SHUN HING ELECTRONIC TRADING CO LTD v. SUNRISE AIR CONDITIONING CO LTD AND OTHERS

HCA 251/2018

[2021] HKCFI 1190

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 251 OF 2018

________________________

________________________

________________________

J U D G M E N T

________________________

INTRODUCTION

Introduction

1.  This is the trial of the Plaintiff’s action against the 3^rd Defendant to enforce her deed of guarantee.  The Plaintiff is a sub-contractor of construction works (the “Projects”).  It sub-contracted the installation works to the 1^st Defendant under eight installation projects.  The 2^nd Defendant was the sole director and shareholder of the 1^st Defendant.  The 3^rd Defendant is the 2^nd Defendant’s cohabitee.   

2.  The 1^st Defendant encountered financial difficulties since the last quarter of 2016.  Work progress was delayed.   At the request of the 1^st Defendant, the Plaintiff advanced certain retention money and progress payments to the 1^st Defendant under an Accounts Receivable Pledge Agreement dated 19 January 2017 (the “January Pledge Agreement”), a Supplemental Account Receivable Pledge Agreement dated 24 April 2017 (the “April Pledge Agreement”) and a Second Supplemental Account Receivable Pledge Agreement dated 5 July 2017 (the “July Pledge Agreement”) (collectively the “Pledge Agreements”).  After signing the April Pledge Agreement, the Plaintiff became concerned as to whether the 1^st Defendant would be able to settle its indebtedness and asked the 1^st and 2^nd Defendants to provide some form of security or guarantee.  The 2^nd Defendant agreed to execute a personal guarantee in favour of the Plaintiff as security for the 1^st Defendant’s indebtedness and to procure “his wife” to execute a similar guarantee with a charge over her property.  The executed guarantees (respectively, the “D2 Guarantee” and “D3 Guarantee”) were furnished to the Plaintiff on or about 28 July 2017.

3.  Despite the financial assistance, the 1^st Defendant was unable to complete the installation works within reasonable time. Pursuant to the installation agreements, the Plaintiff engaged alternative sub-contractors to complete the works on behalf of the 1^st Defendant and incurred extra costs of $12,317,540.40 as at 26 January 2018.  On 11 September and 7 November 2017, the Plaintiff and the 1^st Defendant entered into two loan agreements under which the extra costs incurred by the Plaintiff were treated as loans granted to the 1^st Defendant (the “Loan Agreements”).  Under the Loan Agreements, the 1^st Defendant was liable to make repayments starting from January 2018.  But it failed to pay. 

4.  On 30 January 2018, the Plaintiff commenced action against all three Defendants.  Final judgment based on the amount due as at 26 January 2018 was entered against the 1^st Defendant in respect of its various agreements with the Plaintiff on 2 March 2018 and against the 2^nd Defendant in respect of his D2 Guarantee on 25 May 2018 in default of notice of intention to defend.  The 3^rd Defendant disputed her liability under her D3 Guarantee.  In the meantime, further works were executed by the Plaintiff on behalf of the 1^st Defendant.  The Plaintiff claims that as of January 2021, the 3^rd Defendant is indebted to the Plaintiff in the sum of $34,946,908.25.

5.  The 3^rd Defendant’s defence are:

(1)  undue influence or misrepresentation by the 2^nd Defendant;

(2)  the Plaintiff’s failure to take steps to ensure there was no undue influence, including to satisfy itself that the 3^rd Defendant understood her risk by standing as guarantor and that she had received independent legal advice;

(3)  the Plaintiff had constructive notice of the undue influence and/or misrepresentation;

(4)  conspiracy between the 2^nd Defendant and persons unknown with the sole or predominant intention of injuring her by inducing her to sign the D3 Guarantee; and

(5)  the D3 Guarantee was discharged and/or the 3^rd Defendant was released of the guarantee because the Plaintiff and the 1^st Defendant subsequently entered into the Loan Agreements which were substantially or materially different from the Pledge Agreements.

She also counterclaims for declarations and orders to the effect that the D3 Guarantee is null, void and unenforceable.

6.  At the trial, no evidence was adduced or submission advanced in respect of the conspiracy defence at item (4) above.  This defence is deemed to have been abandoned.  In fact, it does not appear to me to be a plausible defence.

The issues

7.  The issues raised by the pleadings are:

(1)  whether the 3^rd Defendant was induced to sign the D3 Guarantee by (a) misrepresentation and/or (b) actual and/or presumed undue influence exerted by the 2^nd Defendant;

(2)  if the answer is in the affirmative, whether:

(a)  the 2^nd Defendant was acting as agent of the Plaintiff in making the misrepresentation;

(b)  whether the Plaintiff had constructive notice of the misrepresentation and/or undue influence;

(c)  whether the Plaintiff had a duty to take adequate steps to bring home to the 3^rd Defendant the risk she was running by entering into the D3 Guarantee; and

(d)  whether the 3^rd Defendant had been informed of and had known about the contents of the D3 Guarantee;

(3)  whether the D3 Guarantee had been discharged by the Loan Agreements; and

(4)  if all issues are resolved in favour of the Plaintiff, the extent of the 3^rd Defendant’s liability under the D3 Guarantee.

The parties’ witnesses and their credibility

8.  There are only two witnesses in this trial.  Much of the Plaintiff’s factual case is documented which the 3^rd Defendant is not capable of disputing.  The Plaintiff’s burden of proof is a light one.  The Plaintiff called its senior manager (“Lee”).  Lee impressed me as an unsophisticated and straightforward technical man.  His answers in cross-examination are direct and spontaneous.  I find him a credible witness and accept his evidence.

9.  The 3^rd Defendant had received secondary school education.  She had worked for about three years as a clerk and telephone sales person before cohabiting with the 2^nd Defendant in 2000 and became a full time housewife.  She gave birth to a son in 2004.  In April 2015, she bought a unit in City Point in Tsuen Wan (the “Tsuen Wan Property”) which was used as the matrimonial home with the 2^nd Defendant.  In July 2017, she executed the D3 Guarantee.  Litigation followed quickly afterwards in January 2018.  She said that the 2^nd Defendant deserted her in 2019 after his business failure.  Thereafter she took up clerical employment in an accounting firm to maintain herself and her son and pay mortgage for the Tsuen Wan Property.  She had no contact with the 2^nd Defendant, though he maintained contact with her son.

10.  She raised the defence of undue influence by the 2^nd Defendant. In the words of Lord Nicholls in Royal Bank of Scotland v Etridge (No. 2)[1], the evidence required to discharge the burden of proving undue influence depends on the nature of the relationship, the extent to which the transaction cannot be readily accounted for by the ordinary motives of ordinary person in that relationship and all the circumstances of the case.  The court has to be careful in assessing independently the credibility of the party alleging undue influence.  The court has to have regard to all the relevant circumstances, including inherent probabilities or improbabilities of one’s story, his or her background, the contemporaneous documents, or incontrovertible evidence or evidence not in dispute which tend to support or contradict one account or the other and the overall impression of the characters or motivations of the witnesses: see In re B (Children)[2].  

