THE SUMITOMO BANK v. XIN HUA ESTATE LTD. AND OTHERS

HCCL 256/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.256 OF 1998

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J U D G M E N T

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THE ACTION

1. In this case the plaintiff, a Japanese bank ("Sumitomo"), by a writ issued on 26 October 1998, seeks judgment against each of the defendants in the sum of HK$217 million, together with interest thereon and costs. This figure represented the principal sum under a term loan provided by Sumitomo to the 1st defendant ("Xin Hua Estate") pursuant to a Facility Agreement dated 26 March 1997 (as amended) for the purpose of financing the required down-payment for the purchase of a building in Hong Kong known as the Pearl Oriental Centre.

2. The 2nd defendant ("Sun Wah Finance") is an associate company which guaranteed Xin Hua Estate's obligations under the Facility Agreement pursuant to a Guarantee and Indemnity dated 26 March 1997, whilst the 3rd defendant ("GDB") issued an Irrevocable Standby Letter of Credit dated 19 May 1997 in favour of Sumitomo whereby it undertook to repay, on demand, a maximum sum of $217 million plus interest and costs upon default under the Facility Agreement. This Letter of Credit, also, was one of the security documents required under the Facility Agreement.

3. There is no dispute that Sumitomo provided the loan in question, that it was drawn down by Xin Hua Estate, and that this sum, together with interest accruing thereon, has not been repaid. These monies, therefore, are clearly due and owing, subject to the various defences and counterclaims mounted by each of the defendants, the result of which, it is said, is that the amount of the indebtedness prima facie owing to Sumitomo is at the least extinguished by the damages owed by Sumitomo to Xin Hua Estate consequent upon breach by Sumitomo of its agreement to finance the purchase of the building in question, alternatively as a result Sumitomo's misrepresentations or breach of collateral warranty. For these reasons, also, it is said that the security obligations of Sun Wah Finance under its Guarantee no longer bite, whilst in turn GDB is entitled, it asserts, either to rescind the Letter of Credit, or to have its liability to pay thereunder extinguished by virtue of its own cross-claim against Sumitomo.

4. That, in very broad terms, is the shape of the case which is larded with a considerable amount of detail and beset with even larger amounts of paper. However, before going further, it may assist to sketch in a little of the uncontroversial and established background to this dispute.

THE FACTUAL BACKGROUND

5. The history of the relationship between Sumitomo and the Xin Hua organization (initially Xin Hua International Investment Holdings Limited, and thereafter Xin Hua Estate) has as its key what has been referred to, both in this trial and in the case papers, as the 'News Building Project'. It is evident that it had been decided at the highest political levels in Beijing that the transfer of sovereignty of Hong Kong to China should be marked by the purchase of a specific building in Hong Kong which could accommodate and function as the Hong Kong base for various Mainland news organizations, and which was anticipated to be established as such by the date of the handover of sovereignty. To this end, a gentleman by the name of Mr Jin Peng came to Hong Kong to oversee this project, and in due course he met, and began negotiating with, Mr Raymond Chan of the Sumitomo Bank. These two men have figured large in the events of this case, and both have given evidence over the course of several days during this trial. Mr Chan's immediately superior, Mr Okubo, was also involved, albeit considerably more peripherally, whilst at the outset of the work on the News Building Project Mr Jin worked with Mr Mo Chin Ching, regrettably now deceased.

6. The original negotiations with Sumitomo for the financing of a building had taken place in early 1996. The intended purchase vehicle at that stage was Xin Hua International Investment Holdings, and the intended building for purchase the Guangdong Mountain Building.

7. It is eminently clear on the face of Sumitomo's internal documentation that the Bank welcomed the opportunity to participate in the financing of the News Building. An internal report to Tokyo Head Office, in connection with a preliminary financing application dated 3 September 1996, recognized the very high level of political interest in this project, and participation was seen as an avenue towards upgrading the status of the Bank in the eyes of the Central Government; indeed, Mr Jin Peng and Mr Mo Chin Ching were seen as having close connections within high political echelons in Beijing, and Sumitomo anticipated working with them as one of the key elements of its PRC strategy. Moreover, purchase of the Guangdong Mountain Building was recommended because not only was the owner, Guangdong Enterprises, perceived as offering "a good discount to Xin Hua News Agency", so that resale of the property would result in a handsome profit to the Borrower, but in addition there is no doubt that the commercial relationship had been sweetened by the efforts of Xin Hua and Mr Jin to assist in resolving a problem Sumitomo then had with a non-performing loan in China. This was a loan due from one Hong Kong Shen Nan Trading Company Limited, and it transpires that as the result of negotiations between Mr Jin and Mr Chan, Xin Hua (via a company called Treasure Star) actually had assumed responsibility for the outstanding loan payment, which had been rescheduled to be repaid over the next two years. As will hereafter appear, this assistance with the 'Shen Nan debt', as it has been termed throughout, assumed some significance in terms of the defences now raised to Sumitomo's present claim.

8. In any event, it is clear that by the latter part of 1996 Sumitomo was ready and willing to assist and to arrange a syndicated loan to assist Xin Hua in the purchase of the 'News Building'. By a letter dated 25 September 1996 addressed to Xin Hua International Investment Holdings, for the attention of Mr Jin, Sumitomo stated :

"Dear Sir,

RE: HK$880 MILLION TERM LOAN FACILITY

We refer to our previous discussion on your proposed acquisition of Guangdong Mountain Building.

Please be advised that we have approved to arrange an 18-month term loan facility up to HK$880 million for financing the aforesaid acquisition. Our final underwritten amount of this facility shall be HK$300 million and we understand that China Merchants Bank will commit for HK$230 million.

The terms and conditions are summarized in the attached sheets.

Kindly signify your acceptance by signing and returning the duplicate of this letter to us within 7 days from the date of this letter."

This letter speaks for itself. It was countersigned by Mr Jin on 26 September 1996 beneath Chinese characters indicating acceptance of all the terms and conditions enclosed with that letter, and it was duly returned to Sumitomo.

9. In fact this purchase of the Guangdong Mountain Building fell through at the end of 1996, Mr Jin by letter dated 25 November 1996 apologizing to Sumitomo "for any inconvenience caused" by the decision "approved by the leadership of the New China News Agency" to select other premises. This letter concludes with the observation that "the property market is unstable" and "therefore we must be very cautious in selecting premises again".

10. On any version of events, this letter of 25 November 1996 signified the conclusion of the Guangdong Mountain Building episode and marked the beginning of the transaction the non-completion of which by Xin Hua Estate has resulted in litigation both in these proceedings and in other current High Court proceedings issued by the vendors of the building thereafter selected for purchase, namely, the Pearl Oriental Centre in Gloucester Road, Wanchai.

11. By a letter dated 17 February 1997 from Mr Jin to Mr Raymond Chan, then Assistant General Manager of Sumitomo, written under the letterhead of Sun Wah Finance, Mr Jin stated as follows :

"Re : 6 months Bridging Loan & long term finance for the acquisition of News Building.

Dear Sir,

Further to our meeting last month, we would like to request a USD28 million six months Bridging Loan for partial down payment of News Building. The terms and conditions are set below :

(A) Loan Amount	= USD28 million.
(B) Tenor	= Six months.
(D) Security:	USD28 million stand by letter of credit will be issued by Guangdong Development Bank as collateral for the Bridging loan.
(C) Loan purpose:	To finance Sun Wah Finance Co. Ltd. on acquiring Pearl Development Center which is located on 200 Gloucester Rd. H.K. (Please check the details from the provisional agreement).

(E) Further to your facility letter dated 17.9.96 the long term finance for News Building will be arranged by your Bank whereas China Merchant Bank will commit part of the loan (USD30 million). Please reconfirm the arrangement on your revised facility letter.

Please check all informations attached and looking forward to receipt your advise in the near future.

Thanks for your kind cooperation."

It is common ground but there is no significance in the different reference to the name of the building in paragraph (C), and it is also agreed that the date of the Facility Letter in paragraph (E) should in fact have read 25 September 1996. Perhaps an explanation for this is that this letter appears, on the evidence of Mr Jin, to have been written by his legal advisor, Mr David Leung, who, whilst not called to give evidence, appears to have worked closely as Mr Jin's investment adviser during the events giving rise to this litigation.

12. It is also worth noting at this stage that some four days after this letter to Sumitomo, a company called Margaux Finance Limited, by letter dated 21 February 1997, offered Xin Hua International Investment Holdings a loan of HK1.225 billion "for your purchase of the captioned property", namely Pearl Oriental Centre.

