UNITED OVERSEAS BANK LTD (INCORPORATED IN SINGAPORE WITH LIMITED LIABILITY) v. GRACEWOOD INTERNATIONAL LTD AND OTHERS

HCMP 1452/2020

[2021] HKCFI 2950

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1452 OF 2020

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JUDGMENT

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1.  The plaintiff bank commenced the present action against the 1^st and the 2^nd defendants as borrowers for the repayment of all monies due under the plaintiff’s loan facilities, and for the enforcement of the mortgages and charges in respect of their properties securing those loans. The defendants are also sued on their guarantees in respect of the indebtedness.

Background

2.  Much of the background is not or, in view of the documentary evidence, cannot be disputed.

3.  The 3^rd defendant (“Wong Sr”) founded the 1^st defendant (“Gracewood”) and its subsidiary, the 2^nd defendant (“GNT”) in the 1990s to carry on the business of trading in oil products and futures.  Wong Sr runs the business with his wife, Madam Cheung Mei Mei (“Madam Cheung”), and his son, Ivan Wong Chiu Yui (“Wong Jr”).  They are directors of the corporate defendants.

4.  The banking relationship between the plaintiff (“the Bank”) and the defendants started in about 2005.  Over the years, the Bank has extended various loan facilities to Gracewood and GNT.  In connection with such loan facilities, the defendants have provided various securities with the Bank, including mortgages and charges over the following properties:

(1)  Flat 3, 5/F (with roof B3) of Block B and car parking space no 17 on the LG/F, Billion Terrace, Nos 137-139 Blue Pool Road, Hong Kong (“the Billion Terrace Property”);

(2)  Office No 8, 17/F of Tower II, Admiralty Centre, No 18 Harcourt Road, Hong Kong (“the Admiralty Centre Property”); and

(3)  Flat B, 31/F and car parking space no 17 on the B/F, The Colonade, No 152 Tai Hang Road, Hong Kong (“the Colonade Property”).

5.  (1) and (3) above are properties owned by Gracewood.  The former is unoccupied while the latter is the residence of Wong Sr and Madam Cheung.  GNT owns the property under (2) above which houses its office.

6.  On 2 December 2005, Gracewood and GNT executed the mortgages over the Billion Terrace Property and the Admiralty Centre Property with the Bank.  On 6 April 2011, Gracewood and GNT executed two further charges over these properties in favour of the Bank.

7.  On 1 April 2014, Gracewood and GNT executed two letters guaranteeing the repayment of each other’s indebtedness to the Bank.  On the same day, Wong Sr executed a letter guaranteeing the repayment of the debts of Gracewood and GNT (collectively the “Guarantees”).

8.  On 8 April 2016, the Bank issued to the defendants a facility letter (“the Facility Letter”) together the standard terms for banking facilities (“the Standard Terms”) whereby the Bank extended financial facilities to Gracewood and GNT.  In return, a mortgage over the Colonnade Property was executed in favour of the Bank on 26 May 2016.

9.  Relevant to the present case are the financing facilities known as Trust Receipt Financing (“TRF”) no. EP1IL000592, EP1IL000594 and EP1IL000597 (collectively the “Facilities”).  The Facility Letter provided that interest for these facilities would be charged at 1.5% per annum over LIBOR or COF, whichever was higher, and LIBOR and COF would be fixed at the Bank’s absolute discretion.

10.  Between the end of 2019 and early 2020, the Bank observed the strain of the facility usage by the corporate defendants, and indicated the need for further security for the continuation of the Facilities such as personal guarantees of the directors.  The turning point of the parties’ relationship came about in March 2020 when the Bank informed the defendants that the upper limit for the TRF had to be reduced from US$40,000,000.00 to US$20,000,000.00, and that higher interest rate would be charged for TRF EP1IL000592.  As will be discussed below, the defendants dispute that they agreed to the higher interest rate.

