HUNG WAI KUEN AND OTHERS v. CHENG SHUN PING

HCA 1674/2019

[2023] HKCFI 949

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1674 OF 2019

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JUDGMENT

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1.  This action arose from the development of a plot of land in the New Territories, known as Lot 510 in Demarcation District 176 (“Land”). The 1^st and 2^nd Plaintiffs (“Hung” and “Chan”) together were the developer of the Land which was (and is) in the ownership of the Defendant (“Cheng”).

2.  There are 3 key documents which, on their face, set out the relationship between the parties :

(1)  Hung and Chan, as developer, entered into a Chinese Development Agreement (發展合約) dated 18 November 2011 with Cheng (“Agreement”).  It provided for the rebuilding of a three-storey house on the Land (“Development” and “House”).  It is common ground that the House would be a New Territories Exempted House (“NTEH”)[1];

(2)  A Legal Charge dated 18 November 2011 (“Charge”) which had been registered against the Land.  Recital (1) of the document referred to a 5-year interest free loan of HK$600,000 made by Hung and Chan to Cheng.  The Charge was signed by all 3 of them.  The reason why the Charge came to be made is heavily disputed by the parties;

(3)  The 3rd Plaintiff (“Ng”) is the purchaser of the 1/F unit (二樓) of the House upon completion from Cheng as the vendor under a Chinese Provisional Sale and Purchase Agreement dated 25 May 2012 (“PSPA”). The other two storeys, ie, the G/F (地下) and 2/F (三樓) units inclusive of the roof would, under the terms of the Agreement, be transferred by Cheng to Hung and Chan as their return on the Development.

3.  It should be emphasised that although Cheng admitted to the signing of the Agreement and the PSPA, he strongly disputes the case of Plaintiffs on the reason why he did so.  The parties are also at loggerheads on why the Charge was created.

Background

4.  Given the existence of the key documents, the background facts can be briefly stated.  Unless stated otherwise, the following facts are not in dispute[2]. 

5.  Under the Agreement, Cheng would be paid a total sum of HK$850,000, HK$600,000 of which was to be paid upon the signing of the Agreement.  According to the case of Hung and Chan, they signed the Agreement on 14 November 2011 and Chan paid the HK$600,000 to Cheng’s solicitors, Messrs Rene Hout & Co (“RHC”) on that day.  There was an Official Receipt issued by RHC to Chan dated 14 November 2011 for HK$600,000 as “Deposit” for “Lot 510 DD176”.  The Receipt is not in dispute. 

6.  The case of Hung and Chan is that the Agreement was signed by Cheng on 18 November 2011, which is not in dispute.  On 14 November 2011, Hung and Chan also executed the Charge as Lender.  The circumstances under which these documents were signed are disputed (see below).    

7.  Under the Agreement, Cheng would be entitled to the 1/F unit of the House.  Upon Cheng’s expression of intention to sell the 1/F unit, Chan looked for potential purchasers.  In April 2012, at a meeting in a restaurant in Shatin (“Restaurant”) attended by, inter alios, Hung, Chan, Ng, Cheng and a friend of Hung and Chan (“Lai”), Cheng agreed with Ng on the sale of the 1/F unit.  At the meeting, Cheng also asked for the payment of the balance of HK$250,000 under the Agreement. 

8.  On 25 May 2012, at another meeting in the Restaurant attended by the same people, the PSPA was signed by Cheng as owner, Ng as purchaser, Hung and Chan as developer and Lai as witness.  Ng paid HK$500,000 to Cheng in cash as part of the HK$1,350,000 purchase price pursuant to Clause B(1) of the PSPA.  Chan also paid the balance of HK$250,000 due under the Agreement to Cheng in cash.  There was a bank statement of Chan’s account showing that a sum of HK$300,000 in cash was withdrawn on 17 May 2012, which is relied upon by Hung and Chan as proof of the HK$250,000 payment.

9.  The events under paras 7 and 8 above are disputed by Cheng.

10.  The documentary evidence, which is indisputable[3], showed that from June 2012 onwards various actions were taken and costs incurred by Hung and Chan to effect the Development, eg, professionals were engaged to survey and repair the slope adjacent to the Land and to carry out boundary redefinition and produce re-dimension plans, numerous correspondence were exchanged with the Lands Department for required approvals for the Development and unauthorised structures on the Land were removed at the request of the Lands Department. 

11.  The exchanges with the Lands Department were in the name of Cheng, who was acting via RHC in respect of some of the matters[4]. Under Clause A(7) of the Agreement, Cheng was to sign all necessary papers for the Development to proceed, and for it to be completed.  On the case of Hung and Chan, these papers were to be prepared by them as the developer, which is not disputed.