11.  For reasons as I shall give when analyzing her evidence, I find the 3^rd Defendant evasive when cross-examined about her claim that the deposit of $750,000 for the purchase of the Tsuen Wan Property was paid by her and about the circumstances surrounding the execution of the D3 Guarantee. As pointed out by Mr Liu, counsel for the Plaintiff, she could not have earned that amount of money in the three years when she worked as a clerk and telephone sales person before living with the 2^nd Defendant.  I may not draw too adverse an inference on her credibility about the deposit as she might have some understandable, though not entirely honest, motive in making that assertion which had nothing to do with the crucial issue in dispute.  But her evasiveness about the circumstances surrounding the execution of the D3 Guarantee and her asserted alienation with the 2^nd Defendant since his business collapse troubled me.  Adopting the approach in the preceding paragraph when assessing her evidence, I do not find her credible.

MISREPRESENTATION

The execution of the D3 Guarantee – the incontrovertible evidence

12.  In April 2017 when the 1^st Defendant’s insolvency became a cause for concern, Lee asked the 2^nd Defendant if he could offer any valuable assets as security for the 1^st Defendant’s indebtedness.  He also caused a property search to be made against the 2^nd Defendant. He found out he had a joint unencumbered property in Sheung Shui (the “Sheung Shui Property”) with Chan Wai Yuk (“Chan”) whom Lee believed was the 2^nd Defendant’s wife.  Unknown to Lee then, the 2^nd Defendant had separated with Chan and was cohabiting with the 3^rd Defendant.

13.  On 24 April 2017, the 2^nd Defendant offered to execute a personal guarantee and to procure “his wife” to execute a similar guarantee together with a charge over her property located at Tsuen Wan as additional security.  He produced a Monthly HIBOR-based Mortgage Plan Repayment Advice (“Repayment Advice”) issued by The Hongkong and Shanghai Banking Corporation Limited to the 3^rd Defendant in relation to the Tsuen Wan Property.  Lee asked the 2^nd Defendant to produce a copy of his marriage certificate with the 3^rd Defendant, but the 2^nd Defendant refused for “his wife’s” privacy reasons.  Then, Lee asked for a copy of the 3^rd Defendant’s identity card.  At the time, Lee did not notice that the property offered as security was not the Sheung Shui Property and that the name of the 2^nd Defendant’s “wife” was not Chan.  But nothing material turned on those matters.

14.  On 5 May 2017, the 2^nd Defendant provided a letter executed by the 1^st Defendant offering the Tsuen Wan Property as security for its indebtedness.  Lee caused a property search to be conducted.  The search confirmed that the 3^rd Defendant was the registered owner of the Tsuen Wan Property.  The Plaintiff agreed in principle to the 2^nd Defendant’s proposal.

15.  At a meeting on 11 May 2017, Lee urged the 2^nd Defendant to invite the 3^rd Defendant, whom he assumed to be the 2^nd Defendant’s wife, to seek independent legal advice in relation to her obligation under the guarantee proposed to be given by her.

16.  Lee sent the draft deeds of guarantee to be executed by the 2^nd and 3^rd Defendants to the 2^nd Defendant by email on 18 and 27 May 2017 respectively.  In the emails, Lee specifically drew the 2^nd Defendant’s attention to clause 9 of the draft deeds of guarantee relating to seeking independent legal advice by him and the 3^rd Defendant.

17.  On or about 27 July 2017, the 2^nd Defendant handed Lee two deeds of guarantee executed by him and the 3^rd Defendant. Lee asked whether they had sought independent legal advice.  The 2^nd Defendant replied in the affirmative.

18.  Later, Lee came to notice that the deed of guarantee signed by the 2^nd Defendant had not been attested.  He asked the 2^nd Defendant to take it back for proper attestation.  A week later, the 2^nd Defendant attended Lee’s office.  On that occasion, Lee witnessed the 2^nd Defendant signing on the deed of guarantee and Lee attested his signature as witness (ie the D2 Guarantee).  Lee also returned the deed of guarantee signed by the 3^rd Defendant (the “Unattested D3 Guarantee”) as it had not been attested and told the 2^nd Defendant to arrange for attestation.

19.  On or about 13 September 2017, the 2^nd Defendant attended Lee’s office and handed over to him the D3 Guarantee signed by the 3^rd Defendant and attested by him. 

20.  Lee’s evidence was not challenged or disputed by the 3^rd Defendant.  I accept the account of the event as related to me by Lee.  I now turn to examine the 3^rd Defendant’s account of the execution of the D3 Guarantee.

The 3^rd Defendant’s case about execution of the D3 Guarantee

21.  The 3^rd Defendant’s case as pleaded in paragraph 4(3) of her Amended Defence and Counterclaim is that the 2^nd Defendant induced her to sign on the D3 Guarantee by representing, assuring and warranting to her that she was to sign only as a witness to the 2^nd Defendant’s signature on the internal record of the 1^st Defendant.  That plea is echoed by the 3^rd Defendant’s witness statement dated 7 September 2018 in which she specifically said that she saw the 2^nd Defendant sign and then pointed at a particular spot on the document asking her to sign and write down the number of her identity card.  Then in her supplemental witness statement dated 7 October 2020, more than two years later, she changed her previous allegations.  She averred that the 2^nd Defendant showed her a piece of paper, asked her to sign on that piece of paper and to write down her identity card number.  She asked him what the paper was.  The 2^nd Defendant replied that it was a company document and told her to sign as a witness.  At the time, she did not notice if the 2^nd Defendant had signed on that document.  Though her evidence was amended by the supplemental witness statement, her witness statement dated 7 September 2018 nevertheless stood as a previous inconsistent statement casting doubt on her credibility.

Misrepresentation

22.  The 3^rd Defendant bears the burden of proof.  She is effectively alleging fraudulent misrepresentation, which is a very serious allegation.  The more serious the allegation, the more cogent evidence is required to overcome the unlikelihood of what is alleged in order to prove the allegation: see Phipson on Evidence[3].  The 3^rd Defendant’s case of misrepresentation arose against the backdrop of her 17 years’ de facto spousal relationship with the 2^nd Defendant.  There is no dispute that the 2^nd Defendant was the sole breadwinner of the family.  His income came solely from the business of the 1^st Defendant.  As will be demonstrated below, he provided the funds for the purchase of the Tsuen Wan Property held in the name of the 3^rd Defendant.  Then the 1^st Defendant fell into financial difficulties in 2017.  On the 3^rd Defendant’s case, it was under those circumstances that the 2^nd Defendant misrepresented to her and deceived her into signing the D3 Guarantee and stole her identity card and the facility letter to make copies.  As the authorities in the next section show, it is more probable for a wife to guarantee her husband’s indebtedness under such circumstances out of love or reciprocal duty arising out of that spousal relationship than out of undue influence exerted on her by the husband.  The 3^rd Defendant has to adduce very cogent evidence to overcome the unlikelihood of the 2^nd Defendant practicing a fraud on her than the likelihood of her helping him out of distress.  Her case is very much against inherent probability.

