BANK OF INDIA v. GOBINDRAM NARAINDAS SADHWANI VINOO GOBINDRAM SADHWANI

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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Preliminary

1. In this action the Plaintiff ("the Bank") claims against the 1st Defendant, Gobindram Naraindas Sadhwani (Mr. Gobindram) and 2nd Defendant ("Mrs. Gobindram") his wife as the guarantors for the payment by the 1st Third Part, Sadhwanis (Japan) Ltd. ("SJL") of its indebtedness to the Bank. The Bank, as its name indicates, is a body incorporated in India. It has in Japan, a branch in Osaka ("the Osaka Branch") and a regional office. in Tokyo ("the Tokyo Office"). SJL is managed by Mr. Kishinchand Naraindas Sadhwani, the 2nd Third Party ("Mr. Kishinchand"), who is a brother of Mr. Gobindram. Mr. Kishinchand, and his wife Radhika Kishinchand Sadhwani, the 3rd Third Party lived in the Osaka area, in which SJL carries on business. For the purpose of that business, credit facilities have for long been obtained from the Osaka Branch. In 1978, the limits of those credit facilities were increased to an amount of ¥230m.upon the security inter alia of the personal guarantees of Mr. and Mrs. Kishinchand and, of Mr. and Mrs. Gobindram, under a contract of guarantee dated the 5th June 1978 (the Guarantee).

2. In addition to Messrs. Kishinchand and Gobindram, there are three other Sadhwani brothers. One brother decided to strike out on his own. The business activities of the remaining four, which originated in an agreement in 1976 in Sri Lanka, 1ed to the formation of family companies in Sri Lanka, Nigeria, Hong Kong and Japan.

3. In Japan, prior to its incorporation, SJL was held by Mr. Kishinchand as sole proprietor. Upon incorporation 60% of the shareholding was allotted to him and his wife and 40% of the shareholding to Mr. and Mrs. Gobindram. Mr. and Mrs. Kishinchand were the directors and the former managed and continues to manage SJL.

4. In Hong Kong the shares in Sadhwanis (Hong Kong) Limited were held between the 4 Sadhwani brothers and their families, all of whom were represented on the board of directors. Mr. Gobindram as the brother resident in Hong Kong managed the company.

5. The Sri Lanka family company, Esquire (Garments) Industry Limited ("Esquire"), was managed by the eldest brother Mr. Lakhimal Sadhwani, and his son Mr. Chandru Sadhwani. And finally the Nigerian company, Sadhwanis (Nigeria)Limited was managed by Mr. Mohandas Sadhwani the brother who resided in Lagos.

6. About 1980 there was some falling out between Mr. Kishinchand and the other brothers. Mr. Gobindram, another brother and a nephew went to see him in Japan, but did not succeed in patching up matters; no agreement was reached and Mr. Kishinchand did not even attend the final meeting. Then Mr. Kishinchand, on the 18th August 1980 removed the control of Esquire from his eldest brother's family and vested it in his own. That action was reversed by the other three brothers on the 17th and 18th March 1981.

7. In September or October 1980 Mr. Kishinchand informed the Osaka Branch that the Sadhwani brothers had recently decided that the personal guarantees for the credit facilities of each company should be provided by the locally resident brothers. He requested the Osaka Branch to dispense with the guarantees of Mr. and Mrs. Gobindram. After careful consideration by the Osaka Branch, the Tokyo Office and Head Office in Bombay and certain steps that need not be of concern, the Bank took a new guarantee dated the 8th April 1981 in the sum of ¥330m. from Mr. and Mrs. Kishinchand. Between 3rd December 1980 and 19th February 1981, SJL drew 8 bills of exchange, 7 upon Esquire in Sri Lanka and 1 upon Sadhwanis Nigeria. These bills were purchased or accepted for collection by the Osaka Branch under the credit facilities already adverted to. All the bills were accepted by the drawees but were subsequently dishonoured. The Osaka Branch then sought payment from SJL, only to be told by Mr. Kishinchand to pursue the Hong Kong guarantors, Mr. and Mrs. Gobindram. The Bank then, in December 1981 obtained a provisional attachment of Mr. Kishinchand's property interests in Japan from the Japanese courts. In March 1982, Mr. Kishinchand went to the Bank's head office in Bombay and offered a legal mortgage of his properties in Japan which he valued at ¥250m. to secure payment of the bills; he also offered an undertaking to bear all legal costs if the Bank in return undertook to proceed against Mr. Gobindram as guarantor in Hong Kong and against the drawees in Sri Lanka and Nigeria.

8. After due consideration the offer was accepted and an agreement dated 12th May 1982 ("the Agreement") to the foregoing general effect was entered into between the Bank through its Osaka Branch on the one hand and SJL and Mr. and Mrs. Kishinchand on the other.   Also Mr. and Mrs. Kishinchand and SJL mortgaged their property rights in Japan to the Bank. The Bank then released one of Mr. Kishinchand's properties from the provisional attachment and he was able to sell it for the very substantial sum of ¥119.6m. Also in pursuance of the Agreement the Bank instituted proceedings against the drawees in Sri Lanka and Nigeria, which have not got very far, and in Hong Kong filed this action in June 1982.

9. The Defendants resist the Plaintiff's claim upon several grounds. As to the amount claimed they admit the principal sum alleged by the Plaintiff to be due from the principal debtor SJL, but require the Plaintiff to prove the amount of interest, in reality disputing not the calculation of that total amount, but the rates of interest applied. They also counterclaim to be subrogated to the Plaintiff's rights under the mortgage by Mr. and Mrs. Kishinchand of valuable property rights in Japan to secure the indebtedness of SJL. However, upon the Bank having indicated during the trial that if it succeeded upon the guarantee it would cooperate in effectuating the subrogation of the Defendants to the Bank's rights in question, the Defendants, without actually abandoning their counterclaim, have not pursued it.

10. The Defendants' have also brought third party proceedings against SJL and Mr. and Mrs. Kishinchand and the Third Parties in turn brought fourth party proceedings against Esquire and Sadhwanis (Nigeria) Ltd. However; upon the Third Parties failing to provide security ordered against them in respect of the Fourth Party Proceedings, those proceedings were dismissed.

