XCHRX CEF GC BROKERAGE LTD. v. CHRISTOPHER TU

HCA17517/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 17517 OF 1998

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J U D G M E N T

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1. The Plaintiff is a broker. It is suing the Defendant under a written guarantee dated 4 December 1996 given in the Plaintiff's favour in consideration of the Plaintiff executing trading orders and providing other services of a broker to a BVI company called Corbin Profits Limited ("Corbin").

2. The Plaintiff alleges that on 16 and 17 September 1998, it executed buy orders given by Corbin in respect of a total of 830,000 shares in a company called Chi Cheung Investments Limited ("Chi Cheung") at the total cost of $5,851,000.39. However, it is alleged that when, despite repeated demands for settlement, Corbin failed to put the Plaintiff in funds for the purchase, the Plaintiff liquidated the shares leaving a deficiency of $4,962,829.52 owing by Corbin. A demand for payment was made against the Defendant under the guarantee but no payment has resulted.

3. On 5 March 1999, after a Defence and Counterclaim was filed by the Defendant, the Plaintiff issued a Summons for summary judgment. It is supported by a verifying Affidavit provided by Leung Chi Ho dated 4 March 1999.

4. The Defendant has filed an Affidavit dated 21 April 1999 resisting the application. He states that because of his frequent travel on business, he entrusted the buying and selling of shares on his behalf to one Wong Wai Yi ("Wong").

5. The Defendant explains that in about July 1997, Wong asked him to sign the guarantee which forms the subject-matter of this Action, saying that this was necessary for trading through the Plaintiff company. The Defendant saw that the guarantee sought was in respect of trading by Corbin and, when he queried this, was told by Wong that since Wong already had an account with the Plaintiff, "it would be more convenient to use the existing account to buy and sell shares for [the Defendant]". The Defendant says that Wong told him that an unidentified broker working for the Plaintiff had said that the Corbin account could be used for the Defendant's transactions in this way provided that Wong's guarantee was given and that such guarantee would be limited to the buying and selling of shares on the Defendant's behalf. Wong also told the Defendant that Wong would notify him if the Corbin account was used on his behalf.

6. The Defendant says that he then, at Wong's request, signed the guarantee, leaving blank the space naming the customer for Wong to fill in.

7. The Defendant says that he did not in fact authorise Wong to buy the Chi Cheung shares and knew nothing of their purchase. He denies liability.

8. In his 2nd Affirmation, Leung Chi Ho ("Leung") confirms that Wong opened an account for Corbin in late 1996 and was asked to provide a personal guarantee. The account was opened on 14 January 1997 against Wong's promise to provide such a guarantee. When the Plaintiff later discovered that the guarantee had not been given, it wrote to Corbin pressing for the outstanding document. The documentation was received on 23 July 1997 and was presumably back-dated to 4 December 1996 to the time when the account was opened by Wong. Leung denies that Wong ever acted on the Plaintiff's behalf and denies that the Plaintiff was in any way concerned with any representations made to the Defendant by Wong.

9. On 18 May 1999, the learned Master made an order for leave to defend conditional on the Defendant paying $900,000 into Court. The Plaintiff brings this appeal, seeking final judgment in the amount claimed in the Writ.

10. Mr Kenneth Ng, who appears for the Plaintiff, invites me to approach the case on the assumption, for present purposes, that the Defendant's allegations of fact are true. He submits that on the basis of such facts, no triable defence is disclosed. In particular, no triable defence of mistake in any form, whether at common law or in equity, whether mutual or unilateral. He therefore submits that the Master should have given judgment and not conditional leave to defend.

The terms of the Guarantee

11. The Guarantee is in the form of a letter addressed to the Plaintiff. In large font and capital letters at the top of the document, it states: "Unlimited Continuing Guaranty". Underneath that heading are three boxes, all of which have been filled in. The first is for "Name of Account" and this contains the words "Corbin Profits Ltd." The account number and Corbin's address are given in the other two boxes.

12. The body of the letter, so far as material, states as follows :-

"Dear Sirs,

In consideration of your acting as brokers &/or principals for [blank], hereinafter called the 'Customer' in executing orders to buy, sell and deal in Commodities (as hereinafter defined) and securities of all kinds, the undersigned hereby guarantees the payment to you of all commissions, fees, expenses or charges which may be incurred in the execution of such orders, the payment to you of the purchase price, or the delivery to you (as the case may be) of such Commodities and securities of all kinds and the payment of any losses which you may sustain upon said Customer's account by reason of insufficient margin or otherwise. .......

This shall be a continuing Guaranty for any such indebtedness which the Customer shall incur to you, in accordance with the rules and customs of any exchange upon which the Customer's orders are executed and in accordance with any special agreements now or hereafter existing between you and the Customer.

It is expressly agreed that this Guaranty shall continue for any present or future accounts that the Customer may have with you.

.......

You are hereby authorized to hold any and all equities, securities and monies on any account or accounts which the undersigned may have with you directly or indirectly as security for any loss or debit balance due or owing by the Customer to you. You are further authorized from time to time, whenever you deem it necessary for you[r] protection, to transfer any such securities or monies to the account or accounts of the Customer without notice to the undersigned, free and clear of any further claims of the undersigned therein or thereto. Any equities or securities so held or transferred may be liquidated, hypothecated and rehypothecated in accordance with the terms of the hypothecation agreement of the Customer and/or the undersigned with you, or with any subsidiary or affiliate of yours. Any demand for the performance of this Guaranty, the assertion of enforcement by you of such lien, or any transfer or transfers of securities or monies shall not release or affect such lien or release the undersigned as guarantor or otherwise affect this Guaranty or the liability of the undersigned for any debit balance or loss incurred to you by the Customer, it being the intention of this instrument that you shall at all times have any and all remedies herein and by law provided to protect and compensate you against any loss or debit balance incurred to you by the Customer.

