Hsin Chong (Maintenance) Ltd v. John Cheung Suen Yue
Read the full judgment text of HCA 4184/1979 on BabelCite. This High Court CFI judgment.
1. The plaintiff company claims the sum of $500,000 in respect of a contract of indemnity. The defendant admits signing a document, upon which the plaintiff relies as evidence of the contract, but pleads, firstly, that it was a guarantee, not an indemnity, and that the defendant has been discharged by virtue of a variation of the contract between the plaintiff and the principal debtor; and, secondly, that improper pressure and misrepresentation by a director of the plaintiff render the agreement
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HCA004184/1979
IN THE SUPREME COURT OF HONG KONG HIGH COURT -----------------
----------------- Coram: Bewley, J. Date of Judgment: 5th November, 1980 ----------------- JUDGMENT ----------------- 1. The plaintiff company claims the sum of $500,000 in respect of a contract of indemnity. The defendant admits signing a document, upon which the plaintiff relies as evidence of the contract, but pleads, firstly, that it was a guarantee, not an indemnity, and that the defendant has been discharged by virtue of a variation of the contract between the plaintiff and the principal debtor; and, secondly, that improper pressure and misrepresentation by a director of the plaintiff render the agreement unenforceable. Matters came about in this way. 2. The defendant was the manager of the plaintiff company, which was a subsidiary of Hsin Chong Construction Co. Ltd., which in turn was a subsidiary of Hsin Chong (Holdings) Ltd. The managing director of the parent company was also on the boards of the construction company and the plaintiff company. He is Mr. Geoffrey Yeh (PW1), an important witness in this action. 3. Hsin Chong is a big concern and is engaged on many different contracts at any one time. Much of its work is on contracts with the Hong Kong government. The tender for a government contract is made in the name of the construction company, which then sub-contracts the work, on a non-profit basis, to the plaintiff. The plaintiff in turn engages one or more sub-contractors to do the actual work. The latter themselves may sub-contract some or all of the work. 4. The plaintiff was incorporated in 1972. The chairman was Mr. Godfrey Yeh. Members of the board included Mr. Geoffrey Yeh, Mr. C.K. Chien, his son Philip and Mr. Vincent Loh. The manager was the defendant, who himself became a member of the board in 1973. 5. The defendant is a longstanding friend of Mr. C.K. Chien and it was the latter who was responsible for his appointment. There were only 2 shareholders: the defendant held 25% and the construction company 75%. Business prospered as the plaintiff played its part in the booming construction industry. 6. One of its major sub-contractors was a firm called Ng Dun Kee Works ("NDK"). The firm was wholly owned by Mr. Ng Dun, who was introduced to the directors of the plaintiff by the defendant soon after the latter's appointment. His firm became one of the plaintiff's principal sub-contractors, particularly in the sphere of road construction and maintenance. He was considered a reliable man, in whom the defendant obviously placed much faith. We do not know the background of his relationship with the defendant, or what, if any, connection the defendant had with NDK. 7. Between 1972-75 the plaintiff had no cause to doubt NDK's financial soundness. There was no call for unusual financial help: only the usual advances in connection with the contracts were made. Unknown to the other directors of the company, however, Mr. C.K. Chien in this period made several short term - and one long term - interest-bearing loans to NDK. NDK still owes Mr. Chien $100,000. 8. Then, in March, 1976, NDK found itself in a financial bind - as Mr. Geoffrey Yeh would have it - and applied, with the support of the defendant, to the plaintiff company for help. A number of post-dated cheques were falling due at the end of the month and NDK needed $1,500,000 to meet them. 9. On 26th March the defendant, having ascertained that Mr. Geoffrey Yeh was available, arranged a meeting in the latter's office between Mr. Yeh, Mr. C.K. Chien, Mr. Ng, Mr. Loh and himself. There is much dispute as to what took place at this meeting, but it is common ground that:
10. The meeting was not properly convened. To give legal effect to the decision, a purported record of the proceedings, signed by the chairman of the company, Mr. Godfrey Yeh, and the secretary Mr. Lau, neither of whom was present at the meeting, was circulated to all the directors for their signature. This procedure is authorized by Article 87 of the Articles of Association. It is known as a 'paper' meeting and was a common method of giving retrospective legal effect to management decisions. 11. However, this document (A124) does not accord with the oral evidence of any of those who were present on 26th March. It states that there was an offer by the defendant, but does not say whether it was accepted. It also states that the financial assistance - the consideration for the offer - was dependant upon a report from S.N. Tsang & Co., a firm of chartered accountants. All the directors signed this 'minute', but there is no evidence as to when they did so. 12. Then, on 1st April, the defendant signed the 'letter of indemnity' (A137). This is in the following terms: LETTER OF INDEMNITY To: Hsin Chong (Maintenance) Ltd. In consideration of Hsin Chong (Maintenance) Ltd. having granted the necessary financial assistance to Messrs. Ng Dun Kee Works, I hereby undertake the following:-
Dated this First day of April 1976.
