XCHRX LOCK KWOK ON ANTHONY v. YU TAI PENG

H.C.A. No. 5377 of 1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 5377 OF 1997

__________

__________

____________________

DECISION

____________________

Introduction

1. This is an application made by the 2nd Defendant ("D2") against the Plaintiff for:-

(a) the dismissal of the Plaintiff's action against D2;

(b) alternatively, a determination pursuant to R.H.C. Ord. 14A as to whether the letter from the Plaintiff dated 24 September, 1996 was a notice given within the period specified in clause 2.01 of the agreement dated 25 August, 1995

("D2's application").

2. According to the pleadings, the Plaintiff's claim was based on a guarantee dated 27 July, 1995 signed by the 3 Defendants. In his Amended Defence, D2 averred that it was the common intention of the parties that the said guarantee would be executed by the 3 Defendants together with one Dennis Yu. Dennis Yu did not do so and the said guarantee is therefore unenforceable against the 3 sureties, including D2.

3. Summary Judgment was at one stage entered by the Master against the Defendants in November, 1997. That Judgment was set aside and leave to defend was given to D2 and the Third Defendant by Mr. Justice Stone in January, 1998 when he allowed the appeal from the Master.

Nature of D2's Application

4. As aforesaid, there are two parts to D2's application: an application to dismiss the action against D2 and an application for determination pursuant to Ord. 14A. They will be dealt with under separate headings.

Application for Dismissing the Action

5. Para. 1 of D2's application relies on 3 grounds. However, at the beginning of the hearing, Mr. Harris for D2 said that he would only rely on the first ground, namely, the action against D2 should be dismissed because the pleadings disclose no reasonable cause of action.

6. The marginal note of D2's application refers inter alia to R.H.C. Ord. 18 r. 19 and the Court's inherent jurisdiction. The wording of para. 1 of D2's application, however, is different from (1) the wording of Ord. 18 r. 19(1)(a), or from (2) that in the standard forms relating to applications made under that rule: see Forms 303 to 312, Chitty & Jacob's Queen's Bench Forms (1986) 21st ed., and Forms 47-8, Vol. 32, Atkin's Court Forms (1996 issue) 2nd ed. R.H.C. Ord. 18 r.19(1)(a) stipulates that:-

"(1) The Court may ... order to be struck out or amended any pleading or the indorsement of any writ in the action, or anything in any pleading or in the indorsement, on the ground that ... it discloses no reasonable cause of action ... and may order the action to be stayed or dismissed ... ".

The obvious omission from para. 1 of D2's application is the application for a striking out of the whole or part of the Amended Statement of Claim, or indeed any other pleadings (for example, the Reply or the Plaintiff's Answers to the Request for Further and Better Particulars).

7. Mr. Chan for the Plaintiff submitted that this omission was not accidental. He submitted that para. 1 of D2's application was worded like this because D2 realized he cannot successfully argue that the Amended Statement of Claim by itself discloses no reasonable cause of action. Neither can D2 validly argue that the Plaintiff's Answers to the Request for Further and Better Particulars or the Reply standing on their own disclose no reasonable cause of action. Mr. Chan said it appears D2 is seeking to ask the Court to examine the Amended Statement of Claim, the Amended Defence of D2, the Plaintiff's Answers to Request for Further and Better Particulars and the Reply together, and then to find that the Plaintiff's claim against D2 should be dismissed. Mr. Harris for D2 did not argue that Mr. Chan had summarized the position wrongly.

8. I do not consider that Ord. 18 r. 19(1)(a) is intended for such an exercise and find that it is not open for me to approach the matter in this manner under that rule. This however does not necessarily mean that I cannot dismiss an action pursuant to the inherent jurisdiction of the Court after taking into account all the averments in the pleadings: see the wide discretionary powers described in the footnotes in The Supreme Court Practice 1999, at para. 18/19/26 to 18/19/38. Neither counsel has referred me to any precedent case deciding on this issue. I am prepared to consider this part of D2's application on the basis it is open to me to adopt such an approach under the Court's inherent jurisdiction.

9. In support of this part of D2's application, Mr. Harris relied heavily on the following parts of the pleadings:-

(a) in D2's Amended Defence:-

"4. (i) it was the common intention of the parties herein that the Guarantee would be executed by the defendants herein and [Dennis Yu];

(ii) [Dennis Yu] did not execute the guarantee [sic];

(iii) the guarantee [sic] is therefore unenforceable against [D2];";

(b) in the Reply:-

"3. Subject to the matters pleaded herein, it is admitted that the original common intention of the parties ("the Original Common Intention") was that the Guarantee would be signed by the 3 Defendants herein together [sic] a [Dennis Yu]. Save as aforesaid, paragraph 4(i) of [D2's Amended Defence] is denied.

