LEE WING FUNG v. LEE WING CHIU

HEADNOTE

                Set-off in relation to a different subject-matter cannot be relied upon as a defence to an action on a bill of exchange in the absence of fraud, invalidation of the bill itself or partial failure of consideration. Nova (Jersey) Knit Ltd. v. Kammgarn Spinnesei G. M. B. H. (1977) 1 W.L.R. 713 at 720, 721 and 726 followed.

2.              No need to wait for filing of a "Defence" before judgment is entered if and when it is clear to a District Judge that there is really no reasonable defence after due investigations (e.g. from affidavits) from the parties and after hearing their legal representatives in Court. Kwangtung Provicial Bank v. Tang Chik-leung Civil Appeal No. 2 of 1985 considered.

3.              Stay of execution ordered in respect of half of the judgment debt which is apparently held in trust by the Plaintiff for his brother against whoa the Defendant is filing a counter-claim to a High Court Action in which they are parties. Barclay's Bank v. Aschaffenburger Zellstoffwerke A. G. (1976) 1, Lloyds Law Report 387 at 389 followed.

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT VICTORIA

CIVIL JURISDICTION

ACTION NO.3357 OF 1985

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EX-TEMPORE JUDGMENT

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1. Before me are (1) an application by the Defendant for transferring this action to the High Court and (2) an application by the plaintiff for judgment apparently under Rule 27(1) (b) and Rule 27(2) of the District Court Civil Procedure (General) Rules, both calling for decision.

PRELIMINARY

2. The facts disclosed by the pleadings and affirmations can be simply summarized in this paragraph. The Plaintiff and the Defendant and a related person called LEE Wing-yuen are brothers. In 1978 the Defendant set up the Jets Communication Service Co. Ltd., apparently with three others, and by 1979 the Defendant had acquired all the share - holdings in the Company after the departure of the three. In 1980 the plaintiff and LEE Wing-yuen (hereinafter called L. W. Y.) joined the Company upon the Defendant agreeing to sell 40% of the share-holdings to the Plaintiff and the balance 60% to L. W. Y., and the Defendant left the Company altogether next year. The Plaintiff and L. W. Y. were to pay for the shares by cheques, seven out of ten of which was said to have been dishonoured to the value of $650,000 in respect of which, I am told by Mr. Yu, the Defendant intends to file a counterclaim to High Court Action A28/85 against L. W. Y. and the plaintiff. This High Court Action was taken by the Overseas Trust Bank Ltd. against L. W. Y. in respect of certain dishonoured cheques drawn by L. W. Y. in favour of the Defendant who had endorsed them over to the Bank and the Defendant was joined in as a party thereto by L. W. Y. as endorser. In 1983 the Defendant re-purchased all the shares then held by the Plaintiff and L. W. Y. at the total value of $1 million in the same proportion of 40 and 60 per cent. There was some delay in the payment of this 1 million, and on 14th of March 1984 a variation deed was entered into between the three brothers, thereby time was entered for payment. Pursuant to that variation agreement, 17 cheques were issued to the Plaintiff for payment to himself as well as to L. W. Y. 13 out of the 17 were duly honoured and the cheque for $50,000 in this underlining action was one of the four which were countermanded. I should also mention that the pending High Court Action was for $300,000.

LAW

3. The law of set-off and counterclaim relating to Bill of Exchange may be summarized by quoting what Lord Wilberforce said in Nova Knit Ltd. (1977) 1 W.L.R. 713 at 720 C-D:-

"I shall deal however with the second point. I take it to be clear law that unliquidated cross-claims cannot be relied upon by way of extinguishing set-off against a claim on bill of exchange: Warwick v. Nairn (1855) 10 Exch. 762; James Lamont & Co. Ltd. v. Hyland Ltd. (1950) 1 k .B. 585. 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: Warwick v. Narin, 10 Exch. 762; Agra and Masterman's Bank Ltd. v. Leighton (1866) L.R. 2 Exch. 56; James Lamont & Co. v. Hyland (1950) 1 K. B. 585, Brown, Shipley & Co. Ltd. v. Alicia Hosiery Ltd. (1966) 1 Lloyd's Rep. 668."

and at 721 F-H Lord Wilberforce elaborated by saying:-

"When one person buys goods from another, it is often, one would think generally, important for the seller to be sure of his price: he may (as indeed the appellants here) have bought the goods from someone else whom he has to pay. He may demand payment in cash; but if the buyer cannot provide this at once, he may agree to take bills of exchange payable at future dates. These are taken as equivalent to deferred instalments of cash. Unless they are to be treated as unconditionally payable instruments (as in the Act, section 3, says " an uncon-ditional order in writing"), which the seller can negotiate for cash, the seller might just as well give credit. And it is for this reason that English law (and German law appears to be no different) does not allow cross-olaims, or defences (emphasis by me), except such limited defences as those based en fraud, invalidity, or failure of consideration, to be made. I fear that the Court of Appeal's decision, if it had been allowed to stand, would have made a very substantial inroad upon the commercial principle on which bills of exchange have always rested."

