GTH (GERMAN TRADE HOUSE) INTERNATIONAL LTD. v. LAU WAI KI

IN THE COURT OF APPEAL

1996, No. 17
(Civil)

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J U D G M E N T

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Litton, V.-P.:

Introduction

1. The plaintiff is a trading company. The defendant is the Deputy Managing Director and a shareholder of a company called Gain Ease Electronics Industrial Ltd. (Gain Ease).

2. On 5 September 1995 the plaintiff issued a writ against the defendant, amended on 7 September before service. By this writ the plaintiff sued the defendant as guarantor for Gain Ease for two sums:

(i) HK$859,643.68 as evidenced by a cheque for that amount dated 30 August 1995 issued by Gain Ease which was dishonoured on presentation and

(ii) US$10,208 said to be loss of profit suffered by the plaintiff.

3. On 27 September 1995 default judgment was entered against the defendant in favour of the plaintiff in those two sums together with interest at the rate of 12% per annum from 5 September 1995, the date of the writ.

4. When the defendant applied to the Master to set aside the default judgment, he failed but on his appeal to Keith J under Order 58 rule 1(1) of the Rules of the Supreme Court he succeeded. By his judgment dated 15 January 1996 Keith J set aside the default judgment. Hence the plaintiff's appeal to this court.

The issues before the judge

5. Before the judge, there were broadly two issues: (i) Should time be extended to enable the defendant to appeal against the Master's order; and (ii) has the defendant shown that he has a real prospect of succeeding in the action. Before us, the only issue is the defendant's prospect of successfully resisting the plaintiff's claim.

Background facts

6. In December 1993 the plaintiff bought from Gain Ease 2,100 sets of electronic goods at the price of US$85 per set. The goods were delivered and the plaintiff paid for them. However, 1,276 sets were found defective and were returned to Gain Ease who agreed to send replacement sets by the end of January 1995. These were not sent. On 31 March 1995 the defendant wrote to the plaintiff as follows:

" 31 MARCH, 1995

GTH(GERMAN TRADE HOUSE)
INTERNATIONAL LTD.
ROOM 1305-7 TOWER I,
WORLD TRADE SQUARE,
123 HOI BUN ROAD,
KWUN TONG, HONG KONG.

PERSONAL GUARANTEE

I, LAU WAI KI, ID XXXXXXX(X)

I, WOULD LIKE TO APOLOGIZE FOR THE SHIPMENT DELAY OF 1267 SETS GEX-01, AND I, GUARANTEE THAT GAIN EASE WILL DELIVER 1267 SETS OF GEX-01. IF GAIN EASE FAILURE TO DELIVERY, I WILL PERSONALLY TAKE CARE ABOUT THE SHIPMENT TO YOUR CO. BY THE END OF APRIL 1995 WITHOUT FURTHER DELAY.

LAU WAI KI"

This was followed by a letter from the plaintiff's solicitors, countersigned by the defendant, dated 10 April 1995 as follows:

" 10 April 1995

Mr. Lau Wai Ki,
c/o Gain Ease Electronics Industrial Ltd.,
1204-5 Cheung Fung Industrial Building,
23-39 Pak Tin Par Street,
Tsuen Wan,
New Territories.

Dear Sir,

Re: 1,276 sets "Magnum MCD-986"

We have instructions to act for GTH (German Trade House) International Limited.

We send you herewith a copy of our letter to Gain Ease Electronics Industrial Ltd. dated even date for your reference.

We are instructed that you, in consideration of our client giving to Gain Ease Electronics Industrial Ltd. an extension to time to 30th April 1995 to deliver the Replacement Goods to our client, agreed with our client to guarantee the due delivery of the Replacement Goods on the 30th April 1995, and in the event that the Replacement Goods shall not be delivered on the due date to pay to our client all loss and damages which our client may suffer as a result of the breach of agreement by Gain Ease Electronics Industrial Ltd.

Kindly sign and return to us a copy of this letter to signify your confirmation of and agreement to the above.

