BANK OF CHINA (HONG KONG) LTD v. KWAN CHAN YEE

HCA2946/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2946 OF 2003

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J U D G M E N T

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The plaintiff’s claim

1.  The plaintiff claims against the defendant the amount owing to the plaintiff by two principal debtors under a mortgage under which the plaintiff granted general banking facilities to the debtors.  The claim is based on a Deed of Guarantee executed by the defendant on 28 January 1999.

The defence

2. The defence was that the defendant was unaware when she signed the Guarantee that she was undertaking to repay on demand all debts owing by the principal debtors and she believed that she was only guaranteeing a new loan of $850,000 to be advanced to the principal debtors by the plaintiff.

The evidence

3. The evidence as stated by the two defence witnesses, the defendant and her brother-in-law, one of the two principal debtors, in Court and in their witness statements which were adopted as their evidence-in-chief, showed the following chronology of events :

(1)     the debtors who were husband and wife bought their 1^st property in November 1994;

(2)     they bought their 2^nd property in October 1997 for $5.273 million while building was still going on.  The plaintiff lent $3,691,000 to the debtors on 21 October 1997 secured by an equitable mortgage;

(3)     they applied to the plaintiff for a bridging loan of $2.485 million which was to pay for the shortfall between the expected selling price of the 1^st property and the mortgage on it and to finance the purchase of the 2^nd property;

(4)     on 28 January 1999 the principal debtors went to the offices of solicitors acting for the plaintiff.  This firm of solicitors also acted for the debtors in their sale of the 1^st property and for the plaintiff in the release of the mortgage on that property.  The firm claimed it did not act for the plaintiff in the guarantee to be signed by the defendant in respect of a new loan of $850,000 to be made by the plaintiff to the debtors;

(5)     upon arrival, a conveyancing executive of the firm showed the debtors a facility letter dated 28 January 1999 for the loan of $850,000 — page 174 of the bundle;

(6)     the defendant arrived later and met the conveyancing executive;

(7)     the executive gave the defendant a copy of the facility letter and then directed her to sign at various places on various documents by turning up the page in question and pointing to the place where she should sign;

(8)     since early 2002, the debtors were unable to repay the loan of $850,000 or the mortgage on the 2^nd property; on 23 July 2002 they were declared bankrupt;

(9)     the 2^nd property was sold on the instructions of the plaintiff on 31 October 2002; and

(10)    in May 2003 the plaintiff approached the defendant to repay a sum of $2.8 million.

The defendant’s evidence

4. She said that her own mortgage payments were $30,000 per month and the other expenses came to $30,000 per month, so there was only $20,000 per month left for her family to spend.  When she was given the facility letter in the solicitors’ firm, she briefly read it and saw the figure $850,000.  She did not read the details.  She did not have the opportunity to read the documents before she signed them.  She did not ask for a chance to read the documents because she believed that the executive was giving her documents which related to the $850,000.  No one told her to seek legal advice on the guarantee.  No one told her the amount which was owed by the debtors on the 2^nd property.  If she had known the amount owing on that mortgage was $3.6 million, she would not have signed the guarantee because she could not afford that.  She read the guarantee document after she was approached by the plaintiff in May 2003.  She did not understand the contents completely.  She had studied Contract Law for a few lessons and she thought this was in 2000 or 2001.  The signature under “Acknowledgment — I/We have considered all relevant matters and am/are prepared to execute the Guarantee in your favour” in the letter addressed to “Guarantor(s)” (page 204) “appears to be mine”.  The signature on the Deed of Guarantee (page 212) “looks like my signature”.  She cannot be 100% sure that it was she who signed those documents.

5. Under cross-examination, she said she did not know the contents of the documents when she signed them.  She agreed that it was more likely than not that the signatures on the documents shown were hers.  She admitted that since April 1995 she had been employed as an administrative officer by The Executive Committee of the Alice Ho Miu Ling Nethersole Hospital and she had to draft employment contracts according to formats.  She admitted that she did not remember all of what was said or done at the meeting on 28 January 1999.  In her letter of 13 May 2003 to the plaintiff, she had said, “I cannot recall what I have signed and whether I have signed anything.”  She denied that she saw the column “Important Notice to the Guarantor” on the Deed of Guarantee.  Her evidence is as stated in her statement paragraph 12, namely, “I signed all of them because Jim (the conveyancing executive) gave me the nod in the first place in assuring me of the fact that I was asked to execute for guaranteeing repayment of the principal loan of the sum specified on the facility letter, i.e. $850,000 but not otherwise. ”  She remembered Jim nodded his head but in May 2003 she could not remember if she had signed anything.  She had discussed the incident with her sister after which she (the defendant) was able to recollect.  It was her own recollection.  She trusted Jim at that time (after he nodded) so she did not read the documents.  She assumed that her sister and brother-in-law would be able to repay the plaintiff.

