CHEKIANG FIRST BANK LTD. v. FONG SIU KIN and Another

IN THE COURT OF APPEAL

1996, No. 242
(Civil)

- Headnote -

Contractual obligation - Relief in equity as a result of undue influence - Woman mortgaged her property to secure a third party's indebtedness to a Bank - Third party defaulted - Whether woman who received no benefit from the transaction, could have the mortgage set aside.

On the pleaded case the Bank was the alleged wrongdoer, acting through its agents. The trial judge had found no undue influence exercised by the Bank and on the facts, the relationship between the woman and the Bank did not give rise to a presumption of undue influence. The Judge awarded the Bank costs on a solicitors-and-own-client basis.

Held (Court of Appeal):

Undue Influence

Whether the solicitors, in the circumstances, were wise or unwise to have rendered legal services to all three parties in the transaction was not the issue. Unless (i) the relationship and the other circumstances gave rise to a presumption of undue influence, or (ii) there was evidence of some vitiating factor operating on the woman's will, the case was not made out.

Costs

As the Legal charge contained provisions for costs on a solicitor-and-own-client basis, the court in the exercise of its jurisdiction under s52A Supreme Court Ordinance did not err in allowing costs on a solicitor-and-own-client basis: The principle in Gomba Holdings v. Minories Finance [1993] Ch 171 followed.

IN THE COURT OF APPEAL

1996, No. 242
(Civil)

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J U D G M E N T

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Litton, V.-P.:

1. By a legal charge dated 19 May 1988 Madam Fong Siu-kin (the appellant) mortgaged a unit she owned in a factory building in Kwun Tong to the Chekiang First Bank (the respondent). It was not to secure any loans or facilities granted to her. She got nothing out of the transaction. It was to secure banking facilities granted to a Mr Ma Yiu-fei trading as Grand Plastic Bags and Printing Co. to the extent of $380,000 and interest. At the time of the charge Mr Ma was already indebted to the bank in the sum of approximately $44,000, unsecured.

2. Madam Fong was, in 1988, a married woman aged 61 years, illiterate. The legal charge was executed in a solicitor's office, the contents of the instrument having been explained to her by a clerk Mr Nelson Chan. The execution of the deed was witnessed by a solicitor Mr Frank Cheung. The firm of solicitors Messrs F. Zimmern & Co. acted for all three parties in the transaction: the lender, the principal debtor and Madam Fong the surety. The transaction, on its face, was grossly disadvantageous to Madam Fong. She risked losing her property to the Bank if Mr Ma should default in payment to the Bank. And yet, no-one advised her as to her vulnerability.

3. Some time later Mr Ma got into financial difficulties. On 22 August 1994 the Bank wrote to Madam Fong seeking repayment of $332,755 owed by Mr Ma. This was followed by an originating summons issued on 13 September 1994 in which the Bank sued Madam Fong as the 1st defendant and Mr Ma as the 2nd defendant, seeking as against them jointly and severally the repayment of sums due and an order for delivery up of possession of the property. At some stage pleadings were ordered and the matter proceeded as if initiated by writ in the ordinary course.

The pleadings

4. In her amended Defence, para 4, Madam Fong pleaded as follows:

"The 1st Defendant's execution of the Legal Charge was procured by the undue influence of the Plaintiff, its agents and/or its servants over the 1st Defendant and/or was improperly obtained by the Plaintiff, its agents and/or its servants from the 1st Defendant."

5. This averment of wrongdoing by the Bank (through its servants and agents) was then particularized. This was followed by para 5 which reads:

"5. By facts pleaded above, at the time of the execution of the Legal Charge, there existed between the 1st Defendant and the Plaintiff a relationship of trust and confidence and the Legal Charge was executed at the request, which was made under the above circumstances by the 2nd Defendant personally and by the 2nd Defendant as agent or servant of the Plaintiff and by F. Zimmern & Co. as agent or servant of the Plaintiff."

The trial

6. The matter went to trial before Mrs Justice Bokhary. The principal witnesses were Madam Fong and Mr Nelson Chan the clerk. Madam Fong turned out to be a totally unreliable witness - confused and contradictory in her evidence, as the judge found. It was Madam Fong's case that, at the solicitor's office, she said she was giving the title deeds to the property for one year only. This however was rejected by the judge. Mr Chan's evidence, accepted by the judge, was as follows:

" He (Mr Nelson Chan) cannot now remember what happened during the execution of this particular legal charge. However, it was his invariable practice to give the parties to such things a full explanation. Such explanation would include: the parties involved; the amount of banking facilities involved; the interest rate; the liability of both the mortgagor and the borrower to make repayment; the right of redemption; and the right of the Bank to sell the property in case of default in repayment.

