NATIONAL BANK OF CANADA (BANQUE NATIONALE DU CANADA) v. ROGERIO LAM SOU FUNG

IN THE COURT OF APPEAL

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REASONS FOR JUDGMENT

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Fuad, J.A.:

1. At the conclusion of the hearing of this appeal I agreed with both My Lords that it should be dismissed, and I now give my reasons.

2. The appeal arose out of a refusal by a Judge in Chambers to give leave to defend in an 0.14 application. The Master had given the defendant unconditional leave to defend and the Judge reversed the order on appeal.

3. On the 18th February 1982 the National Bank of Canada ("the Bank") entered into a deed with Mr. Rogerio Lam Sou Fung under which the Bank agreed to grant Lam & Associates (Real Estates) Ltd. ("the Company") a loan facility of up to $30,000,000 and to enter into a mortgage deed with the Company whereby certain property they owned would be mortgaged to the Bank, Mr. Lam agreeing unconditionally and irrevocably to guarantee due payment of the sums advanced to the Company, with interest.

4. The Company duly entered into the mortgage deed, and on the 11th January 1983 there was a supplemental deed executed under which the Bank and the Company agreed to extend the repayment date stipulated in the mortgage deed for a further two months - to the 18th March 1983.

5. On the 11th January 1983 Mr. Lam himself executed a supplemental deed to his guarantee, agreeing that his obligations under the original guarantee would continue to have effect during the extended period.

6. By the 18th March 1983 the Company had paid only the interest due on the loans and further arrangements were made between the parties whereby Mr. Lam's guarantee would continue in force. The guarantee would also cover the Bank's possible legal costs in recovering their money.

7. By the 9th September 1983 the Company's indebtedness stood at $30 million with $230,575 interest. Four days later the Bank demanded payment from the Company and Mr. Lam. Between the 20th September 1983 and the 7th February 1984 the Company paid back a total of $27,523,750 and as at the 20th March 1984 the Company still owed the Bank $2,476,250 principal and $1,161,006 interest making a total of $3,637,256. Appropriate letters before action were written and there being no response whatever from Mr. Lam, the Bank issued a writ, endorsed with a Statement of Claim, against him on the 18th April 1984 claiming the amount still owed by the Company and $31,137 legal costs incurred by the Bank.

8. On the 22nd May 1984 the Bank applied for summary judgment. Meanwhile Mr. Lam had filed a Defence (on the 15th May 1984). The Master, as we have seen, gave Mr. Lam unconditional leave to defend. But, as we know, the Bank succeeded in getting judgment on appeal to the Judge in Chambers.

9. In his affidavit dated the 31st May 1984 Mr. Lam denied his indebtedness. It is not possible to summarise this labyrinthine document while retaining its full meaning, and so I will set out all the material parts. I make no apology for doing so since the Defence, in its essentials, is oddly reminiscent of the language and thought processes employed by Mr. Lam. This is what he said:

"5.         Upon the default of Lam & Associates (Real Estates) Ltd. (hereinafter called "the Borrower") in repaying the amount due to the Plaintiff under the Mortgage and the Second Supplemental Deed thereto after the 17th May, 1983, the Borrower, with the knowledge and approval of the Plaintiff, entered into negotiations to sell that portion of the mortgaged property comprising the 32nd floor of the Bank of America Tower and four carparking spaces on the 4th floor of the same building.

 

6.        On the 19th August, 1983 the Plaintiff consented to the re-assignment of parts of the 32nd floor and two carparking spaces on the 4th floor of the Bank of America Tower for the purposes of the sale thereof by the Borrower to MM Worms Far East And Associates Limited and Preservatrice Fonciere Tiard Compagnie D'Assurances. A copy of the letter from the Plaintiff's solicitors to the Borrower's solicitors is now produced and shown to me marked "RLSF-2".

 

7.         Concurrent with the negotiations between the Borrower and the aforesaid purchasers, the Borrower with the knowledge and approval of the Plaintiff conducted negotiations for the sale of the remaining portion of the 32nd floor and two carparking spaces on the 4th floor of the Bank of America Tower with Hong Kong Carpet Manufacturers Limited (hereinafter called "the Purchaser").

