The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 47 of 1995

Cheung Bing Sum Juana Appellant

v.

Leo Lee Respondent

FROM

THE COURT OF APPEAL OF HONG KONG

---------------

JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 26th November 1996

------------------

Present at the hearing:-

Lord Goff of Chieveley

Lord Mustill

Lord Steyn

Lord Hoffmann

Lord Clyde

  ·[Delivered by Lord Hoffmann]

-------------------------

1. This appeal arises out of an agreement made on 15th October 1986 by which the appellant (whom their Lordships will call "the vendor") agreed to sell her flat in Shatin to the respondent ("the purchaser") for (HK)$380,000. The vendor signed a receipt for a deposit of $25,000 paid in cash by the purchaser.  The receipt also contained a description of the flat and the price, the names of the parties and a provision for completion 50 days after contract. The vendor failed to complete and in May 1987 the purchaser commenced proceedings for specific performance. At the trial before Deputy Judge Evans in 1993, the vendor appeared in person and conducted the case with the assistance of her husband.  Her defence was that no such agreement had been made.  The receipt was a forgery and the payment of $25,000 had in fact been a usurious loan to finance the appellant's gambling.

2. The purchaser's evidence was that in June 1986, some four months before the agreement for the sale of the flat, he had advanced $15,000 to the vendor to invest in a massage parlour.  In  return,  the vendor  had  given him six postdated cheques, each for $5,000, falling due on 5th July 1986 and at monthly intervals thereafter.  The first cheque was dishonoured on presentation.  The vendor then asked for two months grace and the purchaser agreed. At the end of September the purchaser agreed to accept a cheque for $25,000 in full settlement of the vendor's liability but retained the original cheques until it had cleared.  It was however also dishonoured.  The purchaser then presented the $5,000 cheques falling due in August and September but without any greater success.

3. In mid-October the vendor told the purchaser that because she was financially embarrassed, she would have to sell her flat.  She offered it to the purchaser for $380,000, which she said was the price she had paid.  This price and the other terms were agreed on the telephone.  The parties then met and signed the receipt.  The purchaser handed over the deposit money and the dishonoured $25,000 cheque.  He kept the six $5,000 cheques but said that he would deduct the sum owing from the balance of the purchase price at completion.  As completion did not take place, he commenced separate proceedings in the District Court for the sums due on the cheques.  There was an abortive attempt to consolidate these proceedings with the action for specific performance but the action is presently stayed.  The purchaser does not now claim to set off anything due under the cheques against the purchase price of the flat.

4. The judge accepted the purchaser's account of the matter and rejected that of the vendor. He also rejected various alternative defences (such as laches and a claim that the vendor was not beneficial owner of the property) and decreed specific performance.

5. In the Court of Appeal the vendor was represented by counsel.  She was constrained to accept the judge's findings of fact.  But she advanced certain new defences which had not been raised in the court below.  The first was that the agreement in June to advance $15,000 in return for a total of $30,000 payable over the next six months was in effect a loan at an annual rate of interest exceeding 200% and therefore contravened section 24(1) of the Money Lenders Ordinance, Cap. 163:-

"Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 60 per cent per annum commits an offence."

6. In addition to the criminal sanction of section 24(1), the repayment of the loan and any security for the loan is made unenforceable by section 24(2):-

"No agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds the rate specified in subsection (1)."

7. Mr. Dykes, who appeared for the vendor, said that the agreement for the sale of the flat was "security given in respect of" the loan and therefore also unenforceable.  The Court of Appeal rejected this argument.  Nazareth J.A., who gave the judgment of the court, said:-

"... even if [the $15,000 advance] was an illegal trans­action and an offence under section 24 of that Ordi­nance ... on the evidence it was not connected with the agreement for purchase of the defendant's flat.  The evidence shows that the defendant received $25,000 in cash as a deposit in the context of the agreement for the purchase and sale of the flat.  In that light the agreement for sale and purchase plainly would not be tainted by the illegality of what must therefore be a separate transaction."

8. Their Lordships agree.  There was no evidence that the purchaser had persuaded the vendor to sell him the flat, that the sale was at an undervalue or that the purpose of the transaction was to provide the purchaser with security for the repayment of his loan. In these respects, the facts are very different from those in Lee Leo v. Cheong Oi Sum Ader [1993] 2 H.K.C. 736, to which their Lordships were referred.  In practice it would not have been open to the vendor to put forward such a case consistently with the defence which she chose to run at the trial. Thus the only link between the loan transaction and the sale of the flat was that, having agreed to buy the flat, the purchaser agreed not to demand immediate payment of the money due on the cheques but to set off the loan debt against the balance of the purchase price. Putting the matter at its highest, it may be said that whatever the motive for the transaction, the purchaser's right to a conveyance of the flat combined with his right to set off the loan debt constituted security for repayment of the loan.  But the vendor does not seek to rely upon such security. He is ready willing and able to pay the whole price less the deposit.  In those circumstances, their Lordships consider that it is unnecess­ary to decide whether there may be said to be a security provided by the potential set-off which is rendered unenforceable by section 24(2).  The purchaser is not seeking to enforce it.

9. Mr. Dykes relied in the alternative upon section 25 of the Money Lenders Ordinance. This gives the court power, in proceedings for the recovery of money lent "or the enforcement of any  agreement  or security in respect of any loan" to reopen

a transaction which it is satisfied is extortionate so as to do justice between the parties.  "Extortionate" is defined in subsection (2) as a transaction which either requires grossly exorbitant payments to be made or grossly contravenes ordinary principles of fair dealing.  Mr. Dykes said that the court of trial had not considered whether to exercise its power under section 25 and this Board should therefore remit the case to the High Court for further hearing.

10. Their Lordships consider that there is no basis upon which the agreement for the sale of the flat could be reopened under section 25.  For the reasons already given, the proceedings in the High Court were not proceedings for the recovery of money lent or the enforcement of any agreement or security in respect of a loan.  So far as there may have been any potential element of security arising out of the sale of the flat, the order for specific performance claimed by the purchaser did not seek to enforce it.  Furthermore, absent any question of set-off, their Lordships find it impossible to see how an ordinary sale of a flat at market value can be said grossly to contravene ordinary principles of fair dealing.

11. Finally Mr. Dykes submitted that the agreement to set off the $30,000 against the balance of the purchase price was a term of the sale agreement which had not been recorded in the receipt.  The memorandum evidencing the terms of the agreement was therefore incomplete and the contract unenforceable under section 3 of the Conveyancing and Property Ordinance, Cap. 219.  Their Lordships think there is nothing in this point.  No agreement was required to enable the purchaser to set off an existing debt against the debt due under the sale agreement.  He was entitled to do so under the general law.  The agreement to set off the loan against the balance of the purchase price was no more than an extension of the period agreed for payment of the cheques given in return for the $15,000 advance.  In the absence of such an agreement, the cheques would have been payable on the dates on which they fell due.  Properly analysed, it was a variation of the loan agreement rather than a term of the sale agreement.  In any case, it is well established that a defendant can rely upon section 3 (which reproduces section 4 of the Statute of Frauds 1677) only if the section is expressly pleaded.  There was no such pleading at the trial and no application was made to amend, either in the Court of Appeal or before their Lordships' Board.  Their Lordships will therefore humbly advise Her Majesty that the appeal should be dismissed.  The appellant must pay the respondent's costs before their Lordships' Board.

© CROWN COPYRIGHT as at the date of judgment.