SUN WAH ALUMINIUM WINDOWS & CURTAIN WALL CO LTD v. PANYU FANTASY FILM CITY LTD OPERATED AS SAMMYLAND & ANOTHER

HCA 3119/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3119 OF 2002

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J U D G M E N T

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1. This is an appeal from the order of Master Woolley made on 21 August 2003 whereby he ordered that judgment be entered against the 2nd defendant for the sum of HK$2,296,261.00 with interest thereon and costs with certificate for counsel.

Background

2. The plaintiff is company incorporated in Hong Kong carrying on the business of, inter alia, construction works. The 1st defendant is a joint venture company established in the Mainland and engaged in the operation of a theme park called Sammyland in Panyu, Guangzhou, Guangdong Province in the Mainland. The 2nd defendant was the shareholder of Penny Farthing Agents Ltd., the foreign party of the 1st defendant.

3. By an agreement in Chinese dated 12 May 2000 the plaintiff and the 1st defendant agreed that the plaintiff would perform construction and engineering works for the 1st defendant at Sammyland as specified therein for the total price of RMB4,154,400.00 ("the agreement"). The plaintiff and the 1st defendant agreed that the total price would be paid by instalments and this is reflected in the repayment schedule signed by the plaintiff and the 1st defendant also dated 12 May 2000 ("the repayment schedule").

4. Also on 12 May 2000 and at the same time as the agreement and the repayment schedule were signed, the 2nd defendant signed a letter of guarantee whereby he personally guaranteed that the 1st defendant would repay the plaintiff in accordance with the repayment schedule ("the guarantee"). The 2nd defendant also issued and delivered to the plaintiff six post-dated cheques in the plaintiff's favour "for security purpose".

5. The six post-dated cheques all drawn on the Standard Chartered Bank are as follows:

(1) cheque no. 320022 dated 23 July 2000 in the sum of HK$186,916.00;

(2) cheque no. 320021 dated 30 July 2000 in the sum of HK$186,916.00;

(3) cheque no. 320028 dated 31 August 2000 in the sum of HK$1,401,869.00;

(4) cheque no. 320027 dated 31 October 2000 in the sum of HK$700,935.00;

(5) cheque no. 320026 dated 30 November 2000 in the sum of HK$835,888.00;

(6) cheque no. 320025 dated 28 February 2001 in the sum of HK$420,560.00.

The above cheques will be referred to as cheques 1 to 6, respectively.

6. In or about the middle of July 2000 the 2nd defendant issued and delivered to the plaintiff a further cheque no. 005155 dated 19 July 2000 also drawn on the Standard Chartered Bank in favour of the plaintiff ("cheque 7").

7. The plaintiff's pleaded case in the statement of claim is that the plaintiff and/or its contractors performed and completed the agreed construction and engineering works and provided materials to the defendant.

8. The plaintiff presented cheques 1, 2, 3, 6 and 7 for payment on or after their due dates but the same were dishonoured. The total amount of these cheques is the sum of HK$2,296,261.00 being the judgment sum ordered by the master. Cheques 4 and 5 were never presented for payment.

The claim

9. The plaintiff's claim in this action against the 1st defendant is for the sum of RMB4,154,000.00 or its equivalent in Hong Kong currency with interest thereon and costs. The plaintiff also claims the said sum against the 2nd defendant under the guarantee. There is a further and/or alternative claim against the 2nd defendant on the dishonoured cheques in the said sum of HK$2,296,261.00 and a claim also for interest and costs on all its claims against the 2nd defendant.

The O. 14 application

10. It is in respect of the alternative claim on the dishonoured cheques that the plaintiff issued O. 14 proceedings for summary judgment on 3 October 2002 and it is on that application that the master gave judgment to the plaintiff.

11. It is trite law that a bill of exchange is to be treated as cash. It is to be honoured unless there is some good reason to the contrary. It was only in exceptional circumstances that a court would deprive a plaintiff of judgment on a claim based on a cheque. Where it was arguable that the cheque was a form of guarantee of payment and that the condition which had been imposed had not been fulfilled, it has been held that the defendant ought to be given unconditional leave to defend the action (Townearn Industrial Ltd. v. Golden Globe Holding Ltd. [2003] 1 HKC 186) .

