CHUNG KHIAW BANK LTD. v. HO SUI FONG AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

CIVIL JURISDICTION

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ASSESSMENT OF DAMAGES

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1. This is an assessment of the amount due from the 1st Defendant to the Plaintiff under a mortgage.

2. The Plaintiff Bank was the mortgagee and the 1st Defendant the ortgagor of the properties situate at and known as Flats H and J on the 9th floor of Central Mansion, 527-539 Jaffe Road and 8-12 Cannon Road, Hong Kong. The Mortgage was executed on 14 January, 1981 to secure the granting of banking facilities to the extent of $600,000.00 by the Plaintiff to the 2nd Defendant who was the son of the 1st Defendant. Relevant to the present proceedings are the following Provisions in the said Mortgage : -

3. In the letter of offer dated 27 December 1980 (Exhibit P-4) sent by the Plaintiff which was signed and returned by both Defendants in connection with the granting of banking facilities to the 2nd Defendant, the interest chargeable was stated to be 2.5% over the HK$ prime rate. Pursuant to this letter of offer and the said Mortgage, the Plaintiff granted an overdraft and a fixed loan to the 2nd Defendant.

4. On 7 December, 1982, the Plaintiff made a written demand on both Defendants for repayment of all monies then due and owing under the overdraft and fixed loan in the total sum of $640,674.05 with interest at $262.13 per day from 5 November, 1982. The 2 Defendants were also notified that if the said sum and interest were not paid within 1 month, the Plaintiff would exercise its powers under the said Mortgage including the power of sale. The Defendants defaulted in payment.

5. The Plaintiff commenced the present proceedings on 17 January 1983 by writ for possession of the properties and for the outstanding sums and interest. On 25 March, 1983, an order for possession was obtained. Possession of the properties was actually recovered at the end of 1983. On 31 December, 1984, the properties were sold by the Plaintiff by public auction for $555,000.00. The proceeds of sale after deductions of the necessary expenses incurred in the auction were used to reduce the outstanding debt. In the meantime, the Plaintiff instituted another set of proceedings in High Court Action No. 2816 of 1984 against the 2nd Defendant only and somehow obtained judgment against him on 19 June, 1984 for $640,674.05 together with interest at 2.5% p.a. over the prime rate. Nothing was apparently done for some time after the sale of the properties. On 11 November, 1988, the Plaintiff applied in the present proceedings for leave to enter judgment against both Defendants for the outstanding amount with interest. On 18 October, 1989, it was by consent ordered that there be judgment against the 1st Defendant for an amount to be assessed. And hence, the present assessment. The action against the 2nd Defendant was quite rightly withdrawn on 10 September, 1990. In this assessment, the parties produced their respective bundles of documents which were not challenged. They also called oral evidence.

6. Before me, the Plaintiff is seeking, notwithstanding the partial repayment out of the net proceeds of sale of the properties in December, 1984, a total sum of $806,819.09, comprising a sum of $258,256.17 as principal under the overdraft, a sum of $209,844.40 as principal under the fixed loan and interests thereon at 5% over prime which amount to $168,183.23 and $152,535.29 respectively as at 11 December, 1990.

7. The 1st Defendant disputes this on 2 main grounds. First, it is alleged that the Plaintiff was negligent in the sale of the properties and that they were sold at grossly under value. Second, the Plaintiff was not entitled to charge interest at 5% over prime.

8. The facts as presented by the Plaintiff relating to the sale of the properties are as follows :

9. I should also mention several points which are relevant to the issues before me. First, Mr. Sun (PW-1) said that after the 1st auction, the Plaintiff had been advised by one or 2 firms of valuers. However, he was unable to tell us what the estimated value of the properties were at about the time of the 2nd auction or to produce any further valuation report. The only reports that could be produced by the Plaintiff were those referred to earlier on and dated January, February and April, 1984. They were, to say the least, obtained 8 to 11 months before. Second, neither PW-1 nor any other witness for the Plaintiff was able to tell us whether the 2nd auction had been advertised or not and if so, how it was advertised. Third, the purchaser was given an unusually generous period of 6 months after the auction to complete the sale. Fourth, during this period of 6 months, the purchaser was able to sell the properties to another person at $579,280.00 and that other person was further able to resell the properties as separate units at $410,000.00 and $280,000.00 - i. e. a total of $690,000.00 before the date specified for completion. There is no evidence before me and it seems unlikely that during this period, the properties were partitioned or renovated to facilitate the sale of the properties as separate units.

