INDIAN OVERSEAS BANK v. SEABULK SYSTEMS INC. AND OTHERS

HCA 846/2012

[2018] HKCFI 112

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 846 OF 2012

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J U D G M E N T

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Introduction

1.  The present action was brought by the plaintiff bank (“P”) for repayment of sums advanced under credit facilities extended to a Canadian company, and to enforce personal guarantees executed by the two shareholders and directors of the company.

2.  The defendants (“Ds”) denied liability and counterclaimed against the bank for, amongst other things, loss and damage sustained by them as a result of the bank’s misrepresentation, negligent advice and breaches of various duties in particular failure and/or negligence to secure payment under demand guarantees which were provided to the bank. 

3.  Counsel Ms Bianca Yu appeared for P and Mr Timothy Parker appeared for Ds at the trial.

Brief Background

4.  P is a banking corporation incorporated under the laws of Republic of India and it has a branch in Hong Kong (“IOB”).

5.  The 1^st defendant (“Seabulk”) is a company incorporated in Vancouver, British Columbia and engaged in the design, commissioning, building and installation of port machinery and equipment and changed its name to the present one in August 2014.  It is part of the Katra Group.  It was registered under the then Part XI of the Companies Ordinance as a non- Hong Kong company with a registered place of business in Hong Kong, but filed a Notice of Cessation of Place of Business in Hong Kong in December 2014.

6.  The 2^nd defendant (“ D2”) is the Chairman, Founder and owner of the Katra Group, and is a director and shareholder holding about 32.5% of the shareholding of Seabulk, and it would appear that D2/Katra Group only increased their shareholding in Seabulk from 12.5% to about 32.5% from January 2007 to March 2007 by infusing an additional USD1m into Seabulk[1].

7.  The 3^rd defendant (“D3”) is the other shareholder of Seabulk, holding 62.5% and he is also the President of and Founder of Seabulk.  Both D2 and D3 were directors of Seabulk at the material times.

8.  In May 2007, Seabulk was awarded a contract by St Lawrence Stevedoring, a division of Quebec Stevedoring Co Ltd (“QSL”) to design, supply, install and commission a bulk material handling system including a shiploader, stacker reclaimer and conveyors (“System”) at the Port of Quebec, Canada where QSL was a terminal operator.  The supply of the   System to the port of Quebec was for a total consideration of CAD 18,700,000. The payment of the purchase price was to be under a letter of credit issued by the Royal Bank of Canada (“RBC”) in favour of Seabulk for the full amount of CAD 18.70m (“RBC L/C”).

9.  Upon execution by Seabulk of the contract with QSL on 24 May 2007 (“Quebec Contract”), the following day, ie 25 May 2007, Seabulk entered into a contract with Shanghai Zhenhua Port Machinery Co Ltd (“ZPMC”) for the acquisition of one lot of newly manufactured bulk material handling equipment (“Equipment”) for a total consideration of CAD 11,500,000 (“ZPMC Contract”).  The Equipment would then be integrated by Seabulk into and formed part of the System.

10.  The contract price under the ZPMC Contract was to be paid by way of by 5 payments, 4 of which were to be drawn against a single irrevocable letter of credit issued by a bank and provided by Seabulk for CAD 9,200,000.  Under the ZPMC Contract, ZPMC had to provide 4 demand guarantees, namely 3 Advance Payment Guarantees and a Performance Guarantee to Seabulk (collectively “APGs”)[2].

11.  The project thus consisted of the acquisition by Seabulk of the Equipment from ZPMC for the purpose of Seabulk carrying out the installation of the System at the Port of Quebec for QSL (“Project”).

12.  P was first approached in August 2007 by Seabulk in Chennai and Seabulk was referred to IOB in Hong Kong, to provide financing for Seabulk for the Project, and that IOB was further informed by Seabulk that the Project was secured by the RBC L/C and the APGs issued by Bank of China, Shanghai Branch (“BOC”).

13.  By a sanction letter dated 29 August 2007 (“Sanction Letter”)[3] and subsequently modified by 4 modification letters (“Modification Letters”) dated respectively 27 September 2007, 14 November 2007, 7 January 2009, and 6 February 2009[4], and a General Security Agreement Relating to Goods dated 21 September 2007 (“GSA”)[5], IOB agreed to advance general banking/credit facilities to Seabulk (“Facility”), subject to a total limit of CAD 15m.

14.  The Facility stated in the Sanction Letter consisted of:

(i)   a letter of credit in favour of ZPMC of CAD 9.2m – margin 25%;

(ii)   “packing loan” for advance payments under the ZPMC Contract of CAD 11.5m – margin 25%;

(iii)   a letter of credit in favour of other suppliers of CAD 3.5m margin – 25%;

(iv)   a performance guarantee in favour of QSL for CAD 1.87m – margin 25% (to be increased to 100% out of the final payment under the RBC L/C);

15.  The collateral securities for the Facility included:

(i)   “Goods” as defined under the GSA, and all bills, promissory notes, documents of title, transportation documents, insurance policies and other documents relating to the Goods;

(ii)   Personal guarantees from D2 and D3 (“Personal Guarantees”);

(iii)   Cash deposit under lien to IOB;

(iv)   Assignment of the APGs (“Assignment Agreements”);

(v)   Assignment of the RBC L/C.

16.  As will be seen later in this judgment, the terms of the Sanction Letter were accepted by D2 signing on a duplicate copy thereof on about 31 August 2007, and later D3 formally signed on behalf of Seabulk on a duplicate copy of the Sanction Letter on about 21 September 2007.  The Assignment Agreements of two of the four APGs were executed on 5 November 2007 and the two remaining ones were executed respectively on 15 November 2007 and 10 January 2009.

17.  The Assignment Agreements were respectively sent by IOB to BOC for registration and record.  BOC had replied to IOB and confirmed that BOC had duly registered and recorded the assignment on the APGs.

18.  It was not disputed that the Facility was extended to Seabulk.

19.  It would appear that Seabulk made the first 3 payments to ZPMC totaling CAD 8.05m under Clause 3.1 of the ZPMC Contract as follows[6]:

i   “Payment 1” of CAD 2.3m on 9 November 2007;

ii   “Payment 2” of CAD 3.45m on 26 November 2007;

iii   “Payment 3” of CAD 2.3m on 20 January 2009.

20.  Without going into details at this stage, very briefly, it was the pleaded case of the defendants (collectively “Ds”) that, amongst other things,  there were representations and advice made to Ds by IOB upon which Ds had acted on and in reliance thereof in executing and/or entered into the Facility, namely the Sanction Letter, the GSA, the Personal Guarantees and the APGs (“Financial Instruments”)[7].

21.  The time of delivery of the System by Seabulk as stated in the Quebec Contract was between 20 November 2008 and 20 December 2008 and in accordance with the terms of that contract, the certificate by the “Bureau Veritas” must be issued not later than 30 April 2009.  The DDU delivery date stated in the ZPMC Contract of the Equipment at the Port of Quebec was stated to be not earlier than 20 November 2008 and not later 20 December 2008. 

22.  On the letter of credit issued on 25 January 2008 by IOB to ZPMC for CAD 5.75m, the delivery date was stated to be 20 December 2008.  There was however delay in the delivery of the Equipment, which only arrived in Port of Quebee around 18 April 2009. 

23.  By an email dated 14 December 2009, Seabulk informed IOB that the Equipment had been installed at the Port of Quebec and relevant testing of the Equipment had been carried out.  IOB was further informed that it was after the final testing process of the Equipment was completed that Seabulk would be furnished with a “Bureau Veritas” certification which would enable QSL to release payments to Seabulk under the Quebec Contract. IOB was only subsequently informed that due to technical problems with the Equipment and the relevant testing of the Equipment was not completed/successful, Seabulk was not able to claim payment from QSL under the Quebec Contract[8].

24.  On 30 April 2010, Ds notified IOB that ZPMC was in breach of its obligations under the ZPMC Contract.

25.  On 3 May 2010, IOB issued demand letters to BOC in relation to the invocation of each of the APGs and demanded payment from BOC under the APGs (“Demand Letters”)[9].  The Demand Letters were counter-signed by Seabulk as “original beneficiary” of the APGs confirming ZPMC was in breach as set out in the Demand Letters.

26.  On 4 May 2010, IOB further sent out the demands by way of SWIFT messages to BOC in relation to the invocation of the APGs[10].

27.  There was no response from BOC.  The expiry date of the APGs was 7 May 2010.

28.  It was only on 10 May 2010 that BOC replied that the Demand Letters payment were not considered to be “valid claiming documents”.  IOB tried to seek clarification from BOC which went quiet for another next two weeks.

29.  Eventually, on 28 May 2010 BOC replied advising IOB that 4 orders had been made on 25 May 2010 by the No 2 Intermediate People’s Court in Shanghai restraining BOC from making payments under respectively each of the APGs (“Restraint Orders”).

30.  As seen in the decisions of the Intermediate People’s Court of 25 May 2010 (“25.05.10 Decisions”)[11], the Restraint Orders were said to be obtained by ZPMC on the basis that (i) the demands made by Seabulk through IOB were fraudulent and (ii) the written demands were not given in accordance with the requirements stated on the APGs.

31.  The Restraint Orders then led to a series of proceedings in Shanghai (as seen later in this judgement), leading to the final decisions of the Supreme People’s Court and are now collectively referred to as “SH Proceedings”.

32.  Seabulk failed to repay IOB sums due under the Sanction Letter.  The writ herein was issued by P on 21 May 2012.  As at 15 May 2012, Seabulk owed IOB a total outstanding sum of CAD 9,665,484.94 (principal amount of CAD 6,869,056.64 plus interest amount of CAD 2796,428.30) and USD interest amount of USD137,899.18.

33.  It would transpire that Seabulk had commenced arbitration proceedings with QSL in respect of the Quebec Contract in September 2009 and Seabulk’s statement of claim was submitted in about March 2010 (“Quebec Arbitration Proceedings”)[12]. There was an interim award issued by the Quebec Arbitration Tribunal on 29 November 2010 and later a final award was received by Seabulk on 24 May 2012. There was a summary in English prepared by Seabulk’s Quebec lawyers on 24 May 2012 (“Final Award Summary”) which was only sent to IOB on 15 June 2012, wherein Seabulk was awarded CAD 4,434,285[13].

34.  So far as the SH Proceedings were concerned, after IOB  learnt of the Restraint Orders issued by Intermediate People’s Court, on about 14 June 2010, IOB applied for reconsideration and objection to the Restraint Orders, and a hearing was held on or about 17 June 2010, wherein the Presiding Judge apparently advised that the application would not separately proceed if ZPMC decided to commence a law suit seeking an order to cease payments under the APGs within 30 days[14].

35.  ZPMC commenced 4 law suits on 22 June 2010, respectively in relation to each of the APGs, in the Intermediate People’s Court in Shanghai seeking to cease the payments respectively under each of the APGs, and IOB was named as defendant, and Seabulk and BOC named as “third-party defendants”.  A decision was eventually handed down by the Intermediate People’s Court on 22 May 2012 (“22.05.12 Decisions”)[15].  IOB filed appeals on 19 June 2012 and on 29 November 2013, Shanghai Higher People’s Court delivered its decisions dismissing the appeals (“29.11.13 Decisions”)[16]. On about 22 May 2014, IOB lodged petitions to the Supreme People’s Court for a retrial but eventually on 29 September 2014, IOB’s petitions were dismissed by the Supreme People’s Court (“29.09.14 Decisions”)[17].

36.  In the course of the SH Proceedings, Seabulk initiated arbitration proceedings against ZPMC in London on about 3 December 2012 claiming against ZPMC for damages for breach of contract and/or for indemnity by ZPMC (“London Arbitration Proceedings”).  According to Ds, the London Arbitration Proceedings were issued at the instance of IOB who urged Seabulk to exert pressure on ZPMC by proceeding with the arbitration.  The claim was subsequently discontinued in 2014 with no award made, apparently due to Seabulk’s failure to pay the arbitration fees.

37.  In short, P failed in its claims against BOC under the APGs, and the amounts owed by Seabulk have remained unpaid todate.

Preliminary matters

38.  There were a number of last minute summonses which had to be dealt with at the commencement of the trial, two issued by P and one by Ds.  The main disputed one was a summons issued by P on 12 April 2017, about a week before the trial, for leave to amend its statement of claim and its reply to defence and counterclaim (“Amendment Summons”).

39.  This was followed by Ds’ summons issued on 13 April 2017 for leave to file Ds’ 3^rd Supplemental List of Documents, to which P had no objection and leave was duly granted by this Court and costs be ordered to be in the cause.

40.  P then issued another summons on 18 April 2017, the day prior to the commencement of the trial (“New Evidence Summons”) for, amongst other things, (i) leave to call P’s former Chief Manager of IOB in Hong Kong, Mr Venkata Subba Rao Kakarla (“Mr Subba Rao”) as a witness at the trial; (ii) leave to file P’s 3^rd Supplemental List of Documents, and (iii) leave to file a further affirmation of Mr Ashok Choudhary, the current Senior Manager of IOB (“Mr Choudhary”).

41.  I made relevant orders on P’s two summonses at the trial, and indicated I would give reasons for the order made in relation to P’s Amendment Summons.  The brief reasons are set out hereunder.

Amendment Summons

42.  The amendments sought by P consisted of 3 groups:

(i)   Amendments to the definition of “SH Proceedings” in paragraph 20 of the proposed draft amended statement of claim;

(ii)   Amendments to plead specific contractual provisions of the Sanction Letter and, GSAs, Assignment Agreements and the Personal Guarantees, on which P relied to claim costs of the SH Proceedings (paragraphs 8A.1–8A.3, 12A.1–12A.2 of the proposed draft amended statement of claim) and on which P relied to contend that it owed no duties to Ds (paragraph 5A.1 and 6e of the proposed draft re-amended reply to defence and counterclaim);

(iii)   A new pleading in paragraph 6 of the proposed draft amended reply to defence and counterclaim, that Seabulk “requested P to prepare, handle and deal with and consented/acquiesced to the way P prepared, handled and deal with the relevant Assignment Agreements and/or APGs”.

43.  Ds’ objection was mainly as follows:

(1)   The amendments came very late for which P had provided no reasons and were substantial in nature and that the trial would have to be abandoned, if the amendments were allowed;

(2)   The amendments were bad in law because, among other things

(i)   They were an attempt to introduce new causes of action outside the limitation period;

(ii)   They sought to put in issue matters that were res judicata;

(iii)   They were insufficiently particularized.

44.  The relevant applicable rules for amendment of pleadings have been set out in Order 20 r 5 and r 8 of the Rules of the High Court (RHC). As set out in paragraph 20/8/1 of the Hong Kong Civil Procedure 2018 (HKCP), Vol 1, rules 5,7 and 8 should be read together as conferring upon the court a general power to allow or order amendments to be made.  In particular, r 5 deals more particularly with the power of the court to allow the writ or any pleading to be amended, and r 8 deals more particularly with the power of the court to order amendment of any document (other than a judgment or order, see r 8(2) and r 11).  Following the introduction of r 8(1A), the court’s discretion in ordering amendment of pleadings is conditional upon it being satisfied that such amendment is necessary either for disposing fairly of the cause or matter, or for saving costs.

45.  Mr Parker referred to DBS Hong Kong Ltd v Sit Pan Jit, unrep HCA 382/2009, 6 February 2014 where amendments of pleadings were sought 1.5 months before trial.  DHCJ Marlene Ng had cited with approval the principles in Ketteman v Hansel Properties Ltd [1987] 1 AC 189   which were summarized by DHCJ Lok, as he then was, in Li Shiu To v Li Shiu Tsang & Anor,HCA 416 of 2003 unrep, 14 August 2012.

46.  In Li Shiu To, after setting out those Ketteman principles, DHCJ Lok had put a caveat thereon, namely that one should not assume that, once the Ketteman principles are satisfied, the court would automatically grant an application for amendment of pleading in particular at a very late stage of the proceedings.  In particular, if a party makes a late application to amend the pleading with the effect that the trial date may have to be adjourned the court would be very reluctant in allowing the application unless there are exceptional circumstances[18].

47.  So far as the 1^st group of amendments were concerned, these were in relation to the definition of “SH Proceedings”. Prior to the proposed amendments, the definition was confined to ZPMC’s application for the Restraint Orders.  The amendments would include the subsequent substantive proceedings and also appeals all the way to the Supreme People’s Court.