Any triable issues?

12. Ms Yang, counsel for the 2nd defendant, submitted that there was a triable issue as to whether the conditions under which the post-dated cheques had been delivered to the plaintiff had been met before they were presented for payment. She relied on the construction of the guarantee to show that the delivery of the cheques was conditional and submitted that the evidence shows that the conditions had not been fulfilled before the cheques were presented for payment.

13. The 2nd defendant is not seeking to adduce oral evidence to show that the delivery of the cheques was conditional. It is well settled that the 2nd defendant would not be permitted to do this (Great Sincere Trading Co. Ltd. v. Swee Hong & Co. [1968] HKLR 660, Suen Ho Sun v. Kamenar International Ltd. [1989] 1 HKC 135 and S.Y. Chan Ltd v. Choy Wai Bor [2001] 3 HKLRD 145) .

14. There is no dispute between the parties that the six post-dated cheques were given as security. The plaintiff in para. 8 of the statement of claim pleads that the six post-dated cheques were delivered to the plaintiff "for purported part payment of the said Price and/or as security for the performance of the [guarantee] by the 2nd defendant." The said Price is a reference to the total sum of RMB4,154,400.00. Thus, it is also the plaintiff's case that the six post-dated cheques were delivered as security for the performance by the 2nd defendant of the guarantee. As to cheque 7, the plaintiff pleads that the same was delivered to the plaintiff by the 2nd defendant in or about mid-July 2000 "for purported part payment of the said Price".

15. In his affirmation the 2nd defendant took the point that the 1st defendant's liability to pay the plaintiff would only arise when all of the works had been completed, duly certified by licensed surveyors and the relevant invoice was submitted to the 1st defendant (para. 11 of the 2nd defendant's affirmation). However, this is not what was stated in the agreement and the guarantee and Ms Yang accepted that she could not pursue this line of argument and did not press on with it.

16. Ms Yang, however, submitted that on a construction of the guarantee the cheques were delivered to the plaintiff for payment only on the conditions that :

(a) the 1st defendant's payment obligations had arisen; and

(b) the 1st defendant had failed to discharge the same; and

(c) the 2nd defendant had failed to discharge the 1st defendant's liability.

17. The guarantee signed by the 2nd defendant provided as follows:

“ In order to ensure that [the plaintiff] will receive payment for the construction after completion of the project. I, [the 2nd defendant]....................hereby personally guarantee in writing that [the 1st defendant] shall repay on schedule in accordance with [the repayment schedule]. 6 post-dated cheques are hereby issued for security purpose."

The particulars of cheques 1 to 6 were then set out in the guarantee.

18. Mr. Cheung, counsel for the plaintiff, submitted that the six post-dated cheques were delivered to the plaintiff to guarantee timely payment by the 1st defendant. He submitted that the six post-dated cheques were given as security as stated in the guarantee and that so long as the 1st defendant had failed to pay in accordance with the repayment schedule the plaintiff was then entitled to present the cheques on due dates and to realize its security subject to the question of quantum. It was submitted that if the value of the cheques was in excess of the value of the works done the plaintiff was entitled to present all the cheques for payment and the defendant was entitled to claim the overpayment from the plaintiff. It was Mr. Cheung's submission that the evidence showed that the 1st defendant had defaulted in payment of at least two instalments under the repayment schedule by 25 June 2000 and hence the plaintiff was entitled to present the cheques for payment.

19. Mr. Cheung also pointed to the contemporaneous documents in particular, the letters between the plaintiff and the 1st defendant and to the letter dated 20 September 2000 from the 2nd defendant to Mr. Yeung Kang Lam ("Mr. Yeung") of the plaintiff where the 2nd defendant said that he had made arrangements with Mr. Tsang of the plaintiff to make payment of the outstanding construction costs in two instalments immediately after receipt of investments funds from Standard Chartered Bank. This was relied on as an admission by the 2nd defendant that the sums were due. That may well be so but in the O. 14 application the plaintiff relies only on the alternative claim on the dishonoured cheques. The cheques were delivered on conditions. The question is whether there is a triable issue as to whether the conditions were fulfilled before the cheques could be presented for payment.

