Re Keneva Co Ltd

HCMP000228/1986

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Coram: Deputy High Court Judge Barnett

Date of Hearing: 9 June 1986

Date of Decision: 18 June 1986

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DECISION

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1. By tenancy agreement dated 18th August 1983, the plaintiff let certain premises to Atlas Industries Ltd. (which I shall refer to as "Atlas Industries"). The agreement was for a term of 2 years until 31st March 1985 at a monthly rent of $248,392.50. Clause 4(1) provided that to secure the due performance and observance of the terms and conditions the tenant, Atlas Industries, should furnish a bank guarantee for the sum of $248,392.50. Pursuant to C1.4(1) the defendant gave the plaintiff a guarantee dated 29th July 1983. The guarantee reads:

(The emphasis is mine.)

2. In May 1985 there were negotiations between the plaintiff's agent and the Atlas Group of companies as to the renewal of the tenancy agreement. As a result of those negotiations on 22nd July 1985 the plaintiff's agent offered Atlas Electronics Manufacturing Ltd. (which I shall call "Atlas Electronics") a lease of part of the premises, previously let to Atlas Industries, for a period of two years commencing from 1st August 1985. This offer was accepted by Atlas Electronics on the same day and a formal tenancy agreement was finally signed on 1st October, 1985.

3. Clause 4(m) of the new agreement provided :

4. By letter dated 14th August 1985 the plaintiff's agent wrote to Atlas Electronics about the necessary guarantee. The relevant part of the letter reads as fellows:

"

Finally, Clause 4(m) of the Tenancy Agreement requires your company to funish your landlord with a properly executed Bank Guarantee in a form acceptable to them in the sum of $173,507.50. You will recollect that your current Bank Guarantee, which is still in force, is in excess of this amount, reflecting the previous rent passing. Will you kindly arrange for the amended Guarantee to be furnished by your company, copy of which should be sent to us without further delay. "

5. Atlas Electronics on 12th August applied to the defendant for a reduction in the amount to be provided by the defendant's guarantee which was apparently given by way of stand-by letter of credit. A copy of the Atlas Electronics application for amendment was sent to the plaintiff for acceptance by the defendant on 19th August. The plaintiff did not reply to the defendant's covering letter. In October the plaintiff learnt that the Atlas companies were in financial difficulties and received a letter from the defendant dated 25th October giving notice that "our guarantee shall expire one month from today, i.e. November 25th 1985. Atlas Electronics being in arrears of rent, the plaintiff's agent by letter dated 29th October gave notice to the defendant that the plaintiff proposed to recover arrears of rent, service charges and interest in accordance with the terms of the guarantee. The defendant denied liability.

6. It is to be observed that in all the correspondence to which I have referred, the parties themselves referred to "Gurantee No. 029616 for $248,392.50 in favour of (the plaintiff) for account of Atlas Electronics Manufacturing Ltd.".

7. For the plaintiff, Mr. Chain seeks a declaration that the defendant is liable to the plaintiff on the Guarantee dated 29th July 1983 for a sum of $173,507.50. He seeks to support this declaration on two grounds. First, he contends that there was a continuing guarantee on the part of the defendant in which the mistake as to the identity of the principal debtor was "put right" in August 1985 when agreement was reached between the plaintiff and Atlas Electronics. Thus, in its letter of 25th October in which the defendant gave notice of expiry of the guarantee, there was no indication other than that the defendant still considered the guarantee to be effective.

8. Secondly, Mr. Chain relies on estoppel by convention. He asserts that in their dealings from August 1985 onwards the parties clearly acted on the assumption that the guarantee was still in existence and continued to be effective regardless of any defence which the defendant might previously have had because of the mistaken identity of the principal debtor. Mr. Chain did not concede, however, that there was any such defence.

9. In dealing with Mr. Chain's first argument, Miss Yuen on behalf of the plaintiff pointed out that a guarantee is based upon contractual principles. Therefore, she said, a consensus ad idem was needed and this was not to be found either in July 1983, upon the giving of the original guarantee, nor in August 1985. In 1983, said Miss Yuen, the plaintiff was seeking a guarantee for due performance by Atlas Industries under its tenancy agreement with the plaintiff. Such a guarantee quite clearly was not forthcoming so that no guarantee ever came into existence.

10. Next, said Miss Yuen, it is necessary to consider whether a new contract of guarantee was made in August 1985. What the plaintiff was then seeking was a guarantee for due performance by Atlas Electronics for the duration of the new tenancy agreement. The plaintiff did not want a guarantee which could be revoked during the term of the tenancy as could the original guarantee, which could be revoked at any time after March 1985. It is relevant, said Miss Yuen, that on the Atlas Electronics application for amendment, a provision for the guarantee to be extended until 31st July 1987 was deleted. Consequently, there was uncertainty as to a guarantee. Was there one in force, and if so, what was the extent of the defendant's liability and for what period ?