He cannot now remember what was said on this occasion. However, if Madam Fong had indeed - as she said in evidence she had - told him that the use of title deeds was for one year only, then he would have remembered it as something unusual and would have reported the matter to the Bank and to his superiors in the firm. So he did not think that he had been told any such thing."

7. As mentioned earlier, the transaction was, on its face, grossly disadvantageous to Madam Fong. But the effect of the instrument had, as the judge found, been fully explained to her. But equally, the danger of entering into such a transaction was, on those findings, never emphasised by Mr Chan the clerk nor, in terms, mentioned. There is no evidence that Mr Chan ever thought of giving Madam Fong such advice. The solicitor Mr Frank Cheung, who witnessed the signatures, did not testify at the trial and it is impossible to surmise what he might have thought. But then, the firm was in an awkward position. They owed duties to Mr Ma, who would not have taken it too kindly if, by the solicitor's intervention, Madam Fong should at the last minute have changed her mind and refused to hand over the title deeds or execute the legal charge. Nor would the Bank, for whom the solicitors also acted, have been too pleased if Madam Fong had pulled out of the transaction at the last minute.

8. But, whether it was wise or unwise for the solicitors to have rendered legal services to all three parties in these circumstances was not the issue. The matter in issue before the judge was whether the Bank had procured the execution of the charge by undue influence practised on Madam Fong - presumed or actual. The judge was not trying an action for damages for breach of duty against the solicitors . Whether the solicitors were in such a situation of conflicting duties that they could not have properly discharged their responsibility to Madam Fong was at best peripheral to what the judge had to decide.

9. The judge concluded as follows:

" I do not find that anybody exercised any undue influence on Madam Fong, did anything improper to obtain the Legal Charge or indeed did anything in anyway legally wrong in relation to the matters with which this case is concerned.

If any presumption of undue influence or the like ever arose, the same would have been rebutted by the whole of the evidence in this case."

Undue influence

10. A person who has been induced to enter into a transaction by the undue influence of another ("the wrongdoer") is entitled to set that transaction aside as against the wrongdoer: Barclays Bank v. O'Brien [1994] 1 AC 180 at 189-C.

11. The first question must then be, in every case: Who was the wrongdoer?

12. Here, upon the pleadings, the wrongdoer was the Bank. The Defence - para 4 - averred that Madam Fong's execution of the legal charge was "procured by the undue influence of the plaintiff" acting through its agents and/or servants. The particulars of that averment of wrongdoing as pleaded in para 4 appeared in 7 sub-paragraphs. Stripped of legalese and put in plain English they were to this effect:

(i) Madam Fong's daughter and Mr Ma's wife were former primary schoolmates.

(ii) The daughter told Madam Fong that Mr Ma needed money to buy a shop: The money was needed for one year.

(iii) The 4 persons met: That is, Madam Fong, her daughter, Mr and Mrs Ma. Mr Ma "confirmed" to Madam Fong that the lending would be from a financial institution and would only be for one year and asked Madam Fong to help him borrow $380,000 from a bank by using her property as security. Mr Ma emphasized that he would not deceive her and would let have the title deeds back after one year. (Emphasis added).

(iv) Madam Fong attended the offices of Messrs F. Zimmern & Co. for the execution of the legal charge. Immediately prior to signing a clerk told her it was a mortgage involving banking facilities to be granted to Mr Ma secured on her property, guaranteeing Mr Ma's indebtedness. Madam Fong "confirmed" to the clerk that the lending should be limited to be one year but the clerk "confirmed" to Madam Fong that it was a matter between Madam Fong and Mr Ma and the Bank "would not care". (Emphasis added).

(v) Mr Ma asked Madam Fong just to sign and said "things would be all right". The rest of the contents of the document was not explained to Madam Fong before she signed the document.

(vi) The solicitors, as agents for the Bank, exercised undue influence ("actual or presumed") over Madam Fong as particularized earlier.

(vii) Madam Fong had no independent advice.

