MURRAY ALASTAIR ELLIOT v. HEALTHY LIVING PRODUCTS INTERNATIONAL LTD AND OTHERS

Date of Hearing : 22 February 2007

Date of Filing of Written Submissions : 2 March 2007

Date of Handing Down Judgment : 12 May 2007

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J U D G M E N T

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Introduction

1. This is an assessment of damages pursuant to the order of Deputy Judge Gill dated 19 April 2006.

2. The Plaintiff’s claim arose out of an agreement dated 26 June 2003 for sale and purchase at HK$8.83M of a property described as House 56, Hing Keng Shek, Sai Kung, Hong Kong.  Completion should have occurred on 25 August 2003 but the 1^st Defendant had refused to assign.  Hence, the litigation.

3. Following trial on liability, the deputy judge gave judgment for the Plaintiff, ordering, inter alia, specific performance of the agreement subject to a lis pendens in favour of Nu Life International Limited under HCA 1157 of 2006 concerning its claim against the Plaintiff and the 1^st Defendant in relation to the property, and damages occasioned by the 1^st Defendant’s default to be assessed.  Pursuant to the judge’s order, completion of the sale and purchase agreement took place on 2 August 2006.

The Plaintiff’s claim

4. The Plaintiff’s original claim amounted to HK$1,318,352.50 and consists of two parts.  They are his cost of alternative rental accommodation of HK$1,317,000 and the incidental stamp duty of HK$1,352.50.

5. Consistent with its Schedule of Damages, the 1^st Defendant maintained that, subject to strict proof of the damages asserted, the following deductions should in any event be made to arrive at the Plaintiff’s net loss and damage, if any:

a.	Mortgage Interests	HK$520,360
b.	Government Rent and Rates	HK$75,184.96
c.	Rent for Short Term Tenancy	HK$220,701.91
d.	Interest on balance of purchase price	HK$42,870.25
e.	Maintenance of Swimming Pool	HK$56,837.42
	Total	HK$915,954.54

6. In the interest of time and to narrow the ambit of the assessment, the Plaintiff conceded that items b, c, d above (the quantum of which were agreed) totaling HK$338,757.12 should be deducted to arrive at his actual loss.  As regards the mortgage interests, the Plaintiff further agreed that they should be set-off but only in the lower amount of HK$345,832.76.  The cost of maintaining the swimming pool at the suit premises was also agreed as itemized above, but the Plaintiff saw no reason why it should also be for his account when he had similar expenses to bear in the interim.

Legal principles

7. In a contractual dispute, damages should be quantified so as to place an aggrieved party in the position he would have been but for the breach so far as monetary compensation can achieve it, subject always to the constraint of remoteness of damages.  In the context of disputed deductions, as here, it is as well that basic principles should be revisited.  Chitty On Contracts 29^th ed. Vol. 1, para. 26-001 reads:

“ … This implies a “net loss” approach in which the gains made by the claimant as the result of the breach (e.g. savings made because he is relieved from performing his side of a contract which has been terminated for breach; savings in taxation; benefits obtained from partial performance; or the salvage value of something left in his hands) must be set off against his losses arising from the breach (after he has taken reasonable steps to minimize those losses).”

8. These principles have been gleaned from the House of Lords’ decisions in Westwood v Secretary Of State For Employment [1985] 1 AC 20 and British Westinghouse Electric And Manufacturing Company, Limited v Underground Electric Railways Company of London, Limited [1912] AC 673.  It is common ground that they are applicable to the exercise before me.

9. I turn then to assess the Plaintiff’s loss.

The Plaintiff’s claim for alternative accommodation

10. The suit premises was purchased as a family home.  To the extent that delivery of vacant possession was delayed by the conduct of the 1^st Defendant, the Plaintiff has had to remain in rented accommodation at House 55, Hing Keng Shek, Sai Kung, a rental property in the same development (“the rented property”).

11. The Plaintiff’s evidence in this regard was succinct, clear and credible.  The issue addressed in his witness statement was elaborated upon in testimony that was tested in cross-examination.  I have no hesitation that the Plaintiff was a truthful and reliable witness not given to exaggeration.

12. The rental claim is supported by two tenancy agreements dated 5 October 2001 and 11 August 2005.  Paragraphs 5 and 6 of the Plaintiff’s witness statement (that has been adopted as evidence in chief) set out the monthly rentals paid from 19 October 2003 to 18 July 2006, the latter date being the cut-off date for assessment pursuant to my reasoned ruling at the invitation of the parties at the commencement of the assessment hearing.  The landlord of the rented property was Mo Ming Enterprises Ltd.  Three letters have been produced from the landlord evidencing payments of rent by the Plaintiff for the period from 19 April 2004 to 18 July 2006.  There were however rental receipts for the earlier period from 19 October 2003 to 18 April 2004.

13. The Plaintiff has explained that rental had been increased from HK$38,000 pm to HK$45,000 pm as of 19 October 2005.  He also said that he had to bear one half of the stamp duty payable when a new tenancy agreement was entered into dated 11 August 2005.  His paid share of the stamp duty was HK$1,352.50.

14. The Plaintiff adequately and convincingly addressed the areas of concern of Miss Tong, counsel for the 1^st Defendant in cross-examination.  I am satisfied to accept and act upon his evidence.  In particular, I find that rentals both before and after the hike to HK$45,000 pm had been paid as and when due as explained.  There was nothing untoward or suspicious in his testimony.  I, therefore, hold that the Plaintiff has incurred rental expenses of HK$1,317,000 in addition to the half-share stamp duty of HK$1,352.50.

