GOODWAY RUBBER INDUSTRIES SDN BHD v. BEST PROFITS TRADING LTD AND OTHERS

HCA 716/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.716 OF 2003

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J U D G M E N T

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This action

1. This is the trial of an action by the plaintiff, a Malaysian company, against the 2^nd and 3^rd defendants on a joint and several Guarantee and Indemnity dated 7 August 2002.

2. The amount sought to be recovered by the plaintiff against these defendants is US$203,998.88, together with interest and costs.

3. The 2^nd and 3^rd defendants, Mr Herbert Chau and Mr Chris Lai, the signatories to the guarantee, were at all material times directors of the 1^st defendant, Best Profits Trading Limited, a Hong Kong company.

4. The plaintiff, Goodway Rubber Industries Sdn Bhd., is a Malaysian company.  As its name suggests, it is a supplier of raw materials in the rubber business.

5. Goodway had a course of dealing with Best Profits.

6. Between July 2001 and May 2002 Goodway supplied raw materials to Best Profits.  The payment terms for such supply were 60 days from the invoice date.

7. After Goodway’s last shipment to Best Profits on 7 May 2002, there was a default in payment.  As at 7 May 2002 the sum of US$216,998.88 was outstanding.

8. The directors of Goodway, Mr Tai Boon Wee and Mr Julian Lim Boon Chang, were concerned at this state of affairs.

9. They had meetings with Mr Lai and Mr Chau of Best Profit on 24 July 2002 and on 7 August 2002.

10. Mr Lai and Mr Chau did not dispute the debt of Best Profits to Goodway; the default in payment was said to have been as a consequence of the non-payment to Best Profits by the purchaser, from Best Profits, of the goods sold to Best Profits by Goodway.

11. At the meeting on 7 August 2002 Messrs Chau and Lai signed two documents at the request of Mr Tai and Mr Lim.

12. The first was a Credit Facility Agreement, and the second was the Guarantee and Indemnity that now provides the plaintiff’s cause of action against the 2^nd and 3^rd defendants.  Both documents are dated 7 August 2002.

13. Thereafter further meetings were held between these parties, on 20 August 2002 and on 11 September 2002.  These meetings focused upon a repayment schedule of the Best Profits’ debt to Goodway; it was agreed that if Best Profits could recover its debts faster, so would the repayment schedule be accelerated.

14. In fact, some payment was made by Best Profits in September 2002, but thereafter there was default in relation to the payment schedule agreed.

15. Accordingly, on 25 February 2003 Goodway instituted proceedings against the defendants herein — against Best Profits in the amount due and owing of US$203,998.88 (which sum took into account the repayment of US$13,000 thus far effected), and against the 2^nd and 3^rd defendants, for the like sum, under the Guarantee that had been signed on 7 August 2002.

Resolution against the 1^st defendant

16. Although the 1^st defendant, Best Profits, initially defended the action against it, filing a Defence on 12 March 2003, this defence to the claim did not continue.

17. On 5 November 2004 a Consent Judgment was entered in favour of the plaintiff against the 1^st defendant in the sum of US$203,998.88, together with interest and costs.

Position of the 2^nd and 3^rd defendants

18. On 25 November 2004 this action against the 2^nd and 3^rd defendants was called on for trial before this court.

19. On that day both the 2^nd and 3^rd defendants were present.  However, they were unrepresented.

20. Although all defendants had had the benefit of professional representation, at least up to and including the preparation of witness statements, the court was informed that shortly prior to the trial of the action the 2^nd and 3^rd defendants had released their solicitors, and were in the process of making application for legal aid.

21. As a consequence the 2^nd and 3^rd defendants wished to adjourn the trial in order to allow time for their legal aid application to be processed.

22. After a degree of hesitation at what was viewed as a transparent delaying tactic, this court reluctantly acceded to such adjournment, and a new date was fixed.

23. I have been informed by counsel for the plaintiff, Mr Lau, who appeared both at the adjourned and resumed hearings, that the defendants’ application for legal aid was refused by the Director of Legal Aid by Memorandum of Notification of such refusal dated 1 December 2004, that is, less than a week later.

24. At the resumption of this trial, on 2 March 2005, the 2^nd defendant only, Mr Herbert Chau, appeared to defend the plaintiff’s claim.

25. Mr Chau informed the court that he had been told by Mr Chris Lai, the 3^rd defendant, in a telephone conversation that Mr Lai was in the process of seeking a bankruptcy order against himself.

