Feng v Bomani [1995] FJHC 97; Hbc0171j.94s (24 May 1995)

IN THE HIGH COURT OF FIJI
At Suva
Civil Jurisdiction

CIVIL ACTION NO. 0171 OF 1994

Between:

1. MAQI FENG
2. CITIC DEVELOPMENT INC. LTD.
Plaintiffs

- and -

1. ELIKI BOMANI
2. RESORT CONDOMINIUM INTERNATIONAL
(FIJI) LTD.
3. BEL-AIR INVESTMENTS LTD.
4. THE PUBLIC TRUSTEE
Defendants

Mr. S.C. Maharaj for Plaintiffs
Mr. D. Jamnadas for 1st, 2nd and 3rd Defendants
Mr. M.L. Ahmadu for 4th Defendant

JUDGMENT

The initial originating summons in this action was issued on 13th of April 1993 and sought an order against two named defendants requiring them to specifically perform an agreement entered into between the 2nd plaintiff company ('Citic') and the 3rd defendant company ('Resort Condo') by providing a third party mortgage over Lot 1 on D.P.4206 situated at Waqadra, Nadi ('the land'). Unfortunately a subsequent search of the Certificate of Title to 'the land' revealed that 'the land' did not in fact belong to 'Resort Condo'.

This 'complication' gave rise to an amended originating summons which added a further two (2) defendants, Bel-Air Investments Limited ('Bel-Air'), the registered proprietor of 'the land' and the Public Trustee, the registered mortgagee of 'the land'. The orders sought in the amended summons were also adapted and expanded to reflect the change in defendants and in particular, reference may be made to the following orders:

"3. ... third defendant do execute and provide a third party mortgage ... which when registered shall rank as a second mortgage over (land) ... known as Waqadra (part of) and ... being Lot 1 D.P. Number 4206 in favour of the second plaintiff."

and

"4. ... that the fourth defendant do provide its consent for the execution and registration of (a) second mortgage by the third defendant in favour of the second plaintiff over (land) known as Waqadra (part of) and ... being Lot 1 D.P. Number 4206."

The factual background to this case is not in dispute and may be briefly described as being principally based upon an Agreement dated 13th November 1992 entered into between 'Citic' and 'Resort Condo' for the development of 'the land', with the starting capital of $100,000 being provided by 'Citic' through a short-term loan, and all development works on 'the land' being carried out by 'Resort Condo'.

Pursuant to the Agreement on the 18th of November 1992 the sum of $US65,000 was paid over on behalf of 'Citic' to the 1st defendant and a hand-written receipt was issued for it.

Also pursuant to the Agreement the loan was to be secured by mortgages to be provided by 'Resort Condo' over two (2) pieces of land described in the Agreement as follows:

"... THAT PIECE OF LAND OF LOT 8 ON DEPOSITED PLAN NO. 2246 IN THE CITY OF SUVA IN THE ISLAND OF VITI LEVU, ALL THE REAL ESTATE WHICH WILL BE BUILT UP ON THAT PIECE OF LAND OF LOT 1 ON DEPOSITED PLAN NO. 4206 IN THE DISTRICT OF NADI WHICH HAS ALREADY BEEN MORTGAGED TO THE PUBLIC TRUSTEE OF FIJI TO PARTY A FOR THE STARTING CAPITAL, $F100,000 ..."

As to the first piece of land which is owned by 'Resort Condo', a mortgage was duly registered in favour of the 1st plaintiff (not 'Citic' as agreed) on 20th November 1992. As to the latter piece of land i.e. "LOT 1 ON DEPOSITED PLAN NO. 4206", perhaps not surprisingly, no mortgage has been provided as agreed despite numerous requests. So much then for the background to the case.

With the exception of the Public Trustee, none of the other named defendants has filed any affidavit, although counsel did briefly appear on their behalf at the hearing of the summons and orally opposed the application.

In particular, counsel laid emphasis on the registered proprietorship of 'the land'; the absence of any 'privity' on the part of 'Bel-Air' to the agreement sought to be specifically enforced by the plaintiffs; and the fact that 'Bel-Air' had been incorporated and became the registered proprietor of 'the land' long before the said Agreement had been entered into and therefore presumably could have been made a party to the Agreement if that was intended by the parties.

Nothing was said however as to the obvious benefit that would accrue to 'Bel Air' from the performance of the Agreement i.e. through its land being developed, nor did counsel enlighten the court as to the details of development works (if any) that had been or was proposed to be undertaken by 'Resort Condo' on 'the land'. It was conceded however that the 1st defendant was a shareholder in both 'Resort Condo' and 'Bel Air'.

