XCHRX SIN HUA BANK LTD., HONG KONG BRANCH v. CHAN HOI YIN AND ANOTHER

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15411 OF 2000

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J U D G M E N T

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1. This is an application by the plaintiff bank against the 2nd defendant for summary judgment. The bank is suing on a guarantee signed by the 2nd defendant in favour of a company owned and run by the elder brother of the 2nd defendant.

2. The limit of the guarantee is $400,000 and that is the amount which the bank is suing the 2nd defendant for, together with interest and costs.

3. The main defences as run before me at this hearing on behalf of the 2nd defendant are two: first, undue influence based on Barclays Bank v O'Brien [1994] 1 AC 180; the second defence is unconscionable bargain.

4. So far as the first defence of undue influence is concerned, Mr Lam, counsel for the 2nd defendant, argues that this is a case falling within Class 2(B) of the classification set out by Lord Browne-Wilkinson in Barclays (at pp. 189B-190A).

5. The gist of his argument is that by reason of the brother/sister relationship, and by reason of the fact that she agreed to execute this guarantee at the request of her brother to no apparent advantage to her, she being a housewife not involved in the brother's business at all, there is material before the court, at least at this Order 14 stage, to infer that she, i.e., the 2nd defendant reposed generally trust and confidence in her brother.

6. At the hearing I pointed out that the affidavit evidence put forward by the 2nd defendant in this regard was very short and did not condescend upon particulars, for example, there was no description of what generally the relationship between the 2nd defendant and her brother was like prior to the request for the making of the guarantee.

7. Mr Lam accepted my criticism but maintained that the known facts were already sufficient for the court to infer a relationship under which the sister reposed trust and confidence in her brother, and he reminded me that this is an Order 14 hearing only.

8. I observed then and I would like to repeat now that in an Order 14 application, it is for the defendant to condescend upon particulars, and although the law does not oblige a defendant to put forward the whole of his case, if the defendant does not put forward a sufficient case to make it an arguable one then the defendant would only have himself to blame.

9. I must say that the defendant in the present case, given the way she prepared and put forward her affidavit evidence, made her case very difficult to run. But be that as it may, my task remains this: I have to see whether on the materials actually put forward before me there are nonetheless sufficient materials to mount an arguable case of undue influence within Class 2(B).

10. I have already pointed out that the borrower and the 2nd defendant are brother and sister. I think that even at this day and age in a society like Hong Kong arguably one can still assume some sort of general trust and confidence being reposed by a sibling in another. I am not talking about a presumption, it is just an inference to be drawn basing on one's common experience in a society like Hong Kong, and of course there is this fact that the 2nd defendant did agree to execute a guarantee for her brother at the brother's request with no advantage whatsoever to herself. And she also did say in her affidavit that she signed the guarantee because he was her brother.

11. I take all these into account and although I am not totally happy with the way the defendant presented her evidence before me at this application, I cannot say at this stage that a case falling within Class 2(B) is totally unarguable, even on the very limited materials before me. And it is possible, if not quite probable, that at trial, if given the chance the 2nd defendant would be able to tell the trial judge more about her relationship with her brother, prior to the request for the making of the guarantee.

12. The next issue I have to consider is this: on the assumption that the case arguably falls within Class 2(B), is the bank affected by actual or constructive notice of the existence of this relationship? Now, in my view it is arguable that this matter will stand or fall together with the first issue discussed by me above because the bank may be assumed to have at least known that this is the sister of the borrower - although there is no direct evidence as to it, I think it would be very natural for the bank to have asked the borrower who this proposed guarantor was, and what relationship she may have with the borrower, before accepting her as a new guarantor in replacement of an outgoing one.

13. The bank would, presumably, know that this was a woman who had nothing to do with the business of the borrower and also be aware of the fact that she was entering into this guarantee at the request of the borrower, her brother, to no apparent advantage to her. In those circumstances I would say that arguably the bank would be affected with actual or constructive notice of this relationship of trust and confidence between the two.