23.  Mr Liu criticized the 3^rd Defendant’s credibility by referring, on the one hand, to the inconsistency between her pleading and her evidence; and, to the change in her evidence, on the other. With respect, I do not think there is any inconsistency between the pleaded case and the two versions in the witness statements.  Though the pleaded case remains the same, there is an important twist in the evidence in support.  In her first version, the 3^rd Defendant specifically averred that she saw the 2^nd Defendant signed first and then she signed to witnessed his signature.  In her second version, she said that when she signed the document she did not notice if the 2^nd Defendant had signed or not.  

24.  In her evidence in court, the 3^rd Defendant painted a very uneventful picture about her execution of the D3 Guarantee.  She recalled it was just like a regular day.  She was watching television when the 2^nd Defendant returned home; gave her a single piece of paper; and asked her to sign.  Everything happened very casually.  She never thought of it as any big deal at the time.  She had no idea what that piece of paper was.  She did not know it was a guarantee until she was told by her solicitors after they had obtained a copy from the Plaintiff’s solicitors.  During cross-examination, she tried to excuse the inconsistency between her two witness statements by asking a rhetorical question of whether one would still remember what happened on a usual day at home a year ago. 

25.  The D3 Guarantee was signed between July and August 2017.  The Defence and Counterclaim was first filed on 29 March 2018.  At the latest, that must be the first time when the 3^rd Defendant was alerted of the need to recount her execution of the D3 Guarantee.  That was just nine months after she signed the D3 Guarantee.  She was not entirely honest to describe her signing of the D3 Guarantee as a casual event on a regular day.  It was not her daily routine to sign documents for the 2^nd Defendant.  On her evidence, she had a good recollection of the event, insofar as it supports her case.  She said the 2^nd Defendant gave her a single piece of paper and asked her to sign saying it was “nothing special, it’s a document for witnessing”.  Then she asked, “so what is it?”  The 2^nd Defendant did not answer but just told her to witness a signature.  If she had the curiosity to ask what the document was, it is incredible that she would not have actually looked at the piece of paper she was asked to sign when she was signing.  If she had looked, she must have noticed that nobody had signed and there was no signature for her witness.  She must also have also seen the words “INDEPENDENT LEGAL ADVICE” underlined and in bold print.  That must have put her on inquiry what the document was and what were the other pages making up the rest of the document which were not shown to her, especially when the 2^nd Defendant declined to answer her question.  I find the 3^rd Defendant evasive.  She was less than truthful.

26.  The 3^rd Defendant was not asked to recall a usual event which happened two years ago.  It was a special event.  On her case, she was asked to sign something without knowing what it was; and despite she had asked she was not told what it was.  She signed because of undue influence, not to mention misrepresentation which on her case she did not know the true nature of the D3 Guarantee.  Then, when faced with the legal action which would determine the fate of her most valuable asset, she must have approached the matter with all seriousness and tried hard to recall this particular event on which her defence was based.  She must have recalled the facts or made up the facts when giving instructions about her defence.  Half a year later, she prepared her witness statement.  Then, as Mr Liu submitted, when her account was contradicted by the Unattested D3 Guarantee taken before the 2^nd Defendant had put down his attesting signature which showed that her account could not be true, she put forward her second version of the events.  Was her first version an honestly mistaken account or a fabrication? Was her second version also a fabrication?

27.  Mr Liu asked me to draw adverse inference against the 3^rd Defendant for not calling the 2^nd Defendant to support her evidence.  It is a well-established principle that in the absence of explanation, a party’s failure to call a witness who is expected to have evidence in support of his case or to contradict the opponent’s case, would entitle adverse inference to be drawn against that party.  The general and usual inference is that the party knows that the evidence that witness will give will be adverse to his case or supportive of the opponent’s case.  The effect of silence in the face of the opponent’s evidence may convert that evidence into proof in relation to matters which are, or likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence:  see R v IRC, ex p TC Coombs & Co[4], per Lord Lowry.  In Bank of China (Hong Kong) Ltd v Wong Tang & Ors[5], Chu J (as Chu JA then was) drew adverse inference against the wife for not calling her husband to give evidence in support of her case of undue influence exerted on her by her husband.  Whether to draw any adverse inference and what inference to draw is fact sensitive.  In that case, the husband was still living with the wife and had provided documents to her for the purpose of defending the case.  Those facts were stronger than those in the present case, but I do not consider these are sufficiently distinguishing features from the present case because in the present case the 3^rd Defendant had no difficulties contacting the 2^nd Defendant.

28.  Mr Ng, counsel for the 3^rd Defendant, submits that it was possible that the 2^nd Defendant would wish to avoid appearing in court for fear of enforcement action being taken against him.  That was not the explanation given by the 3^rd Defendant.  Indeed, it was her choice not to call him.  Furthermore, the 2^nd Defendant could have nothing more to fear other than his own bankruptcy as final judgment had already been obtained against him.

29.  The only explanation given by the 3^rd Defendant for not calling the 2^nd Defendant is that he had deserted her after his business collapsed.  However, during cross-examination, she admitted that she knew the 2^nd Defendant was still in contact with her son and she permitted her son to meet the 2^nd Defendant.  Obviously, she has the means to contact the 2^nd Defendant, at least through her son.  The 2^nd Defendant would be able to give evidence on some material aspects of her case, including whether he made the alleged representations to her; whether he explained the contents of the D3 Guarantee to her and advised her to seek independent legal advice; whether he was dominating on her and she was submissive to him; and how he was able to obtain a copy of her identity card to show Lee without her consenting to guarantee the 1^st Defendant’s indebtedness.  It is very important that she obtained the corroborating evidence from the 2^nd Defendant as the fate of the Tsuen Wan Property very much depends on the outcome of this litigation.  If her case is genuine, the 2^nd Defendant has a very compelling moral obligation to bail the 3^rd Defendant out and protect her Tsuen Wan Property from enforcement action by the Plaintiff.  There is no reason why she would not have called him.  It is open to the court to draw some adverse inference for her failing to call the 2^nd Defendant.

