BANK OF CHINA (HONG KONG) LTD v. WELL LOK PRINTING LTD AND OTHERS

cacv 386/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 386 of 2006

(on appeal from hcmp NO. 3925 of 2002)

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J U D G M E N T

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1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal from an order of Recorder A Chan SC dated 5 September 2006 dismissing the action of the plaintiff against the third defendant (“the wife”) and declaring that the all-monies mortgage (referred to as the “2^nd Charge” in the judgment) against the wife be set aside.  At the conclusion of the hearing, judgment was reserved which we now give.

Background

3.  This appeal arises out of the proceedings by the plaintiff against the wife in respect of her alleged liability under the 2^nd Charge.  The plaintiff is the successor corporation of the Sin Hua Bank who was the chargee under the 2^nd Charge.  For convenience, the term “the bank” will hereafter be used to refer to the plaintiff and/or the Sin Hua Bank. 

4.  The wife is married to the second defendant (“ the husband”) who carried on a printing business through the first defendant (“the company”) which he controlled.  The wife came to Hong Kong from the mainland when she was 11 and married her husband four years later in 1966.  There are three children of the marriage.  The wife is a person of limited education.  She did not complete her primary education and is unable to read English documents.  She has always been a menial worker earning no more than $4000-$5000 per month.

5.  In 1988, the husband and the wife purchased a flat in Shaukeiwan (“the Man Hong property”) which became the family home.  The wife contributed $170,000 towards the purchase price of $400,000, the balance being financed by a mortgage loan.  The husband was solely responsible for the mortgage repayments.  His business prospered and by 1991 he was able to pay off the mortgage although the Man Hong property was mortgaged later that year to raise finance for the husband’s business and again 2 or 3 years later to enable the husband to buy out one of his business partners.

6.  In June 1996, a flat in On Chak Mansions which is the subject matter of the 2^nd Charge (“the Property”) was purchased in joint names of the husband and wife as their new family home.  The wife’s evidence concerning the purchase was to the effect that the decision was that of her husband’s.  She herself was concerned about the price ($3.95 million) as it was considerably higher than that of the Man Hong property and her income was limited and unstable but she was told by the husband that business was good, that he could afford mortgage repayments on his own and there was no need for her or the children to bear any of the financial burden.  As always, she abided her husband’s decision.

7.  The judge accepted the wife’s evidence that it was her understanding that the husband wanted to purchase the Property on their joint names but that she was not required to make any financial contribution towards it.  The mortgage loan would be taken up by the husband alone and all that was required of her was to agree to have the Property charged as security for the mortgage.  That was necessary as she would be one of the owners of the Property.  The wife said that no one had ever disabused her of such understanding.

8.  The husband applied for and obtained a mortgage loan of $2.73 million and an overdraft facility of $350,000 (“the renovation loan”) from the bank.  The 2^nd Charge was executed by the husband and wife with the husband being the borrower and the Property being charged by an all-monies charge.

9.  About six years after the purchase, the husband defaulted on his mortgage repayments.  The bank obtained an order for possession of the Property as well as a money judgment against, inter alia, the wife for the husband’s total outstanding indebtedness to the bank which as at 19 October 2002, stood at approximately $7.6 million.  The Property was sold by the bank on 8 August 2003 for $1.868 million.

10.  Subsequent to the sale, the wife obtained an order from the master in January 2004 setting aside the money judgment against her.  Pursuant to the master’s order, the bank filed its statement of claim against the wife, limiting its claim to the amount outstanding on the mortgage loan (after taking into account the partial repayment from the net sale proceeds) which, together with accrued interest as at 4 February 2004, stood at $839,780.87 and interest thereon from 5 February 2004.  No claim was made in respect of the husband’s other outstanding liabilities to the bank which must stand at several million dollars.

