NGO TAI HONG v. ENDENNE DEVELOPMENT LTD AND OTHERS

HCA 7988/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7988 OF 2000

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AND

HCA 7929/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7929 OF 2000

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BETWEEN

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J U D G M E N T

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I.       Introduction

1.  Endenne was the developer of House Lot Nos. 36 and 37 Wing Ning Lei, DD No. 111, Yuen Long (the Property).  The Property is a small house development.  Fung and Chan (husband and wife) are the shareholders and directors of Endenne.  Fung is in charge of Endenne’s day-to-day activities.

2.  Ngo says that Endenne, Fung and Chan (the 3 Defendants) fraudulently caused him to buy the Property’s 2nd floor flat by falsely representing that the Property’s development had been authorised and approved by the District Lands Office Yuen Long (DLOYL).

3.  Ip and Willis (the Firm) acted for Ngo in the purchase of the Flat.  Ngo says that the Firm was negligent in its handling of his case.  The Firm (Ngo says) should have been suspicious of Endenne’s representations.  But, when Ngo purchased the Flat, Fung was employed as the Firm’s liaison clerk.  Ngo alleges that such employment relationship put the Firm in a position of conflict.  Fung’s closeness to the Firm (Ngo contends) clouded the Firm’s judgment, preventing it from noticing problems with Endenne’s title.

4.  I therefore have to decide 3 issues.  First, did the 3 Defendants fraudulently induce Ngo to buy the Flat?  Second, if there has been misrepresentation, is Ngo entitled to rescind the Assignment of the Flat and claim damages against the 3 Defendants?  Third, is Ngo entitled to claim damages against the Firm?

5.  I note that none of the 3 Defendants appeared or were represented at trial.

II.      Background

6.  On 7 April 1997 Ngo entered into a provisional agreement to buy the Flat from Endenne.  Chan signed the provisional agreement on Endenne’s behalf.  The provisional agreement stated that Ngo and Endenne would separately instruct the Firm to act in the sale of the Flat.

7.  Shortly after, Fung instructed the Firm to handle the conveyance of the Flat on Endenne’s behalf.  Willis, a experienced partner, handled the transaction on the Firm’s behalf.  Willis was assisted by Jimmy Chan, then a legal executive with the Firm.

8.  Fung handed Willis copies of the following documents relating to the Property (including the Flat):-

(1) An Approval Letter dated 18 March 1995 from DLOYL to Endenne authorising Endenne to redevelop House Lot Nos. 36 and 37.

(2) A Certificate of Exemption dated 18 March 1995 from DLOYL to Endenne, exempting the redevelopment from having to comply with the Buildings Ordinance (Cap.123) (BO) in relation to building works.

(3) A Certificate of Exemption dated 18 March 1995 from DLOYL to Endenne, exempting the redevelopment from having to comply with the BO in relation to site formation works.

(4) A Certificate of Exemption dated 18 March 1995 from DLOYL to Endenne, exempting the development from having to comply with the BO in relation to drainage works.

9.  Under the Buildings Ordinance (Application to the New Territories) Ordinance (Cap.121) (BOANTO), the Director of Lands or his delegate may exempt small house developments (such as that of the Property) from compliance with the BO.  The BOANTO provides for the Director of Lands or his delegate to issue an Approval Letter and Certificates of Exemption, similar to those which Fung handed to Willis, as evidence of the granting of exemption. 

10.  Typically, in small house sale transactions, a solicitor will insist on being shown an Approval Letter and 3 Certificates of Exemptions (relating to building, site formation and drainage works) before proceeding with a sale.

11.  Further, although not mentioned in the BOANTO, it is usual for the vendor of units in a small house development to obtain a "No Objection Letter" (NOL) from the District Lands Office.  The NOL signifies that the Government has no objection to the occupation of a completed small house development.  A prudent solicitor will insist on a small house developer providing a copy of an NOL, before the solicitor allows the sale to proceed.

12.  Willis noticed that Fung had not provided a copy NOL.  He asked Fung for one.  Fung replied that, although Endenne had applied to DLOYL for an NOL, he was unsure whether one had ever been received.  Fung said that the Property’s re-development had been completed 2 years previously, in 1995.  Given the lapse of time since then, Fung could not remember what the precise position was on the NOL.  However, he promised to search among Endenne’s papers and, if no NOL could be found, to apply to the DLOYL for one.

