PARKIE TRADING LTD. AND ANOTHER v. WONG TSUN TSUN THAI KITCHEN LTD. AND OTHERS

1996, No. A1462

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. By Notice of Appeal dated 9th April 1997, the 1st, 2nd and 3rd Defendants appeal against the Judgment of Master Woolley dated 4th April 1997 whereby he granted the Plaintiffs summary judgment against the Defendants.

2. This case has attracted an inordinate amount of paper, relatively little of which was actually referred to during the course of the hearing, possibly because the way it has been argued before me bears, I am informed, little resemblance to the form of the argument which took place the learned Master. I also note that the time estimated for the hearing of this appeal was plainly inadequate, which is the reason for the bifurcated nature of this hearing. Practitioners ought not to assume that judicial tolerance will indefinitely be extended to the increasingly frequent practice of short listing.

3. But to return to the broad shape of the case itself. On the pleadings the 1st Plaintiff claims against the 1st Defendant the sum of HK$4,581,756.00, being the outstanding balance of principal and interest under an Agreement for Transfer of Business dated 25th July 1995 for the transfer of the 1st Plaintiff's business to the 1st Defendant for a "transfer fee" of RMB7 million. The business in question was that of one Lee Kung Seafood Restaurant (to quote from the document itself, "including all existing stock, decoration, fittings, utensil, tenancy right of 78 Lee Wan North, Lee Wan District, Guangzhou, transfer of business 'licence', transfer of authorised representative, all the Transferor's interest and goodwill").

4. The 1st Plaintiff also claims against the 2nd Defendant for the like sum pursuant to a guarantee executed by the 2nd Defendant.

5. Finally, the 2nd Plaintiff claims against the 3rd Defendant for the sum of HK$1,212,615.00 being the amount of dishonoured cheques drawn by the 3rd Defendant in favour of the 2nd Plaintiff.

6. Mr. Benjamin Chain, who argued this appeal vigorously but with conspicuous fairness, made it clear at the outset that whilst various defences had been raised before the Master below, on appeal he intended to take two points only: first, that the 1st Defendant has a good counterclaim against the 1st Plaintiff for wrongful eviction from the restaurant premises the subject of the Agreement; and second, and in any event, that the 3rd Defendant is not liable to the 2nd Plaintiff on the cheques in question by reason of want of consideration.

7. Mr. Chain further made it clear that there was no dispute that the 1st Defendant was the "purchaser" of the restaurant business from the 1st Plaintiff, and that, subject to the counterclaim which, he suggests, should result in all Defendants having unconditional leave to defend, the 1st Plaintiff is liable to pay the balance of the purchase price, and that the 2nd Defendant is liable as guarantor thereof. I turn therefore to consider the two specific aspects of the case upon which Mr. Chain asks the Court to focus.

8. With regard to the 1st Defendant's counterclaim, this arises, said Mr. Chain, by reason of the wrongful eviction of the 1st Defendant from the Guangzhou premises by the 1st Plaintiff (the tenant thereof), whom it is asserted was acting in concert with the landlord of those premises. In turn this led to civil proceedings in Guangzhou, wherein the 1st Defendant herein is the Plaintiff and the Plaintiff herein is the 2nd Defendant, the landlord of the Guangzhou premises being the 1st Defendant in those proceedings. Broadly speaking, in the Chinese proceedings the 1st Defendant herein is suing for recovery of the restaurant and/or for damages (that appears to be a distinction between the claim as it appears on the face of the Court documents and that as advanced by the 1st Defendant's legal representatives); the defence advanced thereto is that the 1st Defendant herein had defaulted upon the payment of rent, as from 1st October 1996, and in any event the 1st Defendant had wound up the business of the restaurant, failed to pay utility charges and food suppliers' bills, and, at the time of the alleged "eviction" was in fact conducting a closure sale. This latter allegation is strongly disputed by the 1st Defendant, who alleges, inter alia, that the restaurant was temporarily closed for the purposes of the installation of a new fire extinguishing system, and that the 1st Defendant has been wrongfully and forcibly evicted at the end of 1996; the case is put by the 1st Defendant as follows:

"The said restaurant was closed only for the purposes of installing a new fire extinguishing system. Even when the said restaurant was so closed, there remain 10 other employees taking care of the said restaurant every day. but on or about 17th December 1996 about 100 people sent by Liu Yue Hing (landlord) and the Plaintiffs came to the said restaurant and wrongfully and forcibly evicted all the staff of the restaurant, purported to repossess the said restaurant for Liu Yue Hing and the 1st Plaintiff. As a result thereof, the 1st Defendant was forced to take leave for proceedings in China for the recovery of the said restaurant. The 1st Defendant also alleges that the actions taken were in breach of the agreement entered into with the landlord to the effect that the 1st Defendant would be permitted further time to pay the outstanding rent."

9. As I understand the position, the proceedings in China have been completed and judgment has been reserved. Mr. Chain had hoped to be able to inform the Court when judgment would be delivered, but thus far he has been unable to do so. In any event, Mr. Chain submits that by reason of this claim against the 1st Plaintiff in the Chinese proceedings, there should be unconditional leave to defend these proceedings; alternatively his fallback position is that there should be an interim stay of execution, with liberty to apply, pending the outcome of the Chinese proceedings. Mr. Chain anticipated that the quantum claimed and awarded in the Chinese proceedings would comfortably exceed the Plaintiffs' claim in these proceedings, and suggested, in effect, that it would be just and convenient to 'wait and see'; if necessary he went on to suggest that a counterclaim could be launched in the present proceedings in terms of a claim to enforce such judgment as his client was successful in obtaining in the Chinese proceedings. During the course of argument he referred me to White Book Marginal Note 14/3-4/13 (at p. 163), wherein the learned editors proffer an analysis of the authorities as to what order should be made where a Defendant raises a set-off or counterclaim. Mr. Chain directs my attention to sub-paragraph (b), which reads as follows:

"Where the Defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the Defendant admits the whole or part of the claim."

10. This is a bold submission; the paragraph in question clearly contemplates a counterclaim in the same proceedings and not, as here, a quite independent claim in another jurisdiction arising out of a plainly subsequent event.

11. Mr. Edward Chan Q.C. strongly opposes both limbs of Mr. Chain's submission. He says that he has judgment and should be permitted to execute thereon, and that the result of the Chinese proceedings should not be permitted to affect the decision in this case. In a nutshell Mr. Chan says that the 1st Defendant elected, rightly in the circumstances, to pursue its 'counterclaim' in another jurisdiction, that the 1st Plaintiff has not applied for a stay of these proceedings in China, and that it is a matter of speculation as to whether the 1st Defendant in any event will succeed in China. If the 1st Defendant succeeds and obtains a monetary judgment, at that stage, and at that stage only, will there be a cause of action available for suit in Hong Kong upon that judgment. There was nothing in this case, said Mr. Chan Q.C., that could constitute an equitable set-off; the transaction involving the sale, and the events leading to the eviction from the restaurant, were manifestly different events, and as such did not fall with any principles of the well-known case of Hanak v. Green [1958] Probate 23; indeed, Mr. Chan points out that the events giving rise to this 'counterclaim' occurred some six months after the issuance of the Plaintiff's Order 14 summons on 19th June 1996.

12. At the adjourned hearing of this appeal, my attention was further drawn to the case of Aectra Refining Inc v. Exmar N.V. [1994] 1 WLR 1634 (CA), and in particular to the judgment of Hoffmann L.J. (as he then was), in which the distinction is drawn between an "independent set-off" and a "transaction set-off"; to quote from Hoffmann L.J. (at pp. 1648-1649):

"For the reasons given by Hirst L.J., I agree that in principle the claims for hire and bunkers in the Pacifica arbitration were liquidated claims capable of being set off at common law. The fact that they were disputed on grounds which could not easily be resolved does not in my judgment affect their liquidated nature. But the plaintiffs challenge the claim to set-off on another ground, which the judge did not find necessary to decide. They say that, to be available as a set-off, a claim must be capable of being litigated in the court in which the set-off is pleaded. This claim, it is said, did not qualify for set-off because the parties had agreed that it should be submitted to the decision of an arbitrator.

