CACV 312/2005
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF APPEAL
CIVIL APPEAL NO. 312 OF 2005
(ON APPEAL FROM HCA NO. 11077 OF 1994)
BETWEEN
ESQUIRE (ELECTRONICS) LIMITED Plaintiff And THE HONG KONG AND SHANGHAI 1st Defendant BANKING CORPORATION LIMITED WAYFOONG PROPERTY LIMITED 2nd Defendant (formerly known as HS PROPERTY MANAGEMENT LIMITED)
AND BETWEEN
MAGIC SCORE LIMITED Plaintiff And THE HONG KONG AND SHANGHAI 1st Defendant BANKING CORPORATION LIMITED WAYFOONG PROPERTY LIMITED 2nd Defendant (formerly known as HS PROPERTY MANAGEMENT LIMITED) (by original writ and order to carry on)
Before: Hon Rogers VP, Stock and Tang JJA in Court
Date of Hearing: 5-8 & 11-13 September 2006
Date of Handing Down Judgment: 12 October 2006
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J U D G M E N T
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Hon Rogers VP:
1. This was an appeal from the judgment Waung J given on 19 July 2005. The claims in the case arose out of the sale of a commercial property, Li Fung House, Kowloon, (also referred to below as “the property”) which was effected as part of a restructuring agreement directed to bringing to an end the protracted period during which the plaintiff, Esquire (Electronics) Ltd (“Esquire”) had been insolvent and had had to be “rescued” by a consortium of banks of which the first defendant (“the Bank”) was the lead bank. In the judgment the judge held that the plaintiff had established liability against the Bank on its claims in respect of breach of fiduciary duty, economic duress and undue influence. Decisions as to remedies and reliefs to which the plaintiff might be entitled were left to be decided as a separate matter.
2. At the conclusion of the hearing of this appeal this court did not consider it necessary to hear argument on the question of limitation, thus, in effect, indicating that the appeal would be allowed. The reasons for so doing were that, on any footing, the Bank had not acted in breach of any fiduciary duty, it had not inflicted economic duress and it had not been guilty of exerting any undue influence.
3. In his judgment, the judge set out at some length, an analysis of the various authorities relevant to each head of claim. Before considering the law in relation to each aspect it is important to ascertain the facts. In this respect, the first matter which must be observed is the length of time which elapsed between the conclusion of the trial of the action on 12 March 2004 and the delivery of judgment, more than 16 months later, on 19 July 2005.
4. The Court of Final Appeal has in other cases made clear that such a lengthy period of delay is unacceptable. It has done so for very good reasons. Quite apart from the effect on the parties and the adverse effect on the public confidence in the due administration of justice which such a delay has, a period of delay, even considerably shorter than 16 months, immediately raises the question as to how much of what transpired at trial could have been remembered by the judge. Unfortunately in this case there are factors which indicate that the judge must have forgotten important events and aspects of the trial.
5. Comparing the transcript and the judgment there are areas which clearly lead to the conclusion that the judge must have forgotten important conclusions to which he had arrived in the course of hearing the case. What a judge says in the course of argument cannot be taken to be his final view on a matter, but it is entirely different if a judge, in effect, stops counsel in the course of submissions on a particular point. He then might be said to be exercising a case management function. If a judge does stop counsel from addressing him on a particular point, although it cannot bind him irrevocably in respect of that point, the better course may be to give the party concerned an opportunity of addressing the court further should the judge, on reflection, form a different view. At the very least, the party concerned would be entitled to an acknowledgment of the change in the judge’s conclusion on the point and a full explanation as to the judge’s thinking. The lapses in this case, in this regard, are almost certainly attributable to the delay in the preparation of the judgment having led the judge to forget important factors and the conclusions to which he arrived as a result of them.
6. The importance of the delay goes further. A trial which lasts 24 working days, of itself, puts a strain on the memory of the judge as to what took place. Nevertheless, where there has been no significant delay in giving judgment, an appellate court is entitled to assume that the mere failure to refer to a part of the evidence does not mean that the judge has overlooked it or that other forms of error have occurred. But delay in preparation of a judgment complicates matters because, as was said by the Full Court of the Federal Court of Australia in the case of Expectation Pty Ltd v PRD Realty Pty Ltd 209 ALR 568 at paragraph 72:
“However, where there is significant delay, no favourable assumptions can be made. In such circumstances, it is up to the trial judge to put beyond question any suggestion that he or she has lost an understanding of the issues.”
7. This case is made even more complicated in this respect by the fact that the events in question took place some 17 years before the trial of the action. In such circumstances contemporaneous documentation is usually of the highest importance. In a number of important respects, the judge did not accept contemporaneous documents as being accurate. That rejection must fall to be considered carefully in the light of all the relevant facts and evidence. One of the matters to which this court has had to give consideration was as to how far the judge’s rejection of contemporaneous documentation can be sustained, particularly if the documentation of one party has been said to be inaccurate but the judge has not referred to the fact that the documentation from the opposing party supports the accuracy of the documentation that has not been accepted.
BACKGROUND
8. The starting point of an analysis of the facts in this case is the purchase of Li Fung House by Esquire in September 1981. At the time Esquire was involved in trading in consumer electronics as an importer and exporter and a retailer as well as a wholesaler. It had been founded sometime prior to the purchase of the property by Sabahagchand Choithramanni Gurdas (“Gurdas”) who held 50% of the shares, the other 50% of the Esquire shares was held by his brother Sabahagchand Choithramani Arajan (“Arjan”). Gurdas’ witness statement puts the commencement of business by Arjan and himself as 1965.
9. In August 1981 Esquire obtained a valuation of the property at $151 million. It was at the time the tenant of part of the ground floor of the building and the first floor. Despite the valuation Esquire purchased the property in September 1981 for $180 million. It is possible that at the time inflation was running high: the best lending rate reached 20% in October 1981. The prevalence of inflation at the time might have influenced the thinking of Gurdas as to the advisability of the purchase at what at the time might have been considered a high price. Esquire obtained a loan of $180 million from the Bank for the purchase. The loan was to be repayable as to the first $30 million by 31 December 1982 as to the next $30 million by 1 June 1983 and the remainder over a five-year period.
10. The property was, of course, subject to a mortgage and for banking purposes that was calculated at a value of $166 million. It is noteworthy that the first tranche of repayments (the two repayments of $30 million each) were to be made from the sale of other property assets and the General Manager of the Bank at the time indicated his serious concern as to those sales happening. The annual turnover of Esquire was said to have been $565 million with a net profit of $16.2 million and that was sufficient to enable consent for the loan to be given. The further charge and mortgage which was dated 30 October 1981 provided for banking facilities up to $300 million and was in standard form of an assignment by way of first legal mortgage of amongst other things Li Fung House; the monies secured were repayable on demand.
The 1984 restructuring 11. All did not go well for Esquire in subsequent years. Possibly associated with the difficulties which arose in Hong Kong commencing in 1982, financial difficulties arose which necessitated Esquire first of all seeking further facilities and subsequently a restructuring arrangement with its bankers. There were altogether five banks involved including the Bank. By far the largest amount owing was that to the Bank namely $309 million. This was divided notionally into the Bank’s non- property portion of something over $127 million and the property portion, which was something over $182 million. The Bank’s non-property portion, on its own, represented some 62% of the money owing to all the banks.
12. By an agreement dated 22 February 1984 Esquire, Gurdas, Arjan and the banks entered what has been termed a restructuring agreement. The effect of the agreement was that the debts owing to the banks would be treated as frozen debt. That has been referred to as hardcore debt. It would be non-interest bearing from the effective date of the agreement which was backdated to 13 September 1983. Esquire would have three accounts namely a working account, an escrow account and the hardcore frozen debt account. $160,000 would be transferred each working day into the escrow account from the working account and $2 million per month would be paid out of the escrow account which would be divided amongst the banks in accordance with the percentage of the total amount owing on their hardcore debt.
13. As already indicated, the property portion of the Bank’s debt was treated separately from the non-property hardcore frozen debt. There would be a separate property account into which the rents payable in respect of the various properties owned by Esquire would be paid. There were two specific provisions in the restructuring agreement namely clauses 8 and 10 which preserved the Bank’s rights as mortgagee including the right of disposal of any of the properties including, importantly as regards this case, Li Fung House.
14. One of the requirements of the restructuring agreement was that the accounting firm of Peat, Marwick, Mitchell and Co. (“PMM”) were appointed by the banks to monitor the operation of the agreement and to report at regular intervals in relation to the financial condition of Esquire and its companies. The Bank was also given the right to require Esquire to appoint and pay for a controller to supervise all aspects of the financial affairs of Esquire and its companies.
15. In July 1984 PMM reported to the Bank on the financial position of Esquire. It appeared that the position was stable in that although the hardcore debt had been reduced further facilities had been provided. That letter pointed out that even taking into account the income generated by reason of handling the Esquire accounts the return to the Bank on the total money borrowed was only 3.3%. The clear implication in the letter was that the Bank should consider the cost of the funds and the letter raised the question as to whether the Bank should continue with the scheme of financial restructuring of the Esquire Group.
16. It was shortly after that, in August 1984, that Ramasundara Naga Ratnam (“Ratnam”) was appointed Group General Manager of the Esquire Companies. Ratnam was a chartered accountant who came to Esquire with a background of having been in senior management of a company with a US$100 million turnover. In his witness statement he said that he:
“had much exposure to complicated corporate finance problems and had acquired a decent working knowledge of commercial contracts, loan agreements and dealt with banks and financial institutions extensively.”
17. By January 1985 the value of Li Fung House had fallen to approximately $80 million. This, in itself, did not prevent the other banks, other than Bank of America, from agreeing to extend the 1984 agreements until the end of July of 1985. The minutes of the meeting of representatives of the banks (other than Bank of America) on 29 March 1985 attended by a representative from PMM recorded the fact that the banks had agreed to continue the restructuring scheme until July and that there should be a moratorium on payments from Esquire until that date. This was apparently in the light of losses which had been incurred by Esquire particularly in January and February of that year. Because of that fact the Bank had considered that tighter control of Esquire’s financial affairs was required and it was recorded that Gurdas had agreed to employ Sajjad Khan (“Khan”) as the Group Financial Controller. Khan would be on temporary release from another firm of accountants, Arthur Young and Co. He was seconded on 1 April 1985.
Assignment of the Bank of America debt
18. Although, at the meeting of 29 March 1985, the Bank’s representatives expressed the view that the Bank would not conclude an agreement to buy out the Bank of America debt until July, the Bank was forced, by reason of Bank of America presenting a formal demand in respect of the sum owing to it, namely some $21 million, to buy out the Bank of America. There had been internal memoranda within the Bank showing that consideration was given to buying out the debts of all banks at $0.20 in the dollar, but the Bank was unable to achieve that figure in respect of the Bank of America debt and had to pay some $8 million the equivalent of $0.36 in the dollar. It is noteworthy that in the internal Bank memos reference is made to the fact that the Bank was taking the advice of leading counsel as to the handling of the Bank of America debt.
19. In the internal bank memo dated 20 April 1985 it is specifically stated that any benefit which would eventually arise from the discount would accrue to the Bank. The letter of 25 April 1985 to Esquire, Gurdas and Arjan, which was signed as being agreed to and acknowledged both on behalf of Esquire and the two directors, records the fact that the Bank of America debt of $21 million was transferred and owing by Esquire and was guaranteed by Gurdas and Arjan. On this aspect it may be noted that although the Bank of America debt was assigned to the Bank on 27 April 2005 and notice thereof was given to Esquire on 1 May, the notes of the meeting of 28 May 2005 between the representatives of the banks show that the representatives of the Bank were content to inform the meeting that the Bank was still negotiating with Bank of America at $0.20 in the dollar.
The continuing financial difficulties – discussions of sale of properties
20. At the beginning of 1985 the position of Esquire had begun to look optimistic. In 1984 the turnover had reached $500 million and it was understood that there had been a net profit of $26 million, of course, that was in a situation where no interest was payable on the hardcore debt. Nevertheless, there were still difficulties. According to an internal memo from the Manager Credit Control dated 4 February 1985, Gurdas had an “undisciplined buying” policy which led to slow moving inventory. As a result it was said that the Bank would continue to monitor the stock build- up. That note records the fact that Gurdas was asking for forgiveness of old hardcore debt. The Bank’s reaction was that subject to the other banks’ attitude it was a request that might be sympathetically considered provided there had been successful performance after a further period of two years. It was in the context of the seemingly successful results, primarily it would seem in 1984, that in early 1985 the property portion of the Bank’s debt became interest-bearing.
21. In mid-April 1985 reference was made in internal memos in the Bank to the possibility of selling the various properties owned by Esquire, including Li Fung House. Shortly thereafter a valuation was obtained from a firm of valuers which put the value of Li Fung House at $83 million with a rental income of $12 million per year. That valuation was, no doubt, considered disappointing and the internal memos within the Bank indicated that the agents who were appointed to dispose of the property considered that there should be a target price of $120 million with the possibility of a price of $140 million being achieved should there be attractive financing attached to the sale. At that time the Bank’s net cash exposure to Esquire was $337 million.
22. Esquire’s attitude can be gleaned from a letter written by Gurdas on 3 May 1985 in which he said that Li Fung House could be sold together with two other properties if a satisfactory price could be negotiated. It was Esquire’s intention to move all its activities to Wing On Plaza. That letter appears to have been primarily directed to explaining the downturn in Esquire’s business which had commenced in the first quarter of 1985.
23. As already referred to, there was a meeting on 28 May 1985 between the remaining banks which supported Esquire, a representative from PMM and Khan. The notes of the meeting, which were recorded by the Bank’s solicitor, record that not only were the first quarter results for Esquire poor but because there was a deficit at the end of March which was unlikely to be made up until the end of June, the banks would not see any payments out of the escrow account until later in the year.
24. By 3 July 1985 it was recorded that the sale price of $140 million for Li Fung House could not be reached and that a more realistic figure might be $115 million with a “commercially acceptable finance package”. The rough calculations appear to be that even if all the properties were sold there would be a shortfall of some $46 million. Esquire was proposing that it should bear $17 million by taking out a loan and that the Bank should absorb a loss of some $29 million which was described as “forgiveness”. The reason given at that stage was that Gurdas felt that the financing arrangements which had been finally put in place in respect of Li Fung House had caused an excessively fast drain on Esquire’s capital. There were other factors as well. Apparently Gurdas felt that the interest charged at 2½% above prime was a penal rate and he felt aggrieved by not having sold Wing On Plaza because there had been talk of the Bank wishing to use that building.
25. There was an internal memo from the Manager of Credit Control dated 15 July 1985 which records that Esquire’s sales in June had been down. There had been sales of old stock which had improved the liquidity but because it was old stock it did not necessarily translate into profit. Interestingly, there is a reference to a request by Esquire for forgiveness of part of the hardcore frozen debt. That was considered by the writer of the memo to be out of the question. He continued:
“It is paradoxical that we should support a company with on-going trading lines when we have written off-I do not believe our external auditors would accept the resultant provision. The answer must lie, I fear, in an equity position.”
26. The reference to equity position was clearly a reference followed up on the following page where it is stated that the writer’s opinion was that in reality the only way the Bank would get its money back was for Esquire to go public. In effect, the Bank’s debt would be capitalised. Suggestions of the banks taking an equity position also appeared in the notes of the meeting of bank representatives on 29 March 1985.
27. Later that month, on 24 July 1985, Gurdas refers in a letter to the fact that Esquire had made a final offer of $135 million for the sale of Li Fung House, which was a reduction of some $5 million on their original figure. The letter went on to indicate that Esquire would be agreeable to sell the property for $132 million provided that there were certain matters that were agreed to by the Bank. Those matters included the Bank waiving $18 million debt and also agreeing to increase the overdraft line from $35 million to $60 million. Interestingly, again, the letter records the fact that the stock held by Esquire had been reduced from $60 million some 15 months previously to a level of about $32 to $33 million. On 8 August 1985 Esquire had written under the hand of Gurdas to the agent in charge of selling Li Fung House indicating that they would consider the sale of that property only at a reserve price of not less than $135 million.
28. It appears that there was some disquiet within the Bank as to the handling of the sale by the sales agent although there were indications in the correspondence from HS Property Management Company Ltd (“the second defendant”), who were also involved in marketing the property that difficulties arose from the requirement from Esquire that the marketing should be on a confidential basis.
29. A memo from the Deputy Manager (Credit) Mongkok to the Assistant General Manager- Corporate Banking of 7 August 1985 records that on 11 July 1985 $4 million was transferred from the Escrow Account to the working account as no profit was generated from the operation in the previous months.
Oliner’s first restructuring proposal
30. It was at about this stage that reference to Oliner first appears in the documentation. Oliner is a US attorney who was apparently engaged by Esquire from time to time. His first engagement by Esquire appears to have been in relation to a trademark dispute with a well-known magazine of the same name. It appears that prior to Oliner’s appearance on the scene, Esquire was about to concede to the magazine’s demands to cease using the name Esquire and this had been upon counsel’s advice. Oliner reversed the situation, it would seem by taking charge of the litigation in England and in the United States and by skilful negotiation. As a result Esquire was able to keep its own name.
31. In a memo of 18 July 1985 from the Deputy Manager (Credit) Mongkok reference is made to a charge being made by Oliner of some US$200,000 in relation to his work in relation to negotiating with the other banks. In a memo of 16 August from the Manager Corporate Banking to the Assistant General Manager Corporate Banking reference is made to Oliner’s past success in relation to the trademark matter and to some other negotiations in relation to a restructuring exercise, which appear to be unconnected to Esquire. It is pointed out that Oliner’s fees were US$50,000 in respect of the trademark dispute and that after the Bank had advised Gurdas to engage Oliner’s services, explaining that any proposals had to come from Esquire to its bankers, a further fee had been negotiated between Oliner and Gurdas of US$75,000. The suggestion that the fee had been US$200,000 was inaccurate. This was in the context of Esquire not having made a profit and the turnover being on average 25% below forecast and 5% below break even. Reference is also made to Gurdas’s inability to match his sales program to his purchasing policy with a consequent buildup of non-selling inventory and his general lack of sound financial and inventory management as a backup to the “one man band” that was said to still exist to some extent.
