The recent appeal in Gain Global Corp Ltd v Fongs1 may finally spell the end of a claim against now defunct law firm Fongs alleging that they had failed to verify the identity of the purported owner seeking to obtain a mortgage over his property.
Background
On 11 March 2016, the purported owner sought a HK$10 million loan secured against the property from the lender. The lender engaged Fongs to prepare the relevant mortgage documents but provided only certified true copies of the title deeds. On 14 March 2016, Fongs received an email from the lender Instructing them to investigate title to the property and to prepare a rental assignment and mortgage in favour of the lender. Fongs subsequently informed the lender that the title deeds were not originals and that the borrower was suspicious suggesting that the lender should obtain a certificate of registered particulars issued by the Immigration Department to verify the borrower's identity. Despite this advice, the lender insisted on proceeding with the transaction without obtaining the certificate.
The borrower signed the rental assignment, mortgage, and a statutory declaration declaring that he was the registered owner of the property and that the original title deeds had been lost. The fraud unravelled when the borrower defaulted on the second instalment of interest, and was then discovered to be an impostor. Subsequent proceedings by the true owner resulted in registration of the mortgage and the rental assignment being vacated from the Land Registry.
The lender subsequently commenced proceedings against Fongs claiming damages of HK$10,101,763.33 and interest.
Arguments
The crux of the lender's argument was that Fongs had an obligation to satisfy themselves that the borrower had good title to the property. This necessarily involved verifying the identity of the borrower. It was only by discharging this duty would Fongs be able to ensure that the Plaintiff would obtain good title under the mortgage.
The allegation on appeal was that had Fongs verified the genuineness of the tenancy agreement's stamp certificate (by authenticating it on the IRD website) they would have discovered that the tenancy agreement provided by the borrower was forged. This would have put them on a train of inquiry to ultimately conclude that the borrower was not the true owner of the property. The fraud would therefore have unravelled before the loan had been advanced and the lender would not have suffered the loss it ultimately incurred.
Fongs denied they had any obligation to verify the borrower's identity and in particular, had never undertaken to guarantee against any identity fraud.
The Court of Appeal decision
The court took the view that the Defendant's duty was defined strictly by the terms and limits of the retainer which was documented in the email from the lender. Any implied duty of care must relate to the duty the Defendant was instructed to perform under the express terms of the email. In the absence of express terms in the email requiring Fongs to verify the identity of the borrower or that he was the true owner of the property and to check all other available documents which might indicate the borrower's good title to the property, such as the documents other than the title deeds, no implied duty to do so could arise. Fongs never assumed any unqualified obligation to warrant that the lender would obtain good title under the mortgage, and never undertook to insure against any identity fraud.
The court applied the legal test of put on inquiry in PT Asuransi Tugu Pratama Indonesia TBK v Citibank NA2 where Lord Sumption found that only where there are features indicating a potential wrongdoing, and no special explanation is given, inquiry is required before proceeding. However, in the absence of such features, no inquiry is required before proceeding.
The court was satisfied that the stamp certificate and tenancy agreement were not title documents and therefore their scrutiny or authentication did not form part of the exercise to investigate title Fongs had been engaged to conduct. It was also found that misdescription of the property's address on the stamp certificate was a common typographical error and insufficient to put Fongs on inquiry.
Fongs had previously made a material offer to settle the lender's claim. Given the lender was unsuccessful in its claim and therefore did not achieve a better outcome at trial than the offer, costs were awarded to Fongs on an indemnity basis as a result.
Comment
The solicitor's retainer dictates the terms of engagement and covers not only topics such as hourly rates and terms of payment but also prescribes the scope of the engagement itself including expressly listing the work that is expected to be carried out by the solicitor. Conversely, by its absence, the retainer excludes the carrying out of work outside the four corners of the retainer. It must therefore be the case that any work that falls outside the terms of a retainer cannot be the subject of a claim that the solicitor is negligent by having not carried out that work. Principle 5.01 commentary 8 in the Hong Kong Solicitors' Guide prescribes the solicitor's obligation to have a written retainer (advisable unless it is a criminal matter).
These principles will likely apply to the terms of engagement of professionals and highlights the importance of agreeing and setting out clear terms in a retainer or engagement letter. This will ensure not only that it is clear to parties what work is required to be carried out but also what work is not to be carried out (unless the engagement is subsequently amended). This will afford professionals some degree of protection in case there is any allegation of loss caused by a failure to carry out work that was not part of the engagement.
[1] [2025] HKCA 586
[2] (2023) 26 HKCFAR
