NGO TAI HONG v. JOHN DAVID ANDREW IP AND ANOTHER

cacv 12/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 12 of 2006

(on appeal from HCA NO. 7929 of 2000)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of Reyes J given on 19 December 2005.  The claim before the judge was a claim against two solicitors John David Andrew Ip and Andrew Patrick Willis (“Willis”), who were the partners in the firm of Ip and Willis (“the defendant firm”).  The claim was based on breach of contract, negligence and breach of fiduciary duty.

2.  The claim against the solicitors had been consolidated with a claim against three defendants namely a company Endenne Development Limited (“Endenne”) and its two directors, Fung Ping Yan (“Fung”) and his wife Chan Wai Lan.  The company and the two directors did not appear at trial and judgment was entered against them.  The judgment in the plaintiff’s favour against those three defendants jointly and severally was for damages assessed at $1,324,902.50.  Since it was evident that any judgment entered against those defendants would, in all likelihood, remain unsatisfied the plaintiff pursued the case against the solicitors, namely the defendant firm.  The judge found in favour of the defendant firm and dismissed the plaintiff’s claim against them.

Background

3.  Endenne was the developer of House Lot Nos. 36 and 37 Wing Ning Lei, DD No. 111, Yuen Long (“the Property”).  Fung was a clerk employed by the defendant firm.  Willis said Fung had been a “liaison” clerk.  It might be observed that that does not seem to be an expression in common use.  Willis went on to describe Fung as being responsible for “contacting clients and things like that” he continued “He brought me a fair amount of conveyancing business.”  It is also clear from Willis’ witness statement that Fung was not required to do any clerical work within the defendant firm .  Thus his role in relation to the firm would appear to be tolerably clear from Willis’ own evidence: Fung was an unqualified person who was there to bring in local business.

4.  Endenne developed the Property into three flats.  On 7 April 1997 it entered into a provisional Sale and Purchase Agreement with the plaintiff to sell the second floor flat to the plaintiff.  On the judge’s finding, Fung instructed the firm to handle the conveyance of that flat on Endenne’s behalf.  The judge said in paragraph 8 of his judgment that:

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

(1) An Approval Letter dated 18 March 1995 from DLOYL (i.e. the District Land Office Yuen Long) to Endenne authorising Endenne to redevelop House Lot Nos. 36 and 37.

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

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

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

5.  Regrettably, as will transpire, Fung did not hand Willis any such documents.  He handed Willis forged documents, and possibly even only copies of the forgeries, which were said to be those documents.  The judge went on to say that when small house sale transactions are undertaken, the solicitor acting for a purchaser will insist on being shown the approval letter and the three Certificates of Exemption which relate to the building, the site formation the drainage works.  There was one further document which was also required and that was a “No Objection” letter from the District Lands Office which confirms that there is no objection to the occupation of a completed small house development.  Again, as the judge recorded, Willis asked Fung to produce a No Objection letter.  The judge said at paragraph 12:

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

6.  It has to be said that when he came to give oral evidence Willis corrected the impression that might have been gained from his witness statement as to the terms of that conversation.  That seems to have been as a result of an observation made by the judge when the case was opened that clause 3 of the Sale and Purchase Agreement did not accord with what subsequently transpired.  Willis had inserted into the Sale and Purchase Agreement, which the plaintiff was to sign, clause 3 which read as follows:

“3.	(a)	The Vendor hereby declares that the Vendor has applied for the issuance of a ‘No-Objection’ letter by the District Lands Officer, Yuen Long and that within 7 days after issue thereof the Vendor will notify the Purchaser thereof, and
	(b)	The purchase shall be completed at the offices of [the Firm] on or before 19th May 1997 or within 7 days of the Purchaser being notified in writing that a ‘No Objection’ letter has been issued by the District Lands Officer, Yuen Long, whichever is the later, before 4:00 p.m. on that day if it is weekday and before 12:00 noon on that day if it is Saturday when the residue of the purchase money shall be fully paid and the Vendor and all other necessary parties (if any) will execute a proper assurance in favour of the Purchaser and/or his nominee, nominees, sub-purchaser or sub-purchasers of the said property free from all incumbrances subject from (and inclusive of) the date of completion to the rents and profits or vacant possession of the said property.  All outgoings up to (but exclusive of) the date of completion shall be cleared by the Vendor.”

7.  As it transpired, Fung did not produce any letter from the District Lands Office in response to a recent request.  He produced a forged letter dated 13 December 1995 i.e. one dated some 17 months earlier.  On the strength of that, the assignment of the flat to the plaintiff went ahead.

