SHUN KAI FINANCE CO. LTD. v. JAPAN LEASING (HONG KONG) LTD.

HCA 4316 & 4318/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4316 & 4318 OF 2001

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DECISION

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1. This is an application by the defendant to strike out paragraphs 4 to 8, and Prayers (1) and (2) of the plaintiff's amended statements of claim in these two actions, the facts of, and claims made in, which are almost identical. The grounds upon which this is sought are, as is usually the case, those available under Order 18, rule 19 as well as under the inherent jurisdiction of the court. But before I look at those put forward, it is necessary to set out the background to this, and to the other proceedings in which these parties are involved.

2. The plaintiff is a finance company engaged in the business of lending money on the security of mortgages. For some years the plaintiff had an agreement with the defendant by which the defendant would make loans to the plaintiff who would then in turn make loans to their own customers, who were always property owners able to secure the loans against their property. The latter loans would often be greater than the loan in each case from the defendant, the plaintiff adding money of their own, and no doubt charging greater interest. The loans would be secured by a mortgage by the owner in each case in favour of the plaintiff, and the plaintiff would then execute a sub-mortgage in favour of the defendant of the same property. These arrangements were embodied in a Master Loan Agreement between the plaintiff and the defendant dated 19 May 1993.

3. In each of the cases before me two loans were made to each of the owners, who were Jade Base Investment Ltd (Jade Base) in HCA 4316 of 2001, and Ticsound (Music) Ltd (Ticsound) in HCA 4318 of 2001. In the first case, the plaintiff had borrowed $5,800,000.00 from the defendant and then on lent $6,200,000.00 to Jade Base, in May 1993. In June 1995, the plaintiff borrowed a further $4,125,323.00 from the defendant and lent a sum of $4,200,000.00 to Jade Base. Both loans were secured by a mortgage and further charge to the plaintiff, and then by a sub-mortgage and further sub-mortgage from the plaintiff to the defendant. Similar transactions were entered into with Ticsound in May 1993 and June 1995, for identical sums secured by similar mortgages and sub-mortgages. Under the respective mortgages and further charges the owners made instalment payments to the plaintiff and the plaintiff, until in any event early 1998, made regular payments to the defendant.

4. Under clause 5 of the Master Loan Agreement between the plaintiff and the defendant, the defendant authorized and appointed the plaintiff as their agent to collect and receive monies payable under the mortgages and further charges between the plaintiff and the owners, and to keep them without having to account to the defendant. This was subject to there firstly being no default on the part of the plaintiff in the terms of their loan from the defendant, and a proviso that the authorization may be revoked upon 7 working days' prior written notice by the defendant if the plaintiff makes any default. In June 1998, the defendant claimed that the plaintiff was in default of its monthly payments since March 1998, and by letters dated 22 June 1998 from their solicitors, demanded payment within 10 days, failing which legal proceedings would ensue. On the same day, the defendant's solicitors also wrote to the owners, requiring them to make payments under their mortgages direct to the defendant.

5. The precise meaning and construction of clause 5 is the subject of HCA 13826 of 1998, between these parties (the main action), and I need not go further into it for the purpose of this application. Suffice it to say that the plaintiff claims that the defendant was in breach of that agreement by failing to give the plaintiff 7 working days notice of the revocation of their authority under it.

6. The defendant went into voluntary liquidation on 30 September 1998. Since then a number of owners have wished to redeem their mortgages and arrangements have been made to accommodate them, initially by the defendant dealing with them direct, and receiving the sums due, and, where appropriate, retaining the balance owed to the plaintiff pending resolution of the dispute between them. However, since February 1999, a number have been by way of the plaintiff dealing with the owners and accounting to the defendant for the amount owed by the plaintiff. In all such cases the evidence seems to be that, until those with which I am concerned here, the full amount owed by the plaintiff has been paid, following receipt from the owners of the sums due under their mortgages. These arrangements were made without prejudice to the parties' positions in the main action.

