GREAT TREASURE INTERNATIONAL LTD. v. MIMASU (HK) CO. LTD.

DCCJ 16767/2001

IN THE DISTRICT COURT OF

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 16767 OF 2001

__________

JUDGMENT

__________

Introduction

1. This is an application by the Plaintiff for summary judgment against the Defendant for the sum of $119,369.00 pursuant to a cheque number 433753 delivered by the Defendant and drawn on The Bank of Tokyo - Mitsubishi Limited which was dishonoured when the same was duly presented by the Plaintiff for payment.

2. The Statement of Claim as indorsed on the Writ of Summons was filed on 5th October, 2001. It avers that the said cheque represents the price of goods sold and delivered by the Plaintiff to the Defendant, namely 5,372 pieces of woven pants (invoice number GT537/01). By the time of the hearing of this application, the Defendant has not filed any defence. In opposing the application, the Defendant contends, by way of affirmations, firstly, that the said cheque was only delivered to the Plaintiff on condition that they will not present it for payment until the goods were duly accepted by their customer in Japan. In other words, they contends that it was only a conditional delivery within the meaning of section 21(2)(b) of the Bills of Exchange Ordinance, Cap 19, ("the Ordinance")and secondly, as the goods were later found to be defective and was rejected by its Japanese customer, there is a total failure of consideration and the Defendant should be given an unconditional leave to defend.

Plaintiff's case

3. According to the affirmation of Szeto Man Bun, the sales supervisor of the Plaintiff, the Plaintiff sold and delivered the goods to the Defendant as evidenced by an invoice numbered GT 537/01 dated 17th August, 2001. The goods were in fact inspected and accepted by the Defendant prior to delivery thereof. Upon delivery of the goods, the Defendant issued a post-dated cheque dated 18th September, 2001 in favour of the Plaintiff as payment of the goods. When the Plaintiff duly presented the cheque for payment, however, the cheque was dishonoured and returned to the Plaintiff with a notice of dishonour which read "payment countermanded". The Plaintiff immediately demanded the payment for the outstanding price for the goods and instructed the solicitors to issue a letter for demand dated 22nd Septmeber, 2001 to the Defendant. Despite repeated demands, the Defendant has failed to pay the amount to the Plaintiff. According to another affirmation of Wong Hon Fai, Louis, the director of the Plaintiff, the Plaintiff denies that it has agreed to hold on the cheque until the goods have been duly accepted by the Defendant's overseas buyer. It was also denied that the Defendant have ever mentioned about the specific and extraordinary conditions at the time when the contract was made. When the Defendant took delivery of the goods in August, 2001, there was never any complaint at all. The Defendant's representative duly inspected the goods and signed on the delivery confirmation.

Defendant's case

4. According to the affirmation of Shinichi Noda, the general manager of the Defendant, they have no previous dealings with the Plaintiff before this action. In early August 2001, it was orally agreed between the Plaintiff and the Defendant that a) the Defendant would send inspectors to the Plaintiff's factories in China to check the manufacture of the goods; b) the Plaintiff should make final inspections of the goods and in particular to carry out a metallic matter detection test after completion of the manufacture of the goods before they were packed into boxes; c) the goods were to be delivered to the Defendant's office in China on 18th August, 2001. On 17th August, 2001, the Plaintiff informed the Defendant that they would only delivered the goods upon receipt of payment. The Defendant insisted, however, that payment would not be made until the goods were delivered. At last, the Plaintiff compromised and promised not to present the cheque for payment unless and until the goods were duly accepted by the Defendant's overseas Japanese customers. As the goods were scheduled to be shipped on 22nd August, 2001, the Defendant had no choice but to deliver to the Plaintiff a cheque in the sum of HK$ 119,369.00 in the belief that the Plaintiff would not present the same until he was permitted to do so, and it was post-dated 18th September, 2001. The cheque was delivered to the Plaintiff on 18th August, 2001 in the Hong Kong office of the Defendant. After the goods were delivered by the Plaintiff to the Defendant's office in China on the 29th August, 2001, the goods were found to be defective but as the goods have to be shipped to Japan on the 22nd August, 2001, no repair or alteration can be done. On 30th August, 2001, the Defendant received complaints from its customer in Japan about the various defects in the goods. In particular on 13th September, 2001, the Defendant was further informed that the goods could not pass the metal detecting test. As a result, the Defendant countermanded the payment of the cheque on the same day. Despite two attempted calls by the Defendant to the Plaintiff to discuss the quality of the goods as well as compensation, the Plaintiff refuse to hold any discussion. The Defendant, so they say, has made compensation to its Japanese customer in a sum well exceed $119,369.00.

Issues

i) The first issue in this application is whether the Defendant's evidence on what was said at the time when the cheque was issued is admissible?

