LEOMARK HOLDINGS LTD. v. CHIK HO MING

HCA 3065/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3065 OF 1997

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J U D G M E N T

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1. On 14 September 1999, before Mr Simon Leung, instructed by Messrs C L Chow & Co. for the Plaintiff, opened the plaintiff's case, Jackson J. told the parties that he had had an opportunity to read the papers and it seemed plain to the learned Judge that the two days set down for the trial was simply insufficient. Mr Leung agreed that difficult matters of law were involved but thought two days should be sufficient. After hearing submission from Mr Leung and the defendant who appeared in person, the learned Judge did not believe this case would finish in two days and told the parties that the state of his diary was such that if this case did not finish in two days, it would then have to be part-heard until January 2000. The learned Judge adjourned the case, to be set down again, for no less than three days and to a date to be fixed in consultation with counsel's diary. The learned Judge was minded to make an order that costs be in the cause, but Mr Leung asked for costs asserting that that day's costs was thrown away as a result of the defendant's application for an adjournment. The learned Judge said it was not and he "won't be manoeuvred in that way" and reserved costs.

2. This case came before me on 17 April 2000, with Mr Simon Leung again representing the plaintiff on the instructions of Messrs C L Chow & Co. As Mr Leung agreed with Jackson J. that difficult matters of law were involved and as Mr Leung insisted at the previous hearing that the plaintiff was ready, Mr Leung might have been more helpful to the Court if he had not kept his list of authorities to himself (despite paragraph 2 of Practice Direction 5.5 on submission of authorities which states that as "early as possible before the hearing and, in any event ... for a judge of the High Court ... not later than 12 noon on the day before the hearing, every party or his solicitor must lodge with the Clerk of the Court and the other party or his solicitor a list of authorities it is intended to cite") until I asked for it on 17 April 2000. Of the authorities in such list, Mr Leung cited O'Donovan and Phillips, The Modern Contract of Guarantee (3rd ed) at p. 299; Egbert v National Crown Bank [1918] AC 903; Ankar Proprietary Ltd v National Westminster Finance(Australia) Ltd (1987) 162 CLR 549; Perry v National Provincial Bank of England [1910] 1 Ch 464 and Halsbury's Laws of England (4th ed) Vol. 16 at paras. 955; 1047. Mr. Leung did not cite the other authorities in his list, i.e. David Foskett, QC, The Law and Practice of Compromise (3rd ed) at 6-14; 6-15; Halsbury's Laws of England (4th ed) Vol. 20 at paras. 304; 306; 308; Traders Group Ltd v Brewster (1968) 2 DLR 390; ANZ Banking Group Ltd v Taudien (1981) 6 ACLR 289 and Halsbury's Laws of England (4th ed) Vol. 16 at para. 1046.

The guarantee by Deed dated 2 August 1991

3. By a deed dated 2 August 1991 ("the Deed") signed sealed and delivered by the defendant before one "C. L. Chow", solicitor of Messrs C. L. Chow & Lam, the defendant:-

"hereby agree to guarantee and be answerable to you for the due payment by PAN PACIFIC TEXTILE GROUP INC. of 110 East, 9th Street, Suite C1151, Los Angeles, CA90079, U.S.A. ('the Principal Debtor') for all the goods shipped under D/A (60 days) terms to (the Principal Debtor) and formally accepted by (the Principal Debtor) which fulfil the sales terms of quality, quantity and shipment date of the contract and which you may from time to time supply to it subject to the limitation that my liability under this guarantee shall not at any time exceed the sum of US TWO MILLION AND FIVE HUNDRED THOUSAND DOLLARS (US$2,500,000.00.).

2. That this guarantee shall be a continuing guarantee to you for all debts whatsoever and whensoever contracted by (the Principal Debtor) with you in respect of goods to be supplied to it subject always to the above limitation and sales condition.

3. That you are to be at liberty without notice to me at any time and without in any way discharging me from my liability hereunder to grant time or other indulgence to (the Principal Debtor) and to accept payment from it in cash or by means of negotiable instruments and to treat me in all respects as though I were jointly and severally liable with it to you instead of being merely surety for it."

4. As the defendant's guarantee was by deed, no consideration was necessary and none is alleged in the Amended Statement of Claim.

