INABATA SANGYO (HK) LTD v. SUPERIOR PRECISION ENGINEERING CO. LTD AND OTHERS

HCA 1086/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1086 OF 2008

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ASSESSMENT OF DAMAGES

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Background

1.  On 18 August 2005, the 1^st Defendant and the Plaintiff entered into a sale and purchase contract whereby the 1^st Defendant agreed to purchase 12 sets of hydraulic injection moulding machines (“the Goods”) at a total price of JPY256,300,000 (“the Contract”).  There is a retention of title clause in the Contract.  It means that the Goods shall remain the property of the Plaintiff until purchase price of the Goods is fully paid.

2.  The 2^nd to 5^th Defendants guaranteed the payment of the purchase price of the Goods by a written guarantee dated 19 August 2005.

3.  The 1^st Defendant is a company incorporated in Hong Kong while the 2^nd , 4^th and 5^th Defendants were the shareholders/directors and the 3^rd Defendant was a director of the 1^st Defendant at all material times.

4.  The 1^st Defendant only partly settled the purchase price leaving an outstanding sum of JPY192,000,000 and an outstanding interest of JPY11,566,973.

5.  The Plaintiff obtained default judgment against the 2^nd and 5^th Defendants.

6.  On 11 March 2009, the Court entered summary judgment against the 1^st Defendant and granted unconditional leave to the 4^th Defendant to defend.

7.  The Plaintiff also obtained interlocutory judgment against the 3^rd Defendant with damages to be assessed because the Court found that there were disputes of facts in relation to whether the Plaintiff had acted reasonably in mitigating its loss.

8.  This is the assessment of damages against the 3^rd Defendant.

The Plaintiff’s Case

9.  The Plaintiff called 2 witnesses.  The first one is Mr. Masahiro Sato who is the General Manager of Shanghai Inabata Trading Co. Ltd., a wholly-owned subsidiary of the Plaintiff.

10.  Mr. Sato adopted his witness statement dated 29 September 2009 as his evidence.

11.  In his witness statement, Mr. Sato said that in around June 2008, he discovered that the Plaintiff had been perpetrating a fraud upon the Plaintiff and that had been for a period of 6 months.  Mr. Sato found out that while the 1^st Defendant had provided 5 bank transfer slips purporting to be evidence of bank transfers for payment of part of the purchase price of the Goods, between December 2007 and May 2008, there were in fact no such transfers.

12.  A representative of the Plaintiff was sent to visit the offices and factory of the 1^st Defendant in WuXi, PRC.  On 11 July 2008, the Plaintiff caused a search to be made at WuXi City Commercial Administrative Management Bureau.  The results shown that the 1^st Defendant had transferred its interest in the Goods to a connected third party, Superior Precision Engineering (WuXi) Ltd, which in turn had mortgaged the Goods to Bank of China in PRC (“the Bank”) as security for certain loans (“the Loan”).  These transactions were carried out without the knowledge/consent of the Plaintiff.

13.  In fact, as early as on 1 July 2008, the Plaintiff had through its PRC lawyer, Mr. Min Wei, raised objection to the WuXi Court’s property preservation procedures in relation to the Goods.  On 26 September 2008, the Plaintiff raised objection to execution to the WuXi Court. Upon advice of Mr. Min Wei, including a letter dated 24 November 2008, the Plaintiff withdrew its objection to the property preservation in the WuXi Court on 26 November 2008.

14.  Under cross-examination, Mr. Sato accepted that the rights of the Bank only extended to the amount of the Loan. However, he had no idea as to the extent of the claim of the Bank. Mr. Sato believed that he did give a thought about it but he did nothing further. He was not sure if the Plaintiff had any right in the proceeds of sale of the Goods. There was no advice on this.

15.  Mr. Min Wei was also called as a factual witness as well as an expert witness.  In so far as factual evidence is concerned, his evidence had already been covered by that of Mr. Sato.

16.  In the course of this hearing, I excluded the expert evidence of Mr. Min upon the application of the 3^rd Defendant.  It was my ruling that Mr. Min had not read the Code of Conduct for expert witnesses in Appendix D of Order 38 of the Rules of the High Court before he prepared his expert report.  I had given my reasons when I made this ruling and I shall not repeat them here.

