LUKS INDUSTRIAL CO LTD v. OCEAN PALACE INTERNATIONAL HOLDINGS LTD

DCCJ 3855/2016

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3855 OF 2016

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DECISION

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1.  This is a claim on dishonoured cheque in the sum of HK$350,000 (“the Cheque”).  The plaintiff applied for a summary judgment under Order 14 of the Rules of District Court.

Legal principles on summary judgment

2.  The legal principles on a summary judgment application are well established and are not in dispute. 

3.  The purpose of a summary judgment is to enable a plaintiff to obtain expeditious judgment summarily when there is plainly no defence.  The burden is on the defendant to show that there is a triable issue or that there ought to be some other reason to order a trial of the claim.  The test is whether the defendant’s assertion is believable, but not whether the defence is to be believed.  The onus is on the defendant to show that the defence is real and bona fide and not “frivolous or practically moonshine”.  In a summary judgment application, the court shall not embark on a mini-trial on affidavit evidence.  If there are serious factual disputes, leave to defend shall be given.  The court will not accept the pleaded defence on its face value, but shall test it against the evidence and consider the inherent probability of the defence. (Hong Kong Civil Procedure 2017 14/4/1; Ng Shou Chun v Hung Chun San [1994] 1 HKC 155; Paul Y Management Ltd v Eternal Unity Development Ltd CACV 16/2008, 12 August 2008)

Legal principles on bills of exchange

4.  A cheque is a bill of exchange drawn on a banker payable on demand (section 73 of the Bills of Exchange Ordinance).  Section 3(1) of the Bills of Exchange Ordinance provides that:-

“A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person or to bearer.”

5.  A cheque is treated as cash, and not as merely giving a right of action for the creditor to litigate a counterclaim.  (Fielding & Platt Ltd v Selim Najjar [1969] 1 WLR 357, per Lord Denning MR; SY Chan Ltd v Choy Wai Bor [2001] 3 HKLRD 145)

6.  Extrinsic evidence is not admissible to contradict the written terms of the cheque.  There are numerous authorities in support of this proposition.

7.  In Great Sincere Trading Co Ltd v Swee Hong & Co [1968] HKLR 660, Mills-Owens J has held that:-

“The evidence of the alleged oral arrangement, as I see it, is an attempt to qualify the nature or tenor of the instrument; an attempt to introduce into the unconditional order for payment expressed by the instrument itself, a condition contrary to its terms.  It is as if when the cheque was handed over the defendants said: “This is a cheque which is not a cheque unless we are put in funds” … But whichever way it is put the effect is to contradict the instrument … and that the defendants cannot be permitted to do on the strength merely of oral evidence.”

8.  In SY Chan Ltd v Choy Wai Bor, supra, Recorder Kwok SC reviewed a number of local decisions and concluded that in an action on dishonoured cheque, parol evidence is not admissible to contradict the expressed terms of the cheque :-

“In view of the formal nature of negotiable instruments, to admit extrinsic evidence would undermine the certainty and finality which ought to attach to each party’s promise on the instrument.”

9.  This is to be distinguished from adducing evidence to show that there was no consideration for the cheque, which is admissible.  The Court of Appeal in Man Sun Finance (International) Corporation Limited v Wong Kwan-Man, unreported, Civil Appeal No. 34 of 1982, 5 May 1982 has said that:

“It is a general rule that evidence of a parol agreement contradicting a term of a contemporaneous written agreement is inadmissible. A cheque is, by statutory definition (Section 3(1) Bills of Exchange Ord.), a bill of exchange payable on demand or at some future time. The defendant seeks to adduce evidence that there was an oral agreement that the cheque was not to be payable at all. He, therefore, seeks to prove an oral agreement denying the existence of an essential characteristic of the instrument he admits by his pleading to be a cheque. He is not allowed to do that. But he can adduce evidence to show that there was no consideration for the cheque. (Foster v. Jolly, per Parke, B. [1835] 1 Cr. M. & R. 703) I rule, therefore, that the evidence led for the purpose of showing that the cheque was not payable is not admissible but the evidence led for the purpose of showing that there was no consideration for it is admissible.”

