BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION v. GRAHAM HARRY FOUNTAIN

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J U D G M E N T

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Clough, J.A.:

1. The defendant guarantor appeals against the order of Bokhary J. made on the 26th September 1989 dismissing the defendant's appeal against the order of Master Perrior made on the 15th June 1989 dismissing the defendant's application under Order 14 rule 11 to set aside the summary judgment obtained in this action by the plaintiff bank (which is incorporated in the United States of America) on the 4th February 1985 in a hearing at which the defendant did not appear. The defendant has also appealed against the same learned judge's dismissal of his appeal against the same learned master's dismissal of a concurrent application for a stay of the judgment in question. However in the course of his opening submissions Mr. Barlow, for the defendant, abandoned this appeal.

2. The Plaintiff sued the defendant as the guarantor under a continuing guarantee dated the 18th March 1981 in the plaintiff's printed form under which the defendant guaranteed and promised to pay on demand, in U.S. currency, all the indebtedness to the plaintiff of Energy Systems Holdings Limited ("the company") of which the defendant was managing director. The guarantee was also executed by three other directors ("the co-guarantors") of the company and all the guarantors were expressed to be jointly and severally liable. The guarantee was expressed to be governed by and construed according to the laws of the State of California, but it was common ground on the hearing of this appeal that on all material issues the law of California was the same as that of Hong Kong. Prior to the execution of the guarantee the company had on the 14th October 1976 entered into an agreement with the plaintiff for banking and financial facilities to be afforded by the plaintiff to the company.

3. The plaintiff's writ in the action, indorsed with a statement of claim, was issued on the 6th December 1984 when it also obtained a prohibition order against the defendant. The plaintiff claimed that the company was indebted to it as at the 30th November 1984 in the total sum of (US) $1,304,419.44 comprising principal of (US) $950,000 and interest amounting to (US) $354,419.44, with interest accruing on a daily basis at a specified rate. Another alleged debt of the company to the plaintiff in the sum of (HK) $138,266.23 with accruing interest was also pleaded. It was common ground that the guarantor's liability in respect of this debt was discharged as a result of other separate proceedings against the defendant's wife subsequent to the summary judgment obtained in this action.

4. It was pleaded in the statement of claim that by a letter from the plaintiff's solicitors dated the 6th December 1984 "addressed to the Defendant" the plaintiff had demanded payment by the defendant of both the company's debts with interest accruing and that the defendant had failed to make any payment. Accordingly the amount of both debts with accruing interest was claimed against the defendant as guarantor.

5. Notice of intention to defend was given on the 31st December 1984 by the defendant's solicitors on his behalf. A summons for summary judgment under Order 14 was issued by the plaintiff on the 9th January 1985. The verifying affirmation was made by Mr. Winston Chan, a loan officer of the plaintiff, who exhibited thereto a copy of the relevant guarantee and a copy of the letter of demand which he affirmed had been "referred to" in the statement of claim. The copy of the guarantee exhibited by Mr. Chan had had the name of the company typed in as the borrower in the blank space in clause (1). In clause (2) the blank spaces for the insertion of the limit (if any) of the amount of the guarantee had been completed by typing in the words, "UNLIMITED AMOUNT" and "UNLIMITED". The plaintiff's solicitors' letter of demand dated the 6th December addressed to the defendant was indorsed with the words "BY HAND" and demanded immediate payment of both debts and accrued interest and threatened legal action against the defendant without further notice if payment was not made forthwith.

6. Although represented by solicitors the defendant failed to file any evidence in opposition to the plaintiff's application for summary judgment or to appear at the hearing of the application on 4th February 1985 when summary judgment was given by a master in respect of both the debts.

7. The plaintiff never sought execution of the U.S. dollar judgment in Hong Kong, no doubt because the defendant had no traceable assets in this jurisdiction. However, on the 28th March 1985 the plaintiff entered into an agreement ("the Assignment") with the Wing On Bank ("Wing On") by clause 5 whereof it assigned or purported to assign to Wing On for the sum of (US) $865,000 (a) the same amount (defined as the "Assigned Portion") of the company's then debt of (US) $1,346,344.79 together with (b) the benefit of the guarantee to the extent of the Assigned Portion, and (c) the benefit, to the same extent, of the plaintiff's judgment against the defendant, subject, in the case of (c), to the provise that any monies recevered by the plaintiff under the judgment should first be applied in discharge of the plaintiff's un-assigned portion of the debt and that any balance remaining thereafter should be paid to Wing On the discharge of the Assigned Pertion.

8. The Assignment was a complex instrument, the full terms and effect of which it is not necessary to explore for the purposes of this appeal, but it is pertinent to mention some provisions of that instrument. Included in the recitals ((7), (8), (9)) were references to the presentation on the 7th March 1985 of the plaintiff's petition to wind up the company, to the appointment of the Official Receiver as provisional liquidater of the company on the 1st April 1985, to the fact that the company was Wing On's customer, and to the desire of Wing On that the company should continue to carry on business.

9. These recitals were linked with clause 4.01 of the Assignment under which the plaintiff undertook not to institute any legal proceedings against the company to enforce payment of the plaintiff's un-assigned portion of the debt by the company, or to present any fresh petition to wind up the company, without the prior consent of Wing On.

10. Under clause 5.03 of the Assignment the plaintiff was required to sign and deliver to Wing On "....such notices of assignment and such other documents as may be required for the purpose of perfecting or better assuring to Wing On Bank the Assigned Portion and all rights and benefits herein before assigned.". This resulted in the defendant being served by Wing On's solicitors with a notice of assignment dated the 28th Marcn 1985, addressed to him and signed on behalf of the plaintiff, the body of which was in the following terms:

"     We hereby give you notice that by an Agreement dated the 28th day of March 1985, we have assigned to The Wing On Bank Limited absolutely:-

(a)     that portion of the indebtedness of Energy Systems Holdings Limited ('the Company') to us in the sum of US$865,000.00 ('the Assigned Portion') together with the full benefit of all rights appertaining thereto including, inter alia, the right to charge interest thereon at such rate as may be permitted by law; and

(b)     the full benefit of the Guarantee dated the 18th day of March 1981 given by you as one of the guarantors to us in respect of the liabilities of the Company to us to the extent of the Assigned Portion; and

(c)     the full benefit of the judgment obtained by us against you in High Court Action No. 8313 of 1984.

