DAO HENG BANK LTD. v. HO YIN YUK AND ANOTHER

HCMP 644/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 644 OF 2000

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J U D G M E N T

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The action

1. The facts in this case are rather unusual. The Plaintiff bank sues the Defendants, respectively the mortgagor of two properties and the borrower under general banking facilities and an instalment loan granted by the Plaintiff, for repayment of the indebtedness and possession of the mortgaged properties upon default of repayment. The 2nd Defendant did not defend this action and a default judgment has been obtained against him; thus far the judgment remains wholly unsatisfied (with the exception of a sum of HK$619,407.33 received by the Plaintiff in late September 2002). The 1st Defendant not only defends the Plaintiff's claim but also joins in a solicitor as a Third Party.

Madam Ho's evidence

2. The 1st Defendant ("Madam Ho") was born in 1925 in the Mainland. She is now 77 years old. She has never received any education and is illiterate. She came to live in Hong Kong in around 1936. She got married in 1955 but her husband passed away about 28 years ago leaving her with a sizeable estate. Madam Ho has never worked since her husband passed away. She remains a widow and has been living alone for a long time. She has an adopted daughter and there are two children from her late husband's previous marriage. All of them have their own family and over the years Madam Ho maintains little contact with them.

3. In 1994, Madam Ho came to know a beauty therapist Ms Ho Chor Man Bevan ("Bevan"). Her husband is the 2nd Defendant ("Lam"). She became friends with the couple, and they often had meals and played mahjong in her flat i.e. Flat C, 8th Floor, Yuk Sau Mansion, 20 Yuk Sau Street, Hong Kong, one of the subject properties. Soon they became very close friends, and indeed shortly after knowing her, they started calling her "mama", and occasionally they called her "godmother" ("契媽"). She came to trust the couple very much.

4. Towards the end of 1994, Bevan (together with a colleague) suggested to Madam Ho to buy some skin care products to keep in the beauty shop they worked in, so Bevan could use them for her facial treatments there. The result of the treatments was apparently good and on each visit she was persuaded to buy something. She wrote cheques from her current account with a bank and gave them to Bevan to make payment on her behalf. As Madam Ho only knew how to write her name and did not know numbers, Bevan asked her to just write her name on the blank cheques for her to complete later. She did not know exactly how many cheques had been written in that way nor what goods she had bought for her. On many occasions Bevan told her that the goods had been ordered but would be delivered later. In around that period of time, Bevan told Madam Ho that she and her colleague had asked a foreign lady who had previously done a facial massage demonstration for Madam Ho at an exhibition sometime in late 1995 to manufacture skin care products specially for her and the products would even carry her name. Thereafter from time to time, Bevan asked Madam Ho just to sign blank cheques for her to make payment on her behalf, leaving the name of the payee and other details to Bevan to fill in.

5. According to Madam Ho, she trusted Bevan and believed her story that monies were owing to the foreign lady. Bevan told her that she was being pursued by the foreign lady for payment of her products. Madam Ho did not know how much had been paid by her in this manner and who the payees were. On a few occasions, when Madam Ho asked Bevan why the cosmetic products had not yet arrived, Bevan simply asked her to wait a little bit longer and use other products instead in the meantime. Madam Ho said she had in fact never received any cosmetic products from the foreign lady but nonetheless she believed Bevan.

6. According to Madam Ho, in late July 1997, she discovered that she did not have much cash left in her bank accounts. She told Bevan not to buy any more goods for her. Bevan assured her that there would be no problem; however, later on, Bevan told her that monies totalling HK$4,000,000.00 were owing to the foreign lady for products that Bevan had apparently bought or ordered for her. Bevan told her that she needed to pay quickly as the products were arriving soon and she was being hard pressed by the foreign lady to settle the outstanding prices.

7. According to Madam Ho, as she did not have much cash left, Bevan suggested to her to mortgage her two properties, i.e. her residence in Yuk Sau Mansion and another property known as Flat B, 3rd Floor, Mint Garden, No. 3 Cheong Ming Street, Hong Kong in order to raise a loan. Bevan told her that her husband, Lam, would get a mortgage from a bank and raise the necessary money to pay for the outstanding sums due to the foreign lady. Bevan also told her that she and Lam would deal with the mortgage repayments.

8. According to Madam Ho, on one afternoon in August 1997, the couple drove her to a bank. Inside the bank, Lam introduced her to a manager of the bank. Although she could not remember clearly in the witness box, she said most probably Lam introduced her to the bank manager as his mama (rather than godmother). He told the bank manager that she was mortgaging her two properties to the bank. After a short discussion in which she took no real part, they went off to a solicitors firm also in Central.

9. According to Madam Ho, only she, Lam and Bevan went to the solicitors' office, and no representative from the bank went with them. When the three of them arrived, staff from the solicitors firm greeted them. Again, although Madam Ho could not be sure in the box, she said probably she was introduced to the staff of the solicitors firm as Lam's mama (rather than godmother). Inside the solicitors firm, she was asked to and did execute certain documents. She said she received no detailed explanation of the nature and contents of the documents. She was simply asked to sign. She was informed by a female staff of the firm that her two properties were lent to Lam to mortgage to the Plaintiff bank for a loan to Lam. She did not know how exactly this was to be done. She was asked to sign her name a few times on some documents.

10. According to Madam Ho, after signing the documents, Lam drove her back to her residence. She was not asked to pay any legal fees or expenses to the solicitors or to the bank, nor did she receive a cent of the bank loan secured by the mortgaging of her properties to the bank. She said later on Lam asked her to deposit HK$55,000.00 odd each month into his bank account. Lam told her to remember to deposit money into the bank account and if not, the bank might repossess her properties. According to Madam Ho, between October 1997 and April 1999, she paid a total of HK$880,000.00 into the bank account.

11. According to Madam Ho, she was never a customer of the bank, nor did she ever have any business or commercial transactions or relationship with the bank prior to the execution of the documents.

12. To cut a long story short, Madam Ho eventually discovered in mid 1998 that Lam and Bevan had been deceiving her of her properties and monies. Apart from the two properties in question, another property of Madam Ho was "sold" by Madam Ho to a BVI company controlled by Lam in late 1997 through the same firm of solicitors. Moreover it was discovered that in fact on the very day when Madam Ho attended the solicitors firm with Lam and Bevan to execute the mortgage documents, the solicitors had prepared for her to execute, and she did execute, a will naming Lam as her sole executor and devising in favour of Lam the two mortgaged properties in question. According to Madam Ho, no one - including Lam, Bevan, those in the solicitors firm and those from the bank - had told her about the will, and she had no intention whatsoever to make the will in favour of Lam.

13. In 1999, Madam Ho commenced two High Court actions against Lam alone and the couple respectively regarding her monies that had been deceived by Lam and Bevan and some related property transactions. On the other hand, Lam commenced another two High Court actions against Ho in respect of certain alleged transactions between them. All four actions were heard together in November 2001 and on 19 November 2001, Yeung J (as he then was) gave judgment in all four actions in favour of Madam Ho against Lam and/or Bevan. According to the learned Judge, Lam and Bevan had wrongfully obtained very substantial amounts of money from Madam Ho. Judgment for two sums of over HK$10,000,000.00 and over HK$5,000,000.00 respectively was entered against the couple.

14. In the meantime, by 1999 Madam Ho could no longer afford to make monthly mortgage instalment repayment to the bank, and the present action was commenced by the bank in 2000, claiming the usual relief under a mortgage action.

15. There is no dispute that the bank involved in the above narrative is the Plaintiff, and the solicitors firm involved is a sole proprietorship of the Third Party ("Tam"). It is common ground that the visit to the bank premises (which was the Plaintiff's Eastern Branch) as well as the visit to the solicitors' office took place on 26 August 1997 and on that day, two legal charges post-dated to 27 August 1997 were executed by Madam Ho as the mortgagor and by Lam as the requesting party/borrower. Moreover a will dated 26 August 1997 was executed by Madam Ho in the solicitors' office during that meeting.

