THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD. v. NORMAN JOHN MARTEL

HCA4484/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4484 OF 2001

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J U D G M E N T

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1. This is the defendant's appeal and the plaintiff's cross-appeal against the master's order dated 1 November 2002 giving summary judgment for the plaintiff. The background facts giving rise to the dispute are largely not in dispute. They may be summarised below.

Background facts

2. By a facility letter dated 9 June 1993 ("the 1993 Facility Letter"), the plaintiff renewed and extended banking facilities to CCL Systems Ltd ("CCL"). The facilities so extended were made up of an overdraft of HK$2,000,000, an import line of documentary credit of HK$8,000,000 including trust receipts of HK$4,250,000 and a corporate credit card facility of HK$90,000. The plaintiff was then holding as security, inter alia, a joint and several guarantee given by the directors of CCL at the time, namely, Mr Davie Rodney Stroud, Mr Louie Ching Wing and the defendant dated 16 November 1988 for HK$5,500,000. As part of the facility for the new facilities, the plaintiff required a new joint and several guarantee from the directors for a maximum liability of HK$6,000,000. A standard form guarantee was enclosed with the 1993 Facility Letter for completion and return. The directors signed the guarantee on 10 June 1993 ("the Guarantee"). CCL subsequently changed its name to Constructional Systems Ltd ("CSL").

3. In April 1998, the defendant notified CSL that he was resigning as a director. (There is some minor confusion as to when the resignation exactly took place. In the letters he wrote to the plaintiff, the defendant said that he ceased to be a director on 30 June 1998. In his witness statement, he said he worked up to the end of July 1998 because one of the other two directors took a one-month leave. In his defence, the defendant pleaded that the resignation took effect on 1 August 1998. But this minor confusion should not cause any particular difficulty for present purposes.) By letters dated 30 April and 5 June 1999, the defendant informed the plaintiff that he ceased to a director of CSL and requested to be released as a guarantor under the Guarantee. On the evidence before me, there is no suggestion that the plaintiff made any reply to his request at the time. Instead, the plaintiff took steps to renew and revise the facilities extended to CSL by a facility letter dated 16 June 1999 ("the 1999 Facility Letter"). That was done, apparently, without the defendant's prior knowledge or consent.

4. Under the 1999 Facility Letter, the revised facilities consisted of an overdraft of HK$1,000,000, a loan of HK$2,000,000 with interest to be repaid by 17 equal instalments of HK$110,000 each with a final instalment of HK$113,000, commencing one month after drawing down, an import/export facilities of HK$6,000,000 including trust receipts of HK$4,000,000 and a corporate credit card of HK$90,000. Other than the adjustments of the limits on the overdraft and import facilities, the 1999 Facility Letter introduced a new element, namely, the loan of HK$2,000,000. The plaintiff continued to hold the Guarantee as part of the security.

5. By a letter dated 30 August 1999 from the plaintiff to CSL, the plaintiff offered to release the Guarantee if the three guarantors would agree to replace it with a fresh one by Mr Stroud and Mr Louie only. The defendant protested by a letter dated 31 August 1999 to the plaintiff that the banking facilities had been renewed as revised purportedly with the Guarantee as security without his consent and in the face of his resignation from CSL as a director. In its letter dated 3 September 1999, the plaintiff suggested that the defendant should take up the matter with CSL with a view to providing them with a proposal for a replacement of the Guarantee. By another letter dated 20 September 1999, the defendant reiterated that he was no longer bound by the Guarantee. The defendant's solicitors then wrote to the plaintiff on 29 September 1999, pointing out that by releasing the defendant from the Guarantee, the plaintiff would be in precisely the same position as if Mr Stroud and Mr Louie had replaced it with a fresh one. The plaintiff indicated its disagreement in its reply letter dated 8 October 1999.

