BANK OF CHINA (HONG KONG) LTD v. WONG KING SING & ANOTHER

HCMP3350/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3350 OF 1998

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J U D G M E N T

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The claim

1. In this trial, the only protagonists are the plaintiff, the China State Bank Limited, and the second named 2nd defendant, Mr Wong King Fu. I shall hereafter refer to them as, respectively, "the Bank" and "WKF". Judgment has already been entered against the 1st defendant and the first named 2nd defendant.

2. The Bank's claim arises out of a Legal Charge dated 15 September 1997 (although executed on 12 September 1997) whereby certain shop premises were charged by Choi Kai Cheung ("CKC") and WKF to the Bank to secure the repayment of all monies which may become payable by Wong King Sing (the 1st defendant and WKF's brother) ("WKS") trading as Techpeople Computer Store or of such monies as may be owed under the Charge by CKC and WKF. The Bank was described in the Charge as "the Lender", WKS (trading as Techpeople Computer Store) as "the Principal" and CKC & WKF as the "Chargor". The relevant property can in simple form be described as Unit 136 on the First Floor of a mall known as Sim City within Chung Kiu Commercial Building ("the Property"). I will refer to this Charge as "the 2nd Legal Charge" as this is how the pleadings have described it.

3. WKF also entered into an Equitable Mortgage for the Property dated 12 September 2001. This was executed at the same time as the 2nd Legal Charge. It contains similar terms and conditions to those found in the 2nd Legal Charge, but as there is no claim based on this agreement, I say no more about it.

4. Both the 2nd Legal Charge and the Equitable Mortgage were provided in relation to the purchase of the Property although the liabilities of the chargors thereunder went beyond the loan provided for the purchase of that property.

5. On the same day, another Legal Charge was entered into, this time between the Bank and WKS, whereby Unit 123 of Sim City was charged to the Bank by WKS also to secure the payment of all monies which may become payable by WKS trading as Techpeople Computer Store. The pleadings refer to this Charge as the 1st Legal Charge and I am content to do likewise. The Charge was provided in relation to the purchase of Unit 123, although again the chargor's liability went beyond the loan provided for the purchase of that property.

6. Both Charges were in similar terms. I set out the more salient terms and conditions of the 2nd Legal Charge.

7. By clause 1, the Principal (WKS trading as Techpeople Computer Store) and the Chargor (CKC & WKF) jointly and severally covenanted to pay on demand to the Lender (the Bank) :-

(a) "all present and future indebtedness of the Principal to the Lender according to the books of the Lender on any current or other account together with all bank charges thereon;" and

(b) "all costs charges and expenses however incurred by the Lender or by any receiver or any delegate appointed by the Lender in relation to the ... [Charge] on a full indemnity basis;" and

(c) "all other liabilities of the Principal to the Lender according to the Books of the Lender whether present future actual or contingent or as principal or guarantor and whether due alone or with any other person"

together with interest thereon under the provisions of clauses 3 and 7 of the Charge.

8. By clause 2, the Property was charged to the Bank.

9. Clauses 3 and 7 set out the interest provisions of the Charge.

10. WKS trading as Techpeople Computer Store defaulted in payment of both principal and interest under both the 1st and 2nd Legal Charges. Accordingly, by two letters dated 1 June 1998 from the Bank's solicitors to WKS, payment was demanded of the sum of HK$10,292,655.92, being the principal due under various banking facilities together with interest up to 24 May 1998.

11. Similar letters were sent to CKC and WKF demanding payment of the said sum by reason of the terms of the 2nd Legal Charge.

12. No payment has been made by WKS, CKC and WKF. The Bank therefore claims the principal and interest due in the present proceedings.

The present proceedings

13. On 16 July 1998, the Bank commenced the present proceedings by Originating Summons, which was subsequently amended on 13 August 1998. In support of the proceedings, the Bank filed an Affirmation of Chan Tat Ming dated 10 September 1998 (filed on 15 September 1998).

14. No Acknowledgment of Service was entered by the defendants. On 27 October 1998, on the first hearing of the Originating Summons, judgment was entered against the defendants by Registrar Betts granting the relief sought by the Bank ("the October 1998 Judgment").

15. By a summons dated 9 March 1999, WKF applied to set aside the October 1998 Judgment. This was supported by his Affirmation dated 9 March 1999 (WKF's 1st Affirmation). The Bank responded by an Affirmation of Chan Pok Lang ("CPL") dated 26 March 1999 and in response to this affirmation, WKF served another Affirmation dated 27 April 1999.

16. The setting aside summons was heard by Master Sweeney on 12 May 1999, who ordered the setting aside of the October Judgment insofar as it affected WKF. It was also ordered that the Affirmations of Chan Tat Ming and CPL (to which I have referred above) were to stand as the Writ and the Statement of Claim. WKF was given leave to serve a Defence within 14 days. This was done on 25 May 1999.

The issues

17. The Defence raises the following defences (and this was in fact the way that the case was opened by Mr S.C. Lam (for WKF)) :-

(a) No admissions are made as to the amount of the indebtedness owed by WKS to the Bank and the Bank was put to strict proof of this.

(b) Misrepresentation and non-disclosure : WKF alleges that the banking facilities that the Bank had afforded to WKS were not disclosed to him at the time he entered into the 2nd Legal Charge and the Equitable Mortgage. It is also asserted by WKF that the Bank actually misrepresented the position by telling him that the documents were for a mortgage of the Property and that the limit of liability under the 2nd Legal Charge was only $4.5 million, being the mortgage loan. This misrepresentation was said to taken place on 12 September 1997 at the offices of the Bank's solicitors (Messrs Wat & Co.) and was alleged to have been made by a "staff" of that firm.

(c) Undue influence : here the allegation is that WKF was induced to sign the 2nd Legal Charge by the undue influence of his brother WKS, who acted as the Bank's agent for the purposes of inducing him to sign the documents. It is not clear from the pleadings whether actual or presumed undue influence is relied on, but I shall assume both.