10. On the issue of negligence, the 1st Defendant submitted that the Plaintiff owed a duty as mortgagee towards the 1st Defendant to obtain the proper or best price for the properties in the sale and that the Plaintiff was in breach of such duty. She alleged that there was no evidence of advertisement of the 2nd auction, that no valuation reports had been taken out within a reasonable time before the 2nd auction; that the Plaintiff had wrongly relied on the forced sale value as a basis for setting the reserve price although this was not a case of a forced sale; and that the open market value could be achieved in this case since there was at least 6 to 9 months to do so.

11. On the other hand, the Plaintiff argued that the 1st Defendant had failed to discharge the burden of proving negligence on the part of the Plaintiff. The Bank had taken all reasonable steps to sell the properties including instructing different valuers, placing the auction in the hands of professional auctioneers and fixing a reserve price higher than that suggested by the auctioneers. The Plaintiff submitted that since there was no evidence that the 2nd auction was not properly advertised, the Defendant had failed to show that the Plaintiff had not done so. Regarding the lack of more recent valuation report, it was argued that since the price was much the same in early as well as late 1984, the failure to get an updated valuation did not cause any damage. As to the reliance on the forced sale value, the Plaintiff submitted that this was not the case. It had set a reserve price which was higher than the forced sale value and the sale was made through a public auction where the best price was obtained. Lastly, the Plaintiff said it was under no obligation to wait for the best moment to sell the properties.

12. The law on the duties of a mortgagee towards a mortgagor in exercising a power of sale is not seriously disputed by the parties. Earlier authorities seem to suggest that a mortgagee need only act in good faith. The Court of Appeal in Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] ch 949, however, cleared the doubt and held that a mortgagee must also take reasonable care to obtain a proper price. Regarding a mortgagee's duties, Salmon L.J. remarked as follows :

"Once the power has accrued, the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may he impropitious and that by waiting a higher price could be obtained. He has the right to realise his security by turning it into money when he likes. Not, in my view, is there anything to prevent a mortgagee from accepting the best bid he can get at an auction, even though the auction is badly attended and the bidding exceptionally low. Provided none of those adverse factors is due to any fault of the mortgagee, he can do as he likes. If the mortgagee's interests, as he sees them, conflict with those of the mortgagor, the mortgagee can give preference to his own interests, which of course he could not do were he a trustee of the power of sale for the mortgagor." (at p. 965G)   "The proposition that the mortgagee owes both duties, in my judgment, represents the true view of the law. Approaching the matter first of all on principle, it is to be observed that if the sale yields a surplus over the amount owed under the mortgage, the mortgagee holds the surplus in trust for the mortgagor. If the sale shows a deficiency, the mortgagor has to make it good out of his own pocket. The mortgagor is vitally affected by the result of the sale but its preparation and conduct is left entirely in the hands of the mortgagee. The proximity between them could scarcely be closer. Surely they are "neighbours". Given that the power of sale is for the benefit of the mortgagee and that he is entitled to choose the moment to sell which suits him, it would be strange indeed if he were under no legal obligation to take reasonable care to obtain what I call the true market value at the date of the sale. Some of the textbooks refer to the 'proper price', others to the 'best price'. ... I prefer to call it the true market price."(at p. 966)

13. Salmon L.J. appeared to base this duty of care on the law of tort whereas the learned authors of Megarry and Wade, on The Law of Real Property, 5th ed. at p. 939 (footnote 14) thought that it was derived from principles of equity. The House of Lords in China and South Sea Bank Ltd. v. George Tan [1990] HKLR 546 when commenting on the duty of care allegedly owed by a Mortgagee towards a guarantor remarked :

"The Court of Appeal sought to find ... a duty in the tort of negligence but the tort of negligence has not yet subsumed all torts and does not supplant the principles of equity or contradict contractual promises or complement the remedy of judicial review or supplement statutory rights."