8.  In the transaction the defendant firm, Willis being the partner responsible, acted both for the vendor, the purchaser and the mortgagee.  Willis considered that he was entitled to do so because there was exemption under Rule 5C(4) of the Solicitors’ Practice Rules.  The relevant parts of Rule 5C for the purposes of this action provided that:

“(1) Subject to subrules (2), (3), (4) and (5), a solicitor, or 2 or more solicitors practising in partnership or association, shall not act for both the vendor and the purchaser on a sale or other disposition of land for value.

………

(4) A solicitor, or 2 or more solicitors practising in partnership or association, may act for both the vendor and the purchaser in the sale and purchase of a unit or other interest in a completed development by the owner of the whole development where in respect of the unit or interest no assignment has been executed since the date of the occupation permit or the certificate of compliance in respect of the development, whichever is required in respect of such sale and purchase, and if both are required, the earlier, and in the completion of such sale and purchase, if and only if the agreement for sale and purchase to be entered into by the vendor and the purchaser contains such clauses as the Council may, subject to the prior approval of the Chief Justice, from time to time specify for mandatory inclusion in the agreement.

(5) Where pursuant to subrule (2), (3) or (4), a solicitor or 2 or more solicitors practising in partnership or association act for both the vendor and the purchaser in the sale and purchase of a unit or other interest in a development, that solicitor or solicitors may also act for the purchaser and the sub-purchasers in the sub-sale and sub-purchase of the unit or interest and in the completion of the sub-sale and sub-purchase if and only if the agreement or agreements for sub-sale and sub-purchase to be entered into by the parties contain such clauses as the Council may, subject to the prior approval of the Chief Justice, from time to time specify for mandatory inclusion in such agreement or agreements.”

9.  The difficulties in this case came to light in 2000.  The defendant firm had acted for the first purchasers of the other two flats in the Property when they had purchased their flats.  In April 2000 the owners of the first-floor flat attempted to sell it.  The solicitors for the prospective purchaser raised requisitions in their letter dated the 13 April 2000.  Amongst those requisitions were requisitions relating to the various documents referred to in paragraph 4 above and the No Objection letter.  The requisitions were based partly on the fact that some of the contents were illegible and also on the fact that the Property had been described in different ways in different documents.  The defendant firm answered the requisition by saying that in its view the certified copy of the approval of redevelopment was perfectly legible and that the New Territories Administration and the District Lands Offices were “notoriously lax in their descriptions and transliterations of names of New Territories villages”.

10.  Following that, the solicitors for the prospective purchasers then made enquiries of the District Lands Office Yuen Long.  It did not take the District Lands Office very long to reply that it had no record of issuing any approval for redevelopment, certificates of exemption or No Objection letter in respect of the Property.  There is no dispute between the parties that the documents that had previously been relied on in relation to the Property were forgeries.

11.  In paragraph 50 the judge summarised the plaintiff’s arguments that the defendant firm was negligent as follows:

“…the Firm was negligent in the following respects:-

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

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

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

12.  The judge’s finding in respect of the first point was somewhat cryptic.  He said that he had summarised the evidence in Section II of his judgment and that on reflection he did not consider that there was any real inconsistency between Willis’s evidence and clause 3(a) of the Sale and Purchase Agreement, quoted above.  The summary of what would appear to be the relevant evidence did not extend beyond the simple statement that Fung had given Willis a copy of the No Objection letter.  The reference to the inconsistency between Willis’ evidence and clause 3(a) was a reference to the point taken by the judge during the opening and countered by Willis in giving supplemental evidence in chief before the cross-examination began.  Clause 3(a) states that the No Objection letter has been applied for and its receipt is awaited, whereas the letter relied on was dated some 2 years earlier.  Whatever else happened it does not appear that Willis did any more than accept what Fung told him.

13.  As regards the documents in question, the judge indicated very clearly in the course of cross-examination of Willis on behalf of the plaintiff that he considered that matters relating to their apparent authenticity were for submission and not for evidence.

14.  The judge was even more dismissive of the third point taken on behalf of the plaintiff.  He said at paragraph 54 of his judgment:

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

15.  In those circumstances the judge dismissed the plaintiff’s claim against the defendant firm.

This appeal

16.  The starting point for this appeal must, in my view, be in respect of the position of the defendant firm in acting for the plaintiff in relation to the conveyance.  As has already been noted it was the defendant firm’s case that it was entitled to act on behalf of the plaintiff by reason of compliance with Rule 5C(4).  However, that rule is only applicable “if and only if the agreement for sale and purchase….contains such clauses as the Council may, subject to the prior approval of the Chief Justice, from time to time specify for mandatory inclusion in the agreement.”

