STANDARD CHARTERED BANK (HONG kONG) LTD v. SWEETMART GARMENT WORKS LTD AND OTHERS

HCA 1807/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1807 OF 2005

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J U D G M E N T

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This action

1.  This is an action on a guarantee brought by the plaintiff bank, Standard Chartered, against the 2^nd defendant, Mr Wong Chit Ming.

2.  The sum claimed due to the bank by the 2^nd defendant is set out in the Amended Statement of Claim dated 27 February 2006, wherein the bank seeks recovery of the respective sums of HK$2,751,125.85 and Stg 1,048,577.74, together with interest thereon and costs on an indemnity basis.

The factual background

3.  The 1^st defendant, Sweetmart Garment Works Ltd (‘Sweetmart’) is, or rather was, a Hong Kong garment manufacturer and exporter.

4.  At the time material to this claim this factory was operated by the twin sons of the 2^nd defendant, Wong Tze Cheong and Wong Tze Tim, the 3^rd and 4^th defendants respectively.

5.  The plaintiff bank was approached for credit facilities to be granted to Sweetmart, which required working capital, and which resulted in the grant by the bank of a Facility Letter dated 13 March 2002 signed on behalf of Sweetmart; on 18 March 2002 Sweetmart also signed a ‘General Customer Agreement’.

6.  On 18 March 2002 the 3^rd and 4^th defendants signed a Guarantee, up to a maximum sum of HK$20 million, in favour of the bank “in consideration of [Standard Chartered] granting or continuing banking facilities of other accommodation for so long as the Bank may think fit…”, and on 20^th March 2002 this same Guarantee was signed by the 2^nd defendant. 

7.  It is the nature and extent of the obligation(s) arising under this latter Guarantee which underpin the present action against Mr Wong Chit Ming.

8.  In this action, Standard Chartered also had claimed against Sweetmart, the principal debtor, and in addition had sought to enforce the Guarantee against the 2^nd, 3^rd and 4^th defendants.

9.  The current state of play is that the 1^st defendant, Sweetmart, has been wound up, and summary judgment has been obtained against the 3^rd and the 4^th defendants.  It appears, however, that none of these defendants are good for the money.

10.  Accordingly, this trial has proceeded only against the 2^nd defendant, Mr Wong Chit Ming, the father of the 3^rd and 4^th defendants; I understand that in recent times Mr Wong has been living in retirement in Canada.

11.  The authenticity of the Guarantee as signed by the 2^nd defendant is not in dispute. 

12.  I deal later with the arguments raised on his behalf; for present purposes suffice to note that he resists this action, and thus disputes any liability under the Guarantee, on the primary bases that either the Facility Letter of 13 March 2002 had been superceded, and thus that the original agreement underpinning the Guarantee had ceased to exist; alternatively that the Guarantee as signed had been discharged by reason of a material variation to the rights and obligations existing between Sweetmart and the bank at the time Mr Wong signed the Guarantee.

13.  This judgment, therefore, is concerned with an evaluation of the legal arguments raised in defence to this claim by the 2^nd defendant; this is not a case the result of which primarily is dependent upon judicial findings of fact.

The viva voce evidence

14.  In addition to the undisputed documentary evidence, of which there is relatively little, there were two viva voce witnesses.

15.  For the plaintiff bank evidence was given by Mr Leung Chun Chung, a Senior Manager in Wholesale Banking/Local Corporates department.

16.  On behalf of the 2^nd defendant, Mr Wong Chit Ming himself gave evidence.

17.  Both witnesses presented in a straightforward manner, although Mr Wong was the more demonstrative and ebullient, and for the most part the evidence on each side did little more than speak to and/or elaborate upon the undisputed documentation.  As earlier noted, few if any factual disputes arise which require specific findings, although I make one such later in this judgment.

The issues for decision

18.  Despite semantic differences in framing, there is, I think, little or no material difference between leading counsel on each side, Mr Paul Shieh SC for the bank and Mr Ronny Wong SC for the 2^nd defendant, regarding the principal issues for decision in this case.

19.  For present purposes I have no difficulty in adopting the classification of these issues as suggested by the respective leading counsel; accordingly I take these issues in turn.

Issue 1:  What was the nature of the agreement or obligation as was guaranteed by the 2^nd defendant under the Guarantee?

20.  A good deal has been said on this subject, but the major difference between the parties shortly may be summarized.

21.  The plaintiff bank says that the obligations within the Guarantee related to a continuous course of dealing between the plaintiff bank and the principal obligor, Sweetmart, and thus relate to all banking facilities granted by the bank to the 1^st defendant over the relevant period.

22.  Thus, the bank says that this is an ‘all monies’ Guarantee, by which the 2^nd defendant signatory expressly agreed “to unconditionally guarantee, undertake and agree on written demand by [the bank] to pay and discharge:

(i)  all monies now or hereafter advanced to or paid for or on account of [the 1^st defendant] (whether jointly or with any other person) by the [plaintiff] and

(ii) all other liabilities of [the 1^st defendant] to [the plaintiff] whatsoever, whether actual or contingent, present or future, and including…”

23.  The only limitation upon this all-embracing obligation, conceded Mr Shieh SC for the bank, is that under this Guarantee there is an undisputed maximum amount for which the guarantors, in this instance the 2^nd defendant, is to be liable; once more this is expressly specified in the document, this liability ceiling being HK$20 million, “plus interest, commission, cost, charges and expenses as aforesaid”.

24.  For the 2^nd defendant Mr Ronny Wong SC firmly argued to the contrary.  His position was that the Guarantee as signed by his client did not guarantee a continuous course of dealings, as now is alleged, but simply and solely guaranteed a specific underlying contract, namely the Facility Letter of 13 March 2002.  Thus, he concluded, this guarantee did not fall within the rubric of an “all monies/continuous course of dealing” guarantee.

25.  Accordingly, so the defence argument went, if the Guarantee was referable to a particular agreement or obligation, which was substituted or superceded by other separate agreements – in particular in this instance the Facility Letters of 24 February 2003 and 12 March 2003 – it followed as a matter of law that the Guarantee thereby subsequently was discharged as against the 2^nd defendant.

