ATOM XQUARE LTD (formerly known as ATOM XQUARE CORPORATION LIMITED v. ARIST HOME LTD AND ANOTHER

HCA 1511/2017

[2019] HKCFI 2488

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1511 OF 2017

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J U D G M E N T

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A.  Introduction

1.  This is the 2^nd defendant’s appeal from the Master’s order dated 29 May 2019 granting summary judgment against her in favour of the plaintiff, given on the plaintiff’s Order 14 summons dated 16 January 2019.  The appeal is brought by Notice of Appeal dated 11 June 2019, and the matter comes before me on a de novo hearing.

2.  The action was commenced by the plaintiff (“Atom”) against the 1^st defendant (“AHL”) and the 2^nd defendant (“Lau”) by writ and claim dated 27 June 2017.  The claim was amended with leave, by the amended statement of claim dated 12 December 2018.

3.  In the action, Atom claims against AHL for breach of an agreement between them dated 1 December 2015 (“Agreement”), under which Atom was to provide engineering design supply chain services for the development of a coffee machine in consideration of AHL’s payment of non-recurring engineering fees totalling US$715,000, payable by 13 monthly instalments of US$55,000 (equivalent to HK$426,250).

4.  Invoices were issued by Atom each month, and AHL settled some invoices.  But AHL failed to settle others, leaving an outstanding amount of US$495,000 (equivalent to HK$3,836,250).

5.  Atom pleads that in order to induce it to continue the provision of its service under the Agreement notwithstanding AHL’s breach in failure to make timely instalment payments, and to give time to AHL for settling the payments then due, on 6 October 2016 Lau drew two post-dated cheques payable to Atom for settlement of the indebtedness owed by AHL under certain invoices.  One cheque was dated 27 October 2016 in the sum of HK$200,000 (“the 1^st Cheque”), and the other was dated 10 November 2016 in the sum of HK$1,931,250 (“the 2^nd Cheque”).  The amount of the two cheques in total was the total amount then outstanding on the invoices.

6.  On 26 October 2016, Atom was requested not to present the 1^st Cheque, and Lau drew a replacement cheque in the same sum of HK$200,000.  That cheque was presented for payment on or about 27 October 2016 and was honoured.  There is no dispute that the then outstanding amounts due on the invoices was reduced by that sum.  However, when the 2^nd Cheque was presented for payment on or about 10 November 2016, it was dishonoured.  Notice of dishonour was given to Lau by Atom and its solicitors.  Atom claims against Lau on the dishonoured 2^nd Cheque.

7.  AHL and Lau filed a defence and counterclaim, thought the counterclaim is by AHL only. Subsequent to the hearing before the Master, and so after the grant of summary judgment, the defence and counterclaim was amended by consent to include allegations of fraudulent misrepresentation against an employee of Atom, one Lui Ho Man Marcus (“Lui”), who was added as the 2^nd defendant by way of counterclaim.

8.  The application for summary judgment was pursued only against Lau (and not against AHL), and pursued on the basis of the dishonoured 2^nd Cheque.

B.   Applicable Principles

9.  The principles applicable on applications for summary judgment are well-known, well-settled and need not be rehearsed at any great length.

10.  Suffice it to say that the application proceeds on the case as pleaded in the claim, and those pleaded facts must be verified on affidavit.  The burden is then on the defendant to satisfy the court that he has a real or bona fide defence, that is that there are triable issues, or that there is some other reason for there to be a trial.

11.  The court will not embark upon a mini-trial of the action on paper.  However, mere assertion on affidavit does not of itself entitle a defendant to leave to defend, and the court is entitled to test the assertions against the totality of the evidence put forward.  In order to avoid judgment, the defendant’s assertions do not have to be believed, but they must be capable of being believed.

12.  Leave to defend should be given where the defendant raises any substantial question of fact which ought to be tried.  But, where the defence asserted is frivolous and “practically moonshine”, judgment will be entered.

C.  The Claim

13.  The claim on the dishonoured 2^nd Cheque is straightforward.  As has been often repeated in authorities, bills of exchange are treated as cash.  Where there is an action between the immediate parties to a bill of exchange, judgment will not be held up by virtue of a claim to set-off or counterclaim by the defendant, and execution will not be stayed unless there are exceptional circumstances or some strong or good reasons to the contrary.

