THE BANK OF TOKYO, LIMITED AND OTHERS v. REGENTHILL LIMITED AND OTHERS

1985, No. A3054

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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RULING

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1. This is an application by the defendants to re-amend their defence. The 1st amendment goes to the construction and breach of the loan agreement in relation to the question of consent to the terms of sale which the defendants were seeking to offer to the public. It has been agreed between counsel that I should say nothing about that at this moment, and indeed until the earliest at the end of Mr Thomas's opening. The more contentious part of the amendment upon which I must now rule, is the application to add two pleas by way of defence and indeed counterclaim. The first is a plea for rectification; and the second is to add to the action a claim in negligence against a fresh party, the firm of Deacons.

2. The claim in rectification is quite simply put. The ordinary type of plea of rectification, with which one is more familiar, usually asserts that the parties made an oral agreement in terms X, and the Court is then invited to correct the written agreement so that it accords with the terms of the oral agreement. In this instance, I am faced with two written agreements. The first is an agreement contained in a letter of 8th September addressed by the Bank of Tokyo to the 1st defendant, which is said to have been accepted by a letter of 17th September. That is the governing agreement for the purposes of this application. It is said that that is inconsistent with the much more detailed loan agreement which was executed on 28th February 1981 and there is a particular clause of that which requires rectification.

3. The offer letter of the bank was written about 4 days after Regenthill had successfully bid for Lot. No. 1049 at Government Auction. That bid required the buyer to pay $203,000,000 on or before the 4th October. The offer letter outlines the bank's proposals for lending first of all, Tranche A which is $77,000,000 the then estimated construction costs in full of the building proposed to be developed on site: and secondly, B, $203,000,000 to finance part of the land premium. That was on offer "in one lump sum within one month from the date of the sale of the Lot" and that was in fact one month from the 4th September. Certain provisions for repayment, interest rates commitment fee and so on art set out. The crucial part of the letter under the side-heading "Security" says:

4. Other conditions are set out - principally the provision of the information. Then side-heading "Documentation - subject to satisfactory documentation including the above terms and conditions. "

5. The acceptance of the proposal in that letter by Regenthill Estates' Letter of 17th September is said to constitute the first of the binding agreements.

6. The second binding agreement is the loan agreement itself which provides what the shareholders are to do. Before turning to that, I should emphasize this. The defendants' case is that the phrase "shareholders' funding agreement to meet financial costs and any cost overruns" necessarily excludes any obligation by the defendants to contribute either to the land costs or to building costs. That is the essential nature of a shareholders' funding agreement. In the agreement, in fact made, one finds this in clause 14(b) under the side-heading "Gurantors and Shareholders" "Each guarantor and shareholder convenants so long as any sums remain to be lent or remain payable under the Security Documents, that he or it will - 3. Compliance with obligations - procure that the borrower complies with its obligations under the Security Documents" which means everything without exclusion; and "5. provision of financial assistance: procure that sufficient funds are available to the borrower (including without limitation for the purpose of construction costs) to enable it punctually to comply with all its obligations contained in Clause 14A(i) and in the Security Documents." There is express reference there to construction costs. 14A(i) is another express reference to construction costs. So that there is then a head on collision between the provisions of that document and that clause, which was in fact executed, and what the defendants say is the true meaning of sub-paragraph 5 in the letter.

7. I am bound to say, sitting here, it seems to me to be a fairly obvious conflict. When an application to amend is made in this form, on the opening day of the hearing, it is natural for a court to ask itself; why is this application made so late? On this construction of the letter, there is, as I have said, a glaring and obvious inconsistency. Let us suppose that it was overlooked in the very heavy documentation of February 1981. It was brought to the surface in very stark terms, one would have thought, by the original statement of claim in this action, which recited the provisions of 14B(iii) and (v), which I have just read. That one would have thought might have triggered off some recollection on the part of some representative of the defendants who had been involved with this:

'Good heavens that is not what I ever expected. '

8. The explanation for this is gallantly shouldered by the defendants' legal advisors in, certainly in my experience, a unique exercise in an attempted self immolation. Mr Oscar Lai was then apparently the solicitor, wearing in those days his Deacons hat, who was most concerned with this enterprise. He must be asserting that he never read the agreements properly either when they were executed, or indeed in relation to the statement of claim when it was originally served. He entrusted the details to his assistant then and now, Miss Lun. She apparently failed to spot the difference. She was suprised by not getting a separate agreement labelled "shareholders funding agreement" with the documentation which came to her from Linklaters & Paines. She enquired of the partner dealing with it, who was also a partner in Deacons, and was told, so it is pleaded, that Clause 14B was equivalent to such shareholders funding agreement. That may well be true in the sense that this was the Linklaters' equivalent of such an agreement. But that it did nothing like what it is now asserted that it should have, still seems to me to be glaringly obvious.

