneth misrepresented to the Defendant the purchaser was not the owner of unit 11C?  If it did, was the misrepresentation negligent or fraudulent?

II.   Was there a breach of the agency agreement by the Plaintiff in failing to act honestly and in the best interests of its client, the Defendants?

Findings

I.  Did the Plaintiff misrepresented to the Defendants the purchaser was not the owner of unit 11C?

15.          It was the Plaintiff’s case that it did not know the name of the purchaser.  Kenneth’s evidence was he was contacted on the telephone by a Mr. Chan who asked him to negotiate with the register owner of unit 10C the sale of the property.  He was told by Mr. Chan the purchaser was his boss who preferred not to disclose his name at that stage.  Kenneth then negotiated the sale price with Mr. Lim on Mr. Chan’s instructions.  He did not ask Mr. Chan to sign an estate agent agreement (EAA Form 4) neither did Mr. Chan ask to view the property.

16.          Kenneth admitted not only did he not find out the name of the purchaser, he did not find out Mr. Chan’s full name, and he had never met with Mr. Chan throughout the period of negotiations.  He had only come to know Mr. Chan’s full name when he read the witness statements in preparation for the trial.  He claimed there was no need for him to ascertain the identity of the purchaser before he represented the prospective purchaser and negotiated with Mr. Lim.  He claimed he had only found out the purchaser was Mr. Ko after he received the signed provisional sale and purchaser agreement from Mr. Wu on 13 March 2006.  He admitted the purchaser did not sign a EAA Form 4 agreement with the Plaintiff prior to signing the provisional sale and purchase agreement.

17.          Kenneth admitted Mr. Lim had asked him to find out the identity of the purchaser at an early stage of the negotiation.  As Mr. Chan told him his boss was not sure in which name the property would be purchased, he did not fill in the purchaser’s name on the provisional sale and purchase agreement before it was given to Mr. Lim to sign.  He claimed Mr. Lim was satisfied with the explanation, therefore, he had fulfilled his duty to Mr. Lim.  He did not ascertain the identity of the purchaser because he trusted Mr. Chan’s offer was a genuine one.

18.          Mr. Lim, on the other hand, claimed he had insisted the purchaser should not be the owner of unit 11C or he would have raised the price or simply not agree to the sale.   He explained that he and his wife had originally wanted to purchase unit 11C rather than unit 10C because unit 11C has a roof area which his young family could enjoy.  At the time, he was told by Kenneth that the owner of unit 11C had put it in the market at $6.8 million through the Plaintiff but the owner was not in Hong Kong.  Thinking he could purchase unit 11C after he sold unit 10C, he agreed to negotiate the sale of unit 10C.

19.          He claimed Kenneth had told him the reason the purchaser wanted to buy unit 10C instead of unit 11C for fung shui reason.  Kenneth had further told him he knew the owner of 11C as he was the agent when the owner purchased 11C.  Mr. Lim therefore accepted Kenneth’s words when Kenneth repeated on a number of occasions that the purchaser was not the registered owner of unit 11C and did not insist on writing into the agreement the condition that the offer was not opened to the owner of unit 11C when Kenneth told him he could not do so.

20.          When he received from Kenneth the signed copy of the agreement on 13 March 2006, his suspicion was aroused as he noticed the purchaser’s name was Ko Sik Ka.  At his inquiry, the District Manager of Centaline Property Agency Ltd. of the Castle Peak Road area, Mr. Ho Chi Shuen (DW2) who was the agent for Mr. Ko in the sale of Houses 17 and 18 of Aqua Blue in early March 2006, confirmed to him Mr. Ko Sik Ka and Mr. Kelvin Ko were the same person.

