Civil Action1997

CHINLUCK PROPERTIES LTD v. CASIL CLEARING LTD

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57437-EN-2007-06-14

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HCA 11008/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11008 OF 1997

_________________

BETWEEN

	CHINLUCK PROPERTIES LIMITED	Plaintiff
	and
	CASIL CLEARING LIMITED	Defendant
	(By Original Action)

________________

AND BETWEEN

	CASIL CLEARING LIMITED	Plaintiff
	and
	CHINLUCK PROPERTIES LIMITED	1^st Defendant
	CHENG ZHEN SHU	2^nd Defendant

(By Counterclaim)

_________________

Before: Hon Saunders J in Court

Date of Hearing: 10 May 2007

Date of Judgment: 14 June 2007

_________________

J U D G M E N T

_________________

Background:

1. This case involved a claim and a counterclaim in respect of a loan agreement and mortgage by Casil to Chinluck and Mr Shu. The total sum agreed to be advanced was $300 million. The trial as to liability came before me in June 2004, and as to damages in October 2006.

2. Chinluck succeeded in its claim against Casil, that Casil was in breach of contract in failing to advance the full amount of money agreed to be advanced under a loan agreement. Casil, in its defence and counterclaim, pleaded a set-off as a substantive defence against Chinluck’s claim. Casil wholly succeeded in that counterclaim and set-off.

3. Chinluck was awarded $100 nominal damages for Casil’s breach of contract. On the counterclaim and set-off, Casil is entitled to judgment for the sum of $251,516,821.65, (the sum actually advanced), together with interest thereon, against both Chinluck and Mr Shu.

4. Depending upon how the interest is calculated Casil may be entitled to enforce a judgement that may exceed $580 million.

5. Two issues now arise. First the question of the costs in the litigation, secondly, the question of interest.

Costs:

6. Casil is plainly entitled to its costs on the counterclaim against Chinluck, and the claim against Mr Shu. Mr Lui does not dispute that entitlement. The submission he makes for Chinluck is that there should be no order as to costs on the claim by Chinluck.

7. The usual order, when a claim by a plaintiff has been extinguished by a counterclaim made by a defendant, is to enter judgment for the defendant, with costs, on the claim, and on the counterclaim, to enter judgement for the defendant, for the amount of the counterclaim, with costs: see Hanak v Green [1958] 2 QB 9.

8. The court has a discretion as to costs where the plaintiff is successful on the issue of liability, but recovers nominal damages only: see O 15 r 2(4). This enables the court to do justice in respect of a party whose success on liability is a substantial success, although receiving only nominal damages, for example the establishment of a legal right with a continuing importance: see Alltrans Express v CVA Holdings [1984] 1 WLR 394. An example of the establishment of a legal right with a continuing importance would be the establishment of an act of trespass, thereby the establishment of a right to exclude the trespasser in the future.

9. In the present case while establishing a legal right, the breach of contract, and recovering nominal damages, Chinluck did not establish anything that is of continuing value.

10. Mr Lui contends that notwithstanding the absence of the establishment of anything with continuing value, Chinluck, having succeeded in establishing a legal right, should still be entitled to its costs. Mr Lui relies upon three factors to contends that Casil unreasonably contested the claim by Chinluck on the issue of liability, saying that its arguments were necessarily weak if not hopeless.

11. The three factors are:

(i) There was only a blanket denial of Casil’s breach of the Agreement in its defence;
(ii) Casil called no witness at trial to testify in support of the allegation that it had no knowledge that the Loan was to be used for the Peng Chau project. A suggestion that all of its executive officers had “retired and could not be located” was criticised by the court as “unbelievable”;
(iii) The defence by Casil to the allegation of breach of the agreement was flimsy.

12. Mr Ho’s initial position was that an award of $100 on a claim for damages for $499 million could be described only as a complete failure of the claim and consequently the usual rule should apply.

13. In normal circumstances, Mr Ho’s submission would be quite right. However, I am satisfied that the consequence of the position adopted by Casil, namely a blanket denial in the defence, calling no witnesses to support its position, and the propounding of arguments which may properly be described as flimsy, all of which added to the length of the trial, is that this is a case where the discretion ought to be exercised, to an extent, in favour of Chinluck.

14. Mr Ho put before me a schedule, with which Mr Lui did not take exception, in which he assessed the various issues in the trial, 12 in all, and attributed a percentage of the time spent at trial on each issue. Mr Ho suggested that the allocation of costs on the trial on liability if not entirely to Casil, ought to be on the percentage of time basis: Chinluck 45%, Casil 55%.

15. I am satisfied that would do justice to the situation and accordingly order that Chinluck and Mr Shu must pay 55% of the costs of the trial on liability, to be taxed on a party and party basis.

16. Casil is entitled to its costs on the trial as to damages in full.

The interest rate issue:

17. The question in relation to interest is as to the rate of interest to be paid following the termination of the Loan Agreement, upon the Loan being called in by Casil on 4 December 1997, consequent upon a event of default having occurred.

18. The documents entered into between the parties comprise a Loan Agreement, dated 24 July 1997, and a Mortgage, dated the same day. The Loan Agreement contains the following provision in respect of interest:

“ 2. Interest
A. Interest on the Loan shall accrue at the rate of 15% per annum.
B. Interest on the Loan shall be payable on the 28th of December of 1997, 28th of June, 1998, 28th of December, 1998 and 28th of June, 1999 (“Interest Payment Dates”). Notwithstanding Clause 9 of this Agreement, if any of the Interest Payment Dates shall fall on a date which is not a business day, such Interest Payment Date shall fall on the immediately preceding business day.
3. Repayment
The full principal amount of the loan and all other sums payable under the terms of this Agreement shall be repaid by the Borrower on 23rd of July, 1999 (“the Repayment Date”)”

The Mortgage document describes Mr Shu as the 1^st Mortgagor, and Chinluck as the 2^nd Mortgagor. Chinluck is also described as the Borrower. The Mortgage contains the following provision in respect of interest:

“ 2. COVENANT FOR REPAYMENT OF SECURED INDEBTEDNESS
2.01 In consideration of the Lender agreeing at the request of the Mortgagor to grant to the Borrower the Facility applied for the Mortgagor and the Borrower HEREBY COVENANTS with the Lender that, subject as hereinafter provided, the Mortgagor and/or the Borrower will on demand by notice in writing of the Lender made to the Mortgagor and/or the Borrower pays make good and discharged to the Lender:-
(i) all sums of money which at the date of such demand may be outstanding and according to the books of the Lender, payable by the Borrower to the Lender in respect of any account whatsoever between Borrower and the Lender; and
…..
(xii) interest on all sums advanced and all other moneys payable hereunder at such a rate(s) per as is is/are applicable under the terms relating to any facility(ies) granted to the Borrower or at such other rate(s) as may from time to time be determined by the Lender which determination shall be conclusive and binding on the Borrower. Such interest shall be calculated with the usual monthly rests or on such other basis as may from time to time be stipulated by the Lender in any facility letter covering the relevant sums advanced and shall be paid monthly in arrears on such a date in each succeeding calendar month as the Lender shall stipulate.”

19. What is significant, is that, contrary to what I would understand to be the usual practice in respect of a mortgage, none of the documents securing the advance make any provision whatsoever for any penalty interest to be payable in the event of default. There is no evidence that Casil made any “determination” permitted by Clause 2.01(xii) of the Mortgage.

The case for the Borrowers:

20. The primary argument for Chinluck and Mr Shu is that the contractual interest rate of 15% is chargeable only on the sum of $176,516,821.65, from 24 July 1997, (the date of the advance of that sum) to 4 December 1997, (the date of default), and on $75,000,000 from 4 August 1997, (the date of the advance of that sum), to 4 December 1997. The argument is that in the absence of a provision in either the Loan Agreement, or the Mortgage, for default interest, the Loan Agreement having come to an end upon default, interest thereafter should be charged at a commercial rate.

21. Thus, Mr Lui accepts that interest is payable at the rate of 15% until 4 December 1997, but he says that thereafter pre-judgement interest should be awarded at the usual rate under s 48 High Court Ordinance, that is prime plus 1%.

22. The starting point, Mr Lui argues, is that Chinluck and Casil had not agreed on the chargeable rate of interest upon default of repayment. Instead, Clause 2 of the Loan Agreement is, he says, specifically confined to the two-year term.

23. Mr Lui says that the court should have regard to the factual matrix, and points to the evidence of an advance of $30 million by Casil to Chinluck, less than two weeks prior to the Loan Agreement being executed, (11 July 1997), in which the parties expressly agreed on how, and at what rate, interest would be charged in case of default in repayment. Consequently, Mr Lui says, post-default interest was not a matter that was not in the consideration of the parties.

24. Mr Lui argues that the court should not rewrite the Loan Agreement by implying a 15% default rate, and further that it is neither obvious nor necessary to give business efficacy to the Loan Agreement to warrant its implication. He says that the prior course of dealings shows that had Chinluck and Casil considered it necessary to agree on post-default interest payments they would have done so.

25. Mr Lui argues that there is no rule that the court must award pre-judgement interest on the debt or damages at a rate higher or equal to that chargeable to the amount of the principle of for default: see Ward v Morrison (1842) Car & M 368. He further argues that once the outstanding principal at the time of default, agreed at $251,516,821.65, became payable by Casil’s demand, the outstanding principal and interest merged to become a single debt, and the Loan Agreement came to an end: see Niagara Air Bus Inc v Camerman (1991) 80 DLR (4^th), (Ontario, Canada). Both of those cases involved promissory notes which provided for interest during the term of the note, but made no provision for interest on the note after maturity.

The case for the Lender:

26. Mr Ho argues that in determining the interest rate payable I should have regard to Clause 1.01(h) and Clause 4.01 of the Mortgage, in addition to those set out above:

“ 1.01 (h) “Secured Indebtedness” means all sums from time to time advanced by the Lender to the Borrower and outstanding and interest thereon and all other moneys and obligations in respect of the moneys which the Mortgagor and/or the Borrower covenants to pay to the Lender under the terms of this Charge.”
“ 4.01 If the Mortgagor and/or the Borrower shall on demand as aforesaid or otherwise pay to the Lender the Secured Indebtedness and have duly performed and observed all the terms, covenants and agreements herein provided THEN THE LENDER SHALL at any time after such payment shall have been so made upon the request and cost of the Mortgagor execute a receipt or otherwise discharge this security.”

27. Mr Ho argues, relying upon the provisions of the Loan Agreement and the Mortgage that have been set out, that where the covenant to pay interest is an independent covenant, so as to entitle the mortgagee, (Casil), to hold the title deeds until all outstanding principal and interest has been repaid, the covenant to pay interest would not be merged in the judgement obtained upon the principal covenant to repay. Consequently, he says that upon a true construction of all the relevant documents Casil should be entitled to the benefit of charging interest at the rate of 15% on the principal outstanding until full payment.

28. Mr Ho relies upon Economic Life Assurance Society v Usborne & Ors [1902] AC 147 HL(I) to support the proposition that ultimately it is a question of the construction of the relevant documents. In that case the lender succeeded in obtaining interest at a rate higher than the judgement rate, the rate being the rate for which provision was made in the loan documents.

Discussion:

29. Both counsel agree that the governing principle is that interest should usually be awarded to a plaintiff, not as compensation for damage done, but for being kept out of money which ought to have been paid to him: see London Chatham & Dover Railway Co v South Eastern Railway Co [1893] AC 429 at 437. That is undoubtedly right. But that principle does not govern the interpretation of the relevant documents.

30. In his submissions, Mr Ho set out a passage from the speech of Lord Davey, in Economic Life, at p 155, in which the learned judge referred to the right of the mortgagee to sit upon the title deeds until they have been paid every penny of the sum advanced together with interest, measured by what was expressed in the covenant.

31. I accept Mr Ho’s submission that Casil is entitled to sit upon the title deeds until they had been paid the principal and the interest due, measured by what is expressed in the covenant. That right arises from the Mortgage. But that right alone does not determine Casil’s entitlement to interest rate of 15%, the prescribed rate of the two-year period of the loan. The rate to be paid during the period of default must be determined by the construction the loan documents, the Loan Agreement and the Mortgage.

32. The Mortgage in the present case defines “Secured Indebtedness” to mean:

“all sums from time to time advanced by the Lender to the Borrower and outstanding and interest thereon” (my emphasis).

In the construction of the documents securing the loan effect must be given to all the words that are contained therein. I am satisfied that the expression “and outstanding and interest thereon”, when read with the other provisions of the Mortgage, makes it plain that Casil are entitled to sit upon the title documents until all moneys due repaid. But unlike a provision prescribing the payment of interest “so long as any sum should remain due”, or words to that equivalent, the expression contained in the definition of “Secured Indebtedness”, does not make it clear that a specified interest rate is payable after default.

33. The deeds in consideration in Economic Life contained a covenant for the payment of principal and interest on a certain day, and for the payment of subsequent interest if the principal was not paid upon that day, (see p 154). Consequently, as a matter of construction, interest was payable in terms of the documents, until the principal was repaid.

34. Neither the Loan the Agreement nor the Mortgage document in the present case make any reference whatsoever to a requirement for the payment of interest, if the principal is not paid, either upon the due date, or upon demand been made consequent upon default by the borrower. In the absence of such a provision, and with the Court having the power to order the borrower to pay a commercial rate of interest from the date of default or due date, it is not necessary to imply into the agreement between the parties any requirement for interest at the contractual rate following those dates.

35. I accordingly reject Mr Ho’s submission that interest should be calculated at the rate of 15% to the date of judgement, and thereafter until the date of payment. Had there been a provision in the documentation for default interest, or a provision that interest should be paid at contractual rate so long as the loan was outstanding, the position would be different. But the documentation is quite devoid of any such provision.

36. The appropriate rate of interest to be charged from 4 December 1997, is prime plus 1%: see Komala Deccof & Co SA v Perushaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) [1984] HKLR 219 CA. I accordingly order that the interest to be paid by Chinluck and Mr Shu from 4 December 1997, to the date of judgement, shall be calculated at prime plus 1%. The post-judgement interest rate shall be in accordance with the usual rates applying in that circumstance.

Costs:

37. Chinluck and Mr Shu have succeeded in the arguments as to costs, (partially), and on the question of interest, (substantially). In those circumstances I am satisfied that the proper order for costs on the argument on interest and costs is that Chinluck and Mr Shu must have their costs paid by Casil, to be taxed on a party and party basis.

(John Saunders)
Judge of the Court of First Instance
High Court

Mr Mike Lui, instructed by Messrs Lo & Lo, for the Plaintiffs by original action and the Defendants by counterclaim

Mr Ambrose Ho SC and Ms Joyce Leung, instructed by Messrs Winston Chu & Co, for the Defendant by original action and the Plaintiff by counterclaim

55489-EN-2006-12-20

CHINLUCK PROPERTIES LTD v. CASIL CLEARING LTD

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HCA 11008/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11008 OF 1997

____________

BETWEEN

	CHINLUCK PROPERTIES LIMITED	Plaintiff
	and
	CASIL CLEARING LIMITED	Defendant
	(By Original Action)

____________

AND BETWEEN

	CASIL CLEARING LIMITED	Plaintiff
	and
	CHINLUCK PROPERTIES LIMITED	1^st Defendant
	CHENG ZHEN SHU	2^nd Defendant
	(By Counterclaim)

____________

Before: Hon Saunders J in Court

Dates of Hearing: 17-20, 23 October 2006

Date of Judgment: 20 December 2006

________________

J U D G M E N T

________________

Background:

1. In 1995 Chinluck and Mr Shu were the owners of certain land on Peng Chau, (the Peng Chau land). Mr Shu, effectively the sole shareholder in Chinluck, intended to develop the Peng Chau land into a commercial and residential development, which he envisaged being, in a way, a replica of the Discovery Bay environment, but on Peng Chau, (the Project).

2. On 18 August 1995, a Committee of the Planning and Lands Department approved zoning amendments, proposed by Chinluck for the purpose of implementing the Project.

3. On 2 December 1996, Casil agreed to lend Chinluck $20 million, to be secured by a First Charge over part of the Peng Chau land.

