Dbs Bank (Hong Kong) Ltd v. Hunter Socks & Apparel International Ltd and Others

HCMP 2241/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2241 of 2016

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ACTION NO 1447 of 2016

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(Heard Together)

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JUDGMENT

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1.By the mortgage action commenced by the Originating Summons in HCMP 2241/2016 (“HCMP 2241”) issued on 29 August 2016 (“the OS”) the plaintiff (“the Bank”) claims against the 1^st defendant (“Hunter”), 2^nd defendant (“Ease Keen”), 4^th defendant (“Lo”), 5^th defendant (“Terence”), 6^th defendant (“Gerald”) and the 7^th defendant (“Deven”) for payment of all monies due to the Bank under the respective covenants contained in:

(a) a mortgage dated 18 May 2012 made between Ease Keen as mortgagor, Hunter as the borrower, and the Bank as the lender (“the 1^st mortgage”);

(b) a mortgage dated 18 May 2012 made between Lo and Terence as mortgagor, Hunter as the borrower, and the Bank as the lender (“the 2^nd mortgage”);

(c) a guarantee and indemnity dated 20 May 2011 executed by Ease Keen in favour of the Bank to secure the indebtedness of Hunter to the Bank (“the 1^st guarantee”);

(d) a guarantee and indemnity dated 20 May 2011 executed jointly and severally by Terence, Gerald and Deven in favour of the Bank to secure the indebtedness of Hunter to the Bank (“the 2^nd guarantee”).

2.The Bank also claims:

(a) delivery of vacant possession by Ease Keen of the mortgaged property under the 1^st mortgage namely, Flat F on 19/F, Tower 5, The Greenwood (Phase 1), Laguna Verde, No 8 Laguna Verde Avenue, Kowloon;

(b) delivery of vacant possession by Lo and Terence of the mortgaged property under the 2^nd mortgage namely, Unit B, 3/F, Mackenny Centre, No 660 Castle Peak Road, Kowloon.

3.Interest and costs are also claimed.

4.Although there was also a claim for payment against the 3^rd defendant under another guarantee and indemnity also dated 20 May 2011, this no longer arises as the proceedings against the 3^rd defendant were discontinued on 23 September 2016.

5.Terence, Gerald and Deven are siblings.  Their mother is Lo.

6.Hunter is a company incorporated in Hong Kong carrying on the business of trading knitted socks. Terence and Deven are shareholders and directors of Hunter. 

7.Ease Keen is also a company incorporated in Hong Kong carrying on the business of holding investment properties.  Terence, Gerald and Deven are directors of Ease Keen.

8.By a letter of demand dated 25 May 2016 the Bank demanded payment from Hunter of the alleged indebtedness due to the Bank by Hunter as particularized therein.  The Bank demanded payment of the total sum of HK$6,111,039.57 and US$4,952,732.96 (“the alleged indebtedness”).

9.The alleged indebtedness was the total sum of the outstanding principal for banking facilities granted to Hunter and accrued interest and the early termination amount in the sum of US$2,606,807.64 payable under the ISDA 2002 Master Agreement dated 3 February 2012 (“the ISDA Master Agreement”) made between the Bank and Hunter in respect of foreign exchange derivative agreements (“the FX derivative agreements”).‌

10.By a letter of demand also dated 25 May 2016 the Bank demanded that Ease Keen repay the alleged indebtedness under the 1^st mortgage.  By another letter of demand also dated 25 May 2016 the Bank demanded that Ease Keen repay the alleged indebtedness under the 1^st guarantee.

11.By a letter of demand also dated 25 May 2016 the Bank demanded that Lo and Terence repay the alleged indebtedness under the 2^nd mortgage.

12.By letters of demand also dated 25 May 2016 the Bank demanded that Terence, Gerald and Deven repay the alleged indebtedness under the 2^nd guarantee.

13.By the writ issued on 1 June 2016 in HCA 1447/2016 (“HCA 1447”), Hunter, Deven, Terence, Gerald, Lo and Ease Keen as plaintiffs brought proceedings against the Bank for the relief claimed in the indorsement of claim.  Hunter’s claim is for rescission of the FX derivative agreements particularized therein, alternatively, damages for misrepresentation by the Bank and damages for wrongful termination of the FX derivative agreement particularized therein, and for the declarations and injunctions set out therein.  The other plaintiffs claim, inter alia, a declaration that the Bank is not entitled to enforce its rights under the 1^st and 2^nd mortgages and the 1^st and 2^nd guarantees in view of the disputes over the FX derivative agreements between Hunter and the Bank.