11.  Although the amount claimed by the bank represents part only of the monies secured by the 2^nd Charge, its entitlement depends entirely on the validity and enforceability of the 2^nd Charge against the wife.  I agree with the recorder that the fact that the bank has confined its claim to the outstanding liabilities under the mortgage loan has no effect on the nature and content of the 2^nd Charge.

12.  The recorder held that the wife executed the 2^nd Charge under the undue influence of the husband, that the bank was put on inquiry and failed to take reasonable steps to bring home to the wife her exposure under the 2^nd Charge.

This appeal

13.  Mr Shieh SC who appeared for the bank accepted that the plaintiff’s claim depended on the enforceability of the 2^nd Charge in its full extent despite the fact that his client had limited the amount claimed.  He submitted that the recorder erred in holding that a presumption of undue influence arose as between the husband and the wife, that it had not been rebutted on the facts, that the bank was “put on notice”, and that the bank had not taken reasonable steps to satisfy itself that the wife understood the nature and effect of the transaction into which she was entering.  In essence, this appeal raised two main issues which are considered below.

Undue influence

14.  For the presumption of undue influence to arise, it is necessary for the wife to establish not only that she reposed trust and confidence in the husband in the management of her financial affairs but also that the transaction could not be readily explicable by the relationship of the parties.  Mr Shieh SC accepted that the wife did repose trust and confidence in the husband but he made the point that in the present case, whilst the wife agreed to stand surety for the husband’s past, present and future debts, she also obtained a joint tenancy in the Property without having to make any financial contribution.  It was therefore not a “pure surety case”.  He submitted that even if this case were to be treated as a “pure surety case”, there was nothing in the evidence to take it out of the ordinary case of a traditional wife reposing trust and confidence in the husband in financial matters.

15.  Mr Shieh SC referred to the speeches of Lord Nicholls and Lord Scott in Royal Bank of Scotland PLC v Etridge (No. 2) [2002] 2 AC 773 for the proposition that a wife’s guarantee of her husband’s overdraft together with a charge on her share of the matrimonial home was not manifestly to her disadvantage and was not to be regarded as prima facie evidence of the exercise of undue influence by the husband:

“	28.	In a narrow sense, such a transaction plainly (“manifestly”) is disadvantageous to the wife.  She undertakes a serious financial obligation, and in return she personally receives nothing.  But that would be to take an unrealistically blinkered view of such a transaction.  Unlike the relationship of solicitor and client or medical adviser and patient, in the case of husband and wife there are inherent reasons why such a transaction may well be for her benefit.  Ordinarily, the fortunes of husband and wife are bound up together.  If the husband’s business is the source of the family income, the wife has a lively interest in doing what she can to support the business.  A wife’s affection and self-interest run hand-in-hand in inclining her to join with her husband in charging the matrimonial home, usually a jointly-owned asset, to obtain the financial facilities needed by the business.  The finance may be needed to start a new business, or expand a promising business, or rescue an ailing business.
		…
	30.	… I do not think that, in the ordinary course, a guarantee of the character I have mentioned is to be regarded as a transaction which, failing proof to the contrary, is explicable only on the basis that it has been procured by the exercise of undue influence by the husband.  Wives frequently enter into such transactions.  There are good and sufficient reasons why they are willing to do so, despite the risks involved for them and their families.  They may be enthusiastic.  They may not.  They may be less optimistic than their husbands about the prospects of the husband’s businesses.  They may be anxious, perhaps exceedingly so.  But this is a far cry from saying that such transactions as a class are to be regarded as prima facie evidence of the exercise of undue influence by husbands.
	31.	I have emphasised the phrase “in the ordinary course”.  There will be cases where a wife’s signature of a guarantee or a charge of her share in the matrimonial home does call for explanation.  Nothing I have said above is directed at such a case.”

