CHU KAM LUN v. YAP LISA SUSANTO

CACV 86/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 86 OF 1999

(ON APPEAL FROM HCA 11622 OF 1998)

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J U D G M E N T

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Leong, J.A.:

1. On 15th July 1998, the plaintiff (respondent) issued a writ claiming $900,000 from the defendant (appellant) on a dishonoured cheque issued by the defendant. The writ was served on the same day by inserting it enclosed in an envelope addressed to the defendant in the letter box of Flat A, 30/F., Valiant Park, No. 52 Conduit Road, Hong Kong, which the plaintiff said was the last known address of the defendant. On 11th August 1998 judgment was entered for the plaintiff against the defendant for $900,000 with interest and costs, no notice of intention to defend having been given by the defendant. On 5th September 1998 the defendant applied to set aside the default judgment on the ground that service of the writ was ineffective because she was out of Hong Kong at the time of service of the writ and had no knowledge of it and the judgment was therefore irregular and further, she had a meritorious defence to the plaintiff's claim. The application was dismissed on 23rd September 1998 by Master Lok in chambers. The defendant appealed to the Court of First Instance against the order of Master Lok. Sears, J. dismissed the appeal on 24th January 1999, holding that the judgment was a regular judgment and even if it were irregular, the defendant was not entitled to have it set aside as of right. Sears, J. further held that the defendant has no defence to the claim and in those circumstances it would be pointless to set the judgment aside. The defendant now appeals against the decision of Sears, J.

2. The facts are these. The defendant signed a provisional agreement on 6th July 1998 to purchase from the plaintiff, Flat 30E, Robinson Place, Robinson Road, Hong Kong. The purchase price was $9 million and was to be paid by an initial deposit of $900,000 on signing the provisional agreement with the balance on completion on or before 18th September 1998. The transaction was introduced to the defendant by a Mr. Law of the Hong Kong Property Services (Agency) Ltd. Mr. Law after obtaining the defendant's signature on the provisional agreement, took it to the plaintiff for signature and at the same time handed to the plaintiff a cheque No. 336AA051197 in the sum of $900,000 drawn by the defendant on her account in the Shanghai Commercial Bank. The plaintiff signed the provisional agreement and acknowledged in the provisional agreement receipt of the cheque as the initial deposit. The defendant was then staying at her premises at 30A, Valiant Park, No. 52 Conduit Road, Hong Kong but the address she put on the provisional agreement was an Indonesian address and it appears that at that time, the parties did not regard this as anything significant. On 7th July 1998, the defendant departed for Indonesia. Mr. Law took the provisional agreement which by then had been signed by all parties to the defendant at the airport. The defendant on perusal of the provisional agreement found that it did not contain a warranty by the plaintiff that Flat 30E had a full sea view which she said was a condition of her purchase. From the airport, she spoke to the plaintiff on the phone about it but the plaintiff refused to give such a warranty. She also found out on the phone that the plaintiff had already obtained her cheque. She immediately phoned the bank and countermanded payment of the cheque. The defendant did not return to Hong Kong until 30th August 1998.

3. The defendant's case as she deposed in her affirmation is this. The cheque in question was given by her to Mr. Law solely as initial deposit for the purchase of Flat 40D Robinson Place, a different property also owned by the plaintiff and was not issued for the plaintiff's agreement to sell Flat 30E to her. This is evidenced by a contemporaneous memorandum signed by Mr. Law to that effect. The purchase of Flat 40D failed because the plaintiff sold it to someone else. The cheque should have been either destroyed by Mr. Law in accordance with the memorandum or returned to her. But without her consent or knowledge, Mr. Law wrongfully applied the cheque to pay for the initial deposit under the provisional agreement for the purchase of Flat 30E. Thus the cheque was not supported by consideration. Secondly, when she signed the provisional agreement, Mr. Law represented to her that Flat 30E had a full sea view and that the plaintiff would insert a warranty to that effect in the provisional agreement after it was signed. Because the provisional agreement did not contain such a term and the plaintiff refused to give the warranty, she was entitled not to complete the purchase. Thirdly, she had no knowledge of the writ and she only became aware of the judgment on 29th August 1998 while she was still in Indonesia. The plaintiff knew she was in Indonesia and also her Indonesian address and the writ should not have been served at her Valiant Park address.

4. Ms Wong, counsel for the defendant submits that purported service of the writ was bad. Order 10, rule 1(2)(b) is inapplicable because the writ was served at an address which was not the defendant's last known address and when the defendant was not physically within the jurisdiction. That being so, it could not have effectively brought the proceedings to the notice of the defendant. She submits that the judgment entered was irregular and should be set aside ex debito justitiae.

