CHENG CHAU YIN ANN v. CHENG KWOK FAI SIMON AND OTHERS

CACV 333/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 333 OF 1999

(ON APPEAL FROM HCA 3839/1999)

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J U D G M E N T

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Hon Mayo VP:

1. This is an appeal by D2 from the judgment entered by Deputy Judge Gill for the plaintiff pursuant to an application made for summary judgment under Order 14. Judgment in default had already been entered against D1. D3 has not appealed from the Judge's determination.

2. The plaintiff and D1 were friends. D1 had invested moneys on the plaintiff's behalf in various real estate investments.

3. So far as the present proceedings are concerned D1 who was a director of a company Full Country Development Ltd ("Full Country") represented to the plaintiff that his company was the beneficial owner of a project known as the Wan Fung Project and that it had the right and title to sell flats which were being developed. He persuaded the plaintiff to purchase one of the flats for $4 million. $2.3 million of the purchase moneys would be advanced by the National Commercial Bank ("NCB") and their interests would be secured by way of an equitable mortgage secured on the flat. In fact the legal and equitable interests in the Wan Fung Project were vested in the company called Keep Point. D1 claimed that he was authorised to represent Keep Point in selling the flats through Full Country.

4. D1 instructed D3 a firm of solicitors to represent Keep Point. He also introduced the plaintiff to D2 another firm of solicitors to represent her interests in the purchase of the flat.

5. Prior to D2 being instructed to act for the plaintiff she entered into a Provisional Sale and Purchase Agreement with Keep Point. D1 purportedly signed this Agreement for and on behalf of Keep Point.

6. After D2 obtained instructions from the plaintiff they wrote to D3 requesting a draft Sale and Purchase Agreement. D3 sent them a draft formal Sale and Purchase Agreement together with various copy muniments of title.

7. There would appear to be some dispute concerning the latter. Mr David Chung a partner of D2 stated on affirmation that various copy deeds were supplied. This was disputed by the plaintiff who stated in her affirmation that D3 failed to supply the relevant copy deeds when they were requested to do so. It appears from the Judge's judgment that he accepted the plaintiff's version of the evidence.

8. Be that as it may the form of the Sale and Purchase Agreement was agreed and the plaintiff signed her copy and D1 purported to sign Keep Point's copy.

9. Under the terms of the Agreement the purchase price became payable at various different dates. It was however a term of the Sale and Purchase Agreement that any purchase moneys would be held by D3 as a stakeholder pending the issuance of the occupation permits of the flats. Needless to say conditions in accordance with Law Society circulars were attached to D3's holding the money in this way. One of the conditions being that the moneys could not be transferred to any third party prior to the completion of the flats.

10. D2 requested NCB to pay to them the moneys they were advancing. They did so. D2 then passed the moneys on D3 in accordance with the terms of the Sale and Purchase Agreement. It would appear that D3 then in breach of the terms of the Agreement and the terms of an undertaking given by D3 in a statutory declaration passed the moneys on to D1 who has since disappeared and is the subject of an investigation which is being conducted by the commercial crime office.

11. Keep Point claimed that at no time did they authorise D1 to represent him on the sale of the flats. They say that at all material times the only solicitors who represented them on the sale of the flats was Messrs Gallant Ho and Co.

12. NCB required the plaintiff to repay to them the moneys they had advanced and she had no alternative but to comply with this demand. She also of course lost the balance of the remainder of the moneys which had been paid under the Sale and Purchase Agreement.

13. The plaintiff's claim against D2 is formulated in this way at para. 8 of the amended Statement of Claim:

"8. The said duties of the 2nd Defendant include, inter alia, the following:

(a) Duty to ascertain that the purported vendor of the said Unit has a good title to the said Unit by, inter alia, requesting for and perusing title of document relating to the said Unit.

(b) Duty to take all such steps as may be necessary to ensure that the purported vendor of the said Unit has the capacity to pass and transfer a good title of the said Unit to the Plaintiff and that the purported vendor would execute all such documents to pass interests in the said Unit to the Plaintiff in a proper manner.

(c) Duty to take all such steps as may be necessary to ensure that the mortgage loan to be obtained would be used towards purchase of the said Unit from the true owner of the said Unit.

(d) Duty to take all steps as may be necessary to ensure that the mortgage loan or any part thereof to be obtained for purchase of the said Unit would not be paid to anyone other than the true owner of the said Unit.

(e) Duty to take all such steps as may be necessary to ensure that the Plaintiff would obtain a good title to the said Unit upon payment of the purchase price.

(f) Duty to take all steps as may be necessary to protect the Plaintiff's interest in the said purchase including, inter alia, causing all relevant documents and deeds to be registered at the Land Registry in a timely manner."

