Posts Tagged ‘Michael Lower’

Guest v Guest: Aims of proprietary estoppel and principles governing relief (2)

January 9, 2023

Introduction

An earlier blog post outlined the facts and the judgment of the majority of the UK Supreme Court in Guest v Guest ([2022] UKSC 27).  

One of the distinctive features of proprietary estoppel, in comparison with the common intention constructive trust for example, is the judicial discretion as to the relief to be awarded. This discretion gives judges some flexibility and an ability to seek solutions that are fair to all concerned in the circumstances of a particular case.

It is desirable, however, that there should be a conceptual framework to guide the exercise of judicial discretion. Judges can then draw on this framework as they exercise their discretion and can use it to give reasons for their decision.

Judges will then be helped to focus on, and properly assess, the facts of the case that are of most importance in the light of the guiding principles.  Clarity of exposition as to the relative importance of these facts and the part they played in designing the relief will help appeal courts to assess whether a first instance award was soundly based.

This clarity must also be helpful to the parties and their advisers when negotiating a potential settlement, surely a good thing.

This blog post outlines the approach taken by the majority in Guest v Guest which proposed an expectations-based model for relief. This approach gave rise to the outcome described in the earlier blog post. A minority of the Supreme Court advocated a different approach placing a heavier emphasis on detriment.

Guest v Guest concerned the promise of a future right

Lord Briggs made the point that Guest v Guest concerned the promise of a future interest, rather than an assurance of a supposed existing right. The same doctrine applies, he thought, but he implies that the relevant considerations might differ ([8]).

Expectation v detriment

A description of the detriment-based approach of the minority in the Supreme Court in Guest v Guest can help us to understand why the difference in approach can have very significant practical consequences.

The majority took the plaintiff’s expectation (of sufficient land to run a viable farming business) as the starting point, modified so that accelerated receipt of the award did not mean that the plaintiff got more than his expectation.

The minority took the plaintiff’s detriment as the guiding principle. It thought that the detriment was easy to identify and quantify. The plaintiff worked for many years at low wages on his father’s farm because of the assurance. The detriment was the difference between market-level wages for the work he did and the wages he actually received ([278]).

This could be identified with certainty (GBP 267,748). The plaintiff was also entitled to interest on the sum at 2% above base rate (GBP 342,162). Rounded up, he total relief that the minority would have awarded was, thus, GBP  610,000.

The value of the majority’s award is not specified in the judgment but it is presumably much more valuable than the sum arrived at by the minority’s detriment-based approach.

Proprietary estoppel seeks to undo unconscionability

While the main focus of the judgments is on the principles governing equitable relief in proprietary estoppel, some attention is paid to the broader question of the aim of proprietary estoppel.

Giving the majority judgment, Lord Briggs said:

‘neither expectation fulfilment nor detriment compensation is the aim of the remedy. The aim remains what it has always been, namely the prevention or undoing of unconscionable conduct’ ([94]).

Fulfilling expectations while avoiding an award that is out of all proportion to the detriment

Lord Briggs’ review of the authorities led him to the conclusion that expectation fulfillment has always been the starting point for equitable relief ([5]).

But specific enforcement of the promise might sometimes be disproportionate to the detriment and so be much more than is required to undo the unconscionability ([6] and [10]).

So ‘the concept of a proportionality test does appear to have taken root in England, as part of the assessment of whether a proposed remedy to deal with the proven unconscionability based on satisfying the claimant’s expectation works substantial justice between the parties’ ([72]).

And ‘the best summary of the proportionality test is that the remedy should not, without some good reason, be out of all proportion to the detriment, if that can readily be identified. If it cannot, then the proportionality test is unlikely to be of much use’ ([72]).

Lord Briggs close his discussion of proportionality by observing that, ‘the question of proportionality is not to be carried out on the basis of a purely financial comparison’ ([73]).

