Cotteen Investments Ltd v. Tomases Investments Ltd and Another

CACV000037/1983

Contract - guarantee - breach of contract by principal debtor - rescission - action against principal debtor and guarantor - compromise on terms that contract not rescinded and that letter of guarantee be amended - further breach by principal debtor - second action brought - application for summary judgment under O.86 against guarantor - Master entered judgment - appeal lodged - Plaintiff took out further summons under O.14 on short notice - appeal allowed without hearing Plaintiff - judgment entered under O.14 - appeal by both parties - Held: l. Plaintiff should have been heard on appeal from Master but application under O.86 clearly misconceived; 2.A contract once rescinded could not be revived; 3. Nevertheless guarantor estopped from denying that he was bound by terms identical to unperformed terms of original guarantee; 4. There was no arguable defence.

Practice and procedure - if court agrees to treat an application as being other than it is, that fact should be recorded - the O.14 application was not an abuse of the process although judgment already given, because intention clearly was to pursue it only if existing judgment set aside - no necessity for judge to adjourn O.14 application by reason of short notice since such adjournment would have served no useful purpose. Per curiam: "The taking of short cuts in procedure all too frequently leads to errors".

K. KWOK (Cheung, Chan & Chung) for Appellant/2nd Defendant

D. Chang, Q.C. with Mok (F. Zimmern & Co.) for Respondent/Plaintiff

BETWEEN

----------

Coram: Sir Alan Huggins, V.-P., Yang, J.A. and Penlington, J.

Date of Judgment: 3rd June 1983.

___________

JUDGMENT

___________

Sir Alan Huggins, V.-P.:

1. The Appellant (to whom, for convenience, I will refer as "the 2nd Defendant") guaranteed up to a limit of $11,400,000.00 the payment by the 1st Defendant of the instalments of the purchase price under a contract of purchase and sale between the 1st Defendant and the Plaintiff. The issue is whether in the events which have happened the Appellant is clearly still liable under the guarantee.

2. The letter of guarantee was in these terms:

The 1st Defendant failed to pay the third instalment and the Plaintiff by his solicitors wrote a letter dated 11th March 1982 in these terms:

We, on behalf of our client, Cotteen Investments Ltd., hereby rescind the Agreement for Sale & Purchase dated the 22nd day of August 1981 entered into between you and our client for the sale and purchase of the above premises. Our client exercises its power to rescind by virtue of Clause 14 of the said Agreement following your failure and/or refusal to pay the instalment of purchase price due on the 3rd February 1982 amounting to HK$2,280,000.00. All monies paid by you under the said Agreement are hereby forfeited and our client reserves the right to recover damages against you for breach of contract."

That letter was addressed to the 1st Defendant. On 13th March 1982 the Plaintiff commenced an action (1982 No. 2013) against both Defendants for a declaration that it had rescinded the contract and for "damages". There was then correspondence between solicitors, not all of which correspondence is before us. In particular the first letter sent to the solicitors for the Plaintiff has not been exhibited. The relevance of this is that the solicitors for the 1st Defendant were also, to the knowledge of the Plaintiff, the solicitors for the 2nd Defendant, and it is material to know whether this correspondence was carried on by them in their capacity as agents of both the let Defendant and the 2nd Defendant or only as agents for the 1st Defendant. On 15th March 1982 they wrote as follows:

Counsel for the Plaintiff emphasises that in this letter the solicitors repeatedly referred to "our client" in the singular. In reply the solicitors for the Plaintiff wrote on 17th March 1982:

The significant passage in that letter is sub-paragraph (c). Unless the recipients were acting also on behalf of the 2nd Defendant, this passage was pointless: even assuming that the rescission effected by the letter of 11th March could be waived so as to resuscitate the original contract - as to which there is a dispute - any agreement between the original contractors alone to revive the guarantee was bound to fail. There was a further letter dated 17th March from the Plaintiff's solicitors, but this is not material. On 18th March 1982 the other solicitors replied:

The first paragraph is grammatically wrong, there being a singular relative pronoun as the subject of a plural verb. The end of the first paragraph, however, expressly indicates that the solicitors were replying not only on behalf of the 1st Defendant but also on behalf of the 2nd Defendant. To that letter the Plaintiff's solicitors replied:

The action was duly withdrawn.