4. A land exchange was a necessary element of the Project. Application for the land exchange had been made during 1996. On 9 May 1997, the Planning Department notified planners acting on behalf of Chinluck that the Planning Department would not object to the Project as shown on the Revised Master Layout Plan. Although approvals from other departments of Government would be required, this advice of “no objection”, was essentially the “green light” for the Project. There were many matters yet to be dealt with, but with this advice Mr Shu and Chinluck could confidently proceed with the Project.

5. On 24 July 1997, Chinluck executed a Loan Agreement and a mortgage over the Peng Chau land, in order to borrow the sum of $330 million from Casil. Mr Shu entered into a Guarantee in respect of the loan.

6. Casil did not advance the whole of the sum of $330 million to Chinluck following the execution of the security documents. By early September 1997, a little over $251,500,000 had been advanced, leaving a balance is due of some $78,500,000, yet to be advanced. Despite numerous demands by Mr Shu and Chinluck, this balance was not advanced by Casil.

7. On 25 September 1997, Chinluck made formal demand upon Casil for the immediate payment of the balance due. On 17 October 1997, there being no response from Casil, Chinluck issued a writ seeking specific performance of the Loan Agreement, or alternatively damages for breach of contract for the failure to advance the full amount.

8. Neither Chinluck nor Mr Shu paid any interest at all at any time in relation to the sums that had been advanced pursuant to the Loan Agreement.

9. In November 1997, Hong Kong was suffering directly from the Asian Financial Crisis. The consequence of that was a dramatic change in the economic fortunes of Hong Kong. Property prices dropped dramatically, as did the demand for luxury and upper end property. The consequences of the Asia financial Crisis were not in dispute

10. The security documents executed by Chinluck in favour of Casil contained provisions, the consequence of which were that a material adverse change in Chinluck’s business, assets, general conditions or prospects of business, which could materially affect its ability to perform its payment obligations under the Loan Agreement, would constitute an Event of Default, entitling Casil to demand repayment of the loan.

11. Although Chinluck had issued a writ demanding payment of the balance not advanced, neither Chinluck, nor Mr Shu as guarantor of the loan, make any payments of interest on the sum that had been advanced. The provisions of the Loan Agreement, in relation to an Event of Default, were not incorporated in the mortgage itself. Consequently, any adverse change in Chinluck’s conditions or prospects of business, while entitling Casil to call in the loan, did not entitle it to exercise its powers under the mortgage.

12. On 4 December 1997, Casil demanded repayment of the sums that had been advanced pursuant to the Loan Agreement. On 6 December 1997, Casil filed a defence to the writ, and by counterclaim sued Chinluck for the amount advanced under the Loan Agreement, and Mr Shu on the Guarantee. Further demands on Chinluck, under both the Loan Agreement and the mortgage, and on Mr Shu, on the Guarantee, in relation to non-payment of interest, were made on 6 January 1999.

13. For the reasons set out in paras 83-90 of the judgment on liability I am satisfied that the Asia Financial Crisis, and the general economic situation in Hong Kong in December 1997, constituted an Event of Default under the Loan Agreement entitling Casil to call in the loan.

14. The failure to pay interest under the mortgage was also a clear breach of the mortgage.

15. Those proceedings came before me for trial in June 2004. At the commencement of the trial I ordered that the issues of liability and quantum should be tried separately. In a reserved judgement delivered on 30 July 2004, I found:

(1) Casil were in breach of the Loan Agreement in failing to advance the full amount due to be advanced under the Loan Agreement on 24 July 1997, and Chinluck were entitled to damages in respect of that breach.

(2) On 4 December 1997, an Event of Default had occurred, (the Asian Financial Crisis, which constituted a relevant material change in Chinluck’s prospects of business), entitling Casil to demand repayment of the sums advanced under the Loan Agreement.

(3) The failure of Chinluck and Mr Shu to pay interest instalments constituted a breach of the Loan Agreement and the mortgage, entitling Casil to demand repayment of the sums and advanced under the Loan Agreement and to exercise its powers under the mortgage, and to make demand of Mr Shu under the Guarantee.

(4) Casil were entitled to judgement under the Loan Agreement for the amount of principal outstanding as at 4 December 1997, together with interest thereon, in terms of the Loan Agreement.

(5) Casil were entitled to judgement, for the same sum, against Mr Shu on the Guarantee.

16. The primary issue now arising for consideration is the amount of damages to which Chinluck are entitled, consequent upon Casil’s breach of contract. The sum for which Casil are entitled to judgement under the Loan Agreement or the Guarantee is a matter of arithmetical calculation only.

The relevant law:

17. The assessment of contractual damages requires an examination of two issues. They are the issues of remoteness, and causation. First, any loss of profit which is too remote cannot be recovered. Second, the alleged damages must have resulted directly from the breach of contract.

Remoteness of damage:

18. The classic test for remoteness of damage in contractual claims was laid down in Hadley v Baxendale (1854) 9 Ex 341 at 344-5. I adopt Mr Tong’s statement of the two limb’s of the rule in the following terms:

(1) Damages which are such as may fairly and reasonably be considered either arising naturally, (i.e., according to the usual course of things), from the breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time when they made the contract, as the probable result of the breach of that contract;

(2) If the special circumstances under which the contract was actually made were communicated by the plaintiff to the defendant and are thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach under the special circumstances, so known and communicated.

19. Mr Tong put his case, relying upon the second limb of this test. Mr Ho did not dispute the proposition relied upon by Mr Tong.

Causation:

20. Both Mr Tong and Mr Ho accepted that Chinluck carried the burden, on the balance of probabilities, of satisfying the court as to the fact of damage, i.e. causation. Issue was joined as to whether or not the failure of Casil to pay the full amount of the Loan on 24 July 1997, was causative of the failure of the Project to proceed. Central to this issue is the question as to the date at which the damages were to be assessed.

The case for Chinluck:

21. The case for Chinluck may be simply stated. I adopt the terms of Mr Tong’s submissions:

(1) It was within both parties’ contemplation that if Casil failed to advance the loan as set out in the Loan Agreement Chinluck would not be able to complete the Project. This was the only direct result of the Court’s finding that Casil knew at the time of the contract that Chinluck required to Loan for no other purpose, save to develop the Project.

(2) Damages should be assessed as at the date of the breach, i.e. 24 July 1997. The Court should assess, as damages, the profits which Chinluck, on 24 July 1997, could reasonably expect to make upon the completion of the Project, and which were lost by virtue of the failure of the Project to proceed.

(3) This Court should not take into account the market fluctuations, subsequent to Casil’s breach on 24 July 1997, in assessing the loss of profit. Market fluctuations were within both parties’ contemplation when the Loan Agreement was entered into.

(4) The valuation approach as suggested by Casil’s expert Mr Alexander-Webber should be rejected.

The case for Casil:

22. The contrary case for Casil may be equally simply stated. I adopt the terms of Mr Ho’s submissions as follows:

(1) Chinluck must prove the fact of damage, (i.e. causation), and the amount of damage, (i.e. quantum). If Chinluck fails on either count, the action must fail, or at most, Chinluck will be entitled to be awarded nominal damages where a right has been infringed.

(2) In considering the damages occasioned by a wrongful act all those facts which have actually happened down to the date of trial must be taken into account. The court cannot ignore the actual events which happened after the breach of contract, even though the damages would be assessed at the date of the breach.

23. Mr Ho submitted that where a new intervening force, between the date of the breach and the date of the trial, which must be evaluated in relation to damages, is an independent act which could not reasonably be expected by the parties, and that has caused the eventual loss, the liability would not reach Casil.

24. In other words, if the event causing the loss would have happened whether Casil had acted in breach or not, then Casil will not be liable for further damage following upon the happening of the event.

The date at which damages are assessed:

25. If Mr Tong is right, and the damages are to be assessed at the date of breach by Casil, 24 July 1997, then the subsequent intervening factor of the Asian Financial Crisis and all that went with it, may be disregarded as having any impact upon the conclusion to be draw.

26. Mr Tong relied upon two authorities to establish that the damages for loss of profit are to be assessed as at the date of breach, without taking into account matters which occurred after the breach and before the date of trial. They are Jamal v Moolla Dawood, Sons & Co [1916] AC 175 and Campbell Mostyn (Provisions) Ltd v Barnett Trading Company [1954] 1 Lloyd’s Rep 65. Both are sale of goods cases, both support the proposition that in particular, market fluctuations are to be disregarded.

27. I adopt the following passage from McGregor on Damages, 17^th Ed, para 16-002:

“Where damages are awarded for a loss in relation to property, the normal measure is based upon the market value of the property at the time of the wrong, whether in tort or breach of contract. Thus in the case of the tort of conversion of goods the appropriate time is the time of conversion, while in the case of breach of a contract to sell goods the appropriate time is the time of due delivery, whether the breach be by seller or buyer.”

Although not cited in this passage of the textbook, the cases cited by Mr Tong support that proposition.

28. McGregor recognises that difficulties may arise by reason of a fluctuation in market values between the time of a wrong and the time the judgement is entered in the claimant’s action for damages. In Johnson v Agnew [1980] AC 367, the House of Lords held that the normal rule for sale of goods cases was that where there exist ready markets for the innocent party to sell the goods, damages should be assessed at the date of the breach. The rule is not absolute and, as was done in Johnson v Agnew, a case involving damages for breach of contract, the court can order such other date as justice requires in an appropriate case.

29. Mr Ho relied upon a number of authorities to contend that, in appropriate circumstances, events which have actually happened between the date of breach and the date of trial should be taken into account. They are Carslogie S S Co v Royal Norwegian Government [1954] AC 292; Maredeanto Compaia Naviera S A v Bergbau-Handel GmbH, The Mihalis Angelos [1971] 1 QB 164; The Kingsway [1918] P 344 CA; B S & N Ltd, (BVI) v Micado Shipping Ltd (Malta), The Seaflower [2002] 2 Lloyds’ Rep 37; and Golden Strait Corpn v Nippon Yusen Kubishika Kaisha [2006] 1 WLR 533. All of those authorities amply support the proposition that in appropriate circumstances, in assessing damages for breach of contract, events that have actually occurred between the date of breach in the date of trial should be taken into account.

30. In The Mihalis Angelos, Megaw LJ said at p 206G-207B:

“In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost, subject to his duty to mitigate. If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events.”

31. In Golden Strait Corpn, the court was required to consider the impact of the Second Gulf War on an assessment of damages. The contract involved a charter of a vessel for a seven year period. In December 2001, the charterers repudiated the charterparty. In March 2003, the United States and the United Kingdom went to war against Iraq. In September 2003, the owners sought damages for the charterers’ repudiation, claiming the basic hire they would have received up to December 2005. An arbitrator concluded that the charterers would have cancelled under a war clause on the outbreak of the Iraq war, and awarded damages only to the period up to March 2003. Lord Mance said, at 545-5:

“24 Certainty, finality and ease of settlement are all of course important general considerations. But the element of uncertainty, resulting from the war clause, meant that the owners were never entitled to absolute confidence that the charter would run for its full seven-year period. They never had an asset which they could bank or sell on that basis. There is no reason why the transmutation of their claims to performance of the charter into claims for damages for non-performance of the charter should improve their position in this respect.

25 Further, as Mr Young submitted, the assessment of damages often depends on, or is informed by, subsequent events, and the claim for loss on the spot market from 17 December 2001 until 1 April 2002, the claim based on a substitute rate as from 1 April 2002 and the claim for loss of a profit share - which as I have said would surely depend on looking at actual market rates over the balance of the original charter - are all instances applicable in this case. The additional need to take into account the now known fact of the Second Gulf War is simply another instance.

26 In any event, I consider that this is a situation where any considerations of the type mentioned in the first sentence of para 24 above would have, so far as necessary, to yield to the greater importance of achieving an assessment of damages and compensation which more accurately reflects the actual loss which the owners can, at whatever is the date of assessment, now be seen to have suffered as a result of the charterers’ repudiation.”

32. In a sale of goods case, there is invariably an immediately available alternative market for the goods. That is why, in sale of goods cases such as those cited by Mr Tong, damages are invariably assessed at the date of the breach. But where there is no immediately available market, such as in the present case, where the apartments to be sold to yield the profit did not yet, at the date of the breach exist, and whether they would actually come into existence was dependant on many factors, that date is readily seen as inappropriate for the assessment of damages.

33. For precisely the same reasons as enunciated by Lord Mance, I am satisfied that Mr Ho is right, and that it is appropriate in the circumstances of this case, not to follow the usual rule in contractual sale of goods cases, but to assess the damages, having a proper regard to the now known facts.

34. Mr Ho relied also on the decision of Glidewell LJ in Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 807, where the Court adopted the approach in the Australian decisions in this area. The question posed was: “How does the court decide whether the breach of duty was the cause of the loss or merely the occasion for the loss?” Glidewell LJ’s answer, at p 1374H-1375A, is in the following terms:

“The answer in my judgement is supplied by the Australian decisions to which I have referred, which I hold to represent the law of England as well as of Australia, in relation to a breach of the duty imposed on the defendant whether by contract or in tort in a situation analogous to breach of contract. The answer in the end is by the application of the court’s common sense.”

35. In my view it simply defies common sense to assert that in relation to a long-term, continuing event, such as the Project, an intervening events, of such immense significance, as the Asian Financial Crisis and its effect on Hong Kong, and Casil’s right, by 4 December 1997, to demand repayment of the whole of the sum then advanced, should be ignored.

The evidence:

Remoteness:

36. In paragraphs 62-68 of the judgement delivered on 30 July 2004, as to liability, I dealt with the issue as to whether Casil were aware that the Loan would be utilised in the Project. I held, (para 68), that Casil were fully aware that it was Chinluck’s intention to use the proceeds of the Loan for the development of the Project.

37. Mr Ho did not challenge Mr Tong’s contention that in those circumstances the second limb of the test in Hadley v Baxendale was satisfied. It follows that the parties must have reasonably contemplated that the failure of the Project might ordinarily follow from a breach of the Loan Agreement, and that Casil will be liable to the amount of injury which would ordinarily follow from that breach.

38. The claim by Chinluck for loss of profits damages does not fail by reason of remoteness.

Causation:

39. Chinluck relied upon two facts to assert that the cause of the failure of the Project to proceed was the failure of Casil to advance the full amount of the money due under the Loan Agreement. It was contended first that the failure to advance the remaining sum of the Loan Agreement prevented Chinluck from concluding negotiation with the villagers on Peng Chau, to withdraw their objections against the Project, and second, that with the failure to advance the full sum under the Loan Agreement, Chinluck was unable to pay the land premium due to the Government upon the necessary land exchange.

Compensation to the villagers:

40. A necessary part of the Project was the payment of compensation to villagers who were affected by the development of the Project. The case for Chinluck was that because insufficient funds were available, they were unable to reach agreement with the villagers, and make payment of compensation.

41. I accept Mr Ho’s submission that the evidence in this respect fell well short of that which would be required to establish the proposition relied upon, even on the balance of probabilities. The only evidence there was in this respect came from Mr Leung Kai Hung, Ken, who was the personal assistant to Mr Shu from 1996 onwards. His evidence was that objections to the Project had come from the indigenous villagers, and the Peng Chau Rural Committee, which must be overcome before the District Office would consider the land exchange application. These objections related to the effect the Project on graves in the area, and on the loss of land that would become part of the Project, for the construction of a school.

42. The evidence from Ken Leung was that it took Chinluck a great deal of time and effort to negotiate with the villagers in order to reach agreement on compensation to them, before the objections were withdrawn. That simple assertion, together with a letter dated 22 July 1998, (Ex D2 594-2), from the Peng Chau Rural Committee in which the Chairman of the Committee informed the District Officer that no objection was raised to the Project and that the Committee supported the development plan, constituted the entire evidence upon which Chinluck relied.

43. The date at which agreement was reached with the villagers and the Rural Committee is important. If that agreement was reached prior to Casil’s entitlement to demand repayment of the sums advanced under Loan Agreement, then it is arguable that the failure to advance the full amount on 24 July 1997, was a relevant causative factor in Chinluck’s inability to make payment of the compensation. On the other hand, if the agreement was reached after December 1997, when Casil were entitled to repayment of the amount advanced, the failure to advance the full amount on 24 July 1997, could not have had any impact on Chinluck’s ability to make payment of the compensation.

44. It was vaguely suggested by Mr Ken Leung that the agreement as to compensation had been reached well prior to the Rural Committee’s letter of 22 July 1998. The inference was that the letter was withheld until such time as Chinluck were able to make payment of compensation, or alternatively that Chinluck, being unable to pay the compensation, delayed in reaching agreement until that time. There was simply nothing in the documentary evidence, or the oral evidence from Chinluck to substantiate such an inference.