Necessary deductions

15. As to the quantum of mortgage interests to be deducted, Mr. Che, solicitor for the Plaintiff contended that no more than HK$345,832.76 should be deducted.  Miss Tong begged to differ.  In this regard, Miss Tong’s submission is well founded on the evidence.

16. The Bank of China (Hong Kong) Ltd. (“the Bank of China”) would have funded the Plaintiff’s purchase of the suit premises had completion taken place as contemplated.  The Bank of China would have financed the Plaintiff with a mortgage loan of HK$6,181,000.00 at the interest rate of 2.6125% below prime: see its letter to the Plaintiff’s solicitors, Messrs. Wong Hui & Co dated 7 August 2003 and the Facility Letter of even date.

17. The Facility Letter issued following negotiation clearly set out the terms of repayment by 120 equal monthly installments and the charges payable in the event of prepayment.

18. The incontrovertible evidence was that the Plaintiff would have had to take up the mortgage loan with the Bank of China were he to honour his side of the bargain in August 2003.  As Miss Tong rightly submitted, interests that would have accrued on the mortgage loan between 25 August 2003 and 18 July 2006 would have been HK$517,860.79.  I accept her schedule of the calculations as correct.

19. The Plaintiff asserted in cross-examination that he could have fully repaid the mortgage loan in 3 years.  He said the suit premise was eventually assigned to him without recourse to borrowing as he had amassed sufficient funding in the interim through savings from the combined salaries of himself and his wife, bonus payments and the sale of his bonus shares.  The fact however remains that if the Sale and Purchase Agreement had proceeded as envisaged, he would have undertaken contractual obligations under the mortgage on terms stipulated in the Facility Letter.  He would have been exposed to mortgage interest liability in the amount Miss Tong submitted, namely HK$517,860.79.

20. The Plaintiff further asserted in cross-examination that the Bank of China had agreed to waive the valuation fee of HK$2,500.  This is undocumented but more important, it runs counter to the actual term in the Facility Letter itself, specifying that it was for the account of the Plaintiff.

21. Accordingly, I am of the considered view that a deduction of HK$520,360 (being HK$517,860.79 + HK$2,500) is appropriate.

22. Finally, there is the dispute whether the cost of upkeeping the swimming pool at the suit premises should be taken into account.  The 1^st Defendant in my view has established that the pool was indeed maintained by Arthur Swimming Pool Services Co. Ltd in the sum of HK$1,200 pm. totaling HK$56,837.42 from 25August 2003 to 18 July 2006.  This claim is partially supported by receipts.

23. The Plaintiff for his part, testified that he had a similar financial obligation of HK$800 each month in respect of the swimming pool at the rented house.  Despite the lack of documentary support, I am prepared to accept this aspect of his testimony raised for the first time in chief.  In the same period between default and final completion, he would have incurred expenses of HK$37,445.16.  The amount notionally saved would have been HK$19,392.26 (HK$56,837.42 - HK$37,445.16).  This “saving” must be deducted.

Net Loss accruing for payment

24. I assessed damages payable by the 1^st Defendant to the Plaintiff as follows:

	Rental and Stamp Duty	HK$1,318,352.50
	LESS
(a)	Agreed Deductions	HK$338,757.12
(b)	Mortgage Interests	HK$520,360
(c)	Swimming Pool Expenditure	HK$19,392.26
	Net Damages	HK$439,843.12

25. I award damages to the Plaintiff in the sum of HK$439,843.12 with interest at judgment rate from the date of service of the writ until full payment.

Costs

26. The damages assessed as payable beat the open offer of the 1^st Defendant.  The Plaintiff has had to prove his case.  He has also made reasonable concessions by agreeing to a number of deductions.  I can perceive no reason why he should be denied his costs of the assessment with certificate for counsel.

27. In sum, I order the 1^st Defendant to bear the Plaintiff’s costs of the assessment, such costs to include any costs reserved in respect thereof, taxed if not agreed with certificate for counsel.

Date of Hearing: 13 July 2006

Date of Judgment: 19 July 2006

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J U D G M E N T

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1.  In a judgment handed down on 19 April 2006 I found in favour of the plaintiff (Mr Murray) in his claim for specific performance of a contract between himself as purchaser and the 1^st defendant (Healthy Living) as vendor of a house known as House 56, Hing Keng Shek, Sai Kung.  The defence mounted by all defendants was that Healthy Living as registered proprietor of House 56 was the owner thereof under a resulting trust in favour of the 2^nd defendant (Nu Life HK), which had not as beneficial owner consented to the sale.

2.  In the event, Mr Murray succeeded in his claim because I found it not made out that Nu Life HK had such interest.

3.  Following applications for directions made in turn by Mr Murray and jointly by Healthy Living and Nu Life HK, I made certain orders on 18 May 2006.  These included the dismissal of the defendants’ joint application to stay the order for specific performance pending appeal, and directions and a timetable concerning completion.  The stay dismissal followed Mr Murray’s willingness to undertake not to dispose of House 56 after completion (other than for the purpose of raising a mortgage) pending the appeal or further order.

4.  I gave liberty to apply.

5.  There have been developments giving rise to two further applications; one by Mr Murray, the other by Healthy Living.  These are the matters now before me.

6.  The most significant development post-judgment is the emergence of a further claim of beneficial interest in House 56 under a resulting trust from Healthy Living by a company called Nu Life International Limited (Nu Life International).  As the name suggests it had or has connections with Nu Life HK with common shareholders and directors and so on. It was not and never has been a party to these proceedings, and took no part and, of course, there was no pleaded case.