11. The Third Parties' solicitors withdrew prior to the hearing of this action, at which the third Parties did not appear. The Defendants have nevertheless pursued their Third Party claims as they are entitled to do.

12. With that brief outline of the background and the facts, I proceed to the first issue.

Determination of the Proper Law: The test to be applied

13. The major issue between the parties is whether or not Japanese law is the proper law of the contract i.e. the Guarantee. The Defendant contends for Japanese law in reliance upon the test of closest and most real connection. The Plaintiff on the other hand contends otherwise in reliance upon the second of the three-stage or sub-rule test propounded thus in Dicey and Morris" Conflict of Laws (11th Ed. Vol.2 p. 1161):

"Rule 180 - The term "proper law of a contract" means the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.

 

Sub-Rule 1. - When the intention of the parties to a contract, as to the law governing the contract, is expressed in words, this expressed intention, in general, determines the proper law of the contract.

 

Sub-Rule 2. - When the intention of the parties to a contract with regard to the law governing the contract is not expressed in words, their intention is to be inferred from the terms and nature of the contract, and from the general circumstances of the case, and such inferred intention determines the proper law of the contract.

 

Sub-Rule 3. - When the intention of the parties to a contract with regard to the law governing it is not expressed and cannot be inferred from the circumstances, the contract is governed by the system of law with which the transaction has its closest and most real connection."

14. The learned Editors of Halsbury's Laws see the law in the same light in stating it in the following way:

"585.    Inferred choice of law. If there is no express choice o e proper law, the court will consider whether it can ascertain that there was an inferred or implied choice of law by the parties. .......

 

587.    No express or inferred choice of law. Where the parties have not expressed a choice as to the proper law and no such choice can be inferred, the proper law of their contract is the system of law with which the transaction has the closest and most real connection. In such a case the court does not seek to find some presumed or fictitious intention of the parties but, rather, holds the contract to be governed by the law with which it is most closely connected, for that is what it is presumed that reasonable businessmen would have decided.

 

        In determining with what system of law the transaction is most closely connected, the court should look at all the circumstances. Whilst firm rules cannot be laid down, it is clear that the court will look at such factors as the place of contracting, the place of performance, the place of residence or business of the parties and the nature and subject matter of the contract."

 

(4th Ed. Vol. 8, paras. 585, 507)

15. I see no need to adumbrate the numerous authorities relied upon in the foregoing test, nor those through which counsel have conscientiously taken me and which I have carefully considered. The preponderance of authority clearly supports the three-stage criteria which in any event has been confirmed by the House of Lords in Amin Rasheed v. Kuwait Insurance Co. (1984) AC 50. Lord Diplock at p. 61 said:

16. It is true there are cases in which the courts have proceeded directly from the first to the third stage. In those drawn to my attention, which I see no need to list, there does not seem to me to have been any conscious or considered conclusion that the second stage dues not exist. Moreover none of those cases has the authority of the House of Lords" decision in Amin Rasheed. I should add that in Amin Rasheed, Lord Roskill, Lord Brandon and Lord Brightman agreed with Lord Diplock; and although Lord Wilberforce proceeded to the same conclusion by means of the third stage, there is nothing in his judgment that negates the second stage. I conclude, therefore, that in determining the proper law, the three-stage test must be applied, notwithstanding that it is clear from the authorities that the line between the second and the third stages is fine, that both those stages often merge and that the same result generally emerges from the application of either of the 2 latter stages (see Dicey and Morris p.1162, 1163).

Second Stage - Inferred or Implied Choice of Law

17. In the absence of express intention as to the proper law, I proceed to the second stage i.e. the implied intention to be inferred "from the terms of the contract and the relevant surrounding circumstances" in the words of Lord Atkin adopted by Lord Diplock which I quoted earlier.

18. As may be expected, the courts have resorted to different factors from which to infer the intentions of the parties (para. 585 Halsburys Law, 4th Ed. Vol. 8). The same factors have not always prevailed, nor have they always been accorded the same weight. The classic process of weighing the factors must be followed. In that process the Plaintiff sets much store by the Common Law form in which-the Guarantee was framed. Many of its provisions are in common form and clearly must have been drafted by reference to particular rules of the Common Law and decisions of the English courts. Indeed Mr. Anthony Dicks for the Plaintiff submits that several of "nose provisions are only intelligible by reference to English law. While the latter may explain their purpose and origins, I do not accept that the former are only intelligible by reference to Common Law. In Amin Rasheed, upon which Mr. Dicks relies so heavily, Lord Wilberforce, although alone in resorting to the third stage or sub-rule, pointed out at p. 69 G - H that "there is nothing unusual in a situation, where under the proper law of a contract, resort is had to some other system of law for purposes of interpretation. In that case, that other system becomes a source of law for purposes of interpretation." But Mr. Dicks points to the conclusion of Diplock LJ at 62 D - E, that the provisions of the insurance contract in the Lloyds' standard form of marine policy with which he was concerned, taken as a whole pointed "ineluctably to the conclusion that the intention of the parties was that their mutual rights and obligations under writ should be determined in accordance with the English system of marine insurance". I do not find anything like the special features of the Lloyds policy and of marine insurance law in the Guarantee or he law of principal and surety, and certainly not in the same degree. Furthermore, unlike the absence of an indigenous law of marine insurance in the lex loci contractus in Amin Rasheed, in this case there is no question of there not being an appropriate code under Japanese law. I do not think, therefore, that the conclusions of Lord Diplock in the different circumstances of Amin Rasheed, can simply be taken as decisive or overwhelming in this case. The different circumstances have to be carefully weighed.

19. I have no doubt that the Bank's printed form of guarantee was used as a matter of routine convenience. Had the Bank wished Indian law (the only applicable Common Law system contemplated by the parties) to apply, I think it would most probably, if not certainly, have provided for that in the process of devising and printing the form. In that respect and having regard to Mr. Joshi's evidence that it was good for Japanese law as well as other laws, the omission of a choice of law provision is of importance. The form in its original printed state referred to Indian currency, but this was replaced by typed references to yen, which is indicative of Japanese law being the common choice.

