JIANGSU GOLDEN CIVIL BUILDING GROUP (HONG KONG) CO LTD v. CHAU WA KIN

HCA 3121/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3121 OF 2002

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J U D G M E N T

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1.  This is a claim under a guarantee for moneys advanced to and otherwise due by the principal debtor called W. Ho Civil Engineering and Construction Company Limited (W. Ho).  W. Ho became insolvent and has been wound up on a creditor’s petition.  A director and the majority shareholder called Chow Ho Kin also guaranteed the debt.  But he, too, had no money and has been made bankrupt.  The plaintiff thus turns to Mr Chow’s co-guarantor, his younger brother, for recovery of moneys now due.

2.  A feature of this case is that the younger brother, called Chau Wa Kin, is a highly successful and popular pop star in Hong Kong and Taiwan.  A further feature is that the guarantee he is said to have given is the third of three he entered into between the end of 1998 and mid-2000 concerning debts of W. Ho.  He was called upon to make good in respect of the other two guarantees upon W. Ho’s default, and settled both.  The first of these demands was made and responded to a short while before he signed this guarantee.  Of the three guarantees this one alone is challenged.

3.  The plaintiff produced a document which purports to be the guarantee.  The defendant pleaded a number of defences which raise issues of fact and law.  Not all of these defences have been pursued; those that remain require a detailed account of how it all came about.

History

GE 97/21

4.  In early 1999 W. Ho won the right to contract with the Hong Kong Government to undertake repairs and maintenance on slopes described as dangerous slopes in Hong Kong.  The resultant contract became known as GE 97/21.  The total contract price was about $97 million; it was a substantial project.

The Need for Funds

5.  Work having got underway, by mid-1999 W. Ho was experiencing cash flow problems that threatened to derail its ability to perform contract GE 97/21.  As a result of this Mr Chow cast around for investment capital.  A business associate called Li Sai Ki offered his services.  Mr Li had connections in the PRC and in particular knew of construction companies that might be interested in a joint venture in Hong Kong.

The Connection with CCCC

6.  Representing W. Ho’s interests Mr Li was introduced to the senior management of Changsu Civil Construction Company Limited (CCCC), a state-owned company carrying on business in the construction industry in Jiangsu, PRC, in particular its Managing Director Hu Liang Gan and his assistant manager called Jiang Wen Hui (Mr Jiang).  CCCC had accumulated capital from projects completed locally, and its management were looking to expand into Hong Kong and elsewhere offshore.

The Co-operation Agreement

7.  The upshot was a deal brokered by Mr Li representing W. Ho, which was set out in a document called the Co-operation Agreement, signed in December 1999.  The parties had established that work contracted for under GE 97/21 was about 70% done.  If adequately funded, W. Ho could complete in about 7 months.  It was agreed that CCCC would advance a total of RMB4 million, in return for a 3% share of the profit to be earned on GE 97/21, and training of representatives of CCCC who would come to Hong Kong and be based here.  In this respect it was envisaged that the relationship would move on past the one-off advance recorded.

8.  CCCC designated Mr Jiang to handle its affairs here and he was posted to Hong Kong with another executive.

9.  As to the terms of the advance:

It was recorded that payment of the first instalment of RMB1 million would be made forthwith, the balance by instalments thereafter, which were to begin once CCCC’s officers had clearance to settle in Hong Kong.  Repayment was timed to coincide with the anticipated completion date 7 months’ hence.  It was subsequently agreed that CCCC’s share of the profit translated to HK$900,000.

10.  The money was paid over in four tranches of RMB1 million each between December and April 2000.  The arrangement provided for and implemented was that the money was paid by CCCC to Mr Li who transferred it to W. Ho.  But whether he did so in full is a point of conjecture.

11.  Mr Chow has come to say that, converted to Hong Kong dollars, the advance was the equivalent of $3.5 million.  But W. Ho was paid only $2.45 million, so there was a shortfall of $1.05 million; that he repeatedly complained of this to Mr  Jiang.  It is Mr Chow’s account that Mr Jiang assured him repeatedly that the shortfall would be forthcoming.  Mr Jiang’s version is at odds with that.  There was no such complaint, because there was no shortfall; moreover, he produced four receipts, branded “Official Receipts” of W. Ho, signed by Mr Chow, each for RMB1 million.  Mr Chow’s reposte was that Jiang told him to hand over receipts for the full amount first before the next instalment would be paid.  He did so; the accumulated shortfall came to $1.05 million.

12.  This is the first disputed issue of fact.

The Plaintiff Comes into Being

13.  Meanwhile in April 2000 Jiangsu Golden Civil Building Group (Hong Kong) Company Limited (the plaintiff) was incorporated in Hong Kong.  As a wholly-owned subsidiary of CCCC its function was to foster CCCC’s interests in Hong Kong, in particular under the Co-operation Agreement and such further business that might be developed.  Mr Jiang was made a director and put in charge.  It was funded by its parent.  CCCC authorised it to be responsible for collection of moneys due under the Co-operation Agreement.

