FORTUNE ASSET DEVELOPMENT LTD v. DE MONSA INVESTMENTS LTD

HCA 167/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 167 OF 2009

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BETWEEN

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J U D G M E N T

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Background:

1.  This is an application by Fortune Asset, as vendor, against De Monsa, as purchaser, for an order pursuant to O 86 RHC, for rescission of a sale and purchase agreement dated 2 July 2008, (the SPA), and consequential damages, in relation to an aborted sale of four office floors, 11, 12, 13 and 15, in a building known as Silver Fortune Plaza, No 1 Wellington Street, Central Hong Kong.

2.  Fortune Asset was the owner of a number of floors in Silver Fortune Plaza. De Monsa is a corporate vehicle used by the family of Mr Lauw Siang Liong, (Mr Lauw), for property investment in Hong Kong. Mr Lauw is one of only two directors and shareholders of De Monsa, the other being his son, who resides in Indonesia. The general manager of De Monsa is Law Wai, (Mr Law).

3.  The application was originally couched in terms of an application for summary judgment under O 14. On 17 August 2009, the day prior to the hearing, Ms Wong, recognised that in an action for rescission of an agreement for the sale and purchase of property, the application for summary judgment is made, not under O 14, but under O 86. Accordingly she caused the solicitors to file a summons seeking to appropriately amend the summons for summary judgment. The essential nature of the proceedings did not change in any way.

4.  Mr Ho sensibly recognised that he was unable to object to the application to amend the summons, and I made an order formalising the correct state of the papers.

The application to adduce further evidence:

5.  The argument began with an application by Mr Ho for leave to file further evidence, namely the fourth affirmation of Mr Law. That application was strongly opposed by Ms Wong who contended that it ought to be determined having regard to O 32 r 11A(4) RHC, which provides:

“Where the determination of the application is adjourned for the hearing of the summons, no further evidence may be adduced unless it appears to the Court that there are exceptional circumstances making desirable that further evidence should be adduced.”

6.  There is a background which needs to be briefly recited. The writ was issued on 20 January 2009, and the application for summary judgment filed on 13 February 2009. On 6 March 2009, Mr Law filed his first affirmation, raising, for the very first time, the issue of mental incapacity on the part of a director of De Monsa, Mr Lauw.

7.  At the first call over hearing before the Registrar, on 9 March 2009, the solicitors for De Monsa sought three months to file further affirmations. They were given 28 days. They did not file anything within those 28 days and at a second call over on 15 April 2009, sought further time. On 17 April 2009, the Registrar made an unless order, requiring De Monsa to file and serve all its affirmations in opposition by 4 p.m. on 5 May 2009, failing which De Monsa would be barred from defending the action.

8.  The order made on 15 April 2009 contained a further provision that no further affirmations should be filed without leave of the Court.

9.  The argument mounted by Ms Wong was that the application failed to comply with O 32 r 11A(4), in that there were no exceptional circumstances which justified the admission of further evidence.

10.  I accept Ms Wong’s argument that the application must be dealt with under O 32 r 11A(4). The mere fact that the order of 15 April 2009, provided that no further affirmation should be filed without leave of the Court cannot, and should not, be seen to relieve either party from the plain requirements of O 32 r 11A(4). It is clear from that rule that one of the objectives of Civil Justice Reform is to ensure that parties to litigation are properly notified of the grounds upon which applications are being made for the earliest possible opportunity, and to prevent last-minute evidence being put in, save in exceptional circumstances.

11.  To allow last-minute evidence, save in exceptional circumstances, would not be to ensure that a case is dealt with as expeditiously as is reasonably practicable: see O 1A r 1(b); nor would it ensure fairness between the parties: O 1A r 1(d).