...

6. In further reply to paragraph 4 ...

Despite the Original Common Intention, the delivery of the Guarantee (as signed only by the 3 Defendants herein) to the Plaintiff by the 3rd Defendant on behalf of himself and the 1st and 2nd Defendants constituted an offer made collectively by the Defendants to the Plaintiff asking the Plaintiff to accept the Guarantee as signed by them ...

The aforesaid offer by the Defendants was accepted by the Plaintiff by his conduct ... ";

(c) in the Plaintiff's Answers to the Request for Further and Better Particulars, the averments made in the Reply were further elaborated by way of detailed facts: see especially Answers 1(a)(5) to (7) and 2(a)(2) to (3) thereof.

10. Mr. Harris argued that by reason of the Plaintiff's admission of a "common intention", the Plaintiff's claim against D2 based on the guarantee is bound to fail as a matter of law. His argument can be summarized as follows.

11. Because of the way in which the Plaintiff's case was pleaded in the passages quoted above, D2 was alleged to have authorized his agent to deal with the execution of the guarantee. D2 was therefore bound by his agent when the agent chose to procure the execution of this document by the 3 defendants, leaving out Dennis Yu. I shall refer to this as "the Plaintiff's case based on agency". Mr. Harris submitted that on the facts pleaded, the Plaintiff's case based on agency has no chance of success and therefore ought to be dismissed.

12. Mr. Harris further contended insofar as the Plaintiff alleged D2 was liable contractually under the terms of the guarantee, he will rely on the lack of execution of the document by Dennis Yu as a ground for avoiding this liability. I shall refer to this as "the Plaintiff's case based on contract". Mr. Harris submitted that there is a "presumption" in law that a joint and several guarantee shall not be binding unless all those named in it have executed the document. He relied on the following passage in O'Donovan and Phillips: The Modern Law of Guarantee, 3rd ed., in support:-

"... a clause in the guarantee providing that the liability of the guarantors shall be 'joint and several' invariably carries with it the implication that the guarantee shall not be binding unless all those named in the guarantee execute it ... This presumption, arising from the form of the documentation, is not a rule of law and can be rebutted by other evidence indicating that one guarantor agreed to remain liable despite the failure of one guarantor to execute the guarantee. ... " (at p. 88).

13. Mr. Harris also relied on James Graham and Co. (Timber) Ltd. v. Southgate-Sands [1986] QB 80. In that case, the signature of one of the co-sureties was found to have been forged. The Court also found the parties to the guarantee contemplated a joint and several guarantee. On that basis the Court of Appeal held that the other co-sureties who had signed were not liable under the guarantee because the condition precedent had not been fulfilled.

14. He argued that there were at least a few places in the guarantee document which showed that this was a joint and several guarantee: (1) clause 14.06 which expressly provided for such, (2) the definition of parties included Dennis Yu, and (3) the names of guarantors listed in the Schedule to the guarantee. The document also includes a space for execution by Dennis Yu (which has been left unsigned). By reason of the above matters, he argued that this document is legally not binding on D2 in the absence of special circumstances. Mr. Harris submitted the special circumstances relied on by the Plaintiff were the Plaintiff's case based on agency.

15. On the points made by Mr. Harris regarding the Plaintiff's case based on contract, Mr. Chan advanced the following arguments. First, there were a number of clauses in the guarantee document which provided each co-surety's liability is not affected by things like (1) invalidity or irregularity in its execution, or (2) the Plaintiff releasing or refraining from enforcing against any other guarantee or security, or (3) any act or omission which may affect or discharge the guarantee on the liability of any one of the co-sureties. By way of examples, Mr. Chan referred me to clauses 14.02(a), (d), (f), (g) and (i), 14.04 and 5.01(b) of the guarantee. He submitted these clauses militate against D2's point that there was a "condition precedent" that all co-sureties must sign the guarantee before it becomes binding.

16. Secondly, Mr. Chan argued Mr. Harris had misinterpreted the so-called "admission" by the Plaintiff at para. 3 of the Reply. Mr. Chan said that a mere plea that there was an original common intention is at most neutral. He referred to the observation in the Judgment of Byblos Bank v. Al-Khudhairy [1987] BCLC 232 at 241b to c. The Court of Appeal said:-

"on the evidence, at the outset all parties contemplated and, according to Al-Khudhairy, they agreed that all the securities required by the bank would be forthcoming. But more than this is required to establish the existence of a term which would have the effect that if the bank did not obtain one the securities it was seeking, Mr. Al-Khudhairy's guarantee was not to be enforceable.".