I propose to deal firstly with the order sought against the Public Trustee who was joined in the action as a 'precautionary measure' on the part of the plaintiffs' and insofar as its rights of 'tacking' as a first mortgagee of 'the land', stood to be adversely affected in the event that the plaintiffs application against 'Bel-Air' was successful.

With all due regard to the submissions of counsel for the plaintiffs I cannot accept that the Public Trustee has been properly joined as a party to the action. In the first place, the Public Trustee is not a party to the Agreement between 'Citic' and 'Resort Condo'; secondly, there is nothing in the Public Trustee's mortgage which requires its consent to a second or subsequent mortgage over 'the land' and, although the title deeds are held by the Public Trustee, that fact alone is insufficient reason to join him as a defendant.

As was said by Williams J. in In re Wright (1894) 12 N.Z.L.R. 585 in ordering the Registrar to require production of the title documents from a first mortgagee in order to register a second mortgage, at p. 586:

"A certificate of title is not the property of the first mortgagee, he is only entitled to possession of it; and he cannot prevent other instruments being registered, but, on the contrary is bound to produce it in order that they may be registered."

Furthermore the right of a mortgagor to further deal with mortgaged land has been long settled since Hopkinson v. Rolt (1861) 131 R.R. 313 (per Lord Campbell L.C. when he said at p. 319):

"Although the mortgagor has parted with the legal interest in the hereditaments mortgaged, he remains the equitable owner of all his interest not transferred beneficially to the mortgagee, and he may still deal with his property in any way consistent with the rights of the mortgagee."

Even more directly relevant and in similar vein Lord Shaw of Dumfermline said almost 50 years later in Deeley v. Lloyds Bank Limited [1912] UKLawRpAC 54; (1912) A.C. 756 at p. 781:

"In the case of a grant of a mortgage to a bank by a customer in security of advances made and to be made, there, of course, still remains in the customer an estate capable of being disposed of by sale or affected by subsequent mortgage ..."

A fortiori under the Torrens system of land titles where the mortgagor remains the registered proprietor of the mortgaged land and where a registered mortgage is regarded as a legal charge against that estate without operating as a transfer of the land. (See: Section 63 Land Transfer Act Cap. 131.)

Clearly then in the absence of any agreement to the contrary (of which none has been drawn to the court's attention), not only is 'Bel-Air' prima facie entitled to further mortgage 'the land' but the Public Trustee as an existing mortgage is not required to consent to such subsequent mortgage nor can he prevent the registration of the same.

In the circumstances the joinder and orders sought against the Public Trustee are misconceived and are accordingly refused with costs to the Public Trustee.

I turn next to consider the plaintiffs substantive claim against 'Bel-Air'. In this regard as already noted 'Bel-Air' is not and has never been a party to the Agreement entered into between 'Citic' and 'Resort Condo' and although 'Bel-Air' undoubtedly stands to benefit under the terms of the Agreement that cannot render it liable to perform its terms nor entitle it to enforce it.

This fundamental common law principle of the 'law of contract' is succinctly set out in para. 329 of Vol.9 of Halsburys 'Laws of England' (4th edn) which reads:

"The doctrine of privity of contract is that, as a general rule, a contract cannot confer rights or impose obligations on strangers to it, that is, persons who are not parties to it. The parties to a contract are those who reach agreement ... The doctrine has been accepted by the courts and would seem to be intimately connected with the doctrine of consideration and the rule that consideration must move from the promisee."

Further the headnote in The Chesterfield and Midland Silkstone Colliery Co. (Ltd) v. Hawkins (1865) 140 R.R. 677 states:

"Where a deed is made inter partes, no one who is not expressed to be a party can sue on a covenant contained in it; and this is not a mere rule of construction, but a rule of positive law."

Half a century later Viscount Haldane L.C. said in discussing the relevant principles in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] UKHL 1; (1915) A.C. 847 at p. 853:

"My Lords, in the law ... certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaestum tertio arising by way of contract. ... A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor's request ... A third proposition is that a principal not named in the contract may sue upon it if the promisee really contracted as his agent. But again in order to entitle him to sue, he must have given consideration either personally or through the promisee, acting as his agent in giving it."

(Reaffirmed by the House of Lords in Midland Silicones Ltd. v. Scruttons (1961) 2 Lloyds 365.)

Bearing the above principles in mind and the nature of the plaintiffs' claims against the defendants', I am satisfied that there is nothing in the evidence that would even vaguely support the suggestion that the circumstances in this case fall within any recognised common law or equitable exception to the general rule. (See: paras. 336 and 339 of Halsbury's Laws ibid.)

In seeking to support its claim however, counsel for the plaintiffs laid stress on the obvious value-added benefit that the successful completion of the Agreement would confer on 'Bel-Air'; to the absence of any doubt in the Agreement as to the identity of the property which was intended to be mortgaged; and to the 'gross misrepresentation' in the Agreement by 'Resort Condo', albeit implicitly, that it was either the registered proprietor of 'the land' or at the very least had the necessary control and power to enable it to obtain a second mortgage over 'the land' from the registered proprietor.

