XCHRX CITIBANK, N.A. v. CHIT LEE HOLDINGS LTD. AND ANOTHER

HCA15246/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.15246 OF 1999

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J U D G M E N T

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The appeal

1. This is the plaintiff's appeal against the master's decision in which she ordered that leave be granted to both the defendants to defend this action on liability but not on quantum. The 1st defendant is a limited company and was recently wound up by the court. The plaintiff now proceeds against the 2nd defendant only. There was no cross appeal or submission by the 2nd defendant on the question of quantum.

The facts

2. The plaintiff is a bank. It had granted credit facilities to a

company called Chit Lee Marble and Minerals Company Limited ("the Company") pursuant to a mortgage dated 2 June 1998 ("the Mortgage") executed by the Company in favour of the plaintiff and a facility letter ("the Letter") dated 4 November 1998 from the plaintiff to the Company.

3. On 14 September 1999, the Company was indebted to the plaintiff in the sum of HK$2,050,727.45 together with interests at the rate of 4.5% above the Hong Kong dollar prime rate on the sum of HK$2,042,000 from and including 29 September 1999 until payment in full. Each of the defendants had executed a guarantee dated 5 May 1998 ("the Guarantee") in favour of the plaintiff to guarantee the liabilities due by the Company to the plaintiff for an unlimited amount. The plaintiff seeks summary judgment against the defendants for the sums owing by the Company.

The defence

4. The 2nd defendant is a director of the Company. In her defence filed on 15 October 1999, the only challenge she raised to the plaintiff's claim was on the quantum. This is repeated in a statement filed by her on 20 November 1999. It stated that the plaintiff had not provided accurate or detailed records in support of its claim, and until its records had been proved to be correct and genuine, the plaintiff cannot substantiate any liability against her.

5. In her first affirmation filed on 23 February 2000, she dwelt at length on the signing of "the guarantee" on 4 November 1998. She stated that she was notified by Wong Kong Ming ("Mr Wong"), the director of the 1st defendant, that she had to sign several guarantees. On arriving the office of the Company, she enquired with the representatives of the plaintiff what documents would need to be signed. Mr Mak, one of the representatives of the plaintiff, informed her that "a mortgage loan agreement would need to be signed. The Bank will then be relying on such security in advancing two loan facilities : one is a general banking facility of HK$5 million from the Bank, the other is a HKSAR Government guaranteed loan advanced by both the Special Finance Scheme for Small and Medium Enterprises and the Bank in the sum of HK$3 million. The total loan would be HK$8 million which would replace the loan amount reached previously in a Loan Agreement on 2 June 1999. As such, there would need to be a guarantee from the Directors."

6. She asked for the amount that would need to be guaranteed and was told HK$8 million. She stated that :

"... At that time, I thought that the HK$8,000,000.00 was for Loan secured with properties, and they have clearly told me that the total amount recoverable by the guarantee is HK$8,000,000.00. I trusted the representatives of the Bank and signed immediately. I didn't have a chance to read over the contents of the document thoroughly because my English is not good. I have trusted the words of the representatives of the Bank, but the representatives of the Bank didn't thoroughly explain to me the contents of the loan security agreement. In about 10 minutes time, I went home, and they didn't give my any copies of the documents."

7. She later found out from Mr Wong that the Company had reached an oral agreement in January 1999 and April 1999 in respect of the rescheduling and the extension of the loan repayment. The contents were not made known to her. Because of the two attempts in rescheduling and extending the loan repayment, she found out from Mr Wong that the money that could have been used for repaying the plaintiff was in fact spent on some other matter.

8. Regarding the Guarantee of 5 May 1998, she accepted that she and the Company had signed the document. She stated that :

"... The documents were supplied by the Bank and, in respect of Item 'A' [i.e. the Guarantee] on the first page with reference to 'LOAN NOT EXCEED THE SUM OF ......', there was a space that was left blank. The reason being the Bank had not determined the exact loan amount. It is in accordance with the normal practice of the Banking business to sign an incomplete document. Since we trusted such practice of the Bank. We were not given a copy of the signed document by the Bank. The above was signed on 5th May 1998, and it was not until about one month later that the loan was granted. The employees of the Bank had told us throughout that there's a limit to the guarantee. No one had explained the (contents of the guarantee) to us, whose English was not good and who had not thoroughly read the contents of the guarantee."

She stated that from 1996 to 1998, she had moved to Canada and had not participated in any of the business activities and bank meetings conducted by the Company and she had not participated in any of the Company's business functions. She was an Executive Director on paper. She stated that she was not made aware that :

"... the guarantee of the Executive Director in the loan security agreement is unlimited, it was duly caused by the misrepresentation of the representatives of the Bank."

She stated that she had received secondary education and could only read and understand simple English but not the English legal documents, especially documents of guarantee in this case.

9. In her second affirmation, she again dealt with the event of 4 November 1998. She said that before signing the guarantee on 4 November 1998, she had never received any copies of the guarantee or explanatory note from the plaintiff. The plaintiff had further not explained to her the contents of the guarantee and requested her to seek legal advice. On 4 November 1998, Mr Chan of the plaintiff informed her that the upper limit of her guarantee was HK$8 million, and "the worst would be dispossession of her charged property".