26.  This is a foundation point in this case.

27.  I have no difficulty with the proposition advanced by Mr Wong that the ambit of the obligation assumed by the 2^nd defendant qua guarantor necessitates construction of the document against the backdrop of the factual matrix prevailing at the time.

28.  In this connection Mr Wong emphasised that the Facility Letter of 13 March 2002 was executed by the 3^rd defendant before the 2^nd defendant had executed the Guarantee and the Form of 3^rd Party Acknowledgment, and that this Facility Letter specifically referred to the undertaking by the 1^st defendant, Sweetmart, to release a property mortgaged with DBS on or before 31^st December 2002: this was known as ‘the Belfran Road Property’, which was (and apparently remains) the 2^nd defendant’s matrimonial home.

29.  Counsel further observed that the plaintiff bank, in the person of Mr Leung, had requested the 3^rd and 4^th defendants to forward to their father, the 2^nd defendant, the form of Guarantee for execution, together with the Form of Third Party Acknowledgment and also the Facility Letter of 13^th March 2002 and the General Customer’s Agreement.

30.  It was also asserted that prior to the execution by Mr Wong, of the Guarantee and the Form of Third Party Acknowledgment, his sons had told him that they had raised HK$20 million in banking facilities with the plaintiff for the use of Sweetmart, and that a condition of such banking facilities was the 1^st defendant company’s undertaking to secure the release, on or before 31^st December 2002, of the mortgage of the Belfran Road property – a matter about which the 2^nd defendant claims to have felt “relieved”, and thus materially contributed to his willingness to sign the Guarantee and the accompanying Third Party Acknowledgment.  In the event, however, it appears undisputed that Mr Wong had not been sent, and thus had not sighted, a copy of this Facility Letter or a copy of the bank’s General Customer Agreement.

31.  It followed from the foregoing, asserted Mr Wong, that the Guarantee as executed by the 2^nd defendant inextricably was linked to the content of the Facility Letter of 13 March 2002, and could not be considered to represent other than a guarantee irrevocably and exclusively linked to this Facility Letter.  In other words, that this Guarantee as executed could not be considered to be an “all moneys/continuous course of dealing” obligation in the context of the dealings between the plaintiff and the 1^st and 2^nd defendants.

32.  On behalf of the plaintiff bank, Mr Shieh SC demurred; his case emphatically was to the contrary.

33.  He said that it was clear that this was a form of Guarantee whereby the very nature of the obligation was that the surety guaranteed – up to the undisputed ceiling of HK$20 million – that there was to be a continuous course of dealing between the bank and the 1^st defendant, Sweetmart, notwithstanding the issuance of supervening Facility Letters.

34.  Mr Shieh pointed out that on its face this Guarantee did not refer to any particular agreement; instead, the document employed the wide language of “all moneys” and “all other liabilities”, and given the fact that the Guarantee expressly provided that the liability of the 2^nd defendant should not exceed HK$20 million, it must follow that the phrases “all moneys” and “all other liabilities” could not and did not refer solely to quantum relating to any specific transaction.

35.  This latter factor, submitted Mr Shieh, factually distinguished the instant case from that of The Hong Kong and Shanghai Bank v Norman John Martel, CACV 54 of 2003, unrep., wherein upon an appeal against the grant of summary judgment upon a guarantee, the Court of Appeal suggested (at para 28 of the judgment) that “it was at least arguable” that the guarantee there in question “was an agreement to guarantee the company’s liabilities to the bank arising from the range of business and financing activities specified in the facility letter”, and that since this letter had not included other financing activities “the grant of a fixed-term loan was therefore a material variation.”

36.  I accept Mr Shieh’s argument in this regard.  It is clear that the Court of Appeal in Martel, op cit., was not finally deciding the point, but was reviewing the case then before it upon the basis of whether the defendant had raised a triable issue within the context of an Order 14 application for summary judgment.

37.  Mr Shieh also pointed out that a phrase such as “all moneys which are now or may from time to time be owing or remain unpaid” by the principal obligor to the creditor should be interpreted widely as a ‘continuing guarantee’ relating to a continuing course of dealings, and advocated that the court adopt a like approach in the present case.

38.  In this regard leading counsel drew the court’s attention to passages in O’Donovan and Phillips, The Modern Contract of Guarantee, 2003, at para 5-23, wherein, in commenting upon that which constituted a ‘continuing guarantee’, the learned authors therein observe:

“Today, the guarantee…is usually drafted so that it is clearly a continuing guarantee.  The guarantee will relate to “all moneys which are now or may from time to time be owing or remain unpaid” by the principal to the creditor, and there may also be a specific reference to the guarantee being ‘a continuing security’.  In less obvious cases the court will construe the guarantee as continuing if there are phrases of a general character which convey the idea that the guarantee is to apply to a continued course of dealing between principal and creditor rather than a specific transaction or loan…”

and further, op cit., at para 5-80:

“Generally, ‘all monies’ clauses in guarantees have been broadly interpreted, and their potentially wide ambit have often not been restrained by the statement of consideration or recital which might indicate the guarantee is to be limited to a particular type of transaction…”

39.  In this connection see also, for example, the case of Bank of India v Trans Continental Commodity Merchants Ltd & Patel [1982] 1 Lloyd’s LR 506, at 512, wherein Bingham J (as he then was) was concerned with the construction of a guarantee, and took the view that the language of the guarantee was deliberately widely drawn so as to cover any liability of the company to the bank arising out of their mutual relations as banker and customer.  Also of assistance is the judgment of Phillips J (as he then was) in Wardens and Commonality of the Mystery of Mercers of the City of London v New Hampshire Insurance Company, QBD (Commercial Court), unrep., Judgment dated 18 January 1991, where his Lordship observed (at page 11 of the Lexis report):

“In my judgment the cases demonstrate that the construction of a contract of guarantee is of critical importance.  It is vital to identify the precise nature of the obligation or obligations guaranteed.  In many cases the obligations will be those arising under a specific contract between debtor and creditor.  This may be evident from the terms of the contract of guarantee itself, where specific reference is made to the contract giving rise to the obligations guaranteed, or from a consideration of the circumstances surrounding the conclusion of a contract of guarantee, where these show that a specific contract was the subject matter of the guarantee.  In such circumstances the terms of the contract giving rise to the obligations guaranteed will be treated as embodied or incorporated in the contract of guarantee.  The rule in Holme v Brunskill will then apply and any variation of the underlying contract which is not manifestly insubstantial or incapable of prejudicing the surety will discharge the surety from his obligations under the contract of guarantee.