30.  Mr Liu argues that the Repayment Advice and the copy of the 3^rd Defendant’s identity card given by the 2^nd Defendant to Lee is evidence of the 3^rd Defendant’s knowledge of and consent to execute the D3 Guarantee.  The 3^rd Defendant explained that the 2^nd Defendant could help himself to those documents because the Repayment Advice was left freely in the sitting room and the 2^nd Defendant knew she kept her identity card in her handbag.  He had a photocopier at home and could have made copies of these documents without seeking her consent.  The possibility of a person unwittingly or recklessly exposing his cohabitee’s property to risks in order to temporarily relieve himself from his own financial pressure is not one which I would lightly ignore.  However, having considered the evidence in its totality, the evasiveness of the 3^rd Defendant and her previous inconsistent statement, I discount that possibility.

31.  The 2^nd Defendant said that the Tsuen Wan Property was a gift by the 3^rd Defendant to her and her son and was all she had. She said even if she had money she would have to think about whether to help the 2^nd Defendant, suggesting that she would not have offered the property as security for the 1^st Defendant, if she had known the nature of the D3 Guarantee.  I can see the force of that argument from a cohabitee with no independent source of income.  However, she and the 2^nd Defendant had lived together as husband and wife for seventeen years by the time of the incident.  The property was substantially purchased from the income of the 2^nd Defendant.  The 1^st Defendant was the source of their income.  The 3^rd Defendant certainly had an interest to see that the 1^st Defendant survived its financial crisis.  Besides, life is not logic, but experience.  It is not unusual for a spouse under such situation to help the other out of love or reciprocal duty to each other.  It is not unlikely that the 3^rd Defendant would have signed the D3 Guarantee knowing what it was without having been misrepresented as to its true nature.

32.  The credibility of the 3^rd Defendant and how she came to have signed the D3 Guarantee remains the most crucial question.  It is easy to make an allegation of misrepresentation and undue influence against someone who will not be called to be cross-examined.  As shown by the Unattested D3 Guarantee, the 2^nd Defendant had not signed when the 3^rd Defendant signed.  This cast serious doubt on her account of being told to sign to witness the 2^nd Defendant’s signature.  Her evidence was to support her case of misrepresentation and undue influence; that she signed believing that she was to witness the 2^nd Defendant’s signature on some company documents; and that she had no intention to assume any liability as guarantor for any indebtedness.  But the Unattested D3 Guarantee betrayed her.  It showed precisely the opposite, that is, she signed assuming liability as guarantor and leaving it to the 2^nd Defendant to sign as witness to her signature. 

33.  Having tested the 3^rd Defendant’s evidence against inherent probability and having considered the inconsistencies in her evidence and her evasiveness, I find the 3^rd Defendant an incredible witness.  I do not accept her evidence that she signed the D3 Guarantee because of misrepresentation by the 2^nd Defendant and that she had no knowledge of the nature of the document.  I find it more inherently probable that the 3^rd Defendant as a cohabiting partner agreed to sign the D3 Guarantee to support the 1^st   and 2^nd Defendants for their common benefit than the 2^nd Defendant making misrepresentation to deceive her into signing the D3 Guarantee.  The 2^nd Defendant has failed to discharge the burden of proving her case of misrepresentation.  On the fact, the 3^rd Defendant’s defence of misrepresentation cannot even get off the ground.

UNDUE INFLUENCE

The law

34.  The cases in which a contract may be set aside for undue influence have been divided into two categories.  The first category is where it is established by direct proof that actual undue influence was used to procure the contract as in the case where coercion has been used or where one party exercised a dominating influence over the mind of the other so that his or her independence in decision making was substantially undermined.  For this category, it is not necessary to prove there was a pre-existing relationship between the parties, nor is it necessary to establish that the transaction was manifestly disadvantageous to the party seeking to set it aside.

35.  The second category is labelled “presumed undue influence”.  There are two sub-categories.  Class 2A refers to cases where undue influence is presumed as in the case where a specific relationship exists, such as religious superior and inferior and doctor and patient.  The relationship of husband and wife does not give rise to such presumption and therefore does not fall under this class: see Bank of Credit and Commerce International SA v Aboody and Another[6].  Class 2B refers to cases where evidence is required to prove the assertion:  see Etridge (No. 2)[7].  In Li Sau Ying v Bank of China (Hong Kong) Ltd[8], Lord Scott NPJ echoed Lord Hobhouse’s view in Etridge (No. 2)[9] doubting the utility of Class 2B under the presumption, and emphasized that the focus should not be on the presumption but on the question of whether the evidence justifies a conclusion that the impugned transaction was procured by undue influence.

36.  To establish undue influence under Class 2B, the complainant has to show:

(1)  that he placed trust and confidence in the influencer or that the influencer had acquired an ascendancy or domination over him; and

(2)  that the transaction cannot be readily explicable by the relationship of the parties.

See: Bank of China (Hong Kong) Ltd v Wong King Sing & Others[10].   An example of a transaction which calls for explanation or which cannot be readily explicable by the relationship of the parties is a transaction which is manifestly disadvantageous to the complainant, such as a gift which is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity, or other ordinary motives on which ordinary men act: see Etridge (No. 2)[11].

37.  In terms of trust and confidence in the relationship between husband and wife, Lord Scott said in Etridge (No. 2)[12]:

“I would assume in every case in which a wife and husband are living together that there is a reciprocal trust and confidence between them. … I would not expect evidence to be necessary to establish the existence of that trust and confidence. I would expect evidence to be necessary to demonstrate its absence.”

The above dicta were adopted by Recorder Ma (as Ma CJ then was) in Bank of China (Hong Kong) Ltd v Wong King Sing & Others[13]. These principles apply to cohabitees as they apply to husband and wife, since the “tenderness” shown by the law to married women is not based on the marriage ceremony but reflects the underlying risk of one cohabitee exploiting the emotional involvement and trust of the other: see Barclays Bank Plc v O’Brien[14].

38.  The burden of proof is on the person seeking to set aside or avoid liability under the relevant transaction.  However, once it is established that the complainant falls within either Class 2A or 2B, the burden shifts to the influencer to show that the transaction was entered into with an independent free will free from any undue influence: see Bank of China (Hong Kong) Ltd v Wong King Sing & Others[15].  In that case, Recorder Ma set out the following three questions which must be answered in ascertaining whether in a tri-partite relationship, the relevant transaction has in fact been affected by undue influence[16]:

(1)  Has the wife proved what is necessary for the court to be satisfied that the transaction was affected by the undue influence of the husband?

(2)  Was the lender put on inquiry?

(3)  If so, did the lender take reasonable steps to satisfy itself that there was no undue influence?