At page 726 E-H per Lord Salmon:-

"I agree that there is no defence to the bills, since the only possible defence (which is not relied on by the respondents) could be that their acceptance had been procured by fraud, duress or for a consideration which had failed and because the damages claimed in the arbitration are unliquidated damages and such damages cannot be set off against a claim on the bills of exchange: James Lamont & Co. Ltd. v. Hyland Ltd. (1950) 1 K.B. 585."

4. Mr. Yu submitted with force that Nova Knit has no application to set-off as opposed to abatement and counterclaim. Legally, set-off can be had for liquidated damages or at least for a cross-claim related to the claim. Put it in another way the contention is that Nova Knit was an exception rather than a rule. Heavy reliance was placed on the fact in Nova Knit that the counterclaim there was for unliquidated damages, i.e. general damages, and that the line of cases pointing at set-off concerned sale of goods whereas in this instant Action we have a family relationship complication.

5. Set-off as a shield is a line of defence purporting to extinguish or reduce the amount under claimed. From the underlined words (emphasis by myself) of the judgments of the two noble Law Lords above-cited, it is sufficiently clear to me, with every respect to Mr. Yu, that Nova knit applies to this Action in that partial failure of consideration has to be made out before set-off can be raised as the defence here. In the absence of such failure, as conceded, the Defendant cannot really rely on set-off as a shield. "Action on bills of exchange constituted an exception to the rights of abatement and equitable defence" (see paragraph 476 of Halsbury, Vol. 42). This apart, the intended counterclaim, which if pursued, would be for $650,000 exceeding the claim in this underlining Action by $600,000, and which would be founded on the original sale of shares by the Defendant to the Plaintiff and the dishonoured cheques for that price some four or five years ago, was in substance in the nature of a counterclaim as a sword rather than a mere set-off. It is worth-noting that no "set-off" was had against the purchase price that the Defendant had to pay to the Plaintiff and L. W. Y. for the re-purchase of the shares in 1983 nor the variation of payment arrangment in 1984. The proposition of the law that the restriction of set-off in relation to a bill of exchange as above-quoted is not limited to sale of goods or work done but extends to other commercial transactions, and the proposition that is applies to both legal and equitable set-off can be found in the judgment of Sir Eric Sachs in Cebora (1976) 1 Lloyd's Law Reports, 271 at 278:-

"Any erosion of the application by our Courts of the law merchant relating to bills of exchange is likely to work to the detriment of this country, which depends on international trade  to a degree that needs no emphasis. For some generations one of those certainties has been that the bona fide holder for value of a bill of exchange is entitled, save in truly exceptional circumstances, on its maturity to have it treated as cash, so that in an action upon it the Court will refuse to regard either as a defence or as grounds for a stay of execution, any set-off, legal or equitable, or any counterclaim, whether arising on the particular transaction upon which the bill of exchange came into existence, or a fortiori, arising in any other way. This rule of practice is thus, in effect, pay on the bill of exchange first and pursue claims later."

6. In the absence of fraud, duress or partial failure of consideration as has been conceded, I see no valid legal defence to the plaintiff action.

PROCEDURAL LAW

7. It is further submitted that the District Court cannot enter judgment prior to exhausting the filing of a Defence or the like under Rule 27 of the District Court Rules relying heavily on the judgment of Kempster, J.A. in Kwangtung Provicial Bank Civil Action No. 2 of 1985 at page 21 that: -

"The whole of the rule, apt to give effect to the provisions of rules 25 and 26, is subject to the words "Where - (a) any party appearing or present in Court, upon being required so to do by the Court for the purpose of framing issues -.!