Where on the other hand the guarantee is given in respect of obligations arising out of a contemplated course of dealing without reference, express or implied, to any specific contract, it will be open to the creditor to vary the terms applying to the course of dealing so long as that course of dealing remains within the scope of the guarantee…” [emphasis added]

40.  Whilst by their nature ‘guarantee cases’ inevitably are fact-sensitive, after considering the available evidence I reject the submission on behalf of the 2^nd defendant that in this particular instance the obligation of his client was limited solely to underpinning the banking facilities provided by the plaintiff bank to the 1^st defendant company under the 13 March 2002 Facility Letter.  In my judgment that is too ambitious (and optimistic) a reading of the relevant documentation as set against the prevailing factual matrix.

41.  I also accept the submission of Mr Shieh that what documents the 3^rd and 4^th defendants might have seen when signing their respective Third Party Acknowledgments and Guarantees is nothing to the immediate point in a situation wherein this court essentially is concerned with the construction of this Guarantee as signed by this 2^nd defendant.

42.  I further bear in mind the 2^nd defendant’s unchallenged evidence that he “was not told of or provided with a copy of the facility letter [the 13^th March 2002 Facility Letter] nor a copy of the General Customer Agreement between the 1^st defendant and the plaintiff” before he signed the Guarantee now under scrutiny; in fact, his evidence, which I have no reason to disbelieve, was that he had seen none of the Facility Letters issued by the bank to the 1^st defendant.

43.  In the circumstances I hold that this Facility Letter of 13^th March 2002 was not the sole principal agreement underlying the Guarantee, nor am I prepared to arrogate evidentiary significance to the ‘twin boxes’ appearing on the face of the Third Party Acknowledgment form, which it is claimed on behalf of the 2^nd defendant demonstrate that he had been informed by the plaintiff bank that the specific ‘underlying contract’ was this Facility Letter; not only are the ‘ticks’ in these boxes inconclusive, but the narrative adjacent to the two boxes seems to be mutually inconsistent, nor is there any evidence as to who may have placed the ‘ticks’ there and when, and I have no inclination to speculate.

44.  Looked at in the round, therefore, in my view there is nothing on the face of the Guarantee (nor, for that matter, in the Third Party Acknowledgment) to link the Guarantee exclusively to any specific document, and although the guarantor naturally would know that the Guarantee related to some contractual obligations, in itself that is insufficient exclusively to tie the Guarantee to the initial Facility Letter.

45.  On general principles the essence of a ‘continuous course of dealing’ guarantee is precisely that it is not to be artificially thus restricted, and extends over the entire ambit of the banker/primary obligor/guarantor relationship.

46.  I have reached the foregoing conclusion notwithstanding one element which has caused me concern. 

47.  This is the claim that the Guarantee as signed by Mr Wong Chit Ming was linked specifically and exclusively to this 13 March 2002 Facility Letter by reason of the 1^st defendant’s undertaking to secure the release, on or before 31 December 2002, of a property (which I am told was the matrimonial home of Mr Wong) at Belfran Road in Kowloon, which property at that time was owned by Mr Wong and his wife but which was the subject of a mortgage with DBS Kwong On Bank to secure borrowings of the 1^st defendant.  I have been informed that this mortgage was not in fact so released – for reasons I know not – but for present purposes this is nothing to the point.

48.  In this context the factual issue arises as to whether Mr Wong had been informed by his sons, the 3^rd and 4^th defendants, that the undertaking of the 1^st defendant to release of the DBS mortgage was a requirement or condition of the plaintiff bank, as recited in the 13 February 2002 Facility Letter, in order that banking facilities be granted by the plaintiff to the 1^st defendant company, whose financial affairs the 2^nd defendant was guaranteeing.

49.  In his supplemental witness statement, which was adopted as his evidence in chief, Mr Wong spoke about how he had felt “extremely relieved” when his sons had told him about this undertaking to release the Belfran Road property in relation to the new facility of HK$20 million from the plaintiff, and that this had “contributed substantially” to his willingness to furnish the Guarantee as requested by his sons.

50.  In his viva voce evidence in the witness box it is fair to say that this aspect occasioned more guarded expression, in that Mr Wong did not immediately acknowledge this fact, although ultimately he did, I think, mention the existence of such “relief”.

51.  On this aspect of the evidence, Mr Shieh took strong issue with the suggestion as made that the release of the Belfran Road property was a key issue in the decision of Mr Wong to enter into the Guarantee; he went so far as to doubt whether Mr Wong even had been aware of this.  He noted that if the release of the DBS mortgage on the Belfran Road property had formed such an important part of the 2^nd defendant’s decision to sign the Guarantee, it is odd that this fact did not find its way into at least one of the three affidavits filed on his behalf in 2005 and 2006 when application was made to set aside the default judgment which then had been entered against him, although in this context it is fair also to bear in mind that the fact of the DBS mortgage was pleaded in the draft Defence as exhibited to the affidavit in support of the application to set aside the default judgment.

52.  True it is, said counsel, that the 1^st defendant company’s undertaking to release the existing mortgage featured in the 2^nd defendant’s witness statements prepared for this action, but when firmly pressed in cross-examination as to why this aspect had not been mentioned in his earlier affidavits, Mr Shieh emphasized that it was noticeable that Mr Wong did not directly respond to the question, and merely had repeated the general sentiment that in terms of signing the Guarantee he had trusted the bank, as indeed he then had trusted his two sons – although, as his witness statement unfortunately makes clear, this trust was to turn out to have been misplaced, and it appears that in terms of the financial situation of Sweetmart at the least the 2^nd defendant was kept uninformed of the true position.

