DOW MBF LTD v. DETRICK LTD AND ANOTHER

HEADNOTE

Plaintiff (Hong Kong Deposit Taking Company) - D1 (Hong Kong Company) - D2 (Malaysian citizen domiciled and resident in Malaysia) - Plaintiff grants credit facilities to D1 at request of D2 under Facility Letter - terms of Facility Letter accepted by D2 on behalf of D1 in Malaysia - D2 executing Contract of Guarantee on same date-express term in Facility Letter that it and all related documentation will be governed and interpreted in accordance with Hong Kong law and that D1 submits to non-exclusive jurisdiction of Hong Kong - no express term in Contract of Guarantee - whether proper law of guarantee Malaysian law or Hong Kong law - whether performance by D2 of Contract of Guarantee will involve breach of Malaysian law - whether D2 has arguable defence to action in Hong Kong on grounds of illegality.

IN THE HIGH COURT OF JUSTICE

HONG KONG

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BETWEEN

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JUDGMENT

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1. This is an appeal from the decision of the Master whereby he allowed the respondent /plaintiff's application for final judgment under O.14, r.1 against the appellant/2nd defendant for the amount claimed in the Statement of Claim and interest and costs. The appellant seeks to have the Order of the Master set aside and that in its place, it may be ordered that he be given unconditional leave to defend.

2. The respondent is a licensed deposit taking company incorporated in Hong Kong and having its registered office in the Bank of America Tower, Hong Kong.

3. The 1st defendant is a company incorporated in Hong Kong and has its registered office in Swire House, Chater Road and is registered under the Business Registration Regulations in Hong Kong having its principal place of business in Hong Kong.

4. The appellant is a Malaysian citizen residing and domiciled in Malaysia.

5. Summary judgment has already been entered against the 1st defendant and there is no appeal against that Order.

6. The plaintiff's cause of action against the appellant is based on a Letter of Guarantee, whereby the appellant purported to guarantee the obligations of the 1st defendant under a Facility Letter provided by the respondent to the 1st defendant.

7. The Facility Letter is dated the 14th October 1985 and indicates that the respondent was prepared to make available to the 1st defendant a one-year revolving credit facility in the form of advances for an amount not exceeding US$950,000 subject to certain terms and conditions, which offer was accepted by the appellant on behalf of the 1st defendant on the 17th October 1985.

8. Under Clause 12 of the Facility Letter, the facility could be terminated by the respondent at any time at its sole discretion, in which case the respondent had the right to demand immediate repayment from the 1st defendant of all amounts outstanding under the facility.

9. Clause 8 of the Facility Letter provided for the rate of interest. Clause 17 provided for an increased rate of interest in default of payment on due date.

10. The guarantee upon which the respondent bases its cause of action against the appellant is dated the 17th October 1985 (that is the same date that the appellant executed the Facility Letter on behalf of the first defendant) in which it expressly stated that-

"In consideration of (the respondent) agreeing, at the request of the (appellant), not to require immediate payment of such of the sums as are now due or unpaid, and in consideration of any like sum or sums which (the respondent) may hereafter advance or permit to become due or of any and all liabilities to (the respondent), the undersigned (appellant) hereby irrevocably guarantee to (the respondent) the payment to (the respondent) on first demand of every sum of money which may be now or may hereafter from time to time become due or owing to (the respondent)anywhere from or by (the 1st defendant) ......"

11. The respondent pursuant to the Facility Letter and in reliance on the guarantee made the facility available to the 1st defendant and on the 17th November 1985 the 1st defendant was indebted to the respondent in the sun, of US$927,094.33. Despite repeated demands made by the respondent, neither the 1st defendant, nor the appellant paid any part of the sums outstanding.

12. The respondent filed its writ on the 29th December 1986 and acknowledgment of service having been made indicating an intention, on the part of the 1st defendant, and the appellant to defend, the respondent applied for summary judgment against both the 1st defendant and the appellant under O.14, r.1 for the payment of US$927,094.33 and interest on US$908,143.96 at 6¼% p.a. above sibor from the 18th November 1986 to the date of judgment and thereafter hereafter at the judgment rate until date of judgment and costs.