13. Be that as it may. Pearl Oriental Centre clearly was now the sole target for the News Building Project. Consequent upon Mr Jin's letter of request of 17 February 1997, Sumitomo Hong Kong reverted to Head Office in Tokyo to obtain approval for the grant of the bridging loan in question. It was noted that the purchaser would be changed from Xin Hua Investment to Xin Hua Estate, a Hong Kong company which was "ultimately 100% owned by Xin Hua News Agency Beijing". This internal documentation speaks for itself, and is further notable for the emphasis on security for this loan in the form of a guarantee from Sun Wah Finance and a "Standby Letter of Credit in the same amount as this Loan Facility" to be issued by GDB "with SAFE approval", the latter being the acronym for the mainland Chinese State Administration for Foreign Exchange.

14. Approval for the bridging loan in the sum of US$28 million was given on 5 March 1996. As will later become apparent, this led to a sequence of three letters which have assumed prominence in argument in this case, in particular as to their effect and as to the inferences that may be drawn therefrom. The sequence commences with the letter of 6 March 1997 from Sumitomo to Xin Hua Estate from Mr Raymond Chan, by now General Manager of the China Department, to Mr Jin Peng, and indicates that the bridging loan has been approved and that an internal review was being conducted as to long term financing, as to which headquarters' final instruction would be obtained "shortly". Similar letters were sent to GDB on 14 and 20 March 1997. I revert to these letters later in this judgment.

15. In any event, this letter of 6 March was followed by a further letter dated 11 March 1997 from Sumitomo to Xin Hua Estate, for the attention of Mr Jin Peng, stating :

"Dear Sir,

RE : USD28 Million Bridging Loan Facility

We refer to your proposal letter dated 17 February 1997 on the acquisition of Pearl Oriental Centre.

Please be advised that we have approved to provide a 6-month bridging term loan facility up to USD28 million for financing partial downpayment of the aforesaid acquisition.

The terms and conditions are summarized in the attached sheets.

Kingly signify your acceptance by signing and returning the duplicate of this letter to us as soon as possible."

16. Mr Jin signed and returned this letter, and by a letter dated 14 March from Mr Jin to Sumitomo, Mr Jin "on Beijing's behalf" expressed "our thankfulness for your agreement to finance the deposit" relevant to the purchase of the Pearl Oriental Centre, at the same time requesting a letter to be sent directly to GDB "which says it will issue an S L/C upon receipt of the letter".

17. This, therefore, formed the background to the formal execution of the Facility Agreement entered into between Sumitomo and Xin Hua Estate dated 26 March 1997 relating to the bridging loan facility of HK$217 million. As might be expected, this Facility Agreement is a complex and detailed document which was no doubt the subject of intensive commercial drafting. Clause 6 thereof has been the focus of particular attention. It reads :-

"6. REPAYMENT

6.1 The Borrower shall repay the Loan on the Repayment Date together with all interest, costs, fees, expenses, charges and other monies then outstanding to the Lender pursuant to this Agreement and the other Security Documents. No part of the Loan repaid shall be available for reborrowing.

6.2 It is the intention of the Borrower and the Lender that the Loan shall be repaid out of the proceeds of the Long-Term Financing and the Borrower undertakes to procure that such proceeds are applied in and towards repayment of the Loan."

18. Long-Term Financing as used in the Agreement meant :-

"... the long-term financing of the Borrower's acquisition of the Property pursuant to the Sale and Purchase Agreement which financing is to be provided by a syndicate of financial institutions arranged and coordinated by the Lender...."

whilst the Repayment Date is defined as :-

"... the earlier of (i) the date on which the Long-Term Financing becomes available for drawing and (ii) the date falling 6 months after the Drawdown Date."

19. Security for the obligations under the Facility Agreement was provided by a Guarantee and Indemnity of the same date, 26 March 1997, executed by Sun Wah Finance, and by an Irrevocable Standby Letter of Credit dated 19 May 1997 issued in favour of Sumitomo by GDB.

20. Drawdown of the bridging loan under the Facility Agreement took place on 22 May 1997, and on 24 May 1997 Xin Hua Estate entered into a Sale and Purchase Agreement for the purchase of Pearl Oriental Centre, 200 Gloucester Road, Wanchai at the price of HK$1.72 billion. A deposit of HK$172 million was due upon the signing of this agreement (which was met out of the Sumitomo bridging loan as drawn down) whilst the balance of HK$1.376 billion was to be paid by Xin Hua Estate to the vendor's solicitors "at or prior to noon on 20 December 1997".

21. It is a matter of record that such completion did not take place, and that the deposit paid by Xin Hua Estate was forfeited by the vendors of Pearl Oriental Centre, who thereafter instituted High Court proceedings against Xin Hua Estate by reason of the failure to complete the purchase of the building. But that is to jump ahead in the story.

22. Repayment of the bridging loan under the Facility Agreement of 26 March 1997 was extended by an Amendment Agreement dated 24 November 1997 to which Sumitomo, Xin Hua Estate and Sun Wah Finance were parties, under which the "repayment date" was redefined as :-

"...the earlier of (i) the date on which the Long-Term Financing becomes available for drawing and (ii) the date falling 8 months after the Drawdown Date.",

an extension to which GDB consented by countersigning Sumitomo's letter dated 25 November 1997.

23. Thereafter, a 2nd Amendment Agreement dated 26 January 1998 between the like parties made further changes to the "Repayment Date", now defined as :-

"...the earlier of (i) the date on which the Long-Term Financing becomes available for drawing; (ii) 26th March 1998; and (iii) the date on which the Lender demands immediate repayment of the Loan.",

GDB once again providing its collateral consent by countersignature on 26 January of Sumitomo's letter dated 26 January 1998.

24. There were two further changes of note in the 2nd Amendment Agreement, Clause (d) of the Recital recording that :-

"(D) On or around 18th December 1997, the Borrower defaulted in payment of its other indebtedness thereby creating an Event of Default under Clause 17.1(k) (Cross Default) of the Facility Agreement (the 'Event of Default'). Pursuant to Clause 17.2 of the Facility Agreement, the Lender served a notice in writing on the Borrower on 24th December 1997 declaring that the Loan together with interest accrued thereon and all other sums payable under the Facility Agreement have become immediately due and payable.",

whilst Clause 8.4 for the first time introduced an 'Entire Agreement' provision.

25. Lastly, by a 3rd Amendment Agreement dated 31 March 1998, again with like parties, 'Repayment Date' was further redefined as :-

"...the earlier of (i) the date on which the Long-Term Financing becomes available for drawing; (ii) 11th May 1998; and (iii) the date on which the Lender demands immediate payment of the loan."

26. Recital E recorded what has been termed "the Further Event of Default" which "has occurred and is continuing", whilst :-

"Each of the Borrower (Xin Hua Estate) and the Guarantor (Sun Wah Finance) hereby irrevocably agrees and acknowledges that :-

(iv) the Lender is entitled, at any time, to make immediate demand on the Borrower for payment in full of the Loan and all other sums including, without limitation, interest and default interest account to the date of demand, costs and expenses and legal fees payable pursuant to the Amended Facility Agreement;"

In turn, Clause 8.4 provided :-

"8.4 Entire Agreement

This Agreement and the documents referred to herein constitute the entire agreement between the Lender, the Borrower and the Guarantor and supersede any previous expressions of intent or understandings in respect of the Amended Facility Agreement, the Loan, the Long-Term Financing, the Facility Agreement, the Event of Default or any aspect thereof."

27. Once again, by countersignature on Sumitomo's letter of 31 March 1998, GDB expressly indicated its consent to the terms of the 3rd Amendment Agreement, and in particular that all references in the Facility Agreement to the Standby Letter of Credit "shall mean the Agreement as amended" and that the Standby Letter of Credit, as amended by letters of 25 November 1997 and 23 January 1998 "shall remain in full force and effect".

28. As the foregoing summary demonstrates, the Facility Agreement and its subsequent trio of amendments covered the period of a full calendar year, that is, from March 1997 to March 1998. The bridging loan of HK$217 million remained unpaid during this period, nor did any long-term financing materialize. In this connection, during April to November 1997, a number of letters were sent from Sumitomo to Xin Hua Estate containing 'indicative proposals' and 'revised indicative proposals' for the long-term financing in question, each of which referred to Sumitomo as 'Arranger' and the 'Lenders' as "a group of financial institutions to be selected by the Arranger in consultation with the Borrower". The terms and conditions attached to each such letter of offer expressly concluded that these offers were "provided for indication purpose only, based on the current market situation and based on our Head Office's approval [and] shall not constitute a commitment from Sumitomo Bank Ltd".