7.  However, by writ dated 29 May 2006 it filed a claim against Healthy Living and Mr Murray as 1^st and 2^nd defendants.  The primary prayer is for a declaration barring the sale and purchase to Mr Murray.  The writ and statement of claim were filed under HCA 1157 of 2006 and then registered as a lis pendens against the title of House 56 on 30 May 2006.  The memorial number is 06503002240020.

8.  The application brought by Mr Murray derives from what is said to be the failure by Healthy Living and/or its solicitors to comply with the directions for completion of the sale made by the orders of 18 May 2006; in particular, the failure by Healthy Living to execute an assignment in proper form, and the non-delivery of the title deeds.  These failures to comply were seen as a delaying tactic, and the application brought on Mr Murray’s behalf is to invite an order giving conduct of the sale to his solicitors with a direction to the Registrar of the High Court to execute the assignment for and on behalf of Healthy Living, with further consequential directions. 

9.  In the event, the title deeds were in due course sent to Mr Murray’s solicitors so that is no longer an issue.  But a material sticking point remains the execution of the assignment.

10.  In the usual way Mr Murray’s solicitors sent a draft for consideration and execution.  In it there was no reference to the claim of Nu Life International which by then had been registered on the title.  By letter in response, Healthy Living’s solicitors proposed the inclusion of words to be inserted after the description of the property being assigned to include the following reference to the claim, thus:

“Subject to the interest of Nu Life International Limited as found by Deputy High Court Judge Gill in his judgment dated 19 April 2006 under High Court Action No. 3202 of 2003 and/or subject to the interest of Nu Life International Limited in High Court Action No. 1157 of 2006and registered in the Land Registry with memorial no. 06053002240020.”

11.  Mr Murray’s solicitors rejected this inclusion as not being in line with the agreement for sale and purchase.  The response to that was that Healthy Living was, with the emergence of this claim, unable to pass good title without reference to the encumbrance; the covenant to do so implicit in the proposed form of assignment would be a lie.

12.  The impasse led to a further development made by Healthy Living’s solicitors in correspondence and then mounted in the cross-application filed on its behalf.  This is to the effect that clause 11 of the agreement for sale and purchase has been brought into play.  This reads as follows:

“… If the [Plaintiff] shall make or insist on any objection or requisition in respect of the title conveyance or any matter appearing on the title deeds or particulars or conditions or otherwise of the Property which the [1^st Defendant] shall be unable or (on the grounds of difficulty, delay or expense or on any other reasonable ground) unwilling to remove or comply with or if the title of the [1^st Defendant] shall be defective, the [1^st Defendant] shall notwithstanding any previous negotiation or litigation be at liberty on giving to the [Plaintiff] or his solicitors not less than five (5) days’ notice in writing to annul the sale in which case, unless the objection or requisition shall have  been in the meantime withdrawn by the [Plaintiff] or the same shall have been removed or complied with by the [1^st Defendant], the sale shall at the expiration of the notice be annulled the [Plaintiff] being in that event entitled to a return of all the said deposit or deposits but without interest, costs or compensation.”

13.  It is Healthy Living’s case that Mr Murray was, by his recalcitrant conduct, insisting on the removal of the requisition evidenced by the registration of the writ.  Five days notice was given inviting him to withdraw his objection; when that was not forthcoming, the sale was effectively annulled.  Thus a primary feature of its application is that Healthy Living should be entitled to a declaration to that effect.

14.  I find no merit in that proposition.  The impasse stemmed from there being reference or not to the newly emerged so-called encumbrance in the body of the assignment.  There was no insistence by those representing Mr Murray that it be removed or complied with.  As Mr Yin on his behalf has submitted, he stands ready to defend or otherwise have disposed of the claim Nu Life International has brought.  His solicitors wrote on 26 June 2006 to those representing Healthy Living thus:

“… we disagree that we have insisted on your removing the encumbrance against the property as alleged. … For the avoidance of doubt we have no requisitions in respect of the title deeds …”

15.  The dispute, as I am satisfied, is not about the removal of an encumbrance whose presence and effect is not disputed, but whether or in what way it should be referred to in the assignment.

16.  I am satisfied clause 11 does not come into the play and there is no nullity.

17.  Healthy Living’s secondary position is that either it should now be discharged from having to specifically perform, or that it do so subject to the claim by Nu Life International. 

18.  There is a third proposal; that the completion be adjourned pending determination of the Nu Life International claim.

19.  Ms Tong representing Healthy Living was quick to give the assurance that her client is ready and willing to comply with the terms of the judgment and consequential directions as long as it is not exposed to the fiction that it is assigning the property free of encumbrance.

20.  Mr Yin accepts that the registration of the writ does represent a blot on the title which has to be addressed.  His submission is however (if I am correct in my interpretation of it) that as between the parties there is no such blot; they contracted for the passing of an unencumbered title and possession and the assignment should mirror that.  His point is that an assignment which is silent on the existence of the encumbrance will not affect the claim by Nu Life International.  But if (or, as he would have it, when) the blot goes, Healthy Living must be estopped from denying the purchaser Mr Murray an unencumbered title.  He went on to deal with a matter of history as to the existence and make-up of Nu Life International and its link with Nu Life HK and other parties to the litigation.

21.  Of course Nu Life HK made precisely the claim that has been now mounted by Nu Life International, and that claim is maintained on appeal.

