KEEP POINT DEVELOPMENT LTD. v. CHAN CHI YIM AND ANOTHER

HCMP 6550/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6550 OF 1998

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J U D G M E N T

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1. On 14 March 2000 I gave judgment in these proceedings for the plaintiff against the defendants for, inter alia, a declaration that option agreements in their favour in respect of residential and shop units in a development in Wong Tai Sin, Kowloon, were null and void as against the plaintiff, the present owner of the site. The defendants now seek, by way of these third party proceedings, damages and an indemnity in respect of the costs for which they are presently liable to the plaintiff, against the 1st Third Party, Full Country Development Ltd (Full Country), and the 2nd Third Party, Yuen Sung & Co., solicitors (Yuen Sung).

2. The history of this matter is set out in my judgment against the defendants on 14 March 2000, but of the sake of completeness I will repeat it here.

3. The plaintiff in these proceedings is the owner of the property at 112-134 Wang Fung Street, and 84 Sheung Fung Street, Wong Tai Sin, Kowloon. The 63 defendants were all owners of units in the property which formerly stood on that site and which were sold by them to Full Country in 1994. Full Country sold the property as a vacant site to the plaintiff on 30 December 1996. Yuen Sung is the firm of solicitors who acted for the defendants on the sale to Full Country in 1994.

4. The sale by the defendants to Full Country in 1994 included "option agreements" being entered into, whereby the defendants were entitled to purchase units, equivalent to those they owned, in the new building to be constructed on the site. For reasons which are given below, these option agreements were not registered in the Land Registry prior to the sale in 1996, and a declaration was sought in these proceedings that they are null and void as against the plaintiff under the provisions of the Land Registration Ordinance, Cap. 128, that the defendants are not entitled to register the agreements, and an injunction to restrain them from doing so. As I have said above, judgment in these terms has already been given in the plaintiff's favour.

5. The property on the site in question, prior to its demolition in or about 1995, was called Sheung Fung Building, and comprised blocks A to D, and all the defendants had been owners of either residential units or shops. It was a comparatively old property, having been built in about 1969. Commencing in about 1993, the owners of units in the building were approached by representatives acting for Full Country with proposals for redevelopment of the property, and negotiations were conducted by one Mr Cheng Kwok Tung the general manager of Full Country, who informed the owners that the boss of Full Country was Mr Cheng Kwok Fai, who was understood to be his brother or cousin, and a respected member of the community, being a senior member of various charitable groups such as Pok Oi Hospital, the Rotary Club and the Lions Club.

6. The proposals put to the owners were that they would sell their units to Full Country, and either be paid the full agreed price, or receive 10% of the purchase price, the balance of 90% being withheld as payment for a similar unit in the new development when completed, or in another building nearby called Profit Mansion, also being developed by Full Country. In effect it was a "swap" arrangement. In addition they were to receive a monthly payment during the construction period as "rental reimbursement" and a payment in respect of a moving allowance. As it turned out, as I shall come to later, some of the defendants received a number of other payments as well. Finding the proposal for the swap arrangement extremely attractive, the defendants entered into provisional sale and purchase agreements in Chinese embodying these terms, and, at that time, without any legal advice or representation. Formal sale and purchase agreements in the usual form, and excluding any reference to the swap arrangement, were then signed, followed shortly thereafter by assignments of the properties. At the same time, each of the defendants and Full Country entered into a further agreement (the option agreement), whereby the defendants were granted options to purchase new units, the consideration for which was deemed to be paid under Clause 1 as the balance of the purchase price for their old units.

7. The option under the agreement was exercisable within one month of notification that Full Country was in a position to pre-sell units in the new building, or within one month of issuance of the Occupation Permit, and contained in particular the following terms:

8. It will be apparent from the conditions in clause 2.1 and 2.3 that, although this was called an option agreement, if the "option" is not exercised, then it lapses and the sum withheld by Full Country from the purchase of their old unit is forfeited. An option implies that a party to it is given a choice as to whether to take it up or not. In this case the defendants were given no real choice, either they gave notice that they wished to have the new flat, or they lost a sum equivalent to 90% of the value of their old unit, being the whole price of the new unit. I will return to the true nature of this document later.

9. The option agreements, as well as the sale and purchase agreements and assignments, were signed by all except one of the owners at the offices of Yuen Sung, who were appointed by Full Country to act for the defendants, their fees also being paid by Full Country. The exception was a Mr Cheung Chiu Po, who was separately represented on the sale, and whose option agreement was registered (the Cheung Chiu Po option). The assignments were duly registered in the Land Registry in blocks on 31 May 1994 and 4 October 1994, with one registered on 10 September 1994. On the face of the record at the Land Registry, all the units except one had been unconditionally assigned to Full Country.

10. Full Country then proceeded with the demolition of the building which was completed by the end of 1995. Meanwhile the defendants found that their rental reimbursements were not being paid on time. There would be periods when they fell badly into arrears, then some would be paid. They then heard rumours of the property being sold, but were sent a letter by Yuen Sung on 22 December 1995, enclosing a reply that they had received from Full Country to the effect that this was denied, and saying they would "pay close attention to this matter".