12.  On 14 February 2019, the Lands Department issued a Letter of No Objection to the Development to Cheng (c/o RHC), which set out the conditions and parameters prescribed for the Development.  A Letter of Acceptance of those terms, to be signed by Cheng as well as Hung and Chan as the Lender under the Charge, was enclosed with the Letter of No Objection.   

13.  Cheng disputes that he had signed the Letter of Acceptance (the document was not available at the trial).  However, on 5 March 2019 the Lands Department wrote to him (c/o RHC) acknowledging the receipt of, inter alia, the Letter of Acceptance.

14.  On or around 26 March 2019, Chan was informed by the Lands Department that Cheng and one of his sons (鄭智業) had gone to the Lands Department and asked for all applications in relation to the Development to be suspended.  This part of the case of Hung and Chan is denied by Cheng. However, as of the date of trial, no work could be commenced on the Land for the Development.

The respective case

15.  The case of the Plaintiffs is based on the Agreement and the PSPA.  The background facts set out above, albeit that some of which are under dispute, had encapsulated their case.  They contend that, having been duly paid under both agreements and having performed part of the deal in starting the approval process, Cheng was (and is) not entitled to renege and bring the Development to a halt.  Hung and Chan are unable to commence work on the Land, and Ng’s entitlement under the PSPA is also defeated.

16.  The Plaintiffs therefore seek an order for specific performance to compel Cheng to perform the Agreement and the PSPA, or alternatively damages against him.  However, it is not in dispute that Cheng, with his financial situation, will not be able to pay damages should he be held liable in this Action. 

17.  Cheng’s case is that he had received a sum of HK$600,000 from Hung and Chan.  However, it was a Loan from them, which was evidenced by the Charge.  As part of the Loan “arrangement/agreement”[5] which was made orally, Cheng signed the Agreement and the PSPA relying on the oral representations by Hung and Chan (“Representations”) that those agreements were just added securities for the repayment of the Loan.  They would not be used or become enforceable or presented to anyone, and when the Loan was repaid in full the agreements would be destroyed.

18.  Cheng attempted to repay the Loan but to no avail.  He contends that Hung and Chan were “in breach” of the Representations and by his Counterclaim sought declaratory relief that the Agreement and the PSPA were “rendered null and void”.  In his Opening Submissions (in response to criticism made in the Plaintiffs’ Opening Submissions), Mr Chan (who appeared with Mr Yiu for Cheng) clarified that Cheng is in fact seeking rescission of the Agreement and the PSPA. 

19.  As regards Cheng’s case against Ng, apart from relying on the Representations (the legal basis for which was not made clear[6]) the only submission made in the Opening was that Ng’s claim against Cheng is “premature and misconceived” because the two pre-conditions for Cheng’s duty to transfer the 1/F unit to Ng, namely, the completion of the House and the issuance of Occupation Permit have not yet been fulfilled.

20.  Cheng had been residing in an elderly home since 2015 due to health reason.  After another stroke in 2019, he was certified on 14 February 2019 to be medically and/or mentally unfit to execute any document.

21.  Sometime after February or March 2019, Cheng’s son had instructed solicitors to inform the Lands Department to put a halt on all the applications regarding the Development in light of Cheng’s health conditions.

22.  The case of Hung and Chan on the Charge is that there was no oral Loan arrangement or agreement.  The Charge was prepared by Ms Winnie Wong (“Winnie”) of RHC on Cheng’s instructions, the purpose of which was to reduce the risk of his disposal of the Land prior to completion of the Development.  It was done in response to their concern whether Cheng would follow through with the Development.  Such arrangement was in line with Clause A(5) of the Agreement, which made clear that the Land should not be disposed of by Cheng.  Hung and Chan were not aware of the precise terms and contents of the Charge at the time of execution.

Issues

23.  There is an Agreed Joint Statement of Issues in Dispute.  However, Mr Fan, who appeared for the Plaintiffs, had helpfully streamlined them as follows (to which Mr Chan had agreed) :

(1)  The primary issue is whether Cheng’s factual account on the Agreement and PSPA is to be believed, in particular whether the Representations were made.  If Cheng’s account is rejected, there can be no factual basis for impugning those agreements;

(2)  Under the Agreement, the following issues arose:

(a)  Mr Chan had helpfully accepted that, subject to the underlying factual dispute, Cheng had an implied obligation not to obstruct the Development (see para 12 of the Re-Re-Amended Statement of Claim).  However, there remains an issue whether Cheng was in breach of such term;

