VICTOR CHANDLER (INTERNATIONAL) LTD v. ZHOU CHU JIAN HE

HCA2475/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2475 OF 2006

------------------------------------------

____________________

____________________

R U L I N G

____________________

1. By Summons dated 7 June 2007, the defendant seeks to set aside the ex parte order of Master De Souza dated 4 December 2006 granting leave to the plaintiff to issue and serve a concurrent Writ of Summons and Statement of Claim out of the jurisdiction, as well as the ex parte order of Master Hui dated 11 April 2007 for substituted service of the concurrent Writ of Summons upon the defendant.  The defendant also seeks for the whole of the plaintiff’s claim to be struck out.

2. The application is brought under Order 12, rule 8(1)(a), (c) and (g) of the Rules of the High Court.

Background

3. The plaintiff, a company incorporated in Gibraltar, carries on a telephone betting business and is licensed by the Gibraltar government to do so.

4. The defendant is a Chinese national resident in Beijing.

5. After some discussion between the plaintiff and the defendant in Beijing in late March 2003, the plaintiff granted credit facilities to the defendant to open an account with the plaintiff for phone betting.  Such credit facilities were extended by the plaintiff on 21 April 2003.

6. As a result of the utilization of such credit facilities granted by the plaintiff in carrying out phone betting, the defendant drew seven cheques and delivered same to a Michael Charlton of the plaintiff in Beijing in October 2004.  All seven cheques were drawn on the DBS Bank in Hong Kong and all seven cheques were dishonoured upon presentation, payment having been stopped by the defendant’s instructions to the bank.

7. On 10 November 2006, the plaintiff issued the Writ herein with Statement of Claim endorsed against the defendant claiming HK$28 million upon the seven dishonoured cheques drawn by the defendant on DBS Bank in favour of the plaintiff.

8. On 30 November 2006, the plaintiff applied ex parte for leave to serve a concurrent Writ out of jurisdiction on the basis that it falls within Order 11, rule (1)(d)(ii) and/or (e) of the RHC i.e. the claim is brought to recover damages in respect of a breach of contract on the seven cheques which is governed by Hong Kong law, and the claim is brought in respect of a breach within the jurisdiction (due to the dishonour of the seven cheques) in respect of a contract made out of jurisdiction.

9. Leave was granted by Master De Souza for service of a concurrent Writ out of jurisdiction.

10. On 4 April 2007, the plaintiff applied ex parte for substituted service of the concurrent Writ upon the defendant out of jurisdiction.  That application was granted by Master Hui on 11 April 2007.

11. The defendant, having acknowledged service, now applies under Order 12, rule 8(1)(a), (c) and (g) of RHC to set aside the two ex parte orders of the Masters on the grounds that there is no serious issue to be tried.  In this respect the defendant avers :

(a)	the seven cheques are unenforceable because the consideration for them are deemed to be illegal under Hong Kong law (“the Illegaility Point”); and
(b)	of the seven cheques, the plaintiff has admitted that two of them are not in its possession (“the Possession Point”).

The Illegality Point

12. It is not disputed that a cheque is unenforceable if the consideration thereof is illegal unless the holder is a holder in due course.  In the present case, the plaintiff being the payee of the seven cheques cannot be a holder in due course.

13. There is also no dispute to the proposition that the consideration of the cheques is illegal if it is illegal under either the governing law of the underlying contract or the laws of Hong Kong where the cheques are payable.

14. Whether the consideration is illegal under the governing law of the contract must depend upon expert evidence as to the law of the governing contract.

15. Moreover, there may well be a dispute as to whether Gibraltar law or PRC law would be the governing law of the contract.  On this the defendant has reserved its rights to contend that PRC law should be the governing law of the underlying contract.  This however is not a live issue for determination on this application.

16. For present purposes, the defendant, in bringing this application, is content to limit his arguments on one narrow legal point, namely, that the cheques are unenforceable under Hong Kong law because the consideration for them was illegal.