11. The difficulty in making payments to the defendants appears to have been one of the first signs that Full Country was having financial difficulties, in particular raising capital to proceed with the development, and in 1996 Cheng Kwok Fai of Full Country approached the plaintiff's group to seek assistance with finance for the development on a profit-sharing basis. A series of negotiations followed which culminated in the sale of the property on 30 December 1996 to the plaintiff, which was formed for the purpose, with an option agreement allowing Full Country to buy back the project subject to certain conditions. These conditions were not in the end met by Full Country and the plaintiff remained the sole owner of the property. The assignment to the plaintiff was registered in the Land Registry on 31 January 1997.

12. The defendants became aware of the sale in early 1997 through newspaper reports, but, on confronting Cheng Kwok Tung, were assured that it was only a loan. The units in Profit Mansion then became available, and a number of the defendants were given keys to these and moved in, although no assignments were executed. In 1998 the occupiers of these units began receiving letters from banks and finance companies demanding repayment of mortgage loans, and Cheng Kwok Tung admitted that these units had been mortgaged by Full Country. By October 1998 the defendants realised that they may well have been the victims of, at best a breach of contract, and at worst deception, heard that Full Country was in the process of being wound up, and that Cheng Kwok Fai had absconded, and reported the matter to the Commercial Crimes Bureau. A winding up order was made against Full Country on 4 November 1998. Later in November, and in December 1998 the defendants lodged their option agreements with the Land Registry for registration. These proceedings were commenced on 3 December 1998.

13. The Official Receiver has taken no part in these proceedings on behalf of Full Country, now in liquidation. Indeed, it is difficult to see what defence could be raised on its behalf against the defendants in respect of its breach of contract at least. I accordingly give judgment for the defendants against Full Country for damages to be assessed and costs.

14. In respect of Yuen Sung it is the defendants' case that they failed to carry out their duty as their solicitors to protect the interests of the defendants, in that they failed to warn them sufficiently or at all of the inherent risks to which they were exposing themselves by entering into these agreements, and failed properly to advise them. In particular the defendants say that the effect and the risks of the provision that the agreements would not be registered in the Land Registry were not made clear to them.

15. The evidence of the defendants is that they were approached from about the middle of 1993 onwards by Cheng Kwok Tung on behalf of Full Country with the latter's proposals for redevelopment of the site. Following agreement being reached with each owner, they then signed a provisional agreement in Chinese setting out the terms of the transaction, payments to be made, the fact that the balance of the purchase price would go to pay for a new unit, and including a clause which, in most of the agreements read:

16. The defendants then attended at the offices of Yuen Sung to sign the formal sale and purchase agreements on various dates from July 1993 to September 1994 where they were attended to by Mr Winston Yuen, a partner of that firm. These were in the usual form and contained no reference to the swap arrangement. At this time, it seems that all Mr Yuen did was to explain the contents and nature of the sale and purchase agreements, and no complaint is made of this. These were, on the face of them, standard sale and purchase agreements for the outright sale of each of the units, although subject to the Chinese provisional agreements, which set out the terms of the swap. It is not clear whether Mr Yuen was aware of the existence of that agreement or saw a copy at that time.

17. The defendants then attended again at the office of Mr Yuen when they were to sign the assignments of their units and the option agreements to give effect to the agreement they had made with Full Country. These meetings with Mr Yuen were on two occasions when a substantial number of the defendants were seen together, namely 31 May 1994 and 4 October 1994, and on other occasions when the remaining defendants were seen either singly or in smaller groups. What transpired at these meetings, and what advice and explanation was given by Mr Yuen, is the crux of this matter, and I shall have to consider the evidence in respect of each.

18. But first it is important to look at the nature of the agreement itself.

19. There has been some debate throughout this trial as to whether the arrangement, as embodied in the option agreement, should be described as a swap or a sale and purchase agreement. In effect, it is both. To the defendants, as laymen, they were exchanging their properties for some cash payments and a new unit in the building to be built on the site. At the same time, they were well aware that the bulk of the purchase price theoretically paid for their units was withheld by Full Country as payment for the new unit, and the option agreement was evidence of that payment and the obligation of Full Country to assign a new unit upon its completion. They had to all intents and purposes paid in advance for those new units. Several said in evidence that they regarded this agreement as an agreement for sale and purchase, and it is easy to understand why. Indeed, Mr Yuen conceded that calling it an option agreement was the only way that any agreement in respect of new units, not yet built, and not even at a stage of development when pre-sale could commence, could be devised, even though it could not, by any stretch of the imagination, be a true option, where the purchasers' only choice was to take the new unit or forfeit the purchase price already paid.

20. However, not only had they paid in advance, under that agreement the payment could in no circumstances be refunded to them if they could not, or neglected to, proceed with the eventual assignment, under clause 2.3, and the agreement lapsed if they had not taken it up within the one month period specified in clause 2.1. Further, Full Country had the right, not only to take out a building mortgage to finance the construction, but to take out a general legal charge to borrow money without restriction, under clause 3.2. And, under clause 6.4, they agreed that their interests in the site should not be registered in the Lands Registry, with the obvious result that any mortgagee could, in the event of default, sell free of their interests. There can be no doubt that this is not just an unusual agreement, but an extraordinary one, fraught with immense danger for an unwary layman who might not appreciate that danger. In Tsing Lung Investment Co. Ltd v. Yu Sai Kin [1989] 1 HKC 513, Godfrey J described an arrangement whereby a purchaser was to pay the balance of the purchase money, not when the vendor was ready to give possession, but immediately after signing the agreement, as a lunatic arrangement, and in that case the money was to be paid to a stakeholder. Here, the money is effectively paid to the developer/vendor, with no recourse to the purchaser to recover it if he decides not to proceed. To a lawyer, this should set alarm bells ringing and red lights flashing.