(per Lord Nicholls)

“	159.	… For my part, I would assume in every case in which a wife and husband are living together that there is a reciprocal trust and confidence between them.  In the fairly common circumstance that the financial and business decisions of the family are primarily taken by the husband, I would assume that the wife would have trust and confidence in his ability to do so and would support his decisions.  I would not expect evidence to be necessary to establish the existence of that trust and confidence.  I would expect evidence to be necessary to demonstrate its absence.  In cases where experience, probably bitter, had led a wife to doubt the wisdom of her husband’s financial or business decisions, I still would not regard her willingness to support those decisions with her own assets as an indication that he had exerted undue influence over her to persuade her to do so.  Rather I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple.  The proposition that if a wife, who generally reposes trust and confidence in her husband, agrees to become surety to support his debts or his business enterprises a presumption of undue influence arises is one that I am unable to accept.  To regard the husband in such a case as a presumed “ wrongdoer” does not seem to me consistent with the relationship of trust and confidence that is a part of every healthy marriage.
	160.	There are, of course, cases where a husband does abuse that trust and confidence.  He may do so by expressions of quite unjustified over-optimistic enthusiasm about the prospects of success of his business enterprises.  He may do so by positive misrepresentation of his business intentions, or of the nature of the security he is asking his wife to grant his creditors, or of some other material matter.  He may do so by subjecting her to excessive pressure, emotional blackmail or bullying in order to persuade her to sign.  But none of these things should, in my opinion, be presumed merely from the fact of the relationship of general trust and confidence.  More is needed before the stage is reached at which, in the absence of any other evidence, an inference of undue influence can properly be drawn or a presumption of the existence of undue influence can be said to arise.”

(per Lord Scott)

16.  As I understand it, Mr Shieh SC was not adopting the extreme position that such transactions can never give rise to undue influence.  Indeed, one of the conjoined appeals in Etridge which went to full trial would suggest otherwise.  Both Lord Nicholls’ and Lord Scott’s observations were directed at transactions or situations which could be considered to be the ‘ordinary’ case.  Whilst they did not elaborate on the circumstances that might be said to fall outside the ‘ordinary’, one of the conjoined appeals in Etridge, Coleman (the facts of which appear in § 282 et seq. of the opinion of Lord Scott), is an illustration of what may be considered to be out of the ‘ordinary’.

17.  Mr and Mrs Coleman were Hassidic Jews.  In that case, the matrimonial home which was in joint names was charged with the repayment of sums advanced by the bank for the purpose of enabling Mr Coleman to make property acquisitions.  When he defaulted, Mrs Coleman defended the proceedings on the basis of undue influence.  The judge described Mrs Coleman’s upbringing and education in these terms:

“

The upbringing and education of Mrs Coleman prepared her principally for marriage within her own religious community and for a life of subservience to the wishes of her husband.  I do not mean this in any derogatory sense.  Hers may well have been a happy state, but it was one in which her husband’s wishes and judgment in matters of finance and business were to be followed without question.”

Lord Scott considered that the trust and confidence of the wife to be ‘accentuated’ in a Hassidic marriage.  He considered that

“

the presumption [of undue influence] arose out of their relationship, in which Mrs Coleman was not merely disinclined to second-guess her husband on matters of business, but appears to have regarded herself as obliged not to do so.  In such a case …the rebuttal of the presumption would have needed legal advice from someone independent of the husband who could have impressed upon her that she should not sign unless she truly wanted to do so.”

That case shows that even in contemporary English society, a particular cultural context is a factor that might take the case out of the ‘ordinary’.

18.  The present case does have features that can fairly be said to be out of the ‘ordinary’.  As noted earlier, the wife’s education was fairly rudimentary.  She began working in menial jobs after she left school at the age of 11 without completing elementary schooling.  She then married at a very tender age presumably to someone considerably older.  The daughter of the marriage, Wai Ying gave evidence on the relationship between her parents which the recorder summarised in § 14 of his judgment:

“

14.