13. Also, on 1st April, the first report of S.N. Tsang and Co. was received, followed by subsequent reports on 8th April and 13th April. They do not contain any particularly adverse comments. 14. But things were not going well for NDK - it was apparently a difficult time for all sub-contractors in the trade - and the minutes of a meeting of the plaintiff's directors on 10th June reveal that, on the recommendation of the defendant, it was resolved that, in respect of one of the government contracts on which NDK was working, the plaintiff's 7% profit margin be waived. The same day Mr. Ng Dun gave S.N. Tsang & Co. power of attorney to handle all NDK's financial affairs. 15. Then, on 26th June, came a letter from Mr. Ng, who was now in Taiwan receiving medical treatment, in which he stated that "the present financial position was unsound". He requested the plaintiff to pay his sub-contractors their 5% retention money. 16. The fact that NDK was unable to pay its sub-contractors is revealed in the minutes of a directors' meeting on 8th July. They were, however, willing to continue working, provided the plaintiff company itself undertook to pay for the work done after 1st April. In addition, NDK on 8th July assigned all accounts receivable from the plaintiff to the sub-contractors. (A184) 17. To assist the sub-contractors, two unsecured loans from Sun Hung Kai Finance Co. Ltd., totalling $950,000, were arranged. Repayment of these loans was guaranteed by Hsin Chong (Construction) Co., which in turn was indemnified by the plaintiff. As security, the 8 sub-contractors authorized the plaintiff to retain the accounts receivable assigned to them by NDK on 8th July. 18. Meanwhile, on 3rd June, a fourth loan of $20,000 was made by the plaintiff to NDK. This was repaid on 22nd July, 1976. But no repayment, whether by retention of accounts payable or otherwise, was made during 1976 of the outstanding $1,500,000. 19. On 22nd January, 1977, Mr. Ng wrote to the plaintiff agreeing that, in consideration for the plaintiff's not requiring immediate payment of sums due, now or in the future, any sums standing to NDK's credit with the plaintiff might be applied in repayment of the debt. 20. At about the same time - with Chinese New Year approaching - NDK requested the plaintiff to release the whole 5% retention money for the first year of the maintenance contracts. It was agreed that, although the whole 5% could not be released, as some work remained to be done, not less than 2½% would be released. In fact 3½% amounting to $90,000, was paid out. 21. One of the plaintiff's other main sub-contractors, Ng Ming Kee, was also in serious trouble at this time. To help it meet its New Year commitments, an ex gratia payment of $200,000 was made by the plaintiff. 22. It is of the first importance that a principal contractor retains his sub-contractors. No only is replacement an expensive business, but it is also time - consuming. This, in turn, may lead to late completion of the project, with attendant heavy monetary penalties under the government contract. Mr. Yeh described this situation as a 'recurring nightmare'. It is this that prompted the plaintiff company to do everything in its power to assist NDK and the other sub-contractors. 23. Mr. Yeh told the Court that, when the initial application for a loan was made by the defendant and Mr. Ng Dun on 26th March, 1976, it was always in his contemplation that, at some future stage, more than $1,500,000 might be needed. It was the lesser of two evils to continue making unsecured loans to a sub-contractor, in order to keep him on the job, than to cancel his sub-contract and face the prospect of government penalties. In his view, however, it was important to obtain security in respect of the initial loan; thereafter risks might be taken. 24. Starting in April, 1977, this is what in fact happened. Between 7th April and 30th August the plaintiff made 10 further loans totalling $1,265,000 to NDK. Between 20th April and 24th October, 1977, repayments totalling $663,750 were made by way of deductions from accounts payable to NDK. So far as the actual loans were concerned, NDK was still indebted to the plaintiff in the sum of $2,101,250. 25. On 18th April the defendant was charged with a criminal offence by the I.C.A.C. He continued as manager of the plaintiff until his conviction on 15th September, when he was dismissed. 26. On 10th May NDK was forced to take the step of authorizing the plaintiff to pay directly the creditors of the sub-contractors, in respect of materials supplied or work done, and to pay them the balance due under their contracts with NDK (A207). 27. Alas, all these efforts at resuscitation were to no avail. On 22nd September the plaintiff wrote to NDK terminating 4 contracts on the grounds that NDK was unable to complete the work (A253). A reply from NDK was received the same day, in which termination was accepted and the plaintiff was authorised to deduct, from payments due to NDK, its losses under the contracts. 