XCHRX CHAN KUM BUN AND ANOTHER v. HAUXTON ENTERPRISES LTD. AND ANOTHER

HCA11803/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.11803 OF 1999

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J U D G M E N T

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Background

1. This is an appeal from Master Cannon's order on 25 November 1999 in which the plaintiffs contended that the solicitors for the defendant limited company should bear costs personally in this case.

2. The plaintiffs are Mr and Mrs Chan, they entered into a provisional sales and purchase agreement dated 18 June 1999 for the acquisition of a flat at Flora Garden of Chun Fai Road with the defendant, Hauxton Enterprises Limited ("Hauxton"). It was a two dollar company whose shareholders and directors were Mr and Mrs Yun. Mr Yun Kwok-wing, Edwin, is also the sole proprietor of Yun & Co. Solicitors, who acted for Hauxton in this case until 31 May 2000. Mr and Mrs Chan were represented by Messrs C.C. Lee & Co. in these proceedings until 25 January 2000 whereupon they acted in person.

3. Upon signing the provisional agreement, Mr and Mrs Chan has paid the initial deposit of $230,000. It was provided that the deposit paid under clause 2 shall be paid to Hauxton's solicitors, Yun & Co., as stakeholders who may release the same to the defendant provided that the balance of the said price is sufficient to discharge the existing legal charge/mortgage. A further deposit of $525,000 should be paid upon the signing of the formal agreement for sale and purchase on or before 2 July 1999.

4. Drafts of the formal agreement were negotiated and exchanged on 2 July 1999 and a personal cheque of the plaintiffs for $525,000 was also enclosed, to be held by Yun & Co. as stakeholder according to the formal agreement. Mrs Chan contended that due to her oversight, she failed to ensure there were sufficient funds to meet the cheque on 2 July, but on the afternoon of the next day, she had already arranged by phone to transfer sufficient funds into the relevant bank account.

5. By a letter dated 6 July 1999, Yun & Co. wrote to C.C. Lee & Co. stating that the cheque was dishonoured upon presentation and the purchaser purported to forfeit the initial deposit. Even though Mr and Mrs Chan, by a letter of the same date, informed Yun & Co. that there was sufficient funds for meeting the cheque which might immediately be presented for payment, a reply from Yun & Co. indicated their refusal to do so. A writ was issued for and on behalf of Mr and Mrs Chan on 22 July 1999 and Hauxton filed its defence and counterclaim on 2 September 1999.

6. Briefly speaking, Mr and Mrs Chan contended that they did not fail to pay the deposit balance because none was required until the formal agreement was signed and that Hauxton, on or about 7 September, had still not signed the formal agreement. They claimed against Hauxton for specific performance of the provisional agreement and alternatively, relief against forfeiture as a preliminary to and in addition to specific performance.

7. Hauxton counterclaimed against Mr and Mrs Chan for a declaration for the forfeiture of the initial deposit, the vacation of the registration of the provisional agreement on 16 July and for damages to be assessed.

The Settlement of the Action and argument on Costs

8. However, after the amended statement of claim was filed on 15 September 1999, Hauxton on 5 October 1999 filed a notice of withdrawal of defence and counterclaim. Thus, on 25 November 1999, with the consent of Yun & Co. acting for Hauxton, an order was made by Master Cannon to sign judgment for the plaintiffs against Hauxton for specific performance of the provisional agreement as follows :

1. Judgment for Mr and Mrs Chan against Hauxton for specific performance of the provisional agreement;

2. Hauxton to pay its own expenses within 21 days from the date of the order and to show good title to the plaintiffs;

3. Upon proof of Hauxton's title to the flat, the two parties should within seven days complete the transaction and Hauxton should execute a conveyance free from all encumbrances; and

4. Cost of the plaintiffs' summons dated 21 October 1999 and the defendant's notice dated 22 October 1999 and notice of withdrawal of defence and counterclaim filed and served on 5 October should be paid by the defendant on a party-and-party basis, to be taxed if not agreed.

