JOIN TRADER LTD. v. KWONG PO LAM AND ANOTHER

HCA 4276/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4276 OF 2001

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REASONS FOR DECISION

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1. This is an appeal from a decision of Master K Y Chan of 8 March 2002 dismissing the plaintiff's summons for summary judgment against the defendants under the provisions of Order 14. At the hearing I dismissed the appeal with costs to the defendants and now give my reasons for so doing. The background to the dispute between these parties is set out in my decision of 19 July 2002 allowing an appeal against an order that the plaintiff pay security for costs, which I repeat here.

2. These proceedings arise out of a failed transaction for the sale by the defendants and purchase by the plaintiff of the shares of a company called Key Ball Ltd, which was a vehicle for the ownership of a property in Broadwood Road, Hong Kong. One requirement of the agreement for sale and purchase was that the shareholders and directors of Key Ball Ltd, the defendants, sign a guarantee that the company had no hidden, or possibly any, debts. It is the plaintiff's claim that the defendants were in breach by not signing an effective guarantee.

3. The only issue arises out of the clause in the agreement as to the guarantees to be given, and whether the guarantees themselves comply with it. I will set out both here. The English translation of the clause, 2(c), of the agreement, which the parties accept for the purpose of this hearing, reads as follows:

"(c) The shareholders of the vendor (1) Kwong Po Lam (2) Luckjade Holdings Ltd. are willing to provide personal guarantees to guarantee that the aforementioned company does not have any hidden items of liability and the vendors are also willing within 6 days to proceed to a firm of solicitors to sign a guarantee to show that the said company does not exist (sic) any item of liability. Otherwise the vendor shall be obliged to refund the deposit and another sum equivalent to the amount of deposit."

This agreement was signed on 5 September 2001 and the completion of the procedure for transfer of the shares was fixed to be not later than 5 November 2001. The guarantees were signed on 11 September 2001 and are in similar terms, again in an agreed translation for this hearing, as follows:

"I, Kwong Po Lam hereby guarantee that save and except that "KEY BALL LIMITED" has mortgaged the aforesaid company's property, namely "Flat D1 on the 34th Floor of Block D and Car Parking Space No. 43, Car Park Level 2, Beverly Hill, No. 6 Broadwood Road, Hong Kong" to Dao Heng Bank Limited, the aforesaid company will not have any hidden items of liability as at the date hereof."

4. The plaintiff's complaint in respect of these guarantees is that they firstly fail to state that the company has no item of liability at all, and secondly, that they only guarantee "up to the date hereof" rather than up to the date of completion.

5. As to the first, the question is what is meant by "hidden items of liability". The obvious and natural meaning of these words seem to me to be items of liability of which the plaintiff is unaware, or would normally be unaware. Indeed, as a matter of common sense, the purpose of such a guarantee must be to ensure that the plaintiff either knows of any liabilities which it might inherit upon purchase of the company, or has a guarantee that there are none. There is no evidence before me that any debts were either known to the plaintiff, or had previously been revealed, or ought to have been known. It must follow that any debt is a "hidden" debt, i.e. hidden from the plaintiff. It is therefore at least arguable that by guaranteeing that the company has no hidden debts, the guarantors are saying that there is no debt at all. This would comply with both descriptions of the debt in the agreement: "hidden items of liability" and "any item of liability". The fact that there is a mortgage, known to the plaintiff from the land search, and mentioned in the guarantee, helps neither party at this stage. It puts the plaintiff on notice that there may be a debt, but it may equally be a mortgage for banking facilities which have never been used. By guaranteeing that there are no hidden debts, the defendants are saying that there is nothing owed to the bank secured by that mortgage either. Whether that is what they intended to say is a matter for evidence at trial.

6. The second matter is whether the guarantees should have covered the period up to completion, rather than merely the date they were made. For this I return to the wording of the agreement itself which is very clear in that the tense used is the present, using "does not" twice in respect of the company's liability. The guarantees follow this faithfully by reference to "the date hereof". Mr Lee submits that this means that the guarantees do not cover any liability between that date and the date of completion two months later, and further liability could arise, for instance the rates payable to the government on 1 October. He says that the clear intention of clause 2(c) was to guarantee that there would be no liabilities as at the date of completion.

7. This, I regret, is where I part company with his arguments, as this is not what clause 2(c) says. It may well have been what the parties intended, which again is a matter for evidence at trial, but it is not what was put into the agreement and which was signed by the parties. I agree that it makes little sense to have a guarantee at a date other than that of completion, for the assurance that the plaintiff needs, but if both sides willingly enter into an agreement so badly drafted that it does not provide that assurance, what they in effect agreed, and intended the agreement to mean, must be a matter for trial. As a matter of pure construction, the guarantees are in accordance with the agreement. If that is not what the plaintiff wanted, then the agreement should not have been signed in this form.

8. For these reasons I found that it is clear that there are arguable defences to this claim and the master was correct in dismissing this application.