20. The inability to enforce a contract according to one system of law has long been accepted as a relevant factor to be weighed in determining whether it is to be governed by some other law under which it is enforceable (see e.g. South African Breweries Ltd. v. King (1899) 2 Ch 173, 181). But in this case, as will be seen, the possibility of the Guarantee not being enforceable wholly or partly is the result not so much of Japanese law, but of the conduct of the Plaintiff in which it need not have indulged. Moreover that conduct was subsequent to the execution of the Guarantee and could hardly have been forseen. In the circumstances, I do not consider that the possibility (and it was no more than that) of the contract being unenforceable in Japanese law favours Common Law as the proper law intended by the parties.

21. Mr. Dicks also submits that notwithstanding its technical facade of a Japanese corporation, SJL was part of an Indian joint family business albeit in Japan, which resorted to the branch of an Indian bank also in Japan, to do business in an Indian way. That, again, may well be so but it does not in my view necessarily or even probably point to a choice of Indian law. Mr. Gobindram who acted both in his own behalf and on behalf of his wife, never gave the proper law a thought, and left it a11 to Mr. Kishinchand in Japan. There is no evidence that Mr. Kishinchand, who likewise acted on his wife's behalf, gave it any more thought.

22. Having regard to the foregoing considerations, the circumstances, counsels' comprehensive submissions, and taking account of the authorities pressed upon me, and the by no means unanimous views taken in them of similar circumstances, I am satisfied that no intention as to the proper law can be inferred from the Guarantee and the relevant surrounding circumstances.

23. It remains to mention Mr. Dicks' submission that as the onus of establishing Japanese law as the proper law rests on the Defendants, the Defendants fail at the second stage. I do not accept that. In my view the Defendant's may discharge that onus at each stage which arises. In the same way that the absence of express intention at the first stage requires consideration to be given to the second stage, the absence of any inferred or implied intention at the second stage requires consideration to be given to the third stage. To that third stage I now proceed.

Third Stage - The System with which the Guarantee has the Closest and Most Real Connection.

24. In determining the legal system with which a contract is most closely connected, the courts have given great weight to the law of the place of performance (Dicey and Morris, Conflict of Laws, 11th Rd., Vol. 2, p. 1193). That is not to say that it is not to be weighed against the other factors. Notwithstanding the possibility of the Gobindrams paying in Hong Kong, on the evidence the place of performance must be regarded as Japan.

25. But that is far from being the only factor pointing to Japanese law as the system with which the Guarantee has its closest and most real connection. Two of the 4 coguarantors resided in Japan, and one of those 2, Mr. Kishinchand, on the evidence was the only guarantor who played an active part and actually took the decisions for the four. The negotiations between the parties took place in Japan. The Guarantee formed part of the Sadhwani operations in Japan, and although the Guarantee was legally an independent transaction and separate from the principal debtors' contract with the Bank, its connection with Japanese based operations is inescapable.

26. The principal sum guaranteed was expressed in Yen and the Guarantee in addition bears a 100 Yen stamp.

27. All the Guarantors had assets in Japan, although Mr. Joshi claimed there were other ways of reaching the Gobindrams.

28. Some of the factors considered in the context of the second-stage are also of obvious relevance. I do not propose to repeat them. It seems to me perfectly plain that it is the system of Japanese law with which the Guarantee has its closest and most real connection. The only alternative is Indian law and with that the connection is comparatively tenuous. I have at the second stage explained why I do not attach much weight to the Common Law form of the Guarantee, the English language in which it is expressed and the role of the Head Office in Bombay.

29. In my judgment, therefore, the proper law of the contract of Guarantee is Japanese law, being the system of law with which it has the closest and most real connection.

Japanese Law - The Expert Witnesses

30. Three issues fall to be determined under Japanese law as the proper law of the contract, arising from the defences pleaded by the Defendants. Before I come to those, it is helpful to say something of the 2 expert witnesses on Japanese law called by the parties who restricted themselves to one each. The Plaintiff's witness was Mr. Takashi Wakai, a member of a firm of Japanese lawyers who have acted for the Bank for some time. It has been agreed between the parties that no objection would be taken on that ground.

31. Mr. Wakai was admitted to practise law in Japan in I976. He graduated in 1974, then attended the Legal Training and Research Institute (1974 - 1976), the University of Michigan Law School (LL. M, 1980) and the University of Washington Law School (comparative law fellow 1980 - 1981). He has been in active practise for about ten years (principally in the areas of banking and corporate practice, international finance, international agreements and litigation) and he says he has extensive experience in drafting contracts of guarantee and of indemnity.

32. Mr. Tasuku Matsuo, the Defendants, expert, is much older than Mr. Wakai. He is the senior partner of his firm which is retained on a regular basis by a very impressive list of clients including several leading Japanese banks and financial institutions; besides acting when required for other banks including foreign banks. Bankruptcy law is one of his specialities.

33. Mr. Wakai was the more articulate and fluent in English. He gave his evidence clearly and rationalized his views in a way that any Common Law lawyer would, which perhaps is not surprising having regard to that part of his legal training in America. Mr. Matsuo on the other hand was somewhat discursive and his mannerisms at times inclined to the theatrical rather than what one might expect in the practise of law. But despite any initially unfavourable impression, it became clear that Mr. Matsuo was an experienced, cautious and truthful witness. In one instance he had adopted a mistaken view of the facts but was very ready to correct himself when he realised that. He impressed me as a truthful and learned witness on Japanese law and practice, even where that was not easy to explain or to rationalize. In that respect Mr. Wakai seemed much more concerned to hold his client's line, and perhaps his own, since he personally had advised the bank on its provisional attachment of the property interests of SJL and Mr. and Mrs. Kishinchand. In three instances I noted he was most reluctant to answer Mr. Yu's repeated questions when the obvious answers would have been in the Defendants" favour. His reasoning that the I981 guarantee effected only a partial release of the Defendants from the 1978 guarantee i.e. of only the pre-1981 liabilities, was very difficult to understand, and, moreover, entailed a conflict with his claim in another respect, that a release had to be communicated. His explanation for changing his original categorization of the Guarantee as an ordinary guarantee or "Hosho"(to which Article 448 of the Japanese Civil Code would have applied) to that of a STK (exempt from Article 448) was not wholly convincing. However, notwithstanding the differences that divided them, there was a broad measure of agreement between Mr. Wakai and Mr. Matsuo. Both, as they are entitled to do, gave their opinions on the ultimate issues. Needless to say their reasons and the manner in which they approached their conclusions have to be given careful consideration. Those issues are however matters for the court and in deciding them I have disregarded matters upon which they would not be entitled to rely e.g. banking practice which was relied on by Mr. Matsuo, and of which the requisite notice was not given.