(b)  Whether Hung and Chan are entitled to specific performance of the Agreement.  Alternatively, if damages are to be awarded, the appropriate quantum of the same;

(3)  Under the PSPA, the following issues arose:

(a)  Given the acceptance that Cheng had an implied obligation under the PSPA not to obstruct the building of the House, whether he was in breach of such term;

(b)  Whether Ng is entitled to specific performance of the PSPA.  Alternatively, if damages are to be awarded, the appropriate quantum of the same;

(4)  On Cheng’s Counterclaim:

(a)  Whether declaratory relief should be granted to the effect that the Agreement and PSPA are null and void (see prayers (2) and (3) of Counterclaim);

(b)  Whether the alleged Loan exists, and if so whether the Charge is liable to be discharged upon repayment of the Loan.

Witnesses

24.  Each of the Plaintiffs gave evidence at the trial.  In addition, Lai and Winnie were called by them to give evidence. Cheng was the only witness for his case.

Applicable principles

25.  The following principles are not in dispute :

(1)  A person of full age and ordinary understanding who willingly signed a document is bound by it in the absence of vitiating factors, in respect of which the burden of proof is on him: see Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334, [84] and [96][7];

(2)  In assessing a party’s case on a particular issue, the court will be assisted by the following considerations: see Lee Fu Wing v Tan Po Ting Paul [2009] 5 HKLRD 513, [53]:

(a)  Whether the party’s case is inherently plausible or implausible;

(b)  Whether the party’s case is, in a material way, contradicted by other evidence (documentary or otherwise) which is undisputed or indisputable;

(c)  Where it is shown that a witness has been discredited over one or more matters to which he has given evidence using the above tests.  This is relevant to the assessment of his overall credibility; and

(d)  The demeanour of the witness.

Evaluation of the evidence

26.  For the purpose of assessing the evidence of the witnesses, I remind myself that where their evidence was based solely on recollection, the events in question took place over 10 years ago and there is bound to be elements of unreliability and inconsistency in such evidence. 

27.  With the exception of Hung, each of witnesses for the Plaintiffs’ case gave evidence in a straight forward manner and left a good impression as a reliable witness.  Although Hung was a difficult witness in that he was unsophisticated and, despite the repeated advice of the court had difficulty focusing on the questions and giving simple answers rather than repeating himself, he did not give the impression of being less than candid. 

28.  Most importantly, the evidence of the Plaintiffs was supported by the documentary evidence.  Further, I am unable to see any good reason why Winnie and Lai, who had no personal interest in these matters, would have come forward to give evidence to support a false case.

29.  At the time of the trial, Cheng was in his mid-70s.  It appeared that he had a stroke sometime after the Agreement was made, which was evidenced by the noticeable change of his signature on a document dated 5 June 2015[8] and consistent with his evidence that he had been residing in an elderly home since 2015[9].  However, it was apparent from his cross-examination that whilst suffering from impairment to his speech (he had to speak slowly, softly, in short answers and sometimes it was difficult to hear what he had said), Cheng’s mind remained reasonably lucid.  There were times when, unexpectedly, he denied what he had said in his witness statements.  I believe that, more likely than not, it was due to his confusion over the details of the story which he had to make up to explain away the documents or his misunderstanding of the questions.

30.  In light of the documentary evidence, I should focus on the inherent probabilities of, firstly, the 3 key documents.  The Agreement and the Charge were of the same date.  I do not believe that precisely when the documents were signed by the parties is important.  In fact, one of Cheng’s answers given in cross-examination was consistent with the Plaintiff’s case.  He said that Hung, Chan and Lai were not present when he signed the Agreement.  On the other hand, he also said that the signatures of Hung and Chan were not there when he signed the Agreement, which was inconsistent with their case.  In any case, Winnie had confirmed that Hung and Chan had paid a deposit under the Agreement a few days before the 18 November 2011 (RHC’s receipt was dated 14 November 2011).  I accept Mr Fan’s submission that, more likely than not, Hung and Chan did not simply pay the HK$600,000 deposit without signing the Agreement and the Charge on that day. 

31.  There is something inherently improbable in Cheng’s allegation of a 5-year interest free loan from Hung and Chan.  Cheng said that he did not know Chan in November 2011, and he was unable to provide a meaningful answer[10] as to why Chan would participate in giving him such a loan[11].

32.  The Charge, the only documentary evidence on the Loan, must be considered in conjunction with (a) the Receipt of HK$600,000 dated 14 November 2011, which was corroborated by Winnie’s evidence; and (b) the Agreement.  In respect of the latter, there were specific terms stated therein which were most probably the result of negotiations between the parties, eg, under Remark, the Developer had the right of first refusal to purchase the 1/F unit from Cheng at HK$1,500,000 if he wanted to sell it.  Such right would expire in 12 months after the issuance of “Certificate of Satisfaction” (by the Lands Department).  Plainly, a negotiated development agreement militates against the suggested Loan. 

