DESMOND YIU CHOWN LEUNG AND OTHERS v. CHOW WAI LAM WILLIAM AND OTHERS

FACV No. 18 of 2004

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 18 OF 2004 (CIVIL)

(ON APPEAL FROM CACV NO. 223 OF 2003)

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Between

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Court: Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Nazareth NPJ and Lord Millett NPJ

Hearing and Decision: 25 October 2005

Handing Down of Reasons: 4 November 2005

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J U D G M E N T

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Mr Justice Bokhary PJ:

1.  At the conclusion of the hearing, we announced our decision dismissing the appeal and, the appellants accepting that they could not resist costs, awarded the respondents costs.  We now hand down our reasons, which are given by Mr Justice Chan PJ for the Court.

Mr Justice Chan PJ:

2.  In this action, the appellants claimed against the respondents who were partners of a solicitors firm, for their failure to protect the appellants’ interests in a loan transaction, alleging breach of contract, misrepresentation and breach of duty of care.  The appellants’ claims were rejected by Deputy Judge Muttrie and their appeal was also dismissed by the Court of Appeal (Rogers VP and Le Pichon JA with Yuen JA dissenting).

Issue in this appeal

3.  In the present appeal, the appellants do not seek to rely on their claims based on contract and misrepresentation.  The issue in this appeal is: whether in the absence of an express contract of retainer, the respondents are liable to the appellants on the basis that the 1^st respondent, (“Mr Chow”), one of the partners, had by his conduct assumed the responsibility of a lawyer to protect the appellants’ interests in the transaction, but had failed to do so.

4.  One of the difficulties now facing the appellants is that in the courts below, this cause of action based on assumption of responsibility was presented as an alternative basis for their claims.  Their primary case was that there was indeed an express contract of retainer whereby Mr Chow was specifically instructed by the appellants and had agreed to act for them in the loan transaction and that they had relied on his express assurances that their interests would be looked after. But this primary case was rejected by the trial judge who disbelieved the appellants’ evidence.  The question is whether in the light of the evidence in this case, the appellants can still succeed on the alternative basis.

Appellants’ submissions in this appeal

5.  Most of the facts relating to the loan transaction and its documentation were not in dispute.  It was Mr Chow’s involvement which was hotly disputed at the trial.  Having considered all the evidence, the judge held that where there was a conflict, he would prefer Mr Chow’s evidence to that of the appellants.  There is no challenge to that finding.

6.  Mr Warren Chan SC leading Mr M C Chiu for the appellants, however, made two main submissions: first, that based even on what he described as the undisputed facts and applying a proper analysis of the principles on assumption of responsibility, the respondents should be held liable to the appellants; and second, that the rejection by the judge of the appellants’ evidence on their primary case does not affect their alternative case which is quite separate and independent.  The judge and the majority of the Court of Appeal, it was said, had failed to consider properly these undisputed facts in the light of the applicable law.  Counsel urged us to uphold Yuen JA’s dissenting judgment.

Principles on assumption of responsibility

7.  The applicable principles are not in dispute.  It is common ground that since Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465, it has been established that, even in the absence of a contract, a duty of care arises where (1) party A relies on party B to provide information, advice or services in circumstances where it is reasonable to rely on party B; and (2) party B takes it upon himself to provide such information, advice or services, when he knows or ought to have known that party A is relying on him.  See Lord Reid at 486, Lord Morris of Borth-y-Gest at 494 and Lord Hodson at 514.  In these circumstances, party B is said to have assumed responsibility to exercise care towards party A.  See Lord Devlin at 528.  It is not necessary to show that party B has knowingly or deliberately assumed such responsibility.  The test for the existence of such a duty is an objective one: whether it can reasonably be said that he has by his conduct accepted responsibility.  See Lord Goff of Chieveley in Henderson v Merrett Syndicates Ltd [1995] 2 A.C. 145, 181; Lord Steyn in Williams v Natural Life Health Foods Ltd [1998] 1 W.L.R. 830, 834; and Lord Slynn of Hadley in Phelps v Hillingdon London Borough Council [2001] 2 A.C. 619, 654.

The loan transaction and its documentation

8.  At the trial, some facts were either accepted or not challenged by the parties and are in that sense “undisputed”.  They are as follows.

9.  A Mr Yan Kwok Kei Gay (“Mr Yan”) was a member of the Yan family who operated a well known candy and ice cream making business.  The Yan family made use of a company called Chapol Limited (“Chapol”) of which Mr Yan was a member and director to develop a site in Aberdeen into a building called Yan’s Tower.  In late 1994, through a mutual friend, the 1^st to 3^rd appellants, (“Mr Leung, Mr Yip and Madam Tai” respectively), agreed to lend $5,000,000 to Chapol for six months at an interest of 2.5 % per month.  Mr Leung was to put up $500,000 and Mr Yip and Madam Tai were to contribute $4,500,000.  The loan was purported to be secured by Chapol agreeing to sell the whole of the 17^th floor of Yan’s Tower to the appellants at the price of $1,000 per square foot if it should fail to make repayment. 

