CASIL CLEARING LTD v. CHINLUCK PROPERTIES LTD AND ANOTHER

HCA 11008/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11008 of 1997

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JUDGMENT

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Background:

1. These proceedings comprise an action in damages for breach of an agreement to loan money in which the plaintiff, Chinluck Properties Limited, alleges that the defendant, Casil Clearing Limited, has failed to pay to it the full amount of the loan of HK$330 million, agreed to be advanced by way of mortgage.

2. By counterclaim, Casil Clearing Limited sues Chinluck Properties Limited to seeking repayment of the sum of HK$251,516,681.95, advanced pursuant to the loan agreement, together with interest thereon. Further, in the counterclaim, Casil Clearing Limited sues Chinluck Properties Limited and Mr Cheng Zhen Shu, pursuant to the mortgage, and Mr Shu pursuant to a personal guarantee given in respect of the loan agreement and mortgage, seeking recovery of the funds advanced to Chinluck Properties Limited.

3. At the commencement of the trial, for reasons I then gave, I ordered that the issues of liability and quantum be tried separately. This judgment will therefore be confined to issues of liability. The facts were largely not in dispute, and the facts I now set out are the facts as I find them. I shall indicate where it is necessary to resolve a dispute between the parties as to fact.

The Parties:

4. Chinluck Properties Limited (Chinluck) is one of a number of companies owned by Mr. Cheng Zhen Shu (Mr. Shu). Mr. Shu is a property developer in Hong Kong and in the Mainland, and uses various companies, in what he calls the Chinluck Group, for that property development. Other companies in the Chinluck Group that feature in this litigation are Chinluck Limited, (Chinluck Limited), Chinluck Holdings Limited, (Chinluck Holdings), Gold All Investments Limited, (Gold All), and Richfame Dynasty Limited, (Richfame). All are beneficially owned by Mr. Shu.

5. Casil Clearing Limited, (Casil), is a wholly-owned subsidiary of China Aerospace International Limited, (China Aerospace), and is the holder of a money lenders licence in Hong Kong.

The relevant legal principle:

6. I accept Mr Wong's submission that I should approach the construction of the contracts between the parties having regard to the surrounding circumstances, or factual matrix, in which those documents were made. The proper approach to the evidence that may be used in the construction of a contract is set out in the judgment of Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, HL, at 912-3. These are principles that I apply in the construction of documents in this action.

The property and the Project:

7. In May 1991 Mr Shu became the owner of land in Peng Chau, known as Peng Chau Lots 378 RP and 380 RP. In September 1991, Chinluck became the owner of adjacent land in Peng Chau known as Peng Chau Lots 378A, 379, 380A, and 422. I will refer to all the properties collectively as "the Peng Chau land". In 1995 Mr Shu decided to develop the Peng Chau land into a commercial and residential development (the Project). Chinluck envisaged the Project as being, in a way,, a replica of the Discovery Bay environment on Peng Chau. Proposed zoning amendments were suggested by Chinluck, and approved by the Committee of the Planning ands Land Department in August 1995.

8. In order to undertake the Project it would be necessary for a land exchange to take place as the original land grants by Government were for agricultural and industrial purposes, and accordingly, without a land exchange, the Project could not proceed. Of course, with a land exchange to permit residential and commercial purposes, a new land premium would have to be paid by the developer to Government. Part of the land exchange included the surrender of land for the construction of a school and the provision of emergency vehicular access to the Project. Government would pay a sum of compensation for the land surrendered.

9. By early 1997 Chinluck had made significant progress on the Project. It had engaged land planners to make applications to the relevant Government Departments in relation to the land exchange. Architects had prepared a master layout plan and building plans for the Project. The land exchange proposal had been submitted to the District Land Office, Islands, for approval. Appropriate zoning amendments had been secured from the Committee of the Planning and Lands Department which would allow the development of the Project. Surveyors had been engaged and had commenced the procedures required to secure the removal of occupants of parts of the lands, and to handle objections raised by villagers against the Project. With a view to securing funds for the Project, Mr Shu approached China Aerospace, with whom he had had a relationship, to secure financial support.

The relationship between the Chinluck Group and Casil:

10. Mr Shu and the Chinluck Group of companies had a good relationship with China Aerospace and Casil, having previously borrowed money from Casil for other land development purposes, both in the Hong Kong and in the Mainland. In December 1996, Casil had advanced to Chinluck HK$20 million for a three-month term commencing on 29 November 1996 and secured over Peng Chau Lot 422, one of the lots comprised in the Project. In January 1997, Casil advanced to Richfame, HK$70 million for a term of six months commencing on 20 January 1997, to fund a development project known as Fortune House Project in Hong Kong.

11. The first discussions with senior officers of China Aerospace about the possibility of China Aerospace providing financial support to the Project took place on a number of occasions prior to early 1997. The unchallenged evidence of Mr Shu was that he had discussed the matter of the Project, in broad terms, with a number of senior executives of China Aerospace and Casil.

12. In early March 1997, Mr Shu began negotiating with the management of China Aerospace and Casil for an advance of HK$330 million, which on Mr Shu's case, was for the Project. Mr Shu first approached Mr Lu Kun Lai, an Executive Director and Vice Chairman of China Aerospace in early March 1997. On 15 March 1997, a document setting out proposals and plans for the Project was sent to Casil. A day or so after the receipt of the document by Casil, arrangements were made for the Deputy General Manager of Casil, one Mr. Gao, to inspect the land and its location.

13. On 21 March 1997 a comprehensive and detailed development proposal was prepared and sent to Mr. Gao. That document, prepared by Mr Ken Leung, personal assistant to Mr Shu, made it clear that the Project required an initial capital of HK$330 million, taking into account the land premium payable on the land exchange, consultancy, construction, development and administration, and finance costs. In terms of the document, upon completion of the predominant part of the project, within three years, Chinluck could earn a profit of some HK$499 million. It was clear from that document that the land exchange was a crucial early step in the procedure as it was required to enable the project to proceed, and that included in the initial capital required, was the sum to be applied in payment of the land premium.

14. In April 1997 Casil advanced to Chinluck HK$8 million, for a term of six months commencing on 1 April 1997, at an interest rate of 13%. That sum was secured by mortgage over the Peng Chau land. In early May 1997 the Planning Department of Government notified Chinluck's consultants that there would be no objection to the Project as shown in a Master Layout Plan that had been submitted to Government.

15. Also in May 1997, Casil agreed to lend Gold All up to US$4,859,710.00 for a term of six months. That sum was secured on a property being developed in Shanghai known as Prince Garden, and by a personal guarantee from Mr Shu. It is clear from the documents that the purpose of that advance was the development of Prince Garden in Shanghai. By way of a further advance, on 27 May 1997, Casil advanced to Richfame HK$4.7 million, secured by mortgage over Fortune House. Again it is clear that that sum was used for the development of Fortune House. This loan was due for repayment on 30 June 1997.

16. On 11 July 1997 a further agreement was made whereby Casil advanced to Chinluck HK$30 million, for a term of one year with interest at 15%. It appears that this sum was unsecured. The purpose of loan was to assist Chinluck in the development of a hotel project it was undertaking in Guangzhou.

The Loan on the security of the Project:

17. On 27 May 1997, at the request of Casil, and on the instruction of Chinluck, a survey report was prepared by Vigers, valuing the land comprised in the Project at HK$430 million, on the assumption that the land was developed in accordance with the proposals in the Project and delivered with vacant possession, that a land exchange offer was received from Government in accordance with an indicated offer, and the Project was completed on the day of the report. The valuation report was provided to Casil.

18. In a meeting at a banquet on or about 14 June 1997, Mr Shu was informed by Mr Wang Meiyu, the Chairman of China Aerospace, that Casil would advance to Chinluck HK$330 million, to be secured by a charge over the land comprised in the Project. Mr Wang told Mr Shu that he should follow up the matter with Mr Lu, who had been given full authority to deal with the Chinluck Group in matters relating to the loan. I will refer to the full sum of HK$330 million as "the Loan".

19. On 9 July 1997 Mr Shu, undercover of a letter, headed "Peng Chau - loan of Hong Kong dollars three hundred and thirty million", forwarded what is described in the letter as "the title deed of Peng Chau for the security of the above loan". Bearing in mind that the Peng Chau land had been mortgaged to Casil in April 1997, it is not clear why Chinluck should still be holding the title deeds. However nothing appears to turn on this point.

