ZHUHAI INTERNATIONAL CONTAINER TERMINALS (JIUZHOU) LTD v. LO TONG HOI AND ANOTHER

CACV 181 /2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 181 OF 2011

(ON APPEAL FROM HCA NO. 932 OF 2009)

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BETWEEN

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J U D G M E N T

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Hon Cheung JA:

1.  I agree with the judgment of Kwan JA.

Hon Yuen JA:

2.  I agree with the judgment of Kwan JA.

Hon Kwan JA:

3.  This is the appeal of the plaintiff, Zhuhai International Container Terminals (Jiuzhou) Limited, against the judgment of Deputy Judge Cheng, SC. The judge dismissed the plaintiff’s claim against the 1^st defendant, Lo Tong Hoi. The appeal turns on the construction of a personal guarantee dated 1 January 2000 executed by the 1^st defendant in favour of the plaintiff (“the 2000 Personal Guarantee”).

Background

4.  The relevant background matters, taken largely from the judgment below, may be stated as follows.

5.  The plaintiff has been carrying on business as service providers in connection with providing its terminal facilities for cargo loading and unloading at Zhuhai. Since 1993, Wide Tech Shipping Limited (“Wide Tech”), which provided container feeder services by operating barges between Hong Kong and the Pearl River delta, had entered into business relations with the plaintiff in that Wide Tech used the plaintiff’s port services and facilities at the charges agreed. The 1^st and 2^nd defendants were shareholders and directors of Wide Tech at various times. Wide Tech went into liquidation in 2009. After taking into account the sums recovered under the bank guarantee issued in the plaintiff’s favour and the plaintiff’s settlement with the 2^nd defendant who had also executed a personal guarantee to the plaintiff on 1 January 2000, Wide Tech owed the plaintiff more than $1 million.

6.  Wide Tech and the plaintiff had entered into a total of 16 agreements successively covering the period from 1 November 1993 to 1 July 2008 in respect of the rates of charges and other terms and conditions for the use of the port services and facilities (“the tariff agreements”). Each of the tariff agreements provided for a specific period in which it was to take effect. Save for the first tariff agreement executed on 1 November 1993, all the subsequent agreements contained a term requiring Wide Tech to provide a guarantee to the plaintiff for an amount equivalent to the average of the sum of the operation charges of two months and not less than $2 million in any event. As from 2004, the tariff agreement specifically stipulated that the guarantee to be furnished must be a bank guarantee.

7.  Pursuant to the contractual requirement, the 1^st defendant had executed a total of six personal guarantees in favour of the plaintiff dated 29 November 1994, 23 October 1995, 1 November 1996, 31 December 1997, 1 January 1999 and 1 January 2000, the last of which was the 2000 Personal Guarantee. Each of the first five guarantees guaranteed liability up to $2 million. The liability under the 2000 Personal Guarantee was up to $1 million. The 2^nd defendant executed similar personal guarantees to the plaintiff for the same amounts during this period.

8.  The practice adopted by the plaintiff and Wide Tech was that towards the end of each year, after negotiation of the charges to be levied under the tariff agreement for the next year, the plaintiff would send Wide Tech a set of documents comprising the new tariff agreement and the personal guarantees to be executed. After execution, the documents would be returned to the plaintiff. The personal guarantees executed in the last year would not be returned to Wide Tech.

9.  After the 1^st and 2^nd defendants had executed the two personal guarantees both dated 1 January 2000, no more personal guarantees were provided to the plaintiff. From May 2000 to July 2008, Wide Tech caused a bank in Macau to provide a bank guarantee to the plaintiff for each year. Each of the first four bank guarantees provided from May 2000 to May 2003 was for liability up to $1 million. Each of the five bank guarantees provided from May 2004 to July 2008 was for liability of up to $2 million.

The judgment below

10.  Two lines of defence were raised by the 1^st defendant in this action of the plaintiff to enforce the 2000 Personal Guarantee in respect of the liabilities owed by Wide Tech as at 30 March 2009. Firstly, it was contended that on the proper construction of the 2000 Personal Guarantee, it had ceased to have effect when the tariff agreement executed on 31 December 1999 in respect of the period from 1 January to 31 December 2000 expired and all liabilities in respect of that tariff agreement had been discharged. Secondly, it was alleged that pursuant to an oral agreement made between the plaintiff and Wide Tech in 1999, it was agreed that two personal guarantees of $1 million each would be provided as temporary security before Wide Tech was to obtain a bank guarantee of $1 million and that after the provision of the bank guarantee, the two personal guarantees would be replaced or superseded. As a bank guarantee was issued to the plaintiff on 25 May 2000, the 2000 Personal Guarantee was superseded.