14. D2's answer to all of this is that they also are the innocent victims of the misconduct of D1 and possibly D3. They claim that at all times they have adhered to the practices and requirements of the Law Society in relation to the sale of flats in the course of construction. More particularly it is contended on their behalf that they were fully entitled to place reliance upon the representations made to them by D3 that they represented Keep Point. It would have been invidious for them to seek assurances that D1 was indeed an authorised signatory of the company. They go on to say that the Sale and Purchase Agreement was in a standard form which provided that any moneys paid to D3 would be held by them as stakeholders and that they would not part with possession of the moneys prior to completion to any third party.

15. They also contended that it was the usual practice of solicitors to defer making a full investigation of the title to property until shortly before completion. It would thus have been premature for them to undertake this investigation at the time of the exchange of formal contracts.

16. There was also nothing in the criticism that they had no authority to make the various payments to D3. The payments were made in accordance with the terms of the contract the plaintiff had just agreed and signed.

17. In his judgment the Judge made much of the failure of D2 to undertake a search at the Companies Registries to satisfy themselves that D1 was an authorised signatory of Keep Point. It is difficult to see how this was of assistance to the plaintiff. There is no requirement that an authorised signatory of a company for signing contracts must be a director. In any event there was no evidence that there is any standard requirement for solicitors to undertake a search of this nature when acting for a prospective purchaser. Over and above this it is by no means clear that D2 was not entitled to place reliance upon representations made by a fellow practitioners that their clients were duly authorised to enter into the transaction.

18. At p. 9 of the judgment the Judge deals with the question of the failure of D2 to obtain the title deeds of the property from D3.

"... In particular, having asked for the documents of title, Albert Hwang did not follow up their request when it was apparently ignored. And there was no enquiry as to the signatory's authority or authenticity. A little more persistence on their part would surely have uncovered the leading role Simon Cheng was playing, without authority. As it was Simon Cheng's fraud (and there can be no other reasonable explanation but that he committed a fraud) went undetected. It is, as I find, no argument to say that a solicitor's obligations do not require him to insure against his client's loss against fraud. Quite so, but the whole purpose of the enquiry that must be undertaken is to minimize any actual or potential loss including that occasioned by criminal conduct. Non compliance with a standard request to supply documents of title for perusal should have set alarm bells ringing, but apparently did not. Had steps been taken to pursue this it is very likely the fraud would have been uncovered before Miss Cheng was to suffer the loss associated with the disbursement of the Bank advance, which she now seeks to recover."

19. As indicated earlier in this judgment it was never satisfactorily established that no title deeds were supplied. Mr Chung states on affirmation that title deeds were furnished to his firm. This was clearly an issue which would have to be canvassed at trial.

20. The plaintiff's answer to this is that D2's defence does not amount to more than a "mere general denial of liability".

21. Mr Chan for the plaintiff points to the fact that D1 introduced the plaintiff to D2. He referred to this in his skeleton argument as being crucial background information. I do not see how this is necessarily of crucial significance. It is common ground that the plaintiff and D1 were friends. I see no reason to draw an adverse inference from the fact that an introduction was effected by D1.

22. However the main contention which is advanced by Mr Chan is that it was incumbent upon D2 to investigate Keep Point's title and undertake the customary's enquiries and searches.

23. This however begs one of the main issues in this litigation. That is the question as to when it was appropriate to undertake this work.

24. D2 asserts that in conformity with the accepted practice the moneys payable under the Sale and Purchase Agreement were to be held by D3 as stakeholders. The necessary investigations and enquiries would be undertaken when the construction of the building was completed or nearing completion.

25. Mr Chan also makes the point that there was delay in registering the Sale and Purchase Agreement at the land office for which no satisfactory explanation has been forthcoming. It may well be the case that there has been inexcusable delay in registering the Sale and Purchase Agreement. It is however an entirely different matter to establish that the losses which have been sustained are attributable to this fact.

26. What appears to emerge from all of this is that D2 has done a great deal more than putting forward a "mere general denial".

27. There are a number of issues which clearly will have to be resolved in a trial.

28. In my view the application for summary judgment which was taken out by the plaintiff against D2 was misconceived. This being the case I think application should be dismissed.

Ribeiro JA:

29. I agree with the judgment that has just been delivered by the learned Vice-President and I have nothing to add.

V Bokhary J:

30. For the reasons given by my lord the Vice-President, I too would allow this appeal.

Mayo VP:

31. That being the case the appeal is allowed and the Order 14 summons is dismissed.

32. Costs of appeal are to D2 in any event and costs order below is to be varied to costs being payable to D2 in any event.