The Subcontract Agreement

14.  By June 2000, with repayment under the Co-operation Agreement pending, it became evident that W. Ho had fallen back into insolvency and would not be able to repay; moreover, that GE 97/21 could not be completed without more financial input.

15.  This led to an agreement, called the Subcontract Agreement, entered into between the plaintiff and W. Ho.  Mr Chow signed for W. Ho.  Mr Jiang signed for the plaintiff.  This took place on 3 July 2000 at the office of a firm of solicitors called George Tung, Jimmy Ng and Valent Tse.  The 3^rd named partner (Mr Tse) had acted for W. Ho and Mr Chow in the past.  He was asked to witness their signatures and he did so.

16.  By the terms of the Subcontract Agreement W. Ho subcontracted the remaining work to be undertaken under GE 97/21 (estimated to be 20% of the total) to the plaintiff, the profit to be shared between the parties. 

17.  The agreement further provided that W. Ho was required to submit a proposal as to how it would repay the original advance of RMB4 million and agreed profit share of $900,000, repayment of which had to be secured by personal guarantees given by Mr Chow and his brother Chau Wa Kin.

18.  What the Subcontract Agreement did not record was that there was still outstanding a shortfall of $1.05 million or any other amount in respect of that original advance.

The Defendant

19.  I digress now to give a profile of Chau Wa Kin.  He is a celebrity in Hong Kong where he was born and Taiwan where he now lives in the music industry.  He was born on 22 December 1960.  He was the youngest of four brothers; Chow is the next youngest; 7 years his senior.  His early years were spent with his family in Hong Kong before he moved to Taiwan where he read maths at NTU in Taipei.  There his interest in music developed, then flourished.

20.  By 1987 he had released his first album.  Since then there have been 30 more.  Many have become platinum.  It is said he has won numerous awards, is popular internationally and supports a number of charities in Asia and elsewhere.  He is married, to an American, whom he met during his studies.  They have children.  The family lives in Taipei, where he has business interests.  Cantonese is his first language, but he is also fluent in Putonghua and can read, write and speak in English.

21.  The defendant was not involved in W. Ho.  However, he provided financial assistance, formally and informally.  He owned a recording company in Hong Kong called Stars Ferry Music Production Company Limited.  Mr Chow was made a director, and had signing rights on its bank account.  Chau Wa Kin allowed him to channel funds to W. Ho for its use from time to time.  He did not expect repayment and there was none.  However there came a point in time when he decided to put a stop to this, compelling his brother to fund his company’s financial needs through commercial means.  But to enable him to do so he lent his support by guaranteeing a loan of $2 million raised from Sin Hua Bank Limited at the end of 1998, and again in early 1999 he guaranteed repayment of a further advance made by a finance company called Silver Bound Capital Limited.

22.  W. Ho’s advancing indebtedness caused it to default in repayment of both advances.  The defendant was called upon to pay off these advances and he did so, first in March 2000 and then again in March 2001.  This cost him about $3.5 million.

The July Repayment Agreement

23.  Mr Jiang had meanwhile taken upon himself the task of drafting the repayment agreement and personal guarantees required under the Subcontract Agreement.  Mr Chow gave him a precedent guarantee to copy, which happened to be the guarantee from the defendant to Silver Bound.  These three documents in draft form were brought by the parties to Mr Tse’s office on 3 July, the date upon which he witnessed the signing of the Subcontract Agreement.  He was asked to engross them in proper form and agreed to do so.  Messrs Jiang and Chow returned to sign these documents on 5 July.

24.  The repayment agreement, called for convenience the July Repayment Agreement, was signed by the parties under the chops of their respective companies.  Mr Tse witnessed their signing.  It set out a timetable for repayment of the debt and profit, by instalments between July 2000 and February 2001, converted into Hong Kong dollars.  Although it was not totalled, the significance of which will be apparent, that total is $4.4 million.  It is also significant that it referred to the Co-operation Agreement and the date of that agreement; 22 December 1999.

25.  The July Repayment Agreement also recorded that Chau Wa Kin would guarantee W. Ho’s repayment.  It provided for default interest in the sum of 1.5% per month.  It further provided for repayment of all sums by 31 May 2001, giving the plaintiff the right to call on the guarantors to repay the outstanding sums due on default.

26.  As with the Subcontract Agreement, there was nothing in the document and indeed nothing in writing elsewhere to suggest that of the loan $1.05 million or any other part of the advance had not been paid.

The Guarantees

27.  Mr Tse had also engrossed the guarantees for signing by the brothers Chow and Chau.  Each included the following terms:

(a) a preamble referring to the obligation in the July Repayment Agreement that there be a guarantee;

(b) the definition of “Guaranteed Moneys” as being (i) all moneys owing by the borrower (W. Ho) to the lender (the plaintiff) at any time, actually or contingently, in any capacity, alone or jointly with any other person under the Repayment Agreement and (ii) interest on such moneys …;

(c) that the guarantor would pay the plaintiff the Guaranteed Moneys on demand together with default interest compounded monthly;

(d) that a certificate of balance signed by the plaintiff would be conclusive evidence of the amount due.