    By reason of the said assignments, you are required to pay to the Wing On Bank Limited oras it may direct the Assigned Portion and interest thereon as aforesaid."

This notice was sent to the defendant as an enclosure to Wing On's solicitors' letter to him dated the 1st April 1985 and acknowledged by him on the 4th April 1985.

11. Clause 4.01 of the assignment did not inhibit the plaintiff from bringing proceedings against the defendant. Evidently believing the defendant to have property there, the plaintiff procured the registration of the remaining un-assigned portion of the Hong Kong judgment in New South Wales on the 13th February 1987. On the 11th August 1988 the defendant was served with notice of this registration. On the 15th August 1988 the defendant instructed solicitors in New South Wales and on the 9th September 1988 they applied on his behalf to set aside the registration of the relevant portion of the Hong Kong judgment.

12. The defendant issued his summons for a stay of execution of the judgment on the 4th April 1989. On the 10th April 1989 the proceedings in New South Wales were stood over to await the outcome of the defendant's application in Hong Kong. On the 21st April 1989 the defendant issued his summons applying to set aside the judgment.

13. By the time the appeals came to be heard by Bokhary J. on the 26th September 1989 a substantial volume of evidence had been filed on both sides. The substance of the defendant's evidence was to the effect that, although he had a defence to the plaintiff's claim, he had not sought to contest it because he was aware of negotiations between Dr. Albert Kwok, the Chairman of Wing On, with the plaintiff about the fate of the company. According to the defendant at the time the action began the company had a close relationship with Wing On to which it owed (HK)$21 million with accrued interest. The plaintiff was seeking to wind up the company and the defendant's evidence was that Dr. Kwok considered that Wing On's best chance of recovering its loans to the company was to keep the company from being wound up. It was to this end, the defendant alleged, that Dr. Kwok sought an agreement with the plaintiff and told the defendant that the matter would have to be dealt with between Wing On and the plaintiff and that the defendant was to make himself available to Wing On's solicitors for this purpose.

14. I mention here that the defendant's evidence, linking in time the issue of the writ in this action (on the 6th December 1984) with the presentation of the plaintiff's winding up petition (on the 7th March 1985) and the appointment of the Official Receiver as provisional liquidater of the company (on the lst April 1985), was clearly mistaken. However it appears from the body of the petition that on the 8th December 1984 the imminence of winding up proceedings by the plaintiff against the company was manifested by the giving, by hand, of a statutory demand to the company under section 178(1)(a) of the Companies Ordinance (Cap. 32).

15. The defendant deposed that he enquired of Dr. Kwok, by a letter dated the 25th March 1985, about the outcome of his negotiations with the plaintiff and was subsequently told by Dr. Kwok "that as a result of the agreement which had been reached no further action would be taken either against the Borrower or myself for the debts of the Borrower to the Plaintiff unless the Wing On Bank gave its consent.". The defendant went on to depose that "This was borne out in my mind" because of the notice of the Assignment which he had received in April 1985.

16. The defendant deposed that although the company's solicitors had told him that the plaintiff had applied for summary judgment, the notice was the first indication he received that judgment had actually been obtained by the plaintiff. As to his failure to resist the plaintiff's application for summary judgment, the defendant said ".... as I knew that discussions were taking place between Wing On and the Plaintiff which would resolve the matter there was no point in resisting the judgment since any judgment would not be enforced against me.". He said that until he had notice of the plaintiff's New South Wales proceedings he had always believed that the plaintiff and Wing On had reached an agreement which precluded the plaintiff from enforcing the Hong Kong judgment against him. The defendant's evidence was that he therefore believed that despite the defects in the guarantee (which he now claims to have existed) it was not necessary for him to take steps to have the judgment in U.S. dollars against him set aside. In his mind, he deposed, this had been borne out by the fact that until the New South Wales proceedings forty two months later no attempt had been made by the plaintiff to enforce the judgment whereas it had sued his wife in 1985 to recover the amount of HK$138,266.23 with interest which was the first debt comprised in the judgment against him.

17. As to the merits of the defendant's proposed defence, he deposed that he could not "specifically remember" signing the guarantee. However he maintained, as his first ground of defence, that he did not sign it in the form alleged by the plaintiff. He produced a copy of the guarantee which he deposed to be the photocopy which he took immediately after he signed the guarantee. This copy bore the signatures of all the guarantors. It had blank spaces in clauses (1) and (2). In clause (1) the space for the borrower's name had not been completed. In clause (2) the space for the limiation (if any) of the guarantee had not been completed.

18. The defendant alleged that he had never seen the completed copy of the guarantee (exhibited to Mr. Winston Chan's verifying affirmation) until after the present proceedings by him had commenced. He further deposed that when he inspected the plaintiff's file in Sydney on the 6th April 1989 he had noticed that the original guarantee in the plaintiff's file did not have any amount inserted in clause (2). Later, at the end of his first affidavit he said, with specific reference to the copy of the guarantee exhibited to Mr. Winston Chan's verifying affirmation, that the guarantee had not been completed when it was signed by him and that he believed that any words in that document other than the printed words were added, after he had signed it, by someone other than himself and without his knowledge or authority.

19. In a subsequent affidavit, (made after Mr. Lau Cheung, Hoo had produced from the plaintiff's files a copy of the guarantee showing the name of the company typed in as the borrower in clause (1) but a blank space in clause (2)), the defendant, when dealing with the point that the company's accounts for the 15 months ended the 30th June 1981, and signed by the defendant, showed that company's bank loan was jointly and severally guaranteed by four directors of the company, deposed that it was never intended that the guarantee should be unlimited. He said his understanding ".... was that the guarantee would only be completed and become effective when the parties had agreed upon the limit of the guarantee."