13. The application was supported by an affidavit of Mr. Lui Chi-keung confirming the contents of this Statement of Claim and stating that he believes that there is no defence to the action.

14. The matter came before the Master on the 2nd March 1987 when judgment was entered against the 1st defendant in terms of the summons. The hearing of the application in respect to the appellant was adjourned to a date to be fixed. It eventually came before Master Perrior on the 27th July 1987 when he gave judgment against the appellant in terms of the summons.

15. The appellant's notice of appeal under O.58, r.1 of the Rules of the Supreme Court indicates that he is dissatisfied with the decision of Master Perrier whereby he allowed the plaintiff's application for final judgment "on the ground that the Facility Letter of the plaintiff (respondent) dated the 14th October 1985 and the Guarantee dated the 17th October 1935 read together conclusively determined that the parties must have intended Hong Kong Law to apply".

16. The significance of these words is that it appears from the appellant's affidavit of the 27th February 1987, that it is the appellant's contention that the proper law of the contract of guarantee is Malaysian Law and that under Malaysian Law, it is an illegal contract and therefore invalid.

17. The appellant claims it is illegal under the Exchange Control Act 1957 (Act 17 of the Laws of Malaysia) which he says makes it an offence under section 9 and Part II of the Fifth Schedule for a person in Malaysia to "do any act which involves, is in association with, or is preparatory to, the making of any payment outside Malaysia, to or for the credit of a person resident outside (Malaysia)", except with the permission of the Controller of Foreign Exchange, and the appellant deposes to his belief that the execution by him of the Guarantee was such an act caught by the statute and that no permission had been obtained from the Controller of Foreign Exchange.

18. So the appellant's defence is that his guarantee is not worth the paper it is written on. Most of his affidavit is concerned with setting out the factual basis for his contention that the Malaysian Law is the proper law of the contract. Having considered the contents of the affidavits and the authorities referred to, I have reached the firm conclusion that the Master was plainly right in deciding that the proper law of the contract was and is Hong Kong Law and that the appellant's contention that Malaysian Law is the proper law of the contract is not arguable. The Facility Letter and the Guarantee are closely related documents. The parties to both contracts must have intended that the same law should govern both contracts. The Facility Letter is recorded on paper with the letterhead of the respondent, a deposit taking company incorporated in Hong Kong. It is addressed to the 1st defendant for the attention of the appellant and another. In Clause 1 the 1st defendant is described as a company duly organised and existing under the Law of Hong Kong "the borrower". The respondent in Clause 2 bound itself and/or, at its discretion, its affiliated banks and financial institutions. In Clause 13 the Facility Letter sets out the security required by the respondent. That was stated to consist of a deposit and formal pledge of shares of a Malaysian company and the unconditional and irrevocable guarantee of the appellant. The latter was obviously to be executed in Malaysia because the Facility Letter required that it be duly notarised by an acceptable Notary Public in Malaysia. In Clause 14 it was made a condition precedent to each advance that the security had been given. However, the most important clause in the present context is Clause 16 which specifically sets out the governing law of the contract as follows:-

"This Facility Letter and all related documentation will be governed by and interpreted in accordance with the Laws of Hong Kong. The Borrower hereby irrevocably submits to the non-exclusive jurisdiction of Hong Kong, which submission shall not be construed to limit any rights we may have in law or in equity."

19. It was therefore expressly stated in the Facility Letter as between the respondent and the 1st defendant that the Facility Letter and all related documentation will be governed and interpretated in accordance with the Laws of Hong Kong.

20. Mr. Barretto for the appellant argues that the meaning of the words "all related documentation" should not be construed to include the Letter of Guarantee. Mr. Fung on the other hand argues that the Letter of Guarantee obviously falls within the meaning of those words. I agree with Mr. Fun that these words must include the Letter of Guarantee, as Clause 13(b) of the Facility Letter specifically refers to a guarantee substantially in the form attached to the Facility Letter. Furthermore, it is clear that both the Facility Letter and the Letter of Guarantee were signed by the appellant on the 17th October 1985, and I do not accept, therefore, that it can be reasonably argue that the appellant and the respondent had any intention that any other law should govern the Letter of Guarantee than Hong Kong Law. Of course it is not expressed in the Letter of Guarantee itself, but in the circumstances, there can only be one conclusion as to the intention of the parties, i.e. that Hong Kong Law should be applied.