7. In August 2001 solicitors acting for Jade Base and Ticsound wrote to the plaintiff's solicitors requesting to redeem their properties, and the plaintiff's solicitors in turn wrote to the defendant's solicitors referring to previous similar cases, and, inter alia, requesting their calculation of the redemption figures. In each case that letter only referred to "the Sub-Mortgage" although there were, as I have said above, two sub-mortgages in respect of each property. Indeed, in the reply from the defendant's solicitors dated 28 August 2001, they specifically refer to the two sub-mortgages and, in sending the rest of the title deeds, say that they have retained these for preparing the releases. However, in their letters of 4 September 2001, the defendant's solicitors refer to the release of only one sub-mortgage in each case, and quote a redemption figure for Jade Base of $2,036,813.40, and for Ticsound of $2,588,769.54. There is no dispute that these figures were about half the total sums due, and, on the evidence before me, it appears clear that the defendant's solicitors, or their client the liquidator, had omitted the second loan from the calculation in each case, in error.

8. However, the plaintiff proceeded to request payment from the owners of not only the redemption sum quoted by the defendant, and the amount due to them, but the balance of the total sum, taking into account the whole of the second loan as well. Meanwhile, the plaintiff's solicitors sent to the defendant's solicitors a draft undertaking letter containing a reference to both sub-mortgages, but only the sum previously quoted by the defendant's solicitors, which the latter approved with amendments, leaving the sum payable unchanged. On 13 September 2001 the undertaking letters were sent to the defendant's solicitors with cheques for the sums quoted, on the same day that the owners had sent similar letters to the plaintiff's solicitors with their cheques for the full amount of the two loans. The error was noticed by the defendant's solicitors the next day, and the cheques from the plaintiff were returned with a letter pointing out the mistake and saying that they were unable to comply with the undertakings.

9. In the amended statements of claim, the plaintiff pleads that there were contracts between them and the defendant that the latter would release the sub-mortgages within 17 days of payment of the sums quoted by the defendant, and contained in the letters of undertaking approved, and therefore agreed to, by the defendant's solicitors on their behalf, and that they are in breach of that contract.

10. Mr Fok for the defendant contends first that the agreement contained in the letter of undertaking is a fiction and is subject to a qualification that it will be discharged by a return of the money tendered. However, this ignores that fact that the purpose of these undertakings, more usual in conveyancing, is to bind the solicitors to act in a certain way, for instance by delivery of executed documents, upon receipt of proper payment for their client. If they are unable to do so, then they are under a duty to return the money paid. This does not alter the contractual relationship and obligations of their respective clients. If there is a binding contract, and one party's solicitor is unable to comply with the undertaking because his client refuses to execute a necessary document, his duty as between him, his client and the Law Society, is discharged upon return of the money. His client may still be liable under the original contract.

11. All the plaintiff maintains here is that there was a contract between the parties, and the undertaking letter, on being approved by the defendant's solicitors, evidenced that contract, in addition to providing the undertaking the solicitors were required to give to carry that contract into effect. There was some suggestion in the course of submissions of it being arrived at after negotiations, but there is no evidence of such beyond a discussion on the telephone between Mr Wong of the plaintiff and Ms Leung Chuk Chun of the liquidators, the contents of which are disputed. That letter is the only evidence of the contract pleaded, but it must be enough to raise an arguable case that one existed.

12. The next point raised on behalf of the defendant was that the agreement must fail for want of consideration, as, on the authority of Foakes v. Beer (1884) 9 App. Cas. 605, a creditor is not bound by a promise to accept part payment in full settlement of a debt. There are two problems with this argument. The first is that it is not suggested that the payment extinguishes the debt arising out of the transaction by which the mortgages came into existence, but only that it is consideration for release of the sub-mortgage. The second is that where there is a dispute as to the amount owed, acceptance of a tender of less than the sum claimed can be good consideration. There is clearly a dispute here between the parties as to their respective rights and what is due between them. This is evident from the main action itself and the differences over the rights conferred on each party by the Master Loan Agreement.