16. It is Madam Ho's case that the two mortgages are not enforceable against her because of undue influence. It is her case that at all material times she was under the undue influence of Bevan and Lam, and therefore the two charges were liable to be set aside by her as against Lam. Further and more importantly, the bank was on the facts of the case "put on inquiry", but it failed to set up a private meeting with her and advise her of the risk and extent of liability under the charges, and advise her to seek independent legal advice. As a result, the bank does not take the legal charges free from her equity to set aside the same for undue influence, but rather is subject to her equity to set aside the legal charges. Madam Ho therefore counterclaims a declaration that she is entitled to avoid the legal charges and that the same are not enforceable against her.

17. Not only that, Madam Ho also joins Tam as a Third Party. She claims that Tam's firm represented her (as well as the bank and Lam) in the two mortgages. Contractual (and/or tortuous) duty of care was owed by Tam's firm to her, and she claims that Tam breached his duty of care owed to her in failing to explain to her the risk and extent of liability under the legal charges and in failing to advise her to seek independent legal advice. She also claims that Tam failed to set up a private meeting with her in the absence of Lam for the purpose of explaining to her, her risk and extent of liability under the legal charges, and advising her to seek independent legal advice, or attending to any queries which she might want to raise. Madam Ho also alleges that Tam's firm prepared the will for her execution without her instructions and procured her execution of the (unauthorised) will. Madam Ho therefore claims against Tam an indemnity against any judgment that may be entered in favour of the Plaintiff against her as well as other consequential relief.

The bank's case

18. There is no dispute that at the material times, only the Eastern Branch of the Plaintiff bank was in direct contact with Madam Ho and Lam. Nor is it in dispute that only the branch manager Mr Mak Kam Ho ("Mak") and an account officer of the branch, Ms Pauline Lai ("Lai"), were involved in dealing with the customers. Yet neither Mak nor Lai was called to give evidence by the bank. Instead a bank officer from the head office, Ms Connie Yung ("Yung") who had no personal knowledge about the relevant events at the material times was called to give evidence on behalf of the bank at trial. According to her, Mak had left the bank but she was not sure if Lai still worked for the bank. In any event, there is no evidence regarding whether the bank has lost contact with either of them or why they could not be called to give evidence. The bank has not sought to disclose or rely on any witness statements or other statements that it may have taken from the two of them after the dispute in the present case arose. All that I have from the side of the bank is the evidence of this bank officer, who was only able to give evidence according to the records and documents kept by the bank and the documents disclosed in the present proceedings. Needless to say, her evidence is of very limited use in so far as one is seeking to find out what actually happened regarding the bank and the various individuals involved in the present case.

19. According to the bank records and internal documents, as well as what Yung was able to tell this Court during trial, it all started in July 1997 when Lam was introduced by Tam's solicitors firm as a potential customer for banking facilities. According to a facility proposal form dated 11 July 1997, Lam as the intending borrower applied to the Eastern Branch for overdraft facilities up to HK$4,000,000.00. Lam, a sales director of an estate agency, apparently represented to the bank that he applied for the facilities for "personal investment purpose". As security for the proposed facilities, the two properties in question were offered for mortgage. Apparently the two properties' then market values well exceeded the amount of facilities asked for and that was considered as a plus factor by the bank in evaluating the application. According to the internal documents generated during the approval process, Tam's firm was not at that time on the bank's list of approved solicitors. More importantly, according to the information obtained by the bank, the two properties were then under "self-occupation"; and perhaps most importantly, Lai stated in an internal document that the intending mortgagor i.e. Madam Ho who was known to be aged 72 at the time, was the mother of Lam. According to Lai's report to her superior:

"Madam Ho Yin Yuk (aged 72), mother of Mr Lam, also the mortgagor of the two properties. She lives with his son in Mint Garden for few years. Another property in Yuk Sau Mansion is occupied by her daughter.

In addition, Madam Ho is one of the directors of Sing On Restaurant Ltd, which located (sic) in Temple Street (owned property). Part of the O/D is used for decoration and business development."

20. Pausing here, the facts set out in the above extract are patently wrong. Madam Ho is not the mother of Lam; she never lived together with Lam in Mint Garden or for that matter in any other property for any period of time. Mint Garden was at all material times let by Madam Ho to a tenant. As for the Yuk Sau Mansion property, at the material times it was not occupied by Madam Ho's daughter but by Madam Ho herself.

21. According to the undisputed evidence, Madam Ho was indeed one of the directors of Sing On Restaurant Ltd at the material time which owned a property in Temple Street. The property was let to a tenant and the company did no business apart from the letting. There was no decoration requirement and there was no business development plan.

22. According to another internal document generated by the credit division of the bank, again the two properties were said to be owned by the borrower (Lam)'s "mother, aged 72". It then went on to comment on the "weaknesses" of the application as follows:

"- OD 4M is too much for a personal account.

- Vague loan purpose, personal inv't, without further details provided. As regards to another usage, decoration of his mother's restaurant, amt is obviously too much and IL[Instalment Loan] is more suitable. Afraid used for properties speculation, especially given subject's occupation."

23. According to Yung's reading of this document, the bank at that time did not really believe the reasons given by Lam to the bank for applying for the overdraft facilities; in particular, the bank thought that quite obviously, the supposed decoration of the restaurant premises could not have required such a substantial amount of facilities from the bank. It must have been suspecting that given his occupation Lam applied for the facilities to finance his property speculation activities.

24. Probably because of the reservation in this last document, when the application for facilities was eventually approved in August 1997, the bank only approved overdraft facilities of up to HK$2,500,000.00 instead of HK$4,000,000.00, but it also approved an instalment loan of HK$1,500,000.00 repayable by 60 monthly instalments, then calculated at HK$30,000.00 odd per month.

25. Yung accepted in evidence that according to all available documents, in particular those document provided to the bank, there was nothing to indicate that prior to the meeting at the Eastern Branch office premises on 26 August 1997, there was any direct contact between the bank and Madam Ho. Rather all contacts were made between the bank and Lam for himself and purportedly on behalf of Madam Ho.

26. Yung also agreed from reading the bank's internal documents that the facilities and instalment loan were only approved because the bank considered that the lending ratio was low in view of the market values of the two properties and the apparently satisfactory repayment ability of Lam, the borrower. She accepted that in those circumstances, even though the bank might well have suspicion about the real purpose of the application for facilities, the bank apparently did not take any steps to verify the same. Indeed there is no record of the bank having ever taken any steps to verify the information apparently supplied by Lam to the bank, which appeared in the internal records.

27. In those circumstances, apparently that was why the bank did not discover the various inaccuracies in the information supplied to it by Lam, as highlighted by me above.

28. During cross-examination of Madam Ho by counsel for the bank, it was suggested to Madam Ho that in the only meeting between Madam Ho and Mak and Lai in the Eastern Office on 26 August 1997, Lam introduced Madam Ho to the bank officers or addressed her as his godmother. As I mentioned above, although Madam Ho could not recollect clearly, she said in evidence that quite likely Lam called her mama in front of the bank people. In any event, there is nothing in the contemporaneous internal documents of the bank to suggest that the bank had any idea that Madam Ho was the "godmother" (instead of the mother) of Lam at the material times. This is further strengthened by the internal documents of the bank generated at a subsequent stage in July 1998 when Lam applied to the bank to vary the terms of the instalment loan. According to these subsequent documents, Madam Ho was still described as the mother of Lam by Lai, and the variation application was recommended by Mak as the branch manager involved. There was no mention whatsoever that Madam Ho was just the "godmother" of Lam in the documents.

29. Apart from Yung who confirmed as part of her evidence that the total outstanding indebtedness under the facilities and instalment loan was by the time of trial in a total sum of almost HK$5,000,000.00, the bank called no other evidence. (As mentioned above, around HK$600,000.00 was received by the bank from the sale of a property belonging to Lam in late September 2002.)