28.  Clauses 8 and 10 read as follows:

“8. Guarantor as Principal Debtor

The liability of the Guarantor under this Guarantee shall not be discharged or otherwise affected by reason of the Lender entering into any agreement or arrangement with the Borrower or any other person or by reason of any legal limitation, disability or incapacity or any other act, omission or circumstance which, but for this provision, would discharge the Guarantor to any extent.  Any Guaranteed Moneys which may be recoverable from the Borrower for any such reason shall be recoverable by the Lender from the Guarantor as principal debtor by way of indemnity, on demand, together with Default Interest thereon in accordance with Clause 2.02.

10. No Waiver

No act or omission by the Lender pursuant to this Guarantee shall affect its rights, powers and remedies hereunder or any further or other exercise of such rights, powers of remedies.”

29.  Mr Chow signed his guarantee under seal before Mr Tse.  That was stapled together with one of the several copies of the signed July Repayment Agreement.

30.  The parties left, with the engrossed but unsigned guarantee in duplicate prepared for signing by Chau Wa Kin.

31.  It is said of these documents that the pages were held together by ‘corners’ at the top left and stapled.

The Undated Document

32.  It is pertinent to introduce into the paper trail this document, so named because it has no date.  But its existence as a genuine document is in dispute. 

33.  Mr Tse, called to give evidence for the defence, said that a few days after the July Repayment Agreement had been signed and taken away he was informed by either Mr Chow or Mr Jiang that it had to be replaced, because an additional clause had to be inserted concerning prospective liability under the Subcontract Agreement.

34.  In the event, a photocopy was produced by the defence the original of which on the face of the photocopy was signed by W. Ho (Mr Chow) and the plaintiff (Mr Jiang) before Tse, containing the same terms as the July Repayment Agreement and a clause which translates into the following:

“Apart from the above two repayment agreements if party A (W. Ho) is wound up for whatever reason thereby causing party B (the plaintiff) not being able to receive the money receivable under the GE 97/21 subcontract of works (please refer to the Subcontract Agreement made between party A and party B on 3 July 2000) then the guarantor must pay party B all the contract sums receivable within one month of party A’s winding up.”

35.  Significantly, prior to this clause there had been recorded but one only repayment agreement, that concerning the advance of RMB4 million plus profit.

36.  On the basis of Tse’s evidence, it is the defendant’s case that this the Undated Document superseded the July Repayment Agreement.  The plaintiff denies the existence of this document at least as a genuine one; the July Repayment Agreement was not superseded.

37.  This is the next issue of fact to be dealt with.

The Defendant Signs

38.  This happened on 24 July when the defendant purported to sign two original copies of his guarantee, but in circumstances that are in material dispute to which I shall return.

39.  Suffice, for the meantime, to say that on the face of the two documents produced in discovery, one each by the parties, the defendant signed on the signatory page of both documents in English and Chinese characters in the presence of his brother, Mr Chow and Mr Jiang in a hotel room in Tsim Sha Tsui.

40.  The following day Messrs Chow and Jiang went back to Mr Tse’s office, with both copies of the defendant’s guarantee.  Tse signed as if to witness the defendant’s signatures, although he had not been present.  He justified this irregularity by stating that he was familiar with the defendant’s signature and because Mr Chow had seen him sign and had told him so.

41.  Messrs Jiang and Chow left, taking with them one copy each of the defendant’s guarantee.

The Further Advance

42.  The plaintiff with CCCC’s assistance proceeded to fund the ongoing GE 97/21.

43.  But W. Ho’s woes continued unabated.  By September it was insolvent.  Sub-contractors and workers alike were not paid.  They combined to petition for its winding up.

44.  Mr Chow asked the plaintiff for more money.  He said $2.5 million was needed urgently to pay off the workers and forestall the petition.  The parties did agree to such an arrangement on terms that the advance would be made before 1 October and repaid with interest of $100,000 by 31 December 2000.

45.  Whether or not the defendant was told of this enhanced exposure to debt repayment is another disputed issue.

The September Repayment Agreement

46.  The existence of this document as a genuine document is, like the Undated Document, challenged, this time by the defence.

47.  It is the plaintiff’s case that Mr Jiang drafted revised terms of repayment by W. Ho of the original, still unsatisfied, debt of $4.4 million and the prospective additional advance of $2.5 million and interest.  It was intended to supersede the July Repayment Agreement.  It is further the plaintiff’s case that it incorporated, for the first time, a commitment by the defendant, as guarantor, to guarantee payment to the plaintiff of receivables due it under GE 97/21 should W. Ho fall into liquidation.

48.  It is the plaintiff’s case that the document having been drawn up was signed by the parties in Mr Tse’s office and in his presence, and he witnessed the signatures.

49.  It was sealed with sealing wax and by ribbon and the wax affixed to the defendant’s signed and sealed guarantee.

50.  What is particularly pertinent is that the clause relating to the commitment by the defendant to pay the receivables is, in the translation, precisely in the same form as was purportedly recorded in the Undated Document.