20. It seems that it was not until the actual hearing before Bokhary J., and after the judge had raised the point, that those advising the defendant specifically relied on the blank in clause (1) (where the borrower should be named) in the copy of the guarantee produced by the defendant. Prior to that the emphasis had been put on the blank in clause (2) where the space is provided in the form for the insertion of the limit (if any) to the amount of the guarantee.

21. The defendant also deposed to the reasons why he claimed that he did not in fact sign the guarantee until December 1981 at a meeting with the plaintiff's then manager Mr. Rebert Lentz and others. The plaintiff's evidence strenuously denied this allegation, but the issue is not, in my opinion, of any decisive relevance in this appeal.

22. The defendant made an affirmation on Friday the 22nd September 1989 (a few days before the hearing of the appeals on Tuesday the 26th September 1989) in which, for the first time, he gave evidence to support a defence ("the premature writ defence") that the plaintiff's cause of action had not yet accrued when it issued its writ on the 6th December 1984. His evidence was to the effect that, whilst the plaintiff's statement of claim seemed to imply that the plaintiff's solicitor's letter of demand was delivered to him by hand on the 6th December 1984 prior to the issue of the writ in the action on the same date, he was in no doubt that he did not receive the latter on the 6th December 1984. He depased that he could not remember precisely when he received the letter, but he believed it was on or about the 11th December 1984.

23. In support of these allegations the defendant gave evidence describing a meeting he had attended at the plaintiff's offices on the 6th December 1984. He said he went to the meeting "by prior appointment" to meet Mr. Robert wilson, a vice-president of the plaintiff. At the meeting, according to the defendant, were Messrs. Wilson, Winston Chan, William Mellevish, Thomas Fung and Ben Cheng. The defendant said that it soon became apparent that the real purpose of the meeting was to try to enable the plaintiff to obtain from him "a method and timing for the repayment" of the company's loan which he had guaranteed. The plaintiff's representatives had, he said, scrutinised in some detail the documentation relating to the sale of certain assets (including a ranch secured to Wing On) of the company in the United States. His evidence was that, in view of the willingness of the company to assign the proceeds of sale of the ranch to the plaintiff, Wilson had indicated that the plaintiff would hold off any legal action pending, completion of the sale.

24. The defendant further deposed that on the 7th December he had a telephone conversation with Wilson who had expressed the plaintiff's doubts about the ranch sale proceeding, reminded the defendant of his obligation to the plaintiff as guarantor, and told him to make every effort to ascertain the whereabouts of his three co-guarantors if he did not wish to stand alone. According to the defendant he was not told at the meeting on the 6th December or in the telephone conversation on the 7th December either that the plaintiff's writ had been issued on the 6th December or that a prohibition order against him had been obtained on the same day. He said that he knew nothing about the writ until he recived a telephone call about it from Mr. David Pyott of Target on the 10th December 1984. As to the prohibition order, the defendant said he knew nothing about it until it was posted to him on the 10th December 1984 by the plaintiff's solicitors.

25. The defendant claimed to be in no doubt that he had not received the plaintiff's solicitors' letter of demand on the 6th December 1984 because he said that, if he had received it, he would have raised the matter with Wilson and his colleagues on the same day. Likewise, he said, if he had received the letter by the 7th December, he would have raised the matter with Wilson. He added that he had in fact received a letter from Wilson dated the 7th December (which the defendant produced) confirming the substance of their conversation on that date.

26. In his final affidavit made on the date of the hearing of the appeals the defendant again alleged that he was not served with the letter of demand on the 6th December 1984 and had been unaware of its existence until after his conversation with David Pyott on the 10th December 1984.

27. Other defences were raised on behalf of the defendant at the hearing below, but ultimately only one of them ("the discharge defence") was pursued at the hearing of this appeal, namely that by the Assignment and, in particular by its undertaking to Wing On under clause 4.01 thereof (not to sue the company to enforce payment by it of the plaintiff's un-assigned portion of the company's debt without the prior consent of Wing On) the plaintiff had discharged the defendant's obligations as the company's guarantor. In some way it was contended on the defendant's behalf that this discharge resulted from the application of the settled principle that "....a surety is discharged by the creditor dealing with the principal or with a co-surety in a manner at variance with the contract, the performance of which the surety had guaranteed." : See Ward v. National Bank of New Zealand Ltd. (1883) 8 App. Cas. 755(P.C.) at p. 763; National Bank of Nigeria Ltd. v. Awolesi [1964]1 W.L.R.1311 (P.C.) at p.1316. It is not necessary to refer to any further evidence relating to the discharge defence.

28. The evidence on behalf of the plaintiff which was material for the purpose of the appeal was contained in two affirmation made by Mr. Lau Cheung Hoo, a corporate finance manager of the plaintiff. This witness had been employed by the plaintiff since the 8th June 1987. He had therefore not been involved in the matters concerning these proceedings at any time prior to that date. He gave evidence concerning the relevant matters largely from his perusal of the plaintiff's files. Much of what he said was not evidence but argument which should have been left to the plaintiff's counsel.

29. In a combination of factual evidence and comment Lau pointed out, as regards the defendant's explanation for his failure to defend the plaintiff's claim, that the defendant was mistaken regarding the relevant dates of the winding up proceedings against the company, that he had been obliged by the prohibition order to remain in Hong Kong from the 6th December 1984 to the 5th March 1985 (inadvertently stated to be the 5th March 1981), that he had been legally represented when judgment was obtained against him and that it therefore seemed highly improbable that he would have been unaware of the judgment. As to the evidence of the defendant concerning the negotiations between Wing On and the plaintiff, Lau affirmed first that it was not until approximately the 20th March 1988 that "serious negotiations" began and, later in the same affirmation, that "negotiations" did not commence until the middle of March 1985. There was comment regarding the unlikeliheod of the defendant refraining from defending the plaintiff's action if he seriously thought he had any defence.