The Guarantee

10. The Guarantee that the plaintiff relied upon against the 2nd defendant is dated 5 May 1998 and not 4 November 1998. The Guarantee provides that :

"(a) in consideration of your at my/our request :-

(1) from time to time granting, making and/or continuing any loan(s) or advance(s) and ... to or with Chit Lee Marble & Mineral Co. Ltd.

...

(all the loans, advances, facilities, accommodations, arrangements and transactions referred to ... above being hereinafter referred to as 'the Obligations') the undersigned hereby agrees to pay and satisfy to you on demand all sums of money and/or liabilities which are now or shall at any time be owing to you anywhere on account of the Obligations ... PROVIDED ALWAYS that the liability of the undersigned hereunder shall with respect to the loan not exceed THE SUM OF ___________ ***UNLIMITED AMOUNT***

..."

The plaintiff's case

11. Like the 2nd defendant, the plaintiff had concentrated on the events of 4 November 1998. It did not explain how the Guarantee came into being. Mr David Chan, the Assistant Vice-President of the plaintiff, explained that on 4 November 1998, he asked the 2nd defendant to sign an undertaking to guarantee the liabilities due by the Company to the plaintiff. He met the 2nd defendant and Mr Wong. He explained to both of them the contents of the guarantee and advised that the guarantee was for an unlimited amount although the liabilities of the company should be in the region of HK$8 million. He did not say that the guarantee was only limited to HK$8 million. He pointed out to them that the effect of the guarantee was that they both incurred personal liabilities in respect of the liabilities due by the Company to the plaintiff. The 2nd defendant then signed the guarantee in his presence without any question. It did not occur to him that she did not read English as she signed her name in English.

12. Mr Chan stated that when banking facilities were granted to the Company by the Letter dated 4 November 1998, the 2nd defendant also signed the Letter acknowledging the terms. In the Letter, it was further stated that the 2nd defendant was required to sign a guarantee in favour of the plaintiff for an unlimited amount.

The Letter of 4 November 1998

13. The Letter stated that the plaintiff granted to the Company credit facility in the sum of HK$5 million and a credit facility of HK$3 million guaranteed by the Hong Kong Government Special Finance Scheme. The latter included, among other things, a sublimit of HK$3 million as a short-term demand loan. This short-term demand loan was granted for setting off the outstanding trust receipt due by the Company to the plaintiff. The Letter stated that the security for the HK$5 million included, among other things :

"(F) Joint and several guarantee of Wong Kong Ming and Lai Yin Shan Nelly [i.e. the 2nd defendant] for an unlimited amount guaranteeing the repayment of outstanding indebtedness plus interest due to the Lender by the Borrower."

For the HK$3 million, the security included, among other things :

"(K) Joint and several guarantee of Wong Kong Ming and Lai Yin Shan Nelly for an unlimited amount guaranteeing the repayment of outstanding indebtedness plus interest due to the Lender by the Borrower."

The letter was signed by the 2nd defendant.

14. It is not disclosed from the evidence whether the defendants had actually signed a guarantee on 4 November 1998 or afterwards. But whatever may be the position regarding this guarantee, the plaintiff in fact is suing on the Guarantee of 5 May 1998.

Consideration for the Guarantee

15. A number of points were raised by Mr Lam, counsel for the 2nd defendant. First, it was said that the Statement of Claim did not plead that the plaintiff had pursuant to the Guarantee granted loans to the Company. In my view, this is a non-issue because the Guarantee had been exhibited. The consideration for the Guarantee was clearly spelt out in the document itself. The plaintiff had pleaded that facilities were granted to the Company pursuant to the Mortgage and the Letter. It relies on the Guarantee to recover the money owing by the Company to the plaintiff from the defendants. There could not be any misunderstanding on the nature of the plaintiff's claim.

Undue influence

16. Second, Mr Lam submitted that there was undue influence by Mr Wong on the 2nd defendant to sign the Guarantee. There is simply no evidence on this issue. All that Mr Lam can point to was that Mr Wong and the 2nd defendant were sharing the same residential address. There was a belated attempt in the course of the submission by Mr Lam to file further evidence in this regard. This application was rejected by me. Although the 2nd defendant had acted in person and she personally filed the various defence, statement and affirmations, she was represented by Mr Lam at the Order 14 hearing before the master. The evidence filed by her were adopted by her lawyers in opposing the application for summary judgment. There was no application to adjourn the hearing in order to file further affirmations. Likewise, no new affirmation from her was filed for the purpose of this appeal. Mr Lam's submission on undue influence is based on a case that simply does not exist on the evidence.

Non est factum and misrepresentation

17. Although both parties had, may be unnecessarily, dealt with the events of 4 November 1998, the real issue in this case is whether the 2nd defendant had raised a triable issue to the plaintiff's claim on the Guarantee of 5 May 1998 by way of non est factum and misrepresentation. Mr Lam submitted that because there was no denial by the plaintiff on the allegation of the 2nd defendant on the Guarantees, she ought to be given leave to defend. The fact that the plaintiff had not contradicted the factual allegation does not mean that the 2nd defendant is bound to be given leave to defend. The test ultimately is whether the defence is credible or not.