32. In a memo dated 23 August 1985 from the Deputy Manager (Credit) Mongkok to the Manager Credit Control Main Office, the net cash exposure of the Bank to the Esquire Group was put at $434 million. At the same time Oliner wrote from New York to the Bank setting out Esquire’s proposals for restructuring. In brief they were that after a period of seven years all but $7.85 million would have been paid off and that the Bank would be expected to waive that remaining amount. Central to the proposal was that the properties located in Minden Avenue, Winner Godown and Li Fung House would be sold at the earliest possible date at prices which had previously been discussed and agreed. In respect of Li Fung House the price was $135 million. 33. That was followed by a memo from the Assistant General Manager Credit Control dated 31 August 1985 sent to the Manager Corporate Banking of the Bank. The memo commences by saying that it is a summary of the recent discussions which had been held with the management of Esquire and Oliner who had been retained by Esquire to assist in negotiating a long-term restructuring.
The transfer from the escrow account
34. Importantly for the purposes of this case reference is made to the fact that Esquire had not made a profit for several months but that $200,000 per day had been debited from their account. That sum had been estimated to be Esquire’s profit but in view of the fact that it was not making a profit the balance would have to be returned. Part of the problem appears to have arisen from the fact that there had been no write down in the value of the inventory and that as a result of the reduction in the inventory from $70 million to about $32 million there had been a loss which had to be recorded in the accounts. The memo states:
“It is suggested that HK$11M is refunded to the company to free up their lines and that repayment of this “refund” takes priority over any future disbursements from future profits.”
35. The memo alludes to the problem of excessive inventory, stating that if the Bank was to continue to support Esquire the key to profitability was that inventory over 6 months old should not be allowed to build up. Reference was also made in this memo to the Bank’s position that if Esquire was to continue to retain premises in Wing On Plaza it should pay market rent, which no doubt would go to reduce the amount of the property of the loan.
36. There was also a memo dated 31 August from the Manager Corporate Banking to the District Manager Mongkok instructing that the retained profits of $15,585,588 for 1989 should be applied to the loans against Imports.
37. In a further note dated 11 September 1985 from the Assistant Manager Credit Control to the Manager Credit Control reference is again made to the overstatement of the profits in the opening paragraph which states:
“Our recent discussions with District Manager Mongkok, representatives of the company and Arthur Young indicate that a decision is required on whether we intend to support this Group or not. If we are going to support the company requires that we will reimburse them with HKD10.0M representing the overstatement of profits earned in 1984 and subsequently deducted from their facilities through the Escrow Account.”
38. The losses incurred by Esquire were put at $10.9 million. It will be noted that PMM had been removed in 1985 from their position and replaced by Arthur Young because, apparently, the cash generated by the Esquire Group had been substantially over stated.
39. The memo indicates what, perhaps, might be regarded as a degree of dissatisfaction. Gurdas and Arjan’s expenses were put at running at $450,000 per month which included not only their salary but also rent and utilities payments, presumably on their behalf, life assurance payments of $200,000 per month and $100,000 per month entertainment expenses. In addition reference is made to the fact that Gurdas had diluted his shareholding in the “Indian companies” but that there had been no repayment of intercompany debt. 40. At around this time Gurdas was continuing to attribute the losses to the inability of Esquire to extend its trading lines of credit. An example of this were the explanations contained in his letter of 11 October 1985 to the Mongkok office of the Bank. That letter reported on the management accounts for Esquire in the 11 months up to August 1985. What is quite clear from the documentation is that the memo of 11 September 1985 followed instructions from the Assistant General Manager Corporate Banking to the District Manager Mongkok of 4 September in which it was said that the escrow account should be discontinued for the time being and the credit balances reversed to the Esquire current account and that the credit balances in the “003” account should also be transferred to the current account.
41. The upshot was that of some $24 million which had been transferred into escrow in anticipation of profits being made but which were not made during 1984, $8 million had been paid to the other banks leaving the Bank’s share of $15.58 million in the escrow account. This had not been transferred to the hardcore frozen debt account to reduce the hardcore debt and, as a result of the various instructions given, the sum of $15,585,588.04 million was transferred on 2 October 1985 from the escrow account to the working account and is shown in the bank statements of both accounts. No doubt Esquire must have received those bank statements at the time. The net result of this was recorded in an internal memo of the Bank dated 25 November 1985. Later, when in letters of 15 and 18 October 1986 Esquire raised the query as to what had happened to the $15.58 million and why the hardcore frozen debt had not been reduced by that amount, it took the Bank a few days to retrace the steps and work the matter out. The result was concisely stated in the Bank’s internal memo of 3 November 1986: that money never had been transferred to reduce hardcore debt and, it would seem, for sound reasons.
42. It may also be observed that the memo of 4 September gave instructions to write off the interest in the suspense account as the scheme did not provide for interest to be collected on hardcore debt. Earlier memos of 29 and 31 August from the Manager Corporate Banking had put the date of the restructuring agreement coming into effect on 1 January 1984.
Further steps towards the sale of Li Fung House
43. Meanwhile efforts to sell Li Fung House were unsuccessful. It appears from the correspondence that the only potential buyer was prepared to offer no more than $128 million which was considered too low, particularly as the buyer required substantial financing together with delayed repayment terms. Despite that, in letters in the second half of November 1985 Gurdas referred to the property having been sold for $128 million and indeed in the later letter expressed his thanks to the Bank for their “prodigious” efforts in selling the property. This sale, clearly, had not happened, but it is indicative that at that time Gurdas was content that the property might be sold at that price.
44. In January 1986 the Bank agreed with Esquire that Li Fung House and Wing On Centre would not be sold during 1986 and that the loans on these properties would be charged at 2% below the best lending rate. The letter of 25 January 1986 recording that went on to say that the Bank had agreed to this course in order that Esquire and the Bank should benefit from any appreciation in value of the properties. The final paragraph in relation to that stated:
“It is clearly agreed by both the Bank and by the Esquire Group that if an improved offer for either Li Fung House or your Wing On Centre property is received that you will negotiate in good faith for the sale of these properties.” 45. The response from Esquire four days later requested that if the interest rate were to go up more than 2% from the then prime rate the matter would be reviewed as to the proportions between interest and principal from rental income. (The best lending rate rose on 1 April 1986 from 7% to 8%) As regards the sale of Li Fung House it was said that if any better offer materialised that had to be subject to a satisfactory sale and lease back of the floors occupied by Esquire.
46. Esquire’s financial position did not appear to improve during the course of 1986. A memo from the Assistant Manager Credit Control to the Manager Credit Control of 27 May 1986 complains of continuing problems with inventory holdings and also that receivables had not been collected on a timely basis. The memo goes on:
“Gurdas is not devoting himself to his business. Travelling expenditure in April was more than double the monthly average. Gurdas is attempting to introduce Matsushita to the Indian Government. This is no benefit to Esquire in the short term and the longer term advantages are not clear.”
47. The memo shows that from October 1985 to April 1986 profit had been generated in only two months and the profits in those months were significantly lower than the losses in other months.
48. In minutes of a meeting on 30 September 1986 between Ratnam and the Account Manager Credit Control, Ratnam is recorded as inquiring if the Bank was willing to sell Li Fung House. The minute records that he was advised that the Bank was not willing to do so until the property was fully let and then only after major marketing. Although Ratnam commented on other parts of the minute in a letter dated 3 October 1986 he made no comment as to the entry in respect of Li Fung House.
49. Shortly thereafter Gurdas was informed by the Bank that $40 million had been transferred from the property account to the frozen hardcore debt account. The effect of this was that $40 million which would otherwise have been interest bearing in the property account became non-interest bearing.
50. Gurdas wrote again to the Bank on 10 October 1986 in relation to Wing On Plaza and in that letter reiterated the agreement which had been reached that there would be no sale of Li Fung House during 1986 in order that both the Bank and Esquire could benefit from any capital appreciation but that Esquire had also agreed that if genuine offers were received in 1986 they would be considered. The second page of the letter commenced with a request that the Bank should grant Esquire “sizeable relief” in respect of its debts.
51. As already noted, shortly thereafter on 15 and 18 October 1986 Esquire wrote to the Bank raising queries as to the amounts owing on the hardcore debt. The first letter, signed by Gurdas, raised the matter in general terms. The second letter, signed by Ratnam, was more specific. One query was in respect of interest which had been charged between 13 September 1983 and 31 December 1983. During that period interest should not have been charged on the hardcore frozen debt. Ratnam’s letter was clear as to what interest had been charged and what had been credited back. The other query related to the amount which had been in the escrow account put in the letter at “about $15.5/16M”. It was suggested in Esquire’s letters that that money should have reduced the hardcore frozen debt but that had not been done. Given that Ratnam was a chartered accountant with considerable experience in the commercial field, it would not have been unreasonable if Esquire’s bank account statements had been checked prior to making that enquiry but the nature of the enquiry would indicate that had not happened. 52. In a meeting with Gurdas on 28 October 1986, the minutes of which were signed by the Account Manager Credit Control, the matter of interest was recorded in the following terms:
“HSBC advised that we were still trying to reconcile the problem but it looked as if Esquire was correct about the $13 M interest charge from Sept-Dec 83. In such case HSBC intended to offset this against the Bank of America assigned debt.”
In respect of the escrow payments the Bank was still looking into the matter.
53. In relation to the Bank of America debt Esquire had written to the Bank four days earlier stating that they had made a request at the time of the assignment that the benefit should be passed to Esquire “which to our belief had been agreed in principle.” That statement as to Esquire’s belief hardly accords with the letter referred to in paragraph 19 above. The Bank’s position that the benefit of the assignment of that debt would be for the Bank was stated clearly in a letter to Gurdas’s attention dated 28 October 1986.
54. On 30 October 1986 a further Inter-bank Agreement was signed between the remaining banks, obviously not including Bank of America. Indeed reference is made in the Restructuring Agreement signed on the same date, again between the banks, including the Bank, Esquire, Gurdas and Arjan, to the assignment of the Bank of America indebtedness to the Bank. Also in clause 8 it was stated that in the event of a full repayment of the Bank’s property portion the income or proceeds from the properties would be paid first in reduction of the Bank’s non-property portion and secondly paid into the escrow account and aggregated with the net income and distributed to the other banks.
55. The sale of Li Fung House came up for discussion again on 25 November 1986 when T. R. Sommerfield was the Account Manager Credit Control. Gurdas commenced by justifying what was referred to as a “Wish List” which had been provided in anticipation of the meeting. The first request was in respect of the properties that Esquire should be able to take the benefit of the rising market rather than having them marketed straightaway. Sommerfield is recorded as stating that the properties were “legally, ethically and economically” the Bank’s. The notes of the meeting state clearly that Gurdas wanted to hold the properties whereas Sommerfield stated that the Bank wished to sell. Sommerfield also stated that it was a principle of the negotiation that the cash generated by the sale would have to be used to reduce the outstanding amounts owed to the Bank and that the Bank would not subsidise the trading operation since the profits went to all the banks.
56. Three options were put forward by Sommerfield. First that the Bank could enter into possession and sell the properties, secondly that Gurdas could agree to a sale in exchange for some concessions on the money issues and thirdly that Gurdas could arrange a remortgage of the property with another bank. Gurdas is recorded as saying that there was a fourth option namely to hold the property for a few months. As will transpire, Gurdas succeeded in this respect. As Sommerfield said in the course of his cross-examination:
“HIS LORDSHIP: You acceded to his fourth option?
A. He asked for a few months and that is what he got.
MR LEE: Yes, there is no document that you told him, but effectively he got it. Is that a fair summary?
A. Yes, we acceded to his request. Q. Good.”
(Transcript Day 15 p. 47)
It is a fair comment that when it came to the judgment, the judge appears to have forgotten this. Gurdas confirmed the accuracy of this note and the outcome of the meeting: see transcript day 9 pages 27 to 32. This note also records Gurdas requesting that the Bank forgive $30 million debt which was said to arise from the accounting errors identified in the correspondence referred to in paragraph 51 above.
57. From a memo of 25 November 1986 from Sommerfield to the Manager Corporate Banking through the Assistant Manager Credit Control it emerges that it was thought there were good reasons to delay selling Li Fung House for a few months until after Chinese New Year since the period until then was normally a slack period and informal advice from 2 property companies suggested leaving the matter until after Chinese New Year.
58. On 1 December 1986 Sommerfield sent a memo to the Deputy Manager Mongkok requesting a revised figure for the interest charged between 13 September 1983 and the end of the year. He also requested information about distributions from the escrow account in 1984 and 1985 with details as to which account the various sums had been credited. At the same time Gurdas wrote to the Bank of Credit and Commerce explaining the poor past results but being optimistic as to the future, partly on the basis of the fact that the Bank had transferred the sum of $40 million to the frozen account from the property account whereby the interest was reduced. He also referred in that letter to the fact that the properties were valued at $170 million with a liability of $82 million. He anticipated that the rental income would increase by 25% every three years and hence with the Bank’s property loan at 2% below prime there would be a substantial reduction in the liability over the next five years.
59. The second defendant gave a valuation of Li Fung House on 6 December 1986 and $135 million.
60. On 15 December 1986 Sommerfield wrote to Esquire, addressing the letter for the attention of Ratnam but copying it to Gurdas, setting out various matters which arose from recent discussions. Importantly there was a statement that the Bank would ask the second defendant to value all the properties which were mortgaged by Esquire to the Bank for sale and rental. In cross-examination at day 9 page 41 Gurdas agreed that he would have seen the letter and it would have indicated to him that the Bank was looking to value, amongst other things, Li Fung House, with a view to sale. On that same day the Deputy Manager Mongkok sent a memo to the Account Manager Credit Control dealing with the interest which had been charged from September to December 1983 and also the amounts which had been transferred from the escrow account.
61. Matters then moved forward to the end of February. There was a letter dated 25 February 1987 from Gurdas to the Bank in which Gurdas expounded on the comparatively good results which had been achieved and was optimistic for the future. On that letter Pullen, who was the Manager of Credit Control Department, wrote that he had lunch with Gurdas on 26 February 1987 and that Gurdas wanted forgiveness of debt whereas Pullen had said that the Bank wanted the property sold. There was then the comment “Suggest this suitable situation for Oliner to come up with deal.”
62. On that day the Bank sought a further valuation of the Esquire properties. That was provided on 6 March 1987 and Li Fung House was valued at $157 million. 63. The history of the matter up to the meetings in March 1987 has been set out above in somewhat greater detail than otherwise would have been the case in order to establish the context in which the meetings took place in March 1987.
The March meeting and the agreement to sell Li Fung House
64. The first meeting on 12 March 1987 took place on the morning of 12 March. Present were Khan, Ratnam and Oliner on behalf of Esquire and Sommerfield and two others, including the Assistant Manager of Sommerfield’s Department, on behalf of the Bank. Sommerfield’s note of that meeting commences with Oliner stating that Esquire wished to come to a deal with the banks which allowed the company to trade profitably and close the open-ended obligations of the current arrangement. Implicit in that restructuring was the notion that the property was critical to the company’s image and provided the backbone to the balance sheet.
65. The note shows that it was Esquire’s position that the amounts owing to the Bank were $86 million in respect of property loans, $159 million in respect of hardcore debt (which included $8 million in respect of the Bank of America debt) and $125 million owed in respect of trading lines. The Bank’s position was that the hardcore debt should be calculated at $201 million that was stated to be a basic principle within the parameter of which the Bank was willing to be flexible. The discrepancy between the Bank’s figures and the Esquire figures lay in the difference in respect of what has become to be known as the “$30 million”, namely the interest charged between September and December 1983 and the $15.85 million transferred from escrow. In addition the $13 million difference between the amount paid by the Bank in respect of the assignment of the Bank of America debt and the value of the debt was added in.
66. The difference in those amounts has come to be an important feature in this case, particularly the $30 million. When questioned about it in the course of evidence, Sommerfield referred to the claim in respect of interest as being a dumb negotiating tactic. That it clearly was. The Bank had already indicated to Gurdas that Esquire was probably correct that interest should not have been charged in that period and therefore should be reduced in the hardcore debt. Not only was Esquire’s General Manager at the meeting but Esquire was also represented at that meeting by, amongst others, another accountant namely Khan. Oliner’s presence at the meeting was only explicable on the basis that Esquire wished to come to an overall final settlement with the Bank. His only function in relation to Esquire, apart from handling the trademark dispute, was to represent Esquire in negotiations with the various banks. The suggested claim by the Bank relating to the interest overcharge was, therefore, no more than, as Sommerfield said, a dumb negotiating tactic. As the history has demonstrated Esquire had consistently requested the Bank to write off or “forgive” large amounts, particularly when the subject of the sale of the property was discussed. As will be dealt with below, the negotiations took place with both sides knowing full well that whatever the calculation of the amount owing, the Bank would have to write off a very large sum if the restructuring were to come to an end.