34. With those preliminary observations, I proceed to the specific issues under Japanese law.

The Issues under Japanese Law

35. The Defendants contend that the Guarantee is discharged or otherwise rendered inoperative by or under Japanese law in one or a11 of the following three respects:

Discharge of Guarantee under Article 448 of the Japanese Civil Code

36. Article 448 is in the following terms:

                "(Limits of Suretyship)

If the burden of a surety is more onerous than that of the principal obligor as to either its subject or its terms, it shall be reduced to the extent of the principal obligation."

37. The Plaintiff by the Agreement agreed to withhold legal action against SJL and Mr. and Mrs. Kishinchand and to proceed against Mr. and Mrs. Gobindram. In consequence, the Defendants say the I978 Guarantee has been discharged or rendered wholly or partly inoperative against them. However, Mr. Wakai for the Plaintiff testified that there are two types of guarantee under Japanese law by reason of the scope under Article 91 of the Japanese Civil Code for parties to declare an intention which deviates from the provisions of a law i.e. Article 448 in the present context. The text of Article 91 is as follows:

"If the parties to a juristic act have declared an intention which deviates from any provisions of a law or ordinance not concerned with the public order, such intention shall prevail."

38. Those contracts of guarantee which do not deviate and remain subject to statutory provisions, for convenience he calls statutory guarantees, in broad terms generally known as "Hosho"; and those others that do deviate from statutory provisions, he says are usually called Songai Tanpo Keiyaku ("STK"). The Guarantee contains an express release clause authorising the Plaintiff to vary the terms of any contract with the principal debtors or to release, discharge, enter into any composition, or compound or promise to grant time or any other indulgence or not to sue the principal debtors or any person liable on bills etc. or as a surety. Such provision Mr. Wakai says clearly shows an intention to deviate from Article 448, and in consequence the Guarantee is not a statutory guarantee and the Article 448 does not apply.

39. Mr. Matsuo says that whether or not Article 448 applies to the Guarantee depends on the intention of the parties to be gathered from the contract as a whole. Both experts agree that application of Article 448 is a matter of interpretation. Mr. Wakai's explanation as to why he originally classified the guarantee as being other than a STK was far from convincing. Also it was not easy to follow his assertion that the Guarantee was not subject to Article 448, and by that simple fact became a STK. Mr. Matsuo explained the manner in which Article 448 would render the Guarantee inoperative. He stressed his experience of the law, his study not only of Professor Wagatsuma's works but also those of other Japanese professors, Professor Wagatsuma's emphasis upon viewing the entire matter prudently, and the concern of Japanese courts that STK do not work "ruthlessly to the people" e.g. where merchants and loan sharks disguise STK as guarantees, apparently to evade statutory protection afforded to guarantors. I was impressed by his evidence of how Japanese courts would take a comprehensive or global view of issues like the application of protective provisions such as Article 448, of the issue of release and of the principles of good faith and abuse of right (to which I shall return); and that Japanese courts would not permit clauses like the express release clause in the Guarantee to displace Article 448 and evade the principles of good faith and abuse of right.

40. As I indicated at the outset I preferred the evidence of Mr. Matsuo, whom I thought more reliable and credible. Largely upon his evidence, but also upon that of Mr. Wakai where they did not differ, I find that the relevant provisions or rules of Japanese law are that whether or not Article 448 applies or is displaced under Article 91 is a matter of the intention of the parties; that it is not open to the parties to contract out of Article l, and that the principles of good faith and abuse of right will apply in determining the application of Article 448; and that the Japanese courts would be concerned to see that guarantees do not work too oppressively. I accept Mr. Matsuo's evidence, which was not disputed, that the Japanese courts would consider the issue of the application of Article 448 in the context of the principles of good faith and abuse of right.

41. Mr. Wakai's evidence, as I have noted, was that Article 448 would not apply. Mr. Matsuo's evidence given in the context of the application of abuse of right and good faith principles, which he felt unable to isolate, was that the Guarantee would be rendered inoperative or discharged. These are questions for the court, notwithstanding that appropriate weigh; should be given to those conclusions. But I accept that as a matter of practice Japanese courts would consider the issues of the application of Article 448 and the principles of good faith and abuse of right together. I propose to do the same.

Express Release of the Defendants from the Guarantee

42. Next the Defendants claim that they were released and discharged by the Plaintiff at the end of 1980 or early in 1981 in the context of the 1981 guarantee. The relevant facts are these. After the succession of guarantees taken from Mr. and Mrs. Kishinchand and Mr. and Mrs. Gobindram ending with the I978 guarantee, in 1980 Mr. Kishinchand misled the Osaka branch into believing that the Sadhwani brothers had agreed that the indebtedness of each Sadhwani company would be guaranteed by the locally resident brother. He proposed to the Bank that it should take a new guarantee from only him and his wife and release Mr. and Mrs. Gobindram. The Bank after careful consideration of his proposal agreed, and sent the 1981 guarantee form to him for completion by only him and his wife. It is perfectly clear from the Bank's internal documents that Mr. and Mrs. Gobindram were intended to be released and were regarded as having been released. However, no formal release was executed, nor was any release communicated to Mr. and Mrs. Gobindram, who remained unaware of what was going on. The Plaintiff contends that while there might have been an intention on its part or the part of some of its officers to. release Mr. and Mrs. Gobindram, no such release was legally affected.