48.  The failure to include the substantive proceedings and the appeals as part of the SH Proceedings was said to be due to an inadvertent error in drafting.

49.  As seen in the amended defence and counterclaim (“AD&C”), Ds themselves had pleaded and referred to the substantive proceedings and the appeals in the SH Proceedings in paragraphs 11A to 11D[19].  Ds were clearly fully aware of all the various stages of those proceedings and were relying on those decisions in the SH Proceedings.

50.  What Ds took issue with was the inclusion by P of the costs of all those proceedings in the higher courts, which would result if the proposed amendments were allowed, on the basis that IOB was advancing “fresh claims that post-date the writ”, as P was seeking an indemnity in relation to all the costs of the SH Proceedings. 

51.  As pointed out by Ms Yu, the real dispute in relation to the legal costs between P and Ds had always been whether P was entitled to the legal costs of P’s attempt/s to enforce the APGs.  I accepted that those proposed amendments were really correcting an omission to include the legal costs up to and including the appeal to the highest court in the Mainland, and for which omission P’s legal term had admitted inadvertence.  P had pleaded in the statement of claim the first set of proceedings wherein the Restraint Orders were granted and further that P was involved to oppose/set aside the Restraint Orders and that P was entitled to be indemnified by Ds in respect of all legal costs incurred as a result of those proceedings under Clause 1 of the Personal Guarantees and/or also the implied term of the Assignment Agreements[20].

52.  I was of the view that those proposed 1^st group of amendments were necessary either for disposing fairly of the matter or for saving costs and had allowed those amendments.

53.  As for the 2^nd group of proposed amendments, Mr Parker submitted that P was trying to resile from its own pleaded proposition of law that the assignment of the APGs from Seabulk to P was valid and was trying to plead Ds’ alleged breach (or P’s alleged entitlement) under a range of further contractual provisions in the GSA, Assignment Agreements and Personal Guarantees, and that none of these contractual clauses had been previously pleaded.

54.  Mr Parker submitted that these new amendments involved a new allegation that Seabulk failed to assign the APGs to P thereby being in breach of the Sanction Letter and that this new allegation was being raised outside the limitation period of 6 years and that this applied to all of the new contractual claims P wanted to plead.  Also, the assignment point was res judicata.  In the SH Proceedings, to which both P and Seabulk were parties, P had argued that the Assignment Agreements were valid, and the Supreme People’s Court held that the APGs were validly assigned and what had not passed was the right to espouse a claim.

55.  Mr Parker also submitted that the allegation that the Assignment Agreements did not validly assign the APGs was bad in law as it lacked particulars. Mr Parker pointed out that the evidence of P’s witnesses was that there was a valid assignment and to now plead that there had not been a valid assignment would be inconsistent with the evidence of P’s own witness.

56.  Ms Yu had made it clear that P was not disputing what was held by the Supreme People’s Court.  In the amended reply to defence and counterclaim, P had in fact pleaded that further, if, which was not admitted, the APGs could not be and/or were not validly assigned to P, its security which consisted of the assignment of the APGs was defective and/or ineffectual when it was obtained by P and could give rise to no duty to Ds, where as pleaded or otherwise.

57.  Ms Yu had submitted that the proposed amendments were points of law that were open to P to put forward and they were proposed to be pleaded to further define the issues, namely whether P would be entitled to the costs of the SH Proceedings and whether P owed duties of care to Ds.   Ms Yu submitted that P would be entitled to raise these points at trial even if the proposed amendments were not pleaded. 

58.  In particular, Ms Yu referred to paragraph 18/11/1 of HKCP, which states as follows: 

“If a party intends to raise a point of law on the facts as pleaded, it is a convenient course to do so in the pleading; it can be any point of law that necessitates legal argument, eg jurisdiction, lex fori, absolute privilege etc, see, too, O 14A. But nevertheless he may, at the trial, raise a point of law open to him even though not pleaded (Independent Automatic Sales Ltd v Knowles & Foster [1962] 3 All ER 27). In a proper case, the court will allow a party to amend his pleading so as to raise a point of law for argument before the trial, as in Lever v Land Securities Co (1894) 70 LT 323; or keep the point open for argument in the final appellate court, as in Cummings v London Bullion Co[1952] 1 KB 327; or allow a preliminary point of law to be argued under O 33, r 3, without any pleadings, as in Ramage v Womack [1900] 1 QB 116, and Roberts v Charing Cross, etc, Ry (1903) 87 LT 732. Novel yet-to-be-established principles of law may be required to be pleaded: Tadjudin Sunny v Bank of America, National Association (unrep, HCA 322/2008, [2014] HKEC 2138) [6]-[12].”

59.  Mr Parker submitted that there was no way that Ds could respond to these new allegations of fact and law without the trial being abandoned.

60.  Having considered those proposed 2^nd group of amendments, I am not satisfied that those amendments were necessary either for disposing fairly of the cause or matter, or for saving costs.  The application was made very late, and there was no supporting affirmation to explain the lateness or whether there were any exceptional circumstances as to why those proposed amendments should be allowed.  Further, Ms Yu herself had said that she could raise those points of law even if not pleaded.  More importantly, those amendments could disrupt the trial.  Having considered all the submissions, I did not allow them.

61.  The 3^rd group of amendments were submitted by Ms Yu to be necessary and were as a result of the disclosure of documents, in particular emails, that were adduced by Mr Suba Rao, IOB’s former Chief Manager, after the pre-trial review in reply to D3’s supplemental witness statement.  Ds would not be prejudiced by such amendment as these emails ought to have been in the possession of Seabulk.

62.  In paragraph 6 of the draft reply to defence and counterclaim, P was replying to the matters set out in paragraphs 6 and 7 of the AD&C.  In short, in paragraph 6, Ds pleaded that it was at the demand of P that D1 assigned its benefits and interests under the APGs to P under the Assignment Agreements and that throughout, it was P who prepared, handled and dealt with the whole process, and in paragraph 7, Ds repeated that it was P who arranged the APGs directly with BOC and communicated direct with BOC.

63.  In reply, P did not admit what was pleaded by Ds save that P admitted that it had prepared, handled and dealt with the relevant Assignment Agreements and/or APGs.

64.  Again, there was no supporting affirmation from P to explain why these proposed amendments were made so late.  Those documents/emails were produced by Mr Subba Rao in his witness statement on about 23 February 2017.

65.  Those emails would speak for themselves, and I was not satisfied that the proposed amendment would be necessary either for disposing fairly of the cause or matter or for saving costs.  I did not allow the proposed 3^rd group of amendments.

66.  To summarise, I only allowed the amendments in relation to paragraph 20 of the statement of claim.

67.  In light of the above, and that it was P who was seeking the indulgence of the Court at very last minute, and was not successful in obtaining leave for the majority of the amendments, I ordered Ds’ costs to be paid by P. 

68.  Ds sought costs to be taxed on an indemnity basis.  Ms Yu suggested the matter to be dealt with at the end of the trial. Since it was an isolated application, I do not see why it should be dealt with at end of trial.  

69.  The PTR took place on 23 January 2017, almost 3 months prior to the trial.  Leave was given for Ds to file D3’s supplemental witness statement at the PTR.  P arranged for Mr Subba Rao to file a witness statement in response on 23 February 2017.  By then, P should have received all information from Mr Subba Rao.  P’s delay in seeking leave to amend its pleadings 7 days before the trial was unexplained.

70.  This court only accepted the explanation in relation to the amendment of paragraph 20 as P’s lawyers admitted inadvertence at the trial.  All the other proposed amendments had been disallowed.  P’s application had unnecessarily delayed the commencement of the trial, and in my view, the application in relation to the other proposed amendments should not have been made at this late stage without any supporting affirmations or explanations.  I ordered costs on indemnity basis.

New Evidence Summons

71.  Ds agreed to paragraphs 1 and 2 of P’s New Evidence Summons, namely for IOB to call Mr Subba Rao as a witness, and for his witness statement dated 23 February 2017 to stand as part of his evidence in chief. 

72.  I gave leave to P to file its 3^rd Supplemental List of Documents.  Ds’ main objection to this application was that there was no proper summons or supporting affirmation for leave.  After discussing with Ms Yu, Mr Parker only confined his objection to certain items of the documents, which he submitted were plainly intended to support P’s new claims and new lines of defence to counterclaim, and since the proposed amendments were not allowed, P should not be allowed to include those disputed documents. 

73.  Ms Yu submitted that those documents were clearly in Ds’ possession and not disclosed by Ds.  The explanation given by Ms Yu for the lateness in seeking leave to produce was because of personnel changes at IOB and they were only lately discovered by the bank, but all the documents were clearly in the possession of Ds and were intentionally withheld.

74.  Having considered the documents in particular the emails, which were contemporaneous documents, I am of the view that they should clearly have been in the possession of Ds.  They were contemporaneous documents and necessary to dispose to enable the real questions between the parties to be decided and there would not be any injustice to Ds. 

75.  I granted leave to P to file its 3^rd Supplemental List of Documents.

76.  As for Mr Choudhary’ affirmation, the main objection from Mr Parker was that Mr Choudhary was not in a position to give evidence on certain paragraphs of his affirmation, and save for those, leave was granted for Mr Choudhary’s affirmation to stand as part of his evidence in chief at trial.

77.  The costs of P’s New Evidence Summons was ordered to be costs in the cause.

Further New Evidence

78.  On the 4^th day of the trial, on 24 April 2017, Ds then suddenly further issued a summons to seek leave to file their 4^th Supplemental List of Documents and to produce further documents said to arise out of matters from out of Ms Yu’s cross examination of Ds’ witnesses.  Leave was so granted by this Court with leave to P to produce any relevant documents in reply, with costs in the cause.

The witnesses

79.  The witnesses on P’s side who attended trial to be cross examined were Mr Choudhary, the Senior Manager of IOB since August 2013 to the present and Mr Subba Rao, the Chief Manager of IOB from 21 July 2006 to 9 October 2009.  P also called Mr Zhou Jing, a Mainland lawyer who had the conduct of the SH Proceedings on behalf of P (“Mr Zhou”).

80.  On Ds’ side, the witnesses who attended the trial to be cross examined were Mr Anand Subramanian (“Mr S”), the Chief Investment Officer of the Katra Group[21], D2 and D3.

List of Agreed Issues

81.  The amount of the Facility advanced by IOB to Seabulk was not disputed by Ds.  As at 20 August 2012, the outstanding loan balance plus interest accumulating at the default rate totaled CAD 12,345,073.69.

82.  It was also not disputed that no value was derived from BOC under the APGs and CAD 9.2m was unrealized under the APGs.

83.  The “Agreed Issues” in the “List of Issues” were stated to be:

(i)   whether P could establish its claim against Seabulk for the outstanding loan;

(ii)   whether P would be entitled to enforce the Personal Guarantees against D2 and D3;

(iii)   whether Ds could establish their case of misrepresentation and negligence and breaches of duty against P.

In respect of the alleged Representation and advice given by P

(i)   What was the scope of P’s services to Seabulk?

(ii)   Did P make the alleged Representation?

(iii)   If so, did P breach the alleged Representation?

(iv)   If so, what would be the appropriate measure of damages?

(v)   Did P owe a duty of care as pleaded to advise Ds on the financial arrangements in respect of the Project?

(vi)   If so, did P breach that duty?

(vii)   If so, what would be the appropriate measure of damages?

In respect of Ds’ claim that P was negligent and/or was in breach of duty in relation to the security

(i)   Did P owed the pleaded duties of care to Ds in respect of the security?

(ii)   If so, did P breach any of these duties, and/or was P’s conduct negligent?

(iii)   If so,

(a)   were Ds’ alleged liabilities to P extinguished or reduced; and/or

(b)   what would be the appropriate measure of damages?

84.  There were two further issues stated in the “List of Issues” to be “Disputed Issues”:

(i)   Whether P would be entitled to the declaration to be indemnified by Ds in respect of legal costs incurred as a result of the SH Proceedings, or only as defined at paragraph 20 of the Statement of Claim?

(ii)   In respect of Ds’ claim that P was negligent and/or in breach of duty in relation to the security, were Ds, or only D2 and D3 were precluded from taking issue with P’s actions in relation to the security.

85.  As earlier seen, P was given leave to amend the definition of “SH Proceedings” in paragraph 20 of the Statement of Claim, and the dispute in (i) above in relation to the definition of “SH Proceedings” has fallen away.

86.  Broadly, as summarized in Ds’ Opening Submissions, the thrust of Ds’ pleaded case in the AD&C was mainly (1) P misrepresented its ability to competently handle the security (“Misrepresentation Issue”) ; (2) P advised Ds in relation to the security and its advice was negligent (“Negligent Advice Issue”); (3) P owed each of Ds a duty to deal with the security in such a way as to maximize the value, and in breach of duty squandered the available security entirely; further or alternatively, P was negligent in dealing with the security (“Breach of Lender’s Duty Issue”)[22].

The Misrepresentation Issue

87.  In their original defence and counterclaim filed by Ds in March 2014, Ds mainly made no admission or denied P’s allegations, and their counterclaim was based on P’s failure and/or negligence to make a proper claim against and/or to secure payment by BOC under the APGs. There were then substantial amendments to the defence and counterclaim in January 2016, as seen in the AD&C.

88.  On the Misrepresentation Issue, and also the Negligent Advice Issue, what was pleaded in paragraph 4A of the AD&C was that:

(i)   The officers of Seabulk first had contact with P in or around 9 August 2007.

(ii)   In or around early August 2007, at multiple meetings with IOB’s Managing Director and CEO on 6 and 9 August 2007 in Mumbai and Chennai and also through telephonic discussions with the Senior Management in Hong Kong on 8, 9, 11 and 14 August 2007, IOB agreed to provide professional, independent financial advice and assistance to Ds as regards the structuring and establishing of a financing arrangement for the Project.

(iii)   IOB had orally represented to Ds that IOB had all of the necessary knowledge and understanding of, and certification and qualification in, the banking environment in each jurisdiction relevant to structure the international financing for the Project (“Representation”)[23].

(iv)   P was aware at all material times that Ds had no prior presence in, or knowledge of, Hong Kong or Mainland China, and that Ds had never done business with ZPMC before.

89.  It was further pleaded in the AD&C that:

(i)   in reliance upon the Representation, Ds agreed to follow P’s advice[24];

(ii)   acting on P’s advice, and at all times in reliance upon the Representation, Ds respectively executed and/or entered into the Financial Instruments;

(iii)   at P’s insistence, following P’s advice and in reliance upon  the Representation, Seabulk agreed to assign the APGs to IOB and executed the Assignment Agreements[25].

90.  On Ds’ side, Mr S was the one who was said to be involved in discussing the Facility and processing the same with IOB including the discussing and facilitating the completion of the documentation and the disbursement of the loan.  Mr S had also said that most of the communication in processing the Facility was undertaken with a Mr Srinivasan, the then Chief Executive of IOB and Mr Subba Rao.

91.  Mr S said in his 1^st witness statement that he was involved in discussing the loan proposal and processing the same, and in discussing and facilitating the completion of the documentation process and the disbursement of the loan[26].  Mr S’s evidence was that although IOB did not expressly say so, IOB had professed competence by providing the loan on the basis of the structure of the loan and the security package. 

92.  Mr S’s above evidence in fact indicated there was no express statement from IOB made to him in relation to its competence.

93.  The earliest email between IOB and Seabulk appeared to be  one dated 11 August 2007 sent by the then Chief Manager of Overseas Credit Department of IOB to Mr S, referring to an earlier letter which Mr S had sent to IOB’s then General Manager, and asking Mr S to forward all papers related to the proposal of the Project to the Chief Executive of IOB[27].

94.  Then, on 14 August 2007, Mr S sent a detailed email to officers of IOB including Mr Subba Rao (“14.08.07 Email”)[28].  In this email, Mr S had referred to the parties’ ongoing discussions in relation to the proposed funding for Seabulk in the Project.  It was clear that IOB had requested for further information and Mr S had filled up the forms provided to Seabulk by the bank and Mr S set out in his email that Seabulk was seeking a line of credit of CAD 15m from IOB and he had set out the details of how the credit line would be funded and secured.  Mr S stated that the Project was fully secured through the letter of credit issued by RBC and the APGs issued by ZPMC through BOC and asked IOB to revert with any queries in finalising the proposal. 

95.  It can be seen from the 14.08.07 Email that it was clearly Seabulk which was seeking the funding from IOB for the Project.

