Editor's note: Under the laws of Hong Kong, how can we interpret and understand the validity of the "Terms and Conditions for Margin Accounts and Leveraged Foreign Exchange Trading Accounts"? In the guarantee contract dispute between Haitong International Securities Co., Ltd. and Chen Hong, Benchmark Chambers International & Benchmark International Mediation Center (BCI & BIMC), as the base of Supreme People's Court of China for Discerning Hong Kong, Macao, Taiwan and foreign law, was entrusted by the plaintiff to ascertain the validity of the "Terms and Conditions for Margin Accounts and Leveraged Foreign Exchange Trading Accounts". The following is excerpted from the case judgment (Case Reference: (2016) YUE 0391 Min Chu No. 1944 and No. 1945).
Issue 1: The validity of the "Terms and Conditions for Margin Accounts and Leveraged Foreign Exchange Trading Accounts"
At common law, factors that may affect the validity of a contract include misrepresentation, mistake, illegality, duress, undue influence, and unconscionable bargains, etc. Any factor affecting the validity of a contract other than illegality is a question of fact. As one of the parties in the present case is a securities company, several precedent cases at common law demonstrate that undue influence is related to the validity of contracts involving banks or securities companies. There is no information in the provided materials indicating that the present case relates to any of the aforementioned factors. Unless there exists evidence to the contrary, the "Terms and Conditions of Margin Account and Leveraged Foreign Exchange Trading Accounts" in the present case should be deemed valid.
Issue 2: Whether it is legal to collect compound interest monthly on the principal and the interest of arrears at a rate of 13% per annum.
According to Section 2 of the Money Lenders Ordinance (Cap.163), "money lenders" means any person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business, but does not include (a) a person specified in Part 1 of Schedule 1; or (b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such loan. Schedule 1 provides that in the case of an exempt person, including any subsidiary of an authorized institution within the meaning of the Banking Ordinance (Cap. 155), if the plaintiff can prove that it is exempted, the provisions about "illegal agreements" in Section 22 does not apply to the plaintiff. This is subject to except that the plaintiff shall refrain from charging exorbitant interest rates on loans (that is, simple interest exceeding 48%) or that its business practices and how the money-lending transactions are conducted shall be lawful.
Issue 3: Manners of assurance of guarantee liabilities
1. The validity of the guarantee clauses
Since a guarantee is a contract or a contractual term, any factor in contract law that affects the validity of a contract has an effect on the validity of a guarantee or a guarantee clause. This legal opinion only focuses on two factors: undue influence and illegality.
(1) Undue influence
Undue influence is a legal doctrine in contract law. It can void a contract and relieve the contracting parties from their contractual liabilities. Geoffery Ma Tao-Li, the Chief Justice of the Court of Final Appeal, summarized two points in his judgment of the case Bank of China (Hong Kong) Ltd. v Wong King Sing Sing [2002] 1 HKLRD 358: One was about the bank's knowledge of the relationship between the creditor and the guarantor, and the other was that the nature of the transaction was clearly detrimental to the guarantor. In a nutshell, undue influence was ultimately a simple concept of informal consent. The court must apply common sense, and it was not required to strictly follow the principles derived from authorities. The judgment also mentioned that the matrimonial relationship was not sufficient to give rise to presumed undue influence. In that case, one of the parties was allegedly under undue influence exercised by his brother, and the court held that the burden of proof shifted to the influencer to show that the transaction was not one in which undue influence could have existed.
As for the inquiry responsibility of the bank, the Hong Kong Court of Final Appeal provided detailed discussion in the case XXX, and held that the court must look at the relationship between the principal debtor and the guarantor with the eyes of the bank. Generally, banks would (but not always) know whether the guarantor is the wife of the principal debtor. However, some wives (as guarantors) do not take their husband's last name. Therefore, according to the court judgment on "non-commercial relationship" in Royal Bank of Scotland Plc v Etridge (No2) [2002] AC 773, it is not necessary for a proposed mortgagee (usually a bank) to make inquiries about the relationship between the principal debtor and the proposed guarantor or mortgagor before deciding on the steps it should take. And for a creditor bank to make inquiries of that character would in most cases be an unwarranted impertinence.
In the present case, it is unconvincing for the debtor to use "undue influence" as a defense. Since Chen Hong is the only director and shareholder of Jinyong company and Zhuoda company, banks are generally not responsible for making inquiries, and therefore securities companies are also not under such responsibility. Given the existing evidence, there is no material supporting the guarantor's defense of undue influence.