The alleged undue influence

39.  The 3^rd Defendant has not pleaded any particulars to support her case of reposing general trust and confidence in the 2nd Defendant.  It was only in re-examination that she gave as examples of trust and confidence that the 2^nd Defendant handled family matters well; gave her household expenses; dealt with everything; took good care of her and their son; drove her son to school and was generally a responsible “husband”.  Mr Liu submits that these are evidence of reposing general trust and confidence in the 2^nd Defendant but do not relate to the management of the financial affairs of the family.  I respectfully disagree.  Trust and confidence in the context of an intimate and long relationship is difficult to plead and particularise.  As Lord Scott put it in Etridge (No. 2), there is reciprocity between the husband and wife and he would not expect evidence to be necessary to establish the existence of that trust and confidence.  Rather, his Lordship would expect evidence to be necessary to demonstrate its absence. 

40.  Indeed, Mr Liu is able to point to evidence to the contrary.  The evidence arose out of excessive pleading by the 3^rd Defendant. She pleaded misrepresentation and/or undue influence.  The two defences may not be inconsistent, but the evidence as she presented is.  It is her case that she signed the D3 Guarantee because of what was misrepresented to her, not expressly because she reposed trust and confidence on the 2^nd Defendant.  There might be an element of trust and confidence which caused her to readily accept what was misrepresented to her.  But that was not what she said in evidence.  What she said was that the Tsuen Wan Property was a gift to her and her son and it was all she had.  The property was very important to her.  Then she went on and said even if she had money she would have to think about whether to help the 2^nd Defendant.  This is evidence that she had an independent free will to decide whether to sign the D3 Guarantee or not.  She claimed that had she known the document she signed was a guarantee, she would not have signed as she and her son would otherwise have nowhere to live.  She said even if she had savings of her own, she would probably have had to think whether to help the 2^nd Defendant or how to help him.  It is manifestly obvious that she knew the Tsuen Wan Property is all that she had and she knew the risks in signing a guarantee.  She was capable of making a proper assessment of her risk and making an independent decision.  Then, having rejected her evidence about the misrepresentation, what is left is that she was capable of making an independent decision and the probability that she signed the D3 Guarantee as an exercise of her own free will and her own judgment rather than her reposing trust and confidence in the 2^nd Defendant.

41.  Mr Ng said that the 3^rd Defendant has no interest in the 1^st Defendant and the Tsuen Wan Property is registered in her sole name and is her only valuable asset.  He therefore submits that the transaction is disadvantageous to the 3^rd Defendant and is inexplicable on the basis of their de facto spousal relationship, particularly as the D3 Guarantee was to “see to” a business liability far higher than the value of the Tsuen Wan Property.

42.  With respect, Mr Ng’s submission is based on an unduly commercial approach to a spousal or de facto spousal relationship and overlooked the reality in a relationship involving both emotion and mutual commitment to pursue a life in common for better or for worse.  In Etridge (No. 2)[17], the House of Lords clarified the once misconceived application of the law of undue influence in the husband and wife scenarios.  Lord Nicholls said:

“27. The problem has arisen in the context of wives guaranteeing payment of their husband’s business debts. In recent years judge after judge has grappled with the baffling question whether a wife’s guarantee of her husband’s bank overdraft, together with a charge on her share of the matrimonial home, was a transaction manifestly to her disadvantage.

28. In a narrow sense, such a transaction plainly (‘manifestly’) is disadvantageous to the wife. She undertakes a serious financial obligation, and in return she personally receives nothing. But that would be to take an unrealistically blinkered view of such a transaction. Unlike the relationship of solicitor and client or medical adviser and patient, in the case of husband and wife there are inherent reasons why such a transaction may well be for her benefit. Ordinarily, the fortunes of husband and wife are bound up together. If the husband’s business is the source of the family income, the wife has a lively interest in doing what she can to support the business. A wife’s affection and self-interest run hand-in-hand in inclining her to join with her husband in charging the matrimonial home, usually a jointly-owned asset, to obtain the financial facilities needed by the business. The finance may be needed to start a new business, or expand a promising business, or rescue an ailing business.

…

30. I return to husband and wife cases. I do not think that, in the ordinary course, a guarantee of the character I have mentioned is to be regarded as a transaction which, failing proof to the contrary, is explicable only on the basis that it has been procured by the exercise of undue influence by the husband. Wives frequently enter into such transactions. There are good and sufficient reasons why they are willing to do so, despite the risks involved for them and their families. They may be enthusiastic. They may not. They may be less optimistic than their husbands about the prospects of the husbands’ businesses. They may be anxious, perhaps exceedingly so. But this is a far cry from saying that such transactions as a class are to be regarded as prima facie evidence of the exercise of undue influence by husbands.

31. I have emphasised the phrase ‘in the ordinary course’. There will be cases where a wife’s signature of a guarantee or a charge of her share in the matrimonial home does call for explanation. Nothing I have said above is directed at such a case.

A cautionary note

32. I add a cautionary note, prompted by some of the first instance judgments in the cases currently being considered by the House. It concerns the general approach to be adopted by a court when considering whether a wife’s guarantee of her husband’s bank overdraft was procured by her husband’s undue influence. Undue influence has a connotation of impropriety. In the eye of the law, undue influence means that influence has been misused. Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence. Similarly, when a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of hyperbole may be natural. Courts should not too readily treat such exaggerations as misstatements.

33. Inaccurate explanations of a proposed transaction are a different matter.  So are cases where a husband, in whom a wife has reposed trust and confidence for the management of their financial affairs, prefers his interests to hers and makes a choice for both of them on that footing.  Such a husband abuses the influence he has.  He fails to discharge the obligation of candour and fairness he owes a wife who is looking to him to make the major financial decisions.”

43.  In the same case, Lord Scott of Foscote suggested against the presumption of undue influence in a transaction which on the face is disadvantageous to the wife.  His Lordship said[18]:

“In cases where experience, probably bitter, had led a wife to doubt the wisdom of her husband’s financial or business decisions, I still would not regard her willingness to support those decisions with her own assets as an indication that he had exerted undue influence over her to persuade her to do so. Rather I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple. The proposition that if a wife, who generally reposes trust and confidence in her husband, agrees to become surety to support his debts or his business enterprises a presumption of undue influence arises is one that I am unable to accept. To regard the husband in such a case as a presumed ‘wrongdoer’ does not seem to me consistent with the relationship of trust and confidence that is a part of every healthy marriage.”

44.  The above rationale has been consistently adopted by the Hong Kong courts: see Bank of China (Hong Kong) Limited v The Personal Representative of Fu Kit Keung[19], Bank of China (Hong Kong) Limited and Chan Fook Wing & Anor[20].  It is all a matter of inference and common sense.  Where the husband is the sole breadwinner of the family and family assets are charged to enable the husband to generate income for the family, the husband and wife can be fairly treated as one economic entity.  What is beneficial for the husband is also beneficial for the family and therefore for the wife.  Furthermore, the wife also has a reciprocal duty to contribute to the welfare and wealth of the family.  The detriment to the wife by charging her or joint property as security or standing in as surety for the family business dwarfs into insignificance in the face of the greater benefit to the family.  Such arrangements are often a joint business decision, usually with an element of love, affection and reciprocal duty, but not one of reposing trust and confidence and still less the result of undue influence.

