FULL ARTS METAL WORKS LTD. v. KONG LAI CHAU

1996, No.A8184

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

---------------

---------------

____________________

J U D G M E N T

____________________

1. This is an appeal, by Notice of Appeal dated 10th November 1997, from the decision of Master Cannon dated 5th November 1997 whereby the learned Master granted the Plaintiff summary judgment and ordered that final judgment be entered against the Defendant herein in the sum of HK$3,380,036.23, together with interest and costs.

2. As Mr Pow, who appeared for the Defendant, told me, the background to this dispute arises from a share acquisition agreement of a company named Buildcon Building Supplies Company Limited ("Buildcon"). The Defendant originally had been the beneficial owner of Buildcon via his nominee Kambertech Limited ("Kambertech"), but in the event an agreement bearing the title Buildcon Building Supplies Share Acquisition Agreement ("Share Acquisition Agreement"), was entered into between the Defendant and Kambertech with, inter alia, the present Plaintiff and his nominee Eastop International Investments Limited ("Eastop"), whereby working capital was injected into Buildcon. In this regard, I was taken to Clause 6.1 of that Share Acquisition Agreement which provided, in effect, that the two sides would furnish financial assistance to Buildcon in a 65:35% split, whether such assistance be by direct capital injection or by third party borrowings underpinned by guarantees of Buildcon's indebtedness from Eastop and Kambertech respectively in, in substance, a like 65:35 ratio.

3. So far so good. But this Share Acquisition Agreement (or more precisely the breach thereof) does not provide the cause of action in this case. Subsequent to the Share Acquisition Agreement, the Plaintiff and the Defendant, together with Eastop and Guangdong Corporation Limited (which I am told, was effectively the financier of the present Plaintiff) entered into an agreement entitled "Agreement and Guarantee" made on 27th March 1995 ("the Agreement"), which is the agreement which forms the basis of the present action.

4. Recital C of this Agreement rehearses the Share Acquisition Agreement to which I have earlier alluded, whilst the relevant part of the body of the Agreement reads as follows :-

"In consideration of ... Full Arts' ... granting and continuing to grant, from time to time, financial assistance to Buildcon (including but not limited to guarantee), Mr Kong hereby agrees and undertakes to indemnify ... Full Arts ... from losses damages claims and demands which ... Full Arts ... may incur or sustain by reason or on account of ... Full Arts ... having given the financial assistance to Buildcon and Mr Kong shall pay to ... Full Arts ... on demand all sum of money which is now or may at any time hereafter become due and owing pursuant to this Agreement; provided that Mr Kong's liability hereunder shall not exceed thirty-five (35)% of the aggregate value of the financial assistance granted or provided by ... Full Arts ... to Buildcon and losses costs damages claims and demands which ... Full Arts ... may incur or sustain as a result of providing such financial assistance. Mr Kong hereby agrees and declares that this Agreement and Guarantee shall be binding on his personal representative and successors and assigns."

And it is the construction of this document which provides the present focus of this application.

5. Miss Lam, who appeared at short notice on behalf of the Plaintiff, and who put her case with ability, advanced her argument succinctly. The position is clear, she says. The Plaintiff has advanced the pleaded sum of HK$9,657,246.38 and the Defendant has to date refused to indemnify or pay to the Plaintiff the relevant 35% proportion, which at 13th July stood at HK$3,380,036.23; that is, the sum as claimed in the Statement of Claim, and for which the Plaintiff now has its judgment. Miss Lam maintained that the crucial question the Court needed to answer is whether, on a proper construction of the terms of the Agreement, the Defendant is liable to pay the Plaintiff the sum claimed or whether, as alleged, the Defendant was liable to pay the said sum only upon Buildcon's default. The terms of the Agreement are clear, she says. By providing financial assistance to Buildcon, the Plaintiff has incurred a loss of this amount, and a demand has been duly made. Ergo, the Defendant must pay. The Agreement was clearly a contract of indemnity, not of guarantee, although, in truth, argued Miss Lam, such classification was not crucial to the issue, and indeed served to deflect the true analysis.

6. Mr Pow, who opened the appeal for the Defendant, covered a number of topics in the course of an interesting address. In essence, however, he took two fundamental points.

7. First, if the Agreement was a guarantee as the Defendant contended, then the Defendant's liability was dependent upon the default of the principal, a matter which was neither pleaded nor adverted to in the Plaintiff's evidence. If this was correct, Mr Pow asserted, then he must get home.

