Hongkong & Shanghai Banking Corporation Ltd v Jurong Engineering Ltd and Others

• Jurisdiction: Singapore
• Judgment Date: 11 February 2000
• Date: 11 February 2000
• Docket Number: Suit No 1755 of 1998
• Court: High Court (Singapore)

Hongkong & Shanghai Banking Corp Ltd

Plaintiff

and

Jurong Engineering Ltd and others

Defendant

[2000] SGHC 20

Tay Yong Kwong JC

Suit No 1755 of 1998

High Court

Agency–Competency of agents–General manager not expressly authorised to commit principal–Whether general manager having apparent authority to commit principal to compromise agreement–Banking–Lending and security–Loan extended by bank to principal's subsidiary–Letters of awareness furnished by principal to bank as part of loan agreement–Whether bank relying on letters of awareness–Whether principal legally liable to bank–Contract–Contractual terms–Operative clauses in letters of awareness ambiguous and general–Effect of operative clauses–Contract–Intention to create legal relations–Loan extended by bank to principal's subsidiary–Letters of awareness furnished by principal to bank as part of loan agreement–Subsidiary subsequently wound up–Bank seeking payment from principal for subsidiary's debt–Intentions of parties in relation to letters of awareness not expressly stated–Presumption of intention to create legal relations–Whether parties intending to create legal relations–Whether letters of awareness having binding legal effect

The plaintiff (“HSBC”) extended credit facilities to Huge Corporation Pte Ltd (“Huge”) a subsidiary, of the first defendant (“JEL”). It was secured by a letter of awareness drafted by HSBC and agreed to by JEL. Over the next few years, the amounts under the credit facilities were increased, with each supported by a fresh letter of awareness. All the letters of awareness were materially similar with only minor variations in wording and were approved by JEL's board.

Huge subsequently encountered financial difficulties. JEL reduced its shareholding in Huge, without informing HSBC, and Huge became an associated company of JEL. The credit facilities were reduced by HSBC, but were still supported by the third letter of awareness. All three parties then met to discuss how Huge's debts to HSBC could be repaid. The second defendant, who was the General Manager (Finance) of JEL, then sent a letter proposing a repayment schedule to HSBC which it accepted (“the compromise agreement”). Despite all this, Huge's debts remained unpaid and the credit facilities were eventually suspended. Huge was wound up and HSBC sought payment of the outstanding amount from JEL, who refused to pay.

HSBC then sued JEL on three grounds: (a) breach of the third letter of awareness; (b) breach of the alleged compromise agreement under which JEL promised to repay Huge's outstanding debts; and (c) breach of oral warranties made on JEL's behalf by the second, third and fourth defendants that JEL would financially support Huge and cause it to repay its outstanding debts. The second, third and fourth defendants were officers of JEL.

The main issues before the court were: (a) whether the third letter of awareness created legally enforceable obligations between the parties; (b) whether the alleged compromise agreement was legally binding and enforceable; and (c) whether the second, third and fourth defendants made the alleged oral warranties.

Held, dismissing HSBC's claims:

(1) The parties' intention in relation to the effect of the letters of awareness was not stated in writing. However, because the letters of awareness were made in a commercial context, the parties were presumed to have intended to create legal relations. This presumption operated to shift the burden of proof onto the first defendant to show that there was no intention to create legal relations. The operation of this presumption, though, did not relieve the court of ascertaining the true substance and reality of the transaction: at [43].

(2) HSBC did not place great reliance on the letters of awareness in deciding whether to extend or to continue credit facilities to Huge. On the facts, HSBC had forwarded the draft letter to JEL after credit facilities had already been extended to Huge. The parties did not negotiate as to the wording or content of the letters prior to the extension of the facilities, and HSBC's indifferent attitude towards the content of the letters was odd if it considered them legally binding: at [46] and [48].

(3) The operative clauses in the third letter of awareness were ambiguous, open-ended, general, and did not give rise to any substantial legal rights. At best, they imposed a moral obligation on JEL to HSBC in ensuring that the debt owed Huge was repaid. On the facts, the court held that the parties did not intend to create legal relations in relation to the letters of awareness, and HSBC only received a moral assurance instead of a corporate guarantee: at [57] and [58].

