INTERNATIONAL BANK OF ASIA LTD. v. ALBERT HWANG, DAVID CHUNG & CO, A FIRM

HCA22423/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.22423 OF 1998

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J U D G M E N T

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BACKGROUND

1. This is an action in professional negligence against a firm of solicitors, being the defendant ("AHDC"), arising out of the sale of flats in an uncompleted development called Lucky Mansion at 128 Wan Fung Street, Wong Tai Sin. The plaintiff is a bank ("IBA") and it was the mortgagee who provided finance in respect of 14 transactions for the purchase of uncompleted units in the development of the property. AHDC was its solicitors.

2. The registered owner of the property and the developer was Keep Point Development Ltd ("Keep Point").

3. In or about May 1998 one Paul Chiang joined AHDC as a conveyancing clerk. He introduced one Cheng Kwok Fai ("Cheng") and the Lucky Mansion project to AHDC. In the same month, Paul Chiang approached Louise Chan of IBA in respect of a referral of equitable mortgage business at the project. Since then IBA began to receive 14 loan applications and later approved the loans.

4. Between June and October 1998, IBA gave written instructions to AHDC which included the checking of title and drawing up equitable mortgages to secure loans to purchasers of flats in the development from the registered owner Keep Point.

5. Altogether loans amounting to $17.34 million were made by IBA to 14 purchasers in and between July and October 1998 in reliance upon the security of those mortgages. The aforesaid purchasers entered into provisional sale and purchase agreements with Cheng who held himself out to be a director and the authorized representative of Keep Point. The solicitor who purported to act on behalf of the vendor Keep Point was Joseph Chan Kwok Yim ("Joseph Chan") of Messrs Ho & Chan.

6. AHDC made a land search which showed that Keep Point was the registered owner, but the company search showed that Cheng Kwok Fai was not even a director of Keep Point contrary to his representation as stated in the provisional sale and purchase agreements. AHDC did not take any action at all and, in particular, did not inform his client the plaintiff bank IBA.

7. Instead, AHDC issued various certificates of title confirming that they were satisfied that the vendor had a good title to the property and these certificates were issued on divers dates between June and October 1998.

8. A statutory declaration was made by the aforesaid Joseph Chan of Messrs Ho & Chan containing an undertaking as required by the Non-Consent Scheme, but this was not registered. It was purportedly dated 30 June 1998. Since the building was under construction, the sale and purchase agreements were in respect of uncompleted units. Two schemes were in place in Hong Kong to protect the interest of purchasers on uncompleted units : the Consent Scheme in respect of new development at new lots granted by the Government to developers and the Non-Consent Scheme in respect of redevelopment by demolition of old buildings and erection of new building on old allots acquired by developers from existing owners. The development of Lucky Mansion fell within the scope of Non-Consent Scheme because it took place on old lots.

9. Paul Chiang was supposed to be supervised by partner of AHDC, Mr David Chung Dai Wei. By 2 July 1998, Mr Patrick Mak Ka Ming ("Patrick Mak") joined AHDC as an assistant solicitor. He was assigned by David Chung to supervise Paul Chiang. It then transpired that Paul Chiang had a high degree of autonomy and supervision given by David Chung and later Patrick Mak was quite minimal. In fact, between July and October 1998, declarations of trust and/or powers of attorney were made by 5 of the 14 purchasers in favour of Cheng and they were prepared by AHDC. The deeds were executed in the presence of and witnessed by Paul Chiang. Paul Chiang's signature was then certified by Patrick Mak. However, Patrick Mak said when he certified Cheng's signature he did not realize that those deeds were in respect of units in Lucky Mansion. Of course should the defendant bank IBA be informed that the purchasers were in fact trustees, they would not have approved the loan.

10. By mid-August 1998, AHDC encountered difficulty in registering the various mortgages with the Land Registry. By September and October the statutory declaration of Joseph Chan was still not registered. By a letter dated 30 October 1998, AHDC received a letter from Messrs Gallant Ho, solicitors, informing AHDC that they had been acting for Keep Point and no agreement had been executed by their clients in favour of those 14 purchasers. Even by then the bank was not informed of the precarious position. It was only by 4 November 1998 that one of the borrowers, Lam Chi Hung, made a telephone call to Louise Chan of IBA and informed him that he would stop subsequent payment of loans because of difficulty over the title of his unit. The next day on 5 November 1998, AHDC by a letter to IBA informed them that since mid-August they had been unable to register the requisite documentation with the Land Registry in respect of the mortgages and advised the bank to seek independent legal advice.