17.  The 3^rd Defendant did not call any witness.

The Issue

18.  The only issue before the Court is whether the Plaintiff had mitigated its loss.

19.  It is trite law, and there is no dispute from the parties, that a Plaintiff “must take all reasonable steps to mitigate the loss to him consequent upon the Defendant’s wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through unreasonable action or inaction, to avoid”.  (para 7-004, McGregor on Damages, 18^th edition).  The onus is on the Defendant to prove that the Plaintiff had failed to take certain steps to mitigate his loss (para 26-103, Volume 2, Chitty on Contract, 2008 edition).

20.  Mr. Chain, Counsel for the 3^rd Defendant, submitted that since the Court excluded the expert evidence of Mr. Min, there was in fact no evidence of PRC law before the Court.  In the absence of proof of foreign law, the common law rule is that the Court applies Hong Kong law i.e. the foreign law is deemed to be the same as Hong Kong law.  On this, Mr. Chain relied on rule 18 as stated in Dicey, Morris and Collins on the Conflict of Laws, 14^th edition.

21.  Mr. Chain went on to submit that by applying Hong Kong law, the retention of title clause was a valid one and enforceable against the whole world including the Bank.  The Plaintiff should have commenced and proceeded with a litigation in the PRC by claiming title to the Goods.  He relied on Western Trust & Savings Ltd v Clive Travers & Co. [1997] PNLR 295 to support his submission (“Western Trust”).

22.  In Western Trust, H & W were registered proprietors of a property.  The Plaintiffs offered H a loan on condition that they obtained a first legal mortgage on the property.  The Defendant solicitors acted for both H and the Plaintiffs.  In a report on title, which purported to reveal any matters adversely affecting the property, the Defendants negligently failed to inform the Plaintiffs that W was also a registered proprietor, and that there was already a mortgage in favour of another lender.  The Plaintiffs would not have entered the transaction if the report had been accurate.  In May 1987, the Plaintiffs advanced a sum to H.  The Defendants discharged the pre-existing mortgage from this sum and accounted for the rest to H.  In early 1988, the Plaintiffs were aware of W’s involvement.  H then fell into arrears with the loan.  In August 1988, the Plaintiffs commenced proceedings against H for possession of the property which were adjourned for several times.  In December 1990, W was joined as a defendant in the possession action.  The Plaintiffs took no further steps in the possession action thereafter.  In January 1993, the Plaintiffs took out proceedings against the Defendants who contended that the Plaintiffs had failed to establish the necessary causation in respect of their loss and, by not pursuing the possession action, had failed to mitigate their damages.  The Court assessed the Plaintiffs’ damages in the nominal sum of £1.  The Plaintiffs’ appeal was dismissed.

23.  Phillips LJ, after having referred to Pilkington v Wood [1953] 1 Ch 770, as cited by Counsel for the Plaintiffs therein, said the “facts of [Pilkington] case were, in my judgment, very different from the facts in the present case.  In the present case the litigation in question was no more than a possession action which is an ordinary feature of enforcing security, with which the Plaintiffs in this case will be well familiar and which would have been a necessary step whether or not there were defects in the security.  Such litigation is in no way analogous to the action that was proposed in Pilkington”.  (letter F, page 303)

24.  In Pilkington, the Plaintiff claimed against his solicitors for failing to advise him of a title defect.  The Defendants admitted liability but contended that the Plaintiff should, before bringing the action against the Defendant, have mitigated his loss by suing the vendor on the covenant for title as implied by statute.  Harman J found that the vendor would resist any claim and went on to rule that “the so-called duty to mitigate does not go so far as to oblige the injured party, even under an indemnity, to embark on a complicated and difficult piece of litigation against a third party”.  (page 777 of the report)

25.  These authorities are illustration of what a Plaintiff should have done to mitigate his loss under particular circumstances.  In Pilkington, the Court ruled that the Plaintiff did not act unreasonably in not claiming against the vendor.  In Western Trust, the Court ruled that the Plaintiffs should have commenced and proceeded with the possession action.  It is obvious and understandable that decisions in these cases were, and cases of this sort must be, made against the backgrounds of the case.

