XCHRX Mount Top Management Ltd. v. Charter General Holdings Ltd.

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 16001 OF 2000

_____________________

J U D G M E N T

_____________________

1. The Plaintiff is a limited company registered at Tortola, British Virgin Islands. This is an appeal by the defendant company against a refusal by Master Cheung in the High Court to order the plaintiff to give security for costs as a condition to pursuing the action.

2. The claim, for $200,000, is brought by the plaintiffs in respect of a dishonoured cheque drawn by the defendants. The defendants allege that they have a good defence because the plaintiffs have given them no consideration for the cheque. Before I consider the factual background to the action, it is helpful to identify the legal principles which I must have regard to in disposing of this appeal. Fortunately, these principles are relatively straightforward and not in doubt.

3. Of the modern cases, the most frequently cited is that of Porzelack KG v Porzelack (U.K.) Limited [1987] 1 WLR 420, a decision of Sir Nicholas Brown-Wilkinson VC (as he then was). At page 423B-F, the Vice-Chancellor said as follows:

"Under RSC Order 23, Rule 1(1)(a), it seems to me that I have an entirely general discretion either to award or refuse security having regard to all the circumstances of the case. However, it is clear on the authorities that if other matters are equal, it is normally just to exercise the discretion by ordering security against a non-resident plaintiff. The question is what in all the circumstances of the case is the just answer. The matters urged before me have spread over a fairly wide field. First, there have been attempts to go into the likelihood of the plaintiff winning the case or the defendant winning the case, presumably following the note in the Supreme Court Practice 1985, page 384 under rubric 23/1-3/2 which says: "A major matter for consideration is the likelihood of the plaintiff succeeding." This is the second occasion recently on which I have had a major hearing on security for costs and in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action. I do not think that is a right course to adopt on an application for security for costs. The decision is necessarily made at an interlocutory stage on inadequate material and without any hearing of the evidence. A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time. Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed in the sense that there is a very high probability of success, then that is a matter that can be weighed but for myself I deplore the attempt to go into the merits of the case unless it can be demonstrated one way or another that there is a high degree of probability of success or failure."

4. This approach has been adopted in Hong Kong, see for example The Walt Disney Company v Disney Property Agency [1992] No. A7289, a decision of Godfrey J (as he then was) when he directed that the world-famous Walt Disney Company, as plaintiff, should provide security for costs in a passing off action that it had brought against a rather nondescript Hong Kong property company. Godfrey J drew attention to the then recent decision of Lord Donaldson of Lymington MR in "the Alpha" (1991) 2 Lloyds's List Law Reports page 52 at page 54 where the Master of the Rolls said:

"The basic principle underlying RSC Order 23, Rule 1(1)(a) is that it is prima facie unjust that a foreign plaintiff who by virtue of his foreign residence is more or less immune to the consequences of an order for costs against him should be allowed to proceed without making funds available within the jurisdiction against which such an order can be executed."

5. It is against the background of those principles that I must now have regard to all the circumstances of this case in deciding how to exercise my discretion in this matter. The facts that are material appear to be the following:

6. The plaintiffs are management consultants with particular expertise in designing computer programmes that provide their clients with assistance in the day to day running of their business operations. The defendant is a trading company which was, and I presume still is, a joint venture partner with a PRC corporation, Changchun Charter Times Square Development Company Limited ("Changchun Charter") who inter alia operate a department store in China which employs over 2,000 people. A Miss Chu Kin-ping ("Miss Chu") is an executive director of both the defendant and Changchun Charter.

7. The affidavit of Mr Chan Pak-fa, an accounting officer of the defendants who works under Miss Chu's supervision and instructions, makes clear that the defendants draw cheques on behalf of Changchun Charter if payments have to be made in Hong Kong (see paragraph 4, page 11 of the bundle).

8. Through the introduction of a Miss Wong Man-sze, an employee of the defendants, Miss Chu was introduced to Mr Lai Tat-wai ("Mr Lai"), the plaintiff's senior executive. As a result of discussions between Miss Chu and Mr Lai, Mr Lai was able to interest Miss Chu in the sort of computer software programmes that the plaintiffs might be able to produce for Changchun Charter who were experiencing difficulties in the way that their department store was being operated on a day to day basis.