17.  The judge was not shown and did not have before him a copy of the relevant form of agreement.  This court was provided with a copy of that form which was effective from 1 May 1996 after a strong request had been made.  The heading of that form makes clear that the clauses which have been underlined are mandatory for inclusion and should not be altered unless prior approval has been obtained from the Council of the Law Society.  It is not suggested that any prior approval was obtained for any alterations.  Since this court was provided with the relevant form only at the end of the hearing of this appeal, the parties were requested to make further submissions as to which clauses were said to have been omitted and which clauses were said to have been changed.  As a result of those submissions there is no doubt that at least clauses 1, 3(6), 4 and 23 in the draft form were not contained in the Sale and Purchase Agreement and that there were alterations in the wording of clauses 2, 3, 6, 7, 8, 9, 10, 11, 12, 13, 14, 17, 18, 20, 24, 25 and 28 of the draft form appear, if at all, in an altered form in the Sale and Purchase Agreement when compared with the draft form.  It may be said that many of difference were linguistic but the fact remains that the clauses were mandatory and the wording could not be altered.  In those circumstances it would appear that the provisions of Rule 5C(4) have not been satisfied.

18.  Moreover, it would appear that despite the fact that the judge referred to the fact that Fung was employed by the defendant firm, the importance of the fact was not appreciated.  Willis’ approach to the question of conflict of interest appears to have been ambivalent.  Whilst he relied upon Rule 5C, one passage in the course of his evidence is perhaps revealing:

“Q.      In any event, no doubt Mr Fung had an interest or a stake in this transaction.

A.      Mr Fung, you are talking about?

Q.      Yes.  Hold the shares of Endenne.

A.      I agree he would be interested insofar he’s a shareholder and/or a director of the vendor company.

Q.      So Mr Fung indirectly, or even directly, had an interest in the property in question.

COURT:      I think that’s been accepted by Mr Willis.

MR CHUNG:      Yes, yes.

Q.      And you told the court earlier if the vendor was personally involved you would be “put on guard”, can you explain what you meant by “put on guard”?

A.      If the -- sorry?

Q.      If the vendor was personally involved in the transaction, you would be “put on guard”.

A.      If the vendor were personally involved...

Q.      I mean, the vendor, who is a staff of your...

A.      What I said was, if a staff of mine instructed me in a transaction and I was acting also for another party to the conveyancing transaction, I would have to tell -- well, in this context, a purchaser, “He’s a staff of mine, he is the purchaser.”

Q.      So you advise the purchaser of the possible conflict of interest, is that correct?

A.      Personally, I would just tell him he could take independent advice but I do not see any conflict of interest there because the bargain was already made by the parties before instructions came to us.”

(Transcript p.98 E-O)

19.  In saying that he did not see any conflict of interest, because “the bargain was already made by the parties before instructions came to us” Willis was either being obtuse to an amazing extent or else demonstrating a lack of understanding of the duties and obligations of a solicitor acting for a purchaser in a conveyancing transaction.  Indeed, it would appear that Willis’ attitude to a potential conflict of interest was simply that if the purchaser gave his firm instructions that was the end of any possibility of a conflict of interest on his, (Willis’) or the firm’s part.  At page 94A-N during the cross-examination of Willis the following interchange took place:

“Now, going back to the issue of conflict of interest, you told the court you did not give any advise or instruction to Jimmy Chan to advise my client in respect of the issue of conflict of interest.

A.        Before the adjournment I did say so.

Q.        Yes, before the adjournment.  Did it occur to you that representing both the purchaser and the vendor, the vendor -- the shareholder, one of the major shareholders was your staff, would you anticipate any conflict of interest issue at that time?  Had you anticipated any issues in this regard?

A.        Well, of course Endenne Development was a corporate entity; I knew Mr Fung was a shareholder and director of that company.  I did not see a possibility of a conflict of interest because the purchaser in the preliminary agreement wished to instruct us.

Q.        Well, you never talked to the plaintiff, so you relied on the document only.

A.        I relied on that document.  It clearly states that Ip and Willis was acting for the vendor, and also clearly stated that the purchaser would instruct us.  And I...

Q.        So you didn’t forsee any problem...

A.        ...instructed Jimmy Chan to confirm his instruction to us if and when he came up.

Q.        Without raising the issue with the plaintiff.

A.        Without raising the issue of conflict of interest with him.  I did not instruct Jimmy Chan on this matter.

Q.        We know that.  You heard the evidence of the plaintiff...

MR ISMAIL:  Sorry, “did not Jimmy Chan to”?