67. The matter of the $15.85 million transferred from escrow was, rather different. Here the Bank had indeed, at the relevant time, transferred monies, which seemingly should never have been put into the escrow account, back into the working account. Those monies had never been used to reduce the hardcore frozen debt and the Bank was clearly entitled to claim them. The Bank’s representatives knew that, too, from the memo of 15 December 1986, which was in response to a request for confirmation of what was stated in the memo of 3 November 1986. The facts relating to this transfer out of escrow were conceded by Ratnam in the course of his cross-examination after the documents had been shown to him: see transcript day 6 pages 111-115. 68. It is not surprising that after the matter had been fully ventilated at the trial and the matter had been fully explained to the witness the judge said, in the course of submissions on behalf of the Bank, on day 20 at transcript page 152:
“HIS LORDSHIP: I have no problem so far as the $15 million with the escrow overstatement is concerned. I think the bulk of the documentation shows either you are right or at least you are arguably right and that you could not possibly say that you did not have a genuine belief that you are entitled to at least demand that sum.
MR FOK: Yes.
HIS LORDSHIP: I have greater difficulty with the BOA and the other $15 million.”
69. In this passage the judge was evidently not merely expressing a provisional view but was directing counsel to move on and address him on other issues. I would simply add that reading the transcript of the argument in the court below gives the impression that even Esquire’s counsel accepted the true position to be that the Bank had not taken this sum but had credited back to the working account an amount which was considered should never have been in the escrow account. In all those circumstances the judge’s treatment of this matter in his judgment, wherein he appears to hold it as an error, if not an act of dishonesty, on the part of the Bank to make a claim in respect of the amount of $15.85 million transferred from the escrow account would appear to be another manifestation of delay in the production of a judgment leading to a failure of memory in respect of important matters culminating in a significant error.
70. The discussion then turned to the question of the sale of the properties. Asked why the Bank wished to sell the properties, the Bank’s position was that it had financed the holding of the properties during bad times and it wished to take advantage of the rise in prices. It was pointed out that the properties were only productive because the property loan was $82 million (no doubt a reference to the fact that this was only because of the transfer of the $40 million) and that the interest on the loan was at 2% below best lending rate. The meeting concluded with the suggestion that the Esquire’s team should refer back to Gurdas. The meeting was said to have ended amicably.
71. There was a second meeting that day. On this occasion Ratnam and Oliner were on their own and Khan was not there. Similarly Sommerfield was there solely with the other account manager and the Assistant Manager was not present. In Sommerfield’s note of that meeting Ratnam commenced by saying that Gurdas did not wish to sell the properties and Oliner asked whether the Bank would give the company time to refinance the assets. The reply on behalf the Bank was that the Bank was not prepared to do a restructuring which would require renegotiation in six month’s time and that the Bank firmly believed that the time had come to sell the properties. There was then a short break requested by Oliner and when the meeting resumed Ratnam confirmed that Gurdas’ instructions were very firm. The note then continued that in view of the irreconcilable differences on basic principles the recommendation to the Bank management would be one of the following namely making a demand on the company, entering into possession and subsequent sale of all or some of the properties or thirdly convening a bank meeting and calling the current scheme into default.
72. The Bank’s representatives gave the Esquire party 24 hours to reply. It was also noted that the Bank’s representatives stated that they considered the market was right for sale. The note further contained a reference to Gurdas having left Hong Kong for Europe at exactly the time he should have stayed. Although a 24-hour deadline had been set, 20 minutes after the meeting concluded Ratnam and Oliner returned and asked Sommerfield to return. They asked for a grace period until the following Monday as they were unsure whether they could contact Gurdas in 24 hours. Sommerfield replied that the demand would be issued the next day but no further action would be taken until the Monday. The note concludes “This arrangement gave the company time to contact G while we loaded our gun.”
73. A number of observations follow upon this. In the first place there was a brief note of that meeting made by Ratnam. Ratnam’s note corresponds very closely to Sommerfield’s note. This is important because not only does it inspire confidence that Sommerfield’s note was accurate but the judge failed to take this into account when considering the evidence and in particular Sommerfield’s credibility.
74. The reference to Gurdas departing for Europe at a time when he should have remained was an observation made at that time. It clearly could not have been something thought up later by Sommerfield or anybody else in the Bank. The history that has been set out above, admittedly extensively, demonstrates that Gurdas and those at Esquire must have been fully aware that the Bank would wish to sell the properties, or at least some of them; the question of the sale of Li Fung House had been on the agenda for two years. There was a history of Gurdas agreeing to the sale when the price of the property was very much lower. Doubtless Gurdas and those at Esquire were not so keen to sell the property once the Bank had relieved it of the necessity of paying interest on $40 million of the property loan and had reduced the amount of interest on the property loan to what could have been little more, if anything, than the cost of funds to the Bank. Furthermore, in view of the arrangement, retention of the property by Esquire could only inure to its benefit if the value of the property went up. If the value of the property were to decline it would not cause harm to Esquire because there was in any event a “black-hole” to which reference will be made below, specifically an amount of debt which Esquire would never pay.
75. From the Bank’s point of view the sale of the property at the current level was assumably a legitimate aim. The Bank had considered that the property auctions at the end of the previous year had been “top-ish”. There were other indications of that as well. Interest rates had come down in January 1987 but on 2 March 1987 there was an increase of best lending rate from 5% to 6%. Indeed, interest rates rose rapidly through to October 1987 when they reached 8.5% best lending rate. That was an event which happened shortly before the long remembered stock market crash of that month which precipitated not only a fall in the stock market but a fall of the property market as well.
76. One other matter which emerges, again, from Ratnam’s note is that he recorded the position of the Bank being:
“1) Not prepared to wait for restructuring in six months time if E cannot arrange other refinance
2) Will have to ask senior management if HK should enter as mortgagee
3) To ask G again”
77. Not only does this confirm Sommerfield’s note but it also indicates that the threat was to call in the mortgage loan. This was also demonstrated by the letter which Sommerfield drafted. It was dated 18 March 1987 and signed by Sommerfield and it related simply to the loan of $82,460,849.69. That was said to be the amount owing on the property loan and the account number was given. The letter was so headed and the only demand in the letter related to the property loan. In summary, therefore, it is quite clear that, as Sommerfield put at the end of his note to the Manager Corporate Banking: a request to advise whether he approved the issuance of the demand and on Arjan personally for the property debt only, the threat was in respect of calling in the property loan.
78. Hence in reaching the conclusion which he did at paragraph 189 of his judgment that:
“The Bank did not confine itself only to a threat of cutting the trading line or making demand only on the Property loan. The Bank relied on the $201,000,000 Hardcore Frozen Debt net...” the judge overlooked two very significant pieces of contemporaneous written evidence. Again, his finding cannot be supported.
79. On 12 March the discussion had not been about the amount owing but had been as to whether Li Fung House, in particular, should be sold. It is clear that the Bank was approaching the matter on the basis that there was to be an overall final settlement which would, upon being worked out, conclude the restructuring by enabling Esquire to have a “clean” balance sheet. There was no prospect, however, of Esquire ever being in a position of being able to pay all the money owing to the Bank. It may be noted that in the original proceedings brought by Esquire, which were struck out, the allegation was made that the threat by the Bank to persuade Esquire to agree to a sale was the threat to exercise its powers as a mortgagee. It was not until the second set of proceeding that the allegations of the threat presently relied upon emerged. The threat pleaded in paragraph 11 of the reamended statement of claim was that the Bank would leave the $30 million discrepancy uncorrected and pursue the Esquire Group for repayment of that sum and the Bank would liquidate the Esquire Group immediately.
The telephone calls of 12 March 1987
80. Matters moved fairly swiftly after that meeting and in the evening of 12 March 1987 Ratnam spoke to Gurdas, who was in Bombay. He said both in cross-examination and in re-examination that Gurdas agreed to sell the property and he relayed that to Sommerfield. There was then a telephone call from Gurdas to Sommerfield. A note was made by Sommerfield on the following day, in which it is said that apart from talking about a large number of irrelevant matters Gurdas had consented to the sale of the property if the Bank thought that that was in the best interests of Esquire. Sommerfield records his reply as being that it was for the directors (of Esquire) to decide that and that his overriding interest was the Bank’s shareholders’ cash but that he also wished to give Gurdas long-term peace of mind. It is recorded that the conversation ended amicably.
81. Although it was said in Gurdas’s witness statement that Ratnam had said that the Bank would not rectify the matter of the interest overcharge in September to December 1983 and the transfer out of escrow, which two sums had come to be known collectively as the $30 million overcharge, in cross-examination Gurdas conceded that Ratnam had never mentioned a specific figure. Indeed the upshot of his cross-examination was that he was unable to confirm that any figure had been mentioned. At this point it should be mentioned that much of Gurdas’ evidence, particularly in cross-examination, was unintelligible. Again, as Ratnam made clear in the course of re- examination if the Bank had indeed made a demand for repayment of the mortgage and called the scheme into default all the trading lines of Esquire would have been cancelled. That would have included the trading lines with other banks including the Bank of Credit and Commerce as well as the Bank.
82. There were two further meetings in the following week. Sommerfield took notes at those meetings. Ratnam, Oliner and Khan all attended together with the Bank’s representatives. It is clear that the purpose of the meetings was to discuss how the total indebtedness of Esquire would be handled and concluded. The discussions appear to have centred on whether the future arrangement would last three or five years, at the end of which all debt would be discharged, and as to how much each month Esquire would pay. One thing that may be noted is that there was to be a set amount to be repaid over and above which Esquire, or Gurdas, would retain the profits. The other matter which emerges is that Esquire was offering total repayments of some $31.2 million whereas the Bank was seeking repayments of $48 million. The difference meant that at the end of the day, having discounted the $30 million which Esquire contested, there would still on Esquire’s proposal be $33.8 million owing and on the Bank’s only $17 million. The amount that would be left owing was sometimes referred to as the “black-hole”. As it transpired in the memo prepared by Sommerfield and submitted to the Manager Corporate Banking it was Esquire’s proposal, which would end with a $33.8 million debt, or black-hole, owing, which was put forward.
The May 1987 agreement and sale of Li Fung House
83. This proposal received scrutiny from the top echelons of the Bank. In the note it was explained that there would be a $30 million upfront forgiveness and a final forgiveness of $33.8 million. In respect of the $30 million upfront forgiveness this was treated in a global fashion with the explanation that $15 million was interest overcharged to the company and that the other $15 million constituted principal repayments which the company claimed to have effected in 1984; the note stated that the Bank’s figures do not reflect the repayments and the records were incomplete. The Chairman required an explanation as to why the interest payments were overcharged and, as to the principal repayments, where the money had gone and why the records did not reflect that. The reply from the Assistant General Manager Corporate Banking explained that the interest overcharge arose because interest had originally been taken to book but was never reversed after the original scheme was implemented and that this matter had been used as a “give-away” in the recent negotiations. As to the principal sums the note explained that the $15 million had originally been intended as a hardcore repayment but was in fact credited back to the working capital accounts. The note concluded with the statement “From the foregoing, you will see that the actual amount forgiven is HKD 15 million rather than HKD 30 million.”
84. Meanwhile matters were moving swiftly with regard to the sale. On 21 March 1987 Gurdas wrote to the Bank, attention Sommerfield, expressing the view that Esquire considered that marketing Li Fung House at this stage would facilitate the overall exposure to the Bank coming down and authorised the second defendant to market the property at the best prices that could be obtained. The letter asked to be informed of the price before the sale. A further valuation of Li Fung House was made and on 25 March 1987 the valuers put the value of the property at $161 million. The valuation report went on to say that in view of the considerable demand for investment property the price achieved on a sale in a “competitive situation” might be in excess of the valuation. On 27 March Sommerfield wrote to Esquire setting out broad outlines for the future, urging that Esquire should improve the gross profit margins, sell off old inventory and should make efforts to collect overdue receivables. The letter went on to refer to negotiations with the other banks which it was hoped would be concluded with a restructuring by the end of May. The letter specifically mentioned that no mention should be made to any bank of the recent negotiations and should any bank query the sale of Li Fung House, Esquire should simply say that advantage was being taken of the strong market.
85. The second defendant provided proposals for marketing the property on 19 March 1987 and these proposals were accepted on 23 March subject to bringing forward the marketing by one week from the dates given by the second defendant. The marketing was to be by distribution of brochures to be prepared as well as by press advertising. 86. Esquire executed a power of attorney in favour of the Bank and the second defendant. That power of attorney commenced with the paragraphs:
“Esquire (Electronics) Limited (the “Company”) hereby irrevocably and unconditionally and by way of security of appoints (the Bank and the second defendant) (the “Attorneys”) jointly and severally to be true and lawful attorneys of the Company for and on behalf of and in the name of the Company or in the name of the Attorneys or either of them to do the following acts, deeds and things namely: --
1. To sell (whether by private contract, auction or other method whatsoever) all that property brief particulars of which are set out in the Schedule hereto (the “Property”) upon and subject to such terms and conditions as the Attorneys or either of them shall think fit in their sole and absolute and unfettered discretion.”
87. It was sought to be suggested in argument that the expression by way of security meant that the Bank had some security that Esquire would do what it had had agreed to do, namely sell the property. That argument is fanciful and unsustainable. The Bank was the mortgagee of the property and it could have exercised its powers as mortgagee to sell property. But, as both the Bank and Esquire were well aware, if the property were to be sold by the mortgagee it would be likely to cause potential purchasers to consider that there were difficulties which required a forced sale and that they could perhaps purchase the property at a lower price because of that. Clearly the sale by an owner who is under no pressure to sell is far more likely to be advantageous than a forced sale or a sale by a mortgagee. The other matter to be noted in respect of the Power of Attorney is that there was a requirement in the power that it was given for the purpose of the sale of the property.
88. The first marketing report in respect of Li Fung House was dated 23 April 1987 and in it reference was made to the sales brochures already having been sent out to some parties and that the press advertising campaign was being carried out in accordance with a schedule. Copies of the advertisements in both English and Chinese newspapers were enclosed with the report. It appeared that there had been responses from a number of parties including investors and estate agents. Two offers had been received. One of $130 million and that was rejected. The other was from a Canadian interest and had been an oral offer of $158 million, but that needed to be improved. There was to be a half page advertisement in the Hong Kong Property Journal on 1 May 1987 and the second stage in the advertising campaign was to commence on the date of the letter.
89. Heads of agreement between the Bank and Esquire, Gurdas and Arjan were signed on 26 April 1987. These provided in the first place that Esquire would confirm and undertake to maintain the appointment of the second defendant as the sole and exclusive agent for the sale of Li Fung House and that they agreed that the sale of the property at the best reasonable price was in the best interests of Esquire and its group. Paragraph 2.05 of the agreement provided that conditional upon the receipt by the Bank of the net proceeds of sale of Li Fung House, the Bank agreed that interest for the period of 13 September 1983 to 31 December 1983 namely $14,883,815.85 should not be chargeable by the Bank and that a principal amount of $15,116,184.15 of the Bank Non Property Portion should be deemed waived and released. There was to be a new property loan of some $16 million and the balance of the Bank’s Lender’s Portion would be repayable as to $1.56 million on a quarterly basis. That was to last for a period of five years until 30 June 1992 at which point the remaining portion and any remaining balance of the Bank’s Lender’s Portions should be waived and released. This emphasised that the proposal put forward by Esquire was accepted: the total payment over the five-year period would be $31.2 million. 90. Reverting to the question of the sale of the property the sale eventually took place to Bethlehem Management Ltd (“Bethlehem”). Important evidence in respect of this was not referred to by the judge in his judgment. For the reasons already set out above, in view of the lapse of time between the hearing and the date of the judgment, no assumption can be made that the judge had taken it into account. The evidence was in the form of an affirmation of Leung Ka Hung. It was admitted into evidence at the trial without cross-examination, subject to the weight to be given to it. Various facts are stated therein which would not seem to be subject to assessment as to weight, rather they were either factually correct or incorrect. Mr Leung had been the Deputy General Manager of Hang Mow Investment Co. Ltd, which was a subsidiary of Hang Chong Investment Ltd, which was ultimately sold in 1991 together with its subsidiary companies. Mr Leung stated that in April 1987 he had noticed advertisements in various Chinese newspapers for the sale of Li Fung House. He had been attracted to it and he had discussed the matter with a director of his company namely Mr Ho Sin Hang. Mr Ho was then and was at the date of the action a director of Hang Seng Bank Limited. He indicated that Hang Mow might be interested in acquiring the property and asked Mr Leung to make inquiries and an appraisal. Mr Leung considered that a fair price for the property would have been in the region of $160 million. He exhibited a letter from the second defendant dated 29 April 1987 in which a price indication of $175-185 million would be considered. He recollected being told that the owner wanted a price in the region of $185 million.
91. The letter of 29 April refers to a letter from Hang Mow of 28 April but that apparently has not been located. After discussions with Mr Ho, Mr Leung was instructed to try and conclude negotiations with the second defendant with a view to acquiring the property for $180 million; that he did in early May 1987. He then instructed Hang Mow’s solicitors, Messrs. C.Y. Kwan & Co, to write to the vendors’ solicitors setting out the terms whereon the property was to be purchased for $180 million. Mr Ho decided that the appropriate company owned by members of the Ho family to purchase the property that was Bethlehem. Another matter to which the judge made no reference was that the Bank had absolutely no interest in Bethlehem.
92. In the second marketing report provided by the second defendant dated 30 April 1987 it was stated that a meeting had been held with Hang Mou Development Co. Ltd and it was understood that one of the directors of Hang Seng Bank was personally interested in the property. The letter gave the indication that there might be an acceptable offer. It was also said that 150 additional copies of the sales brochure would be prepared and forwarded to interested parties. That letter constituting the report was copied to Ratnam. The facts that Ratnam had been sent a copy of this letter and that the letter referred to an acceptable offer being likely to come from a company in which one of the directors was a director of Hang Seng Bank were, again, not referred to by the judge.
