Bank of India v. Surtani Murlidhar Parmanand t/a Ajanta Trading Corporation

1992, No.196
(Civil)

IN THE COURT OF APPEAL

(On Appeal from High Court Action No.A3162 of 1992)

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J U D G M E N T

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Nazareth, J.A. :

1. The appellant ("the bank") appealed to this Court against the order of Woo J. made on 2nd November 1990. By that order Woo J. allowed the appeal of the defendant/ respondent against the summary judgment given by Master Cannon on 29th September 1992 in favour of the bank and granted the defendant unconditional leave to defend. In appealing, the bank sought the restoration of Master Cannon's order. Having heard counsel, we allowed the appeal with costs, set aside the order of Woo J. and restored the judgment entered by Master Cannon. We now give our reasons.

2. The bank's claim was for the payment of indebtedness admitted by the defendant in a deed between the parties dated 28th November 1990 ("the settlement deed"). It provides for the payment of interest and for the debt to be paid off in installments commencing on 31st March 1991, but subject to a clause entitling the bank to the unpaid balance on default. It was not in dispute that the first installment was not paid.

3. The defendant's defence was that about the end of October 1990, before the deed was signed, the bank orally agreed, through Mr Yagnik, its chief manager in Hong Kong, to grant him credit facilities ("the oral agreement"). Throughout meetings with the bank, he affirmed, he had made it clear that he had to have the facilities to trade and could not sign without them. Finally Mr Yagnik confirmed in a telephone call "Don't worry I will definitely give you the facilities as usual". But the bank failed to do so and therefore the installment was not payable.

4. Accordingly the crucial question before this Court and below was whether it was arguable in terms of the threshold criteria in Murjani v. Bank of India [1990] 1 HKLR 586, that the oral agreement had in fact been entered into.

5. The factual background need only be outlined to the following extent. The defendant has been trading under the name of Ajanta Trading Corporation since 1959, and since about 1966 has had financial credit facilities with the bank. On the 12th September 1983 the defendant entered into a facility agreement with the bank for facilities totaling HK$5m, i.e. an L/C facility of HK$1.5m, a D/B bills discounting facility of HK$1.5m and a D/A bills discounting facility of HK$2m. The facilities were expressly stated to be liable to cancellation or amendment without notice. The bank in the context of the agreement took a very comprehensive range of security documentation from the defendant including letters and agreements for pledges, collection of bills, authority to combine accounts and to defer presentment of bills, indemnity, power of sale, a running shipping guarantee, a general letter of hypothecation, and a lien over a cash deposit of HK$250,000.

6. That same year, 1983, there was a foreign exchange crisis in Nigeria resulting in the defendant's Nigerian customers being unable to obtain US dollars to honour bills. This resulted in the defendant becoming indebted to the bank for the amount of the bills. The Nigerian authorities introduced a debt rescheduling scheme providing for interest and deferred payments by installments. Although the bank's case could also be supported on the basis of non-payment of interest, it is not necessary to address that aspect since the matter can equally and more simply be addressed in terms of the debt installments payable.

7. On 31st March 1988 the parties entered into a new facility agreement, superseding the agreement of 12th September 1983. Like the earlier agreement, the new agreement was expressly liable to cancellation without notice and it was supported by security documentation very similar to that of the earlier agreement. However, the total amount of the facility was reduced from HK$5m to HK$1.6m and the cash deposit correspondingly reduced to HK$195,000.

8. The next development that may be mentioned was the bank's letter of 3rd May 1988 asking the defendant for repayment proposals. On 6th December 1989, as the defendant did not make repayment proposals it considered satisfactory and had not paid any interest accruing after 31st December 1983, the bank's solicitors wrote to the defendant, first, canceling the agreement of the 19th May 1984 on account of the defendant's default; second, notifying him that his deposit of US$25,000 (i.e. HK$195,000) had been appropriated to the debt; and third, demanding the entire amount due.

9. On the 18th December 1989, the bank issued a writ in Action No.A7631 against the defendant for repayment of the debt and interest, and on the 12th January 1990 took out a summons for summary judgment.