30. As to the failure of the plaintiff to seek execution against the defendant in respect of the un-assigned portion of the judgment debt, Lau contended that the plaintiff was under no obligation to do so and explained that this was due to investigations by the plaintiff disclosing that the defendant had no assets in Hong Kong. He affirmed that the plaintiff had then instructed its Australian solicitors to advise it on enforcement in Australia and that ".... it was pursuant to the advice of the Australian lawyers that the Judgment was not registered until the 13th February, 1987 in Australia."

31. As to the notice of the Assignment which was received by the defendant in early April 1985, Lau exhibited a copy of the Assignment and contended that "in the context of the Notice of Assignment as a whole" it was "quite clear that what had been assigned to Wing On was US$865,000 worth of the total indebtedness of ESH together with the corresponding benefit of the Guaranty and Judgment, and that to the extent that such indebtedness exceeded US$865,000, the debt remained due and owing to the plaintiff as did the liability of the Defendant under the Guaranty and Judgment."

32. Regarding the consequences of the delay upon the first ground for defending the action (i.e. that the guarantee contained two blanks when signed by the defendant and was not in the form exhibited by Winston Chan in his verifying affirmation), Lau affirmed that it was impossible for him to state with certainty what were the precise circumstances surrounding the signing of the guarantee by the defendant. This was, so Lau affirmed, because none of the officers who were involved with the defendant and the company in 1981 now worked for the plaintiff in Hong Kong.

33. Lau did however, produce what he affirmed was a true copy of the original signed guarantee. This copy differed from the copy which Winston Chan had exhibited to his verifying affirmation in the Order 14 proceedings. The copy produced by Lau had the name of the company typed in the space for the borrower. There was only a blank in clause (2) in the space for the limitation (if any) of the amount of the guarantee. He acknowledged that the space in clause (2) might have been filled in on a copy of the guarantee at a later stage but maintained that, even if the space in that clause had not been completed when the guarantee was signed, the implication would be that the guarantee was unlimited.

34. In a subsequent affirmation, made on the date of the hearing of the appeals below, Lau dealt with the defendant's proposed premature writ defence. He had searched the plaintiff's relevant files and caused the plaintiff's solicitors to search their files for information on this issue. He produced a copy of a memorandum dated the 7th December 1984 from the plaintiff's files. This had been prepared by Mr. Thomas Fung, an assistant vice president of the plaintiff. It was addressed to seven officers of the plaintiff and related to the company's debt and measures taken and to be taken in that regard. It mentioned that a demand letter had been issued to the company and continued:

"     The letter was delivered yesterday afternoon and Graham Fountain responded immediately and agreed to meet with us at 5:00 p.m. while we were meeting with Graham, Lo Winston Chan and W.T. Yip were at the High Court to request for the prohibition order. The idea was to serve Graham while he was in our officer."

On the question of service, although the writ in the action was acknowledged by the defendants on the 31st December 1984 there is no trace of any affidavit of service in the court filed. As indicated earlier in this judgment, the prohibition order was serve by post on the 10th December 1984.

35. The memorandum names three of the plaintiff's officers who, together with Fung, attended the meeting with the defendant. It discusses the defendant's proposal for the payment of the company's debt from the proceeds of pending sales of the company's property in the United sales but concludes with the expression of suspicion regarding the sales and mentions various measures to be taken by the plaintiff, including the delivery of demand letters to all the guarantors of the company's debt.

36. As to the reference in the memorandum to a demand letter having been sent to the company (and not to the defendant). Lau affirmed that the only coy of a demand letter dated the 6th December 1984 in the company's files was a letter from the plaintiff's solicitors addressed to the defendant marked "By Hand", which he produced. This letter contained a demand for payment of both the company's debts claimed in the plaintiff's action.

37. Lau said that the plaintiff's solicitors had informed him that their files only contained two relevant letters dated the 6th December 1984. One was the demand letter addressed to the defendant which Lau had produced, the other concerned the prohibition order obtained against the defendant. Lau also produced five carbon copies of letters obtained from the plaintiff's solicitors' files. These were all date the 8th December 1984. Two of these letters were demand letters to the company (addressed to it in Hong Kong and the United States respectively) in respect of its U.S. dollar debt to the company. The other three were demand letters addressed to the defendant's co-guarantors.

38. In view of the dates and contents of all the letters produced by him Lau contended that the reference in Fung's memorandum dated the 7th December 1984 to the demand letter "to the company" as having been "delivered yesterday afternoon" was a slip. He further contended that the only demand letter which could have been intended to be referred to was the demand letter dated the 6th December 1984 addressed to the defendant.

39. Lau also produced copies of six demand letters obtained from the post room letters file of the plaintiff's solicitors. One of these letters was a copy of the letter of demand dated the 6th December 1984 addressed to the defendant. This letter had been stamped "6 DEC 1984" with the handwritten comment "hand". Lau said that the plaintiff's solicitors had informed him that this indicated that the letter had been delivered by hand on the 6th December 1984. The other five copies of demand letters were copies of the demands sent to the company and the defendant's co-guarantors. They bore similar date stamps and indorsed comments which Lau had been informed by the plaintiff's solicitors indicated the date and manner of despatch. Thus the demand letter dated the 8th December 1984 addressed to the company in Hong Kong had been stamped "10 DEC 1984" with the hand written comment "hand", whereas the copy of the same letter addressed to the United States of American had been stamped "10 DEC 1984" with the hand written comment "By Airmail".

40. Lau further affirmed in the same affirmation that only one of those present at the meeting on the 6th December 1984 or involved at the time was currently working for the plaintiff in Hong Kong, That was Mr. Ben Cheng, who had no recollection of the matter. Thomas Fung was, Lau affirmed, working for another bank in Canada, and in the time available it had not been possible to track down those no longer in Hong Kong.

