CHU LING AND ANOTHER v. PRIWAY INVESTMENTS LTD. AND ANOTHER

HCA 14555/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 14555 OF 1996

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J U D G M E N T

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Introduction

1. The Plaintiffs are a married couple, whom I shall call Mr and Mrs Tsui. The 1st Defendant, which I shall call Priway, is a limited company and at all material times the owner of a residential flat being flat B, 26th Floor, Fu Shan Mansion, Koo Shan Terrace, 25 Taikoo Shing Road, Taikoo Shing, Hong Kong. I shall call this property the flat. The 2nd Defendant whom I shall call Miss Cheung used to be one of two directors and one of two shareholders in Priway before resigning her office and disposing of her shares.

2. This action stems from Mr and Mrs Tsui entering into a provisional agreement for the purchase of the flat from Priway. Miss Cheung held herself out to be authorized to represent Priway, and signed the agreement as its authorized signatory. Subsequently Priway through its majority shareholder refused to recognize the agreement as having been made by Miss Cheung without its knowledge or authority, and because by the time it came to learn of the agreement it had already entered into another agreement for sale to a third party.

3. Deprived of their right to complete the purchase Mr and Mrs Tsui by this action are now suing Priway for the loss suffered, namely the difference between the agreed sale and purchase price and the value of the flat on the due date for completion. In the alternative, in the event that Miss Cheung is found to have acted without Priway's authority whilst holding herself out to have it, they are suing her for breach of warranty in the sum total of their losses occasioned thereby.

4. Priway was prevented from performing the agreement to sell the flat to the third party because Mr and Mrs Tsui registered copies of their agreement and the writ in this action against the title, which registration continues to this day. Priway by its default was liable in damages in a suit brought by the third party purchaser and has suffered further loss by being denied the right to resell the flat. It counterclaims for the losses occasioned thereby.

History

5. The story begins in the evidence of Mr Patrick Tang (Mr Tang) who is by primary occupation a merchant of footwear. He was approached by a friend in the trade, Miss Cheung, who proposed to him that they join forces in property investment. He agreed. Through his accountants they acquired, in March 1995, the shares in Priway, then a shelf company, increased the capital to $10,000 and allotted themselves half each. Miss Cheung was appointed a director, and a secretarial company, controlled by Mr Tang's accountants and committed to act on his instructions, was appointed the other director. Miss Cheung found a suitable property to buy and so it was that in March 1995 Priway became the owner of the flat, bought for $3.78m. Mr Tang says he put up all the share capital and advanced to Priway the balance required to complete the purchase. Miss Cheung apparently had no funds to contribute although she promised to do so in the fullness of time.

6. I digress here to say that Miss Cheung neither filed a witness statement nor chose to attend the trial and give evidence; although represented at the outset she chose to discharge her solicitors before the trial date. Thus I have only Mr Tang's word on Priway's situation as I have just described. Having said that I have no reason to doubt what he has told me.

7. I return to the history. In June 1995 Miss Cheung negotiated a two year tenancy of the flat to run from July of that year. In her capacity as director she signed the tenancy agreement for Priway in the office of the real estate agent through whom the letting was negotiated, a Mr Joe Wong of Dynamic Property Consultants Limited (Dynamic). Rent receipts evidencing payment of the monthly rent reveal that the first, dated 15 June 1995 was signed by Miss Cheung, under a chop marked "Priway Investments Limited - authorized signatory". Those for the months to November 1995 have not been produced. But on Mr Tang's account they probably were signed in the same way given that Miss Cheung was until then in charge of collecting and banking the rent cheques in Priway's account. From December 1995 the receipts was signed under a chop marked "for and on behalf of Priway Investment Ltd - authorized signature" by Mr Tang. This came about because in November 1995 Miss Cheung having been unable to raise capital being her share of the investment elected to pull out. She resigned from her office of director and assigned all but one of her shares to Mr Tang. His accountants chose another secretarial company to take the remaining share and Miss Cheung's seat on the board. Thus, ostensibly, Mr Tang became in sole control of Priway. Miss Cheung handed to him a green box in which she had kept the memorandum of association, minute book, bank book, cheque book, seal and chop. Subsequently she gave him the book of receipt forms she had been using in the rent collection. These had been chopped in advance in the manner I have described already. I mention here that the chop used differed in form from that returned to Mr Tang amongst the company records in the green box, and is significant in that the word "Investment" in the name was wrongly in the singular. This discrepancy escaped Mr Tang's attention, however, until a dramatic chain of events I shall come to soon.