9. In fact this order was made as aforesaid by the plaintiffs' summons pursuant to Order 19, rule 7 of the Rules of the High Court dated 21 October 1999 and the defendant issued a notice under that summons on the next day stating the terms upon which they would consent to the judgment.

10. Originally, solicitors for the plaintiffs before Master Cannon only argued that Yun & Co., without securing the signing of the formal agreement by the defendant, had presented the relevant cheque for payment and wrongfully alleged that the plaintiffs had failed to comply with clause 2 of the provisional agreement and therefore had wrongfully forfeited the initial deposit. It was alleged that the costs in these proceedings were the result of Yun & Co.'s misconduct and default and thus they had to bear costs personally. This was not accepted by Master Cannon.

The Appeal on new basis

11. Thereafter leave to appeal was granted by Master Cannon on 7 December 1999 in respect of the order of costs in the aforesaid paragraph 4.

12. However, this appeal turns on other facts and basis. Subsequent to this order having been made in the morning, Mr and Mrs Chan approached Mr Chow of Centaline, their agent, and learned that in fact Hauxton had already surrendered the flat to the mortgagee, First Pacific Bank, on 9 November 1999 and gave up its rights to redemption. Although there were indications of the same a bit earlier, this was only confirmed after the Order was made in the morning.

13. Mr and Mrs Chan made an enquiry through Mr Chow in the hope that Hauxton would take action to redeem the flat for sale to them. However, they were told that the bank was then offering the flat for sale at $7.7 million. At 3.00 pm that day, a provisional sale and purchase agreement was entered into between the mortgagee bank and Mr and Mrs Chan for the purchase of the very flat at $150,000 more than the original agreed price with Hauxton. Formal agreement for sale and purchase was signed on 7 December and the transaction was completed on 28 December 1999.

14. Before the completion of the sale and purchase, Mr and Mrs Chan, through C.C. Lee & Co., by a letter dated 17 December demanded from Yun & Co. the return of the initial deposit of $230,000 stating that Hauxton had failed to show good title to the flat within 21 days from the date of the Order of 25 November 1999. There was no response to this letter and Mr and Mrs Chan reported the matter to the Hong Kong Law Society on 28 December 1999.

15. On 18 January 1999, another letter was sent by C.C. Lee & Co., again demanding the return of the said sum and stating that they would treat any failure or refusal to do so before 21 January 2000 as dishonest appropriation of the sum. On the same date, Yun & Co. made a reply stating that they were waiting for a reply from the Hong Kong Law Society regarding the deposit in question. There and then there was no mention that the deposit has actually been released to Hauxton as early as 25 June 1999. It was also denied by Yun & Co. that the firm was holding the initial deposit as stakeholder for Mr and Mrs Chan, quite contrary to the provision of the provisional agreement.

16. On the first day of the hearing of this appeal on 26 January 2000, Yun & Co. was represented by Miss S.K. Chan, an assistant solicitor of Yun & Co. She asked for time to reply to the affidavit of Mr Chan. When asked what was the cause for withholding the deposit of $230,000, Miss Chan replied that they were waiting for the Law Society's reply, she has nothing to say at that stage and Mr Yun would explain in the affidavit. There was no explanation why Yun & Co. released the initial deposit to Hauxton, a company also owned by him on 25 June 1999. It was unrelated, to say the least, with the purported dishonour of the cheque for the further deposit by 6 July 1999.

17. Mr Yun, in his affirmation of reply dated 11 February 2000, alleged that the plaintiffs and the plaintiffs' solicitors failed to reply to his letters dated 23 and 27 September 1999, asking for the completion date proposed by him to be set for 27 October 1999. He said that delay had caused considerable losses to him. However, in the course of the hearing, a number of "without prejudice" letter was produced and it was not the case that there was no response from C.C. Lee & Co. In fact, C.C. Lee & Co. replied by their letter dated 28 September 1999 and stated that the offer of no order as to cost was unacceptable unless Mr and Mrs Chan's costs of the two actions were paid on party-to-party basis. They proposed that the estimated costs of $500,000 should be held by C.C. Lee & Co. as stakeholders in the completion, being security money for payment of the plaintiffs' costs until conclusion of the taxation proceedings. The two letters of Yun & Co. dated 29 September did not reply to this point and the matter was pursued by C.C. Lee & Co. by letter dated 30 September 1999. This was vigorously opposed by Yun & Co. in subsequent correspondence. In other words, no agreement was reached between the parties on the overall settlement term of the Order and the matter was eventually argued before Master Cannon on 25 November 1999 as aforesaid. I cannot find any deliberate delay or at all on the part of the plaintiffs and their then solicitors.

