TADANO SOUTH CHINA CO LTD v. BRIGHTFORD LTD AND ANOTHER

cacv 152/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 152 of 2006

(on appeal from HCA NOS. 9630 OF 1999 AND 16180 of 1998)
(Consolidated)

HCA 9630/1999

in the high court of the

hong kong special administrative region

COURT OF FIRST INSTANCE

ACTION NO. 9630 OF 1999

______________________

BETWEEN

HCA 16180/1998

in the high court of the

hong kong special administrative region

COURT OF FIRST INSTANCE

ACTION NO. 16180 OF 1998

______________________

(Consolidated)

__________________________

REASONS FOR JUDGMENT

__________________________

Hon Le Pichon JA:

1.  This was an appeal by the second defendant (in HCA 9630/1999) Lam Chi Biu (“Mr Lam”) from the judgment of Deputy High Court Judge Gill dated 11 April 2006 granting Mr Lam conditional leave to defend on the payment into court of JP¥42, 560, 000 on an appeal from the master who, on 5 December 2005, had granted the plaintiff (in HCA 9630/1999) summary judgment against Mr Lam on the basis of a guarantee executed on 30 April 1998.  At the conclusion of the appeal hearing, the appeal was dismissed with costs, with reasons to be handed down later which we now do.

Background

2.  In 1997, South Sea Western Oil, (SSWO) asked Mr Lam, a director and employee of Shenzhen Mak Kee, to source a 70-ton hydraulic crane for use in Zhang Jiang.  That culminated in a series of contracts for the sale and purchase of such a crane.

3.  The plaintiff in HCA 9630 (Tadano South China) was then a recently incorporated Hong Kong company, being a joint-venture between the manufacturer, Tadano, and a Hong Kong dealer in cranes headed by Henry Luk.  Mr Lam knew Mr Luk with whom he was then on good terms.  The arrangement was that Tadano South China would sell the crane to Brightford Ltd who would be responsible for importing the crane into China for JP¥44,800,000 and Brightford, in turn, would sell the same to Shenzhen Mak Kee for HK$3 million.  For Brightford, that represented a markup of about $300,000.  There was then to be a sale from Shenzhen Mak Kee to SSWO.

4.  Delivery of the crane took place in February 1998 but as it was late, the letter of credit to effect payment by Brightford to Tadano South China lapsed. Shenzhen Mak Kee was unable to pay Brightford without first being paid by SSWO and SSWO refused to pay Shenzhen Mak Kee for a number of reasons: the documentation was not in order, some parts were missing and it could not get a licence to operate the crane.  Tadano South China declined to co-operate because of the non-payment.

5.  In order to resolve the deadlock, Mr Lam called on Mr Luk.  That resulted in Mr Lam signing a form of guarantee on 30 April 1998 in favour of Tadano South China for the unpaid purchase price but capped at JP¥42,560,000.  It was on this guarantee that Tadano South China obtained summary judgment from the master which was the subject matter of the appeal to the judge.

6.  In May 1998, Mr Lam on being informed that the licence was pending, caused Shenzhen Mak Kee to draw a posted-dated cheque in favour of Brightford.  When Brightford failed to complete the import procedure by the deadline, Mr Lam stopped payment.

7.  In October 1998, having received sufficient payment from SSWO, Shenzhen Mak Kee was in a position to settle the amount due to Brightford which, in turn, would enable Brightford to settle with Tadano South China.  According to Mr Lam, because of the devaluation of the Japanese yen meanwhile, Tadano South China refused to co-operate because that would have caused it to suffer a significant loss.

8.  A deed was apparently executed in December 1998 to give effect to a scheme proposed by Tadano South China to settle the dispute but the matter was never resolved and resulted in the commencement of HCA 9630 against Brightford in June 1999.  Mr Lam was joined as a defendant some 2 years later, in May 2001.  The summary judgment application was made four years after that, in September 2005.

9.  The judge granted Mr Lam leave to defend but made it conditional on the payment in of the full amount of the guarantee.

The application to admit Mr Lam’s fourth affidavit

10.  Counsel for Mr Lam sought leave to adduce Mr Lam’s fourth affidavit dated 20 July 2006.  The fresh evidence was directed at two matters, Mr Lam’s lack of means to meet the condition imposed and the absence of any demand by the plaintiff for payment under the guarantee prior to the commencement of the action against Mr Lam.  After hearing counsel’s submissions, leave was refused.