22.  My view is that whatever the parties agreed to under the contract for sale and purchase, there is now a claim.  If completion proceeds before that claim is dealt with, as is favoured by Mr Murray and with which Healthy Living now takes no issue, his assignment must reflect the existence of the claim.  The fact that Nu Life International has a history that is interconnected with some or other of the parties in this action with competing interests which are apparently hard to reconcile is not a matter that bears to this.  That goes to the merits of its case.  If the claim fails or is struck out there will be no claim; Healthy Living will gain no residual benefit.

23.  But the proposed insertion is unnecessarily wide as well as being inaccurate.  The insertion should read simply:

“subject to a claim of Nu Life International Limited made in HCA 1157 of 2006 registered in the Land Registry under memorial no. 06053002240020.”

24.  One remaining matter for consideration is that of possession.  Of course Mr Murrary wants it; his application seeks a direction in this respect, in the way of a purchaser fronting up with the purchase price in full.  I do not see that this should be withheld from him.  I have not been addressed as to why he should not be given possession.  There is the somewhat flip comment twice made in affidavits of the 3^rd defendant (Mr Khan) who has held various offices in the litigants and in particular has been and perhaps still is a director of Healthy Living that:

“The property is now being occupied by the staff of [Nu Life International] who refuses to vacate the premises.”

25.  There is no elaboration, or explanation.

26.  This simply does not wear, given that the evidence at trial was that he occupies House 56; furthermore, that Nu Life International no longer trades.

27.  Dealing now with the summonses filed, Mr Murray’s first:

paragraph 1 is dismissed;

paragraph 2 (without proviso) shall provide for completion to be 14 days from the date of this judgment, time being of the essence;

paragraph 3 shall be amended to require the 1^st defendant to execute the assignment in terms of the plaintiff’s draft, subject to the insertion of the words at paragraph 23 herein;

paragraph 4 shall be in terms;

paragraph 5 shall be in terms;

paragraph 6 is dismissed;

paragraph 7 shall be in terms.

28.  As for the summons brought by Healthy Living:

paragraph 1 is dismissed;

as to paragraph 2 (i) is dismissed, (ii) is in terms;

paragraph 3 is dismissed;

paragraph 4 is in terms.

29.  I come now to costs.  The order is nisi.  Neither party wholly succeeded, or failed.  In the circumstances both should bear their own costs.  So there is no order as to costs.

Mr M Yin, instructed by Messrs Wong Hui & Co., for the Plaintiff

Ms S Tong, instructed by Messrs Hau, Lau, Li & Yeung, for the 1^st Defendant

Dates of Hearing: 6-10, 13, 14, 24, 27 March 2006

Date of Judgment: 19 April 2006

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J U D G M E N T

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1.  This case is about the sale and purchase of a village house of three storeys in Sai Kung.  The plaintiff looking to buy it as a family home and the 1^st defendant as registered proprietor signed a provisional agreement for $8.83 million.  The plaintiff paid an initial deposit of $500,000.  The parties then executed an agreement in full and proper form, and the plaintiff made a further payment of $383,000.  The agreement was signed and dated 26 June 2003 with completion down for 25 August 2003.  The plaintiff arranged bank finance and stood ready to complete.

2.  But there was no completion.

3.  What transpired between the parties during this time is in material dispute.  But it is clear from correspondence that those in control of the 1^st defendant were wanting to pull out and attempts were made to encourage the plaintiff to do likewise.  Although there is a dispute as to his reaction, it is his case that he would have none of it.  The parties had committed to the agreement between them and he was ready, willing and able to complete his part of the bargain.

4.  By early August the 1^st defendant changed its solicitors.  Then it was that through them it gave notice of what was described as “another difficulty in this matter”.  The letter stated that a company called Nu Life International Limited was the effective beneficial owner of the house the 1^st defendant was purporting to sell, and was refusing to consent to its sale.  The plaintiff was invited to step away from the deal.

5.  But the plaintiff would not.  When the 1^st defendant declined to complete he filed this writ on the following day.  His primary prayer is for specific performance, a remedy available to him under section 23 of the agreement unless the vendor therein is prevented by a third party claim to the property, and damages for any loss occasioned by that default.

6.  The defence filed reveals that there is such a company claiming a beneficial interest, called Nu Life International (Hong Kong) Limited, an apparent successor to the company Nu Life International I have already mentioned.  That company has been joined as 2^nd defendant. 

7.  A director of the 1^st and 2^nd defendants called Jawid Khan, who had conduct of the sale insofar as he signed the provisional agreement, was joined as 3^rd defendant.

8.  The primary defence is that the 2^nd defendant was at all material times the beneficial owner of House 56 under a resulting trust from the 1^st defendant, and its refusal to allow the transaction to proceed meant that the 1^st defendant could not complete.  And the plaintiff had actual or constructive notice of that interest.  Further — and this is hotly disputed by the plaintiff — it was agreed between the parties following the signing of the provisional agreement that if the consent of the beneficial owner could not be had the deal would be off.

9.  The plaintiff for his part does not accept that the 2^nd defendant has an equitable interest to prevent his taking title to the house he has bought and wants to make his family’s home.  However, if it is found to be so, his claim lies in damages against the 1^st defendant and Mr Khan, the 3^rd defendant, founded in deceit and misrepresentation.

History

10.  Before going to the evidence and findings of fact, I shall flesh out the background a bit. 

11.  Mr Murray, his wife and now their two sons have since 1999 been renting House 55 in Hing Keng Shek, Sai Kung.  He is a chartered accountant with HSBC.  She is a recently qualified solicitor with Baker & McKenzie.