45. Mr Ken Leung was obliged to concede that he personally was not involved in the negotiations with the villagers or the Rural Committee. He knew nothing of the progress of the negotiations. I accept Mr Ho’s submission that, in cross examination, Mr Ken Leung eventually accepted that agreement with the villagers was reached only closer to the time when the “no objection letter” was issued on 22 July 1998.

46. Chinluck elected not to call Mr Shu, or any officer of Chinluck who was directly involved in the negotiation with the villagers, or any of the villagers themselves, or any of the members of the Pen Chau Rural Committee, to give evidence on this essential point. The law is clear. When a party elects to call no witnesses, thereby depriving the court of positive evidence as to important issues in the case, the court is entitled to draw any reasonable inference against that party, absent any explanation on its part: see Herrington v British Railways Board [1972] AC 877 at 930 and Grave v G A Bonus PLC [1992] 2 Lloyd’s Rep 716.

47. Chinluck has failed on the balance of probabilities to establish that the failure of Casil to advance the full amount due under the Loan Agreement on 24 July 1997, in any way caused Chinluck to be unable to pay compensation to the villages.

48. The agreement for compensation, on the evidence, was not reached until 22 July 1998, by which time Casil had lawfully recalled the monies due under the mortgage and Loan Agreement, and were entitled to exercise their rights under those contracts. In that circumstance it is simply unarguable that the failure to advance the full amount due under the Loan Agreement could have contributed to any inability to pay compensation to the villagers.

Payment of land premium:

49. Again the only evidence called in this respect was from Mr Ken Leung. He was not personally involved in any of the steps or negotiations in relation to the land exchange. I regret that I have to say that in the circumstances most of his evidence in this respect amounted to little more than speculation.

50. Mr Ken Leung had prepared a comprehensive and detailed development proposal in respect of the Project which had been submitted to Casil as part of the application for the loan. That document contemplated a period of six months in which the land exchange arrangements would be completed. The expert witnesses, (as to valuation), called by both sides agreed that a six-month period was over optimistic. The timeframe required was plainly considerably longer than six months.

51. In fact the first basic terms offer with an assessment of premium only came from the Government on 7 August 1998. That was more than 13 months after Casil’s breach of the Loan Agreement, and 8 months after Casil were entitled to demand repayment of the full loan. There was no evidence whatsoever to demonstrate that at any time prior to the occurrence of the Event of Default, (4 December 1997), Chinluck was even close to reaching an agreement with the Government on a land premium figure, or that any kind of offer had been made by the Government for the land exchange to proceed, prior to that date.

52. Just as with the compensation issue, the date is crucial. If the opportunity to make payment of the land premium had not arisen prior to 4 December 1997, at which date Casil were entitled to repayment of the actual amount advanced, then the failure of Casil to pay to Chinluck the full amount due under the Loan Agreement on 24 July 1997, cannot in any way be causative of Chinluck’s inability to make payment of the premium when assessed.

53. In fact Chinluck did not attempt to make payment of the premium after the assessment on 7 August 1998. Negotiations with Government continued. The premium, having been assessed at $99,370,000 on 7 August 1998, was reduced to $66,460,000, as a result of further negotiation, on 9 September 1999. That is even further beyond the date at which Chinluck were obliged to make repayment to Casil of the funds actually advanced.

54. I am satisfied that the failure of Casil to make full payment of the amount of the Loan on 24 July 1997, was not causative of Chinluck’s inability to make payment of the land premium, either after 7 August 1998, or after 9 September 1999.

55. It is overwhelmingly plain that the real cause for the failure of the Project was the quite unexpected intervention of the Asian Financial Crisis in late 1997, which caused a dramatic decline in property values in Hong Kong, from late 1997 and continuing through until 1999. With that decline in property values came a decline in demand. The demand anticipated for the Project simply no longer existed.

Two further factors:

56. There are two further factors to which I must have regard. Mr Ho contended that in any event Chinluck did not have the financial capacity to complete the Project. Further, he argued that with a change in Government land policy in 1998, the Project was in any event, financially precarious.

Chinluck’s financial capacity to complete the Project:

57. Mr Ho submitted that, in the light of the fact that an Event of Default had occurred, entitling Casil to terminate the Loan Agreement and to demand repayment of the Loan, and the breach by Chinluck of the Loan Agreement on 28 December 1997, by failing to pay interest due, Chinluck must prove both that it could make up the initial shortfall of funds of $176.5 million, and that it could repay the balance advanced of $251.8 million when demanded by Casil, and also that it had the ability to arrange continuing finance for the Project.

58. There is a pressing logic in the submission. That the Loan was repayable, by reason alone of the failure to pay interest, could not be disputed. In those circumstances, if Chinluck could not establish how it could make repayment and continue to fund the Project, the whole viability of the Project must inevitably be in question, irrespective of any default on the part of Casil to advance the whole of the Loan on 24 July 1997.

59. Throughout the trial on liability Chinluck maintained the position that they were in urgent need of funds, and thus the whole sum of $330 million should have been advanced. That position changed dramatically at the commencement of the trial for the assessment of damages. Chinluck now said that the construction cost of the Project was not payable immediately, as credit would be supplied by Guangdong Water Conservancy & Hydro-Power Engineering Development Co Ltd, (Guangdong Water). To substantiate this assertion, Chinluck relied upon a letter issued by Guangdong Water dated 1 July 1996.

60. Although plainly in the possession of Chinluck prior to the commencement of the trial on liability on 14 June 2004, it appears that that letter was not discovered, nor produced prior that date. Indeed, it was not translated until 27 September 2006.

61. The letter simply does not support the interpretation placed on it by Chinluck. The first 5 1/2 pages serve simply to introduce Guangdong Water and its background. The letter then sets out, over 2 1/2 pages the concept of the Project. An assertion is made that Guangdong Water has “already negotiated and agreed on terms of co-operation” with Chinluck. No documents setting out the agreed terms were produced. An assertion is made that the whole development plan “will be” contracted to Guangdong Water, as the contractor responsible for the plan. That is a statement of a future intention that ma not come about. No documents substantiating the contract were produced.

62. It is said that “if necessary”, Guangdong Water can provide teams to go into the land to undertake preparation and construction work. It is said that “if necessary”, Chinluck can “first pay a small sum of money as earnest money” for the project. The letter says further that:

“If the conditions allow and both parties have the intention to form a joint-venture in development some of the residential apartments which are in high market demand can become apartments of venture so that funds can be more sufficient and it would be more easy to put the (property) into the market.”

63. The letter is vague and uncertain in the extreme. In my view the letter amounts to little more than an assertion of an intention to enter into a contract at some time in the future, if appropriate terms can be agreed. There is simply no concluded agreement established between Chinluck and Guangdong Water, that the work would be undertaken by Guangdong Water on credit.

64. Surprisingly, although Mr Ken Leung joined Chinluck, “as the personal assistant to the managing director in 1996”, and had, as one of his responsibilities, assisting Mr Shu in completing the Project, he said that he did not know the details of the arrangement with Guangdong Water, “as he had not joined Chinluck at that time”.

65. It is simply remarkable that an officer of Chinluck, in the position of personal assistant to the managing director, would not know of such an important development in relation to the Project, allegedly occurring in the very year in which he joined the company, with responsibilities directly involving the circumstances of the letter, and the Project. In all these circumstances, I place no weight whatsoever on the Guangdong Water letter.

The Change in Government Land Policy:

66. The case for Chinluck was that it was anticipating the presale of flats, and that the proceeds of presale could be used to discharge its financial costs. Mr Ho makes two strong arguments to demonstrate that Chinluck could not rely upon presale in the way in which it was contended.

67. First, it was not disputed that following the Asian Financial Crisis, the Hong Kong Government announced a new land policy which would substantially increase the supply of flats in Hong Kong. Together with the crash of the property market consequent upon the Asian Financial Crisis, and the continued slump in property prices, this substantial increase in the supply of flats would inevitably have the consequence of lowering the price of property in the market. Plainly, the amount for which flats in the Project could be sold by the time they were completed, would be greatly less than anticipated when the Project was first formulated in 1996.

68. Second, there is a real argument as to whether or not the proceeds from the presale of flats could be used to discharge Chinluck’s financial costs. It is not in dispute that consent would have to be obtained from the Lands Department for the presale of flats in the Project. The various conditions of presale are contained in LACO Memorandum No 57, promulgated in 1979, (Ex B4 1173-76), and No 40, promulgated in 1999, (Ex B4 1192-1240).

69. The Loan Agreement from Casil to Chinluck was not a “Building Mortgage”. Mr Ken Leung, and Mr Charles Chan, the expert valuer called for Chinluck, both acknowledged that unless Chinluck could make other financial arrangements, or arrange a Building Mortgage with a financial institution which was qualified to provide a Building Mortgage, consent to pre-sales would not be granted by the Lands Department. Having regard to the state of the market, and Chinluck’s financial position at the time pre-sales would have been considered, the prospect of Chinluck finding alternative finance or obtaining a Building Mortgage was remote indeed.

Conclusion:

70. For the foregoing reasons I am satisfied that the failure of the Project was the unexpected and unprecedented economic downturn caused in Hong Kong by the Asian Financial Crisis and its consequences in Hong Kong. The failure of the Project cannot be attributed to Casil’s action in not paying the full amount of the Loan to Chinluck on 24 in July 1997. In those circumstances Chinluck has failed to establish that the breach of contract on the part of Casil was causative in the failure of the Project.

Quantification of damages:

71. Having reached that conclusion I do not need to consider the quantification of damages, and the competing contentions of the expert valuers called by the parties.

72. It is sufficient if I say that having regard to the need to have regard to contingencies, when assessing damages for loss of profits, as demonstrated in Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602, the valuation method adopted by Mr Charles Chan, for Chinluck, while novel, and taking into account a developer’s expectation in 1997, fails to have proper regard to the reality of the events that occurred.

Nominal damages:

73. Notwithstanding the fact that the breach of contract by Casil was not causative of the failure of the Project, Chinluck are entitled to nominal damages in relation that breach. A plaintiff is entitled to nominal damages where his right has been infringed, but he has not in fact sustained any actual damage from the infringement: see McGregor on Damages, 17^th Ed, para 10-002, and Halsbury’s Laws of Hong Kong, 2004, Reissue Vol 12(1), para 340.171.

74. In Hong Kong, HK$100 is usually awarded, see: Wong Ching Chi v Full Yue Bleaching & Dyeing Co Ltd [1994] 3 HKC 606. I accordingly fix nominal damages to be paid by Casil to Chinluck in the sum of $100. That sum may be set off against the amount due to Casil by way of principal and outstanding interest under the Loan Agreement and the mortgage, to be calculated, with judgement to be entered for Casil for that amount. The same sum will be the sum for which Casil are entitled to judgement against Mr Shu under the guarantee.

75. Leave is reserved to apply in the event of any disagreement in relation to calculation of the sum due.

Costs:

76. Casil is plainly entitled to its costs on the Counterclaim. The award of nominal damages to Chinluck may have an impact on the issue of costs. If agreement cannot be reached on costs, I will hear Counsel on a date to be fixed.

(John Saunders)
Judge of the Court of First Instance
High Court

Mr. Ronny Tong SC and Mr Mike Lui, instructed by Messrs Lo & Lo, for the Plaintiffs by original action and the Defendants by counterclaim

Mr. Ambrose Ho SC and Ms. Joyce Leung, instructed by Messrs Winston Chu & Co, for the Defendant by original action and the Plaintiff by counterclaim

51174-EN-2005-04-22

CHINLUCK PROPERTIES LTD v. CASIL CLEARING LTD

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HCA 11008/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11008 OF 1997

____________

BETWEEN

	CHINLUCK PROPERTIES LIMITED	Plaintiff
	And
	CASIL CLEARING LIMITED	Defendant
	(by original action)

AND BETWEEN

	CASIL CLEARING LIMITED	Plaintiff
	And
	CHINLUCK PROPERTIES LIMITED	1^st Defendant
	CHENG ZHEN SHU	2^nd Defendant
	(by counterclaim)

____________

Before: Deputy High Court Judge Saunders in Chambers

Date of Hearing: 7 March 2005 & 4 April 2005

Date of handing down judgment: 22 April 2005

_______________

J U D G M E N T

_______________

1. In these proceedings the Plaintiff, Chinluck Properties Limited, (Chinluck), sued the Defendant, Casil Clearing Limited, (Casil), for damages for breach of an agreement by Casil to loan money to Chinluck. At the commencement of the trial, I ruled that there should be separate trials on the issue of liability and on the issue of damages.

2. The agreement entered into between the parties was an agreement for Casil to lend to Chinluck $330 million. At the trial of liability I found that Casil was liable, and that it was obliged to advance the whole of that sum to Chinluck. I found that Casil was in breach of the loan agreement by advancing only the sum of $248 million. Chinluck now wishes to proceed to the second trial, that is the assessment of damages of arising as a result of that breach.

3. The matter now comes before me by way of two summonses. First, there is a summons issued by Casil seeking to strike out paragraphs 27 and 28 of the Re-amended Statement of Claim on the grounds they disclose no reasonable cause of action or that they are scandalous, frivolous or vexatious, or they may prejudice, embarrass, or delay the fair trial of the action. Consequential orders are sought. Clauses 27 and 28 are essentially Chinluck’s formulation of the claim for damages.

4. Second, Chinluck, for its part, seeks what amount to a series of directions to put the matter in order for the assessment of the damages.

5. When the matter first came before me, Miss Lo, for Chinluck, was obliged to accept that, having regard to the findings that had been made in the trial as to liability, the formulation for damages in the Re-amended Statement of Claim, (drafted prior to the trial as to liability), were no longer appropriate. In those circumstances I adjourned the matter to allow her to give consideration to re-drafting those paragraphs. This she has now done. Chinluck now mounts its claim on the basis of the loss of anticipated profit, and contends, pursuant to particulars set out in the new paragraphs, damages in the sum of $499,100,000. In the alternative, particularised on the same basis, it is contented that Chinluck has lost the chance to make profit in that same sum.

6. The normal measure of damages for breach of contract is the market value of the benefit of which the innocent party has been deprived through the breach. Where the breach of contract consists of failure to deliver property, (in this case money), on time or at all, the claimant may suffer loss by being deprived the use of the property during the period of the delay: See McGregor on Damages, 17^th Ed., para. 2-026. It is right that a loss of a chance to make profit may found a claim for damages. That damages may be awarded where a plaintiff showed he has lost a chance has been established since Richardson v The Mellish (1842) 2 Bing 229, 103 ER 294.

7. As it transpired, an event of default occurred under the mortgage securing the advance, in December 1997, about 4 months after the breach occurred. I have found that by reason of that event of default Casil was then entitled to call up the whole mortgage, and accordingly Chinluck was required to repay the amount that had been advanced at that time. This conclusion will undoubtedly be a significant fact to be taken into account in the assessment of damages.

8. Mr Ho SC for Casil, takes the matter further and says the consequence of that finding is that Chinluck cannot be entitled to any damages at all, and consequently, that judgment ought to be entered against Chinluck on the claim for damages, in favour of Casil.

9. Miss Lo counters this by saying that the breach of contract having been established, at the least, Chinluck are entitled to nominal damages and costs, thus there is no basis at all to enter judgment in favour of Casil. There is obvious merit in the submission.

10. With the greatest respect to Mr Ho, I have come to the conclusion that his argument fails to distinguish between issues of remoteness of damage, and issues of assessment of damage. Chinluck says that as a result of Casil’s failure to pay the whole sum to it, it was unable to take appropriate steps to enable it to undertake a proposed development of land, and that thereby it suffered the damage claimed. There are two elements to the concept of remoteness. The first is causation, the second is the scope of protection afford by the contract. The distinction between the two is well illustrated in Monarch Steam Ship Company Limited v Karlshamns [1949] AC 196. It may be that in the trial of the assessment of damages, Casil will be able to establish that the breach of contract was not the cause of any inability on the part of Chinluck to complete the development. In such circumstances any damages assessed may well be nominal.

11. In the present case, Chinluck must prove that it was the failure of Casil to pay the balance of the loan, some $52 million, that prevented it from carrying out its proposed development. In this respect issues of mitigation, for example by funding that $52 million from another source, will arise, as will the intervening act of default that entitled Casil to call in the entire loan.