93. In paragraph 65 of the judgment, the judge makes reference to the lack of any specific written offer to the second defendant. He said that no explanation was offered as to whether such document did exist. In making that statement the judge appears to have forgotten the affidavit of John Richard Arnold, the managing director of the second defendant. His evidence was that a year after a transaction was completed the documents would be boxed and sent to storage and the box marked with a date when the contents could be destroyed which would be 7 years from the date of the last document. Hence the second defendant had no documents relating to the sale of Li Fung House. Furthermore, Hang Chong Investment Co. Ltd had been sold.
94. There was a memo for the file of the Bank written by Sommerfield on 4 May 1987 in which he stated that he had authorised the second defendant to accept the offer of $180 million for Li Fung House. Interestingly the memo makes no reference as to the identity of the purchaser. The only matter of concern appears to have been simply the price and the memo deals with the consequential financial arrangements between the Bank and Esquire. There is a letter dated the following day from C.Y. Kwan to the Bank’s solicitors. The letter was subject to contract and it set out the terms and conditions of the proposed sale of Li Fung House. They were simple. The consideration was $180 million with a deposit of $36 million. Apart from the fact that no commission was required to be paid to the second defendant, the remaining terms require no comment. Enclosed with the letter was a cheque for $1 million which was to be returned within 14 days if there were no formal sale and purchase agreement. That was followed by letter of 8 May 1987 from the same solicitors in almost identical terms save that it was an open letter which stated that:
“We are instructed that our respective clients have now agreed and confirmed the sale and purchase of the above property on the following terms and conditions.”
95. Great emphasis has been placed by the plaintiff that the letter of 8 May was copied to the General Manager of the Bank, who was also a director of the Hang Seng Bank in 1987, and to the Chairman of the Hang Seng Bank who also happened to be an adviser to the Board of the Bank. It was suggested in argument that this demonstrated that those two persons were involved in negotiating the sale of the property. However, no questions were asked whether by way of interrogatories or otherwise either of the two persons involved who received a copies of the letter as to that nor as to why they should have received a copies of the letter. They were not called or subpoened to give evidence. When giving evidence Mr Selway-Swift, who at the time had been the Assistant General Manager Corporate Banking said that he had no idea as to why the letter had been copied to those persons and that he had no idea as to the internal workings of the firm of solicitors involved.
96. Far from indicating that the two persons copied with C.Y. Kwan’s letter had been involved in the negotiations for the purchase of the property by Bethlehem, the copying of the letter is consistent with Mr Ho Sin Hang, as a director of a public company drawing the attention of senior persons on Boards of the Hang Seng Bank and the Bank to the fact that a company in which he had an interest was purchasing a property being sold by the Bank as mortgagee. Indeed, the evidence of Sommerfield was that the negotiations for the sale were being conducted on his instructions by employees of the second defendant namely Phil Ashton and Simon Liu. The evidence of Leung was that Mr Ho had left it to Leung himself to conduct the negotiations. Sommerfield’s evidence was that prior to authorising the second defendant to accept an offer of $180 million for the property which is recorded in his memo dated 4 May 1987, he might have spoken to, perhaps, the Manager Corporate Banking and possibly the Assistant General Manager Corporate Banking and possibly the person in charge of the property lending unit of the Bank. When asked if the matter could have gone higher up in the hierarchy of the Bank his answer was
“No, no, I do not think a transaction really as straightforward as a property sale would have required us to go higher up in this case.”
97. Selway-Swift, who was the Assistant General Manager Corporate Banking, said in evidence that he could not remember giving specific approval for the authorisation although he was aware of the sale taking place. Importantly he said that he considered he would have been in a position to approve the sale without the matter going further up in the hierarchy of the Bank : see day 18 page 117.
98. Thus, quite the reverse from indicating some kind of illicit complicity between senior directors of the two banks, the copying of the letter gives the impression that Mr Ho, who was no doubt the person giving instructions, wanted to be perfectly open about what was being done. 99. On the 15 May 1987 Gurdas and Arjan, as the directors of Esquire, passed a board resolution to sell the property to Bethlehem and to enter a tenancy agreement in respect of one of the shops on the ground floor. The sale and purchase agreement was executed on 16 May by Arjan on behalf of Esquire. The assignment took place five days later on 21 May. On 22 May exactly $30 million was credited to the hardcore frozen account. That was confirmed, several months later, in a letter of 29 December 1987 in which it was explained that the actual existing indebtedness to the bank was $28,399,380 and not $58,399,380 as stated in the scheme documentation which was about to be signed. It was that letter which eventually, in 1992, apparently led Gurdas to consult leading counsel, Mr Henry Litton QC, and then contact the then General Manager of the Bank on the basis that counsel had advised Gurdas that the Bank owed Gurdas an “explanation”. Later, as recorded in the judgment below, Gurdas took the matter up with Government officials and politicians. The restructuring agreement had been extended in October 1987 to the end of that year. By a further restructuring agreement between all the parties dated 1 January 1988, the quarterly repayments to all the banks together was and $1.59 million. That compares with a figure of $2.55 million which had been the figure agreed in the heads of agreement of 26 April. The payment to the Bank had correspondingly been reduced from $1.56 million to $771,000. Evidently Esquire’s ability to ask for and succeed in obtaining further concessions was not diminished after the April 1987 negotiations.
100. When, in 1994, it became clear that proceedings were about to be commenced against the Bank and the second defendant, the Bank withdrew its facilities and demanded repayment. That, of course, placed Esquire into difficulties. The petition which resulted in the winding up of Esquire was not presented, as might be implied from paragraph 25 of the judgment below, by the Bank, but by two employees. Indeed on the hearing of the winding up petition the Bank took a neutral stance neither supporting nor opposing the petition. The liquidation did not take place until 1996, not as the judge suggested in paragraph 25 shortly after the demand for repayment. Frankly, nothing could have been more natural than for the Bank to have withdrawn facilities. If it had continued to finance Esquire with the underlying debt still owing and partly interest free, it would have been financing litigation against itself. That is something that not even the most astute company directors could ever justify to a bank’s shareholders.
BREACH OF FIDUCIARY DUTY
101. The judge held that the Bank had been in breach of fiduciary duty in arranging for the sale of the property to Bethlehem. It will be noted that although the power of attorney had been executed it was not used. The sale document to Bethlehem was executed by Esquire in the person of Gurdas and Arjan.
102. This ground of complaint by the plaintiff is simply answered by the fact that the Bank had no further duties than that of a mortgagee in selling the property. The property was being sold because the Bank was threatening to exercise the powers that it had as a mortgagee. The Bank caused Esquire to execute the power of attorney in order to avoid the appearance of the sale being a distress sale. That course was something that would benefit both the Bank and Esquire. In the circumstances of a sale of a mortgagee the Bank’s duty was to obtain the full price for the property. See for example Farrar v Farrars Limited per Lindley LJ, (1888) 40 Ch.D. 395 at 411. In view of the agreement between the parties recorded at the commencement of the 11th day of the trial there can be no question but that the sale price was the full price of the property at that date. Even if there were any doubt about it, comparison can be made between the price achieved, namely $180 million, and the valuation which had been given of $161 million and that corresponded very closely to the value which Leung had put on the property when it first came to his attention. 103. If there were any doubt about the extent of the Bank’s obligations and duties, it would be resolved by the terms of the power of attorney. The power of attorney was given as “security”. That meant security for the money owing to the Bank. The Bank was given the power of attorney for the purpose of sale. In respect of that it had the “sole and absolute and unfettered discretion” as to the terms and conditions upon which the property should be sold. Adopting what was said by Mason J (as he then was) in Hospital Products Ltd v United States Surgical Corporation [1984-85] 156 CLR 41 at page 97 if a fiduciary relationship were to exist at all it would have to accommodate itself to the terms of the contract so that it is consistent with it and conforms to it. A fiduciary relationship cannot be superimposed upon a contract in such a way as to alter the operation which the contract was intended to have according to its true construction.
104. I have no doubt that in this case the true construction of the arrangement between the Bank and Esquire which gave rise to the creation of the power of attorney was that the property would be sold at its full market value. That was achieved.
105. The judge summarised his finding in respect of this part of the case in paragraph 83 of the judgment way he said:
“The core complaint in this case can be summarized in my view by one short statement, namely a senior partner has no business selling his principal’s property to his junior partner in a private sale. The partners can be partners in a law firm or a business or a bank such as the Hang Seng Bank.”
106. The judge did not analyse in any detail how he arrived at the conclusion that the directors of Bethlehem or Hang Chong Investment Ltd were “partners” of the Bank. Directors of a company are not partners. They are in a very different position from partners. They may have to work together with their other directors but that is in the interests of the Company and not in their own personal interests.
107. There is no reason suggested in this case that the Bank would have wished to bestow any special benefit on either Bethlehem, Hang Chong Investment Ltd or the directors of the Hang Seng Bank who were also directors of Bethlehem. Indeed, such a suggestion would be unrealistic. The property was being sold at the insistence of the Bank because the Bank wished to recover as much as possible from the wreck of Esquire, knowing full well that at the end of the day in order for Esquire to have a clean balance there would still be a deficit or “black-hole”. There would thus be no incentive to the Bank to achieve a lower price for the sale of the property than the best price obtainable.
108. In paragraph 24 of the judgment the judge referred to the Bank being a close associate of Bethlehem and in paragraph 25 he spoke of the close relationship between the Bank and Bethlehem. This was simply not the case. There was no evidence of any such close relationship or association between the companies. Furthermore, the 2 directors of Hang Seng Bank who were also directors of Bethlehem, had a miniscule share in the Hang Seng Bank and a mere 5 shares out of a total number of 300 issued shares in Bethlehem. Ho Sin Hang had 44 shares.
109. As was demonstrated in argument by Mr Jarvis QC on behalf of the Bank, any shareholding in Hang Seng Bank by those who had an interest in Hang Chong Investment Ltd or any of its subsidiaries including Bethlehem was minimal and, it would be noted, Hang Sang Bank was a publicly quoted company. Even if there were any fiduciary duty involved in the way the judge appeared to consider it arose, it is answered by subjecting everything that was done in the case to vigilant scrutiny, as was said by Lord Mackenzie in the case of Henry Burrell v George Burrell and others 1915 SC 333. In that case a wife of one of the trustees had purchased shares belonging to a trust estate. Lord Dundas had analysed what had happened on the basis that there had been no bargaining of any sort between the wife and the trustees, that the wife had acted on her own, had purchased the shares on her own initiative and not at the instigation or advice of her husband, that the lady involved was a capable businesswoman accustomed to managing her own ample means, that the payment had been made out of her own money and finally that the price was an adequate and even a full one. In those circumstances the court was unanimous in rejecting any allegation of impropriety or breach of trust. Lord Mackenzie said that he was unable to imagine any case which could be stronger for sustaining the transaction which the pursuer sought to challenge.
110. In this case, as already pointed out, the judge overlooked the fact that Leung had become aware of the fact that the property was for sale independently of any connection between those having an interest in his employer and the Hang Sang Bank let alone the Bank. There is no question that Hang Chong Investment Ltd was a well-established property company and Bethlehem purchased the property from its own funds. The price was the full price. The only other factor remaining was as to whether there had been any bargaining which involved some underhand dealing between directors of the Hang Sang Bank and the Bank. It was in this respect that the judge attempted to find some collusion based upon the fact that C.Y. Kwan’s letter had been copied as referred to in paragraph 95 above. Observations in respect of that have already been made. The suggestion that there had been any impropriety in that respect was wholly speculative, ignored significant evidence and, as has already been said above, commercially unrealistic.
111. In his letter of 8 August 1994 to the member of the Legislative Council, Gurdas indicated that his “recent inquiries” had elicited the fact that the purchaser had as its shareholders persons who were directors of the Hang Seng Bank. If the identity of the purchaser had been of the slightest interest to Esquire or Gurdas or Arjan at the time of the sale inquiries, which would have been completed within an hour, would have revealed from records at the Companies Registry who the shareholders and directors of Bethlehem were. Furthermore as pointed out in paragraph 92 above the letter copied to Ratnam had indicated that a director of the Hang Seng Bank was interested in the purchase of the property and if any doubt prevailed at the time that the correct price had not been obtained or that Bethlehem was not connected with “Hang Mou Development Co. Ltd” referred to in that letter a simple inquiry would have sufficed.
112. Some reliance was placed by the judge on his assessment that the sale had taken place too quickly. The two reports by the second defendant show quite clearly that there had been wide dissemination of the fact that Li Fung House was for sale. It may be that there were further brochures which could have been sent out but, given the advertisements and given the fact that contact had been made with a large number of parties who were considered possible recipients, there is no reason to suppose that any party that was in a position to be able to afford a property such as Li Fung House would not have come to know of its existence on the market and made approaches if it had any intention of purchasing the property.
113. The major item for negotiation on the purchase of such a property is the matter of price. Once a price has been offered by a potential buyer and a seller considers that it has achieved the maximum in the circumstances, it would be foolhardy for a seller to delay. Experience of cases that have come through this court shows that many property deals are arranged very quickly. There was no evidence to support the judge’s conclusion that there was anything sinister about the speed at which the negotiations were concluded and, once concluded, there was no reason to delay the signing of the sale and purchase agreement and indeed complete the purchase.
ECONOMIC DURESS 114. Before dealing with the issues of economic duress and undue influence, it should be observed that the trial judge took the unusual course of splitting the trial between what were termed remedies and reliefs from an assessment of whether there had been economic duress or undue influence. Whereas it is quite normal that questions of quantum are separated from a trial on liability, the question as to the existence of a remedy or a relief is fundamental to a cause of action. Nothing in this judgment should be taken as indicating that on the facts of this case a cause of action would exist under the heading of economic duress or undue influence in respect of a transaction to which the Bank was not a party. The sale of the property, was effected by Esquire, as opposed to the Bank under the power of attorney. The allegations in this case relate to the sale of the property and not to the agreement between the Bank, Esquire, Gurdas and Arjan of 26 April 1987 which the plaintiff treats as a separate matter. It is, however, for the purposes of this judgment unnecessary to decide the matter since there was, in my view, no economic duress nor undue influence.
115. The judge’s assessment of the witnesses appears to be more an assessment of their characters and from a point of view of amiability rather than credibility. In respect of Sommerfield, for example he referred to him in paragraph 157 as being shrewd, intelligent, giving his evidence carefully, cleverly, calmly and well thought out. None of these epithets would indicate that he was dishonest or that his evidence was unreliable. The judge went on to say that he ranked Sommerfield amongst one of the most formidable witnesses that he had encountered. It is difficult to discern what is meant by formidable in those circumstances. That is, usually, a description used in relation to a well-prepared expert who is familiar with his subject. The judge concludes paragraph 157 by saying that where Sommerfield’s evidence conflicted with that of Gurdas or Ratnam he preferred the evidence of Esquire’s witnesses. That catchall of a conclusion, most apt in other types of cases, for example of an accident where a judge needs to discern which of the witnesses described the accident best, would appear to be inappropriate in this case. This is particularly so in the instance already mentioned where Ratnam had given evidence both in cross-examination and in re- examination that the Gurdas had told him on the telephone conversation in the evening of 12 March 1987 that he agreed to a sale of the property. When giving evidence on day 9, Gurdas said clearly that he had not told Ratnam that he was willing to sell the building: see page 77 lines 22-25. Not surprisingly the opening words of paragraph 184 of the judgment record that Gurdas had told Ratnam that he agreed to sell. Surprisingly the next sentence goes on to suggest that it was only at the end of the telephone conversation with Sommerfield that Gurdas confirmed to Sommerfield that he was willing to sell “after resistance failed”.
116. Given the fact that the judge found that Ratnam was a credible witness and that his evidence coincides with Sommerfield’s note of the telephone conversations, it seems a little difficult to understand how the judge could come to the conclusion that Gurdas had not already indicated that he was willing to agree to the sale of the property prior to his conversation with Sommerfield and that his conversation with Sommerfield was on that basis. What also has to be borne in mind is that much of Gurdas’ oral evidence was incoherent and incomprehensible. This court’s attention has been drawn to a list of passages in the transcripts where Gurdas evidence was said to be incoherent or unintelligible. It is not sufficient for the judge to say in paragraph 153 that Gurdas “could be mistaken on the minor detail for example on the matter of the sequence of telephone calls that night of the 12th of March.” What took place on 12 March 1987 forms the foundation of the plaintiff’s case.
117. As set out above, Esquire’s agreement to sell the property as part of the overall scheme of refinancing its debts was brought about because of the threat that should Esquire not agree to the sale of the property as part of the restructuring, the Bank would call in the mortgage. The Bank was perfectly entitled to call in the mortgage. Argument was addressed to this court on the basis that that it was illegal for it to have done so because it would have been in breach of the Bank’s agreement with the other banks in the initial restructuring agreement. As already noted clauses 8 and 10 of the restructuring agreement make it quite clear that the Bank was entitled to sell the property as mortgagee without reference to the other banks. The Bank could also have called in the trading lines.
118. What took place in 1987 had to be considered in the light of the Bank having waived by that stage some $100 million in interest. The judge’s approach to the matter is highlighted in paragraph 185 of the judgment that:
“It is perfectly possible then Esquire would refuse to sell would require, if pressure of liquidation is applied, a forgiveness by the Bank of say $15 Million to $25 Million (say combination of front-end and back-end) from the $159 Million Hardcore frozen debt.”
That statement that the Bank should be prepared to forego such a substantial sum of money ignores the reality of the situation that banks are in business to lend money on the basis that it will be returned together with interest for the ultimate benefit of their shareholders. It might also be bourne in mind that the amount which the judge considered the Bank should easily write off, was larger than a number of initial public offerings on the Hong Kong Stock Exchange around that period.