41. Each side blamed the other for the delay occasioned in the course of the New South Wales proceedings. The defendant complained of the substantial interval between registration of the judgment in New South Wales on the 13th February 1987 and service of notice of the registration on him on the 11th August 1988. The plaintiff explained through Lau's evidence that personal service was required under the New South Wales procedure and there had been difficulty in tracing the defendant without the co-operation of his New South Wales solicitors. The defendant's solicitor in New South Wales replied that substituted service was permissible.

42. The plaintiff complained, by Lau, of the delay by the defendant in making his applications in Hong Kong. The defendant explained that he had acted promptly to resist the New South Wales proceedings because he had been advised, inter alia, on the strength of the notice of the Assignment, that the assignment of the judgment debt by the plaintiff was a bar to its enforcement of the judgment. He deposed that it was not until November 1988 when he discovered (from evidence filed on behalf of the plaintiff in the New South Wales proceedings) that the notice was not an accurate notice of the actual Assignment.

43. The defendant's evidence was that after obtaining the advice of leading counsel on the 28th December 1988 regarding the changed situation created by the disclosure of the terms of the Assignment he had instructed his solicitor in New South Wales on the same date to contact his Hong Kong solicitors immediately after the New Year and to explain the position to them and take the steps in Hong Kong which New South Wales counsel had advised to be taken. The solicitor having the conduct of the New South Wales proceedings on behalf of the defendant made an affidavit confirming the defendant's evidence on these matters. He deposed that the period of delay between mid-January and the 22nd March 1989 (When he instructed the defendant's solicitors in Hong Kong) was the result of oversight by his firm.

44. As regards the merits of the defendant's proposed grounds of defence, the judge's approach was to apply the test of "an arguable case" in the sense contemplated by Sir Roger Ormrod when delivering the judgment of the court in The "Saudi Eagle" [1986]2 Lloyd's Rep. 221 where he indicated that the standard of arguable case required to set aside a default judgment was higher than that to be met by a defendant seeking leave to defend under Order 14. Adverting to the phrase "an arguable case" for the purposes of Order 14 Sir Roger Ormrod commented at p.223 in a passage cited by Bokhary J.:

".....If it is used in the same sense in relation to setting aside a default judgment, it does not accord, in our judgment, with the standard indicated by each of their Lordships in Evans v. Bartlam. All of them clearly contemplated that a defendant who is asking the Court to exercise its discretion in his favour should show that he has a defence which has a real prospect of success. (In Evans v. Bartlam there was an obvious defence under the Gaming Act and in Vann v. Awford a reasonable prospect of reducing the quantum of the claim.)"

45. Mr. Barlow, for the defendant, contended that Sir Roger Ormrod then fell into error when in the next passage at p.223, also cited by the learned judge below, he added:

"     Indeed it would be surprising if the standard required for obtaining, leave to defend (which has only to displace the plaintiff's assertion that there is no defence) were the same as that required to displace a regular judgment of the Court and with it the rights acquired by the plaintiff. In our opinion, therefore, to arrive at a reasoned assessment of the justice of the case the Court must form a provisional view of the probable outcome if the judgment were to be set aside and the defence developed. The "arguable" defence must carry some degree of conviction."

46. That passage was criticised by Hobhouse J. in The "Ruben Martinez Villena" [1987]2 Lloyd's Rep. 621 at p.624 where he observed:

"     If in that passage he is intending to say that the Court must do its best to predict the outcome of the action if the judgment is set aside, and should only set aside a judgment if it is satisfied that the outcome of the action will, on a better than 50-50 chance, be a judgment in favour of the defendants, then I consider that statement goes beyond the law as it has been laid down in the authorities. As it is an obiter dictum it is not binding on me and I am under no obligation to follow it; but I doubt whether Sir Roger Ormrod was intending to say that."

47. Mr. Barlow relied on this criticism for the proposition that Sir Roger Ormrod had propounded too stringent a test for an arguable case and that the judge in the present case had therefore erred in following such a test which amounted to requiring the defendant to show that he would probably succeed in his defence at the trial.

48. I am unable to accept this argument. I am in no doubt that in The "Saudi Eagle" Sir Roger Ormod was clearly founding on Evans v. Bartlam [1937] A.C. 473 (H.L.) when propounding his "real prospect of success" test. Thus he had earlier observed at p.223 that Evans v. Bartlam indicated that, in the exercise of the court's discretion whether to set aside a default judgment, "the primary consideration is whether the defendant 'has merits to which the Court should pay heed' (per Lord Wright at p.489), not as a rule of law but as a matter of common sense, since there is no point in setting aside a judgment if the defendant has no defence ....". At p.223 he had also cited Lord Russell of Killowen's reference at p.482 in Evans v. Bartlam to "some serious defence". Finally Sir Roger Ormrod had expressed the conclusion of the court that the defendants in The "Saudi Eagle" case had not "shown that they have a defence which has any reasonable prospect of success.".

49. In my opinion the judge is not to be faulted in the present case for following Sir Roger Ormrod's "reasonable prospect of success" test which is consistent with the relevant dicta in Evans v. Bartlam: ("prima facie defence", per Lord Atkin at p.480, Lord Thankerton concurring; "some serious defence", per Lord Russell of Killowen at p.482; "merits to which the Court should pay heed" and defendant "clearly shows an issue which the Court should try, per Lord Wright at p.489; Lord Roche concurring generally).

50. In accordance with the almost invariable practice accepted in Evans v. Bartlam, the judge below gave consideration (in the manner indicated hereafter) when exercising his discretion under Order 14 rule 11, both to the merits of the proposed defence and to the defendant's explanation for his failure to resist what Mr. Barlow conceded to be a regular judgment. The judge also considered in the manner indicated hereafter, the question of delay and prejudice alleged to have been occasioned thereby to the plaintiff.