13. Such was the case pleaded (after amendment) as put before the judge at the trial.

14. In the face of this, it is no wonder that the judgment was bare as regards findings of fact. What was the judge to make of Madam Fong's case?

15. On the pleaded case, the Bank - the alleged wrongdoer - had exerted no undue influence over Madam Fong. It was asserted as part of her case that, before signing, she was told that the transaction involved a mortgage of her property, guaranteeing Mr Ma's indebtedness to the Bank. Assuming that Mr Chan the clerk or Mr Frank Cheung the solicitor had been, for the purposes of the transaction, the Bank's agent: What acts had they performed which could have been construed as coercion, domination or pressure which sapped Madam Fong's will and induced her to enter into the transaction?

16. The case based on presumed undue influence must have been even more difficult for the judge to understand. Madam Fong had no prior dealings with the alleged wrongdoer the Bank. The Bank had no relationship with Madam Fong of the kind identified in Barclays Bank v. O'Brien at p189 as class 2(A) or class 2(B) cases, which might have given rise to a presumption of undue influence: Class 2(A), those well-known relationships such as medical adviser and patient where the presumption arises as a matter of law, and class 2(B), those instances where the complainant has in fact reposed trust and confidence in the wrongdoer and proves the de facto existence of a relationship where generally trust and confidence would be reposed in the wrongdoer.

17. These matters were far removed from the pleaded case. It is not surprising that the judge made few findings of fact and gave judgment for the Bank, dismissing Madam Fong's counterclaim to have the transaction set aside.

The appeal

18. Before us counsel (who did not appear in the court below), perhaps sensing the difficulty he was in, shifted ground. The primary wrongdoer he says was Mr Ma who, at the solicitor's office, had put his arms round Madam Fong's shoulder and urged her to sign, assuring her that he would not harm her and that things would be all right. The only evidence as to this came from Madam Fong.

19. There are several problems with this submission: (1) The judge had made no findings in Madam Fong's favour in this regard. This was clearly a matter in controversy: It had been raised in the Defence and was denied in the Reply. The judge specifically said that she was unable to rely on Madam Fong's evidence on any matter in controversy. (2) The facts, even if true, come nowhere near establishing what is referred to in Barclays Bank v. O'Brien as a class 1 case: actual undue influence. (3) Faced with the reality that, on Madam Fong's own case, actual undue influence by Mr Ma cannot be established, counsel suggests this as an alternative: The class 2(B) relationship in Barclays Bank v. O'Brien, giving rise to an evidential presumption of undue influence, is open-ended: It can accommodate relationships like husband and wife, co-habitees etc if the facts are right - and counsel submits it can accommodate Madam Fong and Mr Ma. The problem with this submission is that Madam Fong never suggested, directly or inferentially, that she had reposed trust and confidence in Mr Ma, or on anybody else - apart perhaps from her own daughter with whom she subsequently quarrelled as a result of this case.

20. Of course establishing thatMr Ma was the wrongdoer does not get Madam Fong home - for she seeks to set aside the transaction against the Bank, not Mr Ma.

21. Having reached this point and concluding as I do that a case of wrongdoing by Mr Ma cannot possibly be made out, I need not go on to consider the further point: Whether the Bank through the agency of the solicitors might be fixed with notice of Mr Ma's wrongdoing, to the extent that in equity the transaction must be set aside as against the Bank.

22. There is no material before the court from which it can properly be inferred that the Bank knew, or ought to have known, that Madam Fong was susceptible to pressure or misrepresentation by Mr Ma.

Costs

23. In the court below the judge awarded the Bank costs on a solicitor-and-own-client basis, on account of clause 2(d) of the legal charge which says:

"2(d) Pay to the Bank all usual or lawful costs and charges (including all legal charges calculated on a solicitor and own client basis) incurred by the Bank under or in connection with any of the foregoing matters or under or in connection with any other matter arising under or in consequence of these presents or in connection with the premises hereinafter charged or expressed and intended so to be."

24. Counsel says that the judge erred because Madam Fong's liability under the legal charge was limited to the sum of $380,000 and interest thereon, and the judgment debt against her had already brought her liability up to the limit - or at least nearly so.

25. To deal with this argument, it is necessary to identify the source of the jurisdiction to award costs. This is to be found in s52A of the Supreme Court Ordinance which vests a general discretion as to costs in the High Court: a jurisdiction the exercise of which is regulated by Order 62 of the Rules of the Supreme Court.