11.  On 17 April 2020, a debt of US$10,845,624.32 under TRF EP1IL000592 fell due.

12.  On 24 April 2020, a sum of US$8,860,000.00 under TRF EP1IL000594 fell due.

13.  On 15 May 2020, a sum of US$9,530,000.00 under TRF EP1IL000597 also fell due.

14.  Since the debt under the Facilities started to fall due after mid-April 2020, the parties have been engaged in discussion by way of email as well as over the telephone and meeting.  Amongst other things, repayment proposal and provision of further security have been discussed, including the pledge of the personal insurance policies of the defendants’ directors and the application of their fixed deposit with the Bank in repayment.

15.  During the discussion, Gracewood and GNT through their solicitors, Hastings & Co (“Hastings”), wrote to the Bank on 19 May 2020 putting on record the defendants’ instruction and request for clarification of the Bank’s position regarding the Facilities and the way forward for the parties.  In response, the Bank by letter dated 26 May 2020 to Hastings reiterated its contractual right, and demanded for repayment of the outstanding loan and interest in 14 days or appropriate action would be taken (the “26/5/2020 Demand”).

16.  Nevertheless, further negotiation ensued.  Amongst others, there was a meeting on 8 June 2020 during which, according to the defendants, the representatives of the Bank represented that the Bank would be keen at working out the loan restructuring with the defendants and would not enforce the securities against them.  On the contrary, the Bank puts forward its version of the exchanges of terms between the parties during the meeting and denies the alleged representation that it would not enforce the securities.

17.  On 19 August 2020, the Bank informed Wong Sr and Wong Jr that it had to discontinue the banking relationship and would issue demand for repayment.  Indeed, the Bank through its solicitors, Wilkinson & Grist (“W&G”), demanded for repayment of the outstanding indebtedness within 7 days, failing which legal proceedings would be instituted (the “19/8/2020 Demand”).

18.  On 14 September 2020, the Bank commenced these proceedings to recover the outstanding debt from the defendants and to enforce the mortgages and charges over the various properties as well as the guarantees of the defendants.

These proceedings

19.  The court in Wing Hang Bank Ltd v Liu Kam Ying & Ors [2002] 2 HKC 57 explained (at §10):-

“Unlike Order 14 applications where the defendant is obliged to provide sufficient grounds to justify the action continuing to trial, the burden in summary judgment applications under the originating summons procedure is on the plaintiff to justify its entitlement to summary judgment. However, once this is prima facie demonstrated on the evidence, it is then up to the defendant to show that he does have a defence or defences to the claim. In this way, there may in practice be little difference between an application for summary judgment in originating summonses and an application for summary judgment under RHC, Order 14.”

See also this Court’s decision in Dah Sing Bank Ltd v Rich Star Investment Development Ltd & Ors [2019] HKCFI 1825 (at §18).

20.  Insofar as the defendants’ discharge of their evidential burden is concerned, they are expected to condescend upon particulars as a defendant must do in resisting a summary judgment application.

21.  By the affirmation of Wong Sr filed on their behalf, the defendants contend that the Bank is barred from enforcing its legal rights against them by reason of the doctrine of promissory estoppel.  The basis of the estoppel is this:

(1)  The Bank has promised or represented to the defendants that it would not take legal action to recover the debts or enforce its securities immediately, but would engage in bona fide negotiations regarding the future terms of the facilities and the banking relationship moving forward, and a repayment schedule for the loans.

(2)  As a result, it is inequitable for the Bank to resile from its promise/representation by unilaterally terminating the negotiations and commencing legal proceedings against the defendants without any notice and without giving them a reasonable time to seek alternative financing.

(3)  The defendants anticipated that they would be able to repay the Bank (subject to confirmation of the correct amount) within the following 6 months (as of January 2021).

22.  Essentially, it is argued on behalf of the defendants that whether or not there was the alleged promise/representation by the Bank mentioned above constitutes factual dispute which could not be resolved by summary determination.  It is also argued that no reasonable notice has been given to the defendants after the termination of the negotiation between the parties.  Such reasonable time had yet to expire as at the time of the commencement of these proceedings and even at the time of the present hearing.  Therefore, the right of the Bank to repayment is yet to accrue.  Whether there was reasonable notice, the defendants say, is fact-sensitive and also could not be resolved by summary determination.