Pong's evidence

30. It is not in dispute that two persons from the solicitors firm were directly involved in the transactions, namely Tam and one of his conveyancing clerks, a Ms Carolina Pong ("Pong"). Pong is and was a very experienced conveyancing clerk in the employ of Tam's firm. According to her, she had known Lam for some time prior to 1997. He referred approximately 4 to 5 conveyancing transactions per year to her or her firm. She was the point of contact for Lam. In around July 1997, Lam called her and asked her to recommend a bank to Madam Ho because Madam Ho intended to borrow HK$4,000,000.00 by way of a mortgage over two properties owned by her. She recommended the Eastern Branch of the Plaintiff bank to Lam; she also called Mak over the telephone introducing the potential business to Mak and asking him to carry out valuation on the properties.

31. Then in early August 1997, Lam called her and asked her to contact the bank to inquire why it had not yet approved Madam Ho's loan application. Pong said she therefore called Mak and she was told by Mak that the bank required a guarantor for the requested loan to Madam Ho because she was an elderly woman with no income proof. She said she was told by Mak that Lam was going to act as Madam Ho's guarantor; Mak also briefly mentioned to her that Madam Ho had said that she needed a will. Pong said in evidence that prior to this telephone conversation, she was under the impression that Madam Ho could be a client of Lam. However, from this telephone conversation, she got the impression that Lam and Madam Ho were probably friends or close friends as Lam was willing to stand as guarantor for Madam Ho's intending loan.

32. Pong said on 21 August 1997, her firm received two letters of instructions from the bank, instructing the solicitors firm to prepare legal charges in favour of the bank in respect of the two properties. In the letters of instructions, Madam Ho was described as the "mortgagor/chargor", and Lam the "principal party". Instead of alerting Pong to the fact that under the intended transactions, Lam was the borrower of money from the bank, or more correctly the customer under the general banking facilities to be offered by the bank upon the security of the two legal charges to be prepared by the solicitors firm, Pong said in evidence that the letters of instructions actually confirmed her belief based on what Lam had told her, namely, that Madam Ho was borrowing the loan from the bank whereas Lam was acting as her guarantor. That, according to Pong, was her understanding of the term "principal party" in the letters of instructions.

33. Pong further explained in evidence that since the intended transactions were to involve three parties, she chose a standard form for three parties that was used by the bank to prepare the two legal charges in question. She thought that this was the appropriate form to use because three parties were involved. She did not realise, as is plainly the case, that the form of legal charge used by her is only suitable for use by a mortgagor mortgaging his or her property in favour of the bank to secure a bank loan or general banking facilities granted by the bank, not to the mortgagor, but to a third person called "the requesting party" in the standard form legal charge.

34. Pong prepared the two legal charges for her principal Tam's approval. The documents were approved. Therefore she made an appointment for execution of the legal charges with Lam. She accepted that throughout it was Lam who contacted her and gave instructions purportedly on behalf of Madam Ho to her and her firm, and she had never spoken directly with or met Madam Ho personally prior to a meeting on 26 August 1997. She said she did not know the actual relationship between Madam Ho and Lam and did not learn about their alleged relationship from the bank either.

35. Pong also said in evidence that in about mid August 1997, Lam telephoned her and told her that Madam Ho wanted to make a will. Pong said she was not surprised by this as Mak, the bank manager, had previously mentioned rather casually to her about Madam Ho's intention to make a will. Lam told her over the telephone that Madam Ho wanted to name him as the sole executor of her will and leave to him her two properties in question. She therefore prepared the will according to the standard form used by her firm, the will was approved by her principal and it was ready for execution together with the two legal charges on 26 August 1997 as per the instructions of Lam given to her over the telephone purportedly on behalf of Madam Ho.

36. According to Pong, Lam together with his wife and an elderly lady who was introduced to her and her principal simply as Madam Ho, attended her firm's office on 26 August 1997 to execute the documents. She said the documents were chiefly explained by her principal Tam to Madam Ho and Lam and after explanation, and after Madam Ho's indication of agreement to the contents of the documents, Madam Ho and Lam executed the legal charges and Madam Ho also executed the will.

37. Pursuant to the execution of the legal charges, drawdown letters prepared by her were sent to the bank and the instalment loan of HK$1,500,000.00 was made available to Lam through the solicitors firm. According to Pong who said she believed throughout that it was Madam Ho who was borrowing the bank loan, the reason why the instalment loan of HK$1,500,000.00 was released by her firm to Lam instead was that, that was the specific instructions of Madam Ho at the meeting on 26 August 1997.

38. Pong was cross-examined by Mr Chan appearing for Madam Ho on a letter written subsequently by the solicitors firm to the police after Madam Ho had discovered that she had been deceived and had reported the matter to the police, explaining the two legal charges as well as the will. It was pointed out to Pong during cross-examination that according to the letter which was admittedly written to a substantial extent by her principal based on information supplied by her, Madam Ho had personally telephoned her to give instructions to prepare the will. Pong accepted that this was strictly speaking a mistake because the instructions were actually given by Lam purportedly on behalf of Madam Ho. She explained that when the letter to the police was written, she did not realise that she had to be very exact about who did what. Whilst on this letter to the police, it is noteworthy that the letter also sought to explain to the police that the instructions from Lam on behalf of Madam Ho were to apply for a mortgage loan to Madam Ho and that was indeed the effect of the two legal charges. This I must say is very surprising given that this letter to the police, although based very much on Pong's information, was written by a qualified solicitor, Tam. As I said, a casual reading of the two legal charges in question would reveal that this was not the case. In fact, the two drawdown letters prepared by Pong quite clearly stated that Lam was the "borrower" whereas Madam Ho was only the "mortgagor".

39. Pong accepted in evidence that in her opinion, her firm acted for the bank as well as Madam Ho and Lam in the legal charges. Based on her story, her firm acted for Madam Ho in relation to the will.

40. Pong insisted during cross-examination that she and Tam had interpreted and explained the will to Madam Ho before she signed it. She and Tam signed the will as witnesses.

41. Pong was also cross-examined in relation to a third property (Karen Court), which on the face of the conveyancing documents prepared by Pong's firm was a sale of the property by Madam Ho to a BVI company owned and controlled by Lam for HK$4,000,000.00. Pong admitted that prior to completion, she had been told by Lam who again was responsible for giving purported instructions on behalf of Madam Ho that in fact this was going to be a gift and no money was to change hands. Pong insisted that when the assignment was executed by Madam Ho, Madam Ho told her that she was making a gift of the property in favour of the infant son of Lam. Pong said she suspected nothing wrong because she was under the impression that Madam Ho and Lam had a very close relationship as evidenced by Lam's willingness to act as Madam Ho's guarantor under the two legal charges (as per her understanding of the situation as described above). Pong and her firm also acted for the BVI company on the instructions of Lam in the resale of the Karen Court property in 1999.

Tam's evidence

42. Tam, the Third Party, gave evidence at trial. Tam was admitted as a solicitor in Hong Kong in 1981 and qualified as a solicitor in England and Wales in 1985. He started his own firm of which he was and is the sole proprietor in 1985. According to him, Lam had referred business to his firm but prior to the mortgage transactions in question, he had never met Lam. According to Tam, the mortgage transactions as well as the will were basically handled by Pong, one of his most experienced conveyancing clerks. But Tam personally attended to the approval of the draft documents, perusal of the title documents and execution of the documents.

43. Tam maintained that in the mortgage transactions, he only acted for the bank from which he received instructions under the instruction letters dated 20 August 1997 in respect of the two properties in question. He accepted that at the material time, there was nothing to stop a solicitor from acting for both the mortgagor and the mortgagee at the same time in a mortgage transaction, but he maintained that it was his practice throughout that in a situation where he received instructions from the bank to prepare the mortgage documents, he only acted for the bank. In fact, he said that was his general practice even if the mortgage transaction was ancillary to a sale and purchase transaction in which he acted for the purchaser. He said in those circumstances, he would expressly tell his purchaser client that in relation to the mortgage transaction, he did not act for him but for the bank. Although Tam portrayed that as his invariable practice, he accepted during cross-examination that his staff might not be aware of that practice and might treat the mortgagors as the firm's clients as well. He had to make this concession because as mentioned above, Pong said in evidence that in relation to the legal charges in question, according to her understanding, besides the bank, her firm also acted for Madam Ho and Lam.