11. What happened was Cheng was apparently acting in complicity with Joseph Chan of Messrs Ho & Chan, the solicitors claiming to represent Keep Point as vendor. The solicitors released the funds to Cheng, contrary to the rules of Non-Consent Scheme which governed the transaction so the purchasers and IBA lost all their money as well as obtaining no title to their flats. Those 14 purchasers then defaulted in repayment of the loan plus interest and most of them could not be found. Joseph Chan, Cheng Kwok Fai and Paul Chiang all disappeared after the matter was revealed. IBA claimed in this action that, had AHDC done their job properly, doubts about the transactions would have surfaced and the loans would never have been released.

THE CLAIM IN NEGLIGENCE

12. In this case, to my mind, the defendant's solicitors were clearly negligent in the handling of the transactions for IBA. They were grouped under various headings which shall be considered one by one hereinbelow.

(1) Failure to check signatory's authority

13. It was submitted by Mr Malcolm Merry, counsel for the plaintiff that there was a foreseeable risk that the vendor might not have authorized whoever was purporting to represent it. The vendor was a company, not a natural person. A large amount of money was changing hands and the money was not to be exchanged for a conveyance of the property since the building was not yet completed. Thus, the bank's equitable mortgages would be useless unless the signatory for Keep Point had authority to make the sale and purchase agreements.

14. Thus, the defendant's failure to verify the authority of Cheng would raise three questions to be considered :

(a) Whether releasing the monies without verification of the authority of whoever purportedly signing the agreement involve the foreseeable risk?

(b) Whether such risk could be avoided?

(c) Whether the defendant was negligent in failing to avoid that risk?

15. AHDC had been instructed to investigate title and prepare equitable mortgages. This must mean mortgages which were effective. In advancing money, obviously IBA would be relying upon their security being good. This would necessarily involve ascertaining in advance the authority of whoever was to sign on behalf of Keep Point. This is a separate matter from the question of whether Messrs Ho & Chan had instructions to represent Keep Point, although the two questions are connected. Thus any objection that it is improper to query the other solicitor's instructions or that it is sufficient to rely upon their apparent validity of those instructions, does not apply at all.

16. The company search clearly shown that Cheng was not even a director of Keep Point and his representation in the sale and purchase agreement describing himself as a director would raise clear doubt. The obligation to check became stronger once the first sale and purchase agreement ostensibly signed by Keep Point had been returned (probably in July 1998), showing that it had been executed by Cheng described as a director. By then, AHDC had the results of a company search which showed that Cheng was not a director. This alone should have prompted enquiries. Further, the staff at AHDC knew of Cheng as the introducer of purchasers rather as a vendor. The declaration of trust, the first of which was made on 8 August 1998 and was also known to their staff, suggested that Cheng was himself a purchaser rather than a vendor. Both David Chung and Patrick Mak expected Paul Chiang to check the signatory was a director. It is common ground between the parties that no such checking of authority was done.

17. As Lord Brightman pointed out at p.307E in Edward Wong Finance Co. Ltd v. Johnson Stokes and Master [1984] 1 AC 296, it would not be unethical for a solicitor to insist on a certain course of action notwithstanding the possible implication that the solicitor so requesting was not trusting his colleague if such course of action was necessary to deal with a foreseeable risk. If Messrs Ho & Chan declined to give the information requested, that would serve as another warning bell. AHDC should relate the same to IBA with an advice as to the risk pertaining thereto. It would be up to IBA to decide whether such risk was acceptable. However, AHDC did not take any of these steps. Thus, the firm had not done everything which it reasonably could have done to protect the interests of its client.

(2) Insufficient supervision

18. It is quite clear from the evidence of David Chung and Patrick Mak that Paul Chiang enjoyed a high degree of autonomy within the firm. As David Chung put it, Paul Chiang "worked independently". Paul Chiang had the very wide range of duties indeed and to describe them compendiously as David Chung did as the "day-to-day handling of files" is an understatement.

19. Excessive trust was placed in Chiang. The supervision of him was extremely loose, almost non-existent. It was at most passive and reactive : David Chung and Patick Mak would only respond to problems brought to them by Paul Chiang. David Chung said "if he did not come to me, I would not go to him".

20. There seems to have been no monitoring of Paul Chiang's work, no regular checking of files, no arrangement for reporting of progress on matters, and no firm meeting to discuss on the progress at all.

21. On the other hand, Patrick Mak's role, after he joined the firm in July, was confined to perusal of title documents, dealing with Paul Chiang's queries, if any, and verification of Paul Chiang's signature (along with other solicitors). Everything else, including comparison between the details of execution on the agreements and the information on the company search were left to Paul Chiang.