51.  Notwithstanding the apparent regularity of the signing of this document in the presence of a solicitor, who signed also as witness, it is not accepted by the defence that this document ever came into being.  Mr Chow denies he signed it and Mr Tse that he witnessed the signatures.  It is thus the defence case that the document was fabricated by combining its text with the execution page of the Undated Document which was genuine.

52.  Pausing here, it is apparent, even to the untrained naked eye, that the execution page of these two documents is identical, the signatures exactly matching, so that one or other of them must be a fabrication and thus of no force and effect.  Notwithstanding the defence denial of the genuineness of the September Repayment Agreement, it nevertheless pleads the existence of what it terms the 2^nd Repayment Agreement in its statement of defence on the grounds of material variation, in the following manner:

“27.   …

(c)     In or around late September 2000, a meeting was held between Jiang and the Defendant’s brother during which the Plaintiff offered to advance a further loan of HK$2.5 million to W. Ho on condition of W. Ho executing another set of loan and repayment agreements.

(d)     The Defendant’s brother, acting on behalf of W. Ho, accepted the Plaintiff’s aforesaid offer and duly signed a loan agreement (“the 2^nd Loan Agreement”) and a repayment agreement (“the 2^nd Repayment Agreement”) with the Plaintiff in or about late September/early October 2000.

(e)     The legal effect of the 2^nd Repayment Agreement was to vary the terms of the 1^st Repayment Agreement by rendering W. Ho liable to repay a further sum of HK$2.5 million (together with interest thereon of HK$100,000) on or before 31^st December 2000 in addition to repayment of the other sums due under the 1^st Repayment Agreement.

28.  In the premises, by reason of the aforesaid variation of the 1^st Repayment Agreement, the Defendant is discharged from all liability to the Plaintiff under the Guarantee.”

53.  Nevertheless, the matter of which of the two documents is a false one is another dispute of fact to be resolved.

W. Ho Falls

54.  The plaintiff paid over the advance of $2.5 million on 30 September 2000, just before the deadline set by the workers and subcontractors, and they withdrew their petition.

55.  But still the troubles persisted.  Work on GE 97/21 fell behind schedule and, with wages and other payments in arrears, then stopped altogether.  In December the Government repossessed the sites.  Such payments that were due and paid were reduced by penalties incurred for delay.  The plaintiff found itself in a loss situation having paid out more than it had received, largely to keep the workforce on site.  W. Ho, needless to say, was by then in default in meeting on schedule repayment of the amounts due under the September Repayment Agreement.

56.  W. Ho was wound up on a creditor’s petition on 15 January 2001.  Mr Chow was made bankrupt on 22 January 2001.

Demand

57.  Mr Jiang instructed solicitors to make formal demand of the defendant of all sums due, being the total of the two advances ($7 million) and a further approximately $2.78 million loss under the Subcontract Agreement, in all $9.78 million with interest accruing thereon.

58.  With nothing forthcoming, this writ issued in August 2002.

The Defences

59.  After amendments, and reamendments, to the statement of defence, those that remain are as follows:

(a)     Misrepresentation.  Prior to his signing the guarantee on 24 July 2000, the defendant’s brother told him in Mr Jiang’s presence that the indebtedness due and to be secured was in the region of “several hundred thousand dollars”, and that the purpose of the guarantee was to provide reassurance to Jiang’s superiors and was of no legal effect.

(b)    Non-performance by the plaintiff.  The plaintiff had not complied with its obligations to advance $3.5 million to W. Ho, having wrongfully withheld $1.05 million.

(c)     Undue influence.  The defendant signed the guarantee because of the undue influence exercised by Mr Chow, his elder brother; more particularly he exploited his position in the family hierarchy of seniority or dominance over the defendant.  And the plaintiff through Mr Jiang had notice of the undue influence.

(d)    Variation.  I have already repeated verbatim the defence’s pleaded case under this head.

Which Document is Genuine?

60.  The first dispute of fact I propose to deal with is which of the Undated Document and September Repayment Agreement falls away for being a fabrication.

61.  The first point for consideration is that the plaintiff produced an original of the September Repayment Agreement, affixed as it was by ribbon and sealing wax to the defendant’s guarantee.  The defendant’s Undated Document was a photocopy, with no explanation as to why it was a copy and not the original or what had become of the original.  As the editors Kelly and Lindbalm of Scientific Examination of Questioned Documents, second Edition recount at 17.7:

“Fabrications

Copies can be used to create fabrications of non-existent original documents.  Signatures can be placed on contracts and agreements, dates or amounts altered, or paragraphs added.  Usually these cut-and-paste efforts are quite detectable with careful scrutiny.  The first red flag is that a copy, rather than an original document is proffered.  Since no original in fact exists, the proponent must explain why only a copy of a valuable or otherwise important document can be found.”

62.  The second is that the evidence of Messrs Tse and Chow, particularly the former, on the manner in which the Undated Document came into being and why the September Repayment Agreement is a forgery was wholly unconvincing and unbelievable.  That of Mr Jiang going to the genuineness of the September Repayment Agreement was on the other hand straightforward and credible. 