21. I can see why the defendants wanted to enter such an agreement with Full Country, having been made an offer which was difficult to refuse. They were to be paid 10% of the "purchase price" offered for their properties, which was in every case more than the market value, immediately, as well as generous payments for removal and redecoration, monthly rental reimbursement for the time the site was under development so that they could afford to live elsewhere, and in many cases interest free loans to redeem their mortgages. And when the new building was ready, which they were promised would be within 24 months, they would be the proud owners of brand new units in modern building. As a matter of human nature they could hardly fail to be tempted by such a deal, and even more so when one goes on to consider the sort of people the defendants are.

22. They are ordinary Hong Kong people. They are hawkers and housewives, workers, drivers, decorators and caretakers. Many are old and retired, and for most, their property in the old building was their only or main asset, for which they had worked and saved all their lives. Few have completed secondary education, and some not even primary, and one, Cheng Tak Man, the 4th defendant, had only gone as far as primary 2 and admitted to being semi-illiterate. It is true that amongst the owners of the shop units were some who had become moderately successful in their businesses, with some owning, dealing in and letting properties. Such business acumen can be found at any level of society and does not equate with any specialist knowledge, legal or otherwise, but no doubt sharpens the ability to recognize a good deal when they see one.

23. In short these people were vulnerable. In the face of an extremely tempting deal from men they respected and trusted as pillars of the community, they needed firm guidance and informed advice before they committed themselves to such, to a lawyer, obvious dangers that the deal presented. In order to see whether that is what they received it is necessary to look carefully at the evidence of what transpired on the occasions they visited their solicitor, Yuen Sung & Co.

24. Counsel have agreed, in order not to have to call all 60 or so defendants, to call only five of the 29 who attended on 31 May 1994 in respect of Blocks A and B of the old building, and four of the 21 who attended on 4 October 1994 in respect of Blocks C and D, and accept my findings as to fact as if all who made witness statements had given evidence. Some of the others not at these meetings, or with different circumstances, will be considered separately.

The 31 May meeting

25. Of the 29 owners who went to Yuen Sung on 31 May, a number were taken by bus, arranged by Full Country, and some went on their own. Once there, again, some were seen and spoken to by Mr Yuen in groups and some individually. They were accompanied by Cheng Kwok Tung who was also present at the office throughout, and a number of the defendants who wished to negotiate better financial terms were sent to speak to him in another room. While I have no doubt that this was much quicker than conducting negotiations through the other side's solicitor, such an arrangement is at the very least bound to raise some doubt as to the solicitor's interest being totally independent of that of Full Country, particularly bearing in mind that he had been approached personally by Cheng Kwok Tung to act for the defendants, having acted in the same capacity in respect of Full Country's other development, Profit Mansion. A further matter which raises a query as to Mr Yuen's dedication to the interests of his clients is the amendment he unilaterally suggested to Full Country's solicitors, without apparently taking instructions from the defendants, that the latter should bear the costs of the stamp duty; this in an agreement, on the face of it extremely generous, where all other legal costs and expenses were to be borne by Full Country. He says in evidence that it did not occur to him to at least attempt to have that expense also added to what Full Country would pay, as purchasers usually paid stamp duty.

26. It also raises a question as to who was giving instructions to Mr Yuen, and the desirability of an apparently close relationship and cooperation with a party whose interests were opposed to those of his clients. The assignments and the option agreements were all drafted by Messrs Ho & Chan, Full Country's solicitors, and not as a result of instructions given by the defendants. Indeed, few of the defendants had their Chinese provisional agreements with them when they attended Yuen Sung's office, and Mr Yuen admitted that information about the deal with the defendants had come from Cheng Kwok Tung himself, not his solicitors. Clearly the defendants were told by Cheng Kwok Tung that Yuen Sung would act for them, and when they should attend to sign the necessary documents.

27. The defendants' evidence about the meeting with Mr Yuen that day is very similar. They agree that he went through the documents with them, including the option agreement, translated each clause to them, and explained the meaning of each. Mr Yuen says that he drew the attention of the defendants to the fact that they had agreed not to register the option agreement at the Lands registry, and that he explained the risks that this entailed, namely that they could lose their rights in the land and have only a claim against Full Country for damages if the property was taken over by a mortgagee or Full Country sold it in breach of their agreement not to do so. The defendants deny that this was spelt out clearly, or that they were advised of the danger of this provision, although they admit that Mr Yuen referred to some risks during the initial period of construction before Full Country could commence pre-selling the new units and their interests could be registered. They understood these risks to be only related to the building mortgage which would be taken out by Full Country to finance the construction and which would in any event be paid in stages according to the progress of construction, which would be monitored by the bank. Mr Yuen admits he did not point out, and should have pointed out, that the agreement in fact permitted Full Country to mortgage the site under any legal charge for unlimited amounts.

