DAH SING BANK, LTD v. HOP SHING PRINTING CO (a firm) AND OTHERS

HCA 3252/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3252 OF 2003

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J U D G M E N T

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1.  Dah Sing Bank Limited, (the Bank), is the owner of a certain Offset Printing Press, (the machine).  By a lease agreement dated 10 October 2002, the Bank agreed to lease the machine to Technique Papeurtrip Products Factory, (Technique) a firm owned by the third defendant, for a period of four years at a monthly rental of $74,375.  Technique fell into default on the lease.  The four defendants in these proceedings were guarantors to the Bank for the due performance of the terms of the lease by Technique.  The Bank has obtained summary judgment against the Defendants from the Master.  The first, second and fourth defendants now appeal to this court.

2.  Although it has not been specifically stated I understand that Mr Wong, the fourth defendant, is the proprietor of the first and second defendants and that anything said by him applies equally to those two defendants.

Non Est Factum:

3.  First it is contended that the defendants have available to them a defence of non est factum.  The affidavit of Mr Wong complains that he was not informed about the nature of the documents that he was to sign, that the guarantees, both corporate and individual, were not explained to him, and that he was not given a copy of the guarantee document.  He says that he was told by someone called Stephen Chu, a person he believed to be the financial consultant of another printing company that was somehow involved with Technique, that the documents he was signing were general banking documents in relation to the loan and that they would not have any adverse effect or liability upon him.  It was Stephen Chu who apparently brought an officer of the Bank with him to see Mr Wong to sign the documents.  Mr Wong’s evidence was that the bank officer did not explain the documents but merely pointed out where he was to sign. 

4.  Even if these facts are accepted they fall a long way short of providing a basis for a defence of non est factum.  Any representation by Stephen Chu, or anyone else associated with Technique is not a representation for which the Bank must take responsibility.  The simple answer to Mr Wong is that if he did not know the nature of the documents then he ought not to have signed them.  If he elects to sign documents, not knowing their nature, then he will be responsible for them and their contents.  The law is quite clear.  There is no obligation upon the Bank to explain the documents to Mr Wong.  Mr Wong chooses to sign documents without having their content explain to him then he must accept the consequences of signing the document.  There is plainly no basis for such a defence.

5.  The manner in which the matter was argued incorporated an allegation of misrepresentation.  That allegation stands better to be considered by itself, as first, Mr Wong’s evidence was that the Bank officer made no oral representation as to the circumstances, and second, on the facts there is no evidence of misrepresentation at the time the lease was entered into or the guarantees given.

Misrepresentation:

6.  The general rule is that a creditor is under no duty to disclose material facts to a surety.  That is so even if the creditor knows something which affects the principal’s credit, or of any circumstances unconnected with the transaction in which the surety is about to engage, which may render his position more hazardous, unless the surety makes specific inquiry: see Andrews & Millet, Law of Guarantees, 4^th ed 2005, para 5-015, p141.  However if the creditor has represented a particular state of affairs to the surety, and it comes to his knowledge, before the contract is entered into, that there has been a material change of circumstances, the creditor will be obliged to tell the surety about it.  He must also correct any mistake or misapprehension by the surety of which he has actual knowledge before the contract is made: see supra at pp. 142-3.

7.  The claim of misrepresentation begins with the assertion in the lease that the location of the premises in which the equipment was situate was “Shang Sha Village, Chang An Town, Dongguan, Dongguan Chang Shang Sha Wah Feng Paper Products Factory”.  It is clear that that statement comprises a representation as to the location of the machine and the party in whose physical possession the machine would be.  It was subsequently discovered, after the default arose, that the machine was not in possession of Technique, but in the possession of the company known as Dongguan Chang Shang Sha Wah Feng Paper Products Factory, (Wah Feng), and that instead of being situate in Shang Sha Village, Chang An Town, Dongguan, (the Shang Shah address), the machine was located at “The 2^nd Industrial District, Jiekou Management District, Chang An Town Dongguan, (the Jiekou address).