11. Apart from consensus, Miss Yuen also argued that there was no consideration to support the guarantee. The 1983 agreement under which a guarantee was taken from the defendant in lieu of a cash deposit was with Atlas Industries and not Atlas Electronics This situation did not change in August 1985 because, as far as the defendant was concerned, the consideration remained the same. There was no evidence that the defendant knew that there was to be a new tenancy agreement, only that there was to be a reduction in the amount under the guarantee.

12. Taking all these matters into account, Miss Yuen contended that there was no guarantee in existence in 1983, or in August 1985.

13. Mr. Chain conceded that the dealings between the parties in August 1985 depended upon the existence of a continuing guarantee. He maintained, however, that a guarantee was given in July 1983 which was capable of being renewed in 1985. The question as to whether the guarantee was effective and afforded the plaintiff the protection it wanted before August 1985 was another matter which was not before the court.

14. There is no question in my mind but that there was a contract of guarantee in existence. I cannot accept Miss Yuen's argument that there was never any such contract. The question that has to be resolved is whether, for reasons put forward by Miss Yuen, the contract was void. I do not think it permissible to accept Mr. Chain's argument that this is not an issue to be resolved by me, because I am being asked to pronounce for the plaintiff on the 1983 guarantee. The issue is crucial to his argument, if the renewal of the guarantee in August 1985 depended upon the existence of the continuing guarantee. If that guarantee was void, it must follow, it appears to me, that there was nothing upon which there was room for negotiation or discussion between the parties in August 1985.

15. Mr. chain said that there might be evidence to show that Atlas Electronics had in some way made themselves liable for Atlas Industries' due performance under the 1983 tenancy agreement. The guarantee from the defendant therefore was simply by way of better protection for the plaintiff. There might be some other explanation which could be put forward in evidence.

16. There was, however, no reason why the defendant could not have adduced such evidence, if it existed, in these proceedings. As I pointed out to Mr. chain in the course of argument, this was an avenue of escape which the defendant might take and care should have been taken to block this avenue. In any event, it seeks to me entirely fanciful to suggest that the 1983 guarantee is other than what it purprots to be, namely a guarantee for the due performance by Atlas Electronics under a lease to which Atlas Electronics itself would be a party.

17. I have no hesitation in saying that because of the mistake as to the identity of the principal debtor the guarantee is void. Consequently there is nothing which could be renewed by the parties in August 1985. Mr. chain's argument therefore fails.

18. In case I am wrong about this, I shall consider whether the guarantee was, as Mr. Chain contended, "put right" in August 1985. In effect, Mr. chain was saying that the guarantee should not be looked at in isolation but in the general setting which prevailed in and after August 1985. The document and correspondence, he said, clearly showed that both the plaintiff and defendant regarded the guarantee as continuing and effective. Until the guarantee was revoked, therefore, the defendant was contractually bound to the plaintiff to discharge any indebtedness of Atlas Electronics arising out of non-performance of a lessee's obligations.

19. I have considered Miss Yuen's arguments on consensus and consideration. It seems to me the essential elements are there. The defendant was content to continue its guarantee. The plaintiff allowed Atlas Electronics to take possession without the payment of a cash deposit. Whilst it is true that the guarantee was capable of revocation before the term expired, that was within the knowledge of the plaintiff which did not demur.

20. I am satisfied, therefore, that the guarantee was valid and enforceable until formally revoked by the defendant.

21. Although it is not necessary for the purpose of this decision I think I should deal with Mr. Chair's argument based on estoppel by convention. Mr. Chain relied upon the decision of the Court of Appeal in Amalgamated Investment & Property Co. Ltd. (in liquidation) v. Texas Commerce International Bank Ltd. (1982) 1 Q.B. 84. In that case Lord Denning, M.R. said at p.121:

"So I come to this conclusion: when the parties to a contract are both under a common mistake as to the meaning or effect of it - and thereafter embark on a course of dealing on the footing of that mistake - thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. The parties are bound by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them. "

22. In the same case Brandon, L.J. said at p.130:

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

23. These two passages are useful. First they give an indication of the nature of the estoppel with which we are concerned. Secondly, there is a guide to the type of situation which will give rise to estoppel of this nature. Even then, Brandon, L.J. gives only a glimpse of the top of a very complicated factual iceberg.

24. I have no difficulty in finding that there is insufficient on the evidence before me to found an estoppel by convention. Even if the parties wrongly assumed the guarantee to be effective, there was no subsequent course of dealing such as to give rise to this estoppel. The matter begins and ends with the guarantee. There is no edifice which relies on it.

25. Accordingly, the plaintiff is refused the leave sought. Subject to anything counsel may wish to say, the defendant will have the costs of these proceedings to be taxed, if not otherwise agreed.

Representation:

Mr. Benjamin chain instructed by M.K. Iam & Co for the Plaintiff.

Miss Maria Yuen instructed by Kao, Lee & Yip for the Defendant.