SHENZHEN DEVELOPMENT BANK CO. LTD. v. NEW CENTURY INT'L (HOLDINGS) LTD. AND ANOTHER

HCA 2976/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2976 OF 2001

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J U D G M E N T

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1. In this action, the Plaintiff claims against both Defendants in respect of a bank loan made in August 1998. The 1st Defendant was the borrower and the 2nd Defendant was the guarantor. The loan documentations were in Chinese and were prepared by a solicitors firm in Hong Kong. Both Defendants are Hong Kong companies whilst the Plaintiff is a bank carrying on business in mainland China. The loan amount was US$12 million and it was for a fixed term of 10 months. The loan agreement was executed by the 1st Defendant on 29 August 1998 ["the Agreement'] and the guarantee was executed by the 2nd Defendant on 31 August 1998 ["the Guarantee"]. It is common ground that the intentions of the parties were to use this loan to discharge the liabilities of the 1st Defendant under an old loan made under an earlier agreement dated 15 July 1997. The old loan had been advanced in two tranches of US$6,000,000 each. They were due to be repaid on 16 July and 31 July 1998 respectively.

2. By a summons dated 6 December 2001, the Plaintiff seeks summary judgment against the Defendants. Although the 1st Defendant did not file any evidence to resist the application, their solicitor relied on the points raised and the evidence filed by the 2nd Defendant. Four lines of defence were relied upon by the 2nd Defendant,

(a) there had not been any drawdown under the Agreement;

(b) the grant of a loan to repay an old loan was illegal and unenforceable under the law in mainland China, which was applicable because mainland China was the place of performance;

(c) under the law in the mainland, the Guarantee, being accessory (從屬) to the loan agreement, is equally unenforceable if the loan agreement was unenforceable;

(d) lack of approval from the relevant authority to allow the Plaintiff to make such a loan also rendered the loan illegal and unenforceable.

3. I have formulated the issues in a manner slightly different from those set out by Mr Tong SC (who appeared together with Mr Au for the 2nd Defendant) in his skeleton submissions. Mr Tong raised an additional point about the choice of law clause in the loan documentation. That is an issue which I must consider before I discuss the illegality issues.

The drawdown

4. I first deal with the drawdown of the loan. The argument of the Defendants was as follows,

(a) The Agreement provided that the loan would be made available to the borrower upon receipt of a drawdown notice from the borrower, see Clause 2(1). The form of drawdown notice was prescribed under Clause 1(1) and Annex 1. The notice could be given within a drawdown period of 3 months. Clause 5 of the Agreement also stipulated that there could be more than one drawdown during the drawdown period. One precondition for a drawdown was that the borrower needed to give drawdown notice at least two working days prior to actual drawdown.

(b) No drawdown notice has been issued in the present case.

(c) Hence no loan has been made under the Agreement.

5. Mr Tong emphasized that as far as the 2nd Defendant was concerned, it only provided a guarantee in respect of the obligation of the 1st Defendant regarding the loan made under the Agreement. The 2nd Defendant has not guaranteed other obligations owed by the 1st Defendant to the Plaintiff. Whilst there might be other arrangement under which facilities were provided to the 2nd Defendant, that would not be within the scope of the Guarantee executed by the 2nd Defendant on 31 August 1998.

6. Mr Tong further said that the loan under the Agreement was not advanced automatically and he referred to the cancellation charges under Clause 5(3) to support his argument.

7. Whilst it cannot be disputed that there was no drawdown notice, in my judgment there cannot be any doubt that the loan was advanced under the Loan Agreement. The evidence clearly showed that on 31 August 1991 a sum of US$12,000,000 was credited into the account of the 1st Defendant by the Plaintiff and that sum was used to paid off the previous loan by two tranches, each in the sum of US$6,000,000. Apart from the account entries, there was also a borrowing note bearing the chop of the 1st Defendant and the signatures of its directors. According to that note, the amount of the loan was US$12,000,000 and the duration of the loan was 10 months. The interest rate was prime plus 3.7% which was the rate chargeable under the Agreement. The purpose of the loan was also consistent with that provided for under Clause 3 of the Agreement.

8. On the same date as the sum being credit into the account of the 1st Defendant, viz. 31 August 1998, the board of directors of the 2nd Defendant passed a resolution approving the provision of a guarantee in respect of the loan to the 1st Defendant by the Plaintiff. The board came to that decision after reading the loan documentations and taking into account that its wholly owned subsidiary China Everbright Financial Holdings Limited held 20% of the shareholdings of the 1st Defendant and there were constant dealings between the two.

