BANK OF CHINA (HONG KONG) LTD v. EDDY TECHNOLOGY CO LTD AND OTHERS

HCA 1019/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1019 OF 2015

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JUDGMENT

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1.  By a summons dated 18 November 2015, the Plaintiff applied for summary judgment against the Defendants. Master Ho found in favour of the Plaintiff and granted summary judgment by an order dated 6 July 2016. The Defendants now appeal against such order.

Background

2.  The Plaintiff, Bank of China (Hong Kong) Limited, is the successor corporation to Sin Hua Bank Limited Hong Kong Branch (“SHB”).

3.  SHB and the 1^st Defendant entered into 3 loan agreements:

(i)   by a facility letter dated 24 June 1997, the 1^st Defendant requested and SHB granted to the 1^st Defendant a loan of $1,800,000 (“the 1^st Loan");

(ii)   pursuant to an Undertaking for Repayment of Loan dated 28 October 1999 executed by the 1^st Defendant in favour of SHB,SHB granted another loan of $1,000,000 to the 1^st Defendant (“the 2^nd Loan"); and

(iii)   pursuant to another Undertaking for Repayment of Loan dated 29 November 1999,SHB granted a third loan of $770,000 to the 1^st Defendant (“the 3^rd Loan").

4.  Further, the 1^st Defendant owed monies not only in respect of the 1^st, 2^nd and 3^rd Loans but also in respect of, inter alia, an overdraft account no 031-381-0-002990-9 (“the Overdraft Account”)and a time loans account no 031-381-4-001744-7 (“the Time Loans Account”).

5.  As security for all sums due by the 1^st Defendant to SHB, by a Legal Charge dated 25 June 1997 (“the Legal Charge"),the 2^nd and 3^rd Defendants as mortgagors and the 1^st Defendant as borrower charged the property known as Flat G, 24^th Floor, Block 2, Prosperous Garden, No 3 Public Square Street, Kowloon, Hong Kong (“the "Property") to SHB.

6.  Further, by 3 deeds of guarantees (“the Guarantees")dated 15 May 1997,3 May 1999 and 28 October 1999 respectively, the 2^nd and 3^rd Defendants jointly and severally agreed to pay to SHB on demand in writing all sums due and payable by the 1^st Defendant to SHB up to the total extent of $12,300,000 together with interest thereon.

7.  In September 2002, the 1^st Defendant defaulted in making payments under the various loans that it owed to the Plaintiff, and the Plaintiff demanded payment by a letter dated 7 September 2002.

8.  By a letter dated 31 December 2003, the 3^rd Defendant wrote to SHB, informing SHB that there was a purchaser who was willing to purchase the Property at a price of $2,200,000 and requesting SHB to consent to such sale.

9.  On 10 February 2004, the Property was released from the Legal Charge and the Property was sold by the 2^nd and 3^rd Defendants at the price of $2,200,000.

10.  On 11 February 2004, the proceeds of sale in the sum of $2,200,000 was paid to the Plaintiff towards repayment of the various loans owed by the Defendants as follows: (i) $539,102.18 in satisfaction of the outstanding indebtedness under the Overdraft Account; (ii) $1,404,836.13 in satisfaction of the outstanding indebtedness under the Time Loans Account; and (iii) $256,061.69 in satisfaction of the outstanding indebtedness under the 2^nd Loan.

11.  By 3 letters dated 23 September 2005,the Plaintiff through its then solicitors demanded the Defendants to pay the outstanding balance of the 1^st, 2^nd and 3^rd Loans.  Between 10 November 2005 and 29 December 2006, the Defendants made numerous requests for indulgence from the Plaintiff. However, no settlement was reached.

12.  By letters dated 14 January 2009,the Plaintiff again demanded payment from the Defendants of the outstanding indebtedness of the 1^st, 2^nd and 3^rd Loans in the total sum of $4,151,435.12 as at 9 January 2009 together with further interest.  By a letter dated 17 April 2009, the Defendants again requested indulgence from the Plaintiff.

