STAR TEXTILE LTD v. SURPASS INTERNATIONAL (HK) LTD AND ANOTHER

HCA34/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 34 OF 2007

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JUDGMENT

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1. The plaintiff’s claim against the 1^st defendant (“D1”) and the 2^nd defendant (“D2”) is for the sum of US$594,313.04 and HK$476,924.49 together with interest on those sums and costs.

2. The plaintiff’s claim against D1 is in respect of the unpaid balance owing to the plaintiff for goods sold and delivered by the plaintiff as pleaded and particularized in the statement of claim.  The claim against the D2 is on a personal guarantee given by her to the plaintiff guaranteeing the payment of the unpaid balance to the plaintiff.

3. In the defence and counterclaim both defendants denied liability to the plaintiff.  Additionally, D1 also counterclaimed for damages for breach of contract alleging that the goods sold and delivered were defective in the manner pleaded in the counterclaim.

4. At the commencement of the trial on 22 April 2008 D1 consented to judgment being given to the plaintiff against it for the sum of US$594,313.04 and HK$476,924.49 as claimed together with interest on the said sums from issue of writ on 6 January 2007 to judgment at half judgment rate and from judgment to payment at judgment rate and also for the costs of the action to be costs to the plaintiff against D1.  Accordingly, judgment by consent was entered for the plaintiff against D1 for the said sums and interest and costs of the action.  By consent, D1’s counterclaim was also dismissed with costs to the plaintiff.

5. The trial then proceeded in respect of the plaintiff’s claim against D2.

6. The claim against D2 is on a personal guarantee given by her to the plaintiff.

7. The defences raised by paragraphs 8A and 9 of the amended defence filed on 26 March 2008 are as follows :

(1)  that the document executed by D2 dated 18 May 2006 was not “in nature and effect” a personal guarantee of D2;

Alternatively,

(2)   that D2 executed the guarantee by “common mistake or mistake in communication in relation to the true nature and effect of ” the guarantee;

(3)  that D2 was induced by the plaintiff to execute the guarantee by misrepresentation and D2 should not be bound by the guarantee; and

(4)   that the guarantee was unenforceable for want of consideration.

8. D2’s primary case is that the said document executed by her dated 18 May 2006 was not in nature and effect a personal guarantee given by her but that it was a confirmation of settlement between D1 and the plaintiff that D1 would continue with the contracts that it had entered into with the plaintiff.  The other defences are raised in the alternative.

The issues

9. The issues are :

(1)  whether the document executed by D2 dated 18 May 2006 is a personal guarantee given by her to the plaintiff or whether it is merely a confirmation of settlement between D1 and the plaintiff?

If it is a personal guarantee, then:

(2)  whether there was any common mistake or mistake in communication in relation to the true nature and effect of the guarantee;

(3)  whether D2 was induced by misrepresentation of the plaintiff that the document was only a confirmation of settlement; and

(4)  whether the personal guarantee is unenforceable for want of consideration.

The witnesses

10. I heard evidence from Ms Ng Siu Yuk (“Ng”) who gave evidence for the plaintiff.  I also heard evidence from D2.

11. I have no hesitation in believing Ng and accepting her as a witness of truth.  She was an honest witness who gave truthful and reliable evidence.  I found her to be an impressive and credible witness. 

12. I cannot say the same for D2.  I found her to be untruthful when giving evidence on certain matters.  She also did not, in my view, give truthful evidence about the circumstances giving rise to the execution of the document dated 18 May 2006.  I also found her to be an unreliable witness.

13. I have no hesitation in preferring the evidence of Ng to that of D2 where their evidence is at variance.

The background

14. The undisputed facts are that at all material times Ng was a shareholder and director of the plaintiff actively involved in the business of the plaintiff.  Kok Ying Hai (“Kok”) was employed by the plaintiff.  It is not disputed that Kok was the one who negotiated the purchase orders with D1. 

15. D2, together with her husband Terence Tse (“Tse”), were at all material times the directors and shareholders of D1.  They were also the directors and shareholders of Lee Wo Textiles Co. Ltd (“Lee Wo”).

16. It is also undisputed that the plaintiff and D1 entered into a series of purchase orders whereby the plaintiff agreed to supply to D1 garments as particularized in and on the terms as set out in the purchase orders.  There were a total of 14 purchase orders entered into from December 2005 to July 2006.  However, one purchase order being the 13^th purchase order namely, purchase order no. SUR000013-06 was subsequently cancelled.