12.  I read the new affidavit and the exhibits de bene esse. There was nothing contained in the affidavit all the exhibits which could not have been within the contemplation of those advising De Monsa as being relevant to the issues at the time the order was made on 15 April 2009. A proper review of the potential issues that might arise in these proceedings ought to have resulted in the information contained in the affidavit being filed within time limits imposed. There was nothing in the evidence in support of the application to suggest that exceptional circumstances had arisen.

13.  I accordingly decline the application for leave to admit further evidence, and have dealt with the application on the basis of the evidence as it stood. Fortune Asset is obliged to instruct Ms Wong to prepare to oppose the application, which duly failed. There will be an order nisi that Fortune Asset shall have its costs on the application, which I fix in a gross sum of $20,000, to be paid forthwith.

The factual background:

14.  By a preliminary agreement for sale and purchase made on 7 December 2007, De Monsa agreed to purchase the four floors from Fortune Asset for the sum of $211,056,000.

15.  The original date for completion of the purchase was 30 June 2008, but subsequently, at the request of De Monsa, in a formal agreement, the SPA, entered into between the parties on 2 July 2008, that date was extended to 31 December 2008.

16.  On 31 December 2008, De Monsa failed to complete the purchase. Following that failure, acting pursuant to the terms of the contract, Fortune Asset resold the four floors, and now seeks an order for recession, and damages based on the loss on the sale price, together with costs incurred in the resale and the costs arising from noncompletion.

The sale of floors 21-23 Silver Fortune Plaza:

17.  Ms Wong’s submission that De Monsa is a seasoned and prominent investor in the local property market is not open to challenge. Apart from any other transactions, De Monsa had, on 14 November 2007, less than a month before the transaction at issue, agreed to purchase four other floors, 20-23, of the same building, from Fortune Asset for the sum of $163,568,400. The evidence is that it was Mr Lauw who negotiated the purchase on behalf of De Monsa.

18.  Completion of that sale was due on 15 May 2008. On 3 December 2007, three weeks after signing the preliminary agreement for sale and purchase, De Monsa sold floors 20-23, giving it a profit of $22,864,400. The evidence appears to be that it was Mr Lauw who negotiated that very profitable quick sale. Four days later, the preliminary agreement for sale and purchase, the subject of these proceedings, was signed.

19.  The agreement for sale and purchase in respect of floors 20-23 duly proceeded to completion on 15 May 2007, without complaint on the part of De Monsa, when an assignment was completed by Fortune Asset to De Monsa’s sub-purchaser with De Monsa as confirmor. The assignment was signed for De Monsa by Mr Lauw. On the completion of the transaction De Monsa received its profit exceeding $22 million.

The transaction on floors 11-13, and 15 Silver Fortune Plaza:

20.  The representatives of the parties did not meet each other during the negotiations in respect of either transaction, the common link between them being two agents with Centaline Property Agency Limited. Both preliminary agreements were signed for De Monsa by Mr Lauw.

21.  On 7 December 2008, the same day as the signing of the preliminary agreement for sale and purchase of floors 11-13 & 15, the solicitors for De Monsa wrote to the solicitors for Fortune Asset asking, on the usual undertaking, for the relevant title deeds and documents for perusal.

22.  Mr Lauw personally signed a deposit cheque in relation to the sale and purchase of floors 11-13 & 15 on 7 December 2007 $6,331,680, and on 28 December 2007 a cashier's order for $14,773,920 was sent to Fortune Asset’s solicitors by De Monsa’s solicitors for the balance of deposit.

23.  There was subsequently a disagreement as to whether Fortune Asset had satisfactorily answered requisitions on title, but nothing turns on that. That is because, following negotiations through their solicitors in late June 2008, the parties agreed to the following on 30 June 2008:

(i) the completion date would be extended to 31 December 2008,

(ii) a further deposit of $15 million would be paid on or before 30 June 2008,

(iii) a further deposit of $6,105,600 would be paid or before 30 July 2008,

(iv) De Monsa would sign a formal SPA in which it would confirm acceptance of title.