63.  Third is the matter of the text of the Undated Document, and reference in the clause dealing with GE 97/21 to two repayment agreements when only one had been recorded, because of course at that stage there was only one.  Precisely the same clause was used in the September Repayment Agreement by which time there were two repayment agreements.

64.  Finally it is not pleaded by the defendant that the plaintiff is relying on a forged or false document being the September Repayment Agreement to justify its claim and the quantum of that claim.

65.  In fact the pleaded defence at paragraph 27(c) to (e) of the statement of defence is consistent with the terms of the September Repayment Agreement.

66.  Having regard to these factors I am satisfied that the September Repayment Agreement is a genuine document upon which I can rely, whilst the Undated Document falls away for being a forgery, or at least a fabrication.

The Defences of Misrepresentation, Non-Performance and Undue Influence

67.  As these defences are reliant on findings of fact on disputed evidence I come to deal with these matters next.

68.  Was there a shortfall in the original advance?  The only evidence in support of this contention arises from Mr Chow’s protestations, made in his witness statement and repeated from the witness box, that W. Ho was short-changed, and that on numerous occasions thereafter when he complained he was assured by Jiang that he would chase up the balance.

69.  But the evidence to the contrary is overwhelming.  At the top of the pile are the documents branded “Official Receipts”, all signed by Mr Chow, raising a compelling presumption that as recorded the money was paid and received in full.  There was no evidence from anyone else from or on behalf of W. Ho who being a bookkeeper or in-house accountant should have been able to vouch for the shortfall.  There were no accounts, audited or otherwise; surely these could have been found and produced to support the complaint, if there was a shortfall.

70.  And the July Repayment Agreement, the Subcontract Agreement and the September Repayment Agreement in all of which Mr Chow was a signatory are all silent on a compelling issue, if it were true, that 25% of the original advance had not been paid.  Mr Li who brokered the advance and was the conduit through whom the instalments were paid would surely have been able to verify a shortfall, if there was one.  Yet he was not called and there was no explanation for that.

71.  I have no difficulty in rejecting as a fabrication that the plaintiff had not paid the sum of $1.05 million and thus that there had been material non-performance by the plaintiff.

72.  What were the circumstances giving rise to the signing by the defendant of the guarantee?

73.  It is not in dispute that Messrs Chow and Jiang met Chau Wa Kin in his hotel room at the Hyatt during the afternoon of 24 July 2000.  Mr Chau was in Hong Kong for a series of concerts.  Nor is it disputed that they came away with two copies of the guarantee, both signed by Mr Chau, under seal.  

74.  Before they left Mr Chau agreed to pose with Mr Jiang in a photoshoot.  The resultant photographs show the two men smiling at the camera, arms intertwined, in what is depicted as a happy and relaxed situation.  When the men met a few days later Mr Chau autographed one of the photographs. 

75.  But what happened during the course of the meeting is significantly in dispute.

76.  Mr Chow’s account is that in setting up the meeting he did not tell his brother that the purpose was to get him to guarantee W. Ho’s indebtedness yet again.  He feared there would be an immediate rejection, given the recent history.  Instead he said the intention was to show a potential partner in business that he was close to and supported by his famous younger brother.

77.  At the meeting Mr Jiang pulled out of his case not the two copies of the complete guarantee form but instead the execution pages only.  He (Mr Chow) told his brother that his signature was required for the purpose of persuading Jiang’s bosses to advance a few hundred thousand dollars to W. Ho.  Mr Jiang assured him that they had no legal effect.  His brother albeit with some reluctance signed both copies, in English and Chinese characters.

78.  The defendant in his evidence said he had no idea of the intended purpose of the meeting.  Jiang spent most of the time extolling the virtues of a relationship between the company he headed and W. Ho, which rather bored him.  Then he was shown a pile of papers, whose contents were not explained and which he did not examine, at least not in detail.  When he was asked to sign his name on two single sheets, where indicated, he had no wish to do so, and did so with some reluctance.

79.  He was angry and upset with his brother for putting him on the spot.  But he hid his feelings in order not to embarrass him in front of Mr Jiang.

80.  He did not know he was signing a guarantee.  Chow told him it concerned only a few hundred thousand dollars.  His attention was not directed to a document being a Repayment Agreement.

81.  Mr Jiang’s account was in substantial contrast.  Prior to the meeting Chow had told him that he had his brother’s confirmation that he was willing to sign a guarantee to secure repayment of the RMB4 million and agreed profit margin.

82.  At the hotel room having been introduced to Mr Chau he told him that a personal guarantee was required.  Chau professed to be already aware of it.  He was then shown and read an original copy of the July Repayment Agreement that was bound to the guarantee that Mr Chow had signed earlier that month.  Mr Chau read the documents.  He remarked that the Co-opration Agreement happened to have been signed on 22 December which was his birthday.  He also ran through the repayment terms, calculated what the total indebtedness was, and said casually: “$4.4 million.  It’s not much.  My guarantee is worth this sum of money only?”  Then he read through and signed both copies of his own guarantee, the pages of which were stapled together in the way they had left Mr Tse’s office, without hesitation or reluctance.  Having done so, he put his arm around Chow and said “Since we were born, we as two brothers could not be separated.  I support him.”

