SOUNDSTONE LTD v. ASIAN BUSINESS LTD AND OTHERS

DCCJ 1994/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1994 OF 2002

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

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

_____________

Judgment

_____________

In this claim against the 2nd and 3rd Defendants, the Plaintiff (hereinafter referred to as "Soundstone") claims the sum of HK$265,200.00 and HK$26,210.56 pursuant to a guarantee on a loan by the Plaintiff to the 1st Defendant. The 2nd and 3rd Defendants raise the following lines of Defence: -

1. It was KSP Group Limited ("KSP"), not the Plaintiff who agreed to lend the money to the 1st Defendant.

2. There was a total failure of consideration : both the oral agreement and the making of the loan advance were completed prior to the signing of the letter dated 21st February 2001 so there was no consideration passing from the Plaintiff to the 2nd and 3rd Defendants in respect of any obligations they may have had under the Acknowledgement of Receipt and Guarantee.

3. This relates to construction of the Acknowledgement of Receipt and Guarantee. It was pleaded that the "guarantee" given in the Acknowledgment Receipt and Guarantee was conditional on the 1st Defendant receiving payment from United Merchants Limited, Inc. ("UML").

2. The issues in the trial are:-

1) Whether it was agreed that the lender was to be the KSP Group Limited and not the Plaintiff.

2) Whether the pleaded case of the Plaintiff in the Amended Statement of Claim encompasses an oral agreement for a guarantee made at the time when the oral agreement for the loan was effected. Further, whether there was consideration for the guarantee.

3) Whether the guarantee given in the the Acknowledgement Receipt and Guarantee dated 21st February 2001 at page 2 of Bundle C was conditional on the 1st Defendant receiving payment from UML.

1st Issue

3. Mr. So Tat Ming the first witness for the Plaintiff stated in evidence, that at the meeting where the loan was discussed a day or so before 21st February 2001 it was stated that the Plaintiff would make the loan to the 1st Defendant. He stated that both Mr. Kafry and himself stated that. He stated that it was mentioned at the meeting that as the loan was an urgent one, they had to find out which Company had the money. They found the Plaintiff had the money. That was why they mentioned that. Mr. So stood firm under cross-examination that it was not the case that the discussion was on the basis that the money would be lent from KSP to the 1st Defendant. He denied the suggestion of the Defendants' Solicitor that the decision for Soundstone to lend the money was made after the discussions for the loan.

4. Mr. Michael Jarkie gave evidence that it was stated that the Plaintiff would make the loan. However he could not remember whether this fact was discussed at the meeting related to the loan.

5. Mr. Robert Kane the 2nd Defendant stated that at the meeting related to the loan agreement, he thought KSP was going to lend the 1st Defendant money.

He stated that Soundstone was never mentioned. He stated under cross-examination that when he saw the name of Soundstone at the top of the Acknowledgement of Receipt and Guarantee, he thought Soundstone was a holding company. He denied that it was clear to him at the meeting that it was Soundstone who would lend money to the 1st Defendant.

6. Mr. Brent Craig Edwards the 3rd Defendant stated in evidence that at the meeting related to the loan agreement, Soundstone was not mentioned. The first time he heard about the name of Soundstone was on the 21st February 2001. Under cross-examination he denied that he knew that Soundstone was the company who would lend money to the 1st Defendant.

Finding

7. In my view, it is much more likely in a discussion conducted related to a loan as in this case, that the name of the lender would be mentioned. I find the evidence of Mr. So and Mr. Jarkie more credible in this aspect. It would be natural to for the Plaintiffs to discuss which Company in the group had the money to lend to the 1st Defendant, at the meeting in the presence of the 2nd and 3rd Defendants. In my view, the version of facts of the 2nd and 3rd Defendants is far less credible. I therefore accept the evidence of Mr. So and Mr. Jarkie in relation to this issue and I do not accept the evidence of the 2nd and 3rd Defendants. I therefore find that the identity of the lender being Soundstone, was discussed at the meeting related to the loan. Hence the lender was the Plaintiff and not KSP.

2nd Issue

8. In relation to this issue, I have to first decide on the construction of the 1st and 2nd paragraphs of the Amended Statement of Claim, whether it is capable of supporting the Plaintiff's case which emerged from the evidence of the Plaintiff's witnesses that at a meeting a day or two before the 21st February 2001, when an oral agreement for the loan was made, an oral agreement for a guarantee was also concluded. After the conclusion of the evidence of the Plaintiff's witnesses, the Plaintiff's Counsel applied to re-amend the Statement of Claim to reflect the fact that an oral agreement for a guarantee was made at the time when the oral loan agreement was made. The application to amend the Statement of Claim was opposed by the 2nd and 3rd Defendants. I refused the application.