8.  It is plain from other documents signed on 10 October 2002, that the Bank knew that the operator of the machine would be Wah Feng.  The argument is made that the statement of the location of the premises contained in the lease, at the time the lease and guarantee were given, was a misrepresentation because, (i) the machine was located at the Jiekou address, and (ii) the machine was in the possession of Wah Feng.

9.  There is no evidence to suggest that at the time the lease and guarantee were made that the machine was not located at the Shang Shah address.    In the absence of any evidence to suggest that machine was not located as represented in the lease the representation in the lease gives rise to no basis for a defence.  Indeed the whole of the evidence points to the machine having been moved after the lease was made.  This in itself gives rise to another contention upon which it is said that there is a basis for defence.  I shall deal with this later, (the material variation defence).

10.  The representation contained in the lease is a clear representation that the machine would be at the Wah Feng Factory.  It is right that no representation was made that Wah Feng would be the actual operator of the machine, (that is the effect of the other documents signed on 10 October 2002), but it is plain from the statement in the lease that the machine would be in the physical possession of Wah Feng.  No enquiry was made of those assertions by the guarantors and there is no obligation upon the Bank to further explain the situation.  I am satisfied that there was no misrepresentation on the part of the Bank, either as to the location of the machine, or the party in whose possession the machine would then be.

11.  I am accordingly satisfied that there is no basis in fact upon which the defendants may contend that there was any misrepresentation on the part of the Bank at the time the guarantees were entered into.

Material variation:

12.  As an alternative to the misrepresentation defence it was contended that the delivery of the machine to Wah Feng, or its removal to Jiekou, constituted a material variation of the contract which would discharge the surety.  The law clearly as that a material variation of the principal contract will normally discharge a contract of guarantee unless the guarantor consents to the variation.  That said, it is open to the parties to agree that a guarantee is not to be affected by any variation in the principal contract.  Such an agreement is clearly effective: British Motor Trust Co Ltd v Hyams (1934) 50 TLR 230.

13.  For the defendants, two variations of the principal lease were contended.  They were first, the delivery of possession of the machine to Wah Feng, and secondly the relocation of the machine from the Shang Shah address to the Jiekou address.

14.  As to the delivery of the possession of the machine to Wah Feng, it is plain from the expressions used in the lease that the machine was to be located at the Wah Feng factory, in other words in the physical possession of Wah Feng.  There has been no variation which might otherwise release the surety.

15.  It is clear from the evidence that the Bank knew that the machine had been relocated to the Jiekou address, because during the duration of the lease the Bank obtained inspection reports in relation to the machine, which reports make it plain that at the time of the reports the machine was at the Jiekou address.

16.  In this case the parties have agreed that a variation of the principal contract will not discharge the guarantee.  Clause 6 of the guarantee provides as follows:

Without prejudice to this Guarantee and without discharging or in any way affecting the liability is of the Guarantor(s) hereunder, the Bank may at all times without the consent of or notice to the Guarantor(s):-
(a)	renew, determine, vary or increase any credit or other facilities to the Customer or the terms or conditions in respect of any agreement, arrangement or transaction with the Customer in any manner whatsoever;

17.  I am satisfied that this clause provides a complete answer to the Bank, to any suggestion that the relocation of the machine was a variation of the principal contract to which the guarantors had not given their consent.  Under the provisions of clause 6 the Bank is entitled to vary any of the “terms or conditions” of the lease without the consent of, or notice to the guarantors.  The location of the machine is certainly one of the “terms or conditions” of the lease.

18.  Mr Siu sought to argue that the words in clause 6(a): “credit or other facilities to the Customer” and “the terms and conditions” should be interpreted on an ejusdem generis basis, and that the expression “terms or conditions” was limited by the expression “credit or other facilities”.