9. The Defendants did not adduce any evidence to show that there were some other arrangements apart from the Agreement under which the Plaintiff credit the 1st Defendant's account with US$12,000,000. In Paragraph 6 of the First Affirmation of Tse Hang Mui filed on behalf of the 2nd Defendant, he only said that the evidence produced by the Plaintiff was inconclusive to prove that a loan was granted. Similar comments were made in paragraph 3 of his Second Affirmation. Bearing in mind the threshold burden on a defendant in an Order 14 application, I do not regard these as sufficient evidence to sustain a positive case that the US$12,000,000 was advanced under other arrangement.

10. In the end, the point of the Defendants boils down to the lack of drawdown notice. I accept the submission of Mr Jat SC (who appeared with Mr Kenneth Ng on behalf of the Plaintiff) that there is no doubt that the requirement of drawdown notice was for the benefit and protection of the Plaintiff and the Plaintiff could waive the same (see Chitty on Contracts, 28th Edn., Para. 23-044). Hence, the absence of a drawdown notice does not mean that no loan has been advanced under the Agreement. Ultimately, the question is whether the loan has been drawn pursuant to the Agreement. Despite the absence of drawdown notice, for reasons given in Paragraphs 7 to 9 above, the evidence as to making of the loan under the Agreement is overwhelming and I do not see any triable issue under this head.

Were the transactions governed by the law of mainland China?

11. Before I consider the substantive issues regarding the illegality arguments of the Defendants, I must examine whether there is arguable case that the law of mainland China applied to these transactions. Both the Agreement and the Guarantee contained a choice of law clause stipulating that Hong Kong law applied, see Clause 25 (1) of the Agreement and Clause 24 (1) of the Guarantee.

12. Mr Tong relied on the principle illustrated by the case of Ralli Brothers v Compania Naviera Sotay Aznar [1920] 2 KB 287. The Court of Appeal in that case applied the following principle of law set out in the second edition of Conflict of Laws by Professor Dicey at p. 553,

"A contract (whether lawful by its proper law or not) is, in general, invalid in so far as the performance of it is unlawful by the law of the country where the contract is to be performed."

Scrutton LJ said at p. 304,

"...where a contract requires an act to be done in a foreign country, it is, in the absence of very special circumstances, an implied term of the continuing validity of such a provision that the act to be done in the foreign country shall not be illegal by the law of that country."

13. Mr Jat did not dispute this principle. However, he submitted that it would only apply if the contract necessitated performance at a particular place and the performance was illegal according to the law at that place. In support of this proposition, he cited the case of Toprak v Finagrain [1979] 2 Ll Rep 98 at p. 106. Mr Jat argued that there was no requirement under the Agreement that the loan has to be repaid in mainland China. Clause 10(2) of the Agreement provided for directions to be given by the Plaintiff regarding mode of repayment. Mr Jat submitted that there could be a direction for repayment by depositing US$ into account outside mainland China.

14. To that, Mr Tong retorted by arguing that since the Plaintiff did not have any place of business other than in mainland China, in the absence of express provision as to manner of repayment, the law is that the debtor has a duty to seek out the creditor and to pay him at his place of business. He relied on Drexel v Drexel [1916] 1 Ch 250 and Rein v Stein [1892] 1 QB 753.

15. On this point, I agree with Mr Jat. Given the term of Clause 10(2) in the Agreement, I do not think it is correct to treat this as a case where the contract did not provide for the manner of repayment. That clause provided that the mode of repayment shall be stipulated by the Plaintiff. In the present case, repayment was demanded by Messrs Koo & Partners on behalf of the Plaintiff on 1 December 1998 in Hong Kong. The demand included a demand for the sum of $3,000 being the costs of that firm. By necessary implication, it was a demand for repayment in Hong Kong through that firm. As far as repayment obligations under the Agreement is concerned, I do not think the contract necessarily required performance in mainland China.

16. I further observe that there are suggestions that it is doubtful whether the principle is as wide as generally formulated (see Chitty on Contracts, 28th Edn., Para. 17-032; Cheshire & North, Private International Law, 11th Edn., p. 485-9). However, the point has not been argued before me and I do not express any views thereon.

17. But this is not the end of the matter. Mr Tong also relied on the case of Foster v Driscoll [1929] 1 KB 470. At p. 521, Sankey LJ said,

"To sum up, in my view an English contract should and will be held invalid on account of illegality if the real object and intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally."

18. In Toprak, at p. 106-7, Goff J (as he then was) said this was a related but not identical principle as the one applied in Ralli Brothers. The focus of the principle in Foster is on the common intention of the parties. It is applicable even though there were alternative modes of performance on the face of the documents if it is established that the common intention of the parties was to violate the law of the foreign country. His Lordship regarded Regazzoni v KC Sethia [1958] AC 301 as decided on this principle. On the facts of Toprak, Goff J found that the defendant could not establish such a common intention. The contemplation of the parties that the contract would be performed in a particular manner was held to be insufficient to bring this principle into operation. This was confirmed in the Court of Appeal by Lord Denning MR at p. 114 (with concurrence of Roskill LJ at p. 116 and Cumming-Bruce LJ at p. 117).