10.  It will be a good defence if there is a total failure of consideration. (Sin Yuk Hung v Sin Tung San, unreported, HCA 474 of 2013, 18 December 2013; Xu Ziming v Ruifeng Petroleum Chemical Holdings Limited, unreported, HCA 450 of 2013, 6 May 2015)

11.  The learned author of Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes, 16^th edition at paragraph 4-008 explained total failure of consideration as follows:-

“A total failure of consideration will occur when the party against whom liability is sought to be enforced received no part of the benefit for which he bargained in the transaction which led him becoming a party to the bill, for example, where an advance or payment promised to him was never made, where goods agreed to be sold to him are never delivered, or if delivered, are lawfully rejected by him before his obligation to pay matures, or where his acceptance is given against the receipt of a bill of lading which turns out to be a forgery.”

12.  It is not a total failure of consideration if the plaintiff can show that there was at least some consideration (Townearn Industrial Limited v Golden Globe Holdings Limited, unreported, HCA 10357 of 2000, 19 March 2002).

13.  Partial failure of consideration is a pro tanto defence against an immediate party, and against a remote party who is not a holder for value provided that the partial failure is an ascertained and liquidated amount. (Chalmers and Guest on Bills of Exchange and Cheques and Promissory Notes 16^th edition, §4-009; Byles on Bills of Exchange and Cheques 29^th edition §19-037).

14.  In Nova (Jersey) Knit Ltd v Kammgarn Spinnerei G.m.b.H. [1977] WLR 713, Lord Wilberforce has said:-

“As between the immediate parties, a partial failure of consideration may be relied upon as a pro tanto defence, but only when the amount involved is ascertained and liquidated.”

15.  Lord Russell has said in the same case:-

“The bill is itself a contract separate from the contract of sale. Its purpose is not merely to serve as a negotiable instrument, it is also to avoid postponement of the purchaser’s liability to the vendor himself, a postponement grounded upon some allegation of failure in some respect by the vendor under the underlying contract, unless it be total or quantified partial failure of consideration.”

16.  In Hong Kong, the Court of Appeal in Suen Ho Sun v Kamenar International Limited, unreported, CACV 141 of 1988, 17 January 1989 has accepted the defence on quantified partial failure of consideration, allowed the appeal and granted a conditional leave to defend.

17.  A claim to set-off or counterclaim by the immediate parties to the bill of exchange will not hold up the judgment, nor will it justify a stay of execution.  (Montebianco Industrie Tessili S.p.A. v Carlyle Mills (London) Limited [1981] 1 Lloyd’s Rep 509)

Facts

18.  I shall highlight below the salient facts of this case.

19.  The plaintiff was the owner of a yacht (“Yacht”) and a speedboat (collectively the “Boats”) and the holder of a licence to use a designated berth (“the Licence”) at Club Marina Cove (“the Club”).  The plaintiff’s director Mrs Luk has held an individual membership at the Club (“the Membership”).

20.  The defendant is a company carrying on a business of brokering the sale and purchase of yachts and other related business. Mr Jeffrey Chan of Nextwave Yachting Limited was a long term working partner with the defendant, through whom, the defendant said it came to know that the plaintiff was intending to sell the Yacht and the Licence in a single transaction for a consideration of HK$1,050,000.

21.  The plaintiff denies that it was intending to sell the Boats and the Licence in one single transaction for a consideration of HK$1,050,000. The plaintiff’s evidence was that it did not matter whether the Membership, the Boats and the Licence were sold in one go or separately, as long as the selling price was good.

22.  On 14 April 2016, the plaintiff received the Cheque dated 20 April 2016 from Mr Jeffrey Chan (on behalf of the defendant) at a meeting (“the Meeting”).

23.  The defendant’s case was that the Cheque was an earnest money and the intended transaction was for the purchase of the Yacht and the Licence together for HK$1,050,000.  The plaintiff however contended that the Cheque was part payment for the Licence only.

24.  The plaintiff further contended that the Yacht has been sold to a Mr Cheng at the Meeting with the knowledge of the defendant.  The defendant denied its knowledge of the sale.

25.  On 28 April 2016, the plaintiff banked in the Cheque which was countermanded.

The defence

26.  The defendant raised two defences in the pleading:-

(1)  the Cheque was given to the plaintiff as an earnest money with the condition that the Cheque shall not be deposited unless the defendant had received the full payment from its principal and confirmed with the plaintiff that it could deposit the same (“Conditional Delivery”); and

(2)  the Cheque was paid for the purchase of the Yacht and the Licence together.  The Club’s rules do not permit the transfer of the Licence independent from the Yacht.  There was a total failure of consideration on the part of the plaintiff since the Yacht has already been sold to a third party and the club has already exercised its right to retract the plaintiff’s right to use the berth due to its non-payment of monthly rents (“Total Failure of Consideration”).