26. Inquiries thus made by the plaintiff’s solicitors, at the request of the court, to the office of the Official Receiver yielded the information that a Bankruptcy Order had been made against the 3^rd defendant on 1 March 2005, the day prior to the resumed hearing of this trial.

27. Counsel on behalf of the plaintiff, Mr Lau, accepted that, by reason of the provisions of section 12 of the Bankruptcy Ordinance, Cap.6, he could no longer proceed with this action against the 3^rd defendant absent the consent of the Bankruptcy Court.

28. Accordingly, with the consent of the plaintiff the plaintiff’s case against the 3^rd defendant was adjourned sine die, with liberty to apply to restore, costs reserved.

Case against the 2^nd defendant

29. This case continued against the 2^nd defendant, Mr Herbert Chau.

30. From the plaintiff’s viewpoint the case is straightforward.  Mr Chau had signed the Guarantee and Indemnity dated 7 August 2002, the plaintiff wished to hold him to the obligation thus undertaken, and to effect recovery of the sum outstanding of US$203,998.88.

31. Mr Chau’s pleaded Defence and Counterclaim made the primary assertion that both Mr Chau and the 3^rd defendant, Mr Chris Lai, had signed the Guarantee “under a mistake of fact and were induced to do so by the misrepresentation of the plaintiff”.  It was pleaded that Mr Chau and Mr Lai had signed an English document at the spaces on the page directed by Mr Tai Boon Wee on the basis of the representation that they were required to sign the document as representatives of Best Profits, and that the document was a ‘credit facility agreement’ which had to be signed by all dealers which had business with the plaintiff.

32. It is said that this representation was made fraudulently or recklessly, and that had it been appreciated that the document so presented to Messrs Chau and Lai included a personal guarantee, the document would not have been signed.

33. It is further said that the 2^nd and 3^rd defendants did not discover that the document as signed included a guarantee until they sought advice from a Lau Kam Cheuk, an accountant and auditor of the 1^st defendant.

34. The case, therefore, is that that which now is appreciated to be a guarantee is null and void and/or unenforceable, and a Counterclaim is pleaded seeking, inter alia, rescission of the Guarantee, alternatively a declaration that the Guarantee is unenforceable against the 2^nd and 3^rd defendants.

The evidence

35. Two witnesses for the plaintiff gave evidence, namely Mr Tai Boon Wee and Mr Julian Lim Shu Chang.

36. Mr Chau gave evidence on his own behalf.

37. Mr Tai is the Managing Director of Goodway.  His evidence covered the history of events, including the meetings with Messrs Chau and Lai which had given rise to this claim, culminating in the signing by the 2^nd and 3^rd defendants of the Guarantee and Indemnity dated 7 August 2002.

38. Mr Tai stated that had these gentlemen not signed, he would have been extremely concerned as to the indebtedness of Best Profits, and would have considered immediately commencing legal proceedings against the company.  He said that Chau and Lai had given assurances of their intention to pay the debts owed to Best Profits by Goodway, and that they had said that if they had intended not to do so, they would not have signed the Guarantee and Indemnity; in addition they had requested, and reluctantly were accorded, more time to meet with their debtors before committing to a repayment schedule to Goodway.

39. Mr Tai refuted the suggestion that he had misrepresented the nature of the document which was the Guarantee and Indemnity, and suggested that it is commercially “preposterous” that any business person would have signed documents worth in the region of a quarter of a million US dollars without considering their contents.  He said that there was nothing hidden or shadowy about the Credit Facility Agreement and the Guarantee and Indemnity, the nature of the documents being clearly stated on their face.

40. He further noted that Goodway had been conducting business with Best Profits, Chau and Lai for three years, and that during this time all contracts, documents and correspondence had always been in English.  Moreover, he stated that prior to the commencement of these legal proceedings that Messrs Chau and Lai had never taken issue with the terms or the validity of the Credit Facility Agreement or with the Guarantee and Indemnity, and suggested that throughout this whole “unfortunate incident” the defendants, by their collective conduct, had demonstrated that they had had no intention of settling the outstanding indebtedness to Goodway, and were merely delaying matters.

41. The evidence of Mr Julian Lim, Country Manager of Goodway responsible for the China market, was in like vein to that of Mr Tai, although he had not been present at all the meetings that had taken place between the parties to discuss the indebtedness to Goodway.

