MITSUBIISHI CORPORATION (HONG KONG) LTD v. COLLECTLY INDUSTRIES LTD

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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JUDGMENT

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The Background

1. The plaintiff and Sanxia Gorges Investment Company Limited (Sanxia) entered into two agreements on 25 January 1994 (the contracts) under which the plaintiff sold to Sanxia some construction equipment. On the same date, the defendant, which is a trading company of the Hubei Provincial Government, gave an unconditional guarantee to the plaintiff undertaking to pay if Sanxia failed to do so (the first guarantee). Some time after this, the plaintiff and the defendant entered into an undated agreement under which the plaintiff agreed to pay "commission" to the defendant in respect of the contracts. On 25 November 1994, the plaintiff and Sanxia entered into another agreement. This referred to them having entered into an agreement dated 28 January 1994, and their wish to amend this agreement, which they do. Judging by the terms of this agreement on 25 November 1994, it looks as if the plaintiff and Sanxia are amending the undated agreement regarding commission, but, of course, this undated agreement was between the plaintiff and the defendant. Under the agreement of 25 November 1994, the plaintiff paid the sum of US$1,826,821.28. Sanxia agreed to repay this commission if Sanxia "can not effect every repayment of the principal" to the plaintiff.

2. In February 1996, there were some meetings between people representing the plaintiff and people representing the defendant and Sanxia. Then, on 26 February 1996, the defendant wrote to the plaintiff, referring to the agreement of 25 November 1994, and guaranteeing the obligation of Sanxia to return the commission (the second guarantee).

3. On 15 April 1996, the plaintiff wrote to Sanxia demanding payment in full under the contracts. On the same day, the plaintiff wrote to Sanxia demanding the return of the commission of US$1,827,482.45. On 16 April 1996, the plaintiff wrote to the defendant demanding payment under the second guarantee. This demand was repeated on 31 May 1996. There was no payment and no reply to these two letters.

4. In June 1996, there were meetings between the representatives of the plaintiff and Sanxia. On 12 June 1996, there was a letter written by Three Gorges Investment Company, which, I believe, is Sanxia, to the plaintiff in which interest payments were promised.

5. On 21 September 1996, the plaintiff issued a writ against the defendant, basing its claim on the second guarantee, given, it is said, "in consideration of the Plaintiff agreeing to postpone taking immediate action against Sanxia".

6. On 16 October 1996, the plaintiff issued an Order 14 summons. This is the summons now before me.

The Issues

7. There is obviously some confusion about the agreement of 25 November 1994 amending the earlier agreement, but there is no doubt that, under this agreement of 25 November 1994, the plaintiff agreed to pay money to Sanxia, and did pay to it the sum of US$1,826,821.28. And there is no doubt that, under the second guarantee, the defendant guaranteed Sanxia's obligation to return this money in certain circumstances. There is no dispute on the evidence that these circumstances came about, and there is no dispute that, if the second guarantee is binding on the defendant, it is obliged to pay.

8. The defendant, however, says that the second guarantee is not binding, and it says so for three reasons -

• The plaintiff's representatives assured the defendant "that no action or enforcement would be taken on the guarantee until after the Plaintiff has taken action and enforced against Sanxia and the machinery... and such action proved insufficient to satisfy the amount owing to the Plaintiff under the two contracts ...".

• There was no consideration to support the second guarantee.

• The obligations of Sanxia under the two contracts were varied, thus releasing the defendant from the second guarantee.

The Assurance

9. Mr Ng Cheong Sau, who gives evidence on behalf of the defendant, is a director of both the defendant and Sanxia.

10. The assertion by Mr Ng that the plaintiff gave the assurance mentioned above is not credible. The second guarantee is a formal, carefully drafted, carefully typed document. It takes care to spell out precisely in what circumstances payment under the second guarantee will be due. The defendant says that, in spite of this, the understanding between the parties was otherwise; that payment would not be due as stipulated in the second guarantee, but the plaintiff was obliged to pursue Sanxia first. This is not a case, of course, of the second guarantee being given, and a subsequent agreement to vary it. Mr Ng, of the defendant, makes it quite clear that the defendant entered into the inconsistent second guarantee after the agreement that the plaintiff would pursue Sanxia first. There is absolutely no evidence from the defendant to explain why a formal guarantee was signed on its behalf saying something that was not consistent with what had been agreed. This is especially so if Mr Ng is right in saying that the defendant drew up the guarantee. I know that Mr Ng suggests that the defendant simply followed the first guarantee, but, if the wording of the guarantee was within defendant's control, it very hard to understand why the defendant did not draft it to reflect what had been agreed.

11. The defendant seeks to support the evidence of Mr Ng, of the defendant, on this point by producing a letter dated 14 May 1997 from a Mr Nakamura written to "Boss Ng" in which Mr Nakamura confirms that the assurance was given. This statement is not in evidence, and I attached no weight to it. Mr Cheung said that the defendant could get this evidence in proper form, but it is too late for that now.