45.  In the present case, when the Tsuen Wan Property was purchased in April 2015, the 2^nd Defendant’s business in the 1^st Defendant was the sole source of income for the family.  With her three years’ working time before she cohabited with the 1^st Defendant, she could not have earned and saved a meaningful portion of the down payment of $1.5 million for the purchase of that property.  The circumstances strongly suggest that the substantial part, if not the whole, of the down payment was paid by the 2^nd Defendant.  There is no dispute that the monthly mortgage payments were at least until the end of 2018 paid from the household expenses given to the 3^rd Defendant by the 2^nd Defendant.  The property is in reality family asset acquired by the 2^nd Defendant but held in the name of the 3^rd Defendant.  The 1^st and 2^nd Defendants were in financial difficulties.  They and the 3^rd Defendant were in the same boat.  In the circumstances, it would not have been unreasonable for the 3^rd Defendant to agree to offer the Tsuen Wan Property as security to keep the 1^st Defendant afloat.  

46.  Mr Ng argues that it begs belief that the 3^rd Defendant would have without undue influence agreed to guarantee an indebtedness which she could not possibly pay anything remotely close.  The 2^nd Defendant was the person in the best position to judge whether the 3^rd Defendant’s risk in giving the D3 Guarantee was real.  He gave the D2 Guarantee and asked the 3^rd Defendant to do the same.  If his financial position was so hopeless, he would not have asked the 3^rd Defendant to do so because there would be a real risk of bringing her financial ruin and depriving her and their son of a roof over their heads.  He might have entertained some false hope and made an error of judgment, leading to his unwitting decision of asking the 3^rd Defendant to give the guarantee.  He might even have failed to appreciate the legal consequence.  As the events turned out, it was a wrong decision.  But that is far from saying that he had exerted undue influence on the 3^rd Defendant coercing her to execute the D3 Guarantee.  The 3^rd Defendant has failed to discharge the burden of proving that she executed the D3 Guarantee as a result of undue influence exerted on her by the 2^nd Defendant.

47.  There is no dispute that the 3^rd Defendant signed the D3 Guarantee.  Accordingly, having failed to establish her case that she signed the guarantee as result of misrepresentation or undue influence, she is bound by the D3 Guarantee.

THE EXTENT OF THE 3^rd DEFENDANT’S LIABILITY

Introduction

48.  There is no dispute as between the 1^st Defendant and the Plaintiff that despite the advance made under the Pledge Agreements the 1^st Defendant failed to complete the works under the eight projects and the Plaintiff had to engage alternative sub-contractors to complete the works and incurred further costs.  The 1^st Defendant accepted that such further costs paid by the Plaintiff amounted to loans due by the 1^st Defendant to the Plaintiff and entered into the two Loan Agreements.  The dispute between the parties is whether the D3 Guarantee covered the 1^st Defendant’s liability under the Loan Agreements.  This raises the question of construction of the D3 Guarantee.

49.  The 3^rd Defendant accepts that if the D3 Guarantee is binding on her, on the true construction of the guarantee, her liability would be limited to the “Secured Indebtedness” under the Pledge Agreements only.  In addition, she argues that in any event, the D3 Guarantee was discharged by the subsequent Loan Agreements. 

50.  The thrust of the Plaintiff’s argument is that the D3 Guarantee is a continuing guarantee which on its true construction not only covers the Secured Indebtedness under the Pledge Agreements, but is wide enough to cover the 1^st Defendant’s liability to complete the eight projects and its future contracts with the Plaintiff, namely the Loan Agreements. 

Some legal principles on construction of documents

51.  The question of what is the nature of the guarantee obligation that the guarantor has assumed is to be resolved by ordinary principles of construction of documents or contracts: see Law of Guarantees[21].  It is trite principle that interpretation of a document is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of making of the document: Jumbo King Ltd v Faithful Properties Ltd & Ors[22] and Investors Compensation Scheme Ltd v West Bromwich Building Society & Ors (No. 1)[23].  The guarantee must be read and construed as a whole.  The starting point in any interpretation exercise is context (together with purpose) rather than what may be the natural and ordinary meaning of the words: see Fully Profit (Asia) Ltd v Secretary for Justice[24].

52.  Guarantees are to be construed in favour of surety.  The court should require evidence of clear intention from the words used in a contract of guarantee to justify the nature and extent of the liability undertaken by a surety. Terms in a guarantee which seek to preserve the liability of the surety in circumstances in which he would otherwise be discharged are likely to come under particularly careful scrutiny: see  Law of Guarantees[25].

53.  Recitals of the guarantee may qualify the more general words in the body of the guarantee.  If the recital is so inconsistent with the operative words of the guarantee, the latter must be qualified in order to give effect to the plain and obvious intention of the parties: see Law of Guarantees[26].

54.  Under the rule in Holme v Brunskill[27] any material variation to the terms of the principal contract between the creditor and principal will discharge the guarantor unless the wording of the guarantee prevents so.  The guarantor will remain liable only where the alteration to the principal is obviously unsubstantial, with no possible prejudice to the guarantor resulting, or where the alteration is inevitably for the benefit of the guarantor.  The threshold is very high.  The guarantee is discharged when the amendment can potentially cause prejudice or increase the risk borne by the guarantor: see AVC Property Development Co Ltd v Joyful Grace Trading Ltd and Another[28].

The factual matrix

55.  The thrust of the 3^rd Defendant’s argument is that the scope of the D3 Guarantee is limited to the amount advanced under the Pledge Agreements.  The factual context in which the D3 Guarantee was signed has been set out in the recital of the D3 Guarantee, the incontrovertible evidence of Lee; and paragraph 5(1) of the Plaintiff’s Amended Reply and Defence to Counterclaim.     

56.  In summary, the 1^st Defendant was unable to pay its sub-contractors/suppliers which caused delay in the execution of works under the eight projects.  At the 1^st Defendant’s request, the parties entered into the Pledge Agreements under which the Plaintiff advanced retention monies and progress payments which the 1^st Defendant was yet to receive to enable it to pay its sub-contractors/suppliers so as to enable the eight projects to be completed.  The purpose was to complete the eight projects.  Despite the advance, the 1^st Defendant was still unable to complete the eight projects and the Plaintiff became concerned about the 1^st Defendant’s ability to settle its indebtedness under the Pledge Agreements.  It requested the 1^st and 2^nd Defendants to provide some forms of security to guarantee the repayment.  The 2^nd Defendant offered to procure “his wife”, who turned out to be his cohabitee, the 3^rd Defendant, to execute a guarantee with a charge on her Tsuen Wan Property.  On Lee’s evidence, which is the only available evidence about the prior negotiation before execution of the D3 Guarantee, there was no mention about guaranteeing the performance of the agreements relating to the eight projects, ie the agreements under Schedule 1 of the Pledge Agreements.

