DHARMALA INTERNATIONAL FINANCE LTD. v. CHARTER VIEW HOLDINGS (H.K.) LTD. AND OTHERS

CACV 98/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 98 OF 1999

(ON APPEAL FROM HCA 12792 OF 1997)

______________

______________

_______________

J U D G M E N T

_______________

Nazareth V-P.:

1. This is an appeal against the order of Findlay J. dismissing an appeal against Master Chu's order of summary judgment in favour of the Plaintiff.

2. The facts are as follows. The Plaintiff is a deposit taking company. It entered into an agreement with the 1st Defendant dated 24th March 1994, whereby it granted credit facilitates for $8 million to the 1st Defendant. By written instruments of guarantee dated the same date, 24th March 1994, the 2nd and 3rd Defendants guaranteed payment to the Plaintiff on demand of monies unpaid under the credit facility agreement. The 2nd Defendant was a director of the 1st Defendant but ceased to hold such office in May 1995. In June 1995, the 1st Defendant sent the Plaintiff the documents of title to 2 consignments of syringes it had sold to Outrial Trading Ltd. ("Outrial"). The documents included two bills of exchange, one for $5.9 million and the other for US$727,531. These were to be presented to the Belgian Bank in Hong Kong. The latest date for acceptance of the first bill was 22nd July 1995 and that of the second the 26th July 1995. On 4th September 1995, the 1st Defendant wrote to the Plaintiff stating that it had agreed to Outrial's request to extend the maturity date of the first bill to 25th October and the maturity date of the second bill to 26th October. The Plaintiff passed on this information to the Belgian Bank, noting its additional charges of HK$293,820 and US$36,231.03, with a request that the drawee's acceptance be obtained and that the Belgian Bank inform the Plaintiff.

3. On 27th October 1995, the 1st Defendant wrote to the Plaintiff saying

"We hereby record the telephone conversation between your goodself and the undersigned ..... of even date that

(I) We have frozen all the deposit paid by the Drawee, please inform ..... "Belgian Bank" to discharge all the Drawee's liabilities.

(II) Regarding the advance made by you on 26/06/95 and 27/06/95 respectively, we will make repayment within 30 days."

4. On 8th December 1995, the Belgian Bank wrote to the Plaintiff enclosing copies of the drawee's letters, i.e. from Outrial to the Belgian Bank dated 4th December 1995 and saying that as arranged with the drawer payment was to be settled in RMB and since 15th November the drawer had been charged in the drawee's account in PRC. The Belgian Bank went on to ask the Plaintiff to "Please contact the drawer and let us have your disposal instructions regarding the relative documents of the bills".

5. On 12th December, the Plaintiff wrote to the 1st Defendant stating that the bills remained unpaid and enclosing a copy of the Belgian Bank's letter with Outrial's 2 letters which contained the words: "Kingly confirm your acceptance by signing and returning the copy of said telex at your early convenience".

6. On 16th December 1995, the 1st Defendant replied "We would like to reiterate our instructions given to you on the 27th October 1995 that the Drawee's liabilities to be discharged".

7. On 13th January 1996, the 1st Defendant wrote to the Plaintiff "Please be informed that repayment [of the bills] will be postponed to the month of March 1996".

8. On 1st April 1996, the 1st Defendant wrote to the Plaintiff "Kindly inform [the Belgian Bank] that the outstanding bills will be paid directly to us by the drawee in RMB. Please do not protest."

9. There was other correspondence in a similar vein which it is not necessary to set out. The bills were not honoured nor the amount of the credit advanced to the 1st Defendant repaid despite demand. On 26th November 1997, the Plaintiff issued its writ and on 8th April 1998, amended its Statement of Claim. The Plaintiff then applied for summary judgment on 12th August 1998 and on 5th January 1999, Master Chu gave judgment against the 2nd and 3rd Defendants for HK$1,712,821.67 and US$851,554.33 with interest and costs. The Defendants appealed on 16th March 1999. Their appeals were dismissed by Findlay J. The 2nd Defendant now appeals against that dismissal.

The Judgment

10. In his judgment, Findlay J. pointed out that counsel before him submitted there should be a trial because the 2nd Defendant had an arguable defence. The latter had been brought down to a simple point: That the Plaintiff had in some way prejudiced the 2nd Defendant's position by not seeking to enforce the two bills of exchange which were a form of security for the debt owed by the 1st Defendant. He continued:

"On analysis, it appears that, in fact, the Plaintiff did nothing active by which, in any way, the value or integrity of those bills were affected. In the course of exchanges with Mr. HUNG [counsel for the Defendants] the matter comes down to this: The 2nd Defendant says that the Plaintiff, by its inaction, might have led a company called Outrial - which was ultimately liable on these bills - to believe that the Plaintiff would not enforce them. .....