13.  On 11 June 2009, the Plaintiff issued a letter granting indulgence to the Defendants, which was countersigned by all the Defendants (“the 2009 Letter"). The 2009 Letter provided a new payment schedule by which the 1^st Defendant was to repay the outstanding indebtedness under the 1^st, 2^nd and 3^rd Loans in the following manner (“the Schedule”):

(i) $40,000.00 each quarter commencing from the second quarter of 2009;

(ii) $80,000.00 each quarter commencing from the first quarter of 2010;

(iii) $120,000.00 each quarter commencing from the first quarter of 2011; and

(iv) $160,000.00 each quarter commencing from the first quarter of 2012 until payment of the whole outstanding indebtedness.

14.  The 2009 Letter stated that if the 1^st Defendant failed to make payment in accordance with the Schedule, the preferential arrangements thereunder would be automatically revoked.  Further, the 2009 Letter stated that the Plaintiff would retain all its rights pursuant to the relevant loan facilities agreements.

15.  The 1^st Defendant failed to make punctual repayments according to the Schedule since the first quarter of 2014, and the Plaintiff chased for payment from time to time.

16.  The 1^st Defendant has failed to make any further repayment after paying the instalment for the third quarter of 2014.

17.  It is the Plaintiff’s case that, by reason of such default of payments, all preferential arrangements under the 2009 Letter have been automatically revoked and the whole balance of the outstanding indebtedness under the 1^st, 2^nd and 3^rd Loans immediately became due and payable by the 1^st Defendant.

18.  By a letter dated 20 January 2015, the 1^st Defendant requested the Plaintiff to provide documents in respect of various accounts maintained by the 1^st Defendant with the Plaintiff in respect of the 1^st, 2^nd and 3^rd Loans.

19.  The Plaintiff, through its solicitors, replied by a letter dated 13 February 2015providing, inter alia, a conclusive evidence certificate under the Legal Charge and the relevant statements of account in respect of the 1^st, 2^nd and 3^rd Loans.

20.  By letters dated 30 April 2015 to the Defendants, the Plaintiff demanded payment of the whole outstanding indebtedness in the total sum of $3,070,247.76, but to no avail.

21.  The Plaintiff commenced these proceedings by a writ dated 8 May 2015. The Plaintiff also took out the present application for summary judgment on 18 November 2015.

The issues in the O 14 application

22.  The Plaintiff's case is a simple one. The Plaintiff seeks repayment from the Defendants of the outstanding indebtedness under 1^st, 2^nd and 3^rd Loans.  The Plaintiff confirms that the sums claimed in the Statement of Claim are the correct amounts of the sums due under the various loan agreements.  The Plaintiff also relies upon the conclusive evidence clauses in the loan facilities agreements entered into between the parties.  In light of those clauses, the Plaintiff argues that it is not open to the Defendants to contest the sums claimed for by the Plaintiff.

23.  The Defendants filed a Defence dated 29 June 2015 (“the Defence”).

24.  According to the Defence, the following 3 terms ought to be implied into the loan facilities agreements:

(i) SHB and its successors shall exercise reasonable skill and care when dealing with the Defendants, including not to misrepresent the financial position between SHB and its successors and the 1^st Defendant, or not to make repayment demands which were premature or not in accordance with the terms of the relevant loan facilities agreements;

(ii) SHB and its successors shall provide details, breakdowns, calculations, records etc. about the financial position between SHB and its successors and the 1^st Defendant within reasonable time upon reasonable request made by the Defendants; and

(iii) SHB and its successors shall not do anything that may hinder or prevent the due performance of the 1^st Defendant under the relevant loan agreements.

25.  It is the Defendants’ case that the Plaintiff has breached these alleged implied terms.  The Defendants’ allegations can be summarised as follows:

(i) In July 2002, the Plaintiff unilaterally and without reasonable cause refused to accept the 1^st Defendant’s repayment by freezing his bank account with the Plaintiff.

(ii) Although the Plaintiff arranged the reactivation of repayment in or about September 2002 upon the 1^st Defendant's complaint, the Plaintiff wrongly charged overdue interest from the 1^st Defendant.

(iii) In June 2003, the Plaintiff again unilaterally and without reasonable cause refused to accept the 1^st Defendant’s repayment by freezing the bank account of the Plaintiff.