D.  The Defence

14.  In the amended defence and counterclaim, three apparent defences were pleaded:

(a)  First, it was alleged that the 1^st Cheque and the 2^nd Cheque were issued by Lau solely as a gesture of goodwill so that Atom’s staff could show the cheques to their “boss” and as evidence only showing AHL’s good intention to continue the Agreement, and that the two cheques would not be presented for payment.  Hence, it is alleged that the 2^nd Cheque was a conditional cheque.

(b)  Secondly, it was pleaded that Atom should only be paid when it fully performed all its tasks under the statement of work under the Agreement.

(c)  Thirdly, reliance was placed on the arbitration clause in the Agreement.

15.  In Lau’s affidavit filed in opposition to the application for summary judgment she further raised two matters:

(a)  First, she alleged that Atom was seeking double recovery against both AHL and herself.  She asserted the risk of inconsistent judgments if she were required to pre-pay the amount of the dishonoured cheque and then for the real dispute between Atom and AHL to be resolved at trial.

(b)  Secondly, she alleged a total failure of consideration for the 2^nd Cheque.

16.  In his skeleton submissions, Mr Joseph Wong, Counsel for Lau, put the points in the following way as reasons why the case is not suitable for summary judgment, so that unconditional leave to defend should be granted:

(a)  The 2^nd Cheque was issued as a conditional cheque solely as a gesture of goodwill so that Lui and Atom’s staff could show it to their “boss”.

(b)  The 2^nd Cheque was vitiated by an oral agreement (“Oral Agreement”) alleged to have been made between Nelson Chiu (“Chiu”) and Lui in early 2016, in particular the agreement that the post-dated cheques were only issued so that they could show them to their “boss” and would not be presented to the bank for payment.

(c)  There was a total failure of consideration in respect of the 2^nd Cheque, and a “forbearance by Atom to sue AHL” argument is a new forensic point not supported by affidavit evidence.

(d)  Atom’s claims involve underlying allegations of fraud and/or dishonesty against AHL and Lau, hence engaging the “fraud exception” under Order 14 rule 1(2)(b).

(e)  In any event, given that the main dispute between Atom and AHL remains unresolved, there is a risk of inconsistent findings and risk of multiplicity of proceedings, so that it is more appropriate for the entire dispute amongst all parties to be resolved at trial.

17.  I can deal with each of these matters in turn.

E.  Analysis

E.1  Background

18.  A considerable amount of the evidence filed in the context of the summary judgment application, in particular by Lau, goes into significant detail as to the background dealings between Atom and AHL prior to and during the course of the Agreement.  In my view, much of the background material is scene-setting but does not directly impact the current application. Nevertheless, some of the ground can be traversed.

19.  Atom had three directors, and though Lui was not one of them, he was plainly involved front and centre in the dealings with AHL under the Agreement.  There is on the face of the pleadings, as now amended, a significant dispute as to whether or not he made certain representations on which AHL relied in entering into the Agreement.

20.  AHL had at the material times two directors, of which Lau was one. She became the sole director on or after 1 December 2016.  Ordinarily, AHL was represented by Chiu in its face-to-face dealings with staff of Atom.  Chiu and Lau are husband and wife.

21.  The original dealings relating to the project were between Atom and a company called Nbition Ltd under an agreement with similar terms to the Agreement.  That agreement was terminated by consent, and AHL was in effect substituted as the contracting party with Atom.

22.  Clause 3.1 of the Agreement provides that the non-recurring engineering fees are to be paid in monthly instalments in arrears.  Monthly invoices were issued. Four were settled by AHL.  The remaining nine remain unpaid.

23.  On the face of the pleadings, and on the affidavit evidence filed, there is a dispute as to whether or not any representations made by Lui were false, and whether Atom properly performed its obligations under the Agreement.  I do not need to seek to resolve those disputes for the purpose of the present application.  But the suggestion made for Lau is that AHL ceased making payments under the Agreement because of Atom’s significant delay and lack of meaningful progress with its obligations.

24.  There were discussions between the parties as to payment of fees from around mid-2016.  As indicated above, on 6 October 2016 Lau drew the 1^st Cheque and the 2^nd Cheque.  On 26 October 2016, Lau issued the replacement cheque which was later presented and honoured.  The 2^nd Cheque was presented but dishonoured.