8. In late 1996 the tenant asked Mr Tang to be released early from his tenancy. Mr Tang acceded to the request and on behalf of Priway executed a surrender, which formality was minuted in the minute book. Then having checked the newspapers and noted a rise in the real estate market, he decided to list the flat for sale, with a target in mind of $5m.

9. The circumstances giving rise to the role Miss Cheung played from this point on are central to the issues before me. It is Mr Tang's account that because he was busy at the time and lived some distance from Taikoo Shing and because Miss Cheung lived handily and wanted to earn some pin money she should approach various agents in the area and list the flat with them and, if necessary, introduce any who found a buyer to the tenant and the flat. For this he promised to pay her 1/2% of the price if a sale was achieved. I have no version of Miss Cheung before me, although in her pleadings she claimed that Mr Tang had asked her to do much more, namely, to actually sell the flat on Priway's behalf.

10. In the event Dynamic was one of the real estate companies with whom Miss Cheung listed the flat. Coincidentally, the same Mr Wong who had handled the tenancy came to show Mr Tsui through on 27 November 1996. He was told the asking price was $4.6m and he expressed interest. Mr Wong took him back to the flat on 29 November, this time with his wife and cheque book. On their account Miss Cheung was present when they arrived. Mr Wong introduced her as the owner but she corrected him by saying in fact the owner was a limited company but she represented it and was authorized to act on its behalf. She produced a Priway chop. It matched the one used to chop the rent receipts Mr Tang had been signing, with "Investments" incorrectly missing the second "s". Mr Wong told the Tsuis that Miss Cheung was an old customer who had on an earlier occasion signed the tenancy agreement for and on behalf of the owner which was in fact true. Mr and Mrs Tsui were keen to buy. There was some haggling but Miss Cheung held firm to her price. Mr Tsui offered $4.57m, completion on 1 March 1997, conditional upon their obtaining mortgage approval by 2 December. Miss Cheung made a telephone call as if to take instructions, for when she hung up she agreed to that price and those terms. They all retired to Dynamic's office and there a provisional agreement incorporating the agreed terms was prepared and signed. Miss Cheung using her Priway chop signed as authorized signatory. Mr Tsui wrote a cheque in favour of Priway for the initial deposit of $50,000 which Mr Wong was to hold unbanked pending the outcome of their approach to their bank for mortgage assistance.

11. On 2 December the parties met again at the flat. When Mr and Mrs Tsui arrived with Mr Wong, Miss Cheung was already there and there were also other people apparently inspecting it. The Tsuis had been treated favourably by their bank earlier that day and they were able to announce that the agreement was now unconditional. Miss Cheung told the others the flat was now sold and they left. Once again the parties went down to Dynamic's office to complete the paper work and payment and receipt of the deposit. But once there Miss Cheung, without warning, tore up the agreement. When asked why she said nothing. She was ushered into another room by Mr Wong where she spoke to Mr Wong and his manager, a Mr Yu. Mr Wong emerged to tell Mrs Tsui that she had said she regretted selling at too low a price but had been persuaded to restore the deal if the vendor's share of the real estate commission could be reduced by $10,000. The Tsuis, to preserve the deal, agreed to increase their share to make up the shortfall. A fresh provisional agreement was prepared, this time containing no conditional clause and adjusting the parties' share of commission to be paid. Miss Cheung signed as before, using the chop. Mrs Tsui signed for herself and her husband and handed to Miss Cheung a deposit cheque for $120,000 made payable to Priway. Mr Wong handed back the cheque for $50,000 now superseded.

12. And so, it seemed, the deal was done. Mr and Mrs Tsui handed their copy of the provisional agreement to their solicitors and anticipated completion and a move into their new home come the following March.