The failure to disclose the earlier surrender of the property to Master Cannon on 25 November 1999

18. Mr Yun said he failed to mention to Master Cannon that the flat had in fact been surrendered to the bank way back on 8 November 1999. He said it was just an "inadvertence" on his part as he was concentrating on the issue of costs.

19. I find the explanation of Mr Yun totally startling, surprising and incredible. He is an officer of the court and he was consenting to judgment for and on behalf of his client, who happened to be his own company, with a view to complete the sale of the property by way of a court order - a solemn specific performance order. He must have known, there and then, that he had no way to complete the sale, the bank having recovered possession of the same due to default of the mortgage payment.

20. Under clause 2 of the order, his client would have to show good title within 21 days thereof. Nothing was done within these 21 days. He did not even write to the other side and say : if they could pay the balance sum, he could arrange for title deeds to be furnished within the stipulated time. In fact, not a single word was said, not a single step was taken. It must be an irresistible inference that the defendant (this was also known to Mr Yun himself) did not intend to show good title to the property as it had no ability to do so, the flat being surrendered to the bank already. Hauxton, at the instigation of Mr Yun, did not intend to complete the sale at all.

21. All these facts were unknown to Master Cannon. Master Cannon's decision was only based on whether Yun & Co. was behaving improperly in handling the conveyancing side of the matter. It has been stated in the oft-quoted case concerning the personal liability of solicitors : Ho Lee Man v. Wong Wai Kai, No.2 [1993] 1 HKC 193 that under Order 62, rule 8(1), the jurisdiction to control over its own officers, including ordering a solicitor to bear cost personally had to be exercised with care and discretion and only in clear cases. The conduct of the solicitor must be such as to amount to a serious dereliction of duty and professional misconduct. I think this is the case here. Mr Yun, when consenting to the judgment, knew perfectly well that the defendant Hauxton (his own company) would not and could not perform the completion of the sale according to the Order. The clear fact that the property had already been surrendered to the bank a short while ago, on 8 November 1999, must be a very relevant factor which was incumbent on him to inform the court. He failed to do so. Instead he gave the court the impression that his client (which was in fact owned and controlled by him) intended to complete the sale and he only argued on the costs order in light of the handling of the conveyancing side previously by his firm. He, in my view, should bear costs personally in the litigation between the contracting parties to the sale and purchase of the property.

The deposit not returned

22. At the hearing before me on 10 May 2000, Mr Yun appeared in person for his own solicitors firm and, as he stated, he was also representing his own company or "our company" which belongs to him and his wife.

23. In this appeal, the plaintiffs also applied for the return of the deposit in the sum of $230,000 and damages of $150,000 in lieu of specific performance since the defendant did not and in fact had no intention to perform the completion of sale and purchase. It was stated clearly in the provisional agreement that the further deposit payable under clause 2(a), (b) and (c) should be paid to the vendor solicitors as stakeholder who may only release the same to the vendor provided that the balance of the purchase price is sufficient to discharge the existing legal charge/mortgage. (This was printed at the margin of the provisional agreement and signed again by Mr Yun for Hauxton.) This anticipated a successful completion after repaying the mortgage. When Yun & Co. released the money at a very early stage on 25 June 1999, they did so at their own risk.

24. When asked why the $230,000 deposit was not returned when there was no completion of the sale, Mr Yun's first answer was that there were no instructions from his own client. When he was asked again why he did not himself, as the sole owner of the company, give instruction to himself as solicitor, he eventually gave an undertaking for and on behalf of his company to return the deposit within 14 days thereof, i.e. by 24 May 2000.