11.  The judge held in favour of the 1^st defendant on the construction issue and dismissed the plaintiff’s claim. On the alternative case of an oral agreement, the judge found against the 1^st defendant on the evidence.

Construction of the 2000 Personal Guarantee

12.  The material provisions of the 2000 Personal Guarantee, as set out in the judgment, are as follows:

“1. Guarantee. In consideration of the Company [i.e. the plaintiff] at any request agreeing to enter into a tariff agreement with Wide Tech Shipping Limited of 25th Floor, China Overseas Building, 139 Hennessy Road, Wanchai, Hong Kong (the “Carrier”) for the use of the Company’s terminal facilities and loading and unloading services at Zhuhai upon the terms and conditions set out in the copy document attached hereto (the “Agreement”), I Lo Tong Hoi (the “Guarantor”), holder of Macau Identification Card No. …, hereby unconditionally and irrevocably guarantee and undertake with the Company as primary obligor and not merely as surety, that in the event of the Carrier at any time making default in the payment of any fee or charge payable by the Carrier to the Company under the Agreement, the Guarantor will on demand pay to the Company any arrear of such fee or charge as the Company may confirm to the Guarantor in writing from time to time up to the aggregate amount of HK$1,000,000.00, together with interest to date of payment, both before and after judgment, at the rates and on the terms set out in the Agreement and all other charges and expenses (including legal and other costs on a full indemnity basis) incurred by the Company in relation to the enforcement of the Agreement and this Guarantee.

2. Indemnity.  Without prejudice to the guarantee contained in paragraph 1, the Guarantor unconditionally and irrevocably undertakes, as a separate, additional and continuing obligation, to indemnify the Company on demand against all costs and expenses whatsoever arising out of any failure by the Carrier to make due and punctual payment of all fees and charges under the Agreement or to duly and punctually observe and perform all its other obligations thereunder. This indemnity shall remain in effect notwithstanding that the guarantee under paragraph 1 may cease to be valid or enforceable against the Guarantor for any reason whatsoever.

…

6. Continuing Security. This Guarantee is a continuing security and covers the ultimate balance from time to time owing to the Company by the Carrier in relation to the Agreement in any manner whatsoever notwithstanding any settlement of account or other matter whatsoever.  This Guarantee is in addition to, and independent of, any other guarantee or security or other remedy now or at any time hereafter held by the Company. This Guarantee shall be binding on the Guarantor until full and final payment of the ultimate balance from time to time owing to the Company by the Carrier under the Agreement in which case the Guarantor shall be discharged.”        

[italics supplied]

13.  Crucial to the construction of the guarantee is the meaning to be attributed to the words “the Agreement” which I have highlighted in the above clauses. The judge held that they referred to the tariff agreement executed on 31 December 1999 in respect of the period from 1 January to 31 December 2000 (“the 2000 Tariff Agreement”), as those words were defined to mean “a tariff agreement … for the use of the Company’s terminal facilities and loading and unloading services at Zhuhai upon the terms and conditions set out in the copy document attached hereto”.  The judge had regard to the surrounding circumstances that in each year, the plaintiff had provided to Wide Tech for execution a tariff agreement for the next year and the draft personal guarantees. She held that “the Agreement” can only relate to the 2000 Tariff Agreement that was attached to the draft personal guarantees which the defendants were requested to provide.

14.  The judge rejected the submission of Miss Lorinda Lau, who appeared for the plaintiff in this appeal and below, that “the Agreement” referred to was “the terms and conditions set out in the copy document attached hereto”, namely, a set of standard terms and conditions of business by which certain arrangements were to be implemented for the execution of the tariff agreement and a copy of which Wide Tech had acknowledged receipt in May 1996. The judge noted there is no evidence to suggest that a set of the standard terms and conditions of business was ever attached to the 2000 Personal Guarantee or indeed in any other years. The terms and conditions themselves cannot be said to be an agreement in any way.