27.  At the hearing, the defendant has abandoned the defence on Conditional Delivery, which in my view, rightly so in light of the clear authorities on the non-admissibility of extrinsic evidence to contradict the expressed term of the cheque.

Total Failure of Consideration

28.  On the defence of Total Failure of Consideration, there are three issues:-

(1)  on the parties’ agreement, whether the Cheque was a part payment for the Yacht and the Licence together (as contended by the defendant) or for the Licence only (as contended by the plaintiff);

(2)  whether the Licence must be sold with the Yacht according to the rules of the Club, and therefore support the defendant’s contention that the Licence could not be sold separately from the Yacht; and

(3)  has the plaintiff given any valuable consideration for the Cheque, and in relation to this issue, a further question was whether the plaintiff was unable to transfer the Yacht and the Licence to the defendant.

29.  There are serious factual disputes between the parties, including the circumstances under which the Cheque was passed to the plaintiff, the purpose of the Cheque and the subsequent negotiations between the parties.  I do not need to go into every details of these factual disputes in this application.  These disputes cannot be resolved on affidavit evidence.  I shall not embark on a mini-trial on these disputes.  I will only focus on those matters that are relevant to find whether the defence on Total Failure of Consideration is believable.

What was the Cheque for?

30.  The parties’ evidence on the circumstance in which the Cheque was given to the plaintiff differs materially.  There was no documentary evidence showing the purpose for which the Cheque was passed to the plaintiff.

31.  For the present purpose, I will focus on the question whether the defendant’s assertion that the Cheque was for the purchase of both the Yacht and the Licence together is believable.

32.  The plaintiff produced the following email (“the Email”) written by the Club to Mrs Luk of the plaintiff on the date after the Meeting:-

“陸太，

關於 閣下和Next Wave Yachting 買賣船一事，本會現特別安排Next Wave Yachting之新船（長度須限於58尺內，闊度須限於15尺內）可安排停泊於本會西湖D11橋位。

倘若日後須要作橋位調配，本會將會於西湖安排另一橋位停泊。

Hyddie Cheng

匡湖遊艇會會所”

33.  The Email was written after the plaintiff has informed the Club of the transaction and made enquiry as to whether the berth can be reserved for Next Wave Yachting[1].

34.  The Email started by referring to the sale and purchase of a boat (買賣船).  It did not refer to a transfer of the Licence or the right to use the berth.

35.  The plaintiff argued that if the plaintiff was to sell the Yacht to the defendant, the Club would not refer to the boat of Next Wave Yachting as the “new” boat and would not specify the permitted length and width of the boat that can use the berth.  The plaintiff invited the court to infer that the Club was not referring to a sale and purchase of boat, but only a transfer of the right to use the berth.

36.  There may be many reasons for the Club to use the term “new” boat and specify the permitted length and width in the Email.  May be from the Club’s perspective, the boat, after transfer, will be newly owned by the defendant (or New Wave Yachting) and therefore the term “new boat” was used.  May be it was the Club’s practice to specify the permitted length and width for all new user.  This court shall not speculate one way or the other.  In the absence of further evidence, I do not consider these references to new boat and the permitted length and width provided sufficient basis to displace the clear reference to the sale and purchase of boat in the first sentence of the Email.

37.  The plaintiff next referred to the draft agreements produced by the defendant to be signed with its principal.  The plaintiff argued that the defendant has no instruction to purchase the Yacht since the draft agreements have not mentioned the purchase of the Yacht.  While this is a factor for consideration, I do not think it is appropriate to rely only on these draft agreements to find that the defendant has no instruction to purchase the Yacht, in particular when there was other evidence to the contrary.

38.  I therefore do not consider the defendant’s assertion that the transaction was for the Yacht and the Licence together is unbelievable.