18. The essence of these defences is that as WKF did not willingly enter into the 2nd Legal Charge, he is therefore not to be held liable thereunder. The nature of these defences inevitably involves the Court having to consider the extent to which the relevant person (in this case, WKF) might or would have been induced or misled into signing documents which on their face impose liability. It is therefore necessary when considering defences based on misrepresentation and undue influence (and to a certain extent, non-disclosure), particularly in the context of commercial documents, for the Court to assess the character, ability and general comprehension of commercial matters of the relevant person. To these aspects I shall presently return.

19. Although the Bank was put to strict proof of the amount of the indebtedness of WKS trading as Techpeople Computer Store, counsel agreed that Mr Lam (for WKF) should open the case. I was amenable to this course.

20. I now deal with the issues.

Indebtedness of WKS

21. There was no real dispute on the indebtedness owed by WKS (trading as Techpeople Computer Store) to the Bank. Mr Chan Tat Ming, the deputy manager of the Bank's Cheung Sha Wan branch (where Techpeople Computer Store had an account), gave evidence as to the present state of the indebtedness. Previously, in his Affirmation dated 10 September 1998, to which I have referred above, he had stated the indebtedness at 10 September 1998 to be $10,592,706.37. This Affirmation was admitted as his evidence in chief. In giving evidence, Mr Chan produced a statement of indebtedness (Exhibit P1) showing the indebtedness of WKS as at 1 April 2001 to be $8,645,673.71, being $7,920,160.93 principal and $725,512.78 interest.

22. I accept this evidence. As I have said, there was no real challenge to this.

23. I now deal with what became the main focus of the trial : the issues of misrepresentation/non-disclosure and undue influence.

Misrepresentation and non-disclosure

24. These aspects can conveniently be considered at the same time. In my judgment both these defences fail.

25. As to the misrepresentation defence, there was simply no evidence from WKF (or anyone else) to the effect that it was represented to him that the total extent of WKS's liability under the 2nd Legal Charge was limited only to the mortgage loan of $4.5 million. In fact, misrepresentation was not even introduced as an issue in Mr Lam's opening.

26. The defence is also inconsistent with the contemporaneous documents. I need only refer to two such documents :-

(a) A facility letter dated 5 September 1997 from the Bank to Techpeople Computer Store, countersigned by WKF, in which it is stated, "As security, we [the Bank] require a legal charge on ... [the Property] to be executed in our favour for General Banking Facilities to the total extent of all moneys".

(b) A letter dated 12 September 1997 from Messrs Wat & Co. to CKC and WKF, again signed by WKF, in which it is stated that the 2nd Legal Charge was "to secure all moneys in respect of general banking facilities to be granted to ... [WKS] from time to time by ... [the Bank]".

27. As to non-disclosure, this bore some resemblance to the misrepresentation defence in that it was asserted the Bank failed to disclose to WKF the full extent of the facilities afforded to WKS. In my view, it did not have to as long as it did not misrepresent the position. There is no general duty on the part of a creditor like the Bank to disclose material facts to a surety (which is how WKF is to be regarded), in particular any circumstances which would make the surety's position more hazardous. In other words, it is the surety who has the obligation to make all necessary inquiries. The creditor's duty is simply not to mislead. See in this context : Law of Guarantees : Andrews and Millett (3rd edition) at paragraph 5.15.

28. To these general statements of principle, however, is an important qualification. Where there exist facts (in this context usually arrangements between the creditor and the principle debtor (in the present case, WKS)) of which the surety is unaware and which he could not in the circumstances be expected to know but which materially affect his liability or potential liability, it is then incumbent on the creditor to disclose such facts to the surety. A failure to disclose would result in the creditor being unable to enforce the contract signed by the surety. Just as a surety will in general be discharged if the contractual arrangements between the creditor and the debtor are materially altered without his consent (since the surety's risk will be different to that which he had originally assumed) so the surety will not be liable in the first place where he has not been informed of matters or arrangements which he might not reasonably expect to have been a part of the risk he would bear under the contract with the creditor. This is a well established principle : Hamilton v. Watson (1845) 12 C. & F. 109 (House of Lords); London General Omnibus Co. Ltd v. Holloway [1912] 2 KB 72; Law of Guarantees : Andrews and Millett (3rd edition) at paragraph 5.15; Spencer Bower, Turner & Sutton : Actionable Non-Disclosure (2nd edition) at paragraphs 8.19, 8.23. I was also referred to Levett v. Barclays Bank Plc [1995] 1 WLR 1260, where the principle is also referred to. There is some debate as to whether the facts that have to be disclosed are restricted only to arrangements between creditor and debtor or whether there should be disclosure of further matters (such as arrangements made between the creditor and third parties such as co-sureties or as between the debtor and third parties) : see here Law of Guarantees: Andrews and Millett (3rd edition) at paragraph 5.15. It is not necessary in this case for me to reach a view on this, but I would be inclined towards the views expressed by the High Court of Australia in Commercial Bank of Australia v. Amadio (1983) 151 CLR 447.

29. Applying the above principles to the facts of the present case, I find that a case for non-disclosure has not been made out. The complaint is that the Bank did not disclose to him details of the full extent of the facilities afforded to WKS. Specifically, it is said that the Bank did not disclose to him details regarding the loan arrangements underlying the purchase of Shop 123.

30. In my view, however, quite apart from the actual wording of the 2nd Legal Charge (which provided for WKF being liable for "all present and future" indebtedness of WKS), the two documents I have referred to in paragraph 25 above (both signed by WKF) would have made it clear to WKF that he was effectively to be a surety for WKF's indebtedness under banking facilities provided to Techpeople Computer Store as existed from time to time. In addition, when WKF attended the offices of Messrs Wat & Co. on 12 September 1997, he was told by CPL (then a conveyancing clerk with that firm) before signing the 2nd Legal Charge that he would be liable without limit under the Charge for all moneys which might be owing by WKS from time to time. I shall return to this part of CPL's evidence when dealing with the issue of undue influence.