26.  It is the 3^rd Defendant’s case that the Goods are subject to a retention of title clause and thus a piece of simple litigation for claiming title will help to mitigate or even avoid any loss.  This submission is however premised upon the exclusion of the expert evidence of Mr. Min concerning what is the governing PRC law and its application.

27.  The issue here is not whether PRC law or Hong Kong law should apply at the material times.  The position, of course, would be different, if that is so.  As the 3^rd Defendant is saying that the Plaintiff failed to mitigate, the 3^rd Defendant has to prove so.  It is incumbent upon the 3^rd Defendant to adduce evidence to show that the Plaintiff failed to take reasonable steps to mitigate loss in the light of all the circumstances including the applicable law, be it PRC law or Hong Kong law.  If the 3^rd Defendant contends Hong Kong law should apply, evidence should be led for this purpose.  However, there is no such evidence and in fact the 3^rd Defendant adduced no evidence in this case.  It is thus not open to the 3^rd Defendant to submit that Hong Kong law applies by reason of the failure on the part of the Plaintiff to prove what is the governing PRC law.

28.  Even assuming that the submission of the 3^rd Defendant is right and that Hong Kong law shall apply, does it mean that the Plaintiff should pursue legal proceedings in PRC to claim title to the Goods or the balance of the proceeds of sale after paying off the debt owing to the Bank? It is not a question of mere submission and the question has to be answered in the light of the factual backgrounds of this case as placed before the Court.  The only evidence before the Court is that the 1^st Defendant had not fully paid for the Goods which are subject to a retention of title clause.  The Goods were somehow mortgaged to the Bank by Superior WuXi.  There is no evidence as to what had happened to the Goods after they came into the hands of the 1^st Defendant. There is no evidence as to the circumstances under which and how Superior WuXi would be in the position to mortgage the Goods.  There is also no evidence as to the stance of Superior WuXi in relation to the ownership or title of the Goods or the balance of the proceeds of sale. 

29.  While some machineries and plants of Superior WuXi (and including the Goods) were sold by auction at around RMB 16 million and part of this proceeds of sale was applied to pay off the Loan in full, there is no evidence as to the price at which the Goods were sold; and there is no evidence as to the extent of the interest of the Bank in the proceeds of sale. The fact that the Bank is fully paid off does not necessarily mean that the proceeds of sale of the Goods is sufficient to pay off the debt owing to the Bank. It may be the case that there is other security in relation to the Loan and such security is part of the machineries and plants sold as aforesaid.

30.  What are known to the Court are only small parts of the story.  Without the missing information as aforesaid, I am of the view that there is simply insufficient evidence to support the submission of the 3^rd Defendant that the situation is that simple like Western Trust.  

31.  The 3^rd Defendant submitted that since the advice of Mr. Min, being the Plaintiff’s lawyer and thus its agent, was patently wrong, the Plaintiff was not entitled to rely on the fact that they acted upon the advice of their lawyer. I do not agree that the Court should view this matter from the perspective of agent and principal as suggested by the 3^rd Defendant. Even assuming the advice is wrong and that the situation is a simple and straightforward one so that a simple litigation in PRC will help to mitigate or avoid loss, the ultimate question for the Court to decide remains the same - did the Plaintiff act reasonably in all the circumstances? 

32.  Once the Plaintiff spotted that there might be something wrong, they carried out investigation without any delay.  The Plaintiff’s objection to the WuXi Court’s property preservation procedures was raised by the Plaintiff’s PRC lawyer, Mr. Min, on 1 July 2008, less than one month after Mr. Sato discovered the alleged fraud.  A search was conducted on 11 July 2008 revealing the mortgage aforesaid.  The Plaintiff raised objection to execution to the WuXi Court on 26 September 2008.  Notice of hearing was issued by the WuXi Court on 7 October 2008.  The hearing scheduled to take place on 21 October 2008 was vacated.  The Plaintiff eventually withdrew their objection on 26 November 2008.  Such withdrawal was approved by WuXi Court on 2 December 2008.