12. Most telling is that this story of the alleged assurance by the plaintiff only emerges after the plaintiff commences the Order 14 proceedings. As I have said, the plaintiff wrote to the defendant on 16 April 1996 and 31 May 1996 demanding payment under the second guarantee. The first letter made it quite clear that the demand was being made because Sanxia had failed to pay. The recipient of this letter could not possibly have thought that the plaintiff had pursued Sanxia and the machinery without success. And yet there is no response by the defendant to these letters. Of course, it can readily be understood that a layman might not understand that a guarantee is not enforceable because there was no consideration, or because the obligation guaranteed has been varied-these are technical legal matters - but the defendant well knew, if it is telling the truth, that it had been assured that the guarantee would not be used in the circumstances stated in the guarantee; that a great deal more was requited of the plaintiff before it could recover. If what the defendant says now is the truth of the matter, it is quite inexplicable that the defendant did not write back immediately and say something to the effect - "What are you talking about? You assured us that you would proceed against Sanxia to the point of exhaustion before calling on us." But, not only did this not happen, but the defendant has said not one word to explain why it did not do this. This behaviour for businessmen with a legitimate complaint is not credible.

13. I reject as unbelievable this assertion by the defendant of an unwritten assurance contradicting the clear terms if the guarantee.

Consideration

14. The plaintiff says that the consideration was its forbearance from proceeding against Sanxia. It is of some interest that the plaintiff alleges this in its statement of claim filed long before the plaintiff knew that the defendant was suggesting that the guarantee was without consideration.

15. On 18 January 1996, the plaintiff wrote to Sanxia pressing Sanxia to propose satisfactory arrangements to settle what was due. There were then meetings on 23 and 24 February 1996 regarding settlement. The defendant gave the guarantee on 26 February 1996. Sanxia made payments in March 1996. The plaintiff did not pursue Sanxia until it wrote demanding payment in full on 15 April 1996.

16. There is a dispute regarding the giving of the guarantee. Mr Okubo, of the plaintiff says that Mr Ng volunteered it. Mr Ng says Mr Okubo asked for it to satisfy his superiors. It is strange that, if Mr Okubo asked for the guarantee, he did not provide the draft of what he wanted to be signed by the defendant, but instead left it to the defendant to provide this. It seems to me that this dispute is of little moment.

17. Mr Ng says that, during the period immediately before the giving of the guarantee, the plaintiff and Sanxia were negotiating repayment and "at no time during this period was any legal or enforcement action by the plaintiff against [Sanxia] imminent." On this basis, Mr Ng says there was no consideration. This, of course, is nonsense. The fact that Sanxia was trying to delay payment makes it entirely probable that the guarantee would be given to assist in that endeavour. I do not accept that the defendant gave the guarantee to satisfy Mr Okubo's superiors only, and it was not to have any influence on the plaintiff's attitude to pursuing Sanxia.

18. The only credible explanation for giving the guarantee was to keep the plaintiff happy and induce it not to take immediate action against Sanxia. That is sufficient consideration.

19. I find the defendant's case that there was no consideration for the guarantee is without substance.

Variation

20. Mr Ng, on behalf of the defendant, says that, subsequent to the guarantee, the plaintiff entered into an agreement with Sanxia for the rearrangement of Sanxia's payment obligations under the contracts. He gives no particulars of making of this agreement, and does not say how he knows this, but he says that it is evidenced by certain documents, which he produces. Mr Ng says that under this agreement, Sanxia's only obligation was to make interest payments-the obligations to repay capital being deferred. In its letter to the defendant of 16 April 1996, the plaintiff complained that Sanxia had not paid the first instalment of capital in accordance with the contracts. The defendant did not contradict this.

21. The documents produced by Mr Ng do not support any such agreement as alleged by him. The defendant provided no translations of these documents, but those provided by the plaintiff do not say what Mr Ng suggests they say. The defendant does not challenge the accuracy of the plaintiff's translations. The documents reveal no more than promises by Sanxia to pay the interest. There is no suggestion in these documents that the plaintiff bound itself to vary the obligations under the contracts. Mr Lisa Poon also says, on behalf of the defendant, that an agreement was reached regarding repayment by Sanxia on 12 June 1996, but she gives no details of this agreement, and does not suggest she was present at the time. One of the documents mentioned by Mr Ng is dated 12 June 1996. This refers to a meeting between the plaintiff and Sanxia, but says no more than payments of interest will be made on 31 October 1996 and 31 December 1996. It goes nowhere towards establishing that the plaintiff bound itself to some variation of the obligations of Sanxia under the contracts.

22. I find that there is no evidence that the plaintiff bound itself to a variation of the obligations of Sanxia under the contracts.

Result

23. In the result, I find that the defendant has not advanced any credible defence fit for trial. Accordingly, I grant judgment in favour of the plaintiff against the defendant in the sum of US$1,827,482.45. This sum will bear interest from 16 April 1996 to the date of judgment at a rate to be agreed. Failing agreement, the matter may be brought back to me. From the date of judgment, the sum will bear interest at the judgment rate. The plaintiff is entitled to its costs of suit, and I so order.