ON HING PAPER AGENCY LTD v. BEST TRI COLOUR PRINTING& PACKAGING CO LTD AND ANOTHER

   HCA410/2008

   IN THE HIGH COURT OF THE

   HONG KONG SPECIAL ADMINISTRATIVE REGION

   COURT OF FIRST INSTANCE

   ACTION NO. 410 OF 2008

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BETWEEN

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J U D G M E N T

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1.  In early 2007 the plaintiff sold to the 1^st defendant (“D1”) a large quantity of paper. By this action the plaintiff claims against the 2^nd defendant (Mr Li), who was at the material time a director of D1, the price of the goods supplied namely $1,538,162.64.

2.  Judgment against D1 was entered on 2 May 2008 but the company had gone out of business in late 2007. The claim against Mr Li is based on a Letter of Guarantee signed by him on 1 June 2007. The letter contained nine paragraphs, the first three of which stated :

“  In consideration of your refraining from instituting any legal proceedings which On Hing Paper Agency Ltd. are entitled to institute against Best Tri Colour Printing Packaging Co Ltd Unit, 1008, 10/F., Eight Commercial Tower, 8 Sun Yip Street, H.K. (the ‘Company’) for the recovery of the sum of HK$5,000,000.00 and interest thereon at the rate of 2% over and above the prime lending rate of Hongkong Bank for the time being and from time to time being a sum due and payable by the Company to you pursuant to the paper products sold and delivered to the Company, the particular whereof are annexed hereto (the ‘obligations’), I/we, the undersigned, hereby jointly and severally undertake, and agree with you as follows :

(1)  To make good any default by the Company or its estate in the payment of all moneys due to you under this guarantee immediately on written demand by you.

(2)  To pay all costs and expenses (on a full indemnity basis) arising out of or in connection with the recovery or attempted recovery by you of moneys due to you under this guarantee.

(3)  We shall be jointly and severally liable under this guarantee as if I/we were the principal debtors and not merely sureties for the Company.  Accordingly, the guarantee herein contained is the primary obligation on our part which shall be unconditional irrespective or any invalidity, irregularity or unenforceability of or defect in any provision hereof.”

3.  There is no dispute that Mr Li signed this personal guarantee. Neither is there any dispute that none of the $1,538,162 due to the plaintiff has been paid.

4.  Mr Li disputed that he was liable under the guarantee primarily because he claimed that Ms Helen Chu, a director of the plaintiff, induced him into signing it by making certain misrepresentations.

5.  The pleaded defence stated that Ms Chu induced Mr Li into signing by :

(a)  promising that the plaintiff would not sue D1 and would not use the Letter of Guarantee as evidence or to claim against Mr Li; and

(b)  alternatively, if the plaintiff did sue on the guarantee it would sue all three of D1’s directors not just Mr Li.

6.  This pleaded case is, on its face, flawed for two reasons. Firstly, (a) was a promise not to sue and was followed by (b), a promise that if the promise was broken three people would be sued not one. Secondly, the liability under the Guarantee was stated to be “joint and several” and so (b) would appear to serve no purpose.

7.  At trial, however, the defence focused on one inducement in particular. Mr Li’s case was that Ms Chu promised that the plaintiff would not sue Mr Li provided he signed the letter. This promise was allegedly made at a meeting on 1 June 2007. Mr Li, Ms Chu and Mr Ng Kam Hei (an accounts manager of the plaintiff) were at the meeting. They were also the three witnesses at trial.

8.  As a result of the meeting, it was Mr Li’s case that Ms Chu had promised him that D1 would not be sued for the debt, Mr Li would not be sued for the debt, D1 had its credit extended to the sum of $5 million and Ms Chu was, accordingly, in possession of a worthless piece of paper. Mr Li stated in evidence that Ms Chu’s reason for embarking on this arrangement was that she would be able to produce the letter to her (senior) directors. As will be seen from what follows in this judgment, I found this explanation to be inherently very improbable. Such a piece of paper would only keep Ms Chu’s superiors at bay for a very short time given that the plaintiff company had been continuously pressing for payment and would no doubt continue to do so.

THE WITNESSES

(1)  Ms Chu

9.  Ms Chu was a good witness. I accepted her evidence that she had been chasing Mr Li for payment. She sent Mr Li a draft Letter of Guarantee for him to peruse. At the meeting on 1 June 2007, she explained that Mr Li still tried to persuade her and Mr Ng that the company was in good shape and that he offered a repayment schedule. However, the plaintiff was not prepared to accept this without a personal guarantee in writing. Ms Chu said that no inducements or misrepresentations were made. There was no reason to do so. She believed Mr Li to be an experienced businessman who realized that the debt was to be paid and that the only way of postponing proceedings against his company was to accept personal liability.

10.  Ms Chu answered questions in a straightforward way. I considered her to be a reliable witness. Her evidence was credible and logical.

(2)  Mr Ng Kam Hei

11.  Mr Ng was also reliable. His evidence was brief. He was present at the meeting on 1 June 2007 and corroborated Ms Chu’s account of what had transpired.