MR CHUNG:  “To advise...”

A.        To go into the issue on conflict of interest with the plaintiff.

MR ISMAIL:  Thank you, thank you.”

20.  A little further on there is another passage which again reveals first that whilst Willis recognised that if the vendor had been an employee of his firm there would be a conflict of interest but because the vendor was a corporate entity, albeit the employee was clearly a controlling shareholder, there was no conflict.  In the second place it shows that Willis considered that any obligation to advise the client about a conflict of interest was satisfied by inclusion of a provision permitting the client to instruct another solicitor:

“Q.      Now, would you -- knowing that what he said yesterday, would you have changed your mind?  Would you -- if we can live life again, turn the clock back, would you, knowing that the plaintiff just basically was kind of passive in offering the retainer to you, would you have changed you know your action as to -- would you advise him of the conflict of interest issue?

A.      I would not, because for various reasons -- no, not for various reasons.  In my experience, some of my peers, they work -- they are directors of property companies, maybe large ones as well, they get work from developers on a first sale, they do conveyancing work.  I don’t -- they’re only interested in their fees and nothing else, they’re not personally interested in the transaction or whatever.  Of course, there may be a conflict of interest there, but I don’t understand clearly...

Q.      Mr Willis, listen to this carefully.  My point is -- my contention is not that you acted for both the purchaser and the vendor.  My contention is that you acted for both parties and one of the parties, a director and major shareholder, was your staff.  Would that prompt you into expecting any conflict of interest issues?

COURT:      Strictly, Mr Chung, there either is or is not a conflict of interest; that’s strictly a question of law.  Mr Willis’s views on the matter -- on the question of whether there is or is not a conflict of interest are only of passing interest to the court.  He said that as far as he is concerned, there was no material conflict of interest; he didn’t feel any need to advise the client, Mr Ngo, about that and if he had to do it all over again, he wouldn’t be so advising the client.

A.      I have not answered that yet, my Lord.

COURT:      Have I gone to far, Mr Willis?

A.      If I -- it depends on the circumstances, but I would not have personally advised him.  But in all our documents, in fact the formal agreement, we have clauses saying he’s free to choose other firms of solicitors.

COURT:      Right.

A.      I believe my legal executive - then legal executive - very conscientious, would have explained all the clauses.

COURT:      Could you just backtrack a little bit, you say, “I would not have advised him,” what exactly do you mean by that?  “If you had to do it over again, I would not have advised him,” what do you mean by that?

A.      I did not or I do not see per se conflict of interest in the light of the work I was doing...

COURT:      On this particular job.

A.      ...on this particular job, even though Mr Fung was a staff of mine.

COURT:      Right.

A.      Because it would be different, possibly I would be on guard if he personally was the vendor then I would advise the purchaser, “This is a staff of my company.”

COURT:      If he personally was the vendor, what do you mean by that?  If Mr Fung was…

A.      Was the vendor...

COURT:      ...the vendor as opposed to Endenne.

A.      ...as opposed to Endenne.

COURT:      Now, what difference does it make in this case because Endenne is really, when you look at it, a shell company.  It’s the corporate vehicle of Mr Fung and his wife, there’s no real difference.

A.      Rightly or wrongly that was my view.

COURT:      That was your view at the time.

A.      Yes.”

(Transcript 94T-96I)

21.  That distinction between acting on behalf of Fung and acting on behalf of Fung’s company was clearly illusory because, even during his evidence in chief, when he was being asked by his own counsel as to the instructions which he was taking from Fung in respect of the documents he said:

“Q.      Did you keep any notes of your conversation with Mr Fung?

A.      No, of course not, he was a former staff of mine and I would not have made notes on conversations.”

(Transcript 70N-O)

22.  In looking at the matter as a question of whether there was a loss by reason of the failure to advise on a potential conflict of interest, it appears to me that the importance and significance of the conflict of interest has been entirely overlooked.  Quite apart from the fact that Rule 5C is of no assistance in this matter, there was clearly a very strong conflict of interest by reason of the fact that the defendant firm was acting for a member of the staff of its own firm.  The notes in Chapter 7 of the Hong Kong Solicitor’s Guide to Professional Conduct, 1995 edition, made that abundantly clear.  When it is considered that Fung was not simply an office worker but somebody engaged to generate business the matter takes on a further dimension.  In the context of a case like this it appears to me futile to suggest that there was any real distinction between a company which was owned by the member of the staff and his wife and the staff himself.  The fact that the plaintiff might have been aware on the date that the Sale and Purchase Agreement was signed that Fung was a member of the staff of the defendant is insufficient to render the situation as not being one of conflict.