24.  The evidence of a director of Fortune Asset is that shortly prior to these negotiations and the subsequent agreement taking place, he was visited by the two estate agents relaying a message from De Monsa, that it had not yet been able to borrow money to pay for the balance of the purchase price, and wish to have the date of completion extent. The director says that he told the estate agents that De Monsa’s solicitors should contact Fortune Asset’s solicitors and have the matter sorted out through the solicitors.

25.  There is no evidence from the two estate agents, and the director of Fortune Asset does not assert as to which particular person at De Monsa requested that the message be conveyed.

26.  As agreed, on 30 June 2008, the further deposit of $15 million was paid, and De Monsa’s solicitors sent to Fortune Asset’s solicitors the SPA, advising that it had been duly signed by De Monsa. This document was signed by Mr Lauw for De Monsa, and his signature was witnessed by a solicitor. Further, on 30 July 2008, the further deposit of $6,105,600 was paid.

27.  Between 8 August 2008, and 29 October 2008, there was correspondence between the respective solicitors concerning the terms of the renewal of the tenancy of the 11^th floor, in the premises being sold. On four occasions, 11 August 2008, 5 September 2008, 18 September 2008 and 3 October 2008 various proposals which had been put by Fortune Asset’s solicitors to De Monsa’s solicitors, elicited the advice from De Monsa’s solicitors that the terms were acceptable to their client. A further proposal, sent on 17 October 2008, was returned on 29 October 2008, with suggested amendments marked for consideration. On one occasion there had been a slight delay as De Monsa’s solicitors informed Fortune Asset’s solicitors that all of their client’s officers in charge were out of town and unavailable until 3 October 2008. Other than that, no issue was raised.

28.  On 15 December 2008, 29 December 2008, and 30 December 2008, Fortune Asset’s solicitors asked De Monsa’s solicitors for a draft Assignment and Completion Undertaking for approval. There was no reply to those letters.

29.  Instead, about two days before completion was due on 31 December 2008, a director of Fortune Asset was informed by the two estate agents, again allegedly on behalf of De Monsa, that De Monsa had been unable to borrow the money to pay for the balance of the purchase price, and wished to have the date of completion extended. Again, the director told the estate agents that the matter should be dealt with between solicitors. Again, the director does not assert as to which person at De Monsa requested that the message be relayed.

30.  In the event, completion did not take place. By a letter dated 2 January 2009, Fortune Asset, by its solicitors, informed De Monsa’s solicitors that Fortune Asset treated the failure to complete as a repudiation of the SPA, accepted that repudiation, thereby terminating the SPA, forfeited $21,105,600 from the deposits, and retained that sum to set off against any loss or damage suffered by Fortune Asset.

31.  On 15 January 2009, Fortune Asset resold the 11^th floor, and on the 20 February 2009, resold floors 12, 13 & 15, the total resale price amounting to $129,952,950, a shortfall of $81,103,050.

32.  There is a dispute as to the extent of the damages. The case for De Monsa will be that the property was sold by Fortune Asset as an undervalue of some $20 million. That case was dependent upon a valuation exhibited to the affidavit sought to be admitted late. But in any event, the affidavit of Mr Yik Choi Man, the assistant general manager of Fortune Asset, concedes that De Monsa has a bone fide or genuine defence as to the amount of damages claim. Consequently, irrespective of any question of liability, there must be leave to defend on the issue of damages.

The estate agents:

33.  Both transactions between De Monsa and Fortune Asset were negotiated by the same two estate agents. There is apparently no document formally appointing either the estate agents or their employer, Centaline, as agents for either the vendor or the purchaser. However, Ms Wong was not able to argue that there was no case to say that the estate agents were the agents of both parties.

34.  The relationship of principal and agent may be implied from the conduct or the situation of the parties: see Bowstead & Reynolds on Agency, 17^th Edn., § 2-001.