23.  The defendants also question the Bank’s unilateral change of the interest rate, to which they deny having agreed.  They also question the claim for indemnity costs in these proceedings.

The alleged estoppel

24.  Clear and unequivocal promise or representation is key before a party is held to have forgone its contractual right.  In explaining that, the court in Fortis Bank Asia HK v Queensmill Investment Limited HCMP 7864/1999 (7 June 2001) cited what is now in Chitty on Contracts (33^rd ed) at §4-092:

“The purpose of the requirement that the promise or representation must be “clear” or “unequivocal” is to prevent a party from losing his legal rights under a contract merely because he has granted some indulgence by failing to insist throughout on strict performance of the contract; or merely because he has offered some concession in the course of negotiations for the settlement of a dispute arising out of the contract or merely because he has declared his willingness to continue such negotiations. Thus the requirement was not satisfied where one of the parties to such a negotiation throughout insisted on strict compliance with the terms of the contract; where he accepted less than that to which he was entitled but did so subject to an express reservation of his rights; where an admission that he was liable for certain expenses was made by his solicitor, expressly “without prejudice”; and where a charter’s notice that the ship would be redelivered on a specified date within the contractual “redelivery window” was made expressly “without guarantee” and subject to other qualifications.”

25.  The present case involves the banker-customer relationship built on substantial credit facilities in a purely commercial and business context.  It is in such context that the allegations in respect of any promise, representation and understanding of the parties are to be assessed objectively.  In such context, any suggestion that the Bank somehow promised or represented not to enforce its rights under the loan and the securities at all is inherently difficult to take root.

26.  The exchange between the parties, as evidenced by the contemporaneous documents, suggested the Bank’s indulgence and readiness to negotiate with the defendants for a satisfactory resolution.  The Bank might be keen at doing so, as this could be evidenced by its positive exchanges of terms with the defendants.  That however could not be suggestive of, or fairly understood to be, any promise or representation not to enforce the Bank’s contractual rights at all.

27.  The written terms of the contractual documents further stand in the defendants’ way, of which the defendants are expected to be aware in the context of the present case.  Amongst others:

Clause 17.01 of the Mortgages

“No failure to exercise and no delay in exercising on the part of the Lender any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law.”

Clause 20.02 of the Mortgages

“Notwithstanding the foregoing agreement between the Borrower and the Mortgagor: -

…

(ii)        the liability of the Mortgagor shall not be affected by any extension of time for payment or other indulgence being granted or shown to the Borrower or any modification of the terms relating to the general banking facilities granted hereunder and the interests thereon or any other matter or thing whereby the liability of the Mortgagor would but for this provision have been discharged…”

Clause 4 of the Guarantees

“The Guarantor shall be liable as principal obligor hereunder and the obligations of the Guarantor hereunder shall not be affected by any act, omission, fact, circumstances, matter or thing which, but for this provision, might operate to release or exonerate the Guarantor from its obligations hereunder, including without limitation, and whether or not known to the Guarantor:

(a) any time or indulgence granted to, or composition with the Customer, the Guarantor or other persons;

…

(e) any amendment to, or variation of the terms of any documentation in connection with the Liabilities or any other documents or security;

…

(i)  anything done or omitted or any other circumstances which, but for this provision, might operate to exonerate the Guarantor or any other person (whether as primary obligor or as surety)”

Clause 15 of the Guarantees

“No failure or delay by the Bank in exercising any right or remedy shall operate as a waiver thereof nor shall any single or partial exercise or waiver of any right or remedy preclude its further exercise or the exercise of any other right or remedy. Any waiver or consent given by the Bank under this Guarantee shall be in writing and may be given subject to such conditions as the Bank may impose. Any waiver or consent shall be effective only in the instance and for the purpose for which it is given.