Other factors that might mean that it is not appropriate to fulfil the plaintiff’s expectation

Proportionality is a relevant factor, then. Other factors too may mean that specific performance of the promise would be unjust:

‘The promise may be incapable of specific enforcement, for example where the underlying property is no longer in the hands of the promisor or his estate. The promised date for performance may lie so far in the future, or the date may be so unpredictable, that an order for performance on the promised date would be too insubstantial as a remedy. Or the early enforcement in full of a promise which, although repudiated, is years away from the due date for performance may give the promisee too much, or something radically different from that which was promised. The promisor may have other powerful equitable or moral claims on his bounty, so that the appropriation of the whole of the promised property to meet the claim of the promisee may be unjust to those other claimants, and be more the cause of unconscionable conduct than a remedy for it. Finally the magnitude of specific enforcement in full may be so disproportionate to the detriment undertaken by the promisee that something much less than full specific enforcement is needed to clear the conscience of the promisor ([6]).

In some cases, as in Guest v Guest itself, the need for a ‘clean break’ between the parties might also be an important factor ([64]) so that solutions that would require the parties to live or work together might be unworkable.

The majority’s principles for the design of equitable relief

Lord Briggs argued that the court should approach equitable relief in the following stages:

  1. Decide whether repudiation of the promise is unconscionable in the circumstances ([74]);
  2. Start with the assumption that the appropriate relief is full performance of the promise performance (or a monetary equivalent) but be aware that there may be factors which would render this disproportionate ([75];
  3. The burden of proof is on the party arguing that full performance is disproportionate ([76]);
  4. Full performance is likely to be appropriate in cases that fall just short of a contract ([77];
  5. Just because full specific performance is inappropriate does not mean that detriment should be taken as the yardstick ([79];
  6. ‘In the end the court will have to consider its provisional remedy in the round, against all the relevant circumstances, and ask itself whether it would cause injustice to third parties’ ([80]).

Appropriate to focus on detriment where it is specific and short-lived

Despite the insistence on performance of the promise as the starting point, Lord Briggs acknowledged that it might be appropriate to focus on detriment (and undoing it) ‘where the detriment is specific and short-lived, and in particular shorter than the parties are likely to have contemplated’ ([72]).

But, ‘wherever the relevant detriment has (as here) had lifelong consequences, a detrimental valuation analysis will fall upon stony ground’ ([72]).

Fulfilling expectations where the promise has had life-changing consequences: harm v detriment

Throughout his judgment, Lord Briggs distinguishes between ‘detriment’ and ‘harm’. Detriment is an essential element of a proprietary estoppel claim and, as we have seen, the court should consider whether the proposed award is proportionate given the detriment; this presupposes that detriment can always be measured in some way.

‘Harm’ seems to be a broader concept, less susceptible to being reduced to a specific sum of money. The idea seems to be that repudiation of a promise may give rise to harm that is incalculable or difficult to calculate. In such cases, it seems that the court should be more ready to give full effect to the promise.

Lord Briggs explained the harm in Guest:

‘In a case like the present, the harm consists of the soul-destroying, gut-wrenching realisation of being deprived, and then actually being deprived over the rest of a lifetime, of an expected inheritance of land upon which the promisee has spent the whole of his life and work to date and which, in due course, he expected to be able to pass on to one or more of his own children, making the same promise to them as his father made to him  … this cannot necessarily be valued with any reliability ([11]).

Specific performance recognises the inability to assign a monetary value to expectations concerning land ([12]). It also seems appropriate where the promise has induced ‘life-changing choices’ ([51]).

A detriment-based approach, ‘mistakenly treats the detriment rather than the loss of expectation as the relevant harm’ ([53]).

In Guest, the fact that the father’s promise induced the son to make decisions ‘with incalculable whole-life consequences’ ([95]) meant that it would be inadequate for relief to be based on the detriment (reduced wages over the course of a career).

Thus, it would be, ‘simply impossible to identify some monetarised value of his detriment in a way which would render a fulfilment of his expectation disproportionate’ ([95]).