12.  In or about 2001 the Murrays decided to seek out a house to buy, taking advantage thus of the record low levels of mortgage interest.  They engaged one Serinne Lau of Ricacorp Properties Limited to help.  They were keen to buy in the area, and Ms Lau was known to them as an agent with knowledge and experience in Sai Kung.  They came to be interested in several properties and, in turn, proceeded to take steps to buy them.  But for various reasons these efforts came to naught.

13.  They came to learn that House 56, Hing Keng Shek was for sale.  This house, as the number suggests, stands close to theirs, and in fact is the end house in a cul-de-sac just up from their entrance.  However, the advertised price was much more than they were prepared to pay.  Then it was that Ms Lau said to them that the owners were prepared to take $8.8 million to $9 million.  That was within their budget, and they expressed interest.

14.  Ms Lau attended at their house in the evening of 14 June and filled out a provisional agreement form; on their instructions the offering price was $8.8 million.  Mr Murray signed as the purchaser; then she went off to present the offer.

15.  The vendor and registered owner of House 56 was a company called Healthy Living Products Limited.  Its directors are Mr Khan and his mother Zarrina Chan.  It was to Madam Chan’s house in another part of Sai Kung that Ms Lau took the agreement.  Madam Chan and Mr Khan have given their account of what happened and I shall come to that.  It is the Murray’s case that Ms Lau rang them to report that the vendor’s directors wanted $8.88 million.  They responded with $8.83 million and that was accepted.

16.  Later that evening Ms Lau returned with the provisional agreement.  The version of Mr Khan and his mother may differ, but the agreement having been altered as to price to $8.88 million, then to $8.83 million with signatures and initials of the signatories in the appropriate place, is consistent with Ms Lau’s account of what transpired.  Mr Murray initialled the amendments; thus the parties came to be committed.

17.  The next day was 15 June.  That evening Mr Khan came to see the Murrays accompanied by a young lady called Amanda Lam.  They were to call again on 21 June.  What it was that was discussed and the outcome are matters that are in material dispute.  Suffice for the meantime to say that the discussions centred around Mr Khan’s wish to cancel the sale and the Murrays’ reaction to that. 

18.  Meanwhile with solicitors engaged those instructed by Healthy Living Products prepared the formal agreement for sale and purchase.  Mr Murray signed and paid the further deposit.  Madam Chan signed for the vendor.  This was on 26 June, the date of the agreement. 

19.  Then there was the change of vendor’s solicitor and the correspondence between solicitors to which I have referred.  The letter breaking news of the interest of a third party and that it intended to charge its interest on the title to stop the sale was of 6 August.  It can be noted this was some weeks after the provisional agreement and the subsequent meetings of 15 and 21 June, and the signing of the formal agreement, and payment of the two deposits, and less than three weeks before the completion date.

20.  I come now to the companies Nu Life International Limited, Nu Life International (Hong Kong) Limited and Healthy Living Products International Limited.

21.  Nu Life International was incorporated in 1991.  There were six founders who became its shareholders and directors.  Mr Khan was one.  Kwong Lam Sang was another.  Nu Life International was engaged in direct marketing of health foods and supplements.  Mr Khan was in charge of sales and marketing.  Mr Kwong was responsible for the finances and accounts.

22.  Nu Life International (Hong Kong) which I shall call hereafter Nu Life HK was purchased as a shell in 1999 for the purpose of taking over the business of Nu Life International.  I repeat verbatim a letter to this effect from the company’s accountants :

“C.W. CHAN & CO.
Certified Public Accountants
Rm. 1301, Eastern Comm. Ctr.,
397 Hennessy Road, Wan Chai,
Hong Kong.

Tel.: 2573 1638  Fax.: 2574 6390

3^rd December, 2003

The Board of Directors
Nu Life International (Hong Kong) Limited
8/F., 113 Argyle Street,
Kowloon.

Dear Sirs,

Nu Life International Limited (formerly Wealthy Holder Limited) was incorporated on 28th May, 1991 and carried on multi-level marketing business, trading of health products and investment in properties.  On 2nd January, 2000, Nu Life International Limited ceased to carry on multi-level marketing business and commenced to lease its properties, equipment and fixtures to a related company, Nu Life International (Hong Kong) Limited (formerly Galleon Trading Limited).  Further, Nu Life International Limited sold all its trading stocks to Nu Life International (Hong Kong) Limited at cost.

Yours faithfully,

(signed)

C. W. Chan & Co.

Certified Public Accountants”

23.  The shares of Nu Life HK were at the time held by various BVI companies, but Mr Kwong referred to the shareholders as those who owned Nu Life International, so no doubt they had the beneficial interest and control; certainly the Board of Directors remained the same.

24.  Mr Kwong said in evidence that the reason for the restructuring was to relieve the enterprise of debts that were pressing and enabled the directors to negotiate a settlement with the creditors that was less punitive than might otherwise have been.

25.  The letter I have copied above does not purport to be a full statement of the transaction in which Nu Life HK took over from Nu Life International.  But it is worth noting at this point that there is no reference to a takeover by Nu Life HK of Nu Life International’s interest in House 56.  Further, there is no reference in the opening audited accounts of Nu Life HK of such acquisition.

26.  Healthy Living was incorporated in 1994.  Its shareholders are various members of Mr Khan’s family.  He describes it as his service company.  He and his mother are the sole directors.

27.  Against that background I come now to deal with the evidence of those matters that are not accepted or are otherwise in dispute.

