LOU SIU PING AND ANOTHER v. LAM TSZ MAN AND ANOTHER

CACV 134/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 134 OF 2012

(ON APPEAL FROM HCA NO. 506 OF 2009)

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REASONS FOR JUDGMENT

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Hon Lam VP (giving Reasons for Judgment of the Court):

1.  This is the 2^nd Defendant’s appeal against the judgment of Deputy High Court Judge Mimmie Chan (as she then was) [“the Judge”] of 16 May 2012. In that judgment, the Judge found the 2^nd Defendant liable to the Plaintiffs for professional negligence in respect of their purchase of a storey in a “ding” house at Shatin Tau Village [“the Property”] from the 1^st Defendant in 2004. The 2^nd Defendant was practicing as a solicitor and at the instructions of the Plaintiffs he had prepared a Power of Attorney and a Will (both documents were executed by the 1^st Defendant). He also retained the title deeds of the Property and confirmed to the Plaintiffs that the 1^st Defendant had title in the Property. He said he had advised the Plaintiffs that title could not be passed to them pending the payment of premium to the Government which could only take place in three years’ time.

2.  Afterwards, the Plaintiffs entered into occupation of the Property and paid the full purchase price at $800,000.

3.  Unbeknown to the Plaintiffs and the 2^nd Defendant, the 1^st Defendant subsequently mortgaged the Property to a third party, a finance company.  Upon default in the repayment of the mortgage loan, the finance company obtained an order for possession against the 1^st Defendant. Despite the intervention of the Plaintiffs, a District Judge in DCCJ 1479 of 2006 found that the finance company had priority over the Plaintiffs in respect of the rights over the Property due to the non-registration of the Plaintiffs’ agreement to purchase.  The Plaintiffs were therefore evicted from the Property.  They then sued the 1^st and 2^nd Defendants in this action.  Default judgment had been entered against the 1^st Defendant. The trial only concerned the 2^nd Defendant. 

4.  After hearing submissions, we dismissed the appeal with reasons to be given later. We now give our reasons.

5.  Mr Chan (appearing together with Mr Ma for the 2^nd Defendant in this appeal, but not below) principally challenged the Judge’s finding that the 2^nd Defendant had not properly advised the Plaintiffs that the documents he prepared (viz the Will and the Power of Attorney) were not documents transferring the title of the Property to the Plaintiffs.  He submitted that the Plaintiffs were well aware that they did not get the title to the Property immediately as it had been clearly stated in the following Chinese documents that title could only be transferred after the payment of premium in three years’ time:

(a)  The sale and purchase agreement of 11 February 2004 (not prepared by the 2^nd Defendant);

(b)   The acknowledgment executed by the Plaintiffs to the 2^nd Defendant on 17 February 2004 [“the Acknowledgment”] ; and

(c)  The sale and purchase agreement of 19 February 2004 (not prepared by the 2^nd Defendant).

6.  Counsel’s primary premise was that the retainer of the 2^nd Defendant by the Plaintiffs was restricted to the preparation of the Will and the Power of Attorney.  As such, the 2^nd Defendant did not owe the Plaintiffs any duty of care to advise them on the adequacy of protection afforded by these documents and the risks of proceeding with the purchase in such circumstances.

7.  With respect, that premise was clearly wrong.  The Judge’s findings on the duty of care owed by the 2^nd Defendant to the Plaintiffs were set out at paras 43 to 48 of her careful judgment:

“Did Woo owe a duty of care to the plaintiffs in relation to their purchase of the Property?

43. I have found that the plaintiffs had informed Woo that they wished to purchase the Property from Lam for the purchase price of $800,000. Further, Woo admits that when Law had called him to set up the meeting with the plaintiffs and with Lam, Law had told him that he was to advise on the title in the Lot. I also consider that on the evidence, and even on Woo’s case as to what transpired at the meeting, he knew or ought reasonably to have known that the plaintiffs were hoping to acquire an interest in the Property from Lam, whether under an agreement for sale and purchase, or in the guise or by virtue of the documents which Woo was instructed to prepare for the parties to sign.

44. It is not disputed that Woo was paid for his services, and he admits that the plaintiffs were his clients.

45. It is also clear that the plaintiffs relied on Woo’s professional skills and advice. They had made it clear to Lam from the initial stage that they had to formalize the sale and purchase at a lawyer’s office, and they refrained from making payment of the purchase price until after they had consulted Woo. Although the plaintiffs accepted in cross-examination that they were aware of the practice of indigenous villagers selling their small houses in the village during the period when the restriction against alienation of their interests operated, there is no evidence that the plaintiffs had knowledge or understanding what effect, if any, such sale had on the interest of the purchaser.