15.  The reasoning of the judge is clearly right.

16.  On appeal, Miss Lau again argued that the standard terms and conditions of business were “the terms and conditions set out in the copy document attached hereto”. She submitted that these terms and conditions were not sent to Wide Tech every year but were only sent where changes were made, as in 1996 and 1999, so there was no need for the standard terms and conditions to be sent to Wide Tech in 2000. I reject this submission as it is contrary to the clear wording in clause 1 that “the Agreement” was defined as “a tariff agreement with Wide Tech … for the use of the Company’s terminal facilities and loading and unloading services at Zhuhai upon the terms and conditions set out in the copy document attached hereto”. The copy of the 2000 Tariff Agreement attached to the draft guarantee contained not merely the rates of tariff but also the terms and conditions upon which the parties agreed to enter into business.

17.  Miss Lau also took a new line on construction. She argued the judge should have found that there was a continuing agreement between the plaintiff and Wide Tech for the use of the plaintiff’s facilities and services and that each year the rates would “have to be re-confirmed”. She contended that the reference to “a tariff agreement … for the use of the Company’s terminal facilities and loading and unloading services at Zhuhai” must mean the continuing agreement entered into since 1993. Further, these words could be construed to mean any subsequent tariff agreement whenever it was to be entered into between the parties.

18.  These arguments are untenable. The contention of an agreement entered into in 1993 for a continuing agreement is not supported by and is contrary to the evidence. Rates and terms and conditions were negotiated before the tariff agreements were signed each year. There is no basis for the suggestion that each year the rates would “have to be re-confirmed” or that the parties were under a contractual obligation to reach agreement on other terms and conditions.

19.  Miss Lau has also ignored the words “upon the terms and conditions set out in the copy document attached hereto”. Further, as the 1^st defendant’s counsel Mr Mike Lui has pointed out, in the first tariff agreement, Wide Tech was not even required to provide any guarantee.

20.  Miss Lau sought to rely on the last sentence in clause 2 to support her argument of a continuing agreement and continuing guarantee. The wording in clause 2 is clear. The indemnity is in respect of “all costs and expenses whatsoever arising out of any failure by [Wide Tech] to make due and punctual payment of all fees and charges under the Agreement…”.

21.  Miss Lau argued that if the 2000 Personal Guarantee would not apply to the tariff agreements subsequent to 2000, this would be illogical and defy commercial sense as no further personal guarantees were provided to the plaintiff and Wide Tech had furnished bank guarantees for each year to the extent of $1 million only from 2000 to 2003. She also sought to rely on the evidence of the plaintiff’s finance manager Simon Chau Tung Nam that he had advised the plaintiff to accept both the personal guarantee and the bank guarantee from 2000 to 2003 and the plaintiff had received legal advice that the 2000 Personal Guarantee had no expiration date. She referred to the judgment of the Supreme Court of New Zealand in Wholesale Distributors v Gibbons [2007] NZSC 37 mentioned by Mortimer NPJ in Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222 at para 22 in support of the proposition that the court should look at post-agreement conduct and statements of the parties in the construction of the agreement.

22.  In Marble Holdings Ltd, it was held that post-agreement conduct and statements of the parties are not generally relevant under Hong Kong law, and that is the same position in England and Australia. Whilst Mortimer NPJ noted there are dicta in the New Zealand case aforesaid favouring the admission of evidence of post-contract conduct as an aid to interpretation, he did not express any view in agreement with that approach.

23.  I do not think any of the above matters submitted by Miss Lau are relevant in the construction of the guarantee, leaving aside the controversy if such evidence is admissible in the first place. Her argument that the arrangements would make no commercial sense if the 2000 Personal Guarantee had in fact expired is not a good one. The subsequent conduct of the parties here could be of no assistance in the interpretation of the guarantee. There was no or no cogent evidence as to the circumstances in the years after 2000 to support the contention that it would have made no commercial sense for the plaintiff to accept merely a bank guarantee of $1 million. There is even less justification for taking into consideration the subjective understanding of the plaintiff’s finance manager or the legal advice received by the plaintiff. I fully endorse these remarks of the judge in another such similar point taken by Miss Lau: “That is purely a matter of internal arrangements of the plaintiff. The fact that they chose to take risk or fail to realise that they were taking risk by reason of its own understanding of the meaning of the document does not affect the construction of the 2000 Personal Guarantee as set out above. The subjective intention or understanding of the parties post contract cannot be relevant”.