19. Is there any evidence in the present case to show a common intention to perform an illegal act in mainland China? If the question is directed to repayment alone, my view is that the Defendant has not established an arguable case that the common intention of the parties was for repayment to be made in mainland China. The transaction was regarded as an offshore loan and it was in US dollars. The Defendants were Hong Kong companies with their registered offices in Hong Kong. The loan documentations were prepared in Hong Kong. The mere fact that the Plaintiff carried on business in mainland China at the most showed that parties might have contemplated the same if they were asked about that, but it did not amount to evidence of common intention.

20. However, I think the issue should be considered broadly. It cannot be denied that there was a common intention that the loan would be advanced in mainland China to repay the old loans which were made in mainland China. The fund was credit on 31 August 1998 into the 1st Defendant's account in mainland China. In fact, it might even be arguable that Clause 3 of the Agreement required the loan to be advanced in mainland China. For these reasons, the law of mainland China is relevant in considering the validity of the Agreement.

21. In the light of that, it is not necessary for me to consider at length a third basis argued by Mr Tong as to why the law of mainland China should be relevant. That argument based on an attack on the bona fide of the Plaintiff in choosing Hong Kong law under the Agreement and the Guarantee. In Vita Food Products Inc. v Unus Shipping Co. [1939] AC 277 at p. 290, Lord Wright said,

"...where there is an express statement by the parties of their intention to select the law of the contract, it is difficult to see what qualifications are possible, provided the intention expressed is bona fide and legal, and provided there is no reason for avoiding the choice on the ground of public policy."

On the facts of that case, the transaction in question had no connection with English law. Yet, the Privy Council upheld the parties' choice of English law. Lord Wright clearly stated on the same page that connection with English law was not as a matter of principle essential. Hence, the absence of such connection cannot by itself be evidence of lack of bona fide.

22. The meaning of lack of bona fide in this context has not been clearly defined. Dicey & Morris on Conflict of Laws, 11th Edn., at p. 1172 observed,

"The formula has never been applied by an English court to strike down a choice of law, and its scope causes some difficulty. No doubt to be given effect a choice of law must be genuine, and not capricious, and it must not be a mere pretence. As Dicey put it, "if it is clear that [the parties] meant to contract under one law ... no declaration of intention to contract under another law so as to give validity to the contract will avail them anything." It does not, however, follow that a choice of law designed to avoid the application of the law which would, in the absence of an express choice, be the proper law is of no effect."

Then at p. 1175-6,

"...where a contract has some connection with the chosen law the mere fact that the choice was intended to avoid the application of the law which would have otherwise been applicable does not invalidate the choice. Where the chosen law has no connection with the transaction the fact that the choice is designed to avoid the application of some other law may be evidence that the choice is not bona fide. But this is not necessarily so."

Further down at p. 1176,

"...in English law it is suggested that no express choice of foreign law in a contract which has some reasonable basis, whether or not it has any direct or indirect relationship with the transaction, will be disregarded. Or, to put it differently, a purely arbitrary choice of law will not be regarded as made in good faith."

23. Cheshire & North, Private International Law, 11th Edn., p. 454 put the matter as follows,

"But the statement that the choice must be bona fide and legal is not free from ambiguity. What it presumably means is that the parties cannot pretend to contract under one law in order to validate an agreement that clearly has its closest connection with another law. If, after having discovered that one particular provision was void under the proper law, they were to try to evade its consequences by claiming that the provision was subject to another legal system, their claim should not be considered as a bona fide expression of their intention. The fact that a choice is made in bad faith is evidenced by a lack of connection between the agreement and the law chosen. Conversely, in the situation where the agreement has a real connection with the law chosen, this is good evidence of a lack of evasive intent by the parties."

24. I agree with Mr Jat that the burden is on the defence to show an arguable case to attack the bona fide of the Plaintiff in making such a choice. Notwithstanding that the choice of law issue has been highlighted by the Plaintiff in evidence, the Defendants did not put forward any specific evidence to attack the bona fide of the Plaintiff. Mr Tong argued this point simply on the basis that given the close connection of the loan with mainland China, it is at least arguable that Hong Kong law was chosen for the purpose of evading the law of mainland China. With respect, I disagree. By reason of the matters I have referred to in Paragraph 19, there are real connections between the transactions and Hong Kong. On evidence before me, I do not think the Defendants have any arguable case as to the lack of bona fide on the part of the Plaintiff in choosing Hong Kong law. There is simply no evidence to show that the Plaintiff believed that the transactions were illegal under the law of mainland China in August 1998, not to mention an intention on its part to evade the same. The case of Golden Acres Limited v Queensland Estates [1969] Qd R 378 relied upon by Mr Tong is therefore distinguishable (see in particular p. 384F to G). The other case cited by Mr Tong, Cardel Leasing v Graham Maxmenko, Ontario Court of Justice, 6 December 1991, seems to be decided on the ground of illegality and unenforceability at the place of performance rather than on the basis of lack of bona fide on the choice of law. Although reference was made by the learned judge in that case to dicta of Lord Wright, I do not find that case to be of much assistance in that respect.