14.By a summons issued in HCMP 2241 on 13 February 2017 the defendants seek an order that HCMP 2241 be stayed pending the final determination of HCA 1447, alternatively, that the OS be continued as if the matter had been begun by writ and for directions that the OS be consolidated with HCA 1447 with consequential directions to be given.

15.By a summons issued in HCA1447 on 14 February 2017 the plaintiffs seek an order that HCA 1447 be consolidated with HCMP 2241 with directions to be given.

16.The OS and the said summonses in HCMP 2211 and HCA 1447 came before me for hearing.

17.As I have said, the demand from the Bank was to repay the Bank the alleged indebtedness which included the early termination amount in the sum of US$2,606,807.64.

18.Although the claim in the OS is for payment of all monies said to be due to the Bank namely, the alleged indebtedness which includes the early termination amount in the sum of US$2,606,807.64, Mr Bernard Man SC, with Mr Jason Lee, for the Bank, made it plain at the hearing of the OS before me that the Bank was seeking a summary determination of only its claim on the outstanding banking facilities and interest against Hunter, the mortgagors under the 1^st and 2^nd mortgages and the guarantors under the 1^st and 2^nd guarantees.  The Bank was not seeking a summary determination of its claim on the early termination amount in the sum of US$2,606,807.64 which, it seems to me, would have to be resolved at trial. 

19.Mr Jean Paul Wou, for the defendants, submitted that the court could not grant summary judgment on part of the claim unlike the situation in a writ action where Order 14, rule 1 of the Rules of the High Court (“RHC”) provides that the plaintiff may apply for judgment on part of a claim included in the writ.  Although there is no similar provision in Order 88 of the RHC governing mortgage actions, I am satisfied that by Order 28, rule 4(1) of the RHC if the liability of the defendant in respect of any claim made by the plaintiff is established, the court may make such order in favour of the plaintiff as the nature of the case may require.  This would, in my view, include granting summary judgment on part of the plaintiff’s claims.

20.The question to consider is whether the liability of the defendants is established to enable the court to give summary judgment to the Bank on part of its claims.

21.Unlike an Order 14 application, the burden is on the Bank.  It must first justify its entitlement to summary judgment in an application for summary determination of the OS.  Once this was demonstrated prima facie on the evidence, the burden fell on the defendants to show that they have an arguable defence to the claim (28/4/1 Hong Kong Civil Procedure 2017).

22.I would also refer to what was said in Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd[2009] 3 HKLRD 94 where at para 4 Rogers VP said:

“ … Applications for summary judgment are only suitable where the court can be satisfied that not only is there no defence but there is no fairly arguable point to be argued on behalf of the defendant. The court cannot embark upon a mini-trial based on affidavit. Except in the most clear and blatant cases, it is impossible for a court to put itself in the position of having to make findings of fact. It should rarely be necessary for a plaintiff, in making an application for summary judgment, to do more than verify the statement of claim. If, thereafter, a defendant can show a triable issue that should, there and then, be an end to the application.”

23.The affirmation in support of the OS made by Chan Kam Siu, of the Bank, particularizes the part of the claims in respect of which the Bank seeks summary judgment.  The Bank seeks summary judgment in respect of the banking facilities granted to Hunter.  Summary judgment is sought not only against Hunter but also against the mortgagors under the 1^st and 2^nd mortgages and the guarantors under the 1^st and 2^nd guarantees. 

24.Order 88 of the RHC applies to mortgage actions.  By Order 88, rule 5(6) it is provided that where the plaintiff claims payment of money secured by the mortgage the affidavit must prove that the money is due and payable and give the particulars mentioned in paragraph (3).  As I have said, by the OS the Bank claims payment of all monies due namely, the alleged indebtedness which includes the early termination amount in the sum of US$2,606,807.64.  The affirmation in support of the OS does not, however, seek to prove that the early termination amount in the sum of US$2,606,807.64 is due and payable and does not provide the particulars of the early termination amount.