31. WKF being aware then (at least he should have been so) that he would be liable under the 2nd Legal Charge for all moneys from time to time owing by WKS (and not just for the $4.5 million or so), he must in my view therefore also have reasonably have expected that such banking facilities afforded to WKS might change from time to time. It is relevant to observe here that in paragraph 11 of WKF's Affirmation dated 9 March 1999 (and this was one of the paragraphs of the Affirmation admitted as part of his evidence in chief), he says that he "understood that the purchase of the [Property] was just for the expansion of ... [WKS's] business". If he wanted to be kept abreast of the full extent of the liability of WKS towards the Bank, it was up to him to find out. There was no evidence to suggest that if he wanted to do so, this would not have been possible. In the circumstances, the Bank was not obliged, in my view, to do more than it did.

32. The complaint that the failure of the Bank to disclose the existence of the loan made in respect of the purchase of Unit 123 somehow rendered misleading WKF's liability under the 2nd Legal Charge, is not in my view justified either.

Undue influence

33. I first deal with the law. In this regard, there has been a recent decision of the House of Lords from which I have derived much assistance. The case is Royal Bank of Scotland v. Etridge (No.2) [2001] 3 WLR 1021. Such was its perceived importance that I asked the parties for further submissions based on this case. Both counsel have provided me with supplemental submissions in writing dated 10, 20 and 24 November 2001.

34. I should preface the discussion of this defence with the observation that, as with all aspects of the law, one has to apply a large degree of common sense to the matter. The proliferation of cases in this area, particularly in recent times, creates a tendency to have principles mechanically set out as almost formulas to be applied. While this is convenient and provides a logical basis for the application of at times not uncomplicated principles, it is to be borne in mind that the defence of undue influence is ultimately a simple concept. It has all to do with informed consent. Once a court forms the view that consent was freely given with full knowledge of the consequences of entering into the relevant transaction, that is the end of the matter, however improvident the transaction may objectively appear. The rationale for the defence of undue influence is to prevent the victimisation of the complainant. It is there to protect people from being forced, tricked or misled in any way by others into entering into a disadvantageous transaction : see Allcard v. Skinner (1887) 36 Ch.D. 145, at 182-3; National Westminster Bank Plc v. Morgan [1985] AC 686, at 705. As Lord Nicholls of Birkenhead said in Royal Bank of Scotland v. Etridge at 1029 paragraph 8, the unacceptable conduct lies in "a relationship between two persons where one has acquired over another a measure of influence, or ascendancy, of which the ascendant person then takes unfair advantage."

35. The burden is of course on the person seeking to set aside or avoid liability under the relevant transaction. It is not for the other party to prove that the transaction was entered into with full understanding of the nature and consequences of the transaction. This reversal of the burden of proof is commonly referred to as the "Romilly heresy" : see Barclays Bank Plc v. O'Brien [1994] 1 AC 180, at 193A-B.

36. That said, although the legal burden of proof is throughout on the party seeking to set aside, the evidential burden may shift. Here, presumptions may arise depending on the circumstances. I will return to this aspect in due course.

37. It is convenient at this point to identify the different classes of undue influence. Here, the starting point is the classification adopted by the English Court of Appeal in Bank of Credit and Commerce International SA v. Aboody [1990] QB 923, summarised by Lord Browne-Wilkinson in his speech in Barclays Bank Plc v. O'Brien at 189-190 :-

"Class 1 : Actual undue influence

In these cases it is necessary for the claimant to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction which is impugned.

Class 2 : Presumed undue influence

In these cases the complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. In Class 2 cases therefore there is no need to produce evidence that actual undue influence was exerted in relation to the particular transaction impugned : once a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice. Such a confidential relationship can be established in two ways, viz.,

Class 2(A)

Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised.

Class 2(B)

Even if there is no relationship falling within Class 2(A), if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence. In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned."

38. In the case of actual undue influence (Class 1), the complainant (on whom the burden of proof on this issue rests) has to demonstrate the following, namely that :-

(a) the person who allegedly influenced (I will refer to him as "the influencer") had the capacity to influence the complainant;

(b) influence was in fact exerted;

(c) the exercise of influence by the influencer was undue; and

(d) the exercise of undue influence resulted in the transaction complained about (although it need not be the only reason as long as it was a significant reason : Chitty on Contracts Vol.1 (28th edition) at paragraphs 7-50).

See : Bank of Credit and Commerce International SA v. Aboody at 967.

39. In cases of actual undue influence, it is not necessary in order for the transaction to be set aside to demonstrate that it was manifestly disadvantageous to the complainant : see the House of Lords decision in CIBC Mortgages Plc v. Pitt [1994] 1 AC 200, at 208-9. As Lord Browne-Wilkinson remarked, actual undue influence is a species of fraud; "A man guilty of fraud is no more entitled to argue that the transaction was beneficial to the person defrauded than is a man who has procured a transaction by misrepresentation. The effect of the wrongdoer's conduct is to prevent the wronged party from bringing a free will and properly informed mind to bear on the proposed transaction which accordingly must be set aside in equity as a matter of justice" : CIBC Mortgages Plc v. Pitt at 209C-D.

40. In cases of presumed undue influence (Class 2), there is first a two-step inquiry :-

(a) Was the relationship between the complainant and the influencer one of those established types of relationship that as a matter of law, undue influence is presumed? This is commonly known as the Class 2(A) category.

(b) If not within Class 2(A), was the relationship nevertheless one in which the complainant generally reposed such a degree of trust and confidence that the presumption of undue influence can be presumed? This is the Class 2(B) category.