 

14. In the light of such remarks and since the relationship between a mortgagee and mortgagor is governed by contractual and equitable principles, it may well be the preferred view that a mortgagee's duty of care toward the mortgagor arises from the principles of equity. In the present case, be it based on tortious or equitable principles, I think the Plaintiff owed the 1st Defendant a duty to obtain a proper price in the sale of the properties.

15. In determining whether there is any breach of such a duty, Salman L.J. in Cuckmere Brick's case had this to say :

"No doubt in deciding whether (a mortgagee) has fallen short of that duty the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line." (at p. 969A).

16. I would respectfully adopt this approach in the present case.

17. Since one of the issues in dispute is whether the Plaintiff had chosen the wrong basis of valuation, I shall deal with this aspect first. In the Plaintiff's valuation reports compiled in January and February, 1984, the valuers gave their opinions on the open market value of the properties whereas in the rather brief April reports, opinions on the forced sale value were obtained. In the subsequent auctions, the reserve prices fixed by the Plaintiff were apparently based on the estimated forced sale value. The difference between an open market value and a forced sale value is that a forced sale is one which is subject to a constraint as to time. The forced sale value is therefore usually lower than the open market value. The parties' experts differed slightly on the difference between the 2 values. PW-2, Mr. Choi, estimated it to be about 30% lower while DW-1, Mr. Webber, said it was between 10% to 25% depending on the type of property involved, marketability and market conditions. I tend to accept the latter being a more reasonable approach.

18. It is accepted that a mortgagee can choose the time of sale. It is also true that a purchaser would generally take advantage of the fact that a mortgagee is usually anxious to dispose of the security in order to get repaid as soon as possible. Hence, in a sale by a mortgagee, the price that can be obtained is often quite near to the forced sale value. However, in the present case, both the Plaintiff's and the Defendant's experts took the view that since the Plaintiff had allowed a 6 month period for the completion of the sale, it could not be regarded as a forced sale. According to the experts, in the first half of 1984, before the signing of the Joint Declaration, because of the uncertainty in the future of Hong Kong, the property market was in a slightly downward trend. After the Joint Declaration in September, the market was more active and prices at the end of 1984 were much the same as those in the beginning of the year. It is also the evidence of DW-1, that during the first half of 1984, it would take about 6 months to get the open market value whereas in the second half, it would take about 2 to 3 months. When all these circumstances are looked at, I accept DW-1's evidence that in this case the proper price of the properties at the time of the 2nd auction was more likely to be nearer to the open market value than the forced sale value. There is no reason why the reserve price should be fixed so close to or with reference to the forced sale value as it was in this case.

19. The figures given by the various experts can be summarized as follows :-

20. From these figures, I think in December, 1984, the open market value of the properties was between $700,000.00 and $750.000.00 whereas the forced sale value was between $530,000.00 and $550,000.00.

21. I note that the properties were 2 flats which had been used as apartments and that some renovation work may have to be carried out to make them more attractive for sale as separate units. Yet, there was in fact a subsale of the properties as separate units (apparently without renovation) during the 6 month period specified for completion. The second confirmor was able to sell at a total sum of $690.000.00 for these 2 flats. There is also the suggestion that a previous abortive auction may affect the price at a subsequent sale. In the circumstances of this case, in particular with the Joint Declaration in between the auctions, I do not think there should be any adverse effect on the 2nd auction.

22. Taking into consideration all the factors which I have mentioned above, I take the view that $650,000.00 (which was nearer to the open market value) was a more accurate estimate of the proper price of the properties in December, 1984. At the 2nd auction, the Plaintiff fixed the reserve price at $550,000.00 and finally sold the properties at $555,000.00 which was the highest bid at the time. That was a price which I think was clearly too low.