28. One of the more unfortunate aspects of this matter is the total lack of any documentary evidence by way of attendance notes from Yuen Sung as to what was said at that meeting. Mr Yuen says that it is not his practice to keep attendance notes in conveyancing matters, as they are not needed for charging the client because the fees are fixed by a scale. I find this an extraordinary admission that this is their prime function. In any event, this was not a normal conveyancing transaction, and one which was fraught with danger, and I would expect a careful solicitor not only to keep a note of the advice given, but to record it in writing for the confirmation of his client that he had received and understood the advice. Indeed, as a matter of common sense and good practice, where advice is given as to the desirability of entering into an agreement which carries particular risks, a client should be given time to consider those risks and perhaps discuss them with others, before committing himself. Here, the defendants were expected to, and mostly did, sign the agreements the same day.

29. The other difficulty arising from this lack of records is that, were it not for one exception, I should have to rely entirely on the memories of those involved of events now some 6 years ago. The exception is a recording made by Chau Fat Yau, the son of the 58th defendant Chau Wun Leung, apparently without Mr Yuen's knowledge, of their meeting on 28 May 1994 when the agreement was explained by Mr Yuen to them, a meeting at which it might be noted, Cheng Kwok Tung was again also present. It has not been suggested that this explanation was not typical of that given to other defendants, and, indeed, I take it to be considerably more thorough than that given to groups of defendants, as it is to one family, with at least one member with an intelligent and enquiring mind asking relevant questions. It therefore forms, in my view, the high point of the 2nd Third Party's case as to the adequacy of the advice given.

30. In the interview Mr Yuen properly explains to the Chau family the reason why it has to be done by way of option agreement, as it is not possible to sell uncompleted units direct at such an early stage of the redevelopment, and the procedure when pre-selling begins. He explained the terms of the agreement as to rental reimbursement, security deposits which were to be held by the other side's solicitors (which never effectively materialised), their own mortgage position, the payment of stamp duty on assignment of the new flat, and their freedom of choice of solicitor to act for them in taking up their right to the new unit. He also mentions risks. These are specifically: risk of default in payment to the mortgagee, of a sale to a third party, of Full Country going into liquidation, and of Full Country failing to complete the development. But it is significant that almost every mention of risk is accompanied by an assurance of the unlikelihood of the eventuality arising, or of the defendants receiving nothing if any of them occurred. In respect of the risk of default to a mortgagee and of liquidation he says (paragraph 29 of the transcript):

31. In respect of failure to complete the development, he says (paragraph 15 of the transcript):

32. And of the risk of Full Country selling to a third party in breach of the agreement (paragraph 17):

33. This on the basis that they would be bound to hear about it and could take steps to prevent it, and even if it was sold it would be for a large sum which they could use to reimburse the defendants.

34. Reading the transcript of that meeting as a whole, it is clear that Mr Yuen feels obliged to mention what risks he sees, but immediately discounts them as either being unlikely to occur, or the danger not being real.

35. But what of the risks attached to non-registration, which to a lawyer must surely loom large as the greatest danger of all, and which, as in fact has happened, is most likely to deprive them of their interest? Mr Yuen's attitude to this is summed up in paragraph 98 of the transcript:

36. It may well be that Mr Yuen honestly believed that this was the case, although if he did, one is bound to wonder why he allowed the non-registration clause to be there at all if it was unnecessary. It is, however, equally clear that he was wrong in this. Not only is it apparent from the registration of the Cheung Chiu Po option, by means of incorporating it in the sale and purchase agreement which was registered, but evidence from the Land Registry by way of a statement shows that even agreements such as these would be registered, although to be fair to Mr Yuen, they had no experience of ever having done so.

37. But what evidence is there that he warned the defendants of the effects of non-registration? There is, in the whole of the transcript of the meeting of 28 May 1994, no specific, clear, unequivocal warning that non-registration could deprive them of their rights totally. There are suggestions as to the effects of registering the new units (paragraph 75):

38. There are suggestions as to the reason for non-registration, although in context of the defendants taking other action which would alert the lending bank of their interests. Indeed, I think it likely that the defendants had been told by Full Country early on that it was necessary to obtain a building mortgage and that they might find it difficult if the bank knew that a large number of the units had effectively already been pre-sold, and at least one defendant, Watt Kin Shing, admitted that Mr Yuen had repeated that non-registration could help Full Country to borrow money. But knowing the reason for non-registration is very different from being properly warned of the risks of so doing.

39. As I have said earlier, I regard this meeting as important from the evidential point of view because it was a meeting direct with the client, not as a group, where questions were asked, and what Mr Yuen clearly considers full explanations given. In the light of this, and the lack of any other record of what was said to the other defendants on 31 May, I accept the evidence of the defendants that, although risks were referred to, there was no specific warning of what Mr Yuen himself accepted in evidence were dangers in the transaction, and no advice to reconsider entering into an agreement which, without amendment, and without registration, exposed them to such dangers.

