XCHRX THE KWANGTUNG PROVINCIAL BANK v. YUEN WAI KWOK t/a GALA RADIO & ELECTRIC CO. AND OTHERS

1998, HCA 15011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15011 OF 1998

_______________

________________

______________

J U D G M E N T

______________

1. In this application, the Plaintiff seeks summary judgment against the 3rd Defendant and, consequentially upon such judgment, dismissal of the 3rd Defendant's Counterclaim.

2. The Plaintiff is a bank which granted certain credit facilities to the 1st Defendant. It is suing the 3rd Defendant as the 1st Defendant's guarantor pursuant to a written guarantee dated 1st May 1997 ("the Guarantee"). By the Guarantee, she agreed to pay to the Plaintiff on demand, all sums due but unpaid from the 1st Defendant to the extent of HK$2,500,000.

3. The Plaintiff alleges that as at 4th August 1998, the 1st Defendant owed to the Plaintiff the principal sum of about HK$4.1 million which, together with interest and an "administration fee" comes to the sum of HK$4,199,249.23 mentioned in the Writ.

4. Demands for payment were made of all the Defendants on 7th August 1998. No payment has resulted. Hence the present claim.

5. The 3rd Defendant relies on a plea of non est factum. She alleges that she was induced to sign the Guarantee by the fraudulent misrepresentation of Tam Ka Hing ("Tam"), acting on behalf of the Plaintiff, as to the nature of the document. Although Mr. Koo, who appeared for the 3rd Defendant, to some extent treated these two allegations as separate, the factual basis of both pleas is the same. They both depend on the allegedly mistaken belief of the 3rd Defendant as to the nature of the document on the occasion when it was signed. The fraudulent misrepresentation is alleged to have induced the mistake and constitutes the factual basis for the non est factum plea.

6. As an additional defence, the 3rd Defendant complains that the Plaintiff permitted the 1st Defendant to sell a property forming part of the security given to the Plaintiff, without appropriating the whole of the proceeds of such sale towards reducing the 1st Defendant's indebtedness to the Plaintiff. It is said that this constituted an "injurious act" which entitles the 3rd Defendant to a discharge of the Guarantee. The property was sold for HK$9.68 million, out of which the Plaintiff appropriated HK$8.88 million towards reducing the 1st Defendant's indebtedness.

7. What the 3rd Defendant says occurred is as follows. She had previously agreed to provide guarantees in respect of the 1st Defendant's liabilities on 27th February 1995 (to the extent of HK$1 million), again on 10th January 1996 (jointly with 2nd Defendant to the extent of HK$1 million) and yet again on 29th May 1996 (to the extent of HK$500,000), such obligations being cumulative.

8. She knew that the 1st Defendant's liabilities were secured by other securities, whose market values were increasing. She says that in April 1997, she approached various members of the Plaintiff's staff and asked them to release her from her guarantees if the market value of such securities increased "to a certain extent". She says that she was told to attend a meeting on 1st May and at that meeting was induced to sign the Guarantee. She alleges that Tam told her that the document she was asked to sign was to release her from liability under the previous guarantees. She says that she does not read English and relied on such representation which fraudulently misled her as to the type of document she was signing. She accordingly brings a counterclaim for a Declaration that the Guarantee is void and for an Order that it be delivered up for cancellation.

9. The Plaintiff attacks the 3rd Defendant's story as wholly incredible. It says that far from misrepresenting the nature of the document to be signed, Tam expressly told the 3rd Defendant that it was a guarantee replacing those given earlier. Moreover, Tam got the 3rd Defendant to sign a document in Chinese certifying her understanding of the position.

10. The certified translation of that document which I shall call "the Chinese Memorandum" is as follows:

"To: The Kwangtung Provincial bank

I, Wan Wai Ping, (ID No. XXXXXXX) hereby confirm my personal guarantee in favour of the 3rd Defendant in the total sum of HK$2.5 million is still valid until further written notice is given.