44. In this connection, Tam also had to explain away his firm's internal files relating to the subject mortgage transactions which named Madam Ho, instead of anyone else including the bank, as the client of his firm. He said this was done purely for internal administrative purpose as his staff might confuse the documents or mix up the files if he named the bank as the client in his firm's files. Presumably this was because the same bank might have many different mortgagor customers and it was easier for the solicitor to name the individual mortgagors instead of the bank as the so-called clients in the files. Tam also explained that since invariably it would be the customer who would be paying for the mortgage document as required by the bank, the bill of his firm would be sent and addressed to the mortgagor for payment. He accepted that in that case, which was what happened in the present case, nothing on the face of the bill would tell anyone including the mortgagor that he or she was not the client of the firm, but was only being asked to foot the solicitors' bill of the bank which alone was the firm's client.

45. In this regard, Tam maintained in evidence that when he met Madam Ho and Lam on 26 August 1997 for the purpose of executing the charges, one of the first things he told the two was that, he or his firm only acted for the bank. He said that he saw nothing wrong with this and he did not see any need to ask Madam Ho or for that matter Lam to consider obtaining legal representation in the transaction.

46. Tam also explained that although the instructions from the bank were only received by his firm on 21 August 1997, his firm (through Pong) had already conducted a land search in respect of the two properties in July. He said this did not mean his firm was at that time acting for Madam Ho. He maintained that this was simply an inexpensive preliminary step taken by his firm in anticipation of obtaining instructions from the bank to prepare the legal charges.

47. During cross-examination, Tam produced his firm's client reference book as well as the relevant client's account ledgers. All the entries showed that Madam Ho was regarded as the client of the firm, although Tam explained that that was merely for internal administrative purpose mirroring his practice in relation to the firm's files as explained above.

48. In relation to the instructions from the bank which clearly stated that under the intending mortgages, Madam Ho was the intending "mortgagor" and Lam the intending "principal party", Tam said the term "principal party" could have two different meanings. First, it could mean a borrower or requesting party both having the same meaning as the recipient of the funds being borrowed; alternatively, according to Tam, a "principal party" could mean the guarantor who would be jointly and severally liable together with the borrower/mortgagor to make repayment to the bank/mortgagee. Tam said, in relation to this second meaning of the term as understood by him, that this meaning was not obtained by him from any law books but somehow it was his understanding from his practice or dealings with clients. Moreover, and in this regard, his evidence was the same as that given by Pong, his understanding of the bank's instructions in the present case was that Lam acted as the "principal party" bearing the second meaning of the term, i.e. as the guarantor only, whereas Madam Ho was the borrower/mortgagor.

49. Pausing here, it must be said that the alternative/second meaning ascribed by Tam to the term "principal party" is patently erroneous and indeed most surprising. Tam had a hard time in the box when he was asked to explain the two drawdown letters issued by his firm after the execution of the charges in which Lam was described as the "borrower". For if Tam (and for that matter, Pong) really understood the bank's instructions as meaning that Lam as the "principal party" was only the guarantor but not the borrower, there would be absolutely no reason for Tam's firm to put down the name of Lam as the borrower in the drawdown letters; instead Madam Ho who was described as the mortgagor in the drawdown letters should also be described as the borrower. Tam gave the surprising answer that since the drawdown letters were standard form letters used by the bank and the standard form letter did not contain a blank item of "guarantor" for his firm to fill in, he simply put down the name of Lam against the item of "borrower" in the standard form. He said there was nowhere else in the standard form letter to indicate to the bank who the "principal party" meaning the guarantor (as per his understanding) was. Again, pausing here, needless to say all this, coming as it did from the mouth of a supposedly experienced conveyancing solicitor, is most surprising.

50. In relation to the two legal charges, Tam accepted, after being invited to read carefully the documents in cross-examination, that in fact they stated quite clearly that Madam Ho was just the mortgagor providing her two properties as security for the banking facilities and instalment loan offered by the bank to Lam. Madam Ho was not herself the borrower in the transaction in question. Tam could not exactly recall whether at the time of execution of the legal charges, i.e. 26 August 1997, he was already aware of this "discrepancy" between the legal charges that his firm had prepared for the parties to execute and his own understanding of the "true" instructions of the bank. But he said that even if he had noticed the discrepancy, he would have done nothing to amend the legal charges because they were based on the bank's standard form legal charges for a three-party situation and he could not amend the standard form.

51. Anyhow, Tam said in evidence that prior to the execution of the legal charges, he had explained to Madam Ho and Lam the meaning and legal effect of the legal charges in accordance with his subjective belief of the instructions of the bank. He also said he told both of them that his firm acted for the bank. He thought that that was sufficient to alert the two lay persons that his firm therefore did not at the same time, even though allowed by law, act for them as well.

52. Pausing here, it can be easily seen that according to Tam's subjective belief of what the true instructions of the bank were, i.e. that Madam Ho was borrowing from the bank using her own properties as security and Lam was joining in to provide additional security by way of a personal guarantee, there was really nothing to worry for Madam Ho. From the angle of Tam, she was mortgaging her own properties for banking facilities and a bank loan to herself.

53. During cross-examination, Tam was asked what his action would have been if he had understood the true position differently, i.e. that Madam Ho was offering her properties for mortgage as security for banking facilities in favour of Lam. Tam answered essentially that as Madam Ho showed no reluctance and asked no question relating to the execution of the charges, there would have been nothing unusual to alert him to take any further steps in the matter. Even if he were acting for Madam Ho in the transaction, he saw no need to investigate the relationship between Madam Ho and Lam in those circumstances. Tam also said that Madam Ho was introduced to her as the godmother of Lam.

54. As to how Tam got this idea that under the bank's instructions, Lam only acted as a guarantor but not a borrower, thereby adopting the second meaning he ascribed to the term "principal party" used in the instruction letters from the bank, Tam was quite unable to give any explanation in Court, except that somehow he got the idea that Madam Ho did not have a source of income sufficient to enable her to make instalment repayments and the bank required Lam to act as her guarantor. Tam could not recall the source of his information or belief.

55. As regards the making of the will, Tam maintained that he had explained the contents of the will to Madam Ho prior to the execution. He said he was aware that it was Lam who gave instructions to his firm purportedly on behalf of Madam Ho, but could not recall when he acquired the knowledge. He saw no need to take any special steps to make sure that Madam Ho intended to make the will. He realised that the revocation clause in the will, revoking all previous wills if any of Madam Ho, could result in a partial intestacy situation as the will in question only dealt with two properties, which situation might not have been intended by Madam Ho assuming that she had previously made wills dealing with the whole of her estate or other properties of hers. But Tam said, apart from explaining to Madam Ho the revocation clause in the will, he saw no need to ask Madam Ho whether she had made any previous wills dealing with other properties of hers. He said as Madam Ho did not raise the point, he saw no need to raise it either. Tam was not sure whether after the execution of the will, his firm gave the original will to Madam Ho or Lam, or gave Madam Ho any copy of the will.

56. As regards the subsequent "sale" of the Karen Court property by Madam Ho to the BVI company controlled by Lam, Tam said that prior to execution of the assignment, Madam Ho had told him and Pong that it represented a gift of the property to Lam's infant son and therefore no sale proceeds were to be received by her. Tam said that he felt there was nothing wrong when in 1999, Lam on behalf of the BVI company instructed him to sell the property to an outsider, notwithstanding his knowledge that the property was supposed to be a gift by Madam Ho to Lam's infant son. He considered that Lam could deal with the property as he wished.

57. Finally, Tam was cross-examined on his firm's representation of Lam and his wife in the other litigations between them and Madam Ho described above. He said he could see no problem in his firm's representing Lam and his wife in those litigations at the time.

Undue influence

58. Much has been written in relation to the law on undue influence. There are many authorities, both local and United Kingdom, concerning the applicable principles, particularly in relation to the vexed question of when a third party (usually a bank) is affected by the undue influence exerted by a wrongdoer on a victim in relation to a transaction in which the third party took part. In the course of this trial, I heard much argument on the applicable law. Many authorities were cited to me. Of particular relevance and importance, in the context of the present case, are the two House of Lords decisions in Barclays Bank plc v. O'Brien [1994] 1 AC 180 and Royal Bank of Scotland plc v. Etridge (No. 2) [2001] 3 WLR 1021, and three local cases, namely, Bank of China (Hong Kong) Ltd v. Wong King Sing [2002] 1 HKLRD 358; Bank of China (Hong Kong) Ltd v. Wong Yuk Ping Caroline, HCMP 2017 of 1995, Poon DJ (8 May 2002); and Re Lai Yin Shan, CACV 2024 of 2001 (25 September 2002).

