SANTANI LTD v. SHUM SHUK FONG

HCA 310/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 310 OF 2011

------------------------

------------------------

J U D G M E N T

------------------------

1. Ms Winnie Choi is a director of the plaintiff company. I shall refer to the plaintiff as ‘Ms Choi’. On 1 June 2010 Ms Choi signed a provisional agreement for the sale of purchase of a flat at B2, 12‑14 Fa Po Street, Kowloon and car park space (‘the flat’) for a purchase price of $8.18 million. The vendor was the defendant (Mme Shum). The transaction duly completed on 7 December 2010.

2. It is agreed between the parties that, at the material time, the true value of the flat was between $6.09 and $6.13 million (they being the respective professional valuations prepared by the parties for the purpose of these proceedings).

3. By this action Ms Choi claims from Mme Shum the difference between the agreed price and the true value, say $2.05 million.  In simple terms, it is Ms Choi’s case that the reason she paid a price approximately 25% higher than the market value was because Mme Shum made a false representation to her and misled her over certain matters relating to the garden area adjacent to the flat.

‘The garden’

4. Since January 1995 Mme Shum had been the tenant of a garden area of approximately 4,500 square feet which was adjacent to the flat.  (She had purchased the flat in 1993).  The owner of the garden area was the Hong Kong Government. The rent for the garden was modest, about $10,000 per quarter in 2010, and over the years Mme Shum had made the area into a very attractive garden containing a fish pond, flowers, trees, statues, walkways etc.  Also in the garden area were two brick structures which were habitable and were occupied by Mme Shum and her husband.  The structures, or similar structures, had been on the land when Mme Shum had acquired the flat in 1993.

5. Mme Shum had also owned a flower shop in Kowloon.  She was knowledgeable about horticultural matters.  She had tended the garden for about 16 years and was rightly proud of it.  It is obvious, and I so find, that Ms Choi was aware of the approximate true value of the flat and agreed to pay an extra $2.05 million because of the prospect of enjoying the garden area in the same way as Mme Shum had done.

6. She also knew that the land was owned by the Government and that she would have to apply for the tenancy, to replace Mme Shum, in due course.  It is her case that she agreed to purchase the flat because of a misrepresentation uttered by Mme Shum whilst discussing and negotiating at a meeting in the garden on 1 June 2010.  Ms Choi must prove that the words alleged were uttered (or similar words to the same effect), that they were untrue, that they were uttered intending to mislead Ms Choi into making the agreement and they did so.

The misrepresentation

7. Ms Choi claims that Mme Shum said words to the effect that the use the garden and the structures thereon for the same purpose as those enjoyed by Mme Shum would continue so long as no additions or alterations were made to the structures.  In evidence Ms Choi said Mme Shum had used words such as “so long as you make no alterations and no additions there would be no problem at all”. 

8. Ms Choi does not have to prove an exact set of words.  Her first burden is to prove that a representation was made to the effect as stated above.  If a representation to this effect was made Ms Choi’s second burden is to prove that it was false.  It must also have been uttered fraudulently, namely with an intention to deceive or, at least, being reckless as to whether it was true or not. Ms Choi must also establish that it induced her to enter into the contract to purchase the flat and car park for $8.18 million.  Before addressing these crucial questions it is necessary to set out the wider factual background to the meeting in the garden on 1 June 2010.

Background

9. Mme Shum had bought the flat in 1993 from a Mr Mak.  Mr Mak had also been the tenant of the garden at the time.  After the purchase Mr Mak and Mme Shum had entered into a separate written agreement concerning the tenancy of the garden.  Thereafter Mme Shum acquired (in January 1995) a 5-year tenancy of the garden from the Hong Kong Government which became renewable thereafter on a quarterly basis.  The agreement between Mr Mak and Mme Shum stated, inter alia, as follows:  (Party B was Mme Shum)

“ Both parties agree to make all the conditions as follows so that Party B can use the piece of land for the purpose of Private Garden. Each party is willing to abide by:

(1) Party B agrees to pay the rent mentioned above, that is HK$5,307.54, for Party A.

