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

HCA1807/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1807 OF 2005

_______________

_________________

_______________

D E C I S I O N

______________ 

1. This is an application to set aside a default judgment by the 2nd defendant.  

2. The 2nd defendant has conceded that the writ was validly served.  The only issue is whether or not he could show real prospects of success in his defence so that the default judgment should be set aside. 

3. The plaintiff is suing under a guarantee.  It was accepted for the purpose of this application by D2 that the 2002 facility letters formed the underlying agreement guaranteed by him.  Subsequently, new facilities were granted to the borrower company under the 2003 facility letters which expressly superseded the 2002 facility letters.  The 2nd defendant claimed he had no knowledge of the 2003 facility letters and there was no evidence to the contrary (I say this with the caveat that this position of lack of knowledge only appeared in the latest affidavit of D2, a copy of which was given to the plaintiff three days before the hearing with yet a revised version on the day before.  There was no reasonable opportunity for the plaintiff to file evidence, if any, to rebut.)

4. Mr Yu for the 2nd defendant submitted that there had been material variations to the underlying agreement which amounted to a novation and they were made without knowledge or consent of D2.  As a result the liabilities of D2 under the guarantee were discharged. 

5. In law, variation in the terms of agreement between the bank and borrower will discharge the surety unless the contract of surety provided to the contrary.  It is thus important to identify the alleged variations and see if they were material.  One also has to ask if the guarantee had provided to the contrary.

The Alleged Variations

6. Mr Yu has identified five variations:

(i)     An additional category of facilities; 

(ii)     Letters of credit calling for cargo receipt not allowed under the 2002 facility letters became allowed under the 2003 facility letters at the discretion of the bank;

(iii)    Change in the terms of the undertaking with regard to the property mortgaged to Kwong On Bank;

(iv)    Increase in interest rate; and

(v)    Arrangement fee being charged.

7. On variation (i), Mr Yu has fairly abandoned that point.  It is because notwithstanding the addition of this category of facilities, the total credit facilities available to the borrower had not been varied.  In any case, the guarantee allowed for variation of credit facilities under Clause 5.  There was thus no prejudice to D2. 

8. On variation (ii), the new term was prescribing a mode for the grant of letters of credit.  It did not purport to extend the facilities.  In my view, the new term, if it was one, had not increased the borrower’s and hence D2’s exposure.  I do not regard this as a variation. 

9. On variation (iii), this was a different term from what existed in the 2002 facility letter.  It appeared to be a variation. 

10. On variation (iv), the increase in interest rate.  I agree with Mr Yu that interest was not credit within the meaning of Clause 5 of the guarantee.  Interest was what the bank charged for advancing credit.  Moreover the liability to bear interest under the guarantee covered only interest that the bank could rightfully charge under the facility letters and not just any interest.  However, I still would find against the 2nd defendant.  This is because even under the 2002 facility letter, the 1st defendant would have been liable to pay to the bank interest at such rate or rates as shall from time to time be agreed with Standard Chartered Bank.  In addition, higher rates might be charged on amounts in default.  In the premises, changes in interest rates were well within the contemplation of the bank, the borrower and D2, the guarantor.   Variation (iv) was therefore not a variation as such.

11. On variation (v), the arrangement fee purported to be an administrative charge of the bank and was commonly found when banks provided credit facilities to a customer.  It was charged under the 2002 facility letters.  Given the amount of credit facilities involved and the $20 million limit of the guarantee, the arrangement fee could not be something beyond the expectation of D2.  I am of the view that it could not be regarded as a variation of the underlying agreement.

Materiality of the Variations

12. From the above analysis, it can be seen that only (iii) could be regarded as a variation.  Was it a material one?  The law does not require the court to embark on an inquiry into materiality if the unsubstantial nature of variation and lack of prejudice to the surety are not self-evident.  Looking at the term under the 2003 facility letter itself, it appeared that this variation purported not only to govern the situation between the bank and the borrower, but it also purported to restrict the borrower’s use of facilities granted by another bank.  In my view it could be a material variation.

