TONG CHUN KEUNG v. LAU KWONG & HUNG (A FIRM) AND OTHERS

HCA 2365/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2365 OF 2008

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D E C I S I O N

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APPLICATION

1.  This is an application for striking out.

BACKGROUND

2.  The Plaintiff was and is the registered owner of the subject property.  He acquired it in February 1999.

3.  He said that he was a causal property investor.  In about January 2007, the property market was booming and he therefore negotiated with a bank to borrow money for property investment using the subject property as security.

4.  It was however discovered that, in the middle of 2006, the 3^rd Defendant, holding out as the Plaintiff, executed, inter alia, a Mortgage in favour of one Million (Far East) Limited (“the Lender/Mortgagee”) who granted credits/loans/debts to the extent of $5 million to one Kwan Kee Frozen Meat Company Limited (“the Borrower”).  The 3^rd Defendant was the sole director and shareholder of the Borrower.  The Borrower was later wound up in December 2006.

5.  Under the fraudulent transaction, the 1^st Defendant was the solicitor firm acting for the Lender/Mortgagee and the 2^nd Defendant represented the “Mortgagor”, i.e. the 3^rd Defendant as the Plaintiff.

6.  The matter was reported to the police.  The 3^rd Defendant was later charged with, inter alia, using forged ID card and fraud under DCCC 782/2007.  He was convicted.

7.  Thereafter, the Lender/Mortgagee commenced HCA 9/2008 against the solicitors, i.e. both the 1^st and the 2^nd Defendants herein.  The Plaintiff also issued HCMP 131/2008 against the Lender/Mortgagee to claim, inter alia, vacation of the Mortgage.  The Lender/Mortgagee agreed to it.

8.  Nonetheless, the Plaintiff further issued the present proceedings against both the solicitor firms and the impostor for, among others, damages for loss of profit he could have earned, interests and costs.

9.  Both the 1^st and the 2^nd Defendants defended for the proceedings and denied negligence.  The 2^nd Defendant averred, inter alia, that the ID card produced by the 3^rd Defendant appeared to be genuine, bearing the name of the Plaintiff.  On the other hand, the 1^st Defendant said in the Defence, among others, that it acted only for the Lender/Mortgagee.  It owed no duty to the Plaintiff.  The alleged damages of loss in the property market were too remote.  The 1^st Defendant further reserved its position to strike out the claim.

10.  Later, the 1^st Defendant did take out an application of striking out and it eventually went before me for substantive argument.  Mr. Anthony Ismail of Counsel acted for the 1^st Defendant.  Miss Lorinda Lau of Counsel represented the Plaintiff.  Upon hearing from both Counsel, I reserved my decision to be handed down.  I now do so.

DISCUSSION

Legal principles on striking out

11.  Both Counsel kindly agreed on the legal principles on striking out of proceedings.  It suffices for me to refer to the useful summary capsulated in the White Book 2009 at page 350:

“…… It is only in plain and obvious cases that the court should exercise its summary powers to strike out the indorsement on any writ or any pleading under this rule.  There should be no trial upon affidavit.  Disputed facts were to be taken in favour of the party sought to be struck out.  Nor should the court decide difficult points of law in striking out proceedings.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out …… Where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made …… The mere fact that the case is weak and not likely to succeed is no ground for striking out ……”

Disputed facts?

12.  With the above principles in mind, a striking out application will not succeed if there is disputed fact because, under such application, all the facts pleaded in the statement of claim are presumed having been proved on balance.  In our case, Counsel did not dispute on facts, but they did so on the interpretation of the nature of the Plaintiff’s claim.  Mr. Ismail said that it was a claim for economic loss.  Miss Lau argued that it was not.

13.  Upon thought, I agree with Mr. Ismail.  Under the Statement of Claim herein, the Plaintiff is only asking for loss of profits, and nothing else.  Paragraphs 22 and 23 of the Statement of Claim sum up his case.

“22.  By reason of the aforesaid Mortgage, the Plaintiff failed to raise sufficient capital from the Bank as the Bank refused to lend monies to the Plaintiff without security and the Plaintiff was not able to pledge the Property to the Bank as security for loan and he suffered loss and damages, being profits he could earn from investing in the real property market.