The Club’s Rules

39.  The defendant argued that according to the rules of the Club, the Licence has to be transferred together with the Yacht.  The rules pleaded by the defendant are as follows:-

“(1)  all the berths situated at the Club were owned by the Club;

(2)  the right to use a designated berth would be assigned to a yacht registered in the name of the member of the Club;

(3)  therefore, only members of the Club with their own yacht registered to the Club were entitled to the right to use the berth at the Club; and

(4)  the licencee of the berth shall pay a monthly rent; otherwise, the right to use the berth would be retracted.”^[2]

40.  These rules do not assist the defendant.  The plain meaning of the above rules was that the berth can only be used by a member of the Club and the right to use the designated berth would be assigned to the member’s own yacht registered with the Club. It does not prohibit an existing member from selling the right to use the berth separately, the caveat was that the new user has to be a member of the Club and has its own yacht registered with the Club.  The above rules do not have the meaning contended by the defendant.

Has the plaintiff given any valuable consideration for the Cheque?

41.  There is a prima facie presumption under section 30 of the Bills of Exchange Ordinance that the defendant who has signed the Cheque is prima facie deemed to have become a party to the Cheque for value. 

42.  Section 2 defined “value” to mean “valuable consideration”. Under section 27, valuable consideration for a bill may be constituted by:-

“(a)  any consideration sufficient to support a simple contract;

(b)  an antecedent debt or liability. Such a debt or liability is deemed valuable consideration whether the bill is payable on demand or at a future time.”

43.  This case does not involve any antecedent debt or liability, section 27(b) is not relevant.

44.  The burden is on the defendant to show that there was a total failure of consideration.

45.  There is no dispute that the Yacht has been transferred to a third party and thus cannot be passed to the defendant. There is also no dispute that the Licence has not been transferred to the defendant.   On the date when the Cheque was presented, neither the Yacht and the Licence was transferred to the defendant. 

46.  The defendant further contended that the Club has already retracted the plaintiff’s right to use the berth (i.e. the Licence) because the plaintiff has ceased to pay the monthly rent of the berth. Without the Licence and the Yacht, the defendant contended that there must be a total failure of consideration on the part of the plaintiff.

47.  The plaintiff disagreed.  Its arguments on this point are twofold:-

(1)  the material time for the value to be given was the time of the receipt of the Cheque, the plaintiff has provided the value when the berth was reserved for the defendant on 15 April 2016 and the plaintiff has suffered a detriment of not being able to use or sell it on 15 April 2016, what happened subsequently does not matter; and

(2)  in any event the defendant still holds the Licence.

48.  First of all, the Cheque was received on 14 April 2016 but it was dated 20 April 2016.  The time to consider whether a value was given should be the time when the Cheque was due for presentation, but not the time of receipt of the Cheque.

49.  Further, this does not necessarily shut out a defence arising after the cause of action accrued.  On this, I respectfully adopt the following remarks of the Court of Appeal in Suen Ho Sun, supra:-

“22.  Thirdly if the defence gets over that factual hurdle, I do not think that the main point relied upon by Mr Chain before us is going to be fatal. He submitted, correctly, that his client's cause of action on the cheque accrued on 5th January (assuming that it was presented and dishonoured on that date) and that he need look no further than that. But I do not believe that necessarily shuts out a defence arising after that cause of action accrued, and perhaps after action brought, which does in fact go to the underlying contract and comes within the dicta of Lord Russell, simply because it did not accrue until about a month later.”

50.  The plaintiff contended that under section 27 of the Bills of Exchange Ordinance, any consideration that is sufficient to support a simple contract may constitute a valuable consideration for the Cheque. These include forbearance or detriment. 

51.  The plaintiff referred to paragraph 20 of Barnes J’s judgment in Man Sun Finance (International) Corporation Limited v Wong Kwan Man, unreported, HCA 535 of 1981, 5 February 1982:-

“20.  The consideration sufficient to support a simple contract must ‘consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other’” [3].

52.  I have no disagreement that forbearance or detriment can be a consideration to support a simple contract and can be considered as a valuable consideration under section 27.  The consideration for the Cheque must, however, be identified within the context of the case.  That forbearance or detriment can be a valuable consideration is different from saying that forbearance or detriment was the consideration which constitute the bargain for the Cheque.