96.  In his 1^st witness statement of 30 September 2015, Mr S said Seabulk was given to believe from IOB that IOB had all the necessary credentials and understanding of banking with a Mainland company like ZPMC and its bankers BOC[29].  Under cross examination, notwithstanding that Mr S said that IOB led Seabulk to believe that IOB had the expertise, and that all officials at IOB, including Mr Subba Rao said they understood the Mainland banks, Mr S agreed with Ms Yu that (1) IOB never actually said they were able to enforce the security (ie the APGs) given to them by Seabulk; and (2) IOB never actually said that they had the relevant competence in the Mainland and Canada jurisdictions.

97.  As mentioned earlier, in the 14.08.07 Email, Mr S had asked IOB to revert with any queries in finalizing the funding proposal.  It would appear from the email which Mr S sent to Mr Subba Rao on 16 August 2007 (“16.08.07 Email”)[30] that IOB did raise further queries by way of a fax. 

98.  In the 16.08.07 Email, Mr S then provided further information and supporting documents to IOB, in particular he had provided IOB with the ZPMC Contract and annexures and set out the payment structure including the APGs.  Further Mr S had stated, amongst other things, that the payment mechanism to ZPMC was entirely interlinked and intertwined with the release of funds from the RBC L/C and as such, all payments of Seabulk would be fully deriskedfrom any unforeseen circumstances in delivering the Equipment and Seabulk or its bankers would not have any financial exposure due to the acts of ZPMC[31].

99.  Thereafter, Seabulk made a formal application for funding from IOB on 18 August 2007, signed by D2, attaching a list setting out Seabulk’s past projects.  In this formal application, Seabulk further set out under the heading “Additional collateral security offered for above request” that the facility sought would be secured through RBC L/C and in addition, ZPMC would provide APGs from BOC[32].

100.  The above indicated that it was Seabulk which offered to IOB the RBC L/C and the APG as additional securities.  It would also appear that the application was to be expedited.

101.  About 11 days later, on 29 August 2007, IOB sent to Seabulk the Sanction Letter. 

102.  This was followed by two emails sent by Mr S to IOB, one sent at 5:30 pm on 31 August 2007 to Mr Subba Rao and one sent at 12:12 pm to another officer of IOB (“31.08.07 Emails”)[33].

103.  As seen in the earlier one, Mr S referred to further discussions between them and it was stated that as discussed, a copy of the Sanction Letter duly signed by D2 (“Acceptance”)[34] was attached.  Mr S had also referred to Ds’ request for using the APGs towards the margin requirement (“Request”).  Mr S had further asked IOB to provide Ds with the documentation requirements to enable them to complete the same at the earliest. 

104.  There were no communications or any amendment of the terms of the Sanction Letter prior to Mr S sending.  There was no mention by Mr S that the Acceptance was subject to IOB accepting Ds’ Request.

105.  The later of the 31.08.07 Emails attached a table of the fund flow mechanism and the collateral details that would be posted by Seabulk at each stage of the funding by IOB (“Fund Flow Table”)[35], indicating that the collateral posted would be significantly higher than the margin requirement of 25% specified in the 1^st Sanction Letter and asked IOB to confirm that the collateral posted would suffice and fulfill the margin requirements of IOB and that once Seabulk received the confirmation, they would revert with their acceptance. 

106.  It is noted that on this later 31.08.07 Email sent at 12:12 pm, there was a handwritten note indicating words to the effect that “party should seek modifications in terms of sanction which …”.

107.  Then there was a letter dated 31 August 2007 sent by Mr S to IOB on Katra’s letter head[36] (“31.08.07 Letter”), enclosing (1) the signed  Acceptance[37]; and (2) the signed Fund Flow Table[38].  The Acceptance was signed by D2 on each page, and the Fund Flow Table bore a signature which appeared to be Mr S’s.

108.  In the 31.08.07 Letter, Mr S expressed appreciation of IOB’s efforts in expediting the entire process within a short timeframe.  Mr S set out the Request, for IOB to accept the APGs towards the margin requirements of 25% and not to seek any additional cash margin from Seabulk, and stated that “Subject to the above request, we are pleased to attach our acceptance to the sanction letter dated August 29, 2007.  We request you to proceed with the documentation process in order to establish the facilities and we are at your disposal in expediting the documentation”.

109.  Mr Parker had argued that the 31.08.07 Emails and the 31.08.07 Letter indicated “conditional acceptance” of the Sanction Letter only as it was expressed to be subject to the Request, and that the formal acceptance was the one signed by D3 on behalf of Seabulk on 21 September 2007.

110.  However, in Ds’ Closing Submissions, it was stated that Seabulk accepted the terms of the Sanction Letter by a letter dated 31 August 2007[39].

111.  Anyway, Ms Yu argued that there had clearly been acceptance on behalf Ds of the terms of the Sanction Letter when Mr S sent out the 31.08.07 Letter with the Acceptance signed by D2.

112.  In the Sanction Letter, IOB had asked Seabulk to arrange for the authorized signatory to sign and return to the bank the duplicate copy of the Sanction Letter to signify Seabulk’s confirmation as to the correctness of the security held and Seabulk’s continued understanding and acceptance of the terms and conditions under which those facilities were granted and that the facilities would be applicable from the date of acceptance and completion of documentation formalities.  In the last paragraph of the Sanction Letter, IOB then asked Seabulk to return the duplicate copy of the Sanction Letter duly signed as a token of acceptance of the terms stated therein.

113.  Having considered the above, I agree with Ms Yu that by sending out the 31.08.07 Letter together with the Acceptance signed by D2 meant that Seabulk had accepted the terms of the Sanction Letter on about 31 August 2007.

114.  Any acceptance will of course be subject to the conditions imposed by IOB as stated in the Sanction Letter and the completion of documentation formalities.  The Acceptance was not expressed to be subject to any conditions imposed by Ds, nor conditional upon IOB agreeing to the Request.  Further, as seen in the 1^st of the Modification Letters of 27 September 2007, what Ds were seeking or requesting in the 31.08.07 Emails and the 31.08.07 Letter were regarded by IOB as requests for modifications only, and modifications of reducing the collateral margin for 25% to 10% were only agreed by IOB on 27 September 2007.  

115.  There was no sufficient evidence of the Representation being made to Mr S prior to him sending out the Acceptance to IOB.

116.  As for D2, he had provided a witness statement in September 2015 and made no mention of the Representation or any representation or the alleged advice as pleaded.  He had said he had had limited interactions on the entire transaction with IOB at the time of the sanctioning of the packing loans and was not involved in any of the issues relating to the Quebec Arbitration Proceedings, SH Proceedings and the London Arbitration Proceedings.  What D2 said in his then witness statement was essentially that he was given the guarantee documents to sign in Singapore and he visited the Singapore branch of IOB to sign the documents, and that he only got involved in a more detailed manner when P aggressively started pursuing Seabulk and started the present proceedings.

117.  During the trial, under cross examination, D2 had said words to the effect that “in Chennai, we talked to them about the fact that we have the instruments … We asked if they are interested.  They said yes, we are comfortable – why don’t you process it, talk to our HK branch.”

118.  When it was suggested to him by Ms Yu that P’s office in Chennai had not said anything about its competence and its qualification, D2 had answered “They did.  On the contrary, P at the senior level told me that it was looking to expand in HK and China, and they would like to get involved.  They had a big balance sheet - they would welcome this type of opportunity.  They encouraged us to go forward and explore the possibility of funding”.  However, D2 had also said that although he was asked to process it with IOB, much would depend on the details, and that what they were talking about in Chennai was at the preliminary state and the concept, and that he and P’s senior level in Chennai did not discuss specifics.

119.  Having considered the evidence of D2, what he said about what he was told by P’s officers in Chennai was clearly at a very initial stage, and I find whatever was alleged to have been said was vague, and there was no sufficient evidence that the Representation, as pleaded, was made to him, whether in Chennai or by IOB in Hong Kong.

120.  D3 first gave a witness statement in September 2015.  What he said then was even less than what D2 had said in the latter’s witness statement.  D3 merely said that he was given the guarantee documents when he was visiting P’s office in Hong Kong, and did not mention the Representation or any oral representation, or any alleged advice at all.  It was only recently in his supplemental witness statement filed on 1 February 2017 that D3 gave evidence as to what happened when he visited IOB’s office in Hong Kong in or about September 2007, and confirmed what was pleaded in paragraph 4A of the AD&C in relation to the alleged advice and the Representation.

121.  It was D3’s evidence in his supplemental witness statement that when he visited IOB in Hong Kong in September 2007 to seek financing for the Project, he met with senior staff of IOB, Mr Subba Rao and Mr Srinivasan and that P’s staff members told him that they had extensive previous experience in dealing with those types of deals, including specific experience in dealing with guarantees from BOC – and so, they said they could handle this matter for Ds, and further IOB’s officers specifically told them that they had the expertise and knowledge of all of the jurisdictions involved to be able to fully and securely carry out the financing for the Project, keeping in mind Ds’ imperative need for full security on both ends of the deal[40].

122.  Under cross examination, D3 had confirmed that the entire basis on which D3 had said that P represented that they knew the legal requirements, was that (1) he was told by IOB that they had experience with BOC and “China risk” and they could handle it; (2) as for Quebec, he was told that P had dealings with Canadian banks and they were aware of the jurisdiction in Canada; and (3) the very fact that Seabulk got the a sanction letter from IOB citing the ZPMC Contract and the Quebec Contract would indicate that IOB was conceding that they were aware of the jurisdiction to which those contracts applied.

123.  So far as (3) is concerned, I do not think by merely referring to the two contracts in the Sanction Letter would indicate any concession on the part of IOB.  Further, those statements in above (1) and (2), even if indeed made by IOB’s staff/officers, would not in my view amount to what was pleaded, namely P represented to Ds that it had “all of the necessary knowledge and undertaking of, and certification and qualification in the banking environment in each jurisdiction relevant to structure internal financing for the Project.”

124.  I have found earlier that Seabulk had accepted the terms of the Sanction Letter on around 31 August 2007.  Even if those statements as alleged by D3 were made, according to D3’s evidence, these would have been made after the terms of the Sanction Letter had been accepted by Seabulk.

125.  It was Ds’ case that Seabulk had no prior presence in Hong Kong and that they only approached IOB because of referral from P’s Chennai branch.  This may well be so, but as I said, the evidence would appear that Seabulk was by then in need of financing for the Project.

126.  Mr S had explained that the ZPMC Contract required progress payments from Seabulk during construction and therefore Seabulk approached IOB for arranging financing.

127.  D3 had revealed said that when Seabulk was awarded the Quebec Contract, it had approached RBC for financing as their first choice but RBC declined.  Seabulk then approached HSBC and UTI Bank, but they also declined, and D3 had said that IOB was the only bank willing to offer the loan against the RBC L/C and the APGs being assigned to IOB. 

128.  Anyway, by the time Seabulk approached P in Chennai in around 9 August 2007, it was already over two months after the signing of the ZPMC Contract and “Payment 1” under the ZPMC Contract had not yet been made. 

129.  Thus, to put the matter in its proper context, by the time IOB was approached, there was no sufficient evidence that any other bank approached by Seabulk had agreed to provide the financing sought by Seabulk.  As D3 had admitted in cross examination, if there was no funding from IOB, Seabulk would encounter a serious problem as they had already signed the two contracts.  He agreed that a company should get the funding before signing those contracts, but said that Seabulk could not get funding from other banks, and that if IOB said no, the only way to deliver the Project would be for Seabulk to arrange through its own funds to be able to pay ZPMC.

130.  Further, as seen in the 16.08.07 Email from Mr S to IOB, in the past Seabulk was predominantly undertaking engineering services prior to the Katra’s involvement, and that Seabulk’s revenues were mainly service fees, and that most of the expenses in the past 18 months had been spent on business development efforts, as a result of which they were awarded the Quebec Contract and there were two other large opportunities in Australia and in New Zealand.  As said by Mr S, Seabulk was in 2007 trying to transform from a mere engineering service company to a project and turnkey construction company, and that D2/Katra Group had “infused” a further USD1 million into Seabulk from January to March 2007. 

131.  Anyway, it would appear from D3’s evidence that by August 2007 Seabulk needed funding expeditiously and was requesting IOB for the same.

132.  It would further appear from the 31.08.07 Letter that IOB had indeed expedited the loan process for which Mr S had expressed appreciation, and that Seabulk had also indicated that they were at the bank’s disposal in expediting the documentation. 

133.  D3 he claimed that he was principally involved in all aspects of the Quebec Contract and the ZPMC Contract and also in the Sanction Letter arrangements with IOB.  However, all he said in his 1^st witness statement was that he was given guarantee documents to sign when he was visiting IOB’s office in Hong Kong.  Further, in his supplemental witness statement, he had said he visited IOB in Hong Kong in September 2007 to seek financing for Seabulk for the Project.  This in fact was not consistent with the evidence of Mr S or D2.

134.  As seen earlier, the financing was sought in around 14 August 2007 from IOB and thus by the time when D3 visited IOB in Hong Kong, which appeared to be around 21 September 2007 (the day on which he signed a duplicate of the Sanction Letter formally on behalf of Seabulk, the GSA and his Personal Guarantee), the financing for the Project had already been sought and accepted and all the documentations had been prepared.

135.  Further, D3 had mentioned in his supplemental witness statement about giving IOB copies of all the documentation concerning the Quebec Contract, ZPMC Contract, the APGs or the RBC L/C in September 2007 when he met with Mr Subba Rao and Mr Srinivasan.  However, copies of the relevant documents requested by IOB had already been sent to IOB in August 2007 by Mr S prior to the issue of the Sanction Letter.

136.  D3 had said due to his health problems, in 2015, he did not wish to be bogged down in litigation and that was why he was only able to provide a brief witness statement at the time, but as his health improved, he sought leave to file his supplemental witness statement to explain his “first-hand knowledge of what actually happened between the parties”[41].  This was however only done about 3 or 4 months prior to the commencement of the trial.

137.  Anyway, I find D3’s evidence rather confusing.  It was not clear how D3 was personally involved in the discussion of the financing or the sanction arrangements prior to his visit to Hong Kong in September 2007.  The application form for the credit facilities was signed by D2 and not by D3.  Compared to D2, the personal financial statement provided by D3 on 20 August 2007to IOB was very brief[42]. 

138.  It was D3’s evidence that during his visit in September 2007, he had met with Mr Srinivasan and Mr Subba Rao of IOB. 

139.  Mr Subba Rao was the Chief Manager of IOB Hong Kong from 21 July 2006 to 9 October 2009.  He made a witness statement on behalf of IOB after D3 obtained leave to file his supplemental witness statement.  He had said Mr Srinivasan only joined the IOB Hong Kong Bank on 29 October 2007 as Chief Executive, and that prior to that, the Chief Executive was a Mr Subhash Chander who was transferred to India on 2 November 2007.  

140.  Thus, D3 could not have met Mr Srinivasan in September 2007 which D3 seemed to later accept.

141.  It was Mr Subba Rao’s evidence that P’s Chennai office was competent to handle a Mainland transaction, but sent Seabulk to Hong Kong because Hong Kong was geographically closer to Mainland.  Mr Parker argued what was said by Mr Subba Rao defied common sense and that D3’s explanation that P’s Chennai office referred the case to Hong Kong because Hong Kong branch had the expertise to deal with the Mainland side was more logical.

142.  There was however no sufficient evidence that P’s Chennai office would not have the competence to hand a Mainland transaction.

143.  Mr Subba Rao had said IOB was competent to handle securities for international transactions.  When asked whether IOB would have any reservation in saying to a customer that the bank had competence in handling international finances, Mr Subba Rao had responded that customers had never asked IOB whether they had the competence in handling international finances. Mr Parker criticized Mr Subba Rao as being very cagey in giving his answers. I have to say that I do not have the same impression as Mr Parker. Even though Mr Subba Rao did not appear to have answered that question directly, this did not in my view affect his overall credibility.

144.  Mr Parker in cross examination had referred to D3 seeing Mr Subba Rao in August 2007.  There was however no sufficient evidence that D3 saw Mr Subba Rao or IOB’s officers in August 2007.  D3 agreed under cross examination that it was Mr S who was the one seeking the credit facilities from IOB in August 2007, and D3 had said it was in September 2007 that he came to Hong Kong.  During the trial, D3 further said he was asked to come to Hong Kong to meet IOB staff and that he did meet them before he signed the acceptance on the Sanction Letter in IOB office on about 21 September 2007. He said that it was in September 2007 that he personally had the opportunity to meet with IOB’s officers.