The proper approach with regard to expert evidence on foreign law

25. The Plaintiff and the 2nd Defendant have filed their respective expert evidence on the law of mainland China. As expected, the two experts contradicted each other. Issues of foreign law are regarded as issues of facts in our courts. But they are facts of a peculiar kind. In the resolution of conflicts in the expert evidence on foreign law, a judge is entitled and indeed obliged to use his legal training insofar as it may have a bearing on the resolution of dispute. The proper approach has been held by the English Court of Appeal in MCC Proceeds Inc. v Bishopsgate Investment Trust [1999] CLC 417 at p. 421 [13] to be as follow,

"In our judgment, the answer varies according to the nature of the issue which arises in the particular case and the kind of decision which the trial judge and now the Court of Appeal is called upon to make. Sometimes the foreign law, apart from being in a foreign language, may involve principles and concepts which are unfamiliar to an English lawyer. The English lawyer. The English judge's training and experience in English law, therefore, can only make a limited contribution to his decision on the issue of foreign law. But the foreign law may be written in the English language; and its concepts may not be so different from English law. Then the English judge's knowledge of the common law and of the rules of statutory construction cannot be left out of account. He is entitled and indeed bound to bring that part of his qualifications to bear on the issue which he has to decide, notwithstanding that it is an issue of foreign law. There is a legal input from him, in addition to the judicial task of assessing the weight of the evidence given."

And further at p. 423 [19],

"[The judge] is entitled, indeed bound, to contribute his own legal skill and experience in reaching his conclusion, so much so that he may, in a suitable case, form his own view of the meaning of a statute which the expert witness tells him is the governing foreign law, even if the expert's opinion as to its meaning is different from his own ..."

And on the same page, [20],

"...whether the judge is only entitled to reject the expert's opinion evidence as to the meaning of the statute when the witness has put forward an 'impossible view' ... in our judgment, the trial judge's powers are not so limited ... in a case where the English court interprets the statute in accordance with English rules of construction, there being no evidence that different rules would govern the foreign court's interpretation, and where there is no suggestion that any of the words of the statute has a special meaning, different from its ordinary meaning, in the foreign context."

26. In [23] at p. 424, the Court of Appeal summarised the function of an expert witness on foreign law as follows,

"(1) to inform the court of the relevant contents of the foreign law; identifying statutes or other legislation and explaining where necessary the foreign court's approach to their construction;

(2) to identify judgments or other authorities, explaining what status they have as sources of the foreign law; and

(3) where there is no authority directly in point, to assist the English judge in making a finding as to what the court's ruling would be if the issue was to arise for decision there."

27. In the more recent case of Morgan Grenfell v SACE [2001] EWCA Civ 1932, 19 December 2001, the English Court of Appeal applied the same approach. In the context of application for summary judgment the same approach was applied by Tomlinson J in Credit Agricole Indosuez v Ecumet (UK) Ltd 29 March 2001. That seems to me to be in line with the approach of our Court of Appeal in Manciple v Char On Man [1995] 3 HKC 459. Even in the context of Order 14 application, the court is not bound to accept that the views of an expert are credible. The court is entitled to examine the views of the expert against the primary source of foreign law. In the present context, as a bilingual judge, I regard myself as duty bound to use my knowledge in the Chinese language and legal training, insofar as permissible in accordance with the principles set out in Bishopsgate Investment to examine the relevant legislations, directives and other authorities referred to by the experts. Of course, I bear in mind that at this stage, the Defendants only need to show that the evidence of their expert is believable. Mr Tong rightly reminded me that if I feel that there are aspects in the expert evidence which could only be resolved by cross-examination or further investigation, it would not be right for me to grant summary judgment on the basis of the expert evidence of one side.

28. Bearing these principles in mind, I can now turn to the several issues raised by the Defendants on the law of mainland China.

Was transaction illegal in mainland China by reason of the loan being used to repay an earlier loan

29. The 2nd Defendant's expert, Grandall Legal Group ["Grandall"] opined that according to the law of mainland China, the repayment of an old loan by a new loan could not be regarded as legal with great certainty (see Para. 1.1 at p. 268 of Bundle). It seems to me that even taking that opinion to its highest, Grandall only went to the extent of casting a doubt over the legality of such transaction. In other words, Grandall was unable to say affirmatively that the courts in mainland China would hold such a transaction to be illegal.