13. But it was not to be. Miss Cheung wrote to Dynamic the following bombshell, which I repeat verbatim:

"DATE: 7 DECEMBER 1996

DYNAMIC PROPERTY CONSULTANTS LTD.
SHOP 31, 4/F KORNHILL
PLAZA SOUTH QUARRY BAY
HONG KONG

ATTN: MR JOE WONG

DEAR SIR

RE: 26TH FLOOR FU SHAN MANSION, TAIKOSHING, HK

I REGREAT TO INFORM YOU THAT THE PRELIM CONTRACT FOR THE SALES OF ABOVE PROPERTY IS NOT VALID AS THE OWNER REFUSED TO RELEASE THE LETTER OF AUTHORIZATION, AND THEY REFUSED TO ACCEPT THE BUYER'S CHEQUE FOR HK$120,000.00 BEING PAYMENT FOR THE INITIAL DEPOSIT, WHICH IS RETURNING HEREWITH FOR YOUR DISPOSAL BY DHL B/L NO. A8910/8601.

WHEN WE MET IN YOU SHOP, I TOLD YOU THAT I AM NOT THE PROPERTY OWNER AND AT THE TIME I SIGNED THIS CONTRACT, I PRESUME I SHALL OBTAIN THE LETTER OF AUTHORIZATIO, WHILST I WAS ASKED VERBALY TO CONTACT THE PROPERTY AGENCY TO ARRANGE SALES OF THE FOREGOING PRPERTY WITH A 1/2% COMMISSION, I MIS-INTERPRETED THAT I CAN SIGN THIS PRELIM CONTRACT.

YOURS FAITHFULLY,

___________________________
JENNIFER L. W. CHEUNG "

14. Mr Wong broke the news to Mr Tsui and returned to him the cheque enclosed with the letter.

15. I revert back to Mr Tang's account of events. He is adamant that Miss Cheung's role was limited to listing the flat with suitable agents and assisting in showing off the flat to interested buyers. Since retiring from Priway she had no authority to represent it as she had when a director. She had no authority to sign any agreement on its behalf or receive a deposit cheque. Had that been so there would have been a minute to record that but there was none. He had no idea that she had in fact signed an agreement on 29 November. He does not remember if he received the telephone call from her on that date. But it is highly unlikely given that his China Re-entry Permit discloses that he took one of his regular visits to the Mainland on that date to visit one or more of the factories he controls there. On such occasions he leaves early and returns late and does not take his mobile phone which cannot be reached there. But even had she communicated an offer he would not have authorized her to sell at $4.57m. Apart from the fact that there was to be no authority to sell, the figure was far below his target price. He had no idea of events of 2 December and in particular that she had signed another agreement for Priway and collected a deposit from the purchasers. In fact, bizarrely, Miss Cheung telephoned him on 4 December to say that one of the agents with whom she had listed the flat, not being of Dynamic, had a buyer keen to pay $4.8m. The upshot of that was that he agreed to be taken by her to the agent's office where he and the buyer, a Miss Florence Lee (Miss Lee), signed a provisional agreement at $4.8m. Throughout Miss Cheung was present, but she said not one word about her commitment with Mr and Mrs Tsui entered into two days before. He was not to hear about that until she telephoned him a few days later and told him as such by which time it was too late to ratify and he declined to do so. He told Miss Cheung to return the deposit cheque. When in due course shown a copy of that agreement he noticed, for the first time, the chop used with the incorrect spelling of Priway's name. Though he came to realize the inscription matched that on the receipt forms he had been signing he had not seen the chop before nor been aware of its existence. He had believed all along there was only one; that returned in the green box. He had not authorized that another chop be made, or that it be retained by Miss Cheung.

16. But Mr and Mrs Tsui were not prepared to accept that Miss Cheung had no authority to sign their agreement on behalf of Priway and were not prepared to release it from its obligations. They took advice and issued a writ claiming wrongful repudiation, seeking specific performance or damages in lieu. Copies of the agreement and writ were registered against the flat's title. That was to have drastic consequences, for it effectively scuppered Priway's sale to Miss Lee, and has prevented any subsequent sale being considered. Miss Lee sued Priway in damages and was awarded summary judgment which was ultimately settled at $1.1m inclusive of costs. Priway incurred its own costs in the litigation of $300,360.