145.  Anyway, when it was put to Mr Subba Rao that D3 had told him that D3/Seabulk was ignorant of the Mainland banking procedures, Mr Subba Rao did not agree and he said by then Seabulk had already entered into the Quebec Contract and the ZPMC Contract and that he could not believe that Seabulk was not aware of the Mainland laws.  Mr Parker pointed out to him that neither contract was subject to Mainland law and that no one at Seabulk knew anything about claiming under the APGs, but Mr Subba Rao responded by saying that there were enough assurances given by Seabulk to lead the bank to believe that Seabulk had the complete expertise in handling the intricacies of the transactions.

146.  Anyway, it was not Ds’ pleaded case that IOB made any representation that it had knowledge of Mainland laws or Canadian laws.  So far as the banking documentations were concerned, those emails between Mr S and IOB during the period from 30 October 2007 to 5 November 2007 (“30.10.07-05.11.07 Emails”)[43] would indicate that Seabulk had the knowledge and understanding of the relevant documentations .

147.  Mr Subba Rao did not agree that it was IOB which procured the issue of the APGs from BOC and he pointed out that the APGs were already incorporated in the ZPMC Contract and although the SWIFT messages in relation to the issue of the APGs was between bank to bank, it was part of the normal banking process for BOC to send the terms of the APGs to IOB and that this was part of the terms of the Sanction Letter.

148.  There were 4 SWIFT messages in relation to the APGs sent by BOC to IOB, two on 18 September 2007, one on 19 October 2007, and the remaining one on 3 December 2008[44].  BOC “quoted” the terms of the APGs in these SWIFT messages.

149.  I accept the evidence from Mr Subba Rao.  The payment structure under the ZPMC Contract was already agreed between Seabulk and ZPMC prior to Seabulk approaching IOB for the Facility, and the APGs were to be provided by ZPMC to Seabulk under the payment terms of the ZPMC Contract. As Mr S himself had said in the 14.08.07 Email that the Project was fully secured by APGs “issued by ZPMC” through BOC.  The APGs had to be procured by ZPMC from BOC and not by IOB as alleged by Ds.  In fact, as seen later, Seabulk had asked ZPMC to approach BOC to seek amendments to the expiry dates of the APGs. 

150.  It was suggested to Mr Subba Rao that IOB had told D3 that the bank had done this many times but Mr Subba Rao said he did not recall giving this statement to D3.  He denied having told D3 or represented that IOB knew how to do the job and how to handle APGs properly or that it was on this basis that Seabulk had accepted the terms of the Sanction Letters.

151.  Having considered all the evidence, I find that there was no sufficient evidence that the Representation, as pleaded, was made by Mr Subba Rao/IOB to D3 and/or Seabulk as alleged.

152.  There was also a legal issue raised by Ms Yu. She submitted that a defendant seeking to defend a claim to enforce a debt on the basis of the plaintiff’s misrepresentation, and the defence was based on the fact that the contract was itself induced by the misrepresentation, in such cases, the defendant would have to show not only that the misrepresentation would entitle him to rescind the contract, but also that the contract had already been rescinded or that he was electing to rescind, before he could be heard to raise misrepresentation as a defence to a claim to enforce payment of a debt or damages due under it[45].

153.  Ms Yu referred to Misrepresentation, Mistake and Non-Disclosure, Cartwright 4^th Ed, where the learned author explains that the need for the defendant to rescind the contract before he can defend a claim aimed at enforcing his obligations under the contract, follows from the fact that misrepresentation renders a contract voidable, not void, and the whole contract, and not simply the representee’s obligations must be rescinded, but if the defendant could show that the contract was void, rather than simply voidable, then he would need not have taken any active steps to avoid the contract.

154.  Ms Yu argued that Ds had to establish that the underlying contract, ie the Sanction Letter, GSA and the Personal Guarantees had already been rescinded or that Ds were electing to rescind, before a misrepresentation claim could be raised as defence. 

155.  Mr Parker however submitted that Ds were not seeking rescission and only damages and that they were entitled to seek damages only and were not bound to seek rescission under s3(1) of the Misrepresentation Ordinance, Cap 284. 

156.  Section 3(1) is similarly worded as section 2(1) of the Misrepresentation Act 1967.  As set out in paragraph 7-05 of Misrepresentation, Mistake and Non-Disclosure, Cartwright, 4^th Ed, the remedy is available only where the claimant “has entered into a contract after a misrepresentation has been made to him by another party, although, in substance, section 2(1) provides a remedy based on the tort of deceit but under which damages on the tor measure are payable for negligent misrepresentation, the statutory claim is limited to the context or pre-contractual misrepresentations. Further, the word “contract” section 2(1) has its ordinary meaning.

157.  As further seen in paragraph 7-44, the claim under section 2(1) of the Act will be available concurrently with a claim for rescission of the contract.

158.  It would appear therefore that the corollary would be that the statutory claim is available without a claim for rescission of the contract. 

159.  Anyway, even if the Representation was made to D3, this would only be in September 2007, after the Acceptance was sent to IOB, and thus s 3(1) would not be applicable.  

160.  To sum up, I find there was no sufficient evidence that the Representation as pleaded had been made by IOB to any of Ds and even if there was the Representation, I find there was no sufficient evidence that such had been an inducement to Ds’ respective decisions in accepting the terms of the Sanction Letter, or in executing and/or entering into any of the Financial Instruments.  There was no sufficient evidence that any of the Ds was acting upon or in reliance of the Representation or any representation in accepting the terms of the Sanction Letter and/or the GSA, and/or in executing and/or entering into the Financial Instruments as pleaded.

The Negligent Advice Issue

161.  Under the heading “The Plaintiff’s Duties” in the AD&C, Ds pleaded that there was a duty of care alleged arising out of contract and at common law[46].  In particular, it was pleaded that P owed the following duties: (i) a duty to act with reasonable, skill, care and attention throughout (and not negligently); (ii) a duty to provide accurate and complete advice; (iii) a duty to properly understand the relevant legal and regulatory framework in each relevant jurisdiction; (iv) a duty to act with due skill, care and attention, and not negligently, in ensuring that Ds’ financial requirements (including the need of Ds to be fully collateralized) were duly met; (v) a duty to act with due skill, care and attention, and not negligently, in the preparation, drafting and execution of any relevant financial document or instrument.

162.  In so far as the duty owed by P in relation to “advice”, what was pleaded that it was an express, alternatively implied term, of the contractual relationship between P and Ds that P would advise Ds as to the most suitable financial arrangements in respect of the Project, and that P owed each of Ds various duties, arising in contract and at common law, including, a duty to provide accurate and complete advice[47].

163.  As seen earlier, Ds had also pleaded in the AD&C that P agreed to provide professional, independent financial advice and assistance to Ds as regards the structuring and establishing of a financing arrangement for the Project.

164.  Further, under the heading “The Plaintiff’s Advice”, Ds pleaded that P agreed to advise upon, structure and provide financing for the Project and P advised Ds to structure the financing the Project as set out thereinafter[48]:

(i)   P would extend the Facility to Seabulk in order to facilitate the purchase from ZMPC the System;

(ii)   D2 and D3 would personally guarantee the Facility;

(iii)   in order to ensure that Ds were fully collateralized at all times, and to afford them full protection against any possible default by ZPMC, fully enforceable APGs would be provided by ZPMC in favour Seabulk;

(iv)   Pursuant to the APGs, in the event of Seabulk notifying BOC of default by ZPMC.  BOC would be required to pay out to Seabulk in respect of the latter’s loss occasioned by such default;

(v)   P would arrange for the assignment of all right, title and interest in the contemplated APGs to P, who would then be responsible for recovering under them in the event of any default of ZPMC.

165.  As seen earlier, Ds pleaded in reliance of the Representation, they agreed to follow P’s advice, and further acting on P’s advice, and at all times in reliance upon the Representation, D2 respectively executed and/or entered into the Financial Instruments.  Further, following P’s advice and in reliance upon the Representation, Ds agreed to assign the APGs to IOB and executed the Assignment Agreements.

166.  Ds’ pleaded case was thus (1) P had a duty to advise Ds, and (2) the advice alleged was in relation to the structure and establishing a financial arrangement for the Project.

167.  As submitted by Ms Yu, generally speaking, banks do not owe their customers a duty to advise them on the wisdom of commercial projects for the purpose of which the bank is asked to lend money.  If the bank is to be placed under such a duty, there must be a request from the customer, accepted by the bank, or some arrangement between the customer and the bank, under which the advice is to be given[49].

168.  The above principle was re-affirmed by the Privy Council in National Commercial Bank (Jamaica) Ltd v Hew (2003) 63 WIR 183, where Lord Millet said[50]:

“It may well have been foolhardy of Mr Hew to embark on the project without obtaining estimates of the likely costs and cash flow forecasts; but the bank was under no duty to advise him against such a course. It may have been unwise of Mr Cobham to have lent the money without insisting on being provided with such estimates and forecasts and without having conducted a feasibility study of his own. But, as Mr Cobham explained, any such study would have been for the bank's protection, not Mr Hew’s. The reason he did not call for such a study is that he did not think that the bank's interests required it; the bank had sufficient security to support a much larger loan than anything that was contemplated at the time. This is a useful illustration of the truism that the viability of a transaction may depend on the vantage point from which it is viewed; what is a viable loan may not be a viable borrowing. This is one reason why a borrower is not entitled to rely on the fact that the lender has chosen to lend him the money as evidence, still less as advice, that the lender thinks that the purpose for which the borrower intends to use it is sound.”

169.  It was further observed by Master McCorry, after citing the above passage in Bank of Ireland (UK) plc v Crawford (unreported) 3 May 2012([2012] NIMaster 6)[51], that there was a need for clarity in terms of the duty to advise which a bank undertakes, if any, and that the law must be cautious about implying terms which include the duty to advise into the contract between the borrower and lender.

170.  Ms Yu thus submitted that the factual basis on which P had assumed the responsibility to advise the customer had to be clear, in that P would only owe a duty of care to advise if it did something more in relation to the customer to show that it was not merely looking after its own interests, but that additionally it was positively prepared to assume responsibility to the customer.

171.  The above general proposition was not disputed by Mr Parker.

172.  Mr Parker however submitted that Ds’ case was that IOB took on the mantle of advisor in relation to the handling of the security, specifically the APGs and its advice was negligent; and under the general law, a lender in possession of security owes duties to the debtor and guarantors, both in equity and in tort, to handle the security with due care and attention, and to take proper steps to realise its maximum value, and IOB breached that duty, and was negligent.

173.  Mr Parker maintained that Ds’ case on the advice issue had always been (1) they received advice from IOB about assignment and enforcement of the APGs; (2) in giving the advice, IOB assumed a duty in law to advise with due care and attention; and (3) the advice given was profoundly wrong resulting in catastrophic losses.

174.  Mr Parker argued that Ds had pleaded in paragraphs 11F (6) and (7) of the AD&C that (1) P was negligent in advising that the right of claim under the APGs could be, in fact had been, assigned to IOB when this was not so and (2) IOB was negligent in failing to advise Seabulk that it was Seabulk alone who was lawfully entitled to make a claim under the APGs, notwithstanding the Assignment Agreements[52].

175.  Ms Yu had made detailed submissions on law and also going to the question of whether or not IOB had advised Ds about the financial structure of the Project generally, which Mr Parker submitted “miss the point entirely”[53].

176.  Notwithstanding Mr Parker’s submissions, I must say I agree with Ms Yu that Ds were somewhat obfuscating the alleged duty to advise upon the financial structure of the Project and the alleged duty to advise Seabulk in the handling of the security.  As mentioned earlier, Ds’ pleaded case under “The Plaintiff’s Advice” was clearly that P had assumed a duty to advise upon the structure and to provide financing for the Project.

177.  This can also be seen from the “Agreed Issues” of the “List of Issues” of which the agreed issue on this topic was “whether P owed a duty as pleaded to advise Ds on the financial arrangement in respect of the Project”.

178.  In any event, during the trial, when Ms Yu was cross examining Mr S or D3 in relation to the “advice on the financial structure”, there was no clarification from Mr Parker that Ds’ case was only in relation to advice on the handling of the security.

179.  It was suggested to Mr S by Ms Yu that Seabulk did not approach IOB for advice on the financial structure, Mr S had disagreed and had said IOB took responsibility for implementing the financing structure. He went on to say that in giving Seabulk the Sanction Letter, IOB advised Ds of what kind of financing should be pursued by Seabulk and that was how the loan was sanctioned in August 2007, and that the advice culminated in the form of the Sanction Letter.  He further said that in giving Seabulk the loan, IOB had advised Seabulk of the loan to take and what security IOB should take[54].

180.  Mr S’s above answers indicated that Ds had not relied on any express statements of advice made in relation to the financial structure, but only in the act of the advancement by IOB of the Facility and the taking of the security itself.

181.  D3 had said under cross examination that Ds never asked for any advice from IOB as far as the Project was concerned but that he got “crucial advice” from IOB on 2 occasions, the first was in Hong Kong during the meeting he had with IOB, and that the advice he got from IOB was that the Project had a “technical risk, contract risk and financial risk” and the only way financing was possible was to “de-couple the financial risk” and that IOB was very “creative” in coming up with the idea that if the financial risk was placed with IOB, Seabulk could then focus on its core strength and IOB could focus on its core strength, and this was a unique idea which D3 thought was very “creative”.

182.  What was said by D3 above was never mentioned in his witness statement, nor pleaded.

183.  When Ms Yu suggested to D3 that it was Seabulk who got “creative” and offered the APGs as collateral back in August 2007, D3 had in fact agreed that they proposed the security to the bank, and disclosed that they had also proposed this to RBC but that unlike RBC, which said Seabulk could assign the APGs to them but Seabulk still had to give 100% margin collateral, IOB accepted the value of the “China guarantee”.  D3 had also said that the fact that the Sanction Letter was given to Seabulk meant that IOB was satisfied with the security offered.

184.  From D3’s answers, there appeared to be really nothing “creative” about IOB agreeing to accept the assignment of the APGs, which, according to D3, had also accepted by RBC, only that RBC was requiring 100% margin collateral.  There was also no sufficient evidence of any advice sought by Ds from IOB, nor was any advice proffered by IOB.

185.  In any event, I accept what was submitted by Ms Yu, the act of granting a loan on the strength of security offered to the bank could not form the basis of any advice to the borrower.

186.  Mr Parker had referred the Court to Woods v Martins Bank [1959] 1 QB 55, the defendants’ bank manager had negligently advised the plaintiff customer to invest in the shares of a particular company on the basis that the company was financially sound and the investment was a wise one to make.  It was held that, amongst other things, the limits of a banker’s business could not be laid down as a matter of law; the nature of such a business must in each case be a matter of fact, and on the facts it was within the scope of the bank’s business to advise on all financial matters, and they owed a duty to the plaintiff to advise him with reasonable care and skill in the transactions referred to[55].

187.  In Morgan v Lloyds Bank, Plc [1998] Lloyds Rep: Banking 73, broadly, the plaintiffs’ claim was but for wrongful actions of the bank, a nursing home owned by the plaintiffs and mortgaged to the bank would have been sold about 15 months earlier for an amount which would have been sufficient to clear the plaintiffs’ then indebtedness to the bank leaving a substantial surplus.  Instead, the nursing home was sold for almost half the amount.  The Court of Appeal had said that:

“For a bank to attract liability in this way it has in my judgment to be shown, first that the Bank gave advice in the course of its banking business and secondly that the customer Plaintiff acted upon that advice or at least relied upon it. I do not consider that an antecedent request for advice by the customer is essential[56].”

188.  In Cornish v Midland Bank PLC [1985] 3 All ER 513 it was held, amongst other things, that where a bank chose to advise a customer as to the nature and effect of a mortgage in favour of the bank prior to the customer executing the mortgage, the bank was under a duty not negligently to misstate the effect of the mortgage, and Glidewell LJ held that[57]:

“There was some discussion before us of the question whether the mere fact that the plaintiff was a customer of the bank imposed on it a duty to advise her. I find it unnecessary to answer this question since to my mind it is clear that, when Mr Park gave the plaintiff an explanation, he undertook the duty to explain fully and properly on the bank's behalf.”