10. There then followed some correspondence between the parties, to some of which it will be necessary to return. The defendant sought to defer repayment over, first, seven years, and later six years, and also to link this to provision by the bank of credit facilities. The exchange led to the bank to offer on 10th May 1990, subject to acceptance by 15th May 1990, a six year repayment proposal specifying installments, interest and a default clause. It also turned down the defendant's request for credit facilities. The defendant nonetheless continued to seek the bank's agreement to provision of credit facilities. On the 29th October 1990 the bank wrote to the defendant enclosing a draft consent summons which made no reference to credit facilities to be granted to the defendant. The defendant responded on the 31st October stating that he did not want a judgment against him. He again suggested that "the agreed terms allowed to be activated simultaneously with the credit facilities".

11. On the 8th November 1990 Ess Tee United Traders of Thailand issued a confirmation note in respect of a sale of Thai rice to Sonam of Benin in West Africa. Payment of US$638,000 was to be made by L/C. On the 21st November 1990 the defendant faxed Sonam stating that the bank had agreed in principle to open the L/C, and requesting Sonam to send US$200,000 to the bank in New York "mentioning L/C No. so and so for account of Sonam order of Ajanta Trading Corporation".

12. On the 28th November 1990 the parties entered into the settlement deed.

13. On the 4th December 1990 the defendant applied to the bank for a L/C for US$638,000 in favour of Ess Tee. The defendant was informed that bank head office approval was required for such an L/C. On 5th December 1990 the bank notified the defendant that it had received US$200,000 on deposit for one month. Later that month the defendant was informed that the bank's head office had refused approval for the L/C and also for three other L/Cs in favour of Sanyo Electric Trading Company of Osaka, Japan, unless in the case of the latter, the defendant's wife provided a personal guarantee.

14. On the 31st March 1991 the defendant failed to pay the first installment of US$60,000 due under the settlement deed on the ground that the bank had failed to provide credit facilities it had promised.

15. On 8th May 1992 the bank issued the writ in the present action for sums due under the settlement deed amounting to principal of US$232,729.75 and interest of US$221,515.58. On 11th June 1992 it took out its summons for summary judgment which came before Master Cannon on the 29th September 1992.

16. Both Mr Michael Bunting for the bank, and Mr Leo Remedios for the defendant, put in helpful skeleton arguments.

17. Mr Bunting places heavy reliance upon the judgment of Hunter JA the Murjani case, which contains the following passage at p 589G:

"... O.14, r.3 puts an onus upon a defendant ... 'to satisfy the court with respect to the claim ... that there is an issue or question in dispute which ought to be tried'. It might be described as a threshold onus upon a defendant to show that there is a triable issue in the case. That onus can only be satisfied on the balance of probabilities, and this is the only way in which a court can consider it."

18. Hunter J.A. then went on to approve the following dicta of Beldam, J. in Bremar Holdings Ltd v de Roth in which the judge was also dealing with an appeal from a master. The report of that case, which Hunter J.A. quoted, said :

"Assuming that that was wrong, the plaintiffs' documentary evidence cast such doubt upon the validity of the defendant's documents and affidavit statements in support of the third suggested defence, that his Lordship found the affidavit incredible, or almost incredible, by reason of its inherent implausibility or inconsistency with the documents.

Even had his Lordship not been of the opinion that no defence was disclosed, he would have held that the affidavit statements were not sufficiently credible to raise an issue or question in dispute which ought to be tried.

The dividing line between a triable issue, albeit shadowy, from no issue, was a fine one which in every case was a matter of opinion based upon an assessment of the sufficiency of the facts alleged and the supporting evidence".

19. Since the defence rests upon a collateral oral agreement the sole effect of which is to vary the settlement deed, the threshold onus is in a sense compounded by the onus to strictly prove such agreement. That onus, as approved by Lord Goff in Universal Dockyard Ltd. v Trinity General Insurance [1989] 2 HKLR 160 at 164, was propounded in the following way by Lord Moulton in Heilbut, Symons & Co. v Buckleton [1913] AC 30 at 47, 48 :-

"Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject-matter."

20. Returning to Mr Bunting's submissions, he argued first, with some force, that if it had been intended that the defendant's obligations under the deed were in some way dependent on fresh credit facilities being made available, that would have been stated in the deed. We are not able to disagree. The defendant's case that it was omitted by mutual mistake is, against the background of the previous correspondence, in our view incredible.

