LOCK KWOK ON ANTHONY v. YU TAI PENG AND OTHERS

1997, No.A5377

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. On 10th November 1997, Master Chu entered summary judgment in favour of the Plaintiff against the Defendants herein in the sum of HK$3,716,820.00, together with interest thereon at the contractual rate of 20% per annum as from 8th October 1996 to 10th November 1997, and thereafter at judgment rate until payment, together with the costs of this action, including costs of the application on a full indemnity basis with a certificate for Counsel.

2. By Notices of Appeal dated 14th November 1997 and 15th November 1997 respectively, the 2nd and 3rd Defendants appealed against that Order, asking for the judgment to be set aside and that the Defendants be given unconditional leave to defend. The 1st Defendant, against whom I am told a Receiving Order has been entered (albeit apparently for reasons unconnected with the present case) does not appeal. This, then, is the judgment consequent upon the hearing of these two appeals.

3. Although the case appears to have attracted a significant amount of paper, its broad shape at least is clear, and it would assist, I think, to provide at the outset a thumbnail sketch of the factual situation.

4. In this action, the Plaintiff claims against the 2nd and 3rd Defendants under a Guarantee, which document bears the date of 27th July 1995. The Beneficiary under this Guarantee is the Plaintiff, Mr Anthony Lock Kwok On, and the Guarantors, as set out in the Schedule thereto, are the 1st Defendant, Mr T.P. Yu and his two sons, Mr Paul Yu, the 2nd Defendant herein, and Mr Steve Yu, the 3rd Defendant. The 4th Guarantor named in the Schedule, Mr Dennis Yu (no relation to the other Guarantors) did not sign this Guarantee, and this fact is itself a significant factor in this case in light of the way in which the argument before me has developed.

5. But I digress. Recital A of the Guarantee relates that :-

"The Beneficiary has at the request of the Guarantors entered into an Agreement related to the sale and purchase of certain shares of Kwan Lee (Holdings) Limited (formerly known as Sentry Investments Limited and being a company incorporated in Australia as a company limited by shares) of even date (the "Agreement") with Peak International Group Limited (the "Purchaser") under which the Beneficiary has agreed to sell and the Purchaser has agreed to purchase the Sale Shares (as defined in the Agreement)."

6. The Sale and Purchase Agreement in question was entered into between the Plaintiff and the aforesaid Peak International Group Limited (which I am told is a BVI company, and against which, for hard-headed commercial reasons, no writ has been issued) on 25th August 1995, and pursuant to Clause 2.03 thereof, the consideration for the shares was to be AUS¢22 per share.

7. The Guarantee of 25th July 1995 (a date accepted by all parties to be factually incorrect, although nothing turns thereon) was, therefore, the instrument by which, pursuant to the various clauses thereof pleaded in the Statement of Claim, the individual guarantors guaranteed the financial obligations of Peak International under the Sale and Purchase Agreement.

8. These obligations were not met. Paragraph 10 of the Statement of Claim pleads that by written notice dated 24th September 1996 given by the Plaintiff to Peak International pursuant to Clause 2.01 of the Sale and Purchase Agreement, the Plaintiff duly gave notice of his intention to sell the shares, whilst paragraph 11 avers that, as a consequence, Peak International was at all material times bound to purchase the shares and pay the Plaintiff the sum of HK$4,322,560,000.00 (i.e. 3.2 million shares at AUS¢22 at the exchange rate of HK$6.14 to AUS$1.00). A certain amount of money only was received by the Plaintiff from Kwan Lee Construction, but after the dishonour of a number of cheques, the balance shortfall remained in terms of the sum claimed in these proceedings, for which sum, of course, the Plaintiff currently has his judgment.

9. So much for the factual background. Mr Jonathan Harris, who appeared for the 2nd Defendant in this appeal, took, I think it fair to say, two major points.

10. First, the 2nd Defendant's principal defence was that the Guarantee had not been executed by all the contemplated Guarantors. Mr Harris put the matter thus : if a guarantee clearly contemplates that another person is going to execute the guarantee as co-surety, the guarantee is to be read as subject to the condition precedent that the guarantee is executed by the co-sureties. This will usually be the case if the guarantee is joint and several. In this connection, Mr Harris took me to several authorities; see for example, Andrews and Millett, The Law of Guarantees, 2nd Ed., at page 91, paragraph 4.22 and the well-known Australian work O'Donovan and Phillips, The Modern Contract of Guarantee, 3rd Ed., at page 88, which reads, in part, as follows :-

