Asian International Acceptance & Capital Ltd v. Samuel Macomber Churn

HCA002708/1974

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

ACTION NO. 2708 OF 1974

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Coram: Trainor, J.

Date of Judgment: 22nd October, 1975.

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JUDGMENT

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1. The defendant in this case addressed a letter dated the 10th March, 1973 to Messrs. Slater Walker Hutchison Ltd. the original plaintiff in this action (hereafter referred to as Slater Walker) as follows:

2. As a result of the letter a Mr. Goodbody of Slater Walker wrote to the defendant on the 27th March:

'This security shall be a continuing security binding on me and my legal personal representative until whichever shall be the earlier of the expiration of twelve calendar months from the date hereof or the repayment by the Principal of the said loan of HK$500,000 together with any interest accrued thereon.'

Would you please telephone me to confirm that you are happy with the draft and the above amendment and to let me know what additional securities you will be charging thereunder so that I can complete the Schedule and let you have an engrossment for signing.

The enclosed draft was never approved of nor executed.

3. The $500,000 referred to in the letter of the 10th March was duly sent by way of cheque to Mr. Nicholson with the following covering letter dated the 13th March:

Will you please sign the duplicate of this letter to confirm your agreement to its contents.

Sgd. Philip J. Nicholson."

4. The defendant gave certain share certificates on the 10th March to Mr. Nicholson for delivery to Slater Walker and between the 30th March and the 3rd July certain other share certificates were also delivered by him to it. With the certificates the defendant gave executed share transfers.

5. On the 5th July, 1973 Slater Walker wrote to the defendant:

6. The letter concluded:

"We are therefore looking to you for a further approximate $1,250,000 worth of security and I suggest that unless this is immediately available you should get in touch with me straight away to arrange a meeting at which we can discuss any alternative forms of security you are able to produce."

7. I make no comment on the fact that what the defendant wrote in the letter of the 10th March was far from the categorical statement attributed to him, but the defendant told me in evidence that on the 30th March he had reminded Mr. Goodbody, to whom he gave the certificates, that no loan agreement or charging instrument had been executed binding Mr. Nicholson as provided for in the letter to him of the 13th March.

8. I was not informed whether or not the defendant did make any further deposit but in February 1974 Mr. Goodbody of Slater Walker drafted a letter for the defendant to send to FNCB Financial Ltd. instructing that Company to pay over to Slater Walker any balance due to the defendant after his obligations to FNCB Financial Ltd. had been discharged should that Company sell two flats which were mortgaged to it. The instruction was said to be irrevocable without the consent of Slater Walker. The letter was sent to the Company on the 18th February, 1974 and copied to Slater Walker.

9. Slater Walker was taken over by Asian International Acceptances and Capital Ltd. and were substituted as plaintiff by an Order of the Registrar on the 6th October, 1975.

10. On the 4th June, 1974 the plaintiff wrote to the defendant asking him to call and execute certain document which they considered necessary to effect a second equitable mortgage on the flats.

11. Sometime after the take over the present plaintiff wrote to the defendant informing him that Gammons Ltd. offered to shareholders the right to acquire further shares in the Company and told the defendant that if he wished them to acquire the offered shares to forward a cheque for the amount payable. (It would appear that all the share transfers had been lodged and the shares transferred to the plaintiff which like its predecessor received the dividends). The defendant duly forwarded the cheque and the shares were acquired, in the plaintiff's name.

12. That, so far as the relevant evidence before me goes, was the extent of the communication between the plaintiff or its predecessor in title until the 12th August, 1974 when the plaintiffs wrote to the defendant as follows:

13. The enclosure therewith reads as follows:

14. The defendant on receipt of this letter contacted Mr. Nicholson who assured him everything was alright and, as I understand the position, took no further action.

15. On the 28th September Solicitors for the plaintiff wrote to the defendant threatening action if further securities were not deposited. On the 11th November a writ was issued seeking an order for sale of the securities deposited and that the proceeds thereof be paid to the plaintiff, and certain other relief part of which was not pursued at the hearing.

16. For the purpose of my judgment I think it might be useful to quote the following paragraphs of the Statement of Claim:

17. It was the evidence of the defendant that he was completely unaware of any variation on the 7th May by Mr. Nicholson of his agreement with Slater Walker until he saw a reference to it in the Statement of Claim. When he saw the reference he wrote to the plaintiff's solicitors and asked for, inter alia, a copy of the variation. He received the following:

If you agree to enter into a scheme of arrangement on the foregoing terms, please sign and return to me the enclosed copy of this letter to evidence your acceptance.

