LAM CHEUK FAI AND ANOTHER v. LAM CHEUK KAM

IN THE SUPREME COURT OF HONG KONG

HIGH COURT 

(MISCELLANEOUS PROCEEDINGS)

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JUDGMENT

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1. This dispute arises out of the purchase of a flat at 2 Robinson Place, No.70 Robinson Road ("the property"), by three brothers for speculative purposes. The purchase price of the property is $6,693,000. The property currently has a value estimated to be in the region of $11 to 12 million and is in the process of being sold. So, on any view, the parties stand to reap a handsome profit but for this unfortunate piece of litigation which once commenced, developed a momentum of its own and generated such rancour that apparently neither reason nor common sense was allowed prevail. In the result, the parties have apparently chosen to squander a substantial part of the profit reaped from this venture on legal costs.

2. I can but express surprise at the fact that the parties' respective legal advisers permitted matters to advance to a point of no return. As will become apparent, the amount of the counterclaim that was the subject of the dispute was of the order of $250,000 against the backdrop of a capital gain of say $4 million to $5 million. The proceedings developed into internecine warfare, and in terms of family relationships, the cost is incalculable. The proceedings culminated in a most unedifying spectacle of three siblings, two of whom are practising solicitors, accusing each other of dishonourable conduct.

3. On 13 November 1995, the 1st and 2nd Plaintiffs took out an Originating Summons for an order for sale of the property. On 15 February 1995, the Defendant was ordered to set out his counterclaim by way of affidavit. When the matter came before Deputy Judge P. Fung, Q.C. on 30 April 1996, the parties were able to reach agreement regarding the sale of the property but not the costs of the Originating Summons or the matters raised in the counterclaim. As the Defendant was hospitalized, the hearing of the counterclaim was adjourned and came before me on 27 May 1996.

The counterclaim

4. The counterclaim as set out in the Defendant's affirmation dated 29 February 1996 is made up of six claims. At the commencement of the hearing, the parties agreed that one of the claims, namely, a sum of $120,000 lent to the 2nd Plaintiff should be determined in separate proceedings between the 2nd Plaintiff and the Defendant. During the first day, several attempts were made to settle the outstanding issues at the Court's instigation but, regrettably, were unsuccessful. Thus began a three day hearing of a family dispute that could and should have been resolved without resort to the courts had there been a modicum of goodwill from the parties involved.

5. By the afternoon of the first day, the items subject to the counterclaim had been whittled down to the following, namely:

6. To resolve these issues, the court had effectively to delve into most of the evidence that had been filed in this case consisting of no less than 10 affirmations which, with exhibits, run to over 300 pages as it was not reasonably practicable to segregate evidence relevant only to the main application (which was for an order for sale) from evidence relating to the counterclaim.

The material events

7. In May 1993, the parties agreed to purchase the property with a view to eventual resale for profit. Although the contract was entered into in the sole name of the 1st Plaintiff, it is common ground that the 1st and 2nd Plaintiffs and the Defendant are beneficially entitled in the proportions 2:1:3. The Sale and Purchase Agreement ("the Agreement") was signed by the 1st Plaintiff either at the end of May or early June. Although the 1st Plaintiff and the Defendant have given different dates for the Agreement, the date itself matters not. Inexplicably, the Agreement itself was not among the many exhibits that are before me.

8. The 1st Plaintiff and the Defendant have also given conflicting accounts as to whose idea it was in the first place to acquire the property. As nothing turns on this, I do not propose to go into the conflicting evidence. On 28 July 1993, the 1st Plaintiff executed a Deed of Declaration of Trust. It recited that the purchase price of the property was $6,693,000 and that the property was in fact purchased by the trustee for and on behalf of the beneficiaries who are the 1st and 2nd Plaintiffs entitled beneficially in the ratios 2:1:3. The Plaintiffs and the Defendant were collectively called "the Beneficiary" in the Declaration of Trust. The trustee declared that the property was held upon trust "for the Beneficiary absolutely in aforementioned ratios and the trustee hereby agrees to assign the premises at the request and costs of the Beneficiary ... to such person or persons and at such time or times and in such manner as the Beneficiary holding 50% or more interest in the premises shall direct or appoint."