21.          DW1 Mr. Ng Chi Chung is an agent at Ricacorp Properties Ltd. of HK Island.  He admitted he had assisted Mr. Lim when the property was purchased.  His evidence in Court was, Mr. Lim had telephoned him on 12 March 2006 and told him he had signed a provisional sale and purchase agreement with the purchaser’s name left blank because the agent had told him the purchaser had not decided whether to use his personal name or the company’s name.  Mr. Ng confirmed that Mr. Lim had told him the agent would be flying to Shanghai to obtain the signature from the purchaser on 12 March 2006.  Mr. Lim called him again the next day telling him he had discovered the purchaser was the owner of unit 11C, and he was angry and unhappy because he was lied to by Kenneth whom he had instructed he did not wish to sell to Mr. Kelvin Ko the owner of unit 11C.  Mr. Ng told Mr. Lim the agreement he signed was a legally binding document.

22.          Mr. Ho and Mr. Ng are experienced estate agents, both had over 10 years experience in the business.  I find their evidence to be truthful.  Mr. Ng supported Mr. Lim’s evidence that he had called Mr. Ng on 12 March 2006 and told him he had instructed Kenneth he did not wish to sell to the owner of unit 11C and that Kenneth had told him the purchaser was not the owner of unit 11C.  This showed Mr. Lim had consulted him before he discovered the identity of the purchaser and again on 13 March 2006 right after he found out the purchaser was the owner of 11C.  His evidence further supported Mr. Lim’s claim that Kenneth had told him the purchaser was in Shanghai on 11 March 2006 and Kenneth would fly to Shanghai on 12 March 2006 to get the purchaser’s signature on the agreement.

23.          Mr. Ho’s evidence confirmed that Mr. Ko had been assisted by his staff Mr. Chan Chu Yiu in the initial contacts in the sale of Houses 17 & 18 at Aqua Blue.  Mr. Ho further said in Court that Mr. Ko owned a number of units at Aqua Blue and other properties along Castle Peak Road and he was a well known property investor of properties on Castle Peak Road who would make initial contacts with estate agents through his 2 staff members one of whom was Mr. Chan Chu Yiu, but Mr. Ko would always conduct the final negotiations personally.

24.          Mr. Lim produced a company search of KK Education Limited’s company return dated 1 December 2006.  It is a company wholly owned by Mr. Ko and Mr. Chan Chu Yiu was named the secretary of the company.  Kenneth admitted he knew the registered owner of Unit 11C was KK Education Limited a company owned by Mr. Ko and he had a copy of the company search record on file from the time he was the agent responsible for the sale of unit 11C to KK Education in 2005.

25.          Based on the evidence of the Defence witnesses Mr. Lim, Mr. Ho and Mr. Ng, I am satisfied Mr. Lim did ask Kenneth if the purchaser he represented in the negotiation was Mr. Kelvin Ko whom Mr. Lim knew was the owner of unit 11C.  Kenneth claimed Mr. Lim had only asked him to find out the identity of the purchaser but claimed he did not know the identity of the purchaser.  He further claimed he trusted Mr. Chan whom he had never met and their contact were by telephone only.

26.          I find Kenneth to be an unreliable witness.  His claim of ignorance of the identity of the purchaser I do not find convincing at all.  Mr. Ho and Mr. Ng, both very experienced estate agents agreed they have never handled any transactions where they failed to find out the full name and identity of the purchaser before approaching the vendor to sign the provisional sale and purchaser agreement.  Furthermore, the usual practice when an offer made by the purchaser is accepted by the vendor, is that payment of a deposit would usually accompany the offer and given to the vendor when the vendor signed the provisional agreement.  Furthermore, it is usual practice for the purchaser to sign the provisional sale and purchase agreement first to give the vendor the choice of accepting or rejecting the offer.

27.          I agree with Mr. Ho and Mr. Ng that it would not be advisable for vendors to sign an open contract without knowing the identity of the purchaser and without the payment of deposit.  It meant the interest of the vendor would not be protected if the offer is kept opened for 3 days pending the acceptance by an unknown purchaser.