28. NDK wrote 3 other letters dated 22nd September. In the first, it is admitted that they were unable to complete contract no. 439/75 and were willing to cancel it and bear any resulting loss (A259). The next letter (A261) refers to contracts nos. 493/73 and 425/74. Although construction under both these contracts had been completed, it was not yet possible to hand the site back to the landlords. NDK, therefore, gave the plaintiff permission to deal with the deposit as it thought fit. 29. The final letter stated that construction under 4 other agreements had also been completed and that a deposit of $127,181 was refundable to NDK. However, in view of NDK's failure to complete the other contracts, this sum was offered in part-payment of outstanding debts. The last 4 letters from NDK were all written on plain foolscap paper, which has not been folded. Except for one important matter, this exchange of correspondence effectively terminated NDK's contractual relationship with the plaintiff. 30. NDK owned a quantity of plant and machinery, for which it now had no further use. On 29th September the plaintiff agreed to purchase it in toto for $180,000 (A264). In fact only 7 items were actually purchased for $109,260. Cheques for $50,000 and $59,260 were forwarded to NDK on 30th September and 8th October respectively. 31. On 30th September the plaintiff made another payment to NDK in the form of a cheque for $150,000. This is recorded in the minutes of a 'paper meeting' dated 4th November, 1977, as an ex gratia payment (A281). According to Mr. Geoffrey Yeh, the purpose of this payment was to ensure that NDK got off the sites without delay. It was, as he put it, 'nuisance money' and is commonly paid in Hong Kong to avoid trouble with contractors who squat on the site after termination of contract. 32. NDK's business registration certificate indicates that business ceased on 30th September, 1977. 33. The only repayments ever made by NDK to the plaintiff were those making up the sum of $683,750 aforesaid. After the final deduction on 24th October, this left a debit balance on the loan account of $2,101,250. But NDK was heavily in debt to the plaintiff under other heads. 34. Between May and September, 1977, the plaintiff had paid approximately $1,800,000 directly to NDK's 8 sub-contractors in excess of the amount owed to NDK for the work done. The plaintiff had also spent approximately $1,800,000 on the purchase of materials on NDK's behalf. NDK owed the plaintiff over $872,000, which the plaintiff had paid to Government for quarry products. Finally, due to slack accounting methods in the plaintiff's Kowloon office, overpayments of approximately $2,900,000 had been made to NDK. There had, in effect, been an under-retention of monies in respect of work done. 35. Against these debits must be set the amount held in retention by the plaintiff, which would normally have been payable to NDK on satisfactory completion of all 11 contracts. This amounted to approximately $2,800,000. The final debit, including the loan account, is in the sum of $6,734,255.58. None of this has been recovered. 36. The plaintiff took out a writ on 8th March, 1978, for $31,250 in a test action - Mr. Ng was thought to have gone to Taiwan - and the writ was served by substituted service. Judgment by default was obtained, but execution could not be levied. Mr. Ng's whereabouts today is still unknown. 37. For tax purposes, the provision of $6,000,000 in the plaintiff's balance sheet has, on the advice of its accountants, been written off. (A296). 38. Details of the March, 1976, loans appeared month by month in financial statements attached to the defendant's monthly reports to the plaintiff's directors (C1-182). In the accounts annexed to the January, 1977, report at page 7 (C37), under the heading 'securities', there appears against the $1,500,000 loan the remarks: "Assignment of amount withheld by H/C. Mr. John Yue would indemnify the company to the maximum amount of HK$500,000." 39. Below this, against a loan to another sub-contractor, Ng Ming Kee, there appears as security merely "Assignment of amount withheld by H/C." I take it these references refer to retention money. 40. Finally, against a loan to Kung Hing Construction Company, there are (1) an assignment of the equity in 15 trucks (2) a charge on plant and machinery and (3) a guarantee by Ng Ming Kee. 41. Again in June and August, 1977, the same information appears in a note to the accounts (C180) and (C87). 42. The plaintiff called 3 witnesses: Mr. Geoffrey Yeh, the managing director of the holding company and a director of the two other companies with which we are concerned: Mr. C.K. Chien, a director of all 3 companies, with particular responsibilities in the plaintiff company; and Mr. W.K. Pau, the group accountant, who explained the figures to the Court. 