9. Having looked at the matter as best I can, I have come to the conclusion that the reason why this matter was not raised until the last moment is that it was never conceived as being a mistake in the first instance, and was never conceived until the last minute as being an arguable defence to this claim. In my judgment rightly so. Because it does not seem to me that this is a claim in rectification which stands any realistic chance of success.

10. The first question which it poses seems to me to be this. Does the 'agreement' constituted by the letters of 8th and 17th September bind Tokyo to demand and to accept some limited security provision under the general description of shareholders funding agreement or not. Because only if it bound Tokyo, can it be shown that they were not entitled to go beyond that agreement in a loan agreement. It seems to me that that question really admits of only one answer, and that is 'no' for two reasons.

11. The first is that this part of the letter does not seem to me to create what the law recognizes as binding, legal obligations at all. The author was writing in the briefest of shorthand. He was doing no more than indicate the headings of the documents which his bank would want under that side-heading of 'security'. He was not starting to define such documents. He was in effect saying this: we want security under these general heads subject to satisfactory documentation, i.e. we will work out and agree between ourselves what documents are satisfactory to bring about this result. It seems to me that this is the area of negotiation. It is not an area of creating obligations at all. I have read out the whole of the six subparagraphs on page 3. You can look at any of them to realise that the bank could have added or taken away from this list; added to the content of the documents in that list; and other members of the syndicate might have come in and said, what about so and so, or what about something else. These are no more than general heads. I cannot see how this phrase can possibly be construed in any event as giving rise to legal obligations.

12. The second reason is this. Even if I am wrong about the first reason, and this in some way does create an obligation, I cannot start to define the extent of that obligation: what in fact, looking at this in terms of obligations, the phrase "shareholders' funding agreement to meet financial costs and any costs overruns" actually means. It seems to me perfectly plain that this was not a term of art, strictly so called, at this time in Hong Kong, which would enable anyone to say, that means an agreement in these particular terms which can then be defined. There were at least two different concepts involved, and at least two different forms of agreement then in circulation.

13. The two different concepts are these. The first is that the "shareholders' funding agreement" could mean, or at least comprehend in part, the agreement between the shareholders inter se, the agreement which regulated how they were going to put up their contributions to the fund and the necessary capitalization scheme, and what was going to happen in the unfortunate circumstance of one or other of them defaulting or being unable to ante up. This is a very important matter for a bank to know. It is not insignificant that a few days after this letter, and before the time came for the payment of the $203,000,000 to complete the purchase, the shareholders here had entered into a document which they called "Heads of Agreement". It was dated 29th September. It covered all the moneys which had to be put up for this fund without any limitation or restriction at all. And, so the amendment tells me, this is a document the bank insisted upon seeing before they in fact advanced by way of temporary bridging loan the $203,000,000 to enable the buyers to honour their obligations to Government. When I first read this document at page 3, I thought that this might be what shareholders' funding agreement means. It is certainly a possibility. The other possibility is that it covers the arrangements of the shareholders collectively between themselves and the bank: that it covers the sort of situation in fact dealt within para. 14B of the loan agreement whereby the shareholders were required to enter into back-up covenants with the lenders in this particular case.

14. So that you start with two quite different concepts, one or other or both of which could be covered. If the concept is in fact the relationship between shareholders and the bank, there were at least two different forms of this in current use in Hong Kong at the time, which were used by various persons and companies who were in fact shareholders in this scheme, in other schemes. One was the Johnson, Stokes & Master format which certainly excluded any requirement of shareholders to contribute to the basic capital costs which were dealt with differently in that document. I would say this, that the form of documentation, is very long and very complex. The second format was apparently (so I am told and I have no reason to doubt), introduced into Hong Kong by Linklaters & Paines. That went through at least three variations. The first that I have seen was used in October 1980 in relation to Greenpalm Estates. That bears a striking similarity to the arrangements here. There was an overlap of parties. The bank again used exactly the same form in its original letter. That produced a equivalent of the covenant in Clause 14B which was not restricted to any particular costs or costs overruns but there was a general restriction to the effect that it was "as far as they were able" to procure. In the light of that, it is very difficult to say that the Bank of Tokyo, the authors of this document, necessarily had the Johnson, Stokes & Master form in mind. Indeed it points strongly to the contrary at the time they wrote this letter. The second variation is before me. The third variation is that which is adopted in August 1981, where very similar terminology was used in the commitment letter, and the equivalent of Clause 14B in fact goes further than the form before me and had again, no limitation at all.