25. On 25 May 2000, Mr and Mrs Chan wrote to the court, with copy to Yun & Co., stating that the stakeholder money of $230,000 was not returned to them whereupon this court had to enquire from Yun & Co. whether there was any breach of undertaking given to the court on the return of the $230,000 deposit since Mr Yun did not respond to the Chans' letter. On 1 June 2000, Yun & Co. wrote in response to the court's letter and said that they have no further instructions to act for the defendant in this case. The defendant had been advised by him to reply to the comment of the court direct. They believed the defendant company would do so shortly. The defendant company in fact has not replied at all even up to now.

26. It is clear from the provisions of the provisional agreement that Yun & Co. were holding the deposit as stakeholder. Thus, in my view, Yun & Co. are personally liable for the return of the deposit when there is no completion of the sale of the property.

The costs incurred

27. I have decided hereinbefore that Yun & Co. had to bear costs personally for all costs incurred by Mr and Mrs Chan in respect of the litigation arising from the failure on the part of Hauxton to complete the sale of the property. In order to save time and money, I have directed the plaintiffs to submit the costs incurred by them. Subsequent to the hearing and at my direction, the 1st plaintiff, Mr Chan, filed an affidavit on 26 May 2000 exhibiting documents which showed that legal costs incurred in the case was in the total sum of $701,600.00. Yun & Co. is, of course, entitled to taxation on the bill of the plaintiff should they wish to do so. The burden is on them to show any part was unreasonably incurred. I therefore just give an order nisi that the amount of legal costs Yun & Co. would have to pay would be $701,600.00 which shall become absolute within 14 days hereof.

28. Since the plaintiff is also successful in this appeal, they are entitled to costs from the time they act in a person. From Mr Chan's aforesaid affidavit, it was shown that the two of them had spent about 80.5 hours on the two hearings on 26 January 2000 and 10 May 2000, including all the preparation. I take a round figure of 80 hours as a reasonable amount of time spent on this case from the time they have acted in personal including the filing of the third affirmation. Since litigants in person are entitled to two-third of what solicitors would be charging, I shall, if I may, take $3,000 as what a solicitor would be charging in this case and the plaintiffs are entitled at the rate of $2,000 per hour pursuant to Order 62, rule 9(4)(b). However, it has not been shown that the plaintiffs had suffered any pecuniary loss in doing the work to which the costs relate, they should not be allowed in respect of the time reasonably spent by them on the work at more than $200 an hour pursuant to Order 62, rule 28A(3). Accordingly, there shall be also an order nisi for the costs of the plaintiffs when they act in person in this appeal, which is assessed according to Order 62, rule 9(4)(b) to a gross sum of $16,000 in lieu of taxed costs.

Conclusion

29. In conclusion, I make the following order :

1. Appeal allowed with costs of the appeal to the plaintiffs against the respondent Yun & Co. that Yun & Co. should bear costs personally on indemnity basis for the action herein including the counterclaim.

2. An order nisi of the aforesaid costs in the sum of $701,600 in respect of the legal costs incurred by the plaintiffs in these proceedings involving the subject matter of the sale of the said property, to be paid by Yun & Co. and the Order shall be made absolute in 14 days' time against Yun & Co.

3. Return of the deposit held by Yun & Co. as stakeholder in the sum of $230,000 within 7 days hereof.

4. An order nisi that the plaintiffs are entitled to the costs of $16,000 in these proceedings when they acted in person in their appeal against Yun & Co.

30. I am afraid the damages allegedly suffered by the plaintiffs in buying the flat from the bank directly at $150,000 more cannot be directed against Yun & Co. themselves. This is a kind of damages in lieu of specific performance when a limited company failed to perform the order of specific performance. For what is worth, I can only hereby direct that the plaintiffs are entitled to pursue the claim for damages in lieu of specific performance against the defendant limited company, to be assessed by a master of the High Court should they wish to do so.