METROCORE ENTERPRISES LTD. v. PHILIP PANG & CO. (a firm) AND ANOTHER

HCA 54/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 54 OF 1999

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J U D G M E N T

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INTRODUCTION

1. The plaintiff claims that it advanced 2 short term loans to Hall (PRC) Company Limited ("the Borrower") in 1996. The plaintiff did not know the Borrower and had not met any person from the Borrower. The plaintiff charged a 3% "arrangement/administrative fee" and 2% per month interest (as the first month's interest had been deducted from the advance, the effective rate was higher) on the first 9-month loan and 4% "arrangement/administrative fee" and 2% per month interest (as the first month's interest had also been deducted from the advance, the effective rate was higher) on the second 9-month loan.

2. The Borrower defaulted. The plaintiff blamed its former solicitors and issued the writ in this action in January 1999. In November 1999, the plaintiff also blamed the company who had sent two valuation reports to the former solicitors and the company was added as the 2nd defendant in this action.

3. By order dated 27 September 1990, Sakhrani J gave leave to proceed with this action notwithstanding the bankruptcy order made against the 1st defendant.

4. The plaintiff canvassed a number of irrelevant matters and left out a number of relevant matters. The gravamen of the plaintiff's complaints related to 2 properties of the Borrower charged to secured its indebtedness. The first property is known as Ma On Kong Lot No. 107 in DD No. 113, Ma On Kong, Yuen Long, New Territories ("the 1st Property") and the other is Lot No. 1443 in DD No. 123, Yuen Long, New Territories ("the 2nd Property").

5. In respect of the 1st Property, the plaintiff claimed that its site area was only about 306.8 sq. ft. Thus the 1st defendant was negligent in failing to advise it that as the house being constructed had a site area of about 659 sq. ft., a substantial portion of it "enroached" (sic) on land not belonging to the Borrower; and the 2nd defendant was negligent in valuing the 1st Property on the basis that its instructions was that it had a site area of about 700 sq. ft.

6. In respect of the 2nd Property, the plaintiff's complaint was that the 1st and 2nd defendants failed to advise that it was a "missing lot", defined in the particulars as "a lot in the New Territories of which there is no record in the Block Crown Lease at the relevant District Lands Registry".

THE CLAIM AGAINST D2

7. The 2nd defendant furnished the 1st defendant with 2 valuation reports. The first report is dated 24 January 1996 ("the 1st Report") and opined that the value of the 1st Property was $2.5 million. The second report is dated 6 February 1996 ("the 2nd Report") and opined that the value of the 2nd Property was $650,000.

8. In my judgment, the plaintiff does not have a leg to stand on in its claim against the 2nd defendant.

9. There is no evidence that the site area of the 1st Property is about 306.8 sq. ft. and not 659 sq. ft. and not 700 sq. ft. In the absent of any evidence on the actual site area of the 1st Property, that is the end of the plaintiff's claim in respect of the 1st Report. Further, on the plaintiff's own pleaded case, "the 1st Sum" of $1.3 million was advanced to "the 1st Defendant" (sic) on about 22 January 1996, and on the plaintiff's own case, there was clearly no reliance on the 1st Report when the plaintiff authorised the release of $1 million of "the 1st Sum" on 24 January 1996. There is no evidence that the remaining $300,000 had in fact been advanced to the Borrower.

10. In respect of the 2nd Report, the plaintiff clearly did not rely on the 2nd Report when it advanced "the 2nd Sum" of $400,000 to the Borrower.

Site area of the 1st Property

11. In the course of the closing submission of Mr Lawrence Ng, counsel for the plaintiff, I asked him whether there was any evidence on the actual site area of the 1st Property. He was unable to draw my attention to any oral evidence. The reason is simple - there was none. The only "evidence" which he drew my attention to was the document at p. 466 of the bundle, described as "Setting out Plan of Ma On Kong House Lot No. 107 in D.D. 113 Ma On Kong Yuen Long New Territories prepared by Ted Chan & Associates Limited" and p. 299 of the bundle, a floor plan attached as Appendix IV to what is described as "Valuation report of Ma On Kong House Lot No. 107 in D.D. No. 113, Ma On Kong, Yuen Long, New Territories prepared by Fotton Surveyors Limited".

