JADE BASE INVESTMENT LTD v. FAN WONG & TSO (a firm)

cacv 69/2006 AND CAcv 132/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal noS. 69 of 2006 and 132 of 2006

(on appeal from HCA NOS. 5212 of 2001 AND 5213 OF 2001 (CONSOLIDATED))

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HCA 5212/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5212 OF 2001

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HCA 5213/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5213 OF 2001

______________________

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(Consolidated pursuant to the Order of Master Cannon on 1st February 2002)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA, I would only add that had these appeals not been dismissed this court would have considered making a special order as to costs with a view to disallowing the preparation of the 11 bundles that were prepared for the appeals.  In the event hardly any documents were referred to or relevant on these appeals.

Hon Le Pichon JA:

2.  These were appeals from the orders made by Master Hui dated 6 February 2006.  In CACV 132 of 2006 the appeal is from the decision of the master on the assessment of damages and in CACV 69 of 2006 the appeal is from the master’s decision to exclude certain evidence comprising the notice of assignment documents from the assessment.  At the conclusion of the appeal hearing, the appeals were dismissed with written reasons to be handed down later which we now do.

Background

3.  Jade Base Investment Ltd (“Jade Base”) and Ticsound (Music) Ltd (collectively “the plaintiffs”) each owned a property in McDonnell Road.  They were the plaintiffs in separate actions brought against Fan Wong & Tso (a firm) (“the defendants”) and Shun Kai Finance Company Ltd (“SKF”) as third-party which were consolidated in 2002.  At all material times, the defendants acted as solicitors for SKF.

4.  In 1993, the plaintiffs mortgaged their respective properties to SKF (“the first mortgages”).  The funding for the advances by SKF was largely financed by back-to-back arrangements with Japan Leasing (HK) Ltd (“Japan Leasing”) in whose favour SKF executed sub-mortgages (“the first sub-mortgages”).  Two years later, each of the plaintiffs entered into a further charge with SKF (“the second mortgages”).  Again the further advances were largely financed by back-to-back arrangements with Japan Leasing in whose favour SKF executed further sub-mortgages (“the second sub-mortgages”).  On 1 August 2001, Messrs Chui & Lau (“C & L”), the plaintiffs’ solicitors, wrote to SKF to the effect that their clients wished to redeem the first and second mortgages.  SKF was asked to provide the total amount payable by the plaintiffs for the release of the properties.  This letter was copied to Japan Leasing to whom all payments had been directed by the plaintiffs after receipt of notices of assignment dated 22 June 1998.  On 8 August 2001, SKF’s former solicitors Yolanda Fan & Co also forwarded a copy of that letter to Japan Leasing.  

5.  It is not disputed that SKF was in direct contact with KPMG the liquidators for Japan Leasing regarding the redemption figures in mid-August 2001 and that at the end of August it had been given two redemption figures for each of the properties, calculated up to 14 September 2001 as follows: for the Ticsound property, $2,588,769.54 and $1,993,596.84 and for the Jade Base property, $2,701,936.15 and $2,036,813.40.  In each case, the amounts were what were due and owing under the first and second sub-mortgages respectively.

6.  I will first set out what happened in relation to the Ticsound property.  Sometime prior to 1 September 2001, the defendants became successor solicitors to Yolanda Fan & Co and on 1 September they wrote to Baker & McKenzie, solicitors for Japan Leasing requesting redemption figures for the Ticsound property.  Although KPMG had provided the two relevant redemption figures for Ticsound (relating to the first and second sub-mortgages) to Baker & McKenzie, in their written reply of 4 September to the defendants, through a clerical error, only one redemption figure, namely that relating to the second sub-mortgage was given.  On the following day, the defendants advised C & L by letter at the amount payable on Discharge/Release of the Ticsound property was as follows:

“	Principal and Interest:	(1)	HK$2,588,769.54 drawn in favour of Japan Leasing (Hong Kong) Limited (In Creditors’ Voluntary Liquidation)
		(2)	HK$2,193,657.17 drawn in favour of Shun Kai Finance Company Limited
		(calculated up to 13th September 2001)		”

In addition, an amount was to be paid for the costs and disbursements of Baker & McKenzie.

