CITIMEX INTERNATIONAL LTD. v. HO KANG POR ALEX

DCCJ17027/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.17027 OF 2001

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JUDGMENT

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Introduction

1. By a writ of summons issued on 8 October, 2001, the plaintiff claimed against the defendant upon a deed of guarantee dated 10 January, 1996 ("the guarantee") executed by him, guaranteeing one third of the liability to the plaintiff of a company called Sculpture Arts Creative Limited (formerly known as Top Jade Development Limited) ("the company"). The principal sum claimed is US$49,187.67. The plaintiff also claims a sum of $13,950.82, which, the plaintiff says, the defendant is also liable to pay under the guarantee. On 12 November, 2001, the defendant filed a defence. No specific defence was put forward by the defendant in the defence. On 20 February, 2002, the plaintiff took out this application for a summary judgment. The plaintiff's application is confined to the principal sum of US$49,187.67 together with interest thereon and costs.

2. The plaintiff's case is rather straightforward. It says that by a loan agreement dated 10 January, 1996 the plaintiff lent a sum of US$147,563.00 to the company for the purchase of certain goods. The sum was advanced by the plaintiff to the Company by way of a letter of credit dated 30 November, 1995 and issued by Niaga Finance Company Limited ("Niaga"). Under the loan agreement, the company agreed to repay all moneys due and owing by the company to the plaintiff under the loan agreement on or before 30 June, 1996. The company also agreed to indemnify the plaintiff all the interest and other expenses paid or payable to Niaga of and incidental to the letter of credit. The amount of the interest and expenses involved is according to the Re-Amended Statement of Claim HK$41,852.45.

3. By the guarantee, the defendant covenanted to guarantee one third of the liability to the plaintiff of the company under the loan agreement. It is the plaintiff's case that the company defaulted to make any repayment to the plaintiff and, therefore, the defendant is liable under the guarantee to repay to the plaintiff the sum of US$49,187.67 and HK$13,950.82, i.e. one third of the loan of US$147,563.00 and one third of the said sum of HK$41,852.45. This application does not concern the claim for the sum of HK$13,950.82.

4. In opposing this application, the defendant does not dispute the making of the guarantee. Nor does he seriously challenge the making of the loan by the plaintiff to the company and its amount. The only defence raised by the defendant before me is that the plaintiff caused or connived at the default of the company and as a result his liability under the guarantee should be discharged.

Without Prejudice Letters

5. At the beginning of the hearing, Mr. Mok, Counsel for the Defendant, challenged the admissibility of 3 letters dated 20, 29 September, and 3 October 2001 respectively and 4 post-dated cheques for the total sum of HK$383,663.00 which are all exhibited to the affirmation of Ie Pek Sin Prenceton filed on 20 February, 2002. These 3 letters, relied upon by the plaintiff as the admissions of liability by the defendant, were all written by the defendant in response to the plaintiff's demand for payment. The 4 post-dated cheques which were enclosed with the letter of 3 October, 2001 were, according to the letter, issued for the purpose of settling the principal sum of US$49,187.67 under the guarantee. For the sake of brevity, any reference to the 3 letters below shall, unless other stated, include the 4 post-dated cheques. In his 2nd affirmation dated 12 July, 2002 the defendant explained that the 3 letters aimed at an amicable settlement with the plaintiff. However, nothing is mentioned there about the admissibility of the 3 letters or the "without-prejudice" nature of them.

6. There is no application taken out by the defendant under Order 41 rule 6 of the Rules of the District Court to strike out the part of the affirmation which he says contains inadmissible evidence. Nor did Mr. Mok allude to the issue in his written submission. At the hearing, Mr. Mok did not offer me any satisfactory explanation as to why the challenge came at this late stage. It was not satisfactory at all for the defendant to raise the issue at the hearing orally without giving sufficient notice to the plaintiff. Be that as it may, the plaintiff took no issue on the question of delay, and I heard submissions from both parties to the issue.

7. The 3 letters, of course, contain no reference to a claim that they were written without prejudice. Mr. Mok submits that the letters are privileged documents as they were issued with a view to negotiating a settlement, and the claim to the privilege does not depend on whether the letters were headed "without privilege". In support of his submission, Mr. Mok referred to me the case of Dixons Stores Group Ltd. v. Thames Television plc [1993] 1 All ER 349.