9. Paragraph 1 of the Amended Statement of Claim pleaded that the oral agreement made between the Plaintiff and the 1st Defendant on or about 21st February 2001 was evidenced by an Acknowledged of Receipt and Guarantee signed by the 2nd and 3rd Defendants dated 21st February 2001. The oral agreement that was evidenced specifically refers to the oral loan agreement made between the Plaintiff and the 1st Defendant. Hence it could not have encompassed the guarantee agreement alleged to have been made between the Plaintiff and the 2nd and 3rd Defendants. Paragraph 2 of the Amended Statement of Claim pleaded that in consideration of the Plaintiff entering into the loan agreement (that was made between the Plaintiff and the 1st Defendant), the 2nd and the 3rd Defendants by the said the guarantee dated 21st February 2001 jointly and severally guaranteed the payment to the Plaintiff the sum of the loan in the sum of HK$288,600.00.

10. In my view, the construction of paragraphs 1 and 2 of the Amended Statement of Claim does not support to an oral agreement for a guarantee entered into between the Plaintiff and the 2nd and 3rd Defendants at the time when the oral agreement for the loan between the Plaintiff and the 1st Defendant was made.

11. Therefore, the evidence of the So Tat Ming and Michael Jarkie related to the oral agreement for a guarantee between the Plaintiff and the 2nd and 3rd Defendants made at the same time as the oral agreement for a loan could not be entertained.

Finding

12. The 2nd and 3rd Defendants' case is that the guarantee was not supported by consideration. Their Solicitor referred to the authority French v. French (1841) 2 M&G 44 in support of this principle. So Tat Ming stated that at first the loan was transferred to the 1st Defendant's bank account in U.S. dollars in the sum of US$37,000.00. However on the 21st February Mr. Brent Edwards telephoned him to ask where the money was. Mr. Edwards requested that the money be paid into the 1st Defendant's bank account in Hong Kong dollars as they needed the money urgently. It was agreed that the Plaintiff was to pay the sum of HK$288,600.00 into the 1st Defendant's bank account in Hong Kong dollars and the 1st Defendant would repay the sum of U.S.$37,000.00 to the Plaintiff immediately upon the receipt of this sum of US$37,000.00 which was being transferred into the 1st Defendant's bank account. Mr. So stated that the Acknowledgement of Receipt and Guarantee was sent to the 2nd and 3rd Defendants for their signature on the 21st February 2001. It was returned to the Plaintiff and he saw that after the sum of HK$288,600.00 was paid into the 1st Defendant's bank account at 3:52 p.m. on the 21st February 2001. He could not remember how the Acknowledgment of Receipt and Guarantee was returned to the Plaintiff.

13. From the evidence of Mr. So Tat Ming, there is no evidence as regards the time of the signing of the Acknowledgement of Receipt and Guarantee by the 2nd and 3rd Defendants. He first saw it after the transfer of the sum of HK$288,600.00 into the bank account of the 2nd and 3rd Defendants.

14. It would seem that there is no positive evidence that the Acknowledgement of Receipt and Guarantee was delivered to the 2nd and 3rd Defendants before the transfer of the sum of HK$288,600.00 by the bank into the bank account of the 1st Defendant or that the 2nd and 3rd Defendants signed the same document before the transfer of the said sum or at the time of the transfer of the said sum. However, as the Acknowledgement of Receipt and Guarantee acknowledged receipt of the sums of US$137,000.00 and HK$288,600.00, the aforesaid sums should prima facie have been received at the time of signature of the Acknowledgement of Receipt and Guarantee by the 2nd & 3rd Defendants. The principle that past consideration is no consideration would apply to this case as the Acknowledgment of Receipt and Guarantee was signed after receipt of HK$288,600.00. Consideration for the guarantee namely the advancement of the loan had been effected before the execution of the guarantee. I find that there is no consideration for the guarantee given by the 2nd and 3rd Defendants.

3rd Issue

15. Related to the construction of the Acknowledgement of Receipt and Guarantee, the 3rd paragraph thereof (hereinafter referred to as "the said paragraph") states,

"We are jointly and severally guarantee the return of the HK$288,600.00 as soon as UML settle the shipments per the list we provided to you by the end of March 2001."

