XCHRX THE BANK OF TOKYO-MITSUBISHI, LTD. v. LEE HOI KWONG

HCA 2671/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2671 OF 2000

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J U D G M E N T

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1. This is an appeal against the decision of Master Leah Cannon whereby she entered judgment for the Plaintiff for $60,000,000 with interest and costs on 25 July 2000.

2. The Plaintiff is an assignee of the Tokyo Bank Ltd. The latter had granted overdraft facilities to a company known as Wing Kee Company Limited in the early 1980's (or may be even in the late 1970's). The Defendant executed a guarantee in favour of the Plaintiff's predecessor on 8 October 1982. The Defendant was a director of the debtor company. The maximum amount guaranteed was $60,000,000.

3. The debtor company defaulted, it eventually going into liquidation in or about 1984. A court winding-up order was made on or about 24 October 1984.

4. There is an unchallenged assertion by the Defendant that during 1983 and 1984 the Tokyo Bank's representatives made several oral demands of the Defendant that he meet his obligations under the guarantee. The Defendant responded that he was unable to do so. Eventually the Bank proved the debt in the winding-up proceedings of the debtor company.

5. Nothing then happened until by letter of 18 February 2000 the Plaintiff sent a letter of demand to the Defendant requesting payment under the guarantee.

6. On 14 March 2000 proceedings were commenced. The Defence, served on 14 April 2000, relies essentially on the Limitation Ordinance, section 6.

7. All the essential facts and events are admitted. The Plaintiff's locus is accepted. Written notice was given to the debtor. Oral demands were made of the guarantor. The guarantee is accepted as a valid document properly executed. The debt is not questioned. The issue falls to be decided solely upon the construction of certain clauses or words, in the guarantee itself. If there is an arguable case on construction on which the defence under the Limitation Ordinance depends then there is clearly a credible defence and the Plaintiff is not entitled to judgment under Order 14.

8. The Plaintiff's case is that time started to run from the time of the written demand of 18 February 2000. The Defendant's case is that it started to run from the time of the oral demand in 1983 or, at the latest, from the oral demand in 1984.

9. The Plaintiff relies upon clause 5 of the guarantee the first sentence of which reads:

"The liability of each of us to pay is to arise first when notice in writing is given to him requiring him to pay."

The Plaintiff contends that "him" refers to the guarantor. The Defendant argues that "him" refers to the debtor. If the sense of the clause and the document is such that "him" can only refer unequivocally to the guarantor the Defendant raises further arguments. On the other hand if it is far from clear that that is so, and arguments as to construction can validly be put forward so as to require a consideration of such then the Defence relied upon is a credible one and the Defendant must succeed on this appeal.

10. Once the principal debtor defaults causing loss to the creditor, the guarantor is immediately liable to the full extent of its obligation, without being entitled to require notice of the default, unless there is any special stipulation to the contrary or to any other effect.

11. Unless it is necessary to make a demand upon the principal debtor in order to establish the principal debtor's own liability to the creditor (viz. by a provision in the guarantee) it is not necessary for the creditor before proceeding against the guarantor, to request the principal debtor to pay. The question of whether such a demand is necessary in any particular case is a matter of construction essentially.

12. Against those basic principles, enunciated by a number of authorities, the guarantee must be considered.

13. Clause 1 contains the agreement by the guarantor "to pay on demand". It does not stipulate whether the demand is required to be oral or written.

14. Clause 5, referred to earlier, provides for the liability to arise when written notice is given to him. The liability is "of each of us" (first person plural) - is the "him" unarguably the same as "one of us"? This clause is consistent, on the face of it, with a requirement that a written demand be made upon the debtor before the guarantor's liability arises. It is therefore a specific stipulation to displace the normal situation whereby liability of the guarantor arises immediately on the debtor's default.

15. If that is correct then the Defendant's liability and the Plaintiff's right of action against him arises on the written notice being given to the Debtor i.e. in 1983 or 1984 when, at the latest notice was given to the liquidators of the company. Time then runs from that notice. If that is the case, whatever otherwise may be the view on the merits of the Defendant's position he is entitled to rely on the limitation point.