43. It is common ground between the experts that what is necessary under Japanese law to effect a release is an "expression of intent", "declaration" or manifestation" of a release or discharge. I accept that evidence. However, Mr. Wakai says that this must be "towards" the Defendants. He adds that for that requirement to be met in the present circumstances, Mr. Kishinchand should, when he received the communication or expression of intent from the Bank, have had authority as the Defendants' agent. Mr. Wakai did not make it clear what sort of authority, but presumably he meant general authority for it would be absurd to suggest that he should have had authority to accept specifically that communication.

44. Mr. Wakai originally claimed that the authority Mr. Matsuo relied upon i.e. the Osaka District Court decision in Okada v. Funasaka, was irrelevant. But on being taken through it in cross-examination was constrained to concede not only that it was relevant, but that it held an implied release as effective notwithstanding that it was not communicated to the obligor.

45. Again I prefer Mr. Matsuo's evidence. In my finding under the relevant rules of Japanese law it is not necessary that the manifestation of release by the creditor be communicated to the Guarantors and it is sufficient for the release to be communicated to an agent of the guarantors; in deciding whether a person is an agent, his previous role is relevant; and once a release is given it cannot be revoked.

46. As to the facts, these are almost wholly not in dispute and emerge largely from undisputed documentary evidence. The Bank after careful consideration of Mr. Kishinchand's proposal that Mr. and Mrs. Gobindram be dispensed with as guarantors, agreed to it and communicated acceptance of the proposal to him. And as to whether he was an agent of the Defendants, there is no doubt that in making the proposal Mr. Kishinchand was acting in his own interests and not those of the Defendants. Nonetheless he had for a very long time and in respect of all the Defendants' dealings with the Osaka Branch been acting as the agent of the Defendants. In my judgment, on his previous role, that would sufficient to constitute him as the Defendants' agent, and to render the communication of the acceptance of his proposal as an effective manifestation of release.

47. The question of whether there was a release, like that of discharge under Article 448, would be considered in conjunction with the application of good faith and abuse of rights principles. But in contrast to the position under Article 448, in the former case the requirements of Japanese law are so clearly met that I find no difficulty in concluding that the release would effectively discharge the Defendants from the Guarantee. Needless, to say, in this respect also, the experts expressed their conclusions which I have disregarded as being questions for the court.

48. The Defendants also pleaded that it was an implied term of the Guarantee that their liability, if any, was "conditional upon the continued existence of the co-guarantors" Mr. and Mrs. Kishinchand, and was accordingly discharged wholly or pro tanto by the release of Mr. and Mrs. Kishinchand. However, I did not understand them to pursue this defence and having regard to my other findings see no need to deal with it.

Release under Principles of Abuse of Rights and Fairness

49. The Defendants' third and most important defence is founded upon paragraphs 2 and 3 of Article I of the Japanese Civil Code, which is in the following terms: Article I (Exercise of private rights)

50. The Defendants say that upon those principles, the Japanese courts would not permit the Plaintiff's claims to succeed. The facts they rely upon in substance are: (a) That the Plaintiff collaborated with SJL and Mr. and Mrs. Kishinchand in intentionally reversing the position of principal debtor and guarantors. (b) That the Plaintiff also collaborated with SJL and Mr. and Mrs. Kishinchand in creating a mortgage which may secure debts of SJL other than those in issue to the prejudice of the Defendants' opportunity of securing reimbursement from SJL and Mr. and Mrs. Kishinchand. (c) That the Plaintiff has been co-operating with SJL and Mr. and Mrs. Kishinchand in taking action to enforce the Guarantee against the Defendants.

51. As to the rules of Japanese law, there is no dispute between the experts. Both agree that Article 1 is the authority for the principles of abuse of rights and fairness which transcend the exercise of private rights; that it is not possible to contract out of those principles; that those principles apply to the exercise of the Plaintiff's rights under the Guarantee; and that in applying those principles the court will have regard to a11 the circumstances. As I have said, Mr. Matsuo expresses the latter rule in his Boston clam chowder analogy. Mr. Matsuo adds, and I accept, that the courts will select such evidence as they consider relevant and approach the matter on a case by case basis. The applicable Japanese law is therefore quite clear. The principles are simply stated in the broad way I have noted and the courts are left to give them effect. Mr. Matsuo indicated that the practice of the Japanese courts is simply to record their decisions by reference to Article l or the principles of good faith and abuse of rights, without setting out detailed reasons or principles. So that while that position in Japanese law is very clear, virtually no guidance is given as to how those very broad principles are to be applied.

52. Before I turn to the facts, it is convenient to deal with Mr. Wakai's evidence that he was told by the Plaintiff that that the Defendants had substantial interest in the drawees of the 3 dishonoured bills, and that in view of that fact the conduct of the Plaintiff relied upon by the Defendants does not constitute a violation of the principles of good faith and abuse of rights. The clear and significant implication was that but for that substantial interest, such conduct would constitute a violation of those principles.

53. What information the Plaintiff gave Mr. Wakai is privileged as the communication of the former to its legal adviser. The Plaintiff has not seen fit to waive that privilege or itself to disclose what that information was and more importantly upon what evidence it was founded. But clear evidence upon the matter came from Mr. Gobindram. He was a transparently truthful witness. I accept his evidence, which in any event, was not challenged. He testified that the shares of Sadhwani (Nigeria) Ltd. are held in the following proportions: Mr. Kishinchand 10%. Mr. Mohandas 10% Mr. Chandru Sadhwani (a son of the eldest brother) 10%, Mr. Gobindram 10%; and Nigerian local shareholding required by Nigerian regulations 60%. Mr. and Mrs. Gobindram did not participate in the management or running of that company.

54. As to Esquire in Sri Lanka, Mr. Gobindram testified that 60% of the shareholding was held by Sadhwanis (Hong Kong) Ltd. and the remaining 40% was held between Mr. Lakhimal Sadhwani (the eldest brother) his wife Mrs. Kamla Sadhwani and his son Mr. Chandru Sadhwani. The directors are Mr. Gobindram, Mr. Lakhimal, his wife Mrs. Kamla Sadhwani, his son Mr. Chandru, Mr. Kishinchand, and Mr. Mohnandas. In fact, the Gobindrams took no part in the management of Esquire as they lived in Hong Kong.