19.  The ejusdem generis principle arises from the linguistic implication by which words having literally a wide meaning (when taken in isolation) are treated as reduced in scope by the verbal context: see Bennion, Statutory Interpretation 4^th Ed, p 1054.  The principle is presumed to apply unless there is some contrary indication. For the principle to apply there must be a sufficient indication of a category that can properly be described as a class or genus.  The expression “credit or other facilities” is an indication of a category that may be described as a class.  So is the expression “terms or conditions” an indication of a quite different category that may equally be described as a class.

20.  In my view it is beyond argument that the two expressions are intended to refer to two quite different matters, one, the extent of the credit or facilities to be allowed to the debtor, the other, the terms and conditions upon which the credit facilities are to be given.  In the circumstances of the documents such as this I am satisfied that it was not intended that the expression terms or conditions should be limited to those “terms and conditions” specifically involving “credit or other facilities”.  I am satisfied that it is beyond argument that clause 6 of the Guarantee enables the Bank to vary any of the provisions of the principal lease without the consent or knowledge of the guarantor.

21.  Thus, if it was that the machine was relocated with the knowledge of the Bank, then such action was perfectly lawful.  If the surety was concerned about the matter, the duty fell upon him to make regular inspections of the machine, which was of course his security for the guarantee he had given.

The negligence defence:

22.  It was argued for the defendants, relying primarily upon Standard Chartered Bank Ltd v Walker & Anor [1982] 3 All ER 938, that the Bank has been negligent in not recovering the equipment, thereby depriving the defendants of the opportunity of themselves, following subrogation of the Bank’s rights after payment of the debt, to realise the security.

23.  The factual circumstances in this case are that when the Bank found Technique to be in default it issued proceedings in the Mainland for the recovery of the machine.  An order was obtained but the machine had gone.  The Bank took no further steps in relation to the machine, and instead pursued the defendants under the guarantee.

24.  It is a right that in Walker’s case the Court of Appeal found that in circumstances where a debenture holder appointed a receiver, who took steps to realise assets and to hold a sale of the company’s stock, a duty of care was owned by the receiver, as an agent of the creditor, not only to the borrower, but also to any guarantor under the debenture, to obtain the best possible price in the circumstances.  Here are however, the Bank has not taken any steps in relation to the machine itself, other than obtaining a court order for its recovery.

25.  It is only in circumstances where actual physical steps are taken in relation to the machine, such as an act of repossession, or steps in the nature of advertising for auction, towards a sale of the machine, that the duty of care, contended for by the defendants’, might arise.  The present circumstance is dealt with by the following passage from China and Sea Bank Ltd v Tan [1990] 1 AC 536 (PC), at p. 545:

“In the present case the security was neither surrendered nor lost nor imperfect nor altered in condition by reason of what was done by the creditor.  The creditor had three sources of repayment.  The creditor could sue the debtor, sell the mortgaged securities or sue the surety.  All of those remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all.  If the creditor chose to sue the security and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety.  If the creditor chose to exercise his power of sale over the mortgaged security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell…….. (The emphasis is mine).

The creditor is not obliged to do anything.  If the creditor does nothing and the debtor declines into bankruptcy the mortgaged securities become valueless and the surety decamps abroad, the creditor loses his money.  If disaster strikes the dental and the mortgaged securities but the surety remains capable of repaying the debt then the creditor loses nothing. ”

26.  Although not cited in the judgement, Walker was cited in argument.  It is consequently clear from the judgement of the Privy Council that the duty of care referred to in Walker arises only in circumstances where the Bank takes active steps in relation to the security.  That is plainly not the case here.  The Bank were perfectly entitled, upon finding the machine gone, to look then to the guarantors and to take no further step in relation to the machine itself.  It is simply not open to argument that the loss of the machine is as a result of anything that the Bank has done.  There is plainly no case to argue nor any triable issue which may be based upon an allegation of negligence against the Bank.