119. In reaching his conclusion that there had been economic duress the judge painted a picture that amounted to a conspiracy. He drew adverse inferences against the Manager Corporate Banking, Diccon Pullen. No allegation had been made against that gentleman in the pleadings and he was not called to give evidence. The inferences drawn by the judge appear to be based solely upon some short handwritten notes made by Pullen on memos. Those notes do not show a conspiracy. Worse still are the suggestions that the General Manager of the bank “allowed himself to be involved in the sale of the Property to a junior partner of the Bank which like his subordinates he must have known was quite inappropriate.” As regards Sommerfield no allegation of dishonesty put to him in the course of a lengthy cross-examination. The most that had been said was that it was put to him that it was unprofessional to fail to acknowledge the mistake in relation to the interest charges and to apologise for it. Sommerfield accepted that. That does not show he was a dishonest witness.
120. The crux of the plaintiff’s case in relation to economic to duress was that the Bank had refused to correct what was termed the $30 million overcharge error. As already explained, that was not the subject of the conversations on 12 March 1987. That was not the reason why Esquire considered that it had to agree to the Bank’s demand to sell the property. It was not the subject of the negotiations that lead to the heads of agreement of 26 April 1987. What was at issue there was how much Esquire would pay over the remaining period after the sale and before all sums still owing by Esquire were finally written off. Any allegation of economic duress founded on such an alleged threat therefore fails at the first hurdle. I would only add that it would seem that Esquire’s case in this regard was constructed five years after the event based upon the letter of 29 December 1987 which Gurdas wished to turn to his own advantage. It cannot escape observation that prior to that there had been no complaint about the matter. The complaints had been that the Bank had required a sale of the property.
121. It also has to be noted that Esquire was represented at the meetings on 12 March by, on one occasion, two accountants and, on the other occasion, a single accountant. It can hardly be supposed that, together with Oliner, these persons would not have known that the interest charged from September to December 1983 had to be deducted. If the Bank had indeed sought to exercise legal rights which included claiming that sum it would have failed unless, of course, the restructuring agreement had been called into default. 122. The requirement of the Bank for the sale of the property supported, as it was, by a determination to exercise its powers as mortgagee, could not be said to have been illegitimate. As already noted, the Bank had supported Esquire to a considerable extent. It had waived interest amounting to $100 million. On the calculations by the Bank holding the property in the future would only have been of marginal benefit on a “Net Present Value” basis. To hold on to the property would have risked a downturn in the market which was balanced against a possible 4% increase on the current “Net Present Value” of a sale of the property. That was an unsatisfactory risk. These calculations on the part of the Bank were not challenged. It was for the mortgagee to decide when was an appropriate time to sell the property. It may well be, as the judge noted, that if the property had been held the matter might have been different. However, the property scene in Hong Kong has not been uninterruptedly positive. If attempts had been made to sell the property in the period immediately following October 1987 there may have been great difficulties. Similarly in the period following June 1989, not to speak of the period following the Asian financial crisis which commenced in October 1997.
123. The judge took exception to the statement in the memo of 18 April 1985 from the Manager Credit Control that Bank of America had undertaken not to inform the other banks of the buy-out price in order that the buy-out could be represented to the other banks as $0.20 in the dollar. Apart from the notice of the meeting of 28 May 1985 where it was stated that the Bank was still negotiating with Bank of America, there is no indication that there was, in fact, any misrepresentation to the other banks. It is entirely understandable that the Bank wished to keep the price at which it had purchased the Bank of America debt confidential. It would have been an open invitation to the other banks if it had been disclosed that there had been that the Bank had bought out Bank of America at $0.36 in the dollar. Whatever the ethics of being prepared to make a representation in this respect, it would seem that it would have little relevance to the allegation of economic duress and the judge’s statement in paragraph 188 that “The Court’s duty in such circumstances, is to ensure that no victim of such conduct will go away without remedy” might be apposite if one of the other banks had complained about a misrepresentation but can hardly be apposite to an allegation of economic duress based on quite different matters by a party not affected by the misrepresentation.
124. As already indicated, the Bank was fully entitled to claim the full sum of $21 million in respect of the Bank of American debt which it had purchased. It may well be that for its own purposes it had entered the amount paid for the debts in its own books at $8 million and it may well be that it valued that debt at only $8 million. Nevertheless the legal liability in respect of the debt was the full $21 million and the documentation indicates that the Bank had made clear to Esquire at the time of the purchase and later that it intended to regard the full amount as an amount of debt owing by Esquire, whether or not it could in practice recover that amount.
125. The letter of 29 December 1987 which caused the difficulty of understanding when it was brought to the notice of leading counsel did not portray dishonesty on the part of the Bank. The amount which had been transferred from the escrow account into the working account was an amount which the Bank was perfectly entitled to claim. Although arguments were raised in this court that Esquire might have been misled into thinking it had more money than it actually did and that it had had to pay interest on the working account amount, it does not detract from the position that the Bank never received that repayment. Esquire had the benefit of the money and had the benefit of the money in order to trade. In respect of the other $15 million, which was again a rounded off figure, the Bank was entitled to claim the balance of the Bank of America debt and to balance one amount against the other. There is no conceivable reason why if the Bank stepped into the shoes of the Bank of America as regards that bank’s debt Esquire, or indeed the other banks, should benefit from the fact that the Bank paid less for that debt and took on the risk of its being irrecoverable.
UNDUE INFLUENCE
126. In this respect it would appear that the approach by the judge was that the Bank being the stronger party had an ascendancy over Esquire.
127. The judge accepted and emphasised that the relationship of banker and customer was not one which would ordinarily give rise to the presumption of undue influence. He went on to say that this was not a case where the presumption arose. Quite apart from that, it is difficult to foresee how a corporation can be subject to undue influence. Nevertheless, even if such a situation could arise, for example in the case where the banker was a trusted adviser, that situation does not exist in the present case. This was a case, quite simply, of a mortgagor and borrower on the one hand and a mortgagee and the lender on the other. The judge painted a picture of Esquire being under the domination of the Bank and looking to it as its rescuer. He graphically drew some analogy of a patient in intensive care and a doctor. As already stated, the Bank’s primary duty was to its shareholders. Its primary business was to lend money and recover it with interest. In so far as rescuing Esquire furthered the interests of the Bank and its shareholders then it was right for it to do so. If rescuing Esquire were not in the best interests of the Bank and its shareholders it had no business to do so. It was perfectly entitled to change course at any time if it considered the circumstances warranted it. In the meantime, if the Bank were to provide the finance and respite in order to create circumstances where Esquire might recover financially, it was proper for the Bank to insist on such supervision of Esquire’s business as the Bank thought necessary.
128. The plaintiff’s case based upon undue influence was unsustainable.
CONCLUSION
129. For the reasons stated I would allow this appeal, set aside the judgment below and make an order nisi of costs in favour of the defendants here and below. It is necessary, in view of the language used in the judgment in criticism of the Bank, which has been referred to in this court as hyperbole, to state that not only was it unwarranted and of a kind that should not find its way into any judgment but the Bank’s actions and those of its personnel in requiring the sale of the property were proper. Indeed, it can be said that the Bank had been extraordinarily accommodating to Esquire and Gurdas. Far from attracting criticism the Bank’s actions in waiving interest and debt took their actions, at the very least, to the limit of what could be justified on a commercial basis by the Bank. The denigration of the Bank’s personnel up to the highest level was perverse.
Hon Stock JA:
A summary
130. There were three heads of claim, each arising from the sale in May 1987 of Li Fung House, the property owned by Esquire but in respect of which the Bank was mortgagee. The property was sold at the insistence of the Bank, and Esquire complained that it was forced to agree to the sale of the property, and to execute a power of attorney in the Bank’s favour to effect the sale, as a result of a threat that was illegitimate.
131. The threat pleaded was that unless Esquire agreed to the sale of the property, the Bank would insist on payment of Esquire’s debts including – and here was the rub – a sum of $30 million which, so the case ran, it was known to the Bank was not in fact owing, failing which the Bank would take steps that would result in Esquire’s liquidation. Esquire’s case was that there was no right in the Bank to make a demand, that the demand made embraced a fraudulent misrepresentation, namely, that the $30 million was owing, and that in the circumstances the demand constituted an unlawful act but even if not unlawful it was unconscionable conduct, and that that act or conduct was a significant cause of Esquire’s agreement to sell. This assertion, that the Bank exerted illegitimate pressure to force Esquire to agree to the sale, founded two of the three heads of claim: a claim in economic duress, and another of actual undue influence.
132. The third head of claim rested on the assertion that in effecting the sale, the Bank owed to Esquire certain fiduciary duties which it breached. It was pleaded that the fiduciary duties that were owed by the Bank to Esquire ‘included duties to act in the best interest of its principal and not to cause the Property to be sold in circumstances where there was an actual or possible conflict of interest… .’ The alleged breach was in selling to a company, Bethlehem, with whom it was said the Bank enjoyed a relationship sufficiently close as to give rise to a real sensible possibility of conflict of interest and duty, and that the Bank had not demonstrated the absence of such risk. The pleadings also suggested a discrete breach of fiduciary duty in selling too soon but, as matters transpired, that suggestion was treated at trial and in the judgment as evidence of an unhealthy desire to favour Bethlehem.
133. The trial judge found in favour of Esquire on each of the three limbs of claim. He was highly critical of the Bank, accepting the testimony of Esquire’s witnesses and rejecting in strong terms that of the Bank’s witnesses. He found that Bethlehem was a close associate of the Bank, that the sale was effected in over-hasty circumstances and that the Bank had breached the Bank’s duty of total loyalty, so he described it, to Esquire. Esquire thus succeeded in its claim for breach of fiduciary duty. In relation to the claim based upon economic duress and undue influence, the judge found that the $30 million sum was deliberately mis-stated or invented by the Bank as part of a scheme to force Esquire to agree to the sale and that ‘to defend its hopeless position of the $30 million overcharge’ (para. 146 judgment), the Bank further invented a $12 million debt arising from its buy-out of a debt owed by Esquire to the Bank of America, and that as a result of these tactics which culminated and manifested themselves in meetings and conversations on 12 March 1987, Esquire capitulated whereas otherwise it might not have done so. This is the appeal from that judgment.
Delays, fact-finding, and appeals
134. There is an advantage enjoyed by a trial judge, although its importance is sometimes overstated, in hearing and seeing witnesses and in gleaning the ‘feel’ of a case as it develops. These are advantages that are not enjoyed by an appellate court, and that is why in relation to findings of primary fact appellate courts will not interfere with such findings unless it be demonstrated that the findings are plainly wrong. That will be a task the more difficult to discharge when the conclusions of the trial judge are based upon the credibility of witnesses, and it is as well, as Mr McGee QC reminded us, for an appellate tribunal invited to such a course to recall the caution sounded by Lord Reid in Benmax v Austin Motor Co Ltd [1955] AC 370, 375 that ‘[e]vidence may read well in print but may be rightly discounted by the trial judge or, on the other hand he may rightly attach importance to evidence which reads badly in print.’ For the principles in general, see Ting Kwok Keung v Tam Dick Yuen & others (2002) 5 HKCFAR 336.
135. In this case, the witnesses testified in February 2004. The events about which they testified took place in 1985, 1986 and 1987. That is a gap of 17 years and more. It is thatdelay, the delay between events and trial, a delay that does not lie at the trial judge’s door, that seems to me to be of particular significance in this case. It is an unusually long gap, for which reason the accuracy of the memory of witnesses was to be approached with especial caution. Comparison with contemporaneous documentation is always an aid to reliability of oral testimony, unless there is reason to believe that the documentation is contrived or materially incomplete; but where the passage of time between events and trial is as long as it was in the present case, and where there is such a host of contemporaneous documentation, as there was in this case, the documentation must, I would have thought, assume a special importance. The learned judge seems, however, in large part to have eschewed reliance upon the documentation. He did so on the footing (para. 151, judgment) that some of it was missing. There was indeed some missing but there was little missing; there was sound explanation for what was missing; and there was a wealth of probative documentation, which we have seen, that was not missing and that was before the court below. In the event, the judge’s determination of the facts depended, it would seem, largely upon his ‘overall assessment of the character of the persons involved and in the light of such assessment [he made a] determination of what truly happened.’ In this approach the judge, in my respectful opinion, fell into error. I do not say that an assessment of the character of a witness plays no part in the fact finding process, but it is a task that may sometimes be elusive even to the best trained eye and ear, and I would venture to suggest that the truth, in so far as one is able to reach it or, as is sometimes the case, to reach a version of it that is more likely to be correct than not, can best be tested by reference to contemporaneous documentation where it exists, or to its absence where one would expect it to have been created, as well as to inherent probabilities (though bearing in mind that there may be occasions where the truth may run against that particular grain) having regard to all the facts that are known. This is particularly so in a case such as the present, where events have taken place so long before trial and where there exists a mountain of contemporaneous documentation that can be used to point the way. This is not to say that the documentation should have been treated as if it stood on its own, not to be explained, contradicted or supported by oral testimony. It is however to say that in this case the approach adopted to assessment of the facts placed far too much emphasis on character impression and too little upon what was suggested by the documentation and by the inherent probabilities in their historical context. That documentation, as well as conflicts within the evidence, inherent probabilities, and a study of how matters were originally pleaded and asserted in witness statements – these are the factors which in a trial such as this, so long removed from the time of the events in question, were likely to be of particular use in assessing the facts; and I am satisfied that in this case they were not adequately utilized and that they combine to drive one to conclusions quite different from those reached by the trial judge.
136. The delay between trial and judgment is a different matter, although in this case its significance is that the delay may account for the aspect that I have highlighted, namely, far too great an emphasis upon an overall impression of character at the expense of hard evidence, contradictions and probabilities. This was a lengthy trial with much paper work and with difficult issues of law and, in the event, the time taken to deliver judgment was, unfortunately, too long. But that in itself is not an automatic passport to appellate success. What may be the ramifications of excessive delay between trial and judgment is a matter that is inevitably case sensitive, and it is with that caveat in mind – the caveat that underscores the importance of the circumstances of the particular case and judgment – that citations from authorities are to be studied. One such authority, to which our attention was drawn and to which reference is made at para. [6] of the judgment of the Vice-President, merits citation:
“[67] Appellate judges have long given, as a reason for appellate deference to the decision of a trial judge, the assessment of the appearance of witnesses as they give their testimony that is possible at trial and normally impossible for an appellate court. On the other hand, for almost as long, appellate judges have cautioned against the dangers of too readily drawing conclusions about truthfulness and reliability simply or mainly from the appearance of witnesses: Fox v Percy [(2003) 214 CLR 118 ] at 128-9... . In any event, it is appropriate to have some doubt about the ability of judges, or anyone else, to tell truth from falsehood accurately on the basis of the appearance of witnesses. Such considerations should encourage trial judges and appellate judges to limit their reliance on the appearance of witnesses and to reach conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events: Fox v Percy at CLR 129.
[68] Where there are relevant contemporaneous materials, such as file notes and correspondence, and there is significant delay between the hearing of evidence and the giving of reasons for conclusions, being reasons that do not advert to the contemporaneous materials and do not give specific reasoning for accepting or rejecting the evidence of particular witnesses, the conclusions reached should be given careful scrutiny and consideration by an appellate court where the findings are challenged on appeal.
[69] Delay between the taking of evidence in the making of a decision is not, of itself, a ground of appeal, unless the judge could no longer produce a proper judgment or parties are unable to obtain from the decision the benefit which they should: cf Boodhoo v Attorney General of Trinidad and Tobago [2004] 1 WLR 1689 at [11]-[12]. Nor does such delay of itself indicate that a trial has miscarried or that a verdict is in any manner unsafe. However, where there is significant delay in giving judgment, it is incumbent upon an appellate court to look with special care at any finding of fact challenged on appeal. In ordinary circumstances, where there is a conflict of evidence, the trial judge who has seen and heard the witnesses, has an advantage.
[70] That advantage includes seeing the oral and documentary evidence unfold in a coherent manner, which cannot be replicated on appeal: State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (in liq) (1999) 160 ALR 588 at 619[90]; 73 AJLR 306 at 330 per Kirby J; Bartlem Pty Ltd v Cox Industries ( Australia) Pty Ltd (2002) 55 IPR 449 at 484 [87]. That advantage will ordinarily prove decisive on appeal unless it can be shown that the trial judge failed to use or misused such an advantage. The mere fact of a long delay itself weakens the trial judge's advantage. Thus, delay must be taken into account when reviewing findings made by a trial judge after a significant delay from the time with the relevant evidence was given.
[71] In the normal course, statements made by a trial judge of a general assertive character can be accepted as encompassing a detailed consideration of the evidence. However, where there is significant delay, such statements should be treated with some reserve. After a significant delay, a more comprehensive statement of the relevant evidence than would normally be required should be provided by the trial judge in order to make manifest, to the parties and the public, that the delay has not affected the decision.”
Expectation Pty Ltd v PRD Realty Pty Ltd and Another (2004) 209 ALR 568 at 572.
137. What it amounts to in this case is that there were two delays; the first, the very long delay of some 17 years between events and trial, a delay outwith the judge’s control; and the second, a delay between trial and judgment. The first delay was such as to render of particular importance factors such as contemporaneous documentation and inherent probabilities, to which the trial judge paid, in my respectful judgment, too little regard and, conversely, too much upon his assessment of character. The relevance of the second delay is that it might have contributed to that approach. In the event, there is not only an absence of sufficient evidential foundation for the core findings of fact, but the contemporaneous documentation, a consideration of the contradictions between that and the oral evidence, and the inherent probabilities in their historical context, point clearly in the Bank’s favour on the three issues at hand. Fiduciary Duty
138. The relationship relied upon by Esquire as creating fiduciary duties on the part of the Bank is that of principal and agent, for it is correctly said that the power of attorney constituted the Bank an agent for Esquire in the sale of Li Fung House. So much is common ground. That being so, what had to be determined by the trial judge was the scope of the agency in this particular case, the extent of the fiduciary duty thus engaged and whether the Bank breached it.