41. Once it can be shown by the complainant that he falls within either Class 2(A) or Class 2(B), a presumption arises in his favour that the relevant transaction has been entered into as a result of undue influence. The effect of this presumption is that once it arises, whether Class 2(A) or 2(B), the burden then shifts to the influencer (or, as will be dealt with below, by the relevant third party such as the Bank in the present case) to show that the transaction was entered into with an independent mind and free of any undue influence : see Bank of Credit and Commerce International SA v. Aboody at 953; Barclays Bank Plc v. O'Brien at 189. If he fails to discharge the burden, the transaction will be set aside without the complainant having to prove any actual undue influence. It is important to bear in mind that the effect of the presumptions is to place an evidential burden on the influencer (or the third party as we shall see) to prove that the transaction was freely entered into by the complainant with full knowledge.

42. In other words, the effect of these presumptions arising in Class 2(A) and Class 2(B) situations is not absolute but can be rebutted by evidence to the contrary. One of the criticisms made by the House of Lords in Royal Bank of Scotland v. Etridge of the extract from Lord Browne-Wilkinson's speech in Barclays Bank plc v. O'Brien dealing with Class 2(B) cases was that it seemed to ignore the evidential and rebuttable character of a Class 2 presumption : Royal Bank of Scotland v. Etridge at 1076 paragraphs 157-158, 1077 paragraph 161 per Lord Scott of Foscote.

43. I should perhaps add in the context of this discussion that in Royal Bank of Scotland v. Etridge at 1031 paragraph 18, Lord Nicholls of Birkenhead said in relation to Class 2(A) situations, "In these cases, the law presumes, irrebuttably, that one party had influence over the other" (my emphasis). As I understand this passage, Lord Nicholls was not saying that in Class 2(A) cases, there was an irrebuttable inference of undue influence. Rather, he was merely saying there was an irrebuttable inference of the existence of a relationship of influence, that is, a relationship in which it will be presumed that the complainant reposed trust and confidence in the influencer.

44. There are important differences in the treatment of Classes 2(A) and 2(B) cases.

45. In Class 2(A) cases, all that the complainant needs prove is the existence of one of those established categories of relationship before the presumption arises. He need not even prove that he actually reposed trust and confidence in that person : Royal Bank of Scotland v. Etridge at 1031 paragraph 18.

46. However, it is not every confidential relationship that gives rise to the presumption : In re. Coomber [1911] 1 Ch 723, at 726-7. The established categories include (and this is not meant to be exhaustive) solicitor and client, religious superior and inferior, doctor and patient, parent and child, guardian and ward, trustee and beneficiary : see In re. Coomber at 726-7; Bank of Credit and Commerce International SA v. Aboody at 953; Chitty on Contracts Vol.1 at paragraphs 7-053 to 7-056; Royal Bank of Scotland v. Etridge at 1031 paragraph 18, 1075 paragraph 157. It is noteworthy that the relationship of husband and wife does not come within this category : Barclays Bank Plc v. O'Brien at 190, reaffirmed in Royal Bank of Scotland v. Etridge at 1032 paragraph 19, 1075 paragraph 157. Nor that of banker and customer : National Westminster Bank Plc v. Morgan [1985] AC 686; Royal Bank of Scotland v. Etridge at 1075 paragraph 157.

47. In Class 2(B) cases, the complainant needs to do more before the presumption arises. Here, the complainant has first to show that :-

(a) he placed trust and confidence in the influencer or that the influencer had acquired an ascendancy or domination over him; and

(b) the transaction cannot be readily explicable by the relationship of the parties.

See Royal Bank of Scotland v. Etridge at 1030 paragraph 14, 1032 paragraph 21.

48. The requirement referred to in sub-paragraph (b) above is not found in the speech of Lord Browne-Wilkinson in Barclays Bank plc v. O'Brien in the passage I have quoted above. That passage has given rise in terms of the way it has dealt with Class 2(B) situations to controversy and difficulties of application in practice. With respect, I adopt as the correct approach the formulation of Lord Nicholls of Birkenhead in Royal Bank of Scotland v. Etridge, as supported by the observations of Lord Scott of Foscote in the same case : Royal Bank of Scotland v. Etridge at 1076-77 paragraphs 159-161.

49. As to the first of these requirements, the complainant must prove the existence of a relationship under which he generally reposed trust and confidence in the influencer or that the influencer had acquired an ascendancy or domination over him. In Goldsworthy v. Brickell [1987] Ch 378, at 401, Nourse LJ said, "In all of these relationships, whether of the first kind [Class 2(A)] or the second [Class 2(B)], the principle is the same. It is that the degree of trust and confidence is such that the party in whom it is reposed, either because he is or has become an adviser of the other or because he has been entrusted with the management of his affairs or everyday needs or for some other reason is in a position to influence him in into effecting the transaction of which complaint is later made." Obviously, whether such a relationship exists in any given case is dependent on the facts, but, as Nourse LJ remarked also at 410, it is not every relationship of trust and confidence to which the presumption applies.

50. In Brusewitz v. Brown (1922) 42 NZLR 1106, at 1109-1110, Salmond J (in a passage cited with approval by Millett LJ in Credit Lyonnais v. Burch [1997] 1 All ER 144 at 153g-j) said :-

" The mere fact that a transaction is based on an inadequate consideration or is otherwise improvident, unreasonable, or unjust is not in itself any ground on which this Court can set it aside as invalid. Nor is such a circumstance in itself even a sufficient ground for a presumption that the transaction was the result of fraud, misrepresentation, mistake, or undue influence, so as to place the burden of supporting the transaction upon the person who profits by it. The law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of his own property as he chooses. However improvident, unreasonable, or unjust such bargains or dispositions may be, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognized invalidating circumstances, such as fraud or undue influence.