83.  Then there was the photoshoot.

84.  Again I have no hesitation in disbelieving the evidence adduced for the defence, that is of the brothers Chow and Chau.

85.  I start with the previous history.  This was the third of three guarantees required of Mr Chau to support W. Ho.  It came before him a short while after he had been called upon to make good on one of those guarantees.  It beggars belief that he would have signed the execution page only without reading the document as a whole or being sure of the extent of the commitment.  It is beyond belief that he would allow himself to be assured that the indebtedness was for a much smaller sum than was in fact secured, or that the document was to impress the bosses in the PRC having no legal effect.

86.  Mr Jiang could not have made up the remark that a date coincided with Mr Chau’s birthday.  I am satisfied he did not make up the balance of his account either; in particular, that before signing the defendant was handed in complete form and read the copy of the July Repayment Agreement and the guarantee before signing, and that he did so without any reluctance or hesitation.  The photographs tell their own story.  They reveal what Mr Jiang attested to; that the mood was relaxed and friendly, showing promise of an emerging relationship amongst the various parties.

87.  Does the evidence support the contention that the defendant signed the guarantee whilst under the influence of his elder brother which prevented him from exercising an independent judgment?

88.  This of course is a defence inconsistent with that of misrepresentation, and implies the proposition: “We put before you two versions of how the guarantee came to be signed; believe one or the other as you choose”.

89.  In respect of the undue influence defence, the defence sought to promote the proposition that Mr Chau was “brought up” by his elder brother Mr Chow.  There was little or nothing put forward to support that contention.  As Mr Chau allowed himself to be persuaded in cross-examination, both sons were brought up by their parents.  The seven years gap between brothers may have given Mr Chow some seniority in the early years, but there was no sign of that from when they were both grown up.  In fact the history and evidence shows that if there was any domination it was by Mr Chau, the highly successful pop star, entrepreneur and businessmen over his poorly performing impoverished sibling, whose business but for the younger brother’s support would have sunk without trace years earlier.

90.  On the bases of these findings of fact, I am satisfied that the defences of non-performance, misrepresentation and undue influence have not been established, and I reject them.

91.  I come now to the remaining defence; that of variation of the principal contract.

The Variation Defence

92.  As pleaded, the variation amounted to the enhancement of W. Ho’s indebtedness and thus the guarantor’s liability by the further advance of $2.5 million and interest.  But the effect of the September Repayment Agreement went further than that, adding to the liability, for the first time, receivables due to the plaintiff under the Subcontract Agreement.

93.  The defence relies on the rule in Holmes v Brunskill (1878) 3 QBD 594; that unless there is an express reservation in the instrument preserving a creditor’s rights against a surety, a material variation of the terms of the contract between the creditor and principal debtor will discharge the surety.

94.  Cotton LJ, in language reminiscent of the era, said at page 505:

“The true rule in my opinion is that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without question evident that the alteration is unsubstantial or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged: yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety the Court … will hold that in such case the surety must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and if he has not so consented, he will be discharged.”

Had the Defendant Contracted out?

95.  In determining whether there is an express reservation binding on the surety, generally the contra proferentum rule applies; namely, that if there is any ambiguity in the terms used in the guarantee, the words of the document will be construed against the party who drew it; see for example HSBC v Martel [2003] 1 HKLRD 497, at p.505.

96.  This is particularly apposite where, as here, the surety gets no benefit under the guarantee.

97.  Mr Scott SC for the plaintiff made two separate points in support of the contention that the defendant was caught by the guarantee and liable for the amounts claimed for.  He submitted that the modern form of guarantee employed by banks and financial institutions who habitually rely on a guarantee as security for an advance to be made are so framed as to protect their right to enforce the same, notwithstanding a variation of the terms of the debt between bank and customer, or in the event of time or other indulgence afforded the debtor.

98.  He noted the terms of paragraph 8 of the guarantee (see paragraph 28 of this judgment) and that it was almost identical to a clause in a guarantee the subject of a Hong Kong case re Lok Kwok Man, unreported HCB 2318 of 1999.  The HSBC had petitioned a guarantor in bankruptcy for failure to comply with a statutory demand made against him.  The guarantor resisted on a number of grounds; in particular, that he had not consented to an increase in the principal’s indebtedness and was not caught by the clause in question.  Deputy Judge To rejected this defence because of the wording, without preamble or explanation:

“The petitioner is therefore free to provide further facilities to the debtor …”

The judge went on to note that the guarantor was “in the driving seat” of the principal with full knowledge of its financial affairs and the extent of its indebtedness to HSBC, and could not thus complain of having no notice of the transaction giving rise to an increase of the indebtedness and increase of his own risk as a guarantor.