33.  The Plaintiff did take out legal proceedings against the Bank at the outset.  However, they withdrew their case upon the legal advice of Mr. Min.  I do not see anything wrong on the part of the Plaintiff.  The Plaintiff is a Hong Kong company facing legal problem in the PRC.  It is entirely normal for the Plaintiff to instruct a PRC lawyer for legal advice.  The Plaintiff is not in the position to tell whether the legal advice rendered by Mr. Min is a sound one or not. Thus, it is also entirely normal and reasonable for the Plaintiff to rely and act on the legal advice given. 

34.  For the reasons aforesaid, I am satisfied that the Plaintiff had acted reasonably.  The 3^rd Defendant failed to prove that the Plaintiff had failed to mitigate its damages.

Quantum

35.  It is my ruling that the 3^rd Defendant has to pay damages in the sum of JPY192,100,000 or HK$15,314,094.39 and interest up to 19 May 2010 at HK$1,461,775.20 and thereafter at judgment rate until full payment.  The calculations of the figures are in fact not disputed by the 3^rd Defendant.

Costs

36.  The 3^rd Defendant do pay costs of the assessment (excluding the costs of and in relation to the expert evidence of Mr. Min) to be assessed by summary assessment if not agreed.

37.  If costs is not agreed and has to be assessed as aforesaid, the parties should fix a date for such hearing (30 minutes) within 14 days from the date of handing down of this judgment.  The 3^rd Defendant shall file and serve his objection not less than 7 days before the hearing.

Mr. K. Bowers of Messrs. Richards Butler for the Plaintiff

Mr. B. Chain instructed by Messrs. So, Lung & Associate for the 3^rd Defendant

HCA1086/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1086 OF 2008

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J U D G M E N T

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1. There were originally two summonses to be dealt with, namely :

(a)  plaintiff’s summons for summary judgment against the 1^st, 3^rd and 4^th defendants; and

(b) the 1^st defendant’s summons to strike out the plaintiff’s Statement of Claim.

2. At the start of the hearing, leave was given to the 1^st defendant to withdraw its summons for striking out.

3. This judgment therefore only deals with the plaintiff’s application for summary judgment.

Background

4. The 1^st defendant is a company incorporated in Hong Kong.

5. The 2^nd, 3^rd, 4^th and 5^th defendants were directors of the 1^st defendant at all material times.

6. On 18 August 2005 the 1^st defendant entered into a written Sales Contract (“the Sales Contract”) with the plaintiff whereby the 1^st defendant agreed to buy from the plaintiff 12 hydraulic injection moulding machines (“the Goods”) for JP¥256,300,000.

7. By a written Guarantee dated 19 August 2005, the 2^nd to 5^th defendants guaranteed the payment of the purchase price by the 1^st defendant under the Sales Contract.

8. The Goods were duly delivered by the plaintiff on various dates and the purchase price under the Sales Contract fell due in the amounts and on the dates as follows :

(a)  JP¥30,300,000 on 29 October 2006;

(b) JP¥116,000,000 on 13 January 2007; and

(c) JP¥110,000,000 on 4 March 2007

9. In November 2006 there was an oral agreement reached between the plaintiff and the 1^st defendant (inter alia) as follows :

(a)  payment of the JP¥30,300,000 be deferred by 4 months to 28 February 2007;

(b) payment of the JP¥116,000,000 and JP¥110,000,000 be deferred for 6 months until 13 July and 4 September 2007 respectively; and

(c) provided that interest on the outstanding purchase price above at the agreed rate of 6% p.a. be paid to the plaintiff by the 1^st defendant on a monthly basis until full payment of the purchase price.

10. On 9 May 2007, the 1^st defendant made part payment of JP¥2,190,839 to the plaintiff in part settlement of the purchase price under the Sales Contract.

11. On 15 June 2007 a further part payment of JP¥30,300,000 was paid by the 1^st defendant to the plaintiff under the Sales Contract.

12. By 12 July 2007 the plaintiff’s statement of account showed the outstanding purchase price under the Sales Contract to be JP¥226,000,000 and the outstanding interest to be JP¥3,278,170.