Wai Ying described her mother as a very traditional and typical Chinese woman.  Despite having a job of her own, Choi would return home after work everyday to take care of her family.  Apart from sharing the financial responsibility, Ko left the rest of the family burden to his wife.  He was described as very chauvinistic by Wai Ying.  He enjoyed the superior position at the head of the family.  He was pre-occupied with his business.  He did not like to discuss his financial affairs with his wife and his decisions were final as far as his family was concerned.  Wai Ying said that she had a close relationship with her mother.  Her mother was a submissive wife who always followed her husband’s decisions.  She was not familiar with matters of finance and was afraid to ask her husband about such matters.”

The recorder accepted that evidence, considering that it was consistent with the evidence of the son and was borne out by a number of objective indicia which he set out in § 15 of his judgment.  There was no challenge to those findings.

19.  Further, there is also the fact as found by the recorder (and accepted by Mr Shieh) that at the time of the purchase of the Property, the husband never mentioned that, apart from securing the mortgage loan, the 2^nd Charge would also secure additional loans that might be made to him from time to time by the bank.  In my view, this omission could fairly be said to be an abuse of the wife’s trust and confidence in the husband. 

20.  For my part, I consider that the circumstances of this case viewed as a whole are such as to take it out of the ‘ordinary’.  The presumption of undue influence arose out of the relationship between the wife and the husband coupled with an explanation given by the husband that put in serious doubt whether there was free and informed consent on the part of the wife.

21.  Rebuttal of the presumption is the next main issue.  In this connection, I would note that in view of the factors highlighted in § 55 of the judgment below, it could not seriously be argued that the bank did not have constructive notice.

Reasonable steps

22.  The bank’s duty was to take “reasonable steps to satisfy itself that the wife has had brought home to her, in a meaningful way, the practical implications of the proposed transaction.”  See the Lord Nicholls at § 54 of Etridge.  There is no dispute as to the duty expressed in those terms.  What was controversial was whether the recorder’s conclusion that the bank had not taken reasonable steps by simply relying on their busy solicitors to explain the salient features of the 2^nd Charge to the wife was correct.

23.  The 2^nd Charge was executed at a meeting at the offices of the bank’s solicitors.  Their conveyancing clerk, one Lau Pui Wan (“Ms Lau”) gave evidence as to the explanation she had given the wife.  It is not suggested that the solicitors acted for any one other than the bank.  They were certainly not acting on any retainer and did not purport to act as solicitors for the wife.  The explanation given by Ms Lau appears from the following passage (being the English translation of the Chinese transcript):

“	634.	Q:	Can you explain to the court approximately which main terms you had explained?
	635.	A:	The parties, that is, who were the mortgagor, debtor, mortgage bank, the property, the property mortgaged, and, that is, it was their wish to take the property to pledge to the bank as a security, and (I) stated clear that this property – there’s no amount in this mortgage agreement, it’s a owned is – that is, unlimted (SIC) extend (SIC), that is, a mortgage of no limit, and told him/her how much their liability was, that is, an unlimited extend (SIC), that is, a liability which was of no limit and no upper limit.  And (I) stated clearly, that is, if the borrower did not repay when it’s due, the mortgagor would have to bear it, that is, to bear the same responsibility, to have to repay.  If one couldn’t repay when it’s due, that is, it was stated briefly, that is, if one couldn’t repay, the bank had the right to take the property for sale or auction, pledge it, and one would get the excess or make up for the shortage, that is, if it’s not enough at that time, he/she had to repay all the variance of the arrears.  And it was also stated, that is, the bank had the right to call loan, call loan, that is, means that the mortgagor or the debtor might be required at once, at any time to repay all the liability, and this property was not with any tenancy agreement, it’s his/her – had the right – no, not with any tenancy agreement, if it was to be rented out at that time, one had to obtain the bank’s agreement before it could be rented out, and, that is, the matter of fire insurance, fire insurance had to be subscribed, and the maintenance – that is, the safekeeping of the agreement, and the redemption of mortgage, that is, how the mortgage could be redeemed, what procedures had to be gone through, and, that is, these are the main items.”