99.  But in a later case on the same topic the Court of Appeal found it at least arguable that the rule in Holmes v Brunskill was not overridden.  Again the issue was an interpretation of a clause in virtually identical terms.  The case is HSBC v Martel (unreported) CACV 54 of 2003.  A Master had given summary judgment in favour of the bank against a guarantor.  On appeal a judge gave unconditional leave to defend; the bank appealed, seeking restoration of the summary judgment.  The bank, inter alia, sought to rely on a clause of almost identical wording to clause 8, including the heading “Guarantor as Principal Debtor”.  Of this clause Yuen JA said at p.11:

“35.     The first point to note is that the heading is “Guarantor as Principal Debtor”.  Reading the clause as a whole, I consider it is arguable that this clause applies only where the customer has been released (in whole or in part) from liability — whether by way of agreement, arrangement, legal limitation, disability, incapacity or other act, omission or circumstance.  The effect of the clause then is that even though the customer is released (in whole or in part) from liability, the surety is not, and any moneys not recoverable from the customer remains recoverable from the surety as principal debtor, hence the heading.

36.      So construed, the clause does not override the application of the rule in Holmes v Brunskill in the present case.  Here the company has not been released from a liability which the bank seeks to recover from the surety as principal debtor.”

The court dismissed the appeal.

100.  Mr Scott invited that the proper course was to follow the ruling of Deputy Judge To, whose decision was made after trial, whilst Yuen JA was ruling in an order 14 RHC application for summary judgment, so that the criterion was the much lower one of whether or not there was an arguable case.  He submitted that the heading “Guarantor as Principal Debtor” which seemed to influence Yuen JA should be given little weight; that it should be treated as a catchphrase or form of identification which should not prevail over express wording; or introduce an ambiguity where none existed, citing an extract from The Interpretation of Contracts by Lewison at 5.12.  The words in the first sentence of clause 8 of the guarantee did not limit the type of “agreement or arrangement” referred to, as the word “any” preceding that phrase was all encompassing.  The two sections of the clause are separate and should be read as such.

101.  Mr Scott’s second proposition was based on the premise, accepted by Mr Remedios for the defence, that for the rule in Holmes v Brunskill to bite the variation must be material, and that it had not been established in this case.

102.  I quote from his closing submission:

“In such a situation the position as between the creditor and the debtor is not altered by the provision of further funds other than by improving the position of the debtor.  In that sense, it can be argued that the advance of the further funding is not ‘material’ to the risk which the surety assumed …  The defendant seems to have overlooked this point in the course of the trial and no evidence at all has been adduced that the advance of an additional $2.5 million to W. Ho in any way adversely affected the risk of default by W. Ho.”

103.  In support of this proposition he quoted from an excerpt from Law of Guarantees, fourth edition, Andrews and Millet, paragraph 9.024, headed “Materiality”, where the authors referred to a variation in which the creditor dealt with securities to the detriment of the surety’s interests:

“This type of variation must be contrasted with a variation which merely affects the amount of the surety’s ultimate liability, but which leaves the risk of default by the principal unchanged; this variation will not be material.”

104.  I note in the same paragraph, the authors state:

“The rule has recently been stated by the High Court of Australia in Ankhar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 C.L.R. 549 (at 559) thus:

‘According to the English cases, the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety’s rights, unless the alteration is unsubstantial and not prejudicial to the surety.  The rule does not permit the courts to enquire into the effect of the alteration.  The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety’s risk.’

Thus, the question of whether a variation is material is answered objectively, without reference to what the parties thought.  A surety may be discharged, therefore, if the variation is potentially prejudicial when made, even though it ultimately has little effect on the surety’s risk.  Accordingly, whenever a creditor seeks a variation in the terms of his contract with the principal without the knowledge or consent of the surety, he does so at his own risk, and unless the benefit or lack of prejudice to the surety is obvious, or there is obviously no possibility of prejudice, the surety will be entitled to be discharged.  It is a matter for the surety as to whether he wishes to continue to be bound by the guarantee in the circumstances of the variation of the principal contract, and if the creditor wishes to avoid the risk that the surety will seek to avoid liability under the guarantee, he should obtain the surety’s prior consent to the variation.”

105.  Dealing with the matter of materiality first; it seems to me that the above passage from Andrews and Millet supports the proposition that one is required to view the terms of the enhancement and circumstances objectively, which goes further than dismissing it as immaterial merely because it increases the amount at risk.

106.  In the circumstances of this case, it is hard to accept that the terms of the September Repayment Agreement would not have substantially added to the risk of the defendant as a guarantor of W. Ho’s indebtedness.  Not only was the indebtedness of the company enhanced for the express purpose of avoiding a winding-up petition brought by its workers and sub-contractors, but there was the additional obligation within the agreement to meet receivable due to the plaintiff under GE 97/21 should those be lost as a result of W. Ho being wound up.

107.  To my mind the variation affected by the September Repayment Agreement was material as being potentially prejudicial; the defendant, unless he had contracted out of this right, needed to be informed of this variation and to consent to it, if he was to be bound.