Yours faithfully,

Lau Wai Ki (signature)
I hereby confirm and agree
the above stated"

7. Gain Ease was unable to meet the deadline of 30 April 1995 to deliver the replacement sets. On 4 May the defendant wrote to apologise for the delay followed by another fax of 8 May to the same effect.

8. On 11 May 1995 Mr Paul Buysse, the plaintiff's Managing Director, wrote expressing his dissatisfaction and extended the deadline for the delivery of the replacement sets to 24 May. By his reply of 15 May 1995 the defendant said:

"We understand that the matter cause you very upset but we sure that we will be honour for our promise.

We will keep yours deadline on 24th May 1995, if we can't delivery the goods on time, we will refund the money to your company in order to settle the matter, frankly speaking, we expect in future, we can maintain our relationship and you can continue to support us.

We remain.

With Best Regards,

KENNY LAU"

9. Despite these promises, the replacement goods were not delivered.

Breach of contract

10. Pausing here to examine the position: Gain Ease had clearly failed in its obligation to deliver the replacement goods. The question then arises: Was the defendant obliged to pay "all loss and damages" suffered by the plaintiff as a result of that breach, as undertaken by him in the letter of 10 April 1995?

11. The judge's conclusion is this:

"... the language of the letter of 10th April suggests that it is very arguable that the letter did not amount to an indemnity itself, and that it merely purported to be an acknowledgement by the Defendant of an indemnity previously given by him. Since not even the Plaintiff alleges that an indemnity had previously been given by the Defendant, it follows that it is strongly arguable that no indemnity had been given by him at all."

Language of the letter of 10 April

12. The "previous indemnity" referred to by the judge is the document of 31 March 1995 where the defendant said he would "personally take care about the shipment" by the end of April 1995 without further delay. It is common ground that this document by itself gave rise to no legal liability. The reason why the judge concluded that the letter of 10 April was no more than an acknowledgement by the defendant of "an indemnity previously given by him" is the appearance of the word "agreed" in that letter. In other words, as a matter of construction, the letter of 10 April did not give rise to any legal obligations on the defendant's part; he was merely acknowledging, by the use of the past tense in the word "agreed", the obligation in the document of 31 March, for what that was worth.

Is the judge right?

13. In my judgment, this is to approach the task of construing that letter far too narrowly. In the letter of 10 April the defendant undertook, for a consideration, to pay to the plaintiff "all loss and damages" which the plaintiff might suffer as a result of Gain Ease's breach. To say that all that the parties intended was to secure by the defendant's signature his acknowledgement of the "personal guarantee" of 31 March is in my judgment to stultify the effect of that letter. It gives disproportionate weight to the past tense used in the word "agreed". The letter of 10 April is in poor English, but its sense is clear enough: the parties intended, by the defendant's signature, that they should enter into a formal agreement: the plaintiff to give time to Gain Ease until 30 April and the defendant to be personally responsible to pay all loss and damage in case of breach.

14. I therefore cannot agree with the judge's approach.

15. It will accordingly be necessary to turn to the other arguments advanced by counsel for the defendant, to see whether they give rise to arguable defences to the plaintiff's claim.

Discharge by variation

16. Mr Tam, counsel for the defendant, says this: The obligation guaranteed by the letter of 10 April was for the "due delivery of the replacement goods on 30 April 1995". In fact the plaintiff extended the time for performance by Gain Ease to 24 May; this new arrangement between the plaintiff and Gain Ease the principal debtor discharged the defendant from his undertaking. Mr Tam relies on the statement of principle in Polak v. Everett [1876] 1 QBD 669 at 673 to this effect:

" It has been established for a very long time, beginning with Rees v. Berrington (6) to the present day, without a single case going to the contrary, that on the principles of equity a surety is discharged when the creditor, without his assent, gives time to the principal debtor, because by so doing he deprives the surety of part of the right he would have had from the mere fact of entering into the suretyship, namely, to use the name of the creditor to sue the principal debtor, and if this right be suspended for a day or an hour, not injuring the surety to the value of one farthing, and even positively benefiting him, nevertheless, by the principles of equity, it is established that this discharges the surety altogether. The reason given for this, as stated in Samuell v. Howarth (1) by Lord Eldon, is, because the creditor, by so giving time to the principal, has put it out of the power of the surety to consider whether he will have recourse to his remedy against the principal or not, and because he in fact cannot have the same remedy against the principal as he would have had under the original contract."