57.  The above factual matrix is reflected in paragraphs 3 and 4 of the Preamble of the D3 Guarantee which recite the fact that under the Pledge Agreements the Plaintiff advanced certain amounts and payment to the 1^st Defendant; and despite that the 1^st Defendant was unable to continue to pay its sub-contractors/suppliers and to complete the eight projects unless further resources were granted.  Then, in consideration of the Plaintiff agreeing to advance payment in accordance with the terms of the Pledge Agreements and to assist the 1^st Defendant to complete the eight projects mentioned in the Pledge Agreements, the 3^rd Defendant agreed to execute the D3 Guarantee.  Completion of the eight projects was at the heart of the Pledge Agreements the performance of which the 3^rd Defendant was asked to guarantee.

58.  Mr Ng submits that the factual matrix leading to the execution of the D3 Guarantee was about providing a security to guarantee repayment by the 1^st Defendant to the Plaintiff under the Pledge Agreements or any future repayment obligations relating to the advance of retention monies and progress payments by the Plaintiff to the 1^st Defendant.  I agree.  But the recitals of the D3 Guarantee do not go that far as to qualify the more general words in the body of the D3 Guarantee nor are inconsistent with the operative words of the guarantee.

The relevant provisions of the D3 Guarantee

59.  Clauses 1 and 2 provide as follows:

“1  GUARANTEE AND INDEMNITY

1.1 In consideration of [the Plaintiff] agreeing to advance payment to the sub-contractors/suppliers of [the 1^st Defendant] under various contracts/agreements in relation to certain projects, particulars of which are set out in the [Pledge Agreements] and to assist [the 1^st Defendant] to complete the works under the projects, the [3^rd Defendant] hereby irrevocably and unconditionally guarantees:

(a) … the due and prompt payment by [the 1^st Defendant] of all the monies (“Secured Indebtedness”) due from [the 1^st Defendant] to [the Plaintiff] from time to time under or in connection with the [Pledge Agreements];

(b) to pay to [the Plaintiff] on demand … all monies and liabilities which are now or at any time hereafter shall have been advanced to … [the 1^st Defendant] … from time to time;

(c) indemnify, and keep indemnified [the Plaintiff] … against all loss, costs, or expenses whatsoever suffered or incurred by [the Plaintiff] arising from or in connection with the failure of [the 1^st Defendant] to perform and discharge any of its obligations and liabilities under the [Pledge Agreements] or in connection with the contracts/agreements under the various project as mentioned in Schedule 1 of the [Pledge Agreements]; and

(d) … indemnify … [the Plaintiff] … all losses, … suffered or incurred by [the Plaintiff] in relation to this Guarantee …

1.2 This Guarantee shall also apply to any future agreement which may … be entered into by [the Plaintiff] and [the 1^st Defendant] in respect of any business and/or transaction carrying on between them.

2  CONTINUING SECURITY

2.1 This Guarantee shall be a continuing security and shall cover and secure the ultimate balance of the Secured Indebtedness from time to time and any obligations and liability to be performed by [the 1^st Defendant] or any intermediate payment or settlement of account by, with or in relation to the Secured Indebtedness …

2.2 …

2.3 The liability of the [3^rd Defendant] under this Guarantee shall be unlimited notwithstanding anything herein contained and be binding as a continuing security on the Guarantor, …

2.4 …

2.5  This Guarantee shall be without prejudice to and shall not be affected nor shall the [3^rd Defendant] Guarantor be exonerated by any time given or extended to [the 1^st Defendant] or other indulgence granted … under the [Pledge Agreements] or contracts/agreements in connection with the projects as mentioned in Schedule 1 of the [Pledge Agreements] or business and/or transaction carrying on between [the Plaintiff] and [the 1^st Defendant].”

(Emphasis highlighted in bold and italic prints)

The construction

60.  Mr Ng submits that Clause 1 is the operative clause of the D3 Guarantee and Clause 2.1 is the crucial clause for interpretation purpose because it provided the purpose of the security and described the D3 Guarantee as a continuing security to cover and secure the ultimate balance of the Secured Indebtedness from time to time.  Clause 2.1 emphasised the scope of the D3 Guarantee as covering repayment obligations by the 1^st Defendant to the Plaintiff under the Pledge Agreements and any future repayment obligations under the Plaintiff’s advance of retention monies and progress payments to the 1^st Defendant.   Hence, he submits, reading the D3 Guarantee as a whole, the scope of the guarantee covers only repayment obligations by the 1^st Defendant to the Plaintiff under the Pledge Agreements and any future repayment obligations under the Plaintiff’s advance of retention monies and progress payments.   He submits it is wrong to argue as Mr Liu does that the D3 Guarantee was wide enough to cover the liabilities arising from the Loan Agreements and the costs incurred by the Plaintiff to engage its own sub-contractors in place of the 1^st Defendant or its sub-contractors to complete the eight projects.

61.  With respect, I am unable to restrict the construction of the D3 Guarantee in that way.  I agree with his submission about the factual matrix and that the purpose of the D3 Guarantee was to provide a security to guarantee repayment by the 1^st Defendant under the various agreements.  But the clear language used in the D3 Guarantee goes beyond guaranteeing repayment of the loans under the Pledge Agreements but also guarantees performance of the eight projects which was the purpose for which the advances were made and the Pledge Agreements executed.

62.  In my view, Clause 1 sets the scope of the D3 Guarantee.  There are three heads of liabilities.  First, under Clause 1.1(b), the 3^rd Defendant guaranteed to repay the Secured Indebtedness on demand.  “Secured Indebtedness” is defined under Clause 1.1(a) as meaning all indebtedness due from the 1^st Defendant to the Plaintiff from time to time under or in connection with the Pledge Agreements.  Furthermore, as stated in that clause, the nature of the guarantor’s liability is a primary liability as principal debtor and not merely as surety.  That is the basic obligation of a guarantor.  This head of liability covers all Secured Indebtedness due under the Pledge Agreements only.  But as the other provisions of Clause 1 shows, that is not the entirety of the guarantor’s liability. 

63.  Second, under Clause 1.1(c), the 3^rd Defendant guaranteed to indemnify the Plaintiff against all consequential loss arising from the 1^st Defendant’s failure to perform its obligations and liabilities under the Pledge Agreements or the eight projects.  This is a secondary source of liability which arose out of the 1^st Defendant’s breach of the Pledge Agreements and the agreements in relation to the eight projects.  This liability is separate and distinct from the Secured Indebtedness. 