E.2  Conditional Cheque

25.  Mr Wong submits that under section 21(2)(b) of the Bills of Exchange Ordinance Cap 19 (“Ordinance”), the delivery of a bill may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill.  He also submits that under section 21(3) there is a rebuttable presumption of valid and unconditional delivery where a bill is no longer in the possession of a party who has signed it as drawn.

26.  Mr Wong refers to and relies on various cases where, on their particular facts, the defendant succeeded in showing an arguable case of conditional delivery.  I do not think factual situations in other cases necessarily assist, not least where the cases relied on relate to evidence of an escrow, or a clear condition imposed.  But Mr Wong also relies on the case of Phoneyork Co Ltd v. Chesson International (Holdings) Ltd (unreported, HCA 2192/2007, 28 May 2012, Recorder Yuen SC) for the principle that the parol evidence rule applies only when the terms of the parties’ agreement are wholly contained in a written contract and not otherwise, and that this is why the parol evidence rule does not apply if the intention to adduce extrinsic evidence is to show, amongst other things, that the contract was only a conditional contract.

27.  Hence, Mr Wong says he is entitled to rely on the content of a recorded telephone conversation between Chiu and Lui on 11 November 2016.  He says that that conversation makes it at least believable that the 2^nd Cheque was given to Atom solely as a gesture of goodwill so that its staff could show it to their “boss” and that it would not be presented to the bank for payment.  He also relies on the modus operandi of previous payment of fees by AHL, which had always been made by AHL in its own name by issuing cheques on its own account in favour of Atom.  Lau had never previously personally paid any such fees.

28.  For his part, Mr Joshua Choy, Counsel for Atom, submits that it is trite law that evidence on an oral agreement between the parties made with delivery of the cheque that it would not be presented by the plaintiff for payment was not admissible.  He relies in particular on the case of SY Chan Ltd v. Choy Wai Bor [2001] 3 HKLRD 145 and Prosperity Lamps & Components Ltd v. Rotegear Corp Ltd [2000] 2 HKC 638. Those two cases were among a long line of authorities considered by Recorder Yuen SC in his decision in the Phoneyork case.  The Recorder was careful to point out that the line of authorities was well established, and that his conclusion did not in any way affect the principles expounded in those authorities, nor did he intend to suggest that those authorities were wrongly decided.  The conclusion in Phoneyork was, as he explained, “only a conclusion on the unusual facts of the case”, and where “in none of the authorities … were there documents or endorsements similar to the Explanatory Memorandum or the Endorsement on the back of the Cheque [as in the Phoneyork case]”.

29.  I am of the view that where the effect of the alleged oral agreement in this case is to render the issuing of the cheques meaningless, that falls foul of the parol evidence rule.  The suggested facts of this case are not close to those in the Phoneyork case, or indeed the other cases relied on by Mr Wong.  There is no intention the cheque should be held in escrow, nor is there in reality any condition (see below), and the defence essentially is to suggest that the 2^nd Cheque was not really intended to have any of the characteristics of a cheque at all.

30.  But, whether the particular evidence relied upon by Lau in this case is admissible or inadmissible does not seem to me to change the inevitable result.

31.  First, there is no commercial sense in Atom’s staff obtaining meaningless cheques which could not be presented for payment for presentation to any “boss” who could not sensibly have been satisfied or comforted by any such gesture.  I would add that no explanation has been offered by Lau as to why there would need to be two cheques if it was simply a gesture, and neither was intended to be presented for payment.  Rather, the fact of the two cheques and their amounts seems much more likely to identify a small advance on what was already owed by the 1^st Cheque, and the balance payable by the 2^nd Cheque when affordable.

32.  Secondly, the fact that AHL had previously paid fees from its own bank account, whereas Lau issued personal cheques in the form of the 1^st Cheque and its replacement and the 2^nd Cheque, rather points to the fact that AHL was in financial difficulty in meeting its payment obligations itself.  In my view, Lau was clearly assuming personal liability, and the provision of the replacement cheque in place of the 1^st Cheque rams that point home.

33.  Thirdly, the particular evidence of the recorded telephone conversation, even if admissible, is firmly against Lau.  Far from suggesting any conditionality, the transcript identifies that the post-dated cheque had been provided with a date intended to match when Chiu had said that he would receive funds to be able to pay (even if it was not known in advance of that date whether such funds would in fact be present by that time).  Against that context, the reference to issuing the cheque to “answer” the boss identifies why the provision of the post-dated cheque might have been an answer for the boss.  The contrary assertion now made by Lau – essentially based on the allegation of the Oral Agreement – is simply not credible.  Put shortly, there was no need to have had any discussion about the date of the cheque and when funds might be available if the intention had been that the cheques were never to be presented for payment.