13. On 4 September 2007, the 1^st defendant made a further part payment of JP¥13,889,918 to the plaintiff.  Of this amount, JP¥11,300,000 was in part payment of the outstanding purchase price under the Sales Contract and JP¥2,588,918 being for payment of interest accrued for the period from 22 April to 31 August 2007.

14. The effect of this last part payment by the 1^st defendant reduced the outstanding purchase price under the Sales Contract to JP¥214,700,000, and reduced the outstanding interest to JP¥2,695,389 by 4 September 2007.

15. By a Settlement Agreement in writing dated 15 November 2007 (“the Settlement Agreement”) the 1^st defendant agreed (inter alia) that the amounts in paragraph 14 above, both as to outstanding purchase price and outstanding interest, was owed to the plaintiff by the 1^st defendant.  The Settlement Agreement was signed by the 3^rd defendant on behalf of the 1^st defendant in his capacity as a director of the 1^st defendant.

16. Thereafter, 2 further payments each of JP¥11,300,000 were made by the 1^st defendant to the plaintiff on 9 October and 12 November 2007.

17. As at 8 July 2008, when the Writ herein was issued, the plaintiff’s statement of accounts showed an outstanding purchase price of JP¥192,000,000 and outstanding interest of JP¥11,566,973 owed to it by the 1^st defendant in respect of the Sales Contract.

18. These are the amounts which the plaintiff now claims against the 1^st defendant in respect of the Sales Contract and Settlement Agreement and against the 2^nd to 5^th defendants as guarantors under the Guarantee given by them.

Plaintiff’s application for summary judgment

19. The present application for summary judgment is made only against the 1^st, 3^rd and 4^th defendants since judgment in default has already been obtained by the plaintiff against the 2^nd and 5^th defendants.

20. In making the application for summary judgment, the plaintiff says that the 1^st, 3^rd and 4^th defendants have no good defence to the claim by the plaintiff.

21. The plaintiff’s claim against the 1^st defendant (for breach of the Sales Contract and the Settlement Agreement) and the claim against the 3^rd and 4^th defendants (sued on their Guarantee) are put on different basis.  Therefore different considerations apply where the 1^st, 3^rd and 4^th defendants are concerned.

22. As such I shall deal with each of the 1^st, 3^rd and 4^th defendants separately in this judgment.

The 1^st defendant

23. At the start of the hearing, Mr Yip who appeared for both the 1^st and 4^th defendants indicated to the court that he will be making no submission on behalf of the 1^st defendant in so far as the application for summary judgment is concerned although he has no instructions to consent to any order sought against the 1^st defendant.

24. However, after hearing the submission of counsel for the 3^rd defendant, Mr Yip indicated that if the court were to accept the submission of the 3^rd defendant that there should only be interlocutory judgment against the 3^rd defendant with damages to be assessed because there is a possible argument that the plaintiff had failed to mitigate its loss in that the plaintiff failed to repossess and re-sell the goods pursuant to the retention of title clause under the Sales Contract, then the same consideration should also apply in the case of the 1^st defendant.

25. I am unable to accept this submission by Mr Yip in respect of the 1^st defendant for the following reasons.

26. There is no dispute that it was the 1^st defendant who had transferred or caused to be transferred to its associated company, Superior Wuxi, the Goods.  Superior Wuxi then pledged the Goods with the Bank of China as security for a loan.  When the loan was not repaid to the Bank of China, it sought a court order in PRC to auction off the Goods in satisfaction of the loan repayment.

27. Admittedly, there was a retention of title clause in the Sales Contract to the effect that the goods shall remain the property of the plaintiff until the purchase price under the Sales Contract had been paid off.

28. However, I am of the view that the 1^st defendant cannot now be heard to say that the plaintiff failed to mitigate its loss because it failed to have recourse to the retention of title clause in the Sales Contract when it was due to the wrongful act of the 1^st defendant in parting with possession of the Goods to Superior Wuxi thereby enabling Superior Wuxi to pledge the Goods to the Bank of China as security for a loan.