House 56 Hing Keng Shek

28.  Messrs Khan and Kwong said that the decision to purchase the house, made in December 1996, was one made by the directors of Nu Life International to provide the company with a capital investment in the lucrative Hong Kong real estate market.  At the same time, with the company’s business expanding into neighbouring Asian countries and, more recently, the UK, it was also to be used to house employees and others connected with Nu Life International when, as frequently happened, they came to Hong Kong on business.  They chose to buy it in the name of a nominee because of uncertainties that surrounded the transfer of sovereignty of the following year.

29.  It was also agreed that Mr Khan would be permitted to live in the house as part of his salary package; that as marketing director of a line of health foods and supplements this semi-rural existence would be a promotional point and good for business.

30.  The house was accordingly purchased, in the name of Mr Khan’s service company Healthy Living, in or about the end of 1996, for $18.38 million.  The downpayment, stamp duty and the cost of redecoration came from Nu Life International.  Healthy Living entered into a mortgage with First Pacific Bank, but Nu Life International paid the mortgage instalments and the outgoings.

31.  Since the original purchase and to date the house has been occupied by Mr Khan as his house and two domestic helpers, and when in Hong Kong by a series of managers from the region.

32.  Contemporaneous documents were put forward in support of the contention that on the facts Healthy Living had title on a resulting trust for Nu Life International.  However, these were not as complete as they might have been.  Those that were produced showed that Nu Life International paid the stamp duty, agent’s commission and two payments representing the balance of the purchase price; a total of $2,955,450.  There were also in the accounts thereafter monthly debits up to December 1999 which matched the mortgage instalments.

33.  This was not a complete record of moneys paid by Nu Life International however, because they were a part of records apparently kept in storage in the PRC.  There was a flood; that has obliterated some of the company’s files and documents.

34.  Also produced was a copy of minutes of a directors meeting dated prior to the purchase in which it was resolved that the company would buy House 56 for $18.38 million, authorising Healthy Living to sign the agreement to buy and otherwise take such steps as were necessary to complete the purchase.

35.  Although authenticity of this document as a contemporaneous document was not conceded, it is to be noted that the real estate agent having conduct of the purchase, a Mr Jenson Poon, was able to dig out from his archives a document which was clearly a copy of the same resolution.

36.  Subsequent to the purchase the value slumped, with the result that the mortgagee bank called for further security from the mortgagor and title holder Healthy Living.  This was provided, out of resources held and owned absolutely by Healthy Living.

37.  When in 2000 there was a restructure of the operation whereby Nu Life HK came on the scene, Nu Life International transferred its interest in House 56 to Nu Life HK, which company then took over the responsibility of paying the mortgage instalments and other expenses.  The letter from the accountants and the accounts did not disclose the transaction in order to keep the asset safe from any claims against the company.  According to Mr Kwong not even the accountants were told about the transaction.  No money changed hands.  There was no revaluation, no ‘purchase’ as such.  Contemporaneous documents in support of this transfer were minutes of meetings of directors of both transferor and transferee companies.

38.  Otherwise the house performed its original function as a guest house for visitors and a home for its marketing director.

39.  The defence contends that given the proximity of Houses 55 and 56 and the Murrays’ familiarity with their neighbour, it must have been apparent to them that House 56 was utilised by Nu Life International for such purpose, and thus that they would have had actual or constructive notice of its interest in the house.

40.  The Murrays’ response is that they had no such knowledge nor that in fact Nu Life in either form had or has the interest contended.  The relationship with Mr Khan was all along a casual one in which there has been no more than an exchange of pleasantries when they met in passing.  They visited House 56 only once, in 2000.  They did not inspect pre-purchase in 2003 because they were well aware of the basic construction and layout of a village house, and they had plans for a decorative makeover.  So, whoever may have stayed and in what circumstances was not a matter they knew of or were concerned about.

41.  They do not concede that there ever has been the trust pleaded.  They point to the lack of a complete picture and query why some only of the records have been preserved.

42.  Applying the principle that the legal owners are presumed to be the beneficial owners as well, their primary case is that that presumption has not been rebutted.

The Sale of House 56

43.  Mr Khan said that at the material time of the signing of the provisional agreement, his mother was disabled by a stroke and that he had told the agent Serinne Lau only to deal with him.  Notwithstanding that instruction she went to his mother’s house with the form of provisional agreement and proceeded to harass her into committing to a prospective sale by warning her of a gloomy outlook in the market.  Madam Chan was concerned at the exposure of Healthy Living by virtue of the securities held by the bank; by the time he got to the house she had signed.  He said when he arrived he told Ms Lau “the company documents approving the sale are not ready”, by which he meant that the approval of the beneficial owner had not been obtained, though this was not spelt out.  In the event he signed, because Ms Lau had told him “there should not be any problem”.  He also said from the witness box that his mother was by then very distressed and he wanted to get rid of Ms Lau and calm her down.  Signing the provisional agreement seemed to be easiest way to achieve this.

44.  I have already recounted the Murrays’ version of events; namely, that they had made an offer, the vendor countered and they accepted the terms; Mr Murray signed the counter offer and made out the deposit cheque payable to the vendor’s solicitors. 

45.  And so the deal was done.

46.  That Mr Khan and his friend Miss Lam called on the Murray in the evening of the next day and then again on 21 June are about all that is not disputed concerning the visits.