(2) Party B agrees that she would not alter the piece of land or change its use for other purposes, until Party A returns it to the District Lands Office.

(3) If the piece of land is in need of removal or recondition of the altered structures due to alteration or change of purpose before it can be returned to Lands Department, all expenses for removal or recondition of the altered structures has to be paid by Party B while Party A shall not be liable for the same.

(4) Party B would also make an application with Lands Department to continue to rent the piece of land for the purpose of Private Garden.

(5)   This Letter of Consent is in duplicate.  Each party agrees to abide by it and each holds a copy of it as proof.”

10. All went well.  Mme Shum paid the rent, commenced using and landscaping the garden and was confirmed as the tenant in January 1995.  The tenancy included the following terms:

“…(i) At the expiration or sooner determination of the tenancy, the tenant will at his own expense and to the satisfaction of the District Lands Officer demolish and remove all structures on the premises;

(d) Not to alter or demolish any building or structure erected on the Premises without the prior consent in writing of the District Lands Officer;

(e) To make such arrangements for the supply of electricity, gas and mains water to the Premises as he shall require and to pay all charges in connection therewith including the cost of installation and maintenance thereof and, on termination of this Agreement, the cost of dismantling all pipes, wires, cables, meters, switches and any other apparatus ancillary thereto;

…”

11. Over the next 15 years, whilst she and her husband lived in and improved the garden area, certain issues arose between Mme Shum and the District Lands Office as evidenced by the following.

12. In 2000 she built an extension and a wall. In 2003 she was told to remove the extension.  She removed half of it (according to her own evidence).  In March 2004 she received a written warning of the termination of the tenancy if there were any breaches of the terms and conditions.  The letter commences “we must hereby emphasize …”.

13. This warning was repeated in May 2006 in a letter in which the District Lands Office informed her that her application for an “expansion of the area” was under “consultation”.

14. In March 2007 she received an Order which stated:

“It is known that the above premise(s) has undergone the following building works:

(1) Certain single-storey additional structures (including additional structures constructed beneath the floor slab of ground floor and at the edge of the platform of the neighbouring car park at Fa Po Villa (No. 12-14 Fa Po Street, Kowloon)).

2.   With regard to the above building works:

(a)  The building works in Item (i) above have been carried out without having first obtained from me the approval of the building plans and consent for the commencement of such building works in accordance with Section 14 of the Buildings Ordinance.

3.   I now exercise the rights conferred on me by Section 24(1) of the Buildings Ordinance and order you:-

(a)  to demolish the building works mentioned in Item (i) above; and

 (b) restore the parts of the building affected by the building works mentioned in Item (i) above to its original appearance in accordance with the plan approved by Building Authority.”

15. Mme Shum stated in evidence that District Lands Office officers inspected the land thereafter.  The order was not complied with and as at June 2010 no follow up action had been taken.

The meeting on 1 June 2010

16. There had been an expression of interest by Ms Choi in buying the flat as early as 2004.  However, no price was agreed.  Thus, since 2004 Ms Choi was aware of the fact that the owner of “the flat” lived in the garden area and looked after it.  There would have been no apparent change to this arrangement between 2004 and 2010.

17. Ms Choi expressed renewed interest in the property and the garden in May 2010, a month before the June meeting.  However, the plaintiff does not rely on anything that took place at that meeting in support of her misrepresentation claim.  Suffice it to say that as at June 2010 Ms Choi knew that the garden was Government property, she knew Mme Shum was the tenant and occupied the garden and she knew the flat and the car park were worth about $6 million.

18. Present at the garden negotiations on 1 June 2010 were Mme Shum, Ms Choi, Mr Lee Kui Man (Ms Choi’s partner, a retired accountant) and two employees of On Kiu Real Estate, Mr Mok Kin Wah (“Mr Mok”) and his colleague Miss Chan Chak Ning (“Miss Chan”).  The negotiations were fairly brief.  I will deal with the representation issue later in this judgment.  As far “the deal” is concerned, Mme Shum asked for $8.38 million, Ms Choi offered $8.13 and soon after $8.18 was agreed.