9. In mid-October 1999, Mr Lai was able to demonstrate management software that the plaintiffs had developed to Mr Wong, the Chairman of Changchun Charter, and to Miss Chu, who is also Mr Wong's wife apart from being a director of both of these companies. Mr Wong, who expressed himself impressed, asked Mr Lai to discuss his proposals in more detail with Miss Chu. Taking the matter shortly, suffice it to say these discussions matured to the stage that the plaintiffs produced a draft contract for Miss Chu's consideration. In the usual way, amendments were made to that draft in the course of negotiations. The original draft agreement was drawn up to be between the plaintiffs and the defendants. So much is not in dispute, but just before signature in its final form, the parties were changed, at Miss Chu's request, so that the plaintiffs and Changchun Charter, the PRC company, became the contracting parties.

10. Towards the end of October, Miss Chu required Mr Lai and his team to go to China for a further demonstration of the software and for the official announcement that the plaintiffs had been appointed consultants in this matter to Changchun Charter. The final version of the contract at clause 4.1 shows that the plaintiffs were to be paid $200,000 as a deposit for the consultancy fee upon signing the agreement. Beyond recording that fact, I am not concerned with this agreement because the parties to it are not the parties to this action and because the plaintiffs are not suing on the contract but on the cheque representing the deposit referred to in clause 4.1, but to this extent the agreement is important because it explains the background to the drawing of the cheque for $200,000 made payable to the plaintiffs.

11. Miss Chu required the plaintiff's team in China for the demonstration and the announcement. Mr Lai says that he made it clear that he would not be prepared to go until the agreement was signed and he received the deposit of $200,000. There is now a dispute as to the circumstances and terms upon which the agreement was signed and the cheque handed over to Mr Lai.

12. The defendant's case, and presumably that of Changchun Charter, is that the agreement would not take effect until the hard copy of the agreement was signed and that the cheque would not be cashed until after Mr Lai and his team had successfully demonstrated the proper operation of the software in China to the satisfaction of Changchun Charter's people.

13. Mr Lai says that he would not have gone to the trouble and expense of going to China and carried out a detailed demonstration unless he had a firm and binding contract with Changchun Charter and a bankable deposit, or part-payment as he prefers to describe it, (see paragraph 22 at page 57 of the bundle). To this I must return presently.

14. The agreement was signed by exchange of facsimiles on 26 October and the defendant's cheque was collected at 5 pm on the same day. On 27 October, Mr Lai attended Changchun Charter's department store and carried out the demonstration. It is now said that what was produced by the plaintiffs by way of software is unsuitable.

15. When the cheque was presented, it was dishonoured. As a result, there is very much a live dispute between the plaintiffs and Changchun Charter as to the quality and suitability of the software. That dispute does not fall to be considered by me on this appeal. The action is on the dishonoured cheque.

16. The plaintiffs took out an Order 14 summons which failed. The defendants were given unconditional leave to defend. From that decision there has been no appeal by the plaintiffs. The defendant's point is that because they are not a party to the contract for the supply of consultancy services and the software, the defendants have not given them any consideration for the cheque and that consequently they have a clean defence to the action.

17. That line of reasoning was clearly sufficiently compelling for the Master who declined to enter summary judgment for the plaintiffs.

18. On this appeal, Mr Li who appears for the plaintiffs, has invited me to reassess the merits which he submits are sufficiently favourable to the plaintiffs for me to refuse security to the defendants and to uphold the Master's decision on this summons.

19. Mr Choi for the defendant says that the correct approach is to say that at the very least all the relevant factors are equally balanced and accordingly that I should order security.

20. Given the fact that the action is based on a dishonoured cheque where the merits would usually favour the drawee of the cheque (the plaintiffs in this case), I have allowed detailed argument on the merits against what is a fairly limited factual background. Unlike Order 14 the plaintiff is not required to show that there is no arguable defence - the burden is less onerous, one of demonstrating a high degree of probability of success. That having been said, this too is a high burden and unless that degree of probability can be readily made out by the plaintiffs, I would be inclined to order security.