21. The extent to which the parties can select the governing law of their contracts, has been commented upon in a number of cases. In R. v. International Trustee for the Protection of Bondholders Aktiengesellschaft⁽¹⁾ Lord Atkin in the House of Lords at p.529 said:-

"The legal principles which are to guide an English Court on the question of the proper law of a contract are now well settled. It is the law which the parties intended to apply. Their intention will be ascertained by the intention expressed in the contract if any which will be conclusive. If no intention be expressed the intention will be presumed by the Court from the terms of the contract and the relevant surrounding circumstances. In coming to its conclusion the Court will be guided by rules which indicate that particular facts or conditions lead to a prima facie inference, and in some case an almost conclusive inference, as to the intention the parties to apply a particular law ......  But all these rules but serve to give prima facie indications of intention they are all capable of being overcome by counter-indications, however difficult it may be in some cases to find such."

22. In Vita Food Products Incorporated v. Unus Shipping Co. Ltd⁽²⁾ Lord Atkin's dictum was commented on by Lord Wright sitting in the Privy Council on an appeal from the Supreme Court of Nova Scotia. At p.290 he said :-

"But as Lord Atkin, dealing with cases where the intention of the parties is expressed, said in Rex v. International Trustee for, etc., Bondholders A.-G., (a case which contains the latest enunciation of this principle), 'Their intention will be ascertained by the intention expressed in the contract if any, which will be conclusive.' It is objected that this is too broadly stated and that some qualifications are necessary. It is true that in questions relating to the conflict of laws rules cannot generally be stated in absolute terms but rather as prima facie presumptions. But where the English rule that intention is the test applies, and where there is an express statement by the parties of their intention to select the law of the contract, it is difficult to see what qualifications are possible, provided the intention expressed is bona fide and legal, and provided there is no reason for avoiding the choice on the ground of public policy."

23. In Boissevain v. Weil⁽³⁾, Denning L. J. (sitting in the Court of Appeal) at p.491 said:-

"Notwithstanding what was said in Vita Food products v. Unus Shipping Co., I do not believe that parties are free to stipulate by what law the validity of their contract is to be determined. Their intention is only one of the factors to be taken into account."

24. This dictum was approved by Kitto J. in The High Court of Australia in Kay's Leasing Corporation Proprietary Limited v. Fletcher⁽⁴⁾ at p. 143.

25. In Tzortzis & anr. v. Moark Line A/B⁽⁵⁾ Lord Denning M.R. (in the Court of Appeal) at p. 411 Expresses himself in terms very similar to those of Lord Wright, by saying:-

"It is clear that if there is an express clause in a contract providing what the proper law is to be, that is conclusive in the absence of some public policy to the contrary. But where there is no express clause, it is a matter of inference from the circumstances of the case."

26. In Golden Acres Limited v: Queensland Estates Pty. Ltd. ⁽⁶⁾ Hoare J. sitting in the Supreme Court at Brisbane preferred to follow the wider approach of Denning L.J. in Boissevain v. Weil ⁽³⁾ and of Kitto in Kay's Leasing Corporation Ltd. v. Fletcher⁽⁴⁾. However in Compagnie d' Armement Maritime S.A. v. Compagnie Tunisiehne de Navigation S.A.^(7), Lord Morris of Borth-Y-Gest in the House of Lords cited the words of Lord Wright in Vita Food Products, Inc. v. Unus Shipping Co. Ltd. ⁽²⁾ referred to above without dissent.

27. In Amin Rasheed Shipping Corp. v. Kuwait Insurance Co. "The Al Wahab" ⁽⁸⁾ Lord Diplock again in the House of Lords at p. 888 said:-

"English conflict rules accord to the parties to a contract a wide liberty to choose the law by which their contract is to be governed. So the first step in the determination of the jurisdiction point is to examine the policy in order to see whether the parties have, by its express terms or by necessary implication from the language used, evinced a common intention as to the system of law by reference to which their mutual rights and obligations under it are to be ascertained."