The rights and remedies provided in this Guarantee are cumulative and not exclusive of any other rights or remedies (whether provided by law or otherwise).”

Clause 19.2 Part A of the Standard Terms

“Delay in exercising or non-exercise of any right by the Bank for whatever reason is not a waiver of that right.”

28.  Whilst the defendants expressed surprise at the termination of negotiation by the Bank and its commencement of these proceedings, the stance of the Bank of merely withholding legal action has all along been made known to the defendants.  Amongst others, the answer by the Bank (the 26/5/2020 Demand) to the specific enquiry by Hastings on behalf of the defendants should leave the defendants with no room for any contrary understanding.  Otherwise, one would have expected the defendants to put on record the alleged promise or representation in response to the Bank’s threat of legal action in the absence of repayment by the defendants in 14 days. The answer tendered by Wong Sr in this respect is not inherently convincing.

29.  The Bank’s subsequent notification of its decision to terminate the negotiation and the banking relationship in August 2020 should further leave the defendants with no misunderstanding about the former’s stance.  Had that caused surprise to the defendants because it went contrary to the alleged promise or representation by the Bank, one would have expected the defendants to point that out in the subsequent correspondence.  Still no mention of that was made by the defendants, including that from Hastings, both before and after the commencement of these proceedings.  Nor was any complaint about any inequity for the Bank to enforce its contractual rights. As pointed out on behalf of the Bank during the hearing, there was not a single document in the correspondence casting light on the existence of the alleged promise or representation by the Bank.  None about the alleged promise or representation was mentioned even in the replies of Hastings or Wong Sr respectively both dated 4 September 2020.

30.  The conduct of the defendants during the negotiation also cannot be categorised as only explicable by any reliance on the alleged promise or representation.  The law is trite.  Any detriment relied upon must be material and that the relevant detriment must be one that the defendants would suffer as a result of change of position in reliance of the promise: see for instance, Handley on Estoppel by Conduct and Election (2^nd ed.) at §5-017; §§13-015 to 13-017.  Materiality and causation are key.

31.  Apart from continuing the negotiation, the defendants are seen to have made payments towards the repayment of the outstanding interests and principal.  The last payment towards the repayment of the outstanding principal was made by the cancellation of a fixed deposit of US$1 million in June 2020.  Such repayments were discharge of pre-existing contractual obligations.  The fixed deposit was one of the securities pledged, which the Bank was entitled to enforce.  Such conduct could not be construed as detriment that the defendants would not have suffered but for their reliance on the alleged promise or representation by the Bank.

32.  The defendants also contend that because of the engagement in negotiation with the Bank, they have lost the opportunity of search for the necessary financial facilities from a replacement banker.  However, there is no suggestion that the engagement of the defendants in the negotiation was known or expected by the parties to proceed on the basis that the defendants had absolved from looking for alternative financing. 

33.  The fact was quite the contrary.  According to Wong Sr, during the parties’ meeting on 8 June 2020 mentioned above, the Bank actually suggested that the defendant could seek parallel credit line from other banks to continue their business and to repay more quickly.  In the course of negotiation in respect of the Bank’s proposal for further security from the defendants by way of pledge of their shares in July 2020, the defendants, according to Wong Sr, also expressed concern about the lack of collateral to offer to other bank for securing such financing if the shares were pledged.

34.  It is also the defendants’ own case that after the Bank has notified them of the termination of the banking relationship and the demand for immediate repayment, they have indeed looked for a replacement bank to take over the indebtedness owed to the Bank, and have secured indications from institutions about provision of trade financing that should substantially bolster their trading activities and margins from the then level. Even when the defendants filed their affirmations in opposition in January 2021, Wong Sr still deposed that they were at the advanced stage of negotiation with a new institution, and anticipated that they would be able to repay the Bank within the following 6 months.

35.  In the circumstances, whilst no arrangement eventually materialised as the defendant might wish, it could not be said that they have acted to their detriment in terms of loss of opportunity to search for alternative financing, let alone attributing such alleged loss to reliance on the alleged promise or representation by the Bank.