25.Mr Man submitted that the banking relationship that the Bank had with Hunter was in two parts:

(1) in respect of banking facilities granted to Hunter for its trading business namely, overdraft, revolving term loan, account payable financing and trust receipt facilities (“the banking facilities”); and

(2) in respect of the FX derivative agreements entered into with Hunter under the ISDA Master Agreement.

26.It was submitted that there was no triable issue on the amounts owing to the Bank in respect of the banking facilities.  The Bank seeks summary judgment for the amounts revised and set out at para 31 of the reply affirmation of Chan Wai Man, of the Bank, in the total sum of HK$6,452,643.82 and US$2,360,839.07 (“the said sums”) which were all in respect of banking facilities granted to Hunter and interest thereon.

27.Mr Man further submitted in his oral submissions that as the evidence showed that Hunter had suffered a net loss of US$737,878 in respect of the FX derivative agreements, if the court were not with him on his primary submission, then summary judgment should be given to the Bank for the said sums less the net loss of US$737,878.

28.As submitted by Mr Wou, the alleged indebtedness is disputed.‌

29.In his affirmation, Terence gives evidence that he was induced to enter, initially through the 3^rd defendant and later on through Hunter after its incorporation in late 2010, into the ISDA Master Agreement and a number of FX derivative agreements made thereunder.

30.The evidence shows that in around January 2010, Ms Hilda Cheng (“Cheng”) who was a Vice President of the Institutional Banking Group of the Bank approached him and introduced a FX derivative product involving USD/CNY exchange rate to him.  It was represented to him that the FX derivative product was of extremely low risk and would yield a decent return.  Mr Wou submitted that this was the 1^st misrepresentation made by the Bank as the product was highly risky, the potential return to Hunter was capped whereas the downside risk was unlimited.

31.Terence then had regular contact with Cheng and Ms Matilda Ao Leong (“Ao Leong”), the assistant manager, advisory sales in Treasury and Markets of the Bank.  He says that Cheng and Ao Leong contacted him regularly to discuss their FX derivative products emphasizing that they would generate attractive returns to Hunter and that their associated risks were acceptable.     

32.The evidence of Terence also shows that Cheng and Ao Leong represented to Terence a number of times that the FX derivative products would not affect their trade facilities with the Bank and that based on their estimate of Hunter’s CNY’s requirements they made the recommendation that the FX derivative products were suitable to Hunter.  Mr Wou submitted that this was the 2^nd misrepresentation as the operation of the FX derivative products was inextricably linked to Hunter’s trade facilities and that Hunter’s trading business did not require the volume of CNY currency to be delivered every month under the FX derivative agreements if CNY devalues over time.

33.The evidence shows that Hunter entered into a number of FX derivative agreements with Hunter from 15 February 2011 to 7 January 2015.  These have helpfully been summarized in Annex 1 to Mr Man’s submissions (“Annex 1”) in respect of each Product, all of which involved USD/CNY rate of exchange.

34.Terence says that since 2012 Hunter has made some gains on the FX derivative agreements but after 2013 Hunter suffered substantial losses. 

35.In around mid 2014 CNY began to devalue and the then outstanding FX derivative agreements (Products 642400 and 708623) began to yield losses for Hunter.  Shortly thereafter, Cheng and Ao Leong suggested to Terence that the Bank could help defer Hunter’s losses by replacing the then existing FX derivative agreements with a new agreement of a larger contract amount, longer tenure and different exchange rates.  As part of the new agreement the Bank would pay Hunter the premium upfront which would match and offset the early termination costs arising from the cancellation of the two existing agreements.  Hunter agreed to this.  This was in effect a replacement of the two existing agreements Products 642400 and 708623 with the new agreement Product 746866.

36.As shown in Annex 1, the early termination costs on 27 June 2014 was US$1,150,000. The new Product 746866 was traded on the same date of 27 June 2014 and the premium paid by the Bank was US$1,150,000 which matched the early termination costs payable by Hunter. 