12. It is stated on p. 466 that "coloured pink area : 28.5 square metres (about)". Nowhere on p. 466 is coloured pink. Neither the maker nor anybody from Ted Chan & Associates Limited was called as a witness. I do not know who was the person who prepared the document. I do not know if he has any qualification. I do not know who did the on site setting out, if it had in fact been done. I do not know the basis (if any) on which the person or persons identified the area within points A, B, C and D as "Ma On Kong House Lot 107". I attach no weight to this document.

13. Mr Lawrence Ng has not explained how p. 299 is remotely relevant. I attach no weight to this floor plan.

14. The plaintiff has made no or no real attempt to prove the actual site area of the 1st Property. That is the end of the plaintiff's claim against the 2nd defendant on "the 1st Sum".

Reliance on the 1st Report

15. A valuation report must be read in the context of the report and one cannot choose to ignore the stated basis on which the writer arrives at his conclusion. The following appears in the 1st Report :

"LOT DETAILS

The property under consideration comprises a piece of land which is registered in the Yuen Long Land Registry as Ma On Kong House Lot No. 107. According to the Block Crown Lease, the subject lot is classified as House Lot.

...

No information about the area of the subject lot is available to us at the time of our inspection at the relevant Land Registry.

...

GENERAL DESCRIPTION

Standing on the subject lot is a 3-storey detached villa type house. At the time of our inspection, the house was under the final stage of construction. As informed, the subject house is scheduled to be completed in mid-1996. The house is designed to be served by an internal staircase and has north and south facing aspects.

...

According to the information supplied to us, the subject house will contain a total gross floor area of about 2,100 square feet with balconies on first floor and second floor.

...

GENERAL COMMENTS

In our valuation, we have relied to a very considerable extent on the information supplied and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, site and floor areas and all other relevant matters.

We have made site inspection of the subject property but on-site measurements have not been taken.

...

OPINION OF VALUE

Based on the above, we are of the opinion that the Open Market Value of the subject property upon completion for loans application purpose, at the date of this report, assuming sale with the benefit of vacant possession and free of all encumbrances, is HK$2,500,000 HONG KONG DOLLARS TWO MILLION FIVE HUNDRED THOUSAND ONLY.

LIMITING CONDITIONS

This report is issued subject to our standard limiting conditions as attached."

16. Under cross-examination, Mr Chen Vee Yong Frederick, a director of the plaintiff, said this :

"Q Did you also notice that the report stated that the registered site area was not available at the land registry when you received the first report

A No

...

A No. Because it was given to me on the 24th. The day we signed, it was very urgent that we signed, so my lawyer confirmed to me that the report was normal, it's standard and the valuation was $2.5 million on site of 700. But subsequently I noticed

Court Are you saying that you didn't read the report because Pang told you that the report was normal and you trusted him

A I read the report, your honour, but I also trusted him that it's a standard report

...

Q Noticed that it's stated very clearly under 'General Comments' 'In our valuation, we have relied to a very considerable extent on the information supplied and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, site and floor areas ...' and that they did not undertake any on site measurements

A Yes

Q After having read the report you had no problem with that

A I notice the 2nd point you just mentioned that - relied on the information - written under 'General Comments', I asked my lawyer whether it's normal and he said it's normal. So I was concerned, but I asked, but I was satisfied."

17. On Mr Chen's own testimony, he was concerned about the reliance by the 2nd defendant on information supplied to the 2nd defendant, so he asked his or the plaintiff's lawyer, the 1st defendant, and was satisfied by what the 1st defendant told him. On the question of site and floor areas, Mr Chen relied on the 1st defendant and did not rely on the 1st Report. This is also fatal against the plaintiff's claim on the 1st Report.

The 1st Sum

18. The plaintiff avers in paragraphs 12 and 20E of the Re-Amended Statement of Claim that :

"On or about 22nd January 1996 the Plaintiff advanced a sum of HK$1,300,000 to the 1st Defendant (sic) by drawing a cheque no. 012524 for HK$1,300,000.00 in favour of the 1st Defendant ('the 1st Sum').

