CARRIER HONG KONG LIMITED FORMERLY KNOWN AS CARICOR (HK) LIMITED v. MONARCH ENGINEERING LIMITED AND OTHERS

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JUDGMENT

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1. I cannot pretend that this is other than a most difficult case to resolve upon the relatively few facts deployed either in evidence or by admission. The underlying principles of law which have to be investigated namely suretyship, and "conventional" estoppel, as it is known, are made for lawyers, and I was fortunate to have Mr. Ribeiro for the Plaintiff and Mr. Sussex for the 3rd Defendant to explain so lucidly their research into, and their expertise in these two matters: I was most grateful for their written submilsions.

2. This Plaintiff carries on business in Hong Kong as a manufacturer and vendor of, in this case, air-conditioning equipment.

3. The 1st Defendant is a limited company incorporated as a "shelf" company in April 1982, but operative and with its present name from only 15th October 1982.

4. The 2nd and 3rd Defendants were at all material times the only directors of the tat Defendant.

5. The action is for payment of an account of $639,064 due from the 1st Defendant to the Plaintiff and also for $600,000 representing the joint and several liability of the 2nd and 3rd Defendants under a guarantee in respect of the 1st Defendants indebtedness.

6. Judgment was signed against the 1st Defendant upon certain admissions, and pursuant to O.27 r.3 R S.C., on the 15th September 1984, in the sum of HK$185,064.

7. Judgment against the 2nd Defendant was signed in default of Defence on the 25th May 1984, in the sum of $600,000.

8. This action therefore proceeds solely against the 3rd Defendant under the terms of the guarantee, and which was dated the 22nd October 1982.

9. The 3rd Defendant gave no evidence and called no witnesses and the matter falls to be decided therefore solely on the testimony of the Plaintiff's two witnesses and upon such facts, and admissions thereto, as appears in the pleadings; the ultimate construction of the relationship under the guarantee between the Plaintiff and the 3rd Defendant being a matter of law.

10. Two bundles of documents, "A" and "B" were, by agreement before the court and I shall refer to the documents therein by those letters and the page number.

11. The history of this matter is that the 2nd Defendant, having previously been employed by a large and respectable customer of the Plaintiff company, sought to create a trading relationship between the Plaintiffs and a new limited company he was forming. This was in September 1982, and as one of the initial orders for equipment from the Plaintiff was in the sum of $546,640 (B2) and dated the 11th of October 1982, the Plaintiffs wanted to investigate the creditworthiness of the new customer before supplying the goods. Before the order was placed, however, there had been the usual negotiations leading to the business. On September 4th 1982 (A6) the 2nd Defendant wrote, on the note paper of Monarch Engineering Co. (omitting "Ltd." for it was not yet incorporated) but referring to the 1st Defendant by its intended name and asking for a "dealership"; nothing much turns on that word but dealership obviously carries commission and credit privilages. On the 8th September 1982 (A7) Mr. William Brown the Regional Director of the Plaintiffs replied, saying that in view of the 2nd Defendant's past association with the Plaintiff the appointment would be no problem; he went on to say:-

"Since the official appointment of a Carrier dealer requires a certain degree of paperwork as well as board approval, this will unfortunately take a short time."

The 2nd and 3rd Defendants then visited Singapore and saw a Mr. Kirkham(A5) of the Plaintiffs' local office, who reported the discussion in glowing terms to Mr. Brown in Hong Bong. On the 11th September 1982 (All) the 3rd Defendant wrote to Mr. Brown explaining the creation of t be corporate 1st Defendant. I should explain at this point that both parties to the action agree that, whereas the 2nd Defendant was the man actively engaged in trading matters the 3rd Defendant was being presented as the man of substance, and it is interesting to read the 3rd Defendant's letter to the Plaintiffs of 23rd September 1982 (All) in which he said:

"However this company is owned jointly by Mr. Aiden Wong and Great China Trading Co., Ltd.

 

        The capital of the company at present is a nominal HK$100,000 but will be increased to HK$1,000,000 shortly. The officers are Mr. Aiden Wong and myself who will both be Managing Directors."

Now in retrospect that letter was misleading, and I shall refer to it later. When on November 25th 1982 a search was made by the Plaintiffs credit controller of the Company's Registry (A24) he found a "$2 company", in that 2 shares of $1,00 only had been issued out of an authorized capital of only 10,000, $1 shares. Great China Trading Co. Ltd. were not shareholders and neither of the Defendants held even 1 share.