17. It is difficult to see how this principle of law can be applied in the defendant's favour. He was the Deputy Managing Director of Gain Ease and all the arrangements made on behalf of Gain Ease were made by him. The relief of the surety's liability is based on principles of equity. The surety is discharged when the creditor without his assent gives time to the principal debtor. Here, not only has he, the surety, assented; he was personally instrumental in the plaintiff giving further time to Gain Ease to perform its contract.

18. In my judgment, there is no merit whatever in this point.

Past consideration

19. In this court, Mr Tam makes the point that the consideration expressed in the letter of 10 April is past consideration: that is, that even before 10 April the plaintiff had already agreed to extend time for the delivery to 30 April 1995. This point was never made in the court below.

20. For this point Mr Tam relies on para 9 of the defendant's first affirmation which says:

" Some time in March 1995, I acting on behalf of Gain East informed Mr Paul Buysse of the Plaintiff that the actual delivery date of the said goods would be by the end of April 1995. The said delivery date was agreeable to Mr Paul Buysse."

21. This statement seems to me far too vague as the evidential foundation for Mr Tam's point. There is before us a fax of 28 March 1995 from the plaintiff as follows:

"YOU HAVE RECEIVED THE ABOVE RETURNED GOODS SINCE NOV 28, 1994 PER THE ATTACHED SLIP AND HAVE PROMISED US THAT YOU WILL REPLACE SAME QUANTITY OF MODEL GEX-08 BY END DECEMBER. WE HAVE BEEN AWAITING FOR MORE THAN 4 MONTHS NOW AND YOUR COMPANY STILL UNABLE TO ADVISE A PRODUCTION/DELIVERY DATE TO US.

WE HAVE INSISTED YOUR REPLACEMENT OF 1,276 SETS BY APRIL 10, 1995 NOT MAY 10 FOR OUR INSPECTION OTHERWISE WE HAVE NO ALTERNATIVE BUT TO CHARGE YOU ALL INTERESTS OCCURRED DURING THE LAST 4 MONTHS.

YOUR IMMEDIATE RESPONSE WILL BE HIGHLY APPRECIATED"

22. It is clear from this that at the end of March the plaintiff was insisting upon delivery of the goods by 10 April 1995. The next written communication is the letter of 10 April, upon which the plaintiff relies in these proceedings, giving an extension to 30 April.

23. I cannot see how, upon the material before the court, the defendant has any prospect of defeating the claim by the "past consideration" point.

Discharge of the principal debtor

24. In para 4 of the defendant's second affirmation he said this:

"4. Now, I come to the dishonoured chequed of the Gain Ease mentioned in paragraph 9 of the Amended Statement of Claim. As Gain Ease was not able to deliver the goods in question on 24th May 1995, it was agreed between the Plaintiff and Gain Ease on or about 1st June 1995 that Gain Ease would compensate the Plaintiff in the sum of HK$859,643.68 payable on 30th August 1995 as full and final settlement. Pursuant to the said settlement agreement, the said cheque was issued by Gain Ease. It was due to the difficult financial situation of Gain Ease that Gain Ease's bank account in Overseas Trust Bank Limited was ceased by the bank on or about 15th June 1995. Anyway, such dealing was made between the Plaintiff and Gain Ease and had nothing to do with me in my personal capacity."

25. What transpired was this: on 5 September 1995 the plaintiff instituted proceedings against Gain Ease on the basis of the dishonoured cheque and on 21 September 1995 it obtained judgment against Gain Ease in the sum of HK$859,643.68, being the amount of the cheque, together with interest at the rate of 12% per annum from 30 August 1995.