Michael Lower

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Guest v Guest: Aims of proprietary estoppel and principles governing relief (1)

December 5, 2022

Introduction

The judgment of the UK Supreme Court in Guest v Guest ([2022] UKSC 27) provides an authoritative review of the fundamental aims of proprietary estoppel and the principles governing equitable relief. The majority judgment was given by Lord Briggs (with whom Lady Arden and Lady Rose agreed).

This blog post provides a description of the facts and of the outcome. The next blog post looks at the account of the fundamental principles concerning equitable relief and the structured approach proposed by the majority of the Supreme Court.

Facts

A father (David) owned Trump Farm (‘the farm’) and promised one of his sons (Andrew) that on the death of his parents, Andrew would inherit enough of the farming business, and of the farm where the business was carried on, to establish a viable farming business. In response, Andrew worked for many years for low pay on the farm and did not pursue any alternative career opportunities.

Andrew and David fell out and David made it clear that Andrew would not receive the promised inheritance. Andrew brought proceedings in proprietary estoppel. The claim succeeded but there was disagreement as to the approach to be taken to the relief to be awarded.

At first instance and in the Court of Appeal, Andrew was held to be entitled to a monetary payment equivalent to 50% of the market value of the farming business and 40% of the market value of the farm. This sum was to be reduced by the value of the parents’ entitlement to a life interest in the farmhouse (see [88] in the Supreme Court judgment).

The problems with this were that the order would probably require the parents to sell the farm during their lifetimes and it meant that Andrew would enjoy accelerated receipt of the sum, in effect giving him more than his expectation.

The Supreme Court therefore gave the parents an option either:

  • The creation of a trust over the farm and business under which the parents were to have a life interest with Andrew to be entitled to 50% of the farming business and 40% of the farm only on their death, thus overcoming the accelerated receipt problem. Andrew would not be entitled to compensation for being off the farm in the meantime ([101] – [102]); or
  • The original first instance award but with a sufficient discount for early receipt built in  ([103]). The first instance approach of reducing the award by the value of a notional life interest in the farmhouse could be taken as the discount if the parents agreed. This would avoid the costs of a further dispute over the discount ([105}).

It was appropriate to allow David to make the choice since:

‘Either remedy if afforded to Andrew would draw the sting of unconscionability from the outright repudiation of their promises to him. Since the aim of the remedy is to prevent or remove unconscionability, then where there are two different ways of doing so the persons against whom the equity is asserted should in principle be the ones to make that choice.’ (104)

Conclusion

This post describes the facts and the outcome in Guest. Its importance lies in its approach to the roles of expectation, detriment and other factors in the design of equitable relief. The next blog post looks at what the majority judgment had to say about these fundamental issues.

Michael Lower

Licence with no provision for termination – implied term

October 17, 2022

The Hong Kong Polytechnic University v Rehabaid Society ([2022] HKCFI 2830) concerned a licence granted by the Hong Kong Polytechnic University (‘the licensor’) to Rehabaid Society (‘the licensee’) in 1988.

The licence contained no express provision as to how it could be ended.

Part of the motivation for the grant of the licence was that the parties foresaw the possibility of fruitful collaboration between the licensee and the licensor’s Rehabilitation Engineering Centre (‘the REC’).

This collaboration ceased and the licensor was very short of space for its other activities.

It argued that there was an implied term that the licence was revocable on reasonable notice should the collaboration between the licensee and the REC end.

The licensee argued that the licence was intended to be irrevocable.

The court agreed that whether a licence was revocable or not depended on the proper construction of its terms ([73]).

The party who seeks to terminate the licence has the burden of proving its right to do so ([82]).

The court reviewed the law on implied terms (Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Limited [2016] AC 742 and Lo Yuk Sui v Fubon Bank (Hong Kong) Limited [2019] HKCA 261).

The court found on the facts that there was no implied term that the licence would end should the collaboration between the licensee and the REC cease.

The licensor’s claim that it was entitled to possession was dismissed and specific performance of the licence was ordered.