5. In S Y Chan Limited v Choi Wai Bor HCA 1731of 2000 Recorder Kenneth Kwok SC said this:

"It has been said, time and again that bills of exchange are treated as cash, Hong Kong civil procedures 2001 para 14/4/19. 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, Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes, 15th edition, para 385. A cheque is an unconditional order in writing, drawn and signed by the drawer, requiring the banker to pay on demand a sum certain in money to, or to the order of, a specified person or to bearer, section 3 and 73 of the Bills of Exchange Ordinance, Cap. 19. The drawer of a cheque, by drawing it, engages that, on due presentment, it shall be paid according to its tenor, and that if it is dishonoured he will compensate the holder, provided that the requisite proceedings on dishonour are duly taken, section 55(1)(a). Extrinsic evidence is, in general, inadmissible to prove that the terms of the contract differed from those expressed in writing on the cheque, Chalmers, para 384."

6. In Suen Ho Sun and Kamenar International Limited 1989 1 HKC 135 CA, reliance was placed by the Defendant on affirmation to contend that there was conditional delivery of the cheque within section 21 of the Ordinance (at page 137 G), and the argument was rejected by the judge (Deputy Judge Rogers, as he then was). In delivering the judgment, Hunter JA affirmed the judge's decision and said that the judge was right in rejecting the argument. After reviewing a number of authorities, Hunter JA came to the conclusion that all of these cases shows that attempts like this to alter the terms of payment are quite inconsistent with the written instrument and are inadmissible in the evidence.

7. The learned author of Byles on Bills (21st edn.) said:

"No mere oral agreement can have any effect at law in controlling the instrument, if contemporaneous with the making of it; for that would be to allow oral evidence to vary the written contract."

8. It may be said that what the Defendant seeks to allege is a contemporaneous oral agreement showing that what purported to be a complete contract, the cheque never came into operative existence. But in Great Sincere Trading Co., Ltd v. Swee Hong & Co. [1968] HKLR 660 Mills-Owens J, however, was of the view that that was not a proper interpretation to be placed upon the alleged oral arrangement which sought to qualify the order of payment, to qualify the tenor of instrument, to operate in defeasence of it, and to suspend the contract embodied in it.

9. Recently, in Prosperity Lamps & Components Limited v Rotegear Corp Limited [2000] 2 HKC 638, Cheung J,(as he then was), held:

"In the present case, the effect of the alleged oral agreement is to render the cheques to be meaningless. They are not to take effect until some third party had paid the Defendant first. In other words, if the Defendant was not paid by the third party, it did not need to pay the Plaintiff at all. This is not a condition suspending the operation of the cheques but in defeasance of the undertaking to pay. This clearly falls foul of the parol evidence rule. Oral evidence is not admissible because it contradicts the terms of the written instrument, namely, the cheques."

10. In our case, the Defendant's defence is that he issued the cheque to the Plaintiff on the condition that the goods supplied would in turn be accepted by its customer in Japan. In my judgment, the Defendant's case is not distinguishable from the above authorities. What the Defendant is attempting to do is to contradict by oral evidence its written engagement that, on due presentment, the cheque would be paid according to its tenor, that is, unconditionally and on demand.

Conditional delivery

11. To support its contention that parol evidence is admissible, the Defendant further raised the defence of conditional delivery. Miss Annie Lai, Counsel for the Defendant, relied on section 21(2)(b) of the Ordinance which provides that as between immediate parties, the delivery 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. The District Court case of Lin Hsien Tseng v So Sin Mui, Bonnie DCCJ 8790/2001 was cited and relied upon. In an action on a dishonoured cheque for $500,000, the learned District Judge held that section 21 of the Ordinance clearly envisages and permits introduction of evidence to prove conditional delivery of a cheque as between the immediate parties to a cheque. He opined that there are two distinct lines of authorities in England and Hong Kong for opposite effects on this point, and he came to the conclusion that it was open to a Defendant to introduce extraneous matters pertaining to the underlying contracts by way of defence.

12. On this point, the learned District Judge is relying on the principle that the defect in delivery may be established by oral evidence; the Parol Evidence rule does not apply. (See para 380, Chalmers & Guest on Bills of Exchange, Cheques and Promissory Notes (15th ed. 1998)).

13. However, as Cheung J has correctly observed in Prosperity Lamps & Components Ltd (supra) and cited the following passages from Chalmers & Guset (ibid.):

"... In practice, however, it may be difficult to distinguish between situations where it is orally agreed that the bill is not to become operative pending the fulfillment of a condition (in which case oral evidence of the conditional delivery will be admitted) and situations where the bill is delivered operatively but subject to an oral agreement in defeasance of a party's liability on the bill in which case oral evidence to qualify the terms of the written instrument will normally not be admitted."

Cheung J went on and cited para 385 & 386 of Chalmers & Guest (ibid.) in his judgment at p.642

"However, since the contracts of the parties to a bill or note must be in writing, oral evidence is in principle excluded by the operation of the rule, even as between immediate parties to the instrument. There is, perhaps, less injustice in this than at first sight appears. In view of the formal nature of negotiable instruments, it is arguable that to admit such evidence would undermine the certainty and finality which ought to attach to each party's promise on the instrument. 'What is to become of bills of exchange and promissory notes', said Lord Ellenborough, 'if they may be cut down by a secret agreement that they shall not be put in suit?'"