55. For completeness it should be noted that the snares in Sadhwanis (Hong Kong) Ltd. were held as follows: Mr. Gobindram 1,000 shares, Mrs. Gobindram 1,000 shares (in 1984, 500 of these were transferred to the Gobindram's son Sunil); Mr. Mohandas 1,000 shares; Mr. Kishinchand l,000 shares, Mr. Chandru Sadhwani 1,000. The directors are Messrs. Gobindram, Kishinchand, Mohandas, Chandru and Sunil and also Mrs. Gobindram. And as noted Mr. Gobindram managed the company.

56. The significance of a substantial interest in the drawees lies in the degree of control it provides, as Mr. Wakai indicated, and bears upon the dishonouring by Esquire of the 7 bills in question. In my finding it is abundantly clear in the context of the question of substantial interest and its purpose, that Mr. and Mrs. Gobindram did not have a substantial interest in the drawees. That the factual basis of Mr. Wakai's opinion in the present context is wholly wrong becomes even clearer from the evidence which establishes that Mr. Kishinchand', family were in control of Esquire at the material time, and that furthermore, the bills drawn upon Esquire were accepted under the signatures of his son Deepu and his daughter-in-law Poonam.

57. To return to the facts, the following provisions of the Agreement are of obvious relevance:

58. At the time the Agreement was negotiated, Mr. Kishinchand valued his property interests in Japan at ¥250m, which was sufficient to meet the principal debtors indebtedness to the Bank, although there might have been some doubts about realising those interests.

59. In pursuance of the Agreement the Bank has brought the present action. Mr. Kishinchand is being kept informed by the Bank of progress in the action and has been providing funds to meet the costs. A provisional attachment in respect of one of the Japanese properties of SJL and the Kishinchands has been lifted on the application of the Bank and the property sold for ¥119.6 million, no part of which has been applied towards SJL's indebtedness to the bank. A revolving mortgage in favour of the Bank has been executed by SJL and the Kishinchands and credit continues to be provided by the Bank to SJL, although the overdraft has been reduced.

60. In my view the circumstances in which the 1981 Guarantee was entered into are also relevant. The Bank quite consciously and deliberately agreed to Mr. Kishinchand's proposal that Mr. and Mrs. Gobindram be dispensed with as guarantors. In the light of that, individual officers including the Osaka Branch manager concerned with the relevant negotiations considered it unethical to enforce the Guarantee against the Defendants, and said so both internally and to Mr. Kishinchand when the latter first suggested that action betaken against the Defendants.

61. While a provisional attachment in Japan does not confer priority upon the applicant, it enables the applicant to share in the proceeds upon realisation. In lifting the provisional attachment in the circumstances it is probable that the Bank did give up a share of those proceeds and that the Defendants as guarantors have been prejudiced. It was also likely in the circumstances that the lifting of the attachment that enabled the principal debtors to effect a sale for ¥119.6m would prejudice the Defendants. Finally Mr. Matsuo's evidence, which I accept, is that. The Defendants would face very real difficulties and risks in seeking to recover by subrogation to the Plaintiff's rights, any indemnity from the principal debtors. It is realistic to assume in all the circumstances that it is probable that they would also encounter difficulties is securing contribution from their co-guarantors Mr. and Mrs. Kishinchand.

62. Also of relevance in my view is the spirit of Article 448 of the Japanese Civil Code which seeks to limit the extent of the burden on a guarantor to that of the principal debtor.

63. Prima facie, therefore, it is very difficult to see how the Bank's conduct could be other than a breach of good faith and abuse of rights principles. But regard must be had to the express release clause in the Guarantee, which has already been discussed, I will not repeat the considerations I have already outlined. Likewise regard must be had to the fact that the Bank in my finding was not motivated by any malice against the Defendants and was misled. It probably felt the Agreement improved its ultimate prospects of recovering the total amount due. At the trial it undertook if its claim succeeded, to cooperate with the Defendant in enabling the Defendants to enforce any rights of subrogation. Although it continues to provide credit to the principal debtors, the amount of their overdraft has been reduced.

64. I do not think these factors neutralise the prima facie position I referred to. Having regard in the round to a11 the circumstances, the views of the experts (other than their conclusions upon the issues that are for the court to decide) and the helpful and very comprehensive submissions made by counsel, the conduct of the Bank is so clearly in breach of a11 principles of good faith and abuse of right, that I have no difficulty in concluding that its claim should be disallowed.

65. On the evidence such disallowance may be total or partial. Very limited guidance is provided under Japanese law in that regard. Where the security under guarantee was undermined in one case; the creditor's claim against the guarantor was disallowed to that extent. In the present case, the following facts and considerations seem to me to be relevant. The release of the Defendants contemplated by the Bank's authorised officials in accepting Mr. Kishinchand's proposal was total. The potential burden re-sulting from the breach that could fall upon the Defendants could conceivably equal the whole of the amount of Bank's claim. The lifting of the provisional attachment, and the total deferment of action against the principal debtors and the co-guarantors in Japan could result in ultimate inability of the Defendants to recover to an extent that is not possible to quantify, which could be total, i.e. it is not possible to quantify the extent to which the Bank has undermined its security and remedies against the principal debtors.

66. Having regard to the foregoing considerations and all the circumstances, it seems to me that the entire claim should be disallowed.

Should jurisdiction over the issues of Japanese law be declined on grounds of imprecision or discretion

67. Before I leave the issues under Japanese law, it is necessary to consider Mr. Dick's submission that the relevant rules of Japanese law as established by the evidence are imprecise and in any case leave the resolution of issues under Japanese law almost wholly in the discretion of the court, and that accordingly on the law of Hong Kong this court ought not to try them.  As to the law of Hong Kong he refers to 3 cases. First, in Re Westminster Bank Ltd. v. Schnapper 1936(l) A11 E.R. 322, in which Clauson 6, in the context of Article 242 of the German Civil Code (which imposes good falth principles and from which l the Japanese Article I is probably derived) appears to have exercised the discretion that a court in Germany should have exercised, but the point was not taken before him presumably because the practice of the German courts was so clear that in applying it Clauson J. did not really have to exercise much discretion.