This did not mean that the court accepted that the licence was irrevocable ([125]) only that it could not be revoked in the circumstances argued for by the licensor.

Michael Lower

Meaning of covenant to reinstate to ‘bare shell’ condition

September 19, 2022

AFH Hong Kong Stores Ltd v Fulton Corporation Ltd ([2022] HKCA 1243) concerned the interpretation of a tenant’s covenant to reinstate the demised premises to a ‘bare shell’ state on the determination of the lease.

The premises were retail premises over five floors of a building in the Central district of Hong Kong. When it took possession, the tenant removed the entire floor slab of one of the floors and part of the floor slab of three others. It installed lifts and staircases.

The lease required the tenant to yield up the premises to the landlord at the end of the lease, ‘in a “bare shell” good clean state of repair and condition on each floor of the Premises to the reasonable satisfaction of the Landlord’ (emphasis added).

The landlord contended that this wording required the tenant to reinstate the floor slabs it had removed while the tenant argued that it was under no such obligation.

There was, perhaps surprisingly if reinstatement had been intended, no express covenant to reinstate the removed floor slabs in the lease nor, so far as can be seen in the judgment, in any license to carry out the alterations.

There was, by contrast, a clause that gave the landlords the option to require the tenant to remove fixtures that the tenant added to the demised premises.

The Court of Appeal referred to the principles of contractual interpretation in the Court of Final Appeal in Eminent Investments (Asia Pacific) Ltd v DIO Corp ([2020] HKCFA 38).

It decided that the reference to ‘on each floor’ supported the landlord’s contention that the tenant had to reinstate the floor slabs that had been removed ([26.1] and [43]).

Michael Lower

Priority contest between a charging order and an assignment

August 27, 2022

Asparouh Ianov Dimitrov v Dominic Tak Ming Lau ([2022] HKCA 1146 ) was a dispute between a creditor with a charging order over the debtor’s property (‘the Property’) and the debtor’s ex-wife to whom the debtor assigned the Property.

The sequence of events was:

  • 20 November 2017 –  charging order nisi obtained
  • 23 November 2017 –  charging order nisi registered
  • 3 January 2018         – debtor assigned the Property to his ex-wife
  • 15 January 2018       – charging order absolute obtained
  • 19 January 2018       – assignment registered
  • 25 January 2018       – charging order absolute registered

The creditor sought a declaration that the charging order had priority over the assignment and an order for sale and succeeded at first instance. The debtor’s wife appealed.

There was no difficulty in confirming that the charging order had priority over the assignment: the priority date for the charging order absolute relates back to the priority date for the charging order nisi ([20]).

Section 5A of the Land Registration Ordinance specifies that a charging order has priority from the day after its registration. The priority date of the charging order was 24 November 2017 (the day after the 23 November 2017 registration).

Section 5 of the Land Registration Ordinance says (in effect) that assignments registered within one month take effect as from the date they were executed. The priority date of the assignment was 3 January 2018.

The debtor’s wife relied (unsuccessfully) on an argument that she had a prior unwritten equitable interest to which the charging order was subject.

She argued, for example, that there was an oral gift of the Property to her before the date of the charging order nisi. She relied on Re Rose to argue that she had an equitable interest because her husband gave her the title deeds.

Hon Chow JA pointed out that her husband had not executed a deed of gift at the relevant time and so had not done everything in his power to divest himself of his interest in the land.

Arguments based on proprietary and / or promissory estoppel failed because, even assuming there to have been an assurance, the wife incurred no detriment.

The declaration that the charging order had priority and the order for sale were upheld.

Michael Lower

Meaning of ‘saleable area’: Top Faith Property Ltd v Wong Ben

July 27, 2022

In Top Faith Property Ltd v Wong Ben ([2022] HKCA 783) Top Faith Property Ltd (‘the buyer’) entered into a Provisional Sale and Purchase Agreement to buy the entire issued share capital of Hero Wealth Corporation Ltd for HK$250 million. Hero Wealth was the vehicle for the ownership of office units in the Lippo Centre.