"... Less obviously, a clause in the guarantee providing that the liability of the guarantors shall be 'joint and several' invariably carries with it the implication that the guarantee shall not be binding unless all those named in the guarantee execute it, even if one of the guarantors is insolvent. This presumption, arising from the form of the documentation, is not a rule of law and can be rebutted by other evidence indicating that one guarantor agreed to remain liable despite the failure of one guarantor to execute the guarantee. For example, the Supreme Court of South Australia in Walter & Morris Ltd v Lymberis held that a guarantee signed by an individual guarantor was binding, even though it was in a form appropriate to a joint and several guarantee. This conclusion was reached primarily on the basis of a clear finding of fact that the guarantor, when he signed the guarantee, contemplated that no other person was intended to be a guarantor jointly with him; and the case is illustrative of the recent trend to interpret the guarantee in the light of surrounding circumstances and commercial reality."

11. I was also referred to the well-known case of James Graham and Co. (Timber) Ltd. v. Southgate-Sands [1986] QB 80. This was a case in the English Court of Appeal wherein the evidence was that the parties mutually contemplated a joint and several guarantee being given by all three of the directors of the borrowing company. One of the signatures was forged, and the Court of Appeal held that the other guarantors who signed were not liable because the condition precedent had not been fulfilled.

12. Mr Harris asserted that on any view of the construction of this Guarantee, which was expressed in Clause 14.06 to create joint and several liabilities, it was contemplated that Dennis Yu would execute it : see the definition of the parties on the first page of the Guarantee and the list of the Guarantors in the Schedule. Mr Harris pointed out that Mr Paul Yu's evidence was that he was not willing to be bound by the Guarantee if Dennis Yu would not sign it (see Paul Yu's first affirmation at paragraph 9) and also that the Plaintiff, Mr Lock, had admitted in paragraph 11 of his second affirmation that it was the intention of all parties that Dennis Yu sign the Guarantee. This passage in the evidence is important; it was relied upon in argument by both Mr Harris and also by Mr Lam, for and on behalf of the 3rd Defendant, and in the circumstances I think it worthwhile to set it out verbatim :-

"... I admit that the original intention was that the 3 Defendants herein and Mr Yu Won Kong Dennis ("Dennis Yu") should sign the Guarantee. I also admit that Dennis Yu refused to sign. Upon being informed by the 3rd Defendant that Dennis Yu refused to sign, I accepted the Guarantee since all the 3 Defendants have already signed the same and I at that time felt sufficiently secured. Save as aforesaid, paragraph 11 of Yu's Affirmation is denied. I have never accepted to leave the 2nd Defendant out. Indeed, given the aforesaid relationship amongst the 3 Defendants, there was at all material times no reason why I should agree to leave out the 2nd Defendant."

13. The end result of the non-signature by one of the clearly mutually anticipated Guarantors, said Mr Harris, was the ineluctable conclusion that the guarantee was not enforceable against his client, the 2nd Defendant herein.

14. Mr Harris' second "bull" point was that the time period specified in Clause 2.01 of the Sale and Purchase Agreement had expired. Clause 2.01 of this Agreement reads as follows :-

"Subject to the condition precedent that the Vendor still beneficially owns the Sale Shares TWELVE (12) months after the date hereof, and upon the Vendor's serving on the Purchase a notice in writing of its intention to sell the Sale Shares not earlier than TWELVE (12) months but not later than THIRTEEN (13) months from the date hereof (whereof time is of the essence), the Vendor shall as beneficial owner sell and the Purchaser shall purchase the Sale Shares."

15. The argument ran thus. The argument was dated 25th August 1995. The relevant Notice is dated 24th September 1996. According to the fax header it was faxed on 25th September 1996. Assuming it was delivered by hand on the same day, it was only served in compliance with clauses 2.01 and 6 if "from" in clause 2.01 is to be read as meaning "from the day after". If it is to be read as stating that the commencement date for the relevant period starts on 25th August, the 13 month period had expired the day before the Notice was served.

16. The preposition from when used in relation to time periods, said Mr Harris, is normally treated as denoting a period commencing the day after the date "from" which the time period runs : see Stroud's Judicial Dictionary, 4th Ed., page 1117, paragraph 1. But it also depends upon the context in which it is used : see Stroud, op.cit. 1117, paragraph 2. In this connection, Clause 2.01 of the Agreement refers, in the third line, to a 12 month period "after the date hereof". This suggests that when the draftsman intended to refer to a period commencing the day following the date of the Agreement he used the word "after", and conversely when he used the word "from" he intended the period to run from the date of the Agreement. Accordingly, maintained Mr Harris, if the relevant time period in Clause 2.01 commenced on 25th August 1995, the Notice was not effective, and if not effective, the obligations under the agreement did not crystallise and, ergo, the provisions of the guarantee failed to bite on the Guarantors.