29. It is clear that so far as the state of the Hong Kong property market was concerned, the "current market situation" was deteriorating through the latter part of 1997, although in terms of pursuing the long-term financing, the documents reveal a good deal of correspondence continuing between Sumitomo and Xin Hua Estate and between Sumitomo Hong Kong and its Head Office in Tokyo, which also entertained the applications by the Hong Kong office for approval to extend the repayment dates under the Facility Agreement.

30. On 21 November 1997, Sumitomo's Hong Kong office applied to Head Office for approval of long-tern financing, an application which was modified by further submissions, and on 10 December 1997, Sumitomo's Head Office approved in principle the application for the arrangement of the syndication for the long-term financing to Xin Hua Estate, but only on the basis that the bridging loan had to be repaid "by the signing of the transaction". Thereafter, in the first half of December 1997, invitations were sent to various banks to sound out their interest in participating in the "HK$800 million Term Loan Facility" to be arranged for Xin Hua Estate, although no commitment on Sumitomo's part was communicated to Xin Hua Estate and no letter of commitment was issued similar to the one of 25 September 1996 which had been sent by Sumitomo with regard to the purchase of the Guangdong Mountain Building. This lack of commitment was also made clear in inter-solicitor correspondence between Messrs Richards Butler for Sumitomo and Messrs Yung, Yu, Yuen for Xin Hua Estate, the letters of that period written on behalf of Sumitomo concluding with the rubric :-

"Without prejudice to any exchange of correspondence between our respective clients to-date, please note that nothing herein shall bind our client ... to lend or make advances to your client."

31. Looked at in the round, it is probably fair to say that matters began to unravel in mid-December 1997. By a writ issued on 12 December 1997 by one Koon Wah Finance Co. Ltd, Xin Hua Estate was sued for HK$6.25 million allegedly consequent upon the dishonour of two cheques of HK$3.125 million each dated 10 December 1997. This constituted an "Event of Default" under the Facility Agreement, and letters to this effect was sent to Xin Hua Estate, Sun Wah Finance and GDB on 24 December 1997.

32. A few days later, on 29 December 1997, newspaper reports in Hong Kong began to be published regarding the failure of Xin Hua Estate to complete its purchase of the News Building in Wanchai, and as a result Sumitomo put on hold any arrangement to commit itself for any form of long-term financing. Thereafter meetings were held by Sumitomo with Mr Jin at various times in the early months of 1998 in which Mr Jin is recorded as making proposals for the repayment of the bridging loan, and it further appears that in this regard Mr Jin was also engaged in seeking credit lines from a number of sources, including from as far afield as Italy.

33. No repayment ultimately was made, however, and matters came to a head in May 1998. In an effort to enforce its security for its loan of HK$217 million, on 12 May 1998, Sumitomo had made a written demand for payment under the GDB Letter of Credit (which was due to expire in May) which in turn stimulated Mr Jin, on behalf of Xin Hua Estate, to commence proceedings the following day, namely 13 May 1998, against Sumitomo in the Guangdong Higher People's Court.

34. The opening of the "Request for Litigation" addressed to the Guangdong Court in these proceedings reads as follows :-

"1. As the Defendant was in breach of contract in its failure to arrange for a syndicated loan to the Plaintiff, the Plaintiff suffered loss in the sum of HK$217,000,000. The Plaintiff is seeking an order that the Plaintiff be absolved from being responsible for the repayment of HK$217,000,000, being the bridging loan provided by the Defendant to the Plaintiff. This sum should constitute damages payable by the Defendant to the Plaintiff.

2. The Plaintiff seeks an order that the Defendant be responsible for all legal costs arising from the litigation and property preservation."

35. In the course of these Guangdong proceedings an 'interim preservation of property order' was obtained, the effect of which was to prevent GDB from honouring its obligations under the letter of credit which had formed the security, in part, for the bridging loan facility. The existence of this Guangdong litigation has formed a constant backdrop to this case. It spawned, for example, an application dated 26 October 1998 for an antisuit injunction by Sumitomo, which was adjourned, for reasons given in an interlocutory judgment dated 5 February 1999, and the injunction so granted by that court in fact remained in place up to and beyond the conclusion of the trial of this action.

36. It was not until a ruling of the Supreme People's Court, handed down on 21 December 1999 in Beijing, which determined that the Guangdong Higher People's Court did not have jurisdiction to hear the dispute between Xin Hua Estate and Sumitomo, that Xin Hua Estate's claim in the Guangdong proceedings was dismissed. It follows from this, therefore, that there was no longer any basis for the property preservation order obtained by Xin Hua Estate over the Standby Letter of Credit issued by GDB in favour of Sumitomo.

37. The commencement of the Guangdong proceedings consequent upon Sumitomo's formal demand for payment under the GDB letter of credit constituted a watershed in this case, and some five months later the writ in the present proceedings was issued, on 26 October 1998. Notwithstanding the onset of litigation, however, the parties continued to hold meetings in May, June and July 1998, the records of which have been made available to this court. No repayment was made, however, and Sumitomo, which earlier had applied for summary judgment (an application which was refused by judgment dated 7 May 1999) now seeks recovery of the sum claimed against each of the defendants herein.

38. I turn now to consider the specific case arising in relation to the three defendants.

THE CASE AGAINST THE 1ST AND 2ND DEFENDANTS

(i) The plaintiff's case

39. There can be no question but that, subject to the defences raised, Sumitomo is entitled to recovery of the monies lent to Xin Hua Estate under the Facility Agreement (as amended), and further to enforce the Guarantee given by Sun Wah Finance.

40. For these purposes, the position of the 1st and 2nd defendants may conveniently be considered together. No argument was advanced on behalf of the defendants that a situation could arise wherein there could be liability on the part of one and not the other, although Mr Ma SC for Sumitomo submitted that under the terms of the Guarantee (Clause 2.1) liability accrued to the guarantor "notwithstanding any dispute" between Sumitomo and Xin Hua. For all practical purposes, however, the case proceeded on the basis that the 1st and 2nd defendants stood or fell together, and for the purposes of this judgment I adopt that approach.

41. It is clear that whilst the legal burden of proving its entitlement to the sum of $217 million lies in Sumitomo, equally the legal and evidential burden of establishing the positive defences raised lies on the defendants; indeed, no issue was taken with this proposition.

42. Accordingly, I find that Sumitomo has established its prima facie entitlement to the return of the money so lent, and I consider now the particular defences that have been raised in opposition.

(ii) The defences

43. The final version of the defence pleading, the Re-Re-Re-Amended Points of Defence and Counterclaim, attained the distinction of amendments in yellow, the last of these amendments being granted on the morning of the second day of this trial. The number of pleading amendments required might be thought to indicate a degree of difficulty in the isolation and formation of the defence case, and may possibly provide some indication of the credibility of the story therein revealed, or, at the least, signify difficulties in pinning down the analytical case.

44. Be that as it may. In outline at least, the case advanced by the 1st and 2nd defendants may conveniently be classified under two main heads, although it is fair to say that in his persuasive closing argument Mr Griffiths SC on behalf of the 1st and 2nd defendants demonstrated enthusiasm for but one of these lines of argument.

(a) The Revised Agreement

45. The pleaded case in this regard is contained in paras 10-11A and 20 of the Defence. In essence, it is there said that at the request of Sumitomo, which was concerned about recovery of a bad debt of some $11 million owed to the bank by Shen Nan Trading Company (which appears to have been effectively owned and controlled through the Nanjing Municipal Government), Mr Jin had been to Nanjing at the end of August 1996 to try to assist in the recovery process, and that after the Nanjing trip, Mr Raymond Chan, through David Leung, made the offer that if Mr Jin assumed the Shen Nan Debt, the plaintiff would finance the News Building project. Shortly thereafter Xin Hua International Investment Holdings decided to accept this proposal, and the agreement itself, concluded orally "in April 1996", was that the plaintiff would finance up to 70% of the purchase price of the Building (then the Guangdong Mountain Building) subject to valuation with an upper limit of $880 million, the term of the facility would not exceed 18 months, and interest was to be 1% above HIBOR.

46. In turn, it is pleaded that in January 1997 this agreement was orally revised to apply to the Pearl Oriental Centre, so that the borrower would now be Xin Hua Estate, and that the amount of the Long Term Financing would be 70% of the estimated value of the building or 70% of the purchase price, whichever was the lower.