(2) Illegality
A guarantee will be illegal in the following four circumstances: explicit or implicit prohibition in laws or regulations; violation of public order; concealment of illegal purposes by a legal form; and that the guarantee is legitimate in legal form, but illegal at the time of performance.
First, the following three manners of a guarantee are explicitly or implicitly prohibited by laws or regulations: explicit prohibition by the laws of Hong Kong; in the case of guarantee by the company for its directors or related persons, the resolution of shareholders' meeting is required; and guarantee shall not constitute illegal financial assistance for the company's acquisition of its own shares.
Second, a guarantee must not violate Hong Kong's social and public policies.
Third, guarantee cannot conceal illegal purposes by a legitimate form. In the present case, the form of the guarantee is legitimate in respect of the clauses. What needs to be considered is whether the purposes of the guarantee documents, such as "Terms and Conditions of the Margin Account and the Leveraged Foreign Exchange Trading Accounts", are legal or not. This is a question of fact, and the existing document evidence alone is not sufficient to establish the illegality of the purposes of the guarantee.
Fourth, the guarantee clause is illegal when performed. As discussed above, this is a question of fact, and the existing document evidence alone cannot indicate that the performance is illegal.
2. Interpretation on guarantee clauses
A guarantee is essentially a contract, and the interpretation of the clauses of a guarantee must be based on the contractual interpretation rules. The rules for the interpretation of guarantee contracts can be summarized as follows: (1) The rules for construing guarantee contracts are the same as those for ordinary contracts. The conditions and circumstances under which a commercial contract is concluded are related to the meaning and effect of its terms. Unless there are indications of contrary conditions or circumstances, literal meaning used in daily life would be adopted. (2) The court will consider the objective expression adopted by the parties when entering into the guarantee contract. (3) The court may adopt the interpretation rule of ut res magis valeat quam pereat, which means that words tend to be interpreted to make the transaction valid. (4) The court may also adopt the unfavorable interpretation principle. That is, if there is an ambiguity in the term drafted by a creditor, the ambiguity will be construed against the creditor but in favor of the guarantor.
3. Extend of guarantee liabilities
At common law, the liabilities of the guarantors are usually assumed jointly, severally, or jointly and severally.
(1) "Jointly" means in combination and conjunction instead of alone.
(2) "severally" refers to separately and individually in the order given; not commonly.
(3) "Jointly and severally" means that liabilities are shared between two or more parties, but each party will bear the overall responsibility separately; the party which has performed a payment obligation is entitled to recover a distribution from the parties that have not performed the obligation.
4. How a guarantor assumes the guarantee responsibility
The common law would follow the rules governing ordinary contracts about whether the guarantors assume joint, several, or joint and several liabilities. If it is specified in the contract, such provisions shall prevail. In certain cases, the courts will use the rule of contract interpretation to determine who is responsible.
(1) The creditor may require two or more guarantors, such as two directors of the company, to assume liability to the landlord for the rent of the company. In such cases, the liability of the guarantors may be joint, several, or joint and several.
(2) Rules of guarantee contract interpretation will be adopted in determining what kind of liability that the guarantor will bear. The rules of interpretation for guarantee contracts are similar to those for ordinary commercial contracts.
(3) It should be noted that common law does not require specific rules to classify liabilities.
(4) Therefore, to distinguish the liabilities of the joint guarantors, the court will examine whether there are clear and unequivocal words and sentences, such as "independent, individual, etc." Portal or extrinsic evidence shall not be easily adopted in interpreting a guarantee contract. Moreover, it shall be clear whether the guaranteed matters are continuing or specific.
Since the terms of the guarantee contract are agreed by both parties, the parties shall bear the legal consequences of the guarantee liabilities under the contract. If the interpretation of the contract and the evidence establish "joint and several guarantee liabilities", the guarantor assumes a "joint liability" as provided in the domestic guarantee law.
5. The relationship between the Hong Kong guarantee law and "The Guarantee Law of the People's Republic of China" ("the Guarantee Law of the PRC")
(1) As discussed above, there is no "general guarantee" or "joint liability guarantee" at common law. According to Article 18 of the Guarantee Law of the PRC, "joint liability guarantee refers to the arrangement laid down in the guarantee contract that the guarantor and the debtor assume joint liability over the debts." In terms of the scope and degree of the liability assumed, the "joint and several guarantee liability" at common law is similar to "joint liability guarantee" in the Guarantee Law of the PRC.