16. In construing the paragraph, "the cardinal presumption is that the parties have intended what they have in fact said, so that their words must be construed as they stand. That is to say, the meaning of the document or of a particular part of it is to be sought in the document itself " (see Chitty on Contracts 28th Ed. para 12-43 page 604).

17. I bear in mind that, the starting point in construing a document, "is that words are to be given their ordinary and natural meaning." (Chitty on Contracts para 12-050).

18. The point taken by the 2nd and 3rd Defendants that they signed as Directors of the 1st Defendant and on behalf of the 1st Defendant cannot stand as the words that "they are jointly and severally guarantee" would suggest that each of the 2nd and 3rd Defendants had entered into the guarantee in their respective personal capacity. The existence of the words "jointly and severally guarantee" clearly point to the fact that they could not have signed on behalf of the 1st Defendant. The contention of the 2nd and 3rd Defendant that they do not understand the meaning of these words would not provide them with any excuse as they are native English speakers and could easily look up the words that they do not understand. It is hard to believe that they would not understand the meaning of these words and I do not believe that.

19. Further, it is clear that there is no designation under their names or signatures, of their capacity as Director. Although it is true that they acknowledged receipt of the advance to Asian Business Ltd., and that would be in their capacity as Directors, because it clearly states that the acknowledgement of receipt related to an advance from the Plaintiff to the 1st Defendant, I find however that in relation to the guarantee in the said paragraph of the Acknowledgment of Receipt and Guarantee it is clear that the 2nd and 3rd Defendants must have signed in their personal capacity as they stated that they jointly and severally guaranteed.

20. In construing the extent of the guarantee, I consider the circumstances or facts when the loan agreement was made. It was the evidence of Mr. So Tat Ming that the 2nd and 3rd Defendants had referred to the contract of the 1st Defendant with UML and had referred to the expected payment of the list of goods by UML to show that the 1st Defendant would have the means to repay.

21. In relation to the precise terms of the guarantee by each of the 2nd and 3rd Defendants in their personal capacity in the said paragraph, I construe the words as they stand, in their ordinary and natural meaning. It is clear that the word "return" has the meaning of "repayment". And it speaks of a time frame and the circumstances when that repayment would be made - that is as soon as UML settle the shipment per the list as provided to the Plaintiff. The time of the expected payment by UML is by the end of March 2001. It seems to me that the natural meaning of that paragraph is that the 2nd and 3rd Defendants guarantee the repayment of the sum of HK$288,600.00 to the Plaintiff upon the receipt of payment by UML to settle the shipments of the list of goods which list had been provided to the Plaintiff and the anticipated date of the settlement by UML is the end of March 2001.

22. In the construction of the guarantee, the contra proferentem rule applies where applying the principles of construction, the words of the document remain ambiguous. In such an eventuality, "the guarantee may be interpreted against the creditor who drafted it and in favour of the guarantor." (para 175 Halsbury's Laws of England 4th Edition Reissue Vol 20) Were any ambiguity to remain after applying the rules of construction aforesaid, the guarantee has to be interpreted against the Plaintiff creditor who drafted it.

23. Having considered the aforesaid I find that the guarantee is not a general guarantee to repay, which becomes effective if the principal debtor fails to perform his obligations. I find that it is merely a promise that the principal debtor will perform his obligations to repay the sum of HK$288,600.00 upon receipt by the 1st Defendant, the payment by UML for the costs of the goods in the list shown to the Plaintiff's representatives at the meeting when the oral loan agreement was made. Failing the repayment by the 1st Defendant in this eventuality, the obligation falls on the 2nd and 3rd Defendants to personally repay the loan. Although the liability of the 1st Defendant to repay the loan is not in question, yet the 2nd and 3rd Defendant's obligation in the guarantee is limited to the promise that the Plaintiff would be repaid immediately upon the eventuality that the 1st Defendant receives payment from UML failing which the 2nd and 3rd Defendant's obligation to repay arises.

24. Having so found, I come to the conclusion that the Plaintiff's claim against the 2nd and 3rd Defendants must fail as there is no dispute that the 1st Defendant has received no payment from UML. I make the following judgment:

Claim dismissed against the 2nd and 3rd Defendants. I make an order nisi for costs of the action as between the Plaintiff and the 2nd and 3rd Defendants to the 2nd and 3rd Defendants to be taxed if not agreed.