47. I can deal with this aspect of the case very shortly. In so far as the issue remained alive at the close of the case, I unequivocally reject this allegation of the "revised agreement". There is no reference to such agreement (or to the alleged original agreement said to have been so revised) in any of the documents in this case, it is positively at variance with the content and tenor of the existing commercial documentation between the bank and Xin Hua, including the specific terms of the bridging loan as advanced and the bank's projected role as "arranger" of a full term loan facility of $880 million, and on its face it makes scant commercial sense. Whilst I have no doubt that assistance in resolving the "Shen Nan debt" problem was most welcome, and served to engender substantial commercial goodwill between the parties, it is difficult to accept that a hardheaded bank would undertake a singular commitment itself to fund $880 million in return merely for the resolution of a $12 million debt. Further, I have no hesitation in disbelieving Mr Jin on this point, whose evidence on the issue varied not only in terms of the pleaded version of events, but also internally between his evidence in-chief and in cross-examination, which in turn further contrasted with his version contained in his affirmation sworn in relation to the anti-suit proceedings.

48. I do not consider it necessary to go into further detail. In my judgment, the case on the 'revised agreement' clearly failed to get off the ground, which no doubt explains why Mr Griffiths SC, for the 1st and 2nd defendants, chose to focus in his final address solely upon the misrepresentation and collateral warranty argument.

(b) Misrepresentation and collateral warranty

49. In essence, the submission put forward - which now lies at the core of the defendants' case - is contained in paras.17A and 22A of the Re-Re-Re-Amended Defence. It is a case run in the alternative to the case on the revised agreement (which is perhaps unsurprising given that the latter is factually inconsistent with the misrepresentation argument), and in essence alleges that in terms of the dealings with Xin Hua International Investment Holdings the plaintiff represented that :-

(a) there would be no difficulty in providing and arranging the long term finance in form of a syndicated loan;

(b) long term finance for the acquisition of Guangdong Mountain Building would certainly be made available;

(c) an 18 month term loan facility up to $880 million had already been approved by the plaintiff's Head Office in Tokyo; and

(d) further documentations were mere formalities.

50. Particulars furnished as to when these representations were made alleged that they were made orally at meetings attended by the plaintiff's officers with Xin Hua, and are to be contained in or inferred from certain correspondence of September 1996.

51. In turn, in the subsequent dealings with Xin Hua Estate, now of course in terms of the Pearl Oriental Centre, "the said representations ... continued in effect", and were "reinforced and reaffirmed by the plaintiff's further representation to Jin acting on behalf of the 1st defendant" to the effect that :-

"(a) the plaintiff would continue to fully support the acquisition of the Building pursuant to its previous promise to finance the acquisition of the Guangdong Mountain Building;

(b) the revised long term finance would receive the final approval of the Tokyo Head Office soon;

(c) formal documentations would be submitted once approval was granted;

(d) the Bridging Loan including interest shall be repaid upon the 1st defendant's receipt of the long term finance;

(e) upon repayment of the Bridging Loan, the Standby Letter of Credit to be opened by the 3rd defendant would be returned immediately to the 3rd defendant;

(f) in the premises, the revised long term finance would certainly and undoubtedly be made available.

Particulars

The said representation are contained in or to be inferred from the plaintiff's letter to the 1st defendant dated 6 March 19961997."

52. Paragraph 22B recites that "acting on the faith of the said representations but not otherwise, the 1st defendant entered into the Facility Agreement", whilst by further amendment made at the start of this trial, para.22C asserts that :

"each of the statements, representations and agreements made by or on behalf of the plaintiff ... constituted collateral warranties or agreements in consideration of which the 1st defendant executed and entered into the Facility Agreement."

53. The core of this case, therefore, is in effect that the long term finance required to complete the purchase of the Pearl Oriental Centre would "certainly and undoubtedly be made available", and that the bridging loan, the recovery of which is the subject of this action, was to be repaid out of and upon the receipt by Xin Hua Estate of the relevant long term finance.

54. In advancing this case Mr Griffiths SC painted the picture of Mr Raymond Chan, an experienced banker in "marketing" deals who, together with his superior, Mr Okubo, clearly regarded the News Building project as a "wonderful opportunity" to enhance the bank's China business, and accordingly were wholly anxious to obtain the project. For Mr Chan, also, this deal represented a personal leap forward; not only had he received praise from Tokyo for helping to resolve the problem of the 'Shen Nan debt', but he clearly perceived an on-going benefit to his burgeoning relationship with Xin Hua, particularly in the context of a large commercial deal. In the atmosphere prevailing before the property crash in the latter part of 1997, the economy and the property market were booming, and, said Mr Griffiths, Mr Chan clearly believed that syndication of the long term financing would represent no difficulty.

55. By contrast, submitted Mr Griffiths, Mr Jin was not a banker. He had no banking experience, having trained as an architect, before he became a cadre in the PRC and began to work for Xin Hua News Agency. He had never been involved with a syndicated loan, and clearly had relied very much on the representations made to him by Mr Raymond Chan of Sumitomo.

56. To a significant extent, evaluation of this submission depends upon the court's assessment of the two major witnesses on each side in this case, Mr Jin Peng on the one hand and Mr Raymond Chan on the other, and it may assist to indicate my views at this stage. Having observed the witnesses, I am in little doubt that the evidence of Raymond Chan, who strongly disputed the representations alleged, is to be preferred to that of Mr Jin on all significant aspects. That is not to say that I formed the view that the impression made by Mr Chan was uniformly favourable. He was noticeably defensive in certain parts of his evidence, in particular, for example, in his reluctance (which, for that matter, was also shared by Mr Okubo) to accept the obvious commercial advantages to Sumitomo of its participation in the News Building project, and also, perhaps, in the context of warning as to difficulties of syndication if the market were to drop - albeit in those heady days this doubtless appeared unlikely. Nevertheless, taken overall I have no doubt that Mr Raymond Chan's version of events (taken together with the basically corroborative evidence of his superior, Mr Okubo) is greatly to be preferred.

57. In his final submission Mr Ma SC chose to describe the evidence of Mr Jin (and indeed that of Mr Yang, to whose testimony I later refer) as "evasive, inconsistent and prone to embellishment", and for my own part I do not think that this pitches it too high. The stakes in this case, both in economic and political terms, were and are clearly very high for Mr Jin, and I have no doubt whatever that his mindset was of a man who was tempted to say whatever he perceived was necessary in order to establish his case. He gave evidence with an occasional charm, but without wishing to be unkind, for my part I feel it difficult, absent documentary confirmation, to place any reliance on the crucial parts of his evidence. The evidence which was now tendered orally in terms of the alleged representations (and, for that matter, in terms of the alleged Revised Agreement) finds no reference whatever in the 20 or so box files of primary papers assembled for the purposes of this action, and I have reluctantly concluded that, for the purpose of this litigation, Mr Jin was conducting what in other contexts might be described as a revisionist view of history. Not only is there no echo of the allegations presently made anywhere in the papers, but the case of the 1st and 2nd defendants is manifestly at variance with all the contemporaneous documents ostensibly governing their commercial relationship with the Sumitomo Bank - the Facility Agreement, the Amendment Agreements, the "indicative proposals", the general inter-client and inter-solicitor correspondence - and is further at variance with the actual conduct of the parties during the period of their relationship. One wonders, for example, how the Amendment Agreements properly could have recited the "default" of Xin Hua if the version of events now put forward had any basis, to say nothing of the "entire agreement" clauses. In fact, as Mr Ma SC pointed out at the outset of proceedings (a point the force of which became increasingly apparent as the case wore on), if the defendants' case was now to be believed, the bulk of the commercial documentation in this case was brought into existence unnecessarily and for no good reason whatever.

58. I do not accept that this is and was the case, and in so far as may be necessary, I unequivocally reject the pleaded assertion that such documentation constituted no more than "mere formalities". Parties who enter into commercial transactions backed by serious commercial documents should, I venture to suggest, expect commercial courts to place very considerable weight upon such objective indiciae of their relationship, and should not be surprised if the court is instinctively reluctant to cast all such documentation aside in favour of allegations as to representations or collateral warranties which not only find no place or profile in the accumulated papers, but (if true) render redundant and inapposite all the contractual documents which have been brought into existence. I unreservedly reject, therefore, the "mere formalities" assertion.

59. Moreover, if the validity of the assertions as to representations and collateral warranties are measured not only against the contemporaneous commercial documents, but also against the conduct of the parties, the defendants find no succour there either. Until the commencement of the Guangdong court proceedings in May 1998, nothing Mr Jin is recorded as saying or doing in any way points towards a verification of the case now being advanced. To the contrary. The meetings which were held between the parties in mid-1998 tend to establish precisely the opposite. As I understand the position, privilege originally was claimed for the notes of these meetings as prepared by officers of Sumitomo, but for reasons which remain unclear, such privilege was specifically waived when these notes became the subject of hearsay notices issued by the defendants shortly before the commencement of this trial. Apart from an occasional minor quibbles in terms of translation, these notes have not been disavowed by Mr Jin and as such (I put it at its lowest) they are clearly inconsistent with his contentions as advanced to this court.

