BANK OF CHINA (HONG KONG) LTD v. LEIGH HARDWICK

HCA 1110/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1110 OF 2006

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DECISION

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The application

1.  This is the defendant’s application under RHC O.20 r.8 for leave to amend the Defence as per the draft Amended Defence annexed to the Summons dated 3 April 2013.

2.  The plaintiff opposes this application.  Miss E. Ling, counsel acts for the defendant and Mr. B. Man, counsel acts for the plaintiff.

The factual background

3.  I shall adopt the summary of the facts stated in Mr. Man’s written submission for the background:

“ a. P is a bank. It extended an instalment loan of HK$4,830,000 to one Wel-express Development Limited (“the Company”) in 1997.

b. There is an all monies deed of guarantee dated 6 June 1997 (“the Guarantee”) signed by D guaranteeing the liabilities (limited to HK$4,830,000) of the Company to P.

c. It is common ground that all material times, D and one Madam Hung Chun Wai (“Madam Hung”) were the only registered shareholders (50% each) and directors of the Company.

d. The Company has defaulted.  P has obtained judgment against the Company. 

e. In this action, P seeks to enforce this Guarantee against D.

f. In his original Defence, D’s only defence was that he did not sign the Guarantee: Def 4 [22-24].”

4.  I shall also supplement the background with Miss Ling’s submission.

“The Defendant and Madam Hung were the shareholders and directors of Wel-Express Development Limited (the “Company”). It is the Defendant’s case that he only became the shareholder and director of the Company upon the request of Madam Hung, with whom he was in an intimate relationship.  The Defendant was merely a nominee of Madam Hung in relation to the Company and had no interest therein.”

5.  In his original defence, the defendant pleaded that he had never signed the Deed of Guarantee.  However, after the forensic expert had advised him that the signature was likely to be his, he took out the Summons to amend his Defence to provide an explanation as to why his signature would appear on the Deed of Guarantee. He intends to plead, by way of the proposed amendments, that he had been tricked into doing so.

The defences in the Amended Defence

6.  By the proposed amendments, the defendant relies on the following defences, which I quote from Miss Ling’s written submissions:

“(1) Misrepresentation – Madam Hung had led the Defendant into believing that the documents he signed were for formality purposes and did not know that they included any personal guarantee. Such conduct, which is intended to conceal facts may amount to a misrepresentation. Chitty on Contracts (31^st ed), Vol 1, §6-019.

Madam Hung’s email at [D1/61][1] states that the Plaintiff knew that the Defendant never intended to be the guarantor for the Company, and yet the Defendant was not given the document to read in its entirety or an opportunity to discuss it with a legal adviser, nor was the document explained to him or his signing of the same witnessed. Since the Plaintiff had knowledge, or ought to have known, of the misrepresentation, the Deed of Guarantee is voidable. Chitty on Contracts (31^st ed), Vol 2, §44-031; Trustees of Beardsley Theobalds Retirement Benefits Scheme v Yardley [2011] EWHC 1380 (QB), §§46-52.

(2) Undue influence – the Defendant had reposed absolute trust and confidence in Madam Hung. Being a mere nominee of Madam Hung in the Company, the guarantee by the Defendant, who had no interest in the Company, was “not otherwise readily explicable”. This gives rise to a presumption of undue influence which the Plaintiff has to adduce evidence to rebut. Further, the misrepresentation and non-disclosure by Madam Hung also constitute actual proof of an abuse of her ability to influence the Defendant.

By reason of the matters and authorities stated in (1) above, the Defendant had knowledge of the undue influence, and, thus, the Deed of Guarantee is voidable.

(3) Non est factum – the Defendant had made a mistake as to the very nature of the transaction.  The Defendant genuinely believed, as a result of Madam Hung’s misrepresentation and/or undue influence or otherwise, that the documents he signed were for formality purposes and did not know that they included any personal guarantee.[2]”

Grounds of objection

7.  Mr. Man’s grounds of objection to the proposed amendments to the Defence are as follows:

(1)   The pleas introduced by the amendment are unarguable.  They are hopeless and should not be allowed.