21. Second, Mr Bunting submitted, the defendant's contemporaneous express declarations directly contradict the defence. He referred to the defendant's letters to the bank of 7th March 1990, in which the defendant stated "we are in a position to de-link the two issues", of 21st March 1990, in which he stated that "the principle of de-link was also resolved by our fax of 7th March 1990", and of 30th July 1990, in which the defendant, in modifying his earlier proposals, implicitly omitted any reference to linkage of credit facilities.

22. The defendant sought to explain the foregoing letters in paragraph 12 of his affidavit by saying that they were written at the dictation of the bank's Chief Manager in Hong Kong, "to help him pacify the bank's head office in India during the negotiations". We find that explanation incredible; moreover, it points clearly to the defendant's knowledge that linkage was unacceptable to the bank's head office, which would have the final say in the matter.

23. Mr Remedios for his part, sought to explain the difficulty posed by the three letters by submitting that the defendant's statements clearly showed that he knew he could not sustain the installment payments unless he received credit facilities, and that as a sincere and genuine trader he would not have executed the settlement deed without some representation or undertaking that the credit facilities would be provided. I am not able to accept that submission in the circumstances, but even if I were, the conclusion does not follow that the bank must in the circumstances have so undertaken or agreed.

24. Third, Mr Bunting points out that the cornerstone of the defence is the economic argument that the defendant could not afford to meet the proposed repayment installments without generating trading profits which were not possible without fresh credit facilities. I have already touched upon inconsistent and implausible aspects of this defence contention. The defendant, moreover, contradicted it in his letter of 30th July 1990, stating that he was in a position to make the proposed repayment installments "from our own earnings" without facilities. The correspondence did not make clear what credit facilities the defendant actually sought or indeed what credit facilities he claims were promised to him. In a letter of 17th April 1991 he stated that a recital in the deed shows that it was agreed that the "previous facilities" would be reinstated. I do not think that a fair reading of the deed does show that. Moreover the previous facilities, as I have said, were reduced from HK$5m to the order of HK$1.6m. The latter would certainly not have covered his application for an L/C in the sum of US$638,000 in favour of Ess Tee.

25. I do not find it necessary to address all the points made by Mr Bunting in the context of his third submission. Suffice it to say I do not think that the economic argument renders the defendant's defence any less implausible.

26. Fourth, Mr Bunting submits, there are other reasons why this version given by the defendant in his affirmation as to the agreement for fresh credit facilities is unbelievable. He points to the defendant's changing story, to begin with, in April 1991, that the facilities of 31st March 1988 would be restored; then in paragraph 17 of his affirmation of 30th July 1992 that his business with the bank would exceed HK$5m (which would very considerably exceed the maximum facilities granted on 31st March 1988); and finally in paragraph 16 of his affirmation of 30th July 1992 he stated that an L/C facility was agreed without limit. The latter contradicted his letter of 17th April 1991 as the L/C facility granted on 31st March 1988 had a HK$1m limit.

27. A second reason pointed to by Mr Bunting is the inherent implausibility of the L/C facility alleged by the defendant, in the following respects. No bank would grant an L/C facility without limit. An L/C facility up to HK$5m secured only by the defendant's personal guarantee is unbelievable. In this respect it is conceded by Mr Remedios that in terms of security, a guarantee given by the defendant adds nothing to his indebtedness.

28. Against the background of previous facilities having been secured by a substantial cash deposit under lien reinforced by the very comprehensive range of documentary security, it is absurd to suppose that a HK$5m L/C would be granted without security.

29. Likewise the defendant's version that cash security of a fixed sum of US$200,000 for L/Cs over HK$5m without limit is no less absurd.

30. Mr Bunting also pointed out that the attempt to link the alleged agreement for an L/C facility with the application for the L/C for the Ess Tee/Sonam contract and the US$200,000 deposit fails. If the defendant's version is to be accepted, then a deposit of US$200,000 as security was not required since the amount of the L/C, i.e. US$638,000 was not in excess of HK$5m. Moreover, according to the defendant's own documents, the deposit of US$200,000 was to be held to the account of Sonam, and prima facie therefore could not be security for the L/C to be issued on the defendant's application.