9. In November 1993, the 1st Plaintiff left for the United States, having on 5 November 1993, executed the Power of Attorney in favour of his sister Karen Lam pursuant to s.7 of the Powers of Attorney "for the purpose of the purchase" of the property.

10. Under the terms of the Agreement, which as noted above, was not produced in evidence, the vendor was entitled to require completion upon the giving of two weeks' prior notice to the purchaser. The development was expected to be completed by early 1995 and accordingly, it was anticipated that completion under the Agreement would take place at about that time.

11. As to the events leading up to completion, I will set out the accounts of the Defendant and the Plaintiffs in turn.

12. The Defendant's evidence is that there was a severe downturn in the property market from about March/April 1994 which had not been expected. By October 1994, the Defendant was of the view that the downturn would continue for some considerable time. He therefore discussed with the 1st Plaintiff by telephone and with the 2nd Plaintiff in person that since in would be unlikely that the property could be sold at a good price prior to completion, they should have a contingency plan for the completion of the sale and purchase of the property.

13. According to the Defendant, there was general agreement that if the property could not be sold at a good price, they should wait and obtain finance to complete the purchase. The Defendant also said that the 1st Plaintiff did suggest that the Defendant purchase the Plaintiffs' shares but that the Defendant rejected the suggestion because he did not have sufficient money at the time. He began making enquiries for financing and discovered that it was extremely difficult to obtain a mortgage because the 1st Plaintiff was not resident in Hong Kong and the banks were unwilling to lend more than 50% for the purchase of luxury properties, namely those with values exceeding $5 million.

14. As he had initiated the investment, the Defendant said he felt morally responsible to keep the joint venture going. In December 1994, he applied to Orix Asia Limited ("Orix") for a mortgage. On or about 14 January 1995 he made arrangements for the auction of his Taikoo Shing flat at a reserve price of $5.1 million. The property was itself subject to an existing mortgage of around $1.5 million. According to the Defendant, the sale of the Taikoo Shing flat was part of what he calls his contingency plan which he had raised with the Plaintiffs a few months earlier and which he said evolved over those several months.

15. The Defendant is the guarantor under the Orix mortgage which was granted to the 1st Plaintiff. The amount of the loan was $4 million. There are heavy interest penalties if redemption were to occur during the first two years. The written terms of the conditions of loan did not contain any condition that the Defendant reside at the property but the Defendant is adamant that at the time he made the application, he represented to Orix that it was to be for his "self use".

16. By about 14 January 1995, the vendor gave notice that completion would take place on 28 January. Even with the mortgage of $4 million, there remained a balance of $1.5 million which the parties had to raise to enable completion to take place. As the Defendant was a 50% beneficial owner, his share of it was $750,000. His evidence is that he did not have the money and that he had to obtain a loan from his parents who in turn had to mortgage their home in Canada in order to raise the money. The amount raised was Can$168,000 which is roughly equivalent to HK$1 million. Each of the Plaintiffs also had to contribute his pro rata share of the shortfall of $1.5 million.

17. Shortly before completion, the Defendant said he had a discussion with the 1st Plaintiff on the telephone and with the 2nd Plaintiff in person. In order to keep the joint venture going, the Defendant proposed that he would personally guarantee the mortgage, occupy the property in order to satisfy the Orix condition and take over responsibility for the monthly mortgage instalments during his occupation of the property. In consideration of those matters, he alone would have the final say as to when and at what price the property is to be sold. It is the Defendant's case that the common understanding was that the property would not be sold for two years unless the price was right and that the Plaintiffs agreed to those terms.

18. I now turn to the evidence of the Plaintiffs. It is the evidence of both Plaintiffs that after signing the Agreement and throughout 1994, they had repeatedly asked the Defendant to sell the property but that he refused. In September 1994, the 2nd Plaintiff who knew the construction company, was able to make arrangements for the Defendant to visit the then uncompleted building. After the inspection, the Defendant allegedly expressed his interest to the 2nd Plaintiff that he, the Defendant, wanted to occupy the property and buy out the Plaintiffs' shares. It was the 2nd Plaintiff's understanding that the Defendant "intended to upgrade his living condition". The 1st Plaintiff heard from the 2nd Plaintiff in October 1994 about the Defendant's intention of moving into the property. It was not until December 1994 that the 1st Plaintiff heard from the Defendant that he wanted to buy the Plaintiffs' shares, that he was putting his Taikoo Shing flat on the market and that he would use the proceeds of sale to acquire the Plaintiffs' shares.