40. My findings in respect of this meeting equally apply to Ms Mak Lai Chu, the 32nd defendant, and Yung Wai Fan, a director of the 63rd defendant, who both attended on that day, and whose evidence is consistent with that of the others defendants to the effect that, while explanations were given, the extent of the risks referred to by Mr Yuen were not made clear.

The 4 October meeting

41. As with the May meeting, I have only the oral evidence of the parties to rely on as to what transpired. Again, the defendants accept that Mr Yuen referred to risks, but confined to the early stage of construction, and again they said there were assurances that the property was valuable and there was little risk of the redevelopment not being completed. I accept that Mr Yuen translated and explained the terms of the option agreement to them, and I have no doubt that they understood those terms. Whether they understood the effect of the terms on their rights in the property depends on how Mr Yuen explained in detail the risks inherent in the terms. From the evidence before me I can see no reason to suppose that the explanation given was any different from or better than that set out in the transcript of the meeting with the Chau family on 28 May 1994, with a similar lack of any firm warning and advice as to the danger the agreement exposed them to.

42. In both cases I find some support for my view in Mr Yuen's own attitude as set out in paragraph 39 of his witness statement, where he says:

43. Apart from the fact that I am far from satisfied that the defendants understood the relevant clause in the Chinese provisional agreement to refer to anything other than that document, it is clear that he considered his duty to merely put into effect an agreement already reached. Indeed, it was submitted on his behalf by counsel that Yuen Sung does not accept that there was any duty to explain the need to register the option agreements, the defendants having agreed not to do so, and registration would accordingly be inconsistent with their instructions.

44. I am further of the view that his attitude to this arrangement, and any dangers attached to it, was coloured to some extent by the fact that he had acted for the owners in another of Full Country's projects, Profit Mansion, which resulted in a successful development with similar arrangements and no difficulties. It would be easy to be lulled into a false sense of security when another was being handled with the same developer, and the same easy relationship between them.

45. I also find it inconsistent with an assertion that the dangers of the agreement were fully explained and agreed to, that out of 63 owners, not one seems to have had second thoughts or considered for a moment following advice not to pursue a course of action which might result in him or her losing his only or main asset.

The other defendants

46. The first of these is Kwan Po Hung, the 17th defendant. Ms Kwan was then living in Canada and had appointed her nephew, Kwan Kok Fu to sign the documents for her. These she said had been explained by Mr Yuen over the telephone, but she denies that the matter of non-registration or other risks had been explained. The documents were faxed to her for her approval, and the power of attorney sent by DHL with another copy of the option. Mr Yuen says that he had explained to her over the telephone the non-registration clause. However, no further explanation was given in the covering letter, and no reminder of any risks which the agreement exposed her to. Again, on the evidence I have, I prefer that of Ms Kwan that no such advice was given apart from an explanation of what the terms meant.

47. Mr Lee Tak Ming, the 23rd defendant, saw Mr Yuen together with his wife on 27 May 1994 when he collected a cheque for part of the deposit and to sign the sale and purchase agreement. He then attended on 31 May to sign the option and assignment. Mr Lee was far from clear as to what had been explained, and obviously had difficulty remembering. He did however recall being told that the land could not be sold, and that he could sue Full Country, although he was not sure how. Again Mr Yuen's evidence is that all matters were fully explained. For the same reasons I cannot accept this, particularly in view of the fact that Mr Lee is not a well educated man, having not progressed further than primary level, and such a man would need very careful and detailed explanations and advice. I am not satisfied that he received more than the other defendants.

48. Mr Li Fuk Man, the 27th defendant, and his wife, Lee Cheuk Sim, were among the group of defendants who attended Yuen Sung on 4 October 1994, and I see nothing in their evidence, or that of Mr Yuen to find that the explanation to them was any different from that to the others that day. The only matter which sets them apart is that they decided a month later to pay a further $400000 on top of the price of their flat for the right to a larger unit in the new building. When they attended to sign an amended agreement, Mr Yuen says that he explained the terms of it again. Why this should be is not explained, as, according to him, everything had already been explained on 4 October, and I am not satisfied that this was so. In any event, he does not, as with the others, contend that he did more than explain. There is, for instance, no evidence of advice as to the wisdom of entering into such an agreement.

49. The 49th defendant Watt Kin Shing is one of the defendants' representatives in the course of these proceedings, and negotiated on behalf of his wife who was the registered owner of one of the old units. He was one of those who attended on 4 October 1994, and my findings above as to that date also apply to him. The only difference is that he and his wife did not sign on that day, but returned the following day to do so, when, Mr Yuen says, he went through the terms of the agreement again. However, once more he does not explain why he did so, and does not say that he advised and warned about the risks inherent in the agreement. Mr Watt agrees that he was told it would not be registered, and why, but not the effect that this could have. That evidence is the same as that given by all the other defendants, and I see no reason not to accept it.

50. The only other defendants whose evidence needs to be considered are those who were seen by Mr Yuen's partner, Mr Tang Ka Nin in June 1994, at the request of Mr Yuen who was unavailable that day. These defendants were the 44th to 47th and were the nominees of the 43rd defendant to take up options on residential units which had been agreed with the 43rd defendant as part of the swap arrangement. Mr Tang said that he had been briefed by Mr Yuen as to the agreements and explained them. However, he said that he did not emphasize that the terms represented any big danger and considered that, if the terms were what the parties had agreed, then they may not be harsh. This accords with the apparent view of Mr Yuen that their duty was to put into effect the agreement reached between the parties and little more, apart from establishing that they understood it.