(4) The second defendant had no actual authority to commit JEL to the alleged compromise agreement in the absence of approval from JEL's board. However, he had the apparent authority to do so for as a general manager, he had the usual authority to sign and send letters on JEL's behalf. Moreover, JEL had acquiesced to his past conduct of making representations to HSBC on its behalf with regard to Huge's credit facilities: at [61] and [71].

(5) However, the evidence showed that at all material times leading up to the compromise agreement, JEL did not intend to assume legal liability in respect of the banking facilities extended to Huge. In addition, HSBC knew all along that JEL's position was that it was only morally obliged in relation to Huge's debts. The actual text of the letter did not contain any consideration but stated that the repayment proposal was made as a gesture of goodwill and for continued business relations. The court also considered various extrinsic evidence to support its conclusion that no compromise agreement had been reached: at [73], [76] and [78].

(6) As there was no evidence as to what was actually warranted, the claims against the second and third defendants were dismissed. The fourth defendant did not make any oral warranty as to anyone's authority and had merely informed HSBC about the repayment schedule and conveyed JEL's intention to fulfil its moral obligations: at [81] and [82].

Alliance Bank v Broom (1864) 2 Drew & Sm 289; 62 ER 631 (refd)

Armagas Ltd v Mundogas SA [1986] AC 717 (refd)

Attorney-General for Ceylon v A D Silva [1953] AC 461 (refd)

Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 (refd)

Brikom Investments Ltd v Carr [1979] QB 467 (refd)

British Bank of the Middle East v Sun Life Assurance Co of Canada (UK) Ltd [1983] BCLC 78 (refd)

Edwards v Skyways Ltd [1964] 1 WLR 349; [1964] 1 All ER 494 (refd)

First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd's Rep 194 (folld)

Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (refd)

Raffaella, The [1985] 2 Lloyd's Rep 36 (refd)

Rules of Court (Cap 322, R 5, 1997 Rev Ed)O 33r 2

K Shanmugam SC, Yang Ing Loong and Steven Lo (Allen & Gledhill) for the plaintiff

Davinder Singh SC, Harpreet Singh and Siraj Omar (Drew & Napier) for the defendant.

Tay Yong Kwang JC

Introduction

1 The plaintiffs' claim in this action is for the sum of $8,843,545.55, plus interest and costs. After considering all the evidence and submissions, I dismissed the plaintiffs' claim.

2 There are four defendants to the suit. The first defendants are a government-linked public company incorporated in Singapore, engaged in the business of mixed construction activities. The source of the first defendants' current troubles stemmed from the financial difficulties, and subsequent collapse, of Huge Corporation Pte Ltd (“Huge”). Huge was an associated company of the first defendants between the years of 1991 and 1994. In 1994, it became a subsidiary of the first defendants, and in 1996, it reverted to being an associated company. When Huge was wound up in August 1998, it owed debts to the plaintiffs under credit facilities which the plaintiffs had extended to it. This led the plaintiffs to initiate this suit against the first defendants, alleging that the latter had incurred liability in relation to these credit facilities in circumstances which will be elaborated on later in this judgment.

3 The second, third and fourth defendants were, at all material times, officers in the employ of the first defendants. The second defendant was the General Manager (Finance and Administration), whereas the third defendant was the senior general manager. Both the second and third defendants were also actively involved in the management of Huge. The fourth defendant was a legal manager in the first defendants' legal department. The plaintiffs say that the second, third and fourth defendants had, on various occasions, given oral warranties to the plaintiffs in their capacity as officers of the first defendants and the personal claims against them are in relation to these oral warranties.

Background facts

4 The relationship between the parties can be traced back to June 1992, when the plaintiffs' representatives first approached the second defendant to offer credit facilities to the first defendants. At that time, the first defendants already had ample sources of funds themselves and the discussion turned instead to the provision of credit facilities to Huge. The first defendants owned 50% of Huge's shares and played a key role in its management.

5 Between June and August 1992, three meetings were held between the first defendants and the plaintiffs. In the course of the negotiations, the plaintiffs were told that the first defendants would not give a corporate guarantee to secure any credit facilities which might be extended to Huge. Instead, it was agreed that the first defendants would issue a letter of awareness to the plaintiffs as part of the facility agreement. In or around 6 August 1992, the plaintiffs extended credit facilities totalling $4m to Huge. Subsequently, the plaintiffs drew up a draft letter of...