The completion of the loan documents and the making of the Loan:

20. Around the middle of July 1997, Mr Ken Leung was informed by Casil that all necessary documentation for the Loan had been drafted and finalised by Casil's solicitors, Messers Fairburn, Catley, Low & Kong, and that arrangements should be made from Mr Shu to sign the documents on behalf of Chinluck, and in his personal capacity as guarantor. On 18 July 1997, Mr Shu, with Ken Leung, attended at Casil's solicitors office and executed a Loan Agreement, a mortgage over the land, and a Personal Guarantee. The documents also required execution by Casil, which was effected on 24 July 1997, and the documents dated that date. Somewhat surprisingly, having regard to the very substantial sum involved, Mr Shu elected not to seek independent legal advice in relation to the documents, but nothing turns on this fact in these proceedings.

21. On 18 July 1997, following the execution of the documents, Mr Shu returned to his office and wrote a letter to Casil requesting that the loan amount of HK$330 million be credited to a specific account with the Hongkong and Shanghai Banking Corporation in the name of Chinluck Limited.

The relevant provisions of the security documents:

22. The security documents in relation to the Loan comprised a document entitled a "Loan Agreement", a mortgage of the Peng Chau land, and a Guarantee signed by Mr Shu personally. The Loan Agreement was made between Casil and Chinluck. The mortgage was given by Mr Shu, and Chinluck, the latter signing in two capacities, first that of a mortgagor of part of the land secured by the mortgage, and second as "the Borrower" who had applied to Casil for the term loan facility. Mr Shu executed the mortgage, as a mortgagor of part of the land secured by the mortgage.

23. Certain provisions in the documents are important in this trial. The Loan Agreement contained the following recital:

"The Borrower has requested the Lender to grant to it a loan for the sum of Hong Kong Dollars Three Hundred and Thirty Million (HK$330,000,000) (the Loan) and the Lender has agreed to advance the Loan to the Borrower and the parties now intend to enter into this Agreement to record the terms and conditions for the advance of the Loan to the Borrower by Lender as follows:-"

Clause 1 of the Loan Agreement provided as follows:

"Advance of the Loan

The lender, relying on the representations, warranties, covenants and undertakings given by the Borrower herein, agrees with the Borrower to make the Loan available to the Borrower upon the signing of this Agreement by the Borrower subject to the terms and conditions contained in this agreement."

Throughout clauses 1, 2, 3 and 4 of the Loan Agreement expression "the Loan", is used. That expression refers to the definition in the recitals of the sum of HK$330 million. The expression is again used in clauses 8 B, and 10. Clause 7 of the Loan Agreement provides:

"7 Undertaking:-

A. The Borrower shall:-

(i) Promptly inform the lender of the occurrence of any Event of Default......"

The relevant parts of Clause 8 are as follows:

"8. Events of Default

A. An Event of Default occurs where:

........

(vii) if anything shall be done or suffered or omitted to be done by the Borrower or any of the other parties to the Security Documents (other than the Lender) which in the opinion of the Lender puts or may put in jeopardy the security created by this Agreement, any of the Security Documents or any other guarantee, security, instrument, agreement or document held by the Lender as security for the obligations of the Borrower hereunder or in respect of all monies payable by the Borrower herein;.

(viii) if there shall occur a material adverse change in the business, assets, general condition or prospects of the Borrower, or of any other party to any of the Security Documents (other than the Lender) which could materially affect the ability of the Borrower and/or such party to perform its payment obligations under this Agreement and/or the Security Documents;".

Clause 8 B provides:

"The Lender shall be entitled at any time after the occurrence of any Event of Default by notice in writing to the Borrower to declare that the loan and all interest accrued and/or other sums payable pursuant to this Agreement shall become immediately due and payable and the Borrower shall immediately pay the same to the Lender."

24. The recitals to the Mortgage contain the following statement:

"The Borrower through the first Mortgagor and the second Mortgagor (collectively hereinafter called "the Mortgagor") has applied to the Lender to grant to the Borrower a term loan facility of up to HK$330,000,000.00 (" the Facility") in the Lender has agreed to grant the same upon the Mortgagor and/or the Borrower entering into the covenants and obligations hereinafter contained".

Clause 2.01 of the Mortgage provides:

"In consideration of the Lender agreeing the requested the Mortgage or to grant to the Borrower the Facility applied for the Mortgage or and Borrower hereby covenants with the Lender that,......".

Provisions of the mortgage made payment of principal and interest under the Loan Agreement a condition of the mortgage. The "Memorial of an instrument to be registered in the Islands New Territories Land Registry under the Land Registration Ordinance" describes the "consideration" for the mortgage as the sum of HK$330,000,000.00.

25. The following provisions of the Guarantee are relevant. Casil is described as "the Creditor", and Mr Shu as "the Guarantor". The recitals contain the following provision:

"Chinluck Properties Ltd (the Borrower) entered into a Loan Agreement dated even date (the Loan Agreement) with the Creditor as lender. By the Loan Agreement, the Creditor has advanced a sum of HK$330,000,000.00 to the Borrower upon the terms and conditions therein contained."

Clause 1.1 of the Guarantee provides that words and expressions used in the Guarantee shall have the same respective meaning must that are ascribed to them in the Loan Agreement. Clause 2.1 of the Guarantee provides:

"In consideration of the Creditor agreeing to provide the Loan to the Borrower in accordance with the terms of Loan Agreement the Guarantor irrevocably and unconditionally undertakes the obligations and liabilities set out in Clauses 2.2 and 2.3."

These clauses contain the usual guarantee to the creditor of all sums due. As is usual with a guarantee, the requirement on the Guarantor, contained in Clause 2.2(a), is to pay to the Creditor, "on demand". The Guarantee contains a "principal obligor" clause in the following terms:

"2.3 The Guarantor, as principal obligor and as a separate and independent obligation and liability from its obligations and liabilities under Clause 2.2, irrevocably and unconditionally agrees to indemnify the Creditor in full on demand against all losses, costs and expenses suffered or incurred by the Creditor arising from or in connection with the failure by the Borrower fully and promptly to perform and discharge any of the obligations and liabilities under the Loan Agreement."

Deductions are made by Casil from the Loan:

26. On 19 July 1997, the day after Chinluck and Mr. Shu signed the security documents, in a telephone conversation with Mr Ken Leung and the "Treasury Manager" of Casil, a Mr. Choi, Chinluck were informed that that there was a prior agreement that all existing loans, including interest and fees, owed by the Chinluck Group to Casil must first be deducted from the Loan. On the pleadings, and in the witness statements this was in dispute, with Mr Shu asserting that there was no such agreement. The fact of such an agreement was recorded in a handwritten sidebar, to a handwritten internal memorandum of Casil dated 11 July 1997, made by Mr Chu Lin Cheung, an officer of Casil. When presented with that note Mr Shu accepted that it was accurate.

27. I accordingly hold that it was agreed between Chinluck and Casil, prior to the execution of the Loan Agreement and the Mortgage that all outstanding existing loans including interest and fees owed by the Chinluck group to Casil would be deducted from the Loan.

The first payment of the Loan is made:

28. It appears also that on 19 July 1997, in the course of the telephone conversations in relation to the repayment of outstanding loans, agreement was reached that a first instalment of the Loan, a sum of HK$20 million, would be advanced immediately, although at that stage Casil had still not signed the loan documents. The evidence did not deal directly with how this came about. According to internal documents of Casil, this advance was understood by Casil to be for a period of two days to cover cash flow. The evidence for Chinluck did not challenge this understanding.

29. On 19 July 1997, just after midday, Mr Choi sent by fax to Mr Leung at Chinluck, a schedule, setting out the required repayments that would be deducted from the Loan. Included in that schedule was the sum of HK$20 million that had been advanced on 19 July 1997. Also included in the amount to be deducted was a sum of HK$48,496,000 described as "Fund to Hang Hau & Yeung", which it was agreed represented the sum required to repay the existing mortgage on the Peng Chau land. The total amount of loans, interest, commissions and legal fees to be deducted was HK$153,688,152.30. That would leave a balance due from the Loan, still to be paid to Chinluck, of HK$176,311,847.70.