(2) However, according to Article 17 of the Guarantee Law of the PRC, "general guarantee" is "the arrangement in the guarantee contract that the guarantor assumes guarantee liabilities when the debtor fails to repay the debt", which is different from "joint" or "several" guarantee liability at common law. Article 17 explicitly provides that a general guarantee arises when the debtor is unable to perform his obligation, while the guarantee liability at common law is more about the clauses and interpretation of the guarantee contract between the debtor and the guarantor, and the debtor may be "jointly" or "severally" liable to the creditor. Therefore, it is not appropriate to hold that there exists a concept similar to "general guarantee" at common law.
Parallel proceedings
At present, China does not have a single specific statute for determining jurisdiction over civil and commercial matters concerning foreign affairs. Relevant provisions are scattered in the civil procedure law, foreign-related laws and regulations concerned, judicial interpretations of the Supreme People's Court, and multilateral or bilateral international treaties China concluded or acceded to. According to paragraph 1 of Article 533 of "The Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China", in a case where a court in the People's Republic of China and a foreign court both have jurisdiction, if one party to the lawsuit files a lawsuit with a foreign court and the other party files a lawsuit with a people's court, the people's court may accept the case. Upon judgment, where the foreign court makes an application, or where a litigant applies to the people's court for recognition and enforcement of the judgment or ruling of the foreign court for the lawsuit, the people's court shall not approve it, except as otherwise stipulated in the international treaties concluded or participated by both parties. Paragraph 2 stipulates that where the people's court has recognized the judgment or ruling of a foreign court, and a litigant files a lawsuit with the people's court over the same dispute, the people's court shall not accept it. According to this article, the examination of the eligibility for parallel litigation shall first be subject to the provisions of international treaties concluded or acceded to by both parties. In a case where there is no such international treaty, and both a people's court and a foreign court have jurisdiction, if one party brings an action in a people's court when the same case was accepted in a foreign court, or the action over the same dispute in the people's court was brought by the other party, it shall not affect the exercise of jurisdiction by the people's court. It does not matter whether the foreign court has accepted the case or even has made a decision.
Recognition and Enforcement
According to Article 1 of "The Arrangement of the Supreme People's Court on the Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters under Consensual Jurisdiction between the Courts of the Mainland and of the Hong Kong Special Administrative Region" ("the Arrangement"), "the parties concerned may apply to the people's court in the mainland or the court of the Hong Kong Special Administrative Region for recognizing and enforcing an enforceable final judgment of payment with executive force made by the people's court or the Hong Kong court in a civil or commercial case." Article 3 stipulates that "a ‘written jurisdiction agreement', as mentioned in this Arrangement, refers to a written agreement concluded by the parties concerned after this Arrangement has become effective, which expressly stipulates that a people's court in the mainland or a Hong Kong court has exclusive jurisdiction over any dispute related to a certain legal relationship that occurred or may occur." According to this Arrangement, only if the parties concerned provide in the agreement that the people's courts in the mainland or the Hong Kong courts shall have the exclusive jurisdiction, they are entitled to apply for recognition and enforcement of the final judgments to the people's courts or the Hong Kong courts. If the parties failed to provide such agreement, they are not subject to the adjustment of this Arrangement.
In this case, the "Letter of Guarantee" signed by the defendant Chen Hong provides that the parties agreed to be bound by the "non-exclusive jurisdiction" of the Hong Kong courts. The agreement concerns "non-exclusive jurisdiction", which has two legal effects: On the one hand, the Hong Kong courts have non-sole jurisdiction over disputes. Since the parties have not agreed on the exclusive jurisdiction of the courts of the mainland or Hong Kong, this case does not fall within the scope of adjustment of "The Arrangement of the Supreme People's Court on the Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters under Consensual Jurisdiction between the Courts of the Mainland and of the Hong Kong Special Administrative Region". The plaintiff Haitong International Securities Co., Ltd. is unable to apply to the people's court in the mainland for the recognition and enforcement of the judgments of the Hong Kong court, according to the Arrangement. On the other hand, "the limitation of non-exclusive jurisdiction" does not exclude the jurisdiction of other courts. The defendant, Chen Hong, lived in Shenzhen. This court has jurisdiction over foreign-related commercial cases and commercial cases involving Hong Kong, Macao and Taiwan. Therefore, this court enjoys jurisdiction over this case. According to the relevant provisions of the mainland domestic law on parallel proceedings, even if the plaintiff Haitong International Securities Co., Ltd. has brought an action over the dispute in the Hong Kong Special Administrative Region, and the High Court of the Special Administrative Region has rendered its decision, regardless of whether the judgment will be invalid or not due to the service of the judgment, the plaintiff Haitong International Securities Co., Ltd. shall still have the right to bring an action over the same dispute in this court. Therefore, this Court shall accept the case and issue its judgment.
Read the original: 蓝海查明案例 ▍香港担保法的效力理解问题