6. By a letter dated 4 November 1999 ("the Withdrawal Letter"), the plaintiff withdrew the banking facilities and cancelled the credit limits. According to the Withdrawal Letter, the outstanding amounts stood at HK$1,001,407 (Overdraft), HK$1,667,000 (HKD Loan), HK$1,342,968 (Import/Export Facilities) with HK$281,548 as trust receipts and HK$1,796.20 (Corporate Credit Card). No further utilisation of facilities would be permitted save on a case by case basis at the plaintiff's absolution. Again, the defendant had no knowledge of the Withdrawal Letter at the time.

7. By another letter dated 25 July 2000 ("the 2000 Facility Letter"), the plaintiff agreed to consolidate CSL's outstanding loans and advances. The plaintiff uplifted a time deposit of HK$3.5 million and interest to partially settle the outstanding import loans and overdraft. The amount of indebtedness then outstanding under CSL exclusive of interest as at 23 July 2000 totalled HK$2,121,759.33, consisting of HK$982,954.53 (Overdraft), HK$779,000 (Loan) and $359,804.80 (Import Loans). The indebtedness was consolidated as a consolidated facility in the sum of HK$2,120,000 to be repaid by a "straight line" basis by 24 monthly instalments of HK$99,395. The indebtedness under CCL was HK$294,348.12 (Import Loans). It was similarly to be repaid on a "straight line" basis by 24 monthly instalments of HK$13,771. The differences in the outstanding figures between the Withdrawal Letter and the 2000 Facility Letter seem to suggest that utilization of the facilities might have taken place despite the withdrawal of the facilities. The plaintiff continued to hold the Guarantee as part of the security. Again, it is not in dispute that the defendant neither had any knowledge of nor given any consent to the 2000 Facility Letter.

8. CSL subsequently went into compulsory liquidation by an order dated 26 February 2001. By a letter dated 8 March 2001, the plaintiff withdrew the facility as restructured pursuant to the 2000 Facility Letter and demanded repayment of the loan then outstanding. On the following day, the plaintiff wrote to the guarantors separately, demanding payment.

Action

9. On 15 February 2001, the plaintiff commenced the present proceedings, claiming against the defendant the sum of HK$2,265,661.71 with interest. The action proceeded in the usual manner and subject to one or two outstanding matters, had reached the stage beyond discovery.

10. By a summons dated 24 July 2002, the plaintiff took out an application for summary judgment under Order 14, Rules of the High Court. On 1 November 2002, the master entered judgment for the plaintiff for the sums due from CSL to the plaintiff as at 4 November 1999 with interest and costs.

Appeals

11. By a notice of appeal dated 14 November 2001, the defendant appealed against the master's order. It contends that the Order 14 summons should be dismissed. The plaintiff is not satisfied with the master's order either and also seeks to appeal against it. Although no formal notice of appeal has been filed, no issue arises out of that. The plaintiff contends that full judgment in terms of the statement of claim should be given against the defendant with costs on an indemnity basis.

12. I agree with counsel that the master's order cannot stand. The basis for the judgment she proposed to enter for the plaintiff is not clear. If judgment were to be entered at all, then it must be on the sum claimed in the statement of claim. On this basis alone, her order must be set aside. The question is then whether summary judgment should be entered for the plaintiff or should the defendant be given leave to defend.

Defence

13. The only substantive defence relied on by the defendant is that there had been a material variation of the principal contract between the plaintiff and CSL without the defendant's consent, the defendant is therefore discharged under the Guarantee. Mr Carolan for the defendant submitted that the addition of the loan of $2,000,000 in the 1999 Facility Letter and the restructuring by way of the 2000 Facility Letter are material variations of the original contract and the defendant is thereby discharged : Holme v. Brunskill (1878) 3 QBD 495. Counsel also relied on the well established proposition that where the creditor enters an agreement with the principal debtor where he is given an extension of time, beyond that contemplated in the original contract, to perform his obligation, as is the case here under the 2000 Facility Letter, the surety is discharged : see Law of Guarantees (3rd edn), para.9.29, at p.300. This, as I understand counsel, is his major complaint.