Pre-contract, the buyer made an inquiry as to the ‘saleable area’ of the office units. The shareholders of Hero Wealth (‘the sellers’) provided a plan stating that the saleable area was 758.46 square metres. This was untrue and the buyer relied on misrepresentation to rescind the contract.

The buyer succeeded at first instance. The sellers appealed. They argued that the statement was true. There was no standard definition of ‘usable area’ and the architect who prepared the plan took a reasonable approach to calculating the usable area.

The 1999 Code of Measuring Practice of the Hong Kong Institute of Surveyors (‘HKIS’) did incorporate a definition of ‘saleable area’. The representation was false if this definition were applied.

However, the sellers argued that this did not enjoy any special status. The architect who prepared the plan was not bound by it and chose, instead, to use the definition of ‘usable floor space’ in the Building (Planning) Regulations (Cap 123F).

The Court of Appeal said that when interpreting a representation, ‘the proper approach is an objective one that focuses on what the words and conduct constituting the Representation would in the relevant context have conveyed to a reasonable person in the position and with the characteristics of the plaintiff’ ([24]).

The question was as to the common understanding of reasonable vendors, purchasers and estate agents) [25]).

The HKIS code was the only available professional guide as to the meaning of the term at the relevant time and was generally accepted by the market ([28]).

Thus, the representation was ‘indisputably false’ and the appeal failed.

Michael Lower

Interpretation of the management charge provisions of a DMC

June 29, 2022

Sam Woo Marine Works Ltd v Po Hang Building (IO) ([2022] HKCA 733) concerned a dispute as to the interpretation of the management charge provisions of a Deed of Mutual Covenant (DMC).

There were three categories of owners in the building: (a) the ground floor owners); (b) the first-floor owners; and (c) the upper floor owners. Clause 3(f) of the DMC stipulated that the items in respect of which a management charge could be levied varied as between each category; the ground floor owners were not liable to contribute to expenses relating to the lift, for example.

Sam Woo owned a unit on the ground floor of the building. In the Court of Appeal, the incorporated owners accepted that there was implied into clause 3(f) a term that they would keep separate accounts for each category of owner ([29]).

The Court of Appeal decided, on its interpretation of the DMC, that any surplus collected from one category of owner could only be used to cover expenditure which that category of owner was responsible for under clause 3(f). So any surplus collected from ground floor owners could not be used to cover later expenditure relating to the lift. This was eventually accepted by the incorporated owners ([41]).

Sam Woo contended that there was a surplus standing to the account of the ground floor owners and that there was a further implied term that this would be used up before a further management charge would be demanded from them.

This contention was rejected both at first instance and in the Court of Appeal. At first instance, it was pointed out that this was an impractical suggestion; each category of owner would be responsible for some items in respect of which there would be a need to provide for contingencies. This made it unlikely that Sam Woo’s proposed term could be implied ([44] and [45]). Section 20(2) of the Building Management Ordinance requires the incorporated owners to establish a contingency fund.

Michael Lower

Priority as between (1) the assignment of the net proceeds of any future sale of property and (2) a charging order over the property

April 28, 2022

In Winland Finance Limited v Gain Hero Finance Limited ([2022] HKCFA 3) the Court of Final Appeal had to consider the order of priority as between (1) the assignee of the net proceeds of any future sale of a flat; and (2) a creditor with a charging order over the flat.

T owned a flat in Kowloon (‘the flat’). In June 2014, T entered into a loan agreement with Winland Finance Limited (‘WF’). T borrowed HK$2.1 million from WF and assigned to WF the net proceeds of any sale of the flat.

In November 2014, T entered into a further loan agreement with Gain Hero Finance Limited (‘GH’). In June 2015, GH obtained judgment against T for breach of the agreement. In August 2015, GH obtained a charging order absolute over the flat. In March 2017, GH obtained an order for sale of the flat. Under the terms of the order, payment would be made to GH and the surplus of the net proceeds of sale would be paid to T.