17. The final chapter in the saga is that the Tsuis appointed valuers to ascertain the value of the flat as at their agreed date of completion to ascertain the extent of their loss. Priway did likewise to establish today's value for the same purpose. The valuers came up with $5.8m and $2.8 respectively, which highlights the dramatic slump that the market was to suffer in between. Neither figure was challenged.

The claims

18. The Tsuis no longer sue for specific performance having now bought another flat. They seek from Priway damages, being the difference between the contract price and the flat's worth at the date of completion, namely $1.23m, interest and costs. In the alternative in the event that Miss Cheung is found to have acted without authority in signing for Priway they sue her for breach of warranty in the sum total of what they may be required to pay on Priway's counterclaim and additional loss they have suffered.

19. Priway denies being in breach of a contract it was not party to. It counterclaims for immediate cancellation of the registered writ, the $1.1m it was required to pay Miss Lee, the costs of that action and interest. In addition, by virtue of its inability to sell the flat because of the encumbrance on title it seeks as further damages the difference between what Miss Lee had contracted to pay and what the property is now worth, namely $2m and costs.

Liability

20. The case of Mr and Mrs Tsui against Priway stands or falls on whether they can establish that Miss Cheung as agent was authorized to sell the flat for and on behalf of Priway the principal.

21. The general rule is that a principal is bound by (and, of course, entitled to the benefit of) a contract made by his agent on his behalf within the scope of his actual authority. That authority may be directly pronounced by the principal, or be established by words or conduct by the principal whereby he represents to a third party that the agent has his authority. This latter doctrine is known as apparent or ostensible authority, and includes those cases where the principal allows another who is not his agent at all to appear to be his agent, and where a person who is his agent within certain limits to appear to have more authority than he actually has, and where the principal allows it to appear that a person who used to be his agent continues to have his authority when in fact such authority has been terminated.

22. The question of whether the person held out to represent and bind the principal has the necessary authority is one of fact. A statement by such person that he is an agent with authority does not of itself give him authority, although such announcement can be prayed in aid of the claim that he has it.

23. A contract for the disposition of property is bound by the same rules. Chitty on Contracts, twenty eighth edition, at para. 32-075 states:-

"(f) Disposition of Property through Agent

32-075  Disposition of property by agent. A disposition of property made by an agent acting within his actual authority obviously transfers the property, in accordance with general principles. And a disposition made by an agent acting within his apparent authority will likewise be effective: if the doctrine of apparent authority is based on estoppel, the estoppel has here an unusually wide effect, for it operates as against all the world. The principal must have made a representation as to the agent's authority to the third party or to a group of third parties, or have been negligent in circumstances in which he owed a duty of care ......"

24. So, what of the facts in this case?

25. In considering the evidence adduced by Mr and Mrs Tsui and Mr Tang by their adopting their witness statements in the usual way and supplementing the same from the witness box, I am bound to say that I found them all to be witnesses of the truth not given to fabricate or dress up their respective accounts. Any lapse in accuracy was I believe a lapse of memory and incidental only to the issues I have to decide. I am satisfied that they are honest people and were doing their best to remember and recount events which gave rise to this litigation.

26. There is no direct evidence that Mr or Mrs Tsui had notice of actual authority acquired by Miss Cheung from Priway to sell the flat. But they were given every reason to suppose she had apparent authority to commit Priway to a sale on 29 November and 2 December. First of all she was at the flat, waiting to receive them, when they called with the agent to inspect it. She told them she represented the owner, whom she named as a private company, and had with her what had the appearance of the vendor's chop. The agent, Mr Wong, assured them he knew her from a past transaction, namely the tenancy, when as an authorized signatory of the landlord, now vendor, she had signed the tenancy agreement. When the Tsuis presented their offer it seems she made a telephone call as if to discuss the same or get instructions.

