DAO HENG BANK LTD. v. CHAN CHIU CHEUNG AND ANOTHER

1996 No. A6653

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

_______________

_______________

_______________

J U D G M E N T

_______________

1. On 13th August 1996 judgment in default of Notice of Intention to Defend was entered against the 1st and 2nd Defendants in the sum of HK$2,253,242.23, together with interest and costs. On 19th February 1997 Master Cannon refused the application by the 2nd Defendant to set aside that judgment. This is an appeal from that order pursuant to the Notice of Appeal filed by the 2nd Defendant dated 22nd February 1997. I heard argument from counsel yesterday morning, and adjourned the case until this afternoon to further consider the matter.

2. After some reflection, I have decided to allow the appeal and to set aside the judgment, and out of deference to the learned Master, with whom I am disagreeing, I set out in this short judgment my reasons for so doing. I am bound to observe, in this connection, that I have a strong suspicion that the ambit of the argument before me ranged far more widely than that which was presented for the learned Master's consideration.

3. The Plaintiff's claim is relatively straightforward. By a Writ issued on 12th June 1996 the Plaintiff Bank prayed for judgment in the sum of HK$2,253,242.33 as the amount due and owing under the account maintained by the partnership with the Plaintiff Bank. Such indebtedness had arisen primarily by reason of the honouring of a cheque No. 367613 dated 1st May 1996 in the sum of HK$2,240,891.00 which had been drawn on the partnership account, that is A.I.T.S. Trading Co. The essence of this case is whether, in honouring the cheque in question, the Plaintiff Bank was in breach of its Mandate, and it is to this point that the bulk of the evidence and the argument of counsel has been directed. What actually happened is that the 1st Defendant, one of the partners of A.I.T.S. Trading Co., signed the cheque and then disappeared, presumably (although I have not specifically been told) in some wise to make off with the proceeds. The fundamental question therefore was whether the rogue partner was entitled to sign the cheque alone, or was there a necessity under the Mandate for the countersignature of his brother and co-partner, the 2nd Defendant.

4. At this stage, I pause to note that it is accepted by counsel for the 2nd Defendant, Mr. Christopher Lam, that this is a regular judgment. Accordingly, I remind myself of the benchmark principles for setting aside such judgment as espoused by the Court of Appeal in the leading cases of G.H. Fountain v. Bank of America National Trust and Savings Association, [1990] 2 HKLR 159 and Premier Fashion Wears Ltd. and Broadway Sportwear Ltd. v. Chow Cheuk-man and Li Hing-chung, [1994] 1 HKLR 377. Does the 2nd Defendant here show a real prospect of success? Does his case carry some degree of conviction? In the words of Lord Wright in the seminal case of Evans v. Bartlam, [1937] AC 473 (which was referred to in both Fountain and Premier Fashion, op. cit.) has the 2nd Defendant disclosed "merits to which the Court should pay heed"?

5. Mr. Lam says that he does. He makes, I think, three basic points. His initial point was that, in terms of the Mandate, undated but accepted by both parties to have been signed around 13th April 1996, the signing instructions thereon are silent and therefore both authorised signatories, says Mr. Lam, are required to sign. Such had not occurred and, ergo, there had been a breach of mandate. He followed this up, I think it not unfair to say after a certain degree of stimulation from the Bench, with the further points that there had been a clear course of dealing between the Bank and the Defendant partnership whereby the signatures of both partners in fact had been required on partnership cheques, alternatively, as the reverse side of this particular coin, that the Plaintiff was estopped in the circumstances from alleging otherwise. It is also fair to say that the draft Defence exhibited did not condescend to either line of argument, but nevertheless the actual underpinning of case is there on the affidavit evidence, and as such the Court can pay due regard thereto.

6. Mr. Russell Coleman, who appears for the Bank, argued forcefully but fairly that Mr. Lam's construction of the Partnership Account Mandate was incorrect, that absent specific indication on the face of the Mandate, ordinary partnership law principles required that one signature be permitted, and that, in any event, the history of events, in particular the history of the Mandate with this Bank, was not susceptible to an argument in terms of a course of dealing in the sense developed by Mr. Lam. In this connection, Mr. Coleman helpfully took me through the 1st Sole Proprietorship Mandate, dated 20th October 1989, the 2nd Sole Proprietorship Mandate, dated 17th July 1995, and the 3rd (and relevant) Mandate, entered into, as I have said, on or about 13th April 1996, which was a true Partnership Account Mandate. He stressed the relatively short period of time between the entry into this Partnership Account Mandate and the signing of the cheque in question. Initially, I was attracted to his argument, but on reflection I have decided that it is not enough to get him home.