(2)   Paragraph 4(6A) is objectionable for the further reason that it will cause prejudice to the plaintiff which is not compensable by costs.[3]

The legal principles

8.  Miss Ling relies upon the general legal principles on amendments as set out in Hong Kong Civil Procedure 2013, §20/8/6.  It will be convenient to note that amendments of the pleadings are generally permissible except for mala fide application or amendments, which will cause prejudice to the other party or parties that cannot be compensated by costs.

9.  Miss Ling also relies upon Natamon Protpakorn v Citibank NA [2009] 1 HKLRD 455 at §§45, 48, 50, that an amendment will survive objection provided it cannot be demonstrated that it is bound to fail.  In effect, an opposition to the application for amendment is a mirror image of an application to strike out a pleading on the basis that it discloses no cause of action pursuant to RHC, O.18 r.19. The Court of Appeal set out the general legal principles at §§25 and 26 as well:

“Principles on amendment

(Per Cheung JA)

25. It is well established that, generally speaking, all such amendments ought to be made ‘for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings’ (per Jenkins L.J. in G. L. Baker Ltd v. Medway Building and Supplies Ltd [1958] 1 WLR 1216 at 1231); see also paragraph 20/8/6 of Hong Kong Civil Procedure 2008. Leave is readily granted to amend before the trial unless it can be demonstrated that the new claim based on the proposed amendment is bound to fail (see Hancock Shipping Co. Ltd v. Kawasaki Heavy Industries Ltd [1992] 1 WLR 1025). While the Court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation (see e.g. Kings Quality Homes Ltd v. A. J. Paints Ltd [1997] 3 All ER 267).

26. It must be borne in mind that to preclude the plaintiff in this case to amend her statement of claim, the initial version of which already had been struck out, is a drastic measure. The defendant seeks to drive the plaintiff from the judgment seat even before she has the chance to put forward her case at the trial, and clearly this can only be done in plain cases. Whilst this principle is usually stated in the context of striking out applications, considering the stand taken by the parties in this application, whereby leave to amend is objected to, it is equally appropriate to adopt the same approach in this instance.

(Per Stone J)

45. Resistance to the current application to amend – which represents the subject-matter of the present appeal – constitutes, in effect, the mirror image of a strike out,

48. It is established principle that leave to amend is liberally granted in order to enable determination of the real issues in dispute, and against this tangled factual matrix, I venture to suggest that it is difficult to understand why the plaintiff’s revised pleading against the defendant should not be permitted the opportunity of detailed consideration at trial, after completion of due interlocutory process; in the latter context, and in the circumstances as have arisen, discovery seems to me likely to be of particular relevance.

50. At trial the plaintiff may win, the plaintiff may lose – as to which eventuality naturally I express no view whatever at this stage – but manifestly this is not the point currently at issue, which is whether this plaintiff is to have the opportunity to put the case as now pleaded against this defendant before a judge of the High Court for adjudication.”

10.  Mr. Man has no dispute over the above authorities and legal principles.

11.  The court has to determine the issues without going into the factual issues, which will be subject to examination in the trial.

Discussion

12.  Miss Ling submits that the defendant relies upon the defences of misrepresentation, undue influence and non est factum.  See paragraph 6.

13.  This case bears significant similarity to the case of Wing Hang Bank Limited v Liu Kam Ying & Others [2002] HKC 57, in which the bank claimed against the 5^th defendant as the guarantor jointly liable together with other two guarantors for their company (D6)’s liability of over $12 million.  The 5^th defendant pleaded the same defences of non est factum, undue influence and misrepresentation as this case.  Mr. Justice Ma (as he then was) dealt with each of the defences in his judgment, setting out the legal requirements for the defences as follows:

“12. I deal with each of these defences in turn.

Non est factum

13. The 5^th defendant’s case here is that the document he signed (i.e. the Guarantee) was different in nature to what he intended to sign. The particulars of this defence are that the 5^th defendant thought that he was signing purely on behalf of the 6^th defendant and not in his personal capacity.

14. In my view, ……Further, the 5^th defendant is a man of full age and capacity. There is no reason at all why he should not be bound by the terms of the Guarantee which clearly states his liability on a personal basis. If he did not read the terms, this was negligent on his part and the defence of non est factum is unavailable in these circumstances.

15. In my judgment, the defence of non est factum fails.

Undue influence

16. The principles of undue influence have recently been the subject of an extensive review by the House of Lords in Royal Bank of Scotland v. Etridge (No.2) [2001] 3 WLR 1021. I have tried to summarize the relevant principles in my judgment in Bank of China (Hong Kong) Limited v. Wong King Sing [2002] 1 HKC 83.