I agree to sign a fresh guarantee in the sum of HK$2.5 million. Please cancel the old guarantee and return the original."

And then the 3rd Defendant signed the document.

11. It is therefore apparent that, at the time of signing the Guarantee, the 3rd Defendant also signed the Chinese Memorandum (Chinese being a language which she has no trouble reading) stating that she was agreeing to sign a fresh guarantee in the sum of $2.5 million and that the old guarantees would be cancelled and returned.

12. The 3rd Defendant says that she signed it thinking, in reliance on what Tam had told her, that "it was only an acknowledgment that the [old guarantees] would continue to be valid until further notice and that it was just a formal procedure required by the Plaintiff." It is to be noted that she does not allege that she did not read it or that she was not given a chance to do so, but only that she signed it "without having fully understood the contents". She complains that, contrary to what one might expect, she was not provided with either a copy of the Guarantee or of the Chinese Memorandum. This, she says, supports the theory that Tam had fraudulently induced her to sign both documents.

13. Miss Wong, who appears for the Plaintiff, invites me to hold that since the Chinese Memorandum states unmistakably that the 3rd Defendant was agreeing to provide a fresh guarantee, her evidence as to her mistaken belief should be rejected as wholly incredible. Alternatively, Miss Wong invites me to hold that the evidence shows such an obvious and undeniable lack of care that the high degree of care needed to support the defence of non est factum is obviously absent, making that defence a non-starter.

14. In my judgment, these are both points of very considerable force. Even without the Chinese Memorandum, it seems to me intrinsically unlikely that Tam or anyone else at the Bank, which already had in its hands the guarantees previously given by the 3rd Defendant, should on the one hand, purport to agree to their release and then, on the other, by some devious and fraudulent means, get the 3rd Defendant to sign the new Guarantee in their place. It prompts one to ask why they did not simply refuse to release existing guarantees in the first place?

15. Mr. Koo seeks to argue that the Bank had a motive for fraud. He points to Mr. Tam's evidence that the Bank wanted to regularise and consolidate the previous guarantees into a fresh guarantee, inter alia, because a term loan previously granted and supported by one or more of the earlier guarantees had been repaid. He suggests that this led to the surreptitious behaviour alleged. Again, with respect, this is commercially extremely hard to accept. It is difficult to see why a bank which wanted a fresh guarantee to regularise the position would not simply ask for it and, if refused by the guarantor, withdraw the facilities given to the principal debtor. It is hard to see why it should instead adopt the elaborate course of fraud alleged.

16. The crucial fact is of course that the 3rd Defendant signed the Chinese Memorandum. In my judgment, it is incredible that Tam should give her this document to sign if he was perpetrating the fraud alleged. If he was taking advantage of the 3rd Defendant's lack of English to misrepresent to her the nature of the document she was signing, it is hardly likely that he would, on the same occasion, hand her the Chinese Memorandum which specifically informs her that she is being asked to agree to a fresh guarantee.

17. Mr. Koo also seeks to persuade me that a letter sent to the 1st Defendant and copied to the 3rd Defendant dated 6th May 1997 casts doubt on Tam's credibility when Tam later deposes to having received no prior request by the 3rd Defendant to be released from the previous guarantees. I do not construe that letter as giving rise to any contradiction. In my view, it merely informs the 1st Defendant, at the 3rd Defendant's request, that the guarantees have been determined and that the documents may be collected for cancellation.

18. I am therefore of the view that the 3rd Defendant's allegation that she was ignorant as to the true nature of the Guarantee signed by her is incredible or at the very least, extremely difficult to accept.