3. The 1st Defendant then failed to pay the fourth instalment and the present action was brought. Before any acknowledgment of service and before notice of intention to defend the action had been given, the Plaintiff took out a summons under 0.86 for summary judgment against both the principal debtor and the guarantor. That was clearly an error, for the case did not fall within any of the three classes of case specified in r.1(1). Nevertheless, when the matter came before the Master he entered judgment for the Plaintiff against the 2nd Defendant. We are told that upon the hearing there was some discussion whether a summons under O.86 was appropriate and Mr. Chang assures us that the application was treated as an application under O.14. By that time the 2nd Defendant had lodged an acknowledgment of service which indicated an intention to defend. Minutes of judgment had accompanied the summons but, again, we do not have a copy of the order which was made by the Master. A notice of appeal lodged by the 2nd Defendant against the Master's order recites that the Master ordered that judgment be entered in terms of paragraph 4 of the minutes, that is to say:

"             It is ordered that there by payment by the 2nd Defendant under the terms of the Guarantee referred to in paragraph 3 of the Statement of Claim including the damages under paragraph 3 hereof, interest under paragraph 5 hereof, costs under paragraph 7 hereof and any payment ordered under paragraph 5 hereof."

4. Before the appeal came on before the judge in chambers the Plaintiff took out a further summons against the 2nd Defendant - one under O.14. We are told, and I accept, that the object of this was that the judge should be able to give judgment against the 2nd Defendant even if some technical objection to the application under O.86 should result in the appeal's succeeding. However, the solicitors for the 2nd Defendant objected by letter to this further summons on the grounds that judgment had already been entered under O.86 and that insufficient notice had been given. They indicated that they would apply to have the application dismissed as an abuse of the process of the court.

5. The appeal and the application under O.14 came before Liu, J. together. He dealt first with the appeal. He heard argument on behalf of the 1st Defendant and, without calling on counsel for the Plaintiff, allowed the appeal and set aside the judgment. It does not appear to have been contended before him that the Master had treated the first application as one under O.14 and that it was not open to the 1st Defendant to argue on the appeal that an application under O.86 was inappropriate. Indeed the judge said that "before the Master the 2nd Defendant strenuously objected to its joinder in the Plaintiff's summons issued under O.86 r.1", and it was because "the liability of the 2nd Defendant under its own guarantee agreement does not fall within any of the categories prescribed by O.86 r.1 of the Rules of the Supreme Court" that the judge allowed the appeal. Before the Master could properly treat the application as one under O.14 he required the consent of the parties, and no one has suggested that such consent was obtained. The subsequent course of the proceedings is inconsistent with any such consent. In particular the taking out of a summons under O.14 would have been unnecessary if judgment had already been given under that Order. Accordingly, I do not think it is open to us to proceed on the basis that the Master treated the application before him as being other than it was stated to be - one under O.86. It follows that no question arises whether it was proper for the Master to treat the summons as having been taken out under O.14 having regard to the fact that, at the date of the summons, no indication had been given by the 2nd Defendant of an intention to defend, although I incline to agree with Mr. Chang that it would not have been wrong for the Master so to treat it in view of the fact that an acknowledgment of service had been filed before the date of the hearing. I would hold that the learned judge was right to conclude that the original application was misconceived and to set aside the judgment which had been entered.

6. The judge took the view that the objection which had been taken to the O.86 summons was unanswerable, and in that I think he was right. However, I do not think he should, as he says he did, have allowed the appeal without calling upon counsel for the Plaintiff: the maxim audi alteram partem enshrines a fundamental right of every litigant in our courts and that right is conferred regardless of the apparent weakness of the litigant's case. In fairness to the judge I think he would not have taken the course he did had he not thought that the dispute between the parties could properly be disposed of upon the O.14 summons and that on that summons the Plaintiff was bound to succeed, for he said:

"as the merits of the parties involved are beyond doubt, agony should not be, in my view further prolonged by inviting arguments from Mr. Mok on behalf of the plaintiff. Thus Mr. Mok was not called upon."

The taking of short-cuts in procedure all too frequently leads to errors and, in the end, produces more trouble and expense than it saves. No criticism could have been levelled against either the judge or the Master if the 2nd Defendant had expressly waived any technical objections to the Master's treating the application before him as one under O.14 and the Master had done so. (It would, of course, have been important that the Master should make a careful and exact record of any such waiver.) As it was, the judge's decision to allow the appeal was reached without a proper hearing. Neverthelss, Mr. Chang has not persuaded me that the judge's decision was wrong on this point and I therefore turn now to the O.14 summons.

7. It would appear from the last passage that L have cited from Liu, J.'s judgment that he had decided to sweep aside all technical objections which might operate against his deciding the merits of the Plaintiff's case. The intention was doubtless good, but once again it must be remembered that rules of procedure are laid down because experience has suggested that they are necessary to enable justice to be done and that those rules are therefore not lightly to be ignored.