The fact of the matter is that all the Plaintiff did was not to proceed against Outrial. .....

the Plaintiff did nothing to, in any way, affect the value, integrity or enforceability of these bills. .....

So we have, in my view, a situation that fits precisely within the parameters of China and South Sea Bank v. Tam to which Mr. HUNG has drawn my attention. .....

That case seems to me firmly establishes that the only basis upon which a surety can defend itself against a claim by a Plaintiff is by showing that, in some way, the Plaintiff affected the value of the security.

In this case, nothing has been drawn to my attention that justifies coming to the conclusion that the Plaintiff in any way affected the value of that security. So it seems to me that the 2nd Defendant ..... has no arguable defence to this matter and that a trial is not justified."

The principal submissions

11. Mr. Mumford submits that China & South Sea Bank is only an authority on enforcement of securities and not on perfecting them. And that the Judge erred in holding that it establishes that the only basis on which a surety can defend itself against a claim by a Plaintiff is by showing that, in some way, the Plaintiff affected the value of the security. He submits also that the judge was in error in holding that the Plaintiff had in no way affected the value of the security. By not giving notice of dishonour to the 1st Defendant in time, the Plaintiff, he contends, had reduced the value of the bills to nil as against the 1st Defendant.

12. The 2nd Defendant's alleged liability, he points out, arises out of the 2 documents for acceptance ("D/A") transactions. In such a transaction he submits, the bill would have been the security, it would have been presented and if dishonoured, the bank would have had an immediate right of action. But what actually happened he says was that the Plaintiff gave extra time to the buyer and the seller (for which it charged extra interest) and failed to give notice of dishonour. The 2nd Defendant's case, he says, is that the Plaintiff agreed to an arrangement whereby the buyer paid the seller directly by-passing the bank and the account guaranteed by the 2nd Defendant. That, he says, was outrageous and yet agreed to by the Plaintiff. The Plaintiff thereby connived at this totally irregular conduct.

13. In reliance upon Bank of India v. Trans Continental Commodity Merchants Ltd. [1983] 2 Lloyd's Rep. 298 at p. 301, 302 Mr. Mumford accepts that mere irregular conduct on the part of the creditor will not discharge the surety, but he says, such conduct will do so if it connives at the default by the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety. The present case he submits comes within these exceptions.

14. Mr. Mumford submits that a material variation to the principal contract without the surety's consent which alters the business effect of the relationship so as to vary the risk, will discharge the surety. He relies again upon a number of authorities which I do not find necessary to address since, as will be seen, I am not able to accept that the business effect of the relationship insofar as the Plaintiff is concerned has been altered, or indeed that the Plaintiff has done anything that has altered the business relationship.

15. Mr. Mumford submits further that the Plaintiff's failure to perfect the securities discharged the Defendant as surety. He relies upon a number of authorities. It does not seem to me that any of them goes quite so far as is contended, a fortiori where the contract expressly entitles the Plaintiff not to perfect the securities.

16. There remain two other grounds upon which the Defendant relies. I will return to these later.

The Plaintiff's submissions

17. For the Plaintiff, Ms. Mairéad Rattigan has a simple answer. She relies primarily upon the terms of the guarantee. The Plaintiff she submits did nothing, and under those terms particularly was entitled to do nothing.

Complaints of positive action against the Plaintiff

18. The allegations and complaints made against the Plaintiff are both of inaction and of action. Two actions are complained of. First that the Plaintiff connived at the buyer's and seller's attempt to pay the purchase price direct from one to the other, thereby by-passing the guarantors, in particular the 2nd Defendant. The second action of the Plaintiff complained of was similar, i.e. that the Plaintiff extended the time within which the buyer was to pay the seller, thereby altering the nature of the contractual relationship and depriving the 2nd Defendant of his security. Mr. Mumford took us through the evidence. I see no necessity to outline it here. Suffice it to say that at best it could be regarded as suspicion. The evidence, however, clearly does not give rise even to a bare probability that the Plaintiff did connive, acquiesce in or agree to the actions complained of. The strongest evidence Mr. Mumford was able to point to was a letter from the seller, mentioning the direct payment arrangements, and asking the Plaintiff to confirm an extension of time. While the word confirm in its strict meaning would undoubtedly mean confirm the existence of an earlier arrangement, it is not uncommonly used, or misused, to seek or refer to a new arrangement that has never been agreed to before. It seems to me plain that this was the way in which it was used by the parties or their staff who were not native English speakers. I cannot see that the point could in any event have much weight. I have no difficulty in rejecting the submission. There is, therefore, nothing to be gained in addressing the authorities relied upon in this context. I accordingly do not propose to do so; that is not to say, that I necessarily accept the authorities as having the effect contended for.

Complaint of inaction

19. I turn then to the Plaintiff's inaction complained of. This was said to be the failure to protest the bills when they were dishonoured, and generally the failure to deal with the transaction in the manner contemplated by the original agreement or in accordance with normal business practice, thereby varying the 2nd Defendant's risk; and that the Plaintiff also had failed to perfect the two bills of exchange in question.