53.  Be that as it may.  In his viva voce evidence Mr Wong accepted that he was aware that upon redemption of the DBS mortgage that the title deeds of the property would be returned by the bank, and he did say that he did not recall anyone, either from the bank or his sons, having contacted him to inform him of the release of the DBS mortgage, nor that the title deeds indeed had been returned, nor whether he had followed up with anyone on whether the mortgage actually had been released. 

54.  In his closing submission Mr Shieh observed that it was difficult to see what could have led Mr Wong to the belief that the mortgage had been discharged if he had not received back the title deeds, and if no-one had told him anything about it, and thus that this tended to undermine his evidence that his sons had told him of a requirement on the part of the plaintiff that the DBS bank mortgage was to be discharged, and that as a consequence he had relied upon this in his decision to sign the Guarantee.

55.  In so far as it is necessary to do so however – and perhaps this is the sole finding of fact which required to be made in this case – ultimately I am not prepared to disbelieve Mr Wong as to that which he said his sons had told him regarding the discharge of the DBS mortgage. 

56.  As to procedural events which had earlier occurred in this litigation, Mr Wong SC stated that whatever may or may not have been in the affidavits spawned by the application to set aside the default judgment, the 2^nd defendant’s case about being told of the lifting of the Belfran property mortgage indeed was mentioned at an early stage of these proceedings; in fact Master Queeny Au-Yeung (as she then was) had considered the change in the undertaking regarding the Belfran Road property, and had noted that this was in favour of the 2^nd defendant, and that it was only after the plaintiff had filed its Amended Reply on 20 October 2008 that this matter had developed into a “hot issue” in terms of supporting the contention as to the connection between the Guarantee and the 13 March 2002 Facility Letter; thereafter the matter had been elaborated in more detail to demonstrate the circumstances by which the 2^nd defendant had been informed by his sons, the 3^rd and 4^th defendants, as to the 1^st defendant’s undertaking to discharge the mortgage on this property.

57.  In his closing written submission Mr Wong SC further noted that the Belfran Road property was the only property which the 2^nd defendant had owned since 1964, that it had at all times been his matrimonial home, and that he had kept it despite his emigration to Canada and resided therein when he returned to Hong Kong.  Moreover, said counsel, it was the 2^nd defendant’s clear evidence that he had been informed of the 1^st defendant’s undertaking to discharge the mortgage on Belfran Road as one of the conditions of the grant by the plaintiff of banking facilities to Sweetmart, that he had executed the Guarantee believing that the property would be released by 31 December 2002, and he had trusted his sons to follow up on the matter – which itself was not unusual since apparently he had given the 3^rd and 4^th defendants a free hand to run their business until the problems of the 1^st defendant had come to a head in mid 2005.

58.  Accordingly I accept Mr Wong Chit Ming’s evidence as to the circumstances in which he came to sign the Guarantee.  He struck me as a solid and cheerful citizen, who was making the best of not being able to enjoy his retirement in the manner in which reasonably might have been envisaged, not least as a consequence of the apparent defalcations of his sons – I note from his witness statement that he has had to suffer the indignity arising from his signature being forged on no less than 6 guarantee instruments – whilst of course his remains the only direct evidence this court has received on this specific issue.

59.  I would go further.  The persuasiveness of Mr Shieh’s adverse inferential argument notwithstanding, given the factual background and the undisputed circumstances of this case, the probability is that the 2^nd defendant indeed was persuaded to sign this Guarantee in the manner in which he has stated, and that, as he has also said, he met his sons in Honolulu when on holiday there and took the Guarantee to the office of a notary public in order to sign the document, although he said (and I accept) that he was not shown a copy of the Facility Letter of 13 March 2002 or a copy of the General Customer Agreement before he so signed.

60.  Acceptance of Mr Wong’s evidence on this aspect, however, in my view does not affect the earlier finding that this Guarantee related to a ‘continuous course of dealings’ between the plaintiff bank and the 1^st defendant.  In this connection I am unable to appreciate why an undertaking envisaged in the initial Facility Letter, albeit not in fact coming to fruition, should be fatal to the ‘continuous course of dealing’ argument based upon a construction of the terms of the Guarantee.

61.  If this be correct, the significant question then arises as to whether the course of dealing which took place between the bank and the 1^st defendant, and in particular the terms appearing within the subsequent Facility Letters, remained within the scope of the Guarantee as executed.

62.  That which appears clearly to have occurred is that pursuant to its express right to review the financial facilities to be granted, and in the exercise of its discretion to review, and if necessary modify, the grant of such facilities, the review procedure was given effect by the bank by the issuance of the subsequent Facility Letters dated 16 May 2002, 24 February 2003 and 12 March 2003.

63.  In principle the issuance of a fresh Facility Letter as generated as part of an annual financial facilities review does not mean that the earlier Facility Letters were rendered otiose and of no effect; these Facility Letters represent an integral part of the evolving banker/customer relationship, and the Facility Letters as periodically issued by the bank to the 1^st defendant self-evidently were no more or less than part of the normal review process of the banking facilities as initially granted to the 1^st defendant pursuant to the 13 March 2002 Facility Letter.  In short, all that was happening, in my view, was that the ongoing banker/customer relationship between the plaintiff and the 1^st defendant was periodically subject to adjustment in line with changing commercial realities. 

64.  On the evidence before the court there was no fundamental change in the essential banker/customer relationship between the plaintiff and the 1^st defendant in terms, for example, of a clearance of existing debt by the 1^st defendant prior to any establishment of a new creditor/debtor obligation pursuant to the subsequent Facility Letters.  Hence the primary conclusion as to the ‘continuous course of dealing’ as buttressed by third party guarantees.