30. The opinion was based on Article 7 of the Commercial Banking Law and Article 17(1) (mistakenly referred to as Article 18(3) in their written opinion) of the Lending General Provisions of the People's Bank of China. These were of course enacted in Chinese. Article 7 of the Commercial Banking Law (商業銀行法) provided,

"商業銀行開展信貸業務,應當嚴格審查借款人的資信,實行担保﹑保障按期收回貸款。

商業銀行依法向借款人收回到期貸款的本金和利息,受法律保護。"

The relevant parts of Article 17 of the Lending General Provisions of the People's Bank of China (中國人民銀行貸款通則) provided,

"借款人申請貸款, 應當具備產品有市場﹑生意經營有效益﹑不擠佔挪用信貸資金﹑恪守信用等基本條件,並且應當符合以下要求:

一﹑有按期還本付息的能力, 原應付貸款利息和到期貸款已清償;沒有清償的, 已經做了貸款人認可的償還計劃。"

31. There is no dispute that these are regarded as law with statutory effect in mainland China. On the face of these statutes, they do not stipulate expressly that it would be illegal to grant a new loan for the purpose of repaying an old loan. Article 7 directed that a commercial bank should prudently and seriously examine the creditworthiness of a borrower and to require the necessary security. Provided that a bank has carefully assessed the creditworthiness of a borrower and the security offered by him, it seems that the requirement has been satisfied. It is also relevant to bear in mind the objectives of the Commercial Banking Law which was set out in Article 1. I note that under Part 4 of that piece of legislation, viz. Articles 34 to 53, there were basic rules governing lending by commercial banks. Articles 36 and 35 contained further provisions as to the examination of the creditworthiness of the borrower and the assessment of the security offered. There was no prohibition against the grant of a new loan to repay an old loan.

32. The Lending General Provisions were promulgated by the People's Bank of China. Article 17 again did not stipulated expressly that it would be illegal to grant a new loan for the purpose of repaying an old loan. Not did it say that such a loan, if granted, shall be unenforceable. It would indeed be remarkable if Article 17 were construed as having the effect that if a loan were granted to a borrower who did not satisfy the criteria in that Article, the loan would become unenforceable. As can be seen from the terms of Article 17, it referred, inter alia, to the marketability of the products of a borrower and the profitability of his business operation. If such a construction were accepted, that would mean as a matter of logic that a bank would not be able to enforce a loan against a borrower whose products turns out to be less marketable than expected or whose business turns out to be less profitable.

33. Grandall was however able to refer to some judicial authorities in mainland China to support their opinion. The first one was a decision by the People's Court at the District of Shing Kwan of the City of Lanchow (甘肅省蘭州市城關區人民法院) in 1998 in the context of an insolvency case. In that case, the borrower was a company which became "bankrupt". One of its creditor, the Bank of Communication, demanded that a charge held by it over the equipment and machinery of the company be given priority. The charge was created on 27 April 1998 in respect of a loan of 4,300,000 RMB. The loan period was from 29 May 1998 to 29 May 1999. The loan was in fact made for the purpose of repaying previous loans advanced by the bank to that company between 1996 and 1997. The company went bankrupt shortly afterwards and the bank was requested to submit proof of debt on 27 August 1998. The court held that the charge was ineffective for a number of reasons. The one relevant for the present purposes is that because the borrower was unable to repay the earlier loans, it was unable to satisfy the basic criteria of a borrower under the General Lending Provisions. The 4,300,000 RMB loan was granted before the repayment of the old loans and it was in effect a payment of the old loans by the new loan. The court said this was against the regulations governing lending and borrowing in the country and should be regarded as null and void. The court referred to the two pieces of statutes mentioned in Paragraph 30 above.

34. This decision appears to support the opinion of Grandall and as Mr Tong submitted, this court should treat a decision of a foreign court on the laws of that country with respect. If this were the only judicial authority on point, I would tend to accept that the question must go to trial despite my own views as to the construction of these statutory provisions. However, the Plaintiff's expert drew attention to a decision of the Supreme People's Court of the People's Republic of China (中華人民共和國最高人民法院) in 1999, the highest court in the country. That was a decision on appeal from the High Court of the Jingsu Province (甘肅省高級人民法院). The case report was published in the Report of the Supreme Peoples' Court (法院公報). Although there is no principle of stare decisis in mainland China, these decisions of the highest court were published in the reports for providing guidance to the other courts in mainland China.