22. David Chung said he was satisfied with Paul Chiang's ability and therefore there was no need to supervise him closely. I am afraid that supervision does not only include supervision as to his ability. It should also include supervision as to his propriety. As an experienced conveyancing clerk, he should have known that Cheng's signature describing himself as a director of Keep Point did not agree with the company search. He should have known that the various declarations of trust, the letter of authorization and indemnity given by Cheng in respect of five purchasers together with the various power of attorney executed by Cheng in their favour, were quite improper transactions as far as the bank was concerned.

(3) Ignoring warning signals

23. Because of the aforesaid insufficient supervision, it is easy to see how the dual or multiple roles of Cheng was not spotted and the declarations of trust and other documents came to be created without the knowledge of David Chung or Patrick Mak. Thus the other signals which warned that all was not right were ignored and were not connected up, namely :

(1) the absence of the statutory declaration;

(2) the non-registration of the agreements and mortgages;

(3) the delay in the signing and return of the agreements;

(4) the incompleteness of the agreements; and

(5) the absence of certified true copies of the original deeds as opposed to the photocopies obtained for the Land Registry with the Land Registry chop which anyone could obtain.

24. In fact, Patrick Mak did not even notice that the certified true copies of the title deeds given by Joseph Chan was just certified true copies of photocopies obtained from the Land Registry.

25. David Chung also knew Cheng and his firm had the assignment to Keep Point by Cheng's company Full Country Development (at C-163) signed on behalf of the latter by Cheng (at C-168) as the previous owner. Had David Chung done his job properly and not relied on Paul Chiang totally, he would have seen the agreements signed by Cheng for Keep Point and his suspicions would have been aroused. However, the impression I got from David Chung was that he left everything to Paul Chiang with little supervision at all.

(4) Failure to inform of material facts

26. IBA was not told of those facts at or soon after the time that they first came to the knowledge of an employee of or partner in AHDC. They are as follows :

(1) Cheng had signed the agreements yet was not a director of Keep Point;

(2) the address of Keep Point on the agreements was not its registered office;

(3) the copies of deeds provided by the vendor were not true copies of the originals;

(4) the statutory declaration of Joseph Chan had not been registered;

(5) the mortgages and agreements could not be registered; and

(6) five of the purchasers were not real purchasers but were to hold their property on trust for Cheng.

Had IBA been informed of these matters promptly, its suspicions (if not those of AHDC) would probably have been aroused and most, if not all, of the loans would not have been advanced.

(5) Non-registration

27. The lack of registration of the statutory declaration and consequent failure to register the mortgages and agreements were matters of importance to IBA, as is evident from paragraphs 6 and 7 of the instruction letter.

28. The making and filing of the statutory declaration for registration is a straightforward process. Accordingly a delay of weeks and months ought not to be tolerated and the bank ought to have been informed.

29. Chung said of the failure to tell IBA because he said : "I was not aware of the consequences". Patrick Mak's explanation was that he thought it would be fixed up shortly. These are very weak and lame excuses and utterly ignore the terms of their instructions and the risks imposed on their clients which they have to protect.

30. Even when Messrs Ho & Chan broke their promise to register the statutory declaration "very soon", AHDC did not inform IBA.

(6) Acceptance of false declaration

31. Purchasers were required to declare that no third party had any interest in their property. This is a requirement evidently directed to the elimination of beneficial interests and resulting trusts.

32. In the case of five purchasers who held on trust for Cheng, these declarations of no third party interest were patently false. AHDC knew through the knowledge of Cheng and Patrick Mak at least, should have known the same by witnessing Paul Chiang's signature in these various declarations of trust and power of attorney.

(7) Inadequate title deeds

33. This is in fact the most serious of all which also leads to the next item in (8). There was the absence of any record of delivery of the title deeds. AHDC could not produce a covering letter from Messrs Ho & Chan regarding the title deeds purportedly sent in June 1998.

34. In spite of repeated requests and invitation in the cross-examination of David Chung, the failure of the defendants to produce the log book which must be the most telling piece of evidence regarding the dates of delivering the title deeds from Messrs Ho & Chan to AHDC, is very eminent.

35. Even by 15 October 1998, AHDC was still asking for the delivery of the title deeds and Messrs Ho & Chan replied by their letter of 20 October 1998 that they would be delivered shortly.

36. Two different explanations were offered to the court for these two letters. David Chung said that probably there was about one purchaser changing solicitors and that was only speculative. It was also improbable or unlikely. Patrick Mak said he was requesting a full set of title deeds for all 14 purchasers, in preparation for completion. However, his letter only had the general caption for Lucky Mansion, 128 Wai Fung Street, Kowloon. The wordings were also different in that it said :

"We refer to the captioned property and note that you have not yet sent the relevant title deeds and documents to us. Kindly let us have the same as soon as possible."