36.  In my judgment, what the defendants contend in terms of the alleged promise or representation by the Bank, and their detriment upon reliance of that, are no good or credible defence both in law and fact.

Reasonable notice before enforcement

37.  As a matter of law, when one party to a contract agreed not to enforce his rights, an equity would be raised in favour of the other party. Such equity is subject to qualifications, namely that the promisor could resile from his promise on giving reasonable notice giving the promisee a reasonable opportunity of resuming his position; and that the promise would become final and irrevocable only if the promisee could not resume his position: see Emmanuel Ayodeji Ajayi v R T Briscoe (Nigeria) Limited [1964] 1 WLR 1326 (at 1330).  Where estoppel is suspensory in nature and does not permanently alter the parties’ position, the promisor may put an end to the suspension and give reasonable notice to the promisee: see Handley on Estoppel by Conduct and Election (above) at §13-23.

38.  The defendants contend that the law requires a reasonable time to be given by the Bank to the defendants before it may exercise and enforce its strict contractual rights.  It is contended that such reasonable time has yet to expire, and therefore the right of action of the Bank was yet to accrue, by the time when these proceedings were commenced.  As mentioned, it was made clear during the hearing that such reasonable time, the defendants contend, has still not expired even as at the time of the hearing. The defendants do not go so far as seeking to strike out these proceedings.  They say that this is triable issue.

39.  The case of Standard Chartered Bank (HK) Limited v Ma Lit Kin, Cary HCA 62/2006 (22 January 2007) is referred to.  There the court (at §§39-45) dismissed the argument that the bank was not entitled to bring the action on the ground that it demanded the debtor to repay by the day following the demand, which was said to be unreasonable and invalid.  The court explained that if there is a promissory estoppel, the critical question is not whether the demand fixed a particular time frame for repayment.  Instead, the critical question is whether the debtor had reasonable notice that the creditor would no longer abide by the understanding to withhold but would insist on his strict legal rights.  In considering the facts of that case, the court took into account not only the time between the demand and the commencement of action but also the time before the hearing of the bank’s application for summary judgment.

40.  What the court in Fortis Bank Asia HK (above) said in this respect led to much discussion during the hearing about the proper reading of the case and what was cited in that case.  The court there suggested at the end that reasonable notice could be served by means of notice to hear the originating summons (ie after the commencement of the originating proceedings).  The court referred to Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 in support.

41.  Both sides in the present case acknowledged that Tool Metal Manufacturing Co Ltd bore quite distinct factual context from that of the present case.  In Tool Metal Manufacturing Co Ltd, the plaintiffs agreed to pay compensation to the defendants according to the terms of their agreement, but the enforcement of which was suspended by the defendants’ agreement pending the foundation of a new agreement.  In an action commenced by the plaintiffs a few years later, the defendants put forward a counterclaim for the payment of such contractual compensation mentioned above.  However, the counterclaim failed on the ground that it was commenced at the time when the waiver of the claim for the compensation was still continuing.  In the defendants’ subsequent action commenced a year later against the plaintiffs for the contractual compensation, the court found that the delivery of the counterclaim in the previous action nevertheless constituted sufficient notice of the intention of the defendants to terminate the suspension of the enforcement of the contractual right to compensation for the purpose of the subsequent action.

42.  Tool Metal Manufacturing Co Ltd therefore supports the principle that the suspensory nature of a promise not to enforce the strict rights of a party may be terminated by reasonable notice.  Hence the purpose for which it is cited on behalf of the Bank in the present case.  However, the circumstances of that case do not lend support to the contention of the defendants in the present case that the right of action of the Bank did not accrue when or even after these proceedings were commenced.