42. He was, however, present at the crucial meeting on 7 August 2002, which had taken place at the Clarion Star Hotel in Guangzhou.  He said that when he had arrived he had been informed by his colleague, Mr Tai, that Chau and Lai had explained that Best Profits was not able to meet its scheduled payments to Goodway because of slow payment by its own debtors.  He said that the story had been that Best Profits had sold Goodway’s products to an affiliated company in China of which Chau and Lai were majority shareholders.  The affiliated company, Shunde Bandag Tire Co Limited, in turn had onsold to a joint venture company, Guangzhou Third Bus Bandag Tire Co Ltd.  There thus was a trail of inter-company unpaid debt, and there had been no dispute of the primary debt due to Goodway.

43. As a consequence Mr Lim had produced a set of Goodway’s standard form Credit Facility Agreement and the Guarantee and Indemnity in issue in this case, one of the requirements of the Credit Facility Agreement being that the customer, in this case Best Profits, procure one or more guarantors to ensure compliance with the terms of the Credit Facility.  He noted that Best Profits was free to choose the guarantor(s) of Best Profits’ liabilities to Goodway, and in this instance Messrs Chau and Lai had executed the Guarantee and Indemnity themselves.  Had this document not been executed, Mr Lim maintained that Goodway would not have permitted any amount to remain outstanding, and would have sought to have recovered against Best Profits immediately.

44. Mr Lim stated that he had written an additional term into the Guarantee and Indemnity, namely that “This Guarantee shall also be effective for all outstanding account as recorded in our Statement of Accounts dated 31/7/2002”, which he said was to ensure that there should be no dispute at a later date in relation to the amount outstanding.

45. His evidence was that it was “incorrect and wrong” to say that there had been either inducement or misrepresentation in relation to the execution of the Credit Facility Agreement and the Guarantee and Indemnity, and that after he had inserted the additional term he had passed the documents to Chau and Lai for their review.  At no time did they suggest that they did not understand English, which would have been an “absurd thing to state” since English was a staple item of their conversations, which also included Cantonese and Putonghua.  Accordingly, after they had reviewed the documents all four men, Chau and Lai of the one part and Tai and Lim of the other, executed the Credit Facility Agreement and the Guarantee and Indemnity, and Lim also ensured that all signed the additional handwritten term in the Guarantee.

46. Mr Lim stressed that had Chau and Lai not signed the documents that Goodway would not have granted any further extension of time to Best Profits in relation to the amount outstanding and would have commenced legal proceedings immediately to collect the existing indebtedness.  He said that Chau and Lai had reiterated their intention to pay the debts owed by Best Profits to Goodway, and that they had stated that otherwise they would not have signed the Guarantee and Indemnity.  They also had requested more time to provide the repayment schedule which Mr Tai had requested.

47. Mr Lim added that at a subsequent meeting between the four men on 11 September 2002, which meeting also included a Mr Liang Run Sen, Manager of Guangzhou Third Bus Bandag, Chau and Lai provisionally had agreed to assign the Goodway debt owed by Guangzhou Third Bus to Shunde Bandag, but that nothing came of this.

48. He noted that before the issuance of the present proceedings, Mr Chau and Mr Lai never had taken issue with the validity of the Credit Facility Agreement and the Guarantee and Indemnity, and that even the letter dated 18 January 2003 signed by Chau and sent by Best Profits to the plaintiff’s solicitor had admitted that they had been required to sign the Guarantee and Indemnity dated 7 August 2002.

49. As a matter of history Mr Lim said that Goodway had been conducting business with Best Profits, Chau and Lai for 3 years prior to this incident, that all the previous correspondence was in English, and that at no time had they stated that they did not understand English.

50. Prior to giving his evidence, Mr Chau, who maintained that his English was very poor, was afforded the opportunity by the court to review with the aid of the court interpreter the witness statements of Mr Tai and Mr Lim, and also that of Mr Lai, whose witness statement Mr Chau formally had adopted for the purposes of his own witness statement.

51. There was no dispute as to the background to, and the primary indebtedness of, Best Profits to Goodway.

52. As to the circumstances of the crucial meeting in Guangzhou on 7 August 2002, whereat the Guarantee and Indemnity had been signed, his evidence was that Mr Lim had taken out of his briefcase an English document which Mr Tai had told Messrs Chau and Lai was merely a credit facility agreement which had to be signed by all dealers doing business with Goodway, and that they were required to sign as representatives of Best Profits.  Such signatures as were appended by Chau and Lai were at certain spaces on the document as directed by Tai.

