JOTZ, KLAUS BERNHARD MARKUS v. HAMAWY, TAREK MAHMOUD AND ANOTHER

HCA 1150/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1150 OF 2013

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AND

HCA 345/2014

ACTION NO 345 OF 2014

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(Consolidated by Order of Master Leong

dated 15 October 2014)

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REASONS FOR JUDGMENT

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1.  Throughout this judgment I shall refer to the parties, plaintiff, 1^st defendant and 2^nd defendant as they appear in High Court action number 1150/2013 before the actions were consolidated.

Parties

2.  The plaintiff is an individual whose profession is airline pilot.  The 1^st defendant is an individual involved in the book publishing business, in particular the publication of children’s books. The 2^nd defendant is a Hong Kong incorporated company wholly owned by the 1^st defendant, who is also the only director.  The 2^nd defendant has been referred to by the plaintiff’s counsel as the alter ego of the 1^st defendant.  I make no finding in this regard but it is clear that at all material times the business activities of the 1^st defendant with which this case is concerned were carried out through the 2^nd defendant.

Defendants’ non-appearance at trial

3.  The trial of this action took place in the absence of the 1^st and 2^nd defendants, whether in person or by way of legal representative.  Though they were represented by solicitors during the course of the proceedings, including at pre-trial reviews held on 15 March 2017 and 8 May 2017, on 31 May 2017, shortly prior to the trial commencing, the then solicitors acting for both the defendants applied for and obtained leave to cease acting.  No notice of acting was filed by replacement solicitors for either defendant and by a letter addressed by the 1^st defendant and by him on behalf of the 2^nd defendant to the Registrar of the High Court dated 7 June 2017, the defendants gave notice that they did not wish to seek an adjournment of the trial, that they would not attend the hearing and that they would leave the matter to be disposed of by the court as it felt just.

4.  The defendants having participated in the proceedings until only shortly before trial and I being satisfied that they had had proper notice of the trial date (as they themselves have acknowledged­ in writing), at the commencement of the trial I resolved to proceed in the absence of the defendants pursuant to the power under Order 35, rule 1(2).  I indicated to counsel for the plaintiff that notwithstanding the absence of the defendants I would require that he prove the case of the plaintiff as pleaded, having due regard where appropriate to the pleaded case by way of defence of the defendants.  In particular, during counsel’s opening I drew his attention to the issue regarding the liability of the 2^nd defendant raised by the defendants in their letter to the Registrar dated 7 June 2017.

Background

5.  Originally the plaintiff and 1^st defendant’s relationship was purely personal, they having met by virtue of being residential neighbours.  However, beginning October 2009, the plaintiff and the 1^st defendant (and via the 1^st defendant, the 2^nd defendant) commenced a business relationship, which ultimately resulted in the plaintiff advancing substantial sums for the purposes of the business of the 1^st and 2^nd defendants, in excess of HK$2.5 million.

Six loans

6.  The details of the monies advanced by the plaintiff to the 1^st and 2^nd defendants (and interest or profit to be earned) as agreed by all parties are as shown in the table below:

Loan Agreement	Capital	Profit
1	US$22,000	US$5,500
2	HK$1,000,000	HK$300,000
3	HK$500,000	HK$125,000
4	HK$500,000	HK$37,500
5	HK$150,000	HK$20,000
6	HK$200,000	HK$10,000

7.  There is no dispute between the parties that the monies as set out above were advanced by the plaintiff (or as to the interest or profit to be earned).  While previously there was a dispute between the parties regarding the terms on which the monies were advanced, the defendants alleging that they were provided as part of the plaintiff’s participation in a partnership and not as loans, I find that any such dispute, and indeed all matters then in issue between the parties, were the subject of and superseded by a Settlement Agreement entered into between the plaintiff, the 1^st defendant and the 2^nd defendant (acting by the 1^st defendant) dated 25 November 2011.

8.  The first loan advanced by the plaintiff (in October 2009) was with and was to be repaid by the 2^nd defendant.  The first loan was not the subject of an agreement in writing.  The subsequent five loan agreements (there were six loans in total) were with and the loans were to be repaid by the 1^st defendant, with performance of the 1^st defendant’s obligations being the subject of an undertaking, in effect a guarantee, given by the 2^nd defendant.  The subsequent five loan agreements were all recorded by an agreement in writing signed by the 1^st defendant personally and on behalf of the 2^nd defendant.

District court proceedings

9.  The 1^st and 2^nd defendant failed to make agreed payments to the plaintiff provided for by the various loan agreements and on 13 June 2011 the plaintiff commenced proceedings in the district court against the 2^nd defendant in respect of the first loan and against the 1^st defendant in respect of the fourth and fifth loans.

Settlement Agreement

10.  The district court proceedings led to a mediation session involving the parties and a mediator being held on 25 November 2011.  The mediation resulted in a formal written Settlement Agreement (a combination of typed and handwritten words prepared by the mediator) bearing the same date signed by each of the plaintiff, 1^st defendant and by the 1^st defendant on behalf of the 2^nd defendant.

