HERAEUS LTD v. CHAN YUN MUI AND ANOTHER

HCA 878/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 878 OF 2011

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D E C I S I O N

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THE APPLICATIONS

1.  There are 2 summonses before the Court:

(a)   The 2^nd Defendant’s (“D2’s”) Summons dated 29 September 2017 applying to amend D2’s Summons dated 6 February 2017 (“the Amend Summons Application”).  The amendment applied for is to put in a revised draft Re-Re-Amended Defence and Counterclaim of D2, in the form as attached to this Summons, so as to amend D2’s Re-Amended Defence and Counterclaim, which D2 asks the Court to allow him to.

(b)   D2’s Summons dated 6 February 2017 to amend his Re-Amended Defence and Counterclaim (“the Amendment Application”), in the form of the latest draft Re-Re-Amended Defence and Counterclaim (if the Amend Summons Application is allowed).

2.  The Plaintiff (“P”) contests, but agrees to deal with both summonses on the basis of the Revised Draft.

3.  Both parties are legally represented.[1]

FACTUAL BACKGROUND

4.  I shall adopt D2’s written submissions on the factual background as stated below.

5.  P at all material times was and is a manufacturer of precious metal products.  D1 and D2 were the beneficial owners of all the issued share capital of Sing Kwong Jewellery & Gold Company Limited (“Sing Kwong”), a company which since 1970s and up to its liquidation on 1 December 2008 carried on the business of manufacturing and trading precious metal products.  Sing Kong had been doing business with the Plaintiff since 1995.

6.  In this action, P sues D1 and D2 as guarantors pursuant to two Guarantees dated 12 November 2002 (“the November 2002 Guarantee”) in respect of Sing Kwong's alleged liabilities to P accrued from May 2006 to 11 May 2011 in the amount of HK$8,321,486.94.

7.  D2’s case (before the present amendments sought) was that he was not liable under the November 2002 Guarantee by reason of the following (with reference to the Re-amended Defence and Re-amended Counterclaim of D2):

(a)   D2 does not recall ever signing the November 2002 Guarantee and disputes its authenticity;

(b)   Even if he did sign the same, he relied on the doctrine of non est factum;

(c)   Alternatively, he signed the November 2002 Guarantee induced by fraudulent or negligent misrepresentation of P;

(d)   Further or alternatively, the November 2002 Guarantee is invalid and not enforceable due to material non-disclosure by P;

(e)   Further or alternatively, his liability under any guarantee given in favour of P only covered any amount in excess of HK$20M owed by Sing Kwong.[2]

8.  D2 submits that what the current revised draft seeks to do is to set out a new plea of the legal consequences of the said business model between P and Sing Kwong, i.e. by the time Sing Kwong chose to pay for a particular consignment and had the price fixed, P would have been paid the amount because of the payments made (post-dated cheque, cash and/or top-up).  There should not be any outstanding, unpaid, amount for the consignment. The issuing of the invoice and setting the price was only an accounting exercise. The additional plea of certain invoices charging too much finance charges and one invoice having double-counted is supported by the report of RSM.[3]

9.  D2 relies upon the following authorities in support of his application:

(a)   MGM Grand Paradise Limited v Chiu Tak Wah (unreported, HCA  259/2012, 8 October 2012, B Chu J) that the court should pay heed to Order 1A RHC and look at the substance rather than the form.

(b)   O.20 r.8 of the Rules of High Court (Cap.4) (“RHC”) also provides:

(1)   For the purpose of determining the real question in controversy between the parties to any proceedings, or of correcting any defect or error in any proceedings, the Court may at any stage of the proceedings and either of its own motion or on the application of any party to the proceedings order a pleading or any other document in the proceedings to be amended on such terms as to costs or otherwise as may be just and in such manner (if any) as it may direct.

(1A)  The Court shall not under paragraph (1) order pleading to be amended unless it is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.

