XCHRX NANYANG COMMERIAL BANK LTD. v. FUNG PIU AND OTHERS

HCA 13559 of 1998

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. This is an appeal from an Order of the Master:-

(1) granting summary judgment against the 1st, 2nd and 3rd Defendants in respect of various Guarantees given by the three Defendants;

(2) refusing to set aside the Default Judgment entered against the 4th Defendant in respect of two Guarantees given by the 4th Defendant.

2. Foshan Shi Wan District Planning Commission ("the Commission") was at all material times the beneficial owner of a PRC company Foshan Shi Wan Sunfame Enterprise Development Corporation ("Foshan Sunfame"). The Commission and Foshan Sunfame desired to do business in Hong Kong and two Hong Kong companies, Sunfame Holding Ltd. ("Sunfame") and Wah Shan Company Ltd., the 4th Defendant were set up by the 1st, 2nd and 3rd Defendants, who were at all material times the shareholders and directors of Sunfame and of the 4th Defendant.

3. In early 1994 Sunfame opened a banking account with the Plaintiff Bank and some months later in September 1994, in order that substantial banking facilities could be granted to Sunfame, the 1st, 2nd, 3rd and 4th Defendants all gave Guarantees to the Plaintiff to answer for all the debts of Sunfame. There were the 1st Guarantee dated 24th September 1994 by the 1st and 2nd Defendant in the sum of $13 million, the 2nd Guarantee dated 27th September 1994 by the 3rd Defendant in the sum of $13 million and the 3rd Guarantee dated 27th September 1994 given by the 4th Defendant in the sum of $13 million. Some 5 months later, in February 1995, the 4th Guarantee dated 22nd February 1995 was given by the 4th Defendant in the sum of $7 million. Then finally on the 30th of December 1996, the 5th Guarantee was given by the 1st, 2nd and 3rd Defendant in the sum of $11 million. Large advances were made by the Plaintiff to the borrower, Sunfame and when Sunfame did not repay the loans, the Plaintiff called upon the Defendants to repay the loans under the respective Guarantees.

4. There is no doubt that large sums were outstanding by the borrower Sunfame to the Plaintiff bank and there is also no doubt that the five Guarantees were properly signed and enforceable. The question is whether they are enforceable against the four Defendants. Miss Chan for the Defendants raised two defences to the claim:-

(1) The Agency Defence:- that each and every one of the Defendants and Sunfame in entering into the relevant banking documents with the Plaintiff, the Guarantees and the General Commercial Agreement and Letter of Indemnity for Shipping Guarantees were doing so as agents for the Commission and for Foshan Sunfame and that the Plaintiff bank had full knowledge of this ;

(2) The Conditional Guarantee Defence:- that the validity of the Guarantees given by the Defendants are conditional upon the giving of a Guarantee to the Plaintiff by Foshan Sunfame or the Commission.

AGENCY DEFENCE

5. There are three obstacles to the Agency Defence:-

(1) liability of principal is additional to the liability of the agent;

(2) parol evidence rule;

(3) the defence is incredible and cannot be believed.

Additional liability of Principal

6. I should start immediately by saying that I do not know of any case and no direct authority has been cited to me to suggest that the law has recognised in any decided case such an Agency Defence. The underlying assumption of the Agency Defence is that the Defendants who signed the Guarantees without any qualification of agency thereby escape liabilities and their liabilities under the Guarantees are replaced by the liability of the alleged principal. That assumption is erroneous and has no true basis in law. I accept the oral and written submission of Miss Cheng (paragraph 7) that the liability of the alleged principal is additional to and not in substitution of the liability of the agent. Whether it is a situation of an undisclosed principal or of a disclosed principal, the agent is still liable under the contract which he had contracted in his own name. The passage in paragraph 8-003 of Bowstead & Reynolds on Agency, 16th edition made the point very clear and in relation to the situation of disclosed principal which is the case relied on by the Defendants, there is never any doubt that the agent is liable (see Higgins v Senior (1841) 8 M. & W. 834 and Basma v Weekes [1950] A.C. 441 at 451). The inability of the Defendants to overcome this obstacle is therefore fatal to the Agency Defence.

7. Strictly speaking it is unnecessary to consider the other two obstacles. But for the sake of completeness, I will briefly state what are my conclusions on the other two obstacles.

Parol Evidence Rule

8. The parol evidence rule is a rule of long standing which prohibits the introduction of oral evidence to vary or contradict the terms expressed in the written document. The usual situation encountered by the Courts in relation to a written contract between party A and party B is an attempt by party B to introduce oral evidence so as to add a new term or clause to the written contract or to alter a particular term or clause (of course to the advantage of party B). What is unusual in this case is the attempt by party B to introduce oral evidence to suggest that the party to the contract is not party B but a totally new person, party C and that only party C should be liable and not party B. There can be no doubt that the Agency Defence offends against the very heart of the parol evidence rule. Is there an arguable legal basis for the non application of the rule here.