11.  The terms of the Settlement Agreement are not disputed by any of the parties.  It refers to the dispute between the parties as concerning all six loan agreements not only those the subject of the then pending district court actions.  It is stated that the parties have reached agreement in mediation on the terms necessary to settle the dispute.  It is stated that the agreement is in full and final settlement of the dispute and that upon execution is binding on all the parties.

12.  It is not necessary to set out the terms of the Settlement Agreement in full.  The majority of the terms are clear and certain in their effect but there are provisions that gave rise to an issue before the court.  In clause 2 of the agreement there appears the words “Party B agrees to repay the Outstanding Amount to Party A”, before is then set out a detailed repayment schedule.  In clause 3 of the agreement there appears the words “Party B agrees to pay Hong Kong dollars 250,000 to Party A on 15 December 2014”.  Party B is the 1^st defendant and Party A is the plaintiff. However, in clause 9 there appears the words “Party B and Party C will make the repayment by way of bank transfer to Party A’s [name of bank] bank account” [underlining added].  Party C is the 2^nd defendant.

Liability of the 2^nd defendant

13.  Therefore, the issue arises as to whether the obligation to make the payments provided for in the Settlement Agreement is solely that of Party B, namely the 1^st defendant, as might appear from clauses 2 and 3 or an obligation of both Party B and Party C, namely both the 1^st defendant and 2^nd defendant, as might appear from clause 9.  This is the issue which was raised (I note for the first time; it does not appear in the defendants’ pleaded case or evidence) in the defendants’ letter to the Registrar dated 7 June 2017, wherein, and though not intending to be represented at trial, the defendants asked that the claim against the 2^nd defendant be “struck out in any event”.

Interpretation of the Settlement Agreement

14.  The principles of contractual interpretation are very well settled.  As already referred to, the written Settlement Agreement was prepared by the mediator in the presence of and signed by or on behalf of all of the plaintiff, 1^st defendant and 2^nd defendant. The stated purpose was to settle all of the disputes as between the parties, namely the respective liabilities of the 1^st defendant and 2^nd defendant in relation to the six separate loan agreements for all of which the 2^nd defendant was either primarily liable (the first loan agreement) or liable effectively as guarantor (loan agreements 2 to 6).

15.  Counsel for the plaintiff submitted that the court should have regard to the Settlement Agreement as a whole and not seek to construe the individual clauses in isolation.  He further submitted that clauses 2 and 9 are neither ambiguous or in contradiction, and that clause 9 should be read as additional or supplemental to clause 2.

16.  Counsel further observed that both the 1^st and 2^nd defendants are recorded as agreeing the amounts due set out in clause 1 without regard to which of them was primarily liable under the terms of the original loans.  He further submitted that the court should interpret the Settlement Agreement as a reasonable objective reader seeking to determine the intention of the parties, and for this purpose was entitled to and should have regard to the expressed intention of the parties to achieve a full and binding settlement of their dispute, which then included not only the pending two district court actions, against in one case the 2^nd defendant and in the other case the 1^st defendant, but their respective liabilities under the other loan agreements not yet the subject of formal claims.  He therefore submitted that the objective intention of the parties as discerned from the Settlement Agreement was that the obligation to make payment fell on both the 1^st defendant and the 2^nd defendant not solely the 1^st defendant.

17.  I am in agreement with the submissions of counsel for the plaintiff.  When construing a contract such as the Settlement Agreement the task should not be approached with such concentration on individual words or clauses that the result is to neglect consideration of the intent of the agreement as a whole.  The greater regard must be had to the clear intention of the parties as evident from the agreement in its entirety not particular words. Read solely in isolation clause 2 (and clause 3) can be said to be clear and unambiguous in their terms.  The same can equally be said of clause 9.  However, in my view the correct approach is to read the clauses together, along with the entirety of the remainder of the Settlement Agreement, which leads me to find that the correct interpretation is that the obligation of payment rests on both the 1^st and 2^nd defendants as were submitted by counsel for the plaintiff.

Resolving ambiguity

18.  Even were I wrong in the view expressed above regarding the interpretation of the Settlement Agreement purely with regard to its object and express terms when read together by a reasonable objective reader, I would have reached the same conclusion were I to have concluded that there was an ambiguity as regards clause 2 (and clause 3) and clause 9.  In my view, having regard to the circumstances of the contract (including the factual and legal background), the relationship between the parties and between the individual defendants and the practical objective that the settlement was intended to achieve, I would again find that it was the intention that the 2^nd defendant should be liable.  If not, there would have been no purpose in including reference to the 2^nd defendant in clause 9.

