XCHRX Melrose Clothing Co. Ltd. v. China Garment (Far East) Ltd.

HCA 6760/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6760 OF 2000

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J U D G M E N T

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Introduction

1. This is an appeal by the defendant against the master's order dated 27 September 2000 whereby he gave summary judgment to the plaintiff for $201,480.56, representing part of its claim on a dishonoured cheque for $248,676.35 dated 20 April 2000 drawn by the defendant payable to the plaintiff ("the Cheque"), with interest and granted unconditional leave to the defendant to defend the balance of the claim, $47,195.79. The defendant seeks to set aside the order and have unconditional leave to defend the entire action.

Plaintiff's case

2. The plaintiff's case may be summarized as follow. The defendant had agreed to supply materials to the plaintiff for it to manufacture garments in Cambodia at a price. Payment was by way of letters of credit but parties subsequently agreed that it be effected by cheque in exchange for the bills of lading and other shipping documents. By a fax dated 15 April 2000, the plaintiff asked the defendant to tender a cheque and to collect the bills of lading and other shipping documents in respect of four invoices, namely, C12563, C12565, C12566 and C12567. On 19 April, the plaintiff delivered the Cheque and collected the documents. However, when the Cheque was presented for payment, it was dishonoured upon the countermand by the defendant.

Defendants' case

3. The defendant does not seriously dispute the facts stated above. But it raises further factual issues.

4. Firstly, after collecting the bills of lading on 19 April, the defendant discovered that the plaintiff had, in breach of the agreement, (1) provided invalid bills of lading for invoices nos. C12566 and C12567 in that the bills did not bear any signature or chop of the issuer ("the Invalid Bills"); and (2) provided the bill of lading for the 3rd lot of shipment of goods under invoice no.C12563 about 30 days after shipment and about 5 days after the shipment arrived at the United Kingdom. It therefore countermanded the Cheque. It should be noted that despite the Invalid Bills, the defendant did not deny that the goods thereunder had already been duly collected by the consignee.

5. Secondly, after the countermand, the parties reached an agreement ("the compromise agreement") whereby (1) the agent of the ultimate buyer of the goods shipped under invoices nos. C12566 and C12567 would pay directly to the plaintiff the price thereof in the sum of $47,195.79 and the same amount would be deducted from the price payable by the agent to the defendant; and (2) the balance of the money for the other 2 lots of shipment covered by the invoices nos. C12565 and C12563 would be settled between the parties after full account of claims for excess freight charges and other claims rendered, if any, by the defendant to the plaintiff. Pursuant to the compromise agreement, the agent paid the plaintiff.

6. Thirdly, the plaintiff is also liable to the defendant for loss and damage it has suffered in respect of other transactions.

7. Relying on the above, the defendant put before the learned master several defence: total failure of consideration, conditional delivery, misrepresentation, estoppel in the sense that the compromises agreement had discharged the defendant's liability and the plaintiff's right on the cheque, and set-off and counterclaim arising from the other transactions. In the event, they did not find much favour with the learned master. But when giving leave to defend the claim for $47,195.79, which represented the total sums due under the two invoices nos. C12566 and C12567, the learned master must have accepted there was a defence or triable issue there.

Fresh evidence

8. At the hearing before me, Mr. Mok, counsel for the defendant, seeks leave to adduce further evidence on the compromise agreement by way of the 2nd affirmation of Cheung Kwok Wing. Exhibited to this affirmation are, inter alia, the parties' correspondence subsequent to the countermand and the receipt issued by the plaintiff to the agent acknowledging its payment under the compromise agreement. For some reasons unknown, they were not placed before the learned master. In support, Mr. Mok relies on Core Resources (Far East) Ltd. v Sky Finders Ltd. [1992] 1 HKLR 193. Ms. Yeung, counsel for the plaintiff, opposes the application. She submits that the fresh evidence is not fresh evidence as such, that some of the points there had already been dealt with previously and that the materials do not exactly support the defence.

9. While the evidence on an appeal to a judge in chambers should ordinarily be the same as it was before the master; but since such an appeal is dealt with by way of an actual rehearing, and the judge treats the matter afresh as though it came before him for the first time, the judge has a discretion to admit fresh evidence, and he frequently does so in the absence of special reasons: see Supreme Court Practice 1999, Vol. 1, para. 14/4/45. However, the reception of the fresh evidence has to be considered in the light that the hearing before the judge is indeed an appeal and the discretion will not inevitably, in every single case, be exercised in favour of the applicant: Core Resources (Far East) Ltd. v. Sky Finders Ltd., supra, per Kaplan J at p.197. Thus, his Lordship in that case did not allow the defendant to adduce new evidence in order to place before the court a wholly different defence to that which had not found favour with the master.