17. On this narrow point of law, the argument for the defendant is presented as follows :

(a)	before the handover of Hong Kong back to China on 1 July 1997, the Gaming Act of 1710 of England (and amendments thereto up to 1843) applied to Hong Kong by virtue of the Application of English Law Ordinance, Cap. 88;
(b)	after 1 July 1997, Article 160 of the Basic Law provides :
	“	Upon the establishment of the Hong Kong Special Administrative Region, the laws previously in force in Hong Kong shall be adopted as laws of the Region except for  those which the Standing Committee of the National People’s Congress declares to be in contravention of this Law.”
(c)	the Application of English Law Ordinance did not continue to be law in Hong Kong after 1 July 1997 as a result of decision of the Standing Committee of National People’s Congress under the Basic Law;
(d)	after 1 July 1997, there is no statute in Hong Kong stipulating that a cheque for repaying loans advanced for gambling is deemed to be given for an illegal consideration;
(e)	however, Article 8 of the Basic Law provides :
	“	The laws previously in force in Hong Kong, that is, the common law, rules of equity, ordinances, subordinate legislation and customary law shall be maintained, except for any that contravene this Law, and subject to any amendment by the legislature of the Hong Kong Special Administrative Region.”
(f)	the laws “previously in force in Hong Kong” include the common law and, relying on the decision in HKSAR v. Ma Wai Kwan David [1997] HKLRD 761 refer to those in force on 30 June 1997;
(g)	as at 30 June 1997, section 3(1) of the Application of English Law Ordinance provides :
	“	The common law and the rules of equity shall be in force in Hong Kong -
		(a)	so far as they are applicable to the circumstances of Hong Kong or its inhabitants;
		(b)	subject to such modifications as such circumstances may require;
		(c)	subject to any amendment thereof (whenever made) by-
			(i)	any Order in Council which applies to Hong Kong;
			(ii)	any Act which applies to Hong Kong;
			(iii)	any Ordinance”;
(h)	although under common law, cheques for repayment of loans advanced for gambling was lawful and enforceable, section 1 of the Gaming Act 1710 (as amended up to 1843) applied to Hong Kong by virtue of the Application of English Law Ordinance, amended the common law such that loans advanced for gambling became illegal;
(i)	as the import of the common law into Hong Kong under the Application of English Law Ordinance was “subject to any amendment thereof (whenever made) by any Act which applies to Hong Kong”, it must follow that, under common law which had been imported into Hong Kong, cheques for the repayment of loans for gambling were unenforceable;
(j)	this remained to be the position under common law in Hong Kong as at 30 June 1997, and this represented the extent of the common law “previously in force in Hong Kong” under Articles 8 and 160 of the Basic Law; and
(k)	as such the common law continues to apply by virtue of the said Articles of the Basic Law, therefore the only logical conclusion is that, under the common law in Hong Kong since 1 July 1997, and now in force, cheques drawn for repayment of loans advanced for gambling are unenforceable.

18. In coming to a determination on the Illegality Point, my first observation is that the argument put forward by the defendant would, if that argument is correct, appear to be entirely circular.  This comes about because it is accepted by the defendant that after the handover of Hong Kong to China, the Application of English Law Ordinance is no longer law in Hong Kong.  It is that very ordinance which, before the handover, applied the Gaming Act (with its amendments up to 1843) to Hong Kong.  Yet it is submitted by the defendant that the legal position in Hong Kong after 1 July 1997 is exactly the same as it was in Hong Kong on 30 June 1997 with the effect of the Application of English Law Ordinance in place, although that ordinance is no longer law in Hong Kong now.  That cannot be right.

19. Upon further analysis of the argument put forward by the defendant I am firmly of the view that the flaw in the submission put forward by the counsel for the defendant comes about when he equated the common law position in Hong Kong to be what was the law applicable in Hong Kong as it existed on 30 June 1997.

20. It must be clear from his analysis of the legal position that the common law position in England was before it was altered by the Gaming Act 1710 (and by its later amendments).  Indeed in paragraph 5.25 of the Skeleton Submission put forward by the defendant at the hearing before me, it was accepted that under the common law, cheques for repayment of loans advanced for gambling were perfectly lawful and enforceable.

21. In England, that common law position was amended by section 1 of the Gaming Act 1710 (and by its later amendments).

22. The legal position in Hong Kong as at 30 June 1997 was the common law position as amended by the Gaming Act 1710 (and its later amendments) which applied in Hong Kong by reason of the Application of English Law Ordinance.

23. It would therefore be incorrect to say that the legal position in Hong Kong as at 30 June 1997 was the common law position.  Rather, what applied in Hong Kong was the common law position as amended by English statute.

24. Counsel for the defendant, in putting forward his arguments, had unfortunately placed too much emphasis on the words “the laws previously in force in Hong Kong shall be adopted as laws of the Region” in Article 160 and the words “The laws previously in force in Hong Kong… shall be maintained” in Article 8 of the Basic Law.

25. However, in both Article 160 and Article 8 of the Basic Law, the words relied on by counsel for the defendant are qualified.  The qualifying words in Article 160 are “except for those which the Standing Committee of the National People’s Congress declares to be in contravention of this Law…” and the qualifying words in Article 8 are “except for any which contravenes this Law”.

26. Moreover, I do not see how the judgment in HKSAR v. Ma Wai Kwan David and Others [1997] HKLRD 761 can assist the defendant’s arguments here.

27. In that case, the court had to decide a very different issue.  That was a trial on a charge of conspiracy to prevent the course of public justice against the respondents (defendants).  The trial commenced in June 1997 shortly before the handover, but was not completed at the handover date.  The question posed to be answered by the court was whether the offence at common law of conspiracy to pervert the course of public justice was still part of the laws of the HKSAR because there was no positive act of adoption of the English common law by the NPC through its Standing Committee and/or the legislature of the HKSAR.