The clause 8.04 argument:

27.  Clause 8.04 of the lease makes provision for the assessment of the amount required to be paid by the lessee, Technique, in the event that the lease is terminated, as is the case here, pursuant to clause 8.01, upon the lessee failing to make payment of the rental.  The clause requires the lessee to pay the Bank “damages” and prescribes a formula for the assessment of such damages, which require the application of the Rule of 78 and the giving of credit by the Bank of the excess of the current market value of the equipment over the residual value of the equipment at the end of the lease period.

28.  Mr Siu raised two arguments based upon this clause.  First he said that as the amount payable by the lessee, which he said was the sum guaranteed by the guarantors, were “damages”, the Bank had a duty to mitigate its loss which duty it had failed to carry out.  Second, he contended that the Bank must give credit for the value of the machine.  The evidence establishes that as at December 2003 the equipment was worth in the order of HK$3.5 million.  It was argued that if credit was given for the value of the equipment then there would be no debt. 

29.  The interpretation of this clause must be read in the light of the rights of the Bank, as set out in China and South Sea Bank Ltd v Tan.  It is plain that the Bank may freely decide which of its remedies it chooses to exercise, and that if it chooses one remedy, and as a result the security disappears, there will be no liability on the Bank.  In light of that right on the part of the Bank it is clear that the obligation to give credit for the value of the machine can only arise where the machine can be found and itself realised.  Clearly if the machine is lost, its current market value will be nil.  The Bank is entitled to enforce its rights against the surety, and upon doing so must, if demanded, assign to the surety its rights under the principal contract.  That includes the right to recover the machine.  If the surety can find the machine all well and good.  But if it cannot, it will be the loser.  It cannot be right that if the machine is gone and cannot be found, that the Bank should have to give some notional credit for its presumed value.

30.  The Bank, being freely able to decide which of its remedies it chooses to exercise, made the sue the lessee or the surety.  While the amount it may recover from the lessee or the guarantor are described as “damages”, I am satisfied that no duty of mitigation arises in relation to the surety.  The effect of the Bank’s right to choose which of its options it exercises overrides any duty that might have otherwise to mitigate damages.

Conclusion:

31.  For the foregoing reasons I am satisfied that no triable issue arises upon which leave may be granted to the defendants to defend and that the Master was right to enter judgement.

Quantum:

32.  The matter however does not end there.  The calculation of the loss set out in paragraph 8 of the Statement of Claim makes provision for an “Interest Rebate”, and claims also an “Early settlement handling fee”, an “O/S Adv Comm”, (whatever that is), an “Inspection fee” and a “Legal fee”.  Mr Au said that the Interest Rebate was the calculation pursuant to the Rule of 78.  However he was obliged to acknowledge that other than a mere assertion to that effect from a witness there was no calculation.  He was further obliged to acknowledge that he could not point to specific provisions in the lease to justify the other matters claimed.

33.  Where credit is to be given for a rebate pursuant to the application of the Rule of 78, a proper calculation should be put before the court.  The defendants are entitled to examine the calculation and ensure that it is correct.  Equally the Bank must be able to point specifically to the provisions of the lease which justify any further charges imposed upon the guarantors.  These matters must be clarified before any judgement may be executed.

34.  Consequently the judgement on liability given by the Master remains undisturbed but will be stayed pending assessment of damages pursuant to O. 37 R. 1(1A).  This should however merely be a matter of calculation and I would expect sensible solicitors to be able to agree the amounts involved.

35.  The question of the right to defend the proceedings was at the heart of the appeal.  The defendants have failed in that respect.  The Statement Claim seeks, as is usual in a guarantee action, costs on an indemnity basis.  Clause 30 of the guarantee makes provision for costs on a full indemnity basis.  There will be in order nisi, to be made absolute at the expiration of 14 days, that the defendants must pay the Bank’s costs of the action on a full indemnity basis.