20. It seems to me that the construction of the guarantee as submitted by Ms Yang is arguable. It is, in my view, arguable that the six post-dated cheques were delivered to the plaintiff for payment only on the conditions that:

(a) the 1st defendant's payment obligation had arisen; and

(b) the 1st defendant had failed to discharge the same; and

(c) that the 2nd defendant had failed to discharge the 1st defendant's liability.

21. The guarantee did not provide that the 2nd defendant was to be responsible for all the liabilities of the 1st defendant. It is in my judgment arguable that as a matter of construction of the guarantee the 2nd defendant was only guaranteeing performance of the agreement of the 1st defendant to pay the plaintiff in accordance with the repayment schedule. It is also arguable that the six post-dated cheques were delivered on that basis "for security purpose". In my judgment a triable issue has been shown.

22. It is then necessary to consider whether a triable issue has been shown as to whether the 1st defendant's payment obligations under the repayment schedule had arisen. Ms Yang submitted that this depended on whether the plaintiff itself had performed its part of the agreement by the time the instalments were due. As Ms Yang rightly pointed out, the plaintiff's case as pleaded is that it had performed and completed the agreed constructions and engineering works (para. 10 of the statement of claim). However, on the evidence adduced on behalf of the plaintiff it is clear that not all the works had been completed. There is some evidence that the construction works had stopped by 16 July 2000. I refer to the letter exhibited as "YKL-7" to the 2nd affirmation of Mr. Yeung. This is a letter from the plaintiff's sub-contractor to the 1st defendant where it is stated, inter alia, that the sub-contractor stopped work at Sammyland on 16th July 2000 for non-payment.

23. Mr. Cheung relied on the records of acceptance of works exhibited to the affirmation of Mr. Tsang Wai Kwok, of the plaintiff, to show that works were carried on even after 16 July 2000. There is also some evidence to show that the plaintiff left the site in September 2000. However, as Ms Yang rightly pointed out, the records of acceptance of works produced by the plaintiff simply show that the works were accepted on the dates in those records some of which were after 16 July 2000. Mr. Cheung accepted that the records do not show specifically that works were carried on after 16 July 2000. It seems to be that this is a question of fact to be resolved at trial.

24. I was referred to para. 44-077 of Vol. 2 Chitty on Contracts 28th Edn. where it is stated :

“ Guarantees of payment by instalments.

More problems arise with contracts involving payment in instalments, where payment is guaranteed by the surety. The creditor's right to claim payment of instalments, whether from the debtor or the surety, prima facie only arises where the events specified in the contract have occurred; thus where the contract is prematurely terminated (whether for breach or any other reason) the debtor may never become liable for instalments thereafter due. In this event, the surety cannot be liable either."

25. It seems to me that it is arguable whether the 2nd defendant as surety is liable to honour the 1st defendant's payment of the instalments under the repayment schedule after the contract has been terminated. It is clear on the evidence that the plaintiff accepted the 1st defendant's repudiation of the agreement for non-payment of the works and once the contract has been prematurely terminated it is arguable that the 1st defendant was not liable for the payment of the instalments as set out in the repayment schedule. He may well be liable for damages to the plaintiff but it is arguable that the 2nd defendant did not agree to honour all of the 1st defendant's liabilities to the plaintiff under the guarantee.

26. If works had indeed stopped by 16 July 2000 it was Ms Yang's contention that by that date only the 1st and 2nd instalments under the repayment schedule had fallen due in the respective sums of RMB80,000.00 each. Ms Yang submitted that as the plaintiff only performed the agreement with the 1st defendant up to 16 July 2000 by that date only the 1st and 2nd instalments of the repayment schedule became due. The 2nd defendant's guarantee was to honour the 1st defendant's punctual payment according to the repayment schedule and the 2nd defendant's liability pursuant to the guarantee was only to the extent of the 1st and 2nd instalments under the repayment schedule. This, in my view, is arguable. Ms Yang accepted that by 16 July 2000 as the first two instalments were due the plaintiff was entitled to present cheque 1 for payment on the due date of 23 July 2000. Cheque 1 was presented and dishonoured.