(c)   The Court’s approach as summarized in Hong Kong Civil Procedure 2018, vol.1, §20/8/6 at 512.  In gist, amendments ought to be made “for the purpose of determining the real question in controversy between the parties to any proceedings or of correcting any defect or error in any proceedings; the Court is to decide the rights of the parties, and not to punish them for mistakes they make in the conduct of their cases by deciding otherwise than in accordance with their rights; unless the party applying was acting mala fide, or that, by his blunder, he had done some injury to his opponent which could not be compensated for by costs or otherwise, the application should be allowed.”

(d)   On the timing of an application to amend, see Hong Kong Civil Procedure 2018, vol.1, §20/8/9 at 515: Subject to the conditions under r.8(1A), as a general rule, however late the amendment is sought to be made, it should be allowed if it will not do the opponent party any injury or prejudice him in any way that cannot be compensated.

10.  P has no argument with the above legal principles.

11.  D2 notes that the major opposition to the proposed amendment by P is based on the “conclusive evidence” clause in the November 2002 Guarantee. D2 argues that there is at least an arguable case that the clause is not applicable in favour of P because of (i) fraud and (ii) manifest errors.  These two issues are hotly contested between P and D2 in this hearing.

DISCUSSION

Acceptability of the conclusive evidence clause

12.  D2 relies upon the English Court of Appeal in Bache & Co (London) Ltd v Banque Vernes et Commerciale de Paris SA [1973] 2 Lloyd’s Rep 437 that such a clause was “only acceptable” because it was usually granted in favour of bankers or brokers who are known to be honest and reliable men of business and who are most unlikely to make a mistake (see 440 per Lord Denning MR).  This consideration manifestly does not apply to P.  D2 therefore submits that the original justification for the acceptance of a conclusive evidence clause does not apply.

13.  It is important to understand the above submissions within the proper context of the judgment of the Court of Appeal.  The headnote of the judgment summarized the reasons of Lord Denning, M.R. and Megaw and Scarman, L.JJ that, as a matter of principle, the conclusive evidence clause was binding according to its terms and the clause was not contrary to public policy because it was the commercial practice for such bank guarantee to be demanded; further, if the figure should be erroneous, it was open to the trading company to have it corrected by instituting proceedings against the brokers.  The cited part of Lord Denning’s judgment, read within the context, in my view, referred to the reliability of such conclusive evidence clause.  Therefore, Lord Denning said “… if a banker or broker gives a notice of default in pursuance of a conclusive evidence clause, the guarantor must honour it, leaving any cross-claims by the customer to be adjusted in separate proceedings.”  It must be borne in mind that it was an application for summary judgment under O.14 and the court had to consider the reliability of the notice issued under the conclusive evidence clause.

14.  It may be right for D2 to say that the consideration of reliability contributed to a broker or bank may not be equally applicable to the case of P in this case.  Since the Court of Appeal had held that this was a contractual term of the parties and it was not against public policy and should be given the full effects, I consider that D2 has stretched the interpretation of the judgment too far to say that the original justification for the acceptance of a conclusive evidence clause does not apply.

15.  There is no dispute by P that because of its draconian nature, a conclusive evidence clause is to be construed strictly, with any ambiguities resolved in favour of the guarantor: see Carey Value Added SL v Grupo Urvasco SA [2011] 2 All ER (Comm) 140 at §41 per Blair J. and any condition precedents for triggering the clause must be strictly observed: Ho Ming Pui Andy v Midland Realty (Strategic) Ltd (HCA 1699/2012, 6 August 2014) at §20 per Chow J.

16.  P also has no dispute over D2’s submission that the Court should always treat any reliance on a conclusive evidence clause, especially when relied upon by entities other than banks or brokers, with extreme care and caution.  As a matter of general principles, an amendment to a pleading should only be shut out for want of arguability in the clearest of cases, and where the argument relied upon by the opposing party is based on a conclusive evidence clause the need of absolute clarity is even higher. 

