CHINA UNITED HOLDINGS LTD AND ANOTHER v. JOHNSON STOKES & MASTER (A firm)

cacv 135/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 135 of 2004

(on appeal from HCCL NO. 42 of 2003)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  This was an appeal from the judgment of Stone J given on 2 April 2004.  At the conclusion of the hearing of this appeal this court dismissed the appeal with costs, with reasons to be given in writing, which we now do. 

2.  The matter before the judge was an application under Order 14A of the Rules of the High Court.  The action against the defendant is framed as one in negligence for having given allegedly faulty professional legal advice.  The nature of that advice will be referred to below.  At this stage, it is sufficient to say that the question raised on the application was directed to the root of the matter.

3.  The application before the judge was for a determination of the following points of law:

(i)	Whether Asia Standard International Group Limited had an immediately enforceable indemnity claim against East Champion Limited as at about 3 March 1999; and
(ii)	Whether Paul Y-ITC Construction Holdings Limited had an immediately enforceable indemnity claim against East Champion Limited in about September 1999 and/or before China United Holdings Ltd executed the ITC Management Deed.

4.  The judge found in the defendant’s favour, answered those questions in the affirmative and made the declarations sought.

5.  On this appeal Mr Sarony SC, who appeared on behalf of the plaintiffs, did not seek to argue that the judge should not have considered the matter on an Order 14A application.  Hence, the argument before this court was simply as to whether the judge had been correct in his decision.  It might be said that by amendments produced at the hearing in the court below the plaintiffs had sought to introduce into the case other reasons as to why the indemnity claims should have been resisted.  These were primarily factual matters which will fall to be decided at the trial of the action.

6.  The matter arises following the sale, in May 1997, of a basement of a building in North Point.  The sale price was HK$470 million.  The purchaser was Great Gains International Limited, which was a wholly-owned subsidiary of the 1^st plaintiff.  Half the purchase price was to be paid in cash and the other half in shares of the 1^st plaintiff.  It was a condition of the sale that a loan of $235 million would be arranged by the vendors.  There was then a sub-sale of the property to East Champion Limited (“East Champion”), which was another wholly-owned subsidiary of the 1^st plaintiff.  East Champion itself took up the loan of $235 million from the International Bank of Asia Ltd (“the Bank”).

7.  One of the conditions in respect of that loan was that Asia Standard International Group Limited and Paul Y-ITC Construction Holdings Limited (referred to collectively as “the two companies”) had to provide guarantees for the repayment by East Champion of the sums of $94 million and $23.5 million respectively.  Those guarantees were duly provided.  Not unnaturally, the two companies sought indemnities from East Champion in respect of their liability under the guarantees.

8.  11 August 1997 thus became a busy day.  There was first the loan agreement signed between East Champion and the Bank.  There were then guarantees provided by the two companies and there then were counter indemnities which were provided by East Champion to the two companies respectively.

9.  There was a default on the loan.  The guarantees were enforced.  The two companies naturally wished to be indemnified under the counter indemnities.  The plaintiffs’ case is that the advice that they were given, that the two companies both had immediate rights to claim against East Champion under the counter indemnities, was erroneous and that as a result the plaintiffs have incurred substantial losses as a result of taking steps to honour the liabilities of East Champion under the counter indemnities.  Although it is said in the plaintiffs’ evidence that three former directors of the 1^st plaintiff had acted fraudulently that is not a matter which features in the statement of claim nor is it something which the plaintiffs can rely upon as being relevant to the determination of the questions posed.  Indeed, Mr Sarony disavowed any intention of so doing.

10.  The point at issue on this application is whether the provisions of clauses 8 and 10 of the guarantees given by the two companies rendered the counter indemnities given to the two companies as being void or, at least, not being immediately enforceable.  Those two clauses read as follows:

“	8.	The Guarantor declares that it has received no security for giving this Guarantee and agrees that should any such security be created while any Secured Indebtedness remains undischarged, any such security shall be forthwith pledged or sub-pledged to the Lender to secure the obligations of the Guarantor hereunder and shall forthwith be deposited with the Lender accordingly.  The Guarantor agrees that if default is made in observing the preceding provisions of this Clause 8, any security taken in contravention and all moneys at any time received in respect thereof shall be held in trust for the Lender as security for the liability of the Guarantor to the Lender hereunder.
	…
	10.	Until all the Secured Indebtedness has been paid discharged and satisfied in full (which expression shall not embrace payment of a dividend in liquidation or winding-up of less than one hundred per cent (100%) the Guarantor waives all rights of subrogation (whether statutory, arising at common law or in equity, or howsoever otherwise) and agrees not to demand or accept repayment in whole or in part of any moneys, obligations or liabilities then or thereafter due to the Guarantor from the Borrower or to demand or accept any security or lien in respect thereof or to assign the same or charge the same as security or to take any step to enforce any right against the Borrower or to claim any set-off or counterclaim against the Borrower or to claim or prove in competition with the Lender in the liquidation or winding-up of, or have the benefit of any share in any payment or composition from the Borrower or any other person or in any other guarantee or security now or hereafter held by the Lender.”

11.  The argument is that because the recitals to the guarantees read as follows:

“	(1)	By an agreement dated the even date (‘the Agreement’, which expression shall include such Agreement as from time to time supplemented or amended) and made between EAST CHAMPION LIMITED (億綽有限公司) whose registered office is at 1202, Evergo House, 38 Gloucester Road, Wanchai, Hong Kong (‘the Borrower’) as borrower, and the Lender as lender, the Lender has agreed to make available to the Borrower a term loan of HK$235,000,000.00 (the ‘loan’) upon and subject to the terms and conditions therein mentioned.
	(2)	It is a condition of the Agreement that the Guarantor shall execute a guarantee in respect of the obligations of the Borrower under the Agreement, and this Guarantee is accordingly supplemental to the Agreement.” (Emphasis added)

that had the effect of blurring any distinction between the loan agreement, the guarantees and the counter indemnities and they all had to be read as one.  It was the plaintiffs’ case that the words “supplemented” and “supplemental” had the effect of creating a tripartite agreement between East Champion, the Bank and the two companies.  It was said that because the Secured Indebtedness had not been fully repaid, as per clause 10 of the guarantees, the two companies did not have an immediately enforceable indemnity claim against East Champion.  It was also said that the two companies were not entitled to take the counter indemnities and that the counter indemnities were therefore void or, at the very least, not immediately enforceable.

12.  In my view this argument was misconceived.  In the first place clause 8 of the guarantees does not, on a proper reading, prevent the two companies from obtaining the counter indemnities.  Taken together, clauses 8 and 10 provide that if the Bank has not been fully repaid, any securities or counter indemnities which the two companies have obtained are held for the benefit of the Bank.  This does not make liability under the counter indemnities any less enforceable or immediately payable. 

13.  In order to give the agreements the meaning contended for by the plaintiffs it would be necessary to read the counter indemnities as if they had been completely redrafted and entered into by the Bank.  That would be wrong.  The Bank was not party to the counter indemnities.  Furthermore, the Bank had not prevented the two companies from obtaining the counter indemnities.  Indeed, the Bank would no doubt be quite content to take any benefit it could as a result of them.  In my view, therefore, the judge was correct in his conclusion for the reasons he expounded and this appeal fell to be dismissed.

Hon Le Pichon JA:

14.  I agree.

Hon Tang JA:

15.  I agree.