189.  InFennnoscandia Ltd v Robert Clarke [1999] All ER (D) 25, the merchant bank agreed to provide a loan to accompany AMC and part of the security for the loan was a pledge of shares and warrants in another company DRC and a personal guarantee given by the respondent Mr Clark. In those proceedings, no contract other than that of banker and customer was pleaded in the statement of claim.  The Court of Appeal had said in this context that[58]:

“If a bank official gives information or advice, and does so dishonestly or negligently with the result that the recipient of the advice sustains loss, then the loser may be able to recover in contract or in tort (Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465) because the court may be prepared to say that by offering the advice in circumstances in which the advisor knew that it would be relied upon he undertook to exercise reasonable care.”

190.  Mr Parker also referred to Verity v Lloyds Bank Plc [1996] Fam Law 213, [1995] CLC 1557 where the plaintiffs were clients of the defendant bank and had earlier been given a copy of the bank’s pamphlet advertising that the bank gave free advice on the financial aspect of starting a business.  Subsequently, the plaintiffs had approached the bank with the idea of buying a second house, improving it and selling it as a profit and which they subsequently bought with advice given by the bank. 

191.  It was held that the bank had not simply decided whether or not to make the loan but had acted as an adviser encouraging the plaintiffs to proceed and therefore owed them a duty of care, and the problems the plaintiffs experienced were reasonably foreseeable and no reasonably careful adviser in the bank’s position could have taken the view that the project was viable or sensible for the plaintiffs to undertake and therefore the bank was in breach of its duty of care.

192.  The Judge had referred to what was said in Woods v Martins Bank, and in light of this authority, the bank had conceded that if a customer of a bank in terms requested advice on the prudence of a particular transaction in view, and the bank gave it, then duty of care arose on the part of the bank and the essential question was whether the bank officer had assumed an advisory role in relation to the purchase of the property.  It was held on the facts of that case that the bank owed the plaintiffs a duty of care to advise as to the prudence of the transaction involving the purchase of the property.

193.  In light of what was stated in the above cases, Mr Parker submitted that Ds would succeed on this issue if they could show that:

(i)   IOB in fact gave advice on the relevant matters;

(ii)   The advice given was wrong;

(iii)   There was loss.

194.  Whether it was properly pleaded or not, as submitted by Mr Parker in the Closing Submissions, Ds’ case on the “advice” was   narrowed to IOB in fact gave advice in relation to the handling of the security, and that P’s/IOB’s advice in relation to the security was negligent.  What Ds said was that IOB advised negligently about the APGs – specifically about the correct claiming procedure under the Mainland banking laws and procedures and the identity of the correct party to state a claim to BOC[59].

195.  As seen in Ds’ Closing Submissions, in relation to the handling of the security under “F(3) The Advice Issue”, Ds mainly relied on the evidence of D3[60].

196.  D3 had explained that he had formed the clear impression that IOB had the sole right to claim under the APGs, and when asked about the basis for his view, his evidence was that IOB told him that all claims under the APGs would be made by the bank, and this was on two occasions, namely (1) when he came to Hong Kong in September 2007; and (2) when a Mr Chockalingam of IOB telephoned him in April 2010 and that on both occasions in no uncertain terms IOB said they would be making the claim.

197.  Mr Parker pointed out that IOB did not call Mr Chockalingam to contradict any D3’s evidence.  Ds further relied on an email dated 30 October 2007[61] when IOB expressly offered advice about the assignment procedure for the APGs.  Further, Mr Parker submitted that all claim letters were drafted by IOB and D3 was only told where to sign, and duly did so[62].

198.  Mr Parker thus submitted IOB was in complete control of the process, Mr Chockalingam having told D3 that any claim was a matter for the bank, and not Seabulk, and that in the premises, IOB did in fact offer advice about the claims procedure and by giving such advice it follows that, in law, IOB came under a duty to do so with due skill and care.  Further, the advice it gave was wrong, in that IOB was not the correct party to espouse a claim.

199.  It was further Mr Parker’s submission that had IOB advised Ds correctly on this subject, namely the proper party to claim under the APGs, then the disaster would have been averted, and that correctly advised, D3 would clearly have issued a claim letter to BOC espousing the claim on Seabulk’s own account, resulting inexorably in BOC paying out the CAD 9.2 million to IOB, in diminution of Seabulk’s liability.

200.  First of all, according to D3, the basis of his clear impression that IOB had the sole right to claim under the APGs was that IOB had told him that all claims under the APGs would be made by the bank.  From the part of the transcript quoted by Mr Parker of D3’s answers set out in paragraph 194 of Ds’ Closing Submissions, all D3 said was IOB told him that all claims under the APGs would be made by IOB and that this was in September 2007 and April 2010 and that on both occasions in no uncertain terms that IOB said they would be making the claim.

201.  Even if IOB did say what was alleged by D3, I do not regard that such was an advice, nor was there sufficient evidence that IOB had “advised” D3 that IOB had the sole right to claim or the proper party to claim under the APGs.  IOB simply sent the Demand Letters as soon they received from Seabulk notification of ZPMC’s breach of its obligations.

202.  As for the email sent by IOB Hong Kong to Mr S at 5:20pm on 30 October 2007 and referred to by Mr Parker, although the word “advise” was used on a number of occasions, eg “we advise/clarify…”, “They (RBC) had advised….”, “Bank of China advised ...”, in my view the word “advise” in the context of that email would appear to mean no more than “inform”, and was not really used in the context as “recommend” or offering suggestions about the best course of action.

203.  As further seen later in this judgment, IOB had in fact prepared demand letters for Seabulk to send in Seabulk’s name and on Seabulk’s letterhead but due to errors of Seabulk, these letters (later referred to the as the 2^nd Set of Letters) were only received after the expiry of the APGs. 

204.  I accept that the relevant documentations in relation to the claim letters were prepared/drafted by IOB’s side, but again this did not necessarily mean that IOB had provided advice to Ds about the claims procedure. 

205.  Having considered the parties’ submissions, I do not find that there was sufficient evidence that the scope of P’s services to Seabulk had included advising and/or rendering assistance to Ds as regards the structuring and establishing of a financial arrangement for the Project and/or handling the securities.  I do not find P owed any duty of care to advise Ds, as pleaded, on the financial arrangements or financial structure in respect of the Projectand/or in relation to the handling of the APGs.  In any event, even if such duty of care as pleaded by Ds existed, having considered the evidence, I am not satisfied that there was any breach of that duty in that I do not find that there was sufficient evidence of any advice given by P/IOB in relation to the financial arrangements or financial structure of the Project as alleged or pleaded in AD&C under the heading “The Plaintiff’s Advice” and/or the handling of the APGs as alleged upon which Ds had acted or relied in executing or entering into any of the Financial Instruments.   

Breach of Lender’s Duty Issue

The alleged duties

206.  It was Ds’ pleaded case that as a result of the assignment by Seabulk to P of the APGs and/or their benefit, P owed each of Ds the following duties:

(i)   A duty to secure and preserve the APGs for their benefit;

(ii)   A duty to take reasonable care in relation to the APGs;

(iii)   A duty to be active in preserving the value of the APGs;

(iv)   A duty to realise the APGs upon any default by ZPMC and to maximize the return and to gain fair value.

Legal Principles

207.  Mr Parker submitted that in general, a lender has wide margin of latitude in dealing with security it holds in respect of indebtedness and that in the context of the present case a lender in possession of security is under a duty to the debtor and any guarantors to act with due care and attention in preserving in preserving its value, and to take proper steps to realise the maximum return[63].

208.  Mr Parker referred to Standard Chartered Bank v Walker [1982] 1 WLR 1410.  In the above case, Lord Denning explained that: (1) in so far as mortgages are concerned the law is set out in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, in that if a mortgagee enters into possession and realizes a mortgaged property, it is his duty to use reasonable care to obtain the best possible price which the circumstances permit.  He owes this duty not only to himself, to clear off as much of the debt as he can, but also to the mortgagor so as to reduce the balance owing as much as possible, and also to the guarantor so that he is made liable for as little as possible on the guarantee[64]; and (2) in so far as the receiver is concerned, the law is well stated by Rigby LJ in Gaskell v Gosling [1896] 1 QB 669, a dissenting judgment which was approved by the House of Lords [1897] AC 575, in that a receiver is the agent of the company, not of the debenture holder, the bank. He owes a duty to use reasonable care to obtain the best possible price which the circumstances of the case permit.  He owes this duty not only to the company, of which he is the agent, to clear off as much of its indebtedness to the bank as possible, but also owes a duty to the guarantor, because the guarantor is liable only to the same extent as the company[65].

209.  Lord Denning further said if it should appear that the mortgagee or the receiver have not used reasonable care to realise the assets to the best advantage, then the mortgagor, the company, and the guarantor are entitled in equity to an allowance, and should be given credit for the amount which the sale should have realized if reasonable care had been used, and their indebtedness is to be reduced accordingly[66].

210.  The above decision was followed in American Express International Banking Group Corp v Hurley [1985] 3 All ER 564[67], and also in the Hong Kong judgment of DHCJ Yee in Basab Inc & Anor v Superb Glory Holdings Ltd & Ors, unrep, HCA 6/2014, 9 March 2017[68].

211.  It has also been held by the English Court of Appeal in Silven Properties Ltd v Royal Bank of Scotland [2004] 1 WLR 997, that if a mortgagee takes possession, he assumes a duty to take reasonable care of the property secured and this requires him to be active in protecting and exploiting the security, maximising the return, but without taking undue risks[69].

212.  Ms Yu however pointed out that the cases relied on by Mr Parker for equitable discharge of Seabulk’s indebtedness were either cases involving a mortgage or a charge under which a mortgagee or a chargee would have an interest in the property subject to the mortgage or charge based on equity of redemption, and submitted that the equitable duty of care to the debtor is based on equity of redemption whereas the equitable duty of care to sureties is based on equity of subrogation. 

213.  She submitted that the lender’s liability to maintain or perfect securities owed to those entitled to the right of subrogation (that of the surety) or the equity of redemption (that of the mortgagee) are in equity and not in common law tort.  In particular, she referred to Downsview Nominees Ltd v First City Corp [1993] AC 295 where the Privy Council had stated that the House of Lords had warned against the danger of extending the ambit of negligence so as to supplant or supplement other torts, contractual obligations, statutory duties or equitable rules in relation to every kind of damage including economic losses[70]. 

214.   In China & South Seas Bank Ltd v Tan [1990] 1 AC 536, the bank made an advance to the debtor and the surety guaranteed repayment of the principal sum and interest.  As security for the loan, the shares of another company was mortgaged to the creditor, the value of which was alleged to be worth twice the sum advanced.  The debtor defaulted and although the shares were then still worth more than the loan, the bank did not exercise its power of sale under the mortgage.  After the shares became worthless, the bank then demanded the payment of the principal sum and interest from the surety.  The bank sought summary judgment against the surety, which was granted by the master, and was upheld by the judge on appeal. 

215.   On further appeal, the Court of Appeal in Hong Kong granted the surety unconditional leave to defend, holding that it was arguable that the surety’s liability was extinguished or greatly reduced by the bank’s breach of duty owed to the surety to exercise the power of sale over the mortgaged shares. 

216.   The bank was granted leave to appeal to the Privy Council.  The Privy Council said that the Hong Kong Court of Appeal sought to find such a duty as claimed by the surety in the tort of negligence, but the Privy Council pointed out the tort of negligence had not subsumed all torts and did not supplant the principles of equity or contradict contractual promises or complement the remedy of judicial review of supplement statutory rights[71]. 

217.   The Privy Council referred to Watts v Shuttleworth (1860) 5 H & N 235 and also Wulff v Jay (1872) LR 7QB 756, and held that a creditor owed no duty to the surety to exercise its power of sale over the mortgaged securities and could decide in its own interest whether to sell and when to do so, and since the creditor had done no act injurious to the surety or inconsistent with his rights, nor failed to perform any act which it was under a duty to do, equity would not intervene to protect the surety; and that, therefore, the surety had no arguable defence to the creditor’s claim under the guarantee[72]. (emphasis added)

218.  The Privy Council had further said that the creditor was not obliged to do anything, and no creditor could carry on the business of lending if he could become liable to a mortgagor and to a surety or to either of them for a decline in value of mortgaged property, unless the creditor was personally responsible for the decline[73].  

219.  Ms Yu had referred to Downsview Nominees Ltd v First City Corp [1993] AC 295 where it was held by the Privy Council that equity imposed on a mortgagee and a receiver and manager specific duties including the duty to exercise their powers in good faith for the purpose of obtaining repayment although, subject to that duty, the exercise of their powers might cause detrimental consequences to the mortgagor; that the equitable duty was owed both to the mortgagor and to any subsequent encumbrancer, whether he was a mortgagee, debenture holder or charge holder.

220.  Ms Yu further submitted that in relation to security held, a lender would not owe an equitable duty of care to all debtors, but only to those interest in the equity of redemption[74].

221.  Ms Yu also submitted that the equitable duty to perfect securities does not extend to securities which are defective when they were received by the creditor as a result of a failure by the principal debtor to make an effective transfer or to put the security documents in proper form[75].

222.  In  the Law of Guarantees, 7^th ed, Andrews & Millett where it is stated that there are two situations in which neglectful or improper dealing by the creditor with security entitles the surety to be discharged from liability in full, namely[76]:

(i)   where the effect of the conduct of the creditor in dealing with the security is to vary the risk of default by the principal;

(ii)   where the creditor breaches a condition of the contract of guarantee.

223.  The learned editors then went on to say the above was to be contrasted with dealings by the creditor with the security that only affected the amount for which the surety would be liable in the event of default by the principal; in this latter situation, default is only available to the extent that the surety has actually suffered a loss by reason of the creditor’s dealing.

224.  However, Mr Parker submitted that there is no need for the Court to be drawn into any academic debates and submitted that the authorities unequivocally established that: “… the creditor’s failure to obtain the proper value of a security which he sells reduces pro tanto the amount for which the guarantor is liable”[77].

225.  With the above general principles in mind, I turn to the facts of the present case.

What was assigned

226.  In the Sanction Letter, under “Special Conditions”, it was stated that the APGs should be legally assigned in favour of IOB and similarly the RBC L/C should also be legally assigned in favour of IOB[78].

227.  The terms were accepted by Seabulk.  By signing and returning a duplicate copy of the Sanction Letter, Seabulk had confirmed the correctness of the security held[79].

228.  As I have found earlier, the APGs were procured by ZPMC from BOC and not by IOB.  The APGs were issued to Seabulk as beneficiary.

229.  Recital A of the Assignment Agreements referred to the APGs “as contained in and/or evidenced by” SWIFT messages.

230.  In the SWIFT messages from BOC to IOB, the details of the APGs were “quoted” by BOC.  Two of the APGs, one of which was a performance guarantee, were issued on 18 September 2007 by BOC.  The 3^rd one was issued on 19 October 2007, and the 4^th one, about a year later, on 3^rd December 2008.  It was expressly stated that the APGs were subject to the URDG Publication 458, referring to the ICC’s Uniform Rules for Demand Guarantees, ICC Publication No 458 (“URDG 458”),

231.  As mentioned earlier, the Assignment Agreements were executed by the parties for the first two APGs on 5 November 2007, for the 3^rd one on 15 November 2007, and the 4^th one on 10 January 2009.

232.  As seen in those 30.10.07-05.11.07 Emails, the Assignment Agreements were referred to as “pro forma agreement” and would appear to have been obtained by IOB from its solicitors[80].  In any event, it was not disputed that the Assignment Agreements were sent by IOB to Seabulk for execution. 

233.  This, however, in my view, would not stop Ds to seek their own legal advice thereon.  In particular, in the letters dated 29 August 2007 sent by IOB to D2 and D3 respectively, D2 and D3 were expressly advised to seek independent legal advice before entering into their Personal Guarantees[81].

234.  In the Assignment Agreements, Seabulk assigned unconditionally and irrevocably absolutely the “Assigned Interest” to IOB.  The “Assigned Interest” was defined to be all the rights, remedies, liens, powers, title and interest whatsoever the Assignor has under the APGs against the BOC and/or ZPMC[82].

235.  Clause 3 of the Assignment Agreements also provided that the assignor “authorizes and allows the assignee to commence legal and/or arbitration proceedings in respect of the assigned interest … in the name of the assignor if necessary”[83].