18. In his Defence the defendant pleaded that the variations made by the plaintiff and Mr. Nicholson in May to the terms of the loan were made without his knowledge or consent and therefore he is discharged from all liability under the agreement. He further pleaded that although he was sent a copy of the letter of the 12th August, 1974 referred to in paragraph 10 of the Statement of Claim, and quoted earlier, he never consented to any variation or agreement proposed or stated in the letter.

19. The defendant further pleaded that the agreement of the 10th March, 1973 was subject to the condition precedent that "full documentation" for the loan to Mr. Nicholson had to be completed; that this had not been done; and, consequently, he is released and discharged from all liability under the said agreement.

20. The defendant counter claimed:

21. Mr. Eddis for the plaintiff conceded that "the documentation" referred to in the letter of the 10th March, 1973 was never executed but argued that: the deposit by the defendant of share certificates with signed transfer forms; the direction to FNCB Financial Ltd. to pay any balance in their hands should they sell the two flats; and by the defendant sending to the plaintiff a cheque to enable the plaintiff to take up the rights issue in Gammon, estopped the defendant from now saying that he is discharged from liability under the agreement to secure Mr. Nicholson's loan.

22. Supposing I were to hold that there was a binding contract between the plaintiff and the defendant prior to the 7th May, 1973 to the extent alleged by the plaintiff what is the position?

23. Mr. Mayne for the defendant argued that the variation agreed on that day by Mr. Nicholson and the plaintiff or its predecessor without the knowledge of the defendant terminated any contract between him and the plaintiff.

24. The position is, he maintained, as Lord Westbury, L.C., said in Blest v. Brown (1862) 4 De G., F. & J. at 376:

"It must be recollected in what manner a surety is bound. You bind him to the letter of his agreement. Beyond the proper interpretation of that engagement you have no hold upon him. He receives no benefit and no consideration. He is bound, therefore, merely according to the proper meaning and effect of the written engagement that he has entered into. If that written agreement is altered in a single line, no matter whether (it) he altered for his benefit, no matter whether the alteration be innocently made, he has the right to say, "The contract is no longer that for which I engaged to be surety; you have put an end to the contract, that I guaranteed, and my obligation, therefore, is at an end."

25. Mr. Mayne also referred to 18 Halsbury, paragraph 922:

"Any material variation of the terms of the contract between the creditor and the principal debtor will discharge the surety, who is relieved from liability by the creditor dealing with the principal debtor ..... in a manner at variance with the contract the performance of which is guaranteed."

26. It was Mr. Mayne's contention that there were two material variations made to the contract by the letter of the 7th May from the creditor, the plaintiff to Mr. Nicholson:

27. The case of Midland Motor Showrooms v. Newman (1929) 2 K.B.250 was cited There Lord Harnworth, M.R. said at 262:

"What is the effect of the creditor giving the debtor time? The surety is thereby deprived of his right to have the securities of the creditor and enforce them in his name ..... The surety in other words has the right to say, I can come in if default is made in payments by the debtor, and I am interested in the due payment of the debt."

28. The Master of the Rolls then went on to quote Gibbs L.C.J. in Orne v. Young (1815) Holt. N.P.C. 84 at 86:

29. In concluding the paragraph after that quotation the Master of the Rolls went on to say:

"These are the principles on which we have to apply here. There was I think a binding agreement for good consideration to delay the enforcements of the creditors' rights, and, therefore the rights of the surety were impinged upon, and it is not for us to determine whether the surety has been thereby injured."

30. Mr. Mayne argued that although the defendant received the letter of the 12th August and did nothing so far as the plaintiff is concerned this could not resurrect the contract which had been terminated by the plaintiff on the 7th May. He argued that the point was well covered in the judgment of Blackburn J. In Polak v. Everett (1875-76) 1 Q.B.D. 669 at 673:

"Now ..... we must take it to be the fact that though the defendant was well aware of this release being executed, he was not an assenting party to it. Then it is argued that knowledge on the part of the surety that there is going to be a release of a part of the security is enough without assent. I cannot see any authority for that. In Pickard v. Sears 6 Ad. & E. 469, 474 it was held that he who stands and sees another alter his position on the faith of a fact which he can contradict, cannot afterwards take advantage of that alteration. But the rule was corrected in Freeman v. Cooke 2 Ex.654; 18 L.J. (Ex) 114 where it was said that if a man stands by and allows another to act without objecting, when, from the usage of trade or otherwise, there is a duty to speak, his silence would preclude him as much as if he proposed the act himself. But to say that a person who, being a surety, becomes aware that the creditor is going to give time or do something else which, if done without his assent, may discharge him, is bound to warn the creditor against doing it, is a thing for which no authority whatever has been cited."