30. Included in the deductions made was a sum described as "Commission Fee on HKD330,000,000.00", of HK$1,650,000. That is 0.5% of the sum of HK$330 million. Also deducted was the sum of HK$608,080.00 being Casil's solicitors fees on the loan documentation.

31. On 23 July 1997, following a request made by Mr Choi, and he supplying information to them, the property valuation and consultant company, C.Y. Leung & Company Ltd. wrote to China Aerospace suggesting a site value of the Peng Chau land at HK$340-350 million. Although nothing turns on the point, it appears that Casil executed the documents the next day, 24 July 1997.

Requests made for the balance of the Loan:

32. On 2 August 1997, by fax, Mr Shu requested the transfer of what he described as "the first instalment" of the Loan of HK$75 million to the account of Chinluck Limited. The evidence did not establish how it came about that this request was for a "first instalment". The sum was duly paid. On an unknown date in August 1997, a letter was prepared by Mr Shu expressing concern at the fact that the balance of the Loan had not been paid. The letter is in terms which make it apparent Mr Shu is aware that Casil has capital difficulties. There is no evidence that that letter was actually sent to Casil.

33. On 8 September 1997 Mr Ken Leung wrote to Casil demonstrating that of the total loan amount in accordance with the loan agreement signed on 24 July 1997, a sum of HK$251,322,847.70 had been drawn, but that the loan balance was not yet drawn. It does not appear that there was any specific response to that letter. However no further funds were advanced.

34. It appears to me that the sum of HK$251,322,847.70 is an error, and that the correct amount that had been drawn down was HK$248,688,152.30, calculated as follows:

Total amount of the Loan	$330,000,000.00
Less preliminary advance	20,000,000.00
Less agreed deduction	153,688,152.30
Less "First Instalment"	75,000,000.00
Sum advanced	248,688,152.30
Balance due	81,311,847.70

It must be remembered that Casil had demanded, and Chinluck had agreed, to the repayment of the HK$20 million advanced on 19 July 1997; (see para. 28 above). That early repayment of $20 million, it seems to me, does not add the sum back into the pool of the total Loan available. Nothing turns on this error however, for it is not in dispute that the full amount of the Loan was not paid to Chinluck. The correct amount can, I am confident, be agreed.

35. It is plain that between 2 August 1997 and 19 September 1997, there were further discussions between the parties as to the Loan balance still not drawn down. It is equally plain that Chinluck and Mr. Shu were concerned about the failure of Casil to allow them to draw down that balance. The unchallenged evidence of Mr Shu was that he was told by Mr. Lu Kun Lai, an executive director and vice chairman of Casil, that because of a lack of cash flow Casil was unable to provide any further advance on the Loan to Chinluck.

36. On 19 September 1997 Mr Shu wrote to Casil complaining that the balance had not been advanced and that that had "caused the entire project to be at a complete halt". That letter was sent to Casil. Again he refers to his understanding of Casil's difficulty with capital. He said in the letter as follows, (this is from the translation):

"(Although our company) understands your company's difficulty in deploying the capitals, to avoid causing damage to this development project owing to delay (in payment of) capital, (our company) sincerely wishes your company to provide (our company) with assistance and pay our company Hong Kong dollars 2.8 millions by 11th day of this month so that this project can start on time. Our company will make a way out of the rest of the capital by ourselves. To solve your company's difficulty, our company is willing to repay your company's loan and interest in full at the end of this year." (sic)

The situation thus was that Chinluck was prepared to accept a greatly reduced sum, and to repay the full amount, 18 months early, if further capital could be advanced.

37. The case for Casil was that they were not in capital difficulties. In the course of evidence from a staff member of Casil, evidence was led, and substantiated by the annual report of China Aerospace, that at that company's balance date on 31 December 1997, the parent company had cash and bank balances totalling HK$452,721,000.00. That isolated piece of information, somewhat disingenuously lead as evidence-in-chief from a Casil staff member, was put entirely in context when I was referred to the fact that the balance sheet also demonstrated that during the year 1997 China Aerospace had operated on a net cash outflow from operating activities, of HK$199,688,000, and the Consolidated Cash Flow Statement showed a deficit of HK$165,385,000. Casil's own accounts, while showing a profit for the year of HK$21.5 million, also showed a Cash Flow deficit of HK$100 million. Casil elected to call no witnesses from the executive management of the company, and no other evidence as to either the financial health of the company, or as to Mr. Shu's assertions that he was informed that Casil was having difficulties in accessing capital.

38. In the absence of any evidence to the contrary, I am satisfied that while neither China Aerospace nor Casil were on the verge of bankruptcy, they were plainly short of capital, and were having difficulty in funding Casil's operations.

No other advances or loans allowed by the Loan Agreement:

39. One of the terms of the Loan Agreement, Clause 7 B (i), was that Chinluck would not, without the prior written consent of Casil, permit to subsist any encumbrance over any of its present or future assets.

40. At the time the Loan Agreement was made there was a charge over a property, owned by Chinluck, situate at 17C Roof, Hoi To Court, 275 Gloucester Rd., Hong Kong, (the Hoi To property), in favour of a finance company called Yu Tai Hing. That advance was repaid by Chinluck, and the charge over the property discharged on 16 September 1997, leaving the property debt free. Chinluck was to later take further advances from Yu Tai Hing on the security of this property, upon which Casil would contend that there was a breach of the Loan Agreement.

41. The consequence of Casil's demand that the Chinluck Group should repay, from the Loan, all outstanding advances meant that at 19 July 1997, when the repayment by deduction was effected, the Chinluck Group was the holder of a very significant portfolio of debt free property in Hong Kong and in the Mainland, and was, by the terms of the Loan Agreement required to keep that property debt free.

Chinluck makes formal demand for the balance of the loan:

42. On 24 September 1997, this time at the request of Chinluck, C.Y. Leung & Company Limited again valued the land. This time they came to the conclusion that land was worth approximately HK$450 million on the open market, upon the assumption that the land exchange had taken place, and the necessary premium settled, and that the land was immediately available for development. The next day, 25 September 1997 Chinluck's solicitors made formal demand upon Casil for the immediate payment of the balance of the Loan, then calculated at HK$78,688,152.30. (I am unable to reconcile this figure with that in paragraph 33 above). The letter recorded that as a result of the breach by Casil to honour its agreement to advance a loan of HK$330 million, and its failure to pay the balance of the loan, Chinluck had suffered loss and damage. The letter recorded that unless the balance due was paid within seven days, legal proceedings would be taken without further notice.

43. On 17 October 1997, there being no response from China Aerospace, Casil, or their solicitors, to the letter of 25 September 1997, Chinluck issued the writ in these proceedings, seeking specific performance of the Loan Agreement and payment of the sum of HK$78,688,152.30. By alternative prayers for relief damages in addition to specific performance to be assessed were sought, and if specific performance were not granted, damages in lieu of specific performance. In the meantime, as best as they could, Chinluck proceeded with the project. On 27 October 1997 public notices were given by the Government notifying the public of the application that had been made or land exchange and inviting objections to be raised.

The consequences of the Asian Financial Crisis:

44. In the latter part of 1997 Hong Kong began to suffer directly from what has become known as the Asian Financial Crisis, that began with the collapse of the currency in Thailand in about July 1997. There is an issue between parties as to precisely when this occurred in Hong Kong, but it seems beyond argument that by late September and certainly by November the Crisis was having its effect in Hong Kong.

45. On 24 November 1997, at the request of China Aerospace, First Pacific Davies undertook a valuation of the Peng Chau land and found it to be worth only HK$265 million, assuming a sale in the open market, with the land exchange having been completed and the land exchange premium having been fully settled. If correct, this was a reduction in value of 56% from the C.Y. Leung & Co. valuation, just two months earlier.

Casil makes formal demand on Chinluck:

46. On 4 December 1997, Casil wrote to Chinluck. The letter demanded the total sum of HK$264,584,158.70 being principal and interest accrued as at 30 November 1997. The letter set out three alleged Events of Default. They were as follows.