13.  Willis did not think that it was appropriate to purchase the Flat unless an NOL was provided.  Pending production of an NOL by Endenne, in order to protect Ngo, Willis inserted the following term in the formal Sale and Purchase Agreement (SPA) which he was then drafting:-

“3.	(a)	The Vendor hereby declares that the Vendor has applied for the issuance of a ‘No-Objection’ letter by the District Lands Officer, Yuen Long and that within 7 days after issue thereof the Vendor will notify the Purchaser thereof, and
	(b)	The purchase shall be completed at the offices of [the Firm] on or before 19th May 1997 or within 7 days of the Purchaser being notified in writing that a 'No Objection’ letter has been issued by the District Lands Officer, Yuen Long, which is the later....”

14.  On 14 April 1997 Ngo visited the Firm’s offices to pay the requisite stamp duty and registration fee.  Ngo met Jimmy Chan at that time and through Jimmy Chan retained the Firm to act on his behalf.

15.  On 19 April 1997 Ngo signed the SPA for the Flat.  Before signing, Jimmy Chan interpreted the SPA to Ngo. In particular, Jimmy Chan explained the effect of SPA cls. 3(a) and (b) drafted by Willis.

16.  During one or both of his visits to the Firm on 14 and 19 April 1997, Ngo saw Fung there.  At the time of their meeting, Fung informed Ngo that Chan was his wife and Chan would be signing the SPA on Endenne’s behalf.  Fung also gave Ngo a business card from which Ngo learned that Fung worked for the Firm.  Finally, Fung introduced Ngo to SPC Credit Ltd. (now AIG Finance (Hong Kong) Ltd.) for help in financing the Flat’s purchase.

17.  A few days after 19 April 1997 Fung gave a copy NOL to Willis.  The NOL was from DLOYL to Endenne and dated 13 December 1995.

18.  In early May 1997 SPC approved Ngo’s application for a mortgage of $875,000.  On 9 May 1997 SPC instructed the Firm to draw a legal mortgage on SPC’s behalf in respect of the Flat.

19.  On 24 May 1997 Ngo again visited the Firm’s offices, this time to sign the Assignment and Mortgage for the Flat.  By that time, Jimmy Chan (in response to Ngo’s query) had informed Ngo that the NOL had been received from Endenne and everything was in order for the Flat’s conveyance.

20.  Two days later Chan signed the Assignment on Endenne’s behalf.

21.  In late June or early July 1997 Ngo moved into the Flat.

22.  Unfortunately, everything was not in order with the Property.  In May 2000, having seen a letter dated 26 May 2000 from DLOYL to solicitors acting for purchasers of the 1st floor unit in the Property, Ngo learned that the DLOYL had not issued an Approval Letter, Certificates of Exemption or NOL for the Property.  The redevelopment in the Property (including the Flat) was in fact unauthorised and in breach of the Buildings Ordinance.

23.  On 23 January 2001 the DLOYL informed the 1st floor owner at the Property that, given the lack of authorisation for the Property’s redevelopment, the DLOYL was considering whether to take "appropriate steps and law enforcement action".  However, since then, the DLOYL has not proceeded on the matter.  In particular, the DLOYL has not registered any encumbrance or charge against the Property (including the Flat).

III.     Discussion

A.      Issue 1: Are the 3 Defendants liable for misrepresentation?

24.  In my judgment, the 3 Defendants are liable for fraudulent misrepresentation.

25.  It is fraud knowingly to state that something is the case, when it is not, for the purpose of inducing someone to enter into an agreement.

26.  By producing the Approval Letter, exemption certificates and NOL to Willis, Endenne was implicitly representing that it:-

(1) had requested the documents from DLOYL; and,

(2) was providing to the Firm what it had received. 

27.  But it is evident from the DLOYL’s 26 May 2000 and 23 January 2001 letters that at least the latter representation by Endenne was false.  Nothing had ever been issued by the DLOYL.  Most likely, this is because the former representation was also untrue.  Nothing had ever been applied for by Endenne.