10. Here, what the defendant seeks to do is to bolster with fresh evidence its case on the compromise agreement, which is neither a new nor different defence. The documents exhibited to the 2nd affirmation of Cheung are largely parties' correspondence or own documents. They do give a fuller picture of the dispute. More importantly, they also show how the parties conducted themselves after the countermand of the cheque. They are highly pertinent and shed considerable light on the credibility of the compromise agreement defence. It is unfortunate that these documents were not before the learned master. I would therefore allow the application. Ms. Yeung does not seek any adjournment or leave to adduce any evidence in reply.

11. For the purpose of this appeal, Mr. Mok abandons most of the grounds originally put before the learned master. He only relies on two: misrepresentation and the compromise agreement. Since most of counsel's effort is devoted to misrepresentation, I will deal with it first.

Misrepresentation

12. According to the defendant's case, it is a breach of the underlying agreement on the plaintiff's part to provide the Invalid Bills. The breach itself is no defence to a claim on the Cheque as it would possibly only give rise to a claim for unliquidated damages: see Nova (Jersey) Knit Ltd. v. Kammgarn Spinnerei G.m.b.H. [1977] 1 WLR 713, HL; Montecchi v. Shimco (U.K.) Ltd. [1979] 1 WLR 1181, CA. (The defendant does not seek to argue that the breach gives rise to a defence of quantified partial failure of consideration: see Nova (Jersey) Knit Ltd. v. Kammgarn Spinnerei G.m.b.H., at p.720, per Lord Wilberforce.) Indeed, having received the agent's payment, the defendant would appear to have difficulty in establishing any real loss and damage.

13. But Mr. Mok submits that it is a defence if the plaintiff, though in the absence of fraud, misrepresented to the defendant that the Invalid Bills were proper and valid in order to induce the defendant to tender the Cheque. He relies on Clovertogs Ltd. v. Jean Scenes Ltd. [1982] Com. L.R. 88, CA. There, the cheques were delivered on the plaintiff's misrepresentation that a contractual certificate of inspection had been given. The English Court of Appeal accepted that the misrepresentation, albeit not fraudulent, was a defence to summary judgment on the dishonoured cheques.

14. Ms. Yeung, in reply, submits that there was no misrepresentation. Mr. Jacky Cheung of the defendant who collected the bills of lading on 19 April was aware that the two bills in question did not bear the signature or chop of the issuer. He agreed to take the bills as it would not affect the collection of the goods by the consignee. However, it should be noted that the parties' correspondence shows that the plaintiff did make complaint about the Invalid Bills soon after collection. More importantly, Ms. Yeung submits, the consignee did subsequently collect the goods. This is not denied by the defendant. Ms. Yeung lastly submits that misrepresentation, which is in any event a matter of counterclaim only, is no defence to summary judgment on the cheque: Brown, Shipely & Co. Ltd. v. Alica Hoisery Ltd. [1966] 1 Lloyd's Rep. 668, CA.

15. After the hearing, counsel have made further submissions in writing to deal with some other more recent authorities and to elaborate on their primary arguments.

16. It is trite law that a bill of exchange or a promissory note is to be treated as cash. It is to be honoured unless there is some good reason to the contrary: Fielding & Platt Ltd. v. Najjar [1969] 1 WLR 357, CA, per Lord Denning at p.361. Good reasons are indeed very limited. Classic exceptions are fraud and total failure of consideration. As between immediate parties, a partial failure of consideration may also be relied on as a pro tanto defence, but only when the amount involved is ascertained and liquidated: Nova (Jersey) Knit Ltd. v. Kammgarn Spinnerei G.m.b.H., ibid, per Lord Wilberforce at p.720 and Lord Russell at p.732.

17. The fact that the defendant may have a counterclaim relating to the subject matter of the underlying contract is no defence: James Lemont & Co. Ltd. v. Hyland, Inc. [1950] 1 KB 585; Nova (Jersey) Knit Ltd. v. Kammgarn Spinnerei G.m.b.H., ibid, per Lord Russell at p.732. When the defendant's counterclaim is unrelated to the subject matter of the underlying contract, the authorities suggest that it is no defence either. In Brown, Shipely & Co. Ltd. v. Alica Hoisery Ltd., supra, the plaintiff sued on 3 bills of exchanged which were accepted by the defendant and indorsed to the plaintiff. The bills were for payment of goods the defendant had contracted to buy from a seller. The goods were then held by the plaintiff as security for a loan to the seller. The bills were given to the plaintiff upon its misrepresentation that the goods were free to be delivered. The misrepresentation was therefore a different matter from that initiated the bills of exchange. Lord Denning held that it was not a defence. In Nova (Jersey) Knit Ltd. v. Kammgarn Spinnerei G.m.b.H., supra, the defendant's claim of mismanagement which was one for a wholly unrelated tort was held to be no defence: per Lord Wilberforce at p.720.