6. In answer to the Court, she said that she knew her sister had borrowed $2.485 million from the plaintiff.  She knew the $850,000 was to repay part of that $2.485 million.  She knew her sister had to sell the 1^st property.  She knew her sister had taken out a mortgage on her 2^nd property.  She knew the value of both of those properties had fallen.  She was confident her sister would be able to pay the mortgage payments on the 2^nd property and the new loan of $850,000.  She knew her sister bought the 2^nd property for about $5 million and made a downpayment of about 30%.

7. She had no reason to believe that the $850,000 had anything to do with the 2^nd property.

The evidence of the defendant’s brother-in-law Lee Fun Chuen

8. He said there was no guarantee required for the mortgage on the 2^nd property.  The proceeds of sale of the 1^st property would be used to repay the bridging loan of $2.485 million but would not be enough, so he had to obtain the $850,000 loan.  He had two loans with the plaintiff — the mortgage on the 2^nd property and the $850,000 loan.  They had different loan account numbers and carried different interest rates.  He did not believe that the defendant was required to guarantee more than $850,000.  He did not think the new loan was in any way connected to the mortgage on the 2^nd property.

9. Under cross-examination, he said that the first time he saw the facility letter dated 28 January 1999 for the $850,000 loan was when he went to the offices of the solicitors.  He did not pay attention to the printed words on the letter, namely “Important notice: This letter sets out the terms and conditions upon which we would grant you a term loan.  You are advised to read and understand such terms and conditions before accepting the term loan.”  That was the first time he saw in writing on how the plaintiff was prepared to lend him the $850,000.  He did not know the new loan was concerned with the 2^nd property.  He saw the heading of the letter which set out the address of the 2^nd property and his and his wife’s names as the mortgagors.  He said he thought it was the address he was living in.  His understanding was the loan had nothing to do with the mortgage on the 2^nd property.  He said he did not pay attention to the first paragraph of the letter which stated that the loan shall be secured by the First Legal Charge dated 13 March 1998 in respect of the above property already executed by the mortgagor(s) in “our favour”.  He said no one explained that to him.  He said Jim did not read out the letter to him.  He said Jim told him about the loan in gist but did not go through the letter item by item.  Jim only read out the figure $850,000, interest rate and that sort of thing.  Lee had asked Jim why the plaintiff did not absorb the new loan into the existing mortgage loan for the 2^nd property so that they would pay less interest on the new loan.  Jim said they were two different loans.  Lee had seen that paragraph 3 of the letter stated that interest on the loan would be charged at the rate of 3% per annum over the prime rate for Hong Kong dollars.  He did not read the letter in detail but he saw the 3%.  He had a glance at paragraph 1 of the letter.  He trusted the bank so there was no need for him to try to find out from the letter what the terms for the new loan were.

10. On the date of his bankruptcy he and his wife owed the plaintiff around $2 million after deduction of the proceeds of sale of the 2^nd property.  He knew that four years after the bankruptcy order he need not repay.  He was sorry he dragged the defendant into this matter.  He was present sometimes, occasionally, when his wife and the defendant discussed what happened at the meeting at the solicitors’ firm.  That occurred more than once.  What was discussed was what was done in the solicitors’ office.

11. At the meeting Jim mentioned paragraph 4 of the letter (page 174 of the bundle) which stated : “We also require a Personal Guarantee for the repayment of the principal amount due up to an unlimited extent accrued interest and default interest thereon and other costs and expenses referred to in the Guarantee, duly executed by Kwan Chan Yee.”  Jim did not read out the whole paragraph.  Lee said he did not know at the time that the guarantee was for the repayment of the principal amount due “up to an unlimited extent”.  In relation to paragraph 4 of the facility letter, Jim said there would be a guarantor.  He did not say the guarantee was up to an unlimited extent.  Jim showed the guarantee documents to Lee for him to have a look.  Lee did not look at them.  Lee’s explanation of why his statement and that of the defendant were in identical terms in describing what happened in the solicitors’ firm was that those were the facts.  He said the relevant paragraphs in both statements were written based on the same facts.  He knew that if he had wanted to, he could have read the documents before signing them.

12. The defendant had said to Jim (as per paragraph 19 of Lee’s statement) that she came to execute documents effecting a guarantee for repayment of a personal loan of $850,000 for her sister and husband, but in a question form.  Jim then said “Ng” and nodded.  Right after the defendant walked in, she said “$850,000, right?” and Jim said “Ng”.  What is in the statement (as quoted above) is correct.

13. On re-examination, Lee said that what happened was when the defendant walked in, Jim asked her the purpose of her coming there and she said “$850,000, right?”  Jim then said “Ng” and he nodded.