Fraud

17.  D2 relies upon Bache at 440 per Megaw LJ; North Shore Ventures Ltd v Anstead Holdings Inc [2012] Ch 31 at §50 per Sir Andrew Morritt C, which held that fraud is a defence to the reliance of a conclusive evidence clause.

18.  P does not dispute the above authority.

19.  D2 relies upon the reason of the facts now pleaded in the revised draft, as verified in the Affirmation of Thomas Chu, that in the knowledge of P, there could not have been any unpaid invoices owed by Sing Kwong, including those sued upon even if the goods were delivered.  D2 therefore submits that it is clear that the present claim is knowingly false and is therefore fraudulent, and so is the Amended Statement of Claim which purports to be the conclusive evidence of the amount due by Sing Kwong.

20.  In response to this allegation of fraud, P submits that this is a new ground manufactured by D2 in his application for amendment and it has made the comments below.

21.  P submits that it is trite that fraud may only be pleaded (1) when there is sufficient evidence and (2) it must be specifically pleaded and the party making the allegations must give full particulars of them. 

22.  P submits that D2 had not made such allegations in his previous pleadings.  The lack of bona fide is evidenced by the fact that in the draft appended to the 1^st Summons and his affirmation evidence, D2 claimed it was he who settled the remaining outstanding indebtedness in 2009.^[4] This contradicts the allegation that all Invoices would have been paid by the time of issuance.

23.  Secondly, the plea of fraud lacks essential particulars.  For instance:

(a)   D2 fails to give particulars as to when and how the deliveries referred to in the Invoices were in fact paid for by Sing Kwong;

(b)   D2 fails to identify a natural person of P who is allegedly behind the fraud. 

24.  Thirdly, there is no, or no sufficient, evidence to support the allegation of fraud.  In order to make out the case of fraud, D2 has to prove, amongst other things, (a) that there was such a practice between Sing Kwong and P as alleged in the Revised Draft; and (b) that the goods delivered as referred to in the Invoices were in fact paid for by Sing Kwong. None of such evidence has been proffered by D2.  

25.  Fourthly, it is contrary to the contemporaneous evidence of (a) Sing Kwong’s written acknowledgement of indebtedness; (b) admission of indebtedness by D1 (who, on D2’s own pleaded case, had been managing Sing Kwong to the exclusion of D2), and (c) Sing Kwong’s, via D1 and Thomas Chu, acknowledgement of indebtedness owed to P in the contemporaneous correspondence. 

26.  Fifthly, even if there had been any manifest errors in the amount of indebtedness claimed against Ds, such errors could hardly be an evidential basis to support a case of fraud. 

27.  At this hearing, Counsel for P further submits that the application for amendment to plead fraud should not be allowed as according to the authorities of Lo Ka-chun v Lo To & Another (unreported, HCA 2015/1980, 28 February 1985 para. 207F) and the Court of Appeal case of Marquis Trading Co (a firm) v Associated Bankers Insurance Co Ltd (unreported, CACV 68/1981, 4 June 1982 at page 9)

28.  In my view, if D2 succeeds in raising a prime facie case of fraud against P, the matter has to be investigated and if found to be true, the conclusive evidence clause is not binding upon D2.  The real question is, as we have been dealing with the defence raised in the Order 14 applications, whether D2’s defence of fraud, under the relevant circumstances, is believable.  Having considered the following circumstances, I find that D2’s defence of fraud is not believable:

(a)   Given the proposed amendments of the modes of payments for the goods delivered, D2 says that there should not be any outstanding indebtedness for the goods delivered by P to Sing Kwong as the accounts will be updated and balanced on a daily basis.  In §14 of the 4^th affirmation of Chu Kwok Hung Thomas, Mr. Chu said “…there would never be any situation where an invoice issued by the Plaintiff to the Company would be ‘unpaid’.”  It cries out for explanation for D2 to allow the schedules attached to the Statement of Claim to be pleaded there since the service of it on D2 in 2011, some 6 years ago.  Up to date, there is no explanation from D2.