(iv) Upon the 1^st Defendant's complaint, the Plaintiff requested the 1^st Defendant to enter into a financial restructuring arrangement that involved realising the Property to repay the 1^st, 2^nd and 3^rd Loans, which would achieve substantial saving on payment of interest.  However, the Plaintiff failed and refused to provide any detail, breakdown, calculation, record etc. showing the then financial position and the financial position of the proposed financial restructuring arrangement.

(v) In light of the alleged representation by the Plaintiff that the alleged financial restructuring arrangement would result in substantial saving on payment of interest, the Defendants agreed to sell the Property to partially repay the 1^st, 2^nd and 3^rd Loans, and the sale proceeds of $2,200,000 were used towards partial repayment of the 1^st, 2^nd and 3^rd Loans.

(vi) Thereafter, the Plaintiff failed and refused to implement any financial restructuring arrangement, and failed to provide details of the then financial position of the 1^st, 2^nd and 3^rd Loans despite the 1^st Defendant's requests and demands.

(vii) Upon complaints from the 1^st Defendant, the Plaintiff and the 1^st Defendant discussed the financial restructuring arrangement in about early 2009 and the Defendants signed the 2009 Letter.  However, the outstanding principal and interest stated in the Letter were incorrect.

(viii) In or about March 2014, the Plaintiff informed the 1^st Defendant that the outstanding principal of the 1^st, 2^nd and 3^rd Loans would be fully repaid on 30 September 2014, and invited the 1^st Defendant (represented by the 3^rd Defendant) to consider making a lump sum full payment to settle the outstanding interest.  However, despite the 3^rd Defendant’srequest, the Plaintiff failed and refused to provide details of the then financial position of the 1^st, 2^nd and 3^rd Loans.

(ix) In or about October 2014, the 3^rd Defendant informed the Plaintiff that the 1^st Defendant wished to make a lump sum final payment to settle all outstanding indebtedness under the 1^st, 2^nd and 3^rd Loans. The Plaintiff promised to provide a final payment schedule which the 1^st Defendant needed to settle, and further payment as stipulated in the 2009 Letter would no longer be required.  However, the Plaintiff failed and refused to provide that financial payment schedule, and the Plaintiff later requested the 1^st Defendant to make further repayment as stipulated in the 2009 Letter.

(x) At around the same time, the 1^st Defendant discovered that, of the proceeds of sale of the Property in the sum of $2,200,000, the Plaintiff had only applied $539,102.18 to repay the 1^st, 2^nd and 3^rd Loans, and the whereabouts of the balance of $1,660,897.82 was unknown.

(xi) Had that balance been applied to repay the 1^st, 2^nd and 3^rd Loans, there would no longer be any outstanding balance due.  The 1^st Defendant therefore ceased to make further repayment.

26.  However, the defence relied on by Mr Lo, counsel for the Defendants, in the hearing is quite different.  Firstly, Mr Lo argues that the amounts presently claimed by the Plaintiff deviate grossly from what had been agreed in the 2009 Letter.  Secondly, the Defendants only defaulted in the payment of the instalment in the last quarter of 2014.  By reason of such default, the indebtedness of the 1^st Defendant would, according to the 2009 Letter, at most generate interest at 6% above prime as from 31 December 2014.  However, the Plaintiff now claims for interest at prime plus 6% retrospectively from 4 August 2005.  Mr Lo argues that, upon proper construction of the terms of the 2009 Letter, it would not entitle the Plaintiff to claim for such “retrospective” interest.  If the terms of the 2009 Letter were to entitle the Plaintiff to claim for such interest, it would amount to a penalty clause which should be struck down by the court.

27.  Instead of relying on the breach of the alleged implied terms, the Defendants are now challenging the amounts due under the various loan facilities agreements.

The effect of the conclusive evidence clauses

28.  I do not accept that there is any triable issue even as to the quantum of the claim.  First, the Plaintiff is entitled to rely on the various conclusive evidence clauses contained in the loan facilities agreements.[1]

29.   It is well-established that conclusive evidence clauses are valid and binding.[2] The High Court of Australia in Dobbs v National Bank of Australasia Ltd[3] had stated: "The clause means what it says, that a certificate of the balance due to the bank by the customer shall be conclusive evidence of his indebtedness to the bank."