This general principle, however, is subject to an important exception. Where there is not merely an absence or inadequacy of consideration for the transfer of property, but there also exists between the grantor and the grantee some special relation of confidence, control, domination, influence, or other form of superiority, such as to render reasonable a presumption that the transaction was procured by the grantee through some unconscientious use of his power over the grantor, the law will make that presumption, and will place on the grantee the burden of supporting the transaction by which he so benefits, and of rebutting the presumption of its invalidity. In such cases it is necessary for the grantee to prove that the suspected transaction has not its source in any improper influence over the mind or will of the grantee, or in any fraud, misrepresentation, mistake, or concealment of material facts which ought to have been disclosed by the grantee to the grantor in view of the relation between them. Unless the grantee can prove this the transaction will be set aside at the suit of the grantor or his representatives.

The commonest and most important instances of this presumption are those cases in which the relation between the parties is some recognized legal relationship of confidence, such as that existing between solicitor and client and between trustee and beneficiary. The rule, however, is not limited to any exclusive and defined list of recognized legal relations. It is quite general in its application. The question in every case is : Did the parties contract at arm's length and on terms of equality, or, on the contrary, did there exist between them such a relation of superiority on the one side and inferiority on the other (whatever the source of nature of that superiority or inferiority may be), and therefore such an opportunity and temptation for the unconscientious abuse of the power and influence so possessed by the superior party, as to justify the legal presumption that such an abuse actually took place and that the transaction was procured thereby?"

51. After Barclays Banks plc v. O'Brien, there was a tendency in practice to treat the words of Lord Browne-Wilkinson in the passage I have quoted above, as words in a statute. The words "trust and confidence" were given much prominence and led to much controversy. Yet, as Lord Nicholls of Birkenhead observed in Royal Bank of Scotland v. Etridge, the principle is not confined to cases of abuse of trust or confidence. There may for example be cases where a risk exists of vulnerable person being exploited. As Lord Nicholls said at p.1030 at paragraph 11, "Several expressions have been used in an endeavour to encapsulate the essence : trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other. None of these descriptions is perfect. None is all embracing. Each has its proper place".

52. Clearly though, the relationship between the complainant and the influencer, though not decisive, is obviously relevant. In particular, the relationship of husband and wife, though insufficient by itself to bring the case within Class 2(A), will nevertheless be relevant in Class 2(B) situations since a wife may well be able to demonstrate that in reality she left decisions on financial matters to her husband enabling her therefore to establish that she reposed trust and confidence in her husband in relation to their financial affairs : Barclays Bank Plc v. O'Brien at 190-1. There are of course other relationships that might attract critical attention, such as that of employer and junior employee : Credit Lyonnais Bank Nederland NV v. Burch [1997] 1 All ER 144.

53. As to the second matter to be proved (i.e. the transaction cannot be readily explicable by the relationship of the parties), the point here is that transactions are commonly entered into by people on the ground of friendship, relationship or charity or for other motives on which many people ordinarily act. It would be wrong for the law to set aside everyday transactions when, say, a gift was clearly intended, such as birthday presents or gifts : see Royal Bank of Scotland v. Etridge at 1033 paragraph 24. The presumption under Class 2(B) is intended to apply when the complainant "makes a gift so large, or enters into a transaction so improvident, as not to be reasonably accounted for on the ground of friendship, relationship, charity or other ordinary motives on which ordinary men act" : see Goldsworthy v. Brickell at 401F-H; Allcard v. Skinner (1885) Ch.D. 145, at 185; Royal Bank of Scotland v. Etridge at 1032 paragraph 22, 1034 paragraph 29, 1088 paragraph 220. And yet, it has to be recognised that sometimes it is the very relationship whether of friendship, kinship or otherwise, that would give rise to the complainant reposing the requisite degree of trust and confidence in the influencer in the first place. The line therefore between what is reasonable (and therefore) acceptable and what is not may therefore at times be hard to gauge. One of the keys is to look at the nature of the transaction itself : Royal Bank of Scotland v. Etridge at 1074 paragraph 156. A Christmas gift is not the same as an unlimited guarantee. This by itself however does not provide the complete answer. Another important guide lies in my view in always looking at the respective characters of the complainant and of the influencer when assessing the impact of their relationship, particularly that of the complainant : c.f. In re. the Estate of Brocklehurst [1978] Ch 14, at 39E-40B. If the complainant is for example a well educated or strong-willed person capable of independent thought, a court may more likely be of the view that he was able to make an informed and free choice for himself in deciding whether or not to enter into the relevant transaction for the benefit of his friend or relative even though he would not personally benefit from the transaction. On the other hand, a naive and dependent person, easily influenced by a stronger or more dominant personality, would be regarded in a completely different light when he has entered into a disadvantageous transaction. In his case, he could well be regarded as having reposed such trust and confidence in the influencer that it becomes questionable whether his decision to enter into the transaction was voluntary. In most cases, it may be sufficient for the court to ask whether the decision was likely to have been freely and voluntarily made by the complainant or whether his mind was effectively made up for him by the influencer. A good illustration of this point is Inche Noriah v. Shaik Allie Bin Omar [1929] AC 127 where the relevant transaction was set aside as between an aunt who was old and illiterate, and her nephew who had the management of her affairs.

54. This latter aspect is what is meant by the requirement commonly referred to as the need to show manifest disadvantage. It is not, as is sometimes thought, restricted to purely commercial considerations. The Court is required to take a broader view. See : Royal Bank of Scotland v. Etridge at 1032-1034 paragraphs 21-31 per Lord Nicholls of Birkenhead, 1088 paragraph 220 per Lord Scott of Foscote.