35.  It must be arguable that the estate agents were the agents of Fortune Asset, because by clause 11 of the provisional sale and purchase agreement Fortune Asset agreed to pay a commission to the agents of $1,055,280. The fact that they were entitled to a commission from Fortune Asset is a sufficient basis upon which it may be argued that the relationship of agency may be implied. That the agents were also entitled to a commission from De Monsa does not detract in any way from the argument that they were agents of Fortune Asset, but merely establishes an argument that they were agents for both parties.

36.  It inevitably follows from the conclusion that it is arguable that the estate agents with the agents of Fortune Asset, is that it is also arguable that any knowledge acquired by the two estate agents while acting in relation to the two transactions may be imputed to Fortune Asset, as the principal of the agents: see Bowstead § 8-207-209.

The defence:

37.  The defence advanced is that Mr Lauw lacked mental capacity to enter into the contracts.

38.  There is medical evidence that on 31 July 2007, a neurosurgeon performed a burr hole drainage of a subdural haematoma on Mr Lauw. There is also a medical evidence from a specialist in psychiatry that Mr Lauw has been suffering from Vascular Dementia, the illness having had its onset since early 2007, and having been aggravated by the brain insult caused by the subdural haematoma.

39.  There is evidence before the court to establish that between March 2007, and September 2008, Mr Lauw entered into some 151 transactions for a total value of over $7.1 billion at a time when he was suffering from vascular dementia.

40.  The evidence establishes that most of these transactions were completed, but some did not proceed. On one, De Monsa sought to escape from the transaction on the basis of the failure to answer requisitions. In others which did not proceed, De Monsa apparently effectively abandoned deposits that had been paid.

The law:

41.  The law is in respect of mental incapacity of a person who enters into a contract is clear. In the case of contracts other than for necessaries, the general rule is that a person who is mentally disordered or otherwise lacking in mental capacity is bound by his contract unless he can show both that this lack of capacity meant that he did not understand what he was doing and that the other party was aware of this incapacity. Where those conditions are satisfied, the contract is avoidable at the option of the incapacitated person: see Chitty on Contracts, Vol 1 30^th Ed. para 8-068.

42.  Two authorities are cited for the foregoing proposition. In Imperial Loan Co Ltd v Stone [1892] 1 QB 599 at 601, Lord Esher MR said:

“When a person enters into a contract, and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding on him in every respect, whether it is executory or executed, as if he had been sane when he made it, unless he can prove further that the person with whom he contracted knew him to be so insane as not to be capable of understanding what he was about.”

More recently, in Hart v O’Connor [1985] AC 1000 (PC, NZ), Lord Brightman said at 1027G:

“To sum the matter up, in the opinion of their Lordships, the validity of a contract entered into by a lunatic who is ostensibly sane is to be judged by the same standards as a contract by a person of sound mind, and is not voidable by the lunatic or his representatives by reason of ‘unfairness’ unless such unfairness amounts to equitable fraud which would have enabled the complaining party to avoid the contract even if he had been sane.”

43.  It is significant in this case that the party seeking to escape from the contract on the basis of mental incapacity is not a natural person, but a corporation. A corporation does not have a mind of its own, but acts through natural persons, its directors or shareholders. The classic statement is contained in the speech of Viscount Haldane LC in Lennard’s Carrying Company Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 at 713:

“My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority to co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company.”

44.  There appear to be no authorities in which the issue of the acts of a corporation, directed by a person lacking mental capacity, have been considered by the courts. It appears to me that it will not be a difficult proposition to argue that the lack of mental capacity of the director of the company may be attributed to the acts of the company, but the matter is not clear. The problem is demonstrated by the following statement on the rules of attribution in MGFM Asia Ltd v Securities Commission [1995] 2 AC, 500 at 507, (PC NZ), per Lord Hoffmann:

“The company’s primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when the rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person “himself”, as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company?