46. I reject without hesitation Woo’s astonishing claim in evidence that he had not been asked by the plaintiffs to protect their interests in relation to the preparation of the Will. It is Woo’s own case that it was not just Lam, but also the plaintiffs, who had instructed him to prepare the Will and other documents. It is also indisputable that Woo was paid by the plaintiffs and by Lam for the work which he carried out, without any distinction as to the preparation of the Will and the advice on the title to the Property. Having so been instructed and paid to render his professional advice and services, Woo had the duty to carry out his work with the care and skill which a normally competent legal practitioner would bring to it. It goes without saying that he would have to take such steps as were reasonably necessary to protect his clients’ interests, without the need for any express instruction from the clients to do so. His clients included the plaintiffs.

47. In these circumstances, I consider that the relationship between Woo and the plaintiffs is so close that it is fair, just and reasonable to impose a duty of care on Woo in respect of the services which he carried out on behalf of the plaintiffs. These services include not only the drafting of the Will and the Power of Attorney affecting the Property, but also his advising the plaintiffs on Lam’s interests in and title to the Property, the extent of Lam’s ability to dispose of his interests in the Property to the plaintiffs, and the validity or enforceability of any interests that may be vested in the plaintiffs by virtue of such disposition.

48.   Clearly, it was reasonably foreseeable by Woo that the plaintiffs would rely on his advice, and would be affected and are likely to be injured by his acts or his lack of care in the carrying out of his services for the plaintiffs.”

8.  It is plain that the Judge found the 2^nd Defendant was retained by the Plaintiffs to advise them generally on the purchase of the Property as opposed to the mere preparation of the Will and the Power of Attorney.  This must be correct in view of the following:

(a)  Despite the signing of the sale and purchase agreement prepared by the 1^st Defendant on 11 February 2004, the Plaintiffs insisted on not making any payment to the 1^st Defendant until they had attended the office of the 2^nd Defendant to formalize the sale and purchase (see paras 17, 23 and 32 of the judgment);

(b)   The Plaintiffs told the 2^nd Defendant that the purpose of visiting his office was to purchase the Property and the 2^nd Defendant was aware that documents he prepared were to be used for the intended purchase (paras 18, 32, 38 and 59 of the judgment);

(c)  The Plaintiffs were unsophisticated women who had no experience in conveyancing or legal matters. Their visit to the office of the 2^nd Defendant on 17 February 2004 was their first visit to a law firm (para 23 of the judgment);

(d)   The Plaintiffs could not give any specific instructions to the 2^nd Defendant to prepare a will or a power of attorney or to instruct him to retain the title deeds (para 24 of the judgment);

(e)  As evidenced by the Acknowledgment, the 2^nd Defendant gave advice to the Plaintiffs on the 1^st Defendant’s title over the Property; and

(f)   The 2^nd Defendant retained the title deeds of the Property after the meeting (paras 21, 59 of the judgment). 

9.  Mr Chan attempted to persuade us that the Plaintiffs were aware of the risk inherent in the purchase of a Ding house property before they attended the office of the 2^nd Defendant and they did not need to seek advice from the 2^nd Defendant with regards to the same.  He referred to the evidence of the 1^st named Plaintiff that she was aware of the need to pay a premium to the government regarding a Ding house.  He also referred to the 2^nd named Plaintiff’s evidence on the risk of purchasing a Ding house before payment of premium.  He contended that it was clear from clause 4 of the 11 February 2004 Agreement that the Plaintiffs would not be getting the title immediately.

10.  We do not think these matters could vitiate the above conclusion of the Judge as regards the scope of the 2^nd Defendant’s duty of care.

11.  In our judgment, there is a substantial gap between an awareness of the fact that one cannot get immediate title and the knowledge of the potential risks involved in making payment before getting title transferred to one’s name.  The Plaintiffs might be aware of the former.  But it does not follow that they were apprised of the risks involved in parting with their money before having the title transferred to them. On the evidence and the facts as found by the Judge, the Plaintiffs were clearly looking to the 2^nd Defendant to protect their interests and he was aware of that.  And the 2^nd Defendant actively participated in the arrangement by: (1) offering advice to the Plaintiffs on the title of the 1^st Defendant; (2) undertaking the preparation of the Will and the Power of Attorney for the benefit of the Plaintiffs; and (3) retaining the title deeds in his custody for the Plaintiffs and the 1^st Defendant. In light of these, the Judge’s analysis at paras 46 and 47 of the judgment is impeccable.