43.  The defendants’ contention also fails as a matter of fact.  It does not suffice by asserting that reasonable time has yet to expire.  Nor does it by arguing that what amounts reasonable time in the present case is fact sensitive and thus triable.  By the 26/5/2020 Demand, the Bank responded to the specific enquiry by Hasting about its stance, and confirmed that the defendants had to repay or else legal action would be initiated.  There was in principle nothing inherently inconsistent between such stance of the Bank and further negotiation.  In any event, the 19/8/2020 Demand following the Bank’s notification to the defendants of the termination of the banking relationship mentioned above should leave the defendants with no doubt about its stance.  According to Wong Sr, the Bank also reiterated its stance to Wong Jr on the telephone subsequently.  W&G sent further letters before action to the defendants’ then solicitors another week later.  These proceedings were commenced only another fortnight later.

44.  The defendants in raising as triable the issue of reasonable notice must state their case with supporting materials that against the above chronology of events, what would have been reasonable notice for the Bank’s right of action to accrue.  The defendants have not done so.

45.  In the circumstances of the present case, the notice given since the Bank’s notification of its termination of the banking relationship and their 19/8/2020 Demand is not demonstrated by evidence to be blatantly unreasonable.  The discussion in respect of the defendants’ own evidence of what they have managed to do afterwards refers.  That ended with the own projection of Wong Sr in January 2021 that they could close the deal with the new institution to enable their repayment to the Bank in 6 months.  It is pointed out on behalf of the defendants that these proceedings were commenced after merely a month has elapsed after they have failed to close the anticipated deal.  That, in my view, does not help bettering the prospect of the defendants’ case.

46.  In the course of the argument, references were also made to various cases including Chan WS and Chan CNP v CC Bank [2021] HKCFI 143 at §§35-36 and Lei Shing Hong Credit Ltd v. Mei Kwan Engineering Co Ltd & Ors HCAJ 52/2009 (16 December 2009) at §§3, 7-8, 10.  Suffice to say that these cases had their respective factual contexts that are not identical to that of the present case, but I understand why they are said to be relevant to the consideration of the sustainability of the contention that indulgence of a party in agreeing to engage in negotiation with another party, without more, would not cause the former to lose, or to be estopped from enforcing, its strict legal rights.

Conclusion on the alleged estoppel

47.  The defendants take issue as to how the Bank has served them, particularly when the Hong Kong Monetary Authority recommended the banking sector to adopt a sympathetic approach towards small and medium corporates during the pandemic.  This court passes no comment on the defendants’ grievance about the Bank as a service provider and business counterpart.  However, as a matter of contractual rights, the circumstances of this case, including those discussed above, do not afford the defendants with arguable ground that the Bank was not at the time of commencement of these proceedings not entitled to enforce its contractual rights to repayment and the securities.

Interest

48.  The defendants question the entitlement of the Bank to charge the higher interest rate on TRF EP1IL000592 as claimed.  As mentioned, the defendants agree that the Bank did mention the charging of higher interest but dispute that they agreed to that.

49.  To begin with, the Bank had the contractual power to unilaterally vary the terms of the facilities.  Clause 5 Part F of the Facility Letter provided: -

“Notwithstanding anything herein, the Facilities and financial covenants (if any) are subject to review by the Bank at any time at the Bank’s absolute discretion. In this connection, the Borrowers shall forward to the Bank the Borrowers’ audited annual financial reports immediately upon receipt from the Borrowers’ auditors for each financial year. Upon the review of the Facilities and financial covenants (if any), the Bank shall have the overriding right at the Bank’s absolute discretion to vary, modify, terminate, reduce, suspend or cancel any of the Facilities and/or to demand immediate repayment of all moneys and liabilities owing to the Bank under the Facilities (whether actual, contingent or otherwise). Without limiting the generality of the foregoing, the Bank reserves the right to vary the terms and conditions, including the interest rate, from time to time at the Bank's sole discretion”

50.  Regarding interest rate, clause 7.1 Part A of the Standard Terms further provided: -

“…Interest rates may be varied by the Bank from time to time in its absolute discretion without prior notice to the Customer. The Bank's calculations as to the interest payable shall be conclusive and binding on the Customer.”