60. Whilst in many ways a postscript to the primary events of this case, these notes are before the court and cannot be ignored. There were apparently a series of meetings in May, June and July 1998; one particularly telling "Meeting Report" is dated 19 May 1998, and occurred a few days after Sumitomo had received notice of the Guangdong litigation, the meeting apparently being held in order "to clarify the case". Mr Jin is there recorded as explaining that "the legal action against us was instructed by Beijing H.O." and that "the main reason for so doing is to buy some time so that they can arrange the funds to pay us". This memo continued :

"The main aim for Mr Jin is to escape from putting the 'loss making' on the table which he hardly can explain to Beijing Headquarter. Therefore, his aim is to fulfill the purchase contract regarding the News Building, but he has not compromised with Pearl Oriental yet. The case is still outstanding..."

61. The efforts of Mr Jin to find an alternative sources of funding in China and in Italy are also therein recorded, and what is noteworthy in both this and other memoranda is an absence of any position on the part of Mr Jin other than to repay Sumitomo what is recognized to be clearly owed. For example, a further meeting on 9 July 1998 attended by Mr Jin goes into detail about "the Italian funds arrangement" which it is anticipated would "be available within the coming few days", at which time upon the relevant bank confirmation the Guangdong injunction on the Standby L/C was said to become "automatically void". At the same meeting, the representatives of Sumitomo, Mr Raymond Chan and Mr Jacky Chu, are recorded as telling Mr Jin that if no news is received from him within the week "we may have to take formal legal action against Xin Hua Estate Ltd in Hong Kong" which may serve to hinder his purported Italian deal, whilst Mr Jin appears to have responded that whilst he could do nothing to stop that, he in turn would also take legal action against Sumitomo "for not executing the syndication loan" and that "although he knows that he will lose the case in Hong Kong but at least he can buy some time".

62. Against this background, therefore, it is difficult to take Mr Jin's oral evidence at face value, and I do not do so. The misrepresentation/collateral warranty case has not been established on the basis of Mr Jin's oral testimony, and I find that this case has not been made out. Nor do I accept Mr Griffiths' characterization of Mr Jin as, in effect, a 'commercial naif' preyed upon by experienced bankers in Hong Kong and unknowingly subject to the vagaries of the Hong Kong property market. I have no doubt whatever that Mr Jin, who was entrusted with the News Building project and had been in Hong Kong for two years prior to the relevant events in this case, was very well conversant with property related matters, and in any event it is not disputed that he had the further advantage of advice from Mr David Leung, who was not called to give evidence in this case, but who is said to have been Xin Hua's investment adviser.

63. It was perhaps in anticipation of the difficulties inherent in and arising from conflicting viva voce evidence in a case of this nature that in his closing submissions Mr Griffiths observed that he did not wish "to tie myself to exactly what each side said", and invited the court to consider the probabilities of the representations in question having been made by Mr Raymond Chan by focusing upon the March 1997 correspondence, which brings into relief the sequence of three letters dated 6, 14 and 20 March 1997 (the latter two being formally addressed to GDB and the first being written to the 1st defendant, but for the eyes of GDB). As Mr Griffiths put it, the March 1997 correspondence "is contemporary and so not fallible".

64. Because these letters figured large in the argument on behalf of all the defendants, I should, perhaps, now set out the relevant parts.

65. The letter of 6 March 1997 from Sumitomo to Xin Hua Estate, for the attention of Mr Jin Peng reads :

"Re : Your Letter of Intent for Purchase of the Hong Kong Pearl Oriental Centre

On the 17th September 1996, our bank have undertaken to arrange the syndicated loan for your purchase of Guangdong Mountain Building. Because Vendor's refusal to sell such property, your Company have recently purchased the Pearl Oriental Centre. Regarding your acquisition of such purchase, our bank expresses full support to it.

For such acquisition, on the condition of Guangdong Development Bank providing a Standby Letter of Credit, our bank (Head Office) have approved a Bridging Loan of HKD$220,000,000.00. Furthermore, in respect of the long-term Loan Facility, our bank is now having an internal vetting of the same and final approval and reply will be obtained from our Head Office soon.

Upon the drawing down of the long-term facility, the Bridging Loan shall be repaid with interest immediately and upon repayment of the Bridging Loan and interest by your Company, our bank would confirm to return forthwith the Standby Letter of Credit to Guangdong Development Bank. We hereby urge your company to complete the acquisition at your earlier convenience."

66. The next two letters of 14 and 20 March respectively, from Raymond Chan of Sumitomo for the attention of Mr Yang Ming, General Manager of the Offshore Business Department at the Head Office of GDB in Guangzhou, read as follows :

"Re : Letter of Intent in respect of the Purchase of Hong Kong Oriental Pearl Centre by Xin Hua Estate Limited

With regard to the purchase of Hong Kong Oriental Pearl Centre by Xin Hua Estate Limited, our bank hereby express our full support for it.

In respect of this purchase, subject to the receipt of the Standby Letter of Credit of your bank, Head Office of our bank has approved and provided a Bridging Loan of USD28,000,000. Moreover, regarding the arrangement of long-term finance, internal vetting procedure is underway the approval procedures are underway; a final decision shall be obtained from the Head Office in the near future. At the time of the withdrawal of the money of such long-term finance, all the principal and interest accrued out of the Bridging Loan should be repaid immediately out of it; when we have confirmed that the interest and principal of the Bridging Loan has been repaid in full, we will return the Standby Letter of Credit of your bank immediately. In the circumstances, we hereby request wish that your bank can arrange your bank to arrange the Standby Letter of Credit as soon as possible".

[14/3/97]

and

"Re : Letter of Intent in respect of the Purchase of Hong Kong Oriental Pearl Centre by Xin Hua Estate Limited

With regard to the purchase of Hong Kong Oriental Pearl Centre by Xin Hua Estate Limited, we hereby express our full support for it.

In respect of this purchase, subject to the receipt of the Standby Letter of Credit of your bank our Head Office has approved and provided a Bridging Loan of USD28,000,000. Moreover, regarding the arrangement of long-term loan, the approval procedures are underway. A final decision shall be obtained from the Head Office in the near future. At the time of the withdrawal of the money of this long-term loan, all the principal and interest of the Bridging Loan should be paid off immediately. When we have confirmed that the loan has been paid off in full, we will return the Standby Letter of Credit of your bank immediately. Besides, when the Bridging Loan has become due for repayment, our bank will, according to the circumstances at that time, extend the time for repayment of the Bridging Loan to ensure that the syndicate in respect of the long-term loan can be established smoothly. We hereby request your bank to arrange the Standby Letter of Credit as soon as possible."

[20/3/97]

67. Mr Griffiths SC strongly submitted that the letter of 6 March in itself contained representations absent any necessary warnings or qualifications. In fact, he said, the $880 million syndicated loan had been approved for Guangdong Mountain Building, and Xin Hua International Investment had been so informed on 25 September 1996. Accordingly the prior approval must be relevant in the context of this letter, and the clear implication from the words "regarding Pearl Oriental Centre our Bank expresses full support for it", when read in terms of what followed, must be that the financing of Pearl Oriental Centre was to be on a like basis. The other two letters of 14 and 20 March 1997 - the first being delivered to Jin Peng for onward transmission to GDB and the second being amended (in terms of the underlined passage) and signed at a meeting at which Mr Jin was present - clearly made the same representations, he said, and when read in the light of the wording of the subsequent Facility Agreement of 26 March 1997, there was no doubt that the letters read as a whole contain representations (which in themselves were also collateral warranties) to the effect that the long term facility for Pearl Oriental Centre will be dealt with in a like manner, that final approval "will" come soon, that the Bridging Loan will be repaid from that facility, and that it was safe to go ahead and "complete the acquisition".

68. These misrepresentations were negligent, asserted Mr Griffiths, because they gave no warning that Sumitomo Head Office approval might not be received, and further that it might not be possible to arrange the facility if the market changed, so that it would not be safe to complete the acquisition at that stage. Warnings were not given because Mr Raymond Chan was highly anxious to complete this large and profitable deal, the prognosis for the market demonstrated that there would be no difficulty in arranging the syndicated loan, and he believed that Head Office approval definitely would be forthcoming.