18. The Clovertogs case is obviously out of line with the long settled and classic case law. It is unfortunate that it cited no authority nor entered into any discussion of principle. It is therefore not surprising that the Clovertogs case has been regarded as being of dubious authority: see The Supreme Court Practice 1999, at para. 14/4/20. May LJ was one of the judges in the Clovertogs case. He himself, in the subsequent case of Famous Ltd. v. Ge Im Italia SRL, The Times Law Reports, August 3, 1987, also found the Clovertogs case surprising and said that it was a decision on its own facts. In re A company, 18 October 1994, unreported, Harman J. commented that the reporter of the Clovertogs case might have misunderstood what the point of the case was. He refused to accept that, on an application to restrain presentation of winding up petition, an innocent misrepresentation on a dishonoured bill of exchange was sufficient to raise a dispute on substantial ground to justify the application.

19. Mr. Mok refers to a more recent unreported decision of the English Court of Appeal in SAFA Ltd v Banque Du Carie, 20 July 2000. This case concerns letters of credit. The Court also agreed that Clovertogs case is of dubious authority because it appeared that the misrepresentation related as much to the underlying transaction as to the issuing of the bill of exchange. This observation is also valid here. On the defendant's case, the alleged misrepresentation on the Invalid Bills related as much to the underlying agreement as to the issuing of the Cheque.

20. Mr. Mok, however, submits that the English Court of Appeal in the SAFA case also held that if the bank could establish with a real prospect of success that there was a misrepresentation by the beneficiary directed at persuading the bank to issue the letter of credit, summary judgment should not be entered against the bank. By analogy, counsel submits, it is a defence if the Cheque was issued upon misrepresentation. It should be noted that the relationship between the beneficiary in the SAFA case was special and not simply governed by the letter of credit. The bank was very much involved in the underlying transaction. I do not consider the analogy a correct one.

21. For my part, I have great difficulty in accepting the proposition in the Clovertogs case. The present rule governing bills of exchange is of great commercial value. It has been so recognized and acted upon for years. The existing rule will be substantially undermined if every drawer of a dishonoured bill were able to resist judgment by asserting that he gave it in reliance of an innocent misrepresentation made by the drawee. In the absence of clear and authoritative authority, I for one will be very slow to countenance any additional defence on misrepresentation. Accordingly, I would decline to follow the Clovertogs case.

22. Even if I am wrong, I doubt if the limited principle in the Clovertogs case has any application here. There is considerable doubt if the Invalid Bills were invalid at all because the consignee had already collected the goods despite the defects. Further, it is doubtful if the defence can be established in the absence of any real loss or damage.

Compromise agreement

23. I now turn to the compromise agreement.

24. The compromise agreement is flatly denied by the plaintiff: the parties were negotiating but no settlement had been reached and that is apparent from the correspondence. But the plaintiff's case is arguably contradicted by its own documents at least insofar as invoices nos. C12566 and C12567 are concerned. Its receipt dated 26 May 2000 (exhibit "CKW-1" to Cheung's 2nd affirmation) confirms that it had received from the agent payment under invoices nos. C12566 and C12567. It also acknowledged that in its fax dated 10 June 2000 to the defendant (exhibit "CKW-7" to Cheung's 2nd affirmation). There is no explanation from the plaintiff as to why and under what circumstances it had agreed to accept and did accept the agent's payment. As the matter now stands, the evidence certainly lends support to the defendant's case relating to these invoices.

25. As to invoices nos. C12563 and C12565, the correspondence ("CKW-6" and "CKW-7") shows that on several occasions, the plaintiff on its own motion suggested to deduct certain sums from the payment due under the two invoices by taking into account matters relating to other transactions: see the faxes dated 2 May, 10 June and 12 June 2000. Further, according to the fax of 10 June 2000, the parties had taken the trouble for going to Cambodia to inspect the materials there for the purpose of making a mutually acceptable deduction. The correspondence is not entirely inconsistent with the defendant's case because one possible way of reading it is that the parties were acting in accordance with the settlement already reached. In my view, the question relating to the compromise agreement cannot be answered on affidavit. It can only be resolved after trial.

26. With the benefit of having fuller materials before me and for the above reasons, I think the defendant is entitled, on the compromise agreement defence, to have the entire action proceed to trial. Unconditional leave to defend the entire action should therefore be given.

Conclusion

27. I will allow this appeal, set aside the order of the learned master and give the defendant unconditional leave to defend the entire action.

28. As the appeal is allowed on the strength of the fresh evidence adduced, I will not disturb the costs order by the learned master. I will make an order nisi that the costs of this appeal be in the cause, to be made absolute within 14 days after handing down.