12. In the meantime and doubtless on the strength of the information contained in (All) the letter of 23rd September the Plaintiffs investigated Great China Trading Co. Ltd. and also Monarch Investment Co. Ltd. and found them to be of substance. The new company therefore appeared to have close relations of some standing and substance.

13. But business had not started between the Plaintiff and the 1st Defendant (to the extent the Defendants required) and at this point I should say that, having seen and heard the Plaintiffs witnesses in the witness box that I am satisfied that they were careful and truthful witnesses and I believe their testimony. I also have to say that I am satisfied that the Plaintiffs, acting through those two witnesses, were prudent and careful in their approach to the opening of business relations with the Defendants. Extensive enquiries were made by the Plaintiffs credit controller and references were taken up, but in spite of all that the 1st Defendant was, in colloquial commercial terms, "a $2 company" - worthless, having no assets.

14. There had been one transaction on the 30th September 1982, involving delivery of goods worth about $20,000 to the 1st Defendant which does not seem to have caused any trouble and was presumably paid for, but I now revert to the purchase order placed by the 1st Defendant on the 12th October 1982 (B2). This was in the sum of $546,000. This was confirmed by a sales order by the Plaintiffs the next day (B3), but the goods were not to be released until the Plaintiffs financial controller Jenny Chan (P.W.1) was satisfied that the payment arrangements were secure.

15. Her evidence was that, on or about 18th October 1982, she had a telephone call from the 2nd Defendant, asking when the 1st Defendant was going to receive the ordered goods. She told him, on the telephone that the Plaintiffs would be looking for either personal bank guarantees, or letters of credit, before releasing the goods. She said to me in evidence that the 2nd Defendant asked what the form was, and she said they had a standard form. The 2nd Defendant then incited her for lunch at the Jockey Club at Shatin, for which he was the host, not surprisingly, since he wanted something from the Plaintiffs, namely the release of goods for his company. At the lunch meeting Jenny Chan said that apart from Letters of Credit or a bankers guarantee the only possible security acceptable to the Plaintiffs was a personal guarantee from both defendants, as Directors of their newly formed company. She repeated that Letters of Credit, or a Bankers Guarantee would be most secure. The 2nd Defendant said that a Bank Guarantee was out of the question but he would try and convince the 3rd Defendant to agree to be a personal guarantor. At this meeting the 2nd Defendant brought up the question of placing debentures, asking, as he had done on the telephone, when making the lunch appointment, if some arrangement such as had been successful with his previous employers, Alliance Engineering Co. Ltd., could be effected. Jenny Chan then said they could not even find the 1st Defendant Company in the Register, and that anyhow Alliance Engineering Co. Ltd. was an old established company whose assets more than covered what they owed.

16. The 2nd Defendant when asked about the very existence of the 1st Defendant said "Oh we've just changed our name". That of course was a reference to the fact that the 2nd and 3rd Defendant had bought a "shelf" company with the name of "Fill Good Ltd." to use as their trading vehicle. Jenny Chan said to me that at that stage she had not met the 3rd Defendant, but she knew from Mr. Brown, her boss, that he was known to the Plaintiffs. Mr. Brown's evidence confirmed this. The meeting for lunch ended on the basis, therefore, that the 2nd Defendant would try and persuade the 3rd Defendant to join him in a personal guarantee and Jerny Chan would post a form to them for that purpose that evening and, if signed, she had indicated to the 2nd Defendant that she would release the goods which had been ordered. Jenny Chan in evidence expressly denied that she agreed on behalf of the Plaintiff to accept a debenture nor requested a debenture, and which evidence I accept. In the course of the trial Mr. Sussex for the 3rd Defendant formally abandoned this allegation, but it is important in the context of the events which happened for me to make it clear that I accept Jenny Chan's evidence and that I find that the 2nd Defendant at that lunch meeting, entirely off his own bat, and unsuccessfully, had tried to persuade Jenny Chan to take, in general terms, a debenture. I find as the only possible inference that the 2nd Defendant was at that stage endeavouring to obtain substantial credit for his shell company without exposing himself to any personal liability and without offering the Plaintiffs the usual security of Letters of Credit or bankers guarantees. I am satisfied that Jenny Chan was aware of this and as Financial Comptroller elect of the company she was divorced from the need to sell, and could look dispassionately at the prospect of payment and need for security. Jenny Chan referred to a conversation she had with the 3rd Defendant at a later stage, after trading had started, and when he asked for the release of certain goods. In cross-examination she confirmed that she told the 3rd Defendant that if he wanted more goods and did not pay cash he would have to extend the guarantee, but that is to proceed too far ahead at this stage, it merely shows that Jenny Chan as Financial Comptroller at all times acted on the basis of a guarantee alone and that at that point of time the 3rd Defendant did not seek to limit or avoid or even query his assumed obligations under the guarantee.

