BANHART CO LTD v. BANK OF CHINA (HONG KONG) LTD

HCA2655/2004

HCA2656/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2655 OF 2004

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BETWEEN

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AND

ACTION NO.2656 OF 2004

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(Consolidated pursuant to the Order of Master Hui dated 14 December 2006)

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D E C I S I O N

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1. This is a defendant’s appeal against a refusal by Master Hui to strike out the plaintiff’s statement of claim (as amended).  His order was that leave be given to the plaintiff to amend, that paragraphs 20 to 22 and prayer 4 of the statement of claim be struck out and that the action be consolidated with HCA2656/2004.

Background

2. In 1997, the plaintiff and the defendant entered into a loan agreement by which the defendant provided to the plaintiff a loan facility of up to $18 million.  The agreement provided that the principal would be repaid in five instalments, the first being $2 million due 12 months after the agreement, namely 29 May 1998.  Four subsequent repayments of $2 million, $2 million, $2 million and $10 million were to be paid on each subsequent anniversary.  Interest was payable every six months.

3. The defendant bank made a mistake.  It requested/demanded the first repayment of principal after six months, instead of 12 months.  As it happened the plaintiff made the repayment.  The bank’s mistake triggered further mistakes in the sense that the second request/demand (after 12 months) should have been the first request/demand and the third request/demand (after 24 months) should have been the second and so on.

4. It is also common ground that in response to the defendant’s third request (for a payment after 24 months) of both principal and interest, the plaintiff only made a payment in respect of interest which was both late and insufficient.  This default constituted an “event of default” which entitled the bank (which is not common ground) to make a formal demand for the whole outstanding sum which, because it was not paid, also entitled the bank to appoint receivers which they did.

5. The plaintiff claims that the initial mistake, the subsequent erroneous demands and the appointment of receivers all constitute breaches of contract and corresponding claims in negligence for breach of duty of care by the bank to its customer.

6. It is accepted by the plaintiff that there is no express term in the loan agreement under which it could bring a claim.  It pleads and relies on the inclusion in the contract of an implied term that the bank would :

“… exercise skill and care when dealing with the Plaintiff, including not to misrepresent the financial position between the Bank and the Defendant [sic] or not to make repayment demands which were premature and/or not in accordance with the terms of the Loan Agreement”

Implied term

7. The plaintiff’s claim is premised on the argument that although the first demand, made after six months, was erroneous and premature, it could nonetheless not be simply ignored by them.  They submit that by virtue of Clause 22 of the Loan Agreement (the ‘conclusive evidence clause’), they had to treat it as a demand which carried with it consequences of both a factual and legal nature which, as a result, could not be disregarded.

8. Clause 22 provides as follows :

“22. Conclusive Statement of Account :

(a)    Any statement of account relating to the Facility signed as correct by any of the duly authorized officer(s) of the Lender shall be conclusive evidence of the Borrower’s indebtedness to the Lender, save for manifest errors.

(b)   Any opinion, determination or decision by the Lender as to any materiality, effect or otherwise howsoever relating to anything herein mentioned or referred to shall be conclusive and binding on the Borrower.”

9. The plaintiff submits that the first (premature) letter from the bank was a statement of account relating to the facility.  It stated what was due in interest and principal.  The error in it was not “manifest” because the error was not apparent on the face of the document.  In other words, an independent reader of the document would not realize it contained an error.  Thus, it had to be regarded as a correct statement which could lead to serious consequence if it was ignored.

10. The defendant submits otherwise.  The bank argues that the mistake was “manifest” because it was plain and obvious and it merely requested an amount of indebtedness; it was not a “statement of account”.

11. On all these sub-issues authorities were cited in support of opposite contentions.  I do not consider it possible to say at this stage that one position is plainly right and the other is plainly wrong.

12. However, the issue of the meaning of the conclusive evidence clause does not stand-alone.  If the plaintiff is right in its argument that the first premature demand was not merely “wasted paper” which could be safely ignored but was a document which could have put the plaintiff in default if it had been ignored, then the implied term is needed in order to give the contract business efficacy.  The reason being that it is obvious that it was a term of the contract that the bank would not make unwarranted, premature erroneous demands for repayment but the implied term is needed to say so.  The expression ‘waste paper’ is taken from Parker LJ’s judgment in Bournemouth and Boscombe AFC Ltd v. Lloyds TSB Bank plc [2003] EWCA Civ 1755, where he said :

“In the words of Lord Hobhouse in Borealis AB v Stargas Ltd at p 229H, the demand was ‘an act devoid of legal significance’.  Lord Hobhouse went on to say this :

‘A ‘demand’ made without any basis for making it or insisting upon compliance is not in reality a demand at all.  It is not a request made ‘as to right’, which is the primary dictionary meaning of ‘demand’.  It is not accompanied by any threat of legal sanction.  It is a request which can voluntarily be acceded to or refused as the person to whom it is made may choose.’

In my judgment, those observations apply to the Bank’s demand dated 2 July 1996.  On the assumed facts, it did not have the contractual effect which it purported to have and the Club was accordingly entitled to ignore it.  It was, in effect, so much waste paper.”