28.  Endenne would have realised that its representations were untrue.  Endenne must have known whether or not it had applied to the DLOYL for any authorisation or exemption and whether or not it had received anything in response.  Contrary to what he told Willis, I do not believe that Fung had forgotten whether Endenne had ever received an NOL.

29.  Further, Endenne must have known that the Approval Letter, exemption certificates and NOL were necessary before the assignment of the Flat could proceed.  Willis made that much clear to Fung (as Endenne’s agent).  In particular, as far as Fung knew, Willis (in his capacity as Ngo’s solicitor) would not advise Ngo to go ahead without an NOL. 

30.  It is an inevitable inference that Endenne intended Ngo to act on the representation which was constituted by the production of the alleged Approval Letter, exemption certificates and NOL to Willis as Ngo’s solicitor.

31.  Ngo indeed acted upon Endenne’s representation.  I accept Ngo’s evidence that, before executing the Assignment, he sought assurance that the title documents for the Flat were in order. Jimmy Chan in turn informed Ngo that Endenne had provided the Approval Letter, requisite certificates and NOL.  Had any of the those documents been missing, Willis would not have advised Ngo to sign the Assignment and Ngo would certainly not have gone ahead with the transaction.

32.  Where there is fraud, a Court is entitled to pierce the corporate veil.  Here Endenne was the corporate vehicle or alter ego of Fung and Chan.  The Court is entitled to attribute Endenne’s actions to Fung and Chan.

33.  As directors, Fung and Chan would have known that no Approval Letter, exemption certificates or NOL had been obtained from the DLOYL.  In those circumstances, they must have colluded to forge the documents eventually provided to Willis, in order to make it seem as if permission to redevelop had been granted.  Fung and Chan must also have intended that Ngo should act on their misrepresentation by entering into the Assignment with Endenne.

34.  I find then that Ngo’s case against Fung and Chan for fraudulent misrepresentation is made out.

B.      Issue 2: Is Ngo entitled to rescind the Assignment and claim damages?

35.  An agreement which results from fraudulent misrepresentation is voidable by the wronged party.  But rescission will not be available where it is impossible to make restitution.  Thus, if a third party acquires an interest in property which is the subject of an agreement, the contract may not be avoided.

36.  Here, fortuitously, Ngo paid off SPC’s mortgage on 14 October 2005.  As at that date, he had repaid the principal loan, plus interest of $494,247.30 and a pre-payment charge of $4,524.51.  Thus, no third party currently has an interest in the Flat and restitution to Endenne is possible.

37.  Subject to certain considerations set out below, I think that Ngo should be entitled to rescind the Assignment.

38.  As far as damages are concerned, the objective is to put Ngo into a similar position as that he would have been in if the misrepresentation had not been made.  The various heads of damage claimed by Ngo have to be assessed in light of this principle.

39.  Ngo asks for re-payment of the purchase price.  Normally, one would be entitled upon rescission to a refund of consideration.  But here Ngo has already enjoyed the benefit of the Flat for some 8 years.  It would be unfair to the 3 Defendants if they received no credit for the time Ngo has occupied the Flat.

40.  Over the last 8 years, Ngo has paid $1,250,000 principal plus $494,247.30 interest for the Flat.  Justice among Ngo and the 3 Defendants can be achieved on a rough-and-ready basis by restricting Ngo’s damages to the return of the principal of $1,250,000.  The mortgage interest of $494,247.30 (plus any expenses incurred on early payment and discharge), together with any interest which Ngo might have earned on that part of the principal which he paid from his own resources in 1997, should roughly equal the total rental value of the Flat over the past 8 years.

41.  Ngo claims various fees: $37,500 commission to estate agents; $9,475 stamp duty; and $2,110 land registration fee.  He should be entitled to the restitution of those amounts.

42.  Ngo asks for reimbursement of the Firm’s fees of $25,817.50 for conveyance of the Flat.  I think that he is entitled to be repaid that sum.

43.  Ngo seeks decoration expenses of $80,000 and removal fees of $8,000.  I do not think that it would be fair to grant restitution of those amounts.  Over 8 years, Ngo has enjoyed the Flat as decorated by him.  Further, if he had simply rented the Flat over the 8 years, he would still have had to move there in the first place.