Mr Lam’s means

11.  In making his order, the judge had this to say:

“42. Prior to rising I invited counsel to take instructions on whether Mr Lam was good for an amount that matched the claim to be paid into court.  The response was that he did not have the wherewithal personally, but would talk to his employer and do his best to persuade them to do so on his behalf.

43. I assume, given that he is a director of Shenzhen Mak Kee who on behalf of his employer had conduct of the transaction and its history, and because he was presumably acting in that capacity when he signed the guarantee, that Shenzhen Mak Kee should and in the circumstances will assist.”

12.  Two comments may be made here: first, although the hearing before the judge was a re- hearing, no evidence had been filed by Mr Lam to deal with his means; second, the judge himself raised the matter at the hearing but no application was made there and then for an opportunity to adduce evidence.

13.  It is settled law that the Court of Appeal does not have an unfettered discretion to receive further evidence on hearing an appeal in proceedings under Order 14 and might do so only on “special grounds” as laid down in Ladd v Marshall [1954] 1 WLR 1489.  It is incumbent upon a defendant, if he has chosen not to mention his means in his affidavit showing cause, to inform the judge in chambers that he wishes to be given an opportunity of adducing evidence to show to what extent he would be able to meet the conditions that might be imposed.  See Hong Kong Civil Procedure 2006 at 14/4/42.

14.  Mr Tsang who appeared for Mr Lam submitted that having regard to paragraph 42 of the judgment, a response to the effect that Mr Lam did not have “the wherewithal personally” had plainly been given at the time and accepted by the judge.  That may be so but it was wholly inadequate in terms of having to discharge the burden which was on Mr Lam to adduce sufficient and proper evidence as to his means.  See the annotation and cases cited at 14/4/16 of Hong Kong Civil Procedure.

15.  Since the hearing, I have had the opportunity of causing a transcript of the relevant interchange between bench and bar concerning that issue to be prepared.  It would appear that the judge canvassed with counsel for Mr Lam the type of orders that was open to him to make and noted the absence of evidence as to Mr Lam’s financial circumstances particularly on the hypothesis that Mr Lam were to be ordered to pay into court the whole amount due under the guarantee.  The judge also remarked upon the evidence that the company of which Mr Lam was a director had in fact been paid the lion’s share of the price.  The judge was anxious to ascertain the practical situation if at the end of the day he were to make such an order and made it plain to counsel that he needed to know whether the order under discussion was one he could make without injustice.  Counsel was therefore asked to take instructions from his client who was not then in court although he had been present earlier.  When advised by counsel that Mr Lam was not an equity shareholder of the company, the judge commented thus:

“Yes, I know, but he is a director and he may have influence.  That is what I want you to get instructions on.”

16.  It would appear that counsel for Mr Lam did revert to the judge on that issue some half an hour later: 

“Personally, Mr Lam is unable to effect payment in because the money was credited into the account of the company.  As to whether the company will pay the money into the court, Mr Lam will do his best to try to motivate the company to help him out but he does need time to do so.”

No application was made at the time for leave to file evidence on that issue.

17.  The evidence now sought to be adduced as to Mr Lam’s means, inter alia, was to the effect that he had resigned as a director of Shenzhen Mak Kee as of 19 December 2005, that the relationship between him and Shenzhen Mak Kee had “turned sour in about end of 2005” and became irretrievable after making a request that payment be made on his behalf in order to satisfy the condition imposed by the judge.  Pausing there, that request could only have been made after judgment was handed down on 11 April 2006.

18.  It is to be noted that the evidence as to Mr Lam’s resignation as director was known to him well before the hearing below.  In fact, he had signed the Form D4 filed with the Companies Registry on 4 January 2006.  This should have been, but was never, disclosed to the judge.  The fault lay squarely on Mr Lam and his legal representatives.  It is now too late to seek to adduce that evidence.

19.  An essential element in the judge’s line of thinking when he was canvassing with counsel for Mr Lam at the hearing as to the type of order that would be open to him to make was his belief, which was entirely reasonable on the evidence before him, that Mr Lam “is a director and he may have influence”.  The burden to make full and frank disclosure as to his position and relationship with the company at the time of the hearing was on Mr Lam.  Instead of disabusing the judge of the belief that Mr Lam had some ‘clout’ vis-à-vis the company, the answer given on instructions would have reinforced the judge’s belief that it would be achievable but that Mr Lam needed time to do so.  In my view, the response could even be said to be somewhat misleading.  In any event, Mr Lam’s failure to make full and frank disclosure and/or his legal advisers’ failure to take proper instructions do not constitute an exception to the Ladd v Marshall rule.