12. When the matter is viewed in this light it may be seen that the concerns that Mr Ho has, while legitimate and relevant in the course of the assessment of damages, are not a basis to strike out the amended pleading, or to enter judgment for the Casil. The arguments he now makes may find favour with the judge and result in the claim for damages being dismissed, or only nominal damages being assessed. But they do not provide a basis to strike out the relevant paragraphs of the Statement of Claim. It may well be that Chinluck will find that it is in very serious difficulties in establishing a claim for damages, particularly in the light of the right of Casil to call in the entire loan consequent upon the event of default, but that is a risk that no doubt Chinluck will take advice on.

13. For these reasons, I am satisfied that Casil’s summons to strike out paragraph 27 and 28 of the Re-amended Statement of Claim and for judgment should be dismissed. There will be the following orders by way of direction made upon Chinluck’s summons

(1) The assessment of damages shall be heard by this Court by the trial judge.
(2) The automatic directions set out in O. 37 r. 1 are not to be applied to the assessment.
(3) Within 60 days of today, the Plaintiff must supply to the Defendant the witness statements, and expert reports, upon which it intends to rely in the assessment.
(4) Within 21 days of today, the Plaintiff must make discovery of documents in accordance with O. 24 r. 2, and inspection within 14 days thereafter in accordance with O. 24 r. 9.
(5) 40 days following the receipt of the Plaintiff’s witness statements and the expert reports, the Defendant shall supply to the Plaintiff copy of the witness statements and the expert reports upon which it intends to rely at the assessment.
(6) Neither party shall thereafter file any further witness statements or expert reports without the leave of the Court.
(7) Leave is reserved to apply.
(8) The costs of incidental to the summons for directions shall be costs in the cause of the assessment. The Plaintiff’s costs on the Defendant’s summons to strike out are to be Plaintiff’s costs in the cause of the assessment.

(John Saunders)
Deputy High Court Judge

Miss Jane Lo instructed by Messrs Lo & Lo, for the Plaintiff by original action & for Defendants by counterclaim

Mr Ambrose Ho, SC instructed by Messrs Winston Chu & Co., for the Defendant by original action & for Plaintiff by counterclaim

41170-EN-2004-07-30

CASIL CLEARING LTD v. CHINLUCK PROPERTIES LTD AND ANOTHER

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HCA011008A/1997

HCA 11008/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11008 of 1997

____________

BETWEEN
	CHINLUCK PROPERTIES LIMITED	Plaintiff

	AND

	CASIL CLEARING LIMITED (By Original Action)	Defendant

____________

AND BETWEEN
	CASIL CLEARING LIMITED	Plaintiff

	AND

	CHINLUCK PROPERTIES LIMITED	1st Defendant
	CHENG ZHEN SHU (By Counterclaim)	2nd Defendant

Coram: Deputy High Court Judge Saunders in Court

Date of Hearing: 14-18, 21, and 24 June 2004

Date of Judgment: 30 July 2004

___________

JUDGMENT

___________

Background:

1. These proceedings comprise an action in damages for breach of an agreement to loan money in which the plaintiff, Chinluck Properties Limited, alleges that the defendant, Casil Clearing Limited, has failed to pay to it the full amount of the loan of HK$330 million, agreed to be advanced by way of mortgage.

2. By counterclaim, Casil Clearing Limited sues Chinluck Properties Limited to seeking repayment of the sum of HK$251,516,681.95, advanced pursuant to the loan agreement, together with interest thereon. Further, in the counterclaim, Casil Clearing Limited sues Chinluck Properties Limited and Mr Cheng Zhen Shu, pursuant to the mortgage, and Mr Shu pursuant to a personal guarantee given in respect of the loan agreement and mortgage, seeking recovery of the funds advanced to Chinluck Properties Limited.

3. At the commencement of the trial, for reasons I then gave, I ordered that the issues of liability and quantum be tried separately. This judgment will therefore be confined to issues of liability. The facts were largely not in dispute, and the facts I now set out are the facts as I find them. I shall indicate where it is necessary to resolve a dispute between the parties as to fact.

The Parties:

4. Chinluck Properties Limited (Chinluck) is one of a number of companies owned by Mr. Cheng Zhen Shu (Mr. Shu). Mr. Shu is a property developer in Hong Kong and in the Mainland, and uses various companies, in what he calls the Chinluck Group, for that property development. Other companies in the Chinluck Group that feature in this litigation are Chinluck Limited, (Chinluck Limited), Chinluck Holdings Limited, (Chinluck Holdings), Gold All Investments Limited, (Gold All), and Richfame Dynasty Limited, (Richfame). All are beneficially owned by Mr. Shu.

5. Casil Clearing Limited, (Casil), is a wholly-owned subsidiary of China Aerospace International Limited, (China Aerospace), and is the holder of a money lenders licence in Hong Kong.

The relevant legal principle:

6. I accept Mr Wong's submission that I should approach the construction of the contracts between the parties having regard to the surrounding circumstances, or factual matrix, in which those documents were made. The proper approach to the evidence that may be used in the construction of a contract is set out in the judgment of Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, HL, at 912-3. These are principles that I apply in the construction of documents in this action.

The property and the Project:

7. In May 1991 Mr Shu became the owner of land in Peng Chau, known as Peng Chau Lots 378 RP and 380 RP. In September 1991, Chinluck became the owner of adjacent land in Peng Chau known as Peng Chau Lots 378A, 379, 380A, and 422. I will refer to all the properties collectively as "the Peng Chau land". In 1995 Mr Shu decided to develop the Peng Chau land into a commercial and residential development (the Project). Chinluck envisaged the Project as being, in a way,, a replica of the Discovery Bay environment on Peng Chau. Proposed zoning amendments were suggested by Chinluck, and approved by the Committee of the Planning ands Land Department in August 1995.

8. In order to undertake the Project it would be necessary for a land exchange to take place as the original land grants by Government were for agricultural and industrial purposes, and accordingly, without a land exchange, the Project could not proceed. Of course, with a land exchange to permit residential and commercial purposes, a new land premium would have to be paid by the developer to Government. Part of the land exchange included the surrender of land for the construction of a school and the provision of emergency vehicular access to the Project. Government would pay a sum of compensation for the land surrendered.

9. By early 1997 Chinluck had made significant progress on the Project. It had engaged land planners to make applications to the relevant Government Departments in relation to the land exchange. Architects had prepared a master layout plan and building plans for the Project. The land exchange proposal had been submitted to the District Land Office, Islands, for approval. Appropriate zoning amendments had been secured from the Committee of the Planning and Lands Department which would allow the development of the Project. Surveyors had been engaged and had commenced the procedures required to secure the removal of occupants of parts of the lands, and to handle objections raised by villagers against the Project. With a view to securing funds for the Project, Mr Shu approached China Aerospace, with whom he had had a relationship, to secure financial support.

The relationship between the Chinluck Group and Casil:

10. Mr Shu and the Chinluck Group of companies had a good relationship with China Aerospace and Casil, having previously borrowed money from Casil for other land development purposes, both in the Hong Kong and in the Mainland. In December 1996, Casil had advanced to Chinluck HK$20 million for a three-month term commencing on 29 November 1996 and secured over Peng Chau Lot 422, one of the lots comprised in the Project. In January 1997, Casil advanced to Richfame, HK$70 million for a term of six months commencing on 20 January 1997, to fund a development project known as Fortune House Project in Hong Kong.

11. The first discussions with senior officers of China Aerospace about the possibility of China Aerospace providing financial support to the Project took place on a number of occasions prior to early 1997. The unchallenged evidence of Mr Shu was that he had discussed the matter of the Project, in broad terms, with a number of senior executives of China Aerospace and Casil.

12. In early March 1997, Mr Shu began negotiating with the management of China Aerospace and Casil for an advance of HK$330 million, which on Mr Shu's case, was for the Project. Mr Shu first approached Mr Lu Kun Lai, an Executive Director and Vice Chairman of China Aerospace in early March 1997. On 15 March 1997, a document setting out proposals and plans for the Project was sent to Casil. A day or so after the receipt of the document by Casil, arrangements were made for the Deputy General Manager of Casil, one Mr. Gao, to inspect the land and its location.

13. On 21 March 1997 a comprehensive and detailed development proposal was prepared and sent to Mr. Gao. That document, prepared by Mr Ken Leung, personal assistant to Mr Shu, made it clear that the Project required an initial capital of HK$330 million, taking into account the land premium payable on the land exchange, consultancy, construction, development and administration, and finance costs. In terms of the document, upon completion of the predominant part of the project, within three years, Chinluck could earn a profit of some HK$499 million. It was clear from that document that the land exchange was a crucial early step in the procedure as it was required to enable the project to proceed, and that included in the initial capital required, was the sum to be applied in payment of the land premium.

14. In April 1997 Casil advanced to Chinluck HK$8 million, for a term of six months commencing on 1 April 1997, at an interest rate of 13%. That sum was secured by mortgage over the Peng Chau land. In early May 1997 the Planning Department of Government notified Chinluck's consultants that there would be no objection to the Project as shown in a Master Layout Plan that had been submitted to Government.

15. Also in May 1997, Casil agreed to lend Gold All up to US$4,859,710.00 for a term of six months. That sum was secured on a property being developed in Shanghai known as Prince Garden, and by a personal guarantee from Mr Shu. It is clear from the documents that the purpose of that advance was the development of Prince Garden in Shanghai. By way of a further advance, on 27 May 1997, Casil advanced to Richfame HK$4.7 million, secured by mortgage over Fortune House. Again it is clear that that sum was used for the development of Fortune House. This loan was due for repayment on 30 June 1997.

16. On 11 July 1997 a further agreement was made whereby Casil advanced to Chinluck HK$30 million, for a term of one year with interest at 15%. It appears that this sum was unsecured. The purpose of loan was to assist Chinluck in the development of a hotel project it was undertaking in Guangzhou.

The Loan on the security of the Project:

17. On 27 May 1997, at the request of Casil, and on the instruction of Chinluck, a survey report was prepared by Vigers, valuing the land comprised in the Project at HK$430 million, on the assumption that the land was developed in accordance with the proposals in the Project and delivered with vacant possession, that a land exchange offer was received from Government in accordance with an indicated offer, and the Project was completed on the day of the report. The valuation report was provided to Casil.

18. In a meeting at a banquet on or about 14 June 1997, Mr Shu was informed by Mr Wang Meiyu, the Chairman of China Aerospace, that Casil would advance to Chinluck HK$330 million, to be secured by a charge over the land comprised in the Project. Mr Wang told Mr Shu that he should follow up the matter with Mr Lu, who had been given full authority to deal with the Chinluck Group in matters relating to the loan. I will refer to the full sum of HK$330 million as "the Loan".

19. On 9 July 1997 Mr Shu, undercover of a letter, headed "Peng Chau - loan of Hong Kong dollars three hundred and thirty million", forwarded what is described in the letter as "the title deed of Peng Chau for the security of the above loan". Bearing in mind that the Peng Chau land had been mortgaged to Casil in April 1997, it is not clear why Chinluck should still be holding the title deeds. However nothing appears to turn on this point.

The completion of the loan documents and the making of the Loan:

20. Around the middle of July 1997, Mr Ken Leung was informed by Casil that all necessary documentation for the Loan had been drafted and finalised by Casil's solicitors, Messers Fairburn, Catley, Low & Kong, and that arrangements should be made from Mr Shu to sign the documents on behalf of Chinluck, and in his personal capacity as guarantor. On 18 July 1997, Mr Shu, with Ken Leung, attended at Casil's solicitors office and executed a Loan Agreement, a mortgage over the land, and a Personal Guarantee. The documents also required execution by Casil, which was effected on 24 July 1997, and the documents dated that date. Somewhat surprisingly, having regard to the very substantial sum involved, Mr Shu elected not to seek independent legal advice in relation to the documents, but nothing turns on this fact in these proceedings.

21. On 18 July 1997, following the execution of the documents, Mr Shu returned to his office and wrote a letter to Casil requesting that the loan amount of HK$330 million be credited to a specific account with the Hongkong and Shanghai Banking Corporation in the name of Chinluck Limited.

The relevant provisions of the security documents:

22. The security documents in relation to the Loan comprised a document entitled a "Loan Agreement", a mortgage of the Peng Chau land, and a Guarantee signed by Mr Shu personally. The Loan Agreement was made between Casil and Chinluck. The mortgage was given by Mr Shu, and Chinluck, the latter signing in two capacities, first that of a mortgagor of part of the land secured by the mortgage, and second as "the Borrower" who had applied to Casil for the term loan facility. Mr Shu executed the mortgage, as a mortgagor of part of the land secured by the mortgage.

23. Certain provisions in the documents are important in this trial. The Loan Agreement contained the following recital:

"The Borrower has requested the Lender to grant to it a loan for the sum of Hong Kong Dollars Three Hundred and Thirty Million (HK$330,000,000) (the Loan) and the Lender has agreed to advance the Loan to the Borrower and the parties now intend to enter into this Agreement to record the terms and conditions for the advance of the Loan to the Borrower by Lender as follows:-"

Clause 1 of the Loan Agreement provided as follows:

"Advance of the Loan

The lender, relying on the representations, warranties, covenants and undertakings given by the Borrower herein, agrees with the Borrower to make the Loan available to the Borrower upon the signing of this Agreement by the Borrower subject to the terms and conditions contained in this agreement."

Throughout clauses 1, 2, 3 and 4 of the Loan Agreement expression "the Loan", is used. That expression refers to the definition in the recitals of the sum of HK$330 million. The expression is again used in clauses 8 B, and 10. Clause 7 of the Loan Agreement provides:

"7 Undertaking:-

A. The Borrower shall:-

(i) Promptly inform the lender of the occurrence of any Event of Default......"

The relevant parts of Clause 8 are as follows:

"8. Events of Default

A. An Event of Default occurs where:

........

(vii) if anything shall be done or suffered or omitted to be done by the Borrower or any of the other parties to the Security Documents (other than the Lender) which in the opinion of the Lender puts or may put in jeopardy the security created by this Agreement, any of the Security Documents or any other guarantee, security, instrument, agreement or document held by the Lender as security for the obligations of the Borrower hereunder or in respect of all monies payable by the Borrower herein;.
(viii) if there shall occur a material adverse change in the business, assets, general condition or prospects of the Borrower, or of any other party to any of the Security Documents (other than the Lender) which could materially affect the ability of the Borrower and/or such party to perform its payment obligations under this Agreement and/or the Security Documents;".

Clause 8 B provides:

"The Lender shall be entitled at any time after the occurrence of any Event of Default by notice in writing to the Borrower to declare that the loan and all interest accrued and/or other sums payable pursuant to this Agreement shall become immediately due and payable and the Borrower shall immediately pay the same to the Lender."

24. The recitals to the Mortgage contain the following statement:

"The Borrower through the first Mortgagor and the second Mortgagor (collectively hereinafter called "the Mortgagor") has applied to the Lender to grant to the Borrower a term loan facility of up to HK$330,000,000.00 (" the Facility") in the Lender has agreed to grant the same upon the Mortgagor and/or the Borrower entering into the covenants and obligations hereinafter contained".

Clause 2.01 of the Mortgage provides:

"In consideration of the Lender agreeing the requested the Mortgage or to grant to the Borrower the Facility applied for the Mortgage or and Borrower hereby covenants with the Lender that,......".

Provisions of the mortgage made payment of principal and interest under the Loan Agreement a condition of the mortgage. The "Memorial of an instrument to be registered in the Islands New Territories Land Registry under the Land Registration Ordinance" describes the "consideration" for the mortgage as the sum of HK$330,000,000.00.

25. The following provisions of the Guarantee are relevant. Casil is described as "the Creditor", and Mr Shu as "the Guarantor". The recitals contain the following provision:

"Chinluck Properties Ltd (the Borrower) entered into a Loan Agreement dated even date (the Loan Agreement) with the Creditor as lender. By the Loan Agreement, the Creditor has advanced a sum of HK$330,000,000.00 to the Borrower upon the terms and conditions therein contained."