28.          Kenneth had clearly induced Mr. Lim to sign an open offer to an unknown purchaser.  As Mr. Lim’s open offer could be retracted anytime before Mr. Ko placed his signature on the agreement on the evening of 12 March 2006, Kenneth had to conceal the purchaser’s identity from him because Mr. Lim had signed an open offer without receiving any consideration.  For this reason, Kenneth had to tell Mr. Lim he had to deliver the agreement to the purchaser in Shanghai on 12 March 2006 for his signature because he knew Mr. Ko would not be back in Hong Kong until the evening of 12 March 2006.  Mr. Lim’s allegation that Kenneth told him he would be delivering the agreement to the purchaser in Shanghai was corroborated by Mr. Ng whom Mr. Lim consulted on 12 March 2006.  Mr. Lim’s evidence is further supported by exhibit D3, a letter he wrote to the Plaintiff on 6 April 2006 accusing Kenneth of lying about the trip to Shanghai and failing to represent his interest. 

29.          I find it inconceivable that Kenneth, an experienced real estate agent would have made an offer to the Vendor for a property on behalf of a total stranger with whom he had only contacted by telephone.  Contrary to the EAA regulations, not only did he fail to ascertain the full name of the intended purchaser or his agent, but he also failed to obtain a duly signed Form 4 from either Mr. Chan or Mr. Ko.  Unless the intended purchaser was someone well known to him or a trusted customer of the Plaintiff whom Kenneth knew, no estate agent would negotiate with a vendor and make an offer for an expensive property on the strength of a telephone call from a prospective purchaser whose name was unknown to him and without the payment of deposit for the property that would usually accompany the offer from a purchaser.

30.          I am satisfied Mr. Lim did repeatedly asked Kenneth if the intended purchaser was Mr. Kelven Ko who owned unit 11C and Kenneth had repeatedly told him it was not.  Kenneth had further told Mr. Lim, the owner had placed unit 11C on the market in order to give him a false sense of security that Mr. Ko was selling unit 11C and therefore had no reason to buy unit 10C.  Furthermore, Mr. Lim was led to believe he might be able to purchase unit 11C after he sold unit 10C at a good price.

31.          I am also satisfied that Kenneth did misrepresent to Mr. Lim the purchaser was not Mr. Ko the owner of unit 11C in order to induce him to sell the property at $7.48 million although it might have been a good price selling to someone who is not the owner of the adjoining property.  It is not disputed Mr. Ko had engaged Kenneth’s services in a number of property transactions including unit 11C prior to this transaction and Kenneth could have ascertained easily Mr. Chan was Mr. Ko’s staff from the company returns of KK Education Ltd. from his records.  Furthermore, he probably had contacted Mr. Chan before in previous transactions, otherwise, Kenneth would have asked to meet the purchaser and obtain his particulars, requested him to sign a Form 4 estate agent agreement and obtained a cheque for the 5% deposit from him according to the usual procedure.

Breach of Contract of Agency

32.          Mr. Lim claimed the Plaintiff had failed to act in good faith and in the Defendant’s best interests and further he had misrepresented to him the purchaser was not the owner of unit 11C.

33.          Chitty on Contracts vol. I 29^th ed. Para. 24-039-40 stated:-

“24-039      …… in the modern law, a term of a contract may be held to be a condition if it has been so categorised by statute or by judicial decision, or if the parties have so agreed in their contract, whether expressly or by necessary implication.  Any failure of performance which constitutes a breach of condition entitles the innocent party to treat himself as discharged from further liability under the contract. ……

24-040      where the failure of performance is not a breach of condition, but of an “intermediate” term, it may still justify the innocent party in treating himself as discharged.  But in such a case regard must be had to the nature and consequences of the breach in order to determine whether this right has arisen. ……”

34.          Mr. Lim had clearly made it an intermediate term of the contract when Kenneth approached him on the sale of the property that Kenneth should ascertain if it was the owner of unit 11C making the offer because he did not wish to sell to the owner of unit 11C.  Even if he was ignorant of the identity of the purchaser, Kenneth had obviously failed to find out from Mr. Chan if the purchaser was Mr. Kelvin Ko, sole shareholder and director of KK Education.  Even though Mr. Ko giving evidence on the Plaintiff’s behalf confirmed he did instruct his staff Mr. Chan not to disclose his identity, Kenneth had no basis to reassure Mr. Lim the purchaser was not the owner of unit 11C even if he genuinely did not know the true identity of the purchaser.  Kenneth had clearly failed to carry out what he was instructed to do.