47. First, it was said that in breach of Clause 7 B (i) of the Loan Agreement Chinluck had permitted to subsist an encumbrance over the Hoi To property after the execution of the Loan Agreement. This allegation refers to the advance set out in paragraph 39 above. Second, it was said that in breach of Clause 7 B (ii) Chinluck had lent or granted credit to Chinluck Limited. This allegation apparently referred to the request that the first instalment of $75 million be credited to Chinluck Limited's account. Third, it was alleged that there had occurred a "material adverse change" in Chinluck's business, assets, general conditions or prospects of business which could materially affect its ability to perform its payment obligations under the Loan Agreement. The relevant portion of the letter read:

"(1) The value of your properties, namely Section A of Peng Chau Lot No. 378, Peng Chau Lot No. 379, Section A of Peng Chau Lot No. 380, Peng Chau Lot No. 422, the Remaining Portion of Peng Chau Lot No. 378, and the Remaining Portion of Peng Chau Lot No. 380, which were charged to us pursuant to the Loan Agreement, has depreciated in value substantially since the execution of the Legal Charge.

(2) The fall of the Hong Kong Stock and Property Market in October 1997 has created a materially adverse financial condition in Hong Kong which can and will materially and adversely affect your ability to complete and successfully market your proposed development in Peng Chau and, as a result, your ability to perform its payment obligations under the Loan Agreement."

The letter did not acknowledge in any way Chinluck's formal demand for payment of the balance of the Loan that had been made on 24 September 1997, nor did it acknowledge in any way the writ which had by then been served, and to which, at that time, no defence had been served.

48. On 8 December 1997, Casil filed a defence to Chinluck's writ. On 19 December 1997, Mr Shu wrote to Casil urging to pay the balance of HK$78 million and reminding Casil that it was in breach of the Loan Agreement to fail or refuse to pay that sum. The letter said that if that sum was not paid in three days, Chinluck would be compelled to withhold interest due on 28 December 1997.

Some defences are abandoned:

49. It is convenient here to record that at trial Casil abandoned the contention that Chinluck was in breach of the Loan Agreement in advancing funds to Chinluck Limited. Having regard to the fact that the request for funds plainly specified the request that the instalment be deposited in a named Chinluck Limited bank account, which request was acceded to by Casil, in respect of funds actually advanced, that was a sensible concession. Also abandoned was a contention that Casil was not obliged to advance the whole or even any part of the Loan not specifically requested or advanced at the time of the signing of the Loan Agreement. The contention that it was a breach of the Loan Agreement to allow the advance from Yu Tai Hing to remain secured over the Hoi To property until 16 September 1997, a period of 2 months following the signing of the Loan Agreement, allegedly in breach of Clause 7 B (i), was also abandoned. This plea however was not abandoned in respect of subsequent advances made by Yu Tai Hing.

Chinluck borrows against other property it owns:

50. Little appears to have happened in the proceedings through 1998, following the issue of the writ and the filing of the defence in late 1997. On 6 July 1998 the board of Chinluck resolved to borrow a new loan of HK$2 million from Yu Tai Hing, secured on the Hoi To property, and other property in Paterson St. Causeway Bay. The resolution authorising the borrowing records that the need to borrow had risen from Casil's failure to provide the remaining portion of the Loan. Later, on 14 July 1998, the advance from Yu Tai Hing was increased by a further HK$3 million, this being secured on other Chinluck properties in Patterson St., as well as the Hoi To property. The consent of Casil to these advances was not obtained by Chinluck. Casil has relied on these advances to found an allegation that they constitute a breach of Clause 7 B (i) of the Loan Agreement.

Demand is made upon Mr Shu:

51. By a letter dated 17 November 1998 the solicitors for Casil made formal demand on Mr Shu pursuant to the Guarantee seeking payment of the sums paid under the Loan Agreement together with interest thereon. The total sum then amounted to some HK$300 million. Mr. Shu did not respond to this demand, either personally, or through solicitors.

52. Chinluck had made good its threat of 19 December 1997, and after that date no further interest had been paid to Casil on the Loan. The next interest instalment fell due, in terms of both the Loan Agreement and the mortgage on 28 December 1997. That sum was not paid, nor was any of the interest due on 28 June 1998, 28 December 1998, and 28 June 1999.

A further demand is made on Chinluck and Mr Shu:

53. On 1 December 1998, at the request of China Aerospace, FPD Savills undertook a valuation property. The valuation was on three different bases. First, current open market value taking into account redevelopment value; second, current open market value on redevelopment basis based upon the proposed land exchange having been accepted; and third, current forced sale value. The best value, the second basis, was HK$150 million. The current forced sale value was HK$10,200,000. This, at best, on this valuation, the Peng Chau land had fallen in value to only 33% of the C.Y. Leung & Co valuation 15 months earlier, and at worst, a mere 2.26% of that valuation.

54. It is the case for Casil that by January 1999, Chinluck was in breach of the terms of the Loan Agreement, by reason of the adverse material change, and Mr Shu and Chinluck were in breach of the terms of the mortgage, and Chinluck of the Loan Agreement, by the failure to have made the interest payments due on 28 December 1997, 28 June 1998, and 28 December 1998. On 6 January 1999, Casil's solicitors made formal demand payment of the amount advanced, together with interest and threatened to the enforcement rights of Casil under mortgage. On the same day another formal demand was made on Mr Shu under the Guarantee. Although Chinluck and Mr Shu were apparently in breach of the terms of the Loan Agreement by their failure to make payment of interest instalments as at 17 November 1998, when the earlier demand had been made on Mr Shu, there was no explanation as to why it was thought necessary to serve second demand on Mr Shu. However, nothing appears to turn on the point.

The need to deliver up the title deeds for the land exchange:

55. Chinluck contends that it was an implied term of the Loan Agreement that Casil would, when required, release the mortgage or take in the appropriate steps to allow the land exchange to take place. This is denied by Casil. The land exchange was a fundamental step in the development of the project. Had all gone well the land exchange was to have taken place during the term of the mortgage. By 30 April 1997, well before the loan documents were signed the District Lands Office, Island Lands Department had written to Chinluck's surveyors indicating approval in principle to the proposed land exchange.

56. The land exchange involved the surrender to government of the existing titles, and the issue of new titles, with appropriate land use provisions, which would permit the development of the Project. The land exchange also involved the surrender of a portion of the land to Government for a school site. To effect this land exchange it would be necessary for the mortgage to be released, the title deeds surrendered to Government, and new title deeds, with appropriate terms to accommodate the Project would be issued.

57. Further steps occurred in relation to the land exchange but as those are matters relevant only to the question of damages not questions of liability, I do not need to consider them in this judgment.

The progress of the litigation:

58. It was not until 12 March 1999, that Mr Shu was joined into the proceedings by way of counterclaim on the Guarantee. At the same time Casil counterclaimed against Chinluck seeking repayment of the amount advanced, said to be HK$251,322,847.70, together with interest thereon, and a further sum of some $18 million that had been paid by the Government by way of compensation for part of the Peng Chau land which had been resumed by Government.

59. The writ originally issued by Chinluck sought specific performance of the Loan Agreement. Chinluck, by that plea, continued to demand payment of the balance of the Loan. On 21 May 2004, 24 days prior to the commencement of the trial, and nearly 5 years 7 months after the date of the issue of the writ, the prayer for specific performance was abandoned, Chinluck then apparently accepting what it contended was the repudiatory breach of the Loan Agreement by Casil in failing to pay the full amount of the Loan.

The issues:

60. The forgoing matters comprise the factual matrix in which the contracts were entered into, and the circumstances surrounding the alleged defaults upon which Casil now seeks to justify its counterclaim against Chinluck, on the Loan Agreement and mortgage, and Mr Shu under the mortgage and on the Guarantee.

61. On these facts the following issues arise for consideration:

(i) Was Casil aware that the loan would be utilised in the Project;

(ii) Was Casil obliged to advance the whole sum of HK$330 million;

(iii) Was Casil in breach of the Loan Agreement by failing to pay to Chinluck the whole of the Loan;

(iv) If a breach of the Loan Agreement, was the failure to pay the full amount of the Loan a breach that would entitle Chinluck to treat the Loan Agreement as having been repudiated by Casil;

(v) Did Chinluck's claim for specific performance impact upon Casil's alleged breach in either failing to pay the whole of the Loan or failing to release the title documents to permit the land exchange;

(vi) Was Casil obliged to release the title documents to permit the land exchange;

(vii) Was Casil in breach of the Loan Agreement in refusing to surrender the title documents for the land exchange;

(viii) Was there an Event of Default pursuant to Clause 8 A (vii) and (viii) of the Loan Agreement which permitted Casil to demand repayment of the monies advanced as at 4 December 1997;

(ix) Was Chinluck in breach Clause 7 B (i) of the Loan Agreement by granting to Yu Tai Hing legal charges and mortgages over the Ho Toi property in April and July 1998;

(x) Has there been a total failure of consideration in the failure by Casil's refusal to pay to Chinluck the full amount of the Loan;

(xi) Are Mr Shu and Chinluck liable under the mortgage;

(xii) Has a valid demand been made upon Mr Shu under the Guarantee.