13. There is a further point here, and that is the effect of the statutory set off under section 35 of the Bankruptcy Ordinance, made applicable to a winding up by section 264 of the Companies Ordinance, which, as Mr Recorder Edward Chan S C found in another action between the same parties, had the result here, where there are mutual dealings between those parties, of extinguishing individual claims as against each other, and the only amount recoverable was the net sum after the set off. In support of this he referred to the judgment of Lord Hoffmann in Stein v. Blake [1996] 1 AC 243, who says at p. 255:

"The cross-claims must obviously be considered separately for the purpose of ascertaining the balance. For that purpose they are treated as if they continued to exist. So, for example, the liquidator or trustee will commence an action in which he pleads a claim for money due under a contract and the defendant will counterclaim for damages under the same or a different contract. This may suggest that the respective claims actually do continue to exist until the court has decided the amounts to which each party is entitled and ascertained the balance due one way or the other in accordance with section 323. But the litigation is merely part of the process of retrospective calculation, from which it will appear that from the date of bankruptcy, the only chose in action which continues to exist as an assignable item of property was the claim to a net balance."

The effect of this is that there is no individual chose in action and no specific debt due in respect of this transaction for which acceptance of a lesser sum could be held to be inadequate consideration.

14. The next ground upon which Mr Fok relies is that, even if the agreement can be held to be a contract, it is vitiated by mistake. As I have noted above, it is clear from the evidence before me, that the defendant's solicitors, and possibly also the defendant, almost certainly made an error. To rely on this the defendant must show either that the mistake was mutual, or that the plaintiff knew of it and had contributed to it or sought to take advantage of it. I have to say immediately that either of these must depend on evidence and accordingly be an issue for trial. I have had my attention drawn to a large amount of correspondence which Mr Fok says supports his contention that the plaintiff either shared the mistake or was aware of it, but I am unable to say that this raises more than a suspicion that this was the case. Whether the defendant can establish this at trial is for the judge hearing the evidence there, and is clearly not something upon which the defendant can rely in an application to strike out.

15. It follows from the above that the plaintiff's claims to have contracts under which, upon payment of the sums requested by the defendant, albeit in error, the defendant must release the sub-mortgages, cannot be held to be frivolous, vexatious or an abuse of process. Not only is there an argument on a contractual basis, but the plaintiff further maintains, as is clear from the main action and their interpretation of the Master Loan Agreement, that they were entitled under that agreement to collect moneys from the owners, as agent of the defendant, and to keep that money. If that is held to be the case, the defendant cannot complain that the balance of the redemption moneys was tendered to the plaintiff rather than to the plaintiff, and if that was in full and proper discharge of the obligations imposed by the mortgages, the defendant has accepted that through its agent, and cannot refuse to release the mortgages.

16. Both Mr Fok and Mr Swaine for the plaintiff have drawn my attention to a number of authorities on the principles by which I should be guided in applications such as this, and I hope I will be forgiven if I do not refer here to them all. It seems to me that those principles are both well established and well known, and are summarised excellently by Silke JA in Ha Francesca v. Tsai Kut Kan & ors (No. 1) [1982] HKC 382 at page 392, where he says:

"My attention has been directed by counsel to the principles upon which the court acts on striking out applications. If I may encapsulate them, striking out should only be done in plain and obvious cases, there should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. The claim must be obviously unsustainable, the pleadings unarguably bad and that it be impossible, not just improbable, for the case to succeed before a court will strike out. If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law in proceedings such as this."

17. It is apparent from this that the burden on the party making the application is an extremely high one. I am conscious of the fact that the defendant, and those acting for the defendant, believe that the plaintiff here took advantage of their error for the purpose of a windfall financial gain, and, to put it mildly, feel aggrieved by that behaviour. If that is what is found by the court at trial then they have every reason to feel aggrieved, but I am not trying the action now, and to accede to the application before me I would have to, not only make preliminary findings of fact where these are disputed, but resolve matters of law which need to be ventilated at length at trial after those facts are established to the satisfaction of the court. For these reasons I consider in inappropriate that the plaintiff's claim, or the part to which the defendant objects here, should be struck out.

18. The defendant's summons is accordingly dismissed with an order nisi that the defendant pays the plaintiff's costs thereof in any event.