7.  On 13 September 2001, C & L sent to the defendants three cheques in relation to the redemption of the Ticsound property.  The letter made it clear that the cheques were sent to the defendants against the firm’s personal undertaking (subject to the usual Law Society qualifications) to send to C & L within 17 days, inter alia, discharge of the first and second mortgages and release of the first and second sub-mortgages.  By this time, Baker & McKenzie came to realise the error that had been made and by letter dated 14 September advised the defendants of the two amounts outstanding in respect of the Ticsound property.  Naturally, Japan Leasing refused to execute the discharge unless it was paid the two amounts.

8.  As noted above, the advances made by SKF under the first and second mortgages had been funded substantially, in fact over 90%, by the back-to-back arrangements.  It would appear that the defendants did not bother to verify what was in fact owing to SKF when they gave instructions for the split cheques to C & L. What transpired was that the amount of the cheque in favour of SKF included the amount required to clear the first sub-mortgage.

9.  Upon receipt of the three cheques from C & L, notwithstanding the inability to obtain the discharge of the first and second sub-mortgages from Japan Leasing, the defendants nonetheless saw fit to release the cheque drawn in favour of SKF to SKF.  In short the defendants’ client was therefore able to and did misappropriate the monies that should have been applied to obtain the discharge of the first sub-mortgage.

10.  Similar events occurred in relation to the Jade Base property.

11.  The first and second mortgages were discharged by SKF on 20 September 2001.  In December 2001, the plaintiffs commenced proceedings seeking specific performance by the defendants of their personal undertakings to discharge the first and second sub-mortgages.  On 4 March 2003, Master Ho awarded summary judgment to the plaintiffs for damages and interest to be assessed.  There was no appeal.

12.  Shortly thereafter C & L wrote to the defendants’ solicitors asking for the return of the cheques.  The cheques that had been in favour of Japan Leasing and Baker & McKenzie were returned in April 2003.  The Jade Base property was sold and the first and second sub-mortgages relating to it released on 30 June 2004.  The Ticsound property has not been sold and the sub-mortgages remain undischarged.

13.  The hearing for the assessment of damages came before Master Hui.  The master assessed damages for breach of the undertakings.  He considered that the plaintiffs should be put in the same position as if the defendants had complied with the undertakings.  He awarded the plaintiffs the amount that was required to obtain the discharge of the sub-mortgages.

This appeal

14.  As a preliminary matter, insofar as Mr Smith SC who appeared for the defendants sought to argue that the basis of liability was for the nonreturn of the cheques, it was a nonstarter.  The basis of the actions was for breach of the undertakings.  That was also the basis of the order 14 summons.  Quite simply, the plaintiffs who have been blameless throughout are entitled to be put into the position they would have been in but for the breach of the undertakings.  I am unable to see how it can be contended that the basis of liability on the summary judgment application was merely for not returning the cheques.  Therefore, it becomes unnecessary to consider Mr Smith’s submissions to the effect that damages were limited to the amount of the cheques payable to SKF less the amount due to SKF from the plaintiffs and that breach of the undertakings gave rise to no loss on the basis that following the discharge of the mortgages, the sub-mortgages were illusory encumbrances.

15.  I will now turn to consider the other issues raised by Mr Smith.

Date for assessment of damages

16.  Mr Smith SC submitted that the correct date for the assessment of damages was the date of the breach.  But that is not an immutable rule.  The court has power to fix another date if to avoid what would otherwise be an injustice.  It would not have been the appropriate date in the present case given the specific performance proceedings.  Mr Smith then submitted that in any event the appropriate date should be shortly after the outcome of those proceedings i.e. March 2003 and not the much later dates of 2 July 2004 for Jade Base and 6 February 2006 (being the date of the assessment of damages hearing) for Ticsound.

17.  At the date of the assessment of damages hearing, the loss had already crystallized in the case of Jade Base in that the property had been sold and the sub-mortgages discharged on 2 July 2004.  I do not consider that the master could be criticized for adopting the date the sub-mortgages were discharged as the appropriate date for the assessment of damages for Jade Base.  The amount awarded did no more than to compensate Jade Base for the actual loss sustained.