19. I am in any event of the opinion that even if she did form such a mistaken belief, her own evidence shows that no reasonably triable issue in relation to the defence of non est factum arises. The requirements of the defence are classically stated in Saunders v Anglia Building Society [1971] AC 1004. Lord Reid summarised the principles as follows (at pages 1015 to 1016) :-

"The plea of non est factum obviously applies when the person sought to be held liable did not in fact sign the document. But at least since the sixteenth century it has also been held to apply in certain cases so as to enable a person who in fact signed a document to say that it is not his deed. Obviously any such extension must be kept within narrow limits if it is not to shake the confidence of those who habitually and rightly rely on signatures when there is no obvious reason to doubt their validity. Originally this extension appears to have been made in favour of those who were unable to read owing to blindness or illiteracy and who therefore but that does not excuse them from taking such precautions as they reasonably can. The matter generally arises where an innocent third party has relied on a signed document in ignorance of the circumstances in which it was signed, and where he will suffer loss if the maker of the document is allowed to have it declared a nullity. So there must be a heavy burden of proof on the person who seeks to invoke this remedy. He must prove all the circumstances necessary to justify its being granted to him, and that necessarily involves his proving that he took all reasonable precautions in the circumstances. I do not say that the remedy can never be available to a man of full capacity. But that could only be in very exceptional circumstances: certainly not where his reason for not scrutinising the document before signing it was that he was too busy or too lazy. In general I do not think he can be heard to say that he signed in reliance on someone he trusted. But, particularly when he was led to believe that the document which he signed was not one which affected his legal rights, there may be cases where this plea can properly be applied in favour of a man of full capacity.

The plea cannot be available to anyone who was content to sign without taking the trouble to try to find out at least the general effect of the document. Many people do frequently sign documents put before them for signature by their solicitor or other trusted advisers without making any inquiry as to their purpose or effect. But the essence of the plea non est factum is that the person signing believed that the document he signed had one character or one effect whereas in fact its character or effect was quite different. He could not have such a belief unless he had taken steps or been given information which gave him some grounds for his belief. The amount of information he must have and the sufficiency of the particularity of his belief must depend on the circumstances of each case."

20. Mr. Koo has sought to argue that the 3rd Defendant took sufficient care to find out the general effect of the document by asking Tam about it. However, as Lord Reid stated in the quoted passage, generally, one cannot be heard to say that one signed in reliance on someone he trusted. This is particularly so in present case as the evidence here is that the 3rd Defendant had experience of business dealings in her own right. More importantly, and fatally for this defence, there is in my view no answer to the criticism that, having been given the opportunity of understanding the nature of the Guarantee by being handed the Chinese Memorandum, she simply signed the Guarantee without bothering to "understand fully" the contents of that Memorandum. That is plainly and obviously lack of reasonable care which precludes the plea of non est factum.

21. The allegation that the Bank's handling of the proceeds of sale of the security was improper and such as to discharge the guarantee in my view also fails to raise any triable issues.

22. In my view, the Bank's acts were within Clause 6 of the Guarantee which states as follows:-

"You shall be entitled without notice and/or consent of me/us and without thereby discharging or affecting my/our liabilities hereunder at any time at your sole and absolute discretion to deal freely with the Principal or any other party or parties liable in respect of any debts and/or liabilities guaranteed hereunder whether jointly, severally or jointly and severally with the Principal or as surety or as provider of securities including but not limited to..... (b) to vary exchange renew discharge release give up abstain from perfecting and/or hold over any securities (including but not limited to any bills notes mortgages charges liens or other securities) indemnities guarantees and/or any other undertaking or arrangement of similar nature whether from the Principal or from any third party or parties covering or in respect of any debts and liabilities hereby guaranteed."

23. There is, in my view, nothing inequitable about the Bank exercising its rights in relation to its security in the manner expressly agreed with the guarantor. Neither is there anything in the authorities precluding the parties from making provision for such conduct in the guarantee. It is my view that the action of the bank falls squarely within the protection of Clause 6 so that there is nothing in the point advanced by the Defendant based on cases like China & South Sea Bank Ltd. v George Tan [1990] 1 AC 536.

24. In conclusion, I find that there is no triable defence disclosed by the 3rd Defendant and no other reason for trial. I accordingly order that there be Judgment against her in favour of the Plaintiff, with the costs of the Action.