37.Terence says that on 10 September 2014 he was invited to lunch by Cheng and Ao Leong where they had a discussion.  At that time the CNY was still weak and Terence expressed his concern about the CNY’s downward trend and the risks associated with the then existing FX derivative agreement Product 746866.  Cheng assured him that so long as the CNY remained weak and the product was generating losses to Hunter, the Bank would be prepared to rollover the product to a new one in order to defer the loss and the Bank would not be enforcing the terms of the FX derivative agreements strictly.  Mr Wou submitted that this was the common understanding between the parties (“the common understanding”).‌

38.In early January 2015, CNY continued its downward trend and the then existing FX derivative agreement Product 746866 began to yield substantial losses for Hunter.  Terence says that through the arrangements of Cheng and Ao Leong the Bank cancelled Product 746866 and created a new Product 790367.  As shown in Annex 1, the early termination costs of US$1,500,000 for Product 746866 payable by Hunter on 7 January 2015 was matched by the premium payable by the Bank to Hunter for the new Product 790367 which Hunter entered into with the Bank also on 7 January 2015 on different terms.  In this way, there was another rollover of the FX derivative agreement to defer the loss to Hunter. 

39.There is no dispute that there were the rollovers of the existing FX derivative agreements on 27 June 2014 and on 7 January 2015.

40.Thereafter, the Bank did not allow any further rollover of existing FX derivative agreements. 

41.It was submitted that in breach of the common understanding the Bank unilaterally declared an event of default by Hunter under the ISDA Master Agreement in respect of the FX derivative agreement Product 790367.  

42.The Bank designated 10 March 2016 as the early termination date.   By the statement dated 17 March 2016 sent by the Bank to Hunter it was stated that the early termination amount was in the sum of US$2,599,323.63 and the Bank demanded immediate payment of the same with interest from Hunter.

43.Mr Wou also submitted that the Bank was negligent and in breach of duty in recommending the high risk FX derivative products to Hunter as it failed to exercise proper care in ascertaining whether the FX derivative products were suitable to Hunter.

44.In their affirmations Cheng and Ao Leong have denied that there was the common understanding between the parties.  They further assert that they had no authority to reach the common understanding with Hunter.

45.Mr Man submitted that as the evidence showed that Hunter had entered into similar agreements with other banks for large sums of money,as summarized in Annex 2 to his submissions, the 1^st misrepresentation was unbelievable as Hunter must have understood the risk associated with the FX derivative agreements.  It was submitted that the 2^nd misrepresentation was also unbelievable as Hunter had huge investments with the other banks in FX derivative agreements and that Hunter must have known that the Bank could not monitor Hunter’s overall exposure and assess whether the FX derivative agreements were suitable to Hunter.

46.In my view, there are clearly disputes of fact between the parties which cannot be resolved on affidavit evidence.  These are matters that have to be resolved at trial with the benefit of discovery of documents and cross-examination. 

47.Despite the submissions of Mr Man, I am of the view that the assertions of the 1^st and 2^nd misrepresentations are believable but whether they are to be believed is a matter to be resolved at trial.  I am also of the view that the common understanding is believable. As to whether or not Cheng and Ao Leong had the authority to enter into the common understanding, this is a matter to be resolved at trial.  In view of their position in the Bank, it is arguable that they would have had apparent or ostensible authority to do so.

48.I would observe that, as shown on the undisputed evidence, there were rollovers of existing FX derivative agreements not only on 27 June 2014 but also on 7 January 2015 when the early termination costs payable by Hunter were matched by the premium payable by the Bank for the new product on the same day.  This had the effect of deferring the loss of Hunter by the early termination of the existing product and the creation of a new product with different terms.  As the premium payable by the Bank for the new product matched the early termination costs of the existing product, there was no immediate loss to Hunter.  The Bank did agree to these rollovers.  I would observe that Cheng and Ao Leong have not condescended to particulars as to why there were these rollovers.

49.The Bank also relies on the terms and conditions of the ISDA Master Agreement in support of its assertion of contractual estoppel against Hunter.  The relevant clauses relied on as set out at para 27 of Mr Man’s submissions are clause (13)(a) of Part 4 of the Schedule, clause (9) of Part 5 of the Schedule and the Risk Disclosure Statement at Annex A of the ISDA Master Agreement. 