27. As regards cheque 7, the 2nd defendant in his affirmation has said that this was not advanced as part payment of the works and was not related to the works. He said that this was a deposit for the plaintiff to make two billboards for Sammyland (paras. 33 and 34 of the 2nd defendant's affirmation). Ms Yang, however, accepted that the 2nd defendant could not show a triable issue that cheque 7 was issued for the purpose asserted by the 2nd defendant in his affirmation as this was a bare assertion without contemporaneous documents to support the same.

28. The plaintiff's case on cheque 7 is set out in the 2nd affirmation of Mr. Yeung at paras. 15 and 16 as follows :

“ In the meantime, we kept on chasing the 2nd Defendant for the 1st and 2nd stage payments and indicated to him that the 3rd stage payment in the sum of RMB200,000.00 would also become due by 23rd July 2000. We expressed to him that the progress of the works were held up by the Defendants' default and that in the absence of payment the Plaintiff would present his post-dated cheques on their respective dates, the first of which being cheque no. 320022 in the sum of HK$186,916.00 dated 23rd July 2000.

It was only under such circumstances where the 2nd Defendant on or about 19th July 2000 issued a cheque no. 5155 in the sum of HK$100,000.00 dated the same date for part settlement of the stage payments already due. This cheque was however dishonoured and formed part of the claim herein against the 2nd Defendant. A copy of this cheque together with the unpaid item memo dated 20th July 2000 has been produced as part of exhibit "YKL-1" to my 1st affirmation."

29. Ms Yang accepted that the plaintiff was also entitled to present cheque 7 for payment on the due date of 19 July 2000. Although it was accepted that on the material before the court the plaintiff was entitled to present cheques 1 and 7 for payment, the 2nd defendant also relied on there subsequently being a settlement agreement between the parties and that because of this the 2nd defendant is not liable for the amounts of cheques 1 and 7 or of any other cheques.

30. Ms Yang submitted that the evidence shows that there was a settlement on two occasions, one in August 2000 and the other in August 2002. I am unable to accept that the evidence shows that there was a settlement agreement between the parties in August 2000. The 2nd defendant does not himself assert this in his affirmation. He does, however, assert that there was a settlement agreement in August 2002.

31. In para. 31 of the 2nd defendant's affirmation he said :

“ Nonetheless, in an attempt to settle this matter quickly, I met with Mr. Yeung at Success Seaford Restaurant at Tsimshatsui on or about 10 August 2002. Mr. Yeung indicated to me that he had made some payments to the Plaintiff's sub-contractors under the "帶資" arrangement. As such, he asked me to repay the Plaintiff the sum of HK$320,000.00 as full and final settlement of the dispute between the Plaintiff, the 1st Defendant and myself under the Contract and the Guarantee. I agreed to his offer. As I had around HK$200,000.00 in hand at that time, I, on behalf of the 1st Defendant, paid Mr. Yeung HK$160,000.00 in cash and the remaining HK$160,000.00 by cheque."

32. The plaintiff denies that there was a settlement agreement. Mr. Yeung in para. 20 of his 2nd affirmation said that :

“ On 30th July 2000, the 4th stage payment in the sum of RMB200,000.00 and the 2nd postdated cheque, no. 32001 in the sum of HK$186,916.00, also became due and no payment was made. Again the 2nd defendant requested me to withhold presenting his cheque. As the 2nd defendant had a company about to be put on list on the Hong Kong Stock Exchange in about October 2002, the 2nd defendant contacted me for a meeting to be arranged. He, on or about 9th August 2002, did come up with HK$80,000.00 cash and a cash cheque no. 923715 in the sum with HK$80,000.00. This cash cheque was honoured, a copy whereof is now produced and shown to me marked exhibit "YKL-9". I crave leave to refer to paragraph 31 of the 2nd defendant's affirmation, wherein he alleged that on or about 10th August 2002 he and I had a meeting in Tsimshatsui and had come to an agreement for full and final settlement by his payment of HK$160,000.00 by cash and HK$160,000.00 by cheque. This allegation is again untrue. The true amount should HK$80,000.00 by cash and HK$80,000.00 by cheque as aforesaid and there was never any settlement agreement, as the subsequent events as mentioned hereinbelow will show."