17. I accept that, as Ng said, the price to be paid by D1 for the garments under the purchase orders were agreed on a free on board basis.  This was not disputed.

18. Although D2 disputed that she was the one who negotiated the terms of the purchase orders, there is no dispute that she did sign some of the purchase orders that D1 entered into with the plaintiff, including the 1^st purchase order dated 24 December 2005 being purchase order no. SUR00001-05.  Some of the other purchase orders were signed by Tse.

19. Each of the purchase orders provided for payment to the plaintiff “BY L/C 60 DAYS SIGHT”. 

20. The plaintiff did not in fact receive letters of credit before shipment of goods under the purchase orders.

21. It is common ground that the plaintiff was to receive payment 60 days after shipment of the goods under the purchase orders.  The goods were manufactured and shipped from Bangladesh.  As security for payment, the plaintiff agreed to accept a letter of credit for HK$1 million.  Thus, an irrevocable letter of credit was issued by Shanghai Commercial Bank Ltd on the application of Lee Wo dated 2 March 2006 for the sum of US$128,205.00 being the equivalent of HK$1 million in favour of the plaintiff as beneficiary with an expiry date of 30 April 2006 (“the letter of credit”).  As D2 said (and which I accept) at that time D1 did not have banking facilities or assets and the letter of credit was provided to the plaintiff by Lee Wo instead of D1.

22. It is plain on the evidence of Ng, which I accept, that by the end of March 2006 D1 had placed 10 purchase orders for the total value of US$721,084.50.  This was not disputed.  However, the plaintiff only had the security of the letter of credit for the sum of US$128,205.00.

23. The 7^th to 10^th purchase orders were purchase order nos. SUR00007-06 to SUR000010-6 all dated 27 March 2006.  Ng gave evidence, which I accept, that in accepting the 7^th to 10^th purchase orders she wanted D1 to provide more security as the security that had been provided by the letter of credit was insufficient.  As a result of this, she instructed Kok to negotiate with Tse and D2 as to the provision of further security if D1 wanted the plaintiff to accept and proceed with the 7^th to 10^th purchase orders.  She was informed by Kok that Tse would provide further security by a letter of credit for HK$2 million and relying on this she asked Kok to inform Tse that the plaintiff would accept and proceed with the 7^th to 10^th purchase orders.

24. Ng also gave evidence that she was informed by Kok that although in late March 2006 Tse had agreed to provide further security by a further letter of credit this was not provided.  This was further delayed to early April and delayed even further to mid-April 2006 and then to mid-May 2006.  The further letter of credit was still not opened by mid-May 2006 and Ng said that she then refused to release bills of lading to D1 for goods that had been shipped.

25. Ng said that on or about 15 May 2006 she refused to release the bill of lading unless D1 provided further security.  She instructed Kok to talk to D2 about this and she was informed by Kok that D2 had offered to provide a personal guarantee to the plaintiff.

26. Ng said that on 18 May 2006 Kok told her that he was going to collect the personal guarantee from D2 so she then released to D1 the bill of lading a copy of which is at page 247 of the bundle of documents.  That document shows that D1 received it on 18 May 2006 as evidenced by the signature of D2 with the company chop of D1 on it.

27. D2 denied that there was any agreement to provide further security to the plaintiff.  She gave evidence that as a result of defective goods that had been delivered by the plaintiff her husband had told her that the overseas buyer Alliance Importers Inc had asked to withhold payment pending calculation of damages.  She then had a settlement discussion with Kok who told her that the goods manufactured by the plaintiff’s manufacturer in Bangladesh had a lot of problems and they were in the course of rectifying the problems.  She said that Kok assured her that the problems would be fixed within a short period of time and suggested that the original payment terms should be varied so that payment would be made 90 days after shipment instead of 60 days.  She also said that Kok suggested that a written settlement confirmation be issued by D1 to confirm the settlement that D1 would continue with the purchase orders and the variation of the payment term from 60 days to 90 days after shipment.  As I have said, D2’s primary case is that the document dated 18 May 2006 was a confirmation of settlement and not a personal guarantee.

28. I do not believe D2.  I have no hesitation in rejecting the evidence of D2.  I believe Ng and accept her evidence.

29. Ng accepted in evidence that D2 had complained about the supply of defective goods to D1.  She said that Kok often told her that there were complaints about the quality of the goods.  However, she was never told by Kok that D1 wanted to cancel all the purchase orders because of the bad quality of the goods or that D1 would refuse to pay for the purchases if the quality did not improve.  I believe Ng.