51.  In other words, it was never the contract between the parties that variation in the interest rate had to be specifically agreed in order to be effective and binding.

52.  It is then argued on behalf of the defendants that assuming that the Bank had the discretion to unilaterally vary the interest rate, this is still subject to the principles in Braganza v BP Shipping Ltd & Anor [2015] 1 WLR 1661.  Essentially, where a contractual term gave a party the power to exercise a discretion, it is not for the court to make the decision for the parties to the contract.  However, where the decision would determine the rights and obligations of both parties and there was a conflict of interest between them, the court would seek to ensure that the power was not abused by way of implying a term in appropriate cases that the power should be exercised not only in good faith but also without being arbitrary, capricious or irrational in the sense in which that term was used when reviewing the decisions of public authorities.  It follows that such a decision could be impugned, not only where it was one that no reasonable decision-maker could have reached, but also where the decision-making process had failed to exclude extraneous considerations or to take account all obviously relevant ones.

53.  The particular context of the contract and the relevant decision under challenge, and hence what called for the attention of the English Supreme Court, in Braganza were discussed by this court in the decision of Chok Kin Ming v EOC [2019] HKCFI 755 (at §§60-68), which was also a case in a similar context as Braganza.

54.  The present case is in a different context.  In the context of contractual discretion conferred on a party to vary the interest rate, Chitty on Contracts (above) has this to say at §22-039:-

“At common law a contract may validly give to one contracting party the power unilaterally to vary the obligations of the parties to the contract… However, the power of one party unilaterally to vary the obligations of the parties may not be unlimited. The courts may imply into the contract a term the effect of which is to curtail that power. In Nash and Staunton v Paragon Finance Plc it was held that a lender’s entitlement to vary interest rate was not completely unfettered. The court implied a term into the agreement to the effect that the rates of interest would not be set dishonestly, for an improper purpose, capriciously or arbitrarily, or in a way in which no reasonable mortgagee, acting reasonably, would do.”

55.  In the context of the present case, the discretion of a financial institution to vary the interest rate for financial facilities, in my judgment, is not inherently unusual or out of the ordinary.  The explanation by the Bank in the present case with reference to the overall market conditions resulting from the liquidity crunch that affected all the customers in the industry, at the relevant time, is not beyond understanding as a matter of commercial consideration.  To suggest that there may be the issue of whether the decision to vary the interest rate was made dishonestly, for an improper purpose, capriciously or arbitrarily, or in a way in which no reasonable mortgagee, acting reasonably, would do is in the circumstances of this case far-fetched.

56.  As to the rate, there is no dispute that the interest for the TRF was 1.5% per annum above LIBOR or COF (whichever is higher) in 2016.  The increase in question is said to have taken place at the end of March 2020, and the rate is said to have become 2.3% per annum above COF (effective from April 2020). The Bank’s tabulation of its calculation of the principal and interest suggests the charge of COF plus 2.3% per annum (with over limit interest) for TRF EP1IL000592 while the rate for the other two TRF facilities remained at COF + 1.5% per annum (with over limit interest).  The unpaid interest was calculated from the end of June 2020 onwards.  The calculations show the amount said to be outstanding as at the date of the commencement of these proceedings (14 September 2020) and the date of the Bank’s affirmation in reply (9 October 2020).

57.  However, the couple of debit notes issued by the Bank to Gracewood for repayment after the alleged increase in interest rate with effect from April 2020 that have been produced per se do not show the alleged increased rate for this particular TRF facility at COF + 2.3%.  The rate for the period between 26 and 31 March 2020 (ie before the alleged increase) was 3.16% per annum and that for the period between 31 March and 17 April 2020 (ie after the alleged increased) was 3.38% per annum.  Counsel confirmed during the hearing that there is no other document produced that shows the Bank’s charging interest on the relevant TRF facility at the alleged higher rate.  There is also no evidence of the COF rate during the relevant period.