He contended that whether or not such was the case can only be ascertained after all the surrounding circumstances have been examined (something eminently unsuitable for an application for summary dismissal of an action): see remarks to this effect in TCB Ltd. v. Gray [1988] 1 All ER 108 and Taubmans Pty. Ltd. v. Loakes (1991) 2 Qd R 109, especially at pp. 111-12. In this connection, I also note what Mr. Justice Stone observed at pp. 10-11 of his written Judgment dated 16 January, 1999 (parts of which are also set out in later paragraphs herein).

17. As regards the Plaintiff's case based on agency, Mr. Chan responded by the following submissions. He argued Mr. Harris erred in assuming that that was the Plaintiff's only case against D2. Mr. Chan said that assumption was not based on a fair reading of the Plaintiff's pleadings. It is important to note there is an implied joinder of issues under the Rules of the High Court. The only "admission" relates to the "original common intention" which he submitted was neutral. Thus, it is still open for the Plaintiff to contend that upon a true construction of the guarantee contract, there was no "condition precedent" in that the document was not binding unless all the co-sureties signed. The case put forward in para. 6 onwards of the Reply was only an alternative case relating to the Plaintiff's case based on agency. Even if this part of the Plaintiff's case is weak (and Mr. Chan acknowledged that it may be so as presently pleaded), it is not so plainly and obviously unsustainable that his claim ought to be dismissed without a trial.

18. I agree with Mr. Chan's above submissions and conclude that the Plaintiff's claim is not so plainly and obviously unsustainable that it should be dismissed now. In this connection, I also repeat my earlier observation that this part of D2's application does not seek to strike out the whole or any part of the Plaintiff's pleadings. Hence, once I conclude that the Plaintiff's action ought not be dismissed, I do not find it necessary or appropriate to consider whether any part of the Plaintiff's pleadings should be struck out. For the above reasons, this part of D2's application is refused.

Ord. 14A Application

19. It was pleaded at para. 10 of the Amended Statement of Claim:-

"By a written notice dated 24th September, 1996 given by the Plaintiff to Peak International [in essence the principal debtor] pursuant to clause 2.01 of the Agreement, the Plaintiff duly gave notice of his intention to sell the Shares.".

This averment was merely not admitted at para. 5 of D2's Amended Defence. It is not immediately apparent from the pleadings as to how the need for para. 2 of D2's application arises. The issues raised by D2 at the hearing before the Judge in chambers for setting aside the summary judgment have to be examined in order to understand this part of D2's application.

20. In short, D2 argued that the written notice was given out of time. This argument was based on the wording of clause 2.01 of the Agreement which states:-

"Subject to the condition precedent that the Vendor still beneficially owns the Sale shares TWELVE (12) months after the date hereof, and upon the Vendor's serving on the Purchaser a notice in writing of its intention to sell the Sale Shares not earlier than TWELVE(12) months but not later than THIRTEEN (13) months from the date hereof (whereof time is of the essence), the Vendor shall as beneficial owner sell and the Purchaser shall purchase the Sale Shares." (italics supplied).

D2's argument was essentially that the word "from", when construed together with the word "after" which appears in the same clause, means time should start to run on 25 August, 1995 (the date of the agreement) instead of 26 August, 1995. This period would expire on 24 September, 1995 and not 25 September, 1995. According to the fax letterhead of the written notice, it was only faxed on 25 September, 1995, one day too late.

21. Another clause in the agreement relating to time is clause 3. It states:-

"Completion of sale and purchase ... shall take place ... on the date to be agreed between the parties hereto, provided that such date shall not be one earlier than TWELVE (12) months from the date hereof and shall be within 14 days of the written notice as referred to in clause 2.01 hereof being served ... " (italics supplied).

22. Two preliminary objections were made by Mr. Chan regarding this part of D2's application. His first preliminary objection was that D2 was estopped from making this part of his application by reason of the matter being res judicata.

