SIN HUA BANK LTD. v. LUSEN ENTERPRISE LTD. AND ANOTHER

HCA 3360/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3360 OF 1999

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J U D G M E N T

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1. The plaintiff Bank's claim against the 2nd defendant is based on a Deed of Guarantee dated 4 December 1997 executed by the 2nd defendant in favour of the plaintiff to secure loan facilities in the sum of $10m. granted by the plaintiff to the 1st defendant. The loan to the 1st defendant was in order to enable the 1st defendant to complete a real estate project in mainland China.

2. It is common ground that the 1st defendant drew down $10m. under this facility and has defaulted in repaying the capital and interest thereunder.

3. On 21 July 1998, letters were sent by the plaintiff's solicitors to the 1st and 2nd defendants demanding repayment of the loan and interest. On 1 March 1999, the plaintiff brought these proceedings. Default judgment against the 1st defendant was obtained on 28 April 1999.

4. The 2nd defendant does not dispute that he signed the deed of guarantee dated 4 December 1997. Nor does he dispute that if he were liable under that deed he would be under an obligation to pay the plaintiff the $10m. advanced to the 1st defendant and interest thereon at 6% over the Prime Lending Rate quoted by the plaintiff from time to time from 21 July 1998, the date of the Bank's letter of demand to the 2nd defendant.

5. The 2nd defendant contends that he is not liable under the deed of guarantee. His defence is that, in the absence of any officer or employee of the plaintiff to explain the contents of the document which was in English, he was misled by Mr Lau Chun Man, a director of the 1st defendant into believing he was simply signing a reference letter in support of the 1st defendant's application for a bank loan. He therefore was completely mistaken as to the nature of the document he was signing.

6. The first hurdle which the 2nd defendant must surmount in order to establish a defence is to prove on balance of probabilities that he was mistaken as to the character of the document he was signing.

7. He has failed to do so.

8. The plaintiff accepts that no member of its staff was present when the 2nd defendant signed the "Deed of Guarantee". The 2nd defendant, however, is a middle aged businessman. On his own account he was involved in the steel and real estate businesses and was a director of at least 3 companies which were acquired by him for the purpose of his business interests. He himself had prior experience in applying for banking facilities.

9. Given his background in business he is not likely to have signed a document, even if told that it was a reference letter and even though it appeared to be in English, without glancing at the document he was signing. Even if he spoke no English, it would have been apparent that this was a long document with numerous printed paragraphs. It was also a document that required to be witnessed. These are features that would have alerted him to the fact that this was unlikely to be a reference letter. It would also have been apparent from Chinese characters of the top at first page of the document that this was a deed of guarantee. Even if the evidence of Miss Ling, a member of the 1st defendant's staff is correct (and I have considerable doubt as to how she would be able to remember such a minor detail) that she had simply placed the document on the table and he had signed it, the only Chinese characters written on the page which the 2nd defendant signed indicated that the document was a limited guarantee. If as he says his English was poor those Chinese characters are likely particularly to have attracted his attention.

10. He claimed to have been misled into believing the document was a reference letter yet he failed to give any convincing explanation as to the nature of the reference he thought he was giving. He claimed that he had not considered that matter carefully. He was evasive as to for whom he thought this reference letter was intended and the purpose for which he was being asked to sign it. I formed this strong impression from the content of his evidence and the manner in which he gave it that his evidence was designed to evade his responsibility for the guarantee which he had signed.

11. The whole basis of his account is inherently unlikely. On his account he was misled by Mr Lau, one of his best friends, into signing the document by the misrepresentation that it was a reference letter. In his own words he was "betrayed" by Lau. Lau had telephoned him asking him to go to his office immediately. On arrival he had been asked to be his referee. Lau had then told him to go into the conference room and wait for Miss Ling to bring the document for him to sign. He had done so. When Miss Ling brought the document he had signed it and then left without reading it.

12. If Lau had wished to mislead an old friend into signing a guarantee for $10m., it is hard to believe he would have gone about it this way. The document as I have said was headed "Deed of Guarantee" in English and in Chinese characters. He would not have asked the 2nd defendant to go into another room in order to sign the document in his absence when the chances of the 2nd defendant looking at the document and realising that deception was probable if not almost inevitable. Moreover, he would have known that Miss Ling was likely to know that the document was a Deed of Guarantee as indeed she did. If he was resolved to mislead the 2nd defendant he would have secured Miss Ling's complicity before asking her to take the document into the 2nd defendant to sign. This is no suggestion from Miss Ling that he did so.

13. I found Mr Wong Wai Kuen, the manager of the Wanchai Branch of the plaintiff, to be an honest and reliable witness. I accept his evidence that he had approved the granting of the loan before the loan documentation including the letter of guarantee were issued to the 1st defendant for signature. I accept that that approval had included approving the 2nd defendant as the guarantor of the loan and that prior to giving approval the bank had obtained documentary evidence of the 2nd defendant's directorships. That the bank was aware of the identity of the 2nd defendant as the guarantor before he signed the document is apparent from the pencilled annotations on the deed of guarantee alongside the place the 2nd defendant was to sign. I am satisfied that that annotation must have been made by a member of the bank staff rather than a member of the 1st defendant's staff, bearing in mind the other pencilled annotations on that document and on the undertaking for payment of loan and customer agreement (exhibits P2 and P3).

14. I also accept Mr Wong's evidence that the practice of the Bank would be to type in the name and particulars of the borrower, the name and particulars of the guarantor and the "specified amount" of the loan on the deed of guarantee before the document was released for signature. The bank could not expect the guarantor to sign a document which left blank the extent of his liability. Nor would the bank leave open the possibility that the borrower might insert the name of some person other than the guarantor whom the bank had approved. The significance of the bank having been notified that the 2nd defendant would be the guarantor at an earlier stage, is that it makes it much more likely that Lau had secured the 2nd defendant's prior agreement to become a guarantor.

15. I accepted the evidence of Wong Wai Kuen rather than that of the 2nd defendant that the meeting involving Wong Wai Kuen and the 2nd defendant and a Mr Lee Man Fai of the plaintiff bank at the bank after the 1st defendant had defaulted on the loan occurred prior to the plaintiff instructing solicitors. I accept that at that meeting Wong and Lee made it clear to the 2nd defendant that they were insisting on him meeting his obligations under the guarantee and that at the meeting, the 2nd defendant had made no mention of being misled into believing the document he had signed was a letter of reference. This satisfies me that the account now being given by the 2nd defendant is a more recent invention.

16. For the reasons above the 2nd defendant has failed to satisfy me on balance of probability that he was misled as to the character of the document that he was signing.

17. In such circumstances, the defence of the 2nd defendant fails. I would add that even I had been satisfied that the 2nd defendant had been mislead into believing that the document he was signing was a reference letter, I would have found that his failure to take the most elementary precaution of examining the document he was signing or making any enquiry whatsoever as to the contents of the many paragraphs of the document constituted negligence or carelessness disentitling him to rely on the defence of "non est facatum". I would also have found that the plaintiff bank had no reason to suspect that the guarantee was executed under a misapprehension.

18. I accordingly give judgment for the plaintiff against the 2nd defendant in the sum of $10m. plus interest thereon at 6% over the plaintiff's prime lending rate from time to time from 21 July 1998 until today and thereafter at judgment rate until payment.

19. The plaintiff's costs to be taxed and paid by 2nd defendant.