23.  The loss and damages hereinabove suffered by the Plaintiff was caused by the negligence, breached of duties, failure to carry out the general and approved practice in carrying out an mortgage transaction, and failure to exercise their due care, skill and diligence prudent solicitors of the 1^st and 2^nd Defendant, their servants, or agents as well as the Fraudulent Acts of the 3^rd Defendant.”

14.  Miss Lau tried to convince me by referring to the case of Bank of East Asia Ltd v Tsien Wui Marble Factory Ltd & Others [2000] 1 HKLRD 268 as well as paragraph 24 of the Statement of Claim.

“24.  The Plaintiff reserves his rights to plea further pending full and proper discovery and administration of interrogatories (if necessary).”

These arguments do not improve the Plaintiff’s case.  There is no “physical damage” done to the subject property and/or the Plaintiff.  Further, a reservation to plead further simply leads the Plaintiff to nowhere as it does not extend the Plaintiff’s claim to something other than the loss of the alleged profits that he could have earned.  Finally, Miss Lau also confirmed that she was not asking for leave to amend her pleadings.

Law in claim for negligence causing pone economic loss

15.  Both Counsel referred me to a recent House of Lords decision, Customs and Excise Commissioners v Barclays Bank plc [2007] 1 AC 181 wherein the concept of economic loss was considered in depth by 5 learned Judges.  Mr. Ismail also pointed that such case had been followed by Stone J. in Hong Kong under Formosa Taffeta Co Ltd v Banque Indosuez, unreported, HCA 5165 of 1977, 14 January 2009.

16.  With the above authorities, I purport to set out the followings:

(a)  In claims for damages of personal or physical injury, reasonable foreseeability of harm is enough to give raise to a duty of care.  However, for economic loss, something more is needed.

(b)  Throughout the years, facing with different situations, different judges developed three tests to identify what the “something more” are about.  They are commonly known as:

(i)  the assumption of responsibility test,

(ii)  the threefold test, and

(iii)  the incremental test.

(c)  The House of Lords found the tests useful, but sometimes difficult to reconcile with one other.  In the end, it was held that no “single common denominator” could be deduced from the tests and so, “the Court would focus its attention on the detailed circumstances of the case and the particular relationship between the parties in the context of their legal and factual situation taken as a whole”.

17.  Hence, for the present purpose, if no duty can be found on the 1^st Defendant towards the Plaintiff by applying all the tests, Mr. Ismail’s application should succeed.  Alternatively, if a duty might exist through any of the tests, the striking out application would fail.

(I)  The assumption of responsibility test

18.  In applying the assumption of responsibility test, I remind myself of the following useful observations.

“…… That phrase can be misleading in that it can suggest that the professional person must knowingly and deliberately accept responsibility.  It is, however, clear that the test is an objective one: Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 181.  The phrase means simply that the law recognises that there is a duty of care.  It is not so much that responsibility is assumed as that it is recognised or imposed by law ……”

(Phelps v Hillingdon London Borough Council

[2001] 2 AC 619, 654)

“36. …… whether a defendant has assumed responsibility is a legal inference to be drawn from his conduct against the background of all the circumstances of the case, it is by no means a simple question of fact.  Questions of fairness and policy will enter into the decision and it may be more useful to try to identify these questions than simply to bandy terms like ‘assumption of responsibility’ and ‘fair, just and reasonable’. ……”

(Barclays Bank, ibid, page 191

per Lord Hoffmann)

19.  So, could it reasonably be said that the 1^st Defendant had by his conduct accepted responsibility towards the Plaintiff in the eyes of the Court?  Miss Lau argued that a “special relationship” was created when the 1^st Defendant was retained to complete the Mortgage.  Upon thought, I decline to accept it.  The Plaintiff has never been a client of the 1^st Defendant.  At the material times, they simply did not know each other.  The Mortgage was not executed before the 1^st Defendant.  Under the transaction, the 1^st Defendant acted only for the Lender/Mortgagee.  The loss of investment profits of the Plaintiff is far-fetched.  As pointed out by Mr. Ismail, the suggestion that the 1^st Defendant had undertaken to protect the Plaintiff’s loss of investment profits should be rejected or that the solicitor firms would be asked to act as security guard for somebody’s property.