Issue 2:  Did the subsequent Facility Letters dated 24 February 2002 and 12 March 2003 supercede the 13 March 2002 Facility Letter and/or otherwise materially affect or vary the obligations under the initial Facility Letter?

65.  Whilst there is a degree of evidential overlapping, this issue ultimately became the major element within the argument put forward on behalf of the 2^nd defendant.  As I understood it, the argument encompassed two sub-strands.

66.  The submission of Mr Wong SC that the Guarantee as signed by his client must be construed as referable and limited to a particular agreement or obligation in terms of the release from mortgage of the Belfran Road property (as expressed in the 13 March 2002 Facility Letter), and thus that the 2^nd defendant’s Guarantee was intended solely to underpin the banking facilities as outlined in the first Facility Letter, and did not extend to the content of the subsequent Facility Letters, is a construction which now has been rejected.  Accordingly I say no more about it.

67.  Mr Wong’s principal submission under this second issue, however, was that if the subsequent Facility Letters of 24 February and 12 March 2003 did not amount to a complete substitution of the underlying agreement, and thus amounted to a continuing guarantee obligation ‘biting’ upon the 2^nd defendant, nevertheless the variations in content within the subsequent Facility Letters constituted ‘material variations’ in the risk assumed by the 2^nd defendant qua guarantor, with the consequence that, as a matter of law, the Guarantee as executed by the 2^nd defendant must be regarded as having been discharged.

68.  Mr Wong emphasised that so far as his client was concerned the changes in the subsequent Facility Letters were made absent the knowledge and consent of the 2^nd defendant, and that the significant variations therein – he outlined a total of five such variations – thereby had exposed his client to risks never envisaged by the initial 13 March 2002 Facility Letter.

69.  I do not think that it is disputed (and in so far as is necessary I have so found) that at no time did Mr Wong Chit Ming have sight of the detailed provisions of the 3 Facility Letters as were supplied by the plaintiff to the primary obligor, the 1^st defendant, and, I assume, to his three sons; to the contrary, I have found that the 2^nd defendant simply executed the Guarantee in Honolulu when requested so to do by his sons, who had brought the document to him in Hawaii for signature.

70.  In the event, in response to the ‘material variation’ line of argument, Mr Shieh proffered a detailed analysis of the variations of which complaint now was made on behalf of the 2^nd defendant. 

71.  First, with regard to the argument that the categories of facilities available to the 1^st defendant – the ‘Trade Finance Groups’ – was increased in the Facility Letter of 24 February 2003 via the head ‘Trade Finance Group All (Discrepant Credit Bills Negotiated - with recourse)’ counsel noted that this represented no more than a re-categorisation of that which already was listed under ‘Trade Finance Group 1’ within the attachment to the 13 March 2002 Facility Letter, and that in any event under both facility letters, the maximum which could be borrowed in relation to “discrepant bills negotiated” was HK$18 million.

72.  I agree.  I do not consider that there was here a material variation, and I am able to discern no prejudice to the 2^nd defendant arising from this re-categorisation.

73.  The second variation relied upon was in terms of letters of credit calling for ‘cargo receipts’ as per the 24 February 2003 Facility Letter, whereas under the 13 March 2002 Facility Letter such letters of credit were not allowed.

74.  Mr Shieh acknowledged that on its face indeed this was a variation, but by the same token submitted that this could not be regarded as ‘material’, pointing out that the plaintiff had not agreed to grant the 1^st defendant borrower a larger sum in banking facilities when permitting such letters of credit which called for cargo receipts.  He stressed that this was not a variation which affected the risk of default by the debtor – see Andrews and Millett, Law of Guarantees (5^th Ed., 2008) para 9-024 – and that whether an L/C calling for a cargo receipt was allowed went merely to the particular documentary requirement of the credit, and did not affect such risk of default by the 1^st defendant.

75.  I agree with this submission also.

76.  The third alleged material variation covered the payment of ‘arrangement fees’.  The Facility Letter of 13 March 2002 provided for an ‘arrangement fee’ of HK$30,000, and in this initial Facility Letter the following legend appeared:

“A handling fee in an amount to be mutually agreed will be payable on each anniversary of the date of this letter if the facilities are continuing.”

77.  Mr Shieh commented that annual fees of this type thereby clearly were within the contemplation of the borrower and the 2^nd defendant, and further observed that the quantum of such annual fees had remained the same under the 24 February 2003 Facility Letter, only to increase to HK$50,000 under the 13 March 2003 Facility Letter, and that this was not a change which could be characterized as a ‘material variation’. 

78.  Once more I agree with this conclusion.

79.  A fourth material variation alleged was the increase in the interest rate upon the credit facility.  Thus, in the 13 March 2002 Facility Letter the rate had been 1.5% per annum over Prime or HIBOR, and whilst export bills were to be discounted, import bills would be financed at the plaintiff’s standard bills finance rate plus 1.5% per annum; as to this, the 12 March 2003 Facility Letter effected a change from 1.5% per annum to 2.5%.

80.  With respect, I find it difficult to accept the contention that this represented a ‘material variation’ sufficient at law to discharge the guarantee obligation; to the contrary, it was a variation contemplated by the terms of the principal agreement/transaction. 

81.  As a matter of principle, in any situation wherein there is a continuous banking facility, absent a specific provision agreed at the outset confirming a fixed/immutable interest rate, it reasonably may be anticipated among commercial men that money/credit market conditions naturally will vary over time, and that such variations necessarily will be reflected in the interest rate charged for any particular facility at any particular time. 

82.  It thus was no surprise when Mr Shieh further pointed out that it is the plaintiff’s case that a change in interest rates expressly was allowed by clause 11 of the General Customer Agreement, which was an integral part of the transaction evidenced by the 13 March 2002 Facility Letter; in fact, the Facility Letter, the General Customer Agreement and the Guarantee were all executed within a short period on the faith of the other documents being executed, and the Facility Letter expressly states that before the banking facilities set out therein may be used, the 1^st defendant must sign the standard form General Customer Agreement, and a joint and several Guarantee must be executed by the 2^nd, 3^rd and 4^th defendants for the maximum sum of HK$20 million plus interest and other charges.