30.  Unless there is “manifest error” in the calculation, the court would uphold the validity of such clause.[4]

31.  The rationale for upholding conclusive evidence clauses is well-established.  As Lord Denning MR explained in Bache & Co. (London) Ltd v Banque Vernes et Commerciale de Paris SA:[5]

" ... public policy is in favour of enforcing [conclusive evidence clauses]. ... this commercial practice (of inserting conclusive evidence clauses) is only acceptable because the bankers or brokers who insert them are known to be honest and reliable men of business who are most unlikely to make a mistake.  Their standing is so high that their word is to be trusted ... As we have repeatedly held, such a certificate must be honoured ... "

32.  The Plaintiff issued the 2 certificates of indebtedness on 13 February and 16 November 2015 respectively.  The figures contained in the second certificate as to the amounts of the indebtedness as at 29 April 2015 are the same as the figures appearing in the Statement of Claim.  As these 2 certificates are binding and conclusive against the Defendants, there is no basis for them to contest the figures contained therein.

The effect of the default clause in the 2009 Letter

33.  More importantly, even without the benefit of the conclusive evidence clauses, the Plaintiff is entitled to claim the sums stated in the Statement of Claim because they reflect the true amounts due under the various loan facilities agreements.

34.  Mr Lo put forward a different calculation based on the terms of the 2009 Letter.

35.  He argues that the aggregate indebtedness under 1^st, 2^nd and 3^rd Loans as at 15 May 2009 was $3,781,270.97 as provided for in the 2009 Letter, comprising the sum of $2,585,304.39 as principal and $1,195,966.85 as interest accrued thereto.  The 2009 Letter then provided for further interest at prime rate (as published by the Plaintiff from time to time) to accrue on the indebtedness commencing as from 13 May 2009, and payment under each instalment would be applied to settle the principal first and then interest.

36.  Instalments were then made by the 1^st Defendant from the 2nd quarter of 2009 to the third quarter of 2014 in the total sum of $2,680,000. According to Mr Lo, such sum should be applied first to pay off the principal. After that, there would still be a balance of $94,695.61 to settle the interest payment.  In such case, the balance of the loans owed as at the last quarter of 2014 should be $1,101,271.24 ($1,195,966.85 - $94,695.61).  Even taking into account the prime plus 6% interest starting to accrue from the last quarter of 2014, the sum of over $3 million claimed by the Plaintiff is excessive.  That is also the reason why the Defendants complain that the Plaintiff is charging them “retrospective interest”.

37.  The problem with such argument is that it overlooks the important default clause in the 2009 Letter.  The 2009 Letter stated that if the 1st Defendants failed to make payment in accordance with the Schedule, the preferential arrangements thereunder, for example the application of the part payments to settle the principal first and the reduction of the amount then claimed by the Plaintiff from the sum of $4,151,435.12 to $3,781,270.97, would be automatically revoked.  Further, it provided that the Plaintiff would retain all its rights pursuant to the original loan facilities agreements.

38.  According to the 2009 Letter, the total amount of indebtedness owed as at 9 January 2009 was $4,151,435.12, which tallies with the figures stated in the accounts enclosed with the 2 certificates of indebtedness.   If the Defendants complied with the terms of payment contained in the Schedule, the Plaintiff was prepared to waive the claim for certain overdue interest adjusting the claim downwards to the sum of $3,781,270.97 as mentioned above. But in the case of default, the Plaintiff would be at liberty to enforce all its rights under the original loan facilities agreements.  That is exactly what the Plaintiff does in this case.

39.  I have the opportunity of perusing the accounts provided by the Plaintiff together with the 2 certificates of indebtedness.  In enforcing its rights under the original loan facilities agreements, the Plaintiff treated the various instalments as part payments of the loans, applying them first to settle the outstanding interest and then the outstanding principal owed under facility no 031-371-4-001626-6.  No part payments were made under the other 2 facilities.  I cannot find that there is any error in the calculation, let alone “manifest error” which is a prerequisite for the court not to enforce the conclusive evidence clauses in the loan facilities agreements.

40.  As the Plaintiff is only enforcing its rights under the underlying loan facilities agreements, there is no question of the Plaintiff in charging any “retrospective interest” as suggested by the Defendants.

41.  As I see it, one of the main disputes relating to the calculation is whether the Plaintiff is entitled use the part payments to settle the outstanding interest first.  I do not find that there is anything in law which prevents the Plaintiff from doing so.  More importantly, there is an express term in the Legal Charge which authorizes the Plaintiff to use the part payments to settle the overdue interest first.  Hence, there is nothing wrong with the approach taken by the Plaintiff.