The rule in Holme v. Brunskill applicable?

14. In reply, Mr Fung for the plaintiff first submitted that the rule in Holme v. Brunskill did not apply. He relied on Wardens and Commonalty of the Mystery of Mercers of the City of London v. New Hampshire Insurance Company, (unreported, 18 January 1991), where Philips J said at p.14 :

"In my judgment the cases demonstrate that the construction of the contract of guarantee is of critical importance. It is vital to identify the precise nature of the obligation or obligations guaranteed. In many cases the obligations will be those arising under a specific contract between debtor and creditor. This may be evident from the terms of the contract of guarantee itself, where specific reference is made to the contract giving rise to the obligations guaranteed, or from a consideration of the circumstances surrounding the conclusion of the contract of guarantee, where these show that a specific contract was the subject matter of the guarantee. In such circumstances the terms of the contract giving rise to the obligations guaranteed will be treated as embodied or incorporated in the contract of guarantee. The rule in Holme v Brunskill will then apply and any variation of the underlying contract which is not manifestly insubstantial or incapable of prejudicing the surety will discharge from his obligations under the contract of guarantee.

Where on the other hand the guarantee is given in respect of obligations arising out of a contemplated course of dealing without reference, express or implied, to any specific contract it will be open to the creditor to vary the terms applying to the course of dealing so long as that course of dealing remains within the scope of the guarantee. Stewart v McKean and Sanderson v Aston were cases which fell into this category. The principle in Holme v Brunskill is in no way weakened by National Westminster Bank v Riley. That case involved an alleged breach of contract where the breach was insubstantial and where the contract allegedly broken was not embodied in the contract of guarantee..."

This case was reversed on other grounds sub nom. Wardens etc of Mercers v. New Hampshire Insurance Co. [1992] 3 All ER 57, [1992] 2 Lloyds Rep. 365.

15. Mr Fung referred to the definition of "Banking Facilities" and "Guaranteed Moneys" in the Guarantee, which read :

"'Banking Facilities' means such facilities as the Bank may make or continue to make available to the Customer or to any other person at the request of the Customer;"

"'Guaranteed Moneys' means (i) all moneys in any currency owing by the Customer to the Bank at any time, actually or contingently, in any capacity, alone or jointly with any other person, (ii) interest on such moneys (both before and after any demand or judgment), to the date on which the Bank receives payment, at the rates payable by the Customer or which would have been payable but for any circumstances which restricts payment and (iii) expenses of the Bank in enforcing this Guarantee on a full indemnity basis;"

Mr Fung then submitted that the Guarantee is not a guarantee only in respect of obligations arising out of the principal contract between the plaintiff and CSL. It was given to secure the defendant's payment of all monies in any currency owing by CSL to the plaintiff at any time. Thus it was open to the plaintiff to withdraw the facilities in November 1999 and consolidate CSL's outstanding indebtedness in July 2000 without affecting the defendant's liability under the Guarantee.

16. The Guarantee, as noted, is in the plaintiff's standard form. On its face, it did not make any specific reference to any facilities. But as rightly observed by Philips J, the extent of the defendant's obligations under the Guarantee has to be determined by a proper consideration of all the circumstances surrounding its conclusion. As noted, by virtue of the 1993 Facility Letter, the plaintiff revised and renewed the banking facilities previously extended to CSL. The previous banking facilities were likewise secured by a personal guarantee given by the three directors for the sum of HK$5,500,000. But the plaintiff requested a new guarantee for HK$6,000,000. A standard form guarantee was enclosed for completion and return. And that took place on the following day, that is, 10 June 1993. Against these undisputed background facts leading to the conclusion of the Guarantee, it is in my view arguable that despite the very wide terms used for "Banking Facilities" and "Guaranteed Moneys", the extent of the obligations under the Guarantee arose specifically out of the 1993 Facility Letter and any subsequent renewal with the defendant's knowledge and consent and that it arose not out of a contemplated and yet unspecified course of dealing. For present purposes, I will therefore hold that the rule in Holme v. Brunskill is applicable.