139. As to the scope of the agency and the duty imposed, the judge seems to have proceeded on the basis that the relationship was a general fiduciary one, whereas in truth it was limited. It was limited by the terms of the contract which created the duty and by the fact that on any view the Bank had its own legitimate interests to safeguard. That being so, to proceed on the footing that the duty owed by the Bank was ‘[no] less complete than would be [the duty] in any other case of an owner asking an agent to sell his property’ (see para. 75 Judgment) was to proceed on an inapt footing. Generally speaking, ‘[t]he distinguishing characteristic of a fiduciary relationship is that its essence, or purpose, is to serve exclusively the interests of a person or group of persons; or, to put it negatively, it is a relationship in which the parties are not each free to pursue their separate interests. Thus, the essence of a trust is that a trustee holds and deals with property in the interests of beneficiaries; the purpose of partnership is the conduct of business in the joint interest of the partners; the agent acts for (in the interests of) the principal.’: Meagher Gummow & Lehane’s “Equity. Doctrines & Remedies” 4th ed., p 158. That was not the character of this relationship or of the contract under which the fiduciary relationship arose. This was a case in which it was accepted, as it had to be, that in selling the property, the Bank was doing so in the protection of its own interest, which is not to say that it was free to pay no regard to those of the donor of the power of attorney. But it is to say that such fiduciary relationship as existed was a limited and not a general one.
140. The point was made by Mason J, as he then was, in Hospital Products Ltd v United States Surgical Corporation [1984] 156 CLR 41, 102 that “[the ] rigorous standards appropriate to the trustee will not apply to a fiduciary who is permitted by contract to pursue his interests in some respects.” Under the contract in this case, namely, the power of attorney, Esquire conferred on the Bank unconditional authority, by way of security, to sell the property upon such terms as the Bank in its absolute discretion thought fit, and that was done in recognition of the fact that the sale was in the interests of the Bank as well as for the benefit of Esquire. Indeed the sale was at the behest of the Bank and the reality is that the relationship remained close to that of mortgagor and mortgagee in that both sides recognized that it was to their mutual advantage that the sale be represented to the outside world as a sale by the owner of the property rather than as a sale by a mortgagee. This vital attribute of the historical and contractual relationship between these parties may, ultimately, have been accorded insufficient recognition by the judge. Having rejected, at para. 80 of the judgment, the suggestion ‘that because the Bank was a mortgagee therefore the Bank was entitled to sell at any time of its choosing and in any manner of its choosing as mortgagee,” he concluded that the Bank ‘for its own good reason’ required a sale under a power of attorney so that it was selling ‘in its representative capacity as agent for Esquire…’(para. 80) and that therefore that the Bank owed ‘total loyalty’to Esquire (para. 85). The tenor of the approach is to assume a general fiduciary duty, an approach that has insufficient regard to the terms of the contract which constituted the Bank an agent for the purpose of sale as well as to the true factual matrix in which that contract was concluded. The duty in this case was not to be categorized by reference to agency as some general concept. What was required before the nature of the fiduciary duty could be determined was close regard to the terms of the contract in this particular case as well as to the factual circumstances, the history, that gave birth to that contract. That is because: “The categories of fiduciary relationships are infinitely varied and the duties of the fiduciary vary with the circumstances which generate the relationship. Fiduciary relationships range from the trustee to the errand boy, the celebrated example given by Moulton LJ in his judgment in In re Coomber [[1911] 1 Ch 723], in which, after referring to the danger of trusting to verbal formulae, he pointed out that the nature of the curial intervention which is justifiable will vary from case to case. In accordance with these comments it is now acknowledged generally that the scope of the fiduciary duty must be moulded according to the nature of the relationship and the facts of the case… . ” per Mason J in Hospital Products above, page 102.
141. But it is not merely a question of the particular factual circumstances, for the terms of this power of attorney, this contract, were vital:
“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of the fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.” per Mason J in Hospital Products, above, page 97.
Much the same point was made by Lord Browne-Wilkinson in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 206:
“The phrase ‘fiduciary duties’ is a dangerous one, giving rise to the mistaken assumption that all fiduciaries owe the same duties in all circumstances. That is not the case. Although, so far as I am aware, every fiduciary is under a duty not to make a profit from his position (unless such profit is authorised), the fiduciary duties owed, for example, by an express trustee are not the same as those owed by an agent. Moreover, and more relevantly, the extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties. Thus, in the case of an agent employed under a contract, the scope of his fiduciary duties are determined by the terms of the underlying contract. … The existence of a contract does not exclude the co-existence of concurrent fiduciary duties (indeed, the contract may well be their source); the contract can and does modify the extent and nature of the general duty that would otherwise arise.”
142. The terms of the contract in this case required the Bank to sell the property and to do so at its absolute discretion. There was thereby imposed no duty of consultation and certainly no duty to sell at a time of Esquire’s choosing or even preference. That the Bank was entitled and expected to have regard to its own interests is a fact that is inimical to the existence of the type of general fiduciary relationship imposed on an agent for the sale of property, but is not inimical to the existence of a limited fiduciary duty. So it was in the Hospital Products case that the capacity of the defendant “to make decisions and take action in some matters by reference to its own interests [was] inconsistent with the existence of a general fiduciary relationship. However it does not exclude the existence of a more limited fiduciary relationship, for it is well settled that a person may be a fiduciary in some activities but not in others”: see Mason J at page 98. 143. That the Bank had legitimate of interests of its own to protect in the sale of the property and that Esquire accepted that to be the case is, in the context of the facts of this case, almost too obvious a proposition to have to state. The entire history of the restructuring agreements, of the periodic granting of new facilities, of the many proposals for the sale of properties and of the periodic granting of relief to Esquire at Esquire’s request – indeed, the very nature of the commercial relationship between this lending bank and its customer – was redolent of dual interests, each of which was legitimate. The history was one in which sale of this and other Esquire properties had been discussed – and in the case of a property at Wing On Plaza, agreed – as being beneficial to Esquire and to the Bank although on each occasion such discussions were accompanied by requests for forgiveness of debt. The point was made by Mr Gurdas himself in a letter to the Bank dated 3 May 1985:
“Taking a longer-term view we have initiated the following steps in order that the strains on both the Bank and Esquire are eased.
(a) In view of the rising trend in the property market we plan to move our activities under one roof in Wing on Plaza where we have enough space….
(b) Li Fung House … Winner Godown and Minden House… could all be sold if satisfactory price can be negotiated.
This will then have the effect of considerably reducing the Bank's exposure to Esquire and Esquire's total liabilities and enable the future cash generation to be utilised for its business rather than service the property loan.”
Appeal bundle D pages 214-215
The passage of time since that letter did not change the nature of the relationship or of the nature of the dual interests. What changed, as is demonstrated by a study of the history, is that whilst once Mr Gurdas was willing to sell, in March 1987 he was not.
144. What then was the extent of the Bank’s duty to Esquire in the sale of the property? Mr Jarvis QC submits that having regard to the terms of the contract (the power of attorney) and the circumstances in which that contract came to be executed, the duty differed not from that owed by a mortgagee in the exercise of a power of sale, for this was in substance a sale at the insistence of a mortgagee with full control reposed in the agent, who was the mortgagee, to sell at its absolute discretion, whilst the form was a matter of mutual convenience and benefit. If that be a correct analysis, then the duty is that described in Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, 1005 [19]:
“… if the mortgagee does exercise the power of sale, he comes under a duty in equity… to the mortgagor … to take reasonable precautions to obtain ‘the fair’ or ‘the true market’ value of or the "proper price" for the mortgaged property at the date of the sale… . The mortgagee is not entitled to act in a way which unfairly prejudices the mortgagor or by selling hastily at a knockdown price sufficient to pay off his debt: Palk v Mortgage Services Funding plc [1993] Ch 330, 337-338 … . He must take proper care whether by fairly and properly exposing the property to the market or otherwise to obtain the best price reasonably obtainable at the date of sale.”
145. It is accepted by the respondent on this appeal that the true market value test was satisfied. Given the agreement of the parties at trial that the price obtained was at current market value, it would have been difficult for Esquire to do other than make that concession. But that concession is not necessarily the end of the matter even on the narrow nature of the fiduciary duty that the appellants would have this court derive from this contract in its factual context, for if it be shown that the mortgagor has acted in bad faith, the transaction might be avoided. That is because, although it is true that a mortgagee does not act as trustee for the mortgagor, he nonetheless ‘has an obligation to act in good faith … and not wilfully or recklessly to sacrifice the interests of the mortgagor’: see Meagher Gummow & Lehan, above, at 2-150. So if there is a sale by a mortgagee in suspicious circumstances, such as to a connected party, it is a transaction to which the court will have close regard to ensure its validity:
“Such a sale may, for example, be fraudulent or at an undervalue or it may be made under circumstances which throw upon the purchasing company the burden of proving the validity of the transaction, and the company may be unable to prove it.
…
A mortgagee with a power of sale, though often called a trustee, is in a very different position from a trustee for sale. A mortgagee is under obligations to the mortgagor, but he has rights of his own which he is entitled to exercise adversely to the mortgagor. A trustee for sale has no business to place himself in such a position as to give rise to a conflict of interest and duty. But every mortgage confers upon the mortgagee the right to realise his security and to find a purchaser if he can, and if in exercise of his power he acts bona fide and takes reasonable precautions to obtain a proper price, the mortgagor has no redress, even although more might have been obtained for the property if the sale had been postponed … ” per Lindley L.J in Farrar v Farrars Limited (1888) 40 Ch D 395, 410-411.
146. The obligations of the mortgagee on sale are summarized in Snell’s Equity 31st ed., para 38- 38:
“A mortgagee is not a trustee of the power of sale. The power is given to him for his own benefit and he need not take account of the interests of the mortgagor in deciding whether or when to sell. Accordingly the court will not interfere with his proposed exercise of the power merely because the sale or its timing would be very disadvantageous to the mortgagor or because it appears that the mortgagor will soon be in a position to redeem. However, the mortgagee owes a duty in equity (not in tort) to exercise the power of sale in good faith and for the sole purpose of securing repayment of monies due under the mortgage. Furthermore if he does choose to sell, he must take reasonable care to obtain a proper price for the property.”
147. Mr McGee, on the other hand, invites the court to say that if the Bank had the right to sell as mortgagee – although, for the purpose of the duress issue, he asserts that by reason of the 1987 restructuring agreement there was no such right – the Bank chose not to travel that route, and instead acted as agent under the power of attorney wherefore normal fiduciary principles applied. Those normal principles require the court to ask whether the relationship between the Bank and Bethlehem was such as to give rise to a suspicion that there was a ‘real sensible possibility of conflict’ (Boardman v Phipps [1967] 2 AC 46 at 124C) between the Bank’s interests and such duty as it owed to Esquire to have regard also to Esquire’s interests; that such conflict is not restricted to the servicing of a fiduciary’s own pecuniary interests but embraces a further duty not to favour a third party (Bristol and West Building Society v Mothew [1998] Ch 1, 18; Kao Lee & Yip v Kao Hoi Yan [2003] 3 HKLRD 296, at [46]) which I understand to mean not to place anyone ‘so connected with [the fiduciary] as to stand in a position more advantageous than an ordinary purchaser’: see Ex parte Forder (1881) 25 Sol. Journ. 720; that if such a relationship is shown, the transaction is to be subjected by the court to vigorous scrutiny as to the true nature of the transaction (Burrell v Burrell’s Trustees [1915] SC 333, at 338), the burden then resting on the agent to dispel the suspicion (Robertson v Roberston [1924] NZLR 552 at 554). How that burden might be discharged will depend on the circumstances of the case and in this regard a passage from the judgment of Lord Dundas in Burrell above at page 337 merits citation, for the indicia there stated may with use be employed in the present case:
“I think it is clear enough upon the proof in each case that there was no bargaining of any sort between the wife and the trustees; that the wife made a purchase on her own initiative, and neither at the instigation nor under the advice of her husband; that both ladies were capable businesswomen accustomed to manage their own ample means; that payment was made in each case out of the wife’s separate estate; and that the price was an adequate, and even a full, one.”
148. In my judgment, the duties owed in the present case by the Bank were not to be viewed or assessed through the same prism as that which views the duties of a mortagee upon sale, but the result in terms of duties owed is little different. The prism is not quite the same for the power of attorney came to be executed as part of a package, a package evidenced by heads of agreement reached before the execution of the power of attorney. That package contemplated steps designed to assist not only the Bank but also Esquire in reducing its property indebtedness as well as its hardcore debt so as to help it on the way to eventual recovery. To those interests the Bank had to have due regard and the fortunes of Esquire could not, as in the case of a forced mortgage sale, be a matter of indifference to the Bank, but in the light of the history and the terms agreed under the power of attorney as well as under the 1987 restructuring agreement, that due regard and the concomitant legitimate interests of the Bank were served once the Bank acted bona fide to obtain a fair price for the property. That said, it matters not for practical purposes in this appeal, whether this narrower test is applied or the wider duty for which Mr McGee contends, for in my judgment none of the duties said to have been breached was breached and that is so assuming that the burden of so demonstrating is on the Bank.
149. There is in this case no suggestion that by selling to Bethlehem the Bank benefitted financially, whether directly or indirectly and no scenario is postulated in which such a benefit was conceivable. All that is suggested is that the Bank was in law prohibited from exercising its power so as to prefer anyone connected with the Bank but that it did so: it preferred Bethlehem, so that Bethlehem was placed in a position better than that of an ordinary prospective purchaser, thereby resulting in a premature sale or a sale under a price that might otherwise have been achieved. The evidence gainsays this. The evidence of Mr Selway-Swift was that he took specific steps to satisfy himself that the transaction was done at arm’s length (transcript, day 17, page 65) and the evidence of Mr Leung, of particular significance but to which the judge has made no reference, was that interest by the Ho family in this property was not induced by any approach from the Bank other than the advertising approach which did not itself identify who was selling. In so far as cosy dealing is suggested by reference to the speed of the sale as well as by the content of the 8th May letter by Bethlehem’s solicitors and its copying to Mr Wrangham and to Mr Q W Lee – indication, it is said, of some contact between senior officers of the Bank and Bethlehem – the suggestion of cosy dealing is negated by Mr Leung’s description of the manner or circumstances in which Mr Ho Sin Hang came to the figure of $180 million. This evidence from Mr Leung is important for it was not challenged and was admitted as to contents. That is not to say that it could stand in the face of other evidence to undermine it if had there been such evidence of any force; but there was none. The much discussed letter of 8th May 1987 and the fact of its copying is, against the testimony of Mr Leung, of scant weight, not least because the sinister implication which it is said to carry can only be carried by a purely speculative route. 150. In the event, the evidence is that the offer and the purchase by Bethlehem was at its initiative in response, not to some personal private approach by someone at the Bank, but to a wide advertising campaign; that the price was proper and well above the level of offers received by any other offeror; that an assessment had been made by the management company that a higher offer from this offeror was not likely; and that no sensible reason for rushing the sale to favour Bethlehem can be provided. The judge does not provide such a reason and his conclusion that this was a ‘good deal’ for the Ho family (para. 85 judgment), seen by the Bank ‘to be a most beneficial deal for the Ho family’ (para. 84), with its implication that it was somehow especially favourable, was, with respect, a conclusion without an evidential – certainly without sufficient evidential – foundation. It may be that the basis for the judge’s comment was his emphasis on the fact that this was a bullish market so that the deal was favourable because had the vendors waited longer, the Hos or others would have had to pay more. He said as much at paragraph 85 of the judgment where he remarked that by not selling when it did, the Bank risked ‘the strong possibility of potential buyers from the second round of marketing making a higher bid… thereby either possibly depriving the Ho family of buying this good Property or at least forcing the Ho family into paying a much higher price… . ’ He failed though to explain why the Bank would wish to act against its own interest, and the line thus taken assumes that which the Bank was understandably not prepared to assume, which was that the market’s continued rise was inevitable. In October 1986 Mr Pullen expressed the view that ‘Hong Kong property prices are now “toppish”’ (Bundle D page 441) and in a paper dated 16 March 1987, Mr Sommerfield said (Bundle Epage 513) that: “Holding the property is of only marginal benefit on an NPV basis. At the same time we would be risking a market downturn.” At the second meeting of 12 March (Bundle E page 518) the Bank asserted that “the market was right for sale” and in a manuscript note on the letter from Esquire dated 21 March 1987 authorising the sale, Mr Pullen wrote: ‘Well done – market looks strong right now for HKD160m [plus].’ To these contemporaneous documents the trial judge has made no reference. It could hardly be suggested that the opinions we there see expressed were out of touch with commercial good sense or, worse, were fabricated with an eye on some conspiratorial deal to make a demand for sale in order to favour the Ho family, a theory rejected by the judge himself at the closing stages of the trial (transcript, day 22, page 66). One wonders what might have been said had the Bank rejected this cash offer, an offer well above the valuations that had been provided, well above offers that had been received, to await the bull’s continuing rise for the prospect of a better offer, only to find that by reason of some event or another, the market went down. The fact is that at the time when in 1997 the Bank finally determined upon a sale and determined to sell when the market was strong, and had in mind prices much less than the price ultimately achieved, Bethlehem had not surfaced as a prospective purchaser, and there is and was no warrant for the finding that when the Bank did agree to sell to Bethlehem, it was doing so at an unpropitious time or in order to do Bethlehem or the Ho’s some favour, or that the deal concluded was other than as an arms’ length transaction at a proper price.
151. I am satisfied that there was no breach of such fiduciary duty as was owed by the Bank to Esquire and that the judge’s findings in this regard cannot stand.