18.  In the case of Ticsound, the sub-mortgages were still on foot at the assessment of damages hearing.  That being the case, the master cannot be criticized for choosing that date as the appropriate date.  There is a separate point being taken as to the award of an additional daily sum which is dealt with in paragraphs 27 to 36 below.

Failure to mitigate

19.  It was said that the plaintiffs ought to have mitigated their damages by seeking the earlier discharge of the sub-mortgages by repaying the outstanding debt out of their own resources.  Mr Smith SC submitted that once the specific performance issue had been decided which was in early March 2003, the plaintiffs were under a duty to mitigate their loss.  It was said that the evidence from the plaintiffs was that they were unwilling rather than unable to do so.  He relied on the first witness statement of Fung Yuk Fan (“Ms Fung”) where it was stated that the shareholder and directors of the plaintiff’s “objected as a matter of principle” to providing finance for the redemption of the sub-mortgages.

20.  But paragraph 24 of Ms Fung’s statement read:

“The position is simply that the Plaintiffs had already made full payments required for the obtaining the releases of the mortgages and the sub-mortgages.  There is no obligation on their part to make any further payment in order to obtain the releases of the sub-mortgages.  The fact is rather that the Defendant had apparently allowed SKF to pocket excessive payments as aforesaid without trying to retrieve the same from SKF.  It has never been the Defendant’s case that it will compensate the Plaintiffs for whatever further payments the Plaintiffs will be required to pay in order to redeem the sub-mortgages.  Without such promise, the Plaintiffs are simply not in a position to raise further funds for the purposes of redeeming the sub-mortgages.  Jade Base and Ticsound are the family companies of the Au Young’s.  They are just property holding companies holding properties for internal use and for leasing purposes…. neither Jade Base nor Ticsound has any substantial capital.  Save for some rental income, neither Jade Base nor Ticsound has any other business income….  Hence, if Jade Base and Ticsound have to raise further moneys to redeem the further mortgages, they can only do so with the backing of their shareholders and directors.  I have confirmed with them that, as a matter of principle, they are not willing to provide any financial backing for the redemption of the further mortgagees.”

21.  What is clear from the plaintiffs’ evidence is that they were not in a position, financially, to redeem the sub-mortgages.  The duty to mitigate is to take such steps as are reasonable in the circumstances.  The plaintiffs had already paid the amounts required to obtain releases of the sub-mortgages to the defendants in 2001.  But for the defendants’ wrongdoing by wrongfully releasing the monies to SKF, the sub-mortgages would have been long discharged.  The notion that the plaintiffs were under an obligation not only to apply further funds of their own but (where necessary) to raise the same from their shareholders and directors or by outside borrowing to discharge the sub-mortgages is as startling as it is audacious in the circumstances of this case.

Interest on the C & L cheques

22.  The point taken here was that for a period of about 1½ years, no interest had been earned on the monies represented by the C & L cheques received back from Baker & McKenzie.  Although the defendants had offered to return the cheques on 16 October 2001, the offer was not taken up until 6 March 2003, immediately after the summary judgment application.  Mr Smith SC submitted that this money would, or should, have earned interest for the plaintiffs in the client account of C & L.  It was said that the plaintiffs should have instructed their solicitors to put the monies in interest bearing accounts.

23.  The plaintiffs’ answer is that whilst they were still seeking specific performance, they were entitled not to accept the return of the cheques.  As to whether credit should have been given for interest earned on the monies represented by the cheques whilst they remained in the client account of C & L, the point has not been pleaded or was it taken below.  There is no allegation in either the Defences or the Amended Response to Statement of Damages that the plaintiffs should have done that.  Moreover, no evidence was adduced as to the interest (if any) paid on those monies in the C & L client account and it was not a matter upon which there had been any cross-examination.  In my view, it is far too late for the point to be taken now.