83.  I again accept Mr Shieh’s argument in this regard.

84.  An additional related matter which arises in this context, and one which was raised during the cross-examination of the bank witness, Mr Antony Leung, by Mr Wong SC for the 2^nd defendant, was that in the 13 March 2002 Facility Letter, within the rubric of ‘Trade Group 1’, letters of credit were available up to HK$5 million, whereas in the 24 February 2003 Facility Letter, this permissive term related to all three Trade Finance Groups so specified, a fact which was also used to buttress a submission that there thus had been a change in the risk faced by the 2^nd defendant under the Guarantee.

85.  In response, Mr Shieh submitted that the ‘change in risk’ argument now canvassed by the 2^nd defendant clearly overlooked the fact that in the 13 March 2002 Facility Letter, from the outset in respect of Trade Finance Groups 2 and 3 there had been no restriction on letters of credit absent the lodgment of export letters of credit, whilst in respect of Trade Finance Group 1 there had been an ‘exception’ of HK$5 million, that it was not open to the 2^nd defendant to focus solely on the monetary exception in the 13 February 2002 Facility Letter without also acknowledging that there was no such restriction for Trade Finance Groups 2 and 3, and that in the Facility Letter of 24 February 2003 the restriction on letters of credit without lodgment of export letters of credit was extended to the other trade facility groups as well, and thus the HK$5 million exception similarly was extended.  It therefore followed, he said, that the letter of credit requirements for Trade Finance Groups 2 and 3 could not be said to be subject to ‘looser’ or ‘riskier’ terms in the Facility Letter of 24 February 2003.

86.  As to the complaint regarding the rate of the discounting of export bills, said Mr Shieh, the submission as made on behalf of the 2^nd defendant was incorrect, and resulted from a misinterpretation of the sentence of the 13 February 2002 Facility Letter when it was suggested that the percentage of 1.5% and 2.5% referred to the rate at which export bills would be discounted when purchased by the plaintiff bank prior to maturity.

87.  To the contrary, Mr Shieh asserted, the relevant section in the Facility Letter was about monies the plaintiff bank would charge to its customers, and when viewed in this light, the term ‘export bills discounting’ must be read as covering financing activities that involved the charging of interest to customers for monies advanced; the flaw in the 2^nd defendant’s argument, he said, was that the term ‘discounting’ was taken almost as a term of art, and that ‘export bill discounting’ referred exclusively to the purchase by the bank of it’s customers bills at a discount, when the term ‘discount’ clearly was (and is) susceptible to more than one interpretation, and in this context was perfectly capable of referring to the financing whereby a bank provided financing to its customer against the security of an export letter of credit, the bank thus making funds available on the strength of the bill and the customer paying the interest charged on such funds.  

88.  Accordingly, leading counsel concluded, ‘export bill discounting’ manifestly was a type of financing activity expressly permitted under Clause 5(a) of the Guarantee, which thus permitted the plaintiff to determine, vary or increase any credit to the 1^st defendant.

89.  Once more I find it difficult to disagree with Mr Shieh’s contentions.  The 2^nd defendant’s arguments under this head accordingly are rejected.

90. The fifth ‘material variation’ relied upon by the 2^nd defendant involves a return to the ‘Belfran Road controversy’, if I may term it thus.

91. It will be recalled from the earlier part of this judgment that this concerned the undertaking on behalf of the 1^st defendant relating to the Belfran Road property owned by the 2^nd defendant, which was a matter contained in the initial 13 March 2002 Facility Letter; the specific terminology there employed was that the 1^st defendant had undertaken to the plaintiff that it would “release the mortgaged property with DBS Kwong On Bank on or before 31 December 2002 and ascertain that no other banks have a better security ratio than [the plaintiff] thereafter”.

92. In this connection Mr Shieh reiterated his earlier contention that in the particular circumstances of this case it was not open to the 2^nd defendant to include any such alleged condition or agreement as part of the principal agreement underpinning the Guarantee as signed by the 2^nd defendant.

93. However, this argument was developed in the context of the fundamental issue of whether the Guarantee in question could and should be linked solely to the obligations within the initial Facility Letter of 13 March 2002 – a contention on behalf of the 2^nd defendant which itself now has been rejected.

94. In its present form, however, the point seems to me to assume a different complexion. 

95. Mr Wong SC for the 2^nd defendant says that the situation materially had changed in the 24 February 2003 Facility Letter and in the 12 March 2003 Facility Letter in that these documents no longer provided for this undertaking and thus, as between the plaintiff bank and the 1^st defendant, the hitherto positive obligation upon Sweetmart, the 1^st defendant, to release the Belfran Road property from the DBS mortgage had been removed; also, he said, it was clear from the wording of the 24 February 2003 Facility Letter that this Letter would supercede any earlier Facility Letter, and thus there no longer was to be any such undertaking by the 1^st defendant to release the Belfran Street property from the pre-existing DBS mortgage. 

96. To the contrary, he continued.  The position now was that the 24 February 2003 Facility Letter contained a wholly different undertaking from its predecessor; in this Letter the undertaking by the 1^st defendant to the plaintiff was that the 1^st defendant would “Not utilize the facility with DBS Kwong On Bank before the mortgaged property is released and will ascertain that no other banks have a better security ratio than [the plaintiff].”

97. Accordingly, argued Mr Wong, this change could not be characterized other than as a ‘material variation’ properly so-called, which variation, he emphasized, was made without the knowledge and consent of the 2^nd defendant and without conferring any benefit upon the 2^nd defendant; indeed the opposite plainly now represented the position, given that the Belfran Road property was to continue encumbered by the DBS mortgage.

98. Mr Shieh’s response to this forensic salvo was to acknowledge the obvious difference between the two Facility Letters in terms of the requirements in relation to the 1^st defendant’s mortgaged property with DBS Bank, albeit he noted that under both Facility Letters the 1^st defendant could borrow from other banks other than the plaintiff so long as other banks did not have a better security ratio than the plaintiff bank.