30. It is contrary to common and commercial sense that the plaintiff would happily go on supplying goods to D1 where the plaintiff did not have sufficient security as to payment.  After all, the payment terms under the purchase orders were that the plaintiff was to be paid by letters of credit.  I find that by the end of March 2006, the only security for payment that the plaintiff had received was the letter of credit for the value of US$128,205.  I also find that by the end of March 2006, there were 10 purchase orders for the total value of US$721,084.50.  Thus, clearly the security for payment that had been provided to the plaintiff by then was insufficient.  It is inconceivable, in my judgment, that the plaintiff would go on supplying goods without further security for payment.

31. D2 gave evidence, which I accept, that the goods purchased by D1 from the plaintiff under the purchase orders were onsold to Onecine Holdings Ltd (“Onecine”).  D2 confirmed in evidence that the shares in Onecine belonged to her husband Tse and his partner George Fong.  There is no documentary evidence to show that any of the goods supplied under the purchase orders were either rejected or returned to the plaintiff because of defective quality.  There is also no documentary evidence of any claim made by Oneline against D1 for damages for the supply of defective goods.  In any event, as D1 consented to judgment for the plaintiff for the amounts claimed and to a dismissal of its counterclaim, it seems to me that the complaints of the supply of defective goods were not serious complaints.  After all, D1 has accepted, by the consent judgment, that the plaintiff was entitled to full payment for the supply of goods under the purchase orders and that its counterclaim for damages should be dismissed.

32. There is a serious dispute of fact as to the circumstances surrounding the execution of the document dated 18 May 2006.  Ng gave evidence that exhibit P2 was received by her by fax from Kok.  It is not disputed that Kok and D2 both travelled to Bangladesh for the purpose of visiting the factory producing the goods under the purchase orders.  It matters not whether, as Ng said, the purpose of that visit was for D2 to inspect the finished garments or whether, as D2 said, the purpose was to find out and to understand what the problems were in the factory in Bangladesh.  What is clear is that exhibit P2 was indeed faxed to the plaintiff on 26 May 2006 from Bangladesh as confirmed by the information at the bottom of the document showing the fax number and name of the sender and the date sent.   This was undoubtedly sent from Bangladesh on 26 May 2006. 

33. Exhibit P2 was unsigned and Ng said that this was the draft of the personal guarantee provided by D2 to Kok which Kok had faxed to Ng from Bangladesh.  Having read exhibit P2, Ng said that she instructed her colleague Ricky Siu (“Siu”) to inform D2 that the wording in the draft proposed was not acceptable.  Siu then went to see D2 to get the amendments.  D2 had already returned to Hong Kong from Bangladesh by that time.  Ng said that Siu then brought exhibit P1 back from D2 but without the handwritten amendments on exhibit P1.  Ng was adamant that the signature of D2 was already on the original of exhibit P1 before the handwritten amendments were made.  Looking at exhibit P1, it seems to me that D2 must have signed the original of exhibit P1 before the handwritten amendments were made on that document.  I so find. 

34. Ng said that the handwritten amendments on exhibit P1 were made because Ng felt that exhibit P1 was still not acceptable.  She, therefore, scribbled amendments on one copy of exhibit P1 herself and asked Siu to clearly write the amendments in exhibit P1 according to her scribbled amendments.  The amendments that were made by Ng included adding the words “on behalf of [D1]” after the words “personal quarantee (sic)”.  Hence, as Ng said (which I accept) the handwritten amendments on the original of exhibit P1 were made by Siu who then took that document back to D2 for her to amend the same.  Ng also said that at that time Kok was still in Bangladesh and had not returned to Hong Kong.  According to Ng, this was how exhibit P3 came to be prepared and signed by D2.  Exhibit P3 was then brought back to Ng by Siu.

35. After exhibit P3 had been signed and given to Ng, she said that she released the bill of lading a copy of which is at pg 250 in the bundle of documents.  That bill of lading shows that on 29 May 2006 D2 signed on the bill of lading with the company chop of D1 affixed thereon.  It seems to me that this confirms that D1 received this bill of lading on 29 May 2006.  It seems to me that although exhibit P3 was dated 18 May 2006 it is highly likely that it was signed by D2 on or before 29 May 2006 but after 26 May 2006 when exhibit P2 was faxed from Bangladesh.  I so find.