43. The defence called only Mr. Vincent Loh, former director of the plaintiff and close associate and friend of the defendant. The defendant himself was not called, although he was in Court throughout the case. Counsel said he made this decision on the grounds that his evidence would have added little of significance to that of Mr. Loh, but would, on the other hand, have greatly lengthened the trial. 44. On these facts I must decide firstly whether there was a contract of any kind between the parties. 45. Although the minutes of the meeting on 26th March (A124) were not subsequently annexed to the minute book after circulation, as required by Article 87, the original minute signed by the chairman and secretary is so annexed. It is in identical form to the document circulated to the directors. In my view this is all that is required; it would be pedantic and not in accordance with the intention of the article to hold otherwise. 46. The loan was made before the first Tsang report was received on 1st April. The defendant's offer was then repeated in the 'letter of indemnity', which was signed the same day. The consideration was supplied in the form of the 3 Loans, even though, strictly speaking, they were made without authority, in that the management did not wait for the S.N. Tsang report, as stipulated in the minutes, before issuing the cheques. They were, however, issued in good faith, which is sufficient to bind the surety. Garrard v. James (1). The validity of the contract between the plaintiff and the defendant is not affected. 47. A contract of this nature is in the form of a request to perform the consideration, followed by the performing of the consideration according to the request. Therefore, no other acceptance of the surety's offer is necessary than the subsequent making of the advance. Morrell v. Cowen(2). The consideration was not past and, on the face of it, the contract is enforceable. 48. The next question is whether the contract is rendered unenforceable by misrepresentation or undue pressure. This involves one of the disputed issues of fact, namely what took place in Mr. Yeh's office on 26th March, 1976. 49. Let me say at the outset that, as to this, I prefer the evidence of Mr. Yeh and Mr. Chien to that of Mr. Loh. I have no doubt at all that, while their memories may be faulty as to certain matters, their evidence about that meeting is essentially true. 50. Mr. Loh, on the other hand, gave the impression, as pointed out by Mr. Jackson-Lipkin in his address, that he was speaking from a brief and, when he was put off his stroke, he tended to backtrack and start again. That was an accurate comment. 51. Mr. Yeh made no bones about the fact that it was his job to deal with group policy and that he was accustomed to delegate matters of detail and routine to others. No major policy decision was taken without his approval. He admitted that he could not remember any details of the meeting. On some vital matters he remained firm: for example, that, while he had insisted on some form of security or guarantee, he did not suggest to the defendant that he should himself offer personal security for the loan. On others he was prepared to admit that he might be wrong. An instance of this is his evidence-in-chief that Mr. Ng was never in his room. In cross-examination he said he might be wrong about this, to the extent that Mr. Ng might have taken part in putting forward the case for a loan. But he was adamant that, in accordance with normal practice, he was not in the room while the merits of the application were being debated. This accorded with Mr. Chien's evidence and, to a great extent, with that of Mr. Loh and I am satisfied it is true. By and large, Mr. Yeh made a good impression. 52. Mr. Chien was more prosaic. He is an older man and, unlike Mr. Yeh, who is fluent in English, gave his evidence in Cantonese. He also impressed as a witness and, on the important points, he corroborated Mr. Yeh. A surprising fact emerged during his cross-examination, which gave added weight to his evidence. It was common ground that he had known the defendant since 1958. He had befriended him and regarded him as his protege. He, in fact, was responsible for his appointment in 1972. But it transpired that, when the defendant joined the plaintiff and became at his request - with Mr. Chien's support - a 25% shareholder, Mr. Chien advanced him $125,000, half the capital required. Not only that, the defendant asked Mr. Chien to treat this, not as a loan, but as a 50% equity in his shareholding. Mr. Chien agreed and admits it has proved a profitable investment. 53. The significance of this is that, at the conclusion of the meeting on 26th March, when the defendant was committed as to $500,000, Mr. Chien assured him that, in the event of his becoming liable as a surety, his son Philip, for whom the 50% shareholding was held in trust, would pay half. 54. Thus, it would have been in the interests of Mr. Chien to support the evidence of Mr. Loh that Mr. Yeh had misrepresented the situation. He has not done so. Even without the financial inducement, his long-standing friendship with the defendant - his conviction must have upset him very much - would have been an additional motive to distort the truth. 