59. As a very general description of the development of the law recently, in O'Brien, the House of Lords set out the circumstances under which a plea of undue influence may be successfully established by a victim against a wrongdoer; the circumstances under which a third party (like a bank) would be affected by the undue influence so established in relation to the enforcement of a transaction in which it took part; and lastly what steps such a third party (bank) should take in order to be able to enforce the transaction nonetheless. O'Brien dealt directly with the vexed tri-parte situation - the husband as the wrongdoer (borrower), the wife as the victim (surety/mortgagor) and the bank as the innocent third party. But it referred to other relationships, such as cohabitees, and parent and child (with the parent as the victim: Avon Finance Co. Ltd v. Bridger [1985] 2 All ER 281).

60. In Etridge, the House of Lords re-visited the whole area of law, including the three matters I referred to above that were dealt with in O'Brien. Of much relevance in our present context is the House of Lords' latest pronouncement on the circumstances under which a third party (bank) may be affected by the undue influence of the wrongdoer on the victim, when the relationship between the latter two was not one of husband and wife, cohabitees, or parent and child.

61. Wong King Sing, a decision by Mr Recorder Ma SC (as he then was), was one of the first reported local cases decided after Etridge, in which the learned Recorder analysed the applicable principles that could be extracted from the two House of Lords cases, and applied the same to the case before him, namely, a case of two brothers, one of whom was employed by another but was "no mere employee".

62. In Wong Yuk Ping Caroline, a husband and wife case, Deputy High Court Judge Poon examined the applicable principles in this area again in paragraphs 50 to 64 of his judgment. In his analysis of the law, he parted company with Mr Recorder Ma on one aspect which I will turn to in due course.

63. Re Lai Yin Shan appears to be the first decided case by the local Court of Appeal after Etridge in relation to this area of the law. The Court of Appeal applied Etridge on the circumstances under which a third party (bank) might be affected by the undue influence exercised by a husband on his wife.

64. Instead of my extracting lengthy passages from these important cases, which would entail lengthening this judgment considerably, I would simply try to set out the general principles of law that may be distilled from these authorities, and point out the areas of controversy requiring future resolution, that are of relevance to the facts in the present case.

Undue influence vs misrepresentation

65. Undue influence taints a transaction because it affects (a) the victim's free will to enter into the transaction and/or (b) his or her informed consent to the transaction. Element (a) concerns the victim's freedom of choice or freedom of contract. Element (b) relates to his or her true knowledge and understanding about the transaction. The two very often go hand in hand, but need not necessarily do so. For instance, a child's free will may have been so overwhelmed by the authority and influence of his father that he entered into a transaction, the true nature and consequences of which he could (and did) perfectly understand, to his utter disadvantage. His knowledge and understanding notwithstanding, the transaction may be attacked for the lack of free will. See Etridge at page 1032D-E (paragraph 20).

66. On the other hand, a victim may have entered into a transaction voluntarily and willingly. But he or she did so because of lies or wrong information supplied to him or her by the wrongdoer relating to, say, the nature of the transaction, the consequences of the transaction, or the reasons for needing to enter into the transaction, which lies or information he or she believed to be true. Normally, this would only be a case of misrepresentation. However, if there was a relationship of trust and confidence between the victim and the wrongdoer so that this relationship adversely affected the judgement of the victim in relation to the lies or misinformation supplied to him or her by the wrongdoer, so much so that he or she failed to realize the falsity of the lies or misinformation when, but for the trust and confidence relationship, he or she would have realized the same, then in my judgment, a case of undue influence (on top of a case of misrepresentation) would be open to the victim to plead. This is of some importance on the facts of the present case which I will come to. In other words, but for the relationship of trust and confidence, or undue influence, the lies or misinformation supplied by the wrongdoer to the victim would not have worked. This distinguishes a true case of undue influence from a case of misrepresentation simpliciter, in which latter case there is no question of the two parties to the contract having a relationship of trust and confidence reposed by one in another.

67. This explains Deputy Judge Poon's case of Wong Yuk Ping Caroline. In that case, the judge found on the evidence that the wife (victim) was not sufficiently under the influence of her husband, as was demonstrated by the fact that on a previous occasion when the husband asked her to sign similar documents, she flatly refused: paragraph 68 of the judgment; on the wife's own case, she entered into the subject transactions in question "willingly and voluntarily", having been (allegedly) misled by her husband about the transactions.

68. Both O'Brien and Etridge apply to legal wrongs other than undue influence (e.g. misrepresentation), in terms of when a third party (bank) is affected by the legal wrong. To a great extent, this lessens the importance of the distinction between undue influence and misrepresentation under the present discussion. However, as will become apparent later, the distinction is of relevance in the present case.

Proof of undue influence

69. How does one establish a case of undue influence against the wrongdoer? I am here dealing with the situation between the wrongdoer and the victim inter se. The use of categories and labels (that was the approach of O'Brien) was criticized in Etridge. However, for the sake of convenience, I would stick to the labels and categories. There are three situations:-

(1) Proof of actual undue influence (class 1). This is no different from any ordinary case in which he who asserts a particular defence must prove it. So if a victim can establish actual undue influence relating to the subject transaction in question, that would suffice. He or she need not establish a general relationship of his or her reposing trust and confidence in the wrongdoer. It could be a one-off incident. Nor, on the other hand, would the establishing of such a general relationship necessarily suffice, in the absence of direct evidence on the exercise of undue influence by the wrongdoer in relation to the particular transaction in question. The establishing of a general relationship of trust and confidence helps only to the extent that it would enable the court to draw the inference, if justified by the totality of evidence before the court, that in relation to the particular transaction in question, undue influence had been exercised (see (3) below).

(2) Presumed undue influence by law (i.e. class 2(A)). If the relationship between the two falls within one specifically recognized by law, for instance, solicitor and client, or parent (as the wrongdoer) and child (as the victim), the law would presume that in relation to the particular transaction in question, the one standing in a dominant position has exerted undue influence on the one in a servient position. In other words, the law presumes that there was undue influence present in relation to the transaction. It is up to the alleged wrongdoer to rebut the presumption by way of evidence.

(3) A relationship of trust and confidence (i.e. class 2(B)). According to O'Brien, if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence (page 189G-H). However, in Etridge, a further requirement was added, namely, the transaction in question has to be manifestly disadvantageous to the complainant in the sense that it cannot be reasonably accounted for on the ground of friendship, relationship, charity or other ordinary motives on which ordinary men act. In other words, the transaction is not readily explicable by the relationship of the parties: Etridge at pages 1032F-1034F (paragraphs 21-31). Mr Recorder Ma agreed with the adoption of this additional requirement in Wong King Sing at page 370D-H (paragraphs 47-48). In relation to this, speaking as a trial judge, the difference of whether or not one should impose this additional requirement before the presumption can be triggered would seem to be more apparent than real. If the transaction could be explained by the relationship, then even if the O'Brien test was used, the presumption could be easily rebutted by the alleged wrongdoer by pointing to the relationship to justify the transaction. On the other hand, if the transaction could not be readily explained by the relationship between the two, then even if the more stringent Etridge test was employed, the presumption would have been raised. In other words, the difference between the two tests is really a difference in terms of the burden of proof. For my part, I see no reason not to adopt the latest test expounded in Etridge.

When is a third party (bank) affected?