51. Before leaving this part, there is one other matter I should deal with. In later documents, Yuen Sung refer to the fact that they say they explained the risks to the defendants. The first of these is the letter of 22 December 1995, following rumours that Full Country had sold the property, and in which they state:

52. The second, or rather the second group of documents, is the record made by Mr Yuen when some of the defendants attended at his office in 1998 to collect their original option agreements. For the first time in his dealings with these defendants, he chose to make attendance notes of what he says passed between them, and in several he carefully recorded their admissions that they had been advised of and were aware of the risks, except for one group where he recorded their view that they would not have dealt with Full Country had they known the risks. These documents do not alter my views. To a large extent they are self-serving, and might have carried more weight had they been contemporaneous with the original signing of the agreements, rather than produced after it was apparent that things had gone badly wrong. Neither do they in any event satisfy me that these defendants had been made fully aware of their situation, rather than merely having the terms of an agreement explained to them.

The solicitor's duty

53. It is not in dispute that Yuen Sung were acting on behalf of the defendants as their clients from the first visit of each to them, although it is clear that most of the information came not from the defendants but from Full Country in the person of Cheng Kwok Tung, and that the defendants attended at the office of Yuen Sung when instructed to do so. Mr Yuen accepted that he owed them a duty as clients to act in their best interests and a general duty of care.

54. The test of the duty of care of solicitors is set out in the judgment of Oliver J in Midland Bank Trust Co. Ltd v. Hett, Stubbs & Kemp [1979] Ch. 384 at p. 403, where he says:

55. This is of course qualified by what the solicitor is retained by the client to do. A conveyancing solicitor acting for a client in the sale and purchase of property, as here, is not under a duty to give general commercial advice. The commercial wisdom, or lack of it, in a particular deal does not necessarily fall within a solicitor's sphere of competence, but the legal effects of a course of action does. Equally, where a solicitor is retained to draw up the documentation for a property transaction, it is his duty to ensure that this not only gives effect to his client's instructions, but that it protect his interests, both present and future, and where any risks therein are apparent to the solicitor, these are not only fully explained so that the client understands, but he is warned of the wisdom of proceeding. I would add that it seems to me to be essential good practice that a solicitor, having warned a client of the danger of a course of action, who still wishes to proceed, should record that warning in writing and ask the client to acknowledge on it that he understands.

56. Throughout these proceedings it has been emphasized on behalf of Yuen Sung that the contents of the documents had been explained to the defendants. I have no doubt that this was the case, in that they were translated clause by clause and the meaning made clear. This is, however, not enough. There must also be a duty on the solicitor to explain the effect of the terms, and to draw their clients' attention to any particular danger, and any unusual provision. Even more so when the solicitor knows that he is dealing with clients who are not generally well educated, and who are not familiar with property transactions. This was summed up by Donaldson LJ in Carradine Properties Ltd v. D J Freeman & Co. (a Firm) [1982] 126 SJ 157 at p. 158 where he says:

57. In this case, even those who had previous property dealings had always relied on their solicitors and knew little of the legal complexities. As Bingham LJ said in County Personnel (Employment Agency) Ltd v. Pulver [1987] 1 WLR 916, at p. 922:

58. The case for Yuen Sung has been to an extent based on the proposition that their retainer extended only to preparing the documentation to put into effect an agreement that had already been reached with Full Country and the defendants, and explaining those documents to them. Indeed, in his final submission, Mr Wong for Yuen Sung goes further and says that there was no duty on them to explain the need to register the option agreements, the defendants having agreed not to do so, and registration would accordingly have been inconsistent with their instructions. However, the provisional agreement did not specify non-registration. The reference to stamping only is unlikely to have been appreciated by a layman as meaning this, even if they thought that it applied to the later agreement, which is not obvious. They gave no further specific instructions to Yuen Sung on this, the draft option agreement containing this provision having been provided by Full Country's solicitors. In these circumstances their duty was clear, to advise and warn of the danger thereby presented. Not only did they not do this, they did not spell out at least one of the other dangers in the agreement, that of the right of Full Country to mortgage the property otherwise than by only a building mortgage, something which Mr Yuen admitted he ought to have done.

59. Karminski LJ highlighted this duty of a solicitor in Sykes v. Midland Bank Executor Co. [1971] 1 QB 113, at p. 130, where he says:

60. All these propositions as to the duty of a solicitor to his client are neatly summarised by Judge Bromley QC in Law v. Cunningham [1993] EGCS 126 as follows:

61. Applying those principles to this matter, it is clear on the evidence that the conduct of the solicitors fell short of that required to properly protect the interests of the clients. The agreement being entered into had dangers which must have been obvious to a competent solicitor, yet in respect of which there were no warnings or advice. Where the documents were explained to the defendants in groups I am satisfied that it was little more than a bare explanation without more, and when they were interviewed in smaller groups or individually, the reference to risks was inadequate to convey the danger of the situation, and accompanied by assurances designed to lead any of them to believe that such risks were not serious.

