XCHRX CHUNG FAI HOLDINGS LTD. v. TATTUNE DEVELOPMENT LTD.

1997 HCA No. 13669

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Introduction

1. This is a claim based on a dishonoured cheque. The cheque was for $15m. It was dated 23rd October 1997. It was drawn on the Defendant's bank account in favour of the Plaintiff. It was dishonoured on presentation. The Plaintiff applied for summary judgment under Ord. 14. The master gave the Defendant leave to defend the action, but that leave was conditional on the Defendant paying the $15m. into court. The Defendant now appeals. It seeks unconditional leave to defend the action.

The Defendant's version of events

2. A number of lengthy affirmations have been filed exhibiting a large number of documents, but stripped to its essentials, the Defendant's version of events is as follows. In October 1997, shares in China Telecom were due to be listed on the Stock Exchange. It was expected that this listing would be substantially oversubscribed. Tai King Wai wanted to subscribe for those shares through a company incorporated in the Cayman Islands of which he was a director, D.H. International Ltd. ("D.H."). He had been introduced to Yim Wai Ning. Mr. Yim had informed Mr. Tai that he was the agent of Nicekind Holdings Ltd. ("Nicekind"), a company incorporated in Hong Kong, which was able to purchase some of the shares since they were to be placed privately. Accordingly, Mr. Tai on behalf of D.H. agreed with Mr. Yim on behalf of Nicekind that D.H. would buy not less than 5m. shares from Nicekind. In due course, the terms of that agreement were incorporated in an agreement in writing dated 8th October 1997.

3. D.H. also agreed to pay an "introduction" or "referral" fee in respect of its agreement with Nicekind. That fee was to be paid to the Plaintiff, a company incorporated in the British Virgin Islands, which Mr. Tai describes as Mr. Yim's company. The fee was to be $3.00 for every share acquired by D.H. The terms of that agreement were incorporated in an agreement in writing dated 9th October 1997. The agreement required D.H. to deliver a banker's draft in the sum of $15m. drawn in favour of the Plaintiff to a firm of solicitors by 5.00 p.m. on 15th October 1997. The solicitors would hold the draft as stakeholders. If D.H. failed to deliver the draft, D.H. was required to pay the Plaintiff $1m. "as liquidated damages". The agreement also contained complicated provisions as to what would happen if Nicekind was not allotted any shares at all, as to what would happen if Nicekind was allotted less than 5m. shares, and as to what would happen if Nicekind was allotted more than 5m. shares.

4. Also on 9th October 1997, but after the agreement between D.H. and the Plaintiff had been executed, another agreement was entered into. D.H. and the Plaintiff were parties to that agreement, as was Wong Tai Yung, a businessman who had introduced Mr. Yim to Mr. Tai in the first place. That agreement read:

"[D.H.] has promise[d] to deposit [a banker's draft] in the sum of $15m. with [a firm of solicitors] by 5.00 p.m. on 15th October 1997 ... [D.H.] and [the Plaintiff] have already signed ... documents concerning such payment [i.e. the earlier agreement on 9th October between D.H. and the Plaintiff]. [D.H.] now deposits a cheque in the sum of $15m. ... with [Mr. Wong]. When the [draft has been deposited with the firm of solicitors] by 5.00 p.m. on 15th October 1997, [Mr. Wong] shall return the cheque to [D.H.]."

The cheque for $15m. deposited with Mr. Wong is the cheque to which this action relates. It was drawn on the account of the Defendant, a company incorporated in Hong Kong, and not on D.H.'s account. Mr. Tai says that that was simply because he was personally interested in the transaction, and the Defendant was one of the companies in which he was a director.

5. What was that cheque for? Mr. Tai's evidence is that he and D.H. regarded it as "merely a sort of earnest money". He does not say what he means by that, but I proceed on the assumption that what he means is that he wanted to show Mr. Yim and the Plaintiff that the draft for $15m. would indeed be deposited with the solicitors by 5.00 p.m. on 15th October. The cheque was therefore intended by Mr. Tai merely to demonstrate the sincerity of Mr. Tai and D.H., and to provide Mr. Yim and the Plaintiff with the comfort of knowing that the draft would be deposited with the solicitors. I acknowledge that in "Words and Phrases Legally Defined", 3rd ed., "earnest" is said to be something

"... given by the contracting party who gives it, as an earnest or token of good faith, and as a guarantee that he will fulfil his contract, and subject to the terms that if, owing to his default, the contract goes off, it will be forfeited."

However, it is plain, I think, that Mr. Tai did not have the latter words in mind when he used the expression "earnest money" in his affirmation.

6. Mr. Tai does not say that he told Mr. Yim that that was the reason for causing the cheque to be drawn. So it cannot be said that there was, to use the words of Mr. Wong Chi Yuen for the Defendant, "a common understanding" that that was the reason for the cheque. But the Defendant's case is that since everyone proceeded on the assumption that the draft would be deposited with the solicitors, no one addressed the question as to what would happen if the draft was not deposited with them. That was why the written agreement was silent on the point. Since the cheque was given simply to convince the Plaintiff that D.H. was in earnest about depositing the draft with the solicitors, and not for the purpose of the Plaintiff presenting the cheque for payment, the Plaintiff could only present the cheque for payment if D.H. agreed.