26. Plainly, the exercise of the court's jurisdiction as to costs cannot be fettered by anything in the mortgage deed.

27. On the other hand, where parties have contractually provided for the basis upon which costs are to be quantified, the court would in the normal course of events give effect to that: The English Court of Appeal so held in Gomba Holdings v. Minories Finance [1993] Ch 171 at 191-B.

28. The judge did not explain the basis of her award of costs. She said:

"Since it is only an order nisi which I am making now, I propose to do no more than to announce the result (without analysing the arguments which may have to be renewed if anyone wishes to re-open the matter before the costs order becomes absolute). The result is this. I make an order nisi as to costs awarding the Bank costs against Madam Fong and Mr Ma on a solicitor and own client basis."

29. Nothing suggests that the judge has erred in deciding as she did.

Conclusion

30. Anyone viewing the facts of this case would have sympathy for Madam Fong. Perhaps she was led by her daughter into doing a very foolish thing. Perhaps, if she had got independent legal advice, she might have reconsidered her position. But she might not. She might have said: "I don't want to spend money on legal advice. I trust Mr Ma. He won't let me down." This is all surmise. And surmise cannot be the foundation of legal principles.

31. The legal position is straight-forward. Madam Fong entered into a legally binding transaction. She failed to establish facts which might have enabled the judge to relieve her of her legal obligations by applying equitable principles. In my judgment this appeal must be dismissed.

Godfrey, J.A. :

32. Whenever a bank accepts security from a third party for the indebtedness of a customer, the bank is likely to be faced, if the customer defaults, with resistance from the third party when it attempts to enforce its security. But the third party cannot succeed in his resistance to the bank's claim merely by showing that, as will often (as here) be the case, the transaction was one which was manifestly disadvantageous to the interests of the third party. The law does not save people from the consequences of their own folly or improvidence. It does, however, save them from being imposed upon by the unconscionable conduct of others.

33. So, if the third party is "poor and ignorant", and thus it is unconscionable to take advantage of him, the bank's security may be set aside, especially where, as here, the asset given by the third party as the security is the third party's only asset of value : see Morrison v. Coast Finance Ltd (1966) 55 DLR (2d) 710 and In re Beaney [1978] 1 WLR 770. But no such case was pleaded or proved below nor advanced here (although perhaps it might have been) and I say no more about it.

34. So, too, if the entry of the third party into the transaction has been procured, or is presumed to have been procured, by undue influence, the bank's security may be set aside, at any rate if the bank has notice, whether actual or constructive, of the facts establishing the undue influence. That case was pleaded here, but after seeing and hearing the witnesses, in particular the third party Madam Fong, the judge held that the case was not proved.

35. We have reviewed the evidence for ourselves and for my part I can see no sufficient ground for holding that, on the evidence, the judge was wrong so to conclude. It is not easy to distinguish between permissible persuasion on the one hand and undue influence on the other. The judge heard and saw Madam Fong describe what had happened at the solicitors' office; the (alleged) promise by the bank's customer Mr. Ma that everything would be all right; the arm round the shoulder; the exhortation to sign. She concluded that this conduct on the part of Mr. Ma did not fall on the wrong side of the line. I am not disposed to disagree with her, although I appreciate that another judge might on the same evidence have reached a different conclusion.

36. Madam Fong's failure to prove undue influence is, as her counsel accepts, fatal to her resistance to the bank's claim to enforce its security.

37. I have, I know, not so far dealt with the argument advanced by counsel on behalf of Madam Fong that it is to be presumed against the bank that Madam Fong was subjected to undue influence because there was created, when she attended at the bank's solicitors' office to execute the security, a relationship of trust and confidence between Madam Fong and those solicitors. I would have accepted this argument if it was the solicitors who were to benefit from the taking of the security. But it was not. It was the bank; and no relationship of trust and confidence came into existence between Madam Fong and the bank merely because she attended at the bank's solicitors' office to execute the security. This argument, if I have correctly understood it, seems to me wholly misconceived.

38. As to the costs point, I agree with Litton V-P.

39. Accordingly, I, too, would dismiss this appeal.

Ching, J.A. :

40. I have had a number of doubts in this matter but in the end, having regard to all of the circumstances, I do not feel that those doubts are so strong that I should dissent from the orders proposed in the judgments already given as to the merits of the appeal.

41. I agree with the Vice-President, Litton, as to his proposed order as to costs.