WF argued that its earlier loan agreement gave it priority over GH’s charging order. WF failed both at first instance and in the Court of Appeal.The Court of Final Appeal also found in favour of GF.

A charging order takes effect as if it were an equitable charge over the property (High Court Ordinance, s. 20B(3)). A charging order affects land and is registrable at the Land Registry ([31]).

An assignment of the future proceeds of sale of land does not give rise to a proprietary interest in the land ([27]) though a proprietary interest in the net proceeds of sale will arise immediately on sale ([24]). The Court of Appeal had already decided that this assignment was not registrable at the Land Registry.

If T were to sell the flat, the proceeds of sale would have to be applied to discharge the charging order before T would become entitled to the net proceeds of sale (Conveyancing and Property Ordinance, s. 54(1)). T could not give WF any greater interest than he was entitled to ([40]).

In a sense, there is no priority battle between GH and WF since only GH had a proprietary interest in land. On sale, WF would acquire a proprietary interest in the net proceeds of sale after GH’s order had been paid off.

In a loose sense, GH could be said to have priority over WF ([41]).

Michael Lower

Undue influence: presumption of undue influence where lender’s lawyer fails to properly advise borrower for whom it also acts

April 8, 2022

Introduction

In Nature Resorts Ltd v First Citizens Bank Ltd ([2022] UKPC 10) Nature Resorts Ltd (‘NRL’) owned the Culloden Estate (‘the Estate’) in Tobago. It was accepted that Mr. Dankou was the sole shareholder and ‘controlling mind and will’ of NRL so that Mr Dankou and NRL could be treated as one and the same for the purposes of the case except where Mr. Dankou was clearly acting in a personal capacity ([2]).

Mr. Dankou’s intention was to develop the Estate as an eco-resort and he secured investment from ‘silent investors’. He was, however, unable to secure all the finance needed for the development.

Mr. Dankou agreed to sell 75% of his shares in NRL to Simon Paler and Christopher James. Messrs. Paler and James borrowed part of the purchase price from First Citizens Bank Ltd (‘the Bank’). The Bank insisted that NRL grant it a charge over the Estate as security for the loan. Part of the purchase price payable to Mr. Dankou was left outstanding and Messrs. Paler and James provided a promissory note in respect of this sum.

Mr. Wheeler was the lawyer who acted for all parties in relation to the above transactions.

Messrs. Paley and James did not make any loan repayments. The Bank decided to exercise its power of sale under the charge over the Estate.

NRL argued that the charge was voidable because of the undue influence exerted by Mr. Wheeler over Mr. Dankou / NRL. This argument failed both in the High Court and the Court of Appeal of Trinidad and Tobago. NRL appealed to the Privy Council. Lord Briggs and Lord Burrows gave a joint judgment with which the other members agreed (on the undue influence question).

What is undue influence?

The Privy Council accepted that the law of Trinidad and Tobago concerning undue influence was the same as the English law ([1]). Undue influence was explained in these terms:

‘undue influence is concerned with a situation where, by reason of the relationship between them, one party (B) has such influence over the other (A) that A does not exercise a free judgment, independent of B, in relation to the making of a transaction between A and B (or, in a three-party situation, between A and a third party, C)’ ([10]).

In Pesticcio v Huet ([2004] EWCA Civ 372) Mummery LJ explained:

‘Although undue influence is sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention is not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising from the relationship of trust and confidence should not operate to the disadvantage of the victim, if the transaction is not satisfactorily explained by ordinary motives … A transaction may be set aside by the court, even though the actions and conduct of the person who benefits from it could not be criticised as wrongful. ([Pesticcio v Huet at [20]].

Presumed undue influence

The party seeking to rely on undue influence must prove their claim on the balance of probabilities. They can, however, try to raise a presumption of undue influence and the burden would then pass to the other party to show that the decision to enter into the transaction was the result of a free and informed decision. Mr. Dankou argued that there was a presumption of undue influence in the present case.