33.  Further, Winnie, who drafted both the Agreement and the Charge explained that the latter was designed to serve the purpose of reducing the risk to Hung and Chan because the Agreement would not be registered against the Land.  The Charge was created so that it could be so registered to prevent disposal of the Land.  There was no Loan.  When asked why it was “inconvenient” to have the Agreement registered, Winnie explained that she had known Cheng for many years and her guess was that Cheng, who was a villager of Wai Village, did not want other villagers to know that he was unable to develop the Land himself. 

34.  I am unable to accept Mr Chan’s submission that the Charge was not advantageous to Cheng and only beneficial to of Hung and Chan.  Therefore, the inference is that Winnie was acting under the instructions of the latter in drafting the Charge.  The propositions ignore the fact that a reasonable developer would be concerned to have his interest in a development protected.  If the Agreement was not going to be registered against the Land, an alternative solution would have to be found.  Otherwise, Cheng would not get any money from the transaction or have the 1/F unit built for him at no cost. 

35.  Despite the criticism that Winnie had knowingly created a false document, I see no reason to doubt her evidence.  Indeed, her evidence is consistent with the documents.  I should also mention that Mr Chan had also criticised Winnie for breach of confidentiality in giving evidence against Cheng.  However, it had not been pointed out which part of her evidence was protected by confidentiality.  In any case, I am inclined to agree with Mr Fan that Winnie’s evidence was relevant to the issues in the trial, and she could have been subpoenaed to give evidence.

36.  There was an inconsistency between the evidence of Winnie on one hand and Hung and Chan on the other, namely, whether the Charge had been interpreted to the latter by the former.  I am inclined to believe that Winnie’s evidence that she had interpreted the document to Hung and Chan prior to their signing is more reliable.  It was a natural thing for Winnie to do and there was an interpretation clause in the Charge.  However, even in the worst case scenario that Hung and Chan were not truthful on this matter, their case is strongly supported by the documentary evidence and inherent probabilities. 

37.  Winnie also said that she was told in May or June 2012 by Cheng that Hung and Chan had paid the balance of HK$250,000 under Clause B(1) of the Agreement.  RHC was retained by Cheng to handle the applications to the Lands Department for the Development.  Winnie’s evidence was consistent with and supportive of the evidence of Hung and Chan, as well as supported by the documents.  There is no good reason to believe that RHC would be acting for Cheng without his instructions. 

38.  Furthermore, there was another development agreement dated 21 February 2011 signed by Cheng and one Mr Fung for the development of the Land.  That agreement was also drafted by Winnie and the terms thereof were similar to much of the terms of the Agreement.  There was also a legal charge against the Land in favour of Fung in the sum of HK$600,000, which could be seen from the Land search.  However, Winnie said that there was a difference with this February transaction in that there were both a loan and an agreement to develop the Land.  Although the terms of February agreement were similar to the Agreement, importantly, Cheng was not entitled to any payment under that earlier agreement.  He would only get the ground floor unit upon completion of development.  Plainly, the Agreement was more attractive to Cheng. 

39.  The significance of this earlier transaction is two-fold.  First, it showed that Cheng was minded to have the Land developed. Second, it was stated on the second page of the February agreement that it was cancelled on 18 November 2011.  That was consistent with Chan’s evidence that he was told by Hung that the Land had been pledged for HK$600,000.  The money had to be repaid for the Land to be “returned”, and Chan’s payment of HK$600,000 would be treated as a deposit for the “investment”.

40.  In my view, Cheng’s case on the Loan must also be assessed in light of the PSPA.  It referred to Cheng, as owner, had applied to build a small house on the Land.  The document was also signed by Hung and Chan as developer.  Plainly, the PSPA fortified the existence of the Agreement and the genuineness of the Development. 

41.  The signing of the PSPA was witnessed by Lai.  I find Ng’s evidence that he had paid HK$500,000 in cash to Cheng upon signing of the PSPA credible.  Ng said that the request for cash by Cheng was made in return for a reduction of HK$150,000 on the asking price of HK$1,500,000. HK$1,500,000 was indeed the price stated on the Agreement for the 1/F unit.  In the PSPA, it was reduced to HK$1,350,000 with the payment of HK$500,000 deposit.