35. In the case before the Supreme People's Court, the lender bank sought to enforce a guarantee provided by the parent company of a borrower which had been declared bankrupt. The guarantee was provided in respect of loans advanced in July and August 1996, a substantial part of which were used to repay the old loans due by the borrower under previous advances between 1992 and 1994. The High Court of the Jingsu Province held that the 1996 loan agreement and guarantee were valid. On appeal, the Supreme People's Court decided that the common intention of the parties were to use the new loan to repay the old loans and the loan agreement did not contravene any law in mainland China. The court therefore held that the agreement was valid. Although there was no specific reference to the two statutory provisions in the judgment, I do not think these could have escaped the attention of the court or the parties. If the effect of those statutory provisions were as those contended for by the Defendants, it is most unlikely that the Supreme People's Court would hold that the agreement in that case did not contravene any law. Despite the ingenuous submission of Mr Tong, I do not agree that the point was not decided by Supreme People's Court.

36. Grandall also referred to a directive issued by the High Court of the Chekiang Province (浙江省高級人民法院) in 1996. That directive dealt with a situation where before a borrower repaid his previous loans, he used a false pretence to apply for a fresh loan whilst both the borrower and lender were aware that the real purpose of the loan was to use that money to repay the old loan. The High Court opined that such conducts were against the Commercial Banking Law and the General Lending Provision. It is not clear which provisions the High Court were referring to and whether the directive was aiming only at false pretence in application and approval of loan or also the making of new loan to repay old loans. Mr Jat argued for the former whilst Mr Tong advocated the latter. For some reasons unknown to me, Grandall only produced a paragraph from that directive and I am therefore not in a position to see the context in which this opinion was expressed by the Court. I do not find it necessary to resolve this dispute because for reasons given below, even if this directive were to be read in the manner contended for by Mr Tong, I do not think it matters very much.

37. As I said, the General Lending Provisions were promulgated by the People's Bank of China. That Bank performed the role of banking regulator in mainland China. In a letter from the bank to its Chekiang branch office dated 19 May 1997, it clearly intimated that the grant of a new loan to repay old loan by itself could not be regarded as a loan on a false pretence and such activities would not contravene the Commercial Banking Law and the General Lending Provision. The loan agreement for the new loan would be regarded as valid. Bearing in mind the role of the Bank and the fact that the General Lending Provisions were in fact promulgated by the Bank, I do not think one could brush aside the opinion of the Bank on the matter. After all, as Mr Tong emphasized, the system in mainland China is different from that in Hong Kong. Grandall also highlighted the role of the People's Bank of China as central bank in laying down banking and financial policies applicable in the country in Paras. 4.2 to 4.4 of their opinion.

38. Grandall also referred to the limitation on the renewal of loans in the General Lending Provisions. That can be found in Article 12. Different limits were prescribed for short term loan, medium term loan and long term loan. It is not suggested that there was any contravention of this article in the present case and I have no evidence as to whether the loan in issue would be classified as short term, medium term or long term. Counsel did not address me on this article. I would only observe that this article clearly shows that the General Lending Provision envisaged that banking facilities could continue to be provided to a borrower who could not repay in accordance with the original terms of the loan. This means that Article 17 cannot be construed in a way that prevent facilities being granted in cases of inability of a borrower to make repayment on time. On this point, Article 17 itself also makes it clear. In sub-paragraph 1, it referred to the scenario where a borrower did not pay off the loan when it fell due. Provided that he has made arrangement with the lender for repayment, the Article envisages that he could apply for new facilities.

39. Ultimately, the issue is whether the Defendants have shown an arguable case that under the law of mainland China, the Agreement would be held to be unenforceable in China by reason of the fact that the loan was made for the purpose of repaying the earlier loan. The expert evidence is to assist the court to predict the likely decision of the court in China, see Bishopsgate Investment, p. 424-5 [24]. On the material before me, bearing in mind the proper approach in question relating to foreign law and in summary judgment application, I come to the conclusion that it is clear that there is no triable issue in this regard. Whether as a matter of authorities, or principles or logic, I am sure that if this issue were brought up for decision in a court in mainland China, the court would follow the decision of the Supreme Peoples' Court and hold that the Agreement did not contravene the Commercial Banking Law or the General Lending Provision.

The Guarantee

40. In view of my conclusion on the legality of the Agreement, it is unnecessary to deal with the question as to the validity of the Guarantee on the basis that the Agreement was invalid. However, for the sake of completeness, I would summarize the positions of the parties and my views thereon.