He then refers to Law Atkin's dictum which I have quoted above in the case of R. v. International Trustee for the Protection of Bondholders Akt⁽¹⁾.

28. There has been no suggestion as between the respondent and the 1st defendant that Hong Kong law is not the governing law in respect of the Facility Letter and judgment has been entered against the 1st defendant. There is nothing in the affidavits to indicate that the choice of the plaintiff and the 1st defendant to select Hong Kong law as the governing law of their contract was other than bona fide or that there was any reason for avoiding the choice on the ground of public policy. The requirement that the selection of the governing law must be legal is of doubtful assistance because as has been pointed out, this begs the question by what law the legality is to be tested. See Halsbury's Laws of England, 4th Edn., Vol. 8 at p. 408. Further in paragraph 586 at p. 410, reference is made to a body of authority in support of the proposition that where a contract is, or any terms of it are, void or invalid under one system of law but good under another, the parties must be taken to have intended to contract with reference to that law by which the agreement would be valid. It is pointed out that this should not be regarded as an irrebuttable presumption but only as a pointer towards the intention of the parties.

29. Mr. Barretto, in arguing that the intention of the parties to the Letter of Guarantee should not be inferred to be the same as that of the parties to the Facility Letter, relies upon dictum in Coast Lines Ltd. v. Hudig & Veder Chartering N. V^.(9) and South African Breweries, Ltd. v. King⁽¹⁰⁾ in which a great deal of emphasis is placed upon the country in which performance of the contract is to take place.

30. However, neither of those cases were dealing with a situation where the intention of the parties had been expressed or could be inferred from the terms of their contract and the circumstances of it.

31. On the subject of invalidity of the contract, Mr. Barretto relies upon Ralli Brothers v. Compaina NavieraSota Y. Aznar^(ll), a decision of the Court of Appeal and de Beeche & Ors. v. The South American Stores & Ors. ⁽¹²⁾, a decision of the House of Lords. But those cases were concerned with the law of the place of performance. I do not consider that hose cases can assist me in deciding what is the prosper law.

32. In support of  his contention that the governing law of the Guarantee is not necessarily the same as the Facility Letter, Mr Barretto refers me to The Metamorphosis⁽¹³⁾ where a bill of lading incorporated the terms of a charterparty. Mr. Rarretto argues that in that case there wasn't enough to make the proper law of the bill of lading the same as the charterparty.

33. With respect, I think he has misread the judgment of Karminski J. who was at pains to distinguish The Metamorphosis⁽¹³⁾ from the Njegos⁽¹⁴⁾ where a bill of lading which incorporated the terms of a charterparty was held to be governed by the same law as the charterparty, i. e English law. He distinguished it not by drawing the inference that the bill of lading and the charterparty in The Metamorphosis⁽¹³⁾ were governed by different systems of law but by emphasising that there was an arbitration clause in the charterparty in the Njegos⁽¹⁴⁾ case and that at an early stage it was admitted on behalf of the defendants that the law to be applied to the charterparty was English. There are a number of authorities where the courts have drawn the inference that related contracts are intended to be governed by the same system of law. In the Njegos⁽¹⁴⁾ it was held that the inference was that sensible businessmen must have intended that a bill of lading should be read with the English interpretation attaching to a charterparty and that the proper law of the contract was English law on that basis and on the basis of business efficacy. Similarly in the case of In re United Railways of the Havana and Regla Warehouses Ltd.⁽¹⁵⁾, Jenkins L.J. in the Court of Appeal noted that one agreement (a lease) was recited in another agreement and that both documents were essential parts of the same transaction and held that in those circumstances they would each have the same proper law.