Negligent or Fraudulent Misrepresentation

35.          Para. 6-043-45 of Chitty on Contracts vol. I stated:-

“6-043  Definition of fraud.  The common law relating to fraud was established by the House of Lords in Derry v Peek.  It was there decided that in order for fraud to be established, it is necessary to prove the absence of an honest belief in the truth of that which has been stated; in the words of Lord Herschell, “fraud is provide when it is shown that a false representation has been made: (1) knowingly; or (2) without belief in its truth; or (3) recklessly, careless whether it be true or false.

6-044  Absence of honest belief.  That the claimant who alleges fraud must prove the absence of an honest belief is demonstrated by Derry v Peek itself.  …… The decisive factor, in Lord Herschell’s words, was that “they honestly believed that what they asserted was true.

6-045  Defendant’s knowledge of falsity of statement.  The requirement of proof of the absence of honest belief does not, however, mean that the claimant must prove the defendant’s knowledge of the falsity of the statement.  It is enough to establish that the latter suspected that his statement might be inaccurate, or that he neglected to inquire into its accuracy, without proving that he actually knew that it was false. …… Lord Cairns expressed the principle as follows: “If persons take upon themselves to make assertions as to which they are ignorant whether they are true or untrue, they must, in a civil point of view, be held as responsible as if they had asserted that which they know to be untrue.”

36.          Even if Kenneth genuinely did not know Mr. Chan’s boss was Mr. Kelvin Ko, he must have been reckless and careless in failing to make the necessary enquiries when he was specifically instructed to ascertain the identity of the purchaser and that he should not be the owner of unit 11C.  I am satisfied the Defendants have satisfied the requirement of proof of absence of honest belief by establishing that Kenneth had failed to ascertain the accuracy of the statement that the purchaser was not the owner of 11C when he was specially instructed to do so.

37.          In the case of Centaline Property Agency Ltd. v. Lai Yuk Chun [2002] 2 HKLRD 241, Deputy High Court Judge To at para. 42 held the fundamental principle is the rights and obligations of the principal and agent are governed by the terms of the contract, whether those terms are expressed or implied.  At para. 43 he said:

“43.    In the present case, the defendant had given express instruction not to sell to her neighbours below $13 million.  That instruction became part of the contract of agency.  This distinguishes the present case from Kelly v Cooper [1993] AC 205.  It is not open to the agent to say I am at liberty to ignore that express term because the law implies into my contract a term that allows me to keep confidential the information of my other principal.  In the present case, not only that the plaintiff was in breach of the contract of agency, it was also guilty of misrepresentation.

44.     If the instructions of both of his principals put the agent in a position of conflict, it is his duty to resolve the conflict or to cease to act, preferably for both principals.  It is not up to the agent to choose to depart from his instruction, not at least, without first informing his principal.”

38.          In that case, the judge dismissed the plaintiff’s claim against the defendant and he further dismissed the defendant’s counterclaim for loss of profits against the plaintiff.  The decision was upheld in the Court of Appeal.  The present case is similar to Lai Yuk Chun’s case, and Mr. Lim’s instruction of not selling to the owner of unit 11C at $7.48 million had become a part of the agency contract.

Conclusion

39.          Similar to the Centaline v. Lai case, the Plaintiff which is responsible for the actions of its director and manager Kenneth, had failed its duty to protect the interests of the Defendants by ascertaining the purchaser was not the owner of unit 11C before Mr. Lim signed the agreement to say the least.  Further, the Plaintiff, by representing to Mr. Lim the purchaser was not the owner of unit 11C, had either done it recklessly or fraudulently because it was Kenneth’s duty to find out.  I found from the factual circumstances Kenneth must know whom he was representing in the purchase of the property.  The Plaintiff had committed a breach of an important term of the agency agreement with Mr. Lim.

40.          For the aforesaid reasons, I dismiss the Plaintiff’s claim against the Defendants.

41.          Costs – Defendants’ cost to be borne by the Plaintiff to be taxed if not agreed.