5. In my view, Order 10, rule 1(2)(b) authorised service of writ on a defendant within the jurisdiction otherwise than personally by inserting it enclosed in an envelope addressed to the defendant in a letter box at the last known address of the defendant. The authorities are clear that for service under this rule to be effective, the defendant has to be physically within the jurisdiction at the time of service. (Barclays Bank of Swaziland Ltd. v. Hahn [1989] 1 WLR 506 applied in Desirable International Fashions Ltd. v. Chiang Shi Chau [1997] 3 HKC 170) Other authorities have held that service is effective when the proceedings are brought to the notice of the defendant and not on mere delivery of the writ to the last known address of the defendant. (Forward v. West Sussex County Council [1995] 1 WLR 1469; Fok Chun Hung v. Lo Yuk Shi [1995] 2 HKC 648) Undoubtedly, the defendant was not within the jurisdiction on 15th July 1998 when the writ was purportedly served pursuant under Order 10, rule 1(2)(b). The defendant deposed that she did not know of the proceedings until 29th August 1998 after judgment had been entered against her. There is no evidence that the proceedings had otherwise been brought to her notice prior to 29th August 1998. There can be no doubt the defendant had no knowledge of the writ at any time prior to judgment being entered on 11th August 1998. On this alone, the service could not have been effective. But there is more to it. When the plaintiff signed the provisional agreement, he knew the defendant's address was in Indonesia and on 7th July 1998 the plaintiff became aware that she left for Indonesia and when she would be back was not known. In the circumstances, the plaintiff must have known that the Valiant Park premises could no longer be regarded as the defendant's usual address and very likely, a writ left at the Valiant Park premises would not reach the defendant at all or at least until some time later. For these reasons, service of the writ was bad and the judgment was an irregular judgment. The next question is whether the irregular judgment should be set aside.

6. Mr. Lee, counsel for the plaintiff argues that despite the judgment being irregular, it should not be set aside unless the defendant has a meritorious defence. Reliance is placed on Honour Finance Co. Ltd v. Chui Mei Mei [1989] 2 HKLR 146 where the Court of Appeal held that the victim of an irregular judgment enjoys a confident expectation that it will be set aside rather than a right. Hunter, J.A. said this in the judgment of the court (at p. 150):

'The mere fact that the defendant was able to show lack of notice was not sufficient to entitle him to be let in to defend. He was required in addition to show a good ground of defence.'

7. Mr. Lee then submits that the defendant has no defence. His argument is this. The plaintiff is suing on the dishonoured cheque which the plaintiff believed was drawn by the defendant for the purchase of Flat 30E. Even if the defendant had been induced by the representation of Mr. Law to enter into the provisional agreement, the defendant remains liable on the cheque because the plaintiff is not suing on the provisional agreement. If Mr. Law had fraudulently given the cheque to the plaintiff or given it to the plaintiff without the defendant's authority, the plaintiff had no knowledge of these facts. Mr. Lee relies on Hasan v. Willson [1977] 1 Lloyd's LR 431 for his proposition that the liability of the defendant as drawer of the cheque would not be vitiated by the fraud of a third party such as Mr. Law, unless it can be shown that the plaintiff had knowledge of such fraud. There was no such evidence. Mr. Lee further submits that the valuable consideration in support of the cheque is the provisional agreement. The plaintiff is a bona fide holder for value of the cheque without notice and the defendant therefore has no defence. That being the case, Mr. Lee submits, even if the judgment is set aside for irregularity, the plaintiff could still obtain an Order 14 summary judgment against the defendant. Thus, it would be pointless to set aside an irregular judgment where the defence is hopeless. Mr. Lee relies on the recent case of Faircharm Investments Ltd. v. Citibank International plc., [1998] Times Law Report, Feb 1998.

8. Ms Wong, for the defendant on the other hand argues that the legal position on setting aside irregular judgments has always been that the defendant is entitled to have an irregular judgment set aside ex debito justitiae - as of right, regardless of the merits of his defence or the conduct of the parties. However, Ms Wong accepts that since the case of Faircharm the position in England appears to have changed. Counsel also accepts that the decision of the Court of Appeal in Honour Finance requires the defendant to an irregular judgment to show that there is a meritorious defence so that despite the judgment being irregular, setting it aside is not as of right. However, she submits that in the more recent cases of Fok Chun Hung v. Lo Yuk Shi [1995] 2 HKC 648 and Po Kwong Marble Factory Ltd. v. Wah Yee Decoration Co. Ltd. [1996] 4 HKC 157 the Court of Appeal took a different view and held that a defendant to an irregular judgment should be entitled to have it set aside without the court going into the merits of his defence. Ms Wong submits that Sears, J. should have followed Po Kwong Marble Factory Ltd. and set aside the irregular judgment.