34.  Fourthly, I accept Mr Choy’s submission that though the suggestion is made for Lau that the 2^nd Cheque was conditional, no actual condition has been identified.  Indeed, a cheque which is payable, albeit only under certain conditions, is the antithesis of a cheque which is never intended to be presented for payment.  This inconsistency emphasises the lack of credibility in the defence put forward.

35.  Fifthly, whilst Mr Wong places reliance on the fact that the 1^st Cheque was replaced, which he says is consistent with an agreement that it was not to have been presented, Lau has not condescended to particulars of why the 1^st Cheque needed to be replaced by another cheque with exactly the same detail, rather than merely having presentation of the 1^st Cheque itself.  The episode of replacement at least strongly suggests that the 1^st Cheque had been countermanded, which seems to me to be inconsistent with an agreement that it was never to have been presented anyway.

36.  I also take into account that the argument of the conditionality of the 2^nd Cheque was not raised prior to the defence and counterclaim. This also tends to show that this is a recent fabrication.

E.3  Oral Agreement

37.  Mr Wong submits that the contract was void for fraud, as that is a matter of defence against an immediate party under sections 29(2) and 30(2) of the Ordinance.  By reference to Note 14/4/19 of the White Book, Mr Wong submits that where a defendant sued on a bill of exchange gives prima facie proof that the negotiation of the bills was affected by fraud, an affidavit by the plaintiff in reply swearing that he is the holder for value is not sufficient to deprive the defendant in such a case of the right to unconditional leave to defend.

38.  Hence, Mr Wong submits that where it is arguable that Lui agreed to the Oral Agreement or at least knew that the purpose of the 2^nd Cheque was not for presentation to the bank for payment, the cheque was vitiated.  He says that both parties assert some oral agreement reached regarding the issue as the cheques, and the difference is only in relation to the contents of that agreement.  Where Order 14 is not appropriate to embark on a mini-trial on affidavit, and where credibility of the witnesses would be an issue, leave to defend should follow.

39.  I do not think this second point is substantially different from the first point. In any event, both essentially rely on the existence of the alleged Oral Agreement.  I have already rejected that as not credible on the basis of the evidence.

40.  That is the end of this point.  But I also agree with Mr Choy that this is not a case where the only difference between the parties is in relation to the contents of an alleged oral agreement.  The claim is based upon a dishonoured cheque, and the assertion is that the 1^st Cheque and 2^nd Cheque were issued in order to induce Atom to continue to provide services under the Agreement notwithstanding AHL’s breach by failing to pay, and in order to give time to AHL to settle fees already then due.  What is alleged by Lau seems to me to be fundamentally different in nature as an oral agreement.

41.  As regards the alleged misrepresentations, they do not seem to me to be relevant to the straightforward claim made on the dishonoured cheque.  I also take into account the timing of the raising of the allegations of misrepresentation by amendment, only after the Master had granted summary judgment.  It is another recent fabrication.

E.4  Failure of Consideration

42.  There is of course no dispute between the parties as to the trite legal proposition that the application for summary judgment should be dismissed if there has been a total failure of consideration for the provision of the cheque.

43.  But none of the matters relied upon by Mr Wong are capable of constituting a total failure of consideration.  A failure to keep to schedule does not amount to a total failure of consideration, and there is evidence of continued work on the project in November and December 2016 even after the 2^nd Cheque was presented but dishonoured.  I do not think it matters that the work might not have been completed, nor that it might been described as only 60% completed.

44.  In any event, it seems to me that there was clear consideration moving from Atom in agreeing to continue to perform services notwithstanding AHL’s failure to pay fees then due capable of supporting Lau’s provision of the 2^nd Cheque.  As a result of the provision of cheques by Lau, Atom continued to provide services and allowed settlement of the fees at a later date.  That Lau was not herself a party to the Agreement does not change that analysis.  Whilst consideration must move from the promisee, it need not necessarily move to the promisor.