7. It is quite clear with respect to the first two Mandates, that the two Defendants, as brothers, were part of a group, known as 'Group B', any two of which were required to sign. At that stage, of course, the entity was a sole proprietorship only. Then came the change of Mandate although it appears, on the Plaintiff's own case, that the practice of two signatories in fact continued. As Mr. Gere Chan, the Plaintiff's bank officer put it (at paragraphs 13 and 14 of his 1st affidavit):

"Prior to receipt of the Third Instruction, the Plaintiff's staffs had continued to comply with the Second Instruction and required both signatures of Chan Chiu Cheung and Chan Chiu Mo to operate the account.

After receipt of the Third Instruction, on or about 13th April 1996, the account can be operated by either one of Chan Chiu Cheung or Chan Chiu Mo; however, it has been a habit for the Plaintiff's staffs in seeing both Defendants signatures on cheques, that on some occasions the staffs continued to request Chan Chiu Mo to counter-sign cheques, even though in accordance with the Third Instruction this was no longer necessary..."

8. I note also that the 2nd Defendant says (at paragraph 10 of his 1st affidavit):

"At the time of signing of the Mandate I was informed by the Plaintiff's employee that the Firm's account with the Plaintiff could only be operated by both Chan Chiu Cheung's and my signatures."

9. At this stage, it is convenient to mention that there is a factual dispute about what happened with regard to the cheque in question; the 2nd Defendant says (at paragraph 11 of his 1st affidavit):

"On or about 2nd May 1996, one Mr. Chan who was the Hennessy Road branch manager of the Plaintiff telephone[d] me requesting me to go to his branch office to counter-sign a cheque purportedly issued by the Firm payable to Dah Sing Finance Ltd. in the sum of $2,240,891.00 bearing only the signature of Chan Chiu Cheung. As I knew absolutely nothing about the nature and reason for that payment, I refused to do so. I had suspicion about the use of the cheque. It was improper for Chan Chiu Cheung to issue the cheque bearing his own signature only. It was also wrong for me to counter-sign the cheque in that manner not having any prior knowledge of what it was for. I wanted to have an explanation from Chan Chiu Cheung of what was happening. But I never got any explanation from him because on or about 2nd May 1996 he disappeared."

10. To this, Mr. Gere Chan replies (at paragraph 16 of his 1st affidavit):

"Contrary to the allegation of Chan Chiu Mo contained in paragraph 11 of his Affirmation, when I received a cheque made payable to Dah Sing Finance Limited in the sum of $2,240,891.00, I contacted Chan Chiu Mo, out of habit, who agreed to come to the branch by the next day to counter-sign the Cheque as usual. No enquiries or questions were made by Chan Chiu Mo on the appropriateness on the cheque, however, I later remembered the existence of the Third Instruction and the Cheque was allowed to clear on the sole signature of Chan Chiu Cheung."

11. In response to this the 2nd Defendant says that (at paragraph 3 of his 2nd affidavit:

"With reference to paragraph 11 of Mr. Chan's Affirmation, I reiterate that the telephone conversation between Mr. Chan and myself whereby I was asked to go to the Plaintiff's branch to counter-sign the Cheque did take place. In fact, on or about 3rd or 4th May 1996 Mr. Chan visited our office with a photocopy of the Cheque. He asked me to sign on it. I refused to do so because Chan Chiu Cheung never told me about the Cheque and I had absolutely no idea what it was all about. I insisted that until I have a chance to speak to Chan Chiu Cheung about the Cheque, I would not sign it. Mr. Chan then left with the photocopy."

12. Obviously, I cannot conduct a trial on the face of the affidavits. But I am firmly of the view that this is an appropriate case for trial and for cross-examination on what I will call, for general descriptive purposes, the primary 'course of dealing' issue. In this connection, I pause to note, also, that the Plaintiff apparently made a report to the police about the incident. I am not sure how or when this occurred, and I (and I think counsel also) have not had a sight of that Report. Doubtless it will come out on discovery.

13. It follows from the foregoing that, in my view, the 2nd Defendant/Appellant has merits sufficient to meet the required benchmark. As Bokhary J.A. pithily observed in Premier Fashion:

"No defence is any good if it will not work in law even if based on fact. Likewise, no defence, whatever its effect in law if believed, is any good if it does not enjoy any real prospect of being believed." (emphasis added).

14. In my view, a Defence based on this line enjoys such a real prospect, even if I am less than taken (and I do not decide the point nor put it any higher), with Mr. Lam's construction argument on the face of the Mandate alone.

15. Accordingly, I am minded to set aside the judgment on the merits and to allow the matter to proceed in normal course. Are there other circumstances which should preclude that? As Litton J.A. observed in Premier Fashion, op. cit. in such cases as these "all the relevant circumstances must be considered".