236.  Article 4 of URDG 458 clearly states that the right to make a demand under the APGs is not assignable unless expressly stated in the APGs or in an amendment thereto.  

237.  Since there was no express statement in the APGs or any amendment in the APGs, at the time of the assignment, what Seabulk had under the APGs was a non-assignable right to make a demand.  Thus Seabulk did not have any assignable right to make a demand and “Assigned Interest” could not have included any right to make a demand.

238.  As seen later on, BOC’s position in the SH Proceedings was that the assignment under the Assignment Agreement was only of the proceeds under the APGs[84].

239.  In my view, the Assignment Agreements were not invalid but the right to make a demand was never assigned by Seabulk to IOB in the first place. 

The Decisions in the SH Proceedings

240.  As stated earlier, and as seen in the 25.05.10 Decisions of the Intermediate People’s Court for the grant of the Restraint Orders[85], it was stated therein that; (1) the demands made by Seabulk through IOB were said to be fraudulent (索款存在欺詐) and (2) the written demands were not given in accordance with the requirements stated on the APGs.

241.  The 22.05.12 Decisions were later handed down by the Intermediate People’s Court after a hearing on 8 February 2012 during which Seabulk was absent notwithstanding being summoned under the law. It was also stated that Seabulk did not put forth any opinion[86].  The Intermediate People’s Court had in the 22.05.12 set out certain factual findings based on the evidence before that Court including the following: -

(i)   On 1 January 2009, Seabulk notified ZPMC stating that if it was known that the Equipment would be delivered by 31 March 2009 it would leave very little time for commissioning and therefore, Seabulk had requested QSL to extend completion of the commissioning of the Equipment to 31 May 2009 to which  QSL had agreed although initially reluctant to do so, and  Seabulk indicated that it had managed to remove any damages for the Equipment[87]and requested ZPMC’s bank to extend the APGs according to the new date[88];

(ii)   On 18 April 2009, Seabulk notified ZPMC that the Equipment had arrived safely at the Port of Quebec[89];

(iii)   Between 11 May 2009 to 25 June 2009, Seabulk and ZPMC exchanged emails for the suspension of the work and compensation.  Seabulk had informed ZPMC that there was dispute between Seabulk and QSL, the effect of which was to delay or prevent the payment and asked ZPMC to suspend all the work on the quay until the dispute between Seabulk and QSL was resolved.  ZPMC later agreed to follow Seabulk’s instruction to withdraw its team but requested Seabulk to confirm in writing on a variety of issues. 

(iv)   It could be seen from the above emails that Seabulk replied to ZPMC with the express statement that (1) the ZPMC Contract had not been terminated and the provisions therein would still apply; (2) Seabulk would compensate ZPMC the expenses of repatriating ZPMC’s team back to China;(3) as for presentation of documents to Seabulk’s bank, Seabulk would accept the compliance certificate for the Equipment “in apparent good order” issued by Lloyd’s Register of Shipping (“Lloyd’s Certificate”) instead of certification by “Bureau Veritas” and Seabulk would negotiate with QSL to persuade the latter to accept the certificate at hand; (4) as soon as it was clear about the expected timeline for the resolution of the dispute with QSL, Seabulk would apply to IOB for extension of the letter of credit; (5) ZPMC’s delay in delivery of the Equipment and the Lloyd’s  Certificate as to the condition of the Equipment when being put into the railway was the cause to the dispute with QSL and Seabulk was dealing with the issues through arbitration, and Seabulk would need ZPMC’s full-range cooperation as per Seabulk’s request and that Seabulk was confident to win the arbitration[90].

(v)   On 12 October 2009, QSL sent an email to ZPMC confirming that the Equipment was being used by QSL and this was also confirmed by Seabulk the following day[91].

(vi)   On 29 December 2009, BOC informed IOB that the validity of the APGs would be extended to 7 May 2010[92].

242.  Then, the Intermediate People’s Court after summing up the arguments from both sides indicated there were two major disputed issues as follows:

(i)   Whether IOB was entitled to make the demand under the APGs;

(ii)   Whether IOB’s demand for payment under the APGs constituted an unfair demand.

243.  On (a) above, the Intermediate People’s Court explained that:

(i)   Article 4 of URDG 458 provides that a beneficiary’s right to make a demand under a guarantee is not assignable unless expressly stated in the guarantee in question (although this does not affect the beneficiary’s right to assign the proceeds of the guarantee);

(ii)   In accordance with Article 4, there are two specific categories of guarantee assignments, one is the assignment of all the rights under the guarantee and a “new beneficiary” emerges as a result of such assignment and the “new beneficiary” is entitled not only to directly make a demand for payment under the guarantee but also to the proceeds under the guarantee, and the other is the assignment of the proceeds under the guarantee, in the event of such assignment, the assignee is not the beneficiary of the guarantee, and has no right to directly make a demand for payment under the guarantee and only entitled to receive the proceeds under the guarantee in an indirect manner.

(iii)   Although there was no express statement in the APGs to dispute that the beneficiary’s right to make a demand was assignable, it was argued on behalf of IOB that the notifications sent to BOC showed that IOB had enclosed copies of the Assignment Agreements in writing to BOC and the Assignment Agreements referred to the assignment of all the rights under the APGs and BOC had responded to IOB and the adoption of the wording “in your bank’s favour” by BOC suggested that IOB was the new beneficiary.  However, ZPMC argued that under Article 4 the assignment of the beneficiary’s right must be “expressly stated” and BOC did not expressly state in its reply to IOB that IOB was to become the new beneficiary.

244.  The Intermediate People’s Court then held that in respect of (a) BOC had expressly confirmed via its reply to IOB that IOB had become the new beneficiary upon the assignment and be entitled to make a demand for payment under the APGs in that:

(i)   BOC must have been aware of the specific type of such assignment;

(ii)   Given the principles of good faith, safety, and efficiency of commercial transactions, had BOC disapproved of the assignments, to avoid the misunderstanding of the other parties to the transaction it would have opposed in in a timely fashion instead of electing to reply in a fairly ambiguous and controversial language to hide its attitude.[93]

245.  As for (b), the Intermediate People’s Court had referred to the Demand Letters in which IOB had referred to Seabulks’ written demand stating ZPMC’s various breaches.  The Court then noted that URDG 458 also provides that “whilst recognizing the needs of the beneficiary, the principal can expect on the grounds of equity and good faith to be informed in writing that, and in what respect, it is claimed he is in breach of his obligations; this should help to eliminate a certain level of abuse of guarantees through unfair demands by beneficiaries”, and “the interests of the beneficiary must be balanced against the need to protect the principal against an unfair claim on the guarantee”[94]

246.  The Intermediate People’s Court also pointed out that URDG 458 referred to a variety of different concepts, namely “fraudulent”, “the manifest abuse of” or “unfair calling of” guarantees[95].

247.  After analyzing the allegations of breaches based on those evidence before the Court, the Court held that it was likely that IOB the assignee and beneficiary of the APGs had very limited knowledge about the transactions under the ZPMC Contract and therefore the Court was unable to establish “fraud”.  The Court held that during the trial, from the evidence presented by ZPMC, particularly those emails which ZPMC exchanged with Seabulk, IOB should have realised that Seabulk’s allegation of ZPMC’s breach of contract was “barely substantiated”.  Under such circumstances, should IOB continue its demand, IOB would be in breach of the principle of good faith, and such demand was thus held by the Intermediate People’s Court to be “manifest abuse or unfair calling” of the APGs[96].  The Court thus found in favour of ZPMC on this issue.

248.  The Intermediate People’s Court ordered that BOC could cease payments to IOB under the APGs.

249.  Both ZPMC and IOB appealed.  On appeal, ZPMC and IOB both submitted further evidence.  ZPMC had produced a copy of Seabulk’s application in the Quebec Arbitration Proceedings downloaded from Seabulk’s website in which it was stated that Seabulk admitted that the date for delivery of Equipment was amended to 31 March 2009 and that the plan was to unload the Equipment as from 9 April 2009, to prove that what was stated in IOB’s Demand Letters under the APGs was untruthful.  This evidence was rejected by the Court as it was only one sided allegation by Seabulk and there was no confirmation. 

250.  IOB had produced 4 items of further evidence including (i) a reply from Seabulk to questions raised by IOB, (ii) a confirmation of a Canadian Court in confirming and enforcing the award of the Quebec Arbitration Proceedings to show that ZPMG was in breach of contract, and (iii) Seabulk’s application to commence the London Arbitration Proceedings against ZPMC on 3 December 2012.  The Court accepted the evidence in (i) that it was Seabulk which had agreed to the date of delivery being postponed to 31 March 2009 and also it was Seabulk which requested ZPMC to leave the work on the site as these were consistent with the evidence produced by ZPMC.  As for (ii) whether ZPMC was in breach of contract, the Court considered this would have to be judged from the facts and the relevant laws.  The Court declined to accept that the confirmation of the Canadian Court to enforce an award in the Quebec Arbitration Proceedings was proof that it was ZPMC’s breach of contract which led to the award, since there were no reasons for the award stated. The Court however accepted Seabulk’s application to commence the London Arbitration Proceedings in (iii) as new evidence[97].

251.  During the appeal, BOC’s position was that the Assignment Agreement was only the assignment of proceeds rather than the right to make the demand[98].

252.  After considering further evidence, the Higher People’s Court   in its 29.11.13 Decisions confirmed that the Intermediate People’s Court’s factual findings were correct[99].  Further, the Higher Peoples’ Court took into account the following:

(i)   IOB in its request to BOC for confirmation on the assignment had due to the misuse of the word “the applicant”, IOB had requested BOC to replace it with “Seabulk”, thus seeking a confirmation that IOB was to remit all money/s demanded by Seabulk directly and/or through IOB to IOB only;

(ii)   The message that BOC sent to IOB in December 2009 for extension of the validity of the APGs to 7 May 2010 stated that “Others remain unchanged. Please advise the beneficiary accordingly”;

(iii)   In December 2012, during the proceedings of second instance[100],Seabulk commenced the London Arbitration Proceedings against ZPMC.

253.  The Higher People’s Court then held that the APGs did not state expressly that the beneficiary’s right to make a demand under the APGs was assignable and the parties also failed to make any express amendment in this regard.  Although Seabulk and IOB executed the Assignment Agreements, BOC was not a party to these agreements, and therefore the Assignment Agreements could not constitute an amendment to the APGs. Further, it was held that from the SWIFT message BOC sent to IOB in (ii) above, by BOC requesting IOB to notify the beneficiary, it could be seen that BOC did not regard IOB as the new beneficiary; in other words the parties to the APGs had not come to an agreement on the assignment of the beneficiary’s right to make a demand.  In light of this, the Higher People’s Court could not conclude that the original beneficiary’s right to make a demand had been assigned to IOB, even though Seabulk’s right to assign any proceeds to which it might become entitled under the APGs should not be affected.

254.  Thus, it was held by the Higher People’s Court that IOB did not have the capacity to make a demand for payment under the APGs, and that in light of this, the Court held it was not necessary for the Court to deliberate on whether IOB’s demand for payment constituted fraud or unfair calling of the APGs and would not comment on this part[101].  IOB’s appeal was dismissed.

255.  IOB then petitioned to the Supreme People’s Court for a retrial.

256.  The Supreme People’s Court had referred to the following in its 29.09.14 Decisions:

(i)   Clause 3 of the Assignment Agreements in which Seabulk unconditionally and irrevocably authorized and allowed IOB to commence legal and/or arbitration proceedings in respect of the Assigned Interest wherever convenient and elected by the IOB against BOC and/or ZPMC in the name of Seabulk, and such provision indicated that it had been agreed by both parties that the assignee [IOB] would need to make the demand in the name of the assignor [that is, Seabulk] under certain specific circumstances.  In light of the foregoing, the provisions of Assignment Agreements were not sufficient for the Court to establish that Seabulk had entirely assigned the claiming right under the guarantee to IOB so as to make IOB the new beneficiary.

(ii)   Both parties used the wording ‘in one’s favour’ instead of ‘beneficiary’, the terminology used by URDG458, in the SWIFT messages exchanged between IOB and BOC.  Each party’s interpretation of ‘in one’s favour’ differed so much from that of the other that the Court could not establish that they had reached an agreement on theassignment of the claiming right from Seabulk to IOB who would thereby become the new beneficiary.

257.  The Supreme People’s Court went on to refer to various correspondence between P and BOC which confirmed the ambiguity between them as to who the beneficiary and proper claimant was.

258.  The Supreme People’s Court concluded that the finding of the Higher People’s Court that IOB was not the new beneficiary of APGs and had no right to make the demand for payment was well founded in fact and law and since IOB having acquired the right to make the demand in in its own name was a prerequisite for the court to continue to deliberate on whether IOB’s claim constituted a fraud in calling of the guarantee or an abuse of rights, it was not improper for the Higher People’s Court to find it unnecessary to make a decision on this issue.  The Court went on to say: “… This case derived from IOB making the demand towards BOC in its own name, which was different from Seabulk making the demand through IOB. Given that a claim cannot be made in the name of one own (sic) concurrently with the name of another, combined with IOB’s lack of capacity to make the demand, the submission that ‘the claiming notice was in compliance with the documentation requirements for demands in both situations’ does not stand”[102].

259.  IOB’s petition for retrial was dismissed.

What went wrong

260.  In light of the 29.09.14 Decisions of the Supreme People’s Court, Mr Parker submitted that IOB had adopted the wrong procedure and that it was not entitled to make the claim in its own name, and that the Supreme People’s Court had based its reasoning on two factors namely (1) the provisions of the Assignment Agreements; and (2) the bank-to- bank correspondence between P and BOC in which P had acted so as to make clear that Seabulk was to be treated as the party vested with the claiming right. 

261.  Mr Zhou of Jin Mou PRC Lawyers attended trial to give evidence for P.  Mr Zhou was involved in advising and assisting IOB in the SH Proceedings after the Restraint Orders.  According to Mr Zhou, on or about 14 June 2010 he made the application to the Intermediate People’s Court for reconsideration of the Restraint Order, and on or about 17 June 2010, the Presiding Judge advised that the Court’s review of the application would not proceed separately if ZPMC decided to commence a lawsuit seeking an order to cease the payments.  Thereafter, ZPMC lodged the 4 lawsuits.

262.  It was Mr Zhou’s evidence in his witness statement that although it was not in the reasoning of the 29.09.14 Decisions of the Supreme People’s Court, he was of the firm view that IOB’s petitions for retrial were refused without a hearing was attributed to the dismissal of the London Arbitration Proceedings commenced by Seabulk against ZPMC as the disputes arising from the APGs could not survive separately when the claim under the underlying contract, ie the ZPMC Contract, did not exist any more[103].

263.  During the trial, Mr Zhou explained that Seabulk had alleged ZPMC breached its obligations under the ZPMC Contract and this was the underlying reason for the demand under the APGs, but in the SH Proceedings, ZPMC had alleged that the claim under the APGs was a fraud, and after initiating the London Arbitration Proceedings, Seabulk then failed to pay the arbitration fees to proceed, which led to the dismissal of the London Arbitration Proceedings.  Mr Zhou was of the view that this would appear to the Supreme People’s Court that Seabulk had no grounds in alleging breach of the ZPMC Contract and it was this which led to the decision of the Supreme People’s Court. 

264.  Mr Zhou however accepted that what he said above was not the reason given by the Supreme People’s Court but maintained this was his view.

265.  It was Ds’ case that Mr Zhou had suggested to D3 that Seabulk should commence arbitration proceedings in London against ZPMC. Mr Zhou denied he had made any suggestions to D3 but confirmed that D3 came to meet him at his office after the 22.05.12 Decisions and Mr Zhou had asked D3 how the dispute between Seabulk and ZPMC was resolved.  Mr Zhou said he did not make any suggestions as to how it should be resolved, but he however agreed that when discussing the case with IOB’s lawyers in Hong Kong, he did mention that as Seabulk initiated the claim under the APGs by alleging breach, Seabulk should make its own arrangements to resolve its dispute with ZPMC, and as there was an arbitration clause in the ZPMC Agreement, it would therefore be logical for Seabulk to consider arbitration, and that he was of the view that Seabulk should consider this at that time.  Mr Zhou further explained that he thought it strange that Seabulk did not take any steps against ZPMC since it was Seabulk which had alleged breach against ZPMC.