14. Now in deciding whether these two issues are arguable I take into account the approach of the English Court of Appeal in Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144 where the court was concerned with an employer and a junior employee. As the Court of Appeal pointed out in that case the evidence before the court in that case was simply that this was a guarantee made by a junior employee. Nothing much by way of evidence was put forward by the employee to establish this relationship of general trust and confidence but the Court of Appeal took into account the fact that this was an employer/employee relationship which could easily develop into a relationship of trust and confidence and the Court of Appeal also took into account the fact that the transaction was quite patently to the disadvantage of the employee, yet the employee was prepared to enter into this transaction, and concluded that there was sufficient material for the trial judge to find that there was a relationship of trust and confidence: See page 154 e - h of the judgment of Millett LJ. The court did not require direct evidence to be provided (p.154g).

15. In our case we are one step removed from the situation faced by the Court of Appeal in Credit Lyonnais in that I am only dealing with an Order 14 application today, I am not conducting the trial and I am not trying to assess the parties' respective evidence here.

16. Given that sort of approach, I think although the evidence put forward by the defendant, as I have said, is by no means satisfactory, I cannot with confidence rule out a case of the 2nd defendant falling within Class 2(B) in the present case and for that reason alone I should give leave to defend.

17. Now I should mention for completeness sake the alternative argument based on unconscionable bargain. The state of law is by no means settled as recognised by Chitty on Contracts Vol.1 (28th edition), paragraph 7-075 onwards and in particular in paragraph 7-078 the learned editors of Chitty pointed out (as a third requirement) that in order to succeed a defendant has to prove that the other party, i.e., the plaintiff must have acted unconscionably in the sense of having knowingly taken advantage of the complainant.

18. Mr Lam referred me to an interesting authority Cresswell v Potter [1978] 1 WLR 255, also referred to in Credit Lyonnais by the Court of Appeal (at p.151f), apparently with approval.

19. In Cresswell v Potter (at p.257C-E) Megarry J. referred to an old case Fry v Lane (1888) 40 Ch.D. 312, where it was suggested that the Court of Equity would intervene in a transaction where the vendor was poor and ignorant and where the sale was at a considerable undervalue and where the vendor had no independent advice.

20. At first glance I found the three requirements to be difficult to understand because they all focussed on the condition of the vendor, who was trying to set aside the transaction. I would have thought that a Court of Equity would also look at the position of the other party as well. In other words I was more attracted to the third requirement laid down in Chitty paragraph 7-078. But then Mr Lam very helpfully reminded me of page 259H of the judgment of Megarry J to the effect that satisfying those three requirements (in Fry v Lane) is not the end of the matter because the other side would still have the chance to prove that the transaction was "fair, just and reasonable" and if he could do so the transaction would be upheld. In considering whether a transaction was fair, just and reasonable I assume that a Court of Equity would take into account the position of the other party as well, i.e., whether he had acted unconscionably or, in the words of Mr Wong, counsel for the plaintiff, whether his conscience had been affected by the transaction.

21. Returning to the facts in the present case, I would think that given my analysis of the facts in the light of the earlier defence of undue influence I cannot rule out the possibility of success in running a defence of unconscionable conduct in the present case as well.

22. On the three requirements (in Fry v Lane) I would think that it is arguable - and I say no more than that - that this is a plaintiff who is less highly educated than some others in this society, and she may have come from a lower income group. She obviously did not take independent legal advice and the transaction was one which brought no benefit to her personally at all.

23. Coupled with the fact that admittedly the bank had only asked the 2nd defendant to take legal advice but did not insist on her doing so and the bank did not explain to her the amount of indebtedness outstanding at the time when the guarantee was executed, I think it is arguable - and again I emphasise that I say no more than that - that the 2nd defendant in the present case may have a defence here.

24. So for all these reasons and notwithstanding my misgivings regarding the evidence put forward by the 2nd defendant I think, in my judgment, I should give leave to the 2nd defendant to defend.