Economic Duress
(1) Law: Illegitimacy of pressure
152. The nature of the creature that is economic duress gives rise to little issue as between the parties to this appeal, save only as to whether the causative act must be an unlawful act or may be a lawful one, an issue upon which there is much learning and which it is not necessary for this court presently to determine. 153. The reason that the law enables the weaker party to avoid a contract entered into under duress is that:
“… his apparent consent was induced by pressure exercised upon him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable unless approbated either expressly or by implication after the illegitimate pressure has ceased to operate on his mind. It is a rationale similar to that which underlies the avoidability of contracts entered into and the recovery of money exacted under colour of office, or under undue influence or in consequence of threats of physical duress.” per Lord Diplock in Universe Tankships Inc of Monrovia v International Transport Workers Federation and others [1983] AC 366 at 384.
154. The key to proving economic duress is proof of the illegitimacy of the suggested pressure. Much commercial activity necessarily involves pressure, often considerable and sometimes overwhelming, exercised by parties who find themselves in powerful bargaining positions. But that of itself is not illegitimate. It was suggested by McHugh JA, as he then was, in Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 46 that:
“Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, would not necessarily constitute economic duress.”
155. The reference there to ‘unconscionable conduct’ itself needs explanation. It has been explained in the Australian courts by reference to a special disadvantage suffered by the weaker party of which the stronger party takes advantage and is discussed in Australia & New Zealand Banking Group v Karam and Others (2005) 64 NSWLR 149 at paragraphs [46] and [66]. In Commercial Bank of Australia Ltd v Amadio [1982-1983] 151 CLR 447, 462 Mason J, as he then was, explained the significance of the adjective ‘special’ in the phrase ‘special disadvantage’:
“I qualify the word ‘disadvantage’ by the adjective ‘special’ in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.”
156. If I understand his position in this regard correctly, Mr McGee would broaden the proposition to a concept of unconscionability not limited to the circumstances of special disadvantage adopted by the Australian courts. For this he points to a comment by Professor Birks, for example, in ‘An Introduction to the Law of Restitution’ (1989) p177 (and approved by Steyn LJ, as he then was, in CTN Cash and Carry Ltd v Gallaher Ltd [1994] 4 All ER 714 at 718) that were economic duress restricted to unlawful act duress, then ‘those who devise outrageous but technically lawful means of compulsion must always escape restitution. . ,’so that it ‘is tolerably clear that, at least where they can be confident of a general consensus in favour of their evaluation, the courts are willing to apply a standard of impropriety rather than technical unlawfulness.’ There is an attractive certainty of approach in the Australian formula, if I may call it that, which sits well with the policy that underlies the law of economic duress, and I am by no means convinced that such English authorities to which we have been taken for their refusal to exclude lawful act duress seek to steer a different course. But it is not necessary to dig further because whichever of the two suggested tests are applied, and whichever of the causative tests – to which I next briefly turn – is applied, the facts are against the respondent both as to the nature of the pressure, and on the question of causation.
(2) Law: Causation
157. In Huyton SA v Cremer G.m.b.H. & Co. [1999] 1 Lloyd’s Rep 620 Mance J, as he then was, comprehensively reviewed authority and academic learning directed at the issue of causation: whether all that had to be shown was that the illegitimate pressure must constitute ‘a’ reason for the weaker party to have entered in the agreement now sought to be vitiated (the test applied by the majority in Barton v Armstrong [1976] AC 104), or (assuming there to be a difference, which I do not think there is) a ‘significant cause’ (Dimskal Shipping Co SA v International Transport Workers Federation ( The Evia Luck) [1992] 2 AC 152); ‘a predominant cause’ (Professor Birks in An Introduction to the Law of Restitution (1985); or the ‘but for’ test, which Mance J favoured. Mr Jarvis urges the ‘but for’ test upon us; Mr McGee, the test of significant cause. It is unnecessary to determine that issue for I am satisfied that on the facts as established by the evidence, none of those tests is satisfied.
(3) Analysis
158. In respect of that part of its claim resting upon economic duress, it is the credibility of Esquire’s case that is its downfall. That credibility was most sensibly to be tested by reference to the long history that preceded the meetings of March 1987, especially the history of proposals and agreements to sell the property and by reference most particularly to the contemporaneous documents and to inherent probabilities. The judge was, however, sceptical about the value of the documentation and instead relied heavily upon an assessment of character as it emerged primarily from impressions conveyed in the course of oral testimony. The danger of that approach especially in a case where the events were so stale and where there was so much contemporaneous documentation is a factor to which I have earlier alluded in some detail.
159. The essence of Esquire’s case under the economic duress aspect of its action was the suggested $30 million overcharge. That is how the judge put it at para. 136 of his judgment, that ‘[the] pressure/threat was that the Bank insisted… that Esquire was owing $30 million overcharge… and threatened that [the] Bank would make demand including this $30 million overcharge and the Bank would liquidate/or finish of Esquire as [a] result.’ He emphasised at paragraph 137 that: “On Esquire’s claim of economic duress, this court is only concerned with the $30 million overcharge threat and not with the BA extra debt threat or the Arjan home threat.”
160. The suggested overcharge of $30 million is overstated. There never was a $30 million overcharge. Nor was it ever conceded by the Bank that there was. The movement of the sum back from the Escrow account to provide trading funds, rather than to reduce the hardcore debt, was a response to Esquire’s expressed concern about the shortage of trading funds. There was nothing underhand about that, nor has it been suggested that there was. All that had been said by March 1987 was that Esquire’s suggestion that they should have been credited with that $15 million would be investigated. In the event the money was not owing to Esquire. Similarly in relation to the suggested Bank of America ‘extra’ debt, with the implication that the Bank was making a demand for a sum not due or that had been waived, the implication is ill-founded. The Bank had purchased the full debt and it was the full debt for which Esquire was liable. With an experienced businessman at its helm and with the services of a chartered accountant as well as of a lawyer, Esquire must have known full well that that was the case and that waiver was a matter at the discretion of the Bank. To say, as did the judge at para 146 of the judgment, that ‘the BA Extra Debt of $12 million was an invention created by the Bank to defend the hopeless position of the $30 million overcharge’ was not accurate, not least because the $12 million was no invention and the overcharge was not $30 million but rather the $15 million interest overcharge. In the same vein the judge talked, at para 181, of a road map which ‘involved the creation of a fictional $42 million ($30 million overcharge plus $12 million BA Extra Debt), a fictional $30 million ($30 million overcharge) a fictional $15 million (Interest overcharge)’. Yet the only error was the error as to interest. The Bank had in October 1986 acknowledged that Esquire was probably correct in its assertion about this overcharge (Bundle D page 435) and whilst it does not stand to the Bank’s credit that it allowed that sum to be included in its starting figure of debt due as if the matter were not resolved, the truth of the matter is that everyone knew what the factual position was in relation to that sum. The Bank was hiding nothing in that regard. It could hardly do so, even had it wished. Mr Oliner, the lawyer for Esquire, knew full well the terms of the 1985 restructuring agreement, including the waiver of interest for the last quarter of 1983, and he was present throughout the 1987 negotiations. There was a chartered accountant engaged by Esquire who knew and could show that the sum was not due, and it is in my judgment quite unrealistic to suggest that Esquire buckled to a demand to sell its flagship property because of a demand – assuming that what happened amounted to a demand – for payment of $15 million dollars that everyone knew was not owed, was not truly at issue, and could at the drop of a hat be shown to be not due. Had it been truly at issue one would have seen that reflected either in correspondence or in notes of the March meetings. The suggestion that was made that the company was so in thrall of the Bank, so dependant on it that it dared not complain is also, with respect, unrealistic and sits ill at ease with the nature and professionalism of the people in charge at Esquire or with history; and by this reference to history, I mean that the company was ready to assert itself, albeit politely, when it thought it right to do so (see, for example, its complaint to the Bank in October 1985: Bundle F page 1089). Inherent probability, the professionalism of the persons present, the ultimate issue at stake, all suggest that had this overcharge been a true and significant issue, had it really been considered by Esquire to be a serious demand that the Bank was intent on pursuing, Esquire would have made a vehement protest about it. Yet none is evident in the documentation whether in March, when Mr Gurdas is said to have been driven to surrender by the very point, or in April in the weeks before the signing of the power of attorney that was said be the result of this surrender or later. The reasonable conclusion is that that was because it was never a true issue.
161. It is instructive to see how Esquire’s case was first framed. In its Statement of Claim dated 3 November 1994, the assertion was that on each occasion when Esquire raised the question of the suggested $30 million overcharge, the Bank threatened Esquire with liquidation proceedings ‘if such question was repeated’, an inherently unlikely contention if ever there was one, but in any event one that was not maintained by Esquire. This was an assertion that went to the central issue in the case and its improbability and its abandonment are matters, I would have thought, of some import. Then there is a further assertion in this pleading that Mr Sommerfield told Mr Gurdas that if he, Gurdas, did not return from Bombay to sign a power of attorney, the Bank would enter the property, another important assertion that finds no echo in the evidence.
162. It is instructive also to see how, in his witness statement dated 12 March 2001, Mr Gurdas couched his reluctance to sell the property:
“74. Of all the properties, Li Fung House was regarded as the Esquire Companies’ flagship property. Indeed the ownership of this property had a substantial commercial impact. To me, the existence of such a flagship property was a symbol of Esquire’s stature in the business community which gave its trading partners and customers confidence in their dealings with Esquire, particularly with trade creditors who would not otherwise have extended the considerably favourable credit terms they did. I believed at all material times, and still do today, that the sale of Li Fung House was evidence to Esquire's customers and trading partners that Esquire was unable to repay its debts. The irony is that Esquire was in early 1987 steadily earning profits and improving its chances of repaying its debts to its creditors banks. In fact, after the sale of Li Fung House, Esquire's customers and trading partners did become more wary of doing business with Esquire and the terms of trade became less favourable towards Esquire.
75. As such, Arjan and I as well as the Esquire companies were anxious to ensure that Esquire retained this property and would not have sold it unless compelled to do so.”
163. That was to paint a half picture. In so far as it suggested that in March 1987 Mr Gurdas was reluctant to sell, it was true, but the fact of the matter is that before that date, Esquire had for long come to terms with the need for a sale of Li Fung House, and the relevance of this history is that it shows that Li Fung House was not always core, as he suggests in his witness statement, to his vision of Esquire’s future, and that it had been recognized by all that when the market improved the property should be sold. That improvement had by March 1987 materialized. It was put to Mr Ratnam in cross-examination that as recently as October 1986 Esquire was prepared to consider sale and would probably have been happy to sell if a reasonable price could be achieved, and Mr Ratnam conceded (transcript, day 4, page 86) that: “That would be fair to say because we also agreed with Mr Selway Swift in January 1986 that later on, a better offer came, we will negotiate in good faith”. That agreement is evidenced in a letter from the Bank to Esquire dated 20 January 1986 (Bundle D page 316). And the good sense of selling Li Fung House was recognized by Mr Gurdas when he wrote the letter of 3 May 1985 to the Bank, the letter in which he canvassed the notion of moving Esquire’s activities under one roof in Wing On Plaza, a good address, he said, and of selling Li Fung House and other properties, so that the Bank’s exposure would be reduced and Esquire’s future prospects improved (see para. 143 above).
164. In July 1985 Esquire wrote (Bundle D page 236) saying that it would not like to accept a sale price of less than $135 million for Li Fung House but acknowledging that “selling our surplus properties was in the immediate and long-term interests of Esquire and this could only improve Esquire's overall position with the Bank and not worsen it and with this end in view we should be willing to be somewhat flexible in relation to this particular deal relating to the proposed sale.” 1986 witnessed growing concern on the Bank’s part about Esquire’s situation, as well as suggestions within the Bank’s ranks that Mr Gurdas was not devoting himself to the business. In October 1986 Mr Gurdas wrote to the Bank (Bundle D page 407) recording the agreement that while there would be no sale of Li Fung House and Wing On Plaza during 1986 “in order that any appreciation in the value of the properties could accrue to the Bank and the company, [the] company had also agreed that if any genuine offers were received during 1986 it will consider them…, ” wherefore he accepted the proposal to sell the tenth floor of Wing On Plaza.
165. It was against that background that the meeting of 12 March took place. The market had risen considerably, and it could have come as no surprise to anyone that the Bank raised the question of Li Fung House. Mr Gurdas said in his witness statement and in his oral testimony that he could not understand why, indeed he was shocked that, the Bank wished to sell (transcript, day 9 page 48), an odd statement, one might think, in the light of this history. $30 million as a specific figure was never mentioned on 12th March – that much became common ground – a stark admission given the tenor of the pleadings and the witness statements. Furthermore, the only reason advanced on behalf of Mr Gurdas at those meetings why he did not wish then to sell was that a sale would, he felt, be detrimental to the company’s image. It is noteworthy that the reason thus advanced had nothing to do with the state of the market. The appreciation in the state of the market which had been awaited by both sides in 1986 had now come to pass, and accordingly Mr Gurdas must have realized that he had as a matter of commercial reality to sell if the Bank so insisted, which it did. That is what forced him to sell. 166. The finding of the learned judge (para 192 judgment) that the $30 million question was ‘the nuclear weapon’ and that ‘what caused the resistance of Gurdas to crumble was the unreasonable, intimidating and deliberately capricious manner of Somerfield’s illegitimate pressure, namely the $30 million overcharge threat’ is a finding with which I cannot agree and is a finding which in my judgment we are entitled to upset. It does not sit with the realities disclosed by the history, or with the conduct of the parties at the time, or with the contemporaneous documentation. And the suggestion that this figure was somehow at the heart of the discussions and was persuasive in causing Esquire to agree to the sale sits ill also with the fact that the more limited figure of $15 million was known by both sides to be incorrect, and could readily be demonstrated to be incorrect by experts who were present at the core meetings, experts who were then and later acting for Esquire. This is not the factual fabric from which a case of economic duress is made.
Undue influence
167. It is, I would have thought, unusual to discover an allegation of undue influence in a commercial setting with the weaker party led by an experienced businessman and advised by a lawyer as well as by a chartered accountant. Be that as it may, apart from reminding ourselves that the burden of proving actual undue influence is upon the party which seeks to set aside the transaction, it is not necessary to rehearse the law of actual undue influence, for the judge’s findings necessarily involved a conclusion that such influence as was exerted by the Bank was undue and causative, and was undue and causative, he held, for the same reason that he held that the pressure exerted by the Bank was illegitimate and causative. Since in my judgment that conclusion under the heading of economic duress cannot be sustained, it can equally not be sustained under this, the last head of claim.
Conclusion
168. I too would allow the appeal. I am indebted to counsel on both sides, and to their teams, for the excellence of their presentations.
Hon Tang JA:
169. For the reasons given by the Vice President and Stock JA, I agree that the appeal should be allowed. Since we are overturning a judgment which has received substantial publicity because of the trenchant criticism made of the Bank and some of its officers, I would add a few words of my own.
Breach of fiduciary duty
170. In para. 75 of the judgment, the judge held that the Bank owed to Esquire “the full duty of loyalty and good faith normally owing by an agent to the principal”.
171. With respect, I disagree.
172. The power of attorney was given by way of security. In the circumstances of this case, the power of attorney could only have been given to secure the proprietary interest of the Bank as mortgagee. 173. Since the scope of the Bank’s duty must be “modelled according to the nature of the relationship and the facts of the case”, per Mason J in Hospital Products Ltd at 102, I have no doubt that the duties owed by the Bank to Esquire under the Power of Attorney in the sale of property were those which a mortgagee owed to a mortgager.
174. A helpful statement of such duties can be found in Snell’s Equity 31st ed., para. 38-38:
“A mortgagee is not a trustee of the power of sale. The power is given to him for his own benefit and he need not take account of the interests of the mortgagor in deciding whether or when to sell. Accordingly the court will not interfere with his proposed exercise of the power merely because the sale or its timing would be very disadvantageous to the mortgagor or because it appears that the mortgagor will soon be in a position to redeem. However, the mortgagee owes a duty in equity (not in tort) to exercise the power of sale in good faith and for the sole purpose of securing repayment of monies due under the mortgage. Furthermore if he does choose to sell, he must take reasonable care to obtain a proper price for the property.”
175. At para. 77, the judge said:
“77. The relevant question on breach of fiduciary duty in this case is whether the manner, the person of the purchaser and its relation with the Bank, and the price of the sale by the Bank amount to a breach of the fiduciary duty of loyalty and good faith.”
176. Then, at para. 83, he said:
“83. The core complaint in this case can be summarized in my view by one short statement, namely a senior partner has no business selling his principal’s property to his junior partner in a private sale.”
177. The judge concluded that the Bank was in breach of fiduciary duty as a agent because:
“… the Bank effected an inappropriate sale, namely with undue haste and to a close friend.” para. 79 of the judgment.
178. Had the Bank taken reasonable care to obtain a proper price for the property? Had the Bank sold the property with undue haste?
179. The judge’s conclusion on undue haste is based in part on his opinion that the sale took place “in a rising market”. He said:
“76. The then market condition is most relevant in the consideration of the breach of fiduciary duty and in my view Esquire has rightly stressed the importance of the strong rising market.”
180. However, the judge also accepted the submission of Mr Fok SC who appeared for the Bank below that:
“… one could not use hindsight and that the Bank did not know that the market would continue to rise so strongly.” para. 76.
181. In considering the question of undue haste, it is necessary to state briefly what measures had been taken to market the property. 182. Advertisements were placed in leading Chinese newspapers for a total of six occasions between 7 and 15 April 1987. Advertisements also appeared in SCMP on 7, 9, 13 and 15 April 1987.
183. 287 brochures had been sent out between 8 and 23 April 1987. The persons to whom sales brochures were sent on 8 April 1987, included many well known property agents, for example, Jones Lang Wootton, Collier Petty, Vigers, Richard Ellis.