55. Once the presumption of undue influence arises (whether Class 2(A) or Class 2(B)), the onus then shifts to the influencer to demonstrate that the relevant transaction was not one in which undue influence could have existed. As was helpfully pointed out by Lord Nicholls of Birkenhead in Royal Bank of Scotland v. Etridge at 1030 paragraph 13, "The evidence required to discharge the burden of proof depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case". One of the relevant circumstances would be whether the complainant received advice from a third party as to the consequences of entering into the relevant transaction : Royal Bank of Scotland v. Etridge at 1032 paragraph 20.

56. In practice, the existence of presumptions should not in my view obscure the function of the Court to take into account the whole of the evidence in arriving at its decision. As I have already remarked, the Court is not required to follow the principles derived from authorities as though they were set formulas. Common sense is required and this means in particular a recognition that the weight of presumptions will vary from case to case. The type and weight of evidence needed to rebut a presumption would depend on the strength of the presumption itself : see Royal Bank of Scotland v. Etridge at 1074 paragraph 153 per Lord Scott of Foscote. For example, the weight of evidence needed to discharge the burden on the influencer in a case like Inche Noriah v. Shaik Allie Bin Omar would have been a very heavy one. The evidence of the complainant will often be of critical importance : c.f. Royal Bank of Scotland v. Etridge at 1056 paragraphs 106-7. The presumptions operate mainly as forensic tools and will be helpful to parties to direct them as to the requisite evidence needed to be adduced.

57. So far, I have only dealt with the position where the complainant seeks to set aside a transaction as against the influencer. I now deal with the position of third parties. By this, I am referring to those transactions such as contracts of suretyship where the complainant (the surety) seeks to set aside or avoid liability to the third party (the creditor, usually a bank) by alleging that the transaction was procured by the undue influence of the influencer (the debtor). The present case falls within this common situation.

58. The crucial question here is : in what circumstances will a third party be affected by the undue influence (actual or presumed) exerted on a complainant by the debtor in transactions entered into between the complainant and the third party?

59. The position of third parties was summarised in the speech of Lord Browne-Wilkinson in Barclays Bank Plc v. O'Brien at 191, where he said :-

"Undue influence, misrepresentation and third parties

Up to this point I have been considering the right of a claimant wife to set aside a transaction as against the wrongdoing husband when the transaction has been procured by his undue influence. But in surety cases the decisive question is whether the claimant wife can set aside the transaction, not against the wrongdoing husband, but against the creditor bank. Of course, if the wrongdoing husband is acting as agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent and the surety contract can be set aside as against the creditor. Apart from this, if the creditor bank has notice, actual or constructive, of the undue influence exercised by the husband (and consequentially of the wife's equity to set aside the transaction) the creditor will take subject to that equity and the wife can set aside the transaction against the creditor (albeit a purchaser for value) as well as against the husband : see Bainbrigge v. Browne (1881) 18 Ch.D. 188 and Bank of Credit and Commerce International S.A. v. Aboody [1990] 1 Q.B. 923, 973. Similarly, in cases such as the present where the wife has been induced to enter into the transaction by the husband's misrepresentation, her equity to set aside the transaction will be enforceable against the creditor if either the husband was acting as the creditor's agent or the creditor had actual or constructive notice."

60. It should be made clear that the questions of agency and constructive notice only arise where it has been shown that the relevant transaction (say, a guarantee) has been affected by undue influence (whether actual or presumed). It is pointless to go into the question of the extent to which a third party is affected by undue influence unless the alleged undue influence has been shown to exist in the first place. In this regard, I respectfully refer to the speech of Lord Hobhouse of Woodborough in Royal Bank of Scotland v. Etridge at 1054 paragraph 101 :-

"It can be expressed by answering three questions : (1) Has the wife proved what is necessary for the court to be satisfied that the transaction was affected by the undue influence of the husband? (2) Was the lender put on inquiry? (3) If so, did the lender take reasonable steps to satisfy itself that there was no undue influence?"

61. From the foregoing it will also be obvious it is not enough merely to prove that the relevant transaction has been affected by undue influence before a third party is affected. Something more has to be shown; hence the further questions of agency and constructive notice. As Lord Hobhouse of Woodborough said in Royal Bank of Scotland v. Etridge, "there has to be some additional factor before the lender's conscience is affected and he is to be restrained from enforcing his legal rights".

62. Although the passages from the speech of Lord Hobhouse of Woodborough referred to above were in the context of constructive notice, they are equally applicable to questions of agency.

63. As to agency, this a question of fact. It has been said that as between spouses, this must be rare indeed : Barclays Bank Plc v. O'Brien at 195. The mere fact that a debtor is required by his bank to obtain security for facilities afforded to him whether by way of guarantee or otherwise and he then approaches the surety, does not mean that the debtor is acting as the agent of the bank; in such circumstances he may well just be acting for himself : Barclays Bank Plc v. O'Brien at 193G-194B. In my view, it will not be a common occurrence for a debtor (the influencer) to be the bank's (the third party's) agent.

64. As for notice of the undue influence, again one begins with the speech of Lord Browne-Wilkinson at 196D-E :-

" Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors : (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction."

65. These words are properly to be regarded as being the underlying rationale why a bank is put on inquiry, not as somehow being the requisite matters which a complainant must prove : see Royal Bank of Scotland v. Etridge at 1038 paragraph 46.

66. The test of what is required to be proved is simpler than that : a bank is put on inquiry whenever a wife offers to stand as surety for her husband's debts : Royal Bank of Scotland v. Etridge at 1037-1038 paragraphs 44-49, 1056-8 paragraphs 108-110.

67. Inherent in this formulation in my view are two requirements which have to be shown :-

(a) Knowledge by the bank of the relationship between the creditor and the surety;

(b) That the nature of the transaction is such as to be apparently disadvantageous to the surety (such as where the surety guarantees the indebtedness of the debtor, no part having been played by the surety in the negotiations : see Royal Bank of Scotland v. Etridge at 1038 paragraphs 46-49, 1072-3 paragraphs 145-147).