"Most cases where the parole evidence has been applied are cases where a party to a bill or note has sought to qualify his absolute undertaking on the instrument by adducing evidence of a contemporaneous oral agreement in defeasance of that undertaking, that is to say, that his liability is to be enforceable against him only in certain contingencies or that it is to be postponed to a time later than that expressed on the face of the instrument. Since the effect of such evidence would be to contradict the terms of the written instrument, it is inadmissible.

14. In our case, the effect of the alleged oral agreement is to render the cheque to be a meaningless bill of instrument. It is not to take effect until the Defendant's customer in Japan had accepted the goods and Defendant's promise is secured before the cheque is to be presented. This situation is, as Mills-Owens J said in Great Sincere Trading Co. Ltd. (supra.) and as followed by a great numbers of decisions, tantamount to a case as if when the cheque is handed over, the Defendant said, "This is a cheque which is not a cheque unless our customer is happy and we allow you to present it for payment." To admit the oral agreement would be to qualify the order for payment, to qualify the terms of instrument. This is not a condition suspending the operation of cheque but in defeasance of the undertaking to pay. If what the Defendant said were admitted into evidence, the effect of the cheque will become a conditional order to pay, conditional upon the Defendant's customer subsequently accepting the goods. It was an order to pay only upon and after further agreement. These attempts to alter the terms of payment were inconsistent with the written instrument.

15. In Lin Hsien Tseng (supra), the case relied by the defendant, the learned District Judge had referred to his another case in point Lee Man Ching Mandy trading as Blossom Industrial Company v Chiu Hung DCCJ 16461 of 2000 and commented that as the Court of Appeal had in the end dismissed the appeal by the Plaintiff CACV 515 of 2001, "It can be safely taken that there is one more authority fallen from the august appellate forum in favour of giving opportunity to a Defendant in an appropriate case to adduce evidence as to alleged controlled delivery of a dishonoured cheque." However, as Recorder Kenneth Kwok SC correctly observed in S Y Chan Limited (supra), when he questioned the learned District Judge's reasoning,

" ...However, Cheung J, delivering the judgment of the Court of Appeal [2001] 4 HC 280 held that what was in issue was whether there was an agreement about the two cheques after the issue of the two cheques."

As the matter stands, the appeal is apparently dismissed not because of the same reason as reached by the learned District Judge.

16. Based on the above authorities, I rule that the Defendant's evidence on what was said at the time of the issue of the cheque is therefore not admissible.

ii) The second issue is whether evidence for the defence of total failure of consideration is admissible in a dishonoured cheque action?

Total failure of consideration

17. In Man Sun Finance (International) Corporation Limited v Wong Kwan-man HCA 535 [1981], Barnes J, while dismissing a similar attempt to lead the evidence of the oral agreement that the cheque must not be presented, held however that the Defendant can adduce evidence to show that there was no consideration for the cheque (Foster v Jolly, per Park, B. [1835] 1 Cr M&R. 703) he ruled that, therefore, "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."(emphasis added)

18. In John Maclean & Sons Electrical (Dingwall) Limited v Mehar International Co. CACV 202, 1993, Godfrey JA said, "The law is well settled. The rule, certainly as between immediate parties, is that bills of exchange are to be treated as cash. The fact that there are cross-claims by the Defendant does not afford him a defence to an action on the bills of exchange. However, where a bill of exchange is given on the sale of goods and the consideration has wholly failed, then, as between the immediate parties to the bill, there is a defence to which the court will give effect."(emphasis added)

19. In the present case, the Defendant alleges that their customer in Japan demanded compensation and threatened to return the goods to them. The Defendant subsequently agreed to bear the cost of making good the defects and such transportation charges.

20. In my judgment, there is material on which this court is entitled to and ought to be satisfied that the Defendant has shown an arguable defence. It may well be the case that the Defendant has lost its right to reject the goods in the sense that they had accepted the goods; it may well be that the Defendant has no reasonable opportunity to examine the goods before it was shipped to its customers in Japan. All these matters, however, need to be gone into at the trial of the case. " Unless it is obvious that the defence put forward by the defendant is 'frivolous and moonshine, O.14 ought not to be applied" : see Codd v. Delap(1905) 92 L.T.510, per Lord Lindley at 511.

21. On the issue that there is total failure of consideration for the cheque, because of this reason and this reason alone, I come to the conclusion that evidence concerning and incidental to the quality of the goods is admissible.

Order

22. For the reasons above, the Order 14 summons is dismissed. I rule that the Defendant be given an unconditional leave to file a defence within 14 days from today and leave to the Plaintiff to file a Reply, if any, within 14 days therafter.

23. The costs of this application to the Defendant, to be taxed if not agreed.