Following the decision in Royal Bank of Scotland plc v Etridge (No 2) ([2001] UKHL 44) the presumption of undue influence is said to arise where, ‘the nature and / or contents of the transaction must make one conclude, in the context of the relationship of influence, that, absent evidence to the contrary, undue influence has been exercised.’ ([12])

Mr. Dankou argued that the relationship between himself / NRL and Mr. Wheeler was one of influence and that Mr. Dankou / NRL did not benefit from the grant of the charge to the Bank so that the transaction was not readily explicable on ordinary motives.

The High Court decided that neither requirement of the presumption of undue influence was satisfied. The Privy Council preferred not to comment on the view that there was no relationship of trust and influence between Mr. Wheeler, on the one hand, and Mr. Dankou / NRL on the other. The Privy Council thought that this raised, ‘difficult questions as to the operation of the so-called irrebuttable legal presumption that the relationship is one of influence’ on which they were not addressed ([29]).

The Privy Council, nevertheless, agreed that there was no presumption of undue influence in this case. The transaction was readily explicable on ordinary motives; the commercial interests of Mr. Dankou / NRL were furthered. The High Court found that the sale of the shares enabled Mr Dankou to pay money to his silent investors and also enabled various debts of the company to be paid off. The Court of Appeal disagreed with this and thought that there was a presumption of undue influence.

The Privy Council sided with the High Court in this regard:

‘The deed of mortgage opened the money-box from which Mr Dankou received payment for his shares. Without it, the sale would have fallen through. Although the Court of Appeal was careful to say, at para 53, that it was NRL that derived no benefit from the mortgage, the Board considers it unrealistic to ignore the benefit to Mr Dankou when considering whether the mortgage was readily explicable. It was the benefit to Mr Dankou, as the sole shareholder in NRL at the time when the transaction was entered into, that rendered the transaction readily explicable. In the Board’s view the Court of Appeal was wrong to ignore this bigger picture and therefore wrong to take the view that the deed of mortgage was not readily explicable.’ ([28])

The presumption of undue influence where the same lawyer acts for borrower and lender

As we have seen, the Court of Appeal thought that a presumption of undue influence was raised in this case. The Privy Council disagreed and expressed concerns about the implications of the Court of Appeal’s reasoning. It was worried that it would mean that parties would be able to raise a presumption of undue influence, arising out of the advice of their lawyers, whenever a transaction worked out badly. If the same lawyer advised both sides then any party for whom the transaction worked out badly might be offered an unjustified escape route on the basis that the lawyer was the agent of the other party (so that any undue influence of the lawyer could be attributed to the client):

‘[26] The Board has concerns that the reasoning of the Court of Appeal may lead to the view that, in many situations where a solicitor (or attorney) is providing professional advice to a client, and the client then enters into a disadvantageous commercial transaction with a third party, the client would be able to invoke the law on undue influence (including the law of agency) to set aside the transaction. There are many instances where, for example, the solicitor is acting for both a purchaser of land and a lender of the money for the purchase where that relationship should not operate to give rise to a presumption of undue influence for either client to be used against the other. This is so where the solicitor does not obtain any personal benefit (beyond his normal fees) from the transaction.

[27] In the Board’s view, where the other party to the transaction is not the solicitor obtaining some benefit from the client but is rather a third party, an ordinary commercial transaction such as a mortgage, entered into by a person engaged in business, should rarely be regarded as one that is not readily explicable on ordinary motives, merely because it is, or turns out to be, disadvantageous. It is readily explicable that the client will enter into such a transaction without being under the undue influence of the solicitor.’

If there was a presumption of undue influence, was it rebutted?

The Court of Appeal decided that there was a presumption of undue influence but that this presumption was rebutted. The Privy Council decided that the Court of Appeal was justified in deciding that, even if a presumption arose, it was rebutted.