19. The ‘garden’ was clearly an important factor in the negotiations.  The meeting took place in the garden, not the flat.  Both parties spoke favourably about the state of the garden, its flowers, trees, pond, patios, statues, huts and so on.  That Ms Choi was interested in the garden was plain and obvious and that she paid about $2 million over and above the value of the flat (the very sum which Mme Shum said she had spent on the garden over the years) was because of the garden was equally plain and obvious.  A key question is whether she did so as a result of being induced by a false representation or whether she was prepared to take the risk of getting a similar tenancy from the Government in any event and would have paid the extra $2 million even if nothing had been said.

20. With the garden in mind a second written agreement was also signed immediately after the Provisional Agreement for the purchase of the flat and car park for $8.18 million.  It was Miss Chan who drafted both agreements.  This second agreement was very similar to the 1993 agreement between Mme Shum and Mr Mak.  In fact the 1993 agreement was used as a template by Miss Chan.  It stated:

“ Now both parties agree to make all the conditions as follows so that Party B can use the land for the purpose of Private Garden. Each party agree to abide by:

(1) Party A agrees to pay the rent mentioned above for Party B until 31 December 2010.

(2) Party B agrees that it would not alter the lot or change its use for other purposes, until Party A returns it to the Lands Department.

(3) If the land is in need of removal or recondition of the altered structures due to alteration or change of purpose before it can be returned to Lands Department, all expenses for removal, recondition or alteration has to be paid by Party B while Party A shall not be liable for the same.

(4) Party B would also make an application with Lands Department to continue to rent the land for the purpose of Private Garden.

(5)   This Letter of Consent is in duplicate.  Each party agree to abide by it and each holds a copy of it as proof.”

21. Party A was Mme Shum.  She agreed to pay the rent until 31 December 2010.  In fact, the Government continued to invoice Mme Shum for the first quarter of 2011 but the plaintiff paid the rent.  Completion of the purchase of the flat had taken place on 7 December 2010.

22. It is common ground that at the time of signing the Provisional Sale agreement and the additional agreement concerning the garden Ms Choi was unaware of the District Land Office’s letter of March 2007 and earlier communications.  Mme Shum had not mentioned them.  Further, it was Mme Choi’s evidence, which I accept that Mme Shum said at the time that she “could use the document for the renewal of the (Short Term) Tenancy.”

Subsequent events

23. On 12 January 2011 Mme Shum received a notice to quit the garden land on 11 April 2011.  On 23 March 2011 she received a “Superceding Order” from the Building Authority ordering her to demolish “(i) a structure on the slope underneath the floor slab of the car park on ground floor and extending beyond the boundary at the rear and (ii) a canopy attached to the structure at item (i) above.”  These structures had been built without approval, they were illegal structures.  At least in part they were the same structures to which the March 2007 Order referred.

24. The District Land Office wrote to her 6 days later informing her that she must “clear and remove all the structures … highlighted in yellow” (on an annexed plan).  Both habitable structures were in yellow.

25. Mme Shum requested an extension to her tenancy so that she could carry out demolition work which was granted up to 30 May 2011.  On 28 May 2011 she informed the District Land Office that she had carried out the demolition work.  However she had not completed the required demolition.

26. The present situation is that the site remains uncleared and it is understood that the Government will only re-tender it for lease after all illegal structures have been removed.