23.  The notion that there was no conflict of interest because the contract had already been concluded by the time the plaintiff approached the defendant firm to act on his behalf is so aberrant that it merits little comment.  It is the solicitor’s function to protect a purchaser and make sure the purchaser obtains what he has contracted to obtain.  There is inevitably a close relationship between the solicitor and a member of his staff.  That is clearly demonstrated in this case by the answer given by Willis to his own counsel.  By acting for both parties in the transaction the defendant firm put itself in a position where it was highly likely that it would not protect the purchaser in the manner it should.  Would the defendant, for example, make the requisitions as to title which should be made?  Would it scrutinise the documents in the way it should?  Would it scrutinise and verify what the vendor was saying in the way that it should? 

24.  It is clear from Willis’ own evidence and that of the defendant firm’s clerk, Chan, that the plaintiff was not advised as to the conflict which clearly existed.  The plaintiff’s knowledge that Fung was employed by the defendant firm and that the defendant firm acted for the vendor was in no way sufficient to put the plaintiff on notice of the difficulties and dangers involved in such a situation.  It was the defendant firm’s duty to advise the plaintiff of the difficulties that may arise particularly in the situation where the defendant firm was taking instructions from a person who was employed to bring in business and thus to whom the firm was beholden, at least to some extent and whose word Willis was prepared to accept without even making a note of what was said.

25.  In my view it is not a question of advice which should have been given to the plaintiff that he might seek separate representation, it was a question of advice that he should seek separate representation and that was not given.  In the absence of proper advice it was thus a case where the defendant firm had no business acting for the plaintiff.  It was not a simple case of negligence: it is a case of breach of contractual and fiduciary duty in failing to advise the plaintiff that he should seek independent advice.

26.  Following on that, the question then arises as to what would have been the position had the defendant firm not acted for the plaintiff but told the plaintiff that he had to seek representation elsewhere.  On the findings of fact by the judge it appears to me to be impossible for this court to reach a concluded view.  Nevertheless, one matter is clear.  On the first occasion that a purchaser was represented by another firm of solicitors in relation to a flat in this Property, the fact that the crucial letters were forgeries came to light almost immediately.

27.  This court has been shown copies of the relevant documents.  It is by no means clear whether the judge saw copies of the relevant documents or the originals thereof.  It would seem that the originals might now be in the custody of the ICAC, but even those may prove to be merely copies.  The documents themselves appear to be scruffy and badly prepared.  Coupled with the discrepancies in the descriptions of the Property their appearance itself might seemingly give cause for concern.   In coming to his conclusion the judge does not seem to have taken into account the significance of the fact that the first time an independent solicitor considered those documents it was found appropriate to verify their contents with the District Lands Office.

28.  The question that falls for consideration is what are the chances that if the plaintiff had been represented by independent solicitors that the documents would have been revealed to be forgeries.  That is a question which this court cannot answer on the facts found by the judge.  In my view this court has no option but to set aside the judgment of the court below and remit the matter for retrial in the light of the judgment of this court.

Hon Le Pichon JA:

29.  I agree.

Hon Barma J:

30.  I agree with the orders that are proposed.  I would add that, apart from not having been shown the relevant form of agreement required by Rule 5C(4), the judge was also not referred to paragraph 7.01 of the Hong Kong Solicitor’s Guide to Professional Conduct, which states that a solicitor must not act where his own interests conflict or are likely to conflict with the interests of a client or potential client.  As paragraph 1 of the commentary makes clear this principle applies equally where a partner or a member of the solicitor’s staff is so interested.  In the circumstance therefore, there was no basis on which Mr Willis should have acted for the plaintiff.  Had Mr Willis acted in accordance with his obligations he would have been bound to decline to act for the plaintiff.  What would have followed had he taken that course is, as my Lord the Vice President points out, not capable of being answered on the findings of fact made.

31.  I would also add that even if Mr Willis could, in principle, have acted for both parties, it remained his duty, in my view, to draw the plaintiff’s attention to the potential conflict of interest between himself and the vendor, which was controlled by Fung.  Simply to include a term in the sale & purchase agreement to the effect that the plaintiff was free to employ his own solicitors, without any further explanation of the potential for a conflict of interest to arise, fell far short of what was required.

Hon Rogers VP:

32.  The judgment below will be set aside and the matter remitted to the Court of First Instance for a new trial before a different court.  There will be an order nisi that that the plaintiff should have the costs of this appeal and the costs below should be costs in the new trial.