55. In spite of what Mr. Mills-Owens has said, the failure to call the defendant has meant that, on this question of fact, there are serious lacunae in the defence case. Had Mr. Loh made a better impression and the plaintiff's witnesses less so, it might not have mattered. But as it is, we do not know the defendant's state of mind, what Mr. Chien said to him in private, his true relationship with NDK. etc. etc. These are crucial matters. Mr. Mills-Owens was possibly relying more on the issues of law, with which I shall later have to deal and did not wish to waste time on the facts. 56. Two points of detail are very obvious. The first is that the question of entering into the contract was in no sense a formality. Mr. Loh insults the intelligence of the Court in suggesting that a man in Geoffrey Yeh's position, having taken a stand - as Mr. Loh admits - against granting a loan without security, should have told the defendant that, 2 hours heated argument notwithstanding, the whole thing was but a formality. 57. The second point that indicates the untruthfulness of Mr. Loh's evidence is his reference to the signing of a document. As to this, he got himself well and truly entangled in cross-examination. It is very unlikely that, in the heated atmosphere, approaching lunch time, the question of a personal commitment having been raised for the first time, those present should have made any reference to the signing of documents. It was lunch time: the matter had dragged on for 2 hours and, at last, there was a breakthrough, the defendant having agreed to stand surety for the loan. I am sure the discussion ended there. Mr. Chien gave a very straight answer to what was perhaps a rather leading question by the Court, when I asked him if the defendant's offer was made in exasperation just before lunch - that had seemed to be the gist of his evidence - and he replied: "Yes, that's exactly how it was." That rang true. 58. For these reasons I rule out any question of improper pressure or misrepresentation by Mr. Yeh. 59. I find that the course of the meeting ran roughly on these lines. Mr. Ng said he needed $1,500,000 urgently to meet post-dated cheques falling due within the next few days. This application was supported by the defendant, who pointed out that the company was cushioned by some $2,400,000 retention money, which would eventually become payable to NDK. Mr. Yeh indicated that he was prepared to lend $1,000,000, but no more. When Mr. Ng said this was not enough, he was asked to wait outside. Mr. Yeh then pointed out that, without security of some kind, the retention money was insufficient to justify a loan of $1,500,000. Eventually, after heated and prolonged argument, the defendant said he would give his personal guarantee. Mr. Yeh agreed to this arrangement and the meeting ended. 60. Having decided there was an enforceable contract between the parties, the next question is whether the contract was one of indemnity or guarantee. An indemnity is a contract by one party to keep the other harmless against loss. A guarantee is a contract to answer for the debt, default or miscarriage of another. Yeoman Credit Co. v. Latter(3). Thus a guarantee involves a collateral obligation - conditional on the non-performance of some other person - whereas the liability of an indemnity is original or direct. 61. The distinction is important. In the case of a guarantee, if the contract between the creditor and the principal debtor is varied without the knowledge or consent of the surety, the latter's liability may be discharged. Not so in the case of an indemnity. 62. In England - and in Hong Kong until 1972 - there is another important consequence. A guarantee is unenforceable under the Statute of Frauds unless it is in writing. For this reason the courts appear to have strained to give effect to contracts by holding them to be contracts of indemnity, rather than of guarantee. The older cases, in particular, have to be read in this light. 63. Nothing turns upon the use by the parties of the word 'indemnity'. In Sarbit v. Booth Fisheries(4), a Canadian case, Coyne J.A. said at p. 116: "If there is any doubt of the proper interpretation ... The acts of the parties and the surrounding circumstances may be looked at in aid. It is the substance and intent of the admission, not its particular form, that is material. 64. And in Moschi v. Lep Air Services Ltd. and others(5) Lord Diplock said, at p. 349: "Even the use of the word guarantee is not in itself conclusive ... every case must depend upon the true construction of the actual words in which the promise is expressed." 