Rebutting the presumption requires the other party to show that the transaction was the result of a free and informed decision. The Privy Council commented:

‘Although neither necessary nor conclusive, the main method of rebuttal is to show that A obtained the fully informed and competent independent advice of a qualified person, most obviously a lawyer.’ ([13])

The Court of Appeal thought that the presumption of undue influence was rebutted; it was satisfied that Mr. Dankou understood what he was doing and the associated risks. The Privy Council agreed: ‘advice from a lawyer is not the only way in which it can be established that free and independent judgment was being exercised.’ ([23]).

The corporate veil

Clearly, the Privy Council’s analysis relies on treating Mr. Dankou and NRL as being one person. The commercial interests of Mr Dankou are treated as being those of the company; Mr. Dankou’s independent judgment is that of the company.

Michael Lower

Part performance and the balance of probabilities: Ng Yuk Pui Kelly v Ng Lai Ling Winnie in the Court of Final Appeal

March 9, 2022

Introduction

In Ng Yuk Pui Kelly v Ng Lai Ling Winnie  ([2021] HKCFA 40) the Court of Final Appeal explained the approach to the doctrine of part performance in Hong Kong. It settles any lingering doubts as to whether the balance of probabilities test is the relevant standard when seeking to show that the acts of part performance point to the existence of the alleged contract.

Mrs Ng was the legal owner of two neighbouring flats in the Central district of Hong Kong. She held the flats on trust for her husband, Kuen, who supplied the entire purchase price.

Kuen orally agreed to sell the two flats to his brother, Kelly, for HK$1 million. Kelly paid the entire purchase price but agreed to Kuen’s requests not to insist on the formal transfer of the title to Kelly. This was because Kuen feared the effect that news of the sale would have on Mrs Ng who had suffered some mental health issues. Kelly was tenant of the flats before the agreement and he stopped paying rent as a result of it.  

Ultimately, the question of the ownership of the flats came to a head when Mrs Ng contracted to sell one of the flats. Kelly brought proceedings to recover the two flats. Mrs. Ng argued that the oral agreement between Kuen and Kelly was unenforceable because of the failure to comply with the formalities requirements in section 3(1) of the Conveyancing and Property Ordinance.

Kelly relied on part performance, common intention constructive trust and proprietary estoppel. Kelly’s claim succeeded insofar as it relied on common constructive trust and proprietary estoppel. It was held that part performance had not been successfully established.

On appeal, Kelly’s claim succeeded based on part performance ([2021] HKCA 724). Mrs. Ng applied for leave to appeal to the Court of Final Appeal. The Court of Final Appeal refused this leave and its reasons for doing so provide extremely valuable guidance concerning the law of part performance.

Part performance

In Steadman v Steadman, Viscount Dilhorne said:

‘the acts of part performance which are alleged to have taken place must point to the existence of some such contract as that alleged.’

This leaves open the question as to whether the linkage between the acts and the contract had to be shown on the balance of probabilities or according to a more demanding ‘unequivocal referability’ test. Steadman adopted the balance of probabilities test, but this seems not (before now) to have been explicitly adopted in Hong Kong.

The Court of Appeal referred to the fact that Kelly remained in possession of the flats without paying rent and demands made by Kelly that the title should be transferred to him as acts of part performance. Mrs Ng argued that none of these, taken individually, satisfied the unequivocal  referability test.

In the Court of Final Appeal, however, Ribeiro PJ said:

‘In deciding whether the doctrine applies, the court looks at all the acts relied on as part performance to see whether, leaving aside evidence of the oral agreement, those acts prove on the balance of probability that they were done in reliance on a contract between the parties consistent with the contract sued upon by the plaintiff. There is no arguable basis for suggesting that one must look at each act individually to see if it is “unequivocally referable” to the contract. Nor is there any basis for the suggestion that one must refrain from assessing the cumulative effect of the acts relied on unless the individual test is satisfied. The authorities are clearly to the contrary.’ ([14] emphasis added)

Michael Lower