33. Although Mr. Yeung said that there was never any settlement agreement as subsequent events would show, he failed to set out any subsequent event in his affirmation.

34. Mr. Cheung submitted that it was unbelievable that the plaintiff would have settled the matter with the 2nd defendant by the payment of the total sum of $160,000.00. In August 2000 the plaintiff was pressing the 1st defendant by letter addressed to the 2nd defendant dated 16 September 2000 for payment of the remaining sum of HK$2,529,542.00 in two instalments. By the letter dated 20 September 2000 the 2nd defendant said that the relevant constructions costs would be repaid in two instalments after receipt of the investment fund from Standard Chartered Bank. It was, therefore, submitted that it was unbelievable that the plaintiff would have reached a settlement with the 2nd defendant to accept only HK$160,000.00.

35. Ms Yang referred me to the Court of Appeal decision in Lee Man Ching Mandy v. Chiu Hing [2001] 4 HKC 280 and what Cheung J (as he then was ) said at page 280 as appears in the English translation provided to me :

“ In the present case, it is not disputed that the two cheques were given by the Defendant to the Plaintiff as security for the delivery of goods. What is in issue is whether, as alleged by the Defendant, there was an agreement reached between the parties in relation to the payment of the two cheques after they were issued. As such, this does not involve a question of the legal implications of oral terms imposed at the time of issuance of the cheques, but is purely a dispute of fact. In Ng Shou Chun v. Hung Chun San [1994] 1 HK 155, the Court of Appeal held that in a summary judgment application, what the court has to consider is whether the defence raised is credible [believable] or not. If it is, then the court should grant leave to defend and should not order summary judgment in favour of the Plaintiff.

In this case, the issue is whether (sic.) was an agreement reached by the parties. This is a dispute of facts, which could not be resolved on affidavit evidence. It is necessary for the court to hear evidence from the parties. In addition to his deposition of the oral agreement, the Defendant paid HK$30,000.00 to the Plaintiff. The Defendant also denied in his Defence that the Plaintiff had written a letter to him on 23rd June 2000. The Plaintiff said she had no reason to give up presenting two cheques in the amount of HK$340,000.00 just because of a payment of HK$30,000.00. This court thinks that the ultimate question is what the agreement reached at the time was. The payment of HK$30,000.00 was evidence in support of the Defendant's assertions. At the present stage, the court could not ignore the HK$30,000.00 and the Defendant's denial of receipt of the Plaintiff's letter, and say that the assertions are unbelievable."

36. It seems to me that in the present case it is accepted by the plaintiff that in August 2002 the 2nd defendant paid a total of HK$160,000.00 to the plaintiff, although the 2nd defendant said that it was a total of $320,000.00. Whether the payment made to the plaintiff in August 2002 was pursuant to a settlement between the plaintiff and the 2nd defendant is a dispute of fact that can only be resolved at trial. The question at this stage is not whether the 2nd defendant's assertion that there was a settlement is to be believed but whether his assertion is believable. Just as Cheung J said in Lee Man Ching Mandy that the court could not ignore the payment of HK$30,000.00 in that case, I am also unable to ignore the payment of the sum of HK$160,000.00 in August 2002. The plaintiff denies that was a settlement. The 2nd defendant says that there was a settlement. That is a dispute of fact and I am unable to say that his assertions are unbelievable. Whether or not they will be believed is a different matter and is a matter for the trial judge.

Conclusion

37. It seems to me that there are triable issues raised and that the 2nd defendant ought to be given unconditional leave to defend the action. It is unnecessary and undesirable for me to deal with all of the evidence and the other submissions of Counsel. These go to the strength or weakness of the respective party's case and is a matter for trial.

38. I allow the appeal and set aside the order of the master.

39. I also make an order nisi for costs of the hearing before the master to be costs in the cause and for the costs of the appeal to be costs to the 2nd defendant in any event.