17. Where third parties such as banks are involved and it is alleged that the relevant contract (in the present case a guarantee) came about as a result of undue influence being exerted on the party sued thereunder, there are three questions that the Court must deal with :

(1) Has it been proved that the transaction was affected by undue influence in the first place?

(2) Was the third party put on inquiry?

(3) If the third party was put on inquiry, did he take reasonable steps to satisfy himself that there was no undue influence?

See : Royal Bank of Scotland v. Etridge at p.1054 at para.101 per Lord Hobhouse of Woodborough.

18. Only if all three questions are answered in favour of the party being sued, would the defence succeed. In the present case, even if I could be satisfied that questions (1) and (3) could be answered in favour of the 5^th defendant (and I should not be taken to accept that this is the case), question (2) just cannot be satisfied on the evidence served by the 5^th defendant.

(19) to (21) [analysis of the facts]

21. In my judgment, the defence of undue influence likewise fails.

Misrepresentation

22. The defendant alleges here that the 4^th defendant misrepresented to him his liability under the Guarantee by saying that he (the 5^th defendant) would never be personally liable under it. Even if true, there is no allegation that the 4^th defendant was acting as the plaintiff’s agent when this alleged misrepresentation was made.

23. The defence, therefore, also fails.”

14.  It can be instantly seen the difficulties faced by the defendant in his defences.

15.  As far as misrepresentation is concerned, even if the defendant had relied upon the representations of Madam Hung that those documents were signed for formality purposes, there is no allegation that Madam Hung was acting as the plaintiff’s agent when this alleged misrepresentation was made.

16.  On the issue of undue influence, the fact that the defendant had reposed trust and confidence on Madam Hung and their intimate relationship do not raise a presumption of undue influence. Yet, the defendant has the difficulty in establishing that the plaintiff was put on inquiry.

17.  The defendant pleaded in the Amended Defence at paragraph 4(6A)(e) that the plaintiff ought to know, had constructive knowledge and/or was put on enquiry for the following three reasons:

(i) that the Deed of Guarantee was not executed in the presence of any witness and no solicitor or a law firm’s staff had explained the contents of the Deed of Guarantee and the defendant was never advised to seek independent legal advice before signing the Deed of Guarantee.

(ii) that the plaintiff was informed by Madam Hung that the defendant actually did not agree to become a guarantor of the company; and

(iii) that the defendant was a mere nominee of Madam Hung and he had no interest in the company.

18.  I agree with Mr. Man that even if the standard procedure was not followed, that would not change the relationship between the defendant and the Company from the eyes of the bank: Li Sau Ying v Bank of China (Hong Kong) Ltd [2004] 7 HKCFAR 579 §41, the relationship between the surety and the debtor must be looked at “with the eyes of the bank”.  Then what about the position between the plaintiff and the defendant?  There seems no law or rule that the execution of the Deed of Guarantee has to be before or witnessed by a solicitor or a law firm’s clerk, still less to require the bank to assign a solicitor to give advice to the defendant to obtain independent legal advice.  The validity of the Deed of Guarantee will not be affected by absence of such formalities as suggested by the defendant. Miss Ling has no argument on this issue.  She submits that she would rather rely upon the fact that the bank was put on inquiry instead.  But this is a separate issue from the way the Deed of Guarantee was executed.

19.  The defendant has filed an affidavit dated 24 April 2013 in support of his application for the proposed amendments to his Defence.  At paragraph 29 of his affidavit he said:

“ …By an e-mail dated 11 April 2004, Madam Hung replied that she never wanted me to be a guarantor for the Company and that no one, including the Bank, informed her that I was the guarantor of the Company and that the bankers of the plaintiff knew that she didn’t want me to be a guarantor…”