51. As to the merits of the proposed first ground of defence he found that the blanks in the guarantee provided no basis for granting either of the defendant's applications. By the end of the hearing of the present appeal Mr. Barlow did not pursue his attack on the judge's decision relating to the blank in clause (2) for the limitation of the amount of the guarantee. The judge's decision relating to the first ground of defence was based solely on absence of merit and he evidently did not find it in this respect necessary to refer to the reasonableness or otherwise of the defendant's explanation for his failure to resist the summary judgment and for his long delay in applying to set it aside. During the hearing of the appeal the plaintiff was given leave to file a respondent's notice relying not only on Lau's evidence regarding the form of the original guarantee but also on the defendant's failure to resist and his delay in applying to set aside the summary judgment, thereby allegedly causing prejudice to the plaintiff. The prejudice alleged was that the plaintiff had been severely hampered to the point that it might now be unable to establish that the defendant had signed the guarantee with the name of the borrower inserted in clause (1).

52. As regards the defendant's proposed premature writ defence, the judge seems never to have actually decided whether the defendant had shown an arguable defence within The "Saudi Eagle" test which he had adopted. He referred to the evidence on both sides on this issue and then moved on to the question of delay and to the argument on behalf of the plaintiff that delay by the defendant coupled with prejudice to the plaintiff was ground for refusing the plaintiff's application for what amounted to an indulgence to the defendant at the expense of the plaintiff.

53. The judge rejected as unreasonable the explanation given by the defendant for his failure to resist summary judgment. As to the considerable delay between the judgment and the defendant's application to set it aside, the judge held that not all but some of the delay was the defendant's fault. He then concluded as fellows:

"     In my judgment, the defendant's act of allowing judgment to go in default and his failure timeously to apply to set it aside has resulted in a position in which the plaintiff is severely hampered and prejudiced in meeting the point as to the accrual of its cause of action.

    In the exercise of my discretion, I decline to grant the defendant any relief on that point. I should not be taken as being of the view that the point would have satisfied the test in the Saudi Eagle if I had been prepared to allow it to be relied upon."

54. Thus whilst the judge did not wish to be taken to have held that The "Saudi Eagle" test had been satisfied by the defendant, he made it clear that he considered the premature writ defence could not be relied upon in support of the defendant's appeal by reason of his unsatisfactory explanation for failing to resist the giving of the judgment, of the defenannt's failure to apply timecusly to set aside the judgment and of the consequential prejudice to the plaintiff. At this stage the judge did not refer to the notice of the assignment.

55. The judge then dealt with and rejected the discharge defence and other defences related to the plaintiff's conduct. The latter defences were not pursued at the hearing of this appeal. As regards the discharge defence, the judge held that this was covered by clause (4) of the guarantee whereby the guarantors had authorised the plaintiff, inter alia:

"     without notice or demand and without affecting their liability [under the guarantee], from time to time to renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof, including increases or decreases of the rate of interest thereon....".

This finding was challenged by the defendant in the present appeal. I found the basis of Mr. Barlow's argument on this issue, to which I made reference earlier in this judgment, difficult to apply to the circumstances of this case where the plaintiff had not made the company a party to the Assignment, However, in view of the opinion I have formed regraing the premature writ defence I prefer to express no firm view on this issue in this appeal.

56. At the end of his judgment the judge dealt with the notice of the Assignment in the following manner:

"     Finally, there is the point in relation to the assignment. I will come straight to the point. I do not think there is anything in the argument. The plaintiff had at one stage given a notice of assignment which, if it were accurate, suggested that the whole of the benefit of the judgment here in question had been assigned to another bank. But in truth, that is not what happened. What seems to have happened is that an arrangement was entered into between the plaintiff and another bank under which the plaintiff assigned a certain portion of what it may be able to recover by way of execution on the judgment, provided that the retained portion is fully satisfied first."

57. In my opinion the judge below was clearly right in concluding that the defendant had given no reasonable explanation for his failure to seek leave to defend in the Order 14 proceedings. The defendant's evidence was that he relied on the successful outcome of pending negotiations between Wing On and the plaintiff which he hoped would result in Wing On being substituted for the plaintiff as the company's creditor and in Wing On, inter alia, not claiming against him under the guarantee. I agree with the judge that this reliance on the mere hope of successful negotiations, to be followed by indulgence by the assignee Wing On, was not reasonable conduct in a debtor who now claims that he knew that the guarantee was defective and that he had an arguable defence to a claim of no less than (US) $1.3 million. Furthermore the defendant submitted to the prohibition order made against him on the 6th December 1984 when he could have applied to have it discharged under Order 44A rule 4(3)(b) if he had a substantial defence.

58. However, although the defendant failed to give a reasonable explanation for allowing judgment to go by default, there is no rule that a reasonable explanation for the default is a necessary prerequisite to a successful application to set aside a default judgment. As Lord Atkin observed in Evans v. Bartlam at p.480:

"     I do not think that any such rule exists, though obviously the reason, if any, for allowing judgment and thereafter applying to set it aside is one of the matters to which the Court will have regard in exercising its discretion. If there were a rigid rule that no one could have a default judgment set aside who knew at the time and intended that there should be a judgment signed, the two rules would be deprived of most of their efficacy."

59. It is well settled that the primary concern of the court in an application to set aside a regular default judgment is whether the applicant can show merits in the form of a defence in the sense explained in Evans v. Bartlam and in The "Saudi Eagle". This was emphasised by Lord Atkin in Evans v. Bartlam at p.480 where he observed:

"     The principle obviously is that unless and until the Court has pronounced a judgment upon the merits or by consent, it is to have the power to revoke the expression of its coercive power where that has only been obtained by a failure to follow any of the rules of procedure."

60. Likewise Lord Wright said at p.489 in the same case:

"     The primary consideration is whether he has merits to which the Court should pay heed; if merits are shown the Court will not prima facie desire to let a judgment pass on which there has been no proper adjudication."