19. According to the 2nd Plaintiff, "later" the Defendant informed him that he had already told the 1st Plaintiff that he would move into the property and buy out the Plaintiff's shares. He was informed by the Defendant that the 1st Plaintiff had already consented and that the Defendant would be putting his Taikoo Shing flat on the market and would use the proceeds to buy out the Plaintiffs' shares at the "then market price". The 2nd Plaintiff said that he consented to this arrangement. It is unclear when this conversation took place but it would seem that it was sometime after the site visit in September 1994 but prior to January 1995.

20. Sometime in January 1995, the Defendant informed each of the Plaintiffs but on separate occasions that he was unable to sell his Taikoo Shing flat, the proceeds of which were to be the source of finance for the acquisition of the Plaintiffs' shares in the property. It was the 1st Plaintiff's understanding that the Defendant asked for his pro rata contribution to the shortfall of $1.5 million because the Taikoo Shing flat could not be sold. The 1st Plaintiff also expressed concern about obtaining a mortgage and the responsibility for servicing the mortgage. He said that the details of the loan were not disclosed to him. All he knew was that the Defendant would move into the property and assume responsibility for the mortgage instalments. The 1st Plaintiff said he never agreed to the Defendant having the final say as regards the price at which the property is to be sold and when it should be sold.

「          So far as the 2nd Plaintiff is concerned, he said that the Defendant subsequently told him about the availability of finance from Orix and the terms thereof. It is the 2nd Plaintiff's evidence that during this conversation, the Defendant mentioned that it was a condition of the mortgage that the property should be "self occupied" and that there was a heavy interest penalty for redemption within the first two years. The 2nd Plaintiff's attitude was that the penalty would be part of the expenses and deductible from the selling price. It was also the 2nd Plaintiff's understanding that the Defendant would move into the property and would take over responsibility for the mortgage instalments and outgoings during his occupation of the property but he denied that he ever agreed that the Plaintiff should have the final say as to when and at what price the property is to be sold.

21. In connection with completion, the 1st Plaintiff was sent two general powers of attorney as the Defendant was under the impression that the original power granted to Karen Lam in November 1993 was no longer valid. As the two powers of attorney were not executed before either a British Consular official or a Notary Public, they were invalid. Several weeks later, after completion had already taken place, the Defendant sent the 1st Plaintiff another two powers of attorney which the 1st Plaintiff executed before a Notary Public. Although originally the 1st Plaintiff had insisted that all these powers of attorney were for the sole purpose of completion and the mortgage, in cross-examination, he acknowledged that those executed in February in favour of the Defendant were in respect of future assignments of the property.

22. Completion of the property took place on 28 January 1996. Apart from the Orix advance, each of the parties contributed his pro rata share of the balance required for completion.

23. The Defendant moved into the property on 29 March 1995. At about this time, his Taikoo Shing flat was sold for $4.8 million. After the discharge of the mortgage which was approximately $1.6 million, and repayment of his parents' loan of $1 million, he was left with HK$2.2 million.

24. The 1st Plaintiff returned to Hong Kong sometime in May 1995. The 1st Plaintiff had understood from the 2nd Plaintiff that the Defendant did not seem to keep his promise to buy their shares because no action had been taken although the Taikoo Shing flat had already been sold. He telephoned the 2nd Plaintiff and said that he wished to come back to discuss with the Defendant "about the selling of the Plaintiffs' shares to the Defendant or the price that he would pay for [their] shares". Upon the 1st Plaintiff's return to Hong Kong, he stayed with the Defendant at the property.

25. The Plaintiffs alleged that a meeting occurred at the Defendant's office on Sunday, 28 May at 6 p.m. The Plaintiffs' evidence is that although the Defendant had sold his Taikoo Shing flat, he maintained that he had insufficient funds to acquire the Plaintiffs' shares in the property. All he could afford was $9 million and even then, according to the 2nd Plaintiff, the payments had to be staged, the original capital element would be paid to the Plaintiffs and the gain would be paid in a subsequent instalment.