I propose to consider each of these in turn.

Was Casil aware that the loan would be utilised in the Project:

62. There was an issue between the parties as to whether or not Casil were aware of the terms of the Project, and whether or not it was intended by Chinluck and Mr Shu, and understood by Casil, that the monies would be used solely for the Project, or, at least, in part for the Project and in part for other Chinluck Group purposes.

63. Mr Shu's unchallenged evidence was that in late 1996 and early 1997 he had discussed the Project in general terms with senior officers of Casil. The first formal approach to Casil came in a letter addressed to Mr H.J. Gao, the Deputy General Manager of Casil, and a director of Casil Realty Limited. The letter dated 15 March 1997, comprised an invitation to Casil to "participate jointly" in the Project. It outlined the project and described the proposed form of cooperation in the following terms:

"since the cost immediately payable at the initial stage of the commencement of this development plan is HK$330 million (Appendix 9), it is now proposed as follows: a) on the part of your company - by way of financing, transfer a sum of HK$330 million to the account of our company on or before 26 March 1997;"

There was no specific response to that invitation, but it was clear from documentation that Chinluck sought HK$330 million for use in the Project.

64. On 21 March 1997, a more comprehensive and detailed proposal was sent to Mr Gao. The proposal specifically described the financing by way of a sum of HK$330 million "to be transferred in one lump sum to the account of Our Group." Estimates on the use of the financial capital required were enclosed with the proposal and they make it quite clear that Chinluck required HK$330 million for the purposes of the Project. A few days after this proposal was sent, both Mr Lu and Mr Gao were taken by Chinluck to Peng Chau for specific purpose of inspecting site of the Project.

65. At the time the security documents were signed valuation reports were prepared on the instructions of both Chinluck and Casil, and all those reports, comprising valuations of the Project, was supplied to Casil. The clear purpose in obtaining those reports was to assess the value of the land as security for the Loan.

66. The uncontested evidence of both Mr Shu and Mr Leung was that the senior executive officers of Casil were aware that Chinluck intended to utilise proceeds of the Loan in the Project. Chinluck elected not to call as witnesses in the trial any of the executive officers of Casil. Notable in their absence was Mr Lu and Mr Gao. It was suggested to me that all of the executive officers of Casil had retired, and were unable to be located. No evidence was led as to the steps taken by way of effort to locate them. Frankly, the suggestion that senior men, of the status held by those in the senior executive ranks of a company of the size and importance as China Aerospace, should simply retire and disappear, is unbelievable. Sensibly, Mr Ho did not persist with an application to have their witness statements form part of the evidence.

67. Mr Tong was right to draw my attention to the principles relating to a party's failure to tender witnesses at trial as set out by Lord Diplock in Herrington v British Railways Board [1972] AC 877 at 930:

"The appellants, who are a public corporation, elected to call no witnesses, thus depriving the court of any positive evidence as to whether the condition of the fence and the adjacent terrain had been noticed by any particular servant of theirs or as to what he or any other of their servants either thought or did about it. This is a legitimate tactical move under our adversarial system of litigation. If a defendant to adopts it he cannot complain if the court draws from the facts which have been disclosed all reasonable inference is as to what are the facts which the defendant has chosen to withhold."

68. In the absence of evidence to the contrary, and having regard to Chinluck's evidence, I am satisfied that Casil were fully aware that it was Chinluck's intention to use the proceeds of the Loan for the development of the Project. It is right that to an extent that intention was frustrated by the requirement that Chinluck should repay from the proceeds of the Loan all other outstanding advances previously made by Casil. Chinluck had agreed to that, but I accept Mr Shu's evidence that he accepted the requirement for the deduction because he was faced was no alternative as he required the money. Certainly, even after the agreement that prior outstanding loans would be deducted from the Loan, it was clear to Casil that all remaining monies to be borrowed under the Loan were primarily for the purpose of the Project.

Was Casil obliged to advance HK$330 million:

69. The factual matrix makes it abundantly clear that, on a proper construction of the Loan Agreement, Casil was obliged to advance sum of HK$330 million. The following facts point to that conclusion. First, Chinluck clearly sought a loan of HK$330,000,00 in one lump sum. That was clear from the proposal documents which referred to the transfer of that sum to Chinluck's account.

70. Next, Casil's own document, the Loan Agreement described the Loan as a "term loan of HK$330 million". The "Arrangement Fee" was fixed at HK$1,650,000.00, representing 0.5% of the Loan, (see Loan Agreement para. 10), and was immediately deducted upon the signing of the Loan Agreement. Should the intention have been that not all of the funds need be advanced there would be a provision either for the pro rata reduction of the fee, or an expression that the whole fee was payable notwithstanding any lesser sum borrowed. The schedule to the Loan Agreement referred to a "Loan" of HK$330 million, and not "loans of up to HK$330 million". The Loan Agreement confirmed that the Loan was a term loan for two years and was not due for repayment until the end of that period, that is 28 July 1999. There is nothing in the Loan Agreement which in any way points to a suggestion or inference that the Loan should be advanced in instalments, or that any right was reserved to Casil not to advance the full sum agreed to be advanced.

71. For these reasons, I am satisfied that Casil entered into an agreement to lend HK$330 million and was obliged by the terms of the agreement to advance that sum.

Was Casil in breach of the Loan Agreement by only advancing HK$248 million:

72. Immediately upon signing the Loan Agreement Mr Shu, on behalf of Chinluck, sought to draw down the full sum of HK$330 million. He did so by a letter addressed to Casil on 18 July 1997.

73. It is unarguable that at that date, Chinluck was not in breach of the Loan Agreement. Mr Ho sought to argue that the request to draw down the balance of the Loan was not made until September 1997, and that at that time Casil was justified in investigating the situation before advancing any further monies. The evidence does not support the contention that no further demand was made between 18 July 1997, and late September 1997. On 23 July 1997, Casil had obtained a valuation report from C.Y. Leung & Co Ltd, and, plainly in reliance upon that report, signed the Loan Agreement. It is clear from the evidence, and not challenged by any evidence from executive officers of Casil, that through August Mr Shu was contacting Casil pressing for the balance of the Loan. A specific letter was written by Mr Leung, of Chinluck, on 8 September 1997 requesting the balance of the Loan.

74. There is nothing in the loan documentation which would permit a conclusion that, prior to advancing the balance of the Loan, Casil were entitled to make any further investigations. The clear obligation on Casil was to advance sum of HK$330 million. That obligation arose upon their execution of the Loan Agreement. If any authority is required for the proposition that where a lender agrees to advance a specific sum, then he must advance the whole sum, it may be found in the old case of Burton v Gray (1871) 8 Ch App 932 CA.

75. I am satisfied that in failing to advance that sum to Chinluck, upon their execution of the Loan Agreement, Chinluck was in breach of the Loan Agreement.

76. I am satisfied that it is no answer on the part of Casil to say that by September 1997 they were entitled to reassess the situation before making any further advance of the Loan. The obligation to pay the full amount of the Loan was an obligation arose upon their execution of the Loan Agreement on 24 July 1997. It might be argued that so long as the full amount of the Loan was paid to the Borrower within a reasonable time there would be no breach. But having regard to the clear demands made by Chinluck, both immediately upon signing of the documentation, and up to the end of August, and the failure of Casil to making further payment, Casil was clearly in breach.

Was Casil's breach a repudiatory breach

77. It is clear law that not every breach of a contract will entitle the innocent party to treat the contract as at an end: Afovos Shipping Co. SA v Pagna [1983] 1 All ER 449, per Lord Diplock at 455. The issue is particularly difficult where the contract is a contract for delivery by instalment, see e.g. Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 KB 148. In that case the Court of Appeal indicated that the chief considerations are first, the ratio quantitatively which the breach bears to the contract as a whole, and secondly, the degree of probability or improbability that such a breach will be repeated.