8. The first objection taken to the O.14 summons - one which does not allege any contravention of the rules - was that the summons was an abuse of the process, because it sought a relief which had already been granted. The judge made no reference to this. Mr. Kwok urges that such a multiplicity of proceedings is patently an abuse of the process and that that abuse could not be remedied by subsequent events. He rightly emphasises that the judgment given upon the application to the Master was a valid and enforceable judgment until it was set aside and that so long as it subsisted no further judgment could lawfully be entered. So much cannot be gainsaid. On the other hand, it is important to remember that the court remains master of its own procedure and should, where possible, not allow technical objections to interfere with the course of justices. It was clearly the intention of the Plaintiff that the summons under O.14 should be resorted to if, and only if, the judgment under O.86 was set aside. Although that was not stated in the summons itself, the position was obviously made clear at the hearing before Liu, J. No order was made on this summons before the judgment under the first summons had been set aside. If the second summons had been issued then and served on the 2nd Defendant's solicitor as he returned to his office after the hearing of the first application, there would have been no basis for this objection. In my view it would be wrong to hold that the summons under O.14 was an abuse of the process.

9. There remains the further technical objection that the O.14 summons gave short notice of the hearing. Again, the judge did not expressly deal with the objection and, more important, he did not make it clear that he had appreciated the failure to comply with the rules and that he excused the irregularity. Normally one would be unwilling to abridge the notice which is required for an application under O.14, because it would be unfair on the defendant, who will need time to prepare his affidavit of defence. In the present case, however, the 2nd Defendant had already filed an affidavit in answer to the O.86 summons and it was reasonably to be assumed that anything which could properly be said in answer to the O.14 summons had already been said in that. The 2nd Defendant had had ample warning of the Plaintiff's claim and would not be prejudiced by the short notice of the new summons. The judge should have made it clear to the parties that such was his view before he proceeded to give judgment on the second summons, but in the circumstances I think he was right not to adjourn the application on that summons when an adjournment would have served no useful purpose.

10. That brings me to the merits of the Plaintiff's application for summary judgment. The liability of the let Defendant to pay the fourth instalment of the purchase price is not in issue between these parties. The question is whether it is clear beyond argument that a guarantee is still in force. The Plaintiff contends that it is still in force either because the original contract between the Plaintiff and the 1st Defendant is still in force or because, if it be arguable that the original contract has been rescinded, there is on the uncontested evidence a new agreement between the Plaintiff and the 2nd Defendant to guarantee performance by the 1st Defendant of a new contract between it and the Plaintiff.

11. As the law now stands even difficult issues of law may properly be decided upon an application for summary judgment under O.14: Cow v Casey 1949 1 K.B. 474. In the case at bar the issue arises whether a notice rescinding a contract under a power contained in the contract itself can ever be rendered inoperative by a subsequent agreement between the parties. The 2nd Defendant contends that it cannot and that therefore its liability to make good the default of the 1st Defendant under the original agreement of purchase and sale came to an end once and for all upon delivery of the letter of rescission dated 11th March 1982. Mr. Kwok submits that a notice to rescind operates as a matter of law and that, although a subsequent agreement may create rights and liabilities identical to those in the former contract, they are necessarily new rights, so that a party who guaranteed performance of the old liability is necessarily discharged and can thereafter be liable only if he enters into a new contract of guarantee. He relies principally on a statement in Chitty on Contract (24th edition) 646 (137O) that "a contract which is rescinded is completely discharged and cannot be revived".

12. Mr. Chang contends that the passage just cited goes too far and is based upon a decision which does not support it.  The King v Inhabitants of Gresham (1786) 1 T.R. 101 was a proceeding under the poor law. The pauper was a settled inhabitant of Gresham. He took employment with a master in Beeston Regis for a period of 12 months. After about three months, upon a dispute between him and his master, the master turned him away and threw down his outstanding wages. The pauper took up the money and returned to Gresham. Six days later, at the request of his master, he returned and continued to work until the end of the year. The question then arose which district was liable to maintain him. That liability turned upon the issue whether he had gained a settlement by twelve months' continuous service in Beeston Regis. It was held that, the contract of employment having been determined when the pauper first left his master and went out of the district, the service had been interrupted and that therefore he remained a settled inhabitant of Gresham. Mr. Chang seeks to differentiate that case on the basis that the litigation was there not between the parties to the contract and he further points out that there was no evidence of an agreement between the pauper and his master as to how the original contract was to be treated. The second of those points cannot be material if, as a matter of law, a contract which has once been determined cannot by a subsequent agreement be treated as never having been determined. Lord Mansfield, C.J. was obviously of opinion that the contract of employment came to an end at the end of the three months, for he said at p. 103:

"...... if it appeared-that the contract has been once dissolved, it cannot be set up by a new agreement. In this case the contract was absolutely dissolved the master insisted upon turning away the servant, and paid him down all his wages that were due; the consent of the other side was by taking up the money".

