CARGO SERVICES AIRFREIGHT LTD. v. GKC HOLDINGS LTD.

HCA18842/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.18842 OF 1998

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J U D G M E N T

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1. The plaintiff brings this action against the defendant under a letter of indemnity or guarantee dated 25 May 1998 ("the Letter of Guarantee") under which the defendant undertook to indemnify the plaintiff against any financial loss in the event that the plaintiff should fail to receive payment from a company known as German Kitchen (China) Ltd ("German Kitchen") for credit facilities given.

2. The background facts and matters may be given as follows.

3. The plaintiff's business included providing services for cargo transportation. The defendant is a company listed in the Stock Exchange of Hong Kong and the parent company of German Kitchen. The business of German Kitchen included the supply and installation of kitchen fittings and sanitary wares for building projects in Hong Kong. In about April 1998, German Kitchen had engaged the services of the plaintiff in some transportation jobs.

4. In about late April or early May 1998, German Kitchen approached the plaintiff requesting freight forwarding services of several big consignments of construction materials from Europe to Hong Kong for a construction project here. Some of the construction materials were required urgently. In view of the volume of the consignments, German Kitchen requested for a credit facility of HK$1 million to give it time to settle the plaintiff's service charges. It was under those circumstances that a facility letter dated 22 May 1998 ("the Facility Letter") was signed by German Kitchen and the Letter of Guarantee was signed by the defendant.

5. It is the plaintiff's case that the plaintiff had requested German Kitchen to procure the defendant to guarantee its indebtedness in respect of the service charges to be incurred as a condition for granting the credit facility and that German Kitchen had agreed to do so. I should mention that German Kitchen and the defendant occupied the same office premises and the two companies had, at the material time, some common directors. Two of the directors of these companies were Mr Peter Cheung Chun Hung and Mr Eugene Tang Yiu Chuen.

6. Although the Facility Letter was dated 22 May 1998 (which was the date on which it was prepared), the plaintiff did not send this to German Kitchen until after the Letter of Guarantee was signed by the defendant. The Deputy Managing Director of the plaintiff, Mr Barry Ng Chin Hung, personally brought the Letter of Guarantee to the defendant to sign in the afternoon of 25 May 1998. This was signed by Mr Eugene Tang in the presence of Mr Barry Ng and Mr Peter Cheung.

7. The Facility Letter was then sent to German Kitchen for its signature. A signed copy was not returned to the plaintiff until after 16 June 1998.

8. It was provided in the Facility Letter that German Kitchen was to have a credit limit of HK$1 million, the credit period was 30 days from date of invoice, the effective date was upon receipt of its confirmation of the agreement and the expiry date of the credit facility was 31 July 1998.

9. There was change in the constitution of the board of directors of the defendant and of German Kitchen in July 1998. On 22 July 1998, Eugene Tang, Peter Cheung and several others resigned as directors of the defendant. On 23 July 1998, these two and a few others resigned as directors of German Kitchen.

10. As German Kitchen had failed to pay the outstanding charges of the plaintiff for the services provided, the plaintiff issued a writ against German Kitchen in the High Court on 21 August 1998. Judgment in default was obtained on 27 October 1998 for HK$1,066,521.06 with interest. Execution of the judgment was stayed because German Kitchen was by then under creditors' voluntary liquidation. The plaintiff issued a writ in this action against the defendant on 5 November 1998.

11. The defendant's case as pleaded is that the Letter of Guarantee was signed by Mr Eugene Tang on or after 22 July 1998 when he was no longer a director of the defendant and that he had signed without proper authority. It is alleged that the plaintiff had knowledge of these matters. These allegations were not pursued by the defendant in this trial. The only point taken by Mr Raymond Lo, who appeared for the defendant, is that the Letter of Guarantee was not supported by consideration and that the plaintiff has not adduced evidence to establish that the judgment debt of $1,066,521.06 was covered by the credit facilities granted.

12. The plaintiff only called Mr Barry Ng to give evidence. The defendant has not called any witness.

13. Apart from giving evidence on the background matters which I have mentioned and accepted, Mr Ng has also testified on other relevant matters and I make these findings based on his evidence :

(1) Between 10 and 20 May 1998, Mr Ng had informed Mr Peter Cheung of his proposal that to grant a credit facility of HK$1 million with a credit term of 30 days, the plaintiff would require a guarantee from the defendant. Mr Cheung reverted to Mr Ng not later than 22 May 1998 that the defendant and German Kitchen had accepted the proposal, and the Facility Letter was prepared on 22 May 1998. Thus, on 22 May 1998, an agreement was concluded between the plaintiff and German Kitchen on the provision of credit facility, the terms of which were evidenced by the Facility Letter which was not signed and returned by German Kitchen until after 16 June 1998.