20.  In view of the interchange between bench and bar at the hearing below, Mr Lam ought to have applied for leave to adduce evidence on the prospects of the company making the payment in the eventuality of the order specifically canvassed being made.  Having failed to do so, he must bear the consequences.

The condition precedent

21.  The guarantee, in pertinent part, read as follows:

“ … the Guarantor, hereby guarantee, unconditionally and irrevocably, as primary obligor, and not merely as surety for payment to the company on demand of the Outstanding Sum and indemnifies and keep fully indemnified the company on demand from and against all or any loss it may incur …”

It was said that the making of the demand by the plaintiff was a condition precedent to any liability to pay on the part of Mr Lam arising under the guarantee.

22.  The “no demand” point was first raised before the judge in oral submissions.  It did not feature in the written submissions below nor was the factual issue raised in the lengthy third affidavit filed by Mr Lam shortly before the hearing before the judge.  Further, despite leave having been given below for amendments to be made to the amended defence, it was never pleaded.

23.  Mr Tsang who was also Mr Lam’s counsel below informed the court that the point only occurred to him the night before the hearing and that he did inform counsel for the plaintiff the following morning.  When taxed as to why it was not included in the amendments to the amended defence, Mr Tsang submitted that the point did not need to be pleaded on the basis that Order 18, rule 19 applied and all that was needed was a master’s summons.  But this is to disregard the need to give the other side at least five clear working days’ notice prior to the day fixed for the hearing when a party intends to apply to strike out pleadings.  See Practice Direction 19.1, para. 5 and Hong Kong Civil Procedure 2006 at 18/19/3, para. (3).  The whole point of the framework is to give the other party adequate time to amend pleadings and/or file evidence and not to take him by surprise.  Had that been done, it would have saved unnecessary time and costs.

24.  It is to be noted that no form of demand was specified in the guarantee.  Whether or not a demand had been made is essentially a question of fact.  Mr Lam now wishes to put in evidence on this issue but the evidence has been within his knowledge all along and therefore cannot possibly fulfil the first of the Ladd v Marshall conditions.  For this reason the application must be rejected.  I would add that even if there had not been that difficulty, the effect of the course that has been taken in relation to the “no demand” point is such that I would have been reluctant to grant leave without requiring Mr Lam to bear substantial costs that would not otherwise have been incurred.  Since Mr Lam is in no position to meet such an order, that option does not arise for consideration in any event.

The appeal

25.  Mr Tsang submitted that the appeal ought to be allowed because it is apparent from the statement of claim that no prior demand had been pleaded, that it was still open to him to apply to strike out the plaintiff’s claim on that basis and that he must therefore have an arguable case that would justify unconditional leave to defend.  What Mr Tsang was seeking to do was nothing short of capitalising on his own errors.

26.  Had the practice direction being complied with, the plaintiff could have applied to amend his pleading and file evidence on the factual issue arising.  The striking out point would thus have fallen away.  I do not see how it can now afford Mr Lam any assistance.

27.  It is axiomatic that where conditional leave to defend has been given, this court will not interfere with the exercise of the judge’s discretion unless there has been some error of principle or misapprehension of facts or unless undue weight has been given to a particular aspect of the facts.  Mr Tsang complained that the judge failed to give consideration to the individual grounds of defence raised by merely summarised them in paragraphs 21 to 26 of the judgment.  He referred to the following passage of the judgment:

“40. There are issues of fact which perhaps do need to be resolved, and the resolution of those might lead to questions of law to be answered as well.

41. But given Mr Lam’s conduct, and a certain paucity of contemporaneous material supporting the allegations he has so lately raised, it seems to me that his assertions that he has arguable grounds of defence, some of which could legitimately be described as shadowy, in my view need to be backed up by money, or money’s worth.”

28.  As I understand it, it was said that the judge was clearly harbouring difficulties and, whilst he considered some of the grounds to be “shadowy”, he must have considered the remaining grounds to have substance.  Therefore he should have granted unconditional leave to defend.

29.  Fairly read, the passage set out above reflected the judge’s reservations as to whether any of the defences had real substance.  The order he made was one that was well within his discretion.  I can see no ground for interfering with the exercise of that discretion.

Hon Yuen JA:

30.  I agree.