47.  Mr Khan and Miss Lam said that on the first occasion he explained that the vendor on whose behalf he had signed had not so far been given approval and authority to sell.  He said the Murrays’ response was to show understanding, asking him “to try to sort out the matters”.  Then it was that he came to realise that the consent by Nu Life International would not be likely, because the company had committed the house for use by guests for the remainder of 2003.  On 21 June, he returned to explain the difficulty and that the sale could not proceed.  Only Mr Murray was home on that occasion and he agreed to cancel, but expressed disappointment because this was the fourth time a prospective purchase had had to be called off.  So it was that it was left that the deal would remain alive, but conditional upon Healthy Living obtaining the required consent.

48.  The Murrays’ account was materially at odds.  On the evening of 15 June Mr Khan told them he loved the house, that it was his mother who wanted to sell and that if they agreed to cancel the sale he would pay Mr Murray’s share of the agency commission.  The Murrays turned down the proposal.  They wanted to proceed.  But Mrs Murray did say words to the effect that if the vendor wanted to pull out it could do so in terms of the provisional agreement upon payment of a penalty to match the deposit paid.

49.  On 21 June, Mr Murray said the request to cancel was repeated with a proposal to pay the commission plus $20,000.  Mr Murray said he told them he would talk to his wife.  In the event they did talk but she would have none of that; they did not get back to Mr Khan.

50.  During neither visit was there any mention of a third party interest.

51.  It is against that significant conflict of evidence as to how the parties were communicating with each other that the following undisputed sequence emerged :

(a)   by 26 June the parties’ solicitors had agreed the terms of the formal agreement for sale and purchase and Mr Murray as purchaser and Madam Chan for the vendor had signed the same;

(b)   Mr Murray made out the further deposit cheque for $383,000 to the vendor’s solicitors;

(c)   the agreement was registered on 26 June;

(d)   by letter of 21 July Healthy Living’s solicitors wrote to Mr Murray’s, disclosing illegal structures on the property.  The response was that he reserved his position;

(e)   then came the change of solicitors and the letter of 6 August I have referred to, disclosing the third party interest;

(f)   solicitors representing Nu Life HK wrote to Mr Murray’s solicitors on 12 August claiming an equitable interest in House 56 under a resulting trust.  On the same date, they wrote to Healthy Living’s solicitors demanding that the sale not proceed.

52.  Following the date of completion and the filing of his writ, Mr Murray renewed his lease of House 55 for a further two years and did the same again in 2005.  It remains his express intention to complete the purchase of House 56 and move his family in.

Nu Life HK – Recent Events

53.  These emerged for the first time from live evidence adduced by Mr Kwong.  He said that in 2003 the five directors of the company sold their shares in the company to two investors as he described them.  The deal required the directors to stay connected for two years to give the new owners the opportunity to familiarize themselves.  Then they resigned in November 2005.

54.  He was asked what happened to House 56.  He said the beneficial interest still belonged to “us five shareholders”.  He said the buyers/investors of the shares having purchased the shares “did not ask questions concerning the property.  So the property remains to be ours”.  He then said that the property was excluded from the transfer; that now House 56 “belongs to us the five shareholders”.  However, he was subsequently to state that the house belongs to Nu Life HK, the 2^nd defendant.

Findings of Fact

55.  Against the challenge from Mr Murray to the contrary, I am satisfied that Nu Life International was the notional buyer and owner of House 56.  Although the financial records are far from complete, I am satisfied there was enough in the contemporaneous documents that were available to establish that Nu Life International put up the purchase price and costs and that since the purchase the house was utilized for the stated designated purpose; namely, to put up overseas guests of the company.

56.  Whether as pleaded and argued Nu Life HK took over the interest and if so whether it still has retained that interest is another matter to which I shall return.

57.  I am also satisfied that the Murrays did not have notice of any third party interest whether actual or constructive.  I accept their account that the relationship between themselves and Mr Khan was convivial but not close and they were not in a position to know how the house was utilized or otherwise have come to be put on the alert.  At least up to the signing of the provisional agreement they had no knowledge of any such interest.

58.  But it goes further.  In respect of the competing accounts of what happened on 15 and 21 June, I accept entirely the versions of the Murrays and reject as a fabrication those of Mr Khan and Miss Lam.  If indeed there had been reference to a prospective third party at either meeting, giving rise to a prospective cancellation, or variation of the deal to a conditional one, then commonsense indicates that the solicitors would have been alerted and the matter confirmed between them.  But what happened?  The final agreement was prepared, approved, signed and registered.  By its terms all previous representations, agreements, warranties, undertakings, written or verbal were superseded.  The further deposit was paid and received.  The vendor warranted there was no third party interest.  It is quite unbelievable that all this would have taken place if there were the outstanding issues Mr Khan and Miss Lam deposed to.

59.  On the other hand, it is apparent that Mr Khan did want to pull out without saying why beyond that he claimed to love the house.  For reasons that he has not shared, he kept the real reason under his hat until early August. 

60.  So it was the first time the Murrays knew, or could have known, about a third party claim was upon receipt of the letter of 6 August.

Nu Life HK – Analysis

61.  In contrast to the extensive evidence leading to the finding that Nu Life International had an interest in House 56, there is a paucity of contemporaneous documents to support the contention made by Mr Kwong and Mr Khan, that in 1999 as a result of a restructure of the business Nu Life HK “took over part of the business and operation of Nu Life International, including its beneficial interest in the property”.  There is the directors’ resolution of Nu Life International of 2 January 2000, a like resolution of Nu Life HK of 4 January 2000 to record the transaction, and a further directors’ resolution of Nu Life HK of 30 May 2000 concerning payment of periodic funds to Mr Khan sufficient to enable him to draw from them mortgage instalments and expenses.