The 7 May 1992 document

5. According to a Chinese document ("the 7 May 1992 document") signed by one To Man Chung on behalf of the Principal debtor, the defendant on behalf of G Tex Industrial Company Limited and one Ng Lai Tong on behalf of the plaintiff, Ng Lai Tong and 3 other representatives of the plaintiff met To Man Chung as representative of the Principal Debtor and the defendant as representative of G Tex Industrial Company Limited on 7 May 1992. The reasons for the meeting as stated in this document were, among others, that:-

"in respect of the production of the double-sided sportswear at a later stage, (the plaintiff) could not make delivery of the goods for Christmas season according to schedule, which seriously affected the sale of (the Principal Debtor) in the United States. (The Principal Debtor) was not only affected in cash flow, it also wasted a great sum for the sale and also encountered the depreciation of the price by reason of the outdated goods and the drawback effect to the reputation of the company.

Mr To Man Chung, in consideration of the sincere co-operation between both parties and the future co-operation, agreed to accept the goods by its original price and also pay in advance for the United States import tax for the goods also part of the price of the goods."

6. On the basis of the facts stated in the quoted passage, the defendant had no liability under the Deed as the plaintiff acknowledged that the doubled-sided sportswear did not fulfil the sales terms on the shipment date. However, the 7 May 1992 document went on to record the following as resolutions:-

"The present goods, which were stored in the warehouse of (the Principal Debtor) were pending for resale in the new season between July and September.

1. Mr. To Man Chung also undertook to sell the goods within three months from July 1992 to September 1992 and guaranteed to settle the price of the goods before the end of September.

2. Mr. Chik Ho Ming also undertook that the personal guarantee shall remain in force.

3. (The plaintiff) agreed to postpone the payment until July to September by reason of the above conditions."

7. It is clear from the document that the defendant "undertook that the personal guarantee shall remain in force".

8. By paragraph 11 of the Amended Statement of claim, the plaintiff relied on this document and pleaded that the defendant "also signed on the Minutes, thereby confirming that he shall continue to be personally responsible to the Plaintiff in the manner described in the Deed". In the course of Mr Leung's final submission, I asked him what was the consideration, if any, for the defendant's undertaking. Mr Leung said that "as a result of the defendant's promise to remain as a guarantor, the plaintiff agreed to extend time of payment for (the Principal Debtor) and business could still go on afterwards between (the Principal Debtor) and the plaintiff". Mr Leung did not make any application for leave to further amend the Amended Statement of Claim to plead consideration for the defendant's undertaking given in the meeting of 7 May 1992. Consideration for any agreement not under seal is a material fact and must be pleaded, except in the case of negotiable instruments, where it is presumed, paragraph 18/12/9 of the 1999 Supreme Court Practice. On the plaintiff's pleaded case, no consideration has been alleged for the defendant's undertaking.

The General Release in 1995

9. The plaintiff and the Principal Debtor entered into a "Settlement Agreement and General Release" ("the General Release") in 1995. The General Release contains the following provisions:-

"This Settlement Agreement and General Release (hereinafter referred to as this 'Agreement' is entered into as of January ___, 1995 by and between (the plaintiff) and (the Principal Debtor).

This Agreement is entered into in the County of Los Angeles, State of California, with respect to the following facts:

A. In or about July of 1991, (the Principal Debtor) agreed to purchase from (the plaintiff) 5,370 dozen ladies reversible warm-up suits at a price of $1,512,600.00 U.S. (hereinafter referred to as 'the ladies reversible warm-up suits').

B. In or about July of 1991, (the Principal Debtor) agreed to purchase from (the plaintiff) 1935 dozen mens (sic) reversible warm-up suits at a price of $545,670 U.S. (hereinafter referred to as the 'mens reversible warm-up suits').

C. (The Principal Debtor) took possession of the ladies reversible warm-up suits, sold part of them, and the remainder is stored in (the Principal Debtor's) warehouse.

D. The customs import duty on the mens reversible warm-up suits has not been paid, and they remain in a bonded warehouse in Los Angeles.

E. On September 3, 1993 (the plaintiff) filed a complaint against (the Principal Debtor) in the United States District Court for the Central District of California to recover the sum of $1,431,150, plus interest and costs, allegedly due on account of the ladies and mens reversible warm-up suits. The Complaint was assigned case number 93-5368-DT(Ex) (hereinafter referred to as 'the Complaint').

F. On September 28, 1993, (the Principal Debtor) filed its answer to the Complaint, in which it denied any liability on the Complaint to (the plaintiff), and in which certain affirmative defenses were asserted.

G. (The plaintiff) and (the Principal Debtor) now wish to resolve all differences and disputes which exist between them, on the conditions set forth herein, including, but not limited to, all of the claims and dispute asserted in or related to the Complaint.

NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:

1. (The Principal Debtor) shall pay to (the plaintiff) the total sum of $930,247.50 as follows:

a. $310,082.50 no later than September 1, 1995;

b. $310,082.50 no later than October 1, 1995; and

c. $310,082.50 no later than November 1, 1995.