266.  Mr Zhou had also said in his witness statement that Seabulk did not accept service of the Shanghai Court documents at the first instance proceedings and refused to answer/reply to the claims by ZPMC, and that the Intermediate People’s Court had to carry out the service process on Seabulk through diplomatic channel and that it eventually took more than one year for service to be confirmed[104].  Furthermore, the Intermediate People’s Court convened hearings for the cases on about 17 January and 8 February 2012 but Seabulk did not authorize its lawyers to appear to argue the cases and the hearings proceeded in default of Seabulk.

267.  Mr Zhou was asked about an unsigned power of attorney dated 9 June 2010 whereby D3 was stated to appoint Mr Zhou as attorney in the SH Proceedings[105]. This was only produced by Ds during the trial.  Mr Zhou denied ever seeing this document and maintained Jin Mou Law Firm never represented Ds.  It was never pleaded in the AD&C that D3 had given a signed power of attorney to Mr Zhou.  When asked, Mr Choudhary also confirmed that he had not seen any signed copy among the bank documents.  I find there was no sufficient evidence that D3 had ever signed that power of attorney or provided the same to Mr Zhou.

268.  Mr Zhou further pointed out in 22.05.12 Decisions, in fact, the Intermediate People’s Court adopted IOB’s arguments on the assignment of the APGs and that BOC had expressly confirmed and consented to IOB being the new beneficiary, but nevertheless the Intermediate People’s Court found that, in default of Seabulk’s defence, that ZPMC had not breached the contract in such way as alleged by Seabulk in its notification.

269.  Later, on about 18 January and 23 April 2013, the Higher People’s Court convened hearings for the appeals.  According to Mr Zhou, although IOB had made an application for D3 to appear as witness, D3 failed to appear, and further Seabulk also elected not to appear, which Mr Zhou understood to be due to concerns over jurisdiction, and further Mr Zhou said that D3 did not wish the Mainland Courts to determine on the merits of the cases, claiming that was the subject matter of the arbitration proceedings against ZPMC.

270.  Mr Parker submitted that:

(i)   In relation to IOB’s suggestion that Seabulk could itself have espoused a claim under the APGs at its own option, the decision to make a claim against BOC and how it should be made and its timing was entirely a matter for IOB;

(ii)   In relation to IOB’s claim that it was Ds’ fault that IOB only made the claim against BOC just before the expiration of the APGs on 7 May 2010, this was plainly wrong as IOB knew perfectly well in December 2008 that it had a right of claim under that APGs but IOB waited 15 months before making any decision to claim;

(iii)   In relation to the confusion surrounding the documents emailed back and forth after the claim had already been made to BOC, D3 had accepted that there were errors on Ds’ end, but very swiftly corrected.

271.  So far as (ii) above was concerned, Mr Parker pointed out that the required delivery date under the ZPMC Contract was 20 November 2008 to 20 December 2008 and thus by 21 December 2008 IOB had a right of claim under the APGs and that the basis was late delivery and that IOB was aware of it.

272.  It was however expressly stated in the APGs that BOC undertook to pay “Upon receipt by us of your duly signed demand for payment in writing stating that the principal is in breach of his obligation(s) under the underlying contract and the respect in which the principal is in breach” (“emphasis added”). 

273.  In my view, IOB could not have known whether ZPMC was in breach of its obligations and the respect in which the breach was of until and unless IOB received notification and information of the same from Seabulk.

274.  Further Mr Parker argued that not only IOB was already aware of late delivery in December 2008, it had also refused the final payment to ZPMC of CAD 2,300,000, as seen in a SWIFT message sent by IOB to BOC on 1 June 2009[106].

275.  What was said in the above SWIFT message from IOB to BOC was that IOB refused the documents due to the discrepancies found therein, including (i) late shipment; (ii) invoice showing description or advance payment not as per L/C; (iii) bill of lading not showing various information; and (iv) certificate dully issued by Bureau Veritas not submitted.  IOB had said that it had conveyed the discrepancies to Seabulk, and should the discrepancies be subsequently accepted, documents would be released by IOB to Seabulk against its acceptance without further reference to BOC.

276.  It was clear from above that IOB was going to revert to Seabulk in relation to the discreparies in the documents.  “Late shipment” would not necessarily mean that ZPMC was in breach of its obligations under the ZPMC Contract.

277.  Clause 7.1 of the ZPMC Contract stated that the contract was to come into full force only upon the performance of terms set out thereunder, including the receipt by ZPMC of “Payment 1” under Clause 3.1.1 and also the receipt by ZPMC of the letter of credit in its favour issued by Seabulk.  Further, Clause 7.2 stated that the conditions described in clause 7.1 were integral and all subsequent dates and times described in the contract, including delivery time was to commence on and be counted from the latest date upon which one or more of these conditions was performed[107]. 

278.  “Payment 1” of CAD 2.3m in Clause 3.1.1 was not paid until  9 November 2007[108], although in the London Arbitration Proceedings, ZPMC claimed it was 12 November 2007[109]. “Payment 2” under Clause 3.1.2 of CAD 3.45m was only made on 26 November 2007[110].  The letter of credit issued by IOB (CN 28094/S) said to be for payment of full invoice value appeared to be for in the amount of CAD 5.75m only, and was issued in favour of ZPMC only on 25 January 2008 (“IOB L/C”)[111].

279.  Payment 3 under Clause 3.1.3 of CA D2.3m was made by IOB to ZPMC on 20 January 2009[112].  This would be after the shipping of the Equipment.

280.  It was not disputed that IOB was aware of the late shipment by end of December 2008.  There had clearly been further discussions between Seabulk and IOB since as seen earlier on 7 January 2009, IOB issued a letter of modification to the Sanction Letter for the Facility to be renewed for a further period of one year.  

281.  Further, it would appear that on about 22 January 2009, Seabulk had sent an email to IOB to seek extension of the IOB L/C and this was agreed by IOB, and on 6 March 2009, the expiry date of the IOB L/C was extended from 15 March 2009 to 30 June 2009[113].  The IOB L/C was thereafter on 29 June 2009 further extended to 31 December 2009[114]. Thus, Seabulk was continuously seeking indulgences from IOB and were granted the same.

282.  Anyway, from the above timeline of actual payments and the date of first issue of the IOB L/C, it would appear that notwithstanding that the terms of the Sanction Letter was accepted by Seabulk around 31 August 2007, the Facility did not become available until about early November 2007. 

283.  Under Clause 6.1.2, the ZPMC Contract should not come into full force as described in Clause 7.1 later than 30 days from 25 May 2007.  In light of the delay of Payment 1 by IOB, and the issue of the IOB L/C, it was not clear when the ZPMC Contract came into full force under Clause 7.1.

284.  According to ZPMC, the Equipment was eventually shipped from Shanghai on 15 January 2009 and the Equipment arrived in Quebec on 16 April 2009 berthing on 18 April 2009[115].

285.  Further, notwithstanding the “late shipment”, it would appear from those correspondence between ZPMC and Seabulk referred to by the Intermediate People’s Court in the 22.05.12 Decisions that Seabulk had agreed to the late delivery and had requested QSL to extend completion of commissioning until 31 May 2009, and that QSL had agreed, and Seabulk had further reported to ZPMC that they had managed to remove any liquidated damages for the Equipment, and further asked ZPMC to ask BOC to extend the APGs according to the new schedules.

286.  Thus, although IOB was aware of the late shipment by ZPMC, this would not necessarily mean that ZPMC was the one in breach of its obligations since the payment to ZPMC were late, or IOB should make a demand under that APGs in December 2008 or in June 2009, as seemed to be suggested by Mr Parker.

287.  ZPMC had all along denied it was in breach of its obligations under the ZPMC Contract and this was why ZPMC alleged in the SH Proceedings that the Demand Letters were fraudulent.

288.  In fact, on 4 June 2010, Seabulk had sent a letter to ZPMC (“04.06.10 Letter”)[116].  Seabulk had referred in this letter to its own delay in paying the advance payment or Payment 1, but had said that notwithstanding its delay in making the payment, the parties had continued with the design work for the Equipment as planned in the ZPMC Contract, and ZPMC had not sought an extension of time, nor was Seabulk asked to amend the IOB L/C to reflect a delayed delivery.

289.  Seabulk had set out a chronology of events under “Contract Implementation” in the 04.06.10 Letter.  In the summary of the letter, Seabulk had stated that it was clear that ZPMC was delinquent in not seeking an extension of time/costs, when the drawing review was not completed in 120 days and in view of this, ZPMC agreed to support Seabulk in its dispute with QSL.  Seabulk then further set out its position in relation to IOB’s claims under the APGs, stating that IOB had retained a right to seek recourse if the terms of the IOB L/C had not been fulfilled.

290.  The 04.06.10 Letter was sent about one month after IOB sent the Demand Letters.  Yet, Seabulk was vague in relation to ZPMC’s breaches.  In fact, Seabulk did not set out clearly its own position nor details of its allegations against ZPMC in relation to those specific breaches mentioned by Seabulk in its letter of 30 April 2010 it sent to IOB, and instead referred to terms of the IOB L/C not being fulfilled.

291.  As seen in the 22.05.12 Decisions, and the 29.11.13 Decisions, both the Intermediate People’s Court and the Higher People’s Court found that the evidence indicated that Seabulk had accepted the delivery deadline of the Equipment by ZPMC to be extended to 31 March 2009.  In any event, it was not disputed that the Equipment had arrived at the Port of Quebec by 18 April 2009 and fully placed on the rails on 25 April 2009.  

292.  As seen in the Interim Award in the Quebec Arbitration Proceedings made on 29 November 2010[117], Seabulk had left the site in May 2009 with ZPMC, and QSL had taken possession of the System on 12 May 2009 and provided startup and began to operate the System.  As found by the Quebec Arbitration Tribunal, the System was on track and also used by QSL since 15 August 2009.  Further, the Lloyd’s Certificate as to the condition of the Equipment when placed on the rails indicated the System was delivered with “no apparent damage”.  The Lloyd’s Certificate was issued on 1 May 2009[118].  The Tribunal made an interim award of CAD 3,666,355.96 to be paid by QSL in the manner stated therein.

293.  It can further be seen in ZPMC’s “Response and Counterclaim” in the London Arbitration Proceedings, ZPMC had alleged that Seabulk’s difficulties in relation to the Project had nothing to do with any breaches of contract of ZPMC but due to, amongst other things[119]:

(i)   Seabulk had no working capital to finance the Project and had failed to take sufficient steps to understand the port infrastructure prior to entering into the ZPMC Contract with ZPMC;

(ii)   Seabulk had allowed QSL to vary the specification of the terminal works and passed those variations to ZPMC after execution of the ZPMC Contract;

(iii)   The variations, changes and/or delayed information caused the delay in the works.

294.  ZPMC further alleged that delivery was not late because Seabulk was late in making the Payment 1 and in providing  the IOB L/C.

295.  Thus, whether ZPMC was in breach of its obligations under the ZPMC Contract was very much disputed.

296.  In any event, there was no sufficient evidence that IOB was kept abreast of what was going on under the ZPMC Contract and/or the Quebec Contract by Seabulk.

297.  According to the letter dated 30 April 2010 sent by Seabulk to IOB, IOB was notified that ZPMC was in breach by virtue of, amongst other things, their failure to design manufacture, supply deliver and/or sell the Equipment to Seabulk as per the ZPMC Contract and in particular the relevant test of the Equipment was not completed/successful[120].  This was accordingly what was stated in the Demand Letters to BOC[121].  These allegations had to be seen in the context of what actually happened at the time, in particular when Seabulk had accepted the late delivery and also the Lloyd’s Certificate was about to be issued.

298.  As said earlier, it was ZPMC’s allegation that the demands under the APGs made by IOB were fraudulent and the Intermediate People’s Court had found that there was “unfair calling” of the APGs, which appeared to be one of the reasons for refusing payment.  The factual findings upon which the Intermediate Court made its finding were confirmed by the Higher People’s Court, and never overturned by either the Higher People’s Court or the Supreme People’s Court.  All the Higher People’s Court said was that it was not necessary to consider whether there was fraud/ unfair calling in light of its decision on IOB’s right to make a demand, and the Supreme Court agreed.

299.  Also, according to Mr Choudhary, although IOB was first informed by Seabulk that the installation and commissioning of the Equipment had been delayed, IOB was told by Seabulk that this would be completed by June 2009.  As seen in a letter dated 13 August 2009 sent by IOB[122] to D2/Seabulk, and copied to D3 and Mr S, IOB was informed by Ds in April 2009 that the formal inauguration of the Equipment was scheduled in the first week of June 2009 before which time the RBC L/C  should have been submitted for settlement, and yet after 3 months, Ds had not submitted the export documents even for the first drawdown under the RBC L/C.  Then, as mentioned earlier, according to IOB, it was later informed by Seabulk that the commissioning of the Equipment was postponed to September 2009 and later again to December 2009.  

300.  In any event, the evidence indicated that Seabulk had been less than forthcoming with IOB.  Even on 12 April 2010, D3 had sent an email to Mr Chockalingam stating that Ds were confident that the IOB loans would be settled before end of the month[123].

301.  It was not clear when or whether IOB was aware of the default notice being served by QSL on about 26 April 2009 and the default notice served by Seabulk in May 2009 against QSL for non payment.  Anyway, what Ds said to IOB in Ds’ 11.05.10 Email was that they were still trying to seek a new letter of credit from RBC which they would “promptly assign” to IOB.

302.  As seen in the email dated 18 May 2010 sent by IOB to Ds, IOB was complaining that Seabulk had not been transparent in the past to keep IOB informed about the development and the Quebec Arbitration Proceedings.  IOB only came to know about what was happening and QSL’s offers in relation to the new letter of credit from QSL’s Quebec Lawyers on 17 May 2010, and IOB then sought complete details about the Project from Seabulk[124].

303.  A brief report on the status of dispute appeared to be only sent to IOB by Seabulk on 10 August 2010 (“Brief Report”)[125].

304.  There was no sufficient evidence that IOB was aware of the details of the matters stated therein prior to IOB issuing the Demand Letters. The Brief Report was brief and vague.  By way of example, Seabulk did not mention when QSL served its default notice, or when Seabulk suspended work on the site, or when exactly Seabulk and ZPMC left the site, or when the Lloyd’s Certification was obtained, or that the Quebec Arbitration Proceedings were filed in September 2009 on behalf of ZPMC, which was set out in the 04.06.10 Letter. 

305.  Mr Parker had referred to an email from D3 to Mr Chockalingam dated 16 May 2012, in which D3 mentioned that  Seabulk and ZPMC withdrew from the site in Quebec by May 2009[126]and that the System was already in operation at the Port of Quebec in 2009.   The above email was however sent to IOB only in May 2012.

306.  There was no sufficient evidence that IOB was aware that Seabulk and ZPMC had withdrawn from the site in May 2009 or the reasons thereof or were aware of the details of the Quebec Arbitration Proceedings prior to IOB sending out the Demand Letters. 

307.  Further, there was no sufficient evidence that IOB was aware of all those matters gleaned from the emails between Seabulk and ZPMC as mentioned by the Intermediate People’s Court in the 22.05.12 Decisions prior to IOB sending out the Demand Letters. 

308.  On 23 April 2010, IOB sent a letter to Seabulk stating that Seabulk had informed the bank of multiple delays and setting a deadline of 29 April 2010 for Seabulk to provide a letter to IOB for invoking the APGs, failing which IOB would initiate appropriate action for recovery of dues including invoking the APGs[127].

309.  It was only in response of the above letter that Seabulk eventually sent a letter of notification on 30 April 2010 to IOB alleging  that ZPMC was in breach of its obligations[128].

310.  Having considered the above, I find the evidence did indicate that there was a lack of transparency of Ds with IOB, and that for reasons of their own, Ds did not notify IOB alleging ZPMC’s breach of its obligations under the ZPMC Contract and the particulars of the breach, until almost the eleventh hour, namely 7 days prior to the expiry of the APGs.  30 April 2010 was in fact a Friday, and just before the 1 May Labour Day weekend.  There was also a time difference between Vancouver and Hong Kong.

311.  It was not until 3 May 2010 that IOB was able to send the Demand Letters to BOC.  On 4 May 2010, IOB had in fact asked Seabulk to send letters of demand to BOC as “original beneficiary “under the APGs as per drafts prepared by IOB and dated 30 April 2010 on Seabulk’s letter head[129].  On 5 May 2010, 9:12 am, Seabulk emailed IOB stating that the 4 letters had been sent out by courier[130] (“1^st Set of Letters”).  However, Seabulk had changed the dates on the 1^st Set of Letters to 4 May 2010, and further the letters contained errors regarding the respective amounts[131].  When IOB found out, it sent another email enclosing new drafts and asked Seabulk not to change anything and to re-sign.  This set of letters were sent out by Seabulk to IOB on 6 May 2010 (“2^nd Set of Letters”)[132].