10.  On 28 December 1994, Mr Yan arranged a meeting with Mr Leung and Mr Yip in Mr Chow’s office.  Mr Chow was a friend of the Yan family. At the meeting, they told Mr Chow about the loan agreed between them.  Upon enquiry by Mr Leung and Mr Yip, Mr Chow advised them on two specific matters: that it was not necessary for the appellants to have a moneylender’s licence to lend money to Mr Yan’s company and that the interest rate charged was not illegal.

11.  On 31 December 1994, they met again in Mr Chow’s office.  This time, Madam Tai was also present.  A loan agreement (“the Loan Agreement”) was executed.  This document reflected the agreement between the parties and contained provisions which referred to the security mentioned above.  Before execution, Madam Tai requested Mr Chow to explain the terms of the document to her which he did.  He also told Madam Tai that no land search on Yan’s Tower had been made.  Madam Tai then signed as lender and Mr Yan for Chapol as borrower.  Mr Chow signed as a witness to both signatures.  Madam Tai then handed over $5,000,000 to Mr Yan and in return, received post-dated cheques for the principal and the monthly interest payments.  In the Loan Agreement, Mr Chow’s solicitor’s chop appeared under each of his attesting signatures.  There was a back sheet which bore the chop of Mr Chow’s firm and its address.  The pages in the document were tied together with a ribbon which was sealed with wax bearing the firm’s seal. 

12.  The respective contributions by Mr Leung and Madam Tai and her husband were recorded in an agreement between them dated on 7 January 1995.  This document was signed by Mr Leung and Madam Tai in Mr Chow’s office.  Mr Chow signed as a witness and his solicitor’s chop was put under his own signatures.  Although there was a wax seal on the document, there was no ribbon and the name of the firm did not appear on the back sheet or anywhere in the document.

13.  The loan was subsequently extended twice, first for three months by a supplemental agreement executed on 30 June 1995 and then for another 11 months by another supplemental agreement executed on 2 October 1995.  For each extension, there was a variation regarding the security offered for the loan, i.e. the identity of the property and/or the unit price at which it could be purchased by the appellants upon Chapol’s default.  On each occasion, the execution was done in Mr Chow’s office;  Madam Tai signing as lender, Mr Yan on behalf of Chapol as borrower and Mr Chow witnessing their signatures.  In both documents, Mr Chow’s solicitor’s chop appeared under each of his attesting signatures.  However, his firm’s name did not appear, either typed or chopped, on the back sheet or in the document.  The pages were not tied together with a ribbon and had no wax seal.

14.  Mr Chow did not open any file for this loan transaction and the attendances in his office.  Nor did he send any bill to the appellants or charge them any fees in respect thereof.

15.  To complete the picture, the principal was never repaid; although Madam Tai received some interest payments.  The security was worthless since Yan’s Tower was already fully mortgaged and none of the three loan documents were registered at the Land Office.  In separate proceedings, judgment was obtained against Chapol for the amount of the loan with interest but this turned out to be fruitless.  Chapol was later ordered to be wound up upon the appellants’ petition.

Mr Chow’s involvement

(i) the appellants’ case

16.  The appellants’ primary case as pleaded which they sought to prove at the trial was that at the meeting held on 28 December 1994, apart from advising them on the Moneylenders Ordinance and the rate of interest, Mr Chow also gave them general advice on lending and the requirement of a security for the loan.  The appellants then specifically instructed him, and he agreed to personally draw up the loan document according to the parties’ agreement.  He also assured them that the loan would be secured by the property in Yan’s Tower; that their interests would be looked after; and that if Chapol defaulted, the loan document to be drawn up would enable them to purchase the property.  He promised to fax a draft to the appellants for their consideration before execution.  They subsequently received a draft from Mr Chow who informed them that the document was ready and asked them to go to his office for execution.  The appellants were however not able to produce any such draft.

17.  It was also alleged that at the meeting on 31 December 1994, apart from explaining the terms in the Loan Agreement to them upon the request of Madam Tai, Mr Chow again assured them that their interests in the property were taken care of under the Loan Agreement and that their right to purchase the property was secure. 

18.  In June 1995 as well as in September 1995, they requested Mr Chow and he agreed to draw up the two supplemental agreements.  He asked them to go to his office when the documents were ready and they went to his office to execute these documents.