65. There must be an original obligation in existence that remains in existence throughout. In Lakeman v. Mountstephen(6), the plaintiff, a contractor, was failing to do certain sewage work, because he was not sure that the Board of Health would pay for it and the defendant, who wanted the work done, said: "Mountstephen, go and do the work and I will see you paid." The House of Lords held that those words did not constitute a promise to pay the debt of another. Their lordships considered if the defendant had guaranteed a liability that primarily rested upon the board, or whether he himself had assumed an original and sole liability. Since the board had not ordered the work to be done and therefore was not a debtor in any sense of the word, it was held that the defendant was himself the only debtor. Lord Selborne said at p. 834: "There can be no suretyship unless there is a principal debtor, who of course may be constituted in the course of the transaction by matters ex post facto and need not be so at the time ... Nor can a man guarantee someone else's debt unless there is a debt of some other person to be guaranteed." 66. In Guild & Co. v. Conrad(7), the defendant orally promised the plaintiff that, if he, the plaintiff would accept certain bills for a firm in which the defendant's son was a partner, he, the defendant, would provide the plaintiff with funds to meet the bills. It was held that this was a promise of indemnity and not of guarantee. Davey L.J. put it in this way at p. 896: "In my opinion there is a plain distinction between a promise to pay the creditor if the principal debtor makes default in payment, and a promise to keep a person, who has entered, or is about to enter, into a contract of liability, indemnified against that liability independently of the question whether a third person makes default or not." 67. Lindley L.J. said at p. 892: "..... if it was a promise to pay if the (debtor) did not pay, then it is void under the Statute of Frauds as not being in writing. But if, on the other hand, it was a promise to put the (creditor) in funds in any event, then it is not such a promise as is within the Statute of Frauds." 68. But in Beattie v. Dimmick(8) (another Canadian case), the contract was held to be one of guarantee. The plaintiff was the holder of a promissory note given by an insurance company. The defendant was the president of the company. The plaintiff was pressing for payment. The defendant orally promised to see him paid if he were not otherwise successful in obtaining his money. 69. In Harburg India Rubber Comb Co. v. Martin(9), the defendant verbally promised the plaintiff that he would endorse some bills for the amount of the judgment debt owing by a company to which the plaintiff had supplied goods and obtained judgment. Vaughan-Williams L.J. said at p. 783: "It seems to me that this contract was as plainly as possible a promise by the defendant to make himself answerable for the debt of the syndicate". And at p.786: "The circumstances of the present case show plainly that there was a guarantee of a debt for which the syndicate was primarily liable, and not an original promise by the defendant to keep the plaintiffs indemnified." 70. In Sarbit v. Hanson(10), the defendant promised to pay a supplier for goods supplied to fishermen if they did not pay. He had an interest in their business. Although, at first instance, this was held to be a contract of guarantee, not indemnity, the Manitoba Court of Appeal reserved this decision. 71. Finally, in Yeoman Credit Ltd. v. Latter(3) the facts were as follows. The plaintiff finance company let a car on hire-purchase to Latter, who was an infant. He defaulted and the company repossessed the car and commenced an action against him and Owen, who was 2nd defendant. The company had known that Latter was under 21 and had required Owen to sign a document headed "Hire-purchase indemnity and undertaking". The County Court judge held the document was a guarantee. But the Court of Appeal thought it was a contract of indemnity. Holroyd-Pearce L.J. said at p. 832: "One may sum up the effect of the document in question as this: it protects the plaintiffs against any loss they may suffer since it assures to them the full sum of the hire-purchase price, plus any costs incurred by them .... Thus the rights of the 2nd defendant (if called upon to pay) are different from the rights of subrogation under a guarantee, rights which would, in such a case as this, be useless. Moreover, whereas the plaintiff's rights against the hirer and the second defendant would, under a normal guarantee, be identical, the document in question gives to the plaintiffs wholly different rights from those which they have against the hirer under the hire-purchase agreement." 