SANDY INVESTMENT LIMITED v. THIAM JOO (HK) LIMITED

IN THE HIGH COURT OF JUSTICE

BETWEEN

___________

JUDGMENT

___________

1. These are appeals from the decisions of two Masters on 0.14 applications in which unconditional leave to defence was granted to the 1st and the 3rd defendants. The plaintiff's claims arose as follows:

2. On the 14th April 1982, a Joint Venture Agreement was entered into with a view to engaging in the manufacture and sale in Indonesia of certain products through the vehicle of a trading Indonesian corporation called P. T. Dover Chemical. There were four parties to this Joint Venture Agreement. The principal parties were the plaintiff and the 2nd defendant. They were to be trading partners under this Joint Venture Agreement. As the trading vehicle in Indonesia could not in law be owned by non-Indonesians, two Indonesian nationals were put up as nominees holding the beneficial interests of the two trading partners in the ratio of 40% to the plaintiff and 60% to the 2nd defendant. The two nominees were intended to be included as a party to this Joint Venture Agreement for the implementation of the aims of the joint venture, but they did not sign the Joint Venture Agreement. The 3rd defendant also became a party to the Joint Venture Agreement for the purpose of, inter alia, guaranteeing the performance of the nominees and the 2nd defendant. See Clauses (2)(a), (7)(d). The 3rd defendant further entered into a Guarantee Agreement supplemental to the Joint Venture Agreement with the plaintiff, whereby the 3rd defendant reiterated his said guarantee to the plaintiff and expressly agreed to be responsible for all losses, damages, costs and expenses incurred by reason of any default or failure on the part of the nominees and the 2nd defendant.

3. Pursuant to the Joint Venture Agreement, P. T. Dover Chemical in Indonesia entered into a Supply Agreement with Lee Chang Yung Chemical Industry Croporation of Formosa for the supply of two plants and technical knowhow.

4. The Joint Venture Agreement, the Guarantee, the Supply Agreement were all dated the 14th April 1982.

5. Pursuant to the Joint Venture Agreement, the plaintiff paid US$400,000 to the 1st defendant for the benefit of the 2nd defendant. This US$400,000 was deposited in the 1st defendant's bank account but duly recorded in its ledger as standing to the credit of the 2nd defendant.

6. At the material time, the 3rd defendant was a substantial shareholder of the 1st defendant company and the 2nd defendant company. The 3rd defendant is also a brother of a director of the 1st defendant company.

7. In 1983, Lee Chang Yung Chemical Industry Corporation "abandoned the Supply Agreement altogether". "The relationship between the joint venture partners deteriorated". Under the Joint Venture Agreement, the plaintiff requested the return of its investment of US$400, 000.

8. The parties settled their differences. US$100,000 was returned direct by the 2nd defendant to the plaintiff. The terms of settlement were embodied in a Settlement Agreement in the form of a letter dated the 11th April 1984 and signed by all the parties to this action. The material part of that letter is set out below:

"Dear Sirs:

               This letter will confirm our agreement reached this day regarding the US$400,000 investment made by (the plaintiff) pursuant to that certain Agreement dated 14 April, 1982 (as amended and supplemented, the "Agreement") among (the plaintiff, the 2nd defendant, the 3rd defendant and the nominees).

               Pursuant to the Agreement and at the request of (the 2nd defendant) and (the 3rd defendant), (the plaintiff) has previously provided an amount equal to US$400,000 to (the 1st defendant), the receipt of which has previously been acknowledged by Mr. Wong Yu wai (i.e. a director of the 1st defendant), in return for a 40% beneficial equity interest in P.T. Dover Chemical. In July 1983 (the plaintiff) notified (the 2nd defendant) and (the 3rd defendant) that it wished to terminate the Agreement and requested a refund of' its US$400,000 investment. After agreeing in principle to the termination, (the 2nd defendant) refunded US$100,000 to (the plaintiff) in September 1983. In return for due consideration, receipt of which is hereby acknowledged, (the plaintiff, the 2nd defendant, the 3rd defendant and the 1st defendant) hereby further agree as follows:

1.    (The 2nd defendant) shall pay US$300,000 (representing the balance of (the plaintiff's investment) to (the plaintiff) as provided in paragraph 3 hereof.

2.     Effective the date hereof, (a) the Agreement and the guarantees of Mr. K. K. Lee and (the 3rd defendant) relating thereto shall be terminated in all respects, (b) neither (the plaintiff, the 3rd defendant, the 2nd defendant) nor any other party to the Agreement shall have any further rights or obligations thereunder or under such guarantees and (c) the 40% beneficial equity interest of (the plaintiff) in P. T. Dover Chemical shall be transferred to and be the sole property of (the 2nd defendant).