23. In his Judgment delivered on 16 January, 1998, Mr. Justice Stone said:-

"... I have decided that there are indeed issues which require to be ventilated at trial. In particular I consider that the impact and relevance upon the parties of the absence of Dennis Yu's signature, which is asserted to be a condition precedent to the sureties' liability under the Guarantee, is an issue which is patently triable ... As also are the issues of the 'other guarantee' which now has emerged, together with the issue of the facts surrounding the service of the Notice under the Sale and Purchase Agreement, in addition to the issue of the construction of Clause 2.01 (the 'after' and 'from' point). In this latter context, I decline Mr. Harris' invitation to decide that point now as a matter of pure construction. It seems to me that I should not even bespeak a provisional view, and that I should leave this aspect to the trial judge to construe in light of the matrix of facts established on the evidence before him. [The learned Judge then referred to Prenn v. Simmonds [1971] 1 WLR 1381 at 1385]."

(underline supplied) (at pp. 10M-11C of the transcript).

24. Relying on this part of the Judgment of Mr. Justice Stone, Mr. Chan submitted D2 had already made such an application at the hearing before Mr. Justice Stone. The learned Judge had considered the application and rejected it. In such circumstances, even if D2 was not satisfied with such a decision, it is not open to him to have it re-litigated before another Judge. The only course available would be to appeal against the decision. Both parties have had difficulties in recalling how the above observations came to be made by the learned Judge in that part of his Judgment. I am therefore left to decide on Mr. Chan's first preliminary objection based purely on what appears in the written Judgment.

25. It has been said in The Supreme Court Practice 1999 that "great flexibility has been introduced as to the manner in which an [Ord. 14A] application may be made ... it may be made orally in the course of any interlocutory application to the court(Ord. 14A r. 2)". I consider that part of Mr. Justice Stone's Judgment made it clear that such an application had been made by Mr. Harris for D2 and that it had been rejected by the learned Judge after consideration. As such, it is not open to D2 to raise it again now. On this ground alone, this part of D2's application is refused.

26. Mr. Chan's second preliminary objection is that before a determination under Ord. 14A can be properly made, the applicant must satisfy the Court that the application falls within that rule. To support this submission, Mr. Chan drew my attention to the provisions of Ord. 14A which stipulate that:-

"(1) The Court may ... determine any question of ... construction of any document arising in any cause or matter ... where it appears to the Court that

(a) such question is suitable for determination without a full trial of the action; and

(b) such determination will finally determine ... the entire cause or matter or any claim or issue therein."

(underline supplied).

27. Mr. Chan argued that, in particular, the applicant must demonstrate that the question to be determined is one "arising in any cause or matter" and that "such determination will finally determine the entire cause or matter ... ". He submitted in the absence of specific pleas made in D2's Amended Defence, the Court will not be able to ascertain whether the matters to be determined are properly within Ord. 14A. I do not agree with Mr. Chan's argument. Although it is usual for matters in issue to be pleaded and traversed in the pleadings, I do not find that the provisions in Ord. 14A lay down a rigid procedure for making an application. As observed in The Supreme Court Practice 1999 (see above), "great flexibility has been introduced" by this Rule. Provided the matter in issue has been made clear in Court documents, merely because the issue has not been set out in the pleadings should not per se make an application under Ord. 14A invalid.

28. Having said that, if I had to decide on the merits of this part of D2's application, I would have come to the same view as that observed by Mr. Justice Stone. Further to what he said in the written Judgment, it is triable as to whether clause 3 ought to be read together with clause 2.01 when construing clause 2.01. It is also triable whether an ambiguity in the meaning of the word "from" in clause 2.01 will be created, and if so, whether evidence relating to the circumstances surrounding the agreement ought or need to be considered. For these reasons, para. 2 of D2's application should be dismissed.

Conclusion

29. D2's application is dismissed with a costs order nisi that the costs of this application be paid by D2 to the Plaintiff to be taxed in any event if not agreed.

Other Matters

30. The hearing of D2's application lasted for about one and a half days. The original estimate of the hearing was one day. I cannot but repeat an observation made by the Courts in England (as quoted in The Supreme Court Practice 1999, para. 18/19/6):-

"Where an application to strike out pleadings involves a prolonged and serious argument, the Court should, as a rule decline to proceed with the argument unless it not only harbours doubts about the soundness of the pleading but, in addition, is satisfied that striking out would obviate the necessity for a trial or substantially reduced the burden of preparing for a trial ... " (citing Williams & Humbert Ltd. v. W & H Trade Marks (Jersey) Ltd. [1986] AC 368).

Despite this observation which was made quite some time ago, some practitioners still chose to proceed with applications which involved such prolonged and serious argument. I must warn practitioners who chance their luck by choosing to do so should know that they risk having to personally bear the costs of such an application should it turn out to be unsuccessful unless sufficiently good cause can be shown otherwise, for example, it was done at lay client's insistence after proper advice has been given.