21. The starting point to the argument must be s. 27(1) Bills of Exchange Ordinance which in its material parts is as follows:

"Valuable consideration for a bill (a cheque being such a bill) may be constituted by;

(a) Any consideration sufficient to support a simple contract; or

(b) An antecedent debt or liability. Such a debt or liability is deemed valuable consideration whether the bill is payable on demand or at a future time."

22. Mr Choi for the defendants has submitted very persuasively that none of the types of consideration contemplated by the section exists here. The defendant is a stranger to the contract between the plaintiff and Changchun Charter and that consequently the defendant has received no consideration for the cheque from the plaintiff. The plaintiff is a volunteer and the cheque is not enforceable at its suit. Reliance is placed on two English cases in particular. Firstly, Oliver v Davis [1949] 2 KB 727 and Hasan v Willson [1977] 1 Lloyd's Rep 431, which were applied by the Hong Kong Court of Appeal in Fortune Focus International v (The Holdings) Company Limited [1998] 1 HKC 578. All these cases turn on the meaning of section 27(1)(b) and are authority for the proposition that the antecedent debt or liability referred to in that subsection must be that of the promisor or the drawer of the bill, a liability that the drawer owes to the drawee. If there is no such liability, the bill cannot be enforced by the drawee, in this case the plaintiffs. The defendants, it is submitted, owe them no such liability. Consequently, the action must fail.

Mr Li for the plaintiff, whilst perhaps not conceding this point, submits that his case is based on section 27(1)(a) which requires any consideration sufficient to support a simple contract. He starts with the proposition that for consideration to be sufficient to support a simple contract, such consideration must move from the promisee, the plaintiffs, but not necessarily to the promisor, the defendant. It is sufficient that consideration moves from the promisee to a stranger, in this case to Changchun Charter. This, of course, is well settled law and is fully discussed in the current edition of Chitty, Volume I, paragraphs 3035 to 3037.

23. Mr Li has suggested a number of ways in which consideration has moved from the plaintiffs to Changchun Charter which he says is therefore sufficient to fix liability for the cheque on the defendants. Firstly, by the plaintiff entering into the agreement with Changchun Charter at the request of the defendant. Mr Li submits that there is clear evidence supporting this construction by virtue of the undisputed evidence that the original parties in the draft agreement were the plaintiffs and the defendants between whom the negotiations had been conducted and it was not until the last moment that Miss Chu, a director of both companies, required that the defendants should be replaced in the contract by Changchun Charter. As part of this limb of his submission, Mr Li also relies on the fact that Mr Lai and Miss Chu agreed that the plaintiffs would collect the defendant's cheque from the defendant's office but I consider that this particular aspect of his case cannot begin to affect the position and I propose to have no regard to it.

24. Secondly, Mr Li submits that consideration is to be found in the plaintiff having agreed to carry out the terms of the agreement for the benefit of Changchun Charter and lastly, that consideration is also to be found in the fact that in return for the cheque, Mr Lai on behalf of the plaintiffs agreed to travel to China and to go to the premises of Changchun Charter and carry out the demonstration on 27 October 1999.

25. This is not a view of the facts that Mr Choi accepts. At worst, he submits, that at this interlocutory stage faced with affidavit evidence that in part is fundamentally conflicting, I cannot begin to come to these sort of conclusions. Before I indicate what sort of view I am prepared to come to on the present state of the evidence, it is helpful to consider whether the sort of factors which Mr Li contends for as being valid consideration are capable of availing the plaintiffs as a matter of law.

26. In this regard, Mr Li has drawn attention to the English Court of Appeal's decision of Diamond v Graham [1968] 1 WLR 1061, a decision which has attracted criticism by virtue of the fact that the court did not have Oliver v Davis supra. drawn to its attention and the correctness of which was perhaps doubted by Robert Goff J (as he then was) in Hasan v Willson supra., although he was able to avoid its consequences by being able to hold that the ratio decidendi of Diamond v Graham could be narrowly drawn on the basis that consideration for the cheque appears to have been furnished by the plaintiff by releasing his cheque inferentially at the implied request of the defendant.