The witnesses

27. Before addressing the specific issues in this case, I propose to comment briefly on some of the witnesses.

28. Mme Shum was not a good witness.  Even making due allowance for her age (she was over 70) and lack of education, time and time again she answered questions by saying that she did not own the land and that Ms Choi would have to apply for a tenancy even when the questions concerned different issues.  She was garrulous and unable or unwilling to give direct answers to straightforward questions.  She was rightly proud of her garden and I accept from her that she had spent in the region of $2 million on it over the years.  However she was plainly unwilling to face the obvious truth that she knew her flat was only worth about $6 million and that her “opening bid” of $8.38 million was to compensate her for the time and money she had spent on the garden.  By the same token I reject her contention that she made no representations (upon which I shall elaborate later) to Ms Choi about her enjoyment of the garden and about there being “no problem” provided she left everything as it was.

29. In short I found myself unable to rely on her evidence with regard to the important issues in this case.

30. Ms Choi however I found to be reliable.  She did not embellish her evidence.  I regarded her as the witness who had the most accurate recollection of what took place and what was said in the garden.  I did not regard the time gap of about 6 months between the garden meeting and when things started to go wrong as being likely to affect the accuracy or reliability of her recollection.  Equally, Mr Lee, the retired accountant, was firm, clear, concise and helpful with his answers. Together they gave a credible and reliable version of events.  Mr Mok and Ms Chan provided positive support for certain aspects of the plaintiff’s case which I also felt able to accept.

Findings

31. (1)  I am satisfied on the evidence that Mme Shum made the representation as alleged.  Mme Shum’s evidence that she said no more than it was Government land and Ms Choi would have to apply for a tenancy is not believable.  Such limited remarks would do nothing to secure the profitable deal which she sought.  The weight of evidence against her on this factual issue is compelling and reliable.

32. (2)  The representation was false.  It could not be said that there was “no problem” nor that Ms Choi’s enjoyment of the land would continue provided no alterations or additions were made.  Mme Shum had had previous dealings with the District Land Office about the land and things thereon which had not been resolved.  She had disclosed none of them.  Subsequent events demonstrate that saying there was “no problem” was false.

33. (3)  The next important question is did Mme Shum know it to be false?  It is submitted in her favour that she may have had an honest belief in its truth based on the fact that no action had been taken since 2007.  I cannot accept this submission.  In my judgment Mme Shum knew it was false.  Even if she did not know, as an absolute certainty, that her statement that there was “no problem” was untrue, her utterance of it was at least reckless in the sense that she cared not whether it was true or not.  Her sole purpose of uttering it was to help persuade Ms Choi to part with over $8 million.  She wanted Ms Choi to believe it. 

34. Whilst keeping in mind that the burden of proving the case is on the plaintiff, the defendant’s pleaded case does not rely on the possibility of an honest belief in the truth of the representation.  Her case is that she did not say it or anything to the same or a similar affect, which I have found to be untrue based of the substantial body of evidence against her.

35. The existence of the 2007 Order is inconsistent with there being “no problem”.  The 2007 Order was preceded by dealings with the Lands Department which remained unresolved.  I am sure that Mme Shum had not forgotten about the 2007 Order and thus the fact that she made no disclosure of it is consistent with her awareness that there was indeed, “a problem”, the opposite of “no problem”.  In evidence she said that she did not know whether the order would be enforced or not.  That is not consistent with there being “no problem”.

36. Further evidence from the plaintiff’s side suggested that later in the discussions in the garden Mme Shum said something along the lines of “if those people (people from the Lands Department or the Buildings Department) come, don’t let them in, don’t answer the door”. Mme Shum denied saying this but I do not believe that the plaintiff’s witnesses invented it and I further find the remark lends some support to the contention that she knew the representation was false.

37. (4)  The false representation induced Ms Choi to enter into the contract to her detriment.  I am satisfied that the fact that Ms Choi was assured that there would be “no problem” etc. made a positive contribution to her decision to sign the Provisional Agreement for Sale for $8.18 million.  I am satisfied also that had she known the true situation she would not have agreed to the purchase at that high price.

38. I accept that Ms Choi probably entered into the negotiations with a positive frame of mind.  She was willing to “pay over the odds” because of the garden.  She knew she would have to apply for the tenancy.  She knew there was an element of risk in relation to the prospective tenancy but Mme Shum’s representations to her were positive factors in the calculation of that risk, in her mind.