78. On my calculations Casil refused to pay some HK$80 million, approximately 25% of the total amount agreed to be advanced. On any terms that is a significant quantity of the whole. Having regard to the fact that Casil knew that Chinluck required HK$330 million for the Project, and that by demanding repayment of all outstanding loans the sum required by Chinluck was reduced by some HK$153 million, the refusal to pay the balance takes on an even greater significance. What began as a request for payment of the balance became a demand that persisted from early August 1997, until late September 1997, following which the writ for specific performance was issued. Even after the issue of the writ Casil, before the occurrence of any Event of Default, declined to make payment of the balance.

79. Having regard to all of these circumstances I am satisfied that Casil's breach of the Loan agreement in failing to pay the full amount was a repudiatory breach of contract by Casil that entitled Chinluck to treat the contract as at an end.

What is the impact of Chinluck's claim for specific performance:

80. The law is clear, and was accepted as such by Mr Tong, that the mere commission of a repudiatory breach of contract does not terminate the contract, but provides the innocent party with a right of election to treat the contract has terminated if it wishes to do so. If, and so long as it does not do so, all obligations under the contract remain alive: see State Trading Corporation of India v M Golodetz [1989] 2 Lloyds Rep 277; Fercometal SARL v Mediterranean Shipping Co SA [1989] AC 788; Chitty on Contracts 2004 Vol. 1 para 24-015 - 24-016. In Fercometal Lord Ackner held that there was no halfway house. The innocent party cannot choose to affirm the contract and yet at the same time be absolved from tendering further performance of the contract. Lord Ackner said:

"When A wrongfully repudiates contractual obligations in anticipation of the time for their performance, he presents the innocent party B with two choices. He may either affirm the contract by treating it as still in force or he may treat it as finally and conclusively discharged. There is no third choice, as a sort of via media, to affirm the contract and yet to be absolved from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform. Such a choice would negate the contract being kept alive for the benefiting both parties and would deny the party who unsuccessfully sought to rescind, the right to take advantage of any supervening circumstance which would justify him in declining to complete."

81. The jurisdiction to order specific performance is based on the existence of a valid, enforceable contract: see Chitty on Contract 2004, Vol. 1 para 27-003; Spry, Equitable Remedies 6th Ed. p. 52. The issue of a writ for specific performance is consequently an act which affirms the contract and an act by the innocent party who treats contract as being in full force and demands completion of the contract. That is precisely what Chinluck sought. By their writ, Chinluck sought performance of the contract by Casil, and the payment of the balance of the Loan. They maintained that position until 21 May 2004. By maintaining that position and keeping the contract alive, Casil had the right, in Lord Ackner's words, to take advantage of any supervening circumstance which would justify them in declining to complete.

82. Any subsequent events following the breach of the contract by Casil must therefore be taken into account in assessing the liabilities and obligations of parties. Had Chinluck elected to accept Casil's breach of contract in its failure to pay the full amount of Loan, the contract would then have come to an end. Chinluck would then have a right in damages against Casil for that breach, but having accepted the repudiation of the contract would have then been obliged to repay that portion of the Loan which had been advanced.

Was there an "adverse material change" default in December 1997:

83. The case for Chinluck was that on a true and proper construction of the relevant clauses, Clauses 7 A (i), 8 A (viii) and 8 B, (see para 22 above), the "Event of Default" envisaged by Clause 8 A (vii) and (viii) was something which occurred internally to Chinluck, that is, a matter within its own knowledge and not known in general public circumstance. The basis for the submission was the requirement that the Borrower must "promptly inform" the Lender of the occurrence of any event of default. It was argued that if an event was public knowledge there would be no point in imposing an obligation on the Borrower to inform the Lender of the event. Thus, an event which affected Hong Kong or Asian generally was not an event contemplated by the clause.

84. I do not accept this submission. First, an event of default occurs if there is a material adverse change in the prospects of the Borrower. As he has been demonstrated in the valuation obtained by Casil on 23 July 1997, the site value of land was in the order of HK$340 million. While the Asian Economic Crisis was undoubtedly an external event it had a direct impact on the value of the Peng Chau land. By 24 November 1997 the value of the land had dropped over 50% to HK$265 million. It is beyond argument that a reduction of value of that extent in the land owned by the property developing company, which it intends in the future to develop, has created a material adverse change in the prospects of that company.

85. Irrespective of the cause of the decline in value, that decline in value per se plainly constituted a "material adverse change" in the assets of Chinluck. It would, having regard to that very substantial reduction in value, be plainly extremely difficult for Chinluck to either raise other funds to replace the Casil advance when it fell due, or even to sell, either in advance or when completed, any residential units in the Project at the values projected in early 1997. Both of these circumstances clearly call into serious question the ability of Chinluck to either pay interest when due, or the principal when due.

86. Mr Tong sought to argue that there was no material effect on the ability of Chinluck to "perform its payment obligations" because the payment obligation was confined to the repayment of the loan upon the expiry of the term, on 23 July 1999. I reject the submission. As well as the obligation to repay the principal at the expiry of the term, Chinluck had obligation to pay interest which was running at 15%, amounting to HK$24,750,000 every 6 months. Plainly such a drastic reduction in the value of land the income of a property developing company would be in question and may be affected.

87. Mr Ho was right to remind me that the obligation on Casil was not, as submitted by Mr Tong, that the circumstances that had occurred, had in actual fact, had a material adverse effect on Chinluck. The expression used in the relevant clause was that there must be a change which "could materially affect the ability of the Borrower" to perform its payment obligations, (the emphasis is mine). It is accordingly sufficient therefore that the material adverse change may merely create a risk that the ability of the Borrower to perform its payment obligations may be affected. I am satisfied that it is not a requirement of the clause that there must be actual proof of the impairment of the ability of the Borrower to meet his payment obligations under the Loan Agreement. It is sufficient that a reasonable commercial man, assessing the adverse change, would justifiably come to the view that the prospects of repayment could be, (in the sense of there being a real risk) jeopardised.

88. I am accordingly satisfied that on 4 December 1997, Casil was entitled, pursuant to the Loan Agreement, to demand the whole of the principal sum then advanced, as they did by a letter of that day. They were so entitled because the depreciation in value of the Peng Chau land since the date of the execution of legal charge constituted a material adverse change in terms of the Loan Agreement.

89. The position had not in any way improved by 6 January 1999, when the second demands were served on Chinluck and Mr Shu. The evidence does not demonstrate any recovery in the value of the Peng Chau property to anything approaching the pre-1997 values. The "material adverse change" accordingly still, on 6 January 1999, gave rights to Casil to take steps under the Loan Agreement.

90. Having so found it is not necessary for me to consider whether the mere fact of the fall of the Hong Kong stock and property market in October 1997, also used in Casil's letter of 4 December 1997, was a basis upon which demand could be made, constituted a valid basis. It is, I think, sufficient if I say that Casil's evidence fell far short of being able to establish the relevant facts that would be required to be established if that ground were to be used as at 4 December 1997.

Was Casil obliged to release the title documents for the land exchange:

91. The land exchange was an essential, and early step in the Project. Attached to the documentation sent to Casil on 21 March 1997 was a program for the proposed works. That program provided for the completion of the application procedure for the land exchange to take place in April 1997. Payment of the land premium was scheduled for September 1997. The land premium would only be required to be paid upon the completion of the land exchange. That the land exchange was to take place was also completely clear to Casil from each of the four valuation reports they received. It was thus plain to Casil that the land exchange would be taking place within months after the completion of Loan Agreement and the registration of mortgage against the Peng Chau land, and well before the Loan was due for repayment.

92. The land exchange would involve the surrender of the existing title documents to Government. In their place the owner of the land would be provided with new title documents by Government, those new title documents containing terms appropriate to the proposed new use. In order to surrender the title documents it would be necessary for any mortgage securities charged upon those title documents to the surrendered. The case for Casil appeared to be that that would necessarily involve repayment of mortgage. But mortgage was for a term of two years, and all involved knew, not only that the land exchange would take place at an early stage, but also that it would take place during the duration of the 2 year term loan.

93. The case for Chinluck was that it was an implied term of the Loan Agreement that Casil should release the title deeds in order to effect of the land exchange. Mr Ho put it that the implied term would involve the release of the title deeds to Chinluck. But that is not the case as I shall shortly demonstrate.