24.  There is no merit in any of the contentions of Miss Lau so the substantive appeal should be dismissed.

Costs below

25.  The judge awarded the entire costs of the proceedings to the 1^st defendant as he had successfully resisted the plaintiff’s claim. No reasons were given in the judgment for the costs order nisi. The plaintiff made no application to the judge for variation of the costs order nisi, taking the stance it had better save some costs and the issue of costs below could be argued in the substantive appeal. The plaintiff argued in this court that the judge was wrong to award all the costs to the 1^st defendant when she had rejected his evidence and ruled against him on (1) his alternative ground of defence of an oral agreement to provide temporary security which was superseded by the bank guarantee provided in May 2000; and (2) two peripheral issues. If I understood Miss Lau correctly, she is not content with merely depriving the 1^st defendant, who had successfully resisted the plaintiff’s claim, of part of his costs below. In her further written submission, her position was that “the plaintiff should get 50% of the costs in the lower court”, namely, that the 1^st defendant should pay 50% of the plaintiff’s costs.

26.  I would say that is a wholly unrealistic submission and I reject this without hesitation. The only question that merits serious consideration is whether the judge should have deprived the 1^st defendant of part of his costs.

27.  If that argument were to be acceded to, and some deduction were to be made to the costs awarded to the defendant, the trial judge would be in the best position to decide what should be an appropriate reduction. As it is, this court does not have the benefit of the judge’s reasons for making the costs order nisi. We are left to do the best we can to form a view on how much time was spent on the failed issues and whether this had added significantly to the time and costs of the proceedings. In the further written submissions which we have to call for from both parties at the conclusion of the hearing, we were asked to trawl through the transcript of proceedings, the pleadings and witness statements to form a view on the time spent and work done on the failed issues. Our task was not made easier by wrong references given in certain places and the dispute of the parties whether certain parts of the proceedings could properly be regarded as taken up by the failed issues.

28.  This is a most unsatisfactory state of affairs and should not be allowed to happen in future.

29.  I start with the established principle that the appeal court does not interfere with the exercise of the trial judge’s discretion on costs unless it could be shown that the judge had failed to exercise the discretion, or exercised it upon a wrong principle, or did not exercise it judicially.

30.  Under Order 62 rule 5, amended as a result of the Civil Justice Reform, the relevant provisions read as follows:

“5 (1) The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account –

(aa) the underlying objectives set out in Order 1A, rule 1;

…

(e) the conduct of all the parties;

(f) whether a party has succeeded on part of his case, even if he has not been wholly successful;

…

(2) For the purpose of paragraph (1)(e), the conduct of the parties includes –

(a) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(b) the manner in which a party has pursued or defended his case or a particular allegation or issue;

(c) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and

(d) conduct before, as well as during, the proceedings.”

31.  As the judge has not given reasons for the costs order nisi, it is not known whether she has taken into account the above provisions. The fact remains that the alternative case was one of two main lines of defence raised by the 1^st defendant. It is a discrete issue from the construction point and evidence was adduced by the parties on this, so this issue must have increased to some extent the time and costs of the proceedings. As the judge did not appear to have exercised judicial discretion on this, it is necessary for this court to consider the matter.

32.  Mr Lui submitted that the 1^st defendant should not be deprived of part of his costs below because the rejection of part of his evidence is but a “normal facet of litigation” that in every dispute of fact, the court is bound to prefer one party’s account to another and the circumstances here are not so exceptional to justify depriving him of part of his costs.

33.  I do not agree with this. On the established principles, it is not necessary to establish that a successful party has acted unreasonably or improperly in raising an issue for it to be deprived of the whole or part of its costs. The court may so order where the failed allegation of the successful party has caused a significant increase in the length or costs of the proceedings (Re Elgindata Ltd (No. 2) [1992] 1 WLR 1207 at 1214B to C). By the amendments introduced to Order 62 rule 5, litigants should bear in mind the possible costs implications. There is incentive to conduct litigation in a responsible way and be selective as to the issues raised.

34.  Having received submissions in writing from the parties after the hearing on the time spent on the alternative line of defence, I am inclined to think that this failed issue had added significantly to the time and costs. I am not prepared to take into account the two peripheral issues, which did not affect the decision of the judge in any way. I take Mr Lui’s point that some of the questioning of the witnesses cannot be regarded as necessitated only by the alternative defence, but the questioning would not have gone on at such length if that had not been raised as a defence. Doing the best I can, I think it appropriate to deprive the 1^st defendant of 25% of the costs below for raising the failed issue.

Costs of this appeal

35.  We have heard arguments on the costs of this appeal. I reject Miss Lau’s contention that the plaintiff should be given 50% of the costs of this appeal. The plaintiff has failed in the substantive appeal but succeeded in overturning part of the costs awarded below. It is the 1^st defendant that should be regarded as the successful party. But as he has not been wholly successful, he would be allowed 80% of the costs of this appeal.