64.  Clause 1.1(c) is drafted in simple language.  On a plain reading, it imposed an obligation to indemnify the Plaintiff against all loss, costs, or expenses incurred by the Plaintiff arising from or in connection with the 1^st Defendant’s failure to perform its obligations and liabilities under the Pledge Agreements or in connection with the agreements under the eight projects stated in Schedule 1 of the Pledge Agreements.  This liability is also separate and distinct from the liability to repay the Secured Indebtedness.  There is no dispute that the 1^st Defendant failed to complete the eight projects and the Plaintiff incurred costs in engaging its own sub-contractors to complete them on behalf of the 1^st Defendant.  The Loan Agreements are evidence of the costs thus incurred which were acknowledged by the 1^st Defendant.  The Plaintiff is entitled to seek an indemnity against the 3^rd Defendant for the costs incurred under Clause 1.1(c) without having to sue under the Loan Agreements.

65.  Third, Under Clause 1.1(d), 3^rd Defendant agreed to indemnify the Plaintiff of all loss arising from enforcement of the D3 Guarantee.  This liability is also separate and distinct from the Secured Indebtedness. 

66.  Mr Liu argues that Clause 1.2 is a fourth head of liability.  That clause provides that the D3 Guarantee shall also apply to any future agreement entered into between the Plaintiff and the 1^st Defendant in respect of any business and/or transaction carrying on between them.  He submits that the words “any agreement” and “any business” have a very wide import and cover liabilities under any agreement entered into between the Plaintiff and the 1^st Defendant, including the Loan Agreements.  However, the basic principle of construction is that a guarantee shall be construed in favour of the surety.  Hence, in the absence of clear wording, guarantees should be given a restrictive meaning.  In my view, Clause 1.2 only emphasises for avoidance of doubt that the D3 Guarantee covers liabilities under any future agreements entered into between the Plaintiff and the 1^st Defendant, but to invoke the 3^rd Defendant’s obligation to guarantee or to indemnify, the liabilities created by those future agreements have also to fall within one of the three heads of liabilities under Clause 1.1.  Clause 1.2 is not a standalone clause.  It has to be read together with Clause 1.1, otherwise, it will embrace liabilities under wholly unrelated contracts which are never within the contemplation of the parties, such as an agreement for the 1^st Defendant to provide catering services for the Plaintiff’s staff on the construction site. 

67.  Relying on the factual matrix and the preamble, Mr Liu submits that as the Loan Agreements were entered into and further loans advanced because of the 1^st Defendant’s breach of implied terms of the Pledge Agreements and failure to complete the eight projects, they fall within the description of such future agreements which the Plaintiff and the 1^st Defendant entered into in respect of the business and/or transaction between them.  This argument is similar to the reasons for which I hold the costs incurred by the Plaintiff were loss for which the Plaintiff is entitled to be indemnified under Clause 1.1(c).  But the Loan Agreements are just loan agreements.  The 1^st Defendant’s liabilities under the Loan Agreements arose from the parties’ agreements to treat the costs incurred by the Plaintiff to complete the eight projects as loans to the 1^st Defendant.  The liability to repay are not part of the Secured Indebtedness, or loss incurred by the Plaintiff as a result of the 1^st Defendant’s breach of the Pledge Agreements or the contracts relating to the eight projects or costs in enforcing the D3 Guarantee.  

68.  In my view, on the true construction of the D3 Guarantee, the 3^rd Defendant’s obligations are to repay the Secured Indebtedness on demand under Clause 1.1(b); to indemnify the Plaintiff of loss or costs incurred as a result of the 1^st Defendant’s failure to perform the Pledge Agreements and agreements in relation to the eight projects under Clause 1.1(c); and to indemnify the Plaintiff of its costs of enforcing the D3 Guarantee under Clause 1.1(d).  The obligation to repay the indebtedness on demand under Clause 1.1(b) and to indemnify the costs of enforcing the guarantee under Clause 1.1(d) are basic obligations of a guarantor.  Such provisions are to be found in any guarantee.  Mr Ng does not argue otherwise.  The obligation under Clause 1.1(c) to indemnify consequential loss for failure to perform the obligation guaranteed is by no means unusual.

Quantum

69.  In accordance with the above construction of the D3 Guarantee, I find that the 3^rd Defendant is under a liability to repay the advances of retention monies and progress payments; to indemnify the Plaintiff of its loss in having to complete the eight projects on behalf of the 1^st Defendant; and to indemnify the Plaintiff of its costs in enforcing the D3 Guarantee.

70.  There is no dispute that the amount of retention monies and progress payments advanced was $5,909,090.94. Lee confirmed under cross-examination that a sum of $1,003,460.33 should be credited to the 1^st Defendant’s account.  Thus, the 3^rd Defendant is only liable to the Plaintiff for $4,905,630.61 under this head.

71.  The Plaintiff claimed that a total amount of $28,101,265 was advanced to the 1^st Defendant under the Loan Agreements.  Under cross-examination, Lee confirmed that the above amount included two sums amounting to $627,689.94 in respect of works done outside the eight projects. After deducting this sum, the amount which the Plaintiff is entitled to be indemnified is $27,473,575.06.

72.  The loan stated under the second Loan Agreement, which included also the amount under the first Loan Agreement, was $12,317,540.40.  Previously, the Plaintiff obtained default judgment against the 1^st Defendant under the Loan Agreements in the amount of $18,093,215 on 2 March 2018.  Mr Ng submits that the 3^rd Defendant’s liability should not exceed either of these amounts.  I do not agree.  The Plaintiff’s entitlement is to be indemnified in respect of its loss under Clause 1.1(c) and not to be repaid the amount stated or advanced under the Loan Agreements.  The amount stated in the Loan Agreements is irrelevant.  The amount stated in the default judgment was based on the Plaintiff’s position as at 26 January 2018.  It is also irrelevant.  There were further substantial costs incurred in respect of the eight projects since then until 28 June 2019.  The 3^rd Defendant’s liability is a primary liability as principal and not merely as a surety.  She is therefore liable to indemnify the Plaintiff the full loss of $27,473,575.06 regardless of the default judgment obtained against the 1^st Defendant.

73.  Accordingly, I enter judgment in favour of the Plaintiff against the 3^rd Defendant in the amount of $32,379,205.67 with interest at the rate of one percent over and above prime rate of The Hongkong and Shanghai Banking Corporation Limited from date of issue of the writ to the date of judgment and thereafter at judgment rate.  The 3^rd Defendant’s counterclaim is dismissed.  I also make a costs order nisi that the 3^rd Defendant shall pay the Plaintiff’s costs of this action on indemnity basis, to be taxed, if not agreed; the 3^rd Defendant’s own costs shall be taxed in accordance with Legal Aid Regulations.