29. The 1^st defendant simply cannot take advantage of its own wrongful act given the circumstances of this case.

30. There being no dispute by the 1^st defendant that by the Settlement Agreement it had accepted the amounts of the outstanding purchase price and outstanding interest stated therein, and no dispute by the 1^st defendant as to the statement of accounts as at the date of the Writ as to the amounts of the purchase price and interest outstanding, there will be summary judgment against the 1^st defendant for the amounts now claimed by the plaintiff.

The 3^rd defendant

31. In the case of the 3^rd defendant, the plaintiff seeks summary judgment against the 3^rd defendant in the amount of JP¥192,100,000.  That is opposed by the 3^rd defendant.  The 3^rd defendant does not dispute that he is liable to the plaintiff under the Guarantee, but submits that there should only be interlocutory judgment to the plaintiff with damages to be assessed, the reason being that the plaintiff’s claim under the Guarantee is a claim for unliquidated damages since the 3^rd defendant only guaranteed to pay “all monies or liabilities owing by the purchaser” under the Guarantee.

32. The 3^rd defendant further submits that the plaintiff has an obligation to mitigate its loss and in the present case there are disputed issues of fact in relation to whether the plaintiff has acted reasonably in not taking steps to recover the Goods in the PRC pursuant to the title retention clause under the Sales Contract or to claim the proceeds of sale after the Goods had been auctioned.

33. The disputed issues of fact can be summarized as follows :

(a)  the plaintiff says that the Bank of China had a security or mortgage over (inter alia) the Goods which had been mortgaged to it by Superior Wuxi;

(b) the plaintiff obtained legal opinion in the PRC saying there is no evidence that the Bank of China was not a bona fide purchaser so its security will be recognized;

(c) even if the rights of Bank of China are recognized, there is still the unresolved issue whether the plaintiff has good title to the Goods and the priority of the conflicting claims between it and the Bank of China since there is no evidence to show that the recognition of Bank of China’s claim will extinguish any claim by the plaintiff to the Goods;

(d) even if the claim of Bank of China has priority over that of the plaintiff to the Goods, presumably the claim of the Bank of China is only to the extent of Superior Wuxi’s indebtedness under the loan.  In the absence of any evidence as to the size of the claim by Bank of China, it cannot be known if after settlement of the Bank of China’s claim whether there will be any balance of proceeds left over from the auction (which realized RMB 16 million) to satisfy partly or wholly the plaintiff’s claim; and

(e)  whether it would be unreasonable for the plaintiff not to have made any claim from the balance of proceeds or how much the plaintiff might have recovered if it had made such a claim.

34. It is submitted by the 3^rd defendant that these issues of fact can only be resolved upon evidence being adduced for damages to be assessed.

35. On the other hand, it was submitted by the plaintiff that while there is a general rule that an innocent party should act immediately upon a breach of contract to mitigate its own loss, that is only possible, given the circumstances of this case, if the plaintiff had possession of the Goods, which it did not at the material time.

36. It was also contended by the plaintiff that any suggestion that the plaintiff could have issued proceedings in the PRC to sue Superior Wuxi to recover the Goods was not a commercially viable course as advised by the plaintiff’s legal advisers in the PRC.

37. It is also trite law that the plaintiff’s duty to mitigate its loss did not go as far as to involve an obligation to issue and pursue complicated legal proceedings in the PRC against the Bank of China, which would have been necessary before the plaintiff could recover the Goods.

38. On the facts of this case therefore, says the plaintiff, it was practically impossible for the plaintiff to repossess the Goods transferred by the 1^st defendant to Superior Wuxi, who in turn mortgaged same with the Bank of China and which was then auctioned off by the PRC court in the liquidation of Superior Wuxi.

39. In coming to my decision, the fact that the above matters were raised and argued by the plaintiff in this hearing indicate that the plaintiff has a duty to mitigate its loss.  However, the real question that has to be decided is how far that duty of the plaintiff to mitigate extends and whether the plaintiff has acted reasonably in the overall circumstances of this case.

40. To resolve that question would involve a determination of both the facts and the law.  It cannot be right for the court to determine the matter including the disputed facts until it has heard all the relevant evidence at trial.

41. Accordingly, there will be interlocutory judgment in favour of the plaintiff against the 3^rd defendant with damages to be assessed.