28. In any event, the court in that case, was not concerned with the question whether the common law, having been amended by an English Statute and which English Statute applied to Hong Kong before its handover only by reason of the Application of English Law Ordinance, Cap.88, such statutory amendment to the common law can continue to apply as part of the laws of the HKSAR after 1 July 1997.

29. It is interesting to note the words of Chan CJHC at page 776 :

“

English law which includes the common law has started to apply in Hong Kong since at least 1844 when the previous Supreme Court Ordinance was enacted.  That Ordinance was replaced by the Application of English Law Ordinance in 1966.  The 1966 Ordinance did not import the English law.  Nor did it terminate the application of English law, which was applied by virtue of the previous Supreme Court Ordinance, and then re-apply the English law all over again.  It continued the application of the English law.  Its effect was, as its long title indicated, ‘to declare the extent to which English law is in force in the Colony’.  It set out clearly the restrictions in the application of English law in Hong Kong and listed those imperial Acts which were still in force.  The reasons for the non-adoption of this Ordinance by the NPC Standing Committee are obvious.  The Basic Law has already adopted the laws previously in force.  Further, that Ordinance referred to imperial Acts which are either not applicable to the HKSAR any more or have been ‘localised’.  In other words, that Ordinance is not only no longer necessary, it also contravenes the Basic Law by its incorporation of imperial Acts.”

30. From this, it must be clear that the reason for non-adoption of the Application of English Law Ordinance in Hong Kong after 1 July 1997 was to stop English Statutes being a part of the laws of Hong Kong after the handover, one such statute being the Gaming Act 1710 and its later amendments.

31. This would further support my view that the submission of counsel for the defendant cannot be right since the position he put forward in his submission is based on the continued effect of the Gaming Act upon the common law in Hong Kong after the handover.

32. Once it is accepted that the Application of English Law Ordinance no longer applied in Hong Kong after 1 July 1997, due to a decision by the National People’s Congress, it must follow that only the common law position (without it being amended by English Statute, namely the Gaming Act of 1710 and its later amendments) would apply in Hong Kong after that date, particularly when it is accepted that there is no local Ordinance equivalent or even similar to the Gaming Act 1710 or its later amendments enacted in Hong Kong.

33. For these reasons, I am unable to accept the arguments put forward by counsel for the defendant on the Illegality Point.

The Possession Point

34. It is trite law that a plaintiff must be a holder of the bill at the commencement of the action before he can sue on it.

35. Section 2 of Bills of Exchange Ordinance defines a “holder” as “the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.”

36. Paragraph 4 of the Affidavit of Lisa Yee Man Li which is dated 30 November 2006 states :

“	but the originals of the remaining 2 cheques dated 31st March 2005 and 30th April 2005 are not in the Plaintiff’s possession.”

This was repeated in her 2^nd Affidavit dated 4 April 2007.

37. Relying on what was stated in the two affidavits as being an admission by the defendant, the defendant says that the plaintiff’s claim in respect of the two missing cheques must fail.  At the very least, the defendant says that the order granting leave to serve out of the jurisdiction should be set aside in so far as these two missing cheques are concerned.

38. The plaintiff on the other hand says that what is stated in the affidavits of Lisa Yee Man Li pertains to the time when the affidavits were sworn, and not to the time of the commencement of the action.  It is pointed out by the plaintiff that at the time of the presentation and dishonour of the seven cheques, the plaintiff had all seven cheques in its possession and which is not disputed by the defendant.

39. At the hearing, counsel for the plaintiff explained that after the seven cheques were dishonoured, they were all returned to the plaintiff by the bank and stamped in the usual way as any dishonoured cheque would be.  In that form, the plaintiff did not and could not have negotiated the two missing cheques to a third party.  For some reason those two missing cheques may have been misplaced in the plaintiff’s office.  That explanation was however said by counsel from the bar table but there was no affidavit evidence of that explanation before me.

40. In coming to a decision on the Possession Point, I am of the view that this point is really factual and would have to depend on the evidence in due course.

41. Firstly, the plaintiff seeks to rely on “an admission” by the plaintiff contained in the affidavit of Lisa Yee Man Li.

42. However, that admission does not go far enough for the plaintiff’s purposes since there is no admission that at the commencement of the action, the plaintiff did not have possession of the two cheques in question.

43. Since this is an interlocutory matter, it is not the time for me to make findings of fact, much less to draw any inference that the admission in the affidavit extends to the time of commencement of the action, albeit that the difference is only about 20 days.

44. Moreover, even if the plaintiff was not in possession of the two cheques, having misplaced them, but not having negotiated them, it may still not be fatal to the plaintiff’s claim on them, if the plaintiff could prove that they had been lost.

45. Therefore I am not persuaded on the Possession Point that I should make the order sought by the defendant on this application.

Conclusion

46. For the reasons given above, the defendant’s application is dismissed.

47. There will be a costs order nisi that the defendant pays the plaintiff the costs of the application in any event.