In the instant case there is no suggestion that the defendant stood by and did nothing; the letter of the 12th August presented him with a fait accompli. There was no question of him standing by and watching the creditor do something to his detriment; he was simply told of something the creditor had already done.

31. It was conceded by Mr. Eddis that if there were a variation of substance made by the plaintiff to the terms of the contract with the debtor, Mr. Nicholson, then the plaintiff must fail; but he maintained there was no such variation. He argued this on two grounds: Firstly, on the ground that when a banking transaction, such as in the present case is entered into it is common knowledge, and implied in a contract if not written into it, that the rate of interest chargeable on a loan may vary with the price of money. He contended that in this case the increase from 10% per annum to 1.2% per month was done in the normal business of banking; that the defendant knew this might happen and assented to it by implication. He argued that the loan to the creditor being on call was one which the plaintiff could call in or vary at any time and that the defendant was aware of this and agreed to it. He argued further that for the same reasons the plaintiff by the letter of the 7th May were exercising their right to call in the balance of the loan outstanding, which in fact is what they did, but were directing the debtor as to when and in what manner they wanted to be paid.

32. I can find no support for these arguments either in authorities or in common sense. When a bank grants a loan at call at a rate of interest stipulated in an agreement, in the absence of something in the agreement to the contrary it can only increase the interest rate by entering into a new agreement to that effect. Granted that it frequently happens that a bank informs a debtor that as and from a certain date a higher rate of interest will be charged, but there is no obligation on the debtor to accept that increase. He can discharge his debt and that is the end of the matter; or he can assent to it, either expressly or impliedly, and thus a new agreement is established. As to the letter of the 7th May that clearly allowed time to the debtor by permitting him to discharge his debt over a period, and a substantial period too. "On call" or "on demand" must mean within a reasonable period, to be interpreted according to the circumstances of the particular case. A bank manager would not be entitled reasonably to expect a customer to repay $500,000 immediately on being asked, out of his pocket so to speak, but if he allow him from the 7th May to the 30th September he is changing the loan from one payable at call to one payable at a future date. In the instant case in addition to extending time the debt was made payable by instalments. To do that without the consent of the surety is unquestionably to alter the position considerably to the detriment of the surety.

33. The second ground on which Mr. Eddis relied was that the defendant wrote the letter of the 7th May to the debtor offering time to pay off the loan at increased rates but without prejudice to the undertaking by the defendant; and that the debtor accepted what was offered on the terms of that letter. In other words what Mr. Eddis argued was that because the letter to the debtor was without prejudice and reservedthe rights of the plaintiff against the defendant the defendant's position was unaffected, even though he was unaware of what was happening. He cited Home v. Brunskill (1878) 3 Q.B.D. 495 at 505:

"Where a creditor does bind himself to give time to the principal debtor, he with an exception hereafter referred to, does deprive the surety of the right which he has, that is to say of the right at once to pay off the debt which he has guaranteed and to sue the principal debtor, and without inquiry whether the surety has, by being deprived of this right, in fact suffered any loss, the courts have held that he is discharged. The exception to which I have referred is, where the creditor on making the agreement with the principal debtor expressly reserves his right against the surety, but this reservation is held to preserve to the surety the right above referred to of which he would be otherwise deprived."

34. With great respect to the learned Cotton L.J. I think that might have been more clearly expressed to indicate that the right must be reserved with the knowledge of the surety. The opinion of the learned Lord Justice of Appeal was clearly indicated, however, where he cited with approval Lord Loughborough in Rees v. Berrington 2 Ves. J. 540 in which he said:

35. I have already announced my decision in this case that even if there were a completed contract of suretyship between the parties it was terminated by the plaintiff by its offer to the principal debtor on the 7th May, 1974 which was accepted by him. I dismissed the plaintiff's claim, and found for the defendant on their counterclaim; ordered all dividends collected by the plaintiffs or their predecessors be paid by the plaintiff to the defendant; that all share certificates deposited with the defendant's predecessor or the defendant by virtue of the loan be handed over to the defendant, or executed transfers for all such shares and accruals thereto as have been transferred to the name of the plaintiff in the respective companies; and the defendant to have his costs of the claim and counterclaim less the costs allowed to the plaintiff on the adjournment of the case on the first day of hearing at the defendant's request.

36. I now give my reasons.

Representation:

Mr. F.A.L. Eddis (Slaughter & May) for Plaintiff

Mr. Ronald E. Mayne (D'Almada Remedios & Co.) for the Defendant.