13. Mr Benjamin Yu, SC who appears for the bank with Ms Eva Sit firstly submits that where there is no issue concerning the factual matrix, it is both possible and proper to disallow an implied term at the strike out stage.  I agree that it is possible to rule out an implied term at the strike out stage but I am not satisfied that it is proper to do so in this case (the onus being on the defendant to show that it is plain and obvious that the plaintiff will lose).  Some investigation into the factual matrix may be or may become relevant.

14. In support of his argument against the implied term he has cited and relied upon a number of authorities including Concord Trust v. The Law Debenture Trust Corporation plc (CA) [2004] 2 AER 737, Borealis v. Stargas Ltd [2002] 2 AC 205 and The Bournemouth AFC case together with the classic authority on implied terms of BP (Westernport) Refinery v. Shire of Hastings (1977) 180 CLR 266 as adopted in Hong Kong in Kensland Reality v. Whale View Investment Ltd (2001) 4 HKCFAR 381.  

15. Based on such authorities, it is argued, that the implied term is superfluous and unnecessary.  The contract works without it because the premature demand had no contractual force.

16. I confess to finding this a difficult question to answer.  Ultimately, however I am not persuaded that the submission made by Mr Charles Sussex, SC leading Mr Douglas Lam that it is arguable that the premature demand did carry serious consequences and that therefore the implied term is necessary both to give the contract business efficacy and to give effect to the parties intention is incontestably bad. 

17. Mr Sussex answers all the authorities with a similar response.  All implied terms cases turn on their own facts.  All terms sought to be implied are different.  The cases cited, he points out, are generally speaking, examples of enormous litigation involving huge syndicated loans, voluminous contracts, teams of lawyers representing numerous parties.  He further points out that those cases are not determinative of the issue concerning the meaning of the conclusive evidence clause in this case.  Our case, he submits, is a simple banker/lay client relationship which requires discrete consideration on its own facts and on its own merits.  In my judgment, his argument is sufficient to keep the plaintiff’s claim alive.  The implied term is pleadable in this situation.

Appointment of receivers

18. The plaintiff’s first argument is that if the bank had never made its first mistake, the situation which arose 18 months later would never had occurred, there would have been no default and no receivers could have, should have or would have been appointed.  It is part of the domino effect of the first mistake. 

19. The defendant’s answer is that the plaintiff’s insufficient payment of some interest only in response to the bank’s third request put the plaintiff in default on any view and this entitled the bank’s action.

20. The defendant has a second string to its bow.  In order to secure the loan facility agreement, the plaintiff mortgaged a property to the bank.  It was an alleged breach of Clause 8 of the mortgage which resulted in the appointment of receivers.  That cause of action was not included in the original writ.  The plaintiff’s summons to re-amend the endorsement to the writ to include the new claim was not issued until December 2006.  This, says the defendant, is clearly time barred.

21. The defendant cites Byblos Bank SAL v. Al-Khudhairy [1987] BCLC 232, an authority for the proposition that the appointment of a receiver is valid even if it was appointed on incorrect grounds provided correct grounds in fact existed at the time of the appointment.  In the present case, the plaintiff concedes that two years after the loan agreement a large sum of interest was outstanding.  However, it is submitted, this situation had developed as a direct result of the defendant’s breaches of the implied term.  Money was repaid early and his cash flow was affected.  Prior to the appointment of the receivers, the whole outstanding principal of over $14 million was demanded.  Had the demand been for outstanding interest only the scenario might have been different.

22. The plaintiff thus relies on the principle that a party cannot take advantage of its own wrong, namely ‘the prevention principle’ as discussed by Ribeiro PJ in the Kensland Realty case.  He concluded at p.417 by saying :

“In deciding how the prevention principle is to be given effect in any particular case, it is necessary to identify with some precision, the relevant breach, the factual consequences flowing from such breach and what, if any, advantage the contract-breaker seeks to take on the basis of such consequences …”

23. The competing argument to the ‘prevention principle’ argument is that the bank’s error was of no legal consequence therefore no advantage can be gained or sought from it.

24. Once again, my decision is that the plaintiff’s stance on this issue is not hopeless.  It would in any event be illogical to find in favour of the plaintiff on the “implied term” issue and in favour of the defendant on the “appointment of receivers” issue or vice versa.  Put simply, if the defendant fails to reach the threshold test to strike out they both remain live issues.

25. The same goes for the limitation argument.  The limitation point depends when the cause of action and consequential damage arose.  That is in dispute.  Moreover, the plaintiff’s answer to the limitation point will include a plea of estoppel which in any event raises triable issues.

26. Relatively minor peripheral issues remain (such as specific disputes relating to the quantum of interest) which do not need to be addressed in view of all the above.

27. In my judgment, the Master was right to make the order he did (including the order to consolidate this action with the much more substantial claim in HCA2656/2004).  In short, the bank made a mistake which it does not dispute.  That mistake was never corrected and it triggered consequential errors which also were not rectified.  In all the circumstances, I do not think the defendant has established a sufficient case to shut out the plaintiff, at this stage, from pursuing its arguments in fact and law.

28. Counsel have undertaken to agree the necessary usual directions in relation to the consolidation order.

29. I make a costs order nisi in the plaintiff’s favour on the appeal.