50.The Bank also relies on clause 9.3 of the Banking Services Terms and Conditions, the terms and conditions contained in the term sheets for the FX derivative agreements as set out at paras 28 and 29 of Mr Man’s submissions. 

51.It was submitted by Mr Man that the claims of misrepresentation and negligence against the Bank were wholly defeated by contractual estoppel as the Bank and Hunter agreed to conduct the FX derivative agreements on the basis that:

(1) the Bank did not provide and owed no duty to provide investment advice relating to the FX derivative products;

(2) Hunter made investment decisions based on its own independent judgment and did not rely on any representations by the Bank as to the risk, suitability and/or performance of the FX derivative products; and

(3) Hunter understood and agreed to bear all of the risks associated with the FX derivative products. 

52.It was also submitted that the common understanding was defeated by the entire agreement clause contained in clause 9(a) of the ISDA Master Agreement.

53.It seems to me that these are also matters that are to be resolved at trial and not at the interlocutory stage.

54.In a recent judgment in the Court of Appeal in Chang Pui Yin and others v Bank of Singapore Limited(CACV 194/2016, 20 July 2017, Lam VP, Cheung and Kwan JJA) the court was concerned with similar clauses relied on by the bank in that case as giving rise to a contractual estoppel.  At paras 35 to 37 Lam VP (giving the judgment of the Court) said:

“ 35. … As held by Lord Hoffmann in Customs and Excise Commissioners v Barclays Bank plc [2007] 1 AC 181 at [36], whether a defendant assumed responsibility is a legal inference to be drawn from his conduct against the background of all the circumstances of the case. At [35], His Lordship said:

‘The answer does not depend upon what the defendant intended but, as in the case of contractual liability, upon what would reasonably be inferred from his conduct against the background of all the circumstances of the case.’

36. It is thus necessary for the court to examine the conduct of the salesperson against the facts and circumstances of each case before one can determine if responsibility had been assumed when recommendations were made. It is not possible to regard decisions reached in other cases with different facts and circumstances as directly applicable and transpose the same to the situation in the case before the court.

37.    Hence, the giving of advice per se does not answer the question as to the assumption of responsibility of such advice.  One must examine the terms and conditions set out in the Services Agreements and the Risk Disclosure Statements as well as other relevant factual circumstances surrounding the dealings between the parties in determining the extent to which the Bank owed duties towards the Plaintiffs in respect of the recommendations of financial products and the management of their portfolios.”

55.And at para 39 Lam VP said:

“ On the issue of construction, we should focus on the relevant context and factual matrix at the time when the Services Agreements were executed.”

56.I would observe that in their affirmations Cheng and Ao Leong have not set out the relevant factual matrix at the time when the agreements including the ISDA Master Agreement were entered into with Hunter. They simply deny making the representations and giving the assurances that Terence says were given without giving any particulars as to the relevant factual matrix at the time when the agreements were made.  It seems to me that these are matters to be investigated at trial with the benefit of discovery and cross-examination and are not suitable for summary determination at the interlocutory stage.

57.Mr Wou also relied on section 5 of the Unconscionable Contracts Ordinance (Cap 458) (“the UCO”) and submitted that the court may limit the application of the clauses relied on by the Bank to avoid any unconscionable result.

58.The matters to be considered by the court in determining whether a contract or part of a contract was unconscionable in the circumstances relating to the contract at the time it was made includes the matters set out in section 6 of the UCO.  These include the relative strengths of the bargaining position of the parties, whether, as a result of conduct engaged in by the other party, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the other party, whether the consumer was able to understand any documents relating to the supply of the goods or services, whether any unfair tactics were used against the consumer in relation to the supply of the goods or services.

59.Mr Man submitted that the UCO did not apply as Hunter was not a consumer within the meaning of the UCO.

60.In Chang Pui Yin the judge at trial held that the plaintiffs did not deal with the bank in that case as consumer and that the UCO was not applicable.  The Court of Appeal held that the judge erred in his conclusion that the UCO was not applicable (at paras 51 to 58 of the judgment of Lam VP). 

