CHAN YIU MAN v. KE JUN XIANG

HCA1425/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1425 OF 2007

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J U D G M E N T

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1.  This is an appeal by the defendant against the Order of Master Yuen given on 12 November 2007.  In that Order, the Master ordered judgment to be entered against the defendant for HK$5,489,720 with interest on the judgment amount at the rate of interest stated in her Order and costs of the action to the plaintiff.  That Order by the Master was a result of Order 14 application by the plaintiff.  The defendant seeks dismissal of the plaintiff’s Order 14 application in this appeal and asks for unconditional leave to defend the claim as well as costs of the appeal.

2.  The plaintiff’s claim was brought upon a cheque issued by the defendant to the plaintiff drawn upon HSBC.  That cheque was dated 16 April 2007.  The cheque was dishonoured upon presentation by the plaintiff due to lack of funds in the defendant’s account with the bank.  The circumstances upon which the defendant came to draw this cheque in favour of the plaintiff and which circumstances are relied upon by the defendant to say that he should be given unconditional leave to defend are as follows.

BACKGROUND FACTS

3.  At all material times the plaintiff was the general manager and the legal representative of a company in the PRC by the name of Fo Shan Shi Hu Jian Wan Property Investment Company Limited (“the Lender”).  The defendant was the general manager and legal representative of Foshan Ri Tong Xing Ye Ji Dian Company Limited (“the Borrower”) which is another company incorporated in the PRC.

4.  On 24 April 2006, a loan agreement in writing was entered into between the Lender and the Borrower whereby the Lender would lend RMB5.7 million to the Borrower (“the Loan Agreement”).  It was also provided in that Loan Agreement that the loan would be repaid by the Borrower before 10 May 2006.  Pursuant to that Loan Agreement, the defendant entered into a guarantee whereby he guaranteed the loan under the Loan Agreement (“the Guarantee”). 

5.  On the same day, namely 24 April 2006, the Lender deposited the amount of the loan into the Borrower’s account.  The loan was not repaid by the Borrower when the due date for repayment under the Loan Agreement was reached, namely 10 May 2006.  When the loan was still outstanding and not repaid by the Borrower on or about 18 January 2007, the plaintiff then approached the defendant concerning the outstanding loan and threatened proceedings to be brought under the Loan Agreement.  The defendant requested a further extension of time for repayment and issued the subject cheque post-dated to 16 April 2007 as security for such further extension.  As a result, an extension agreement dated 18 January 2007 was entered into between the Lender and the Borrower extending the time for repayment of the loan to 25 January 2007 (“the Extension Agreement”).  The plaintiff further acknowledged that there was a part-payment of RMB200,000 which was made to the Lender on 16 April 2007 and for which the plaintiff was prepared to give credit.  That explains why the Master’s Order for judgment was in the amount of RMB5,498,720. 

6.  The loan was still not paid despite the extension of time given in the Extension Agreement.  On 10 May 2007, the Lender commenced arbitration proceedings in PRC in an attempt to recover the loan from the Borrower under the Loan Agreement.  

7.  It is not necessary for me to go into any great detail of the course taken by those arbitration proceedings save to say for present purposes that it was only after the hearing before Master Yuen that the Fo Shan Arbitration Commission, on 16 November 2007, gave its decision in the arbitration dispute that the Loan Agreement between the Lender and the Borrower dated 24 April 2006 was of no effect under PRC law.  The main reason for that being that the Lender was not licenced to make loan in the PRC.  It also ruled that the Extension Agreement between the Lender and the Borrower dated 18 January 2007 was of no effect under PRC law for the same reason and, likewise for the same reason, the Guarantee given by the defendant pursuant to the Loan Agreement was also of no effect.  Therefore the claim made against the defendant on the Guarantee given by him was dismissed.  However the Arbitration Commission came to the conclusion that the Borrower shall be liable to return the balance of the loan to the Lender, with interest not at the agreed rate in the Loan Agreement but only at a much reduced bank rate.

THE DEFENCE

8.  Based on the above background facts, the defendant now submits that the Master was wrong to have come to the decision that she did on the Order 14 application.  The defendant now submits that he should be given unconditional leave to defend the plaintiff’s claim on the dishonoured cheque basically on two grounds, namely :

(1)  total failure of consideration on which the cheque was given; and

(2)  mistake and/or misrepresentation.

Total failure of consideration

9.  The defendant submits that the present cheque, the subject of these proceedings, was issued by the defendant as a guarantee for the repayment of the loan and therefore the consideration for it was the procurement by the plaintiff to have the Lender advancing the loan and entering into the Loan Agreement and the Extension Agreement.  It is submitted by the defendant that since the Fo Shan Arbitration Commission has now ruled that both the Loan Agreement, the Extension Agreement as well as the Guarantee given by the defendant was “of no effect” under PRC laws, the defendant says that therefore the consideration for the cheque wholly failed and the plaintiff cannot sue on it. 

10.  I am unable to accept that submission by the defendant for the following reasons.  Firstly, the subject cheque was itself a different and separate contract from the underlying transaction of the Loan Agreement between the Lender and the Borrower, as well as the Guarantee given by the defendant pursuant to the Loan Agreement.  The subject cheque was issued very much later in time than the Loan Agreement and the Guarantee given by the defendant.  It is clear from the evidence, which is not disputed, that the subject cheque was given by the defendant to the plaintiff in consideration for the plaintiff to procure the Lender to extend the time for repayment of the loan by the Borrower.  In like manner, the contract, in respect of the subject cheque, was also a different and separate contract from the Extension Agreement.  As a matter of fact, the extension of time for repayment was in fact granted. 