8. The legal principle in this area is, in my view, not controversial. In general, the "without prejudice" rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence. The rule is founded upon the public policy of encouraging litigants to settle their differences rather than litigate them to a finish. The application of the rule is not dependent upon the use of the phrase "without prejudice" and if it is clear from the surrounding circumstances that the parties were seeking to compromise the action, evidence of the content of those negotiations will, as a general rule, not be admissible at the trial and cannot be used to establish an admission or partial admission: see Rush v. Tompkins v. Greater London Council [1988] 3 WLR 939.

9. However, correspondence will only be protected by the rule if it is written for the purpose of a genuine attempt to negotiate a settlement between the parties. It follows that there can be no privilege if there is no genuine attempt to compromise or if the correspondence does not form part of a body of negotiation correspondence. I agree with the view of Drake J in Dixons Stores Group Ltd. v. Thames Television plc [1993] 1 All ER 349 that a party to an action could write a letter containing an offer to settle the action without ipso facto attracting to that letter any privilege which could be claimed by the other party, provided the letter was not part of continuing negotiations.

10. It is clear, in my view, from the content of the 3 letters that they were merely attempts made by the defendant unilaterally to seek time for payment. I fail to derive from the letters themselves or even from the affirmations of the defendant any support for the contention that the letters formed part of continuing negotiations for settlement between the parties. A mere request for time for payment cannot per se attract the application of the "without prejudice" rule. Accordingly, I reject the defendant's contention that the 3 letters were "without prejudice" correspondence, and I rule that they are admissible in evidence.

11. In any event, even if the 3 letters were "without prejudice" correspondence, the privilege can be waived by the parties. By referring to the 3 letters and explaining why they were written in his 2nd affirmation dated 12 July, 2002, without claiming any privilege, the defendant has waived the privilege. That being the case, the 3 letters are admissible in evidence.

Order 14

12. Mr. Cheung, Counsel for the Plaintiff, submits that, in determining this application, I should apply the decision of Tandy/Rank Video v. Yee Hing Cassette Factory Ltd. [1991] 1 HKC 136 which adopted the approach in Murjani BK v. Bank of India [1990] 1 HKLR 586. In Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155, Godfrey JA (as he then was) said:

12.1 "In the local case of Murjani BK & Ors v Bank of India [1990] 1 HKLR 586, the Court of Appeal, after going into all the evidence, came to the conclusion that the case of the defendant was plainly advanced dishonestly and was therefore incredible. But Murjani was decided before National Westminster Bank v Daniel and I would sound a note of caution about Murjani, which has come to be cited in almost every case under O 14 or O 86 to justify the plaintiff in asking the court to embark on a mini trial of the action on affidavit evidence. That is not a proper course for the court to take. It will in future be sufficient for the court to ask itself the simple question: 'Is what the defendant says credible?' If so, he must have leave to defend. If not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed; it is whether those assertions are believable."

13. The approach in Ng Shou Chun shall be the one I adopt here. I also remind myself of what Bokhary JA (as he then was) said in Re Safe Rich Industries Ltd (CA 81/94, unreported):

13.1 "The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognized -- because failure to recognize it would create a debt-dodgers' charter -- that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute."

The Defence

14. The defendant's case is as follows. The company was formed to utilise a licence granted by a US company called Photo Sculptures, Inc. to manufacture and distribute certain patented products in Southeast Asia. The company has 3 shareholders and directors, and they are the Plaintiff, Mr. Lai Hiu Ming and Numero Uno International Limited. Each of them holds one share in the company. The defendant says that Mr. Yu, who has also been a director of the Plaintiff, was appointed chairman of the company. The management of the company, says the defendant, was left entirely to Mr. Yu and Mr. Lai. The sum of US$147,000 which is the subject matter of the loan agreement was borrowed from the plaintiff for purchasing machinery for manufacturing the patented products. The defendant says that Mr. Yu promised that the company would not be required to repay the loan to the plaintiff until the company had made sufficient profits to do so. Pausing here, this oral promise certainly contradicts the express term of the loan agreement which provided for repayment by 30 June, 1996 and offends the parol evidence rule: see Hoven International Ltd. v. Mass Resources Development Ltd. [1997] 1 HKC 38. Mr. Mok does not seek to argue otherwise.