61.Lam VP went on to deal with the matters that the court may have regard to in determining whether the contract was unconscionable.  And after considering all the relevant circumstances and the authorities referred to, Lam VP said at para 79:

“ We come to the view that the clauses were unconscionable because (a) it makes a complete mockery of the purported compliance by the Bank with their regulatory duties (which were in place to protect investors like the Changs) and their purported efforts in ascertaining the investment objectives and risk appetites of the Plaintiffs in order to select suitable products for them; and (b) the whole arrangement adopted by the Bank was to deprive the Plaintiffs of the opportunity to make informed decisions on risk level of the products they invest in and yet place the entire risk arising out of such decisions on them, taking advantage of the trust they placed on Mrs Li.”

62.And at para 92, after coming to the conclusion that giving full effect to the clauses in that case would be unconscionable, it was held by the Court of Appeal in Chang Pui Yin that the Court should exercise its power under section 5 of the UCO to limit the applications of those clauses to avoid the unconscionable result by holding that the bank in that case could not rely on those clauses to avoid liabilities to the plaintiffs.

63.Section 3(3) of the UCO provides that it is for the person claiming that a party does not deal as consumer to prove that he does not.  It seems to me that it is fairly arguable that Hunter was a consumer within the meaning of the UCO.  It is also fairly arguable on the evidence before me:

(a) that the clauses relied on by the Bank were unconscionable; and

(b) that the court when considering all the facts and circumstances would hold that the Bank cannot rely on the clauses to avoid its liabilities to Hunter. 

64.I would observe that Terence in his affirmation says that his command of English was basic and that he could not understand the complex banking documents which Cheng and Ao Leong procured his mother Lo and his siblings to sign from time to time.  He also says that the terms and conditions were not explained to him and that he was never asked to consult his own independent professional advisor.  Terence also says that neither Cheng nor Ao Leong nor anyone from the Bank ever contacted his mother and his siblings.  This is undisputed.  These are also matters to be resolved at trial and not at the interlocutory stage.

65.Mr Man also relied on the no set off clauses in the security documents.  He relied on clause 15(a) of the General Commercial Agreement dated 20 May 2011 between the Bank and Hunter to the effect that all sums payable to the Bank by Hunter shall be paid without set-off, counterclaim or any other restriction or condition and free and clear of any deduction or withholdings of any nature.  Reliance was also placed on clause 3.2 of the Terms and Conditions Governing Banking Facilities and Services contained in the facility letters to Hunter which had a similar provision.

66.Mr Man also relied on clause 7 of the 1^st and 2^nd guarantees which contained similar provisions.

67.In Deutsche Bank (Suisse) SA v Gulzar Ahmed Khan & others [2013] EWHC 482 (Comm) the no set off clause in that case was upheld by Hamblen J after trial.  In dealing with the no set off clause Hamblen J said at para 329:

“ Bearing in mind the guidance provided by the Emperor Navigation case[1] I find that:

(1) The clause fulfils a legitimate commercial function by entitling the creditor to prompt payment of monies due and payable so that cross-claims (which may or may not have merit) cannot be used to withhold or delay payment. This is a perfectly sensible arrangement intended to protect the lender’s liquidity/solvency by permitting it to know with confidence that sums due will be paid on the appointed day(s). It is understandable that in a loan contract, the lender, who is the party advancing the money and taking the risk, should wish to be protected in this way.

(2) The clause contains important limitations. In particular:

(a) The clause does not prevent the debtor from contesting whether the sums claimed are actually due. It only comes into play if the sums are either admitted or, if contested, have been proven to be due; and

(b) The clause does not dispossess the debtor of a cross-claim, it merely contemplates that they will fall to be resolved by subsequent negotiation or determination, rather than being used as a ground to withhold payment.

(3) Clauses of this sort are common.  Just considering the disclosure in the present case it is to be noted that very similar provisions can be found in the other loan agreements with Barclays and Coutts.”

68.I would observe that, as Hamblen J said, the no set off clause contains important limitations.  It only comes into play if the sums are either admitted or, if contested, have been proven to be due.

69.The alleged indebtedness is clearly disputed by Hunter as well as by the mortgagors and guarantors.  Their case is that the alleged indebtedness does not arise and as I have said, the early termination amount in the sum of US$2,606,807.64 being part of the alleged indebtedness is a matter to be resolved at trial and has not as yet been proven to be due.  