45.  I do not agree with Mr Wong’s submission that Atom’s case in this respect has somehow “morphed” from the original pleaded case, repeated on affidavit, to a new case of forbearance to sue.  Albeit not using precisely those words, that seems to me the thrust of the pleaded case: instead of bringing the breached agreement to an end, and ceasing to do any further performance under it (and perhaps suing for outstanding fees), Atom continued to perform and afforded AHL further time to settle invoices already due for payment.

E.5  Fraud Exception

46.  This argument is a non-starter.  Properly understood, the fraud exception is only engaged at all when the action includes a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim.

47.  The claim on the dishonoured cheque is not such a claim.

48.  In any event, I also agree with Mr Choy that most, if not all, of the points relied upon by Mr Wong as somehow invoking the fraud exception are irrelevant to the claim on the Agreement and to the delivery of the 2^nd Cheque.  Further, Atom’s attack on the credibility of Lau’s assertions, made by her in her pleadings and affidavit evidence, are not such as would trigger the fraud exception.

E.6  Some Other Reason

49.  The last element of the submissions made by Mr Wong in effect suggest that there is “some other reason” why this matter should go to a trial.

50.  His headline point is that there are substantial questions of fact in the main contractual dispute between Atom and AHL, which can only be resolved at trial.  Therefore, he says, in the context of a claim and counterclaim it is unclear which party would ultimately be liable to the other, yet by its summary judgment application Atom in effect seeks a partial judgment against AHL first by claiming against Lau for the dishonoured cheque.

51.  He also relies on what he describes as potential fragmentation of the claim, a risk of inconsistent findings, and the risk of multiplicity of proceedings which would be inconsistent with the underlying objectives of cost-effectiveness, reasonable proportion and procedural economy under Order 1A rule 1.

52.  I disagree that this is any attempt to obtain “partial” summary judgment. Judgment is sought to resolve the entirety of Atom’s claim against Lau.  Nor to my mind is there any inappropriate “fragmentation”.  Indeed, where there is a straightforward claim against which no credible defence is raised, the underlying objectives would ordinarily suggest that claim is dealt with on a summary basis, so that it is dealt with in a cost-effective way with reasonable proportion and procedural economy.  It might even be thought that is the very basis underpinning the ability to seek and the power to grant summary judgment in appropriate cases.

53.  Nor do I see any risk of inconsistent findings.  The question facing the court at present is simply whether Atom is entitled to payment on the 2^nd Cheque which was dishonoured.  That does not require ventilation of, nor deciding, nor anticipating any decision, on the underlying dispute between Atom and AHL as will be fully canvassed at and decided after a trial.  If Atom has recovered any sum from Lau, its claim against AHL will be accordingly reduced.  Whether Lau is entitled to seek reimbursement from AHL is a separate matter entirely, and actually is not one even raised on the pleadings in these proceedings.

E.7  Arbitration Clause

54.  Though it is not pursued by Mr Wong in submission, I might mention the argument raised in relation to the arbitration clause in the Agreement.

55.  First, Lau is not a party to the contract containing the arbitration clause. Secondly, and perhaps more importantly, the time within which AHL and Lau could have applied for a mandatory stay of these proceedings in favour of arbitration has long since passed.  Such an application would have to have been made as a challenge to the Court’s jurisdiction over the subject matter of the dispute, in advance of engaging in the substantive merits of the dispute in this litigation.  By filing the defence and counterclaim, AHL and Lau must be taken not only to have accepted the jurisdiction of the court, but also to have invoked it for their own purposes.

56.  The reference to the arbitration clause was, therefore, always a bad point.  That such a bad point was taken lends no assistance to the other points taken, but rather suggests a “barrel scraping” exercise.

E.8  Payment Due only after Full Performance

57.  This point, also previously put forward but not pursued by Mr Wong in submission, falls into the same category.

58.  It was an inherently bad point, being (as Mr Choy describes) in “outright contradiction” to the express terms of the Agreement.  Those terms required 13 instalment payments, payable at the end of each month.  This was the commercial arrangement struck by the parties.  For a while, in accordance with those terms Atom issued invoices and AHL paid them.  For AHL later to suggest something fundamentally different does not make its opposition to this application for summary judgment more attractive.

F.  Result

59.  The appeal is dismissed.

G.  Costs

60.  I see no reason why cost should not follow the event. Atom’s costs of the appeal will be paid by Lau to be assessed on a gross sum basis in accordance with directions I give for the matter to be decided by me on paper.