26. The short point is this: Is it reasonably arguable that the arrangement set out in paragraph 4 of the defendant's second affirmation, coupled with the fact that the plaintiff has pursued Gain Ease to judgment upon the dishonoured cheque, has the effect in law of discharging the defendant's obligation under the guarantee of 10 April 1995?

27. If the point is reasonably arguable, the default judgment cannot be allowed to stand.

28. It is necessary to look at the matter from first principles. (i) By the letter of 10 April 1995 the defendant undertook to pay to the plaintiff "all loss and damages" which the plaintiff may suffer as a result of Gain Ease's failure to effect due delivery of the goods. (ii) Gain Ease was in default. This caused the plaintiff loss and damage. (iii) Upon Gain Ease's breach, an obligation immediately arose on the defendant's part to pay for the loss and damage sustained. (iv) This obligation arose on 24 May 1995, though the amount of loss and damage was not immediately ascertainable on that day. (v) When, on or about 1 June 1995, the amount of compensation was agreed as between Gain Ease and the plaintiff and the post-dated cheque for HK$859,643.68 was issued, the measure of the defendant's liability was ascertained.

29. Plainly, the effect in law of the arrangement made on 1 June 1995 was that Gain Ease should be conditionally discharged of its obligation to deliver the goods: conditional, that is, upon the post-dated cheque being met. Did this have the effect in law of discharging the defendant from his obligation to pay for the loss and damage suffered by the plaintiff as a result of Gain Ease's earlier breach?

30. An analogous situation arose in Moschi v. Lep Air Services Ltd. [1973] A.C. 331 where the defendant undertook that a company controlled by the defendant would carry out its contract. In analysing the nature of the guarantor's obligation in guarantees of this kind Lord Reid said at p345-B:

"... if at any time and for any reason the principal debtor ... fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor ... for damages. His contract being that the principal debtor would carry out the principal contract, the damages payable by the guarantor must then be the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor undertook that he would do."

31. In that case the fact that the creditor accepted the principal debtor's repudiatory breach - and therefore discharged the principal debtor from its primary obligation to render performance under the contract, to be replaced by its secondary obligation to pay damages - did not discharge the guarantor. As Lord Diplock said at p350-A, when the party not in default elects to exercise his right to treat the contract as rescinded because of a repudiatory breach by the other party, he is exercising a right conferred upon him by law of which the sole source is the original contract; he is not varying that contract; he is enforcing it.

32. As I see it, that is essentially what happened here. Gain Ease was plainly in breach. By 1 June 1995 the plaintiff no longer looked to Gain Ease for performance; the loss and damage suffered by the plaintiff, putting the defendant's case at its highest, was agreed at HK$859,643.68. (The plaintiff in fact does not accept this; it argues that $859,643.68 was merely the value of the goods undelivered, leaving the matter of damages by way of loss of profit open to be claimed.) But leaving that point aside, obviously if the post-dated cheque had been met, then subject to the argument as to whether $859,643.68 represented all the loss and damage sustained, the defendant would have been discharged. But the cheque was dishonoured on presentation. I cannot see how, in these circumstances, the fact that the plaintiff pursued Gain Ease to judgment on the cheque affects the defendant's liability to pay the damages: a liability which had accrued on 24 May 1995. So long as none of the loss and damage was paid to the plaintiff, the defendant remained liable on the guarantee. It is common ground that the judgment dated 21 September 1995 against Gain Ease remains totally unsatisfied.

33. In the course of the hearing, reference was made to the well-known case of Scarf v. Jardine [1882] 7 AC 345 which concerned the liability of individuals in the alternative. There the customer of a firm could have held an old partner liable for goods sold and delivered to the firm, or the new partners liable, but not both. He had to make an election. Scarf v. Jardine was considered in Clarkson Booker Ltd. v. Andjel [1964] 2 QB 775 in relation to principals and agents. The English Court of Appeal there held that the question of election was one of fact: the institution of proceedings against either principal or agent did not amount as a matter of law to a binding election, so as to bar proceedings against the other, unless it evidenced a clear intention to do so.