26. The Defendant denied that the alleged meeting ever took place. In fact the Plaintiffs have since retracted their evidence that the meeting took place at the date and time alleged. Be that as it may, and irrespective of the conflicting evidence on this issue, the property was advertised for sale at the end of May.

27. On 1 October 1995, the Defendant raised with the 1st Plaintiff the possibility of the latter contributing to the cost of his stay at the property since by August 1995, he had obtained a job. The 1st Plaintiff was unhappy at this suggestion but eventually allegedly promised to pay $10,000 per month together with half the cost of the monthly outgoings after a heated argument. In fact, the 1st Plaintiff moved out of the property on 2 October and has not returned since. Suffice to say that the 1st Plaintiff and the Defendant fell out over this incident. The Defendant took the position that until the 1st Plaintiff honoured his promise to make the payments for the period of his stay in the property, the Defendant would not entertain any proposal for the sale of the property.

28. During the month of October, after the asking price was revised down from $12.8 million to $11 million, there were several prospective purchasers who made verbal offers. The Defendant's stance and the breakdown in the relationship between the parties led to difficulties over inspection of the property by prospective purchasers. After the 1st Plaintiff moved out, the Defendant began to lock both locks on the door rather than one that had been the case when the 1st Plaintiff was staying with him. As a result, the 1st Plaintiff could not gain access to the property for the purpose of showing it to prospective purchasers.

29. On 5 November 1995, the 1st Plaintiff revoked the Powers of Attorney that he had granted the Defendant. The Originating Summons for an order for sale was issued on 13 November 1995.

30. After proceedings had been instituted and the parties had separate legal representation, in January 1996, the Defendant offered to purchase the property at the then market value. Having enquired of Orix, he believed the price to be in the region of $10.5 million. The Plaintiffs however obtained a valuation which indicated that the property had a value of $11.5 million. Thereupon, the Defendant notified the Plaintiffs that he would be willing to sell if they could find a buyer at that price for completion by the end of February 1996. Nothing further occurred in relation to that proposal.

31. In March there were prospective offers. The mistrust of the parties was such that prospective offers were not dealt with timeously. Neither the Plaintiffs nor the Defendant is free from blame for missed opportunities.

32. It is against this background that the Consent Order was made when the matter first came on for hearing on 30 April 1996.

The claim for contribution to mortgage repayments

33. It is common ground that completion took place on 28 January 1995 and that the Defendant moved into the property on 29 March 1995. During the intervening two months, the developer had to remedy numerous defects in the property and renovation work was carried out. The 2nd Plaintiff accepts that such renovation work enhanced the value of the property. Under the terms of the Consent Order, the renovation costs form an item of expenditure that is to be deducted from the proceeds of sale of the property before the net proceeds are distributed, pro rata, to the parties.

          「What was the parties' agreement regarding the Orix mortgage and the repayment instalments? On the evidence, I find that the Orix loan was obtained to enable completion to go forward. It was for the benefit of the parties and not for the Defendant alone. This is supported by the fact that each of them contributed his pro rata share of the balance of $1.5 million. If the Defendant was to buy out the Plaintiffs, why would the Plaintiffs still be contributing at that point in time? Further, even on the Plaintiffs' understanding of the arrangement for servicing the mortgage, the Defendant would only take over the mortgage repayments once he moved in. There was no evidence of any agreement that the Defendant would take over the mortgage repayments from the date the loan was obtained. In the absence of any specific agreement to that effect, prima facie, the burden of the repayments must fall upon the beneficial owners pro rata.

34. Nor is such a result unfair since it is accepted that during the two month period work was being done to the property to enhance its value which is to the benefit of all three beneficiaries/co-owners. Accordingly, the Defendant's claim to contribution succeeds.