12.  Once it is recognized that the 2^nd Defendant had a duty of care which went beyond the preparation of the Will and the Power of Attorney, the Acknowledgment cannot protect him against liability in respect of his failure to advise the Plaintiffs on the risks involved.  On the facts, it is clear beyond peradventure that the arrangement of having a will and power of attorney in place plus the retention of title deeds did not come from the Plaintiffs.  The Judge correctly found that they did not have the ability or the level of sophistication to come up with such idea. It is not necessary to establish whether the idea came from the 1^st or the 2^nd Defendant.  The important point is that the 2^nd Defendant was privy to the arrangement in his capacity as a solicitor. In such circumstances, irrespective of whether the idea came from the 1^st Defendant or the 2^nd Defendant, the 2^nd Defendant owed a duty of care to the Plaintiffs to explain to them the risks involved under such an arrangement.  And it is not enough that he had advised the Plaintiffs that they did not get the title immediately.  A purchaser may well be labouring under a false sense of security flowing from the active involvement of a solicitor in the arrangement even though title was not transferred to him or her immediately.  In our view, a solicitor who allowed himself to be a party to such an arrangement should at least clearly and properly explain to his purchaser clients the potential risks involved in parting with their money under such an arrangement.  If a solicitor is not prepared to assume such duty, he should put in a clear disclaimer stating that he does not assume any duty with regards to the risks involved and he should suggest the purchasers to seek independent legal advice on the risks involved in entering into such an arrangement.

13.  It is not disputed that the 2^nd Defendant had not done any of these.  Taking Mr Chan’s arguments to their highest with regards to the contemporaneous documents he relied upon (the Acknowledgment, the attendance note and the 19 February 2004 agreement), the Plaintiffs had only been told of the fact that they would not get the title immediately.  The 2^nd Defendant had not advised them of the risks involved. Actually, according to the attendance note, the 2^nd Defendant had advised them that “sale/transfer/mortgage is not possible”.   As it turned out, the Plaintiffs were evicted from the Property by a subsequent mortgagee.

14.  Mr Chan submitted given the Judge’s finding that the 2^nd Defendant did not prepare the sale and purchase agreements and was not involved in the execution of those agreements, the 2^nd Defendant did not have the duty to give advice on the risk pertaining to the sale and purchase.  Whilst we agree that the 2^nd Defendant could not be held liable for the terms of the sale and purchase agreements, we do not think the non-involvement of the 2^nd Defendant in the preparation or execution of the agreements could exonerate him from the duty of care discussed above.  A solicitor’s duty to give advice on a conveyancing transaction may stem from his preparation of a sale and purchase agreement.  But it may also stem from his undertaking other works in relation to the conveyancing transaction. In the present case, because of the active involvement of the 2^nd Defendant in the arrangement which was clearly put in place for the purpose of a conveyancing transaction, there is sufficient proximity between the acts he had undertaken and the sale and purchase to give rise to the duty to give proper advice.

15.  Mr Chan also submitted that the risk of the 1^st Defendant mortgaging the Property to another person was remote in view of the occupation of the Property by the Plaintiffs and the retention of title deeds by the 2^nd Defendant.  He contended that as the risk was remote, there was no duty to advise.  With respect, the remoteness of this particular risk does not exonerate the 2^nd Defendant to give advice on risk generally. This contention is in substance an argument based on causation and remoteness of damages and it has not been pleaded.  Because of the failure of the 2^nd Defendant to plead this in his Defence, there was no investigation at the trial as to how the 1^st Defendant was able to obtain the mortgage in these circumstances and why that mortgagee was able to get priority over the Plaintiffs despite their occupation of the Property.  Therefore, it is not open to the 2^nd Defendant to take this point on appeal.

16.  Mr Chan criticised the Judge for finding that the 2^nd Defendant did not advise the Plaintiffs that the documents he prepared did not amount to a sale and purchase or gift or charge on the Property.  Counsel said this was inconsistent with the contemporaneous record in the attendance note.  The Judge did reject the evidence of the 2^nd Defendant in this respect, see paras 54 to 56 of the judgment and there was no reference to the attendance note in those paragraphs.