53. Mr Chau says that he and Mr Lai trusted Mr Tai’s words, and accordingly signed in the belief that the document was a credit facility agreement, and that they had not been warned that they would assume any personal liability for payment of the debts of Best Profits, nor were they advised to seek legal advice.

54. Mr Chau’s evidence was that at a subsequent meeting in Malaysia on 20 August 2002 both he and Mr Lai had signed a repayment schedule on behalf of Best Profits wherein the company was to pay off the sum of US$216,998.88 to Goodway by means of 19 instalments from August 2002 to February 2004, and that at that meeting no-one had told them that on 7 August 2002 they had in fact signed a personal guarantee, nor did anything in the payment schedule suggest that Mr Lai and himself had ever assumed personal liability.

55. Mr Chau continued that he and Mr Lai had discovered that the document they had signed was a personal guarantee only in January 2003 when they had received a copy of a letter dated 8 January 2003 from the plaintiff’s solicitors, Messrs Holman, Fenwick & Willan, and had taken the letter to a Mr Lau Kam Cheuk, an accountant and auditor of Best Profits.  They had learned from Mr Lau that the document they had signed comprised two documents, a credit facility agreement and a personal guarantee, and they had realized that Mr Tai of Goodway had “set up a trap to trick” them into signing the guarantee.

56. At this meeting Mr Lau had told them that he could handle the matter for them, and that there was no need to involve lawyers.  Accordingly Mr Lau had prepared for them a letter of reply dated 18 January 2003 to Messrs Holman, Fenwick & Willan, and that he had asked Mr Chau to sign it, which he did, believing that it was in the “best interests” of Best Profits to act as Mr Lau had advised.

57. Mr Chau said that he was careful in financial matters, and that he never would have committed himself to personal liability for Best Profits’ indebtedness had he known the true situation.  He said that he had always refused to sign personal guarantees in the past.

58. No other witness was called on behalf of Mr Chau.

Decision

59. Despite his protestations, I am able to discern little merit in Mr Chau’s case.  I do not accept his evidence on the crucial issue of the signing of the guarantee, and I am not satisfied that he is as deficient in the English language as he would have had this court believe.

60. To the contrary, I accept the evidence of Mr Tai and Mr Lim as to the history and circumstances of the Goodway/Best Profits dealings, and as to the manner and circumstances in which the Credit Facility Agreement and the Guarantee and Indemnity came to be signed.

61. This evidence is entirely consistent with such contemporaneous documentation as exists.

62. In this connection I have in mind in particular a memorandum prepared by Mr Tai of Goodway prior to the signing of the guarantee.  At the first meeting with Mr Chau and Mr Lai held to discuss Best Profits’ indebtedness, in Hong Kong on 24 July 2002, Mr Tai had expressed his concern at the debt of something approaching a quarter of a million US dollars.  Mr Chau and Mr Lai had reiterated their intention to settle the debt, and Mr Tai then had proposed that they should sign guarantees in order to demonstrate their sincerity to resolve the matter.  Mr Tai’s evidence was that both Mr Chau and Mr Lai had agreed, and both had signed a memorandum, which Mr Tai had written in his diary : paragraph 2 of this signed memorandum, which is before the court, reads: “Chris Lai and Herbert to stand guarantee for the repayment.”

63. The Guarantee and Indemnity thereafter was signed, together with the Credit Facility Agreement, on 7 August 2002.  Each of these documents bears several signatures each of Mr Chau and Mr Lai; Mr Chau has a distinctive signature, and this appears at the end of each page of the guarantee, and in particular, also, adjacent to the handwritten addendum to paragraph 1 of the document which was appended by Mr Lim stating that “This Guarantee shall also be effective for all outstanding account as recorded in our Statement of Accounts dated 31/7/2002”.  In my view the two documents, the Credit Facility Agreement (signed by Mr Lai and countersigned by Mr Chau) and the Guarantee and Indemnity, are distinctive, and in the circumstances I do not accept the proposition advanced that Mr Chau did not understand what was happening.

64. Documentation subsequent to 7 August 2002 is also consistent with the plaintiff’s account, and patently is inconsistent with the story advanced by Mr Chau and, in terms of his witness statement (as adopted by Mr Chau) by Mr Lai.