62. As I have mentioned above, it is easy to see how this happened. The successful conclusion of a previous similar arrangement with the same developer, the comparatively close relationship between the solicitor Full Country's directors, and a belief that the clients had agreed already with the terms would make it easy for a solicitor to fall into the trap of believing that all he had to do was to go through the motions of a straightforward transaction. I have particular concern at the participation of Cheng Kwok Tung in the meetings at Yuen Sung's office. In the 1993 Guide to the Professional Conduct of Solicitors under Basic Principles at p. 216 it clearly states:

63. I have no hesitation in saying that there is no evidence here of any collusion between Mr Yuen and Full Country, and no suggestion of dishonesty or mala fides on his part. But the whole scenario, of the speed of these transactions, the attendance in groups, the presence of Cheng Kwok Tung to immediately renegotiate any financial matter a client was not happy with, takes on the air of an automatic process to be dealt with as efficiently and quickly as possible, and partly at least for the benefit of Full Country. This was a scenario in which the interests of the clients might not be, and in my view in this case were not, at the forefront of the mind of the solicitor, leading him to cut corners and be less than thorough in appreciating and warning his clients of the possible dangers to which they were exposing themselves. Had this been done, I have no doubt that some at least of the defendants would have had second thoughts, and the fact that none of them did confirms my view that the explanations given fell short of the standard of care that they had a right to expect.

64. I am confirmed in this view by the admission of Mr Yuen that he was aware of the Law Society's practice direction in respect of acting for purchasers of uncompleted flats. While the provisions of that practice direction could not apply to this transaction, as the development was not at a stage that pre-sale was possible in the normal course of events, he was well aware that those provisions gave ample protection to a purchaser in the event that the development was not completed. He must have been equally well aware that the present transaction, being also for the sale of uncompleted flats, had none of the protection required under the practice direction. There must therefore be a duty on him to ensure that their rights and interests were otherwise protected. This, in my view, he failed to do.

65. In the circumstances I find that Yuen Sung in their capacity of the defendants' solicitors, failed to adequately advise and warn the defendants of the dangers inherent in the option agreement, and advise as to alternative ways of proceeding by which their interests might be protected, and were accordingly in breach of their duty of care and their duty to act in the best interests of the defendants.

66. It has been argued by Mr Lee on behalf of the defendants that the solicitors' retainer extended beyond the preparation and execution of the documents required to put the agreement between the defendants and Full Country into effect, and that their duty continued to the point when the new units were to be assigned. I am not satisfied that this is right. On the evidence they were retained to assist the defendants with the documentation, and, as I have found, to properly advise them as to the transaction and the way it was carried out. There was no agreement that they should continue to act for them when the units were allocated. Indeed, they made it clear at least to the Chau family in the recorded interview that they were free to choose their own solicitors for that part. It is also clear on the authority of Law v. Cunningham above that no solicitor is expected to guarantee the outcome. It is true that for several of the defendants who contacted them at a later stage, either because of non-payment of rental reimbursement, or of the rumours of sale, they did take steps on their behalf, and may well have led them to believe that they were still acting for them. They accordingly owed them a duty of care in so acting. But by this time the damage caused by the unwise agreements had been done, and there would have been no way of rectifying it, for instance by late registration of them, without the defendants themselves being in breach of their agreements, and leaving them open to Full Country repudiating them.

Reliefs claimed by the defendants

67. In their Third Party amended statement of claim the defendants claim against the 2nd Third Party, Yuen Sung & Co., an indemnity in respect of any damages they may have to pay the plaintiff, the costs, if any, they are ordered to pay in respect of the plaintiff's claim against them, damages, interest and costs. By their further and better particulars filed on 8 May 2000, the damage suffered is particularised under heads of damage as follows:

Indemnity

68. As to the claim for an indemnity for any damages the defendants may have to pay the plaintiff, I can see no reason why they should not be entitled to this as a direct result of the 2nd Third Party's negligence.

Damages

69. In his closing submission, Mr Lee abandoned the defendants' claim for damages for distress and inconvenience, and also for damages on the basis of the value of the new units, placing their claim solely for damages on the basis of the contract price agreed with Full Country for the old units, stamp duty and the costs of ancillary proceedings.

70. Mr Lee argues for the contract price on the premise that, had the defendants been given proper advice, they would have elected to take the cash sum instead of opting for the swap arrangement. Mr Wong on the other hand, says that the evidence shows that there is no certainty that Full Country would, or indeed could, have proceeded had they had to pay cash, and that all the defendants have in fact lost is the value of their old units, less the payments actually made to them by Full Country. These latter were payments made at the time by way deposits, rental reimbursements in advance, and decoration and removal expenses, periodical payments in respect of rental reimbursements over the next 2 to 3 years, and payments made to some defendants in 1997 upon signing of cancellation agreements. He also contends that the sums loaned to the defendants to redeem their mortgages should also be deducted. I can deal with that immediately. In order for Full Country to obtain these units unencumbered all the mortgages over them had to be redeemed at the time of the assignments. To enable the defendants to do so, many were given interest free loans by Full Country, repayable upon the defendants securing new mortgages when the new units were assigned to them. This, as we now know, never happened, but this does not change the nature of the payments. They are still loans which may well be claimed by the liquidator of Full Country in the course of the winding up. It would be wholly wrong, in my view, to make the defendants give credit for a sum which they are liable to repay, and which may be claimed from them.