16. For some reason, I know not why, the relevant box on the face of the Acknowledgement of Service document attached to the Writ was not completed by the solicitors acting for the 2nd Defendant, Messrs. Raymond M.K. Wu. It was clear that at the time they were retained to act, in that there is correspondence on record between 14th and 21st May 1996, and they did not come off the record until 18th June 1996. The Writ was, of course, issued on 12th June 1996 and, Mr. Coleman informs me, was served by post. There was then a lacuna whilst the 2nd Defendant applied for Legal Aid. This application was ultimately rejected, it is not clear why, but in any event prior to the retention of Messrs. Ho, Tse, Wai & Partners, the 2nd Defendant's present solicitors, on 2nd August 1996. This latter firm were presumably unaware of the omission, since they were themselves engaged in correspondence with the Plaintiff's solicitors, Messrs. S.K. Wong & Lee, from 8th August 1996. On the face of the papers the latter firm were less than helpful and did not respond to what appears to be a perfectly reasonable letter of 12th August 1996 asking for the release of statements to the 2nd Defendant as the account holder. It seems not unreasonable to infer that this was because judgment was due to be entered on the following day. The point is taken that Messrs. Ho, Tse, Wai & Partners did not formally come on to the record until 23rd August 1996, but even so correspondence was clearly taking place involving that firm, and I find it difficult to understand or to sympathise with the attitude displayed by the Plaintiff's solicitors.

17. Be that as it may. At the end of the day there was a clear oversight, it is not clear by whom, to complete the relevant form. But this is demonstrably not a case, for example, where nothing had been heard from the 2nd Defendant; per contra the Plaintiff's solicitors had been in correspondence with two sets of firms representing the 2nd Defendant.

18. Further, as Mr. Coleman accepts, post Saudi Eagle [1986] 2 Lloyds 221, merits are now the key in applications of this sort; as the Court of Appeal put it in Fountain, op. cit., the merit factor, being the primary concern, outweighs the absence of a reasonable explanation for the Defendant's failure to resist the default judgment.

19. In the exercise of my discretion, therefore, after taking into account all the evidence and the submissions of counsel, I have no hesitation in allowing the appeal and in setting aside the judgment entered on 13th August 1996. I will now hear counsel on costs and consequential orders, since I am aware that there are in place a Charging Order and a Garnishee Order, both dated 20th August 1996, which, of course, are predicated upon the existence of the judgment which has now been set aside.

20. I have now had the advantage of hearing counsel on three ancillary matters, and I deal with them below individually:

(1) Charging and Garnishee Orders

I have come to the conclusion, after very considerable assistance on the point from Mr. Coleman, that both the Garnishee Order and the Charging Order will have to be set aside in their totality. I so order.

(2) Consequential Directions

Consequent upon the setting aside of the judgment, I give the Defendants 21 days to file and serve a Defence to the Plaintiff's claim, and 14 days thereafter for the Plaintiff to put in a Reply, if so advised.

Mr. Coleman suggests, and I agree, that thereafter the usual directions apply in terms of discovery once pleadings are closed. For the moment I will say no more and let matters take their natural course.

One further housekeeping matter arises. Mr. Coleman, with the consent of Mr. Lam, makes an application 'on the hoof', as it were, for the matter to be transferred to the Commercial List. In the circumstances, I think it would be ungracious of me to refuse. It is perhaps not a matter of enormous moment, but suffice it to say that, in my view, this is quintessentially a matter suitable for this List. It also has the advantage, I suppose, that I am now well and truly familiar with this case, and any further interlocutory applications can be made to me speedily and expeditiously, without the necessity of visiting the Master in the first instance. Accordingly, I grant the application, and the parties will no doubt make whatever administrative arrangements are necessary.

(3) Costs here and below

This is by no means an easy decision in the particular circumstances of this case, given the way the argument has "developed" during the course of the hearing before me, and bearing in mind the way the matter was initially presented on the paper.

Naturally Mr. Lam for the 2nd Defendant and Mr. Coleman for the Plaintiff have divergent views on the appropriate order. I also bear in mind the broad principle that in setting aside of judgment cases the golden thread is that, generally speaking, the person asking for the indulgence generally pays.

21. After some reflection, I am going to make a bifurcated order in this regard. So far as the costs below are concerned, I divide them as follows:

First, all the costs occasioned by the preparation of the application to set aside shall be to the Plaintiff in any event. Second, the costs of the actual hearing before Master Cannon are to be Plaintiff's costs in cause.

22. Turning to the costs of the appeal, in the very particular circumstances of this case my Order is that the costs of and occasioned by this hearing, including the costs of today, are to be Plaintiff's costs in cause.

23. Finally, I would like to thank both counsel for their considerable assistance.