THE SUMITOMO BANK LTD. v. XIN HUA ESTATE LTD. AND OTHERS

HCCL256/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO.256 OF 1998

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J U D G M E N T

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1. There is before the Court an application pursuant to Order 14 rule 1 Rules of the High Court by the Plaintiff herein, The Sumitomo Bank Limited, for final judgment against the 1st, 2nd and 3rd Defendants for the sums of HK$217 million, together with HK$14,572,892.19 in interest thereon (as at the date of the writ) together with interest thereafter and costs.

2. The claim by the Plaintiff bank against the 1st Defendant is for the repayment of a loan of HK$217 million under a Facility Agreement dated 26th March 1997, as amended by three Amendment Agreements respectively dated 24th November 1997, 26th January 1998 and 31st March 1998, which agreements in each case extended the repayment date of the loan.

3. The purpose of the loan was for the down-payment for the purchase by the 1st Defendant of a building known as Pearl Oriental Centre, and before the loan was to be drawn down, the Plaintiff had to have received, inter alia, a Guarantee from the 2nd Defendant and an Irrevocable Standby Letter of Credit from the 3rd Defendant. These instruments were indeed supplied (on 26th March 1997 and 19th May 1997 respectively), and in this application the Plaintiff also seeks summarily to enforce its rights thereunder against the 2nd and 3rd Defendants.

4. Somewhat unusually for a serious Order 14 application, which I accept that this is, the case has been fully pleaded. The writ was issued on 26th October 1998, with Points of Claim following on 18th December 1998.

5. At this juncture, a certain amount of procedural attention was devoted to an application for an anti-suit injunction pursuant to a summons issued by the Plaintiff dated 26th October 1998, which came before this Court for hearing on 5th February 1999.

6. By this summons the Plaintiff applied for an injunction restraining the 1st Defendant from continuing or prosecuting proceedings commenced by the 1st Defendant herein against the present Plaintiff in the Guangdong Higher Peoples Court, and from commencing proceedings elsewhere than in the Courts of Hong Kong with regard to any dispute arising out of or in connection with the Facility Agreement dated 26th March 1997, which, of course, is precisely the agreement the Plaintiff now seeks summarily to enforce. That application, at which the parties had the advantage of being represented by the same leading Counsel as at this hearing, presently stands adjourned because this Court took the view, for the reasons outlined in the brief judgment delivered at the time, that in the circumstances the application for the anti-suit injunction was premature.

7. I further note from the Court file that on the same date as the injunction hearing, this Court also made an Order dated 5th February 1999 formerly dismissing the Plaintiff's application that default judgment be entered against the 2nd and 3rd Defendants, which application was contained in the affidavit of Miss Nanette Fung, the Plaintiff's solicitor, of 1st February 1999.

8. But to return to the history of the pleadings. Points of Defence and Counterclaim on behalf of all three Defendants were filed on 12th February 1999, followed by Points of Reply and Defence to Counterclaim filed on 11th March 1999. And, on the same day, the present application for Order 14 relief was issued by the Plaintiff.

9. The broad shape of the case, as revealed on the pleadings, is accordingly thus : the Plaintiff mounts its claim against the three Defendants for the repayment of the sums claimed pursuant to the primary Facility Agreement, the Guarantee and the Letter of Credit, and in this connection naturally places heavy reliance, in each instance, upon the specific terms of such commercial documentation, Mr Ma S.C. drawing the attention of the Court in this connection to the trenchant observations of Young J. in Hortico (Australia) Pty. Ltd. v. Energy Equipment Co. (Australia) Pty. Ltd. (1985) NSWLR 545 at 553-554, and the necessity for the Court in commercial transactions in general to adopt a "hands off" approach, so that anything short of actual fraud will not warrant any form of equitable intervention.

10. For the Defendants, Mr Warren Chan S.C., invited the Court to eschew any approach remotely smacking of a "mini-trial of the action on affidavit evidence", to adopt the critical words of Godfrey JA in Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155 at 158.