42.  Neither can the Defendants argue that any of the terms in the 2009 Letter is a penalty clause.  The arrangement provided for in the 2009 Letter is a concession or indulgence given by the Plaintiff if the Defendants comply with the terms of payment as contained in the Schedule.  In case of any default, the Plaintiff can enforce its rights under the original loan facilities agreements treating the instalments as part payments under such loan facilities.  This is no different from a usual default clause in a settlement agreement made before a court whereby a plaintiff reserves the right to bring the original claim if the defendant fails to comply with the terms of the settlement agreement.  Hence, there is no merit in the penalty clause argument.

43.  For the above reasons, the Defendants have failed to establish any triable issues as to the quantum of the claim.

The Defendants’ case on breach of the implied terms

44.  Finally, I deal with the Defendants’ case based on the breach of implied terms. 

45.  From the written submissions of Mr Lo, it seems that the defence has shifted and the main complaints of the Defendants are now as follows:

(i) the Plaintiff failed to provide the Defendants with sufficient information about the amounts of indebtedness under the various loans;

(ii) the 2^nd and 3^rd Defendants agreed to sell the Property upon the representation that the Plaintiff would use the proceeds of sale to repay the 1^st, 2^nd and 3^rd Loans;

(iii) instead of paying off the 1^st, 2^nd and 3^rd Loans, the Plaintiff applied the sale proceeds to pay off the other loans owed by the 1^st Defendant; and

(iv) the court should conduct an inquiry to ascertain the reasons as to why the Plaintiff did not keep copies of the 3 cheques representing the sale proceeds of the Property.

46.  I do not quite understand the basis for these complaints.  All of them relate to matters which occurred before the signing of the 2009 Letter.  If these complaints were indeed true, one would wonder why the Defendants would have signed the 2009 Letter, somewhat acknowledging that the total amount of indebtedness as at 9 January 2009 was $4,151,435.12.  Such amount tallies with the calculations shown in the accounts enclosed with the 2 certificates of indebtedness.

47.  The Defendants also cannot demonstrate as to how these alleged “misconducts” on the part of the Plaintiff would prejudice their rights.  There is nothing to suggest that the financial position of the Defendants would have improved if the sale proceeds of the Property had been applied first to settle the sums due under the 1^st, 2^nd and 3^rd Loans as opposed to the other loans.  Further, if the Plaintiff had wrongly applied the sale proceeds to discharge the indebtedness under the other loans, I wonder why the Defendants had not made any protest to the Plaintiff, and they even countersigned the 2009 Letter acknowledging the debts due under the 1^st, 2^nd and 3^rd Loans and not the other loans.

48.  I also find it absurd for the Defendants to suggest that, if they were willing and prepared to repay the loans, the Plaintiff simply ignored them and refused to provide them with the details for payment.

49.  Finally, it is trite law that there are conditions to be satisfied before the court would imply any terms in a contract.[6]  The principal test remains one of necessity, and the question to be answered is whether the term is necessary to give effect to the intention of the parties or to achieve the parties’ objective in entering into the contract rather than whether it is necessary to make the contract work at all.[7] It is clear that the rights and obligations between the Plaintiff (lender), the 1^st Defendant (borrower) and the 2^nd and 3^rd Defendants (guarantors) are well regulated by the terms of the contracts made between them, to be supplemented by various legal principles under the law of surety and guarantee.  There is simply no room for the court to imply any further terms as contended for by the Defendants in the relevant loan facilities agreements.  There is also no factual basis to support that the Plaintiff was in breach of some of these alleged implied terms, for example, the Plaintiff or its predecessor had misrepresented the financial position between the Plaintiff and the 1^st Defendant or the Plaintiff had made premature demands for repayment of debt.[8]

50.  For the above reasons, the Defendants have failed to establish any triable issues either as to liability or quantum, and Master Ho was right in granting summary judgment in favour of the Plaintiff.  I therefore dismiss the appeal. I also make a costs order nisi that the costs of the appeal be to the Plaintiff which shall be made absolute 14 days after the date of the handing down of this Judgment.