(2) Although Mr Cheung had told Mr Ng that the defendant would provide a guarantee on or about 22 May 1998, it was only in the morning of 25 May 1998 that he told Mr Ng that a director of the defendant would be ready to sign it that day.

(3) German Kitchen was invoiced by the plaintiff for the services rendered from the end of May 1998 to the end of June 1998. It was unable to pay the outstanding sum in July 1998 when payment was due. As a result, the plaintiff issued a writ against it in August 1998.

(4) The plaintiff had commenced providing services to German Kitchen before the agreement was reached on granting credit facilities in that the plaintiff had received the cargo from the supplier of German Kitchen in Europe for transportation to Hong Kong. The plaintiff was not anxious to obtain a signed facility letter from German Kitchen because it had the option of not releasing the cargo to German Kitchen in the event that the latter should fail to pay or if no letter of guarantee was provided by the defendant.

14. I turn to deal with the points taken by Mr Raymond Lo on the defendant's behalf.

15. Firstly, it was argued that since the agreement to grant credit facility was concluded before the Letter of Guarantee was signed, there was no consideration for the guarantee. I reject this argument. The correct position at law is set out in Chitty on Contracts, Vol.1, 28th ed at para.3-026 :

"When consideration is past. In determining whether consideration is past, the courts are not, it is submitted, bound to apply a strictly chronological test. If the giving of the consideration and the making of the promise are substantially one transaction, the exact order in which these events occur is not decisive. A manufacturer's 'guarantee' is sometimes given to a customer after he has bought the goods. But it is submitted that the consideration for such a guarantee is not, merely on that ground, past, for the sale and the giving of the 'guarantee' will often in substance be a single transaction. Similarly, where a contract to erect buildings on land and to grant a lease of that land are substantially one transaction, the expenditure of money on the buildings would not be past consideration for the execution of the lease, even though the lease was not executed until after completion of the buildings."

16. In my judgment, I should not apply a strict chronological test here in view of the unchallenged evidence of the plaintiff that it was a condition for granting credit facility to German Kitchen that a guarantee was to be provided by the defendant and having regard to my finding that on or about 22 May 1998, this condition for granting credit facility was accepted by Mr Peter Cheung. I rule that the agreement for granting credit facility and the giving of the guarantee should be treated as one transaction. There was no past consideration.

17. The other argument of Mr Lo is as follows. It was provided in the Facility Letter that the "effective date" of the facility was "upon receipt of [German Kitchen's] confirmation of this agreement". As the Facility Letter was not signed by German Kitchen until 16 June 1998, the effective date had only commenced on that date. The defendant's obligation in the Letter of Guarantee was to indemnify the plaintiff against loss arising from failure to receive payment due to the facilities granted in the Facility Letter. It was argued that as the plaintiff has not proved that the judgment debt of HK$1 million odd was for facilities granted as from the effective date of 16 June 1998, the defendant is not liable under the Letter of Guarantee.

18. I reject this argument as well. I find that there was already a binding verbal agreement between the plaintiff and German Kitchen on 22 May 1998 to grant credit facilities up to HK$1 million for a term of 30 days. The Facility Letter was merely evidence of the binding agreement. What was stated in the Facility Letter about the effective date did not alter the fact that the parties had, by conduct, acted on the binding agreement already concluded and that the plaintiff had, by 16 June 1998, already provided credit facility to German Kitchen as the plaintiff had begun to invoice German Kitchen from the end of May 1998. If there had not been a credit term of 30 days, the plaintiff would have demanded payment before 16 June 1998 of the invoices issued at the end of May. I have found on Mr Barry Ng's evidence that the plaintiff's invoices were issued from the end of May 1998 to the end of June 1998. I also find that payment for these invoices was not demanded until July 1998 as a result of the credit term of 30 days under the agreement to grant facilities. In my judgment, the judgment debt of German Kitchen, which is for the outstanding sum in July 1998, is clearly within the defendant's obligation to indemnify the plaintiff under the Facility Letter.

19. I therefore give judgment to the plaintiff in the sum of HK$1,066,521.06 with interest at the current judgment rate from 21 August 1998 until judgment. The plaintiff seeks costs of this action on an indemnity basis. I have considered the terms of the Letter of Guarantee. I do not think the terms of that letter are sufficiently clear to justify an award of costs on that basis. I will award costs to the plaintiff on a party and party basis.