11. The factual basis of the 1st Defendant's defence, said Mr Chan, was that the Plaintiff had breached an oral agreement whereby it agreed to provide long-term finance in the form of a syndicated loan to the 1st Defendant, which was to be used in the purchase of a building, such building subsequently transpiring to be the Pearl Oriental Centre. The Plaintiff, said Mr Chan, did not and does not deny that there were negotiations on long-term finance, simply contending that there was no binding agreement in this respect. The Plaintiff well knew that the 1st Defendant needed finance to complete the sale, not just to pay the down-payment, and while it took time to arrange the long-term finance, the 1st Defendant needed to make the down-payment for the purchase. The solution here was the provision of the "bridging loan" in question, which was sufficient only to meet such down-payment, and it was common ground that the monies the subject of the Facility Agreement constituted the "bridging loan". Without the long-term finance, submitted Mr Chan, the Plaintiff was well aware that the 1st Defendant would not be able to complete the purchase or, for that matter, to repay the bridging loan. And that in such event, the natural consequence, within the contemplation of any reasonable commercial man, would be that the down-payment would be forfeited, and that there would quite probably be an additional claim for loss and damage by the seller.

12. In the circumstances, he submitted, it was clearly a common understanding and assumption that long-term finance would certainly be made available to the Plaintiff; otherwise, no person of sound commercial mind would have agreed to borrow the bridging loan and to commit itself to such a big project. Nor indeed, at the Plaintiff's request, would the 1st Defendant have procured its associates to take up what has been referred to as the 'Shen Nan bad debt' in the sum of HK$11 million if the Plaintiff had not agreed to finance the project as the 1st Defendant asserted.

13. Yet, said Mr Chan, the Plaintiff had not kept its promise. Long-term finance had not been forthcoming and the disastrous consequences flowing from such default on the part of the Plaintiff had materialised, including the forfeiture of the deposit. In a nutshell, not only had the 1st Defendant lost the bridging loan, it was faced with a claim for further loss and damage. These matters notwithstanding, however, the Plaintiff now maintained its summary demand for payment of the bridging loan.

14. Against this factual background, submitted Mr Chan (which could in no sense be consigned to the category of mere "moonshine" : see here in particular the Plaintiff's letter dated 20th March 1997 to the 3rd Defendant), there was nothing so incredible about the 1st Defendant's case, given a booming property market at that time and an aggressive Japanese bank whose Hong Kong offices were eager to enter the China market and to do business with associates of Xin Hua News Agency; in fact, he said, it was not difficult to see the scope for promises, even though largely undocumented, which could be made to the 1st Defendant in the belief, prior the property market correction, that Head Office in Japan would approve the same without difficulty.

15. Moreover this factual matrix, asserted Mr Chan, bore all the hallmarks of constituting an arguable estoppel. In reliance upon the Plaintiff's promise to provide long-term finance, the 1st Defendant procured its associate to assume the bad debt and to enter into a Sale and Purchase Agreement for the building; accordingly, it was plainly arguable that the Plaintiff is and was estopped from denying that there was a binding agreement, with regard to which it is now in breach. Nor was this simply a case of equitable set-off (against monies admittedly due) by virtue of a closely connected transaction; it was precisely the Plaintiff's failure to provide the long-term finance, as promised in rosier times, that was directly causative of the 1st Defendant's inabilities to repay the bridging loan, and for that matter the consequential loss to the 1st Defendant in suffering forfeiture of the deposit monies.

16. It followed, therefore, that there was a circularity in the argument and in the case. The Plaintiff's breach produced the loss, which could (and should) be set-off against the claim for the outstanding monies the subject of the loan, and it was unjust and unconscionable, alternatively the Plaintiff was estopped, from insisting on payment of the bridging loan, at the very least prior to any set-off being effected if the 1st Defendant should be able to establish its case. In these circumstances, equity should intervene to restrain the Plaintiff from exercising its legal rights, in which context it should not be overlooked that the 1st Defendant had not simply 'pocketed' the bridging loan, but the bulk of that sum had been forfeited, with the balance being used up in related expenses.

17. As to the 2nd Defendant guarantor's entitlement to rely, in effect, upon the 1st Defendant's defence, this was essentially a matter of construction of the Guarantee, submitted Mr Chan. The starting point for this argument being the principle expressed in Andrews & Millett, Law of Guarantees (2nd edn, 1995), pages 322-323 to the effect that :

"... once payment has been demanded of him, the surety is entitled to raise against the creditor all legal and equitable defences to which the principal is entitled at the moment of demand."