(ii) the judge’s findings

19.  The trial judge basically accepted Mr Chow’s evidence.  He found among other things that: the parties had already reached agreement regarding the loan before the 1^st meeting; it was Mr Yan who took the appellants to Mr Chow’s office; at that meeting, Mr Chow did not give any advice to the appellants other than telling them the answers to the two specific questions; the appellants did not instruct him to draft the Loan Agreement and he never agreed to do so; he did not give any assurance to protect the appellants’ interests in the transaction; the Loan Agreement was not drafted by him; at the meeting on 31 December 1994, he did not give any advice or assurance to the appellants and merely acted as a witness to the signatures of the parties on the Loan Agreement.  The judge also did not accept that it was Mr Chow who prepared the “contribution agreement” made between the appellants: he was merely acting as a witness to that document.  Nor did he prepare the two supplemental agreements.  The judge accepted that Mr Chow did not know why and how his firm’s chop and the ribbon or sealing wax came to be put on the Loan Agreement and that it might be a mistake by his staff.

The courts below on the alternative case

20.  The trial judge rejected the appellants’ alternative case that Mr Chow had assumed responsibility to act for the appellants simply on the ground that Mr Chow was doing nothing more than acting as a witness.

21.  In the Court of Appeal, Rogers VP described the appellants’ alternative case as a “forensic manoeuvre” and “lacked the necessary evidential basis”.  He added in paragraph 44 of his judgment:

“Nor, in my view can it be right to impose tortious liability on Mr Chow simply because he did not say that he was not acting on behalf of the plaintiffs when they had come for the purpose of having documents witnessed.  It is not for this court to uphold the judge’s conclusion as I have outlined but then to invent some scenario different to that put forward by the plaintiffs, let alone the findings of fact by the judge that would give rise to the conclusion that an objective observer would suppose that Mr Chow had undertaken to advise the plaintiffs and that the plaintiffs had relied on that to their detriment, when their evidence had been that they had relied on their own requests and the defendants’ alleged positive responses but had not been believed in that respect.”

Le Pichon JA also said in paragraph 58:

“In my view, once the plaintiffs’ positive case has been rejected, the ramifications flowing from that rejection sit uncomfortably with the factual matrix required to support the inference of an assumption of responsibility on the part of Mr Chow.  In other words, it necessarily affects the “relevant contextual scene” mentioned by Lord Steyn in his speech in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 at 835F.  Given that the plaintiffs’ positive case that Mr Chow was acting for them and looking after their interest was disbelieved, I fail to see how it could be said that, viewed objectively, the plaintiffs were led into supposing that Mr Chow was acting for them from things said or done by Mr Chow.”

Any assumption of responsibility?

22.  However, Mr Chan submitted that they were wrong.  He argued that based on the undisputed facts and making an entirely objective assessment of these facts, one can draw the conclusion that Mr Chow had undertaken to protect the appellants’ interests.  In support of his arguments, counsel drew our attention to seven matters, some of which were identified and relied on by Yuen JA in her dissenting judgment:

(1) Mr Chow was a professional man in the business of providing legal services and the appellants were laymen who were seeking assistance;

(2) it was an important business transaction for the appellants, and Mr Chow was aware that they were not in the usual business of lending money to others;

(3) everything was done in a professional setting, that is, in the office of Mr Chow, a solicitors firm; see also Yuen JA paragraph 79;

(4) the appellants as laymen asked for advice on two specific matters and Mr Chow, the professional man gave them his advice; this gave rise to the impression that he was acting for the appellants; see also Yuen JA paragraphs 80 and 81;

(5) just 4 days later, at a pre-arranged meeting, the appellants attended Mr Chow’s office where the Loan Agreement was presented to them for execution; see also Yuen JA paragraphs 82 and 83;

(6) although Madam Tai could read English, she had chosen to ask Mr Chow for explanation of the Loan Agreement and Mr Chow went through the document with her; see also Yuen JA paragraphs 87 and 88; and

(7) at that meeting, Mr Chow said words to the effect that he had done no land search on the property in question; see also Yuen JA paragraphs 94 and 95.

23.  It is said that under such circumstances, Mr Chow should have informed the appellants that the Loan Agreement was not drafted by his firm and that the security they expected to have had not been put in place in the document; that he should have warned them that they should consult their own lawyers.  Having assumed responsibility towards the appellants, Mr Chow had failed to do any of these and was in breach of the duty of care he owed to them.

24.  With respect, I do not think the undisputed facts can be looked at in isolation as suggested by counsel; they must be considered in context, that is, in the light of all the evidence adduced and the judge’s findings.  I would respectfully agree with Rogers VP’s remarks in paragraph 43 of his judgment:

“[The plaintiffs’ argument] must be assessed in the light of the facts found by the judge.  Sight, however, must not be lost of the plaintiffs’ evidence and the judge’s rejection of it.  Once the plaintiffs’ evidence had been rejected, the plaintiffs’ case on tortious liability has to be viewed in the light of the fact that they had tried to construct a case of specific requests to and reliance on drafting by and assurances from Mr Chow, which the judge had held was not true.  The plaintiffs’ evidence was thus more than mere embellishment and exaggeration.  The judge found it to be false.”