8. The effect and scope of Rule 27 has been canvassed in depth by Fuad, J.A. in that Appeal. The observation by Kempster, J. A. above-quoted must be distinguished from this Action in that there a reasonable ground of defence was disclosed in the pleading, albeit imperfect "Defence" whereas here in this Action the defence in the shield of set-off is not available in law as I have above-ruled. True, no defence has filed but the defence in the shield of set-off has been made abundantly clear as the only defence possible if it amounts to that. The filing of a defence along that line would not improve the Defendant's case. Would it be right, or was it the intention of the District Court Rules Committee to wait until the filing of a Defence before pronouncing judgment when it is clear that the "Defence" would amount to no defence at all? With great respect to Mr. Yu, I do not think so as a matter of plain common sense. I am prepared to rule as I do that having heard legal representatives and from the evidence including affirmations or affidavits, a District Judge may enter judgment under Rule 27(1) (b) and Rule 27(2) when it is clear that there is no reasonable defence. After all the District Court Rules are net made to be as rigid and formal as the Supreme Court practice. What is required of a District Judge before entering judgment in these circumstances is really to satisfy, after due investigation net necessarily by strict pleadings if circumstances do not allow that or do not make that available, that there is really no reasonable grounds of defence remaining. That is in essence what is said by Fuad, J. A. at page 12: -

OTHER MATTERS

9. In view of the above, it is unnecessary for me to deal with joinder of LEE Wing-yuen to this Action and the plaintiff to the High Court Action having noted that in law all parties need to be joined if and when it is in the interest, of justice to do so.

10. I have of course in point of time decided against the submission en procedural law before I have made up my mind to enter judgment for the Plaintiff.

11. That half of the value of the cheque in this Action which was really held in trust by the Plaintiff for L. W. Y. does not in the circumstances of this case amounts to partial consideration which matter may be conveniently dealt with in the next heading STAY.

STAY

12. In Thornton v. Maynard (1875) L.R. 10 CP 695, it was held that it was a good equitable defence pro tanto to a declaration by the holder against the acceptor of several bills of exchange on the ground that the Plaintiff had received dividends from the estates of the drawers on account of the bills, the plaintiff suing as trustees for the drawers who had become bankrupt. Here in this instant action, the Plaintiff had received $375,000 out of $750,000 from the Defendant leaving a balance of $25,000 due from the Defendant on the price of re-sale and the variation in 1984. Out of the $50,000 the amount on the cheque of this Action, half would go to the other brother L. W. Y. as the Plaintiff was entitled only to $400,000 being the price of the 40 shares he re-sold to the Defendant. The actual consideration moved from the Plaintiff on the cheque was to the extent or value of $25,000 only. In reality, the Plaintiff would be accounting half of the value of this cheque to L. W. Y.; in truth, the Plaintiff was holding that half in trust for L. W. Y. If the Defendant succeeds in his intended counterclaim against L. W. Y., the Defendant will be entitled to set off this ;$25,000 from what he had to pay because L. W. Y.'s entitlement to half of the value of the cheque is not founded on the cheque itself but on the consideration of the resale and revaluation of payment therefore. Hence, Nova Knit has no application insofar as stay of execution is concerned.

13. In Barclays Bank Limited (1967) 1 Lloyd's Law Report 387 at 389, Thornton was cited and relied upon and Lord Denning, succinctly and convincingly set out the law as follows:-

"In point of law on the bills of exchange themselves, there is no defence in law to the whole amount. Judgment must go for the sum claimed with interest thereon. But, on the other hand, as the German company, it now appears, claim to have this set-off (because they claim liquidated damages which would be, if available, a true set-off) for more than this 26.839 per cent, they should be at liberty to have it available to them against that part of the claim, and no more. Therefore, although there should be judgment for the whole amount with the appropriate interest, there should be a stay as to 26.839 per cent ... ."

14. Immediately above-quoted from Lord Denning brings back the point which I had promised to return, namely the judgment can be entered and should be entered in this case with a stay, that is the trust aspect does not affect the absence of partial failure of consideration, the question of stay apart.

15. In Cebora the question of stay was again considered. To save space and time, suffice it to say that I have borne all the passages cited to me by both Counsel in mind, particularly pales 276 and 277 per Buckle, L. J.

16. In my opinion, there should be a stay of execution for the $25,000 which is really hold on trust by the Plaintiff for LEE Wing-yuen. In the result, judgment is entered for the Plaintiff as claimed but there shall be a stay of half of the judgment debt, namely $25,000 for a period of two months forthwith for Defendant to file a counterclaim in High Court Action A28 of 1985 and the further stay till the conclusion of that High Court Action, or to be ordered otherwise. I shall hear both Counsel en payment in and costs. Mr. LI makes an application for a condition of payment in of the stayed $25,000. I agree with him that a cheque in the usual commercial sense may well be treated as cash, but there is more than commercial transaction in this series of transactions involving the brothers including the parties to this Action. Besides, the amount of $25,000 was no more than a fraction of the larger amount in dispute amongst the parties. For these reasons the application is refused. I should add that there is no need for me to deal with the application for transfer in view of judgment entered and the stay, and it may be taken that that application for transfer has been dismissed.

17. Having heard Counsel my decision on costs will be recorded on the notes of proceedings to save time.

18. I am indebted to both Counsel for their invaluable assistance.