70. Assuming that undue influence can be established as between the wrongdoer and the victim, under what circumstances will a third party (bank) be affected in relation to a transaction to which the third party was a party, such as a transaction like the present one? This is the area giving rise to much controversy. In my judgment, extracting the principles from the authorities, there are several categories of situations under which the third party, say a bank, would be affected:

(1) Actual knowledge or imputed knowledge of undue influence. If the bank had actual knowledge of the undue influence exercised by the wrongdoer on the victim in relation to the transaction in question, then ordinary principles of equity would dictate that the bank is affected by the wrongdoing: see Etridge at page 1036E-G (paragraph 40) and the old cases of equity referred to in that paragraph. Likewise, the bank's imputed knowledge will suffice to affect the bank in accordance with ordinary principles of equity. Therefore, knowledge of the bank's solicitors acquired from the very transaction in question would be imputed to the bank and regarded as the bank's own knowledge: see Snell's Equity (13th ed) paragraph 4-27. Similarly, knowledge of the bank's agent will do. And if the wrongdoer can be regarded as the bank's agent in the transaction, the bank will be affected: see O'Brien at page 195E-G.

(2) The O'Brien approach:

(a) If the relationship between the wrongdoer and the victim was one of husband and wife or cohabitees, and this was known to the bank at the time, the bank would be affected.

(b) In all other cases, if the relationship between the wrongdoer and the victim was one in which the victim reposed trust and confidence in the wrongdoer in relation to his financial affairs generally, and the bank was aware of it at the material time, the bank would be affected: O'Brien at page 198F.

(3) The Etridge test:

(a) The House of Lords in Etridge agreed that in the case of a husband and wife, cohabitees or parties having a sexual relationship (cohabitation is not required), if that relationship was known to the bank at the material time, the bank would be affected: Etridge at pages 1037F-1038H (paragraphs 44-49).

(b) But the House of Lords went further and extracted from these cases as well as other cases a general principle which could, on the one hand, explain the more established cases of parties having a sexual relationship, and on the other, be applicable to all other cases, namely, the test of commercial/non-commercial relationship. The test is: if the relationship between the wrongdoer and the victim was, to the knowledge of the bank, "non-commercial", the bank would be affected: Etridge at page 1048F-G (paragraph 87).

(c) An insignificant disagreement between counsel in the present case is whether in the case of a husband and wife, apart from the knowledge of the bank of such relationship, the nature of the transaction had to be apparently disadvantageous to the wife/victim. On one reading, paragraphs 66 and 67 of Mr Recorder Ma SC's judgment in Wong King Sing (at page 376G-I) would seem to support such an additional requirement. Deputy Judge Poon in paragraph 63(1) of his judgment in Wong Yuk Ping Caroline discussed this matter and expressed his preference against such an additional requirement. This apparent disagreement does not concern me and I do not wish to express any view on it, save to point out that in the latest Court of Appeal judgment in Re Lai Yin Shan, concerning the case of a husband and wife, the Court of Appeal did not refer to this additional requirement of the transaction being to the apparent disadvantage of the victim/wife in deciding whether the bank would be affected: see paragraphs 11 and 12 of the judgment.

(d) More importantly, I do not agree with Mr Lam, counsel for the Plaintiff, that there is such an additional requirement in relation to all other cases. In my judgment, according to Etridge, in all other cases, the commercial/non-commercial test is the sole test.

(4) Constructive notice:

(a) By constructive notice, I am referring to constructive notice in its traditional sense under the law of equity. In its orthodox sense, "a person is deemed to have notice (that is, he has "constructive" notice) of a prior right when he does not actually know of it but would have learned of it had he made the requisite inquiries. A purchaser will be treated as having constructive notice of all that a reasonable prudent purchaser would have discovered": Etridge at page 1036H (paragraph 41); Snell's at paragraphs 4-20 to 4-25. As was pointed out in Etridge at page 1036F-H (paragraphs 40 and 41), traditionally, in this type of situations, where the alleged victim of undue influence entered into a transaction with the so-called third party (bank), the third party would only be affected by the undue influence if it had actual knowledge (including imputed knowledge) of the undue influence.

(b) But the House of Lords in Etridge accepted that in this regard, the law had been extended by O'Brien (see page 1037B, paragraph 42), so that constructive notice on the part of the bank of undue influence was sufficient to affect the bank. This is patently clear from the judgment in O'Brien itself which repeatedly referred to the doctrine of constructive notice as providing the solution to the vexed question facing the House of Lords in that case: see pages 194G to 196E. Lord Browne-Wilkinson specifically said (at page 197A-B) that he "would not exclude exceptional cases where a creditor has knowledge of further facts which render the presence of undue influence not only possible but probable". This would also lend some support for a full-scale application of the doctrine of constructive notice (in its conventional sense) in this area of the law.

(c) Much has been said about what would put the bank on inquiry pursuant to the concept of constructive notice, what sort of inquiries the bank should conduct, and how they departed from the traditional concept of constructive notice: see Etridge at pages 1036H-1037A (paragraph 41) and pages 1037F-1038H (paragraphs 44-49).

(d) Be that as it may, in my judgment, once the concept of constructive notice has been legitimately imported to this area of law concerning a tri-parte relationship, there is nothing to stop a victim of undue influence from arguing that the bank should be fixed with constructive notice of all that a reasonably prudent bank would have discovered (i.e. in the classic sense of constructive notice), and if those discoveries (if made) would have been sufficient to inform the bank that there was present undue influence in the transaction, the bank would be affected.

(e) With the advent of the Etridge test of non-commercial relationship, the circumstances under which a victim might need to resort to constructive notice in its classic sense to defeat a claim by a bank would be limited. But as will be illustrated by the facts in the present case, indeed there is still a place for constructive notice in its classic sense as a ground for defeating a bank's claim in this area of the law. Furthermore, a victim whose relationship with the wrongdoer is classified as "commercial" may still argue, if the facts are right, that the bank had constructive notice (in its conventional sense) of the undue influence and therefore cannot enforce the transaction free from the legal wrong.

71. As to the choice between the O'Brien test and the Etridge test (i.e. (2) and (3) above), I have heard much argument by counsel. Mr Lam, appearing for the bank, argued that the Etridge test is applicable only to cases "in the future". He relied on the following passage in Lord Nicholls' judgment in Etridge at page 1049A-C (paragraph 89):

"89. By the decisions of this House in O'Brien and the Court of Appeal in Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144, English law has taken its first strides in the development some such general principle. It is a workable principle. It is also simple, coherent and eminently desirable. I venture to think this is the way the law is moving, and should continue to move. Equity, it is said, is not past the age of child-bearing. In the present context the equitable concept of being "put on inquiry" is the parent of a principle of general application, a principle which imposes no more than a modest obligation on banks and other creditors. The existence of this obligation in all non-commercial cases does not go beyond the reasonable requirements of the present times. In future, banks and other creditors should regulate their affairs accordingly." (emphasis added)

72. In both Etridge (at page 1039A paragraph 50 and page 1083F paragraph 189) and O'Brien (page 196G-H), there were also other references to certain principles being applicable to "past cases" and some other principles applicable to "future cases", relating to what a bank could and should do in order to uphold a transaction once it had been "put on inquiry". Mr Lam specifically disavowed any intention to rely on these other references in support of his argument.

73. I do not agree with Mr Lam's submission. Put in context, the "non-commercial" test propounded by Lord Nicholls in Etridge was, strictly speaking, obiter dictum. The 8 appeals comprising Etridge were all husband and wife cases. The present case is a non-husband and wife case. Moreover, a House of Lords decision is not binding on this Court. Likewise, similar observations may be made in respect of what was said in O'Brien. In Li Sau Ying v. Kincheng Banking Corporation HCA 18515/1999 (30 May 2002), Deputy High Court Judge Bunting, SC applied the commercial/non-commercial test to a case involving two good friends, and held that the bank was put on inquiry because of its knowledge of the non-commercial relationship between the victim (mortgagor) and the borrower company (owned by the wrongdoer) under a 1996 mortgage: see paragraphs 135 to 136. But there was no discussion of whether the test should be applied to a pre-Etridge transaction - the test was simply applied. In Re Lai Yin Shan, the Court of Appeal was faced with a husband and wife situation. There were some references to the non-commercial test, but there was no specific adoption of that test in the Court of Appeal's judgment.