70.The amounts claimed under the banking facilities are also disputed.  As shown in the evidence, the settlement of the FX derivative agreements were done through Hunter’s USD/CNY savings and/or HKD current accounts it had with the Bank which were also the accounts which enjoyed the banking facilities that the Bank granted to Hunter.  By way of example, Mr Wou referred to the bank statements of Hunter in evidence for account no 47-6064813 dated 30 September 2015 and 31 December 2015 showing 2 settlements for FX derivative agreements which were debited into this account.  This was also the account where the payment of bills in respect of Hunter’s trading business were debited. 

71.Mr Wou submitted that the operation of the FX derivative agreements was inextricably linked to the banking facilities granted to Hunter for its trading business.  It seems to me that this is fairly arguable on the evidence. 

72.In my view, it is fairly arguable that the no set off clauses relied on have no application in this case.

73.Mr Man also submitted that the Bank was within its contractual right to terminate the banking facilities to Hunter which were repayable on demand under the facility letters and the general commercial agreement. 

74.Mr Wou relied on Kensland Realty Ltd v Whale View Investment Ltd(2001) 4 HKCFAR 381 where it was held that it was a principle of law that a person was not permitted to take advantage of his own wrong.  In the contractual context, the “prevention principle” operated to prevent a party who was in breach of an obligation owed to the other party from asserting rights or claiming benefits which arose as a consequence of the breach.  Mr Wou submitted that the Bank was at fault by the early termination of the FX derivative agreement Product 790367 and demanding the early termination costs.  By operation of the “prevention principle” it was submitted that the Bank was prevented from taking advantage of its own wrong and to early terminate Product 790367 and demand immediate payment of the early termination amount in the sum of US$2,606,807.64. It seems to me that this is also fairly arguable.  In my view, whether or not the “prevention principle” applies is also a matter to be resolved at trial.

75.Mr Wou also submitted that as against Ease Keen, Lo, Gerald and Deven, the mortgages and the guarantees have been discharged by conduct.  It was submitted that by inducing Hunter to enter into the FX derivative agreements, the Bank had materially varied its underlying relationship with Hunter which was not brought to the attention of the mortgagors and the guarantors, other than Terence.  The undisputed evidence is that no one from the Bank ever contacted Ease Keen, Lo, Gerald and Deven.  It was submitted that the mortgages and the guarantees were discharged.

76.Mr Man relied on clauses in the mortgages and the guarantees providing that the liability of the mortgagor and the guarantor would not be discharged by reason of variation.  He submitted that such clauses were effective to preserve the liability of the guarantor if a variation takes place (para 7-038 O’Donovan and Phillips, The Modern Contract of Guarantee3^rd ed).

77.On the evidence, the Bank sold high risk FX derivative products to Hunter through Terence.  The Bank never contacted the other mortgagors and guarantors and there is no evidence that they knew of the selling of the high risk FX derivative products to Hunter. 

78.It is significant that in the confirmation and acknowledgement dated 20 May 2011 the guarantors confirmed that they had received from the Bank a copy of the final draft of the facility letter describing the borrower’s obligations.  The facility letter detailed the banking facilities but did not set out any facilities for the purchase of FX derivative products. 

79.I would also refer to paras 7-001 and 7-002 O’Donovan and Phillips, The Modern Contract of Guaranteewhich states:

“ 7-001 The general principal finds its rationale in the fact that the guarantor is responsible only for the obligations which are guaranteed. Thus, if the principal and creditor without the guarantor’s consent agree between themselves to alter the nature of the principal obligation the guarantor is discharged because the obligation in its altered form is not that which was guaranteed.

7-002 The formulation of the principle as set out in Holme v Brunskill ¹ has received wide judicial approval:²

‘ The true rule in my opinion is that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and if he has not consented to the alteration, although in cases where it is without enquiry evidence that the alteration is unsubstantial, or that it cannot otherwise be beneficial to the surety, the surety may not be discharged; yet that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court… will hold that in such case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.’³ ”

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¹    (1878) 3 Q.B.D. 495.