Non-payment

19.  As regards payment, the evidence that the payments made on the behalf of the 1^st defendant and 2^nd defendant ceased with a last payment on 20 December 2012 is not disputed.  The plaintiff has set out the position as to non-payment clearly in his evidence, contained in his two witness statements filed and served before trial, which he adopted as his evidence when in the witness box and I accept his evidence as truthful.  Therefore, pursuant to the terms of the Settlement Agreement, which set out the total amount payable in clause 2, and after giving credit for the part payments made on behalf of the defendants during 2012, which saw the full amount referable to loan one repaid and HK$50,000 referable to loan two repaid, I find that there remains the amount of HK$3,150,000 due and owing to the plaintiff by the 1^st and 2^nd defendant.

Case for the defendants

20.  Notwithstanding that the defendants were not present at trial, counsel for the plaintiff took the court to the Re-Amended Defence and Counterclaim filed and served on behalf of the defendants dated 19 August 2016 and addressed the court as regards the defendants pleaded case in defence of the plaintiff’s claim.  Counsel referred in particular to paragraphs 20 and 21 of the defendants’ Re-Amended Consolidated Defence where the defendants admit what are the key paragraphs of the plaintiff’s Amended Consolidated Statement of Claim as regards the background to, entering into, binding nature and terms of the Settlement Agreement.

21.  Counsel further referred to paragraph 24 of the Amended Consolidated Statement of Claim wherein appears the plaintiff’s allegation as regards the defendants’ failure to make payment of monies due under the Settlement Agreement and noted that the defendants’ only plea in response to the direct allegation of non-payment, which is in paragraph 22 of the Re-Amended Consolidated Defence, is in the nature of a bare denial.

22.  Instead, in paragraph 22 of the Re-Amended Consolidated Defence the defendants refer to an alleged failure by the plaintiff to perform a term of the Settlement Agreement as regards the discontinuance of the first district court action brought by the plaintiff against the 2^nd defendant following the defendants’ payment in full of the amount due under the first loan agreement and appear (the claim is not fully made out) to rely on this as alleged justification for not making payment. However, the plaintiff’s counsel was able to demonstrate to the court, by reference to the contemporaneous correspondence and documents, that the plaintiff did indeed discontinue the subject action and that he did so within one month of the final payment (the payment of which was made late, and not as specified in the Settlement Agreement).  The contemporaneous correspondence and documents further show that the defendants did not in fact seek to make this aspect an issue until very much later thereby casting considerable doubt on their allegation that they viewed this as a repudiatory breach entitling them to cease making further payments and that they had suffered any loss or damage as a consequence.

23.  In any event, I accept the submissions of the plaintiff’s counsel that even if the plaintiff had been late and/or failed to discontinue the action, breach of such a term would not of itself amount to a repudiation of the Settlement Agreement so as to justify the defendants’ failure and/or refusal to make the further payments provided for.  I therefore find that the plaintiff has proved his case in relation to the defendants’ breach of the Settlement Agreement and failure to make payment of the principal sum provided for therein namely HK$3,150,000 and give judgment in favour of the plaintiff accordingly.

Re-Amended Consolidated Counterclaim

24.  The defendants having failed to appear at trial to seek to prove the Re-Amended Consolidated Counterclaim, I order that it to be dismissed.

Interest

25.  There remains the question of interest on the plaintiff’s claim for HK$3,150,000 which as pleaded by the plaintiff was not particularised beyond the usual reference to section 48 of the High Court Ordinance.  At the court’s request counsel for the plaintiff provided written supplemental submissions as regards the plaintiff’s claim for interest.

26.  First, as regards the rate, the plaintiff seeks pre-judgment interest at the commercial prime rate of interest +1% relying on the decision in Komala Deccof & Co SA & Others v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) [1984] HKLR 219.  According to statistics originating from the Hong Kong Monetary Authority provided by the plaintiff’s counsel, which I accept, the commercial prime rate during the period which I determine below was 5% per annum.  I therefore propose to allow interest at the combined rate of 6% per annum for the period pre-judgment.

27.  Second, as regards the period for which interest should run, the plaintiff’s counsel referred to the plaintiff’s solicitors’ demand letter of 2 April 2013 and submitted that interest should run from the date of that letter.  On any basis the letter came several months after the defendants’ last payment on 20 December 2012 (itself some two months late) and therefore I am prepared to take the letter as a starting point.  However, as I noted to counsel during the hearing, the letter itself seeks payment within seven days and therefore I conclude that interest should run from 10 April 2013 to the date of judgment namely 19 June 2017.

28.  Interest from 10 April 2013 to 19 June 2017 on the sum of HK$3,150,000 at the rate of 6% per annum amounts to HK$793,576.00 and I accordingly award the plaintiff pre-judgment in this sum to be paid by the 1^st and 2^nd defendants.

29.  The plaintiff having succeeded with his claim and the defendants Re-amended Consolidated Counterclaim having been dismissed, costs in respect of both the claim and counterclaim should follow the event and are to be paid to the plaintiff, to be taxed if not agreed.  Counsel for the plaintiff raised the question of whether a certificate for counsel is required. I do not believe that it is but were it to be necessary so order.