Clause 1.1 of the Guarantee provides that words and expressions used in the Guarantee shall have the same respective meaning must that are ascribed to them in the Loan Agreement. Clause 2.1 of the Guarantee provides:

"In consideration of the Creditor agreeing to provide the Loan to the Borrower in accordance with the terms of Loan Agreement the Guarantor irrevocably and unconditionally undertakes the obligations and liabilities set out in Clauses 2.2 and 2.3."

These clauses contain the usual guarantee to the creditor of all sums due. As is usual with a guarantee, the requirement on the Guarantor, contained in Clause 2.2(a), is to pay to the Creditor, "on demand". The Guarantee contains a "principal obligor" clause in the following terms:

"2.3 The Guarantor, as principal obligor and as a separate and independent obligation and liability from its obligations and liabilities under Clause 2.2, irrevocably and unconditionally agrees to indemnify the Creditor in full on demand against all losses, costs and expenses suffered or incurred by the Creditor arising from or in connection with the failure by the Borrower fully and promptly to perform and discharge any of the obligations and liabilities under the Loan Agreement."

Deductions are made by Casil from the Loan:

26. On 19 July 1997, the day after Chinluck and Mr. Shu signed the security documents, in a telephone conversation with Mr Ken Leung and the "Treasury Manager" of Casil, a Mr. Choi, Chinluck were informed that that there was a prior agreement that all existing loans, including interest and fees, owed by the Chinluck Group to Casil must first be deducted from the Loan. On the pleadings, and in the witness statements this was in dispute, with Mr Shu asserting that there was no such agreement. The fact of such an agreement was recorded in a handwritten sidebar, to a handwritten internal memorandum of Casil dated 11 July 1997, made by Mr Chu Lin Cheung, an officer of Casil. When presented with that note Mr Shu accepted that it was accurate.

27. I accordingly hold that it was agreed between Chinluck and Casil, prior to the execution of the Loan Agreement and the Mortgage that all outstanding existing loans including interest and fees owed by the Chinluck group to Casil would be deducted from the Loan.

The first payment of the Loan is made:

28. It appears also that on 19 July 1997, in the course of the telephone conversations in relation to the repayment of outstanding loans, agreement was reached that a first instalment of the Loan, a sum of HK$20 million, would be advanced immediately, although at that stage Casil had still not signed the loan documents. The evidence did not deal directly with how this came about. According to internal documents of Casil, this advance was understood by Casil to be for a period of two days to cover cash flow. The evidence for Chinluck did not challenge this understanding.

29. On 19 July 1997, just after midday, Mr Choi sent by fax to Mr Leung at Chinluck, a schedule, setting out the required repayments that would be deducted from the Loan. Included in that schedule was the sum of HK$20 million that had been advanced on 19 July 1997. Also included in the amount to be deducted was a sum of HK$48,496,000 described as "Fund to Hang Hau & Yeung", which it was agreed represented the sum required to repay the existing mortgage on the Peng Chau land. The total amount of loans, interest, commissions and legal fees to be deducted was HK$153,688,152.30. That would leave a balance due from the Loan, still to be paid to Chinluck, of HK$176,311,847.70.

30. Included in the deductions made was a sum described as "Commission Fee on HKD330,000,000.00", of HK$1,650,000. That is 0.5% of the sum of HK$330 million. Also deducted was the sum of HK$608,080.00 being Casil's solicitors fees on the loan documentation.

31. On 23 July 1997, following a request made by Mr Choi, and he supplying information to them, the property valuation and consultant company, C.Y. Leung & Company Ltd. wrote to China Aerospace suggesting a site value of the Peng Chau land at HK$340-350 million. Although nothing turns on the point, it appears that Casil executed the documents the next day, 24 July 1997.

Requests made for the balance of the Loan:

32. On 2 August 1997, by fax, Mr Shu requested the transfer of what he described as "the first instalment" of the Loan of HK$75 million to the account of Chinluck Limited. The evidence did not establish how it came about that this request was for a "first instalment". The sum was duly paid. On an unknown date in August 1997, a letter was prepared by Mr Shu expressing concern at the fact that the balance of the Loan had not been paid. The letter is in terms which make it apparent Mr Shu is aware that Casil has capital difficulties. There is no evidence that that letter was actually sent to Casil.

33. On 8 September 1997 Mr Ken Leung wrote to Casil demonstrating that of the total loan amount in accordance with the loan agreement signed on 24 July 1997, a sum of HK$251,322,847.70 had been drawn, but that the loan balance was not yet drawn. It does not appear that there was any specific response to that letter. However no further funds were advanced.

34. It appears to me that the sum of HK$251,322,847.70 is an error, and that the correct amount that had been drawn down was HK$248,688,152.30, calculated as follows:

Total amount of the Loan $330,000,000.00
Less preliminary advance 20,000,000.00
Less agreed deduction 153,688,152.30
Less "First Instalment" 75,000,000.00
Sum advanced 248,688,152.30
Balance due 81,311,847.70

It must be remembered that Casil had demanded, and Chinluck had agreed, to the repayment of the HK$20 million advanced on 19 July 1997; (see para. 28 above). That early repayment of $20 million, it seems to me, does not add the sum back into the pool of the total Loan available. Nothing turns on this error however, for it is not in dispute that the full amount of the Loan was not paid to Chinluck. The correct amount can, I am confident, be agreed.

35. It is plain that between 2 August 1997 and 19 September 1997, there were further discussions between the parties as to the Loan balance still not drawn down. It is equally plain that Chinluck and Mr. Shu were concerned about the failure of Casil to allow them to draw down that balance. The unchallenged evidence of Mr Shu was that he was told by Mr. Lu Kun Lai, an executive director and vice chairman of Casil, that because of a lack of cash flow Casil was unable to provide any further advance on the Loan to Chinluck.

36. On 19 September 1997 Mr Shu wrote to Casil complaining that the balance had not been advanced and that that had "caused the entire project to be at a complete halt". That letter was sent to Casil. Again he refers to his understanding of Casil's difficulty with capital. He said in the letter as follows, (this is from the translation):

"(Although our company) understands your company's difficulty in deploying the capitals, to avoid causing damage to this development project owing to delay (in payment of) capital, (our company) sincerely wishes your company to provide (our company) with assistance and pay our company Hong Kong dollars 2.8 millions by 11th day of this month so that this project can start on time. Our company will make a way out of the rest of the capital by ourselves. To solve your company's difficulty, our company is willing to repay your company's loan and interest in full at the end of this year." (sic)

The situation thus was that Chinluck was prepared to accept a greatly reduced sum, and to repay the full amount, 18 months early, if further capital could be advanced.

37. The case for Casil was that they were not in capital difficulties. In the course of evidence from a staff member of Casil, evidence was led, and substantiated by the annual report of China Aerospace, that at that company's balance date on 31 December 1997, the parent company had cash and bank balances totalling HK$452,721,000.00. That isolated piece of information, somewhat disingenuously lead as evidence-in-chief from a Casil staff member, was put entirely in context when I was referred to the fact that the balance sheet also demonstrated that during the year 1997 China Aerospace had operated on a net cash outflow from operating activities, of HK$199,688,000, and the Consolidated Cash Flow Statement showed a deficit of HK$165,385,000. Casil's own accounts, while showing a profit for the year of HK$21.5 million, also showed a Cash Flow deficit of HK$100 million. Casil elected to call no witnesses from the executive management of the company, and no other evidence as to either the financial health of the company, or as to Mr. Shu's assertions that he was informed that Casil was having difficulties in accessing capital.

38. In the absence of any evidence to the contrary, I am satisfied that while neither China Aerospace nor Casil were on the verge of bankruptcy, they were plainly short of capital, and were having difficulty in funding Casil's operations.

No other advances or loans allowed by the Loan Agreement:

39. One of the terms of the Loan Agreement, Clause 7 B (i), was that Chinluck would not, without the prior written consent of Casil, permit to subsist any encumbrance over any of its present or future assets.

40. At the time the Loan Agreement was made there was a charge over a property, owned by Chinluck, situate at 17C Roof, Hoi To Court, 275 Gloucester Rd., Hong Kong, (the Hoi To property), in favour of a finance company called Yu Tai Hing. That advance was repaid by Chinluck, and the charge over the property discharged on 16 September 1997, leaving the property debt free. Chinluck was to later take further advances from Yu Tai Hing on the security of this property, upon which Casil would contend that there was a breach of the Loan Agreement.

41. The consequence of Casil's demand that the Chinluck Group should repay, from the Loan, all outstanding advances meant that at 19 July 1997, when the repayment by deduction was effected, the Chinluck Group was the holder of a very significant portfolio of debt free property in Hong Kong and in the Mainland, and was, by the terms of the Loan Agreement required to keep that property debt free.

Chinluck makes formal demand for the balance of the loan:

42. On 24 September 1997, this time at the request of Chinluck, C.Y. Leung & Company Limited again valued the land. This time they came to the conclusion that land was worth approximately HK$450 million on the open market, upon the assumption that the land exchange had taken place, and the necessary premium settled, and that the land was immediately available for development. The next day, 25 September 1997 Chinluck's solicitors made formal demand upon Casil for the immediate payment of the balance of the Loan, then calculated at HK$78,688,152.30. (I am unable to reconcile this figure with that in paragraph 33 above). The letter recorded that as a result of the breach by Casil to honour its agreement to advance a loan of HK$330 million, and its failure to pay the balance of the loan, Chinluck had suffered loss and damage. The letter recorded that unless the balance due was paid within seven days, legal proceedings would be taken without further notice.

43. On 17 October 1997, there being no response from China Aerospace, Casil, or their solicitors, to the letter of 25 September 1997, Chinluck issued the writ in these proceedings, seeking specific performance of the Loan Agreement and payment of the sum of HK$78,688,152.30. By alternative prayers for relief damages in addition to specific performance to be assessed were sought, and if specific performance were not granted, damages in lieu of specific performance. In the meantime, as best as they could, Chinluck proceeded with the project. On 27 October 1997 public notices were given by the Government notifying the public of the application that had been made or land exchange and inviting objections to be raised.

The consequences of the Asian Financial Crisis:

44. In the latter part of 1997 Hong Kong began to suffer directly from what has become known as the Asian Financial Crisis, that began with the collapse of the currency in Thailand in about July 1997. There is an issue between parties as to precisely when this occurred in Hong Kong, but it seems beyond argument that by late September and certainly by November the Crisis was having its effect in Hong Kong.

45. On 24 November 1997, at the request of China Aerospace, First Pacific Davies undertook a valuation of the Peng Chau land and found it to be worth only HK$265 million, assuming a sale in the open market, with the land exchange having been completed and the land exchange premium having been fully settled. If correct, this was a reduction in value of 56% from the C.Y. Leung & Co. valuation, just two months earlier.

Casil makes formal demand on Chinluck:

46. On 4 December 1997, Casil wrote to Chinluck. The letter demanded the total sum of HK$264,584,158.70 being principal and interest accrued as at 30 November 1997. The letter set out three alleged Events of Default. They were as follows.

47. First, it was said that in breach of Clause 7 B (i) of the Loan Agreement Chinluck had permitted to subsist an encumbrance over the Hoi To property after the execution of the Loan Agreement. This allegation refers to the advance set out in paragraph 39 above. Second, it was said that in breach of Clause 7 B (ii) Chinluck had lent or granted credit to Chinluck Limited. This allegation apparently referred to the request that the first instalment of $75 million be credited to Chinluck Limited's account. Third, it was alleged that there had occurred a "material adverse change" in Chinluck's business, assets, general conditions or prospects of business which could materially affect its ability to perform its payment obligations under the Loan Agreement. The relevant portion of the letter read:

"(1) The value of your properties, namely Section A of Peng Chau Lot No. 378, Peng Chau Lot No. 379, Section A of Peng Chau Lot No. 380, Peng Chau Lot No. 422, the Remaining Portion of Peng Chau Lot No. 378, and the Remaining Portion of Peng Chau Lot No. 380, which were charged to us pursuant to the Loan Agreement, has depreciated in value substantially since the execution of the Legal Charge.
(2) The fall of the Hong Kong Stock and Property Market in October 1997 has created a materially adverse financial condition in Hong Kong which can and will materially and adversely affect your ability to complete and successfully market your proposed development in Peng Chau and, as a result, your ability to perform its payment obligations under the Loan Agreement."

The letter did not acknowledge in any way Chinluck's formal demand for payment of the balance of the Loan that had been made on 24 September 1997, nor did it acknowledge in any way the writ which had by then been served, and to which, at that time, no defence had been served.

48. On 8 December 1997, Casil filed a defence to Chinluck's writ. On 19 December 1997, Mr Shu wrote to Casil urging to pay the balance of HK$78 million and reminding Casil that it was in breach of the Loan Agreement to fail or refuse to pay that sum. The letter said that if that sum was not paid in three days, Chinluck would be compelled to withhold interest due on 28 December 1997.

Some defences are abandoned:

49. It is convenient here to record that at trial Casil abandoned the contention that Chinluck was in breach of the Loan Agreement in advancing funds to Chinluck Limited. Having regard to the fact that the request for funds plainly specified the request that the instalment be deposited in a named Chinluck Limited bank account, which request was acceded to by Casil, in respect of funds actually advanced, that was a sensible concession. Also abandoned was a contention that Casil was not obliged to advance the whole or even any part of the Loan not specifically requested or advanced at the time of the signing of the Loan Agreement. The contention that it was a breach of the Loan Agreement to allow the advance from Yu Tai Hing to remain secured over the Hoi To property until 16 September 1997, a period of 2 months following the signing of the Loan Agreement, allegedly in breach of Clause 7 B (i), was also abandoned. This plea however was not abandoned in respect of subsequent advances made by Yu Tai Hing.

Chinluck borrows against other property it owns:

50. Little appears to have happened in the proceedings through 1998, following the issue of the writ and the filing of the defence in late 1997. On 6 July 1998 the board of Chinluck resolved to borrow a new loan of HK$2 million from Yu Tai Hing, secured on the Hoi To property, and other property in Paterson St. Causeway Bay. The resolution authorising the borrowing records that the need to borrow had risen from Casil's failure to provide the remaining portion of the Loan. Later, on 14 July 1998, the advance from Yu Tai Hing was increased by a further HK$3 million, this being secured on other Chinluck properties in Patterson St., as well as the Hoi To property. The consent of Casil to these advances was not obtained by Chinluck. Casil has relied on these advances to found an allegation that they constitute a breach of Clause 7 B (i) of the Loan Agreement.

Demand is made upon Mr Shu:

51. By a letter dated 17 November 1998 the solicitors for Casil made formal demand on Mr Shu pursuant to the Guarantee seeking payment of the sums paid under the Loan Agreement together with interest thereon. The total sum then amounted to some HK$300 million. Mr. Shu did not respond to this demand, either personally, or through solicitors.

52. Chinluck had made good its threat of 19 December 1997, and after that date no further interest had been paid to Casil on the Loan. The next interest instalment fell due, in terms of both the Loan Agreement and the mortgage on 28 December 1997. That sum was not paid, nor was any of the interest due on 28 June 1998, 28 December 1998, and 28 June 1999.

A further demand is made on Chinluck and Mr Shu:

53. On 1 December 1998, at the request of China Aerospace, FPD Savills undertook a valuation property. The valuation was on three different bases. First, current open market value taking into account redevelopment value; second, current open market value on redevelopment basis based upon the proposed land exchange having been accepted; and third, current forced sale value. The best value, the second basis, was HK$150 million. The current forced sale value was HK$10,200,000. This, at best, on this valuation, the Peng Chau land had fallen in value to only 33% of the C.Y. Leung & Co valuation 15 months earlier, and at worst, a mere 2.26% of that valuation.

54. It is the case for Casil that by January 1999, Chinluck was in breach of the terms of the Loan Agreement, by reason of the adverse material change, and Mr Shu and Chinluck were in breach of the terms of the mortgage, and Chinluck of the Loan Agreement, by the failure to have made the interest payments due on 28 December 1997, 28 June 1998, and 28 December 1998. On 6 January 1999, Casil's solicitors made formal demand payment of the amount advanced, together with interest and threatened to the enforcement rights of Casil under mortgage. On the same day another formal demand was made on Mr Shu under the Guarantee. Although Chinluck and Mr Shu were apparently in breach of the terms of the Loan Agreement by their failure to make payment of interest instalments as at 17 November 1998, when the earlier demand had been made on Mr Shu, there was no explanation as to why it was thought necessary to serve second demand on Mr Shu. However, nothing appears to turn on the point.