2. As security for the payment described in paragraph 1 hereof, (the Principal Debtor) shall execute a stipulation for entry of judgment in the form attached hereto as Exhibit '1', which is incorporated herein by this reference.

3. (The Principal Debtor) agrees to pay the customs duty and any other incidental expenses necessary to take the mens reversible warm-up suits out of the bonded warehouse in Los Angeles. ...

...

5. The parties hereby acknowledge that an order dismissing the Complaint was entered on December 21, 1994. Notwithstanding said dismissal, the parties agree that the court shall maintain jurisdiction over the parties, and the Complaint, for the purpose of enforcing the terms of this settlement, and the stipulated judgment attached hereto.

6. Save and except for the executory provisions of this Agreement, (the plaintiff) and its predecessors, successors, heirs, assigns, partners, representatives, agents, employees, shareholders, directors, and attorneys, and each of them, do hereby absolutely, fully and forever release, relieve, waive, relinquish and discharge (the Principal Debtor) and its shareholders, officers, directors, assigns, partners, guarantors, representatives, agents, employees, attorneys, and every entity in which any of them has, have, or may later acquire any interest, and each of them, of and from any and all manner of action or actions, causes of action, suits, debts, liabilities, demands, obligations, costs, expenses, sums of money, controversies, damages, accounts, reckonings and liens of every kind or nature whatsoever, in law or in equity, whether known or unknown, suspected or unsuspected, that (the plaintiff) at any time heretofore had, owned or held, against (the Principal Debtor) including, without limitation any arising out of, or connected to directly or indirectly, the Complaint.

7. Save and except for the executory provisions of this Agreement, (the Principal Debtor) and its predecessors, successors, assigns, partners, representatives, agents, employees, and attorneys, and each of them, does hereby absolutely, fully and forever release, relieve, waive, relinquish, and discharge (the plaintiff) and its shareholders, officers, directors, assigns, partners, guarantors, representatives, agents, employees, and attorneys, and each of them, of and from any and all manner of action or actions, causes of action, suits, debts, liabilities, demands, obligations, costs, expenses, sums of money, controversies, damages, accounts, reckonings, and liens of every kind or nature whatsoever, in law or in equity, whether known or unknown, suspected or unsuspected, that (the Principal Debtor) at any time heretofore had, owned or held, against (the plaintiff) including, without limitation, any arising out of or connected to, directly or indirectly, the Complaint.

...

9. The parties acknowledge that they have been informed by their attorneys as to the meaning and effect of, and that they each understand, Section 1542 of the Civil Code of the State of California, which provides as follows:

'A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.'

The parties do hereby waive and relinquish all rights and benefits that they have or may have under Section 1542 of the Civil Code of the State of California to the fullest extent that they may lawfully waive such rights and benefits pertaining to the subject matter of this Agreement.

...

12. Any suit brought by any party hereto to enforce any provision hereof, or for damages for the breach of any provision hereof, shall be commenced and maintained exclusively in the County of Los Angeles, State of California ...

13. This Agreement is made and entered into in the State of California and shall in all respects be interpreted, enforced and governed in accordance with the laws of that State.

...

15. This Agreement contains the entire agreement ...

16. This Agreement effects a compromise settlement of claims that are contested and denied. Nothing contained herein shall be construed as an admission of liability of any kind."

The parties' pleaded cases

10. The plaintiff issued that the Writ on 24 March 1997 and by its Amended Statement of Claim alleged that in or about June/July 1991 (that is to say before the date of the Deed) the plaintiff and the Principal Debtor entered into a sale and purchase agreement of "some men's and ladies' warm-up suits"; that in or about August 1991, the plaintiff delivered to the Principal Debtor reversible warm-up suits ordered by the later and dispute then arose as to the time of arrival of these goods and the Principal Debtor refused to pay; that by an agreement entered into between the plaintiff and the Principal Debtor on 7 May 1992, the Principal Debtor agreed to pay the plaintiff notwithstanding the dispute "the originally agreed price for these goods, which amounted to US$1,431,150; that such agreement was recorded in "the Minutes" which the defendant also signed thereon "thereby confirming that he shall continue to be personally responsible to the plaintiff in the manner described in the Deed"; that in breach of the 7 May 1992 agreement, the Principal Debtor only paid US$320,000 leaving an outstanding balance of US$1,111,150; and the plaintiff claimed such outstanding balance against the defendant.

11. The plaintiff made no reference to the General Release in its Amended Statement of Claim.

12. The principal defence pleaded by the defendant in his Amended Defence was that he was discharged by the General Release.