The pre-condition for the 2nd Defendant's liability was the 1st Defendant's failure to pay the secured obligations 'when due', which means, said Mr Chan, "presently owing or payable", and at present such monies arguably were not so 'due' from the 1st Defendant to the Plaintiff.

18. Moreover, Mr Chan continued, irrespective of the proper construction of the clauses of the Guarantee, there was judicial authority that even for demand guarantees, unconscionable conduct is treated on the same footing as fraud, which may serve to justify non-payment. So that it did not make sense, bearing in mind the nature of the defence of unconscionable conduct, that the Plaintiff could enforce its security against third parties without any regard to its claim against the principal debtor. This argument, said Mr Chan, applied even to a standby letter of credit, and he drew the attention of the Court to Themehelp Ltd v. West [1995] 4 All ER 215, wherein the English Court of Appeal granted an injunction to restrain the beneficiary from making a demand under the Guarantee when the issuer raised a case of fraud in respect of the underlying transaction. Admittedly the present case did not come within the ambit of fraud, but Mr Chan S.C. in his argument sought to extend the ambit of the principle.

19. Further, he said, a similar line of argument was available in terms of the claim against the 3rd Defendant, so that notwithstanding what was accepted as the "autonomous" nature of a Letter of Credit, unconscionable conduct constituted a defence. However, in this instance the case against the 3rd Defendant was rather more complex, given that Clause 13 of the Letter of Credit in question specifically provided that :

"We accept joint and several liability hereunder as defined in Article 18 of the Security Law of the People's Republic of China",

which was clearly a reference to the Secured Interests Law of the PRC, the relevant article of which prescribed liability of a "guarantor", so that the only way to reconcile these terms in the Letter of Credit, argued Mr Chan, was to treat it as a guarantee in substance, albeit not in form.

20. In addition, arguably there were issues of illegality under the PRC law, given that this Letter of Credit had not been approved and registered with this State Administration of Foreign Exchange of the PRC, and bearing in mind the terms of the Letter of Credit (in particular the fact that the Plaintiff should issue a demand to the 3rd Defendant's office in Guangdong, and that payment should then be made within three business days in Hong Kong dollars to the Plaintiff's account in Hong Kong), the huge amount of money involved and the fact that the 3rd Defendant merely had a representative office in Hong Kong, the commercial reality was that, as the Plaintiff well knew, performance of this Letter of Credit necessarily involved acts to be performed in the PRC, that, is to effect payment under the Letter of Credit. Clearly money had to be transferred from Mainland China to Hong Kong, and as Jack, Documentary Credits (2nd edn, 1993) points out at paragraph 13.30 at p.309 :-

"If documents are to be presented in a country where exchange control will prevent payment pursuant to the credit, this will provide the bank with a defence."

21. Lastly in the context of the 3rd Defendant, Mr Chan raised the issue of comity, which had last raised its head in the course of the discussion between Counsel and the Bench at the anti-suit injunction hearing. On 18th May 1998, the Guangdong Court had granted an interim preservation order restraining the payment of this Letter of Credit. The Plaintiff had challenged the jurisdiction of the Guangdong Court, which had dismissed the Plaintiff's application. The matter was pending appeal, and now to give judgment against the 3rd Defendant would in effect, said Mr Chan, compel the 3rd Defendant to breach the Guangdong Court order. Moreover, the 3rd Defendant would be liable to criminal sanctions.

22. In light of these arguments, which were the subject of an extensive skeleton argument filed by the Defendants, it is, if I may say so, a tribute to Mr Ma's powers of advocacy that the Court was persuaded not to deliver its decision immediately upon this summary judgment application.

23. Mr Ma described the Defendants' argument as mere "chaff in the air", and by rigorous attention to the precise terms of the commercial documentation relating to each Defendant, he sought to convince the Court that in reality there were no triable issues, and that, at bottom, this was a simple claim to which there was clearly no defence.

24. There is no doubt in my mind that what for shorthand purposes I can term the 'commercial paper' arguments are formidable indeed - for example Clause 8.4 of the Amendment Agreements, maintained by Mr Ma to be "determinative" in this case, taken together with a strict construction of Clause 2.1 of the Guarantee, with a result of the Guarantor may have assumed liability greater than the principal obligor, and with the result that the estoppel argument is not available because it arises out of something 'peculiar' to the 1st Defendant; and finally the stress on the 'autonomy principle' underpinning the irrevocable Letter of Credit, with the proper law of that contract being Hong Kong law and the law of the PRC being castigated as irrelevant in the circumstances, and Clause 3 of that Letter of Credit specifically providing for payment without set-off or counterclaim.