More particularly, counsel sought to impose a liability on 'Bel-Air' not on the basis of the equitable doctrine of 'rectification', but by relying upon the principle commonly known as 'lifting the veil of incorporation'. If this is done, counsel says, the Court would inevitably find that the first defendant is the controlling shareholder of both 'Resort Condo' and 'Bel-Air', and also the ultimate beneficiary of the Agreement entered into between 'Citic' and 'Resort Condo'.

As such it is argued, the first defendant should not be permitted to hide behind the 'corporate veils' of 'Resort Condo' and 'Bel-Air', instead he should be made to specifically perform the terms of the Agreement as if he had personally entered into it and as if he was the registered proprietor of the land offered as security under the Agreement.

In support of this rather far-reaching submission counsel referred to the ruling of this court in an earlier Civil Action No. 510 of 1993 in which the plaintiffs' successfully invoked the principle against the first defendant who had unsuccessfully sought to rely on the 'separate entity' doctrine laid down in the leading case of Salomon v. Salomon & Co. (1897) A.C. 22.

In its ruling however this Court listed no less than 5 (five) undisputed 'exceptional circumstances' in the case which clearly showed that the first defendant although not a party to the Agreement, had actively and inextricably dealt with the plaintiffs' in a 'personal capacity', not only in receiving and receipting the loan monies under the Agreement but also in issuing personal cheques in payment of 'interest' due to the plaintiffs' under the Agreement. The first defendant also held 99 of the 100 shares issued by 'Resort Condo' and the date of incorporation, May 1992, had a not insignificant proximity to the date of the Agreement which was November 1992.

In Tunstall v. Steigmann (1962) 2 W.L.R. 1045 where the landlord held virtually the whole of the shares in the limited company incorporated to defeat the tenant's claim for a renewal and had the sole control of the business of the company, the Court of Appeal in refusing to go behind the corporate veil restated and affirmed the principle in Salomon's case (ibid) when it:

"Held (1) that a limited company and the individual or individuals forming the company were separate legal entities, however complete the control might be by one or more of the individuals over the company.

per Ormond LJ (at p.1050). If there has been any departure from a strict observance of the principle .... it has only been made to deal with special circumstances where a limited company might will be a facade concealing the real facts.

per Danckwerts LJ (at p.1055). The personality of those in control of a company is only to be regarded as material in special circumstances, such as a state of war, and only as indicating the mature of the company without really departing from the principle that a limited company incorporated under the Companies Act is a distinct legal entity, differing from the individuals who hold the shares or who control it through the mechanism of the Companies Acts."

Bearing the above in mind and having carefully considered the evidence and submissions of counsel for the plaintiffs', I have no hesitation in holding that none of the 'exceptional circumstances' noted in the above ruling or judgments exists in this case in relation to 'Bel-Air'. True its shareholders are the same as those of 'Resort Condo' but any similarity between the cases ends there.

I cannot accept that the mere existence of a 'common shareholder' is a sufficient let alone 'special circumstance', which would entitle this court to depart from or disregard the general principle that a company is a separate legal entity quite distinct from its shareholders.

Nor, given the date of 'Bel Air's' incorporation, January 1992, and its close proximity to the date of acquisition of 'the land', namely February 1992, would I be justified in drawing the inference that 'Bel Air' (as opposed to 'Resort Condo') was a 'mere cloak or sham' incorporated by the first defendant for the purpose of enabling him to perpetrate a fraud on the plaintiffs'.

Furthermore, given the absence of any 'privity of contract' between 'Bel Air' and 'Citic' or of any direct relationship between 'Resort Condo' and 'Bel Air', it would be wholly unjustified in my view, to hold that 'Bel Air' could or ought to be made liable for any 'misrepresentation' made in the Agreement as appears to have been suggested by counsel for the plaintiffs' or to infer that 'Resort Condo' contracted as an authorised agent of 'Bel Air'.

As was held by the Court of Appeal in J.H. Rayner (Mincing Lane) Ltd v. Dept. of Trade and Industries (1988) 3 W.L.R. 1033:

"(3) That it was the foundation of company law that agency between a corporation and its members in relation to the corporations contracts with third parties could not be inferred from the control exercisable by the members over the corporation or from the fact that the sole object of the contract was to benefit the members; that the relationship of agency was based on the consent of both parties."

In all the circumstances the plaintiffs' originating summons must be and is hereby dismissed with costs to the defendants' to be taxed if not agreed.

(D.V. Fatiaki)
JUDGE

At Suva,
24th May, 1995.

HBC0171J.94S