99. Nor, said Mr Shieh, was it disputed that by the end of 2002 the 1^st defendant had not procured the release of the DBS mortgage, pointing out that in the 24 February 2003 Facility Letter there was no similar undertaking, and thus that the 1^st defendant no longer was under an obligation to obtain funds to pay off the DBS mortgage – a matter which could not prejudice the 2^nd defendant.

100. Mr Shieh further argued that all that the 24 February 2003 Facility Letter required was that the 1^st defendant was not to utilize the DBS facility before the mortgaged property was released, and thus that the purely practical effect of the 1^st defendant’s risk of default (and therefore the downside risk for the 2^nd defendant guarantor) was nil, for the simple reason that whether the 1^st defendant made further drawings from DBS or from the plaintiff bank, the 1^st defendant would be incurring additional liabilities to the extent of the fresh drawing, liabilities which the 2^nd defendant would be guaranteeing from whichever bank any such new borrowings had taken place because, as one of the two joint tenants of the property mortgaged to DBS – this property also having been charged to secure the indebtedness of the 1^st defendant – there was a personal covenant on the part of the 2^nd defendant to repay the debts of the 1^st defendant to DBS.

101. It followed, concluded Mr Shieh, that although admittedly the 1^st defendant’s undertaking had not been given effect, and although the DBS mortgage in fact had remained in place, there was no variation which could be considered ‘material’ in terms of the undertaking regarding the property mortgaged to DBS bank.

102. I hope that I have properly grasped the argument as put forward, and adequately have reflected its main thrust.

103. The problem, however, is that I find difficulty in agreeing with it.

104. The short and ineluctable point is that the initial Facility Letter contained a clear undertaking by the 1^st defendant to release the DBS mortgage, and yet this plainly did not occur, the original undertaking being replaced by an undertaking on the part of the 1^st defendant not further to utilize the DBS facility before the Belfran Road property was released, thus effectively replacing an outright release of the mortgage with what might broadly be described as a freezing of the status quo in terms of the debt level then existing under that mortgage.

105. It may, or it may not, prove to have been the case that the practical effect of this change would, as Mr Shieh strongly submitted, be of no practical consequence, and thus it may be that circumstances would or might exist where there would be no effective downside or prejudice qua the 2^nd defendant, but I do not think that this is the appropriate test to evaluate ‘materiality’.

106. It seems to me that this is an instance where it is open to the 2^nd defendant to purport to apply what has become known as the rule in Holme v Brunskill (1873) 3 QBD 495, namely that if there are any material variations of the terms of the agreement underlying the Guarantee occurring without the Guarantor’s consent (and it is here not in dispute that there has been no knowledge of or consent to such variation on the part of the 2^nd defendant), the guarantor would be discharged from his obligations under the Guarantee.  For the purpose of this rule, a variation is to be taken as ‘material’ where it is not necessarily prejudicial to the guarantor or otherwise prejudices him, where any such lack of benefit or prejudice is not evident without inquiry, and where the variation is not otherwise insubstantial. 

107. Accordingly, notwithstanding the plaintiff’s enticing argument that the subsequent Facility Letters, as issued by the plaintiff bank to the 1^st defendant, by their nature and content served to do no more than to make alterations of detail to the course of dealing as defined and envisaged within the terms and scope of the existing Guarantee as initially signed by the 2^nd defendant, it seems to me that the continuation of the DBS mortgage on the 2^nd defendant’s matrimonial home, in contravention of the undertaking of the 1^st defendant in the initial Facility Letter, must be a characterized as a ‘material variation’ which, other things being equal, would have the effect at law of operating to discharge the 2^nd defendant’s obligations under the Guarantee.

108. If this conclusion be correct as to the materiality of the variation, I move now to consider the third issue, which in the circumstances possibly has come to assume greater significance than may have been anticipated.

Issue 3: Even if there was a material variation, was the rule in Holme v Brunskill overridden by the terms of the Guarantee?

109. It appears settled principle that it is open to the parties themselves to provide, within the terms of the Guarantee itself, that the obligations to be guaranteed will not be discharged by any variation which otherwise would have the effect of discharging the Guarantee.

110. Having found that in this instance there is a material variation which has the effect of bringing into operation the rule in Holme v Brunskill, op cit., I now consider the contention of the plaintiff bank that the operation of this rule is overridden by provisions within the Guarantee itself.

111. That such provisions exist in the present case is clear; for example, under clause 5(a) of the Guarantee, without discharging or in any way affecting the 2^nd defendant’s liability under the Guarantee, the plaintiff could vary or increase any credit to the 1^st defendant, and similarly, in terms of whether letters of credit calling for cargo receipts were to be allowed, the like clause covers this situation in that the relaxation by the plaintiff of its requirements for the grant of credit to the 1^st defendant constitutes an indirect way of varying credit to the company.

112. In the context of the undertaking regarding to the Belfran Road property mortgaged to DBS, clause 5(b) of the Guarantee provides that the plaintiff could grant the 1^st defendant (or any other person) time or indulgence, whilst under clause 5(d) the plaintiff is able to deal with, exchange, release, modify or abstain from perfecting or enforcing any securities or other guarantees or rights which the plaintiff may have against the 1^st defendant or against any other person.

113. This enabled Mr Shieh to argue that in not insisting that the 1^st defendant must, as per the terms of its undertaking, procure the release of the property mortgaged to DBS by the end of 2002, the plaintiff plainly was granting an indulgence to the 1^st defendant, alternatively that it was abstaining from enforcing its contractual right against that entity.

114. Mr Wong’s response to this argument struck me essentially as a rehash of existing submission: namely, that the variation in question, the omission to discharge the Belfran Road mortgage, constituted a material variation from the terms of the initial Facility Letter of 13 March 2002 and that since the Guarantee as executed was “pegged” solely to the 13 March 2002 Facility Letter, this situation has altered the underlying agreement to such an extent that it no longer resembled the indemnification bargain to which the 2^nd defendant initially had consented.