312.  The APGs expired on 7 May 2010.  The 2^nd Set of Letters arrived in Hong Kong only on 8 May 2010.  

313.  The errors in the 1^st Set of Letters were accepted by Ds to have been made by them.  Ds claimed that they were swiftly corrected.  Mr Parker submitted that P never pleaded any claim based on the errors, and further it was plain that P believed it had already submitted a proper valid claim under the APGs and only wanted those letters from Ds in case BOC demanded such letters, but BOC never in fact demanded those letters.

314.  There was no sufficient evidence that had the 2^nd Set of Letters been sent to BOC prior to the expiry date of the APG, that they would have an effect in the SH Proceeding.  However, as I said, IOB was only able to send the Demand Letters to BOC almost at the eleventh hour.  There was no reply from BOC until 10 May 2010 which stated that there were no valid claiming documents required under the APGs as there were no written demands for payment made by the beneficiary Seabulk[133].  By then, it was already after the expiry of the APGs.  It was too late to send the 2^nd Set of Letters.

315.  Having considered all the evidence, I find the lateness in IOB in making a demand under the APGs was caused entirely by Ds. 

316.  Mr Choudhary had given evidence that no real assistance was ever provided by Ds to enable IOB to secure payment under the APGs and that Seabulk never agreed to be involved in the SH Proceedings and refused to be legally represented.  It was suggested to him during cross examination that what he said was incorrect and that Ds had provided enormous assistance to IOB in the SH Proceedings, he did not agree and said it was the other way round. 

317.  Mr Choudhary would not have any personal knowledge of any matters prior to his joining IOB in August 2013.  However, Mr Choudhary had said his evidence was based on the bank’s documents and files which he had gone through prior to the trial.

318.  As mentioned earlier in D3’s 18.06.10 Email, D3 was of the view that as no court proceedings had been served on Seabulk, therefore they had not acted on suggestions from IOB’s lawyers in Hong Kong, and further stated that ZPMC had agreed to file an affidavit supporting Seabulk’s claim at the arbitration scheduled for 10 August 2010 (presumably referring to the Quebec Arbitration with QSL).

319.  The above email and also the 04.06.10 letter indicated that Seabulk was seeking assistance from ZPMC in the Quebec Arbitration Proceedings.  This was also seen from those correspondence between Seabulk and ZPMC referred to by the Intermediate People’s Court in the 22.05.12 Decisions.  Seabulk was fully aware of the Restraint Orders and the law suits and yet that it took the Intermediate People’s Court considerable time to legally effect service on Seabulk.  This had caused much delay of those proceedings before the Intermediate People’s Court.  The 18.06.10 Email was consistent with Mr Zhou’s evidence that Seabulk was unwilling to participate in the SH Proceedings.  It was also consistent with IOB’s case and Mr Choudhary’s evidence that Seabulk was not providing assistance to IOB in the SH Proceedings at that time.

320.  Further, when BOC informed IOB that the demands for payment did not constitute “valid claiming documents”, D3’s 11.05.10 Email indicated that he had been speaking with ZPMC and that ZPMC contended that since the Equipment had been delivered and was in commercial use, they could not instruct BOC to release payments against the APGs.  D3 told IOB that Seabulk was expecting the response from BOC (referring to BOC’s 10.05.10 SWIFT message) and as mentioned earlier, indicated that Seabulk was seeking a new letter of credit from RBC and offering a new security to IOB.

321.  It would appear from the emails thereafter from September 2010 to October 2011, D3 was requesting IOB to permit Seabulk to complete the process of the Quebec Arbitration Proceedings indicating that the balance of an award from the Arbitration Tribunal in Quebec would be used to repay the loan to IOB.

322.  Eventually, it would appear that it was only on 24 December 2011, D3 had sent an email to IOB’s solicitors indicating that Seabulk had by then completed the Quebec Arbitration Proceedings and agreed to assist IOB at the hearings in the SH Proceedings in February 2012[134].

323.  Then there followed a series of emails between D3 and IOB from 6 – 16 January 2012[135].  To summarise, D3 had indicated that Seabulk would attend the hearings and had sent a “statement of defence” to IOB, and further Seabulk agreed to instruct their own lawyer a Mr Shenmin Yan of Rolmax Law Office.  It would appear that Mr Yan had also contacted IOB’s lawyer Mr Zhou for documents in the SH Proceedings.

324.  It was not clear what happened afterwards, but it can be seen from the 22.05.12 Decisions, Seabulk was absent.  D3 did not attend the hearings before the Intermediate People’s Court, nor did their lawyer Mr Yan.

325.  On 16 May 2012, D3 had sent an email to Mr Chockalingam of IOB, an email indicating that Seabulk was expecting a judgment from the Quebec Arbitration Tribunal and then set out the events which Seabulk regarded had frustrated IOB’s ability to collect the loans paid to ZPMC and was seeking IOB’s acceptance to a proposed settlement terms[136].

326.  Thereafter, the 22.05.12 Decisions were handed down from the Intermediate People’s Court and on 24 May 2012, the Final Award of the Quebec Arbitration Tribunal was received by Seabulk.

327.  It would appear that D3 then contacted Seabulk’s lawyer Mr Yan again on 15 June 2012 and stated they did not wish to be a co-defendant but would like to assist IOB, if required, and asked him to find out from IOB’s lawyer as to whether Seabulk’s help was sought.  Ds only produced this email during the trial, but again thereafter, it was not clear what was done by Mr Yan and there was no sufficient evidence that he was formally instructed by Seabulk.  What was clear was that there was no participation and no assistance from Seabulk as seen from the email below.

328.  On 17 July 2012, Mr Chockalingam sent an email to Ds that IOB was informed that since Seabulk was not participating in the SH Proceedings, the legal documents had to be delivered to Seabulk through proper channels and this would take up a lot of time, and it was suggested that Seabulk could authorize someone in Mainland China to receive legal documents.  In the email, it was further stated that in relation to ZPMC’s allegations on facts, the Court had ruled against Seabulk on various issues concerning the performance of the underlying contract, and IOB was not in a position to defend Seabulk.  Mr Chockalingam sought a notarized affirmation from Seabulk and enclosed a questionnaire for Seabulk to review and answer, on which the affirmation could be based[137].

329.  It was not until 18 September 2012 that Seabulk replied and the notarized affirmation from D3 on behalf of Seabulk was not sent to IOB until October 2012[138].

330.  It was quite clear that Seabulk failed to participate in those proceedings before the Intermediate People’s Court notwithstanding agreeing with IOB that they would do so, and in fact had caused considerable delay by their non participation. 

331.  Further, as seen in the 22.05.12 Decisions, there being no participation from Seabulk, the Intermediate People’s Court had made factual findings against Seabulk based on the evidence produced by ZPMC and further concluded that the IOB’s claims under the APGs constituted “unfair calling”.

332.  I find that Ds were unwilling and/or failed to assist IOB in the SH Proceedings until after the Final Award in the Quebuc Arbitration Proceedings and even after that, there was much delay on D’s part in both sending back the notarised affirmation and in commencing the London Arbitration Proceedings against ZPMC.

333.  As regards whether Seabulk could itself have espoused a claim under the APGs at its own option, it was Mr Parker’s submission that once P became the beneficial owner of all rights, title and interest in the APGs, it was legally not open to Seabulk to purport to exercise any right of invocation at its own pleasure.

334.  As pointed out by the Supreme People’s Court in its 29.09.14 Decisions, under Clause 3, the “Assignor” had unconditionally and irrevocably authorized and allowed the “Assignee” to commence legal and/or arbitration proceedings in the name of “Assignor”, if necessary and that in the opinion of the Supreme People’s Court, this provision indicated that the parties had agreed, if necessary, IOB could commence proceedings in the name of Seabulk.

335.  Thus, there was nothing in the Assignment Agreements to restrict Seabulk in making its own demand.  Indeed, based on Ds’ own case, the alleged breach of ZPMC would be known to Ds in December 2008.  As I have said earlier, even though the Assignment Agreements were obtained and sent by IOB to Seabulk, there was nothing to stop Ds from seeking their own legal advice.  There were no provisions in the Assignment Agreements to indicate that P/IOB had the sole right to make a demand after the assignment, or that Seabulk was prevented from making a demand or a claim in its own name.  

336.  Mr Parker referred to the submissions made by Mr Zhou to the Intermediate People’s Court on behalf of P on 8 February 2012[139].  In those submissions, Mr Zhou had referred to a “Reply Letter” issued by China Chamber of International Commerce to ZPMC which was produced by ZPMC as evidence to the Intermediate People’s Court, and a “Discussion Letter” sent in response by IOB and Mr Parker submitted that from the “Discussion Letter”, Mr Zhou was of the view that after the Assignment Agreements, only P could make a claim.

337.  In February 2012, P’s lawyers were making submissions on behalf of IOB to the Intermediate Peoples’ Court, and in fact the Intermediate People’s Court had accepted P’s lawyer’s then argument that P had become the “new beneficiary” and was entitled to make the demands under the APGs.

338.  Mr Parker further referred to the above submissions or “opinion” presented by Mr Zhou to the Intermediate People’s Court in which Mr Zhou had said that the entire issue of the correct party to claim turned on the SWIFT messages between IOB and BOC.  Mr Parker submitted Ds had nothing to do with such correspondence and were not a party to it and that P should therefore be squarely responsible for this[140].

339.  Again, as I have said earlier, these were submissions and arguments made by Mr Zhou at the time of the SH Proceedings before the Intermediate People’s Court, which in fact decided in favour of P on the issue as to whether P had the right to make a demand.

340.  As seen in the 29.11.13 Decisions, and mentioned earlier, the main reasons Higher People’s Court dismissed P’s appeal were that (1) there were no express provisions or amendments in the APGs, the right of the beneficiary to make a demand could not be assigned, and although the Assignment Agreements were signed between IOB and Seabulk, BOC was not a party to those agreements and therefore the Assignment Agreements could not be regarded to be amendments of the provisions of URDG 458; (2) the subsequent correspondence between IOB and BOC indicated that BOC did not regard IOB as the “new beneficiary”.

341.  In dismissing P’s petition for re-trial, the Supreme People’s Court had in particular referred to the provisions of the Assignment Agreements.  As for the bank-to-bank communications, the Court said “each party’s interpretation of “in one’s favour” differed so much from that of the other that the Court could not establish that they had reached an agreement on the assignment of the claiming right from Seabulk to IOB and therefore the Higher People’s Court’s finding that IOB was not the beneficiary of the APGs and did not have the right to make the demand for payment was well founded in fact and law.

342.  It would thus appear from above that the Higher People’s Court and the Supreme People’s Court had overturned the finding of the Intermediate People’s Court that BOC had expressly accepted and confirmed that IOB had become the “new beneficiary” based on the various bank-to bank correspondence.  Hence, in my view, the bank-to-bank correspondence was really in relation to the issue as to whether BOC had confirmed and accepted IOB being the new beneficiary with the right to claim thereby creating a “new agreement”, namely an express statement or amendment to the terms of the APGs, and the Supreme Peoples’ Court had concluded there was no such new agreement between IOB and BOC from their communications. 

343.  It was Ds who offered the APGs to IOB as security and the APGs were expressly stated to be governed by the provisions of URDG 458.  The Assignment Agreements were signed by both IOB and Seabulk.  As I said earlier, the right to make a demand was however never assigned by Seabulk to IOB in the first place.  Although IOB had acted under the belief that it had the right to make the demand, this did not mean that if IOB did have the right to make a demand or had Seabulk been the one who made a demand in time, BOC would have paid under the APGs. 

344.  As seen under Article 10 of URDG 458, a “Guarantor” has a reasonable time to examine a demand and to decide whether to pay or to refuse the demand, and as seen in the “Foreword” of URDG 458, the new rules were said to “preserve the goal of the original rules to balance the interests of the different parties and to curb abuse in the calling of guarantees”.  The Intermediate People’s Court had also referred to the provisions of URDG 458 in relation to “abuse” and “unfair calling”.  

345.  As seen in both the decisions of the Intermediate People’s Court and the Higher People’s Court, there were two issues, (i) whether IOB had the right to make demand under the APGs, and (ii) whether IOB’s demand for payment constituted an “unfair calling”.  The Intermediate People’s Court’s finding that IOB’s demand for payment constituted an “unfair calling” was never overturned, only that the Higher People’s Court did not find it necessary to consider this second issue, and the Supreme People’s Court agreed.  As I have said earlier, the Higher People’s Court had in fact confirmed the factual findings of the Intermediate People’s Court, upon which the Intermediate People’s Court’s conclusion of “unfair calling” was based.

346.  Thus, even if P was held to be entitled to make the claim/demand under the APGs, whether P could succeed in obtaining payment would still have to depend on the second issue.  Further, the Intermediate People’s Court finding that “fraud” was not established only because IOB had very limited knowledge about the transactions under the ZPMC Contract and, the Court was of the view that the alleged breaches by ZPMC were “barely substantiated” and that was why it concluded that there was “manifest abuse” or “unfair calling” of the APGs. 

347.  Having considered all the above, I have come to the view that the APGs were neither surrendered nor lost nor imperfected nor altered in condition by reason of IOB’s acts.  IOB had acted expeditiously as soon as it was notified by Seabulk of ZPMC’s breach almost at the eleventh hour.  IOB had taken the precaution by asking Seabulk to sign demand letters prepared by IOB.  The errors in the 1^st Set of Letters were caused solely by Seabulk.  Seabulk could itself have made a demand but did not.  Seabulk did not participate in the SH Proceedings and failed to render assistance expeditiously.  In my view, IOB had done no act injurious to any of Ds or inconsistent with their respective rights nor failed to perform any act which it was under a duty to do.

348.  Further, the 30.10.07 – 05.11.07 Emails showed Ds were informed of and acquiesced in the way the Assignment Agreements were handled.  Ds also were kept informed of the SH Proceedings.

349.  There was no protestation by Ds throughout the SH Proceedings that P had mishandled the APGs. 

350.  Mr Parker said it was not P’s pleaded case Ds had acquiesced and/or consented to P’s actions in relation to the handling of the security.  However, the documents speak for themselves.  The Demand Letters were counter signed by D3 on behalf of Seabulk as the original beneficiary certifying the Assignment Agreements were valid and P was entitled to claim.  Mr Parker had submitted that P chose not to call Mr Chockalingam, the author of many of the emails.  However, it was never Ds’ case that the emails were not sent or not received, nor did Ds question the authenticity of the emails or any of the documentary evidence.

351.  Having considered all the above, I have come to the conclusion that P was not in breach of any of the alleged duties to Ds as pleaded, and I see no reason why equity should intervene to protect any of Ds.

P’s claim for costs of the SH Proceedings

352.  P claimed it was entitled to be indemnified for the costs of the failed SH Proceedings.  The basis of P’s claim was (1) under Clause 1 of the Personal Guarantees; and (2) it was an implied term of the Assignment Agreements that Seabulk warranted each of the APGs to be valid and enforceable and agreed to indemnify/reimburse P for all legal costs incurred to enforce the same.

353.  Mr Parker submitted that P had not pursued its case on implied terms and was attempting to run an argument based on unpleaded and time-barred contractual claims, and P’s claim to the costs of the SH Proceedings must fail in any event.

354.  In my view, P had however pleaded amongst other things, Clause 9 of the Personal Guarantees and Clause 13.10 of the GSA, and also Clauses 2 and 3 of the Assignment Agreement in the amended Statement of Claims and/or the reply to defence and counterclaim, upon which P relied.  Having considered those provisions, I am of the view that P is entitled to be indemnified in respect of the costs of all the SH Proceedings.

Conclusion 

355.  Having regard to all the above, Ds’ defence and counterclaim must fail.

Order

356.  I give judgment to the plaintiff for the amounts as claimed.  I further declare that P is entitled to be indemnified by Ds jointly and severally in respect of all legal costs incurred as a result of the SH Proceedings.  D’s defence and counterclaim is hereby dismissed. 

357.  P’s costs shall be paid by Ds jointly and severally. This is an order nisi which shall be made final after 21 days.