68. Second, in Kornatzki v. Oppenheimer (1937) 4 A11 E.R.

69. 133, Farwell J. in dealing with a similar issue to that in Re Schnaper, said with reference to that case

"In that case, Clauson, J., does seem to have exercised the discretion, if it be a discretion at a11. But the point does not seem to have been taken either by the court or by counsel in the case, or considered at a11 and, if J were satisfied that this was purely a matter of discretion, notwithstanding that decision, I should feel bound to take the course of finding that it was a matter of discretion for the court, and of taking steps to ascertain from Germany how that discretion would be exercised."

However, Farwell J. was able to dispose of the matter as a question of fact, i.e. by reference to what provision an individual similarly placed would have made for his daughter as opposed to what a German court in its discretion thought was proper provision.

70. Finally, in a Fhrantzes v. Argenti (1960) 2QB 19, Lord Parker C.J. In the context of what amount a Greek court would consider appropriate as the dowry of a Greek daughter, after noting that Farwell J. In Kornatzki v. Oppenheimer felt able to evalutate the sum involved in that case, went on to say ac p. 35 that Farwell J..

"....however, clearly took the view that if discretion had entered into the matter it would have been a matter for the German court alone, and that he would not have had any jurisdiction in the matter. here it seems to me that the considerations ....taken as a. whole, must involve a very large measure of discretion, and that it would be quite wrong for our courts to claim jurisdiction in the matter.

71. Although not binding upon this court, I find the views of Lord Parker C.J. and Farwell J. of great persuasive force. Between thus they have stood now for half a Century and no contrary authority has been drawn to my attention. I accept them as authoritative statements of the law. Mr. Yu does not seek to Contend otherwise but submits the issues of Japanese law are a matter of fact and not of discretion. However, Mr. Matsuo's evidence is that the defences under Article 448 and of release are inextricably bound up with the principles of abuse of right and good faith, which involve his "Boston Clam Chowder" exercise of balancing a11 relevant circumstances. He went on to say it would be for the individual Japanese Court to select what evidence it Wished to take into Consideration, and that the approach would be base by Case. From the evidence of Mr. Matsuo it would seem that there is no established practice in the Japanese Courts on the application of good faith and abuse of right principles Comparable to those of the German Courts alluded to in the Re Schnapper and Kornatzki cases, also that application of those principles Can and do lead to partial disallowance of Claims in Japanese Courts. Furthermore, according to Mr. Matsuo, the Japanese Courts simply wrap up their Conclusions by stating that they have taken all circumstances into account, without setting out their process of reasoning. Upon that basis a very large measure of the discretion exercised by Japanese courts would be essential in applying those principles; only in that way was it possible for cue to arrive at the conclusions I have expressed, by exercising a measure of such discretion larger than that exercised in the Kornatzki and Phrantzes cases. However, I do not accept that Japanese law is imprecise in the present context. It simply leaves a large measure of discretion to the courts. I am not able to find any suggestion in the three authorities of the courts declining to apply foreign law on account of imprecision. Moreover I do not find that approach attractive; it is clearly in conflict with the modern spirit of comity expressed by Lord Diplock in The Abidin Daver (1984) AC 398, 411G : "judicial chauvinism has been replaced by judicial comity."

72. Having arrived at that result, it is not very clear what the next step should be. Farwell J. in Kornatzki stated that if he were satisfied that the issue before him was purely a matter of discretion, he would have felt found to take steps to ascertain iron Germany how the discretion would be exercised. In Phrantzes, Lord Parker having found that the considerations he had to take into account must involve a very large measure of discretion, concluded that it would be quite wrong for our courts to claim jurisdiction In the matter. As I understood Mr. Dicks, he relied upon Kornatzki and Phrantzes in support of his submission that "this court is not the place where Japanese law should be administered." It seems to me that it is not practicable to ascertain from Japan how the discretion would be exercised, as Clauson J. recommends; that option was in any case not suggested by counsel. I think Lord Parker's view that jurisdiction should be declined is to be preferred. As I see it that would require me to dismiss the Plaintiff's claim, as Lord Parker did, notwithstanding that both parties in that case were resident within the jurisdiction. If I am wrong in that conclusion the alternative would presumably be to apply Hong Kong law. I propose therefore to address that alternative. Defendants' Liability under Hong Kong Law

73. The only alternative to Japanese law as the proper law of the Guarantee is Indian law. No evidence as to the latter has been adduced and the presumption is therefore that it is the same as Hong Kong law. In principle under Hong Kong law the Defendants would ordinarily be liable under the Guarantee. As I understood Mr. Yu, he does not dispute that but submits that the conduct of the Plaintiff (substantially the conduct which is the subject of the defences under Japanese law) affords the Defendants a defence under Hong Kong law too.

74. He referred first to the following authorities, Black v. Ottoman Bank (1862) 15 Moo. P.C. 472 and Mayor of Durham v. Fowler (1889) 22 QBD 3,4, both of which concern fidelity of employee guarantees. In the former it was held that the mere passive inactivity of the principal to whom a guarantee is given or his neglect to call the principal debtor to account in reasonable time and to enforce payment against him does not discharge the surety; there must be some positive act done to the prejudice of the surety, or such degree of negligence as to imply connivance and amount to fraud. In the latter it was held that the creditors acquiescence in the debtors irregular mode of accounting was not such connivance as to discharge the sureties. As Mr. Yu concedes these cases do not directly assist him, but he submits they are of assistance in illustrating the nature of the surety's defence.