The need to deliver up the title deeds for the land exchange:

55. Chinluck contends that it was an implied term of the Loan Agreement that Casil would, when required, release the mortgage or take in the appropriate steps to allow the land exchange to take place. This is denied by Casil. The land exchange was a fundamental step in the development of the project. Had all gone well the land exchange was to have taken place during the term of the mortgage. By 30 April 1997, well before the loan documents were signed the District Lands Office, Island Lands Department had written to Chinluck's surveyors indicating approval in principle to the proposed land exchange.

56. The land exchange involved the surrender to government of the existing titles, and the issue of new titles, with appropriate land use provisions, which would permit the development of the Project. The land exchange also involved the surrender of a portion of the land to Government for a school site. To effect this land exchange it would be necessary for the mortgage to be released, the title deeds surrendered to Government, and new title deeds, with appropriate terms to accommodate the Project would be issued.

57. Further steps occurred in relation to the land exchange but as those are matters relevant only to the question of damages not questions of liability, I do not need to consider them in this judgment.

The progress of the litigation:

58. It was not until 12 March 1999, that Mr Shu was joined into the proceedings by way of counterclaim on the Guarantee. At the same time Casil counterclaimed against Chinluck seeking repayment of the amount advanced, said to be HK$251,322,847.70, together with interest thereon, and a further sum of some $18 million that had been paid by the Government by way of compensation for part of the Peng Chau land which had been resumed by Government.

59. The writ originally issued by Chinluck sought specific performance of the Loan Agreement. Chinluck, by that plea, continued to demand payment of the balance of the Loan. On 21 May 2004, 24 days prior to the commencement of the trial, and nearly 5 years 7 months after the date of the issue of the writ, the prayer for specific performance was abandoned, Chinluck then apparently accepting what it contended was the repudiatory breach of the Loan Agreement by Casil in failing to pay the full amount of the Loan.

The issues:

60. The forgoing matters comprise the factual matrix in which the contracts were entered into, and the circumstances surrounding the alleged defaults upon which Casil now seeks to justify its counterclaim against Chinluck, on the Loan Agreement and mortgage, and Mr Shu under the mortgage and on the Guarantee.

61. On these facts the following issues arise for consideration:

(i) Was Casil aware that the loan would be utilised in the Project;
(ii) Was Casil obliged to advance the whole sum of HK$330 million;
(iii) Was Casil in breach of the Loan Agreement by failing to pay to Chinluck the whole of the Loan;
(iv) If a breach of the Loan Agreement, was the failure to pay the full amount of the Loan a breach that would entitle Chinluck to treat the Loan Agreement as having been repudiated by Casil;
(v) Did Chinluck's claim for specific performance impact upon Casil's alleged breach in either failing to pay the whole of the Loan or failing to release the title documents to permit the land exchange;

(vi) Was Casil obliged to release the title documents to permit the land exchange;
(vii) Was Casil in breach of the Loan Agreement in refusing to surrender the title documents for the land exchange;
(viii) Was there an Event of Default pursuant to Clause 8 A (vii) and (viii) of the Loan Agreement which permitted Casil to demand repayment of the monies advanced as at 4 December 1997;
(ix) Was Chinluck in breach Clause 7 B (i) of the Loan Agreement by granting to Yu Tai Hing legal charges and mortgages over the Ho Toi property in April and July 1998;
(x) Has there been a total failure of consideration in the failure by Casil's refusal to pay to Chinluck the full amount of the Loan;
(xi) Are Mr Shu and Chinluck liable under the mortgage;
(xii) Has a valid demand been made upon Mr Shu under the Guarantee.

I propose to consider each of these in turn.

Was Casil aware that the loan would be utilised in the Project:

62. There was an issue between the parties as to whether or not Casil were aware of the terms of the Project, and whether or not it was intended by Chinluck and Mr Shu, and understood by Casil, that the monies would be used solely for the Project, or, at least, in part for the Project and in part for other Chinluck Group purposes.

63. Mr Shu's unchallenged evidence was that in late 1996 and early 1997 he had discussed the Project in general terms with senior officers of Casil. The first formal approach to Casil came in a letter addressed to Mr H.J. Gao, the Deputy General Manager of Casil, and a director of Casil Realty Limited. The letter dated 15 March 1997, comprised an invitation to Casil to "participate jointly" in the Project. It outlined the project and described the proposed form of cooperation in the following terms:

"since the cost immediately payable at the initial stage of the commencement of this development plan is HK$330 million (Appendix 9), it is now proposed as follows: a) on the part of your company - by way of financing, transfer a sum of HK$330 million to the account of our company on or before 26 March 1997;"

There was no specific response to that invitation, but it was clear from documentation that Chinluck sought HK$330 million for use in the Project.

64. On 21 March 1997, a more comprehensive and detailed proposal was sent to Mr Gao. The proposal specifically described the financing by way of a sum of HK$330 million "to be transferred in one lump sum to the account of Our Group." Estimates on the use of the financial capital required were enclosed with the proposal and they make it quite clear that Chinluck required HK$330 million for the purposes of the Project. A few days after this proposal was sent, both Mr Lu and Mr Gao were taken by Chinluck to Peng Chau for specific purpose of inspecting site of the Project.

65. At the time the security documents were signed valuation reports were prepared on the instructions of both Chinluck and Casil, and all those reports, comprising valuations of the Project, was supplied to Casil. The clear purpose in obtaining those reports was to assess the value of the land as security for the Loan.

66. The uncontested evidence of both Mr Shu and Mr Leung was that the senior executive officers of Casil were aware that Chinluck intended to utilise proceeds of the Loan in the Project. Chinluck elected not to call as witnesses in the trial any of the executive officers of Casil. Notable in their absence was Mr Lu and Mr Gao. It was suggested to me that all of the executive officers of Casil had retired, and were unable to be located. No evidence was led as to the steps taken by way of effort to locate them. Frankly, the suggestion that senior men, of the status held by those in the senior executive ranks of a company of the size and importance as China Aerospace, should simply retire and disappear, is unbelievable. Sensibly, Mr Ho did not persist with an application to have their witness statements form part of the evidence.

67. Mr Tong was right to draw my attention to the principles relating to a party's failure to tender witnesses at trial as set out by Lord Diplock in Herrington v British Railways Board [1972] AC 877 at 930:

"The appellants, who are a public corporation, elected to call no witnesses, thus depriving the court of any positive evidence as to whether the condition of the fence and the adjacent terrain had been noticed by any particular servant of theirs or as to what he or any other of their servants either thought or did about it. This is a legitimate tactical move under our adversarial system of litigation. If a defendant to adopts it he cannot complain if the court draws from the facts which have been disclosed all reasonable inference is as to what are the facts which the defendant has chosen to withhold."

68. In the absence of evidence to the contrary, and having regard to Chinluck's evidence, I am satisfied that Casil were fully aware that it was Chinluck's intention to use the proceeds of the Loan for the development of the Project. It is right that to an extent that intention was frustrated by the requirement that Chinluck should repay from the proceeds of the Loan all other outstanding advances previously made by Casil. Chinluck had agreed to that, but I accept Mr Shu's evidence that he accepted the requirement for the deduction because he was faced was no alternative as he required the money. Certainly, even after the agreement that prior outstanding loans would be deducted from the Loan, it was clear to Casil that all remaining monies to be borrowed under the Loan were primarily for the purpose of the Project.

Was Casil obliged to advance HK$330 million:

69. The factual matrix makes it abundantly clear that, on a proper construction of the Loan Agreement, Casil was obliged to advance sum of HK$330 million. The following facts point to that conclusion. First, Chinluck clearly sought a loan of HK$330,000,00 in one lump sum. That was clear from the proposal documents which referred to the transfer of that sum to Chinluck's account.

70. Next, Casil's own document, the Loan Agreement described the Loan as a "term loan of HK$330 million". The "Arrangement Fee" was fixed at HK$1,650,000.00, representing 0.5% of the Loan, (see Loan Agreement para. 10), and was immediately deducted upon the signing of the Loan Agreement. Should the intention have been that not all of the funds need be advanced there would be a provision either for the pro rata reduction of the fee, or an expression that the whole fee was payable notwithstanding any lesser sum borrowed. The schedule to the Loan Agreement referred to a "Loan" of HK$330 million, and not "loans of up to HK$330 million". The Loan Agreement confirmed that the Loan was a term loan for two years and was not due for repayment until the end of that period, that is 28 July 1999. There is nothing in the Loan Agreement which in any way points to a suggestion or inference that the Loan should be advanced in instalments, or that any right was reserved to Casil not to advance the full sum agreed to be advanced.

71. For these reasons, I am satisfied that Casil entered into an agreement to lend HK$330 million and was obliged by the terms of the agreement to advance that sum.

Was Casil in breach of the Loan Agreement by only advancing HK$248 million:

72. Immediately upon signing the Loan Agreement Mr Shu, on behalf of Chinluck, sought to draw down the full sum of HK$330 million. He did so by a letter addressed to Casil on 18 July 1997.

73. It is unarguable that at that date, Chinluck was not in breach of the Loan Agreement. Mr Ho sought to argue that the request to draw down the balance of the Loan was not made until September 1997, and that at that time Casil was justified in investigating the situation before advancing any further monies. The evidence does not support the contention that no further demand was made between 18 July 1997, and late September 1997. On 23 July 1997, Casil had obtained a valuation report from C.Y. Leung & Co Ltd, and, plainly in reliance upon that report, signed the Loan Agreement. It is clear from the evidence, and not challenged by any evidence from executive officers of Casil, that through August Mr Shu was contacting Casil pressing for the balance of the Loan. A specific letter was written by Mr Leung, of Chinluck, on 8 September 1997 requesting the balance of the Loan.

74. There is nothing in the loan documentation which would permit a conclusion that, prior to advancing the balance of the Loan, Casil were entitled to make any further investigations. The clear obligation on Casil was to advance sum of HK$330 million. That obligation arose upon their execution of the Loan Agreement. If any authority is required for the proposition that where a lender agrees to advance a specific sum, then he must advance the whole sum, it may be found in the old case of Burton v Gray (1871) 8 Ch App 932 CA.

75. I am satisfied that in failing to advance that sum to Chinluck, upon their execution of the Loan Agreement, Chinluck was in breach of the Loan Agreement.

76. I am satisfied that it is no answer on the part of Casil to say that by September 1997 they were entitled to reassess the situation before making any further advance of the Loan. The obligation to pay the full amount of the Loan was an obligation arose upon their execution of the Loan Agreement on 24 July 1997. It might be argued that so long as the full amount of the Loan was paid to the Borrower within a reasonable time there would be no breach. But having regard to the clear demands made by Chinluck, both immediately upon signing of the documentation, and up to the end of August, and the failure of Casil to making further payment, Casil was clearly in breach.

Was Casil's breach a repudiatory breach

77. It is clear law that not every breach of a contract will entitle the innocent party to treat the contract as at an end: Afovos Shipping Co. SA v Pagna [1983] 1 All ER 449, per Lord Diplock at 455. The issue is particularly difficult where the contract is a contract for delivery by instalment, see e.g. Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 KB 148. In that case the Court of Appeal indicated that the chief considerations are first, the ratio quantitatively which the breach bears to the contract as a whole, and secondly, the degree of probability or improbability that such a breach will be repeated.

78. On my calculations Casil refused to pay some HK$80 million, approximately 25% of the total amount agreed to be advanced. On any terms that is a significant quantity of the whole. Having regard to the fact that Casil knew that Chinluck required HK$330 million for the Project, and that by demanding repayment of all outstanding loans the sum required by Chinluck was reduced by some HK$153 million, the refusal to pay the balance takes on an even greater significance. What began as a request for payment of the balance became a demand that persisted from early August 1997, until late September 1997, following which the writ for specific performance was issued. Even after the issue of the writ Casil, before the occurrence of any Event of Default, declined to make payment of the balance.

79. Having regard to all of these circumstances I am satisfied that Casil's breach of the Loan agreement in failing to pay the full amount was a repudiatory breach of contract by Casil that entitled Chinluck to treat the contract as at an end.

What is the impact of Chinluck's claim for specific performance:

80. The law is clear, and was accepted as such by Mr Tong, that the mere commission of a repudiatory breach of contract does not terminate the contract, but provides the innocent party with a right of election to treat the contract has terminated if it wishes to do so. If, and so long as it does not do so, all obligations under the contract remain alive: see State Trading Corporation of India v M Golodetz [1989] 2 Lloyds Rep 277; Fercometal SARL v Mediterranean Shipping Co SA [1989] AC 788; Chitty on Contracts 2004 Vol. 1 para 24-015 - 24-016. In Fercometal Lord Ackner held that there was no halfway house. The innocent party cannot choose to affirm the contract and yet at the same time be absolved from tendering further performance of the contract. Lord Ackner said:

"When A wrongfully repudiates contractual obligations in anticipation of the time for their performance, he presents the innocent party B with two choices. He may either affirm the contract by treating it as still in force or he may treat it as finally and conclusively discharged. There is no third choice, as a sort of via media, to affirm the contract and yet to be absolved from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform. Such a choice would negate the contract being kept alive for the benefiting both parties and would deny the party who unsuccessfully sought to rescind, the right to take advantage of any supervening circumstance which would justify him in declining to complete."

81. The jurisdiction to order specific performance is based on the existence of a valid, enforceable contract: see Chitty on Contract 2004, Vol. 1 para 27-003; Spry, Equitable Remedies 6th Ed. p. 52. The issue of a writ for specific performance is consequently an act which affirms the contract and an act by the innocent party who treats contract as being in full force and demands completion of the contract. That is precisely what Chinluck sought. By their writ, Chinluck sought performance of the contract by Casil, and the payment of the balance of the Loan. They maintained that position until 21 May 2004. By maintaining that position and keeping the contract alive, Casil had the right, in Lord Ackner's words, to take advantage of any supervening circumstance which would justify them in declining to complete.

82. Any subsequent events following the breach of the contract by Casil must therefore be taken into account in assessing the liabilities and obligations of parties. Had Chinluck elected to accept Casil's breach of contract in its failure to pay the full amount of Loan, the contract would then have come to an end. Chinluck would then have a right in damages against Casil for that breach, but having accepted the repudiation of the contract would have then been obliged to repay that portion of the Loan which had been advanced.

Was there an "adverse material change" default in December 1997:

83. The case for Chinluck was that on a true and proper construction of the relevant clauses, Clauses 7 A (i), 8 A (viii) and 8 B, (see para 22 above), the "Event of Default" envisaged by Clause 8 A (vii) and (viii) was something which occurred internally to Chinluck, that is, a matter within its own knowledge and not known in general public circumstance. The basis for the submission was the requirement that the Borrower must "promptly inform" the Lender of the occurrence of any event of default. It was argued that if an event was public knowledge there would be no point in imposing an obligation on the Borrower to inform the Lender of the event. Thus, an event which affected Hong Kong or Asian generally was not an event contemplated by the clause.

84. I do not accept this submission. First, an event of default occurs if there is a material adverse change in the prospects of the Borrower. As he has been demonstrated in the valuation obtained by Casil on 23 July 1997, the site value of land was in the order of HK$340 million. While the Asian Economic Crisis was undoubtedly an external event it had a direct impact on the value of the Peng Chau land. By 24 November 1997 the value of the land had dropped over 50% to HK$265 million. It is beyond argument that a reduction of value of that extent in the land owned by the property developing company, which it intends in the future to develop, has created a material adverse change in the prospects of that company.

85. Irrespective of the cause of the decline in value, that decline in value per se plainly constituted a "material adverse change" in the assets of Chinluck. It would, having regard to that very substantial reduction in value, be plainly extremely difficult for Chinluck to either raise other funds to replace the Casil advance when it fell due, or even to sell, either in advance or when completed, any residential units in the Project at the values projected in early 1997. Both of these circumstances clearly call into serious question the ability of Chinluck to either pay interest when due, or the principal when due.

86. Mr Tong sought to argue that there was no material effect on the ability of Chinluck to "perform its payment obligations" because the payment obligation was confined to the repayment of the loan upon the expiry of the term, on 23 July 1999. I reject the submission. As well as the obligation to repay the principal at the expiry of the term, Chinluck had obligation to pay interest which was running at 15%, amounting to HK$24,750,000 every 6 months. Plainly such a drastic reduction in the value of land the income of a property developing company would be in question and may be affected.