20. Contrary to the contentions of the 2nd Defendant, who seems not to have known the correct position, the Plaintiff promptly informed the 2nd Defendant of what the 1st Defendant and the buyer proposed, doing so by telephone. Moreover the Plaintiff did not receive the 1st Defendant's relevant communication until the time for payment of both bills had passed. However all of that may be, as indicated the Plaintiff's primary position is that it had done nothing and under the guarantee was entitled to do nothing.

21. Before I turn to the provisions of the guarantees, I have to say that I am unable to see in the authorities relied upon by Mr. Mumford, anything to the effect that the nature of the transactions here, or of the security, would somehow transcend and prevail over the express terms of the guarantee. In that regard Mr. Mumford's faint reliance upon the Control of Exemption Clauses Ordinance, Cap. 71 is a ground to which I shall return later.

The Guarantee

22. The guarantee as already mentioned, was entered into by the Plaintiff and the 2nd Defendant on 24th March 1994 in consideration of the Plaintiff granting or continuing credit facilities to the 1st Defendant. Ms. Rattigan in particular called attention to the following provisions.

"Clause 3, 3rd paragraph

As between the Lender and the Guarantor or, if there be more than one, as between the Lender and the Guarantors and each of them, the Guarantor or Guarantors shall be regarded as principal debtors and accordingly this Guarantee shall not be affected or discharged by the death [in etc.] ..... of the Principal or of the Guarantor or Guarantors or any of them or by any other act deed matter or thing whereby the Guarantor or Guarantors, as sureties only, might otherwise have been discharged.

.....

Clause 7

The Lender may at all times without prejudice to this guarantee and without discharging or in anyway affecting the liability of the Guarantor:-

(a) .....

(e) deal with exchange release modify or abstain from perfecting or enforcing any securities or other guarantees present or future or rights which the Lender may now or hereafter have from or against the Principal or any other person,

.....

Clause 8

The liability of any Guarantor hereunder shall not be affected by any failure by the Lender to take any security or by any invalidity of any security taken or by any existing or future agreement by the Lender as to the application of any advances made or to be made to the Principal or should this guarantee prove not to be binding on any other Guarantor or Guarantors hereunder for any reason whatever.

Clause 9, 2nd paragraph

The Lender shall be at liberty but not bound to resort to any other means of payment at any time and in any order the Lender thinks fit without thereby discharging or in any way affecting the liability of any Guarantor and the Lender may enforce this guarantee either for payment of the ultimate balance after resorting to other means of payment or for the balance due at any time notwithstanding that other means of payment have not been resorted to and in the latter case without entitling the Guarantor to any benefit from such other means of payment so long as any monies or liabilities remain due or incurred by or from the Principal to the Lender."

23. Plainly under these the Plaintiff was entitled to treat the Defendant as a principal debtor and to abstain from perfecting or enforcing the bills, the liability of the 2nd Defendant as Guarantor was not to be affected by any failure of the Plaintiff to take any security or by any invalidity of any security taken or by any existing or future agreement by the Lender as to the application of any advances; and finally the Plaintiff was at liberty, although not bound, to resort other means of payment in the order it thought fit.

24. I accordingly reject the grounds addressed so far.

The Control Exemption Clauses Ordinance

25. It is submitted on behalf of the 2nd Defendant that any reliance by the Plaintiff upon the terms of the guarantee to escape from the consequences of breaches of any legal or equitable rules would raise a triable issue as to whether any such term was reasonable within the meaning of section 8 of the Control of Exemption Clauses Ordinance, Cap. 71, the 2nd Defendant being a consumer. Furthermore, it is submitted that Exemption Clauses could not be construed so as to permit the Plaintiff to connive at the default of the debtor or to vary the risk, or to give extra time where extra interest was charged.

26. The short answer is that there is simply no evidence of such breaches, connivance or other act alleged, on the part of the Plaintiff; moreover the terms seem to me plainly to meet the reasonableness test under Cap. 71.

Ground 4

27. In the context of this, it was contended that evidence in affirmations submitted on behalf of the Defendants indicated that cheques totalling $2 million were drawn by the 3rd Defendant which should have reduced the claims on both the 2nd and 3rd Defendants, and thus created a triable issue as to the balance due. I accept Ms. Rattigan's short answer here that the cheques were simply sent in by the 3rd Defendant and in the ordinary way would go to as reducing the 3rd Defendant's liability.

Conclusion

28. In the result, I find no merit in the appeal and would dismiss it with an order nisi that the Plaintiff have its costs of the appeal.

Leong J.A.:

29. I agree.

Nazareth V-P.:

30. The appeal is accordingly dismissed with an order nisi that the Plaintiff have its costs of the appeal.