31. I accept also that it would be most unlikely that any bank would conclude an agreement to provide credit facilities specified only "as usual", a fortiori in the context of the other unsatisfactory features adverted to.

32. Fifth, Mr Bunting points to aspects of the defendant's conduct after the alleged oral agreement, which he submits are inconsistent with such an agreement. In particular he points to the very considerable delay in the defendant first raising the existence of such an agreement, when in the circumstances one would have expected it to have been raised promptly. Moreover, in raising the oral agreement alleged, he relied upon the wording of the deed for an express or implied term rather than upon his version of an oral representation by Mr Yagnik.

33. Sixth, Mr Bunting points to the defendant's carelessness with the truth in three respects. They are relatively trivial and do not need to be detailed. Nevertheless they do go towards swelling the cumulative tide against the defendant.

34. In attempting to meet the plaintiff's foregoing case, Mr Remedios, as indicated, sought to rely primarily upon the defendant's statements that he could not continue to trade and to meet his installment obligations without the credit facilities. I have already dealt with those. He also sought to derive some credibility for the defendant's version from the deposit of US$200,000 to the credit of the bank by Sonam upon the order of the defendant. Mr Bunting candidly conceded that that transaction was not entirely clear. However, in my judgment it does not even begin to counter the wholly implausible and incredible nature of the defendant's version. The evidence clearly shows that the bank did not agree to provide fresh credit facilities but that on the contrary it was opposed to doing so. That in no way precluded it from considering the individual requests for letters of credit, which in the event it quickly refused.

35. Furthermore, the justification relied upon by the defendant for non-payment of the installment due, was the non-performance by the bank of its collateral obligation to provide credit facilities "as usual". However there is no evidence that in refusing the defendant's application for the Sonam and Sanyo L/Cs, the bank did not deal with them as usual and refuse in pursuance of its normal criteria and discretion. In the way the defence was presented, this consideration would be fatal to it.

36. The judge in his judgment, while adverting to some of the foregoing matters, did not really address them, simply mentioning that he was not disposed to conclude that the alleged oral agreement could not have been made. I have no hesitation in finding the defendant's version and claim of a collateral oral agreement so utterly incredible by reason of their inherent nature and implausibility, a fortiori by reason of their inconsistency with the documents, as to fall short of the threshold onus described by Hunter J.A. That suffices to dispose of the appeal.

37. However I propose to mention the bank's other grounds and, for myself, to touch upon them only briefly. These were concerned with the question of the lack of certainty of the alleged oral agreement or, approaching the same facts in a different direction, of the alleged promise or representation upon which the defendant sought to raise promissory estoppel. Upon consideration it emerged clearly that what was alleged to have been agreed, or to have been promised was in the nature of an agreement or promise to negotiate which, would be unworkable in practice and in effect unenforceable (see Walford v Miles [1992] 2 AC 128). I think that in the light of the varying security limits, and the discretion that, it was not in dispute, the bank at all times had to refuse facilities, the oral agreement was both uncertain and purposeless as being merely an agreement to agree. As to the basis of the promissory estoppel, the representation would have had to be that the bank would not enforce its strict legal rights under the settlement deed unless it made "credit facilities" available. Viewed in the context of the relevant circumstances, I do not think any such promise or representation would have the requisite degree of certainty necessary in promissory estoppel (see Chitty on Contracts, 26th Edition, Vol.1, para.212; Woodhouse v Nigerian Produce Marketing [1972] AC 741; China-Pacific S.A. v The Food Corporation of India [1980] 2 Lloyds Rep 213 at 222, 223).

38. Had the defendant therefore succeeded in persuading me that he had met the threshold onus in relation to his version of the facts, he would yet have failed in resisting the appeal upon the bank's other grounds.

39. It followed from those reasons that the appeal had to be allowed.

Penlington, J.A.:

40. I agree.

Bokhary, J.A.:

41. I agree that this appeal must be allowed. It is plain that there is no defence to the appellant bank's claim. The allegation of primary fact on which the respondent customer seeks to erect a defence is this. Before the deed of compromise on which he is now sued was executed, the bank's officer with whom he was then negotiating, Mr P.R. Yagnik, had told him over the telephone: "Don't worry, I will definitely give you the facilities as usual."