Examples of the recent application of this principle are to be found in Vann v. Awford (The Times, 23rd April 1986) (where a defendant showing triable issues succeeded in having a judgment set aside despite the fact that he had deliberately misled the court by lying about the reason for not defending the action); and The "Saudi Eagle" per Sir Roger Ormrod at p.223.

61. In the present case, the judge rejected the first ground of defence of the defendant in the following words:

"     In the guarantee in question, which was signed back in 1981, the name of the borrower was left blank. This omission was not one on which the defendant had relied until I pointed it out in the course of the hearing before me today. I think that it is fair to say that the defendant knew full well who the borrower was, and that, if extrinsic evidence were necessary to complete the contract of guarantee in that regard, such extrinsic evidence is to be found in the material placed before the Court by the defendant as well as by the plaintiff itself."

62. I have approached this issue on the basis that if the judgment were set aside the plaintiff would not be relying at any subsequent trial upon the guarantee in the completed form produced in the Order 14 proceedings by Chan, but on the form of the copy produced in these proceedings by Lau i.e. a guarantee form in which the company's name appears in clause (1) but clause (2) remains blank. Furthermore I have borne in mind that all the defendant's evidence directed to blanks in the guarantee form was filed at a time when he was taking no point on the blank in clause (1) where the borrower's name is to be inserted. His evidence was all directed to the blanks in clause (2) where any limitation of the amount of the guarantee is to be inserted.

63. No doubt influenced by New Zealand Loan and Mercantile Agency Co. Ltd. v. Paterson (1882) N.Z.L.R.1 (C.A.) 325 and Caltex Oil (Australia) Pty. Ltd. v. Alderton (1964) 81 W.N.(N.S.W.) (Pt.1) 297, Cited in O'Donovan and Phillips on the Modern Contract of Guarantee, for the proposition that if in a standard form of continuing guarantee a blank is left in the limitation of amount clause, the guarantee will be construed as unlimited, Mr. Barlow concentrated in his reply only on the blank in clause (1) in the copy of the guarantee produced by the defendant. He relied on the above cited authorities for his contention that the blank in clause (1) left that clause incomplete and the guarantee uncertain because otherwise the plaintiff might insert the name of any borrower it chose instead of that of the company.

64. For my part, I am left in doubt, on the submissions made to this court, whether the judge was right in holding, in effect, that extrinsic evidence could be relied upon to identify the borrower in this case. Mr. Huggins, for the plaintiff, referred the court to Chitty on Contracts, 26th edition, para 872 and to Carr v. Lyncn [1900]1 Ch 617 for the proposition that the identity of parties may be established by extrinsic evidence. Here the borrower was not a party to the guarantee. It was intended to be named in the instrument, but was not so named when the defendant signed it. There was no identification or description of any kind of the intended borrower. The guarantee was in that sense incomplete when signed by the defendant.

65. I therefore have difficulty in accepting that the guarantee in the form produced by the defendant can be treated as a complete contract in relation to which extrinsic evidence is admissible to complete the blank in clause (1) and identify the borrower as the company. In accordance with the rule stated in Taylor on Evidence, 8th edition, vol. ii, s.1194 referred to by Lord Davey in Bank of New Zealand v. Simpson [1900]AC 182 (P.C.) at p.188 extrinsic evidence must of necessity be received ".... to identify the persons and things to which the instrument refers". Here the instrument produced by the defendant arguably does not refer to any borrower at all as a person. Moreover, there being no allegation that the copy of the guarantee produced by the defendant had been forged or tampered with it seems to me that his copy is at this stage to be regarded as no less likely than the copy (with clause (1) completed) produced by Lau to be accepted at a trial as the form of guarantee which the defendant signed.

66. However, Mr. Huggins advanced a further argument in support of the judge's conclusion. This argument went beyond the defendant's respondent's notice, but no objection was taken on this score when he advanced it. It was abundantly clear from the defendant's own evidence and from that of the plaintiff that he knew at all material times that the company was intended to be named as the borrower under the guarantee. On this basis Mr. Huggins, citing United Dominion Trust v. Western [1976]1 QB 513, contended that the defendant must have impliedly given the plaintiff authority to complete the name of the borrower on his behalf, if nothing else. Why else, Mr. Huggins asked rhetorically would the defendant sign the guarantee form in blank and give it to the plaintiff? This argument seems to me to be unanswerable (particulary in the absence of any reliance by the defendant on the blank in clause (1) until the judge took the point) even if the defendant only signed the guarantee in December 1981 as he claimed, i.e. subsequent to his signature of the company's accounts referring to the guarantee of the company's debt by the guarantors. As a matter of both law and commercial reality I am therefore unable to accept that the defendant's first ground of defence would have a real or reasonable prospect of success at trial. I add that no argument based on rectification was advanced on behalf of the plaintiff but it could well be advanced at any trial of this action.

67. As to the premature writ defence, it seems to me that the judge erred in making no determination at all on this issue. The question of merits is the primary concern of the court in the present situation in which he rejected all other proposed defences. It also seems to me that, on the evidence which I have reviewed above, the defendant would have a real prospect of success on this issue at trial.

68. Mr. Huggins for the plaintiff conceded that the guarantee, which contained the guarantors' promise to pay "on demand", contained no other provision which entitled the plaintiff to dispense with a formal demand before action. There were no special provisions in the guarantee regarding manner of service or deemed service of demand on the guarantors. On the plaintiff's pleaded case and evidence in support of the Order 14 application there was no express averment that the service of the demand by hand on the 6th December 1984 preceded the issue of the writ on the same day. This was left to implication. The judge observed:

"     On the face of it, therefore, one would not be disposed to think that the legal advisors of the plaintiff had reversed the proper order of demand and writ."