34. I do not consider it to be arguable that the proper law of the contract is other than the law of Hong Kong.

35. But that does not dispose of the matter. There is another question which this Court should consider before ruling the defendant out of Court. That is the question of whether the law of Hong Kong requires the performance by the appellant of a contract which he says is invalid by the laws of the country in which he resides where he says he will have to perform the contract.  In paragraphs 16 and 17 of his affidavit, the appellant has deposed as follows :-

"16.    Further it was known to the plaintiff that I had and have no real assets in Hong Kong, so that if the contract of Guarantee had to be performed, it would have to be done in Malaysia. To the plaintiff's knowledge, I stayed only in hotels during my visits in Hong Kong, as my home was and is in Malaysia. My main occupation is Company Director of Landmarks Holdings Berhad and its subsidiaries and my work is therefore performed for the most part in Malaysia, although I was sometimes required to travel in the course of my work. I had and have no real assets in Hong Kong. This was well known to the plaintiff because the plaintiff's then Managing Director knows that the vast majority of my assets are in Malaysia.

 

17.    I have been advised and verily believe that under the Exchange Control Act, 1957 (Act 17 of the Laws of Malaysia), it is an offence under Section 9 and Part II of the Fifth Schedule for any person in Malaysia to "do any act which involved, is in association with, or is preparatory to the making of any payment outside Malaysia, to or for the credit of a person resident outside "Malaysia", except with the permission of the Controller of Foreign Exchange." I verily believe that the execution of the Guarantee by me was an act which involved, or was in association with, or was preparatory to the making of payment (under the Guarantee) outside Malaysia. As the permission of the Controller of Foreign Exchange had not been obtained, I verily believe that the contract of Guarantee was accordingly invalid As it was illegal under the Laws of Malaysia."

36. This Court must therefore consider whether, on the basis that Hong Kong law is the proper law of the contract, it is right to enforce the contract in the circumstances referred to in the paragraphs referred to above.

37. The position is set out in the 11th edition of Dicey & Morris on The Conflict of Laws, Vol. 2, page 1466 in rule 212 as follows:-

"212, (1)A contractual obligation may be invalidated or discharged by exchange control legislation if -

 

And reference is made there to the case of Kleinwort, Sons. & Co. Ltd. v. Ungarische Baumwolle Industrie A/G^(15a). In this case MacKinnon L.J. in the Court of Appeal distinguished The Ralli Brothers⁽¹¹⁾ and The de Beeche⁽¹²⁾ cases upon which Mr. Barretto relies, saying it is obvious directly one looks at those cases that they are dealing with a totally different set of facts "This is an English contract to do something in England. In those cases the contract was to do something in a foreign country, and, when the law of that foreign country had made it illegal to do that act in that foreign country, it was held that the English Courts would not compel its performance or make the man who had failed to perform it liable in damages."

38. Applying this to the Hong Kong situation, it means that the Hong Kong Court can enforce a contract where one of the parties is a resident or national of Malaysia and where performance of a contract, or the contract itself would be invalid or illegal under the law of Malaysia, if it were to be performed in Hong Kong where neither the contract itself nor acts in performance of the contract are invalid.

39. There is nothing in the Contract of Guarantee or the Facility Letter to show that performance cannot take place in Hong Kong. Indeed it is the most obvious place for performance. It is not against the law of Hong Kong that the appellant should honour his irrevocable guarantee. Indeed if I may borrow from the words of Du Parcq L.J. in the Kleinwort case at p. 697, it is an elementary principle of Hong Kong law that people should keep their contracts and carry them out. If I may also borrow from his words at p. 695, for all I know the appellant may have money due to him in Hong  Kong and elsewhere outside Malaysia from creditors on payment of which he will be in a position to pay the respondent's just demand. Further it is clear that the appellant has some assets outside Malaysia and he hasn't given particulars of those assets. In any event no expert evidence has been adduced on Malaysian Law and the effect of it. Assuming that the law is as the appellant claims, it is hard to believe that the Controller of Foreign Exchange would allow the appellant to evade his contractual obligations under a contract freely entered into on which the other party has bona fide performed its side of the bargain.

40. Although I have not been addressed on the applicability or otherwise of the Bretton Woods Agreement, it has not in any event been suggested by anybody that the Contract of Guarantee upon which the appellant is being sued is a guise to get round the Malaysian Foreign Exchange Legislation, or that it is an "exchange contract" within the meaning of the Bretton floods Agreement.

41. I am of the view that the defence put forward in this case is without any merit.

42. I think the Master was clearly right and I dismiss this appeal and give final judgment for the respondent as claimed with costs.