(3)  Mr Li Hi Choi

12.  Mr Li was not a good witness. His method of answering straightforward questions was often to embark on a lengthy statement of events which were peripheral to the point of the question. The outcome of this case depended to a large extent on the factual findings on what occurred at the 1 June meeting, concerning which I felt unable to place much weight on Mr Li’s version.

EVENTS SUBSEQUENT TO THE 1 JUNE 2007 MEETING

13.  Some of the total sum due (in excess of $2 million) had been paid but the claimed sum of $1,538,162 remained outstanding. Repeated demands were made to which Mr Li did not respond.

14.  On 29 January 2008, the plaintiff was prepared to wait no longer and sent a letter before action (from solicitors) to Mr Li stating an intention to sue on the Letter of Guarantee. A meeting was held in February 2008. At that meeting no mention was made by Mr Li of Ms Chu’s alleged promise not to sue him on his personal guarantee. His explanation for not complaining that the letter before action was in breach of the alleged promise was a vague reference to the matter “being settled” and so there was no need to mention it. I found this explanation untenable. I believe that had the promise been made Mr Li would have referred to it at this meeting.

15.  A little later, in March 2008, he received the writ in this action.

16.  As a result of receiving the writ, he decided to telephone Ms Chu and, unknown to Ms Chu, record the conversation. Ms Chu stated that apart from the meeting in February it was the first time she had been contacted by him for many months and was surprised to hear from him. The call lasted six minutes and the transcript was in evidence.

17.  Mr Li placed considerable reliance on the transcript as evidence in support of his case that Ms Chu made him a promise at the meeting on 1 June. The conversation should be considered as a whole. Mr Li pointed out that it contained up to 10 occasions when he accused Ms Chu of making the inducement 10 months earlier. Ms Chu did not deny it.

18.  However, Ms Chu did not admit it either. In evidence, she stated that she was surprised to hear from Mr Li, she knew he was being sued, he did most of the talking (which is correct), he repeatedly accused her, she gave short answers in between his long and repeated accusations.

19.  In short, the effect of her evidence was that he was garrulous and verbose and paid little attention to her answers and comments. Such criticism was consistent with the manner in which he gave evidence in court.

20.  Further, if Ms Chu’s account of the 1 June meeting was true, which I believed it was, this would have been the first time she had been made aware of the allegation against her. She had been very patient in the preceding 10 months or more. The conversation was consistent with her continuing patience.

21.  In short, I concluded that the reliance placed on the phone conversation by Mr Li and his defence was seriously overstated. An allegation does not get stronger by being repeated by its maker.

DECISION

22.  As I have found that the alleged, or any, inducement was not made it is not necessary to consider whether or not the alleged inducement acted on the mind of the 2^nd defendant.

23.  Mr Stephen Fong, counsel for the plaintiff, made a number of points in support of there having been no inducement or misrepresentation made.

24.  For the sake of completeness they were, in outline, as follows :

(a)  Mr Li’s case had gone through some changes.  His 1^st witness statement made no allegation that the Letter of Guarantee would not be used to claim against him.  However, this was the crux of his defence at trial.

(b)  Mr Li was an experienced businessman who was under no illusions about the nature of a written personal guarantee nor was under any illusion about the plaintiff’s desire to be paid.

(c)  Mr Ng was a good corroborative witness of the events at the 1 June meeting.

(d)  The pleaded defence was inconsistent (as already referred to).

(e)  Mr Li made no mention of the inducement at the meeting in March 2008.

(f)  To make the alleged inducement made no commercial sense and would have been of no benefit whatever to the plaintiff.

All these points carry weight in the plaintiff’s favour.

CONSIDERATION

25.  Should the defence be unsuccessful in their primary argument (which they have been) they submitted that the Letter of Guarantee must fail through lack of consideration.

26.  I do not agree. The consideration was the forbearance to sue D1 provided Mr Li made good any default in payment by D1. Chitty on Contracts states :

“There is sufficient consideration to support a guarantee even of past debt or a past transaction if the creditor promises to forebear from suing the principal debtor or if the creditor promises to give time to the principal debtor.  Likewise, there is sufficient consideration if the creditor, at the request (express or implied) of the guarantor, actually forbears from suing or gives time to the principal debtor.  A creditor’s voluntary inaction, by itself, is not sufficient, but courts will, depending on the circumstances of the case, be inclined to infer that the inaction is attributable to an express or implicit request by the guarantor.  The forbearance by the creditor does not need to be for a specific length of time, so long it is for a reasonable time and actual withdrawal of proceedings against the principal debtor at the request of the guarantor is sufficient consideration even if the creditor does not promise that new proceedings will not be started.”

27.  The plaintiff refrained from suing D1 for nine months after the guarantee and for 10 months after the last payment (in May 2007), during which time numerous requests were made, proposed repayment schedules were never fulfilled and D1 ceased trading. There is no merit in the submission made by Mr Bruce Lau, counsel for the 2^nd defendant, that “it was unreasonable to sue after only 9 months, a very short time”.

28.  There will be judgment for the plaintiff in the sum of $1,538,162.64 plus interest at prime plus 1% from 4 February 2008. The counterclaim seeking a declaration that the guarantee was voidable is dismissed. There will be a costs order nisi in the plaintiff’s favour on the claim and counterclaim.