23. But was the Plaintiff in breach of its duties towards the 1st Defendant? The Plaintiff had obtained expert opinions from various valuers and engaged experienced auctioneers to conduct the sale. However, the only reports which the Plaintiff could produce were those obtained in January, February and April, 1984. They might be of some help for the auction held in early July, 1984, but were certainly out of date by December, 1984. Both experts (PW-2 and DW-1) took the view that it was best to have a valuation report shortly before an auction and that a report to be reliable should be compiled at about 2 to 3 weeks before the date of auction. I think in the present case, an updated valuation was even more important because between the 1st and 2nd auction, the Joint Declaration was signed. Circumstances had changed. The political uncertainty was to some extent cleared, at least for the time being. The property market had become more active again. Apart from that, the unusually long period of 6 months for completion would certainly go to enhance the value of the properties. While a proposed sale in June/July, 1984 might well be a forced sale, I do not think it was in December, 1984. There is no evidence before me of a proper valuation shortly before the 2nd auction. The only evidence is that of PW-1 who said that the Plaintiff had consulted some valuers such as Knight & Frank and was advised to sell at the reserve price of $500,000.00. I have no idea when this "consultation" was done and how. Nor do I know whether these valuers had been told that the Plaintiff could wait for 6 months to complete the sale. Since the figure of $500.000.00 which was suggested as the reserve price was even less than the forced sale value given 8 months before, I strongly suspect they had not been told. I am of the opinion that if the Plaintiff had carried out a proper valuation shortly before the 2nd auction with all the relevant information available, it would no doubt have been advised that the proper price at which the properties could be sold would be much higher than the modest $500,000.00 or thereabouts and I am sure it would not have fixed the reserve price at $550,000.00. No explanation was, however, given by the Plaintiff as to the lack of proper valuation before the sale.

24. It was argued by Counsel for the Plaintiff that the Plaintiff at the 2nd auction had fixed the starting price at $550,000.00 which was already higher than the suggested reserve price of $500,000.00 and allowed the force of the market to determine the best price that could be obtained at the auction. And, it was submitted, if the highest bid was only $550,000.00, the Plaintiff could not be blamed for fixing a low reserve price. At first sight, this appears to be an attractive argument in favour of the Plaintiff. In my opinion, however, I do not think a mortgagee exercising a power of sale can simply leave everything to an auction without doing his part. If he chooses to sell the mortgaged, property by public auction, it has to be a proper and genuine auction and he has to take reasonable steps to ascertain the market condition and the proper price of the property and to ensure that the auction is reasonably attended and fairly conducted. It is only then that the mortgagee can be said to have discharged the duty to take reasonable care to obtain a proper price. In the present case, I do not think the Plaintiff had sufficient regard to the market condition shortly after the Joint Declaration and at the time of the 2nd auction.

25. Another issue in dispute is whether the 2nd auction had been sufficiently advertised. During the course of argument, I was referred to a passage in Megarry & Wade on The Law of Real Property, at p. 939 which says as follows : "(The mortgagee) need not advertise (the sale), or attempt to sell by auction before selling by private contract." With respect, I think that in the present day context, this may well be too general a statement, particularly in the light of the confirmation by the Court of Appeal in Cuckmere brick's of the mortgagee's duty to take reasonable care. I think it depends on the facts of each case in deciding whether it is necessary to advertise a sale and if so, how much it should be advertised. In order to get a proper response at an auction, a reasonable amount of advertisement is required. In the present case, both experts were almost ad idem. They expected there should be advertisements for at least 3 days in 2 newspapers. In his evidence, Mr. Sun (PW-1) said that he knew the Plaintiff had advertised the 1st auction in the wah Kiu Yat Po on 28 June, 1984. He did not tell us whether there was advertisement on any other day. Nor was he able to tell whether the 2nd auction had been advertised or not. No further evidence was adduced on behalf of the Plaintiff regarding the advertisement of the 1st or 2nd auction or the lack of it. As I understand it, it is not the Plaintiff's case that no advertisement was needed. Counsel for the Plaintiff submitted that it was for the 1st Defendant to show that the plaintiff had failed to advertise the auctions sufficiently. I agree that the burden is on the 1st Defendant to establish that the Plaintiff was in breach of its duties towards her. And this the 1st Defendant can do from all the evidence which was adduced. At the end of the day, the picture which was presented to me is this. The 1st auction was held in July, 1984, that was Already 5 - 6 months after full valuation reports were obtained and 3 months after the 2 subsidiary reports in April. We know there was advertisement once in a newspaper. The auction was abortive due to poor response. A 2nd attempt was made 6 months later at a time when the political uncertainty had cleared and the property market appeared to have become more active again. This time, no updated valuation was obtained except some brief consultation. There is no evidence of any advertisement. Although this time it could not be regarded as a Forced sale, the reserve price was somehow fixed very close to the forced sale value. Notwithstanding that the market had become more active, the response at this 2nd auction was not good either. There were, and so it seems only 2 bids: one by the former tenant and one by the successful purchaser. The properties were sold at slightly higher than the reserve price. However, shortly thereafter within 6 months, the properties could be resold twice and finally at roughly 25% higher (at a total of $690,000.00). I cannot but think that the price obtained at the 2nd auction did not truly reflect the proper price of the properties and that this is attributable to the fact that the auction was not sufficiently advertised and poorly attended.