(II)  The threefold test

20.  The threefold test requires 3 elements to be established, namely, (i) reasonable foreseeability, (ii) sufficient proximity, and (iii) fair, just and reasonable in the circumstances to impose a duty of care.  To apply the test, I notice the followings.

“…… Phrases such as ‘foreseeability’, ‘proximity’, ‘neighbourhood’, ‘just and reasonable’, ‘fairness’, ‘voluntary acceptance of risk’, or ‘voluntary assumption of responsibility’ will be found used from time to time in the different cases.  But, as your Lordships have said, such phrases are not precise definitions.  At best they are but labels or phrases descriptive of the very different factual situations which can exist in particular cases and which must be carefully examined in each case before it can be pragmatically determined whether a duty of care exists and, if so, what is the scope and extent of that duty.”

(Caparo Industries plc v Dickman

[1990] 2 AC 628, per Lord Roskill)

“…… the threefold test itself provides no straightforward answer to the vexed question whether or not, in a novel situation, a party owes a duty of care ……”

(Barclays Bank, ibid, page 191

per Lord Bingham)

21.  With this in mind, Miss Lau had an uphill battle to fight. 

(a)  The loss of investment profits is not foreseeable.  The 1^st Defendant did not know that the Plaintiff was a causal property investor.  It further did not know that he would apply loan upon security of the subject property, invest it and earn profits from it.

(b)  The parties in the Mortgage transaction were separately represented.  The 1^st Defendant and the Plaintiff did not know each other.  I do not consider that their relationship is one of sufficiently proximate enough in the circumstances to give rise to a duty.

(c)  I agree with Miss Lau that a solicitor may sometimes be held liable to someone other than his own client.  Ross v Caunters [1979] 3 WLR 605 and White v Jones [1995] 2 WLR 187 are clear authorities to hold solicitors liable for beneficiaries/intended beneficiaries of a Will.  In those case, among others, it is simply fair, just and reasonable to hold the solicitors liable for their negligent acts having done, causing the (intended) beneficiaries to suffer loss under the circumstances. However, in the present case, we are facing a completely different scenario.  I do not intend to repeat the facts of the case and it suffices to take the view that, leaving aside the question of breach of duty, causation, duty to mitigate, and so forth, which are to be disputed elsewhere, I simply see no unfairness for not holding the 1^st Defendant to owe a duty of care for economic loss towards the Plaintiff in the present situation.

(III)  The incremental test

22.  By the incremental test, new duty of care is created by analogy with established cases.  Lord Bingham in Barclays Bank Inc, ibid, at page 192, observed that:

“…… the incremental test is of little value as a test in itself, and is only helpful when used in combination with a test or principle which identifies the legally significant features of a situation.  The closer that facts of the case in issue to those of a case in which a duty of care has been held to exist, the readier a court will be, on the approach of Brennan J adopted in Caparo Industries plc v Dickman, to find that there has been an assumption of responsibility or that the proximity and policy conditions of the threefold test are satisfied.  The converse is also true ……”

23.  Both learned Counsel have done extensive research of cases on the subject.  However, there is no direct authority on the same and we have to go back to the basic test.  From the cases placed before me, by analogy, I do not see fit to extend any of them to the particular circumstances of the present case.

(IV)  Test in Barclays Bank

24.  Finally, it comes to the test of “each case depends on its own facts” as stipulated in Barclays Bank.  To adopt the issue identified by Mr. Ismail in the opening of his written skeleton:

“Does a practicing firm of solicitors owe a duty of care to an owner of property not to cause him economic loss when it caused or permitted a mortgage of his property on the instructions of its client as security for extending credit to its client’s debtor which was executed by a person fraudulently posing as the owner to obtain such credit who was represented and advised by a different firm of solicitors?”

Having gone through the above tests and further consideration of the case of the parties, I am of the view that the answer is negative in the circumstances.

CONCLUSION

25.  In the end, I allow the 1^st Defendant’s application.  The Action and Statement of Claim herein against the 1^st Defendant are struck out on the ground that they disclose no reasonable course of action.  As to costs, I see no reason why costs should not follow the event.  There is an order nisi that the Plaintiff shall pay the 1^st Defendant costs of the proceedings and application, including all costs reserved and Certificate of Counsel for hearings on 29 May and 3 June 2009, to be summarily assessed by me, 0.5 hour reserved, failing agreement by the parties within 21 days.