9. Ms Wong contends that the cheque, being given for an agreement which never came into existence, was given for no consideration and thus the defendant has a defence. On the question of consideration, Mr. Law's status when he applied the cheque to pay the deposit under the provisional agreement is important, so counsel submits. If Mr. Law was the plaintiff's agent, his knowledge of the specific purpose for which the cheque had been drawn by the defendant may be imputed to the plaintiff. The status of an estate agent in a case of this nature is to be decided in particular facts of the case (Cheng Kwok-fai v. Mok Yiu-wah, Peter and another [1990] 2 HKLR 440) and therefore Mr. Law's status at the time is an issue to be tried. Thus the defence available to the defendant is not hopeless or doomed to fail.

10. Finally Ms Wong submits that there is no justification to depart from the authorities in Hong Kong and adopt Faircharm and in any event, since the defendant has a defence, Faircharm has no application.

11. In my view, the Court of Appeal in Honour Finance appeared to have expressed a view different from those expressed in the two more recent cases of Fok Chun Hung and Po Kwong Marble Factory Ltd. Honour Finance was referred to in Fok Chun Hung but there, Godfrey, J.A. did not find it necessary to consider it for the purpose of his decision except to comment that it was decided without the benefit of adversary arguments, thus casting doubt on its weight. Both the views of Hunter, J.A. in Honour Finance and of Godfrey J.A. in Fok Chun Hung were considered by Sears, J. in Po Kwong Marble Factory Ltd. His conclusion was that "these decisions appear to indicate that the judgment must be set aside as of right." Bokhary, J.A., as he then was, in Po Kwong Marble Factory Ltd. was also of the view that once a judgment was found to be irregular, it should be set aside. He said at p.161 of the judgment:

'...Nevertheless, leaving the writ where he left it did not constitute effective service after all. Postal service was an option. It was not resorted to however. The immediate result is that service was not achieved. And the consequential result is that the default judgment is irregular.

That being so, there is no need for the defendant company to show a defence on the merits. And it certainly has not been shown by the plaintiff company that the application to set aside the default judgment is so utterly and manifestly divorced from any merit as to amount to an abuse of process.'

12. Nazareth, V.-P. in the same case also agreed that an irregular judgment should be set aside ex debito justitiae though he had misgivings about conditions being attached to the setting aside.

13. Thus, the weight of the Hong Kong authorities is where the judgment is irregular, it should be set aside without going into the merits of the defence. This would have disposed of the appeal. But there is still the question raised as to whether this court should adopt Faircharm and refuse to set aside the irregular judgment for lack of a meritorious defence.

14. Faircharm is a decision by the English Court of Appeal in February 1998 which is not binding on us. It purports to change a principle which has been established by a long line of authorities. It is referred to in the White Book but it appears that it has not found its way into the law reports. The courts in Hong Kong so far have not taken any view on it. It is doubtful how much weight it has in Hong Kong. Faircharm seems to have decided that if the defendant to an irregular judgment is bound to loose for lack of a meritorious defence, setting aside the irregular judgment only prolongs the life of the action until the plaintiff applies to enter summary judgment which the plaintiff is bound to succeed. In these circumstances, to refuse to set aside is to do what is just and expedient and to achieve justice. Practical as this approach may appear to be, given the assertion of the defendant in the present case, which if true would give rise to the issue of the status of the estate agent Mr. Law in the transaction and the issue of no consideration supporting the cheque, I am unable to say that the defendant is bound to lose if given the opportunity to defend. That being the case it does not arise for a decision on whether it is appropriate to adopt Faircharm for the purpose of this appeal.

15. Mr. Lee, for the plaintiff as a fall back position, submits that if this court is minded to set aside the judgment, it should be on the condition that the defendant be ordered to pay into court $900,000. He contends this is necessary because of the conduct of the defendant. But in so far as he can make out, the only conduct of the defendant he complains of is that the defendant countermanded payment of the cheque at the last minute just before she departed for Indonesia. I see no substance in this argument.

16. For the reasons given above, I would allow the appeal. The order I propose to make is that the judgment entered on 11th August 1998 be set aside, the defendant shall have unconditional leave to defend and shall file a defence within 14 days hereof. I also propose to make a costs order nisi that the defendant shall have the costs of the appeal and in the courts below.

Nazareth V-P:

17. I agree and would add the following.

18. For my part I have to say that I am attracted by the dictum in Faircharm Investments Ltd. v. Citibank International plc. Where a defence is clearly hopeless, it does indeed seem pointless to set aside the judgment even if irregular. On the other hand, it would be a major departure from the long established position that in such circumstances, it is unnecessary to be concerned with the merits of the defence which is not without practical advantage. As Leong, J.A. has shown, it cannot be said that the defence here is hopeless, so that Faircharm does not assist and whether the dictum should be followed does not have to be decided. Moreover, this does not seem to me to provide an appropriate occasion for that to be done and I would reserve the point for such an occasion.

19. The appeal is accordingly allowed and the orders proposed by Leong, J.A. will be made.