65. The letter of 18 January 2003, which on Mr Chau’s case was prepared by the accountant, Mr Lau, in reply to the letter of Holman, Fenwick & Willan of 8 January 2003 threatening legal action for non-payment, accuses the plaintiff of unilaterally putting the China market “in chaotic situation” by supplying similar goods to competitors without prior notice, causing loss to Best Profits and slow repayment of outstanding invoices; it continues thus :

"	Mr Tai Bon Wee realized our situation, which was caused by him, and allows us to repay the invoice as soon as we collected the money from customers.  There was no time limit set during the meeting.  On the other hand we were required to sign the letter of guarantee and indemnity dated 7 August 2002.  After the arrangement we made the following remittance…[details of four payments made to-date].
	As usual we shall arrange a remittance as before, provided that the legal action will be stayed …"  (emphasis added)

66. This letter strikes me as speaking volumes as to the veracity of the allegation that the entry into the guarantee was as the result of misrepresentation or trick; in fact, it seems to pray in aid the very existence of the guarantee as reassurance that the repayments indeed would be effected.

67. In the context of this letter, as written by Mr Lau, Mr Chau suggested in his evidence that this was Mr Lau simply attempting to resolve the situation as he thought best, and that the reference to the guarantee was not made on instructions.  Mr Chau referred to a letter, dated 5 March 2003, purportedly signed by Lau Kam Cheuk, Director of Ready Secretaries & Nominees Ltd., which represents that Messrs Lai and Chau “are not conversant with the English language” and that “they had explained that the letter of guarantee was signed afterwards, and without the knowledge of its content” and that the Company (Best Profits) “considered it was not the right time to make challenge on the personal guarantee, as it may jeopardize the business relationship”.

68. I do not accord this patently self-serving letter — addressed “To Whom It May Concern”  — any weight whatever.  The circumstances in which it came to be written are far from clear, and Mr Lau was not called to give evidence to explain this document.

69. The situation, therefore, is that documentation exists, pre and post-dating 7 August 2002, affirming the guarantee absent any qualification in terms of the defence as now is raised at this trial.

70. In my view the evidence is all one way in favour of the plaintiff.  The defendant, Mr Chau, bears the burden of establishing the misrepresentation/mistake issue that he has raised, and in my judgment he has come nowhere near to discharging this burden and in establishing his contention.

71. In terms of the issues raised on the pleadings this conclusion suffices to determine in the plaintiff’s favour the claim against the 2^nd defendant, Mr Chau, upon the misrepresentation/mistake issue. There is, however, a further matter upon which I should comment briefly.

72. Subsequent to the conclusion of the trial, by letter dated 7 March 2005, this court sought the submissions of the parties upon the issue of past consideration.  This was not a point taken on the face of the Defence, although there might be said to be implicit reference thereto in paragraph 9(6) of the Defence and Counterclaim of the 2^nd and 3^rd defendants.

73. Only the plaintiff responded to this letter, by means of a supplemental written submission dated 10 March 2005 prepared by counsel for the plaintiff, Mr Lawrence Lau.

74. I have considered this submission, and in the past consideration context I have revisited the evidence of Mr Tai and Mr Lim for the plaintiff, and further have considered the express terms of the Guarantee and Indemnity as signed by Mr Chau and Mr Lai.

75. I am satisfied that there was consideration moving from the plaintiff, qua promisee, for the guarantee as was given, whether the same be characterised in terms of the continuation of the grant of the trade facility (in the sense of continuing to carry the existing debt) and/or in terms of forbearance to sue pending the scheduled repayment.  In essence this is but two sides of the same consideration coin, and I am satisfied after reviewing the undisputed facts that it cannot be said that the Guarantee and Indemnity, as signed, is unenforceable for want of consideration.

76. At the end of the day, therefore, I hold that the plaintiff’s claim against the 2^nd defendant, Mr Herbert Chau, must succeed.

77. It follows that the 2^nd defendant’s counterclaim, seeking rescission of the Guarantee and/or a declaration that the Guarantee is unenforceable by the plaintiff, is dismissed.

Order

78. There is to be judgment for the plaintiff against the 2^nd defendant in the sum of US$203,998.88, together with interest on the said sum at the rate of 1% over HIBOR from time to time prevailing in the period from the date of the issuance of the writ herein, that is, 25 February 2003, until the date of judgment herein, namely, 23 March 2005, and thereafter on the judgment sum at the judgment rate from time to time prevailing until payment.

79. The counterclaim of the 2^nd defendant is dismissed.

80. There is to be an order nisi that the costs of the plaintiff’s action herein, and the costs of the 2^nd defendant’s counterclaim, are to be paid by the 2^nd defendant to the plaintiff, to be taxed if not agreed.