34. Understandably, as it seems to me, this line of cases was not in fact relied on by Mr Tam, because the principle involved is quite different. Those cases are concerned with mutually inconsistent rights. If the principal had been sued to judgment in Clarkson Booker v. Andjel, the plaintiff could not have turned round and sued the agent. He had only one cause of action.

35. Here, the obligations of Gain Ease and the defendant were separate obligations. Once it is found that the defendant's obligation as guarantor was not discharged by variation of the original contract with Gain Ease (the defendant having assented to it), then the defendant clearly remained bound until Gain Ease was discharged. So long as the cheque remained unpaid, Gain Ease was not discharged.

Conclusion

36. The defendant has no answer to the plaintiff's claim. I would discharge the judge's order, and restore the default judgment subject to one variation: that the judgment for US$10,208 be quashed and be replaced by an interlocutory judgment for damages to be assessed, based on the loss of profit (if any) suffered by the plaintiff in consequence of Gain Ease's failure to deliver the 1276 replacement sets of goods by 24 May 1995. The reason for this variation is this: the claim for US$10,208 was based upon the plaintiff's mere assertion, unsupported by evidence. To that limited extent the defendant should be permitted to contest the claim.

37. I would make an order nisi that the defendant should pay the costs of the appeal and the costs incurred in the court below.

Godfrey, J.A. :

38. I regret that I am unable to agree.

39. On 10 April 1995, the position here was that Gain Ease Electronics Industrial Ltd. ("Gain Ease") had failed to deliver goods to the plaintiff in accordance with the contract between them made in December 1993. The plaintiff, therefore, had a right to claim damages against Gain Ease for breach of contract. But the plaintiff was apparently willing to waive this breach of contract if (1) goods in accordance with the contract were delivered to the plaintiff by 30 April 1995; and (2) the defendant was prepared to guarantee the performance of the contract by that date. The defendant was willing to give such a guarantee; and in these circumstances the plaintiff, by its solicitors, sent the letter of 10 April 1995 to the defendant. The defendant signed and returned it by way of confirmation and agreement, thus constituting in writing the guarantee he was prepared to give. On this analysis, the guarantee operated as Litton, V.P. has held; and I would therefore agree with him that the judge's construction of it must be rejected.

40. That, however, is not the end of the matter.

41. The goods were not delivered by 30 April 1995. Indeed, despite the expression of willingness on the part of the plaintiff to accept performance as late as 24 May 1995, the goods were not delivered even by that later date.

42. So, by 1 June 1995, the plaintiff was entitled (1) to sue Gain Ease for damages for breach of its contract to deliver the goods; and (2) to sue the defendant as guarantor of the due performance by Gain Ease of the contract (under the guarantee, the plaintiff would be entitled to recover against the defendant whatever sum it was entitled to recover by way of damages against Gain Ease).

43. But this is not what the plaintiff did. Instead, it compromised its claim against Gain Ease. It entered into an agreement with Gain Ease for "the full and final" settlement of its claim (as the defendant contends) for damages on terms that Gain Ease (according to evidence led on behalf of the plaintiff) would "compensate the plaintiff", the "compensation" being quantified at HK$859,643.68, and taking the form of a cheque for that sum post-dated to 30 August 1995. There is no doubt that when a cause of action is compromised by agreement to pay a sum of money in substitution for it, the compromise gives rise to a new cause of action and the plaintiff has to sue on the compromise : see McCallum v. County Resources Ltd. [1963] 1 WLR 657, per Lord Denning MR at p.660F (and also Green v. Rozen [1955] 1 WLR 741, per Slade J. at p.746).