74. Therefore, so far as this case is concerned, nothing is really binding on me. Everything boils down to a choice by me of the true test in relation to a non-husband and wife (and non-sexual) relationship, or to be more precise, the relationship between a godmother and a godson (where the godson is allegedly the wrongdoer). With respect, I agree and adopt the reasoning of Lord Nicholls in Etridge, and find what he said there to be of the highest persuasive authority in this Court. I see no reason not to follow it. If I may say so with respect, when compared with O'Brien, the judgment in Etridge in this regard represents a more detailed and mature consideration of what the law should be in this non-sexual relationship area.

Steps that an affected third party (bank) should take

75. Thus far I have discussed the circumstances under which a bank would be "affected" by the undue influence. I have used the word "affected" deliberately because the other alternative, namely, "put on inquiry", is not an attractive one, as was recognized by the House of Lords in Etridge at pages 1036H-1037A (paragraph 41). The "inquiries" that the bank should have done, in order to sustain the transaction, were steps taken by the bank which would reduce, or even eliminate, the risk of the potential victim entering into the transaction under any misapprehension or as a result of undue influence by the intending wrongdoer. The steps required were not steps designed to find out the true position (i.e. whether there had been exerted on the potential victim undue influence or not). In this regard, O'Brien referred to a number of steps which a bank should take, whereas Etridge re-visited the whole situation (with the benefit of several years of post-O'Brien experience) and gave further (and new) guidance. As this is not in issue in the present case, I will not go into details.

76. But I need say this: It seems to me that the "inquiries" mentioned in O'Brien and Etridge were only relevant and helpful to the bank if the bank was affected by the legal wrong because it was "put on inquiry" under the O'Brien or Etridge approach/test that I mentioned in paragraph 70(2) and (3) above; as a matter of principle, if the bank was affected because it had actual (including imputed) knowledge or constructive notice (in the traditional sense) of the undue influence (i.e. paragraph 70(1) or (4) above), I do not think it could take the transaction free from the legal wrong by simply taking the steps ("inquiries") mentioned in O'Brien or Etridge, unless those steps had the effect of actually eliminating the undue influence before the transaction was eventually entered into.

The present case - findings of fact

77. Having so summarized the relevant principles insofar as they are relevant to the present case, I am now in a position to deal with the facts and issues raised in the present case.

78. First, as regards evidence, I have no reason not to accept Madam Ho's evidence. She was a credible and straightforward witness in the box. Her recollection of the events was to some extent affected by her advancing age. But she had given a detailed witness statement before. Her evidence was not really subjected to much challenge from either side. I accept her evidence as has been outlined by me above.

79. As regards the evidence from the Plaintiff, Ms Yung's evidence consisted mainly of her interpretation of the available internal bank documents and documents disclosed for the purpose of this action. In so far as factual matters (as opposed to reading documents and drawing inferences) are concerned, I have no reason not to believe her evidence.

80. I will refer to the evidence of Ms Pong and Tam, and make findings of fact, where necessary, in relation to the issues raised in the main action.

A case of undue influence

81. In my judgment, this is clearly a case of undue influence. I do not accept Mr Lam's argument that this is a case of misrepresentation only. The significance of this argument is that in the pleading, only undue influence is pleaded by way of defence. No plea of misrepresentation appears in Madam Ho's pleading.

82. On the evidence, I find as a fact that Madam Ho was under the undue influence of Bevan and Lam at all material times, in the sense that she generally reposed trust and confidence in the couple in all matters, including her financial affairs, and more specifically, in relation to her "dealings" with this supposed foreign lady and the purchase of cosmetic products.

83. In relation to the particular transaction in question, the immediate reason for her mortgaging the two properties was her belief in the story that the couple told her that she owed the foreign lady a huge sum of money and she should mortgage her two properties in order to raise money to pay off the indebtedness. Moreover, she agreed that the bank loan should go to Lam because Lam said he would pay the foreign lady on her behalf. All this no doubt constituted misrepresentations made to her. But, as I explained above in relation to the applicable general principles, this does not necessarily exclude a case of undue influence. In my judgment, although in one sense, Madam Ho was fully aware of the nature of the transaction (i.e. the mortgaging of her properties and the bank's advancing money to Lam), on the evidence, I have no doubt that the abuse by the couple of the trust and confidence reposed by Madam Ho in them played a significant and material if not decisive part in tricking Madam Ho into believing their lies, and thus entering into the transaction. If necessary, on the evidence, I am prepared to go further and find as a fact that but for the general trust and confidence reposed by Madam Ho in the couple which they abused, she would not have believed the lies relating to the foreign lady and the supposed money owing to her, and she would not have therefore agreed to enter into the transaction.

84. For these reasons, and applying the general principles I outlined above, I conclude that this is not a case of misrepresentation simpliciter. The misrepresentations made by the couple became effective because of the underlying undue influence exercised by them on Madam Ho. This is a case of undue influence. I reject Mr Lam's submission.

Undue influence proved

85. As to the establishing of a case of undue influence by Madam Ho against Lam, I have already found that there existed a relationship of trust and confidence between Madam Ho and the couple. Moreover, the transaction in question simply cannot be explained by the relationship between them. These two elements combined raise a presumption of undue influence (i.e. class 2(B)). In the absence of evidence from Lam or indeed anyone else to rebut the presumed undue influence, a case of undue influence has been made out. And I so find.

86. In fact, if necessary, on the evidence before me, I would go further and find, regardless of any presumption, that a case of actual undue influence has been proved by Madam Ho based on her evidence which I accept. I have no doubt that in relation to the particular transaction in question, she agreed to enter into this transaction because of the undue influence exerted on her by the couple. Without the undue influence, she would not have believed their story about her owing money to the foreign lady, she would not have agreed to the proposal to mortgage her properties as a way to pay off the supposed indebtedness, and she would not have agreed to let the bank advance money to Lam direct (on the mistaken belief that Lam was to pay off the indebtedness on her behalf by utilizing the mortgage money).

Position of the Plaintiff bank under Etridge

87. As regards the position of the Plaintiff bank, as I said, this is a non-sexual relationship case. The relationship between Madam Ho and Lam was godmother and godchild. According to Etridge, which I accept as representing good law and respectfully follow for the purpose of the present case, the applicable test is the non-commercial relationship test. Certainly, the relationship between a godmother and a godchild is a non-commercial one. But I believe the House of Lords in Etridge meant something more than that in propounding this test. For it is trite that two persons may have as between them more than one relationships. So a husband and a wife, or for example, brothers, may do business together. In that case, apart from their marital or blood relationship which must be "non-commercial", there is superimposed a business or commercial relationship. In applying the Etridge test, which relationship should one focus on? In Re Lai Yin Shan, a husband and wife situation, the Court of Appeal clearly looked at the wife's involvement in the company of which she was a director and shareholder and to which the bank lent money, to see whether the wife could raise a good case of undue influence against the bank, the other director and shareholder of the company being her husband. In Wong King Sing, Mr Recorder Ma SC (as he then was) had to consider the position of two brothers, one of whom was employed by the other. But the case was decided against the brother in favour of the bank on the basis that a case of undue influence (as between the two brothers) had not been made out at all.

88. In my judgment, one cannot simply look at the "personal" relationship between the wrongdoer and the victim, if there existed at the material time another relationship between the two on top that was relevant to the transaction in question. In respect of two persons, one can describe their inter-relationships in many ways. For instance, they may be mother and son, and thus be described as such, but apart from that relationship, they may be referred to as, say, fellow citizens of Hong Kong. But normally, one would not treat the second description/relationship as of any relevance at all. To take another example, a son may do business together with his father. Their business relationship may or may not be pertinent at all. If the transaction in question related to the business which the son did together with his father, then the business relationship between the two should as a matter of common sense if nothing else, be considered. However, if the transaction in question comprised, say, purely a personal loan to the father that was guaranteed by the son, then one would have thought that the business relationship between the two might be less relevant or even irrelevant at all. It all depends on the facts.

89. In my judgment, in order to apply the non-commercial relationship test sensibly, one should use the subject transaction as the relevant context against which to examine the relationship between the wrongdoer and the victim and answer the question of whether the relationship as a whole, vis-à-vis the transaction, was commercial or not.