²    Credit Suisse v Borough Council of Allerdale [1995] 1 Lloyd’s Rep. 315 at 361; Walker Crips Stockbrokers Ltd v Robert Savill [2007] EWHC 2598 at [88]; Davenham Trust Plc v Homegold Ltd (unreported, Mercantile Count, Manchester, 22 April 2009) at [15]; Marubeni Hong Kong & South China Ltd v Government of Mongolia [2005] EWCA Civ 395; [2005] 1 W.L.R. 2497; Barclays Bank Plc v Kingston [2006] EWHC 533; [2006] 2 Lloyd’s Rep. 59 at [15]; Melvin International SA v Poseidon Schiffahrt GmbH NV Kalma [1999] 2 All E.R. (Comm) 761; Metropolitan Properties Co (Regis) Ltd v Bartholomew [1995] 72 P.& C.R. 380 at 383; Howard de Walden Estates Ltd v Pasta Place Ltd [1995] 1 EGLR 79 at 80; Ward v National Bank of New Zealand (1883) & App. Cas. 755 at 763–764; Hancock v Williams (1942) 42 S.R. (NSW) 252; Dunlop New Zealand Ltd v Dumbleton [1968] N.Z.L.R. 1092 at 1096; Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 C.L.R. 549 at 558–559; Lloyds TSB Bank Plc v Hayward [2002] All E.R. (D) 351 at [5].

³    (1878) 3 Q.B.D. 495 at 505.

80.Mr Wou referred to para 7-008 O’Donovan and Phillips, The Modern Contract of Guarantee which states:

“ At first instance in Mystery of the Mercers of the City of London v New Hampshire Insurance Co,²³Phillips J was of the view that the rule regarding variation only applies where obligations arising under a specific contract are guaranteed, and not in respect of obligations arising out of a future course of dealing.  He said:

‘ 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…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 apply…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.’²⁴[Emphasis added]

This passage was cited with approval in National Merchant Buying Society Ltd v Bellamy.²⁵  The guarantor’s argument for discharge failed there in the circumstances because the guarantee was a conventional ‘all monies’ guarantee and not limited to the specific contract.”

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²³  (unreported, 18 January 1991, QB) An appeal was upheld without addressing this issue: [1992] 2 Lloyd’s Rep. 365.

²⁴  See also Pratapsing Moholalshai v Keshavlal Harilal Setalwad (1934) 62 Indian Appeals 23 at 25; Stewart v M’Kean (1853) 10 Exch. 675; 156 E.R. 610; Meney & Co v Birmingham (1890) 34 N.B.R. 336 at 342.

²⁵  [2013] EWCA Civ 452; [2013] 2 All E.R. (Comm) 674 at [30].  The facts are discussed in para.5–113.  Cf. Royal Bank of Canada v Samson Management & Solutions Ltd [2013] ONCA 313 at [51]–[65] (‘all moneys’ drafting regarded as authorising variations of the original contract).

81.It seems to me that whether or not Hunter’s liabilities for the FX derivative agreements are within the scope of the guarantees and the mortgages depends on the proper construction of the guarantees and the mortgages bearing in mind the relevant factual matrix at the time.  It is fairly arguable that Hunter’s liabilities for the FX derivative agreements are not within the scope of the guarantees and the mortgages and that they have been discharged by conduct.  In my view, these are also matters to be resolved at trial. 

82.I am satisfied that there are triable issues and that there should be no summary determination of part of the Bank’s claims.

83.I make an order that HCMP 2241 do continue as if the proceedings had been begun by writ.  I also make an order that HCMP 2241 be consolidated with HCA 1447 and that the Bank be the plaintiff and that Hunter, Ease Keen, Lo, Terence, Gerald and Deven be the defendants in the consolidated proceedings.

84.I give the following directions:

(1) a consolidated statement of claim be filed and served within 28 days from today;

(2) a defence and counterclaim be filed and served within 28 days thereafter;

(3) a reply and defence to counterclaim be filed and served within 28 days thereafter.

85.I also make an order nisi that the costs of the OS and the said summonses be costs in the cause.

Mr Bernard Man SC, leading Mr Jason Lee, instructed by Wilkinson & Grist, for the plaintiff (in HCMP 2241/2016) and the defendant (in HCA 1447/2016)

Mr Jean-Paul Wou, instructed by Stevenson, Wong & Co, for the 1^st, 2^nd and 4^th to 7^th defendants (in HCMP 2241/2016) and the plaintiffs (in HCA 1447/2016)