68. The application of the principle is of course not confined to husband and wife relationships. It includes a variety of possible relationships : see Royal Bank of Scotland v. Etridge at 1047-8 paragraphs 82-88. I am prepared to find the relationship between WKS and WKF falls within that category of relationships which might attract the application of these principles.

69. Once it is established that the third party has been put on inquiry, the burden is then on him to show that reasonable steps have been taken to satisfy himself that the surety's agreement has been properly obtained : Barclays Bank plc v. O'Brien at 196E-F. In the context of surety transactions, since the decision of the House of Lords in Barclays Bank plc v. O'Brien, the third party creditor is required to do the following :-

(a) To insist that the surety attend a private meeting in the absence of the influencer (the debtor) with a representative of the creditor;

(b) At such meeting for that representative of the creditor to tell the surety of the extent of his liability as surety under the contract of suretyship;

(c) To warn the surety of the risk he is running in entering into the transaction;

(d) To urge the surety to take legal advice and in exceptional cases, to insist on it.

See : Barclays Bank plc v. O'Brien at 196F-197B; Royal Bank of Scotland v. Etridge at 1038-9 paragraph 50. These are the requisite criteria for transactions entered into after the decision of the House of Lords in Barclays Bank plc v. O'Brien : at 196G-H. The present transaction falls into this category.

70. In Royal Bank of Scotland v. Etridge, the House of Lords went into great detail as to what compliance with these steps entailed.

71. I now turn to the facts of the present case.

72. I begin with WKF's character. As I have said, this is relevant when one comes to consider the issue of undue influence. From his evidence, the following facts emerge in this regard :-

(a) He is now aged about 40. At the time he entered into the 2nd Legal Charge (15 September 1997), he would therefore have been about 36 years old).

(b) WKF is a graduate of the Chinese University of Hong Kong in sales marketing. He is able to read English. In evidence (in answer one of the Court's questions), he confirmed he knew that he was signing a mortgage. So when he says that he did not know the legal effect of what he was signing, it has to be seen in this context. He therefore must have understood that in signing the 2nd Legal Charge, he was incurring a potential liability thereunder. It is to be noted that in paragraph 10 of the Defence, it appears to be accepted that he was told the 2nd Legal Charge was a mortgage. From his evidence, he knew this to be the case.

(c) He is knowledgeable in commercial matters and has good commercial sense. Unlike a lot of the cases in which the complainant is disadvantaged in this respect, indeed ignorant in such matters, WKF is not in this position. His understanding of the nature of the 2nd Legal Charge provides a good example of this. His perception of the role he played within the business run by his brother, dealt with below, provides a further example of this.

(d) I would describe WKF as a confident man. In particular he was a man confident of his own abilities.

73. I fully accept that even if a person is educated, confident and able, it does not necessarily follow that he cannot be unduly influenced by someone. The Court is required to look at all the circumstances. For example, the nature of the relationship is important. A person may be educated, confident and able, but still be unduly influenced by his or her spouse. There are many instances one can recall in real life where very able men or women implicitly trust their spouse in financial matters so much so that abuses can sometimes occur. The present case, however, is not such an instance.

74. WKF and WKS were brothers. WKS was the elder brother. Not only that he was also WKF's employer in his business. WKF began working for his brother in 1992. It is apparent that WKF looked up to his brother and admired his financial judgment and acumen. As far as the business was concerned (and this was the business carried on by Techpeople Computer Store and Techpeople Limited) (I will refer to this business for convenience as the Techpeople business), WKS alone made decisions on financial matters. Significantly, however, there was no evidence from WKF to the effect that in relation to his (WKF's) personal financial matters, he would defer to WKS's judgment. Indeed, given WKF's character, I would have found this surprising.

75. Although WKF was WKS's employee, I am of the view that in reality he was no mere employee. It was suggested to him in cross examination that he had a share or interest in the Techpeople business. WKF denied this. Admittedly there is no document which shows he had any share or interest in the business. Yet, the impression I have formed on the evidence is that WKF regarded his fortunes as being associated with those of the Techpeople business. The following parts of the evidence demonstrates this :-

(a) I deal first with the purchase of the Property. This was made in the names of WKF and Choi. The purchase was for the expansion of the Techpeople business. Although WKF insisted that he (and Choi) were mere nominees as far as the purchase of the Property was concerned (and pointed to some documents like the provisional sale and purchase agreement which appeared to indicate that the true purchaser was WKS), he did say that the reason for the inclusion of their names was that it represented a "symbolic recognition of the long service of Choi and me in the business". In cross examination he further said that it confirmed his status in the business. It is noteworthy that WKF did not seek to explain the purchase in his and Choi's names on the basis simply that they were mere nominees directed by WKS to enter into the transaction for no apparent reason. There was a reason : it was to recognise their efforts in the business. I also note an answer he gave in response to the suggestion that the reason why his name was used for the purchase of the Property was to give him a share of the business. His answer was "Not necessarily completely right because in fact I had been working with this company for 6 years". He also said that it was a way of providing an incentive to him to have his name used for the purchase.

(b) I should add in relation to the Property that in March 1999 (after demand letters dated 1 June 1998 were sent to him from the Bank), he leased the Property to one Lai Chun Tak for a monthly rental of $36,000. At no stage would it appear that WKF accounted for this money to WKS. He used it for himself.

(c) As far as the business was concerned, WKF's view was that he felt a sense of achievement building it up with his brother. Indeed, at times in his evidence, I had the distinct impression that he felt he was almost indispensable in the business. He said the efforts he put into the business were not just for WKS's benefit but also for his own so that there would be some recognition of his efforts within the field he was in.

(d) What perhaps illustrates WKF's view of his role within the business can be summed up in an answer he gave in cross examination :-

"Q : Do you agree that in case the company wants to retain their able employee, the company usually is to give the shares of the company to them?