The claim for damages for breach of the oral agreement

35. As noted above, the existence of the oral agreement is hotly denied by the Plaintiffs. The Plaintiffs' position appears to be that they understood from the Defendant that the Defendant would be buying their shares in the property. Yet, no discussion apparently ever took place prior to completion as to what the price for the acquisition of their shares would be. In cross-examination, neither of the Plaintiffs would be drawn as to what his perception of the range of the market price was in January 1995. The Plaintiffs appeared to suggest that the Defendant's ability to buy the property hinged entirely on the sale of the Defendant's Taikoo Shing flat. Until that was done, they were not expecting the Defendant to be in a position to acquire their shares.

36. The Plaintiffs appeared to have lost sight of the fact that there is a distinction between the amount of money required for completion to take place (i.e. $5.5 million) and the amount required for the Defendant to acquire the Plaintiffs' shares when it was not the intention that the Plaintiffs should forego any capital gain that had already accrued. In other words, although the market had suffered a down turn in 1994, the property was still worth more than $6,693 million that was the acquisition cost. It is not suggested that the Plaintiffs were willing to assign their interest to the Defendant at cost, i.e. upon reimbursement of capital outlay that had been made by them.

37. As noted above, the Plaintiffs shied away from the question as to the price at which they expected their shares to be a acquired by the Defendant under the pretext that that, in turn, depended on when the Taikoo Shing flat could be sold. I do not find the Plaintiffs' evidence in this regard convincing. First, I do not accept that the parties could have reached any agreement for the Defendant to acquire the Plaintiffs' interests in the property without any discussion as to what the price or price range would be. Second, the Defendant was not even in a position to raise the $5.5 million required for completion on his own. In addition to the $4 million Orix loan, each of the Plaintiffs had to contribute his pro rata share of the balance of $1.5 million. If the Defendant was going to buy out the Plaintiffs once the Taikoo Shing flat was sold which was clearly imminent, why did the Defendant ask them to contribute towards the shortfall? If, as was obvious, the Defendant could not even finance that, how could he finance the acquisition of the Plaintiffs' interest? Third, on the evidence, even if the Taikoo Shing flat had been sold in time, i.e. prior to completion on 28 January, the proceeds alone would not have been sufficient to enable completion to occur. Fourth, the Plaintiffs admitted that between completion and the alleged meeting on 28 May, the subject of whether or not the Defendant was going to buy out the shares of the Plaintiffs was never brought up. No explanation has been proffered other than that the Defendant, having only moved into the property at the end of March, had to be given time to "settle down". Had there been an agreement as suggested by the Plaintiffs, I cannot believe that they would have said and done nothing until the end of May 1995.

38. There is also the fact that the evidence of the Plaintiffs was less than impartial and was heavily coloured by their feelings towards the Defendant. In this connection, it is to be noted that the Plaintiffs were at pains to point out that they had made many requests between the signing of the Agreement in 1993 and the end of 1994 for the property to be sold before completion, but that the Defendant had been uncooperative and difficult about it. But under the Declaration of Trust, the Plaintiffs, holding as they did 50% of the interest in the property, had the power to require a sale of the property. For reasons not readily apparent, they refrained from exercising their rights under the Declaration of Trust and sought to put the blame on the Defendant.

39. The 1st Plaintiff in his evidence referred to the Defendant being "cash rich", suggesting that the Defendant had adequate funds with which to buy them out. In fact, when asked for the basis of that allegation, it transpired that it was nothing more than pure and uninformed speculation on his part.

40. In my judgment, the Defendant's account is not implausible. He frankly admitted that the "contingency plan" evolved over a period of time. It is also quite clear that he was the only one of the three parties to seriously address the need to raise funds to enable completion to take place. The servicing of the mortgage was a heavy burden. Indeed, the Defendant felt it necessary to have a cushion against the not insignificant monthly commitment. It was partly for that reason (apart from repaying the $1 million loan from his parents) that he sold his Taikoo Shing flat. The quid pro quo sought by the Defendant for assuming this burden, namely, the unilateral right to determine when and at what price to sell the property although he would, at the same time, derive the advantage of living in luxury accommodation is not, in the context, unreasonable. Also, the fact that on the evidence the Defendant was not in a financial position to have acquired the Plaintiffs' shares even with the sale of the Taikoo Shing flat is a factor which can be taken into account in assessing which of the two conflicting versions is the more plausible. It would not have made sense for the Defendant to offer to acquire the Plaintiffs' shares when he was not in a financial position to do so.