184. With respect, I agree with the Vice President’s conclusion in para. 112 that:
“… there is no reason to suppose that any party that was in a position to be able to afford a property such as Li Fung House would not have come to know of its existence on the market and made approaches if it had any intention of purchasing the property.”
185. The judge, however, criticized the Bank for not continuing with or waiting until the end of the second stage of press advertisements campaign which:
“… were to appear on 23rd April, 27th April, 29th April, 30th April, 4th May and 5th May.” para. 62.
The judge also complained that only 287 out of 445 brochures had been sent, since 158 brochures which were part of the second stage effect to publicize the property had not been sent. The evidence is not clear whether any of these other brochures had been sent, but, in my view, that mattered not.
186. When one considers whether the property had been properly marketed, one should examine the quality of the actual publicity promoting the sale. That the judge has failed to do. If he had done so, I believe he would have come to the same conclusion as the Vice President.
187. Moreover, in emphasizing the curtailment of the publicity, the judge had overlooked the risk that waiting might have been counterproductive. A potential purchaser might think that in launching a new campaign so soon after the first one, the vendors were “motivated”. That normally leads to lower offers. On the evidence, I am of the view that the property had been properly exposed to the market. In selling the property when it did, the Bank could not be said to have acted with undue haste.
188. I then turn to consider the price. In this, the judge has overlooked the agreement of the parties that a sale at a price anywhere between $178 million and HK$192.9 million would have been a sale at open market value at the time. It was also agreed that open market value was intended to mean:
“… the best price at which the sale of an interest in a property might reasonably be expected to have been completed unconditionally for cash consideration on the date of valuation assuming:
(a) a willing seller;
(b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale;
(c) that the state of the market, levels of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation; (d) that no account is taken of any additional bid by a purchaser with a special interest; and
(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.”
189. Having regard to the agreement, the judge was not entitled to find that the property had not been properly marketed or that the sale had not achieved the open market value of the property.
190. The judge’s view on the inadequacy of the price probably stemmed from his view that the sale took place in a strong rising market. In other words, had the Bank waited, the open market value would have become higher.
191. As the citation from Snell shows a mortgagee is not obliged to wait.
192. Moreover, even if the Bank had not been the mortgagee but an agent for reward, to sell at the market price in a rising market would not per se be a breach of any duty. The implication of the judge’s view is that an agent should not sell in a rising market, at least, until the market stops rising. With respect, that is not a tenable view. Moreover, there was no evidence that an agent for reward would not have sold the property at the time.
193. As for the judge’s view that since the purchaser was willing to pay the asking price, that showed that the asking price was set too low, I will repeat it was agreed that the price was the open market price. Moreover, it was fully supported by (indeed had exceeded), the contemporaneous valuations and expectation. A vendor who revises his asking price when it is met will find it difficult ever to sell his property. I do not believe that is how commercial people would or must behave. Indeed such conduct is likely to dampen interest in the property since prospective buyers might consider it a waste of time to deal with a moving target.
194. I turn to consider the sale to Bethlehem. The agreement for the sale and purchase was dated 16 May 1987 which provided for completion on or before 21 May 1987. According to Leung Ka Hung, he noticed the advertisements in early April 1987. He obtained a brochure from the 2nd defendant.
195. Towards the end of April 1987, at a meeting with 2nd defendant, he was told that the vendor was looking for $175 to $185 million.
196. A subject to contract offer was sent by fax dated 5 May 1987 from C Y Kwan & Co to acquire the property for $180 million. The subject to contract offer was accompanied by a cheque for $1 million as earnest money and which was to be refunded if:
“the formal Agreement for Sale and Purchase be not signed by our client, for any reason whatever, within 14 days from the day hereof, .…..”
197. By letter dated 6 May 1987, the 2nd defendant informed the Bank, attention “Sommerfield”:
“We consider that this is the best offer that can be obtained from the prospective purchaser, S H Ho of Hang Seng Bank, and we would be pleased if you would formally instruct Johnson, Stokes & Master to prepare the sale and purchase agreement, so that it can be signed within 14 calendar days (Please note, not 14 working days).”
198. By letter of the same day, Sommerfield wrote to Ratnam: “… and confirmed that its terms are acceptable. Kindly proceed to complete the sale and requisite tenancy.”
199. There is a memo for file dated 4 May 1987 by Sommerfield which reads:
“Esquire
I have today authorized HSPM to accept an offer of $180 m for Li Fung.”
200. There were two marketing reports by the 2nd defendant dated 23 April 1987 and 30 April 1987 respectively. It is clear from these reports that the response had not been overwhelming. The 1st report mentioned a possible offer of $158 million which according to the second report “could possibly be increased to a maximum of $160 million.”
201. In the circumstances it is difficult to see how the Bank could be criticized for accepting Bethlehem’s offer.
202. Then came C Y Kwan & Co’s letter of 8 May 987 which was copied to Wrangham of the Bank and Q W Lee of the Hang Seng Bank. I have nothing to add to what my Lords have already said.
203. Mr McGhee submitted that the Bank should not have put itself in a position where its relationship with Bethlehem possibly might conflict with the interests of Esquire. That in selling to the Ho family, the Bank was possibly in a position of conflict.
204. But as Lord Upjohn explained in Phipps v Boardman [1967] 2 AC 46 at 125C:
“The phrase ‘possibly may conflict’ requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.”
205. Here, on the evidence, I see no sensible possibility of conflict.
206. The “relationship” between the Bank and Bethlehem was wrongly compared with one of “senior partner and junior partner”, or, of “close friends”. The “relationship” between the Bank and the Ho Family is not the sort of relationship which gives rise to a suspicion that it would give rise to conflict of interest. Mr McGhee referred us to the evidence of Selway-Swift where he said he took steps to satisfying himself that the sale to Bethlehem was at arm’s length. As Mr McGhee accepted that is not determinative but he submitted that that showed the relationship was sufficiently close to raise the question. Although in my view the relationship does not give rise to any suspicion of conflict, I have subjected the transaction to vigilant scrutiny. The Vice President has dealt in some detail with how Bethlehem came to be the purchaser and I will not repeat them. I am satisfied that there is not a sensible possibility of conflict.
207. Indeed, the Bank and Esquire had an identical interest, namely, to get the best price for the property; just as Mr Farrar did in Farrar v Farrars Limited [1888] 40 Ch D 395. Lindley LJ said at 413: “… at this time his interest was to get the best price he could, for his security was by no means ample, he was pursuing that interest, and was discharging his duty at the same time, and he had no conflicting interest in the matter.”
208. As the Vice President has explained, it was clear in May 1987, that even with the property sold, a substantial black hole would be left.
209. In such circumstances, I cannot accept the judge’s view that the Bank wished to close the transaction quickly to stop a higher bid, or that they would not wish the Ho Family being forced “into paying a much higher price”. The evidence does not support such a view. There is no sensible foundation for the judge’s conclusion.
210. The judge attached importance to the fact that in the letter of 8 May 1987, C Y Kwan & Co wanted the agreement to be signed forthwith. The property market in Hong Kong is notoriously volatile. The law reports are full of cases where the parties entered into informal provisional but binding agreements involving millions of dollars. There was no evidence that the speed of this transaction was unusual. Indeed, I note from Mr Gurdas’ witness statement that Esquire’s purchase of the property in 1981, took place within a short time too. According to him, some time in September 1981, he heard that the property was for sale, and he paid a deposit of $3 million on 18 September 1981 upon the signing of the Sale and Purchase Agreement. Esquire needed a mortgage. Here Bethlehem was a cash buyer.
Economic Duress
211. The judge found that on the night of 12 March 1987:
“Gurdas telephoned Sommerfield from India late that night and at the end of that long telephone conversation with Sommerfield, after resistance failed, agreed to sell.”
212. He said “… the capitulation was total …” and that the quality of the pressure applied “was the devil’s work and commands what I can only call awe and horror for the total lack of morality or legality”.
213. Then at para. 192 the judge said:
“… what caused the resistance of Gurdas to crumble was the unreasonable, intimidating and deliberately capricious manner of Sommerfield’s illegitimate pressure, namely the $30 Million Overcharge Threat.”
214. The Vice President has already referred to the first sentence in para. 184 where the judge accepted that at 10 pm on 12 March 1987 Ratnam telephoned Sommerfield to inform him that Gurdas would agree to sell. This is what Ratnam said in re-examination on Day 7 at page 145, referring to his own earlier telephone conversation with Gurdas when Gurdas told him to tell Sommerfield that he was willing to sell the property:
“Therefore (Gurdas) said, ‘Okay, you phone and tell him (Sommerfield).’
Then I said, ‘You also have to speak to him’, which I believe he did subsequently.”
215. This is consistent with Sommerfield’s memo at page 511 of the trial bundle which recorded: “Phone call : Ratnam – TRS – 10:00 p.m. Thurs.
R called to inform TRS that he had contacted G in Bombay, and G had agreed to sell the property.
Phone call : Gurdas – TRS
G phoned from Bombay and, amongst all the b.s., consented to sale of the property ‘if the bank thought that was in the best interests of the company.’ TRS replied that it was the directors who would decide.
G requested TRS to do what was best for the company. TRS replied that his overriding interest was our shareholders’ cash but that he also wished to give G long-term peace of mind. The conversation ended amicably.”
216. Sommerfield said in his evidence that he had no independent recollection of that conversation. Nor what he had regarded as “b.s.” in Gurdas’ conversation with him.
217. The judge accepted Gurdas’ evidence that it was “an unpleasant call” (para. 184). It is not clear from Gurdas’ evidence exactly what he said Sommerfield said to him which led the judge to conclude that “the capitulation was total”.
218. But given that Gurdas had earlier told Ratnam he was willing to sell and had asked Ratnam to tell Sommerfield, although Gurdas also called Sommerfield to tell him he was willing to sell, one might think there would not have been much of an effort, if at all, on Gurdas’ part, in that telephone conversation, to resist selling.
219. The judge based his decision on his assessment of the witnesses. I will only add, to the Vice President’s comments on the judge’s approach, this observation. The judge’s assessment of the Bank’s witnesses was undermined by the highly critical but unjustified views that he had taken of their conduct when he concluded that there were breaches of fiduciary duties in the sale of the property. Although he did not mention Sommerfield by name, having regard Sommerfield’s role in the sale, the judge’s views, expressed so forcefully, would have influenced his assessment of Sommerfield as a witness generally.
220. In any event, with respect, the judge had not properly evaluated the evidence. In particular, the judge has overlooked reliable contemporaneous documents.
221. I refer to the note of the meeting held on Monday 16 March 1987. That meeting was attended by Oliner, Ratnam and Khan for Esquire. The note opened with the following remarks:
“We commenced meeting with concession in principle of forgiveness in return for sale of property.
MO (Oliner) replied with a restatement of certain basic principles: a) the company wanted a clear balance sheet b) release of guarantees c) flexibility in lines d) support from HSBC e) fixed repayment schedule.”
222. In Ratnam’s notes of that meeting, he recorded:
“1. TRS said G has agreed in principle to sell property and HSBC is considering relief / forgiveness in some form.
2. MO said G is agreeable in principle provided it will leave G with a strong trading company and a good balance sheet.”
Then more details on what Esquire wanted.
223. These notes do not support a case of total capitulation at all. The judge ought to have assessed Gurdas’ evidence against the contemporaneous record.
224. Unfortunately, the judge seemed to have concentrated on the events of 12 March 1987, the pressures which were supposedly applied on that day and came to a conclusion on the matter principally on the imperfect recollection of Gurdas.
225. It is clear that the sale of the property and the power of attorney were part of an ongoing discussion between the Bank and Esquire which led to the Esquire Agreement of 26 April 1987, which the Vice President has referred to in para. 89 of his judgment.
226. Sommerfield’s note of 16 March 1987 recorded Oliner proposing a repayment of $9 million per annum for all the banks. $9 million was based on net profits of $750,000 per month, but that Esquire would keep 40% of the profits. Then the note continued with this comment:
“After we noted that $750,000 was low in relation to Jan-Feb profits of $1.5 million per month, MO offered $9 million year 1, $11 million year 2, $13 million year 3.”
Then in a postscript:
“S Khan let slip in a later conversation that G expects the other banks to take a hit of $35 million on hardcore of $45.6 million. $10.6 million over 3 years is $290,000 per month and presupposes net profit of at least $730,000 per month.”
227. This and further negotiations between the parties showed quite clearly that Esquire was able to and did negotiate with the Bank on a commercial basis.
228. The Vice President has analysed the demand which was said to have been made by Sommerfield in meetings on 12 March 1987. The analysis showed that the demand which Sommerfield threatened did not include a demand of payment for the so-called $30 million overcharge.
229. Nor do I accept that it was the “$30 million overcharge” which was a significant cause of Esquire Agreement to the sale of the property.
230. So far as the interest overcharge of $15.6 million was concerned, it may be helpful to note how the Bank and Esquire had decided to deal with it in the facility letter dated 16 October 1986. 231. In the facility letter, the Bank and Esquire agreed that Esquire should reserve its position regarding the actual amount due, pending resolution of Esquire’s query in relation to the $30 million.
232. Mr McGhee submitted that the Bank had devised a strategy to persuade Esquire to sell by threatening to make a demand for payment from Esquire and liquidate or finish off Esquire as a result and that the strategy was illegitimate since the Bank knowingly demanded for too much. Alternatively, under the restructuring arrangements the Bank had no right to serve a demand at all.
233. I have nothing to add to what my Lords have said on the excessive demand.
234. Mr McGhee submitted that under the restructuring agreement of 22 February 1984 as extended by the supplemental agreement dated 30 October 1986, the Bank’s right as mortgagee had been suspended. Hence the Bank had no right to make any demand at all.
235. Under the restructuring agreement, the Lenders had agreed “that until the Termination Date the indebtedness will be paid only out of the Net Profits … ” (clause 6.01). And that “the Lenders shall not, and shall not be entitled to, demand … any repayment” (clause 10), in the absence of an event of default.
236. However, the following clauses make it quite clear that the moratorium did not apply to the Bank as mortgagee in respect of the property:
“8.01 … HSBC shall itself have the power as mortgagee to sell, transfer, mortgage, pledge or otherwise dispose of, or to direct the sale, transfer, mortgage, pledge or other disposition of, any of the Properties on such terms and subject to such conditions as it shall in its absolute discretion determine.
……
8.04 Without in any way fettering the right of HSBC in the exercise of its discretion in relation to any Disposals, HSBC agrees with the other Lenders that in reaching a decision between the Commencement Date and the Termination Date with regard to any Disposal it will have due regard to the continuing business of the Companies and the objectives of this Agreement and the views of the other Lenders.
8.05 It is hereby expressly agreed and declared that in the event that the proceeds of a Disposal of a Property exceed the balance of HSBC’s Property Portion then outstanding, then the excess shall be applied by HSBC first in reduction of HSBC’s Non Property Portion up to the amount secured by any charge over that Property in favour of HSBC, and secondly shall be paid into the Working Account to be applied as described in Clauses 6.03(a) and 6.05.”
237. The reference to payment of any relevant excess “into the Working Account to be applied as described in Clauses 6.03(a) and 6.05”, showed that it was contemplated that the sale of the property would not necessarily have to take place after the termination of the restructuring agreement.
238. Indeed clause 8.01 read together with clause 8.04 show quite clearly that the restructuring agreement would not materially affect the Bank’s right as mortgagee to enforce its security.
239. Lastly, the language of clause 10 itself supports the same view: “In consideration of the foregoing the Lenders shall not, and shall not be entitled to, demand or require or institute proceedings of any kind for or take any other steps whatsoever for or with a view to obtaining from any of the Companies or the Shareholders any repayment or prepayment of principal or interest or other monies payable in respect of the Indebtedness or the Guarantees except, in the case of HSBC, by the exercise of any power (whether of enforcement of security or otherwise) over any interest in a Property as provided in this Agreement.”
Undue Influence
240. The judge’s decision on undue influence is principally based on his earlier findings on breach of fiduciary duty, and economic duress.
241. In para. 229 he said:
“229. For me one of the most convincing manifestation of actual undue influence was how the Bank could impose upon Esquire to sign the Power of Attorney and gave to the Bank carte blanche to enable the Bank to dictate the sale absolutely and in such a way that enabled the Bank to keep Esquire ignorant afterwards that the sale effected in Esquire’s name by the Bank was a sale to the Bank’s partner and in undue haste. I hold therefore that Influence was used by the Bank on Esquire.”
242. Since I am of the view that the judge’s conclusions on breach of fiduciary duty and economic duress are wrong, it follows that there is no foundation for his conclusion on undue influence.
243. Indeed, on the evidence, I can see no undue influence. The evidence show that Esquire was able to negotiate the Esquire Agreement under which if Esquire had been able to trade sufficiently profitably for 5 years, it would have emerged with a clear balance sheet. That was a sound and commercial arrangement and the sale of the property was part of this arrangement.
Hon Rogers VP:
244. The appeal will therefore be allowed. The judgment below will be set aside. The plaintiffs’ actions will be dismissed. There will be an order nisi of costs in favour of the first defendant in this court and both defendants in the court below with a certificate for 3 counsel in this court.
(Anthony Rogers) (Frank Stock) (Robert Tang) Vice-President Justice of Appeal Justice of Appeal
Mr John McGhee QC, Mr Martin Lee SC, Mr Paul Harris SC & Mr Newman Lam, instructed by Messrs Ho, Tse, Wai & Partners, for the Plaintiff/Respondent
Mr John Jarvis QC, Mr Joseph Fok SC & Mr Eugene Fung, instructed by Messrs Johnson, Stokes & Master, for the 1st Defendant/Appellant