42.  I am unable to accept Cheng’s case that the PSPA was signed by him at the same time as the Agreement on 18 November 2011.  The proposition is inherently improbable.  The terms of the two agreements were not consistent in terms of the price of the 1/F unit as well as the right of first refusal of Hung and Chan.  Also, it is common ground that the Agreement was drafted by Winnie.  It is unlikely that she would have drafted the Agreement with its terms had she known that the 1/F unit was never going to be retained by Cheng.  More likely than not, the proposition was a desperate attempt to get out of the PSPA.  

43.  Finally, the efforts made and expenses incurred to apply for various permissions for the purpose of the Development is compelling evidence that the Agreement was genuine and not simply additional security for an interest free loan.  It must also be borne in mind that Cheng was himself a developer of small houses and therefore familiar with the application process.  He was able to read Chinese, the language of the application documents.  Therefore, the proposition that he simply signed the documents without having received any explanation from RHC is not credible.  A cursory look at the documents which he was signing would have informed him of what they were. 

44.  For completeness, I am unable to accept Cheng’s evidence that he had attempted to repay the Loan and that he was unfit to execute any document.  The attempted repayment was a bare assertion and not fit with the picture painted by the evidence (including Cheng’s own evidence) that Cheng was in need of money at the material times.  There was no medical evidence on Cheng’s condition.  Whilst it was possible (or probable) that he was incapacitated during a period of time after his stroke in 2019, his witness statements and testimony in court demonstrated that he had made recovery from the illness. 

45.  In light of the above evidence, I have no hesitation in rejecting Cheng’s case on the Agreement and the PSPA.  I hold that there was no Loan or Representations.  Cheng was and is bound by those agreements.

Breach

46.  As regards the breaches of those agreements, given the concession that Cheng was under a duty not to obstruct the Development or the building of the House, the issue is whether he had carried out such obstruction.  I believe that more likely than not the Development came to a halt by reason of Cheng’s request (whether made by himself or with the help of his son, who must be acting as his father’s agent) made to the Lands Department. 

47.  When asked, Cheng was unable to think of anyone, other than himself as the owner of the Land, who was in a position to bring a halt to the Development.  Indeed, I believe it was unlikely that the Lands Department would have accepted the request of anyone to put a stop to the Development other than Cheng, bearing in mind that it had been dealing with Cheng’s applications as the owner of the Land.  In the premises, I find that Cheng is in breach of both the Agreement and the PSPA.

Remedy

48.  Despite Cheng’s impecuniosity, in their final submissions, the Plaintiffs have elected to be compensated by damages.  It was in recognition of the practical difficulties likely to be encountered with an order for specific performance given the lengthy process to have the Development completed and have the units of the House transferred to them. Perhaps, they are also minded to enforce any monetary judgment against the Land.  I believe that it is a sensible choice and I see no reason to deprive them of awards of damages for the loss of their bargains.

49.  There is expert evidence adduced by the Plaintiffs on the valuation of the different units of the House upon completion of the Development, as well as on the construction costs to complete the Development.  Such evidence is not disputed by Cheng. 

50.  In my view, the later valuation date of 1 March 2023 should be adopted for the assessment of damages.  It better reflects an assessment as of the date of trial.  It is more appropriate than the valuation date of 1 March 2020, which was the date of completion of the Development (had it proceeded in March 2019 in accordance with the Letter of No Objection) agreed by the parties, because the Plaintiffs had only given up on their claims for specific performance in their final submissions: see Chitty on Contracts, 34^th edn, [29-188].

51.  Acting with admirable fairness, Mr Chan did not quarrel with the computation of damages (after deduction of the construction costs and the balance of payment of HK$850,000 under the PSPA) advanced in the Plaintiffs’ final submissions based on the later assessment date: HK$4,368,000 for Hung and Chan and HK$2,910,000 for Ng.

52.  Finally, I should mention briefly that I agree with Mr Fan’s analysis of the applicable statutory provisions that the PSPA, which had not been stamped, is exempted from stamp duty because, with the abandonment of the relief of specific performance, it is “not performed” [12]. If I am wrong, I would have accepted an undertaking from the Plaintiffs’ solicitors offered in para 40 of their final submissions to overcome the inhibition on the admissibility of the PSPA.

Disposition

53.  By reason of the aforesaid, I enter judgment in favour of Hung and Chan as well as Ng in the sums stated in para 51 above. Interest is payable on such sums from 1 March 2020 to date of judgment at prime plus 1% and at judgment rate(s) from date of judgment until payment.  The Counterclaim is dismissed.  There is no dispute that costs should follow the event.  I order that the costs of and occasioned by this Action and the Counterclaim be paid by Cheng, to be taxed if not agreed. 

54.  I am grateful to counsel for their assistance.