44. What then was the effect of the compromise here? The answer is that it operated to substitute for the plaintiff's rights under the original December 1993 contract such new rights as flowed from the compromise. The new rights were a right to payment by Gain Ease of HK$859,643.68, and a right to sue Gain Ease on the post-dated cheque for that sum if in due course the cheque was dishonoured. The termination of the liability of Gain Ease under the original December 1993 contract brought to an end the primary obligation of the defendant under the guarantee to ensure performance of the original December 1993 contract and also his secondary obligation to pay damages to the plaintiff if the original December 1993 contract was not performed. The obligations of a guarantor cannot survive the release of the party liable as principal from the principal's obligations; if the principal enters into substitute obligations instead, the guarantor cannot be held to have guaranteed the performance of those substituted obligations unless he expressly so undertakes. His guarantee extends only to the performance by the principal of the principal's original obligation; it does not extend to the performance of the substituted obligation unless the guarantor enters into what would be, in effect, a fresh guarantee to that effect.

45. Moschi v. Lep Air Services Ltd. [1973] AC 331 was not a case where the principal had settled its original claim against the guarantor by way of compromise; and so, with all respect to Litton, V.P. who thinks otherwise, that decision has no bearing on the present case. On this point, therefore, I find myself constrained to differ from Litton, V.P.

46. But, as Litton, V.P. has pointed out, the post-dated cheque was dishonoured on presentation. In my judgment, the fact that the payment of HK$859,643.68 was made by cheque meant that the compromise operated to terminate the plaintiff's rights under the original December 1993 contract, not absolutely, but only conditionally; i.e. conditionally upon the cheque being honoured.

47. It follows that until 30 August 1995 the compromise agreement operated not to terminate but only to suspend the rights of the plaintiff under the original December 1993 contract and under the defendant's guarantee of the due performance of that contract. When the cheque was dishonoured, the rights of the plaintiff against Gain Ease, and against the defendant, which would have been absolutely determined if the cheque had been honoured, were instead revived; the suspension was lifted, and the plaintiff could have sued Gain Ease for damages (to be assessed) for its breach of the original December 1993 contract and to sue the defendant on his guarantee of the due performance of that contract.

48. But the plaintiff did not do so. Instead of suing Gain Ease for damages, and the defendant as guarantor of payment of those damages, it sued Gain Ease on the dishonoured cheque without making any claim for damages for breach of the original December 1993 contract. The plaintiff was clearly entitled to do that. If it had recovered the HK$859,643.68 from Gain Ease, that would have been the end of the whole matter; the end of its claim against Gain Ease under the original December 1993 contract; the end of its claim against Gain Ease under the compromise agreement; and the end of whatever claim it may have had against the defendant as guarantor of the performance by Gain Ease of the original December 1993 contract.

49. However, the defendant did not recover the HK$859,643.68 from Gain Ease. It obtained judgment in that sum against Gain Ease; but the judgment was fruitless.

50. So now it sues the defendant; and not just for HK$859,643.68 but for HK$10,208 for "loss of profits" on top.

51. In my opinion, it is not entitled to do this.

52. As I have already pointed out, the defendant did not guarantee the performance by Gain Ease of the compromise agreement. So the plaintiff's claim against the defendant can only be a claim on the defendant's guarantee of the due performance by Gain Ease of the original December 1993 contract. But the plaintiff's rights against Gain Ease under the original December 1993 contract, although they revived when the post-dated cheque was dishonoured, finally ceased when the plaintiff obtained judgment, as it elected to do, on the cheque. Its cause of action against Gain Ease on the original December 1993 contract merged in the judgment as soon as that judgment was obtained (see, for this principle, Clarkson Booker v. Andjel [1964] 2 QB 775, especially per Willner and Davies LJJ at p.793 and Russell LJ at p.795). Therefore, after that, the plaintiff could have no cause of action against the defendant as guarantor of the original December 1993 contract.

53. I differ from Litton, V.P. with reluctance; but I have to say that for the reasons I have given the plaintiff's case against the defendant, based on his guarantee of performance by Gain Ease of the original December 1993 contract, seems to me to be completely misconceived.

54. It follows that in my view the defendant has a good defence to the action, or, at least, a defence with a very real prospect of success. Accordingly, I would, for my part, dismiss this appeal.