58.  The Bank may or may not be able to explain in this respect, if given the chance to do so.  However, it was not satisfactorily done with reference to the evidence before the court.  That said, the Bank indicated in its affirmation in reply that it would be prepared to claim interest only at the old, and thus the unchanged, rate.  In view of the lack of other issues so far discussed that should prevent the Bank from obtaining judgment on its claim, I accept such alternative stance to prevent unnecessary delay and waste of costs.

59.  In other words, the applicable rate up to the 9 October 2021 was COF + 1.5% per annum for the (three TRF) Facilities.  There is apparently another 5% for over limit interest, which the defendants did not address in their affirmations in opposition.  In its affirmation in reply, the Bank set out the breakdown for calculation of interest from 9 October 2021 onwards, this time making clear that the current COF was 0.08% per annum.  In other words, the applicable rate from 9 October 2021 would be 0.08 + 1.5 + 5% or 6.58% per annum.  Again, the defendants in their affirmations did not address such rates and calculation on the basis of the undisputed old rate.

60.  Mention should be made about the defendants’ argument that even if the Bank succeeds in its claim, interest should only start to run from a time after taking into account the reasonable period to which the defendants should be entitled before the Bank became entitled to resume insisting on its strict rights.  The argument was advanced in the written submission only in relation to the costs issue. 

61.  In any event, suspension of the rights may affect the timing of the resumption of enforcement of the rights.  This court does not see how that should affect the contractual right of the Bank to interest on the outstanding principal until its repayment.  Otherwise, the Bank would effectively be expected to suffer in the double by giving not only time but also forgoing interest, the nature of which would have exactly been to compensate for the indulgence granted.

Costs

62.  The defendants dispute the Bank’s entitlement to costs of enforcement on an indemnity basis.

63.  Contractually, clause 6.2 Part A of the Standard Terms provides:-

“The Customer shall reimburse the Bank on demand, on a full indemnity basis, for all costs and expenses of whatsoever nature under or in connection with or arising out of the banking facilities …”

The recital of the Guarantees provides: -

“… the total amount recoverable from the Guarantor shall not exceed the sum specified in Part 3 of the Schedule (if Part 3 of the Schedule is not completed, the Guarantor's lability hereunder shall be unlimited) together with a further sum of an unlimited amount for … (iii) all costs and expenses (on a full indemnity basis) reasonably incurred by the Bank in connection with the recovery or attempted recovery by the Bank of any Liabilities, whether from the Customer, the Guarantor or any other person.”

64.  The Bank acknowledges that the court retains an unfettered discretion on costs.  However, where parties have entered into a commercial transaction on a certain basis, the court should be slow to disturb the parties’ agreement, unless the circumstances are such as to cause the court in the exercise of its discretion to intervene: see Bank of China (Hong Kong) Ltd v. Twin Profit Ltd & Ors [2011] 3 HKC 59 at §7; (2012) 15 HKCFAR 560 at §§18-21; Habib Bank Zurich (Hong Kong) Ltd v. Creation Castle Ltd & Ors [2020] HKCFI 1062 at §§90-92.

65.  In my judgment, I see no circumstance in the present case that would have compelled this court not to allow the Bank to get what it has contracted for.

Conclusion

66.  I make the following order:

(1)  In respect of §1 of the originating summons, there be judgment in favour of the Bank against the defendants (jointly and severally) for the principal sum of US$24,795,658.99, with interest on US$6,026,440.20 from 30 June 2020 and on US$18,390,000 from 26 June 2020 all at the rate of the prevailing COF rate + 6.5% per annum until 9 October 2021 and thereafter at the rate of 6.58% per annum until full payment;

(2)  In default of full payment within 30 days upon receipt of the sealed order herein, the Bank is entitled under §§2 to 4 of the originating summons, to the delivery of vacant possession of the Billion Terrace Property, the Admiralty Centre Property and the Colonnade Property as defined in Schedules I, II and III of the originating summons by Gracewood and GNT respectively.

67.  The Bank shall have the costs of and occasioned by these proceedings against the defendants on an indemnity basis to be taxed, if not agreed.