The plaintiff’s witness

14. The plaintiff called as its witness Lee Wai Ho, the officer of the Special Assets Management Department who testified that some time before 1 May 2002, the plaintiff sent to all its loan accounts customers a printed letter informing them that as from 1 May 2002 the overdue interest rate that the plaintiff would charge would be prime rate plus 6%.  The witness also gave evidence that as at 28 September 2004, the outstanding principal owed by the principal debtors was $2,630,506.88 and the accrued interest $554,262.21 making the total indebtedness $3,184,769.09.  He said there was no record of a repayment by the debtors of the total sum of $79,216.

Assessment of the evidence

15. The first noticeable aspect of the defendant’s evidence is that when she gave her evidence-in-chief, she was not even prepared to accept that the signatures on the guarantee documents were hers.  In respect of the signature in the acknowledgement part of the letter to the guarantor, she said the signature “appears to be mine” and in respect of the signature on the Deed of Guarantee, she said it “looks like my signature”.  It was only under cross-examination that she was prepared to accept that it was more likely than not that the signatures on the documents shown were hers.

16. She was a well-educated person and was obviously well-versed in the English language.  A quick glance at the first page of the letter to the guarantor would have enabled any reader to see that under paragraph (3) of the letter, under “your maximum liability under the Guarantee is”, the box “unlimited” was ticked.  I do not accept her evidence that she did not read the details mentioned in the facility letter of which she was given a copy.  I also do not accept her evidence that she did not have the opportunity to read the documents before she signed them.  On her own admission, she did not ask for a chance to read the documents.

17. A lot of suspicion surrounds the question of how much the defendant was able to remember of what was said and done at the solicitors’ offices on 28 January 1999.  After she was approached by the plaintiff in May 2003 to repay the total outstanding amount, she wrote to the plaintiff and said that she could not recall what she had signed and whether she had signed anything.  She admitted that she subsequently discussed the incident with her sister, after which she (the defendant) was able to recollect.  She asserted that what she said in her witness statement was true, namely that she “signed all the documents because the conveyancing executive gave her the nod in the first place in assuring her of the fact that she was asked to execute for guaranteeing repayment of the principal loan of the sum specified on the facility letter, that is, $850,000 but not otherwise”.

18. Her brother-in-law’s evidence was that he was present sometimes when his wife and the defendant discussed what happened at the meeting at the solicitors’ firm.  He said that occurred more than once.  His explanation of why his witness statement and that of the defendant’s were in identical terms in describing what happened in the solicitors’ firm was that those were the facts and the relevant paragraphs in both statements were written based on the same facts.  He said in Court that she had said to the conveyancing executive that she came to execute documents effecting a guarantee for repayment of a personal loan of $850,000 for her sister and husband and Jim then said “Ng” and nodded.  He was asked if Jim said “Yes” and he said “No, he did not”.  The witness then gratuitously volunteered the information that right after the defendant walked in, she said “$850,000 right?” and Jim said “Ng”.  He was asked about what he had said in his witness statement and he said that was also correct.  He was asked in re­-examination to clarify and he said that what happened was when the defendant walked in, Jim asked her the purpose of her going there and she said “$850,000, right?” and Jim said “Ng” and nodded.  He was asked if the defendant said anything about providing a guarantee and he said he did not quite remember.  He was asked to explain the difference between what was in his statement and his evidence in Court and he said that the defendant knew she came to sign the guarantee for $850,000 because previously he had reminded her.  He was again asked if he remembered clearly what the defendant said in response to Jim’s question and he said “$850,000”.

19. The brother-in-law’s evidence was in itself self-contradictory and in my view, cannot possibly support the defendant’s evidence.  I do not accept the defendant’s evidence that she only signed the documents because Jim had assured her that she was only asked to guarantee repayment of the $850,000 loan by nodding to her.  She said the nod was given after she said in answer to his question as to why she was required to go there that she came to execute documents effecting a guarantee for repayment of a personal loan of $850,000 for her sister and her sister’s husband.  I do not accept that that was what happened at the meeting.

The defendant’s defences in law

20. The defendant’s defences were that :

(1)     The alleged Deed of Guarantee did not truly or correctly reflect the true intentions of the parties or embody the Agreement, namely that the defendant would stand as the guarantor for the new loan of $850,000.

(2)     The defendant signed the documents under a total mistake as to their nature, contents and effect, and without negligence on her own part.

(3)     The defendant appended her signature on the documents in reliance of the representation on the part of the plaintiff its servants and/or agents to the effect that she was only required to guarantee for the repayment by the debtors of the new loan.