27. On the other hand I have Mr Tang's account that the role Miss Cheung was to play was, for the consideration of 1/2% commission, to introduce agents to the flat and assist with inspections and no more than that. Had she been given the authority to commit there would have been a minute to record that, as there had been when she signed the tenancy agreement on Priway's behalf. There was no such minute. However she presented herself, she had no authority to commit Priway. He had not exhibited any conduct to suggest otherwise. As far as he was aware she had returned all the company documents and records, chops and so on when she resigned as a director and assigned her shares; he had no idea she had in her possession a chop purportedly of Priway or indeed that there was such a chop. And finally, Miss Cheung's extraordinary behaviour in tearing up an agreement before entering into another one on terms only slightly more favourable to the vendor should have put Mr and Mrs Tsui on enquiry as to her authorized status.

28. The burden is on Mr and Mrs Tsui to establish that Miss Cheung acted with the authority of Priway to commit Priway to the agreement they entered into. They have not, in my view, satisfied that burden. There was neither actual nor apparent authority. The result as I find is that Priway was not a party to the agreement and not bound to perform as if it was. Thus the claim against Priway fails.

29. I come now to the counterclaim.

30. Mr and Mrs Tsui's election to register the encumbrances as they did was to protect what they believed, presumably on advice, were their rights to the flat or damages in lieu. As I have now found they have not and never have had such rights this registration amounted to a wrongful act, for it denied Priway the right to dispose of its flat. By such registration they wrongfully interfered with Priway's title.

31. As a consequence Priway has suffered loss. First it was prevented from performing its contract with Miss Lee, which ultimately rendered Priway liable to satisfy the judgment debt in favour of Miss Lee and the costs of the action she mounted. Secondly, the ongoing existence of the encumbrance on title has prevented Priway mitigating its loss by selling after that. The market has slumped and the flat is now worth substantially less. That is further loss.

32. The consequences of the wrongful act committed by Mr and Mrs Tsui is that they are, as I find, obliged to make good all of this loss.

33. What of Miss Cheung?

34. The rule is that one who expressly or impliedly warrants that he has the authority of another is liable in a contract for breach of warranty of authority to any person to whom the warranty is made and who suffers damage by acting in the faith of it, if in fact he had no such authority.

35. Miss Cheung pleaded she had authority to commit Priway to the agreement with Mr and Mrs Tsui. But as I have indicated, that was illusory. It is hard to know why she performed as she did; suffice to say it was a performance which justified Mr and Mrs Tsui believing they were dealing with a bona fide agent with authority, as a direct result of which they signed the agreement for the purchase of their next family home.

36. Beyond question I am satisfied that Miss Cheung warranted that she was authorized to sign on Priway's behalf when she had no such authority, in breach of that warranty. Mr and Mrs Tsui having entered into the agreement in reliance of that warranty and by reason of being unable to enforce the terms of the agreement have suffered consequential loss, for which, to the extent permitted by law as I shall come to, Miss Cheung must now be held liable.

Quantum

37. The consequences of my rulings on liability are regrettably far reaching, exacerbated by a violent swing in property values during the course of this litigation. It does not escape me that this is a nightmare result for Mr and Mrs Tsui, whose only default was that they believed, as they had every entitlement to, that they were signing an ordinary agreement to buy a home. With perhaps the benefit of hindsight it calls to question why enquiry was not made of Priway to show why Miss Cheung had no authority before they issued the writ; and, further, the wisdom of registering a lis pendens against the title of the subject property in a volatile market like Hong Kong's; I shall say no more than that.

38. It will be of small comfort to Mr and Mrs Tsui that they will have judgment in their favour against Miss Cheung given the uncertainty of her whereabouts and circumstances.

39. Be that as it may it is now my duty to work out who owes what to whom.

40. First, the counterclaim.

41. Mr and Mrs Tsui are liable to meet Priway's loss consequential upon its inability to complete with Miss Lee or thereafter sell the flat. This amounts to the settled final figure after judgment and costs, in all $1,400,360. There will be an award of interest on this amount from the date of payment. The additional loss is the difference between what Miss Lee would have paid and the flat's current worth, $2m. there will be a further order that the copy agreement and writ registered at the Land Registry Office be vacated.