69. Mr Ma SC attacked the misrepresentation/collateral warranty case root and branch, and described the case mounted in terms of the letter of 6 March as "wholly misplaced and unrealistic". He argued that the pleaded case, which was the case he had been occupied in meeting at this trial, was founded upon various representations allegedly made at certain Shenzhen meetings in July and August 1996, which were said to be contained in or inferred from three letters of 11, 25 and 26 September 1996. This case was nowhere made out, he asserted, either on the face of that particular correspondence or in Mr Jin's oral evidence; indeed in so far as those meetings had been concerned, Mr Jin clearly had been embarrassed, in that when it had emerged in Raymond Chan's evidence-in-chief that his Re-entry Permit clearly demonstrated that he could not have been in Shenzhen at the relevant time, Mr Jin had not sought to place him at these meetings, notwithstanding his pleaded presence thereat. Nor had it emerged from Mr Jin's evidence that the pleaded representations actually were made by the plaintiff's representatives at that meeting.

70. If this be correct, argued Mr Ma, the extended representations (as pleaded in para.22A) could not be supported. Moreover, the March correspondence was not only pleaded as an extension of the oral representations earlier made, but also in the context of the alleged Revised Agreement, so that if an agreement had been reached, there could not have been reliance on the March correspondence; in other words, assessment of the credibility of this defence required its juxtaposition against the other factual defences pleaded, and as such this March correspondence could not just be "conveniently excised" from the remainder of the defendants' case.

71. In my judgment there is much in this submission. I bear in mind, also, that the case of misrepresentation/collateral warranty emerged by amendment relatively late in the day, and yet plainly it had come to occupy centre stage as the fulcrum of the defendants' case. It is as plain as a pikestaff, in light of the manner in which this trial developed, that the misrepresentation/collateral warranty case has been perceived as the only point which could reasonably be advanced, and has duly been put forward with considerable skill. But I do not consider that it withstands detailed scrutiny. In my judgment neither representation nor reliance, nor indeed collateral warranty, has been established, either upon the viva voce evidence or upon the documents, and I so hold.

72. So far as the substance of the March 1997 correspondence is concerned, and in particular the 1st and 2nd defendants' case on the 6 March letter, this document clearly cannot be minutely construed in isolation from its factual context. Whilst it is evident that Sumitomo had approved the Bridging Loan, equally it is clear that the Long Term Financing was still undergoing "internal vetting". It is also significant that at the stage of this March correspondence, no terms and conditions of such Long Term Financing had been agreed, and plainly it cannot be gainsaid that where a loan of these dimensions is concerned, a myriad of essential terms and conditions remain to be agreed, the whole package thereafter being reduced into the sort of extensive commercial 'boilerplate' associated with significant deals of this type.

73. Accordingly, I agree with Mr Ma that at the highest these three letters can only have reflected an approval in principle, which itself would be entirely consistent with what followed this March correspondence, in April, May, June and November 1997, during which period letters were sent from Sumitomo to Xin Hua Estate containing "indicative proposals", each concluding at the end of the recitation of proposed terms and conditions with the rubric that the offer was "for indication purposes only, based on the current market situation and subject to our Head Office's approval. It shall not constitute as a commitment from us".

74. In light of these further letters, which attracted no contradictory response from the defendants' solicitors, the irresistible conclusion is that the defendants cannot and did not seriously consider that there was a binding commitment on Sumitomo's part to provide long term finance, and it is thus equally difficult to see how, within this context, the letter or letters of March 1997 can be considered as constituting representation or collateral warranty, as is now suggested. As earlier indicated, I do not accept Mr Jin's evidence - indeed a re-reading of the transcript serves to confirm the initial impression formed during the hearing - but in any event, and for the avoidance of doubt, I specifically reject his evidence that after receipt of these indicative proposal letters in the April-November 1997 period that he spoke with Raymond Chan, who assured him of the long term financing; as Mr Ma SC pointed out, this matter (along with several others) was never even put to Mr Chan for his comments, and I decline to view this as an oversight of counsel.

75. It cannot be gainsaid that no similar letter of undertaking was received by Xin Hua Estate similar to the 25 September 1996 letter sent by Sumitomo with regard to the then proposed purchase of the Guangdong Mountain Building, nor is there anything in the conduct of the 1st and 2nd defendants throughout 1998, whether on the papers or in evidence, which demonstrates or otherwise reveals any complaint in terms of the case presently advanced. Quite the reverse. The reality is that Mr Jin, on behalf of Xin Hua Estate, at no stage disputed liability to repay the Bridging Loan under the Facility Agreement, and indeed made every effort to extend the repayment date for as long as was possible to permit the opportunity to so repay. In such circumstances, the probabilities weigh heavily against the assertion as to the existence of such representations or warranties as now alleged. The objective indications are to the contrary, and I further specifically reject Mr Jin's suggestion, made during cross-examination, that in the 1998 meetings he had complained. Nor does the extensive solicitors' correspondence contain any reference by those acting on behalf of the 1st and 2nd defendants to the fact that the plaintiff was to be taken as being committed to provide or arrange finance, even though, according to Mr Jin, they had been informed that there was such commitment to provide such finance.

76. At the end of the day, in my judgment, the evidence points inexorably to the failure of the misrepresentation and collateral warranty argument, and I so hold.

(iii) The defendants' counterclaim

77. It must not be overlooked that the 1st and 2nd defendants mounted a counterclaim, which in essence sought to attribute losses arising from the non-completion of the purchase of the Pearl Oriental Centre (attributable to forfeiture of the deposit of $172 million, wasted expenditure on the proposed purchase, damages payable to the vendor and loss of profit). To this end, on behalf of the 1st defendant, Mr Griffiths SC sought to set off against the plaintiff's prima facie entitlement to recovery of its $217 million loan the damages arising from the plaintiff's misrepresentation and breach of collateral warranty, and suggested that, in effect, the amount of crystallized loss suffered by Xin Hua Estate would mirror Sumitomo's claim, and hence there would be no outstanding balance attributable to either party.

78. So far as Sun Wah Finance is concerned, he sought rescission of the Guarantee, but said that if there was a theoretical basis for damages, once again the proper order would be a "balance judgment", so that the loss suffered by Sun Wah would reflect the loss of the sum prima facie payable under the Guarantee.

79. The failure of the 1st and 2nd defendants' case in misrepresentation and breach of collateral warranty ineluctably means that these counterclaims (which it is difficult to believe were ever seriously pursued) must also fail. Accordingly, they are dismissed.

THE CASE AGAINST THE 3RD DEFENDANT

(i) The plaintiff's case

80. The plaintiff pursues the 3rd defendant, GDB, pursuant to the Irrevocable Standby Letter of Credit issued by GDB on 19 May 1997. It was issued "at the request and for the account of Xin Hua Estate Limited" to a maximum liability of "HK$217,000,000 together with interest and costs pursuant to the Facility Agreement", and is expressed to be payable upon Sumitomo's written demand stating, inter alia, "that a default has occurred pursuant to the Facility Agreement dated 26 March 1997 made between Xin Hua Estate as Borrower and Sumitomo as Lender". Clause 3 of the Credit further provides :-

"Payment pursuant to the demand hereunder shall be made in Hong Kong dollars for value 3 Hong Kong business days after the receipt of the demand and shall be paid without set-off or counterclaim to your Hong Kong account as notified in the demand and shall revoke this L/C."

81. Further, Clause 11 recites that the L/C is subject to the UCP (1993 Revision, ICCP 500), whilst Clause 12 states that :-

"This L/C shall be governed by and construed in accordance with Hong Kong law and we hereby submit to the jurisdiction of the courts of Hong Kong."

82. Lastly, Clause 15, which recited that this L/C shall become effective "upon registration hereof with the State Administration of Foreign Exchange" is deleted.

83. A formal written demand under the L/C was made by Sumitomo on 12 May 1998, and it is a matter of history that this action stimulated Mr Jin to issue the Guangdong civil proceedings and to obtain an interim preservation of property order, thereby precluding GDB from complying with Sumitomo's demand and making payment under the L/C. Consequent upon the ruling of 21 December 1999 by the Supreme People's Court in Beijing dismissing for want of jurisdiction Xin Hua Estate's claim in the Guangdong litigation, this court has been informed that the property preservation order was formally discharged by a Ruling of the Guangdong Higher People's Court on 1 February 2000. It follows, therefore, that there presently is no formal legal impediment preventing GDB from honouring its commitments under Irrevocable Standby L/C No.GDBJWSB97005. Why then does GDB assert that it has no liability to pay?