(b)   Obviously, the application for pleading fraud is late.

(c)   D2 admitted that he was not involved in the operation of Sing Kwong for the period of the debts incurred. D1 was the one who operated the business.  He was interested in property investment himself.

(d)   D1 had never pleaded fraud against P in respect of the debts in the Statement of Account.  D1 is ready for trial as her case stands.

(e)   D2 has in the previous proceedings confirmed by way of his Listing Questionnaires that he was ready for trial without applications for amendment of his pleadings.

(f)   D2 was a party to the proceedings and he attended the hearing of D1’s application for leave to amend her pleadings, which application I disallowed.  Immediately after the hearing, I delivered my reasons for my Decision and then dealt with the directions on leave to be given to P to set down for trial. D2 had raised no objection to leave being given.  If he genuinely believed that P’s claims were fraudulent, he would have raised it at that stage because he had not pleaded fraud in his Defence. He agreed that the matter could be set down for trial.  This clearly shows that this allegation of fraud was made up recently.

(g)   D2 explains that he was not involved in the business and he was not capable of dealing the matters.  It was not until in 2016 when his son Thomas Chu who took up the matter, the issues were unearthed. I find such reasons unattractive as the matter has been going on for over 6 years.  The action was instituted on 25 May 2011.  Mr. Thomas Chu was involved in the legal proceedings shortly after May 2011.  See paragraphs 34-35 of his affirmation [p.54, bundle A].

Manifest errors

29.  D2 relies upon the second limb of manifest errors of the conclusive evidence to argue that he is not bound by the Statement of Account.  This Court and Deputy High Court Judge Douglas Lam SC had found that the Statement of Claim had constituted the Statement of Account under the conclusive evidence clause.  See my Decision dated 9 December 2016 at §43 in his Reasons for Decision dated 12 April 2017 at §56 respectively.

30.  There had been discussion on the meaning of “manifest errors” in my previous Decision and the Reasons for Decision of Deputy High Court Judge Douglas Lam SC.  Those hearings are in respect of D1’s application for amendment of her Defence.

31.  D2 now revisits this issue and submits that the error needs not be demonstrated “immediately and conclusively” but can be shown by the guarantor’s reading of the statement with reference to his knowledge of the arrangement between the parties concerned.  He relies upon the judgment of Sir Andrew Morritt C at §§51-54 (with whom Tomlinson LJ agreed) and Smith LJ at §§59-61.

32.  Sir Andrew Morrit C said in his judgment at p.52E “The statement was made in the context of his earlier conclusion that there had been a variation of the Loan Agreement.  But I read it as clear justification for a conclusion that if there had been a variation then there was a manifest error.”

33.  It will be easier to demonstrate the meaning of “manifest errors” by reference to the clear expression in Smith LJ at §61 where he said

“... In the present case, the guarantors were able to recognize immediately that the certificate was based upon the interest rates as set out in the original loan agreement and not as varied in November 2004. They could see that it was manifestly incorrect. They could not immediately demonstrate that conclusively; they could not do so until the court had determined the issue of variation. But they were right, as this court has now held. …”

34.  It is quite clear that the starting point must be the error on the Statement of Account being apparent to the guarantor, who might not be able to come down to the amount of the error.  But the error must be apparent on the face of it.  This is consistent with the purpose of a conclusive evidence clause, which is to obviate extensive and complicated investigation and calculation of the indebtedness.

35.  D2 also relies upon In Re Skydon Development Ltd [2013] 1 HKLRD 949, Harris J considered affirmation evidence of the party seeking to demonstrate manifest errors in the context of expert valuation. The headnote of the report is clear.  The court found:

“A ‘manifest error’ was an error which could be readily demonstrated. In the context of an expert valuation, it would be an error which was ‘plain and obvious’ on the face of the document concerned. Here, the parties’ agreement was intended to, and did, prevent the parties arguing about the valuer’s methodology or valuation assumptions. They could only object to the valuation if it contained a clear mistake, which could be demonstrated quickly and was not open to serious debate. Examples included arithmetical errors or basic mistakes about the number of shares P held in C (Dixons Group Plc v Murray –Oboynski [1997] All ER (D) 34 applies)”

This judgment clearly defines the meaning of manifest error and the purpose of the conclusive evidence clause.