41. Clause 3(1) of the Guarantee provided that the obligation under the Guarantee was that of a principal debtor instead of a guarantee. Hence, Clause 3(1)(f) specifically stated that even if the Agreement were held to be illegal, invalid or unenforceable, the 2nd Defendant would still be liable under the Guarantee. To the same effect is Clause 14(1). Mr Jat relied on Yorkshire Railway Wagon Co. v Maclure (1881) 19 Ch D 478 and Garrard v James [1925] 1 Ch 616 for the proposition that if the parties' intention are such that they intended the guarantor to be liable even in the event that the principal debtor is not liable, effect would be given to such intention.

42. If the law of mainland China were applicable, Mr Jat submitted that the position is the same by reason of the proviso in Article 5 of the Guaranty Code (担保法). That Article reads,

"担保合同是主合同的從合同,主合同無效,担保合同無效。担保合同另有約定的, 按照約定。"

43. Mr Tong submitted that the cases cited by Mr Jat were anomalies and could not be regarded as good law. He referred to O'Donovan & Phillips, The Modern Contract of Guarantee, 3rd Edn. p. 263-5.

44. In my judgment, the first question is whether the contract embodied in the Guarantee was a contract of indemnity or a contract of guarantee. This depends on the terms of the contract. In this connection, Clause 3(1) and Clause 14(1) made it clear that the liability of the 2nd Defendant under the Guarantee was one in the nature of indemnity. Thus the principle of co-extensiveness regarding guarantee has no application.

45. Mr Tong further submitted that the Guarantee was governed by the law of mainland China and according to the opinion of Grandall, based on Article 5, the Guarantee could not be valid if the Agreement was invalid by reason of illegality.

46. The only basis on which I hold that the law of mainland China was the governing law for the Agreement was set out in Paragraph 20 above. I do not think that is applicable with regard to the Guarantee. Conceptually, I see no reason why the Guarantee could not be governed by the law of another country. Clause 24 of the Guarantee provided for Hong Kong law as governing law. It further provided for Hong Kong court as the forum (a feature absent in the Agreement). On the facts of the present, bearing in mind that the 2nd Defendant was a Hong Kong company with its registered office in Hong Kong and the reasons given in Paragraphs 15 and 19 above, I do not see any basis to suggest that there was a common intention to confine the performance of the obligations under the Guarantee in mainland China. I am therefore of the view that as far as the Guarantee is concerned, the governing law should be Hong Kong law.

47. Even if I were wrong on that, and the law of mainland China is relevant, I think it is clear from the proviso of Article 5 that if the contract provided for liability on the part of the guarantor independent from the validity of the principal agreement, effect would be given to the same. According to a paper prepared for the consideration of a committee of the Supreme People's Court dated 8 September 1999, in practice there were two types of guarantees under the law of mainland China. The first type was accessory guarantee (從屬担保), the second type was independent guarantee (獨立担保). In respect of the latter type, the contract made by the guarantor is independent from the loan contract and the liability of the guarantor does not depend on the default of the borrower. Once a demand was made by the creditor, the guarantor is obliged to pay. There were two schools of thoughts as to the scope of validity of independent guarantees. The prevalent view seems to be that this type of guarantee was restricted to international economic activities.

48. Clause 2(1) of the Guarantee clearly provided that the 2nd Defendant was not only a guarantor, but also acted as a primary debtor. The 2nd Defendant agreed to repay on demand the sums borrowed by the 1st Defendant. Reading that together with Clause 3(1)(f) and Clause 14(1), the inescapable conclusion is that the parties stipulated that the Guarantee would take effect as an independent guarantee. In the recital of the Agreement, it was provided that the lending was with the permission of the off-shore business department and the loan was made as off-shore business. The borrower and guarantor were not mainland companies. Hence, the loan was classified as international activities as opposed to domestic transaction. I agree with the evidence of the Plaintiff's expert that the Guarantee in the present case comes within the proviso and it is therefore enforceable under the law of mainland China according to its own terms. Grandall simply did not address this issue.

49. Grandall and Mr Tong referred to the law of mainland China dealing with cases where a guarantee is held to be invalid by reason of its accessory nature. In that event, Article 8 of the Interpretation of the Supreme People's Court on the Guaranty Code (最高人民法院關於適用《中華人民共和國担保法》若干問題的解釋) will be relevant. However, in my view, that Article has no relevance in resolving the dispute as to the nature of the contract under the Guarantee.

50. I therefore hold that even if the Agreement was invalid for whatever reasons, the 2nd Defendant is liable to repay the Plaintiff in accordance with the terms of the Guarantee. In coming to that conclusion I have not referred to the copy of the Interpretation of the Supreme People's Court on the Guaranty Code (最高人民法院關於適用《中華人民共和國担保法》若干問題的解釋) (which contained several more pages than the one produced by Grandall) handed to me by Mr Jat in the course of his submissions in reply. If the Plaintiff wishes to rely on that, I think they should have put that in by way of evidence. Given the objection of Mr Tong and the late stage at which this was produced, I do not regard that as part of the evidence in this application.