53.  In the context of a breach of contract claims in Stocznia Gdanska SA v Latvian Shipping Co and others [1998] 1 WLR 574, Lord Goff drew a distinction between the contract for the sale of a vessel and a contract for the design, manufacture and delivery of the vessel.  In the former case, the consideration was the passing of the title of the vessel. In the latter case, the design and construction of the vessel (which are the contractual duties of the vendor) form part of the consideration under the contract.  One has to identify the contractual duties of the parties in determining whether or not a consideration has been given.  The passage of Lord Goff at page 588 is as follows:-

‘The present case cannot, therefore, be approached by asking the simple question whether the property in the vessel or any part of it has passed to the buyers. That test would be apposite if the contract in question was a contract for the sale of goods (or indeed a contract for the sale of land) simpliciter under which the consideration for the price would be the passing of the property in the goods (or land). However before that test can be regarded as appropriate, the anterior question has to be asked: is the contract in question simply a contract for the sale of a ship? or is it rather a contract under which the design and construction of the vessel formed part of the yard's contractual duties, as well as the duty to transfer the finished object to the buyers? If it is the latter, the design and construction of the vessel form part of the consideration for which the price is to be paid, and the fact that the contract has been brought to an end before the property in the vessel or any part of it has passed to the buyers does not prevent the yard from asserting that there has been no total failure of consideration in respect of an instalment of the price which has been paid before the contract was terminated, or that an instalment which has then accrued due could not, if paid, be recoverable on that ground.”

54.  The same approach can be found in Fielding & Platt Ltd v Najjar, supra. The contract in the Fielding case was for the manufacture and sale of an aluminium extrusion-press, with payment by promissory notes by stages.  The English Court of Appeal held that on the first promissory note, there was no failure of consideration as the vendor has started the work to build the machinery.  However, before the second note fell due, the purchaser indicated its inability to make payment, the vendor has suspended all the work on the contract. The Court of Appeal held that there was a failure of consideration on the second note.

55.  The present case is a sale of the Licence. The contractual duty of the plaintiff is to pass the Licence to the defendant. 

56.  Besides, on evidence, I am not satisfied that the plaintiff has shown that it has vacated from the use of the berth at the time when the Cheque was due or has given any valuable consideration for the Cheque. 

57.  The plaintiff mainly relied on the Email and a whatsapp message. There was no evidence that the special arrangement referred to in the Email has taken up by the plaintiff.  There was no evidence that the plaintiff has vacated from the use of the berth.

58.  There was also no evidence on the non-use of the berth by the plaintiff on 20 April 2016 (which was the date of the Cheque) and on 28 April 2016 (which was the date when the Cheque was presented).

59.  I shall also state that this fact that the plaintiff has given a consideration by vacating from the use of the berth was not pleaded in the Reply nor deposed to in the plaintiff’s affirmation.

60.  As to the plaintiff’s contention that it is still the holder of the Licence, the plaintiff relied on the following statement in the 2^nd Affirmation of Chan Chong Yan Zaria made on 3 November 2016:-

“4. At all material times up to 30 April 2016, the Plaintiff’s director Mrs Victoria Luk (“Mrs Luk”) was a member of Club Marina Cove (the “Club”) and is still the holder of a licence to use the berth located at D11 of the Club.”

61.  The plaintiff’s assertion that it is still the holder of the Licence remains to be a bare assertion.   There is no documentary evidence in support.

62.  Further, such assertion does not sit well with the Club’s rules which was not disputed by the plaintiff.   It was the rules of the Club that “only members of the Club with their own yacht registered to the Club were entitled to the right to use the berth at the Club”.   The plaintiff’s evidence was that its director has sold the club membership to another buyer on 13 April 2016[4] and has ceased to be a member of the Club after 30 April 2016, and also it has sold the Yacht to a Mr Cheng on 14 April 2016. According to the Club’s rule, the plaintiff which has ceased to be a member of the Club and has sold the Yacht would not have the right to use the berth. 

Quantified Partial Failure of Consideration

63.  The defendant has not pleaded any defence of quantified partial failure of consideration which in my view may be available to the defendant in respect of the Yacht, as an alternative defence.  As this is not a defence pleaded by the defendant, in fairness, I will not take this into consideration for the present application.

Counterclaim Irrelevant

64.  For completeness, I also state that the defendant’s counterclaim does not impact on whether or not a summary judgment for the dishonoured Cheque should be given.

Conclusion

65.  Having considered all the evidence before the court, I cannot say that the defence was not believable or that it was practically moonshine.  The defendant raised triable issues.  I therefore dismiss this application.

66.  I make a costs order nisi that the plaintiff shall pay the defendant costs of this application, on a party and party basis, to be taxed if not agreed, with a certificate for counsel.  This order will become absolute unless there is any application to vary the same within 14 days from the order.