41. For these reasons, I prefer the evidence of the Defendant on this issue and I find that the parties did enter into an agreement under which the Defendant would assume responsibility for mortgage payments once he moved into the property but that he would have the final determination as to the timing and price of the sale of the property. I also find that it was the common understanding that the property would not be sold for a period of two years because of the heavy interest penalty unless the price was "right".

42. The Defendant relies on the following events as giving rise to repudiation of the Agreement by the Plaintiffs:

Of the four matters relied on, the issuance of an Originating Summons for an order for sale plainly constitutes repudiation of the Agreement.

43. The Defendant claims that the following damages flow from the breach. The first head of claim is for damages through expenses incurred by the Defendant to implement the arrangement, i.e. costs associated with the sale of the Taikoo Shing flat amounting to approximately $40,000. It is plain from the evidence that the Defendant had to sell his Taikoo Shing flat if only in order to repay the loan of $1 million which he had obtained from his parents. These expenses had to be incurred irrespective of the Orix loan and any arrangements regarding the Defendant's occupation of the property. In other words, these expenses did not flow from any breach by the Plaintiffs of the oral agreement. The claim to these special damages must fail.

44. The second head of claim is the capital element of the mortgage repayments that have been made since 29 March 1995. So far as this claim is concerned, the Defendant's claim can only extend, if at all, to the Plaintiffs' pro rata share of the capital repayments, namely only one half of the sum claimed. According to the mortgage repayment tables, as of 27 June 1996, approximately $171,000 of capital had been repaid. One-half would be $85,500. But to succeed under this head of damage, the Defendant has the burden of establishing the value of the unilateral right to decide the timing and price of the sale and segregating it from the overall consideration for the occupation of the property. For example, if the monthly mortgage repayments were to exceed the market rent for the property, the difference could be said to be attributable to the unilateral right. But no such evidence was adduced.

45. Accordingly, I find that the claim for damages for breach has not been made out.

46. Having reached this conclusion, it becomes unnecessary to consider the Plaintiffs' submissions that, in any event, the Agreement, not being in writing, is unenforceable. But as they have some relevance to the question of costs, I will address them briefly. The Plaintiffs relied on s.3 of the Conveyancing and Property Ordinance Cap.219 which provides that "no action shall be brought upon any contract for the sale of the disposition of land unless the agreement upon which such an action is brought, or a memorandum or note thereof, is in writing and signed by the party to be charged ...". It was submitted that such a provision applies equally to contracts which are incidental to such a disposition where they can be said to concern the land.

47. The oral agreement is not a contract for the sale or disposition of land or of any equitable interest in land. Rather, it is a case of the beneficiaries, being sui juris, agreeing that the land is not to be sold without the Defendant's consent to which s.3 would not prima facie apply. But assuming (without deciding) for present purposes that the Plaintiffs' submission is correct that such an agreement has to be in writing, the short answer to it is the doctrine of part performance which was evolved to prevent the use of a statute as an engine of fraud. In the words of Lord Cottenham L.C., the doctrine came into existence "for the purpose of preventing the great injustice that would arise from permitting a party to escape from the engagement he has entered into." Mundy v. Jolliffe (1839) 5 My. & Cr. 167 at p.177. In my judgment, there is no reason why the doctrine would not apply in the present case.

Order

48. On the counterclaim, I order that the 1st and 2nd Plaintiffs pay the Defendant the sum of $44,250 in the proportions of two to one respectively. The counterclaim for damages for breach of the oral agreement is dismissed.

49. So far as the costs of the counterclaim are concerned, although the Defendant has succeeded, it is only as to a small part of the counterclaim originally asserted and as to which the evidence was minimal. Having regard to all the circumstances, there is to be no order as to costs on the counterclaim.

50. That leaves the question of costs of the Originating Summons. On that question, I have come to the conclusion that in this unfortunate family dispute, none of the parties has truly won. This piece of litigation has served little purpose and as noted earlier, the parties should have come to their senses and resolved their dispute amicably. In these circumstances, I do not consider it appropriate to award costs to any of the parties. Accordingly, on the Originating Summons, there is also to be no order as to costs.