84. GDB's pleaded case regarding the Standby L/C commences at paragraph 25E of the Re-Re-Re-Amended defence. There are fundamentally three lines of defence put up on the pleadings : first, the misrepresentation / breach of collateral warranty argument (which overlaps with, but does not precisely factually mirror, that which is run by the 1st and 2nd defendants); second, that the issuance of the L/C was a "mere formality" and entailed no risk on the part of GDB; and third, what has been referred to as "the SAFE issue", namely that the L/C was and is illegal under PRC law since it had not been approved by nor registered with the State Administration of Foreign Exchange pursuant to the relevant statutes and regulations.

85. Evidence on behalf of GDB was given by Mr Yang Ming, the General Manager of the GDB Offshore Banking Department, who was the GDB official who dealt with Mr Raymond Chan of Sumitomo at the time when Sumitomo required the security of an irrevocable standby L/C which could stand as alternative security for the monies advanced to Xin Hua Estate. I did not find Mr Yang to be an impressive witness; he clearly felt under a certain amount of pressure, which on occasion led to some agitation in his demeanour, and I do not approach his evidence, which also contained inconsistencies, with any confidence. Once again, should such be necessary, on all material aspects, I prefer the opposing version of events given by Mr Raymond Chan.

86. For reasons requiring little elaboration, the issuance of an irrevocable letter of credit is seriously regarded in international commerce, so that (as Mr Yang was clearly well aware) banks which issue such instruments are expected to honour their obligations thereunder. Notwithstanding the arguments now put forward, the undisputed facts are that GDB issued the L/C, thereby earning a fee of some HK$280,000, and against the issuance of that credit itself had sought and obtained certain counter-guarantees : a Deed of Indemnity provided by Xin Hua International Investment Holdings dated 19 May 1997, and a Deed of Counter-Guarantee, also dated 19 May 1997, provided by the 2nd defendant, Sun Wah Finance, both of which counter-security documents were clearly issued on a back-to-back basis with the L/C of that date. The position of GDB now, apparently, is that rather than meet its primary commercial obligations and in turn seek to enforce its own security, it has elected, in tandem with the case of the 1st and 2nd defendants, to dispute its liability to honour its own irrevocable credit - not, perhaps, an attractive stance for a reputable commercial bank to adopt.

87. Let me deal immediately with the "mere formality" argument. This is inextricably linked with the case on misrepresentation in that in terms of the representation underpinning this point, it is pleaded that "the standby L/C was merely required to satisfy the Head Office requirement of the Plaintiff". Whilst Mr Warren Chan SC, for GDB, made no mention of reliance on this aspect in his opening, the concept of the L/C not being drawn on and entailing no risk to GDB was very much a part of Mr Yang's evidence, albeit under cross-examination "no risk" became "not much risk". In any event, in so far as it be relevant (for his part Mr Chan SC clearly wished to deemphasise this particular line), I dismiss this proposition. It is abundantly clear from the internal reports of GDB dated 24 March 1997 and 16 May 1997 (both signed by Mr Yang) that GDB accepted that the L/C was a valid security, that risk of some order did attach to the issuance of the L/C : "the economic risks are relatively small" and the letter of credit to be issued "will not necessarily be encashed externally" were two of Mr Yang's specific comments in the second report recommending the issuance of the L/C, which was always subject to necessary counter-guarantees being put in place.

88. I turn therefore to the principal case now made for the 3rd defendant bank in terms of negligent misrepresentation and breach of collateral warranty, namely, that the Long Term Financing would be available, there was linkage between repayment of the bridging loan and arrangement of the syndicated loan constituting such long term financing, that there would be extensions of time to repay if by the scheduled date of repayment long term financing was not in place, and that if no syndicated loan could be arranged, Sumitomo itself would take on the responsibility for the loan.

89. In his closing submissions, Mr Chan SC painted an engaging picture on behalf of his client. There were very compelling reasons, he said, why it was the "strong wish" of Sumitomo to finance the purchase of the News Building, and it was also clear, from Mr Yang's evidence, that GDB was not keen to issue a letter of credit for $217 million. Mr Raymond Chan, on the other hand, had actively courted GDB in this regard - he had even taken the time to travel to Guangzhou to see Mr Yang about the issue of the L/C - and when after more than a month had elapsed, Mr Chan had written the 6 March letter for the eyes of GDB, and then had followed it up with the two further letters of 14 and 20 March 1997. In this regard, Mr Chan adopted Mr Griffiths' arguments as to the import of these letters, and further asked the court to prefer the evidence of Mr Yang to "the improbable version" of Mr Raymond Chan : "not a credible witness". As a matter of probability, Mr Chan asserted, the representations in question must have been made, and it is equally probable that GDB had relied on those representations. Moreover, the two companies which had put up the security for GDB's L/C exposure were, on Mr Yang's evidence, clearly "not good for the money", and absent the letters dated 14 and 20 March 1997, the 3rd defendant clearly would not have issued the Credit.

90. Disputing these contentions, and in asserting the "unsustainable" nature of GDB's case, Mr Ma SC echoed the arguments he had raised with regard to the 1st and 2nd defendants. The trilogy of letters in the March correspondence failed to assist GDB to get home on its case, just as this had failed to assist Xin Hua and Sun Wah Finance; indeed, the final paragraph of the third letter, of 20 March 1997, made it clear that there was no certainty of an extension of the repayment of the bridging loan. Nor were the representations now relied upon referred to or in any sense borne out by GDB's own internal reports for March and May 1997 in relation to the opening of the L/C. In this regard, he submitted, not only was the perceived risk of issuing the credit considered, but it was also recognized that Sumitomo was conducting an internal assessment regarding the long term finance, albeit final approval was anticipated. Critically also, there was no reference whatever in any of these internal reports to the representations as now relied on, although such would have been obvious matters to have been included in just such reports. Nor could there have been any question of GDB or Mr Yang believing that Long Term Financing would definitely be available. The proper construction of the March correspondence apart, in his evidence in cross-examination Mr Yang had expressly recognised that before long term facilities amounting to many millions were entered into, there would have to be agreement between lender and borrower as to the precise terms and conditions for such loan, and there was no suggestion that Mr Yang knew what such terms might be, nor whether Xin Hua Estate would agree thereto.

91. In addition, continued Mr Ma, GDB's conduct at meetings in 1998 with the plaintiff demonstrated that it recognised its liability to Sumitomo; none of the matters now put forward were ever raised, and there was certainly no assertion that the L/C was entered into because of the representations contained in the March letters. Nor, if the representations had been made as alleged, was there any explanation for GDB's fax dated 13 August 1998 whereby at Xin Hua's request it had extended the date of expiry of the L/C to 11 November 1998.

92. I agree with Mr Ma's submissions. In light of the history of this matter, in my view GDB cannot properly say, as it now purports to do, either that the L/C does not constitute a valid commercial obligation or that there is no liability to make payment thereunder, alternatively, that the credit should be rescinded. I have no doubt that Mr Chan and Mr Yang had extensive discussions, just as such discussions occurred between Mr Raymond Chan and Mr Jin, but in my judgment the various allegations of negligent misrepresentation and breach of collateral warranty (all of which fly in the face of the existing commercial documentation) have not been made out, and I hold that GDB is not entitled to avoid liability to make payment under the credit so issued. Indeed, I strongly question whether GDB had ever been under any illusion about its primary obligation to make payment, and thereafter seek to recoup from those entities which in turn had guaranteed its obligation, and I did not believe Mr Yang's assertions in this regard. The notes of the 1998 meetings now before the court reveal a different story. For example, in the record of the joint meeting on 24 April 1998 attended, inter alia, by Mr Yang and Mr Raymond Chan, wherein the extension of the bridging loan was canvassed and at a time when Sumitomo was clearly pressing for repayment, Mr Yang is recorded as being asked "whether GDB is not ready to take responsibility of the Standby L/C", and in response thereto as "finally" admitting "that the Standby L/C is an irrevocable L/C and that GDB will surely take responsibility as an issuing bank". I note here that at the conclusion of his evidence-in-chief, after accepting that the Standby L/C was irrevocable, Mr Yang did not give a direct answer to counsel for GDB when asked a question specifically about this recorded assumption of responsibility by GDB as an issuing bank; on a re-reading of the transcript, I do not consider this response as a denial, nor indeed as amounting to much more than equivocation on the point, but if indeed this was being denied I disbelieve him, and in any event it certainly was not put to Mr Raymond Chan (or for that matter, Mr Yogi, who was also present and who was called at this trial solely to produce certain documents) that the record of this meeting was inaccurate.