16. The Plaintiff contends that in the guarantee the debtor is referred to as the customer throughout and wherever "him" or "his" appears it is by reference to and can only refer to the guarantor. Having considered the whole of the guarantee, there is no doubt that the term customer is frequently and consistently used to refer to the debtor. Indeed in clause 1 with reference to Wing Kee Trading Company Limited (the debtor) it is specifically stated that the debtor is hereinafter called "the customer".

17. Clause 9 on which there has been an exchange of submissions does not in my view affect the position, one way or the other. It is a provision which identifies a variety of steps which the creditor may take or omit to take, without in any way affecting the guarantor's liability under the guarantee.

18. Clause 13 on which the Plaintiff relies is a different proposition however. The debtor is clearly identified as the customer. The references in the clause to "him" and "his" can refer only to "one of us" i.e. the guarantor or "his obligations" or "any one claiming through him". The position is unequivocal - "him" and "his" cannot possibly refer to the debtor.

19. Finally the first provision in clause 5 is to some extent for the protection of the guarantor. In my view the use of the term "him" makes sense only if it refers to the guarantor.

20. I have concluded that the sense of clause 5 is that it must refer to notice in writing to the guarantor. At first blush I saw the attraction of Mr Chong's argument but once the whole agreement had been considered, as was essential, the point became unarguable.

21. On behalf of the Defendant Mr Chong advanced a "fall-back" position on the premise that if clause 5 was solely for the guarantor's benefit, the guarantor could waive it so as, in effect, to rely upon the oral demand in 1983 or 1984 from which time would run. Ingenious though this argument may be it is clear that the clause is for the mutual benefit of the parties to the agreement - the guarantor is entitled to written notice, and the creditor will not have any constraint or restraint at law operating against him until he gives written notice. This means quite simply that the creditor does not have to commit himself to a course which, through sheer force of circumstance, will deny him an effective call upon the guarantee. He can properly bide his time until the guarantor is or may be in a position to satisfy his liability. It is significantly more to the creditor's advantage than it is to the guarantor's. It effectively preserves the right of the creditor so that it cannot be defeated by short-term impecuniosity or an inability to trace the guarantor.

22. Mr Chong argues that in 1983 or 1984 when the oral demands were made of him under the guarantee, instead of repudiating his liability by reason of absence of written notice, he, by his conduct accepted liability, indicated his liability to pay and thereby waived the term in his favour.

23. Mr Ng, rightly in my view, put the matter of notice in proper perspective, and Bradford Old Bank Ltd v. Sutcliffe 1918, 2 K.B. 833 is good support for his contention. In any event, and in my view, Mr Ng's contention that waiver (or estoppel) can only be effective if the conduct is clear and unequivocal is also unanswerable in law. The Defendant fails on this point too.

24. An alternative submission by Mr Chong is that the provision of notice under clause 5 is not the only method by which liability of the guarantor arises, and he relies on clause 9. I have in fact already dealt with this in passing earlier but I cannot accept the argument that any part of this clause concerns what clause 5 provides for, namely when liability under the guarantor first arises. Any purported construction of clause 9 to that effect is to misread the text of that clause. The clause (9) does not affect the provision of clause 5 in any way or to any extent. It cannot be argued that it derogates from the force of the prime sentence.

25. The proper and only construction of the agreement once read and considered in its entirety provides for written notice to be given to the guarantor to cause his liability under the guarantee to arise. That means quite simply, as one would expect, that the creditor has the right to give notice when he wishes or deems it appropriate or practical (which is the same thing). The creditor has the right to decide when he will proceed against the guarantor. If neither debtor nor guarantor is in a position to meet the prime liability the creditor is entitled to adopt such course as will not result in his claim being defeated by the Limitation Ordinance. To infer a contrary state of affairs from this guarantee is in my view unacceptable. There is therefore no defence to this action on the guarantee. As a matter of law, the Plaintiff must succeed. The appeal is therefore dismissed with costs.