94. There are two bases upon which a term will be implied into a contract. The first distinctive business efficacy to the contract. The general principle is stated in the well-known case of The Moorcock (1889) 14 PD 64, at 68 per Bowen LJ. The second basis upon which term may be implied is in a situation where it was so obviously a stipulation in the agreement, that the parties must have intended it to form part of the contract. In this respect, the test known as the "officious bystander" test is used. The term will not, however, thus be implied unless the court is satisfied that both parties would, as reasonable commercial men, have agreed to it, had it been suggested to them: see Chitty on Contracts, 2004 Vol. 1, para 13-007.

95. In the whole of the circumstances it is plain that to give business efficacy to the contract the term ought to be implied. The loan was for two years and the land exchange would take place during that time. There is no other way in which both events could exist. Having regard to the fact that, (a) both parties knew that the land exchange was an early and essential step in the development of the Project, and (b) the Loan was a term loan for a period two years during which time the land exchange would take place; I am left in no doubt at all that had the parties being asked at the time both would have said, of course the title documents must be made available to effect the land exchange. There was simply no other way in which the transaction could have proceeded over the planned several year development programme and the two year term of the mortgage. Whichever test is applied, this is a clear case to imply the appropriate term.

96. The procedure involved would be relatively straightforward in principle, although perhaps in fact complicated by the extent of the land involved and the stage to which the Project had reached at the time the land exchange was to be affected.

97. Upon Government having agreed to the land exchange the legal description of the land following the exchange would be known to the parties. It would be necessary for, at least, a new mortgage to be prepared reflecting that new legal description. It would be a matter for the conveyancers to arrange the execution of the new security documents and the contemporaneous surrender of the old title deeds, the discharge of the old mortgage, and the issue of the new title deeds and the immediate registration of the new mortgage. It would require coordination between Government solicitors, Chinluck's solicitors and Casil's solicitors. The title deeds would remain throughout in possession or control of Casil as mortgagee. They would not be released to Chinluck, and Casil's position as mortgagee would be protected throughout. That would give the protection to the lender in the transaction.

98. I accordingly find that it was an implied term of the Loan Agreement that if the land exchange were approved during the term of the Loan Agreement Casil would be required to make available the title documents in order to effect the Land Exchange. Equally Chinluck and Mr Shu would be obliged to execute any necessary documents in order to perfect Casil's possession as mortgagee of the Peng Chau land in whatever form it was following the completion of the land exchange.

Was Casil in breach of the Loan Agreement in refusing to surrender the title documents for the land exchange:

99. It was not until August 1998 that Chinluck received formal advice from the District Lands Office, Islands Lands Department, that the proposed land exchange was approved. This advice and the terms upon which the approval would be given was contained in a letter dated 7 August 1998. By that time Casil had delivered the letter of 4 December 1997, in which it had called in the Loan, there having been an appropriate Event of Default.

100. I am satisfied, as I have previously indicated, that Casil were then entitled to call in the loan. As will be shortly demonstrated I am satisfied that Chinluck were in default under the Loan Agreement, both as a result of an Event of Default and through their failure to pay interest on the Loan. In those circumstances, I am satisfied that Casil were entitled to retain the title documents until such time as the Loan was repaid. By that time the Loan had ceased, by reason of Chinluck's breach, to be a term loan, and was a loan that was immediately repayable. No issue would therefore arise as to the preparation of a new mortgage, for the mortgage would have to be discharged.

101. I am accordingly satisfied that Casil were not in breach of their obligations and duties under the Loan Agreement in refusing to make available the title documents for the land exchange without repayment of the amount that had been advanced.

102. For this reason it is not necessary for me to consider the consequences of the requirement by Government that any new mortgage given over the Peng Chau land would have to be a "building mortgage", (see condition 20(c) of the Special Conditions to the Land Exchange).

The Yu Tai Hing mortgages:

103. Although the letter of 4 December 1997 demanding repayment of the sum advanced relied upon the encumbrance over the Hoi To property to Yu Tai Hing, Mr Ho did not rely upon that at trial. That was sensible, for as the facts showed the advance was repaid, and the charge over the property was discharged, on 16 September 1997, leaving property debt free. However, in July 1998 Casil borrowed, by two advances, a further HK$5 million from Yu Tai Hing, securing those advances against other Chinluck properties, including the Hoi To property. On its face those advances were a clear breach of Clause 7 B (i) of the Loan Agreement. It was not suggested that the written consent of Casil had been obtained to these advances.

104. Mr Tong in this respect, argued first, that these events occurred after the letter of 4 December 1997, and that no complaint was made about these advances until reliance was made upon them in the pleadings. Second, he argued that the need for funds was caused by Casil's own breach of the Loan Agreement and said that Casil could not seek to benefit from its own wrong. Finally, he argued that was no evidence that Casil's position was adversely affected by this event.

105. In his submissions Mr Ho, while formally relying upon of the 1998 Yu Tai Hing advances, did not press them in any detail. The point is probably moot in any event having regard to my finding that Casil was entitled to call up the loan on for December 1977. While I have considerable sympathy for Mr Tong's point that the need for funds arose from Casil's own default, from which they should not benefit, no authority was cited for the proposition. I am of the view that the 1998 Yu Tai Hing advances constituted a breach of the Loan Agreement.

Has there been a total failure of consideration:

106. The case for Chinluck was that the failure of Casil to advance the full sum of HK$330 million constituted a total failure of consideration which released Chinluck from the provisions of the Loan Agreement and mortgage. Mr Shu for his part relied upon in the same total failure of consideration to contend that he was released from the Guarantee. Both acknowledged that were there a total failure of consideration the actual principal sum advanced would have to be repaid, but said that the release of Chinluck and Mr Shu from the provisions of the Loan Agreement and mortgage, and Mr Shu from the Guarantee, would mean that they were not obliged to pay interest at the contractual rate of 15% per annum, nor meet any other costs imposed by the security documents.

107. Mr Ho contended that the true consideration was Casil's "agreement" to grant loan facility is to Chinluck, rather than the actual performance of advancing the Loan. In my view however it is not necessary to engage in an academic debate on the precise nature of the consideration for the transaction between the parties. It is well-established that any performance of the actual thing promised, as determined by the contract, is fatal to recovery under the heading of a total failure of consideration. In Stocznia Gdanska SA v Latvian S.S. Co. [1998] 1 WLR 574 the contract was for the design, construction and transfer to the buyer of some ships. Payment was to be made by instalments as construction progressed. Work began, and the ships were in the course of construction. Before completion the buyer ceased to make progress payments and the construction yard rescinded the contracts and sued for the unpaid instalments. The buyer contended that as he had not got his finished ships there was a total failure of consideration. At 588 Lord Goff held in the following terms:

"the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due."

In the present case the contractual duty undertaken by Casil was to lend money. It is right that the Loan Agreement specified a sum of HK$330 million, but Chinluck were content to accept the payment of part only, albeit that they were demanding payment of all. Whether the consideration is viewed as the payment of the sum of HK$330 million, or an agreement to pay $330 million, it is unarguable that Casil has performed part of the contractual duties it undertook, by advancing the undisputed sum of HK$248,688,152.30, which sum was accepted by Chinluck.

108. Applying Lord Goff's test, Casil had performed part of the contractual duties it agreed to, and for which, in the context of this case Chinluck would be required to pay interest. I accordingly conclude that there has not been a total failure of consideration which would entitle Chinluck and Mr Shu to be released from the terms of the Loan Agreement, the mortgage, or the Guarantee.

Are Chinluck and Mr Shu liable under the mortgage:

109. The issue of breach of the mortgage must be considered both in terms of breach by Casil, in failing to advance the full amount agreed to be advanced, and as to breach by Mr Shu and Chinluck of the terms of the mortgage. For the reasons I have already set out as to Loan Agreement I conclude that Casil was in breach of the mortgage, but that Chinluck by demanding specific performance has complained that reach and affirmed the contract. Consequently other than any right in Chinluck and Mr Shu to seek damages for that breach, the breach by Casil need not be considered further. Chinluck failed to pay interest after 19 December 1997, and that constituted the breach of the mortgage by both Chinluck and Mr Shu, giving arise to entitlement in Casil to then demand repayment of the full sun that had been advanced. It appears to me that the date at which any damages consequent upon the breach by Casil ought to be assessed would be the date at which failure to make and interest payment occurred. That however is a matter which may yet have to be argued should this matter proceed to a second, damages phase.