It seems that Mr. Man is correct to say that this email said that Madam Hung had told the plaintiff that Madam Hung did not want the defendant to be a guarantor.  He further argues that not wanting to be a guarantor is never a defence; only not agreeing to be a guarantor could possibly be.  This is far from saying that Madam Hung had, on behalf of the defendant, told the plaintiff that the defendant was unwilling to sign any Deed of Guarantee for the company.  I have put this to Miss Ling for her views.  She admits that the proposed amendments to the Defence are based upon the email at page 61 of the hearing bundle.  She fairly agrees that Madam Hung had not stated in her letter on what basis she was of the view that the bank knew that she did not want the defendant to be a guarantor, which is different from the fact that the defendant did not want to be a guarantor himself.  Miss Ling also admits that Madam Hung would not be available to give evidence at trial.  However, she submits, that if the defendant were allowed to amend the Defence, the defendant may be able to make discovery from the plaintiff’s documents to support his case.  However, this is not permissible as held in The New China Hong Kong Group Limited (in Creditors’ Voluntary Liquidation) & Another v Ng Kwai Kai, Kenneth & Others, Kenneth & Others by Fok JA sitting as an additional judge of CFI in HCA519/2010, 11 February 2011 at paragraph 70“…….It is an abuse of the court’s process to start a case without a solid foundation hoping that something will turn up in the course of the proceeding, for example at the stage of discovery or on cross-examination, or to stop time from running: Nomura International plc v Granada Group Ltd [2008] Bus LR 1 at §37, Re a company, ex parte Burr [1992] BCLC 724 at p. 736d-f, and Re Saul D. Harrison & Sons plc [1995] 1 BCLC 14 at pp. 21d-22e.”  The same rationale should apply to defending a case.

20.  It is simply unbelievable that knowing that the defendant had refused to sign the Deed of Guarantee, the bank nevertheless accepted the Deed of Guarantee executed by the defendant and in reliance upon which, the bank agreed to lend money to the company.  This simply defies common sense.

21.  The third reason of being a nominee of Madam Hung is only relevant to the defence of undue influence.[4]  However, the defendant will have the same predicament as in Wing Hang Bank case, viz. there is no pleading that the plaintiff was put on inquiry.  The defendant has not pleaded that his relationship with Madam Hung, that he was only a nominee of Madam Hung and that he had no interest in the company were all told to the plaintiff.  In fact, the defendant pleaded at §4(6A)(e)(iii) of the draft Amended Defence that he never dealt with the plaintiff at all.  There is no factual basis upon which the defendant can rely to say that the plaintiff should be put on inquiry.

22.  For the reasons above, the defendant fails his proposed defences of misrepresentation and undue influence.

23.  On the third defence of non est factum, Miss Ling submits that the Defendant had made a mistake as to the very nature of the transaction.  The Defendant genuinely believed, as a result of Madam Hung’s misrepresentation and/or undue influence or otherwise, that the documents he signed were for formality purposes.  It seems that the law of contract does not recognize the defendant’s conduct as a mistake.  See §§ 19 and 20 of the judgment of the Court of Final Appeal in Kowloon Development Finance Limited v. Pendex Industries Limited & Others FACV 21/2012, delivered by Lord Hoffmann NPJ on 10 May 2013.  In any event, the issue of mistake is not pleaded in the proposed Amended Defence.  The defendant’s conduct is only an act of negligence on his part and according to Wing Hang Bank’s case, the plea of non est factum is not available to him.  This defence also fails.

24.  Mr. Man has also made submissions on the issue of prejudice, relying on paragraph 63 of the judgment of Johnson Controls Hong Kong Ltd. v Associated Engineers Limited HCCT 47/2011 by Hon Au J. on 28 February 2012.  I agree with him that the issue of putting the bank on inquiry relates to factual issue dated back some 13 years ago.  However, for the reasons above, it will not be necessary for me to make reference to this issue.  If the defendant is able to give particulars to support the fact that the defendant had informed or told the bank through Madam Hung that he was unwilling to be a guarantor for the company, I may have to give further consideration to this issue. Miss Ling has admitted that the defendant will not be able to have Madam Hung to give those particulars, I shall not go further into this issue.

25.  I shall, accordingly, dismiss the defendant’s summons for the proposed amendments to the Defence.

26.  On the question of costs, which should follow the event and is to be assessed summarily under O62 rule 9 RHC(with counsel’s certificate) at $80,000 to be paid the defendant to the plaintiff within 14 days from the date hereof.

27.  I shall now make an order in terms as follows:

a. The defendant’s summons be dismissed with costs;

b. The costs of this application, including the costs reserved and today’s hearing as per paragraph 26.

 

 

(K.W. Lung) Registrar, High Court