One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind), was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.” (original emphasis)

45.  There are authorities dealing with the question of the insanity of a principal, acting through an agent; see e.g. Drew v Nunn (1879) 4 QBD 661. But there are apparently none are dealing with the liability of the principal, himself perfectly sane, but acting through an agent lacking mental capacity. While there is a strong argument that the lack of mental capacity on the part of Mr Lauw may be attributable to De Monsa, the argument is also open that it may not be so attributable.

Discussion:

46.  I have reached the conclusion that this is not a proper case for summary judgment.

47.  There is evidence to suggest that at the time of these events Mr Lauw was suffering from a mental incapacity. That is evidence which establishes a reasonably arguable case that Mr Lauw did not understand what he was doing.

48.  Ms Wong has properly drawn my attention to several references in the medical evidence from which it may be argued that while Mr Lauw may have in the past suffered some memory in capacity, and may be suffering from a form of dementia, his condition was not such that a person dealing with him would necessarily be aware of any incapacity. In particular, she draws my attention to the statement of the specialist psychiatrist, Dr Chiu, made in April 2009 in the following terms:

“On the whole he talked in a coherent and relevant manner.”

She also refers me to the statement of Dr Jenny Tsang, another psychiatrist, that:

“His speech was relevant and coherent. He could communicate in Cantonese.”

49.  But notwithstanding those assertions, having regard to the whole of the medical evidence, I am satisfied that there is an arguable case that at the relevant times Mr Lauw was suffering from a lack of mental capacity.

50.  Next, I am satisfied that there is evidence upon which it may be argued that the estate agents knew that Mr Lauw suffered from a mental incapacity. Both estate agents dealt directly with Mr Lauw in December 2007, and it is reasonably arguable that both the estate agents dealt directly with him again in June 2008 prior to the negotiation of the SPA. It is consequently arguable that any knowledge either may have acquired in respect of Mr Lauw’s mental condition at those times may be imputed to Fortune Asset.

51.  I acknowledge that the evidence of Mr Lauw’s mental incapacity would have been apparent to the agents is thin, but in the whole of the circumstances of the case, it cannot be dismissed as mere moonshine.

52.  I am satisfied that it is reasonably arguable that the rules of attribution may be construed so as to attribute the mental capacity of Mr Lauw to De Monsa, so as to entitle De Monsa, at its option to avoid the contract.

53.  The execution of the SPA raises another difficult issue. Ms Wong contended that the execution of that document constituted an affirmation of the contract by De Monsa, in the knowledge of Mr Lauw’s mental incapacity. Ms Wong mounts a persuasive argument when she points out that Mr Law asserts, Mr Lauw’s mental incapacity would have been apparent to the estate agents. If that were so, she said it must have been equally apparent to Mr Law, the general manager of De Monsa. In those circumstances, the act of negotiating and entering into the SPA was a positive act in which De Monsa knowing that it was entitled to avoid the preliminary agreement for sale and purchase, elected not to do so, but instead affirmed that the contract by entering into the SPA.

54.  There is certainly evidence to suggest that, at least, Mr Law knew that Mr Lauw was suffering from a mental incapacity at the relevant times. It is arguable too that Mr Lauw’s son, also a director of De Monsa was at all relevant times where both of his father’s mental incapacity, and the transactions were being entered into. From this it appears to me that there will be a strong argument that when Mr Law gave instructions to solicitors to negotiate not only the SPA, but also the terms of the renewable lease of the 11^th floor, De Monsa was by those acts, electing not to avoid the contract but to affirm it.

55.  But these are all complex issues, and in my view quite inappropriate to be determined on the basis of competing, untested affirmations in summary judgment proceedings. That is particularly so in the absence of any evidence put in by either side from the estate agents.

Conclusion:

56.  I accordingly conclude that the application for summary judgment must fail, and that the matter must go ahead to trial.

57.  There will be an order nisi that costs on the application for summary judgment be the defendant’s costs in the cause.