Consolidation contemplated?

17. Mr Fung did not seriously dispute that the consolidation by the 2000 Facility Letter is a material variation. He however submitted that where the principal contract contemplated and did provide for a variation of its terms, such a variation will not discharge the surety from his liability : J O'Donovan & J Phillips, The Modern Contract of Guarantee, 3rd edn (1996), at pp.396-7. The relevant paragraphs of the 1993 Facility Letter read :

"These facilities are subject to our customary overriding right of withdrawal and repayment upon demand and to our right to call for cash on demand for prospective and contingent liabilities, and to review at any time and, in any event, by 31 May 1994."

Similar reservations of rights were made in the 1999 Facility Letter.

18. Mr Fung contended that the plaintiff had made it clear in the 1993 Facility Letter that the banking facilities granted to CCL were subject to its overriding right of withdrawal and repayment upon demand and review at any time. Thus the subsequent withdrawal by the Withdrawal Letter and consolidation by the 2000 Facility Letter fall within the ambit of the contemplation of the plaintiff and CSL in the 1993 Facility Letter. Accordingly, the defendant is not thereby discharged.

19. While the plaintiff's right to withdraw the facilities and to demand repayment is expressly reserved, it is arguable that on a plain reading of the paragraph quoted in paragraph 17 above, the consolidation and restructuring by virtue of the 2000 Facility Letter especially the giving of time, is not.

Clause 9 applicable?

20. Mr Fung finally submitted that the defendant is not discharged because of the operation of Clause 9 of the Guarantee, which provided :

"The liability of the Guarantor under this Guarantee shall not be discharged or otherwise affected by reason of the Bank entering into any agreement or arrangement with the Customer or any other person or by reason of any legal limitation, disability or incapacity or any other act omission or circumstance which, but for this provision, would discharge the Guarantor to any extent. Any Guaranteed Moneys which may not be recoverable from the Customer for any such reason shall be recoverable by the Bank from the Guarantor as principal debtor by way of indemnity, on demand, together with Default Interest thereon in accordance with Clause 2.03."

He argued that the defendant's liability under the Guarantee would not be discharged by reason of the plaintiff entering into any agreement or arrangement with CSL, including the giving of time.

21. In my view, it is arguable that Clause 9 on a proper interpretation is not specific enough to include the giving of time by virtue of the 2000 Facility Letter. The rule in equity relied on by the defendant is well established. Clear and express wording is required to exclude its operation. The general reference to "any agreement or arrangement" may not be sufficient, especially when one bears in mind the rule of construction that in case of doubt, reservation clauses such as Clause 9 will be construed in favour of the surety : see Chitty on Contracts, 28th edn, Vol.2, para.44-087, at p.1343.

22. Mr Fung referred to Re Lai Kwok Man, HCB2318/99 where Clause 9 was upheld by the deputy judge. But as rightly conceded by him, the facts of that case are all together different and hence distinguishable. Mr Fung also relied on General Produce Co. v. United Bank Ltd [1979] 2 Lloyds Rep. 255 to support his contention that the giving of time to the debtor to perform did not discharge the surety. But in that case, the guarantee expressly provided that the creditor's right against the surety would not be affected by the creditor's giving time and indulgence to the debtor. Here, as noted, it is arguable if Clause 9 has the effect as contended.

Conclusion

23. For the above reasons, I am satisfied that the defendant has raised an arguable defence to the claim. I will therefore allow his appeal, dismiss the plaintiff's cross-appeal, set aside the master's order and give the defendant unconditional leave to defend.

Costs

24. The arguments advanced by the defendant before me were substantially the same as those before the master. It is in my view unreasonable for the plaintiff to oppose the defendant's appeal. I will therefore make an order nisi that costs of the Order 14 summons including the costs of the hearing before the master be in the cause whereas the defendant shall have the costs of the appeal in any event, to be taxed if not agreed.