Exclusion of relevant evidence

24.  Master Hui refused to allow the defendants to adduce two notices of assignment dated 22 June 1998 given by Japan Leasing, one to each of the plaintiffs.  Mr Smith SC submitted that if notices of assignment had only been given in respect of the debts under the second mortgages but not of the debts under the first mortgages, payments to SKF of the outstanding amounts due under the first mortgages would have reduced or discharged those debts which in turn would have reduced or extinguished the amounts secured by the first sub-mortgages in favour of Japan Leasing.  On this basis it was said to be necessary to investigate whether the notices only related to the second mortgages and not also to the first mortgages.

25.  It was common ground at the hearing below that after receipt of the notices the plaintiffs directed all their payments, i.e. under the mortgages as well as the sub-mortgages, to Japan Leasing and the same was applied to reduce SKF’s indebtedness under the first and second sub-mortgages.  Nothing was thereafter paid to SKF.  If the notices had related to the second mortgages only but not the first mortgages (or vice versa) so that part of the monies ought to have been paid to SKF rather than all of it to Japan Leasing, one would have expected the point to have been raised by SKF soon after the notices were given.  Not only did SKF make no complaint during the three years that elapsed before the commencement of these proceedings, it was not a point that was taken in the pleadings in these proceedings.  It was raised for the first time in the cross-examination of the plaintiffs’ witness during the assessment of damages hearing.

26.  Quite apart from these matters, the redemption arrangement involved Japan Leasing.  It is clear that the plaintiffs were to pay all the outstanding monies for the discharge of the encumbrances by paying SKF through the defendants on the basis of the undertakings set out in the letter of 13 September 2001.  The clear intention of the parties was that SKF/the defendants would pay Japan Leasing so that all encumbrances would be released.  The defendants gave the undertakings on that basis.  In these circumstances, the submission that the notices of assignment would have any relevance on quantum is devoid of merit.

The payment of an additional daily sum

27.  This point arises under that part of the order that relates to Ticsound.  The order in pertinent part read:

“The Plaintiff, [Ticsound] having on the 28th day of April 2003 obtained interlocutory judgment herein against the Defendant under High Court Action No.5213 of 2001 for damages to be assessed, and the amount found due to the Plaintiff having been certified at HK$5,240,023.46 and an additional daily sum of HK$3,110.92 after 2nd February 2006 until payment together with interest at judgment rate from the date The Plaintiff pay off Sub-Mortgage Memorial No.5684322 and Further Sub-Mortgage Memorial No.6368334 until the date the Defendant pays up the damages to the Plaintiff as appears by the Master’s Certificate filed on the 3rd day of March 2006.

IT IS THIS DAY ADJUDGED that the Defendant do pay the Plaintiff HK$5,240,023.46 and an additional daily sum of HK$3,110.92 after 2nd February 2006 until payment together with interest at judgment rate from the date of Plaintiff pay off Sub-Mortgage Memorial No.5684322 and Further Sub-Mortgage Memorial No.6368334 until the date the Defendant pays up the damages to the Plaintiff and costs of the assessment, including costs reserved, if any, to be taxed, if not agreed, with certificate to Counsel.”

28.  On 20 March 2006 Ticsound gave an undertaking (“the 2006 undertaking”) in the following terms:

“	(b)	We hereby undertake that we shall only enforce the Judgment against the Defendant up to the amount paid by us to or demanded of us from the Liquidators of Japan Leasing (Hong Kong) Limited (in Creditors’ Voluntary Liquidation) or its assigns in order to obtain a release of the Sub-Mortgage Memorial No.5684322 and the Further Sub-Mortgage Memorial No.6368334 registered against Flat A, 33rd Floor and Car Parking Space No.218 on Second Car Port Level, Nos.35-37 MacDonnell Road, Hong Kong.
	(c)	This undertaking shall not cover the interest and costs granted to us under the Judgment so that in addition to amount paid or demanded of us to obtain the releases in Sub-Mortgage Memorial No.5684322 and Further Sub-Mortgage Memorial No.6368334 as aforesaid, we shall also be entitled to enforce the Judgment against the Defendant to the extent of the interests and costs we are entitled thereunder.”

This undertaking was filed with the court and can only have been on the basis of an undertaking to the court given its terms.