93. Looked at in the round, I formed the strong impression that Mr Yang was in the unfortunate situation of having to defend an untenable position on behalf of GDB. He had recommended to his superiors that the L/C be established, and it is not difficult to comprehend the pressure that he must have felt under. Certainly, some of his responses in cross-examination were revealing of his discomfiture. He was in particular difficulty, for example, in defending the absence, within his own internal reports, of any reference to the meetings or representations he was now asserting in support of GDB's case, and his response that :-

"... when compiling written reports, we had to base on the written documents we had in order to compile written reports. What was said orally was to be reported orally ..."

was not such as to inspire confidence, as was the case with his quibbling in equating small degrees of risk with "nil risk".

94. In my judgment, therefore, the 3rd defendant has failed to establish its primary case on negligent misrepresentation and collateral warranty, and I so find.

95. There is, however, one further aspect of GDB's case, and I turn finally to this issue. In a nutshell, Mr Chan SC submitted that the Standby L/C issued by GDB was void under PRC law, and as a consequence should not be enforced under Hong Kong law. The reason for this was that when provisions of Rules of the PRC on Foreign Exchange Control and the Administrative Measures on Securities Given to Foreign Parties by Domestic Institutions are examined, it was clear that a standby L/C of this type required approval and registration. The general and established principle, said Mr Chan SC, was that the courts will not enforce an agreement where the parties intend to perform an act in a friendly foreign state which is illegal by its law : see Foster v. Driscoll [1929] 1 KB 470, Reggazoni v. Sethia (1944) Ltd [1956] 2 QB 490, Re Emery's Investment Trusts [1959] 1 Ch 410 and Toprak Mahsulleri Ofisi v. Finagrain Compagnie Commerciale [1979] 2 Lloyd LR 98, wherein Goff J (as he then was) observed that the principles in question "spring from the root principle of comity, a root which (as Foster v. Driscoll itself shows) is capable of new growth from time to time". Mr Chan suggested that the plaintiff allowed the bridging loan to be drawn down when there is and was "no evidence of any PRC law that the Standby L/C did not require approval and/or registration". Accordingly, he asserted, this court should not enforce a Standby L/C which was not only void but also illegal under PRC law.

96. For his part, Mr Ma SC shortly submitted that in the circumstances of this case consideration of PRC law, and in particular the aspect of SAFE registration, is and was irrelevant. The proper law of the L/C was expressly stated to be Hong Kong law, and the 3rd defendant, a PRC company registered under Part XI of the Companies Ordinance, Cap.32, was subject to the jurisdiction of the Hong Kong court. It was also clear that performance of the obligation to make payment under the L/C was to take place in Hong Kong and not the Mainland. What was important here was the place of payment, and the source of the 3rd defendant's funds which was not relevant : see, for example, the line of cases of which the latest was Power Curber International Ltd v. National Bank of Kuwait [1981] 1 WLR 1233, and in any event Mr Yang's evidence was that if the 3rd defendant's management had been willing, its financial obligations under the L/C could have been met from funds held outside China. Nor did the authorities referred to by Mr Chan assist, he said. There was to be no performance of an illegal act in China and in any event, no knowledge on the part of Sumitomo had been pleaded, or proved, to the effect that there was any intention on the part of Sumitomo (or for that matter GDB) to break China's internal forex laws and regulations.

97. On the evidence the contrary appears to be the case. It seems to have been settled in solicitors' correspondence that SAFE approval or registration was not necessary, in which connection, the solicitors then purporting to act for GDB had written to Sumitomo's solicitors in a letter dated 9 May 1997 thus :-

"2. SAFE Approval

We are instructed by the Guangdong Development Bank that the issuing of the Standby Letter of Credit doesn't need prior SAFE approval and they will produce a legal opinion in support thereof."

98. An Opinion dated 23 May 1997 was thereafter obtained from one Xu Jian, apparently a lawyer with the China Legal Service (HK) Ltd, albeit I am bound to say that I found this document (which on the evidence was highly expensive to obtain, even by Hong Kong standards) to be less than compelling, concluding as it did somewhat enigmatically :-

"All in all, in my opinion, GDB has the right to provide forex guarantees and offshore financial service pursuant to the relevant regulations."

99. Be that as it may. What occurred thereafter was that Clause 15 of the L/C was deleted, and the L/C was then issued; indeed, this appears to have been done with Mr Yang Ming's approval, at least on the basis of a fax from Mr Jin Pang to Mr Li Hui-zhong of GDB dated 22 May 1997 :-

"After consulting The Sumitomo Bank Ltd and upon approval by Yang Ming, Item 15 of SL/C has been cancelled. Please telex Sumitomo immediately. Thanks."

100. The precise circumstances surrounding this amendment, and the obtaining of the necessary advice, remain less than transparent, and I have no wish to speculate as to exactly what went on. In any event, the legitimacy or otherwise of the L/C under Chinese law absent SAFE approval was debated during the trial via evidence from two experts, one Mr Han Xiao Jing on behalf of the plaintiff and Mr Xie Xiagao for the defendant. My impression of this area was that it verged on the impenetrable, and if I may say so I was not greatly assisted by either expert, each choosing to disagree with the other about the status of the L/C under PRC law without, with respect, doing a great deal more than asserting the intrinsic validity of their opinion in conjunction with recitation of their chosen source material. In the circumstances, therefore, I find it difficult to prefer one opinion rather than the other.

101. In the event, Mr Han's evidence was criticised as unsatisfactory by Mr Chan as being vague and imprecise, whilst Mr Shieh (who dealt with this evidential aspect at trial on behalf of the plaintiff) submitted that the pre-1998 laws relied on by the 3rd defendant (namely, the 1996 Administrative Measures and the 1996 Foreign Exchange Law) had to be interpreted in light of the aim of establishing Offshore Banking Business ("OBB"), which in turn was governed by rules coming into effect in 1998, and that strict insistence on approval requirements would stifle the purpose of OBB's; moreover, said Mr Shieh, laws such as the Foreign Exchange Law laid down only very general principles, and had to be specifically implemented by detailed rules, such as the 1998 rules applying to OBB. Nor did reliance on the letter from the SAFE Guangdong Branch dated 31 March 1994 assist, he said - it was not pleaded, it was clearly not a law, it was not referred to in the expert's reports, and in any event it referred only to "the current" Administrative Measures prevailing in 1994.

102. After wrestling with this particular issue, I have concluded first, on the particular facts of this case, given absence of illegality under the law of the place of performance, that at bottom the argument is irrelevant, as the plaintiff asserts, and that the issue of illegality under Mainland law does not 'bite'; second, that the 3rd defendant has not established such illegality on the evidence before the court; and third (and if this latter conclusion be wrong), that no notice of any such illegality has been established on the part of Sumitomo. In fact, given the posture adopted on behalf of GDB in the solicitors' correspondence, I am surprised that it was thought fit to take the point at all, although I note that Mr Chan was concerned to point out that, appearances notwithstanding, it was not accepted by his clients that the then solicitors in question, Messrs Yung, Yu and Yuen, in fact were acting for GDB at the relevant time - which represents but another curious twist in a case which already has its share of unexplained events.

103. It follows from the foregoing, therefore, that the 3rd defendant's counterclaim for a declaration negating the plaintiff's entitlement to payment under the L/C, alternatively rescission of the L/C, alternatively for damages to be assessed, must also fail. I so hold.

THE RESULT

104. The course of events in this case was undoubtedly materially affected by the onset of the Asian financial crisis and the sharp drop in the Hong Kong property market. Had such not occurred, this case would never have seen the light of day. That said, I have been able to find nothing in the case put up by the defendants which serves to justify the non-payment to the plaintiff of the monies undoubtedly owed. To the contrary. A review of the evidence and the course of these proceedings has driven me to the regrettable conclusion that so far as the defendants were concerned, delay is, and has always been, the overriding objective.

105. I order that there is to be judgment for the plaintiff against each of the 1st, 2nd and 3rd defendants in the principal sum of HK$217 million.

106. As to interest, the sum of $14,572,892.19 has been prayed as interest accruing after the date of the writ herein, that is 26 October 1998. Doubtless this figure has a contractual basis, but prior to any award under this head I wish to be addressed upon its precise calculation, and also upon that element of interest further arising between the latter date and the date of judgment herein.

107. Accordingly, I will hear junior counsel, at an early date to be fixed, as to both interest and also the issue of costs.

108. I thank all counsel for their assistance. I also wish to express the court's appreciation to the court interpreter, Mr Yu, for his considerable efforts during the trial in dealing with the various challenges thrown up by this case.