21. The guarantee signed by the defendant was an all monies-guarantee.  I have found above that I do not accept her evidence of what happened at the solicitors’ offices.  I find that she did know that her liability would be unlimited but still agreed to sign the guarantee because she was confident at that stage that her sister would be able to pay the mortgage payments on the 2^nd property as well as the new loan of $850,000.  By signing her name to the document, she was effectively saying that was her agreement.  The plaintiff cannot be said to be contemplating any other agreement other than that in the guarantee.  That was Mr Swaine’s submission which I accept.  I have also found above that I do not accept that Jim made any representations to the defendant, especially the representation that she would only be liable for the repayment of the new loan.

22. Non est factum was suggested in the pleadings.  It is only where a party is fundamentally mistaken can the defence of non est factum be used.  The defendant took no care to read the documents, according to her and in my view, the plaintiff is entitled to hold her to her signature.  Ma J (as he then was) in Wing Hang Bank Ltd v. Liu Kam Ying & Ors [2002] 2 HKC 57 held that if a guarantor did not read the terms of the guarantee, this was negligent on his part and the defence of non est factum is unavailable in those circumstances.  Furthermore, the plaintiff was under no legal duty to provide the defendant with any explanation of the guarantee or advise her on the consequences of signing the document.  See Barclays Bank plc v. Khaira [1992] 1 WLR 623 — a decision followed by Reyes J in Bank of China (Hong Kong) Ltd v. Major Harmony Ltd & Ors (HCA886/2002).

23. Miss Chan for the defendant relies on the House of Lords’ decisions in Barclays Bank plc. v. O’Brien and another [1993] 4 AER 417 and Royal Bank of Scotland v. Etridge (No.2) and Other Appeals [2001] 4 AER 449.  In O’Brien where the surety was the wife of the debtor, the House of Lords held that the surety obligation was valid and enforceable by the creditor unless the suretyship was procured by the undue influence, misrepresentation or other legal wrong of the principal debtor.  It was also said by Lord Browne-Wilkinson at page 431 that in a case where the creditor is aware that the surety reposes trust and confidence in the principal debtor in relation to his financial affairs, the creditor is put on inquiry in just the same way as it is in relation to husband and wife.  In the instant case, there is no such evidence, nor is there any evidence of misrepresentation or other legal wrong of the principal debtor.  Relationships between siblings are not those which produce a presumption of undue influence —Bank of China (Hong Kong ) Ltd v. Wong King Sing and Ors [2002] 1 HKC 83.  In Etridge, it was held that banks should in the future regulate their affairs on the basis that they are put on inquiry in every case where the relationship between the surety and the debtor is non-commercial.  That was decided by the Lords in October 2001 whereas the present action concerns conduct which occurred in 1998/1999.  Mr Swaine submits that in any case, Etridge is not binding in Hong Kong and he was not able to find any decisions in Hong Kong which followed Etridge.  I agree that that decision is not applicable to the instant case.  Furthermore, there is no evidence that the plaintiff was aware of the non-commercial nature of the relationship between the surety and the debtors.  The defendant’s sister had not misrepresented anything to the defendant and the sister was not acting as the agent of the plaintiff.

24. If indeed the defendant was labouring under a misapprehension of the true nature of the documents, the plaintiff could not have known of that.  There is just no evidence that the plaintiff or Jim knew of the defendant’s mistake.  I find therefore that none of these defences have been made out.

Quantum

25. Under the Deed of Guarantee, the guarantor agreed to pay legal or other costs incurred by the Bank in relation to the guarantee on a full indemnity basis.  The guarantor also agreed that a certificate by any of the Bank’s duly authorised officers as to the moneys and liabilities for the time being due or owing to the Bank by the debtors shall be binding and conclusive evidence in any legal proceedings against the guarantor.  In the facility letter dated 28 January 1999 for the loan of $850,000 (page 174 of the bundle), the principal debtors agreed that all sums due but unpaid should bear overdue interest calculated at the rate of 5% per annum above the prime rate, and that the rate of interest could be varied upon 30 days’ prior notice to the debtors displayed or posted in the banking halls of the plaintiff.  According to the evidence of Mr Lee Wai Ho of the plaintiff, the debtors were given 30 days’ notice of the intended change of interest rate to 6% above prime rate and this was displayed in the plaintiff’s banking halls.  I also accept his evidence that there was no record of a repayment by the debtors of the total sum of $79,216.

Judgment

26. I therefore give judgment for the plaintiff for the sum of $2,630,506.88 which was the outstanding principal plus $554,262.21 which was the accrued interest up to 28 September 2004.  There will also be judgment for interest on the outstanding principal at 6% above Hong Kong prime rate from 29 September 2004 to date of judgment and interest on the judgment sum at the judgment rate from date of judgment until payment.  The counterclaim is dismissed.  I also give judgment for costs against the defendant on a full indemnity basis.