Ching, J.A. :

55. The Plaintiff obtained judgment against the Defendant, for default in acknowledgement of service, in the sums of HK$859,643.68 and US$10,208.00 with interest and costs. The judgment was set aside by Keith, J., on one condition. He also gave consequential directions. The Plaintiff now appeals but does not seek to reinstate the judgment for the sum of US$10,208.00, in which respect it seeks judgment for damages to be assessed.

56. The Defendant was a 15% shareholder in and the deputy managing director responsible for marketing of Gain Ease Electronics Industrial, Ltd. The company entered into a contract to sell to the Plaintiff sets of equipment for which the Plaintiff paid in full. A large number of sets to the value of HK$859,643.68 were alleged to be defective and were returned to the Defendant. They were to be replaced by the end of January 1995. There then came into existence a letter dated 31st March, 1995, addressed to the Plaintiff and signed by the Defendant. It was headed "Personal Guarantee" and after identifying the Defendant as being the writer it stated,

"I would like to apologise for the shipment delay of (the sets of machinery) and I, guarantee that Gain Ease will deliver (the machinery). If Gain Ease failure to delivery, I will personally take care about the shipment to your Co. by the end of April 1995 without further delay."

On 10th April, 1995, another letter came into existence. It was written by the Plaintiff's solicitors for confirmation by the signature of the Defendant. The material part reads,

"We are instructed that you, in consideration of our client giving to Gain Ease Electronics Industrial Ltd. an extension to time to 30th April 1995 to deliver the Replacement Goods to our client, agreed with our client to guarantee the due delivery of the Replacement Goods on the 30th April 1995, and in the event that the Replacement Goods shall not be delivered on the due date to pay to our client all loss and damages which our client may suffer as a result of the breach of agreement by Gain Ease Electronics Industrial Ltd.

Kindly sign and return to us a copy of this letter to signify your confirmation of and agreement to the above."

The Defendant signed it and returned it. The deadline was not met. There were negotiations and discussions the upshot of which was that on or about 1st June, 1995, the company gave to the Plaintiff a cheque in the sum of HK$859,043.68 post-dated to 30th August, 1995. The cheque was dishonoured because the account upon which it was drawn was closed on 15th June, 1995. The Defendant was privy to the negotiations and was one of the signatories of the cheque.

57. When the cheque was dishonoured the Plaintiff took proceedings against the company. Its claim was upon the cheque alone and not upon the underlying transaction of sale and purchase. The company failed to file an acknowledgement of service and judgment in default was taken. The company was the registered owner of real property and on 26th September, 1995, the Plaintiff obtained against it a charging order nisi to satisfy the judgment. It transpired, however, that the company had sold the property on 15th September, 1995, shortly after the writ had been served upon it. The company was wound up on 6th December, 1995. The purchaser was Gain Ease Development (Holdings) Ltd., of which the Defendant was a registered shareholder to the extent of 27% and of which he was a director. It was apparently thought that the judgment was useless and the present proceedings against the Defendant were instituted with the results we have seen. Having obtained judgment against the Defendant in these proceedings the Plaintiff obtained a charging order absolute against property registered in the name of the Defendant himself but before an order for sale had been obtained the judgment was set aside.

58. The appeal to Keith, J., was out of time and he gave an extension. That was but no longer is a subject of this appeal. The fact that it was out of time caused the Judge to accept an undertaking from the Defendant that he would pay the Plaintiff's costs of the originating summons by which the charging order absolute had been obtained. Rightly, the Judge concentrated on the question of whether or not the Defendant had any real prospects of success if the judgment should be set aside. He found that it was strongly arguable that the "guarantee" of 31st March, 1995, was not a binding guarantee at all. There is no appeal as to that. Secondly, the case for the Plaintiff as put before him was that there had been no previous agreement before the letter of 10th April, 1995. It did not purport to be the agreement itself, for it referred to matters "agreed". In those circumstances he held that it was highly arguable whether or not the Defendant ever gave a valid indemnity. That is the basic finding against which the Plaintiff appeals. Thirdly, in view of that finding, the Judge found it unnecessary to consider whether the Defendant had been discharged from any indemnity by reason of the Plaintiff having given further time to the company or by having settled its differences with the company as evidenced by its acceptance of the post-dated cheque. The argument as to the giving of time need not be considered for the Defendant was privy to it.