The 4^th defendant

42. I turn now to deal with the 4^th defendant.

43. The 4^th defendant relies on two defences to the plaintiff’s claim against him on the Guarantee, namely :

(a)  past consideration; and

(b) material variation.

44. In respect of the past consideration defence, it was submitted by the 4^th defendant that the date of the Sales Contract was 18 August 2005 while it is common ground between the parties that the Guarantee was signed and dated 19 August 2005, albeit that there is also the date of  “12^th day of August 2005” which appears at the end of the document before the signatures.

45. The consideration for the Guarantee was stated as being “IN CONSIDERATION of you agreeing at our request to sell to Superior Precision Engineering Co. Ltd … 12 sets of Toshiba Machines” which is accepted to be the Goods under the Sales Contract.

46. In the circumstances, it was submitted that the consideration for the Guarantee must be past consideration since the Sales Contract had already been signed the day before the Guarantee was entered into by the four guarantors, including the 4^th defendant.

47. If the Guarantee was in fact signed and witnessed on 12 August 2005, then the defence of past consideration falls away automatically.

48. But even if the Guarantee was entered into by the guarantors on 19 August 2005, I am unable to accept the submission made by the 4^th defendant as to the defence of past consideration in respect of the guarantee given by him for the following reason.

49. Clause 2 of the Sales Contract provides as follows :

“Subject Clause Personal Guarantee Acceptable to Seller.”

50. While it can be said that Clause 2 was not elegantly worded, it seems clear enough from it that the Sales Contract was made conditional upon personal guarantees being given which would be acceptable to the seller (i.e. the plaintiff).

51. It is common ground that at the time the Sales Contract was entered into on 18 August 2005, there were no personal guarantees given or in existence.  That only came about the following day.

52. It follows therefore that if no personal guarantee was given, or if the personal guarantee given was not acceptable to the plaintiff, the plaintiff was entitled to rescind the Sales Contract on the basis that the condition under Clause 2 had not been fulfilled.

53. In other words, the continuance of the Sales Contract depended upon the condition in Clause 2 being fulfilled.  Therefore the fact that the Sales Contract pre-dating the Guarantee is neither here nor there in so far as the request by the guarantors to enter into the Sales Contract being the consideration for the giving of the Guarantee is concerned.

54. In those circumstances, I am of the view that past consideration point now taken is not a defence open to the 4^th defendant to make in the circumstances of this case.

55. I turn now to deal with the defence of material variation raised by the 4^th defendant.

56. The basis of the 4^th defendant’s contention was that :

(a)  the Sales Contract made no provision for payment of interest by the 1^st defendant in respect of the purchase price;

(b) the Guarantee signed by the 4^th defendant guaranteed the due payment of the purchase price and “all monies or liabilities owing by the Purchaser”;

(c) in November 2006, by the oral agreement made between the plaintiff and the 1^st defendant (but without the involvement of the 4^th defendant) the plaintiff and 1^st defendant agreed to extend the time for the purchase price but would attract interest at 6% p.a. until it was paid;

(d) the written Settlement Agreement dated 15 November 2007 (which was signed by the 3^rd defendant on behalf of the 1^st defendant but without the involvement of the 4^th defendant) again re-iterated interest payment by the 1^st defendant on the unpaid purchase price;

(e)  thus the oral agreement in November 2006 and the Settlement Agreement dated 15 November 2007 amounted to material variation (since no interest payment was ever contemplated for originally under the Sales Contract and the Guarantee) the effect of which would be to add to and increase the liability of the 4^th defendant for the further interest agreed between the plaintiff and the 1^st defendant; and

(f)  such material variation therefore discharged the 4^th defendant liability as a surety under the Guarantee.

57. On the other hand, the plaintiff sought to rely on Clause 7 of the Guarantee which provides :

“7. This Guarantee shall not be affected by any of the following :

(i)    any security which you may now or at any time hereafter take from the Purchaser;

(ii)   any variation, release, surrender or discharge, modification or dealing with in any manner of such security or any failure to enforce such security;

(iii)  any release of any time given or extended to the Purchaser and/or any indulgence, compromise, composition or arrangement made with the Purchaser;

(iv)  any bankruptcy liquidation or other disability or any change in the name style or constitution of the Purchaser or any other act deed or matter whereby we might as sureties have been discharged.”