3.     (The 1st defendant) shall pay, and (the 2nd defendant and the 3rd defendant) shall cause (the 1st defendant) to pay, to(the plaintiff) US$100,000 on each of 15 May, 15 June and 16 July, 1984 (a total of US$300,000) by telegraphic transfer to Account No. 6-087459-01 of (the plaintiff) at The Bank of Tokyo Ltd., Hong Kong Branch, Far East Finance Centre, 16 Harcourt Road, Hong Kong. If for any reason payment of any such instalment shall not be made in full on the day specified, (the 1st defendant) shall pay, and (the 2nd defendant and the 3rd defendant) shall cause (the 1st defendant) to pay, in addition to the amount owing, interest on such overdue amount at a rate equal to the prime rate posted from time to time by The HongKong and Shanghai Banking Corporation for each additional day that such payment is delinquent."

9. Default had been made under the Settlement Agreement, and in the ensuing correspondence between the plaintiff and the 1st defendant, there was no denial of liability. In the reply of the 1st defendant to the first formal demand by the plaintiff's solicitors, the 3rd defendant's brother as a director of the 1st defendant informed the plaintiff of an offer by the 2nd defendant to settle the amount by three equal instalments later in time. Mr. Mumford, counsel for the 1st and the 3rd defendants, suggested that in a further letter of the 1st defendant signed by the same director dated the 2nd August 1984, whereby the 1st defendant offered itself to pay the plaintiff by instalments again later in time, there was in effect no admission of liability. Counsel explained that the said earlier reply of the 1st defendant conveying the 2nd defendant's offer for settling the amount reflected the 1st defendant's understanding that the 2nd defendant had the primary obligation to pay and that the 1st defendant's said letter of the 2nd August merely conceded its liability to pay only in its capacity of a "conduit pipe". These letters are clearly not susceptible of the meaning so eagerly ascribed to them by Mr. Mumford.

10. The plaintiff commenced these proceedings against the 1st defendant for US$300,000 and interest and against the 2nd and the 3rd defendants for damages for breach of the Settlement Agreement. Applications for summary judgment against the 1st defendant and the 3rd defendant were respectively refused by the Masters, hence these appeals.

11. Next I turn to consider paragraphs 1 and 3 of the Settlement Agreement as embodied in the letter of the 11th April 1984. Paragraph 1 stipulates that the 2nd defendant "shall pay" US$300,000 to the plaintiff. Thus it imposes on the 2nd defendant an obligation to pay. A general obligation to pay does not call for payment in any particular way. Paragraph 1 does not say "shall itself pay", "shall pay directly to" or "shall pay through the 1st defendant". Pausing there, the obligation under paragraph 1 is simply that the 2nd defendant "shall pay" the plaintiff, and that obligation is discharged whenever and however the plaintiff is paid. But paragraph 1 does not stop  there, and it goes on to say that the 2nd defendant "shall pay" the  plaintiff "as provided in paragraph 3", not in accordance with paragraph 3.

12. Paragraph 3 is not a provision which specifies how the 2nd defendant is to pay or, as Mr. Mumford put it, the "mechanism for payment". What is really meant by "the 2nd defendant shall pay as provided in paragraph 3" is that the 2nd defendant's obligation under paragraph 1 is or is considered to be discharged by the implementation of paragraph 3 i. e. payment by, inter alia, the 1st defendant. I am presently concentrating on the 2nd defendant's obligation, and I will examine the 1st defendant's obligation under paragraph 3 more closely later.

13. Mr. Mumford, counsel for the 1st and the 3rd defendants, chose to stand or fall on his construction submissions. It was argued that a primary obligation of the 2nd defendant to pay emanated from paragraph 1. As against that 2nd defendant's alleged primary obligation to pay, so ran counsel's argument, the 1st defendant's obligation to pay under paragraph 3 could only be secondary and hence it would not arise unless the 1st defendant had itself been paid the settlement sum of US$300,000 by the 2nd defendant. Mr. Mumford contended that such was the true interpretation of these two paragraphs, and counsel further submitted that if there should be any residual doubt, the commercial backgrounds or matrix, when resorted to, would support this division of the obligations of the 2nd and the 1st defendants into one of primary and one of secondary. It was emphasized on behalf of these defendants that the 1st defendant's involvement had throughout been exclusively tied to the acceptance and transmission of funds for or to the 2nd defendant under the Joint Venture Agreement to which the 1st defendant was not a party and that the 1st defendant had or must have assumed the like role of a conduit pipe for the purposes of this Settlement Agreement.

14. We are not concerned here with the relationship vis-a-vis a creditor on one hand and a principal debtor and surety on the other. The obligations of the 2nd defendant and the 1st defendant are clearly co-existent. Even in the case of a surety, unless conditions precedent to the surety's liability are expressly laid down, he may be sued immediately upon default being made by the principal debtor. The creditor need not wait until the surety has himself been kept in fund by the principal debtor.