 

8.        By letter dated the 10th August, 1983 the Purchaser offered to purchase the balance of the 32nd floor of the Bank of America Tower with a gross floor area of 7,830 square feet at a price of $2,000.00 per square foot for a total consideration of $15,660,000.00 such price to include two carparking spaces on the 4th floor of the same building. A copy of the offer letter from the Purchaser is now produced and shown to me marked "RLSF-3".

 

9.        By letter dated llth August, 1983 the Plaintiff requested the sales agent of the Borrower, namely V-2 Enterprises Limited, to ask the Purchaser to extend the validity of the offer until the 17th August, 1983. A copy of the letter from the Plaintiff to the said V-2 Enterprises Limited dated 11th August, 1983 is now produced and shown to me marked "RLSF-4".

 

10.        The Plaintiff's request was conveyed to the Purchaser by the said V-2 Enterprises Limited by a letter dated 12th August, 1983. A copy of the said letter is now produced and shown to me marked "RLSF-5”.

 

11.        The Plaintiff declined to give its consent to the acceptance by the Borrower of the offer of the Purchaser dated the 10th August, 1983 and caused the Borrower to continue negotiations with the Purchaser in an attempt to secure an improved offer. By letter dated 30th August, 1983 the said V-2 Enterprises Limited with the consent and approval of the Plaintiff offered to sell the premises to the Purchaser for the same price as proposed by that company in its offer made on the 10th August, 1983 but the purchaser declined to accept this offer. A Copy of the said letter dated 30th August, 1983 is now produced and shown to me marked "RLSF-6".

 

12.        On or about 7th February, 1984 the Borrower at the direction of the Plaintiff finally assigned the balance of the 32nd floor of the Bank of America Tower consisting of 7,830 square feet and four carparking spaces on the 4th floor of the same building to the Purchaser for a total consideration of $14,062,500.00. A copy of the said assignment is now produced and shown to me marked "RLSF-7".

 

13.        By reason of the matters aforesaid the Borrower through the actions and/or inactivity of the Plaintiff was unable to accept the offer of the Purchaser dated 10th August, 1983 and was subsequently forced to sell the premises at a reduced price and to assign two additional carparking spaces.

 

14.        Had the Borrower not been prevented from accepting the offer of the Purchaser on the 10th August, 1983, the said sale and purchase would nave been completed in the ordinary course of events on or before the 19th September, 1983. The sum of $15,660,000.00 would have been paid by the Borrower to the Plaintiff in reduction of its indebtedness by that date. In consequence the Borrower would have been liable to the Plaintiff as at that date on a sum of $878,750.00 instead of $16,538,750.00. The Borrower would also have retained two carparking spaces on the 4th floor of the said Bank of America Tower. "

 

10. By the mortgage deed, the Bank had the usual rights and there was provision which prohibited, inter alia, the assignment by the Company of any part of the mortgaged property without the written consent of the Bank, and then only upon conditions reasonably imposed by the Bank.

11. It is common ground that part of the mortgaged property was indeed sold with the Bank's consent. This was on the 22nd August 1983 and the Bank's condition that the proceeds of this sale ($13,461,250) should be paid over to reduce the Company's indebtedness was fulfilled. The Bank actually received the money on the 19th September 1983.

12. Certain other facts are also common ground but the true legal effect of the Bank's conduct in relation to these matters still divides the parties to this action.

13. It seems that in early August 1983, Hong Kong Carpet Manufacturers Ltd. ("H.K. Carpet") expressed an interest in buying some of the mortgaged property. They made an offer which was valid for five days. No sale was agreed and Mr. Lam makes no complaint about the Bank's conduct in relation to that particular offer.