17. That at any rate was the way the argument went, and it is worth noting here that it is common ground between the Plaintiff and the 2nd Defendant that if the underlying premise was right (a matter which is, of course, disputed) this indeed is the factual result.

18. Mr Allen Lam, on behalf of the 3rd Defendant, Mr Steve Yu, adopted Mr Harris's major arguments as set out above. But he added also some of his own. Significant among these additional contentions was that the evidence filed on behalf of his client revealed, in fact, that the Guarantee the subject of the present suit had been cancelled and replaced by a second Guarantee, dated 21st August 1995 (the first Guarantee having been dated 27th July), which was entered into in favour of the Plaintiff by the 1st and the 3rd Defendants only.

19. Mr Lam further argued that the evidence showed that the date of the Sale and Purchase Agreement was 22nd and not 25th August 1995, which had the effect of rendering invalid the Plaintiff's Notice under the Sale and Purchase Agreement, whilst he also maintained that the absence of a signature on that Notice purportedly issued on behalf of the Plaintiff was fatal to its validity. Mr Lam emphasised that in his submission no distinction should be drawn, on the evidence, between the factual position of the 2nd and the 3rd Defendants; in particular, like Mr Harris, he refuted Mr Yuen's suggestion that the 3rd Defendant acted in any sense as the agent of the 2nd Defendant, matters of administrative convenience apart.

20. Faced with a barrage of arguments, Mr Rimsky Yuen, for the Plaintiff, stood his ground and supported the judgment gained below with, if I may say so, a tenacious argument. He chose to do battle head on, and urged the Court to consider all the evidence in the round. Descriptive compression rarely does justice to oral argument, and on the three major points which, in my view, Mr Yuen correctly identified as constituting the main planks in favour of the appeal, he put up a spirited defence of the status quo.

21. With regard to what I will call, for shorthand purposes, the "condition precedent point", involving the non-execution of the Guarantee by Dennis Yu, Mr Yuen maintained that the validity of the Guarantee in its existing form by asserting that, whatever the parties' original intention as to the execution of the guarantee, a variation had taken place whereby it had been accepted and agreed by all remaining parties that the guarantee would be valid absent Dennis Yu's signature. As I understood his argument, the return to the Plaintiff of the Guarantee in its existing form as signed by the three defendants only was, in effect, an implied offer to vary which the Plaintiff thereafter accepted, the variation being supported by consideration, in terms of benefit/detriment, on both sides. And that if this situation effectively meant that Paul Yu, the 2nd Defendant, had a cause of action in negligence against his brother, Steve Yu, the 3rd Defendant, that was not the Plaintiff's problem.

22. Turning to the "wrong guarantee point", Mr Yuen essentially dismissed this in terms of recent invention; the first time the Plaintiff had seen this document, he asserted, was during these proceedings, and it had not been referred to in the Defence of the 3rd Defendant, nor had the point been taken in pre-contract correspondence.

23. Both the foregoing major lines of defence were, therefore, castigated by Mr Yuen, as mere afterthoughts to evade liability. And as to the points surrounding service of the Notice, whilst Mr Yuen accepted that, on Mr Harris' premise, the Notice would be out of time, he invited me to hold that in this context the word "from" meant what it generally meant. Moreover, these documents were the documents of the Defendants, he said, so that they should be construed contra proferentem; and in any event, and without prejudice to linguistic contentions, the parties by their conduct had waived any requirement within the Sale and Purchase Agreement as to the date of service of the Notice. In this context, he took me to the sequence of cheques proffered in purported payment, and asserted that the unequivocal conduct of the parties demonstrated the validity of this Agreement and of the Notice given thereunder. The obligation to pay the Plaintiff in the terms claimed had clearly arisen, he said, and accordingly the Defendants' obligations under the Guarantee had crystallised. The judgment was good and should hold.

24. This, in overview, was the way in which the arguments were mounted, and I pause here to observe that it is abundantly clear to me that the debate before this Court bore very little resemblance to that before the learned Master below. Indeed, Mr Yuen, the only one of the Counsel before me who was present at the hearing below, told me that the only two points taken before the Master were those with regard to the wrong guarantee being sued upon (which argument Mr Lam ran on this appeal) and what for shorthand I will call the "illegality point", namely, that what was envisaged by the transaction was illegal under Australian Company Law, and (I suppose the argument would go) therefore was unenforceable in Hong Kong. This point, however, was effectively abandoned in oral argument by Mr Harris, nor did it even purport to be taken by Mr Lam. So in real terms the parameters of the argument on these appeals were different indeed to those placed before the learned Master.