29.  By a consent order dated 18 October 2006, the execution of the judgment given on 6 February 2006 was stayed until 2 February 2007 conditional upon the payment into court in an interest bearing account by the defendants of a sum of $13 million as security for the judgment.  As I understand it, the sub-mortgages are still subsisting.

30.  The sum of $5.2 million odd was the amount required as at 2 February 2006 to discharge the Ticsound sub-mortgages.  The judgment ordered an additional daily sum of $3110.92 to be paid if payment was made after 2 February 2006.  Mr Smith submitted that the award of the additional daily sum was wrong in principle as the judgment also awarded “interest at judgment rate”.

31.  The effect of the judgment has to be ascertained by reading the judgment and the undertaking together.  Assume the following different scenarios:

(1)	The defendants pay Ticsound the amount required to discharge the sub-mortgages calculated up to 31 March 2007 when the sub-mortgages are redeemed.
(2)	Ticsound applies its own funds to discharge the sub-mortgages on 31 March 2007.  The defendants pay Ticsound its damages on 30 April 2007.

32.  Under scenario (1), the payment to be made by the defendants will comprise the sum of $5.2 million odd plus the additional daily sum calculated up to 31 March 2007, the aggregate amount being “$x”.  Ticsound may not recover any interest from the defendants.  The judgment is thus limited to $x.

33.  Under scenario (2), Ticsound will have paid $x to obtain the release of the sub-mortgages.  The damages recoverable from the defendants would be $x plus interest on that sum at judgment rate from 31 March to 30 April 2007.

34.  The award of damages is to compensate the innocent party for the loss resulting from the defaulting party’s breach.  In the present case, the damages are meant to put Ticsound in the position it would have been but for breach of the undertaking to provide the agreed releases.  At the date of the order, the capital amount required to pay off the Ticsound sub-mortgages as at that stage was known.  But the loss was a continuing one in the sense that unless and until the defendants pay up, interest would accrue on the outstanding capital amount on a daily basis at a fixed rate.  The daily figure was therefore capable of quantification and was not at large.

35.  Under scenario (1) postulated above, the judgment that is enforceable (having regard to the 2006 undertaking) is no more than what is required in order to make Ticsound whole.  Ticsound does not recover any interest in addition.  Under scenario (2), the interest to which Ticsound would be entitled represents compensation for having to be out of pocket during the period between the date of discharging the sub-mortgages out of its own funds and receiving payment from the defendants.  I do not see that the order made (read with the 2006 undertaking) is in any way objectionable or contrary to established principle.

36.  I would only add that the sooner the defendants clear the sub-mortgages the better.  Their stance to date is incomprehensible.  Indeed their attitude in this sorry saga since September 2001 is to be deplored.

Hon Lam J:

37.  I agree. I only wish to add that regarding the point that the sub-mortgages were rendered illusory by the discharge of the principal mortgages, that had been raised and rejected at the hearing before Master Ho.  There is no appeal against that decision and that should be the end of it.

38.  Further, for my part, I do not think one can draw an analogy with a sub-lease.  On their terms, the sub-mortgages operate as assignments of the debts under the principal mortgages and the principal mortgagee’s interest in the properties (see Clause 3 of the sub-mortgages).  Hence, having assigned its interests, SKF was not in a position to give a valid discharge as far as the interests of Japan Leasing under the sub-mortgages are concerned.

39.  Although Section 44(1) of the Conveyancing and Property Ordinance provides that a sub-mortgage should only have effect as a charge, Section 44(2) gives the sub-mortgagee the same protection as if the sub-mortgage had been effected by assignment.  It follows that Japan Leasing could not be worse off in respect of the effect of a discharge of the principal mortgages without a valid discharge of the sub-mortgages.

40.  For the reasons given by Le Pichon JA, the Plaintiffs must be taken to have notice of these sub-mortgages and they are bound by them and need to secure proper discharge of the same in order to have a clean title.  Therefore, the point has no merit in any event.

Hon Rogers VP:

41.  The appeals will therefore be dismissed with an order nisi as to costs in favour of the plaintiffs.