58. In particular, the plaintiff relies on Clause 7(iii) above.

59. It should be noted that whilst Clause 7 and in particular sub-clause (iii) is widely worded, and it makes mention of “time given or extended to the Purchaser” as well as “any indulgence, compromise, composition or arrangement made with the Purchaser”, there is no mention in any part of Clause 7 of any additional liability which is what is complained of by the 4^th defendant by reason of the interest imposed by the oral agreement in November 2006 and by the written Settlement Agreement.  Moreover, the additional liability from the interest imposed is an added burden different in character from indulgence, compromise, composition or arrangement referred to in Clause 7(iii) of the Guarantee.

60. The plaintiff also seeks to rely on the words in Clause 5 of the Settlement Agreement which states “… and without prejudice to the Company’s rights against the Guarantors in any way whatsoever.”

61. I do not see how this can assist the plaintiff in the absence of any evidence that the 4^th defendant was a party or had agreed to the terms contained in the Settlement Agreement which was only as between the plaintiff and the 1^st defendant.

62. I am therefore of the view that, for the reasons above, the 4^th defendant has a reasonably arguable defence to the plaintiff’s claim against him and that he should be given unconditional leave to defend the plaintiff’s claim.

The order

63. The following orders will be made :

(a)  Summary judgment be entered against the 1^st defendant for JP¥192,100,000.00 and outstanding interest thereon at 6% p.a. from 29 October 2006 until date of judgment and thereafter at judgment rate. 

(b) Interlocutory judgment against the 3^rd defendant with damages to be assessed. 

(c) Unconditional leave to the 4^th defendant to defend.  

Costs

64. The following costs order nisi will be made :

(a)  The 1^st defendant do pay the plaintiff’s costs of this action against the 1^st defendant including this application (and the hearing) to be taxed if not agreed. 

(b) The 3^rd defendant do pay to the plaintiff the plaintiff’s costs of the action against the 3^rd defendant up to the order for interlocutory judgment including this Summons.  The costs of the hearing on 20 January 2000 in respect of the 3^rd defendant be costs in the cause of the assessments.  

(c) The costs of this application (including the hearing) in relation to the 4^th defendant be costs in the cause of the claim against the 4^th defendant.  

HCA 1086/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1086 OF 2008

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D E C I S I O N

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1.  The application by the 4^th defendant for the adjournment is refused.

2.  For the same reason, I dismiss the 4^th defendant’s application to vary or otherwise discharge the injunction against him, because I am convinced by Mr Bowers’ second, which should be the third, affidavit filed yesterday, and his submissions, that the two proposed undertakings of the 4^th defendant are not good enough to discharge the Mareva injunction against the 4^th defendant.

3.  Basically in respect of the first lot of shares, the 4^th defendant only holds about 8.23 million shares in Swing Media with doubtful value.  The other lot of 23 million shares (which were listed outside the jurisdiction of the USA) in Inacom were only trading in very small amounts; and according to the latest Bloomberg search, at 10-odd US cents.  They could not even be sold in bulk in one go at this value, and therefore they may be virtually valueless.

[Submissions on costs]

4.  On summary assessment of the costs involved, I have nothing here to doubt Mr Bowers’ hours of work and rates, and in fact the other side only said the summons and affidavit were only served two days ago, but the amount of work for Mr Bowers and Mr Mo(?) even after that has reasonably been set out in the proposed  statement of costs of gross sum assessment.

5.  There are also works done in anticipation of such and application by having the Bloomberg search since 19 June in respect of those shares I mentioned.  But then the only thing I think Mr Bowers also agreed was the hearing was only 1½ hours.

6.  So to that amount of $115,000 should be deducted $10,500, and the total amount is $104,500.

7.  At the outset, I must say that I agree with Mr Bowers that costs should be taxed and paid forthwith.

8.  So costs to the plaintiff to be paid within 14 days by the 4^th defendant, which amounts of costs are summarily assessed at $104,500.