110. The Loan Agreement, and the mortgage are quite separate documents. Somewhat surprisingly, the mortgage does not formally import into its terms the provisions of the Loan Agreement. Consequently, the "material adverse change" provision in the Loan Agreement does not operate to constitute a default under the mortgage. Thus, it is arguable that had Chinluck, in issuing its writ for specific performance maintained payment of the interest, and in all other respects complied with the provisions of the mortgage, the Event of Default relied upon by Casil to call in the Loan in December 1997, may not constitute a breach of the mortgage, and may not give rise to the rights of Casil, as a mortgagee, to exercise its power of sale or any other right arising under the mortgage.

111. Chinluck however, even after issuing its writ for specific performance, did not pay the interest due under the mortgage. That constituted a breach of clauses 2.01 (viii) and (ix) of the mortgage which provide that both Mr Shu and Chinluck must pay all interest on any principal sum borrowed.

112. Mr Tong contended that the demands of 6 January 1999 were invalid and of no legal effect because they merely purported to assert that the Loan was due, which, Mr Tong contended, would not be until 24 July 1999. It is right that the letters make no special reference to in the Event of Default under the Loan Agreement nor any breach of the mortgage or Loan Agreement as to the non-payment of interest, nor any reference to the Yu Tai Hing mortgages. However, although not formally specifying the non-payment of interest as a default, the letter does demand payment of interest, which, at that time, had not been paid. That interest had been due on 28 December 1997, and thereafter and was plainly in arrears. It is well established that a party refuses to perform a contract and gives a wrong or inadequate reason for that refusal, he may later justify the refusal if there were facts in existence that would have provided a good reason, even if he did not know of those facts: see Chitty on Contracts 2004 Vol. 1 para 24-104.

113. I conclude that the demands made by Casil of both Mr Shu and Chinluck, on 6 January 1999, constitute valid demands for payment of the interest and principal then outstanding. At the time of the demands the interest was in arrears, and Casil was entitled to demand repayment of the full sum.

114. The land charged under the mortgage was owned, as to one part, by Chinluck, and as to the second part, by Mr Shu. A mortgage consists of two things, namely a personal contract for payment of a debt and a disposition or charge of the mortgagor's the State or interest and security for repayment of the debt: see Halsbury's Laws of England, 4th Ed. para 302. A breach of the mortgage is therefore a breach of the personal contract for payment of the debt by both Mr Shu and Chinluck.

115. The breach gives rise to personal liability on the part of Mr Shu, as well as liability on the part of Chinluck, as well as being the trigger giving rise to Casil's rights of enforcement under the specific terms of the mortgage documents. No issue arises as to the latter, because Casil has not sought to exercise its powers under the mortgage. However the breach by way of failure to pay interest results in personal liability by Mr Shu for the full amount advanced, together with interest thereon.

Is Mr Shu liable under the Guarantee:

116. The general approach to the construction of a guarantee is that contracts of this kind must be strictly construed so that no liability is imposed on the surety which is not clearly and distinctly covered by the terms of the agreement: Law of Guarantees 3rd Ed. 2000, para 4.02, Andrews & Millett. The law is clear that if a guarantee expressly requires a demand to be made on the surety, the creditor cannot sue the surety until he has made such a demand: see Re Brown's Estate [1893] 2 Ch 300, and Andrews & Millett, above para 7.02A.

117. Clause 2.2 of the Guarantee requires the Guarantor to pay the Creditor upon demand. There are no special provisions in Guarantee as to what might constitute the demand nor as to the circumstances in which the demand may be made, other than that the liability of the Guarantor does not arise until liability has arisen in the Borrower.

118. The demand made by Casil on 4 December 1997, was confined to Chinluck, and cannot constitute a demand under the Guarantee. However, on 17 November 1998, formal demand was made upon Mr Shu seeking payment of the sums paid under the Loan Agreement, together with interest thereon. A second similar demand was made on 6 January 1999. I am satisfied that on both of those dates the demands were valid because the loan had fallen due by virtue of the reduction in value of the Peng Chau land, that constituting an Event of Default, and there was unpaid interest outstanding.

119. Mr. Tong relied upon Burton v Gray (above) where the guarantee was given in consideration of the bank lending to the guarantor's brother a certain sum. The banking records demonstrated that the sum had not in fact been advanced. There is no indication in the report that the brother complained in any way at the conduct of the bank, indeed it may well be argued that he was perfectly content as to the way in which the bank had dealt with the matter. But notwithstanding that, the requirement of strict interpretation of the guarantee meant that the guarantor was released from the guarantee, because that which he had agreed to guarantee was not in fact given. Mr. Tong argued that it was the same in the present case. Casil agreed to lend to Chinluck HK$330 million. They did not in fact advance that sum, and I have held them to be in breach of the Loan Agreement. Chinluck, by electing not to accept that breach as repudiatory of the contract cannot rely upon the breach now. But, it was argued, Chinluck's decision does not impact on Mr Shu in his capacity as guarantor. In the same manner as the guarantor was released in Burton v Gray, Mr. Tong argues, so should Mr Shu be released from the Guarantee in this case.

120. Were the Guarantee limited to being a contract of indemnity, or suretyship, this may well be a good argument. There are however two reasons why, in this case, Mr. Shu is not released from the guarantee. First, the law is that where a creditor has committed a repudiatory breach of contract, or is in breach of a condition of that contract, entitling the principal to terminate the contract and be discharged from any further liability, the surety will be likewise discharged from further liability under his guarantee in the event that the principal accepts the repudiation: see Andrews & Millett, above, 6.29, and Ankhar Pty. Ltd. v National Westminster Finance Ltd. (1987) 61 ALJR L45. The decision of Chinluck to affirm the contract, and waive the breach, by pursuing the writ for specific performance meant that the surety remained liable on the guarantee.

121. Second, the Guarantee document contains a "principal debtor" clause, (see para 24 above). Such a clause is commonly included in bank guarantees and similar documents. Where the creditor wishes to avoid the technical rules relating to contracts of suretyship under which the surety may become discharged from liability in various circumstances, such as a variation of the principal contract, or breach by the creditor of the principal contract, the creditor may require the surety to be made a principal debtor as against the creditor, although he remains a surety as against the person whose debt he guarantees. In such an event the transaction takes effect according to its terms and the creditor is entitled to treat the surety as a principal debtor in every respect: see Chitty on Contract, Vol. 2 28th Ed. Para 44-003; Orme v de Boyette [1981] 1 NZLR 576 at 580 CA.

122. The consequence of being a principal debtor is that any breach of the principal contract by the creditor, or the giving of time or the like, will not serve to release the surety who has agreed to be treated as a principal debtor. It follows that Mr Shu is liable on the Guarantee.

The consequences of the findings on the issues:

123. The consequences of these findings appear to me to be as follows:

1. Chinluck are entitled to damages consequent upon Casil's breach of the Loan Agreement in failing to advance the full amount of the Loan.

2. The failure of Chinluck and Mr Shu to pay the interest instalments due under the Loan Agreement and the mortgage constituted a breach of both the Loan agreement and the mortgage which breach entitled Casil to call in the Loan. That breach occurred on 28 December 1997.

3. On 4 December 1997 an Event of Default had occurred and Casil was then entitled to repayment of the amount that had been advanced.

4. As Casil was entitled to repayment of the Loan at that date, or in any event at 28 December 1997. Consequently, any damages assessed under item 1 above should be assessed as at 4 December 1997, or at the latest, at 28 December 1997.

5. Casil are entitled to judgment under the Loan Agreement for the amount of principal outstanding as at 4 December 1997, together with interest thereon in terms of the Loan Agreement.

6. Casil are entitled to judgment against both Chinluck and Mr Shu under the mortgage.

7. Casil are entitled to judgment against Mr. Shu on the counterclaim against him in so far as it relates to the Guarantee.

124. It may be that counsel will take a different view of the consequences of my findings. There is also the issue of the set-off pleaded by Casil in respect of any damages that may be assessed as a result of Chinluck's breach of the Loan Agreement. For those reasons I do not now enter judgment, but invite the parties to apply to formally enter judgment where appropriate. As the matter is not yet finally concluded, and may yet pass to the damages stage, costs will be reserved.

125. It will be necessary for counsel to arrange a date for directions for the further conduct of this action in terms of the findings that I have made.