108.  Had he contracted out?

109.  I am satisfied he had not.

110.  The guarantee makes it clear that at the outset what was stake; the “Guaranteed Moneys” as defined.  Clause 8 as I find serves to maintain the guarantor’s liability notwithstanding any arrangement or indulgence proferred to the principal debtor which might risk the ongoing liability of the guarantor.  To permit of the interpretation that it allows the creditor and principal debtor to enter into whatever arrangement or agreement including the enhancement of the debt, the amendment to repayment terms and indeed entirely new obligations without reference to the guarantor in my view allows far too liberal an interpretation where strict interpretation is called for.

111.  Deputy Judge To’s different conclusion was given without reason.  But I think he may have been influenced by the circumstances of that case; it was one where the guarantor as a director of the principal debtor orchestrated and directly participated in the increase of the debt giving rise to the variation.

112.  This case is very different.  The debt was enhanced to defer the winding-up of the principal debtor.  But in addition and for the first time the guarantor was put at risk of being liable for losses incurred by the creditor in its subcontract with the principal debtor, a subcontract which was entered into months before the variation and before the guarantee was entered into.  This had no bearing at all on advances made by the creditor to the principal debtor, originally or subsequently.

113.  It follows as I find that the defendant did not contract out of the protection afforded by the rule in Holmes v Brunskill.

Did the Defendant Consent to the Variation?

114.  In particular, was the defendant told of the September Repayment Agreement, was he taken through the terms of it, superseding thus the July Repayment Agreement, and did he consent to the enhanced liability under his guarantee?

115.  The burden being on the plaintiff to prove consent (see, for example, Provincial Bank of Ireland v Fisher [1919] 2 IR 249 HL, I turn to the evidence to see if it has.

116.  There is nothing in writing to support the proposition that the defendant did consent, and no evidence that Mr Jiang or anyone else representing the plaintiff sought confirmation of that from him directly.

117.  Mr Jiang in his evidence said when asked by Chow to make the further advance of $2.5 million by the deadline of 1 October 2000:

“… Chow said he would telephone the defendant and give the defendant a fax about the amendment in respect of the proposed further loan to W. Ho.”

And then:

“I was told by Chow that Chow had informed the defendant of the said amendments to be made to the July Repayment Agreement … I recall that I have on several occasions raised queries about the defendant’s consent to the amendments to the July Repayment Agreement and Chow repeatedly told me that he had certainly informed the defendant of all the amendments and the defendant had already given his consent in this regard … Before I signed the September Repayment Agreement, I asked Tse if the September Repayment Agreement was legally valid and Tse answered in the affirmative … As I had very limited knowledge of the law in Hong Kong, I thought that the September Repayment Agreement being a document signed in a law firm, was legally valid and binding on the plaintiff, W. Ho and the defendant.”

118.  The defendant for his part denied that he had any knowledge of the existence of the September Repayment Agreement or its terms.  He said had he been asked, he would not have given his consent to having to shoulder any enhanced risk as guarantor. 

119.  Both Chow and Tse denied informing Chau of the September Repayment Agreement or having told Mr Jiang that they had done so and had obtained his consent.

120.  Had Mr Jiang been independently and appropriately advised on how to ensure Mr Chau’s continuing liability under the enhanced terms of the September Repayment Agreement he would have been told of the importance of getting his informed consent to the varied terms of W. Ho’s indebtedness to the plaintiff, preferably in writing, and would no doubt have come to know that his understanding of the law that I have reproduced at paragraph 117 was erroneous.  As it was, he relied on Mr Chow’s assurances that he had told him and that he had consented, and Tse’s assurance that the September Repayment Agreement was “legally valid”, whatever that means. 

121.  During the course of the trial both Chow and Tse showed themselves capable of a lax approach to their oath to tell the truth.  On this important issue both denied that either had approached Mr Chau the defendant on the topic, let alone that his informed consent was given, and the defendant denied all knowledge. 

122.  Notwithstanding Mr Scott submitted that I should draw the inference of consent. 

123.  But, overall, I am left with a doubt that the defendant did consent; my finding of fact on this issue is that the plaintiff has failed to establish that he did.

The Result

124.  By virtue of the rule in Holmes v Brunskill, the plaintiff has failed to establish liability; the claim is dismissed.

125.  I come to costs.  These are nisi, and thus subject to argument.  But I make the following points giving rise to this a preliminary order. 

126.  In the normal course these should be fully in favour of the defendant he having succeeded in his defence.  But I have a discretion.  The defence case was riddled with evidence which was patently fabricated or exaggerated.  Chow Ho Kin and the defendant were guilty of this, and the solicitor Tse does not escape censure either.  Examples include the events of 24 July 2000, and those surrounding the emergence of the Undated Document and allegations of forgery.  All these prolonged the trial unnecessarily and introduced issues which were clearly made up.

127.  In the circumstances, I order in favour of the defendant as to one half costs only.

128.  I should mention before closing that no such criticism attaches to the solicitors and counsel representing the defendant; their conduct throughout was exemplary.