9. It is to be noted that what we are concerned with is not the alleged principal, party C making a claim to say that he together with his agent party B can both sue party A. Nor are we concerned with a case where the opposite situation applies namely that party A suing both party B and party C, saying that both party B (the one who signed the contract) and party C (the alleged principal) should be liable. What is novel here is not an additional liability of the alleged principal but the substitution of the liability of an alleged principal for the liability of an agent who signed the contract (with no qualification of agency).

10. In reliance upon this Agency Defence, Miss Chan referred me to the two passages at paragraph 12-098 and 12-099 in Chitty on Contract. In my view the passages and the cases referred to therein do not assist the Defendants. The case of Young v Schuler (1883) 11 Q.B.D. 651 merely shows that where the oral evidence does not contradict the document then it is admissible. The case of Yeoman Credit v Gregory [1963] 1 W.L.R. 343 turns on the special law on bills of exchange and has no general application to parol evidence rule governing contracts. The significance of the parol evidence rule is that oral evidence is not permitted to contradict the express term of the contract and in this case the contradiction is of the most fundamental nature, not just a clause of the agreement but identity of the very person who was agreeing to the liabilities under the Guarantee.

11. It cannot be doubted that in a case of a guarantee, the identity of the guarantor is of fundamental importance. A bank will grant or not grant a facility depending on the identity of the particular guarantor. To suggest that it is no breach of the parol evidence rule or that there is such an exception to the parol evidence rule as to allow parol evidence to be given so as to substitute one identified and known guarantor stated in the written contract for some other guarantor to be identified by parol evidence is to rewrite the law of contract as is generally known. As I put it to Miss Chan for the Defendants in the course of the argument that if she is right in her submission then this will be making new law to give an arguable defence to many guarantors to contend that it is really someone else's guarantee although they have signed their names as guarantors without any agency qualification. There is in my view no substance in this argument of the Defendants.

Agency Defence Incredible

12. The case of the Defendants is that the Plaintiff was at all material times well aware that all the banking documents signed by the Defendants and Sunfame the borrower were all signed by them as agents for Foshan Sunfame and the Commission, with no liabilities on the part of the Defendants and Sunfame. Reliance is placed by the Defendants on pages 91A and 101A of the Bundle as showing Plaintiff's knowledge of alleged agency. They do not. The Court is being asked to believe that the Plaintiff as reasonable banker, with knowledge of the known agency would allow documentation to be made and signed where not a word of such agency appeared in the documents. This I find wholly incredible. But what is more incredible, is that the Court is being asked to believe that as the same principals were involved, that different agents were asked by the Plaintiff to sign on the same day or 2 days later, identical documentation on behalf of the same principals for the same guarantee liability. Thus in relation to the 1st Guarantee of 24th September 1994, why were both the 1st and 2nd Defendant asked to sign the same Guarantee for the same principals and what was the point of 3rd Defendant and 4th Defendant signing the 2nd Guarantee of 27th September 1994 and 3rd Guarantee of 27th September 1994 respectively for the same principals when there was already in existence signed by another agent the same guarantee. The whole story is sheer nonsense. But what is even more incredible is that the Bank knowing the principals of the borrower were Foshan Sunfame and the Commission, the Bank nevertheless wanted to have the repeated Guarantees from the same principals who were also the borrower. The comedy of compounding of incredible story one on top of each other deserves only one fate, namely to be summarised dismissed as being unworthy of belief and consideration. The Defendants do not have a credible case of Agency Defence.

CONDITIONAL GUARANTEE DEFENCE

13. Miss Chan conceded that the conditional guarantee defence is a weak defence. She should concede more. The case of the Conditional Guarantee defence as I understand it is that way back in Febraury 1994 when the bank account was opened by Sunfame, it was already agreed by the Bank with the 4 Defendants that in relation to each of the 4 Defendants, the Guarantees which each would be giving in the future would be conditional upon one of their principals, namely Foshan Sunfame and/or the Commission giving to the Bank a bank guarantee. Some 7 months later the various Defendants gave the various Guarantees and therefore their Guarantees were all subject to the condition earlier agreed. I find that story incredible. But what compounds it is that in the light of the express agreement with the Defendants in February 1994, the Plaintiff bank would be content to allow documentation to be produced in the form of the 5 Guarantees which made no reference whatsoever to this condition. There is no documentary support for this story. In my view the above story of conditional guarantee does not have any chance of being believed and I hold therefore this defence also fails.

CONCLUSION

14. For reasons stated above, I am of the judgment that there is no bona fide defence to the claim of the Plaintiff and summary judgment is rightly given against the 1st, 2nd and 3rd Defendant and it is also correct for the Master to refuse to set aside the Default Judgment against the 4th Defendant. It follows therefore that the appeal of all the Defendants and the application for stay of execution must both be dismissed with costs which will be summarily determined by way of a gross sum assessment under Order 62 rule 4(9)(b), the hearing of which as agreed by the parties is at a date to be fixed.