87. Mr Ho was right to remind me that the obligation on Casil was not, as submitted by Mr Tong, that the circumstances that had occurred, had in actual fact, had a material adverse effect on Chinluck. The expression used in the relevant clause was that there must be a change which "could materially affect the ability of the Borrower" to perform its payment obligations, (the emphasis is mine). It is accordingly sufficient therefore that the material adverse change may merely create a risk that the ability of the Borrower to perform its payment obligations may be affected. I am satisfied that it is not a requirement of the clause that there must be actual proof of the impairment of the ability of the Borrower to meet his payment obligations under the Loan Agreement. It is sufficient that a reasonable commercial man, assessing the adverse change, would justifiably come to the view that the prospects of repayment could be, (in the sense of there being a real risk) jeopardised.

88. I am accordingly satisfied that on 4 December 1997, Casil was entitled, pursuant to the Loan Agreement, to demand the whole of the principal sum then advanced, as they did by a letter of that day. They were so entitled because the depreciation in value of the Peng Chau land since the date of the execution of legal charge constituted a material adverse change in terms of the Loan Agreement.

89. The position had not in any way improved by 6 January 1999, when the second demands were served on Chinluck and Mr Shu. The evidence does not demonstrate any recovery in the value of the Peng Chau property to anything approaching the pre-1997 values. The "material adverse change" accordingly still, on 6 January 1999, gave rights to Casil to take steps under the Loan Agreement.

90. Having so found it is not necessary for me to consider whether the mere fact of the fall of the Hong Kong stock and property market in October 1997, also used in Casil's letter of 4 December 1997, was a basis upon which demand could be made, constituted a valid basis. It is, I think, sufficient if I say that Casil's evidence fell far short of being able to establish the relevant facts that would be required to be established if that ground were to be used as at 4 December 1997.

Was Casil obliged to release the title documents for the land exchange:

91. The land exchange was an essential, and early step in the Project. Attached to the documentation sent to Casil on 21 March 1997 was a program for the proposed works. That program provided for the completion of the application procedure for the land exchange to take place in April 1997. Payment of the land premium was scheduled for September 1997. The land premium would only be required to be paid upon the completion of the land exchange. That the land exchange was to take place was also completely clear to Casil from each of the four valuation reports they received. It was thus plain to Casil that the land exchange would be taking place within months after the completion of Loan Agreement and the registration of mortgage against the Peng Chau land, and well before the Loan was due for repayment.

92. The land exchange would involve the surrender of the existing title documents to Government. In their place the owner of the land would be provided with new title documents by Government, those new title documents containing terms appropriate to the proposed new use. In order to surrender the title documents it would be necessary for any mortgage securities charged upon those title documents to the surrendered. The case for Casil appeared to be that that would necessarily involve repayment of mortgage. But mortgage was for a term of two years, and all involved knew, not only that the land exchange would take place at an early stage, but also that it would take place during the duration of the 2 year term loan.

93. The case for Chinluck was that it was an implied term of the Loan Agreement that Casil should release the title deeds in order to effect of the land exchange. Mr Ho put it that the implied term would involve the release of the title deeds to Chinluck. But that is not the case as I shall shortly demonstrate.

94. There are two bases upon which a term will be implied into a contract. The first distinctive business efficacy to the contract. The general principle is stated in the well-known case of The Moorcock (1889) 14 PD 64, at 68 per Bowen LJ. The second basis upon which term may be implied is in a situation where it was so obviously a stipulation in the agreement, that the parties must have intended it to form part of the contract. In this respect, the test known as the "officious bystander" test is used. The term will not, however, thus be implied unless the court is satisfied that both parties would, as reasonable commercial men, have agreed to it, had it been suggested to them: see Chitty on Contracts, 2004 Vol. 1, para 13-007.

95. In the whole of the circumstances it is plain that to give business efficacy to the contract the term ought to be implied. The loan was for two years and the land exchange would take place during that time. There is no other way in which both events could exist. Having regard to the fact that, (a) both parties knew that the land exchange was an early and essential step in the development of the Project, and (b) the Loan was a term loan for a period two years during which time the land exchange would take place; I am left in no doubt at all that had the parties being asked at the time both would have said, of course the title documents must be made available to effect the land exchange. There was simply no other way in which the transaction could have proceeded over the planned several year development programme and the two year term of the mortgage. Whichever test is applied, this is a clear case to imply the appropriate term.

96. The procedure involved would be relatively straightforward in principle, although perhaps in fact complicated by the extent of the land involved and the stage to which the Project had reached at the time the land exchange was to be affected.

97. Upon Government having agreed to the land exchange the legal description of the land following the exchange would be known to the parties. It would be necessary for, at least, a new mortgage to be prepared reflecting that new legal description. It would be a matter for the conveyancers to arrange the execution of the new security documents and the contemporaneous surrender of the old title deeds, the discharge of the old mortgage, and the issue of the new title deeds and the immediate registration of the new mortgage. It would require coordination between Government solicitors, Chinluck's solicitors and Casil's solicitors. The title deeds would remain throughout in possession or control of Casil as mortgagee. They would not be released to Chinluck, and Casil's position as mortgagee would be protected throughout. That would give the protection to the lender in the transaction.

98. I accordingly find that it was an implied term of the Loan Agreement that if the land exchange were approved during the term of the Loan Agreement Casil would be required to make available the title documents in order to effect the Land Exchange. Equally Chinluck and Mr Shu would be obliged to execute any necessary documents in order to perfect Casil's possession as mortgagee of the Peng Chau land in whatever form it was following the completion of the land exchange.

Was Casil in breach of the Loan Agreement in refusing to surrender the title documents for the land exchange:

99. It was not until August 1998 that Chinluck received formal advice from the District Lands Office, Islands Lands Department, that the proposed land exchange was approved. This advice and the terms upon which the approval would be given was contained in a letter dated 7 August 1998. By that time Casil had delivered the letter of 4 December 1997, in which it had called in the Loan, there having been an appropriate Event of Default.

100. I am satisfied, as I have previously indicated, that Casil were then entitled to call in the loan. As will be shortly demonstrated I am satisfied that Chinluck were in default under the Loan Agreement, both as a result of an Event of Default and through their failure to pay interest on the Loan. In those circumstances, I am satisfied that Casil were entitled to retain the title documents until such time as the Loan was repaid. By that time the Loan had ceased, by reason of Chinluck's breach, to be a term loan, and was a loan that was immediately repayable. No issue would therefore arise as to the preparation of a new mortgage, for the mortgage would have to be discharged.

101. I am accordingly satisfied that Casil were not in breach of their obligations and duties under the Loan Agreement in refusing to make available the title documents for the land exchange without repayment of the amount that had been advanced.

102. For this reason it is not necessary for me to consider the consequences of the requirement by Government that any new mortgage given over the Peng Chau land would have to be a "building mortgage", (see condition 20(c) of the Special Conditions to the Land Exchange).

The Yu Tai Hing mortgages:

103. Although the letter of 4 December 1997 demanding repayment of the sum advanced relied upon the encumbrance over the Hoi To property to Yu Tai Hing, Mr Ho did not rely upon that at trial. That was sensible, for as the facts showed the advance was repaid, and the charge over the property was discharged, on 16 September 1997, leaving property debt free. However, in July 1998 Casil borrowed, by two advances, a further HK$5 million from Yu Tai Hing, securing those advances against other Chinluck properties, including the Hoi To property. On its face those advances were a clear breach of Clause 7 B (i) of the Loan Agreement. It was not suggested that the written consent of Casil had been obtained to these advances.

104. Mr Tong in this respect, argued first, that these events occurred after the letter of 4 December 1997, and that no complaint was made about these advances until reliance was made upon them in the pleadings. Second, he argued that the need for funds was caused by Casil's own breach of the Loan Agreement and said that Casil could not seek to benefit from its own wrong. Finally, he argued that was no evidence that Casil's position was adversely affected by this event.

105. In his submissions Mr Ho, while formally relying upon of the 1998 Yu Tai Hing advances, did not press them in any detail. The point is probably moot in any event having regard to my finding that Casil was entitled to call up the loan on for December 1977. While I have considerable sympathy for Mr Tong's point that the need for funds arose from Casil's own default, from which they should not benefit, no authority was cited for the proposition. I am of the view that the 1998 Yu Tai Hing advances constituted a breach of the Loan Agreement.

Has there been a total failure of consideration:

106. The case for Chinluck was that the failure of Casil to advance the full sum of HK$330 million constituted a total failure of consideration which released Chinluck from the provisions of the Loan Agreement and mortgage. Mr Shu for his part relied upon in the same total failure of consideration to contend that he was released from the Guarantee. Both acknowledged that were there a total failure of consideration the actual principal sum advanced would have to be repaid, but said that the release of Chinluck and Mr Shu from the provisions of the Loan Agreement and mortgage, and Mr Shu from the Guarantee, would mean that they were not obliged to pay interest at the contractual rate of 15% per annum, nor meet any other costs imposed by the security documents.

107. Mr Ho contended that the true consideration was Casil's "agreement" to grant loan facility is to Chinluck, rather than the actual performance of advancing the Loan. In my view however it is not necessary to engage in an academic debate on the precise nature of the consideration for the transaction between the parties. It is well-established that any performance of the actual thing promised, as determined by the contract, is fatal to recovery under the heading of a total failure of consideration. In Stocznia Gdanska SA v Latvian S.S. Co. [1998] 1 WLR 574 the contract was for the design, construction and transfer to the buyer of some ships. Payment was to be made by instalments as construction progressed. Work began, and the ships were in the course of construction. Before completion the buyer ceased to make progress payments and the construction yard rescinded the contracts and sued for the unpaid instalments. The buyer contended that as he had not got his finished ships there was a total failure of consideration. At 588 Lord Goff held in the following terms:

"the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due."

In the present case the contractual duty undertaken by Casil was to lend money. It is right that the Loan Agreement specified a sum of HK$330 million, but Chinluck were content to accept the payment of part only, albeit that they were demanding payment of all. Whether the consideration is viewed as the payment of the sum of HK$330 million, or an agreement to pay $330 million, it is unarguable that Casil has performed part of the contractual duties it undertook, by advancing the undisputed sum of HK$248,688,152.30, which sum was accepted by Chinluck.

108. Applying Lord Goff's test, Casil had performed part of the contractual duties it agreed to, and for which, in the context of this case Chinluck would be required to pay interest. I accordingly conclude that there has not been a total failure of consideration which would entitle Chinluck and Mr Shu to be released from the terms of the Loan Agreement, the mortgage, or the Guarantee.

Are Chinluck and Mr Shu liable under the mortgage:

109. The issue of breach of the mortgage must be considered both in terms of breach by Casil, in failing to advance the full amount agreed to be advanced, and as to breach by Mr Shu and Chinluck of the terms of the mortgage. For the reasons I have already set out as to Loan Agreement I conclude that Casil was in breach of the mortgage, but that Chinluck by demanding specific performance has complained that reach and affirmed the contract. Consequently other than any right in Chinluck and Mr Shu to seek damages for that breach, the breach by Casil need not be considered further. Chinluck failed to pay interest after 19 December 1997, and that constituted the breach of the mortgage by both Chinluck and Mr Shu, giving arise to entitlement in Casil to then demand repayment of the full sun that had been advanced. It appears to me that the date at which any damages consequent upon the breach by Casil ought to be assessed would be the date at which failure to make and interest payment occurred. That however is a matter which may yet have to be argued should this matter proceed to a second, damages phase.

110. The Loan Agreement, and the mortgage are quite separate documents. Somewhat surprisingly, the mortgage does not formally import into its terms the provisions of the Loan Agreement. Consequently, the "material adverse change" provision in the Loan Agreement does not operate to constitute a default under the mortgage. Thus, it is arguable that had Chinluck, in issuing its writ for specific performance maintained payment of the interest, and in all other respects complied with the provisions of the mortgage, the Event of Default relied upon by Casil to call in the Loan in December 1997, may not constitute a breach of the mortgage, and may not give rise to the rights of Casil, as a mortgagee, to exercise its power of sale or any other right arising under the mortgage.

111. Chinluck however, even after issuing its writ for specific performance, did not pay the interest due under the mortgage. That constituted a breach of clauses 2.01 (viii) and (ix) of the mortgage which provide that both Mr Shu and Chinluck must pay all interest on any principal sum borrowed.

112. Mr Tong contended that the demands of 6 January 1999 were invalid and of no legal effect because they merely purported to assert that the Loan was due, which, Mr Tong contended, would not be until 24 July 1999. It is right that the letters make no special reference to in the Event of Default under the Loan Agreement nor any breach of the mortgage or Loan Agreement as to the non-payment of interest, nor any reference to the Yu Tai Hing mortgages. However, although not formally specifying the non-payment of interest as a default, the letter does demand payment of interest, which, at that time, had not been paid. That interest had been due on 28 December 1997, and thereafter and was plainly in arrears. It is well established that a party refuses to perform a contract and gives a wrong or inadequate reason for that refusal, he may later justify the refusal if there were facts in existence that would have provided a good reason, even if he did not know of those facts: see Chitty on Contracts 2004 Vol. 1 para 24-104.

113. I conclude that the demands made by Casil of both Mr Shu and Chinluck, on 6 January 1999, constitute valid demands for payment of the interest and principal then outstanding. At the time of the demands the interest was in arrears, and Casil was entitled to demand repayment of the full sum.

114. The land charged under the mortgage was owned, as to one part, by Chinluck, and as to the second part, by Mr Shu. A mortgage consists of two things, namely a personal contract for payment of a debt and a disposition or charge of the mortgagor's the State or interest and security for repayment of the debt: see Halsbury's Laws of England, 4th Ed. para 302. A breach of the mortgage is therefore a breach of the personal contract for payment of the debt by both Mr Shu and Chinluck.

115. The breach gives rise to personal liability on the part of Mr Shu, as well as liability on the part of Chinluck, as well as being the trigger giving rise to Casil's rights of enforcement under the specific terms of the mortgage documents. No issue arises as to the latter, because Casil has not sought to exercise its powers under the mortgage. However the breach by way of failure to pay interest results in personal liability by Mr Shu for the full amount advanced, together with interest thereon.

Is Mr Shu liable under the Guarantee:

116. The general approach to the construction of a guarantee is that contracts of this kind must be strictly construed so that no liability is imposed on the surety which is not clearly and distinctly covered by the terms of the agreement: Law of Guarantees 3rd Ed. 2000, para 4.02, Andrews & Millett. The law is clear that if a guarantee expressly requires a demand to be made on the surety, the creditor cannot sue the surety until he has made such a demand: see Re Brown's Estate [1893] 2 Ch 300, and Andrews & Millett, above para 7.02A.

117. Clause 2.2 of the Guarantee requires the Guarantor to pay the Creditor upon demand. There are no special provisions in Guarantee as to what might constitute the demand nor as to the circumstances in which the demand may be made, other than that the liability of the Guarantor does not arise until liability has arisen in the Borrower.

118. The demand made by Casil on 4 December 1997, was confined to Chinluck, and cannot constitute a demand under the Guarantee. However, on 17 November 1998, formal demand was made upon Mr Shu seeking payment of the sums paid under the Loan Agreement, together with interest thereon. A second similar demand was made on 6 January 1999. I am satisfied that on both of those dates the demands were valid because the loan had fallen due by virtue of the reduction in value of the Peng Chau land, that constituting an Event of Default, and there was unpaid interest outstanding.

119. Mr. Tong relied upon Burton v Gray (above) where the guarantee was given in consideration of the bank lending to the guarantor's brother a certain sum. The banking records demonstrated that the sum had not in fact been advanced. There is no indication in the report that the brother complained in any way at the conduct of the bank, indeed it may well be argued that he was perfectly content as to the way in which the bank had dealt with the matter. But notwithstanding that, the requirement of strict interpretation of the guarantee meant that the guarantor was released from the guarantee, because that which he had agreed to guarantee was not in fact given. Mr. Tong argued that it was the same in the present case. Casil agreed to lend to Chinluck HK$330 million. They did not in fact advance that sum, and I have held them to be in breach of the Loan Agreement. Chinluck, by electing not to accept that breach as repudiatory of the contract cannot rely upon the breach now. But, it was argued, Chinluck's decision does not impact on Mr Shu in his capacity as guarantor. In the same manner as the guarantor was released in Burton v Gray, Mr. Tong argues, so should Mr Shu be released from the Guarantee in this case.