This Guaranty shall not be affected or discharged by your omission to take action upon the principal debt, or any collateral held by you for its payment, and no notice need be given to the undersigned of any default on the part of the Customer. ......."

Primary liability

13. In the course of the hearing, it emerged from the pleading, as confirmed by Mr Ng, that the Plaintiff has not taken any action against Corbin to recover the sums outstanding (although it was later disclosed that a statutory demand for payment has been made). The Statement of Claim pleads that a demand was made of Corbin to put the Plaintiff in funds for the cost of the Chi Cheung shares and that, when Corbin failed to do so, the Plaintiff sold them. However, there is no plea of a demand for payment of the balance after liquidation of those shares. A possible issue arose as to whether, in the absence of a demand and a default on the part of Corbin, the Defendant's liability under the guarantee was triggered.

14. Having called for the original of the guarantee, I am satisfied that on its true construction, the Defendant undertook primary liability to pay to the Plaintiff or to satisfy (for example from its own securities held by the Plaintiff) all debts incurred and other sums owing by Corbin. There is no requirement that the Plaintiff first establish a default on the part of the Corbin and indeed, the parties agreed that no notice need be given to the Plaintiff of any default on Corbin's part. This is so notwithstanding that the document calls itself a guarantee rather than an indemnity. Accordingly, I am satisfied that no triable issue arises on this point.

Defence of mistake

15. Mr Clifford Smith, appearing for the Defendant, argues principally that a triable defence of mistake arises. He confirms that the suggestion in the Defence that Wong had made misrepresentations to the Defendant on behalf of the Plaintiff is not pursued.

16. The core of the Defendant's case on mistake is formulated in Mr Smith's skeleton argument as follows:-

"The parties were at cross purposes. The Plaintiff believed that the guarantee was given by the beneficial owner of Corbin, and that it was intended by the guarantor to cover all the liabilities of Corbin which arose out of share transactions done on the Defendant's own behalf. This being so there was an essential and radical difference between what each party believed to be the subject matter of the contract of guarantee. The mistaken beliefs of each party were not held unreasonably. The Defendant is thus entitled to relief on the grounds of mistake either at common law or in equity: Associated Japanese Bank v Credit du Nord [1989] 1 WLR 255 at 268-9 and 270. "

17. Mr Smith invites me to find that the assumed facts should lead the Court, applying equitable principles, to set aside the contract on terms. He suggests that such terms may involve the Court holding that the Defendant is liable only in respect of those trades executed on the Corbin account on his instructions or liable for all the transactions of that account if it should be shown that the Defendant was a shareholder of Corbin. This approach, he submits, should result in the Defendant being given leave to defend.

18. Before going into the detailed application of the law of mistake, I should mention that I have considerable doubts whether I should entertain any question of mistake at all on the present facts. The Guarantee, as set out above is in a written document, signed by the Defendant, a person of full age, who admits that he knew that the document was a guarantee of Corbin's account but nevertheless signed it in reliance on Wong's assurances, as previously mentioned, and without any allegation of misrepresentation by the Plaintiff or of knowledge of Wong's representations on the Plaintiff's part. In such circumstances, there is no question of the Defendant raising a defence of non est factum as Mr Smith acknowledges. Accordingly, in the usual course, the Defendant is bound by his signature on the document and would have been so bound even if he had not bothered to read it: Chitty on Contracts, 27th Ed., §5-032.

19. In any event, I have come to the conclusion that the defence of mistake is a non-starter in the present case. In the first place, it is clear to me that the mistakes identified by Mr Smith are not mutual. Even assuming that the Plaintiff believed that the guarantee was given by the beneficial owner of Corbin, this was in no way a mistake shared by the Defendant. He knew full well that he was not Corbin's owner. And assuming that the Defendant genuinely believed, on the basis of what Wong had told him, that the Guarantee would only cover the liabilities of Corbin on share transactions done on the Defendant's behalf, this notion was not even remotely shared by the Plaintiff.

20. I would add that even if there had been a mutual mistake to such effect, the requirement, reiterated in Associated Japanese Bank v Credit du Nord [1989] 1 WLR 255, that the mistake be held on reasonable grounds in my view would preclude the Defendant's reliance on the defence in this case. A belief that his liability would be limited to Corbin's trades on his behalf, formed solely on the basis of what Wong said, flying in the face of the Guarantee's express terms which state that the liability is unlimited, is not a belief held on reasonable grounds.

21. Given that it is not a mutual mistake, does the doctrine of unilateral mistake assist the Defendant? In my judgment, the answer is plainly "No". Whatever doubts there are about the full scope of this defence, it is clear that a unilateral mistake cannot avail a party where the mistake is made without the knowledge of the other party: Chitty, §5-020 et seq. There is no suggestion of any such knowledge in the present case.

Other reason for trial

22. A further point raised by Mr. Smith and put forward by him as another reason for allowing this matter go to trial involved what he called the big difference between the buy and sell prices involved in the liquidation of the Chi Cheung shares. However, there is no suggestion either in the evidence or in his submissions that the prices, which have been disclosed by the Plaintiff are in any way wrong. There is therefore no basis for doubting the correctness of those prices and in my judgment, this point does not provide any reason whatsoever for a trial.

Conclusion

23. In all the circumstances, I hold that the Defendant has disclosed no triable defence. I therefore allow the appeal and order that there be Judgment for the Plaintiff in the sum of $4,962,829.52 with interest. Interest will run at the HSBC best lending rate + 2% from 16 October 1998 until today's date and thereafter at the judgment rate. The Plaintiff is to have the costs of the Action to be taxed if not agreed.