69. However, as the judge went on to add, the defendant asserts that he did not receive the demand letter until some days after the action commenced i.e. on or about the 11th December 1984. Lau has no direct knowledge on this matter. He has produced a copy of the demand letter which indicates that it was sent by hand. He has given hearsay evidence to the effect that the plaintiff's solicitors have informed him that the date stamp ("6 DEC 1984") and indorsement "hand" on their copy of the letter means that it was delivered by hand on the 6th December 1984. Further than that the plaintiff's evidence does not go. There is no acknowledgment of service by the defendant on any copy of the demand letter and no evidence from any messenger or representative of the plaintiff's solicitors to say when or precisely how service was effected.

70. The plaintiff faces the further problem that the issue of a writ is not a judicial act (relating back to the earliest moment of the day when it is made) but an administrative act: see Clarke v. Bradlaugh (1881)7 QBD 151, 8 QBD 63 (C.A.) and the practice notes in the Supreme Court Practice 1988, Vol. 1, para 3/2/6. This means that even if the demand letter was served on the 6th December it still becomes necessary to determine whether the letter was served on that date prior to the issue of the writ, which does not in Hong Kong bear any time stamp affixed in the registry. There was no evidence whatsoever from the plaintiff on this important point.

71. Whilst the defendant can hardly be heard to require reasonable time to effect payment after demand in the absence of any evidence of ability to pay (see Bank of Baroda v. Panessar [1987]Ch 335 at P.348), on the evidence before this court I conclude that his defence based on the contention that the writ was issued prematurely in this case must have a reasonable prospect of success.

72. The judge was, with respect, wrong in declining to decide whether this defence had merit. Instead he refused to allow the defence to be relied upon because the defendant's explanation for his default was unsatisfactory and he had not applied timeously to have the judgment set aside, thereby prejudicing the plaintiff in meeting the defence. In my judgment the merit factor, being the primary concern, outweighs the absence of a reasonable explanation for the defendant's failure to resist the default judgment.

73. The question remains whether the very long delay in applying to set aside the judgment and the alleged consequential prejudice factor to the defendant should tip the scale in favour of the plaintiff. The judge did not quantify the delay attributable to the defendant but confined himself to a general finding that not all but some of the delay was the defendant's fault. In my judgment the judge should at this stage have given consideration to the notice of assignment and the extent to which it could reasonably be said that it induced the delay which occurred after the 4th April 1985.

74. When the judge came to consider the notice at the end of his extempore judgment he had already eliminated the premature writ defence and he confined himself to pointing out the true nature of the Assignment. He did however acknowledge that the notice, "if it were accurate, suggested that the whole of the benefit of the judgment.... had been assigned to another bank." This seems to me to be an important factor which should have been given considerable weight when considering the question of delay and its consequences. The notice was at the very least defective and inaccurate in paragraph (c) which referred to the assignment of "the full benefit of the judgment" to Wing On.

75. I accept that a careful lawyer who had not been given a copy of the Assignment might well have been put on enquiry after reading paragraph (c) in conjunction with paragraphs (a) and (b) which referred to partial assignments. However the defendant and his lawyers in New South Wales were, in my judgment, understandably and genuinely confused by the notice, until they discovered in November 1989 that the notice was inaccurate in a highly material respect. By then there had been a very substantial period of time between the 4th April 1985 and November 1989 when the defendant was under the false impression, that Wing On had the benefit of the entire judgment. He had reason to believe that Wing On would not seek to execute the judgment against him. When he was served on the 11th August 1988 with notice of the registration of the judgment in New South Wales he applied promptly to set aside the registration and his lawyers advised him to rely on the notice of assignment.

76. The defendant was solely responsible for the period of delay between the 4th February 1985, the date of the judgment, and the 4th April 1985 when he acknowledged the notice of the Assignment. Thereafter it seems to me that the subsequent delay (of four years and about eight months) in applying to set aside the judgment until November 1989 (when he and his lawyers learned for the first time that the notice of the Assignment was inaccurate) was induced by the notice signed on behalf of the plaintiff. Thereafter the defendant's solicitor was responsible for three months delay, but that was at a time when the execution of the judgment was being actively contested by the defendant in New South Wales.

77. In all the circumstances, I agree with the judge that the defendant was responsible for some delay in this case, but when the cause of the very lengthy delay is examined and the length of the delay which can fairly be said to have been induced by the plaintiff's inaccurate notice is assessed, all but a few months of it must be regarded as delay for which the defendant has given a reasonable explanation and is substantially attributable to the confusion caused by the plaintiff's notice.

78. It follows, in my opinion, that the responsibility for any prejudice to the plaintiff as a result of the delay should be predominantly attributed to the plaintiff rather than the defendant. Furthermore, as regards the premature writ defence, although time undoubtedly tends to dim the memory, there was no indication in the plaintiff's evidence that any material witness could not be traced or that any records of the plaintiff or its solicitors had been destroyed during the period of delay.

79. I therefore conclude that the judge erred in the manner I have indicated above and that in all the circumstances the decisive factor in this case is the merit of the defendant's defence which should be adjudicated upon by the court, after setting aside the judgment, if justice is to be done between the parties. Accordingly I would formally dismiss the defendant's appeal on the stay application but allow his appeal in respect of his application to set aside the judgment under Order 14 rule 11.

Sir Derek Cons, V.P.:

80. I am grateful to my Lord for his detailed analysis of the evidence and arguments put before us.

81. I agree with his conclusion that the judgment should be set aside having regard to the "premature writ" defence. In that circumstance I do not think it necessary to say anything further.

82. I too would therefore allow the appeal to the extent my Lord has suggested, set aside the judgment entered on the 4th February 1985 and make an order nisi that the Defendant have the costs of the appeal. I would not disturb the order of costs made in favour of the Plaintiff in the court below.

Michael Kempster, J.A.:

83. I also agree both that the judgment should be set aside, in the light of the "premature writ" defence, and that an order should be made in the terms proposed by my Lord the Vice-President.

Order Accordingly