71. But to return to the main question - what is likely to have happened if the defendants had been properly advised not to proceed with the option agreements? For a number of reasons I consider it improbable that Full Country would have offered all the defendants cash sums in the amounts agreed on the swap basis and continued with the development. There is no dispute that these sums were far in excess of the market value. The prices offered on the swap basis were not less than $1,200,000, yet the minimum figure for the agreed market value at the time was a little under $700,000, a mark-up of over 70%. Had Full Country paid all the owners the contract sums instead of the swap arrangement, it would have cost them in the region of $109 million. Instead, their actual outlay to acquire the site with these agreements was about $39 million. They were in effect getting the site at an enormous discount, and had they been able to complete the project, it may well have been a commercial success for them. There is however, no evidence to show either that they had the financial resources then to pay all the owners at that level, nor that the financial viability of doing so was such that they would have wanted to do so. As we now know, Full Country rapidly ran into financial difficulties, entered into negotiations with others which fell through, and finally had to sell the site in breach of their agreement with the defendants.

72. Mr Lee argues that it was still open to the defendants to opt for the cash payment up to the time of signing the option agreement. I am not sure that this is right, as they had already agreed in their provisional agreements with Full Country that the balance of the price need not be paid, but be retained as payment for the new unit. In any event, both the defendants' own pleading and their evidence is against this argument. In the amended statement of claim, it is pleaded in paragraph 33 that, had the defendants been properly advised, they would not have assigned their units to Full Country. This was confirmed in their evidence. All said that they would not have proceeded with the arrangement had they been told of the effects and dangers of non-registration, some said that they would not have sold their unit at all, and none said that they would have opted to take the cash payment.

73. Which leads me to the inevitable conclusion that there would have been no deal with Full Country at all had they been properly advised, and what these defendants have lost by the negligence of Yuen Sung are their old units, which, as they cannot now be returned to them, means the value of those units on the dates that they were assigned to Full Country.

74. This then must be the starting point for the assessment of damages, but on the same basis, that the defendants would not have proceeded with either the swap or a sale, they must give credit for money they have actually received from Full Country, with the exception of the initial deposits paid upon signing the provisional agreements, which were not refundable even in the transaction had not been effected. Sums to be deducted therefore are the balance paid upon assignment, and all other payments made by Full Country in respect of the agreements by way of compensation, rental reimbursements both in advance and paid periodically thereafter, and later payments made upon signing agreements for cancellation of the option agreements. However, on the same basis, the defendants must also recover the stamp duty which they paid on the option agreements, which would not otherwise have been payable, and the 27th defendant must recover the additional $400,000 paid to secure a right to a larger unit.

75. It follows from the above that those who did not own any of the old units, the 44th to 47th Defendants, but were mere nominees can recover nothing, except, of course, any stamp duty paid.

76. There will also be interest on the damages at 6.5% from the dates of assignment to the date hereof.

Costs

77. The claim under this head falls into four parts: the costs of these Third Party proceedings, the defendants' costs of the main action, the costs the defendants are ordered to pay the plaintiff in the main action, and the costs incurred by the 32nd defendant, Mak Lai Chu, in her proceedings against Full Country. The question of costs in the main action has been adjourned to a date after the conclusion of these proceedings, and I have been invited by Mr Wong to defer a decision until that time for further argument. This is not opposed by Mr Lee and I consider it sensible, and so order.

78. In respect of the costs of this part of the proceedings, there must be an order that costs follow the event and are to the defendants against the 1st and 2nd Third Parties to be taxed. However, Mr Wong argues that, in view of the shifting stance of the defendants in their claim for damages, they have been put to unnecessary expense, in particular the costs of valuers instructed to assess the value of the new units, which is not now claimed. There is some merit in this argument and I accordingly order that, upon taxation of the defendants' costs, there shall not be allowed any costs in respect of the valuation of the new units, and there be a further order that the defendants pay the 2nd Third Party the costs incurred by them in instructing valuers in respect of that valuation. I make these orders nisi in the event that either party wishes to revisit the matter.

79. The only other matter is the costs incurred by the 32nd defendant in her proceedings against Full Country in 1997. Mr Wong contends that these are not recoverable as the proceedings were as a result of Full Country's default not the negligence of Yuen Sung. While it is correct that, but for Full Country's default, the proceedings would not have been necessary, the situation that Ms Mak was in would not have occurred if, as I have found above, she had been properly advised and not proceeded with the agreement. I find that such proceedings were reasonably foreseeable and that she should recover the costs of them by way of damages.

Conclusion

80. There will accordingly be judgment for the defendants for damages against the 2nd Third Party to be assessed on the basis set out above. I accept the invitation of counsel to leave it to the parties to calculate the precise figures in the expectation that such an order will be by consent in due course. There will however be liberty to apply in respect of this or, indeed, any other matter arising out of the carrying out of this judgment.