15. In those circumstances, it seems to me totally impossible to say, on looking at page 3, that that phrase necessarily means a document answering a particular description. It seems to me that this claim in rectification falls at the first essential hurdle because the letter either does not create an obligation, or, if I am wrong about that, it does not create a enforceable or definable obligation.

16. Secondly I have frankly never understood how this letter can bind the syndicate. The syndicate did not exist at the time the letter was written. The syndicate was first recruited by a letter which is dated 12th January 1981. It seems to be transparently obvious that the syndicate was first bound by the documents it signed, and in the proportions of its contributions in those document. The pleader endeavours to paper over this crack by asserting that it was the intention that the benefits and obligations under this agreement "should devolve upon and bind such banks". I would not perhaps have disputed that. The expectation was that the banks were going to fall into line with the scheme as prepared by the Bank of Tokyo. But expectation is one thing: obligation is something else. Again there is an attempt to bring them in by saying that this was the only true agreement between the parties and "was adopted by all the plaintiffs". There is no active adoption by the rest of the syndicate that I am aware of, and certainly none is pleaded, except by affixing their signatures to the actual agreements that were signed. I do not see how the syndicate as such, who are the persons who entered into the agreement said to be rectifiable, can be affected in any way by the Bank of Tokyo letter.

17. The third point is simply the mirror image of the first, the lack of particularity. Mr Thomas had said everything that could possibly be said on this, and had the greatest difficulty in defining the rectification which he wants. He was constrained to abandon part of the original version in the pleadings. Then when recognising it was very difficult to deal with this in positive terms, which involves writing in definitions of financial costs and costs overruns, he sought to meet that by another variation perhaps with a little assistance from me. I am not quite sure whether he would recognize it now as assistance. As decided upon in the course of the agrument it involved taking 14B as it stood and adding bits to it and taking bits out. This in itself shows two things. One it involves taking out express references to things like the construction costs which were there, and underlines what is involved in this pleading. Secondly it shows that there is no way in which this court can say; "Yes, the parties did not agree X i.e. 14B; they did agree Y." Rectification as I see it cannot really leave the ground unless the Court can do both, and is satisfied that there was a mistake in the terminology used and that mistake was common to both parties.

18. In these circumstances and for those reasons, I think this application is altogether too speculative and too late and that I must reject it.

19. As far as the addition of Deacons as a party is concerned, I think it is plain that cannot possibly be allowed at this juncture. If there is a case in negligence against Deacons it is perfectly obvious that the plaintiffs cannot be represented as they are, and equally obvious that the defendants cannot be represented as they are in this claim. The whole thing has to go back to the drawing board to be started again.

20. In those circumstances I defer any ruling upon the first two heads of amendments as requested by counsel and I reject the amendments which I think are encompassed basically by the new paragraph 38.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Date of Delivery:  20th May, 1986

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RULING

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                I now have to rule upon the matters which have sensibly been dealt with as a preliminary issue in this case, and first and foremost upon the true construction of clause 14(b)(viii) of the Loan Agreement. Here the decisive issue is whether the mortgagee's consent is required only for a particular type of disposal or for all disposals.

                The covenant reads thus "The Borrower covenants, so long as any sums remain to be lent or remain payable under the security documents that it will

The issue between the parties really seems to me to come down to this. Where does the break came in the first part of this clause? The defendants argue that the decisive break is at the first disjunctive "or". That leaves the first part of sub-para. (a) on its own as requiring no more than the delivery of a draft proforma agreement and a price-list, simply by way of notification, not for consideration and certainly not for approval and consent. The plaintiffs on the other hand assert that there is a break there, but it is not the decisive break. They accept that (a) and (b) are alternatives. (a) is directed to unit sales and requires the delivery of the proforma agreement and the price-list. (b) is directed to other kinds of sales, the most likely sale being the disposition of the whole block as a whole. Those are true alternatives, but the next words that follow cover both. In other words "and the same" relate back both to the complete terms under (b) and to the proforma agreement and the price-list under (a).