59. Paragraph 6 of the Amended Statement of Claim reads,

"On or about 30th April 1995 the Defendant further confirmed and agreed in writing with the Plaintiff that in consideration of the Plaintiff's giving Gain Ease extension of time to 30th April 1995 to deliver the replacement goods, he would personally indemnify the Plaintiff all loss and damages which the Plaintiff might suffer as a result of Gain Ease's failure to duly deliver the replacement goods by 30th April 1995."

This appears to be a pleading that there had been a previous agreement which was confirmed by the letter, alternatively that the letter was the agreement itself. Because of the way the case was put to the Judge, however, the first alternative was effectively removed from his consideration. He held that it was arguable that on the face of the document the consideration was past. I have considerable sympathy with the Judge as to the conclusion to which he came. However, it is doubtful to my mind whether a Defence based upon this would have any chance of success. The judgment obtained by the Plaintiff was a regular one and, after much anxious consideration, I have come to the view that the Defendant has not reached the requisite standard in showing a Defence such that the judgment should have been set aside.

60. There remains the question of the alleged settlement. Paragraph 9 of the Amended Statement of Claim alleges that,

"On or about 1st June 1995, it was agreed amongst the Plaintiff, Gain Ease and the Defendant that the amount of loss and damages suffered by the Plaintiff as a result of the breach of agreement by Gain Ease would not be less than HK$859,643.68 as evidenced by Gain Ease's cheque No. 053091 drawn on Overseas Trust Bank Limited dated 30th August 1995 in favour of the Plaintiff."

The Plaintiff's case is therefore that there was no settlement at all. There was a breach of the company's obligations and the quantum of loss and damages arising from that breach was agreed. Time was then given for payment. The Defendant's case is no different for he says in paragraph 4 of his second affirmation,

"As Gain Ease was not able to deliver the goods in question on 24th May, 1995, it was agreed between the Plaintiff and Gain Ease on or about 1st June 1995 that Gain Ease would compensate the Plaintiff in the sum of HK$859,643.68 payable on 30th August 1995 as full and final settlement. Pursuant to the said settlement agreement, the said cheque was issued by Gain Ease."

There is no allegation that the Defendant was released from his obligations, if any. It would be a pity if, on material such as this, it were thought to be arguable that businessmen, with the knowledge and consent of the indemnifier, should not be able to resolve questions of liability and quantum for fear of releasing the indemnifier. It is true that the Plaintiff sued the company to judgment and began the process of execution. However, the indemnifier remains liable even if the primary obligor should be sued to judgment unless and to the extent that that judgment has satisfied the liability. The essence of an indemnity is that the indemnifier should pay if the primary obligor does not. There was therefore simply not enough to show that the "settlement" released the Defendant from any obligations under the indemnity. Nor, so far as the evidence goes, can I see that by proceeding to judgment and by attempting execution on the cheque the Plaintiff can arguably be said to have lost any of its rights against the Defendant.

61. Subsequent to the hearing further submissions in writing were allowed. It is unnecessary to deal with them since they do not affect the question of liability under the original indemnity or any release therefrom. Not without considerable diffidence I conclude that this appeal should be allowed.

Litton, V.-P.:

The result is that, by a majority, the appeal is allowed. The judge's order is discharged; the default judgment is restored subject to one variation, that the judgment for US$10,208 is quashed and is replaced by an interlocutory judgment for damages to be assessed, based on the loss of profit (if any) suffered by the plaintiff in consequence of Gain Ease's failure to deliver the 1276 replacement sets of goods by 24 May 1995. There will be an order nisi that the defendant should pay the costs of the appeal and the costs incurred in the court below.