25. So strong did the analysis appear, albeit at the Order 14 stage, that I was minded to stand the case down to further reflect upon the argument.

26. I have also been extensively reminded, if indeed such reminder is necessary in the Commercial List, of the general principles underlying the grant of summary judgment applications - indeed, leaving nothing to chance, the Defendants have kindly accorded the Court four pages of extracts from the well-known authorities on the subject.

27. And, given the diligent scholarship that has been placed before me for scrutiny, perhaps I can say that I am particularly attracted in this case to dicta dealing with the argument about whether a defence is bound to fail. In John v Rees [1970] 1 Ch 345 at 402, Megarry J. (as he then was) commented as follows :-

"As everybody who has anything to do with the law well knows, the path of the law is strewn with examples of open and shut cases which, somehow, were not; of unanswerable charges which, in the event, were completely answered; of inexplicable conduct which was fully explained; of fixed and unalterable determinations that, by discussion, suffered a change."

Whilst in the Hutchison case, Godfrey J. (as he then was) at page 514 noted :-

"That is a formidable case, no doubt. But any lawyer with any experience of private practice will be able to remember, only too well, those cases which appeared to be certainties but which, to his surprise, nevertheless failed and, by the same token, those cases which seemed bound to fail but which, to his surprise, nevertheless succeeded. It is for just this reason that the court will not embark, at this stage of an action, on a consideration whether the case of one side or the other is true or false. It will consider only whether the nature of the defence is such that it has to be characterized as an abuse of the process of the court, which is something else altogether."

28. Given my highlighting of these particular extracts, it will be clear, I think, that I have decided not to grant this summary judgment application, because, as I hope the recitation of the argument reveals, in my view there is just too much here to contemplate giving judgment with a settled mind, and to deprive the Defendants of a trial of the issues which have been ventilated on the pleadings and on affidavit. I do not dismiss the Defendants' case as 'moonshine' or as hopelessly 'unarguable', nor, in terms of the oral argument alleged, as necessarily inherently remarkable or highly unlikely on the facts. Nor am I closed-minded with regard to Mr Chan's subtle arguments as to unconscionability or estoppel, albeit any hard-headed commercial lawyer will recognise instinctively the power of commercial 'boiler-plate', if I may so term it.

29. Indeed, so strong does the Plaintiff's case appear, at least on the relevant commercial documents, that one is left to ponder why the decision was not taken at the outset quickly to constitute the pleadings and to obtain an order from the Commercial Court for an early trial. I confess that this was my first reaction upon reading the papers, and I have not altered my view that this would be, and is, the most appropriate way of proceeding. Indeed, it might be thought that cases of this ilk are the modern Commercial Court's raison d'être, wherein a multiparty commercial dispute such as this can be speedily and efficiently dealt with at an early date, an eventuality which Mr Chan S.C. has said, in the course of argument, that he would welcome. Perhaps it is salutary to reflect, given the history of this case, that had the Plaintiff not become sidetracked with interlocutory concerns, the disposition of this entire case could by now probably have been achieved.

30. Be that as it may. After full consideration of all the material before me, a consideration regrettably rendered longer than necessary by diary exigencies, I have arrived at the conclusion that the appropriate course on the present application is that the Defendants are to have unconditional leave to defend, and that the costs of and occasioned by this application are to be in the cause. I so order.

31. I will now hear Counsel on any matter arising, and in particular as to such directions as may be necessary to complete all outstanding procedural matters and to get this case to trial as quickly as may now be achievable.

[Submissions from Counsel]

32. In anticipation, perhaps, of the way this application was likely to go, Mr Paul Shieh, junior counsel for the Plaintiff, has kindly prepared a draft order on the basis that the Court may be minded, as in fact is the case, to order that this action gets to trial as soon as possible. With the cooperation of Mr Paul Lam, junior counsel for the Defendants, it has been possible to agree and initial such draft order containing specific directions in this regard.

33. I thank all Counsel for their assistance in what has been an interesting hearing.