Notwithstanding the landmark House of Lords case of Royal Bank of Scotland plc v Etridge (No 2) [2002] AC 773, the Courts in Hong Kong appear to be taking a tougher stance and  guarantors in Hong Kong may find it harder to argue their way out of a guarantee now.

In days of yore –
the impact of Etridge on guarantee law

In Etridge [2002] 2 AC 773, an English case in which a wife had put up her matrimonial home as surety for her husband’s debt, the House of Lords set aside the guarantee and other securities and formulated the principle that where a person imposes trust and confidence in another and the first person subsequently enters into a transaction that is not to his financial advantage like a guarantee to secure a loan, the lender has to ensure the first person was not unduly influenced by the second, that is, the second person did not so influence the first such that the first person could not exercise his judgment freely. The principles inEtridge were viewed as being guarantor-friendly.

Does the spirit of Etridge live on in Hong Kong?

From the home to the office: different conditions apply

Recent Hong Kong cases suggest, however, that guarantors in Hong Kong would find it harder to set aside personal guarantees compared to the wife in Etridge. This article will examine three such cases. The common feature is that the guarantors in each case executed a personal guarantee in a commercial context.

In Standard Chartered Bank v Li Wai Ping HCA 10587/2000, a wife and her son who had each executed a personal guarantee for a facility loan for their family business sought to set aside their guarantees. Pearldelta Group Ltd v Huge Winners International Ltd & OthersHCA 595/2008, HCA 595A/2008, HCA 818/2008 was a case in which five directors of the defendant company entered into a Subscription and Investment Agreement (SIA) containing personal guarantees with an investment company. Star Textile v Surpass International (HK) Ltd & Another HCA 34/2007 concerned a commercial contract where the seller alleged the buyer defaulted on payment for goods sold and so, before supplying more goods, the seller made the buyer sign a personal guarantee for the monies due from the buyer’s debtor company.

In each of these cases, when the debtor company defaulted on payment and the party that was guaranteed claimed under the personal guarantees, the guarantors tried to set aside their guarantees on similar grounds. The defences they pleaded include undue influence, non est factum (i.e.the document signed is “not his deed” - meaning that those who signed the legal document did not understand the document’s nature and had signed a document essentially different from what they intended) and misrepresentation (i.e. that the other party had made a false statement of fact that induced them to enter into the guarantee). Additionally, the buyer in Star Textile argued that the alleged personal guarantee was in fact not a guarantee. In all the cases the Courts refused to set aside the guarantees. Now we shall examine each of the defences in greater detail.

Non est factum

The directors in Pearldelta Group argued they did not know the SIA contained a personal guarantee when they signed it. Reason being, a previous Letter of Intent signed before the SIA, a draft version of the latter, did not contain the personal guarantee clause. The Court held non est factum could only be found where the defendant did not understand the legal effect of the document. If they signed a document without taking steps to find out its general effect either by reading it or having it explained, they cannot complain afterwards.

In Li Wai Ping, the wife, an Indonesian Chinese and a professed housewife, claimed she did not know she was signing a guarantee as she did not know English. The Court analysed the personal character of the wife and her role in the company and concluded that she was a business-minded hidden director of the company who had a salary record and had executed numerous business and banking documents for the company before, including personal guarantees. She was thus likely to know what she signed.

Undue influence

The wife and son in Li Wai Ping alleged that they had been unduly influenced by the husband/father to sign the guarantees. They failed as the Courts found they were not the vulnerable personalities they alleged. The wife had business sense and the son, far from being weak-minded and doing everything according to his father’s wishes, was in charge of the administration and finances of the company demonstrating his commercial acumen.

There was a husband and wife among the directors in Pearldelta Group and the wife claimed she had been unduly influenced by her husband in executing the personal guarantee. The Court rejected the assertion as there was no evidence that she had been intimidated or deceived into signing the SIA. It is normal for a substantial shareholder and director as she was to offer a personal guarantee on behalf of the company and she could not claim to be a wife standing surety for a husband’s debt.

Misrepresentation

The wife in Li Wai Pingclaimed she did not know the true nature of what she signed as the bank representative misrepresented that signing was a mere formality. The Court did not find misrepresentation after taking into account the businesslike character of the wife and her involvement as director and employee of the company.

Similarly in Star Textile, the buyer tried to set aside the personal guarantee on two grounds, amongst other things: she argued that (1) the alleged personal guarantee was not a personal guarantee but rather a written confirmation of a settlement reached between the parties for the seller’s defective goods, and that (2) alternatively, even if the Court found it was a personal guarantee, the seller had misrepresented to her that the personal guarantee was a confirmation of settlement.

There was written evidence that the seller continued to supply goods after the purported guarantee was executed, and the Court inferred thus that it had to be a personal guarantee since it was contrary to commercial sense that the seller would continue supplying goods if it did not have sufficient security. On misrepresentation, the Court found none. The buyer read and wrote English and it was shown in her evidence in chief she had no difficulty in understanding the meaning of “my personal guarantee on behalf of [the debtor company]” (para. 56), demonstrating she understood the document was not a confirmation of settlement.

Conclusion

As a distinguishing feature from the Etridge case, in all of the above cases the guarantee in question was executed in the course of business and the guarantors were found to be experienced in commercial dealings.The cases show that in commercially savvy Hong Kong, guarantees are not treated as a special type of contract that the Courts are more ready to set aside for the benefit of hapless guarantors. Personal characteristics of the guarantors are important. Crucial factors for consideration include the role that the guarantors played in the company – managerial, administrative, financial – as well as their level of competence in English, which contributes to whether they understand the guarantee signed. In a commercial context, the Courts take the view that guarantors who are directors or shareholders are not naïve people compared to the wife in Etridge type of domestic cases.