                I agree with both counsel when they put this issue before me as one of substance v. form, or substance v. grammar and layout. I have no hesitation myself in preferring substance and the plaintiffs' submissions. First, there is no conceivable reason for drawing a distinction between unit sales and other dispositions. It is perfectly obvious that the mortgagees are as interested in the one as they would be in the other. It is plain that to read the clause in the manner which the defendants had invited me to do, makes really an absolute nonsense. It means that as far as unit sales, which may well be the most likely form of sales which the borrowers were going to make, all they had to do was to present the mortgagees with a draft and a price-list. There was no way in which the mortgagees could make any sort of comment about either. The whole of the first part of this clause on that reading would be reduced to an empty shell.

                Secondly, I do not have any great difficulty in reading the clause sensibly despite the modest objections which might arise from the layout. The opening words show why this information is being supplied. It is being supplied for distribution to the lenders, for a purpose. It is being supplied so that the agent can distribute this information to the lenders for their consideration, and it seems to me quite clearly, for their approval or otherwise, within the time limits set out later on in the clause. Equally, I do not have any difficulty in reading the words "the same" as relating back to the documents and the terms under both (a) and (b).

                Further, it seems to me that this construction is rendered essential by clause 18B of the debenture itself which is in these terms. "After the building completion date, if the relative disposal is permitted by the conditions and Crown lease, the borrower shall be entitled to call upon the agent to re-assign by separate re-assignments of undivided shares of the development and the property, insofar as required to give effect to any disposal, approved or deemed to be approved, by an instructing group pursuant to the loan agreement." This clause is absolutely essential where unit sales take place. Because it enables the borrower to require the mortgagees to make separate re-assignments to individual purchasers. These words, "approved or deemed to be approved by an instructing group", plainly take one back to the mechanisms of sub-clause (viii) which on the plaintiffs' construction would be right, but on the defendants' wrong. Mr Neville Thomas has advanced a highly ingenuous construction of this clause which is consistent with deemed approval under sub-clause (viii); but apart from giving him full marks for ingenuity, it does not seem to me that he can overcome the obstacle of the phrase "an instructing group" in this clause.

                In my judgment therefore, both parties were right when they originally read this agreement as requiring the consent of the mortgagees to both types of disposal envisaged by sub-clause (viii).

                If I am wrong in that view, it seems to me, that in the circumstances of this case, the matter is governed by the reasoning of the Court of Appeal in the decision in Amalgamated Investment & Property Co. Ltd, v. Texas commerce International Bank Limited (1982) 1 Q.B. 84. The correspondence seems to me to show quite clearly that at all material times throughout the arguments and the discussions that went on between these parties after the collapse of the property market, both were proceeding upon the basis that the consent of the mortgagees was necessary to any disposition effected by the borrower. I accept, that as far as Mr Ng is concerned, that was not as a result of any or any careful reading of the clause which I have just been construing. He was simply treating this as a normal transaction where such consent is normally required. I do not think that makes any difference. What matters, as it seems to me, is the assumption which is made, not how it is arrived at.

                Upon the hypothesis that my construction is wrong, this matter is precisely governed by the words of Lord Denning at page 121c where he says this: "if parties to a contract, by their course of dealing, put a particular interpretation on the terms of it, on the face of which each of them, to the knowledge of the other, acts and conducts their mutual affairs, they are bound by that interpretation just as much as if they have written it down as being a variation of the contract. " Those words precisely describe what both parties did in this case. Lord Denning goes on. "There is no need to inquire whether their mistaken interpretation is correct or not; or whether they are mistaken or not; or whether they had in mind the original terms or not. Suffice it that they have, by the course of dealing, put their own interpretation on a contract and cannot be allowed to go back on it. " Exactly the same conclusion is reached if you follow his alternative formulation on convention basis, or Lord Brandon's alternative formulation of convention estoppel at page 131. It seems to me therefore that if I am wrong on the construction, the parties have put that construction erroneously upon the contract and are now bound it.

                For those two reasons, it seems to me that the plaintiffs basically are right and I do not think it is necessary or indeed appropriate to go on and deal with any of the other points which have been raised between counsel.