A : It's one of the ways. But in my mind, apart from money, I have to think if I can take pride in this job, in this field of business In response to your question, frankly, without me, my elder brother would suffer a huge loss in the development of his business. So I know my true value. I do not have to bother myself with whether he would share it with me or not. I can tell you this, counsellor, within the six years which I stayed with the company, I did not utter a single word to my elder brother, asking him to allocate shares of the company to me."

(e) I should add finally that WKF even regarded Choi as his subordinate even though Choi held a 20% stake in Techpeople Limited.

76. In my view, given his position within the business and the way he himself regarded his contribution to it, there was sufficient explanation, if not commercial reason, for WKF to have entered into the 2nd Legal Charge.

77. Further, the above matters really underline WKF's character. Here was a person who was very much his own man. He was not a person who would be easily influenced, much less unduly influenced, by anyone.

78. I now turn specifically to the various heads of undue influence.

79. As to actual undue influence, there is not the slightest evidence to support such a plea. It is true that WKF was instructed by his brother to sign the 2nd Legal Charge and other documents relating to the Property. But this goes a long way short in establishing any actual undue influence. Given the character of WKF as I have described above, I doubt whether WKS was in a position to influence, much less unduly influence, him into doing something he would not have intended to do in the first place.

80. On presumed undue influence, the Class 2(A) presumption does not arise in the present case. A sibling relationship is not one of the recognised categories, nor should it be.

81. The Class 2(B) presumption does not arise either. In my judgment the evidence does not demonstrate either of the requirements that :-

(a) WKF placed trust and confidence in WKS or that WKS had acquired an ascendancy or domination over him; or

(b) the transaction cannot be readily explicable by the relationship of the parties.

82. WKF's character as I have already described demonstrates that (a) is not satisfied. Further, the view I have taken of his role within the Techpeople business reaffirms this. This latter aspect also explains why he entered into the 2nd Legal Charge. It was, I believe, a commercial decision on his part. Respect and admiration for a person is not to be equated with that degree of reliance or dominance that is required for the Class 2(B) presumption to arise. It is not sufficient in the present case that WKF regarded WKS not only as his employer but also his mentor (although this latter aspect has to be seen in the context of his evidence as a whole). The present case is a far cry from the facts of cases like Credit Lyonnais Nederland NV v. Burch.

83. In any event, even if somehow either of the Class 2 presumptions arise (which in my view they do not), I am satisfied that the relevant transaction is not one in which undue influence could have existed.

84. Given the conclusions I have reached, it becomes unnecessary to consider the further matters that would arise in relation to third parties. Out of completeness, however, I shall state my conclusions here.

85. I am satisfied that the Bank knew or must have known that WKF and WKS were brothers. I am also of the view that the nature of the transaction was such that it was apparently disadvantageous to WKF. Afterall, WKF was guaranteeing the indebtedness of his brother and his business without apparently being interested in that business. In these circumstances, had it been relevant, I would have been satisfied that the Bank should have been put on inquiry.

86. The next stage then is to determine whether the Bank took reasonable steps to satisfy itself that WKF's agreement to the 2nd Legal Charge was properly obtained.

87. Here, again had it been relevant, I would not have been satisfied that the Bank had in the circumstances of this case discharged its burden.

88. First, although I accept that CPL did explain to WKF the consequences of entering into the 2nd Legal Charge and also advised him to take legal advice, this was not done at a private meeting. From his evidence, it appeared that WKS was also there. Mr Chan recalled in his examination in chief that the persons who signed a document giving their specimen signatures were all sitting together. This document shows the specimen signatures of WKS, WKF and Choi, as witnessed by Mr Chan. There was no evidence that when Mr Chan explained the consequences of the 2nd Legal Charge and advised him to take independent legal advice, WKS was not present.

89. The need for a private meeting is in my view obvious. If the suspicion is that an influencer has or may have exerted undue influence on the complainant, any advice or warnings given to the complainant at a meeting at which the influencer is present, simply fails to achieve its purpose.

90. I accept it is clear from the terms of the letter dated 12 September 1997 that WKF was informed that it would be in his interest to obtain independent legal advice. There is nothing in the evidence before me nor from his testimony to indicate that he did not understand this. In Barclays Bank plc v. O'Brien at 198A-C, it was said that the importance of a personal interview was that experience showed that as far as written warnings were concerned, these may not be read or the letter itself may be intercepted. This is not the present case because WKF signed the letter. However, there is no evidence before me to suggest that when he signed this letter, WKS was not present.

91. Secondly, in any event, although I find that the consequences of entering into the 2nd Legal Charge were fully explained to him by CPL and he advised WKF that he should seek independent legal advice, this was only done when time was running short for the relevant documents to be signed. As Mr Chan acknowledged, time was tight. Afterall, the date of completion for the purchase of the Property was stated in the provisional sale and purchase agreement to be 12 September 1997, although the actual day of completion was 15 September 1997. In these circumstances, I am of the view that the value of any explanation or advice provided to the complainant surety, loses much of its effect when he is subjected to additional pressure in terms of time. How realistic, one might ask, is the prospect of the surety seeking independent legal advice when he is faced with the pressure of having to sign documents within a tight time schedule? In the present case, this prospect would have been unrealistic.

92. It is important for banks or other third parties to ensure that a surety's agreement has been properly obtained. Adequate time must therefore in my view be allowed for the requisite explanation and advice to be given. In the majority of cases, this should not be done on the very day when the relevant documents must be signed or the relevant transaction carried out.

93. As I have said, the question of whether the Bank in the present case was put on inquiry or if it was, whether it had satisfied itself that WKF's agreement to the 2nd Legal Charge was properly obtained, does not ultimately arise.

Conclusion

94. For the reasons given above, I find in favour of the Bank. Accordingly, there will be judgment for the plaintiff. I will now hear the parties as to the exact amount due to the plaintiff and as to costs.