25. I have chosen to emphasis this aspect at this stage because, after adjourning to review the evidence overnight, and after reflecting on the interesting arguments placed before me, I have decided that there are indeed issues which require to be ventilated at trial. In particular I consider that the impact and relevance upon the parties of the absence of Dennis Yu's signature, which is asserted to be a condition precedent to the sureties' liability under the Guarantee, is an issue which is patently triable, since in essence it goes to the fundamental issue of whether there is a binding contract in existence at all. As also are the issues of the "other guarantee" which now has emerged, together with the issue of the facts surrounding the service of the Notice under the Sale and Purchase Agreement, in addition to the issue of the construction of Clause 2.01 (the "after" and "from" point). In this latter context, I decline Mr Harris' invitation to decide that point now as a matter of pure construction. It seems to me that I should not even bespeak a provisional view, and that I should leave this aspect to the trial judge to construe in light of the matrix of facts established on the evidence before him. In which regard, I am reminded of the celebrated dictum of Lord Wilberforce in Prenn v. Simmonds [1971] 1 WLR 1381 at 1385 :-

" In my opinion, then, evidence of negotiations, or of the parties' intentions, and a fortiori of Dr. Simmonds' intentions, ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction." (emphasis added)

26. Accordingly, in the particular circumstances of this case, I have decided to set aside the judgment of the learned Master. It may be, I know not, that it will transpire the Master was right in her ultimate conclusion, but in the exercise of my discretion I think that it is just and fair that this entire matter be ventilated at trial. The case put up before me in this Court was patently not "frivolous and practically moonshine", to use the words of Lord Lindley in Codd v. Delap (1905) 92 LT 510 at 511, adopted with approval by Godfrey J.A. in the leading case in the Court of Appeal of Man Earn Limited v. Wing Ting Fung [1996] 1 HKC 255 at 228 (CA), and I have no doubt that, notwithstanding Mr Yuen's persuasive submissions, to adopt the approach he urged upon me would inevitably acquire the patina of a trial on affidavit, particular in terms of the drawing of what in the circumstances must be regarded as crucial inferences. This I decline to do. The Plaintiff has failed to satisfy me that the Defendants have no defence, for the reasons shortly outlined, and I consider it inappropriate to say anything further; indeed, notwithstanding the temptation to further expand my views, I note the warning words of Litton V.-P. in Man Earn, op.cit., at 230, that any further observations at this stage would be "unnecessary and otiose".

27. Finally in this connection I would add that I have specifically considered the separate positions of the 2nd and 3rd Defendants, and I have also reflected on Mr Yuen's alternative (and very much secondary submission), which was that, if leave to defend was to be given, then it should be conditional upon the entire sum in question being paid into Court. After some degree of hesitation, particularly, if I may say so, in the case of the 3rd Defendant, I have decided in light of all the arguments that, as a matter of rigorous analysis, this course would be inappropriate, and that the case should now proceed to trial against both Defendants in the normal way.

28. Accordingly, I order that the appeals of the 2nd and 3rd Defendants be allowed, that the judgment dated 10th November 1997 be set aside, and that the 2nd and 3rd Defendants be given unconditional leave to defend.

29. As indicated to Counsel at the conclusion of the hearing, I am disinclined to give leave to amend the existing Defences of the 2nd and 3rd Defendants "in blank", so to speak, although such amendments are obviously necessary to reflect the arguments on the basis of which leave to defend now has been granted by this Court. In the circumstances, however, I think it is not appropriate simply to allow this matter to hang in the air, so to speak, and that I should order also that the 2nd and 3rd Defendants do make application to amend their defences within 21 days from the date hereof, annexing thereto a draft of the proposed amendments. I envisage that consequential directions for the continued conduct of the case can be made either by consent or at this anticipated hearing for leave to amend.

30. Finally, the question of costs. At the conclusion of the hearing yesterday, I discussed with Counsel the orders which seemed to me appropriate in the event of alternative results in these appeals. On reflection, however, I am far from sure that what I would venture to call the "standard" orders in this type of situation are necessarily appropriate given the manifest change in the direction of the argument in this Court, when compared both with what appears on the pleadings as currently drawn, and also with the arguments which were apparently advanced below. In the circumstances, therefore, I think that the fairest course is that the parties should have the opportunity of considering this judgment and thereafter, at a short appointment which can be taken out to suit the convenience of Counsel, the parties should make such submissions as to costs, both here and below, as they may think fit.

31. I thank Counsel on both sides for their considerable assistance, and for the constructive manner in which the case was prepared and presented for the consideration of the Court.