75. He relies primarily upon Bank of India v. Patel (1982) 1 Lloyd's Rep.506, in which the Bank, as in this case, was the creditor and had not been as diligent as it should have been against the debtor. Bingham J. (as he then was, in considering the rule that a contract between creditor and debtor cannot be varied to the potential prejudice of the guarantor without his consenting or being discharged, thought it might be applicable only to its peculiar subject. He went on to say (at p. 515)

"But even if the rule is more generally applicable, it applies only where the debtor' has repudiated the contract and the creditor has without notice to the surety) declined to accept that repudiation. It follows from what I have said, and will say, about the facts that in my judgment there was here no unaccepted repudiation by the company of these exchange contracts. But as a matter of principle I cannot accept Mr. Murray's submission that a surety is discharged if a creditor acts towards the principal debtor in a manner which is irregular and prejudicial to the interests of the surety. Leaving aside what may be the special case of fidelity guarantees, I consider the true principle to be that while a surety is discharged if the creditor acts in bad faith towards him or is guilty of concealment amounting to misrepresentation or causes or connives at the default by the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety, other conduct on the part of the creditor, not having these features, even if irregular, and even if prejudicial to the interests of the surety in a general sense, does riot discharge the surety.

76. Brigham J. proceeded to find the surety liable; the foregoing dictum in terms of discharge of a surety is accordingly obiter. Nonetheless it follows a careful review of the authorities which as not faulted before me. It accords with the general position in equity (see Rowlatt on Principal and Surety, 4th Ed. p. 132). No reason was shown why it should not be followed and I can find none.

77. To return to the present action, what has been referred to for convenience as the "release clause” in the Guarantee and described earlier in this judgment is contained in the following passage in the Guarantee:

"And we and each of us expressly agree that you shall have full discretionary power, without any further consent from us and without in any way affecting our liability under this guarantee, to renew any advance, and to hold over; renew, or give up in whole or in part, and from time to time, any bills, notes, mortgages, charges, liens or other securities received or to be received from the Principal, either alone or jointly with any other person or persons or from any other person or persons or bearing the name of the Principal. You shall be at liberty without in any way affecting our liability under this guarantee and we hereby give our consent to you to vary any contract or any term or terms of any contract entered into with or to release or discharge or to do any act or omission the legal consequence of which is to discharge or to enter into any composition or compound with or promise to grant time or any other indulgence or not to sue, either the Principal or any person or persons liable or any such bills, notes, mortgages, charges, liens, or other securities or any person liable as surety, or collaterally liable for the Principal, or any other person or persons."

78. There also was in the Patel case a release clause broadly to a similar general effect, though not in quite such specific terms nor perhaps quite so wide. But on my reading of his judgment Bingham J. was concerned with the principle contended for on behalf of the guarantor that "if the creditor acts irregularly and in such a way as to, prejudice the interests of the surety, the surety will be discharged unless he consents to that conduct" (p.514). The irregularity complained of was the Bank's failure to close out a foreign exchange contract. Bingham J. found that the Bank was neither bound nor entitled to closeout, that it did not wrongly fail to mitigate its loss, and that there was nothing in the Banks conduct which would in his judgment have the effect of diminishing the guarantor's rights and equities. Upon that conclusion on the facts he felt able to deal summarily with the law.

79. It seems to me, therefore, unsafe to assume that Bingham J. was saying the principles he outlined would override the provisions of the guarantee. I do not myself think they would override clear provisions of the Guarantee. Such provisions are to be construed in the same way as the provisions of any other contract (see Rowlatt p.42). On that basis the Bank had e.g. "full discretionary power .... without affecting [the guarantor's] liability .... to .... give up charges" like the provisional attachment, and to "promise ... not to sue" the principal debtors.

80. But Mr. Kishinchand's refusal to pay the Bank's demands on the bills being dishonoured was a repudiation of the contract between the Bank and the principal debtors, which, without notice to the guarantors the Bank declined to accept. I can find nothing in the release clause to sanction that and it is squarely within the dictum of Bingham J.

81. Furthermore, while I think the Bank may have been motivated not by malice but by a desire to ensure that it did recover the advances on the bills, it seems to me that even if regard is not had to the equitable principles relevant (see Rowlatt p.131), the Bank's total disregard of the unnecessary injury it was likely to inflict upon the Defendants, does amount to bad faith. I would mention only that the evidence is that at the time the principal debtors first refused to pay and also when the Agreement was negotiated, the principal debtors property interests were sufficient to meet the amounts claimed; and that the conduct of the principal debtors is such as to call into question the prospects of the Defendants being able to indemnify themselves.

82. Finally, in the context of the Agreement, I cannot see that the release clause goes beyond sanctioning a bare release or promise not to sue and extends to imposing in effect primary liability upon the Defendants, particularly in circumstances in which they were likely to be unable to indemnify themselves fully.

83. Regrettably the matter was not argued fully, but upon such submissions as were made it seems to me that on the foregoing considerations the Guarantee would not be enforceable against the Defendants under Hong Kong law.

Conclusions on the Plaintiff's Claim.

84. In the light of the conclusions I have reached, it is not necessary to deal with the issue of the rate and amount of interest due upon the principal sum claimed.

85. To sum up my conclusions, in my judgment:

86. It follows that in any even event the Plaintiff's claim must be dismissed.

The Defendants' Counterclaim.

87. I turn to the Defendants' Counterclaim. Mr. Yu made it plain that the counterclaim, essentially for subrogation to the Plaintiff's rights, would arise only if the Plaintiff succeeded in its claim, and that if it did not, the Defendants would not ask for an order, Furthermore under Japanese law, subrogation in the present context is a matter of statutory provision and not for the courts to order. Subject to any submission the Defendants wish to make I would therefore dismiss the counterclaim.

The Third Party Proceedings.

88. Finally I come to the Third Party Proceedings. As I have said the Third Parties have not appeared. Of the several items of relief claimed, Mr. Yu asks only for the 3rd i.e. a declaration that the Defendants are entitled to be indemnified by the 1st and 2nd Third Parties (i.e. SJL and Mr. Kishinchand) against any claim the Plaintiff may establish herein against the Defendants together with interest and costs. Since the Plaintiffs' claim herein is dismissed it seems to me no declaration is called for. As to the Third Parties' counterclaim, this has not been established and is dismissed. The Defendants are entitled to their costs on the Third Party Proceedings and I so order.

89. As to the costs of the main action, I can see no reason why they should not follow the event. I will accordingly make an order nisi that the costs of the action be to the Defendants. Under Order 42 r. 5B(6), the order will become absolute on the expiration of 14 days.