Provisions in the Guarantee to the Contrary

13. In respect of variation (iii), I am of the view that the plaintiff might not be able to pray in aid Clause 5 of the guarantee.  This undertaking given in the 2003 facility letters was not a term to “determine, vary or increase any credit” to the borrower within the meaning of Clause 5(a).  Further, it did not just “modify rights which the bank may now or hereafter have from or against the Customer or any other person” within the meaning of Clause 5(d).  That undertaking had gone a step further, as I say, to control the borrower’s use of facilities granted by another bank.  There must be a reason behind such variation.  A not too far fetched inference is that such undertaking might have an impact on the way the borrower disposes of its available facilities and hence affect its liability to the plaintiff.  For example, if the borrower could not use the facilities granted by Kwong On Bank, the chances are that it might have to resort to the facilities granted by Standard Chartered Bank.  In that way the exposure in actual terms by the guarantor towards Standard Chartered Bank might be affected.  I am of the view that the 2nd defendant has shown an arguable case which has some real prospect of success, if his defence on variation (iii) is accepted by the court.

Partial Judgment

14. Mr Chan has suggested that even if Mr Yu’s arguments were accepted in that there had been material variations, the 2nd defendant would still be liable for all accrued indebtedness before the material variation occurred.  That would be, say, up to 24 February 2003, when the 2003 facility letters came into being.  Without disrespect, I do not agree.  The 2003 facility letters have expressly superseded the 2002 facility letters.  If there had been material variations to the 2002 facility letters, the 2nd defendant would have been discharged altogether, rather than being held liable for part of the debt.  In the premises it is not appropriate to leave part of the judgment to stand. 

Delay

15. Setting aside the judgment is a discretionary measure.  I do have to take into account the conduct of the 2nd defendant.  In the present case there was no delay in taking out the summons for setting aside.  However, there was clear delay in raising the defence of material variations now put forward.  The initial affirmations in support filed by D2 all went to attack the regularity of service of the writ.  When the 2nd defendant purported to revoke the guarantee as of 13 September 2005, he had not relied on the point of material variation.  This delay might eventually go to credibility when the matter goes to trial.  In my view the points raised by Mr Yu were principally issues of law that might not be apparent to a layman.  It is a point worth substantive arguments and I do not think it would be fair to deny the 2nd defendant his day in court.

16. Having regard to all circumstances, I am of the view that the judgment ought to be set aside on the merits ground and I so order.

17. So the order I make will be (1) judgment in default set aside; (2) leave to D2 to file a notice of intention to defend within 14 days from today. I am not considering imposition of any conditions, right, so it is unconditional leave to defend.  (3) Costs of and occasioned by the default judgment and of this application be to the plaintiff with certificate for counsel.

(Discussion on costs)

18. In this case the plaintiff purports to enforce its rights under the guarantee.  I can see nothing which the plaintiff had done was beyond its rights under the guarantee.  The events leading to the present setting aside were wholly caused by the 2nd defendant’s own inaction.  I am of the view that costs ought to be awarded on an indemnity basis in accordance with the terms of the guarantee.  As to whether or not there should have been two counsel, I consider that initially a very junior counsel, Miss Man, was briefed.  Subsequently, Mr Chan was involved.  This scenario only demonstrated that the plaintiff through the solicitors, perhaps, have been very cautious in instructing counsel of the right experience to handle this case.  Initially, the matter turned on regularity of service and I am of the view that Miss Man would have been competent enough to deal with the matter.  It was at a very late stage that the matter took a very different turn and I do not think the plaintiff can be blamed for instructing counsel of six years’ standing to deal with the matter.

19. The plaintiff would, in fact, just be caught in a difficult position when brief had already been delivered to Miss Man before they learnt about the involvement of Mr Denis Yu.  In my view, instructing two counsel in the present case, given the time pressure, was not unreasonable on the part of the plaintiff.  If one looks at the fees charged in total by the two counsel, it cannot be said to be excessive and I am sure when one thinks about the brief which Mr Yu would have, or is likely to have charged by counsel of his standing, $64,000 cannot be regarded as unreasonable.  In the premises, in this exceptional case, I grant a certificate for the two junior counsel.

(Discussion on quantum)

20. So costs as ordered assessed on a gross sum basis and allowed at $220,000.  Thank you.  Once again I extend my thanks to counsel and also to solicitors.