11.  The cheque was drawn on HSBC, a bank in Hong Kong, and therefore governed by Hong Kong law.  It is not necessary for the consideration to enure to the benefit of the defendant as drawer of the cheque as long as the consideration moved from the plaintiff, and in this case the consideration did move from the plaintiff since the plaintiff did procure from the Lender the extension of time for the repayment of the loan.  The plaintiff’s cause of action being on the cheque, the fact that the Fo Shan Arbitration Commission has ruled that both the Loan Agreement and the Extension Agreement to be of no effect, likewise the Guarantee given the defendant under PRC law, that ruling cannot detract from the fact that consideration was in fact given for the cheque now sued upon by the plaintiff.  I therefore do not accept the defendant’s submission as to the total failure of consideration for the cheque.

Mistake and/or misrepresentation

12.  It was submitted by the defendant that the misrepresentation albeit innocently made was that the Lender could lawfully lend the loan to the Borrower and demand a guarantee from the defendant for it, and that it was in consideration of the loan and the guarantee that the subject cheque was issued.  I also do not accept that submission by the defendant for the following reasons. 

13.  The basic facts relating to the point of misrepresentation submitted by the defendant is vague to say the least.  The defendant has not seen fit to condescend to giving any particulars upon the basic facts on which he seeks to establish misrepresentation as a defence in the present case.  The defendant merely says in his affirmation that the parties were under a mistaken belief that the Loan Agreement, the Guarantee and the Extension Agreement were valid and that it was under such mistaken belief that the defendant issued the subject cheque to the plaintiff. 

14.  If there was such mistaken belief on the part of the Lender and the Borrower as to the validity of the Loan Agreement and the Guarantee given by the defendant, that mistaken belief must have existed when the Loan Agreement and the Guarantee given by the defendant were entered into on 24 April 2006 — at a time long before the plaintiff came into the picture.  In order for it to bite, such mistaken belief or misrepresentation which the defendant now wish to rely upon must be one which would affect the contract in respect of the subject cheque drawn by the defendant in favour of the plaintiff.  In the absence of any evidence from the defendant as to anything said or done by the plaintiff to bring about the misrepresentation, the defendant’s case on misrepresentation must fail. 

15.  Furthermore, the law on this area was succinctly stated by Stone J in the case of Yuen Chak Construction Co. Ltd v. Tak Son Contractors Ltd (reported), HCA12996/1996 when he said, at page 6 of his judgment :

“….I considered whether, if the Agreement which “spawned” the cheque had indeed been obtained pursuant to such misrepresentations, with rescission thereafter purporting to follow, that this could then be said to have fulfilled the requirement for a total failure of consideration.”

It is clear from these words that the misrepresentation point is intrinsically linked with the total failure of consideration point.

16.  In the present case, the agreement which spawned the subject cheque was the Extension Agreement.  The evidence in this case from the plaintiff, which is found in paragraph 12 of the Plaintiff’s 3^rd Affirmation and which is not disputed by the defendant, was that when in January 2007 the plaintiff chased after the defendant for the Borrower to repay the loan to the Lender or else the Lender would sue on the Loan Agreement.  It was the defendant who issued the subject cheque with the request to the plaintiff to procure the Lender to extend time for repayment of the loan.  Given these facts, it does not allow any room for the factual basis of misrepresentation relied upon by the defendant. 

17.  Furthermore, it is clear from the law as found in paragraphs 3/050, 3/051 and 3/052 of Chitty on Contract, 13 Ed., Vol. 1 that the defendant will have to put its case as high as showing that the plaintiff knew that the claim of the Lender under the Loan Agreement was invalid or that he did not believe such claim to be valid, such that any compromise or forbearance thereof would not be contractually binding before total failure of consideration would bite.

18.  Even for claims which are doubtful in law or claims which are invalid but made in good faith, any compromise or forbearance of such will still amount to good consideration.

19.  There is no evidence before me from which can be inferred in the present case that the claim of the Lender under the Loan Agreement was known to be invalid by the plaintiff or was not believed by him to be valid until the ruling of the FAC, and even that ruling only shows the Loan Agreement and the Extension Agreement to be of no effect.  Indeed, that ruling came at a time after the hearing before the Master which was well after the subject cheque was issued to the plaintiff in April 2007.

CONCLUSION

20.  For the above reasons, I am satisfied that the Master was entirely correct in coming to the conclusion that she did in this case.  I am further of the view that there is no good or arguable defence in this case and no triable issue which need to be determined at trial.  

21.  The appeal by the defendant is therefore dismissed and the Order of Master Yuen is to stand in its entirety.

COSTS

22.  Costs of the appeal would be to the plaintiff, to be taxed if not agreed.

23.  The plaintiff has asked for certificate for two counsel.  I take the view that this matter could quite easily have been dealt with by junior counsel alone.  Although some law was involved, it was not of a complicated nature nor was the law disputed by the defendant, the only part it played was the application of the law to the facts of this case bearing in mind that the majority of the facts in this case were not disputed by the parties.  This being an Order 14 application, I do not see that there was a need for two counsel to appear albeit that the claim was over HK$5 million.  Therefore, having taken the view that this matter could have been dealt with by one counsel, I decline the application for certificate for two counsel.