18. The law is summarized in Chitty on Contracts, Vol.1, 28th Ed., para.5-057 :

"... the defence of non est factum was not lightly to be allowed where a person of full age and capacity had signed a written document embodying contractual terms. But it was nevertheless held that in exceptional circumstances the plea was available so long as the person signing the document had made a fundamental mistake as to the character or effect of the document."

In Chan Woon-hung trading as Ocean Plastic Factory v. Associated Bankers Insurance Co. Ltd [1993] 2 HKLR 127, Lord Jauncey of Tullichettle stated that :

"... it must always be a question of circumstances to what extent, if at all, ignorance of the language of a contract is relevant to the position of one of the parties thereto. In this appeal the fact that the appellant had in his possession for a prolonged period all the contract documents and that he could at any time have obtained a translation thereof must negative any disability from which he suffered by his lack of understanding of English and any suggestion that the respondents not afforded him reasonable means of certiorating himself as to the contents of the documents."

19. The 2nd defendant was and still is a director of the Company. There was no denial that the document she signed on 5 May 1998 was in fact a guarantee. She referred to it as such. The defence on this document was couched in the vaguest terms. In my view, she has no defence on this point. There is no dispute that the 2nd defendant is of full age. Quite apart from signing the Guarantee of 5 May 1998, she, as one of the directors of the Company, had also signed the Mortgage dated 2 June 1998. She further signed the Letter of 4 November 1998 which granted further facilities to the Company, part of which was used to set off the previous debt of the Company. Despite her allegation that she did not participate in the affairs of the Company, the evidence showed that she was quite prepared to lend her name when money was borrowed from the plaintiff. Even if one proceeded on the basis that a copy of the Guarantee of 5 May 1998 was not supplied to her, one has to say that if she was genuinely concerned about the limits of her liability, she could easily have asked for a copy and have it translated.

Lloyds Bank plc v. Waterhouse

20. Mr Lam relied heavily on the case of Lloyds Bank plc v. Waterhouse [1993] 2 FLR 97. In that case, the defendant provided a guarantee for the bank as security of a loan raised by his son on the purchase of a property. It was alleged that he was doing no more than guaranteeing enough money to enable his son to buy the farm, and his position would be protected by the sale of the land if that proved necessary. The guarantee he signed was in fact an "all monies" guarantee. The English Court of Appeal found that the defence of non est factum was established (Woolf LJ dissenting on this issue) on the following grounds :

(1) he was under a disability, namely, he was an illiterate person;

(2) the document which he had signed was fundamentally different from the document he thought he was signing, the all monies guarantee was different within the concept of non est factum from the guarantee restricted to money borrowed for the purchase of land; and

(3) he was not careless, in that, he had not failed to take proper precaution to ascertain the significance of the document he was signing. He had made exhaustive enquiries of the bank's representatives.

21. The court further held that the answers he received to his enquiries, to the effect that the reason why the bank required a guarantee over and above the value of the land was that it was a matter of the bank's standard practice, amounted in the context in which it was given to negligent misrepresentation.

22. In this case, it can hardly be said that the 2nd defendant is someone under disability. While she said the plaintiff had informed her that there was a limit to the Guarantee of 5 May 1998, she had never spelt out what that limit was. All she said was that on 4 November 1998, the plaintiff told her that the limit of her liability was $8 million. The present claim by the plaintiff is certainly within this limit. Furthermore, the 2nd defendant had not shown what precaution she had exercised to ascertain the true meaning of the Guarantee. She had concentrated her defence on the document she signed on 4 November 1998 which clearly does not provide her with any defence on the plaintiff's claim on the Guarantee of 5 May 1998. She referred to normal banking practice when she said the amount of the liability was left blank. She did not say who told her that it was the normal banking practice. It is a heavy burden to establish non est factum. In my view, the defendant has not raised any triable issue on this point.

23. The case of misrepresentation is likewise based on the flimsiest ground. Mr Chua, counsel for the plaintiff, described this as a "throw away line". I agree. The case of Lloyds Bank can hardly assist the 2nd defendant in this case.

Code of Banking Practice

24. Mr Lam also argued that the Code of Banking Practice 1997 ("the Code") issued by The Hong Kong Association of Banks had not been observed. Under this guideline banks should in writing advise the surety :

"(a) that by giving the guarantee or third party security, the surety might become liable instead of or as well as that other person;

(b) whether the guarantee or third party security includes an All Monies Clause or is unlimited as to amount and, if so, the implications of such liability (for example, that the surety will be liable for all the actual and contingent liabilities of the borrower, whether now or in future). If this is not the case, what the limit of the liability will be ..."

Mr Lam, however, accepted that the Code had no binding legal effect on the banks. As such, I do not see how the reliance on the Code can assist the 2nd defendant.

Conclusion

25. In my view, there is no defence to the plaintiff's claim on liability. Accordingly, there should be judgment to the plaintiff against the 2nd defendant as claimed. The appeal is allowed. The plaintiff is entitled to have the costs nisi of the action, including the appeal and the hearing before the master.