120. Were the Guarantee limited to being a contract of indemnity, or suretyship, this may well be a good argument. There are however two reasons why, in this case, Mr. Shu is not released from the guarantee. First, the law is that where a creditor has committed a repudiatory breach of contract, or is in breach of a condition of that contract, entitling the principal to terminate the contract and be discharged from any further liability, the surety will be likewise discharged from further liability under his guarantee in the event that the principal accepts the repudiation: see Andrews & Millett, above, 6.29, and Ankhar Pty. Ltd. v National Westminster Finance Ltd. (1987) 61 ALJR L45. The decision of Chinluck to affirm the contract, and waive the breach, by pursuing the writ for specific performance meant that the surety remained liable on the guarantee.

121. Second, the Guarantee document contains a "principal debtor" clause, (see para 24 above). Such a clause is commonly included in bank guarantees and similar documents. Where the creditor wishes to avoid the technical rules relating to contracts of suretyship under which the surety may become discharged from liability in various circumstances, such as a variation of the principal contract, or breach by the creditor of the principal contract, the creditor may require the surety to be made a principal debtor as against the creditor, although he remains a surety as against the person whose debt he guarantees. In such an event the transaction takes effect according to its terms and the creditor is entitled to treat the surety as a principal debtor in every respect: see Chitty on Contract, Vol. 2 28th Ed. Para 44-003; Orme v de Boyette [1981] 1 NZLR 576 at 580 CA.

122. The consequence of being a principal debtor is that any breach of the principal contract by the creditor, or the giving of time or the like, will not serve to release the surety who has agreed to be treated as a principal debtor. It follows that Mr Shu is liable on the Guarantee.

The consequences of the findings on the issues:

123. The consequences of these findings appear to me to be as follows:

1. Chinluck are entitled to damages consequent upon Casil's breach of the Loan Agreement in failing to advance the full amount of the Loan.
2. The failure of Chinluck and Mr Shu to pay the interest instalments due under the Loan Agreement and the mortgage constituted a breach of both the Loan agreement and the mortgage which breach entitled Casil to call in the Loan. That breach occurred on 28 December 1997.
3. On 4 December 1997 an Event of Default had occurred and Casil was then entitled to repayment of the amount that had been advanced.
4. As Casil was entitled to repayment of the Loan at that date, or in any event at 28 December 1997. Consequently, any damages assessed under item 1 above should be assessed as at 4 December 1997, or at the latest, at 28 December 1997.
5. Casil are entitled to judgment under the Loan Agreement for the amount of principal outstanding as at 4 December 1997, together with interest thereon in terms of the Loan Agreement.

6. Casil are entitled to judgment against both Chinluck and Mr Shu under the mortgage.
7. Casil are entitled to judgment against Mr. Shu on the counterclaim against him in so far as it relates to the Guarantee.

124. It may be that counsel will take a different view of the consequences of my findings. There is also the issue of the set-off pleaded by Casil in respect of any damages that may be assessed as a result of Chinluck's breach of the Loan Agreement. For those reasons I do not now enter judgment, but invite the parties to apply to formally enter judgment where appropriate. As the matter is not yet finally concluded, and may yet pass to the damages stage, costs will be reserved.

125. It will be necessary for counsel to arrange a date for directions for the further conduct of this action in terms of the findings that I have made.

	(John Saunders)
	Deputy High Court Judge

Representation:

Mr. Ronny Tong SC and Ms. Jane Curzon Lo, instructed by Messrs Lo & Lo, for the Plaintiffs by original action and the Defendants by counterclaim

Mr. Ambrose Ho SC and Ms. Joyce Leung, instructed by Messrs Winston Chu & Co, for the Defendant by original action and the Plaintiff by counterclaim

37683-EN-2001-03-15

CHINLUCK PROPERTIES LTD. v. CASIL CLEARING LTD.

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HCA011008/1997

HCA 11008/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11008 OF 1997

BETWEEN
	CHINLUCK PROPERTIES LIMITED	Plaintiff

	AND

	CASIL CLEARING LIMITED	Defendant

	(by original action)


AND BETWEEN
	CASIL CLEARING LIMITED	Plaintiff

	AND

	CHINLUCK PROPERTIES LIMITED	1st Defendant
	CHENG ZHEN SHU	2nd Defendant

(by counterclaim)

Coram: Hon. Sakhrani J in Chambers

Date of Hearing: 15 March 2001

Date of Judgment: 15 March 2001

_____________________

J U D G M E N T

_____________________

1. This is an appeal from the order of Master Mary Yuen made on 29 November 2000 whereby she gave leave for Gold All International Investment Limited ("Gold All") and Cheng Zhen Shu ("Shu") to be added as plaintiffs in the action. She also gave leave to the plaintiff by original action to amend the writ of summons and the statement of claim.

2. By the statement of claim the original plaintiff Chinluck Properties Limited ("Chinluck") sued the defendant for breach of a loan agreement made between Chinluck as borrower and the defendant as lender dated 24 July 1997 whereby the defendant agreed to grant and advance a loan of HK$330 million to Chinluck. The loan was to be secured by a legal charge on two properties in Peng Chau as pleaded in the statement of claim. The registered owner of one of those properties was Chinluck whilst the registered owner of the other property was Shu. The loan was also to be secured by a personal guarantee from Shu in favour of the defendant. Shu was the president and beneficial owner of all the fully paid up shares of Chinluck and Gold All and other companies pleaded in the amended statement of claim filed pursuant to the order of the master.

3. The legal charge on the two properties and the said personal guarantee of Shu were provided to the defendant and amounts were drawn down under the loan agreement. These included amounts under the loan agreement which were used to pay off loans owing to the defendant by companies controlled by Shu. This has been pleaded in para 5 of the re-amended reply of Chinluck and the defence to re-amended counterclaim of Shu. Also, on 5 August 1997, the plaintiff drew down the sum of HK$75 million from the defendant under the loan agreement. However, when the plaintiff later requested payment of a further sum of HK$78,688,152.30 from the defendant under the loan agreement this was refused by the defendant. Chinluck's claim was for specific performance of the loan agreement and payment of the said sum as well as damages in addition to specific performance.

4. The defendant denies the claim and filed a defence and counterclaim against Chinluck as well as against Shu on the personal guarantee claiming payment of sums due and payable under the loan agreement and under the personal guarantee. The counterclaim against Chinluck and Shu is for, inter alia, payment of the sum of HK$308,720,192.75 as particularized in para 27 thereof.

5. By the application to amend the statement of claim and to add parties as additional plaintiffs, Chinluck sought to add Gold All as the 2nd plaintiff and Shu as the 3rd plaintiff. The loan agreement was previously pleaded as a written agreement made on 24 July 1997. By para 3 of the amended statement of claim, it is pleaded as a contract made partly orally and partly in writing. Also, it is pleaded that Chinluck on behalf of itself and Gold All entered into the loan agreement as the borrower. It is pleaded that in so far as it was made orally, it was made between Wang Mei Yue ("Wang"), chairman of the defendant, and Shu. I am told that a minor amendment needs to be made to the pleading as already filed to make it clear that the meeting took place during a dinner party held on 14 July 1997. Mr Ho, counsel for the plaintiffs, has also submitted that para 3A of the amended statement of claim pleads the oral part of the agreement namely, that it was made known by Shu to Wang and agreed that the loan was required by Gold All to meet stage payments under the Prince Garden project as well as to feed premium payment for exchange of lands for the Peng Chau project. By the earlier part of the pleading, it was asserted that Gold All had entered into a contract to purchase apartment units in Prince Garden in Shanghai, being the Prince Garden project, for resale at a profit and that the deposits and balance of purchase price were to be paid at stages (para 2B and 2C). It was also asserted that Chinluck had submitted an application to the District Lands Office Islands for land exchange in respect of industrial and agricultural lands in Peng Chau which were registered in the names of Chinluck and Shu to be redeveloped into a residential development with clubhouse facilities for profit (para 2E). Thus, it was asserted that the loan under the loan agreement was also required to meet the stage payments under the Prince Garden project as well as for payment of premium for the exchange of lands for the Peng Chau project.

6. Mr Yin, counsel for the defendant, has submitted that the defendant would suffer irreparable prejudice if the amendments were allowed. He points out that previously the loan agreement was said to be in writing but only by the amendment is it said to be partly oral and partly in writing. Wang is alleged to have entered into the oral part of the agreement on behalf of the defendant. Wang, however, has left the defendant's employment in March 1999 and has gone to live in the United States of America. The defendant has difficulty contacting Wang according to the affirmation of Wang Yanguang. However, according to para 10 of the said affirmation, the defendant has been in touch with Wang and has asked him about the allegations in the proposed amended statement of claim. Wang has denied having the discussions or making any alleged oral agreement with Shu. Wang simply denies the oral part of the agreement. The position is not that the defendant will be unable to locate Wang. Even if he is located, from what is stated in the said affirmation Wang denies that he had the discussions as alleged in the amended statement of claim with Shu. Also, it appears that Wang would be a reluctant witness in any event. That might still have been the position even if the matters introduced by amendment as regards the agreement being partly oral and partly in writing were matters originally pleaded. In the circumstances, I do not think that the defendant would be prejudiced by the amendment to the extent that it cannot be adequately compensated by an order for costs in its favour.

7. Mr Ho has submitted that the oral part of the agreement is pleaded in para 3A. I am of the view that para 3 and para 3A of the amended statement of claim sufficiently pleads what the plaintiff's case is on what the oral part of the agreement is.

8. Para 5A of the amended statement of claim pleads implied terms of the loan agreement. The defendant would be entitled to particulars of the basis on which it is said that the terms were implied. I have been told by Mr Ho that the implied terms were to be implied by necessary implication from the terms of the loan agreement. If such particulars are supplied, I see no objection to the amendment in para 5A.

9. As regards the securities provided under the loan agreement namely, the legal charge on the two properties and the personal guarantee, it is important to see the prayers for relief. Quite apart from the claim by Chinluck for specific performance of the loan agreement and for damages in addition to specific performance, there is also a claim for a declaration that the legal charge granted by Chinluck and Shu has been avoided or discharged. There is also a claim for damages for breach of the loan agreement by Gold All. Shu claims for a declaration that his liabilities under the personal guarantee given to the defendant are discharged and for an order that the personal guarantee be delivered up to be cancelled.

10. In para 9 of his defence to amended counterclaim dated 20 May 1999, Shu avers that there has been a total failure of consideration on the part of the defendant. It must be remembered that the loan agreement was a secured loan agreement secured by a legal charge on the two properties and the personal guarantee from Shu. Loans were advanced under the loan agreement for substantial amounts. This is accepted by Mr Ho. It was the non-payment of the sum of HK$78,688,152.30 out of the total loan amount of HK$330 million that was the subject of complaint in the action. There has clearly been consideration moving from the promisee. There is no question but that any claim based on total failure of consideration will inevitably fail. Any claim seeking a discharge of the legal charge on the two properties and the personal guarantee of Shu will, in my view, fail.

11. As is stated in Andrews and Millett "Law of Guarantees" 3rd ed para 9.17:

"If the creditors commits a repudiatory breach of his contract with the principal so that the principal is entitled to treat the contract as at an end, the surety is also discharged from further liability."

And it goes on as follows :

"The principal will, however, remain liable in respect of rights which have accrued due prior to the termination, and the surety will be correspondingly liable."

12. As Mr Yin has submitted, to seek to discharge the securities given under the loan agreement in circumstances where monies have been advanced under the loan agreement would be tantamount to seeking to convert the secured loan into an unsecured loan and that would be re-writing the contract between the parties which the court will not do. In my view, Chinluck's claim for a declaration that the legal charge has been avoided or discharged and Shu's claim for a declaration that the personal guarantee has been discharged are misconceived. I am satisfied that the amendments which deal with these claims ought not to be allowed. Save as aforesaid, I would allow the amendments to the statement of claim. I will hear counsel on the order I should make.

	(Arjan H Sakhrani)
	Judge of the Court of First Instance

Representation:

Mr B K Ho instructed by Messrs Bernard Wong & Co, for the plaintiff (by original action) and defendants (by counterclaim)

Mr Michael Yin instructed by Messrs Winston Chu & Co, for the defendant (by original action) and plaintiff (by counterclaim)

(i)	There was only a blanket denial of Casil’s breach of the Agreement in its defence;
(ii)	Casil called no witness at trial to testify in support of the allegation that it had no knowledge that the Loan was to be used for the Peng Chau project. A suggestion that all of its executive officers had “retired and could not be located” was criticised by the court as “unbelievable”;
(iii)	The defence by Casil to the allegation of breach of the agreement was flimsy.

“	2.	Interest
		A.	Interest on the Loan shall accrue at the rate of 15% per annum.
		B.	Interest on the Loan shall be payable on the 28th of December of 1997, 28th of June, 1998, 28th of December, 1998 and 28th of June, 1999 (“Interest Payment Dates”). Notwithstanding Clause 9 of this Agreement, if any of the Interest Payment Dates shall fall on a date which is not a business day, such Interest Payment Date shall fall on the immediately preceding business day.
	3.	Repayment
		The full principal amount of the loan and all other sums payable under the terms of this Agreement shall be repaid by the Borrower on 23rd of July, 1999 (“the Repayment Date”)”

“	2.	COVENANT FOR REPAYMENT OF SECURED INDEBTEDNESS
		2.01	In consideration of the Lender agreeing at the request of the Mortgagor to grant to the Borrower the Facility applied for the Mortgagor and the Borrower HEREBY COVENANTS with the Lender that, subject as hereinafter provided, the Mortgagor and/or the Borrower will on demand by notice in writing of the Lender made to the Mortgagor and/or the Borrower pays make good and discharged to the Lender:-
			(i)	all sums of money which at the date of such demand may be outstanding and according to the books of the Lender, payable by the Borrower to the Lender in respect of any account whatsoever between Borrower and the Lender; and
			…..
			(xii)	interest on all sums advanced and all other moneys payable hereunder at such a rate(s) per as is is/are applicable under the terms relating to any facility(ies) granted to the Borrower or at such other rate(s) as may from time to time be determined by the Lender which determination shall be conclusive and binding on the Borrower. Such interest shall be calculated with the usual monthly rests or on such other basis as may from time to time be stipulated by the Lender in any facility letter covering the relevant sums advanced and shall be paid monthly in arrears on such a date in each succeeding calendar month as the Lender shall stipulate.”

“	1.01	(h)	“Secured Indebtedness” means all sums from time to time advanced by the Lender to the Borrower and outstanding and interest thereon and all other moneys and obligations in respect of the moneys which the Mortgagor and/or the Borrower covenants to pay to the Lender under the terms of this Charge.”
“	4.01		If the Mortgagor and/or the Borrower shall on demand as aforesaid or otherwise pay to the Lender the Secured Indebtedness and have duly performed and observed all the terms, covenants and agreements herein provided THEN THE LENDER SHALL at any time after such payment shall have been so made upon the request and cost of the Mortgagor execute a receipt or otherwise discharge this security.”

(1)	The assessment of damages shall be heard by this Court by the trial judge.
(2)	The automatic directions set out in O. 37 r. 1 are not to be applied to the assessment.
(3)	Within 60 days of today, the Plaintiff must supply to the Defendant the witness statements, and expert reports, upon which it intends to rely in the assessment.
(4)	Within 21 days of today, the Plaintiff must make discovery of documents in accordance with O. 24 r. 2, and inspection within 14 days thereafter in accordance with O. 24 r. 9.
(5)	40 days following the receipt of the Plaintiff’s witness statements and the expert reports, the Defendant shall supply to the Plaintiff copy of the witness statements and the expert reports upon which it intends to rely at the assessment.
(6)	Neither party shall thereafter file any further witness statements or expert reports without the leave of the Court.
(7)	Leave is reserved to apply.
(8)	The costs of incidental to the summons for directions shall be costs in the cause of the assessment. The Plaintiff’s costs on the Defendant’s summons to strike out are to be Plaintiff’s costs in the cause of the assessment.

Total amount of the Loan	$330,000,000.00
Less preliminary advance	20,000,000.00
Less agreed deduction	153,688,152.30
Less "First Instalment"	75,000,000.00
Sum advanced	248,688,152.30

Balance due	81,311,847.70