36. D2 disputed this evidence of Ng.  D2 said that the plaintiff prepared the first draft, exhibit P2, and that Kok told her that it was for D1 to confirm the settlement with the plaintiff.  She said that she proposed to Kok that there should be some amendments as she was to sign the document in a corporate capacity and she therefore wanted to add the words “on behalf of [D1]”.  It was her clear evidence that it was she and not Ng who wanted to add those words.  She said that Kok was already back in Hong Kong from Bangladesh at that time and he told her that he would take it back to the plaintiff’s office to make the amendments.  However, D2 said that she had already signed the original of exhibit P1 at that time but that she told Kok that she could not give it to him without the amendments.  Although she had signed it she did not give the original of exhibit P1 to him but instead she gave him a copy of the original which had her signature on it.  I do not believe her.

37. In her supplemental witness statement D2 had given a different version.  At paragraph 7 of her supplemental witness statement she clearly said that she had signed the document (exhibit P1) and gave it back to Kok after the amendments had been made to include the words “on behalf of [D1]” in the document.

38. It is clear that at the time she made her supplemental witness statements D2 had not inspected the original of exhibit P1.  If she had inspected it, this would have clearly shown that the handwritten amendments must have been made after she had already signed on the document.  It was only at trial that D2 inspected the original of exhibit P1 and she must have then realized that she had indeed already signed the original of exhibit P1 before the handwritten amendments were made on that document.  That is why, in my view, in the witness box she gave a version which was different from what she had said at paragraph 7 of her supplemental witness statement.  She was evasive and did not give a satisfactory explanation for the change in her evidence.  In my judgment she was untruthful and unreliable.

39. Where the evidence of Ng and D2 are at variance I much prefer the evidence of Ng whom I believe to that of D2 whom I disbelieve.

The construction of exhibit P3

40. The document that was executed by D2 and accepted by the plaintiff is exhibit P3.  It is necessary to construe exhibit P3.  The proper construction of a contract is a question of law for the Court.

41. The intention of the parties to the contract is to be ascertained by the words used by the parties in the contract.  As succinctly stated by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at page 912 :

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

42. It is also important to bear in mind that the parties’ subjective intention is irrelevant and inadmissible for the purpose of construing the contract.

43. The document was addressed to the plaintiff and signed by D2 and her identity card number was also inserted under her signature.  It provided as follows :

“ With reference to our discussion, herebelow pls find my personal quarantee (sic) on behalf of Surprass (sic) International (HK) Ltd.  As below.  The following said orders, will be assured payment settle, 90days upon shipment on board, provide that goods were shipped under good condition and without complaint and claim from the client.”

44. There then followed a table setting out details of the goods and amounts purchased under the 1^st to 13^th purchase orders.  There is no dispute that the details of the goods provided in the table are referable to the 1st to 13^th purchase orders.

45. The word “guarantee” has been misspelt.  However, as Ms Mak, for D2, accepted, nothing turns on this.  In my view, this was clearly a typographical error and there is no doubt that the correct word should be “guarantee” and it should be construed as such.

Issue (1)

46. As to the nature and effect of exhibit P3 it seems to me as a matter of construction that D2 was in her personal capacity guaranteeing the payment of the goods for D1.  The words used must be given their ordinary meaning.  The words “personal guarantee on behalf of [D1]” mean no more than D2 agreeing to personally guarantee for D1 that the plaintiff would be assured payment 90 days upon shipment. 

47. D2 was, in my judgment, actively involved in the business of D1.  Although in her supplemental witness statement at paragraph 2 she tried to minimise her role in D1 by saying that she only assisted her husband to handle and sign part of the shipping documents, she accepted in cross-examination that was incorrect.  As the evidence showed, D2 is, in my view, an experienced business woman having worked in the textile industry for about 10 years before being involved with D1.  She was actively involved in the purchase orders as she was one of D1’s contact persons according to the purchase orders.  She also went to Bangladesh on a few occasions to oversee the factory producing the goods.  It is plain that she was, as I find, actively involved in the business of D1.  I found D2 to be an intelligent business woman who could read and write English.  The bundle of documents contain examples of emails sent to and from her in English.  Her witness and supplemental witness statements were also made in English. 

48. Contrary to the other commercial documents in the bundle of documents which were signed by D2 in a corporate capacity and which included the company chop of D1, no company chop of D1 was placed with the signature of D2 on exhibit P3.  Also, unlike the other commercial documents signed by D2 in a corporate capacity, the identity card number of D2 was inserted in exhibit P3. 

49. In my judgment exhibit P3 was a personal guarantee signed by D2 personally and not a guarantee of D1 which D2 signed in a corporate capacity.