13. The plaintiff did not file or serve any reply.

The plaintiff's witness statements and "witnesses"

14. The trial bundles contain 2 witness statements filed on behalf of the plaintiff. They are witness statements of Chau Miu Han, Fornia and Huang Dongwen. The former had been working in the plaintiff company as its accountant since October 1990 who displayed her ignorance of what "documents against acceptance" meant by saying that "payment would be made by way of bills of lading". The later was appointed as the sales manager of the plaintiff in April 1992. Both witness statements contain statements which are clearly hearsay. As Jerome Chan J. said in Allington Investments Corp & others v First Pacific Banshares Holdings Limited & others [1995] 2 HKC 567 at p. 569, "clearly any hearsay evidence contained in a witness statement will have to comply with the hearsay rules prior to becoming admissible".

15. Mr. Leung called both of them as "witnesses". "Witness" is a simple English word, but it is sensible to remind oneself of its meaning. According to the Concise Oxford Dictionary, a "witness" is "a person present at some event and able to give information about it". It transpired from Miss Chau's oral evidence that she was really present only in the 7 May 1992 meeting about which she told me nothing more than what was already in the 7 May 1992 document. Calling these 2 persons to perpetuate an attempt to lead clearly inadmissible hearsay is helpful neither to the Court nor to the plaintiff.

Analysis and judgment

16. Unless the defendant's undertaking given on 7 May 1992 was enforceable against him, the defendant had no liability under the Deed because the plaintiff acknowledged that the goods did not fulfil the sale terms on the shipment date. No consideration is alleged in the Amended Statement of Claim.

17. More significantly, it is trite law that unless the guarantee otherwise provides or the guarantor consents, the guarantor will be discharged where the creditor releases the principal debtor, see e.g. Rowlatt on Principal and Surety, 5th edition, paragraph 8-01 and Paget's Law of Banking, 11th edition, p. 621.

18. The Deed contains no provision permitting the plaintiff to release the Principal Debtor without the defendant's consent and plaintiff has not alleged any consent on the part of the defendant to release the principal debtor.

19. Clause 13 of the General Release provides that it is governed by the laws of the State of California. In any case to which foreign law applies, that law must be pleaded and proved as a fact to the satisfaction of the judge by expert evidence or sometimes by certain other means and in the absence of satisfactory evidence of foreign law, the court will apply English law to such a case, Dicey & Morris on The Conflict of Laws, 13th edition, rule 18. As neither the plaintiff nor the defendant has pleaded or adduced any evidence on foreign law, I apply Hong Kong law to such a case.

20. In my judgment the plaintiff made it abundantly clear by Clause 6 of the General Release that the Principal Debtor was released. Further, the document was a "Settlement Agreement and General Release" (emphasis added) and by Clause 9, the parties mutually waived and relinquished all rights under Section 1542 of the Civil Code to the fullest extent that they might lawfully do so.

21. Mr. Leung relied on Clause 2 to argue that there was no release of the Principal Debtor or that there was a reservation of the Principal Debtor's debt under the sale and purchase contract in the event of the Principal Debtor's failure to pay in accordance with the General Release.

22. In my judgment Clause 2 is neither a reservation nor a revival. The stipulation for entry of judgment was no more and no less than what was stated expressly in Clause 2, i.e. "security" for "the payment described in paragraph 1 hereof". It is security. And it is security for the payment described in Clause 1 of the compromise agreement, not any debt under any sale and purchase contract. Clause 16 makes it clear that the General Release effected a compromise settlement of claims that were contested and denied. By Clause 1 of the General Release, the plaintiff agreed to pay the total sum of $930,247.50 by 3 instalments. The defendant has never guaranteed any liability which the Principal Debtor might have under Clause 1 of this compromise settlement. If the parties to the General Release had ever intended that the defendant's guarantee should be or continue to be security for the Principal Debtor's liability under Clause 1, they would and should not have agreed by Clause 6 to release the Principal Debtor's "guarantors" (it has been said that a "surety is also discharged if the creditor agrees with the principal not to receive the money from the surety since this is inconsistent with the right of the surety to pay the debt and sue the principal", Rowlatt on Principal and Surety, 5th edition, paragraph 8.02) and would and should have included the Deed as security under Clause 2. The plaintiff was clearly looking only to the Principal Debtor for payment under the compromise agreement and the release of the Principal Debtor's guarantors was part and partial of the consideration to give the stipulation for entry of judgment as security.

23. For the reasons I have given, the plaintiff by the General Release released the Principal Debtor and the defendant guarantor was discharged.

24. The plaintiff's claim fails and I dismiss the Action.

25. I make an order nisi that the plaintiff pays the defendant's costs of the Action, including the costs reserved by Jackson J.