In reliance upon, inter alia, the 1st Report, the Plaintiff advanced the 1st Sum to the Borrower."

19. This is not what Mr Chen said. He said that without any valuation report on the 2nd Property, he authorised the release of $1 million only. On the remaining $300,000, what he said in cross-examination was that:

"To this day, I don't know when or even if he did release $300,000."

Reliance on the 2nd Report

20. Under cross-examination, Mr Chen said that :

"Q Read 2nd Report limiting condition

A Yes

Q p. 372. Valuation comments 'At the time of our land search, document or record regarding the status of the subject lot was not available to us. However, we noticed that the amount of Crown Rent payable of the lot was identical to similar old schedule house lots. For the purpose of this valuation report, we have assumed that the subject lot should be a House Lot.' You also noticed that and you had no problem with that

A To me technical jargon. I have no understanding

Q Did you ask your lawyer Philip Pang

A I remember clearly asking him whether this value 650,000 is acceptable to him also and he said no problem it's fine

Court But he was broker broking the deal, wasn't he

A Yes, but also my lawyer

Q In particular, on p. 381 paragraph 4 'Whilst we have made investigations into the title and area of the property as recorded by the Land Registry, we are unable to accept any responsibility for it, or for any liabilities against the property which were unrecorded at the time of our inspection'. You had no problem with that

A At that time no.

Court You said you read p. 372 prior to releasing the money on 15 February, right

A Yes

Court Did you have any problem with the first sentence 'at the time of the land search, document or record regarding the status of the subject lot was not available to us'

A Yes. I was worried so I asked my lawyer Philip at that time whether this is normal and he said this is normal, this is not a problem. And I was actually more concerned at the value of 650,000. Frankly speaking I was more concerned about the value than the documents because Philip would take care of the documents and I was worried about the value."

21. On Mr Chen's own testimony, he was worried about the absence of any record regarding the status of the subject lot, and he asked his or the plaintiff's lawyer, the 1st defendant, and was satisfied by what the 1st defendant told him. On the question of the 2nd Property being what Mr Lawrence Ng pleaded as the "missing lot", Mr Chen relied on the 1st defendant and did not rely on the 2nd Report. This is clearly a question of title. The 2nd defendant is a valuer, not a conveyancer, and not a lawyer. This is fatal against the plaintiff's claim on the 2nd Report.

Other matters

22. It is not necessary for me to comment on the other defences raised by Mr Walker Sham, counsel for the 2nd defendant. I shall deal briefly with some of them in case the matter goes further.

23. I am not impressed by Mr Chen's testimony and I reject his assertion that he told the 1st defendant that he should have his own valuation report. If that were the case, there would have been no reason why Messrs Lau & Chan should ask the 1st defendant by letter dated 13 July 1998 whether the 1st defendant was acting for the plaintiff or the Borrower in instructing the 2nd defendant. The 1st defendant replied by letter dated 23 September 1998 stating that instructions were given on behalf of the Borrower. There was no compliant in the letter dated 31 October 1998 from Messrs Lau & Chan to the 1st defendant about acting contrary to the plaintiff's alleged express instructions to instruct valuers on behalf of the plaintiff and there was no mention about any requirement of any valuation report. There is no such complaint in the various versions of the Statement of Claim. The 1st defendant's bill at p. 476 related to another action. It is expressly stated in both Reports that the "Opinion of Value" was "for loans application purpose". I find that the 1st defendant instructed the 2nd defendant to prepare valuation reports on behalf of the intended borrower.

24. The valuation report was prepared for the Borrower. I accept Mr Sham's submission that it is reasonable for the 2nd defendant to rely on Limiting Condition No 8 providing that :

"This report is for the use of the party to whom it is addressed and no responsibility is accepted from any third party for the whole or any part of the contents of this report."