24.  The function of the reasonable steps which the law requires the bank to take has to be borne in mind.  As Lord Scott put it (at § 148):

“	[It is] to try and ensure that the wife understood what she was doing in entering into the proposed transaction and that her consent to do so was an informed consent.”

Mr Shieh SC submitted that the fact that Ms Lau’s firm did not act for the wife was irrelevant and that Etridge did not lay down any requirement (as distinct from guidelines) that discharge of the duty imposed on the bank required that the wife be advised by her own solicitors.  That may be so but the point here is that where a solicitor accepts instructions to advise the wife (whether or not he may also be acting for the husband or the bank if no conflicts of duty or interest arise), he assumes responsibilities directly to her, both at law and professionally.  Those duties are owed to the wife alone and to no one else and he is concerned only with her interests.  He would also have the relevant background knowledge of her circumstances which would be relevant to the proper discharge of his duties.  Had the wife been advised by her own solicitors, it would have facilitated the bank’s task in rebutting the presumption.  In the absence of special circumstances, it would have provided the bank with sufficient assurance that the requisite advice would have been given.

25.  As to Mr Shieh’s point that if the explanation were sufficient, the bank should not be blamed if the wife, because of her own attributes, had not ‘clicked’ or ‘taken on board’ the implications of the proposed transaction, I would say this.  It begs the question of what ‘sufficient’ means.  I cannot accept that in deciding what is ‘sufficient’ the particular attributes or inadequacies of the person to whom an explanation is owed can be disregarded.  Explanations are not given in vacuo: their sufficiency has to be gauged in the context of the particular audience.

26.  I regret to say that I find Ms Lau’s explanation to be woefully inadequate in bringing home to the wife the implications of the proposed transaction.  I do not consider that the wife’s consent could be considered to be an ‘informed’ consent by any stretch of the imagination.  For one thing, there was no mention by Ms Lau that there could be other liabilities that have nothing to do with liabilities accruing from the mortgage loan (such as future debts of the husband to the bank) for which the wife would be responsible.

Conclusion

27.  For all these reasons, I would dismiss this appeal.  I would also propose that there be an order nisi of costs in favour of the wife, the wife’s own costs to be taxed in accordance with the legal aid regulations.

Hon Wright J:

28.  I have had the advantage of reading in draft the Judgment of Le Pichon, JA.  I, too, would dismiss the appeal for the reasons which she has given.

29.  On facts of this matter it was the inadequacy of the explanation given by Ms Lau to the wife that resulted in the bank being unable to rebut the presumption of undue influence. 

30.  As Lord Nicholls observed in Etridge:

54.	The furthest a bank can be expected to go is to take reasonable steps to satisfy itself that the wife has had brought home to her, in a meaningful way, the practical implications of the proposed transaction.  This does not wholly eliminate the risk of undue influence or misrepresentation.  But it does mean that a wife enters into a transaction with her eyes open so far as the basic elements of the transaction are concerned.
66.	... the solicitor’s task is an important one.  It is not a formality.
81.	... Wives require... a full and clear explanation of the risks involved.  Typically the risks will be risks any surety would expect.  Protection needed by wives differs from, and goes beyond the disclosure of information.

a view which was echoed by Lord Clyde in these terms:

95.

…But matters of banking practice are principally matters for the banks themselves in the light of rights and liabilities which the law may impose on them.  I would not wish to prescribe what those practices should be.  One can only suggest some courses of action which should meet the requirements of the law.  These are not matters of ritual, the blind performance of which will secure the avoidance of doom, but sensible steps which seek to secure that the personal and commercial interests of the parties involved are secured with certainty and fairness.  Necessarily the precise course to be adopted will depend upon the circumstances.

31.  There was simply no evidence from Ms Lau that there had been even the most passing of references to, let alone a proper explanation of, the fact that the wife potentially would be liable for an amount in excess of the balance owing on the mortgage loan, however that amount may have accrued.

Hon Rogers VP:

32.  There will therefore be an order in terms of paragraph 27 above.