17. The form of guarantee which Jenny Chan sent to the 2nd Defendant was duly completed and signed by the 2nd and 3rd Defendants on 22nd October 1982 and witnessed, and returned to the Plaintiffs and Jenny Chan agreed she saw it, and then authorized the release of the goods ordered on the strength of it, to the 1st Defendant. The guarantee (A21) was completed and no point arises on its wording, but it is dated 22nd October 1982 and is expressed to be

"In consideration of your supplying goods and giving credit to Monarch Engineering Ltd. The 2nd and 3rd Defendants jointly and severally guarantee all moneys owing at any time not exceeding $600,000."

The Guarantee is declared to be irrevocable.

18. What is important, and what this case turns on is the effect of the covering letter (A20) which I accept, as Mr. Sussex contends, must have accompanied the return to the Plaintiffs of the Guarantee. Jenny Char did not see the letter at the time when the Guarantee was returned although it was addressed to her; she says that her credit comptroller, a Mr. Wong, produced the Guarantee to her but she did not inspect it or the letter but did see that the 3rd Defendant had signed. She had said in evidence that the 3rd defendant was the Guarantor they wanted; the 2nd Defendant was only invited to act to save his face and give him the appearance of equal substance. I accept that.

19. The covering letter (A20) reads as follows:

"Referring to our conversation on October 21, 1982, I have much pleasure in forwarding herewith my signed personal guarantee. It is with the understanding that the aforesaid guarantee will not be required when Monarch Engineering Ltd. complete the procedure issuing their Debenture to Caricor.

 

Thank you for your attention."

Jenny Chan to whom the letter was addressed said, in cross-examination that whereas it was addressed to her, if she had seen this letter she would have replied. I accept that. I find that she did not see the letter at the time it was received. But I do find that it was received by the Plaintiffs together with the Guarantee itself.

20. The 3rd Defendant contends that the guarantee (A21) and the covering letter (A20) when construed together constitute an offer, or a counter-offer to provide the guarantee, but on terms. The 3rd Defendant relies on the affidavit of Jenny Chan sworn in O.14 proceedings, on the 16th July 1984 in which she says, at para. 6 thereof:-

The 3rd Defendant says that statement makes it clear that his offer or counter-offer contained in the letter (A20) was never accepted and that there was therefore no guarantee and no suretyship.

21. That is what I must consider first. The effect of the Guarantee (A21) is threefold: it is first a joint promise, then a several promise by the 2nd Defendant, then a several promise by the 2nd Defendant, all in the same terms.

22. The letter (A20) is written on the 1st Defendant's notepaper but in the first person, the person of the 2nd Defendant, and of course the first question must be whether the 3rd Defendant can bring himself under the umbrella of that letter at all and set up an agency since it does not purport to be written on his behalf, or jointly on his behalf.

23. By their Reply to the Defence, the Plaintiffs state (under particulars of para. 8 thereof):

"PARTICULARS

There is no evidence at all as to what took place between the 2nd and 3rd Defendants before the letter (A20) was prepared and despatched. I queried the truth of the inference as pleaded by the Plaintiff during the course of Mr. Sussex's submission but he, not unnaturally, takes the point that the issue is not open to me, in view of the Plaintiffs Reply which I have just set out. With considerable reluctance, I agree with Mr. Sussex. I say with reluctance because having heard Jenny Chan giving evidence I think amore probable inference is that the 2nd Defendant, who wanted the business and knew that the Plaintiffs had accepted Debentures elsewhere, was riding his own hobby horse at this stage, but there it is, I must agree that the question of agency is not open on the pleadings. But is the letter an "offer" or even "counter offer" or is it just "flying a kite", that is to say is the author just being importunate and hoping the Plaintiffs will relent and agree to take the debenture he previously urged. I am certain there was no understanding" at that stage: Jenny Chan had very firmly reminded the 2nd Defendant that his new company was not in the same class as his previous employers so as to qualify for debenture treatment. There was therefore no understanding, and, even more important, no reason for the 2nd Defendant to hope that he could procure the Plaintiffs agreement at that stage to take a debenture; his "offer" had already been refused at the Jockey Club. To treat the letter as a counter-offer or even an offer is to imply that the guarantee would become effective and business commence only if agreement to take a debenture was reached. But the 1st Defendants were waiting for the goods, they were not negotiating for the terms of a guarantee. This question had been raised and rejected and settled at the Jockey Club. A straight personal guarantee by the two directors was the lowest form of security the plaintiff would accept; they were not interested in debentures from a "$2 company".