14. On the 10th August 1983, H.K. Carpet made another offer - this time it was to buy 7,830 square feet at the price of $2,000 per square foot (inclusive of two parking spaces) at a total price of $15,660,000. This offer was valid for 48 hours. The Bank came to hear about it and asked H.K. Carpet to keep the offer open to the 17th August 1983. What happened then is the subject of conflicting testimony as the affidavits show. But what is clear is that on the 31st August 1983 there was a report in the leading English language newspaper that another Bank had repossessed another floor of the building in which the mortgaged property is situated and the author of the article suggested that a realistic price for a floor of the building three floors below the mortgaged property was $1,800 per square foot. On the same day a representative of H.K. Carpet told the Bank that they did not wish to buy at $2,000 per square foot since the realistic price was $200 per square foot less. If this sale had taken place the proceeds would have fallen short, by nearly $879,000, of the Company's indebtedness.

15. Eventually, on the 7th February 1984, H.K. Carpet did buy 7,830 square feet of the mortgaged property, but at a reduced price of $14,062,500. And the price included four car parks and not two. The Bank had given its formal consent to this sale in a letter dated the 29th December 1983. One of the conditions the Bank imposed was the following:-

"6.         Mr. Rogerio Lam and Bylamson & Associates (Enterprises) Limited, the two Guarantors of the mortgage loan, will execute such documents as we may think fit to confirm the validity of their continuing guarantee for the balance of the outstanding mortgage loan liabilities, such Guarantors in the meantime to sign and return to us copy of this letter by way of confirmation of their acknowledgement and consent to the proposed disposal of the Property and that such disposal shall not be in any way whatsoever affecting their respective covenants under their respective Guarantees. " [Emphasis added]

16. Mr. Lam did sign and return a copy of this letter to the Bank. He signed on behalf of the Company (as one of its Directors) and personally. I will say at once that I respectfully and entirely agree with the view formed by the Judge below as to the effect of this acknowledgement. Speaking for myself I cannot imagine circumstances (fraud, undue influence or mistake apart) in which a mortgagor can be heard to complain about a sale which has been sanctioned by him. Surely a guarantor can be in no better position. In all the circumstances I feel that the Judge would have been fully justified in refusing leave to defend on this ground alone. Mr. Lam made no reservations whatever at the time he agreed to the sale, and the proposed defence cannot have been bona fide.

17. This would be sufficient to dispose of the appeal, but in deference to the arguments addressed to us by Mr. Sceats on behalf of Mr. Lam, I will go on to consider the main plank upon which the proposed defence is based. Mr. Lam is in fact seeking to set up a counterclaim by way of set off on account of the Bank's conduct in August 1983. I could stop here, too, because, there is no evidence whatever to show that it was anything that the Bank did or failed to do that resulted in the sale at $2,000 per square foot falling though. Mr. Lam was, on his own account, expecting completion on about the 19th September 1984. The offer to buy was "subject to contract". The reason for the withdrawal of the offer on the 31st August 1983 was that I have mentioned above. I do not see how Mr. Lam can say, as he did, "Had the Borrower not been prevented from accepting the offer of the Purchaser on the 10th August, 1983 the said sale and purchase would have been completed in the ordinary course of events on or before the 19th September 1983. "

18. I mean no disrespect to Mr. Sceats but I must confess that I found it very difficult to understand the legal foundation for his propositions. In essence the complaint against the Bank is that it owed a duty of care to the Company and Mr. Lam when intervening in the negotiations in connection with the 10th August 1983 offer. It is said that the Bank was in breach of this duty in not informing the other parties of its intervention or of its willingness to consent to the offer expeditiously, thus causing the loss of the sale. It seems to me that these contentions must be predicated on the assumption that the Bank was bound to consent to an assignment under clause 9.4 (xii) or (xiv) of the mortgage deed in certain circumstances. I think that Mr. Kaplan is right when he says that the evidence does not support the allegation that the Bank did in fact refuse its consent to the sale, but in my judgment they were perfectly entitled to do so. Do not the submissions of Mr. Sceats mean, in effect, that if a mortgagee does not consent to a sale at a given time, at the then market price, the mortgagor's indebtedness is reduced by the difference between the sum later obtained and the sum that could have been obtained had he consented earlier? Taken to its limits, the submissions made on behalf of Mr. Lam would mean, I suppose, that if no sale ever took place, the debt would be reduced by the sale price that could have been obtained had consent been given. Stated thus, these are startling propositions and no one would lend large sums of money on these terms.