115. It followed from this, he said, that the ‘indulgence clause’ under clause 5(b) did not enable the plaintiff and the 1^st defendant, in their relationship of creditor/debtor, to require the guarantor to shoulder an additional liability, quoting in this regard the judgment of Lord Keith in Burnes v Trade Credits Ltd [1981] 1 WLR 805, 809 (PC).

116. This argument is fine as far as it goes, but at bottom I do not think that it goes far enough.

117. In terms of the decision in Burnes, op cit., this decision seems to me to have turned on the meaning to be attached to the word “advance” as found in the particular guarantee the subject of construction in that case, wherein there was a specific guarantee of a specific mortgage.

118. In the instant case, however, whilst in principle I have accepted the argument that failure to satisfy the undertaking in the initial Facility Letter otherwise would have constituted a ‘material variation’, which in different circumstances would have warranted application of the rule in Holme v Brunskill, op cit., by the same token I have declined to accept the primary (and necessarily correlative) proposition that the Guarantee as executed in this case was “pegged” solely to that first Facility Letter; to the contrary, I have held that it extended to the continuous course of financial dealing between the plaintiff bank and the 1^st defendant, Sweetmart.

119. Hence, I do not consider that this response succeeds.

120. It seems to me, with respect, that the analysis contained in the judgment of Jordan CJ in the Australian case of Hancock v Williams & anr, (1942) NSW State Rep 252 remains as pertinent today as when delivered: as a matter of fundamental principle, a guarantor can only be responsible for the obligation(s) which he has guaranteed (op cit., at 255), and that (op cit., at 256):

“the rights of the obligee and the liabilities of the guarantor are…not destroyed or reduced by anything which, according to the terms of suretyship agreement, leaves the obligation still one which the guarantor has agreed to guarantee.  Hence, if that agreement provides that the oblige may release co-guarantors, or may release securities taken to the guaranteed obligation, or may vary the terms of that obligation, the exercise by him of these rights does not affect the liability of the guarantor: O’Day v Commercial Bank of Australia, 50 CLR 200; British Motor Trust Co Ltd v Hyams, 50 TLR 230…”

121. At the end of the day, however, this is not a debate to which the answer is to be found in fact-specific case-law; clearly the interest in other ‘guarantee cases’ resides in the statements of principle therein asserted.

122. Thus given that this court in the instant case that that the Guarantee is not restricted to the initial Facility Letter, but to the contrary constituted a ‘continuing guarantee’ relating to the course of financial dealings between the plaintiff bank and the 1^st defendant, the contractual obligations of the guarantee in question continue to ‘bite’ upon the agreed mutual obligations contained within such guarantee.

123. If this characterization be correct, it follows that the liability of the guarantor is not destroyed/reduced by any factor which, on the basis of the provisions of the guarantee, leaves extant the obligation which the guarantor had agreed to guarantee – which in the present instance remains the continuous course of dealings between the plaintiff and the primary oblige, the 1^st defendant.

124. The provisions of the Guarantee in the present case provide in a variety of ways for a continuing guarantee notwithstanding any ‘twists and turns’ occurring in the continuing financial relationship between the plaintiff and the 1^st defendant borrower – subject always to the overarching principle (satisfied in the instant case) that the continuing financial relationship as thus guaranteed remains within the ambit/scope of the Guarantee as put in place by the 2^nd defendant. 

125. Such ‘financial twists and turns’ as occurred between the plaintiff and the 1^st defendant fall within the rubric of the specific provisions within the Guarantee to which Mr Shieh has drawn the court’s attention, and in these circumstances it strikes me that his argument is well-founded.  It is difficult, for example, not to view clauses 5(b) and (d) as having application in the present argument.

126. It follows from the foregoing, therefore, that in my view the answer to the question posed therefore must be ‘Yes’, and that accordingly the 2^nd defendant does not escape liability under the Guarantee by application of the rule in Holme v Brunskill, op cit.

Other matters

127. An argument as to agency is pleaded within the Amended Defence (vide paragraph 6(2)) of the 2^nd defendant.

128. Although this found little profile within the final oral submissions made on the 2^nd defendant’s behalf, reference is made to this argument in the helpful written document which was used to supplement oral argument on behalf of the 2^nd defendant, which document was handed up by Mr Wong SC at the conclusion of his closing submission.

129. For the avoidance of doubt, however, and if and in so far as the point remains alive, I fail to see any basis on the present evidence for inferring agency between the plaintiff on the one hand and the 2^nd defendant’s sons, the 3^rd and 4^th defendants, such that (as I take the argument to be), representations made by the sons to their father were capable of binding the plaintiff or of affecting the contractual relationship, via the Guarantee, between the plaintiff bank and Mr Wong Chit Ming, the 2^nd defendant.

130. Any such argument, if indeed still seriously mounted, in my view would fail in limine.

Order

131. It follows from the foregoing, therefore, that in my judgment this claim by the plaintiff against the 2^nd defendant must succeed.

132. This is not a result which provides cause for satisfaction, given the view I have formed that the 2^nd defendant, Mr Wong Chit Ming, demonstrably a decent and reliable man, appears to have been egregiously let down by his two sons, whom he had left to carry on his business, and that the financial problems thereby occasioned by such delegation now have returned to vex him.

133. Be that as it may.  The Order of the court consequent upon this trial therefore is as follows:

(i)  There is to be judgment for the plaintiff against the 2^nd defendant in the sums particularized at subparagraph (3) of the Amended Statement of Claim;

(ii) There is to be interest thereon for the period and at the rates specified in subparagraph (5) of the Amended Statement of Claim;

(iii)    There is to be an order nisi that the plaintiff is to have the costs of this action, including the costs of this trial, such costs to be taxed if not agreed.

As to costs, I decline Mr Shieh’s request for costs on an indemnity or indeed upon any enhanced basis.

134. If and in so far as clarification is required as to the precise ambit/form of the relief so ordered, absent agreement thereon a brief hearing can be arranged as and when appropriate.