Approval to the Plaintiff to conduct off-shore business

51. The Defendants contended that the Plaintiff did not have the relevant approval from the regulatory authority to conduct off-shore business at the material time. According to the Administration of Offshore Banking Procedures (離岸銀行業務管理辦法) promulgated by the People's Bank of China in October 1997 (which came into effect on 1 January 1998), the conduct of offshore banking business should be approved by the State Administration of Foreign Exchange (國家外滙管理局). That function was later taken over by the People's Bank of China.

52. There is no dispute that the Plaintiff had approval to conduct off-shore business in 1996. However, it was suggested by Grandall that with the promulgation of the Administration of Offshore Banking Procedures in 1997, new approval was necessary. No authority was referred to by Grandall in respect of this suggestion. It was flatly contradicted by a letter dated 16 October 2001 from the People's Bank of China Shenzhen Branch Office. According to that letter, the People's Bank of China confirmed that the previous approval continued to remain in force after the promulgation of the Procedures and such approval has never been revoked. Grandall asserted that the Shenzhen Branch Office had no authority to give such confirmation. But the confirmation was supported also by a letter dated 19 December 2001 from by the State Administration of Foreign Exchange after consultation with the People's Bank of China.

53. This suggestion of Grandall was also demonstrated to be invalid by the correspondence between the Plaintiff and the People's Bank of China in 2002 exhibited as "LY-23" to the 3rd Affirmation of Liu Yun. In a letter dated 25 January 2002, the Plaintiff gave a report to the People's Bank of China as to the progress of off-shore business and reference was made to continuation of off-shore business after 1998. In the reply from the People's Bank of China dated 11 June 2002, there was no protestation that the Plaintiff continued to carry on off-shore business after promulgation of the Procedures without new approval. Further, the People's Bank of China clearly authorized the Shenzhen Branch Office to monitor the off-shore operations of the Plaintiff and directed the Branch Office to submit quarterly reports to the headquarter in that regard.

54. Grandall also referred to a confidential internal policy laid down by the People's Bank of China to cease off-shore operations after the Asian financial turmoil. In this connection, Grandall was actually giving evidence of facts as opposed to evidence of expert opinion on the law of mainland China. I refer to the dicta of Evans LJ cited in Paragraph 26 above as to the proper scope of expert evidence on foreign law. Grandall alleged that the policy was implemented in the second half of 1998. The precise date of implementation was not given and how and when the policy was relayed to the Plaintiff was again not mentioned. It is clear that Grandall could only at best give hearsay evidence in a vague and general manner on the matter. Although it is permissible for hearsay evidence to be put in an affidavit for Order 14 application, the source of information must be disclosed. On the allegation as to the implementation of such policy, Grandall only described their source of information as persons then supervising the matter in the People's Bank of China and the State Administration of Foreign Exchange in Para. 4.5 of its report without identifying who such persons were.

55. According to the correspondence exhibited as "LY-23", there was a request by the People's Bank of China not to accept new offshore business from 1999 and the Plaintiff had complied with that request. But that would not affect the Agreement and the Guarantee because they were transactions in 1998. There was no indication whatsoever in the letter of the People's Bank of China dated 11 June 2002 that the Plaintiff's record of the policy was inaccurate.

56. In any event, there is no evidence as to the legal effect, if any, on the transactions if there were contraventions of such internal policy. Even Grandall admitted that the policy was not law in the mainland China (see Para. 4.4 of their report).

57. In the circumstances, in my view, the Defendants have failed to discharge the threshold burden of showing an arguable defence based on the alleged internal policy.

58. I hold that there is no triable issue in respect of the authorization granted to the Plaintiff to conduct off-shore business at the material time, viz. August 1998. In fact, the approval was recited in the Agreement which was executed by the 1st Defendant and considered by the 2nd Defendant before the execution of the Guarantee.

Relief

59. There is therefore no arguable defence on the parts of both Defendants. I order that summary judgment be granted to the Plaintiff in terms of the summons of 6 December 2001. Interest would be calculated on the contractual rate of 6.5% per annum over the prime rate from 1 June 2001 until repayment as prayed for in Prayer (ii) of the Statement of Claim. By reason of Clause 14(2) of the Guarantee, the Plaintiff is entitled to costs on indemnity basis against the 2nd Defendant. However, the provisions in Clauses 17(2) and 18(2) of the Agreement do not clearly stipulate for costs to be payable on indemnity basis. Hence, my costs order nisi would be that the Defendants do pay the Plaintiff's costs of the action, with certificate for two counsel, and that the costs against the 1st Defendant would be taxed on party to party basis if not agreed, whilst the costs against the 2nd Defendant would be taxed on indemnity basis if not agreed.