44.  Ngo asks for refund of 3 years’ fire insurance premium.  But, in the course of his 8 years’ occupation of the Flat, Ngo would have enjoyed the benefit of being insured against fire.  This item therefore does not represent a true out of pocket cost due to misrepresentation.

45.  Ngo finally asks for $2,400 as “legal and miscellaneous expenses of discharge of the mortgage of the subject property”.  I disallow this claim on the consideration stated in my discussion of rental value.

46.  Consequently, Ngo is entitled to damages of $1,324,902.50. Interest will run on that amount from the date of this Judgment until payment at the judgment rate.

47.  Mr. Hylas Chung (appearing for Ngo) points out that, in practice, it may be difficult to enforce a judgment for damages against the 3 Defendants.  If the Assignment were to be rescinded with immediate effect following this Judgment, Ngo would find himself in the unenviable position of having to vacate the Flat, despite non-payment by the 3 Defendants of Ngo’s damages.

48.  I therefore direct that the Assignment is to stand rescinded, only upon payment by the 3 Defendants of Ngo’s damages plus any interest. There will be liberty to apply to deal with any difficulties that may arise in the working out of this Judgment.

C.      Issue 3: Is the Firm liable?

49.  In my judgment, there is no basis for holding the Firm liable to Ngo.

50.  Mr. Chung argues that the Firm was negligent in the following respects:-

(1)     Although the NOL was provided to Willis in suspicious circumstances, Willis did not investigate the NOL’s genuineness.

(2)     Willis failed to notice that there were discrepancies in the Property’s description in the Approval Letter, Certificates of Exemption and NOL provided by Fung.

(3)     Willis failed to advise Ngo of a potential conflict of interest.

51.  Mr. Chung’s first complaint arises because the tenor of SPA cl.3(a) as drafted by Willis is that the NOL had yet to be issued by the DLOYL.  That (Mr. Chung says) must have reflected Willis’ understanding, presumably based on what Fung told him, that an NOL had yet to be issued in the future.  If that is the case, should not Willis have been suspicious when, days after the SPA was signed, Fung provided him with an NOL which had apparently been issued 2 years before on 13 December 1995?

52.  Here, I am satisfied by Willis’ explanation in Court.  I have summarised that evidence in Section II of this Judgment.  On reflection, I do not think that there is a real inconsistency between Willis’ evidence and the thrust of SPA cl.3(a).

53.  Mr. Chung’s second complaint is without merit.  It is obvious from a perusal of the relevant documents that they all refer to the same premises, namely, House Lot. Nos. 36 and 37, Wing Ning Lei, DD No.111, Yuen Long.  There is nothing in the alleged discrepancies identified by Mr. Chung that would have alerted even the most prudent of solicitors to the fact that the documents furnished by Fung were forgeries.  There was nothing on the face of the Approval Letter, Certificates of Exemption or NOL which ought to have prompted Willis to investigate further.

54.  Mr. Chung’s third complaint is likewise lacking in substance.  The Firm could act for both Ngo and Endenne (despite Fung’s employment in the Firm) by reason of Solicitors’ Practice Rules r.5C(4).  Further, Ngo’s own evidence shows that, before executing the Assignment, he was aware that Fung was employed by the Firm and Chan was Fung’s wife.  Finally, even if there were a conflict of interest, I do not see how the failure to advise on such conflict has led to the loss complained of here.

55.  It follows that Ngo’s claim against the Firm must fail.

IV.     Conclusion

56.  There will be judgment in Ngo’s favour against the 3 Defendants. 

57.  The 3 Defendants are jointly and severally liable to pay Ngo damages of $1,324,902.50.  Interest is to run on that sum at the judgment rate from the date of this Judgment until payment. 

58.  Upon satisfaction by the 3 Defendants of Ngo’s damages plus accrued interest, the Assignment dated 26 May 1997 between Endenne and Ngo shall stand rescinded. 

59.  There will be liberty to apply.

60.  Ngo’s claim against the Firm is dismissed.

61.  I shall now hear counsel on costs.