15. It was pressed upon me by Mr. Mumford that the words "shall cause" in paragraph 3 meant or could mean "to see to it that the 1st defendant does pay the plaintiff", in another words, an obligation on the part of the 2nd defendant and the 3rd defendant to take steps or legal proceedings, if necessary, to compel payment by the 1st defendant but not beyond. Counsel further submitted that such obligation of the 2nd defendant and the 3rd defendant to cause payment to be made was likewise subject to the 1st defendant's primary obligation to pay the plaintiff. In effect, so it was submitted, the obligation of the 2nd defendant and the 3rd defendant under paragraph 3 is merely to compel the 1st defendant to pay over to the plaintiff any money which has been received by the 1st defendant from the 2nd defendant. One can readily appreciate why a Hong Kong creditor should prefer the responsibility for payment to be undertaken by someone within jurisdiction, but it is inconceivable that the 2nd defendant should choose not to make direct payment to the plaintiff but instead to pass the money over to the 1st defendant so as to assume the suggested indirect responsibility for compelling the handing over of its own money in the custody of the 1st defendant to the plaintiff. I cannot accept this as the prescribed circuitous method of settlement, which is inherent in the tortuous construction canvassed by Mr. Mumford.

16. There is no express provision in paragraph 3 subjecting the obligations of the 1st, 2nd or 3rd defendants to these advocated conditions precedent, and Mr. Mumford relies on strict interpretation to the exclusion of any implied terms.

17. Mr. Mumford's submissions are, in my view, untenable. Moreover, whatever burden paragraph 1 is said to have cast upon the 2nd defendant, the 1st defendant's concurrent obligation to pay under paragraph 3 is clear: The 1st defendant "shall pay" to the plaintiff. Nothing in the language of paragraph 3 makes it a secondary obligation. It is not expressly subject to any other condition precedent, such as a prior payment by the 1st defendant. The 1st defendant's strict liability to pay is not made dependant on it holding an equivalent sum of the 2nd defendant. In fact, the time schedule for payment by the 1st defendant was fixed, viz. the 15th May, 15th June and the 16th July, all in 1984, whether or not the 1st defendant had been kept in fund. It is monstrous to suggest that the 1st defendant had been prepared to adhere to these specific payment dates if its own liability would have accrued only upon payment by the 2nd defendant.

18. Nothing falling short of an implied term, and it was not contended that there was room for any, would enable the 1st and 3rd defendants to raise these suggested qualifications in view of the unobscure language of paragraphs 1 and 3. Even if the 2nd defendant's obligation under the Settlement Agreement of the 11th April 1984 could, by some stretch of imagination, admit of the ambiguity ventilated in this court, the strict liability of the 1st defendant created by the plain language of paragraph 3 is perfectly clear. In conclusion, it is my view that none of the strained interpretations sought to be put on the 1st defendant's obligation under the Settlement Agreement is sustainable.

19. In my opinion, the 2nd and the 3rd defendants' obligation under paragraph 3 also cannot be so subject to the suggested primary obligation of the 2nd defendant to pay the plaintiff. I really need not resort to the dictionary definition of "cause" which is defined in the Shorter Oxford Dictionary as "to be the cause of; to effect, bring about, produce, adduce, make." "Cause" is commonly used in legal and quasi-legal documents. In the instant appeals, it simply can carry no other meaning than that assigned to it by Lord Alverstone C.J. in Stiles v. Galinski, Nokes v. Islington Corporation. ⁽¹⁾ The learned Chief Justice construed "cause" as meaning more than "take reasonable steps" and held that "the person upon whom the duty (was) cast must see that work specified (was) done". The by-law under consideration by Lord Alverstone provided" that the landlord shall ... cause every part of the premises to be cleansed." In the context of paragraph 3, it is obvious that the 2nd and the 3rd defendants were obliged to see the plaintiff paid by the 1st defendant as stipulated by paragraph 3.

20. The language used for creating these obligations of the 1st defendant and the 2nd and the 3rd defendants in paragraph 3 of the Settlement Agreement is unobscure, and there is no necessity for referring to the commercial backgrounds or the matrix in the sense of "the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction", per Lord Wilberforce in Prenn v Simmonds.⁽²⁾ The facts stated merely serve as a narrative, but they could become material in considering conditional leave.

21. It is not necessary, however, for me to pass on to conditional leave to defend in the light of my understanding of these very simple and straight-forward paragraphs. If I ever entertained doubt as to whether these paragraphs are capable of bearing the meanings submitted by Mr. Mumford, which are founded on much strained interpretation, in conjunction with the said correspondence before action, I would be inclined to order a payment into court by these defendants as a condition for granting leave to defend.

22. Both appeals were therefore allowed with costs at the conclusion of the hearing with an indication that full reasons were to follow, and these I now give.

(1)    [1904] 1 K. B. 615 at p.622

(2)    [1971] 1 W.L.R. 1381 at 1385H