25. I am not impressed by the testimony of the person called by the plaintiff as an "expert". He has less than 10 years post qualification experience. In my judgment, the 2nd defendant could and did legitimately act on the 1st defendant's instructions on site and floor areas of the 1st Property. The fact that the 1st defendant did give instructions on such matters is confirmed by Mr Chen in his testimony quoted under "Reliance on the 1st Report" above. On the 2nd Property, the 2nd defendant stated that it could not find any record of the status of the site. In my judgment, the 2nd defendant had no duty to ascertain or verify the status of the 2nd Property. This is a title problem. The 2nd defendant is a valuer, not a conveyancer and not a lawyer. See also paragraph 4.1.4 of the Guidance Notes for Valuer on the Valuation and inspection of property for mortgage purposes on behalf of banks and other lenders prepared by Hong Kong Institute of Surveyors and Royal Institution of Chartered Surveyors (Hong Kong Branch).

26. I note that Mr Sham has not raised any point under the Money Lenders Ordinance, Cap. 163.

Result

27. The plaintiff's action against the 2nd defendant fails and must be dismissed.

THE CLAIM AGAINST D1

The 1st Property

28. As the plaintiff has not proved the site area of the 1st Property, the plaintiff's claim against the 1st defendant in respect of the 1st Property fails. I note that the plaintiff has sold the 1st Property.

The 2nd Property

29. In my judgment, the 1st defendant was clearly negligent in approving the title of the 2nd Property without sight of the Crown Lease when preparing the Legal Charge. The description of the Crown Lease in the Legal Charge is pathetic :

"ALL THAT piece or parcel of ground situate lying and being at Yuen Long, New Territories, Hong Kong known and registered in the Yuen Long New Territories Land Registry as LOT NO. 1443 IN DEMARCATION DISTRICT NO. 123 together with the messuages erections and buildings thereon if any Subject to and together with all such right rights of way, (if any) and other rights privileges easements and appurtenances belonging or appertaining to or with the Property for the residue of the term of years created by the Crown Lease thereof as extended until the 30th day of June 2047 under Section 6 of the New Territories Leases (Extension) Ordinance Cap. 150 in so far as the Ordinance is applicable."

The Guarantee

30. By a Guarantee dated 24 January 1996, two persons guaranteed the Borrower's indebtedness. The name and the signature of one of the two guarantors was deleted. The deletion purports to be initialled by the guarantor whose name and signature was deleted, but not the plaintiff. The 1st defendant has no business to agree to the termination of the liability of that guarantor. If the plaintiff had agreed to the deletion, the deletion should have been initialled by the plaintiff. The plaintiff thus lost one guarantor.

31. The limit of the guarantee was amended from $1.3 million to $1.7 million. The amendment was initialled by the plaintiff, but not by any of the guarantors. The amendment increased the limit of the guarantors' liability and if the increase had been agreed by the guarantors, they should have initialled the amendment. Any unauthorised alteration might release the guarantors from the guarantee. Mr Ng has not relied on this point, and I do not decide the point.

32. The way the 1st defendant dealt with amendments calls into question his competence to practise as a solicitor.

Quantum

33. There is no evidence on the worth of any of the 2 guarantors and I do not know if the guarantee is worth the paper it was written on. If they were credit worthy, they could have obtained cheaper financing from banks. Mr Ng offered no assistance on how I should assess the plaintiff's loss and damage.

34. Mr Chen's assertion that on the strength of the 2nd Report he authorised the release of $300,000 and $400,000 is unbelievable. The 2nd Report valued the 2nd Property at $650,000. The plaintiff's pleaded case in paragraph 20H of the Re-Amended Statement of Claim is that the plaintiff advanced $400,000 on the strength of the 2nd Property.

35. I assess damages at $400,000 for the loss of guarantor(s) and the loss of 2nd Property as a valuable security.

JUDGMENT

36. I order that :

(1) Judgment be entered in favour of the plaintiff against the 1st defendant in the sum of $400,000 with interest at judgment interest rate(s) from the date of issue of writ in this action.

(2) The plaintiff's action against the 2nd defendant be dismissed.

ORDER NISI ON COSTS

37. I make the following order nisi on costs :

(3) There be no order as to costs between the plaintiff and the 1st defendant from the date of issue of the writ to the date when solicitors for the 1st defendant ceased to act for the 1st defendant, and the 1st defendant do pay the plaintiff 1/2 of its costs thereafter.

(4) The plaintiff pays the 2nd defendant its costs of the action.