42. Next, the Tsuis' claim against Miss Cheung.

43. The general rule in determining the quantum for breach of warranty of authority is that the party relying on the warranty is entitled to recover the difference in worth between his position had the contract been one he could enforce and his position by virtue of there being in fact no enforceable contract.

44. I quote from McGregor on Damages, 16th edition at para. 1308: Lord Esher MR put the measure for breach of warranty of authority concisely in Firbank's Executors v. Humphreys [1886] 18 QBD 54, at p. 60:

"The damages under the general rule are arrived at by considering the difference in the position he [the person acting in reliance on the warranty] would have been in had the representation been true and the position he is actually in in consequence of its being untrue."

45. On the facts of this case I do not believe that this entitles Mr and Mrs Tsui simply to recover from Miss Cheung what they are now bound to pay Priway.

46. This is because of two further principles.

47. The first is that the person who suffers loss as the result of a wrongful act of another has a duty to mitigate that loss.

48. I quote again from McGregor, at para. 295:

"2. THE RULE AS TO AVOIDABLE LOSS: NO RECOVERY
FOR LOSS WHICH THE PLAINTIFF
OUGHT TO HAVE AVOIDED

295 The extent of the damage resulting from a wrongful act, whether tort or breach of contract, can often be considerably lessened by well-advised action on the part of the person wronged. In such circumstances the law requires him to take all reasonable steps to mitigate the loss consequent on the defendant's wrong, and refuses to allow him damages in respect of any part of the loss which is due to his neglect to take such steps. Even persons against whom wrongs have been committed are not entitled to sit back and suffer loss which could be avoided by reasonable efforts or to continue an activity unreasonably so as to increase the loss. This well-established rule finds its most authoritative expression in the speech of Viscount Haldane L.C. in the leading case of British Westinghouse Co. v. Underground Ry [1912] AC 673 at p. 689 where he said:

"The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps."

49. In practical terms could the Tsuis have mitigated their loss?

50. The simplest and most effective way would have been to purchase another comparable home in Taikoo Shing. Their own valuer put the flat's value on the date of completion at $5.8m. Had they gone back to the market it is likely within a complex the size of Taikoo Shing they would have found a comparable alternative at no more than that price. The loss would have been the difference between what they bargained for, namely $4.57m and that figure, namely $1.23m.

51. The second principle is that the most the innocent party can recover in an action for damages is loss that could have been reasonably foreseen flowing from the breach.

52. On the facts of this case much of the loss the unfortunate Tsuis are now to suffer stems from the registration against Priway's title. This was a separate and distinct act on their part which I believe, any reasonable person in the shoes of Miss Cheung, aware of the duty of the innocent party to mitigate his loss, could not be expected to have foreseen.

53. Miss Cheung will as a consequence be liable to pay Mr and Mrs Tsui $1.23m together with interest from 1 March 1997.

54. Costs will follow the event but will be nisi at first instance.

55. Judgment follows.

56. The claims of the 1st and 2nd Plaintiffs against the 1st Defendant are now dismissed.

57. There shall be judgment in favour of the 1st Defendant against the 1st and 2nd Plaintiffs in the following terms:

1. registration of the agreement and copy writ in the Land Registry Office shall be vacated forthwith;

2. the 1st and 2nd Plaintiffs shall pay to the 1st Defendant:

(a) the sum of $1,400,360 together with interest at the prime rate from 25 November 1998 to the date of this judgment, thereafter at judgment rate until payment;

(b) the sum of $2m together with interest at the judgment rate from the date of this judgment to the date of payment;

costs taxed if not agreed.

58. There shall be judgment in favour of the 1st and 2nd Plaintiffs against the 2nd Defendant in the following terms:

the 2nd Defendant shall pay to the 1st and 2nd Plaintiffs:

(a) the sum of $1.23m together with interest at the prime rate from 1 March 1997 to the date of this judgment and thereafter at judgment rate until payment;

(b) costs taxed if not agreed including those costs for which the 1st and 2nd Plaintiffs are liable to the 1st Defendant.

59. The orders for costs are nisi at first instance.