24. I have had the classic authorities of Jones v. Daniel (1894) 2 Ch. p.332 and Crossley v. Maycock L.R Vol. XVIII (1874) p. 181 cited to me and after 100 years these still demonstrate vividly the need for unqualified acceptance of an offer, to found a contract.

25. But can I treat A20 as a letter importing or seeking to import a new term to what was previously agreed? Mr. Sussex says that I must construe A20 objectively, that is to say not with the evidence of what went on at the Jockey Club in mind. As Mr. Justice Romer said, in Jones v. Daniel at p.335,

"Now what would anybody when he receives that letter fairly understand to be the meaning of it?"

We know what Jenny Chan said in her affidavit (supra) and we know what she wrote when she first saw the letter 15 months later. She said (A4) on 23rd January 1984

"..... The credit given to Monarch Engineering is given solely based on the guarantees given by these two gentlemen."

Of course I must look at the document itself, but in so far as Mr. Sussex suggests that the man on the Shaukiwan omnibus is the man to look at the words, there is a mercantile element here, namely the use of the word "debenture", which might well cause that man rapidly to lose interest, and which does bring the matter back to those who know a little about mercantile matters such as counsel, and even judges occasionally, but the real and realistic approach is that contracts are not made in a vaccuum. The court must have regard to its commercial background and to the factual background against which it is made. (Chits on Contracts 25th Edition Vol. 1 para. 766) And I must not approach the task of construction with too nice a concentration on individual words (ibid.)

26. Adopting that approach I do not find the letter of 22nd October 1982 (A20) to be a counter-offer. I find it to be an expression of hope on the part of 2nd Defendant that the Plaintiffs will at a later stage reconsider and exchange the guarantee for a debenture. Why should they not ? The Defendant company might grow into solidity and respect and the Plaintiffs had after all done just that for another established company and to the knowledge of the 2nd Defendant.

27. I do not find therefore the letter of the 2nd Defendant to be a counter-offer and inasmuch as the 3rd Defendant has fixed the Plaintiff, by his pleadings, with the 2nd Defendants agency on his behalf in that letter, he cannot in my judgment now contend for a different construction for himself.

28. I therefore support the Plaintiffs first contention, namely that the covering letter did not modify or otherwise intrude into the terms of the guarantee, so as in any way to qualify its operation, as either an acceptance or an offer by the 2nd and 3rd Defendants. The covering letter was not intended to be or be part of a legally operative document.

29. I hold the return of the guarantee to be an acceptance of the Plaintiffs offer to do business with the 1st Defendant when such was signed.

30. That would be an end to the matter for there is no argument about the legality of the guarantee if, and when standing alone

31. Mr. Ribeiro and Mr. Sussex have however endowed me with the weight of their great research on the second leg of the Plaintiffs case so that I cannot leave the matter without paying tribute to that scholarship, and indicating the views I formed on this aspect, namely whether if there was no concluded guarantee is the (3rd) Defendant estopped from denying his liability as guarantor"?

32. If the equity of estoppel in any of its manifestations applies, the effect is that if one party seeks to go back on what is agreed, assumed or represented and which has formed the basis of dealings between them, then equity will not allow him to do so, if it would be unfair or unjust to do so.

33. Both counsel have drawn heavily on the Texas Bank Case Amalgamated Property Co. v. Texas Bank (C A.) s.17 /1982/ 1 Q.B. where Robert Goff J. (as he then was) reviewed the doctrine at some length on facts which if I may say so were slightly less in dispute than here, and where good faith and integrity were unimpugned by either side. The excursions by Goff J. into the law of estoppel were upheld by the Court of Appeal, each member of which drew heavily on the 3rd Edition of the author of Spencer Bower /Spencer Bower & Turner. Estoppel by Representation/ to show the true nature of estoppel by convention, and where at para. 157 Chapter VIII he says:-

"This form of estoppel is founded, not on a representation of fact made by a representor and believed by a representee, but on an agreed statement of facts the truth of which has been assumed, by the convention of the parties, as the basis of a transaction into which they are about to enter. When the parties have acted in their transaction upon the agreed assumption that a given state of facts is to be accepted between them as true, then as regards that transaction each will be estopped against the other from questioning the truth of the statement of facts so assumed."