27. The facts of Diamond v Graham are these:

28. On 23 July 1960, the plaintiff agreed to lend H ￡1,650 provided that H undertook to procure a cheque for ￡1,665 from the defendant by 25 July 1960, so that the plaintiff should have the defendant's cheque in his possession before his own cheque was presented. The plaintiff gave H a cheque for ￡1,650 but H was unable to get in touch with the defendant by 25 July, so the plaintiff stopped the cheque. On 26 July, H did obtain a cheque from the defendant in favour of the plaintiff for ￡1,665 and at the same time H gave the defendant a cheque for the same amount. The plaintiff paid the defendant's cheque into his bank and authorised payment of the cheque he had drawn in H's favour. The defendant's cheque was dishonoured and H's cheque in favour of the defendant was also dishonoured.

29. In an action by the plaintiff on the cheque drawn by the defendant, Megaur J gave judgment for the plaintiff for ￡1,665. On the defendant's appeal on the ground that the plaintiff was not a holder for value because no value has passed between the defendant and the plaintiff, the Court of Appeal held that there was nothing in section 27(2) which required value to be given by the holder of the cheque so long as value had been given for the cheque and, on the facts, double value had been given, first by H giving the defendant his own cheque in return for the defendant's cheque in favour of the plaintiff and secondly, by the plaintiff releasing his cheque in favour of H after having stopped it, and accordingly the plaintiff was a holder for value and entitled to judgment on the cheque.

30. In Kao Lee & Yip v Euro Treasure Limited [1985] 1 HKC 46, the Court of Appeal was placed in the position of having to decide between Oliver v Davis and Hasan v Willson on the one hand, and Diamond v Graham on the other. Sir Denys Roberts CJ who delivered the judgment considered that if the court had been put to it, it would have followed Diamond v Graham rather than Oliver v Davis but having regard to the facts, the court was able to find that there had been consideration between the parties themselves and there was therefore no necessity of expressing a concluded view between Oliver v Davis and Diamond v Graham.

31. But, it is important for the purposes of my ruling in this matter to observe that the Court of Appeal in Hong Kong in deciding Fortune Focus International Limited v The (Holdings) Company Limited supra. did not have Diamond v Graham nor Kao Lee & Yip v Euro Treasure Limited drawn to its attention and so it did not have the advantage of seeing the strong terms in which Diplock LJ (as he then was) in Diamond v Graham was able to reject the suggestion that the consideration for the bill must pass directly between one party to the bill and the other party to the bill (see page 1065D-E).

32. Given the state of the authorities in Hong Kong, I apprehend, therefore, that I am able to decide for myself which "strain" of authority I should follow, and so I respectfully venture to hold that the cases of Diamond v Graham and Kao Lee-yip v Euro Treasure Limited provide the correct interpretation on section 27(1)(a) for the reasons appearing in Diamond v Graham.

33. That being my view of the law, the next question that I need to consider is whether consideration has been given by the plaintiffs for this cheque. In my judgment, the evidence of consideration moving from the plaintiffs to Changchun Charter in the way suggested by Mr Li are highly compelling, even on the basis of the current affidavit evidence. At the very least, it is clear to me that the plaintiffs, through Mr Li, gave value for the cheque by his going to China to perform the demonstration.

34. In coming to this view of the facts, I have also had regard to the second limb of Mr Choi's submission in support of an order for security that the cheque was only conditional in the sense that it would not be presented for payment until after Changchun Charter had expressed themselves satisfied with the software demonstration.

35. In my judgment, there is simply nothing to support such a view. It is a view of the facts that is inherently unlikely. It is improbable in the extreme that Mr Lai would have journeyed to China on a 'spes' that he would be paid and be given a contract provided that Changchun were satisfied with his demonstration.

36. So far as the cheque is concerned, the overwhelming probability is that he required payment of this initial amount to persuade him that it was worthwhile to travel to China and go to Changchun Charter's department store and perform a detailed and time-consuming demonstration.

37. For all these reasons, therefore, I am of the view that even at this stage and on this evidence, the plaintiffs have shown that they do have a high probability of success in the action which in all the circumstances justifies a refusal to order them to give security. Accordingly, this appeal must stand dismissed.

38. Costs in the cause. Certificate for counsel on the appeal.