25.  Upon proper analysis of all the facts in the light of the judge’s findings, the “whole picture” was not that painted by Mr Chan.

26.  The appellants had already agreed with Mr Yan on the terms of the loan before they first met Mr Chow.  They were obviously not so much concerned with whether or not the security agreed upon could be enforced as they were anxious to know whether it was lawful for them to make the loan without a moneylender’s licence and to charge Mr Yan such high interest rate.  Mr Chow was introduced to them by Mr Yan.  They were seeing Mr Chow not to seek general legal advice on the loan or the security, but for the purpose of satisfying themselves on the two matters which were worrying them.  Apart from that, there was nothing said or done by Mr Chow to suggest to them that he would act for them in the transaction.  At that stage, the appellants could not reasonably have thought so.  Mr Chow might have assumed responsibility in giving them advice on the two specific matters but it was not suggested that the advice was incorrect.  It was not and could not be the subject of any complaint. 

27.  Having been advised on the matters they wanted to know, the appellants did not ask Mr Chow to advise them on any other matter.  They did not give him any instruction to act for them or to draft any loan document for them.  Nor had he agreed to do so.  Then it was Mr Yan (not Mr Chow) who asked them to go Mr Chow’s office on 31 December 1994 to execute the Loan Agreement.  Since the appellants never instructed him, in the absence of any contact from Mr Chow, they could not reasonably expect that he would suddenly volunteer to act for them or to protect their interests in the transaction.  It is difficult to see how the fact that they were advised on two specific matters by Mr Chow only four days before could have given them the impression that the situation might have changed. 

28.  In the circumstances prevailing, one might reasonably presume that Mr Chow was Mr Yan’s solicitors and was acting for him.  The appearance of the Loan Agreement with the firm’s chop and seal might also give the impression that it was prepared by Mr Chow’s firm.  But since the appellants did not instruct him to do so, they could not possibly have thought that the document was prepared on their behalf.  Again, as the judge found, Mr Chow had not said or done anything to make them believe that he was protecting their interests.  All that he had done was to explain the terms of the Loan Agreement to Madam Tai upon her request.  But if they knew, as they ought to have known, that he was not acting for them, objectively, this should not have made them think that he had assumed the responsibility to protect their interests.  As to the explanation given by Mr Chow, there is nothing to suggest that there was anything in it which could give rise to any complaint.  Mr Chow’s statement at the meeting to the effect that he had not done any land search on the property in question is neither here nor there.  It was not, as suggested by Yuen JA, confirmation that Mr Chow was acting for the appellants.

29.  When all the facts are examined properly, it is difficult to conclude that Mr Chow had accepted responsibility towards the appellants and owed them a duty of care to look after their interests.  The matters highlighted by Mr Chan, either taken individually or cumulatively with the others, cannot give rise to the impression that Mr Chow had assumed any responsibility towards the appellants.  There was no duty on the part of Mr Chow to inform the appellants that he was not acting for them, that the document was not drafted by him, or to warn them of the risk in the transaction or to ask them to seek legal advice.  See Law Wan Lan v Well-Built Development Co Ltd [1988] 2 HKLR 435.

Reliance by appellants

30.  Even if it could be said that Mr Chow had assumed the responsibility to look after the appellants’ interests, there is no evidence that they had relied on Mr Chow to do so.  It was their case that they relied on him since they had specifically instructed him to act for them and/or he had given them various assurances.  Once this allegation was disbelieved by the trial judge, there is simply no evidential basis to say, whether taking a subjective or objective view of the matter, that they had looked to Mr Chow to help them in the transaction.  I would respectfully agree with the observations made by the majority of the Court of Appeal as quoted in paragraph 21 above.  The suggestion that objectively the appellants could be said to have relied on Mr Chow’s conduct as giving rise to a duty of care to protect their interests was not only inconsistent with their primary case but was also contradicted by their own evidence at the trial.  While there may be cases where two apparently inconsistent pleas can be run together, this is not one of those cases.  It is therefore not surprising, and Mr Chan had to admit, that in relation to the alternative case based on assumption of responsibility, objective reliance by the appellants was not pleaded in their Re-Re-Amended Statement of Claim.  In any event, on the evidence as accepted by the trial judge, it could not be said that Mr Chow knew or ought to have known that the appellants relied on him. The appellants’ submissions on this ground must also fail.

Mr Warren Chan SC and Mr M C Chiu (instructed by Messrs George Tung, Jimmy Ng & Valent Tse) for the appellants

Mr Simon Westbrook SC and Mr Charles Manzoni (instructed by Messrs Herbert Smith) for the respondents