42. Let us assume that there is a triable issue as to whether that was said. Where does that get the customer? He says that he understood those words to mean that the bank would approach his future requests for facilities in the same way as it had approached such requests by him in the past. But he accepts, through his counsel, that the bank had never been bound to accede to his past requests: each such request was considered on its merits as assessed by the bank by reference to its own legitimate commercial interests. That is the normal approach of any bank.

43. Accordingly, by saying what the customer alleges that he said, Mr Yagnik could not reasonably be taken to have indicated to the customer anything more than this. Despite having had to sue him in the past, the bank would not set its face against granting him facilities in the future.

44. In such circumstances, it is impossible to discover any foundation for the collateral contract asserted by the customer. The rule here (as stated in the House of Lords eighty years ago by Lord Moulton in Heilbut, Symons & Co. v. Buckleton [1913] AC 30 at p. 47 and recently reiterated by Lord Goff of Chieveley in delivering the advice of the Privy Council in Universal Dockyard Ltd v. Trinity General Insurance Co. Ltd [1989] 2 HKLR 160 at pp. 164-165) is that:-

"Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject-matter."

45. No intention to contract begins to appear. And even if such an intention existed, what would the bank and customer have purported to agree?

46. In his skeleton argument, Mr Remedios for the customer contends that the following should be implied as terms of the collateral contract:-

"a) the [bank] will grant facilities to the [customer], where it would have done under normal circumstances and in the ordinary course of its business;

b) the [bank] will continue to grant facilities to the [customer] where it would have done under normal circumstances and in the ordinary course of its business, for the duration of the settlement agreement;

c) the [bank] will, upon receipt of applications by the [customer] for a Letter of Credit, consider them upon their merits."

47. Let us assume that, too, to be so. Still, where does that get the customer? Plainly, a number of terms would remain to be negotiated. Therefore, even if it existed, the collateral contract would be caught by the rule that (as Lord Ackner put it in a speech with which the other members of the House of Lords agreed in the very recent case of Walford v. Miles [1992] 2 AC 128 at p. 138G) "a bare agreement to negotiate has no legal content."

48. In the alternative to his argument based on collateral contract, Mr Remedios seeks to rely on promissory estoppel - hoping thus to avoid the consequences of, as he put it, "ambiguity or lack of clarity" fatal under contract. But for estoppel he is driven to relying on the same matters as he relies on for collateral contract. That dooms the alternative argument to failure. In Woodhouse Ltd v. Nigerian Produce Ltd [1972] AC 741 at p. 757D-F, Lord Hailsham of St Marylebone, L.C. put it like this:-

" Counsel for the appellants was asked whether he knew of any case in which an ambiguous statement had ever formed the basis of a purely promissory estoppel, as contended for here, as distinct from estoppel of a more familiar type based on factual misrepresentation. He candidly replied that he did not. I do not find this surprising, since it would really be an astonishing thing if, in the case of a genuine misunderstanding as to the meaning of an offer, the offeree could obtain by means of the doctrine of promissory estoppel something that he must fail to obtain under the conventional law of contract. I share the feeling of incredulity expressed by Lord Denning M.R. in the course of his judgment in the instant case when he said [1971] 2 Q.B. 23, 59-60:

'If the judge be right, it leads to this extraordinary consequence: A letter which is not sufficient to vary a contract is, nevertheless, sufficient to work an estoppel - which will have the same effect as a variation.'"

49. Considerable sympathy is due to the customer as someone caught up in the notorious Nigerian foreign exchange crisis of the mid 1980's. And Mr Remedios has, if he will permit me to say so, put the customer's case as attractively as it can be put. But the bank's claim is unanswerable. The learned judge's decision withholding summary judgment, despite the admirable care which he took over it, cannot stand. And this appeal must, in my judgment, be allowed.

50. Before parting with this appeal, I wish to express my indebtedness to counsel on both sides for the care which they have put into the preparation and presentation of their respective cases.