8. Second, and in any event, the Defendant was not liable on the face of the true construction of the Agreement, since on the present state of play the Plaintiff has suffered no loss in the true sense, and therefore, whether or not the Agreement is a guarantee or an indemnity, the present claim does not fall within the stipulated liability of the Defendant. In this regard, he suggested that the term "loss" did not equate with a simple liability for 35% of the financial assistance the Plaintiff had ever granted to Buildcon.

9. Mr Pow also maintained that he was content to argue the issue solely on the material presently before the Court, absent any evidence from his client; indeed, I note that no affidavit has been put in on behalf of the Defendant.

10. The case, therefore, presented essentially as a construction issue, although in the course of Mr Pow's address some probing from the Bench elicited information as to the existence of three other pieces of litigation also concerning these or related parties and/or the Defendant's relationship with Buildcon, from which company, I understand, the Defendant has been summarily dismissed from his position as Managing Director. These other cases are HCA No.A8183 of 1996, Consolidated HCA No.A12560 and A14728 of 1996, and HCA No.4373 of 1997. The Court was usefully supplied with copies of pleadings in these cases, and indeed heard Counsel upon their subject matter. After some reflection, however, I am satisfied that if the present case is clear-cut enough to warrant the upholding of the existing judgment, then the existence of such other litigation should not interfere with that view; conversely however, if I am minded to uphold this appeal, so that a trial there must be in this case, there should, in my view, be an element of case management to ensure if possible that all these cases are marshalled to be heard before the same judge. In this context I note, however, that these cases, like the one presently under consideration, are not in the Commercial List and so, to some extent at least, my hands are tied.

11. But to return to the present dispute. Is the matter clear enough on its face to warrant immediate judgment, as Miss Lam contends, or are Mr Pow's criticisms justified? After some reflection, I have come to the conclusion that in this case the matter indeed is sufficiently clouded by doubt, and that there is a sufficient triable issue as to the precise meaning of this Agreement, within its particular factual context, to grant leave to defend and to permit the case to go to trial. I am old-fashioned enough to apply rigorously the well-known principles relating to Order 14 applications, and in these particular circumstances I am fortified by the judgment of Fuad V.-P., in the case of Guangdong Finance Co. Ltd. v. Ranco Services Ltd. and another [1993] 1 HKLR 101 at 105, where the learned Justice of Appeal observed as follows :-

" It is settled and trite law that a surety can never be made liable beyond the precise terms of his commitment and his contract must be strictly construed (see paragraphs 146 and 151 of Volume 20 Halsbury's Laws of England, 4th ed.), and on page 77 of Rowlatt on Principal and Surety, 4th ed., we find 'A guarantee will only extend to a liability precisely answering the description contained in the guarantee'." (emphasis added)

12. These are, with respect, authoritative words, and I am far from convinced, notwithstanding Miss Lam's persuasive and thoughtful submission, that on its face, the words "losses damages claims and demands which ... Full Arts ... may incur or sustain by reason or on account of ... Full Arts ... having given the financial assistance to Buildcon ..." are aimed at the mere act of providing financial assistance by the Plaintiff, or whether (as seems perfectly arguable) such words serve to take the matter further in terms of consequences arising from such provision. Had the former situation been the case (that is, mere indemnification against financial assistance per se), it would have been very easy simply to say so, without more. Maybe such was intended, particularly in light of the content of Clause 6.1 of the Share Acquisition Agreement, and then again maybe it was not; undoubtedly, however, the situation will be clearer to the trial judge who has to construe this Agreement in light of the matrix of facts which will be established upon the evidence before him. In which regard, I am reminded of the celebrated dictum of Lord Wilberforce in Prenn v. Simmonds [1971] 1 WLR 1381 at 1385 :-

" In my opinion, then, evidence of negotiations, or of the parties' intentions, and a fortiori of Dr. Simmonds' intentions, ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction." (emphasis added)

13. In these very particular circumstances, therefore, I have decided to allow the appeal and to set aside the judgment entered by the learned Master. It may be, in the event, that it will transpire that the learned Master was right in her ultimate conclusion ( it may well be, for example, that the present situation owes as much to idiosyncrasies of drafting as to any residual merit ( but in the unfettered exercise of my discretion, in my view it is just and fair that this case should go to trial. And in this context, I emphasise again that, if possible, this case should be managed together with the other cases earlier cited in order to provide for the speedy and economic resolution of all the disputes between the present and related parties arising out of the affairs of Buildcon, and the Defendant's relationship thereto.

14. As to costs, in my judgment the correct Order is that the costs of and occasioned by the hearing before the learned Master below should be costs in the cause, and that the costs of and occasioned by the Appeal should be to the Defendant in any event, to be taxed if not agreed. The matter is certified as fit for Counsel. I will hear the parties upon the terms of the Order and upon consequential directions.

15. I thank both Counsel for their assistance.