26. Looking at all the evidence and taking a broad approach, I think it is fair to conclude that there was no adequate preparaton and no sufficient publicity for the 2nd auction. The plaintiff had wrongly relied on the forced sale value. It had failed to reassess the market condition before the 2nd auction. It had failed to obtain a proper valuation report shortly before the auction. It had failed to advertise it sufficiently or at all. In my judgment, it was in breach of its duty to take reasonable care in obtaining a proper price for the properties. In assessing the amount due and owing by the 1st Defendant to the Plaintiff, I should take into account the proper price of the properties, which I have assessed at $650,000.00 (instead of the $555,000.00).

27. The interest rate was also disputed by the parties. According to PW-1, it was the practice of the Plaintiff to charge interest at 5% over the prime rate for accounts which had no overdraft facilities or for bad accounts. If a customer had defaulted payment, his account would be considered as a bad account and 5% over prime would be chargeable. He added that the Plaintiff would also charge compound interest at times. Hence, it was argued that for the amount due and owing by the 1st Defendant, the Plaintiff was entitled to charge at this customary rate. Counsel also relied on the provision in the mortgage which specified the interest to be 20% p.a. at such other rate as was from time to time charged by the Plaintiff. However, as I pointed out earlier, according to the agreement between the Plaintiff and the 2nd Defendant (the borrower) as evidenced by the letters of offer (P-4 & P-5) which were also signed by the 1st Defendant, the interest rate to be charged by the Plaintiff on the 2nd Defendant was agreed at 2.5% over the prime rate. It is also clear from the Plaintiff's Fined Loan Register exhibited at P-6, that this was indeed the interest charged by the Plaintiff. Apart from the letter of demand, the Plaintiff never informed the 1st Defendant that she would be charged the bank's customary interest rate of 5% over prime. Since she mortgaged the properties to secure the repayment by the 2nd Defendant of the advances and overdraft, I do not think it is either right or fait that she would have to pay a higher rate of interest than the 2nd Defendant. Nor do I think the Plaintiff can avail itself of the alleged banking practice or custom. The interest rate agreed in the said Mortgage was never relied on by the Plaintiff which had all along charged 2.5% over prime according to the letter of offer. They ate estopped from charging a higher rate unless they give express notice to the 1st and 2nd Defendant. In the letter of demand, the 1st and 2nd Defendants were obliged to pay interest on the outstanding amount at "$263.13 pet day". The rate of interest was not clearly specified. Nor were they informed either in the letter of demand or anywhere that the Plaintiff would charge them at a higher interest rate than what they had been charging. It was admitted by PW-1 that there was no statement sent to the Defendants after the issue of the Writ. In the other High Court Action which was instituted by the Plaintiff against the 2nd Defendant (and to which I had made reference earlier), the Plaintiff charged the 2nd Defendant and did obtain judgment against him for interest at 2.5% over prime. In these circumstances, I do not think the Plaintiff is entitled to charge the 1st Defendant at a rate more than 2.5% over prime.

28. For the reasons I have given above, I think the amount which should be due and owing by the 1st Defendant to the Plaintiff can be calculated as follows :

29. The amount due and owing as at 18 October, 1989 is assessed to be $360,593.62. I shall make an order nisi that the 1st Defendant do pay the Plaintiff the costs of this assessment with a Certificate for Counsel.