72. The learned judge concluded at p. 834: "The agreement is more consistent with a primary obligation on the second defendant to secure the plaintiffs against loss if the transaction should turn out unremunerative rather than a secondary obligation to make good the particular defaults of the hirer. The second defendant was in effect saying to the plaintiffs: "Go on with the transaction and I will see you make your profit and suffer no loss." No doubt it was hoped that the hirer would fulfil his obligations, although not legally bound by them. But the second defendant was not purporting to guarantee or make good any particular obligation of the hirer. Under the terms of his agreement he had no liability to do so. His liability was to see that the plaintiffs made their intended profit even though the hirer lawfully, without any default, terminated the hiring. He was underwriting the profitable success of the transaction, he was not insuring against contractual breaches of it by the hirer." 73. These and the other cases on the subject are not easy to reconcile, but it is possible to discern a thread running through most of them. It is this. Where the contract was held to be an indemnity, the obligation of the third party was different from that of the surety and in some cases was not a legally binding obligation at all as between the creditor and the third party. In the case of the guarantee, on the other hand, the obligation was the same and binding on both the principal debtor and surety. 74. In this case the liability of NDK and the defendant differed only as to quantum. The witnesses have used the word "default" and it appears again in the document A137. This is at least an indication that the defendant was to be liable only in the event that NDK could not pay. 75. In this context the fact that no repayment date was mentioned is not significant. NDK was involved in many sub-contracts and was indeed a regular sub-contractor. Moreover, Mr. Yeh anticipated - correctly as it turned out - that further loans might be necessary. 76. Looking at the reality of the matter, as it appeared to those present in Mr. Yeh's office on 26th March, the principal business was the loan to NDK. The offer of suretyship was a collateral matter. The defendant was offering to be liable up to $500,000 if NDK defaulted on the loan. I cannot conceive that it was intended that the plaintiff should have a concurrent right of action against the defendant. Had the plaintiff called in the loan after a month or two and had then turned to the defendant and asked him to pay up, the defendant would surely have retorted: "That is not what we agreed. You go after NDK. If he really cannot pay you, I will meet my obligations." It seems to me that it was intended that NDK should be primarily responsible for the repayment of the debt. This was therefore an agreement to answer for the debt of another and was a guarantee, not an indemnity. 77. The plaintiff stumbled at the previous fence and has one more to negotiate. It is submitted by the defence that the contract between the plaintiff and NDK was varied, without reference to the defendant, as a consequence of the dealings between them in September - October, 1977, and that this is sufficient to discharge the contract of guarantee. He relies on Holme v. Brunskill(11), which lays down that failure to consult the surety about dealings between the creditor and debtor that have the effect of varying the contract discharges the surety from liability. Cotton L.J. said at p. 1316:
This principle was applied in National Bank of Nigeria Ltd. v. Awolesi(12) 78. Mr. Jackson-Lipkin submits that there was no variation of the contract. He argues that, when the plaintiff accepted NDK's repudiation of the first 4 contracts and itself justifiably repudiated the remainder on 22nd September, the loan contract itself was terminated. NDK's conduct, which led to the repudiation of the sub-contracts, had made recovery of the loans impossible. The plaintiff was, therefore, also entitled to repudiate the loan contract. There was no question of variation. 79. He relies on Moschi v. Lep Air Services Ltd.(5). The plaintiff sought to enforce a contract of guarantee to repay a debt by instalments. When the debtor failed to pay, it was held that the contract was repudiated and brought to an end. Lord Diplock said at p. 350:
80. Lord Simon of Glaisdale, after quoting from Cotton L.J.'s judgment in Holme v. Brunskill(11), went on to say at p. 354:
81. In the case at bar it is necessary to decide whether the repudiation of NDK's 7 uncompleted contracts with the plaintiff had the effect of also terminating NDK's contract with the plaintiff for the loan of $1,500,000. If not, was there a variation of the 7 sub-contracts? If so, does that amount to a variation of the loan contract? 82. Mr. Jackson-Lipkin is, in effect, saying: "The 7 contracts have gone: they are at an end. Therefore, the whole basis for the $1,500,000 loan has also gone. Mr. Ng is broke and NDK has abandoned all attempts to earn a profit. There is no prospect of repayment and the position was the same on 22nd September. In these circumstances, repudiation of the 7 contracts necessarily involves repudiation of the loan contract." 83. It was suggested to Mr. Yeh in cross-examination that he did not welcome further inquiries from the I.C.A.C. and was most anxious to see Mr. Ng out of Hong Kong as soon as possible. The inference is that the allegation that NDK was in breach of all its contracts was false. Mr. Ng's speedy compliance was bought by the ex gratia payment and the sale of the plant and machinery. 84. Such being the case, by unjustifiably terminating the contracts, the plaintiff was putting it out of NDK's power to make further repayment of any of the loans. That would be a sufficient variation - being without the defendant's knowledge or consent - to discharge the guarantee. A surety is the sole judge of whether a variation is for his benefit. So runs the defence submission. 85. Mr. Mills-Owens invites the Court to question the veracity of the plaintiff's witnesses on the grounds of the sheer improbability of their story. Here was a sub-contractor, who owed the plaintiff millions of dollars. He admitted his own breach of contract. He was trying to make things as easy for the plaintiff and his own sub-contractors as possible. Yet the plaintiff made him an ex gratia payment of $150,000 in order to forestall any possibility that NDK might prove difficult and fail to vacate the sites. 86. Counsel for the plaintiff concedes that there had never been any threat to do this, but points out that the plaintiff's witnesses knew this was a common hazard in the business - a recurring nightmare - and something to be avoided at all costs. Things might go wrong; a labour dispute might arise, culminating in deadlock and a sit-in at the site. Although the plaintiff knew it was pouring good money after bad, it could not be helped, submits Mr. Jackson-Lipkin. 87. Even if - and it seems a reasonable inference - all the letters of 22nd September were prepared in the plaintiff's office and signed there on behalf of NDK, this was merely formal recognition of the fact that NDK was broke, unable to carry on with its sub-contracts and, ipso facto, in breach of contract with the plaintiff. There is nothing sinister in this. The plaintiff was entitled to take steps to have matters put in writing, providing no improper pressure was brought to bear on NDK. There is no evidence that this was done, nor is it suggested. In point of fact, Mr. Ng was about to leave for Taiwan and had thrown in the towel. It mattered little to him what arrangements were made. He was trying to extricate himself as painlessly as possible and had good reason to cooperate. 88. I do not think, on the other hand, that these letters were written and procured by the plaintiff with a view to salvaging something from the wreck, in the shape of the defendant's $500,000. That would be too devious a ploy and it was not suggested to Mr. Yeh that this was ever in his mind. 89. I accept the evidence of Mr. Yeh and Mr. Chien that the ex gratia payment and the purchase of the machinery were made bona fide. There is nothing to support the theory that the plaintiff's directors were anxious to get Mr. Ng off to Taiwan as soon as possible, in order to protect themselves against some future investigation. Mr. Loh said he thought there might have been a better alternative than terminating the contracts, but he did not say what it was. 90. I find that there was a fundamental breach of contract by NDK and that the plaintiff was entitled to repudiate the sub-contracts. 91. This breach of contract, or rather the several breaches of contract by NDK that led to the termination of all 7 sub-contracts, had the consequential effect of putting an end to the plaintiff's loan contract with NDK. A letter of demand - in which the total debt is inaccurately stated as $5,849,562 - was sent to NDK on 12th December, 1977 (A289). There was no reply. NDK being in breach of this contract, the plaintiff was also entitled to treat it as being at an end. This cannot have the effect of discharging the defendant on his contract of guarantee with the plaintiff. There was no variation of the loan agreement. Moschi v. Lep Air Services Ltd.(5) 92. The debt, although written off in the company's books - for tax purposes and because there was no prospect of its recovery - is still owing and includes the loan of $1,500,000. 93. The defendant contracted to be responsible for $500,000 of the $1,500,000 loan. This is proved by his monthly reports and A137. The guarantee was clearly in respect of the whole loan. There will be judgment for the plaintiff for $500,000 with costs.
Representation: Mr. Jackson-Lipkin, Q.C. & Mr. Gilbert Rodway (Johnson, Stokes & Master) for plaintiff. Mr. Mills-Owens, Q.C. & Mr. Wally Yeung (Arthur Au & Co.) for defendant. (1) 1925 Ch. 616 (2) 1877 7 Ch. D. 151 CA (3) 1961 1 WLR 828 (4) 1951 2 DLR 108 (5) 1973 AC 331 (6) 1874 7 HL 17 (7) 1894 2 QB 885 (8) 1896 27 OR 285 (9) 1902 1 KB 778 (10) 1950 4 DLR 34 (11) 3 QBD 495 (12) 1964 1 WLR 1311 |