7. On the other hand, the Plaintiff's case is that the cheque was its guarantee that it would be paid the $15m. one way or another. It was delivered so as to ensure the due performance by D.H. of its obligation to deposit the draft with the solicitors by 15th October. Although the written agreement did not spell that out, Mr. Yim's evidence is that Mr. Tai had expressly agreed on behalf of D.H. that if the draft was not deposited with the solicitors Mr. Wong could release the cheque to the Plaintiff. If the cheque could not have been presented for payment, the agreement would have spelt that out.

8. In fact, D.H. did not deposit a draft for $15m. with the solicitors, either by 15th October or at all. In due course, Mr. Wong passed the cheque to the Plaintiff, and the Plaintiff presented the cheque for payment. As I have said, it was dishonoured on presentation.

The purpose for which the cheque was delivered

9. On the crucial issue of fact which divides the parties, namely the purpose for which the cheque was delivered to Mr. Wong, a court would normally be extremely sceptical of an assertion that the delivery of a cheque served no purpose other than to show that the drawer of the cheque was sincere in his intention to perform his contractual obligations. But in this particular case, I cannot say that the Defendant's version of events is not believable. It is important to remember that the deposit of the draft was the mechanism by which payment of the referral fee was to be made. D.H.'s failure to deposit the draft simply meant that the agreed method for the payment of the referral fee had not been adopted, and that the Plaintiff would have to sue D.H. for its $15m. It is in that context that the provision in the earlier agreement between DH and the Plaintiff on 9th October should not be overlooked. Cl. 2 of that agreement provided, as I have said, that the failure to deposit the draft entitled the Plaintiff to liquidated damages of $1m. It could be said that Mr. Tai would hardly have intended the cheque for $15m. to be released to the Plaintiff in the event that the draft was not deposited with the solicitors, if it had already been agreed that the Plaintiff's compensation for the non-deposit of the draft would be only $1m.

10. Ms. Sze Kin for the Plaintiff argued that cl. 2 had to be read as providing for liquidated damages for $1m. in addition to the $15m. payable as a referral fee. That may be correct, but it is at the very least arguable that the $15m. was payable for the referral fee, and that the Plaintiff's only remedy for D.H.'s failure to pay the referral fee in the manner prescribed, i.e. its remedy for the fact that it could not convert the draft into cash and would have to sue D.H. for the $15m., was to be $1m. only. In those circumstances, I repeat: it could be said that Mr. Tai would hardly have intended the cheque for $15m. to be released to the Plaintiff if it had already been agreed that the Plaintiff's compensation for the non-deposit of the draft would only be $1m.

Is this a defence in law?

11. The question then arises as to whether, on the Defendant's version of events, the Defendant has a defence in law to the Plaintiff's claim. Section 21(2)(b) of the Bills of Exchange Ordinance (Cap. 19) provides that 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."

"The effect of this provision is not to alter the rule of common law excluding parol evidence to vary a written agreement, but in conformity with the common law it allows, except as against a holder in due course, evidence to be given either that there was no delivery by the defendant with the intention of transferring property in the instrument, as where a bill was indorsed and delivered to be collected on a joint account, or that delivery was subject to the fulfilment of a condition suspending the operation of the instrument, and that the condition has not been fulfilled; in other words, that the instrument was a mere escrow": Byles on Bills of Exchange, 26th ed., p. 399.

This view of the law is based in part on what A. L. Smith L. J. said in New London Credit Syndicate Ltd. v. Neale [1898] 2 QB 487 at p. 490:

"It has been held over and over again, that evidence of a contemporaneous oral agreement is not admissible to vary the effect of such an instrument. If the evidence be to the effect that the document is only delivered as an escrow, or that it is not to take effect as a contract until some condition is fulfilled, it is admissible."

12. I agree with Ms. Sze that the delivery of the cheque was not subject to the fulfilment of a condition suspending the operation of the cheque. On the facts relied on by the Defendant, the intention was that the cheque was not to be presented at all. But equally on the facts relied on by the Defendant, it is strongly arguable that the Defendant did not intend to transfer the property in the cheque, and that the cheque was delivered for a special purpose. That special purpose was to demonstrate to the Plaintiff that D.H. was sincere in its intention to deposit the banker's draft with the solicitors. Mr. Tai's evidence that that was his intention is not rendered inadmissible by cases such as Great Sincere Trading Co. Ltd. v. Swee Hong & Co. [1968] HKLR 660, because of the rule that evidence may be given that "there was no delivery by the defendant with the intention of transferring property in the instrument".

Conclusion

13. For these reasons, the Defendant has an arguable defence to the Plaintiff's claim. The facts upon which the Defendant relies are, in my view, not so shadowy as to justify the imposition of a condition on the leave to defend which the Defendant must have requiring the Defendant to pay the $15m., or any other sum, into court. My conclusion on the defence relating to the purpose for which the cheque was delivered means that it is unnecessary for me to consider the other defences which the Defendant wishes to raise, namely lack of consideration and illegality. Indeed, since there has to be a trial of the action, it would be inappropriate for me even to comment on those defences. The upshot, therefore, is that this appeal must be allowed, the condition which the master imposed on the Defendant's leave to defend the action must be set aside, and the Defendant must be given unconditional leave to defend the action.