If a subsequent agreement could have negatived the effect of that determination of the contract of employment before the date fixed for its expiration, I would have expected a careful enquiry as to what transpired between the pauper and the master when the former resumed his employment. Moreover, I confess that I cannot see why the fact that litigation involves a party who is not party to the contract should be material to the validity of the principle stated by Lord Mansfield.

13. As I understand him, Mr. Chang then argues that, even if the original contract of purchase and sale was determined, by virtue of subsequent events the 2nd Defendant was estopped from denying his liability under the terms of that contract, whether that liability is based upon the continued existence of that contract or upon a new contract containing all the unperformed terms of the old contract. The basis of the alleged estoppel was never precisely defined: certainly it does not appear from the Respondent's Notice, for which leave to file on short notice was given by consent at the opening of the appeal. What is the representation by the 2nd Defendant which the Plaintiff is said to have acted upon to his disadvantage? It seems to be the implied representation contained in the letter of 17th March to the effect that, by virtue of the correspondence, the terms of the guarantee dated 11th March were still effective. Mr. Kwok submits that this approach is not open to the Plaintiff on its pleading: the Statement of Claim expressly relies upon the original contract of guarantee and does not set up an estoppel: therefore, if the contract of purchase and sale was rescinded, the original contract of guarantee has come to an end and it is necessary for the Plaintiff to allege a new contract, which it has not done. Mr. Chang seeks to meet that by saying that the Plaintiff is not bound to plead a new contract of guarantee unless and until the 2nd Defendant pleads the estoppel, whereupon the Plaintiff could (if so advised) set up in the alternative a new contract by way of confession and avoidance.

14. First it must be borne in mind that an estoppel is a matter of defence. The Plaintiff properly did not attempt to set up the estoppel in its Statement of Claim: it was able to formulate its claim on the basis of the original contract and thus had an independent cause of action, as had the plaintiff in Burrowes v Lock (1805) 1O Ves. Jun. 470. In reply it could set up the effect of the correspondence by way of estoppel and L take the Law to be that even if the representation is as to the legal effect of a document, if there is no qualification in the representation suggesting that the document, and not its effect as represented, is to govern the relationship of the parties, the person making it cannot be heard to say that the representation is not true if it was made for the purpose of being acted upon and has been acted upon: see per Luxmore, J. in de Tchihatchef v The Salerni Coupling Ltd. 1932 1 Ch. 330, 342.

what I have just said disposes also of a further point raised by Mr. Kwok and based on the Statement of Claim. Paragraph 8 alleges that, by its failure to pay the fourth instalment, the 2nd Defendant repudiated the contract of purchase and sale and that

"the plaintiff has accepted such repudiation discharging the said agreement in so far as the plaintiff's obligations are concerned, but leaving the plaintiff's rights under the said agreement intact ......".

Paragraph 9 then begins:

"the plaintiff's rights under the said agreement include the power to rescind the sale ......".

Mr. Kwok says that paragraph 9 must have been intended to define "the plaintiff's rights under the said agreement" for the purposes of paragraph 8 and that the power to rescind the sale could only remain intact if the contract of purchase and sale had not been rescinded: indeed, paragraph 8 advanced the unacceptable proposition that there could be an "acceptance of a repudiation" which neither determined the contract nor left it wholly alive, but which discharged the acceptor's obligations whilst leaving all his rights under the contract unaffected. Mr. Chang, of course, replies that "the plaintiff's rights" which are referred to in paragraph 8 are only the Plaintiff's accrued rights, so that the pleader was merely stating the inevitable legal effect of acceptance of a repudiation. Had paragraph 8 stood alone there would have been no difficulty in accepting this as the intention, but it is difficult to reconcile that interpretation with the words I have quoted from paragraph 9. Mr. Chang submits that those words are explicable on the basis that "rescind" can have several meanings and that there can be (1) rescission by the court for, for example, misrepresentation; (2) rescission by acceptance of a repudiation; and (3) rescission under a power of rescission expressly conferred by the contract. He says that "rescind" in paragraph 9 refers to a rescission of the second class. He then cites Hyundai Heavy Industries Co. Ltd. v Papadopoulos 1980 1 W.L.R. 1129, where the plaintiff had applied for summary judgment under O.14. The defendant had guaranteed the liability of the purchaser of a ship. The purchase price was payable by instalments and the purchaser failed to pay the second instalment. The vendor rescinded the contract of sale and purchase in the exercise of an express power of rescission conferred by the contract and, thereafter, a writ claiming the amount of the instalment was issued against the guarantor. The House of Lords held that it was not arguable that the fact that the writ was issued after the rescission of the contract of sale and purchase discharged the guarantor. Viscount Dilhorne referred to Hudson's Building and Engineering Contracts (10th Edition) and to the general principle stated by Professor Winfield that "Every obligation which has accrued due between the parties before the rescission of the contract, and which so creates a then existing cause of action, remains unaffected by the rescission and can still be enforced", and he continued at p. 1135D:

"Hudson then states that there are two qualifications to this general principle, one being that there may be a determination clause in the contract which if exercised by the employer will expressly deprive the contractor of an accrued right to an instalment and it may well be that article 1O of the contract in this base would deprive the builder of the right to an accrued instalment in the event of cancellation or rescission otherwise than under article 11."

Mr. Chang submits that in the present case, even if rescission otherwise than under an express power contained in the contract deprived the Plaintiff of the right to the unpaid instalments, such rescission could not deprive it of its right to damages and he points out that the contract of guarantee not only guaranteed that 1st Defendant would duly pay the instalments of the purchase price but also undertook "to pay and make good ... all loss costs and expenses sustained by [the plaintiff] through default of the purchaser in respect of any of the beforementioned matters". Therefore, he says, there can be no defence to the action. As I understand him Mr. Kwok accepts the statement of principle: he himself drew our attention to the speech of Lord Fraser of Tullybelton where he cites a passage from the speech of Lord Reid in Lep Air Services Ltd. v Rolloswin Investments Ltd. 1973 A.C. 331, 344:

"I would not proceed by saying this is a contract of guarantee and there is a general rule applicable to all guarantees. Parties are free to make any agreement they like and we must I think determine just what this agreement means. With regard to making good to the creditor payments of instalments by the principal debtor there are at least two possible forms of agreement. A person might undertake no more than that if the principal debtor fails to pay any instalment he will pay it. That would be a conditional agreement. There would be no prestable obligation unless and until the debtor failed to pay. There would then on the debtor's failure arise an obligation to pay. If for any reason the debtor ceased to have any obligation to pay the instalment on the due date then he could not fail to pay it on that date. The condition attached to the undertaking would never be purified and the subsidiary obligation would never arise. On the other hand, the guarantor's obligation might be of a different kind. He might undertake that the principal debtor will carry out his contract.   Then if at any time and for any reason the principal debtor acts or fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor, not for the unpaid instalment but for damages. His contract being that the principal debtor would carry out the principal contract, the damages payable by the guarantor must then be the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor undertook that he would do."

Lord Fraser continued:

Mr. Kwok asserts that the present case falls within only the second of Lord Reid's classes of guarantee and that the loss guaranteed by the 2nd Defendant cannot be assessed until the final liability of the 1st Defendant under the contract of purchase and sale has been assessed. I understand him to agree that the substance of his argument is that the 2nd Defendant may have a defence because the 1st Defendant's breach of contract may not cause any loss to the Plaintiff for which the 2nd Defendant would be liable: although the court would assume that the 1st Defendant's breach of contract had caused at least nominal damage, the 2nd Defendant was liable under the guarantee only if something more were proved.

15. Whether or not the letter of guarantee in the present case falls within both of Lord Reid's categories, it clearly falls within the second category and the 2nd Defendant is liable to make good any loss sustained by the Plaintiff through the 1st Defendant's default. That includes a liability to pay at least nominal damages. Paragraphs 8 and 9 of the Statement of Claim are not beyond criticism, but whatever criticism is possible cannot, in my view, defeat the liability of the 2nd Defendant under the letter of guarantee: the factual basis of the claim is clear and I think Liu, J. was right to hold that there was no arguable defence.

16. I would dismiss the appeal.

Yang, J.A.:

17. I have had the advantage of reading the Vice-President's judgment and am in full agreement with it.

Penlington, J.:

18. I also have read the Vice-President's judgment and entirely agree.

3rd June 1983.

Representation:

K. KWOK (Cheung, Chan & Chung) for Appellant/2nd Defendant

D. Chang, Q.C. with Mok (F. Zimmern & Co.) for Respondent/Plaintiff