90. Turning to the facts in the present case, according to the bank records (and I so find), the bank thought that Madam Ho was the mother of Lam - this would clearly be a non-commercial relationship. According to the bank's belief as disclosed in its documents and records, Lam (the supposed son) raised the loan for "personal investment purpose". Part of the reason given for the loan was for the decoration of the supposed mother's restaurant premises. Pausing here, it might suggest that the supposed mother (Madam Ho) took some benefit under the transaction, and therefore could be compared to a guarantor who was being paid a fee to enter into the guarantee: see Etridge at page 1048H (paragraph 88). However, the crucial distinction in the present case is that - and I so find - the bank itself did not believe this story, as may clearly be inferred from its own documents. In the documents, the relevant bank officer suspected that the true reason for the bank loan was for Lam's property speculation. Put at the lowest, the decoration element of the loan was a very minor one in the overall purpose of raising the loan. Viewed in that context, the pertinent/overall relationship between Madam Ho and Lam, according to what was then known to and believed by the bank, must have been non-commercial in nature; the predominant aim of the loan (as per the bank's then information and belief) was to raise a loan to finance Lam's personal investment or speculative activities.

91. This being my conclusion, I hold that the Plaintiff is affected by the undue influence, or put another way, put on inquiry.

92. Mr Lam conceded at trial that in relation to this last aspect, the Plaintiff did not make the requisite inquiries whether in accordance with the principles and guidelines laid down in O'Brien or in accordance with that laid down in Etridge. Nor did Mr Lam attempt to argue that the Plaintiff could rely on Tam, in his capacity as Madam Ho's solicitor (assuming that that was indeed the case), to have properly advised her about the transaction: see The Daiwa Bank Ltd v. Foco Woollen Yarns Co. Ltd HCMP 4193/1999 Muttrie DJ (29 November 2001) paragraphs 60-67. That being the case, the Plaintiff's claim on the two legal charges must fail.

Position of the Plaintiff bank under O'Brien

93. In any event, even if the old test in O'Brien were applicable in the present case, the Plaintiff's case must fail. The old test in O'Brien (which, in my judgment, has been superseded by the new test in Etridge) was that if the bank knew that the victim generally reposed trust and confidence in the wrongdoer, the bank would be affected or would be put on inquiry.

94. Mr Lam, arguing that the O'Brien test should be preferred to the Etridge test (which argument I reject as has been explained in paragraphs 71 to 74 above), contended that the bank in fact knew that Madam Ho was the godmother of Lam, but had no knowledge of the former's reposing trust and confidence in the latter generally. Mr Lam argued that the bank knew by imputed knowledge that Madam Ho was the godmother of Lam. For this he relied on an answer given by Tam during cross-examination that when Madam Ho was introduced to the solicitor on the day when the documents were executed, she was introduced to Tam as the godmother. Tam was the bank's solicitor and therefore his knowledge that Madam Ho was the godmother of Lam was imputed to the bank.

95. Mr Lam argued that the relationship of a godmother and godchild in a society like Hong Kong is a very loose one and does not by itself necessarily suggest any reposing of trust and confidence by one in another. And apart from this relationship, there was nothing or nothing sufficient to indicate such a reposing of trust and confidence by Madam Ho in Lam. The bank, under the O'Brien test, was therefore not affected by the undue influence. Mr Lam conceded during submission that if my finding were that the bank did not know that Madam Ho was the godmother of Lam but mistakenly thought that she was the mother, a case under the O'Brien test would have been made out.

96. For reasons that will become immediately apparent, I need not make a finding on whether Madam Ho was introduced to Tam as the godmother of Lam. Nor need I express any definite view on Mr Lam's argument based on O'Brien or the correctness of his concession.

Position of the Plaintiff bank under constructive notice (conventional sense)

97. What Mr Lam argued by way of imputed knowledge actually works against his own case rather fatally. Based on his own argument, before the execution of the documents, the solicitor of the bank was told that Madam Ho was the godmother of Lam. According to Mr Lam's own contention, this knowledge was imputed to the bank. In other words, prior to the execution of the documents, the bank learned (by way of imputed knowledge) of a new allegation by Lam that Madam Ho was his godmother only. This totally contradicted the previous information supplied by Lam to the bank that Madam Ho was his mother, and threw much doubt on his further representations to the bank that the supposed mother and son resided together in one of the two subject properties for several years and that the supposed son (Lam) was raising the loan partly to finance the decoration of his supposed mother's premises.

98. All these discrepancies, in my judgment, according to ordinary principles of equity, would have put a prudent bank on inquiry (in its classic sense) as to the truthfulness of the various representations made by Lam to the bank, and I have no doubt on the evidence before me that, had the bank made the necessary inquiries, it would have discovered from Madam Ho that she was not the mother of Lam, the loan was not raised for Lam's personal investment purpose or for the purpose of decorating her premises, the two never resided together in one of the properties to be mortgaged and so forth. In those circumstances, the bank would have discovered the misrepresentations made by Lam to Madam Ho as well as the (obviously misplaced) trust and confidence reposed by Madam Ho in Lam and his wife. In other words, by the conventional use of the concept of constructive notice, the bank would be, under Mr Lam's argument, affected by the undue influence as somebody having constructive notice of the legal wrong.

99. In any event, regardless of Mr Lam's argument and the imputed knowledge relating to Madam Ho being the godmother of Lam only, the suspicion that the bank had relating to the actual purpose of the loan was, in my judgment, by itself sufficient to put the Plaintiff bank on inquiry (in the classic sense); and again had the bank made the necessary inquiries, I have no doubt that it would have discovered the true reason for the application of the bank loan and the (misplaced) trust and confidence reposed by Madam Ho in Lam and his wife. In my judgment, for this reason also, the bank is affected by the undue influence and cannot take the subject properties under the legal charges free from it.

Outcome

100. So for all these reasons, I conclude that the Plaintiff is affected by the undue influence. As has been conceded, the bank did not make the necessary inquiries that are required by O'Brien or Etridge. Moreover, the bank had constructive notice of the undue influence (in the traditional sense), which was never eliminated prior to the execution of the legal charges. The inevitable conclusion is that the bank cannot enforce the two legal charges against Madam Ho, who is therefore entitled to rescind the same vis-à-vis both Lam and the Plaintiff.

101. I make an order dismissing the action of the Plaintiff against Madam Ho.

102. In relation to Madam Ho's counterclaim, I make a declaration that she is entitled to avoid the legal charges in question and that the same are not enforceable against her.

103. As regards the third party proceedings, given my conclusion in relation to the main action, I need not deal with the issues raised in the third party proceedings. Although the Third Party Notice refers to Madam Ho's claim for damages and other relief, in addition to her claim for an indemnity by the Third Party against the Plaintiff's claim and the costs of the action, Mr Chan appearing for Madam Ho, did not pursue any such other remedy at trial.

104. In those circumstances, I dismiss the third party claim by Madam Ho against Tam.

105. As regards costs, I make the following cost order nisi:-

(1) as between the Plaintiff and Madam Ho, the costs of the main action be paid by the Plaintiff to Madam Ho to be taxed if not agreed;

(2) as between Madam Ho and Tam, there be no order as to costs regarding the third party proceedings and the costs of Tam's participation in the main action. In other words, each party is to bear his or her own costs (including all costs previously reserved). As a very brief explanation, and without dwelling on the issues raised in the third party proceedings, I would simply say that taking into account all relevant considerations, including the merits relating to the third party claim and Tam's involvement in the dealings between Madam Ho and Lam, I take the view (subject to any further submission from the parties) that the fairest order to make is that there should be no order as to costs. I should also say that I do not regard it as fair and reasonable (again subject to further submission, if any) that the Plaintiff should be made to bear the Third party's costs regarding the latter's participation in the main action or the third party proceedings: C.f. Hong Kong Civil Procedure 2002 Vol. 1 paragraph 16/7/4.

106. Unless any party applies to vary the above cost order nisi within 14 days after this judgment is handed down, the same shall become absolute upon the expiry of the 14-day period.

107. It only remains for me to thank counsel for their very helpful assistance.