15. The defendant claims that in 1996 he was told by Mr. Yu that Citimex International (Singapore) PTE. Limited had acquired a licence from Photo Scuptures, Inc. to manufacture and distribute the patented products in Singapore and Malaysia. After the defendant pointed out that this licence was in breach of the licence granted to the company and would affect the business of the company, Mr. Yu assured him that Citimex International (Singapore) PTE. Limited would share with company profits generated from that licence. In early 1997, the defendant was told by Mr. Yu that the company should cease its operation because of bad business. The defendant claims that the plaintiff caused or connived at the default of the company because under the management of Mr. Yu, the company incurred a substantial loss and Mr. Yu had failed to mitigate the loss of the company by selling the machinery. The defendant's allegations are disputed by the plaintiff. Mr. Yu explains that he did not take part in the business of the company actively and the 2 licences which were both granted in his name were granted to the company and Citimex International (Singapore) PTE. Limited for different territories.

16. In his submission, Mr. Mok for the defendant argues that the defendant has raised a triable issue as to whether the plaintiff caused or connived at the default of the company. He relies on the decision in Bank of India v. Trans Continental Commodity Merchants Ltd. [1983] 2 Lloyd's LR 298, where the Court of Appeal in England held that a surety may be discharged from liability under a guarantee if the creditor caused or connives at the default of the principal debtor. This must be right. If a default has been caused by the principal or occurs as a result of connivance between the creditor and principal, the surety cannot be rendered liable because it would be a fraud on the surety. However, in Bank of India, Robert Goff LJ rejected the proposition that merely irregular conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety. This, I think, must represent the correct legal position in this area: see Bank of Credit and Commerce Hong Kong Ltd. v Quadrutec Hotel Management & Development Ltd. [1996] 4 HKC 316.

17. Mr. Mok also cited to me the unreported decision in Lark International Ltd. v. Chan Hin Fai Wilson HCA No.A8372 of 1994 (10 July, 1995) where Keith J (as he then was) granted unconditional leave to defend on the grounds that there was a triable issue on the question whether the debtor's default was due to the connivance between the creditor and the debtor. The facts of the Lark case are, however, very different from those here. In the Lark case, the creditor was the controlling shareholder of the debtor company. There the loan agreement provided that any sums paid to the debtor by its customers were immediately to be paid to the creditor to reduce the loan. The debtor received sums totalling about HK$13 million from its customers, but it only repaid about HK$6.5 million to the creditor. There was no evidence from the creditor as to what the money was used for. It was in these circumstances that Keith J ruled that there was a triable issue. Here, the plaintiff was not the controlling shareholder of the company, and there is no suggestion before me that the company had had money to make repayment, but did not do so by reason of the conduct of the plaintiff.

18. It must be borne in mind that the threshold onus is on the defendant to show a triable issue in an Order 14 application. I am not satisfied that the facts put forward by the defendant whether individually or collectively are sufficient to show a triable issue that the plaintiff caused or connived at the default of the company. Nor am I satisfied that the alleged conducts of the plaintiff, even if proven, can have affected the liability of the defendant under the guarantee. The defendant cannot point out specifically what the alleged connivance between the plaintiff and the company was. The defendant's case, taken at its highest, merely points to some possibly questionable conducts on the part of the plaintiff and falls far short of establishing a causal link between the alleged conducts and the default of the company. As I said earlier, merely irregular conduct on the part of the creditor will not suffice. In my view, the defendant has failed to discharge the threshold onus to show a triable issue.

19. Also, I do not find the defendant's contentions credible at all. The alleged defence is unclear and vague. Nowhere in the contemporaneous letters from the defendant to the plaintiff in September and October, 2001 did the defendant ever suggest to the plaintiff that the default of the company was caused by the plaintiff or that the guarantee was in any way discharged. No mention is made at all of the alleged misconduct of the plaintiff in the said contemporaneous letters or in the defence. Besides there is no evidence that the defendant has, through Numero Uno International Limited of which he has been a director and shareholder, taken any action against Mr Yu in respect of his alleged misconduct complained of here. The defendant's assertions are unbelievable. No triable issue is raised on this defence.

Conclusion

20. In the end I find all points raised by the defendant, taken at their highest, could not afford the defendant any defence at all and the plaintiff is entitled in this clear case before me to judgment as claimed in the amended summons dated 17 June, 2002 with costs to the plaintiff.

21. Accordingly, I give judgment for the plaintiff against the defendant for the sum of US$49,187.67 or its equivalent in Hong Kong dollars at the time of payment together with interest on the sum of US$49,187.67 from 28 June, 2001 (i.e. the date of the plaintiff's demand letter) to date at 5% per annum and thereafter at judgment rate. There be an order nisi that costs of the application and costs of the action in so far as it relates to the claim for US$49,187.67 be to the plaintiff to be taxed if not agreed with a certificate for counsel.