36.  To say that a manifest error can be shown by way of evidence, and by reference to the actual business arrangement, between the parties, and is not confined to what is shown on the face of the certificate is clearly inconsistent with the above authority D2 relies upon.  The error can only be further investigated if it is apparent on the face of the Statement of Account, as according to Smith LJ, supra.

37.  D2’s submissions that the Statement of Account should not take effect because of the non-existent debts, double charge on certain items or the excessive interest are not acceptable for the following reasons:

(a)   If all items are non-existent, that must be obvious to D1 too, who was in active operation of the business.  Not only had she not raised it, she had negotiated with P on the way to settle the indebtedness.

(b)   It should also be obvious to D2 in 2011 when the Statement of Claim was served upon him.  It is incumbent upon him to explain for his delay in making this application, notwithstanding the fact that he had represented to the court in the Timetabling Questionnaire and Listing Questionnaires (altogether 3) that he had no interlocutory applications to take out.  There is simply no explanation from D2 for the delay.  Delay may not be detrimental to an application for amendment.  However, in this case, delay without explanation can be fatal because to allow D2 to amend as proposed would allow D2 to restructure his pleaded case, making the matter very complicated.  In the 4^th Affirmation of Chu Kwok Hung Thomas at §6, D2 would have to obtain the excel file of KU-6 which contained thousands of alleged accounting entries and he had to rely upon expert evidence.  See §11 of the same affirmation.  This will offend Order 20, r.8 (1A) RHC, which provides that leave should not be given if such amendment is not necessary either for disposing fairly of the cause or matter or for saving costs.

(c)   Double charge of certain items and the excessive interest will certainly require extensive investigation.  D2 has to rely upon expert report to support his allegations.  They are by no means manifest errors.

(d)   I note that the figure of $8,321,486.94 is inconsistent with the sum as added up by Senior Counsel on the Statement of Indebtedness.  There is a shortage of $125,000.  This is to the benefit of D2.  It is clear that it is an arithmetical error, which can be rectified easily.  P can rectify it by way of amendment.  Such inconsistency is manifest error.  But it does not require the restructuring of D2’s Defence as he is now proposing by his proposed amendments.

38.  No doubt, if D2’s proposed amendments were allowed, the matter will become very much complicated and the investigation into the accounts over the years will be a heavy burden for the parties.  The costs will be substantial.  It can be seen that the time for the trial will be delayed for years.

39.  If D2 is unable to argue that the Statement of Account is not binding upon him for the reasons of manifest errors or fraud, this Court should not allow the amendment as such amendments will have no chance of success in the trial.  They will only complicate the matter and incur more time and costs unnecessarily.  The trial will then become unduly prolonged. The court will find it difficult to conduct a fair trial.  See A. Chan J. in Bank of China (Hong Kong) Ltd v Leigh Hardwick (unrep. HCA 1110/2006, 29 August 2013) at § 2.

40.  For the reasons above, D2’s summonses have to be dismissed.  So I order.

COSTS AND ORDER

41.  As to the costs of these applications, including the costs reserved and for today’s hearing (with Counsel’s certificate), P should have the costs, on an indemnity bases as accordingly to the agreement, with a certificate for counsel.  The parties agree the sum of $180,000 for the costs.  So I order.

42.  This Court now makes an order in terms as follows:

(a)   D2’s summonses be dismissed;

(b)   The costs be as per paragraph 41 above.

CASE MANAGEMENGT

43.  P be at liberty to set down as per the court’s previous directions;

44.  The costs of this CMC (15 minutes) be in the cause.