62.  And there was an agreement signed between the two Nu Lifes apparently of 2 January 2000 whereby it was agreed inter alia that Nu Life International “directly transferred the beneficial interest of the property to Nu Life HK effective from 2 January 2000”.

63.  But in none of these documents was there a consideration recorded.  No valuation was called for.  No payment was made.  The transaction was not recorded in the accountant’s letter I have copied; indeed as Mr Kwong said they wanted to keep the transaction secret and the asset away from the clutches of the company’s creditors; not even the accountants were told of the transaction.  No money changed hands, and there was no reference to House 56 in the opening accounts of Nu Life HK or thereafter.

64.  Mr Chan representing Nu Life HK sought to explain this away on the basis that the property was in negative equity; that in fact Nu Life HK was taking on a debt.  But there was no evidence of what House 56 was worth in January 2000 relative to the mortgage.  And even so the proper procedure would be book entry accounting to indicate the passing of interest.  If it was not an asset but a debt why the need for secrecy?

65.  Mr Chan further submitted Nu Life HK’s beneficial interest came into being not by way of transfer from Nu Life international but by way of a new constructive trust, created when Nu Life HK began paying the mortgage intalments.  This was novel; there had been no pleading or evidence to this effect.  This may well have been an attempt to get past statutory formalities concerning the need to register that I shall come to.  Further, at best such a trust would be limited to the payments made rather than ownership of the property overall.

66.  Nor is there any sign in the audited accounts of the regular expenditure intended to meet the mortgage instalments and expenses of House 56. Mr Kwong says that they were recorded as dividends paid to the shareholders; this because the shareholders regarded themselves collectively as the same persona as Nu Life HK.

67.  Then there is the new evidence of Mr Kwong, concerning the recent fate of House 56.  Mr Chan conceded he showed some confusion as to who or what ultimately now owns House 56.  I regard his evidence as being not so much confused as contradictory.  What emerged was that in the transfer of the shares House 56 was not included because the new owners expressed no interest and — in his own words — “so property remains to be ours”.  His further reply to a question from his counsel that it remains to be owned by Nu Life HK makes no sense in the light of that.

68.  If it ever was an asset of Nu Life HK it was no longer.  And the transaction, if transaction there was, was not recorded because there was nothing in the accounts or in the books to suggest that it ever was a property owned by Nu Life HK; in other words there was no need for a divesting of its interest in the property for it had nothing to divest.

69.  Further, and this has the highly persuasive element of commonsense about it, if Nu Life HK had an interest and was looking to stop the sale, it had constructive notice of this via its director Mr Khan on 14 June.  Whey not go straight into print to stop the sale?  Why permit the agreement formalizing the sale to be signed on 26 June?  Why take no steps to stop the sale until 6 August?

70.  What emerges from all this is that Nu Life HK has no beneficial interest in House 56.

Determination

71.  It follows from the above that Nu Life HK having no interest in House 56 has no defence to the claim by Mr Murray to specific performance.  No other competing interest has been pleaded.  So that, really, is the end of the matter.

72.  But in case it becomes a factor for consideration, I shall proceed to analyse the position if it can be said that Nu Life HK did acquire in January 2000 and retain the beneficial interest in House 56 from Nu Life International. 

73.  The question to be posed is: as against Mr Murray, purchaser for value, can Nu Life HK assert that beneficial interest, as a successor to Nu Life International’s interest?

74.  The answer to that lies in the Conveyancing and Property Ordinance (CPO) and Land Registration Ordinance (LRO).

75.  Section 5(1)(a) CPO states :

“5.  Certain instruments to be in writing

(1)  Subject to section 6 —

(a)   no equitable interest in land can be created or disposed of except by writing signed by the person creating or disposing of the same, or by his agent thereunto lawfully authorized in writing, or by will, or by operation of law.”

Section 6 relates to interest in land purportedly created by parole and has no bearing.  Sections 3 and 4 LRO state :

“3.     Priority of registered instruments; effect of

         non-registration

(1)  Subject to this Ordinance, all such deeds, conveyances, and other instruments in writing, and judgments, made, executed, or obtained, and registered in pursuance hereof, shall have priority one over the other according to the priority of their respective dates of registration, which dates shall be determined in accordance with regulations made under this Ordinance.

(2)  All such deeds, conveyances, and other instruments in writing, and judgments, as last aforesaid, which are not registered shall, as against any subsequent bona fide purchaser or mortgagee for valuable consideration of the same parcels of ground, tenements, or premises, be absolutely null and void to all intents and purposes:

Provided that nothing herein contained shall extend to bona fide leases at rack rent for any term not exceeding 3 years.

4.    Notice of unregistered instrument not to affect registered instrument

No notice whatsoever, either actual or constructive, of any prior unregistered deed, conveyance, or other instrument in writing, or judgment, shall affect the priority of any such instrument as aforesaid as is duly registered.”

76.  As there was no registration of the so-called conveyance to Nu Life HK, it follows that Mr Murray is not caught by an assertion that Nu Life HK has a beneficial interest in House 56.

Conclusion

77.  Mr Murray is entitled to specific performance and damages.

78.  Mr Yin, representing him, has prepared a draft order for consideration and I propose to adopt that with the addition that the completion date be fixed at 30 May 2006 with liberty to apply.  There will also be the following amendments, namely, that in clause 2 the words “or alternatively” to the end of the clause are deleted, and clause 3 is deleted.

Date of Hearing: 16 February 2004

Date of Ruling: 4 March 2004