Probably all the title deeds delivered by Messrs Ho & Chan to AHDC were set out in AHDC's list of documents. Those title deeds were sent between 20 and 30 October 1998. Thus there was no proper investigation as to title by the defendant prior to AHDC's tendering each and every "Certificate of Title" and the subsequent release of monies to Messrs Ho & Chan.

37. Further, the copies from which AHDC received were not copies of original (as they ought to have been) but of Land Registry copies. At that time Patrick Mak had not even noticed this. Had he done so, he said he would have found it "strange and unusual". Anyone can get copies from the Land Registry. So this was a warning signal which had been overlooked.

38. The instructions also required the title deeds (i.e. originals or at least certified true copies of the originals) to be collected from the vendor (paragraph 3 at C6). This was not done. The letters of instruction (at C4-8) required title to be investigated and to be satisfactory before an equitable mortgage could be prepared. Even if this had not been spelt out, common sense requires that the title be investigated properly and found to be good because otherwise the security provided by the mortgage would be in jeopardy. Consequently there was a clear breach of instructions and the title was inadequately investigated.

(8) Certificates of title

39. The certificates of title, describing the title as being in order and the title would be given to the purchasers as unassailable, had been issued.

40. David Chung accepted that one could not give a certificate of title unless one have seen and considered all the documents. Yet David Chung had not done so and he relied on Paul Chiang who just told him orally that the title was in order. He then signed the Certificates.

41. Patrick Mak was of the view that there were documents missing. In the title document disclosed by the defendant in the list of document there was no title document after 1986. The root of title, namely Government lease or conditions of exchange were also missing. That shows that title could not have been approved. These certificates ought not to have been issued.

42. Had the certificate of title not been issued, no loans would have been advanced for such a certificate was a pre-requisite to draw down.

43. Thus it is a clear breach of AHDC's duties as spelt out in the terms of IBA's instructions.

CAUSATION - DAMAGES ARISING OUT OF THE DEFENDANT'S LIABILITY

44. The defence argues that the connection between any negligence of the defendant and the plaintiff's loss had been broken by the wrongful and unforeseeable release of the mortgage money by the stakeholder Messrs Ho & Chan.

45. The answer is that had the defendant done their job properly and consequently IBA been fully informed, the loans would never had been advanced, so the opportunity for fraud would not have arisen. Fraud was one of the contingencies which AHDC should have taken reasonable steps to guard against. The failure to investigate the title properly and the negligent way of issuing the certificate of title by itself would be sufficient to connect the defendant's negligence in liability and the damages arising thereof.

46. It does not lie in mouth of the defence to argue that, even had AHDC done their job properly by checking on Cheng's authority, the loss would still have occurred because Messrs Ho & Chan would have provided bogus authority, e.g., a false company minute and board resolution. This is just speculation built on the assumption that bogus authority would not itself have aroused suspicion and that Cheng was prepared to go beyond posing as having authority (by putting a genuine signature on the document but in a false capacity) to outright forgery (by forging the signatures of genuine directors on minutes of a bogus meeting), i.e. from the fraud of falsifying documents to the fraud of forging documents.

DAMAGES

47. Both sides agree that the measure of damages would be the answer to the question : what would have happened had the defendant not been negligent? The clear answer is that those loans would not have been made had the defendant done its jobs according to the written instructions properly. The total amount of the loans advanced is now agreed at $17,317,446.76.

48. The calculation of IBA according to what it would have received at the facility rate would not be applicable since IBA was not enforcing the contractual provisions against purchasers. It is suing its solicitors for negligence. However, in principle, the plaintiff must be entitled to interest on the basis that it has been deprived of the use of the monies. Lord Nicholls referred to interest as one of the element in the basic comparison in Nykredit Bank v. Edward Erdmon Group [1998] 1 All ER 305, at p.309e. In that case interest was awarded by reference to LIBOR, namely the cost of fund of the plaintiffs instead of the interest rates under loan transactions.

49. In a commercial setting, interest is usually awarded at 1% over prime and no evidence is required to support such an award (see Komala Deccof & Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) [1984] HKLR 219 and Determination of the Court of Final Appeal in Polyset Limited v. Panhandat Limited, FACV No.28 of 2000, 25.4.2002).

50. Finally, I do not find the plaintiff's bank had failed to mitigate its losses by not suing the purchasers but its solicitors. The defendant was blatantly negligent in handling the mortgagee's loans. The purchasers did not have any title either. They have also lost all their deposit money. They could not be found. The bank would have to incur about $30,000 each to pursue against them.

51. Thus, in the end I will give judgment for the plaintiff in the sum of $17,317,446.76, together with interest at 1% above prime from the date of the Writ to the date of judgment. There shall also be an order nisi that the defendant do pay the plaintiff's costs of this action, to be taxed if not agreed.