39. At the end of the half hour or so in the garden Mme Shum had made the alleged representation, they had agreed the price, they had signed both the Provisional Agreement and the secondary agreement expressing Ms Choi’s desire to take over the tenancy and Mme Shum had agreed to give her the key to the garden on completion (7 December).  They had agreed that Ms Choi would have possession of the garden from that date and would be responsible for the rent from 1 January 2011 and that Ms Choi would apply for the tenancy in due course thereafter. Mme Shum also suggested waiting a while before doing this.

40. All this, in particular being told there was “no problem” about the huts, caused Ms Choi to calculate the risk as a safe one.

41. It was submitted on Mme Shum’s behalf that, in truth, Ms Choi had already made up her mind and was not thereby induced by anything.  In support of this submission it was pointed out that two of the plaintiff witnesses suggested that the discussion about the status of the huts came after the parties had arrived at a mutually acceptable price.  For example, the estate agent Mr Mok said that $8.18 million was agreed “after continuing discussions about the transaction …” but before Mme Shum “talked about the garden”.  However, he went on to say that at the end of the discussions “both parties then decided to confirm the deal and sign the agreements.” (my emphasis)  This is the version given by all four plaintiff witnesses.  It confirms that it was the misrepresentation which finally induced Ms Choi to enter into the contract, regardless of whether or not she may have been favourably disposed to offer a high price because of the garden.

42. Adverse comment was also made about the absence of any written “Remarks” at Clause 13 of the Provisional Sale agreement and the absence of any reference to the representation in the agreement concerning the tenancy.  I accept that, with hindsight, Ms Choi might have been wiser to insist on something to be included under the “Remarks” Clause; however, I attach little weight to this omission because the fact remains that the evidence proves that Mme Shum did utter the alleged remarks, which were not true and which lulled Ms Choi into signing.  Such criticisms that were made of Ms Choi and her witnesses did not diminish, in my judgment, the effect of these key findings in her favour.  

Representation as to the future?

43. It was argued on Mme Shum’s behalf that the representation, if made, was not actionable because (Chitty on Contracts 31^st Edition 6-006-7):

“The traditional rule is that a misrepresentation must be a false statement of fact, past or present, as distinct from a statement of opinion, or of intention or a mere commendatory statement … A mere statement of opinion which proves to have been unfounded, will not be treated as a misrepresentation.”

and Anson’s Laws of Contract 29^th Edition p.303:

“An expression of the speaker’s intention, a promise and a prediction about the future are not normally misrepresentation. None of these can be regarded as true or false at the time when it is made, except in so far as a person may misrepresent the state of his or her own mind or power to bring an event to pass.”

44. I do not think that this assists the defendant.  I do not think that her representation was intended to mean “there will be no problem when you apply for the tenancy, you will succeed.”  Rather it meant, there is no problem that I am currently aware of concerning these structures and the tenant’s enjoyment of the garden — which was untrue.

Decision

45. The ingredients of a fraudulent representation as set out in Derry v Peak [1889] 14 App.Cas.337 at p.369 namely that:

(i)  the defendant made a false representation;

(ii)   knowing it to be untrue, or having no belief in its truth, or being reckless as to its truth and;

(iii)  the defendant intended to induce the plaintiff to act in reliance on it;

(iv)  and she did so to her detriment.

are proved.

Damages

46. If the representation had not been made she would not have bought the flat and car park for $8.18 million.

47. For the purpose of calculating her loss, it may be assumed that she could have bought an identical flat for $6.13 million (the slightly higher of the two valuations).  This provides the following simple arithmetic to assess her damages:

Price paid	$8,180,000
Value of flat	$6,130,000
	$2,050,000
Stamp duty	$113,750
	$2,163,750

48. There will be judgment for the plaintiff in the sum of $2,163,750 plus interest to be agreed with a costs order nisi in the plaintiff’s favour to be taxed if not agreed.