19. I would here remark that it would be strange indeed if the Bank could be held to have acted in breach of a duty when it had a contractual right to act as it did.

20. I agree with the learned judge that the fact that there is conflicting evidence is of no moment in this case. If one accepts every word that Mr. Lam has deposed to (in the disputed area) in preference to the version given by Miss Ng of the Bank, the position in law would be no different.

21. The proposed defence was, in my judgment, at best misconceived and does not show a reasonable ground of defence. Mr. Lam has failed totally to raise a fairly arguable case. To hold that he had would be to prefer illusion to reality. Once the significance of the undisputed facts is appreciated, and the fog of conceptually untenable propositions dispersed, no difficult point of law is involved. The Judge's decision on this 0.14 application was plainly right.

Sir Alan Huggins, V.-P.:

22. The plaintiff Bank was never formally asked to consent to the sale. Even if it had been, the suggestion that a mortgagee (acting bona fide) can be compelled to consent to a sale of the whole or part of the mortgaged property is a novel one and totally unsupported by authority. I see no reason why he should, in the absence of express agreement, be compelled to accept a surrender of any part of his security save upon payment of the debt in full. If he cannot be forced to consent, then he cannot (in the absence of an estoppel, which is not here alleged) be liable in negligence if he fails to give consent in the only form which would be effective. Even if he could be so liable, the alleged set-off in the present case would necessarily fail, because the loss alleged by the defendant is one arising not from any act or neglect of the Bank but from the withdrawal by a prospective purchaser of his offer - made "subject to contract" - to buy part of the property, an event for which the Bank was in no way responsible. The fact that the Bank had previously consented in writing to the sale of another part of the mortgaged property has no relevance whatever to the present action: it was not contended that the defendant Guarantor had been prejudiced by the previous sale.

23. At one point it appeared to be contended before us that in holding discussions with the prospective purchaser the Bank had been acting as agent for the Mortgagor. This argument was not open on the appeal, was clearly inconsistent with the evidence and would not, in the event, have assisted the defendant.

Cons, J.A.:

24. As I understood the appeal it was put forward in two ways. The first was in negligence. It was said that the Borrower and the Guarantor were neighbours of the Bank within the principle enunciated in Donoghue v. Stevenson, [1932] A.C. 562; the Bank must have realised that in a falling market either to refuse consent or to delay the giving of consent would cause financial loss to the Borrower or Guarantor or both. The Bank would therefore be negligent if it did so.

25. The second approach was in equity. It was said that in a similar market it would be inequitable for the Bank, not wishing to re-enter and realise its security for itself, not to give the necessary assistance to the Borrower to do the best that he could for himself, provided that the price he obtained was reasonable; and for that there was evidence from the Bank itself.

26. I was willing to assume for the sake of the appeal - but no further - that one or other approach could be made good in law. I was also willing to assume that generally speaking the property market was falling at that time, or at least it could not have been expected to rise. Nevertheless I still did not see how the Bank could be said to have acted negligently or unfairly. It discussed the sale with the proposed Purchaser on the 17th August, then later with the Borrower and the Guarantor on the 25th. Everything was going smoothly and, but for the one unfortunate event, it is clear the sale would have been comfortably completed according to time scale suggested by the Borrower himself, that is the Contract would have been signed on the 1st September, followed by completion on the 19th and delivery of vacant possession on the 30th. On the 31st August, the day that the act of the Bank of East Asia was reported in the press, the Purchaser was still free to withdraw from the transaction if he so wished because the offer he had accepted had been expressly made "Subject to Contract". It is equally clear that his decision to so withdraw was the result of reading the report in the press and was not in any way due to any act or omission on the part of the Bank.

27. In my view there was no possible defence to the action and I therefore agreed that the appeal should be dismissed.