17.  But it is a criticism of little moment. The Judge’s basis for holding the 2^nd Defendant to have breached his duty of case can be found at paras 59 to 61:

“59. As explained in paragraph 43 of this Judgment, even if it was true that Lam and/or the plaintiffs had instructed Woo to prepare the Will, Power of Attorney and the Guarantee after having been advised on the conditions of the Grant, I consider it improbable and incredible that Woo would not have known that these documents were for the purpose of, or at least preliminary to, the intended sale of the Property by Lam to the plaintiffs. The fact that the title deeds were left with and to be retained by Woo for an indefinite period after the meeting in February 2004 supports the understanding reached between Lam and the plaintiffs. In my judgment, the fact that Woo accepted these title deeds for an indefinite period is also consistent with his understanding and knowledge that the arrangement agreed between Lam and the plaintiffs was, in effect, a sale and purchase or disposition of the Property, or the preliminary thereto.

60. Obviously, a solicitor cannot compel his clients to accept his legal advice, and Woo has no duty to prevent the plaintiffs from accepting the Will, the Power of Attorney and the Guarantee from Lam as the manner of completing their intended acquisition of any interests in the Property. The plaintiffs acknowledged that they were aware of the practice of indigenous villagers disposing of their interests in small houses prior to the payment of premium to the government and before the expiration of the period of restriction against alienation of their interests in the small houses. However, there is no evidence that the plaintiffs knew that the use of a will and power of attorney was the device used to effect the disposition of interests in small houses, that they knew the effect of such documents and their difference to a purchase, or the risks involved. I accept that it was for the plaintiffs themselves to decide whether to take the commercial risk of proceeding with the transactions proposed by Lam. Yet, they should have been properly advised on the inherent risks, before they could be expected to make the decision whether to proceed.

61.   On the facts of the present case, it is for Woo as the plaintiffs' solicitor, having been told of the plaintiffs original intention of purchasing the Property, to advise them on the distinction between an immediate sale and assignment of the Property from Lam, and Lam executing a will under which the Property is bequeathed to the plaintiffs in the event of his death, coupled with a power of attorney.  Woo also has the duty in the circumstances of this case to advise the plaintiffs on the inherent risks of accepting the Will, Power of Attorney and Guarantee from Lam in the interim of the period of 3 years from the issue of the certificate of compliance or occupation permit, and (as paragraph 12 (3) of the Statement of Claim pleads) on their exposure pending completion to risks of double dealing by Lam, inconsistent with any beneficial rights which the plaintiffs may have in the Property.  To adopt the words of Arden LJ in his judgment in Queen Elizabeth's Grammar School Blackburn Ltd v Banks Wilson (A Firm) [2002] PNLR 14, it behoves a solicitor to urge caution and to point out risks to a lay client even if they would perhaps have been obvious to a fellow lawyer.”

18.  This is in line with our analysis above.

19.  Likewise, the criticism by Mr Chan of the Judge’s finding that the Plaintiffs signed the documents prepared by the 2^nd Defendant on the understanding that they were for immediate acquisition of a beneficial interest in the Property is quite beside the point. On the evidence, the Judge was plainly right in concluding at para 59 of the judgment that the documents were produced and prepared “for the purpose of, or at least preliminary to, the intended sale of the Property” by the 1^st Defendant to the Plaintiffs.  

20.  There is also no merit in Mr Chan’s submission based on joint retainer.  This is clearly a conflict of interest situation. The Plaintiffs needed advice from the 2^nd Defendant to protect them against any inconsistent dealing with the Property by the 1^st Defendant. If the 2^nd Defendant did not consider it appropriate to give advice in this respect, he should have told the Plaintiffs to seek independent legal advice.

21.  The submission on causation can also be disposed of shortly.  Notwithstanding the making of the 11 February Agreement, the Plaintiffs had insisted on going through the formalities before a solicitor before parting with their money.  If proper advice had been given as to the outstanding risk despite the arrangement put in place, the Plaintiffs might well decide not to proceed with the transaction, at least without some further protective measures like stake-holding of the purchase money or registration of the Power of Attorney and Will.  The Judge was correct in holding that the loss was caused by the negligence of the 2^nd Defendant.

22.  As regards the costs of the District Court action, it is difficult to see how Mr Chan could seriously argue that the Plaintiffs were acting unreasonably in seeking to overturn the order for possession when he himself submitted before us the District Judge was wrong in holding that the finance company’s interest should prevail. In our judgment, the Judge was correct in her analysis at paras 68 to 71 of the judgment.

23.  The appeal is devoid of merit and we have accordingly dismissed the same with costs.