50. D2 accepted that D1 would be primarily liable for the outstanding balance of the purchase orders in any event.  She also accepted that if the goods shipped were not in good condition and with complaint and claim from the client, D1 would not be liable for the outstanding balance.  That being so, it is contrary to commonsense that the plaintiff would accept a document from D1 to the effect the D1 would guarantee payment for which D1 was in any event liable.

51. As to Issue (1), I have no hesitation in finding that exhibit P3 is a personal guarantee given by D2 (“the guarantee”) and not a confirmation of settlement between D1 and the plaintiff.

Issue (2)

52. The pleaded defence is that the guarantee was executed by common mistake or mistake in communication in relation to the true nature and effect of the guarantee.  D2 gave evidence that she did not pay attention to the words “personal guarantee” in the guarantee and only thought that it was a confirmation of settlement made by D2 on behalf of D1.  I do not believe D2 and reject her evidence.

53. Her evidence is also contradicted by what she said in her evidence in chief.  She said that she understood the words “my personal guarantee on behalf of [D1]” in the guarantee to mean that “I as a person would guarantee things for my company”.  This shows clearly that there was no mistake on her part in thinking that this was a confirmation of settlement. 

54. In any event, a unilateral mistake about the subject-matter is not of itself sufficient to allow the mistaken party to avoid a contract (paragraph 15.10 Cartwright’s Misrepresentation, Mistake and Non-disclosure 2^nd edn.).

55. Issue (2) is resolved against D2.  This defence fails.

Issue (3)

56. I also find that there was no misrepresentation by Kok that exhibit P3 was a confirmation of settlement.  I do not believe D2 and reject her evidence on misrepresentation.  As I have said, she reads and writes English as is evidenced by the emails and the commercial documents in the bundle as well as her witness and supplemental witness statements made in English.  She also had no difficulty in understanding the words “my personal guarantee on behalf of [D1]” in the guarantee as she said in chief that she understood that to mean “I as a person would guarantee things for my company”.  Even if there was any misrepresentation (which, as I have found, there was not) she could not have relied on it as she signed the document after having understood that she “would guarantee things for my company”.

57. Issue (3) is also resolved against D2.  This defence also fails.

Issue (4)

58. On the question of consideration for the guarantee, as stated at paragraph 2-012 Andrews & Millett Law of Guarantees 5^th edn :

“ The court will not inquire into the value of the consideration given; it need not be of commensurate value with the promise.  Thus the payment of even a small sum of money may suffice.”

59. The plaintiff’s case is that the guarantee was executed by D2 personally in consideration of the further supply of garments under the purchase orders.  After the guarantee was given the plaintiff did, on the undisputed evidence, in fact supply further goods to D1 as evidenced by the documents at pages 239, 242, 244 and 246 of the bundle of documents.

60. I am satisfied that the guarantee is not unenforceable for want of consideration. 

61. Issue (4) is also resolved against D2.  This defence also fails.

62. In my judgment D2 is liable to the plaintiff on the guarantee.

63. However, in my view, she should not be liable for all of the sums that D1 is liable to the plaintiff for under the consent judgment.  The amounts claimed and particularized in the statement of claim include the sum of US$35,770.80 under invoice number 595 dated 5 August 2006.  That was in respect of goods shipped under the 14^th purchase order (SUR00014-06) dated 18 July 2006 which was entered into well after the execution of the guarantee and was not included in the table in the guarantee.  Hence, D2 should not be liable for this sum under the guarantee. 

64. D2 should also not be liable in my judgment for the total sum of HK$676,924.49 claimed and particularized in the statement of claim.  These were for disbursements including hang tags, labels and other disbursements.  The purchase orders referred to in the guarantee did not specify that these disbursements were payable under the purchase orders.  Although D1 is liable for these disbursements and has accepted liability for the same by the consent judgment against it, in my judgment, D2 should not be liable for the sum of HK$676,924.49.

65. In my judgment D2 is liable to the plaintiff for the sum US$594,313.04 as claimed less the sums of US$35,770.80 and US$25,706.94 (being the equivalent of HK$200,000.00 received by the plaintiff from D1).  D2 is, therefore, liable to the plaintiff for the sum of US$532,835.30.

66. I give judgment to the plaintiff against D2 for the said sum of US$532,835.30 with interest thereon from issue of writ on 6 January 2007 at 1% above the best lending rate to judgment and thereafter at judgment rate until payment. 

67. I also make an order nisi that D2 should pay the plaintiff the costs of the action against her.