In the Texas Bark case there was a quadripartite arrangement with the principal contracting parties and the subsidiaries. In the present case, there are 3 parties for the purposes of considering the doctrine. First there is the Plaintiff creditor company and then, secondly the 1st Defendant, debtor company; by ordering goods from the Plaintiff the 1st Defendant assumed a premise to pay. Then, thirdly, and colateral with the 1st Defendant's promise is the (for these purposes) several promise of the 3rd Defendant given to the Plaintiff to guarantee the supply of goods and the credit involved.

34. Now, whereas in the Texas Bank case the vehicle for lending had been constructed by agreement, open and not later contested, the position here is different. As between the Plaintiff and Defendant there can be no doubt of their position but as between Plaintiff and 3rd Defendant, as I understand Mr. Sussex's argument, there is no mutual assumption, nothing beyond the guarantee itself, and to reinforce the argument he points to the letter (A20) as demonstrating the very lack of agreed statement of facts between the parties to found an estoppel.

35. Mr. Ribeiro's argument is that the common assumption is that the goods were supplied by the Plaintiff to the 1st Defendant on the basis that the 1st Defendant liability to pay for them was secured by a guarantee.

36. Now as Mr. Sussex points out we do not know what the 3rd Defendant assumes, since he gave no evidence and called no witnesses. Is the common transaction that between the Plaintiff and the 1st Defendat or that between the Plaintiff and the 3rd Defendant? I think it must be that between the Plaintiff and 3rd Defendant alone, since that is the transaction under which the Plaintiff seeks to recover; he is not suing the 3rd Defendant directly for the price of the goods.

37. I have made a finding when considering the formation of the contract, as to the effect of the covering letter of the 22nd October (A20); if I apply my finding in that aspect, as I do, to the question of estoppel there is nothing in that letter to qualify the effect of the Guarantee (A21). If that letter was given the construction contended for by the 3rd Defendant then there would be clear evidence of an absence of mutuality but I do not so find. The 3rd Defendant never expressed himself in correspondence until he and the 2nd Defendant wrote on the 23rd December 1984, 14 months later, (A43) purporting to discontinue and revoke the guarantee.

38. Indeed the only manifestation of his interest in writing appears in the letter of 23rd September 1982 (A11) to which I have referred in which he wrote to the Plaintiffs Regional Director in terms which I consider to be grossly inaccurate and misleading, he knew full well that the Plaintiffs had to be tempted into big business with his new venture by concrete evidence of worth, or substantial underpinning; he was dropping names". I find little of any evidential value on the central issue, whey I am referred to the 3rd Defendants later telephone calls to the Plaintiffs witnesses asking for the expedition of delivery of goods ordered. I could not attribute to him any state of knowledge at those later stages retrospectively to the earlier time when performance of the contract started.

39. With the guarantee therefore unqualified the Plaintiff does not need the assistance of equity to demonstrate a mutual assumption of any facts whether consistent with or additional to the contract of guarantee. It stands by itself and for its full force and effect and the 3rd Defendant is liable to implement his general promise to the full extent.

40. I feel I must just add that had the 3rd Defendant given evidence in accordance with his pleadings in paras. 13 and 14 of his Defence namely that there was a contract in its final form to accept a debenture, and if I had then found, on the evidence in his favour, I should have done so on the basis that it was an implied term that such debenture would have been accepted and approved in form by the Plaintiff. The document which the 2nd and 3rd Defendant purported to send to the Plaintiffs on the 23rd December 1983 (A43) was as Mr. Ribeiro puts it, a "rubbish document" unregistered, unintelligible and void as against the creditors of the 1st Defendants.

41. In all these circumstances there will be judgment for the Plaintiffs against the third Defendant in the sum of $570,632.61Ø the amount testified to by Jenny Chan as being the net amount properly due under the terms of the guarantee. Together with interest at the rate of 10% p.a. from the 25th January 1984 the date of demand to judgment and at court rates thereafter until payment and with costs, such costs to include any costs reserved to me by any other judge and to be taxed if not agreed. There will be the usual Rule nisi in respect thereof.

42. Delivered this 26th day of February 1986.

By me