This is a difficult point on which there is no authority. The answer must be deduced from first principles. For this purpose it is necessary to distinguish between what Mr. Philip Wood, in his valuable book on English and International Set-Off (1989), calls "independent set-off" and "transaction set-off." Independent set-off, as its name suggests, does not require any relationship between the transactions out of which the cross claims arise. In English law it is based upon section 13 of the Insolvent Debtors Relief Act 172 (2 Geo. 2 c. 22) as amended by the Debtors Relief Amendment Act 1735 (8 Geo. 2 c. 24), known as the Statutes of Set-off, whose effect is now to be found in R.S.C., Ord. 18, r. 17. The only requirements are that the cross-claims must both be due and payable and either liquidated or capable of being quantified by reference to ascertainable facts which do not in their nature require estimation or valuation. Transaction set-off, on the other hand, is a cross-claim arising out of the same transaction or one so closely related that it operates in law or in equity as a complete or partial defeasance of the plaintiff's claim. The category covers a common law abatement of the price of goods or services for breach of warranty, as explained by Parke B. in Mondel v. Steel (1841) 8 M. & W. 858, 872 and equitable set-off, as explained by Morris L.J. in Hanak v. Green [1958] 2 Q.B. 9, 19. At common law, as Parke B. said, the purchaser "defend[s] himself by showing how much less the subject matter of the action was worth" and in equitable set-off the defendant asserts what Morris L.J. called 'an equity which went to impeach 'the title to the legal demand.''" (emphasis added)

13. Each Counsel sought to invoke Aectra Refining Inc. for his own purposes. Mr. Chan Q.C. maintains that the present situation is a classic case of "independent set-off", in the sense used by Hoffmann L.J. Mr. Chain, for his part, maintains that the transactions in question are so closely connected that this is in fact a case of "transaction set-off"; and that if, as he suggests, this is a true case of transaction set-off then, to further quote Hoffmann L.J., (at p. 1649) "In the case of transaction set-off, the authorities are in favour of allowing the set-off to be pleaded, notwithstanding its submission to arbitration or a different jurisdiction." Mr. Chain seeks to take advantage of this latter dictum and apply it to the present set of circumstances.

14. In my view, there are difficulties within this ingenious submission. In my view this clearly is not a transaction set-off within the true meaning of this term; indeed, I note that in his address on the first day of argument Mr. Chain characterised the 'counterclaim' he was advancing as an independent counterclaim. Be that as it may. I do not think that the fact of the present case can be raised to the level of what may be described as a transaction set-off, and it follows that I do not think that the obiter dictum of Hoffmann L.J. in Aectra Refining Inc. should be extended to cover the circumstances of the present case. Moreover, if I be wrong on that, it seems to me that Aectra Refining Inc. (in which the appeal was dismissed) is plainly distinguishable on its facts, there being in that case parallel disputes between the same parties under two time charter parties.

15. It follows, therefore, that I am not with Mr. Chain in his submission. I would further add that, even had the wrongful eviction proceedings been brought in Hong Kong and not in Guangzhou, any cross-claim arising by reason of such alleged wrongful eviction from the Guangzhou premises in my view would have constituted no more than an independent set-off; and further and in any event it seems clear, by reason of the relevant dates, that the 1st Defendant had no existing cause of action at the date of the issuance of the writ herein, thereby probably necessitating a cross-claim by separate action. The point is, however, that even in such hypothetical circumstances I should have been disinclined to have considered more than the grant of a stay of execution pending trial of the 1st Defendant's cross-claim.

16. The result of the foregoing, therefore, is that I reject Mr. Chain's primary contention that the potential judgment in the Guangzhou proceedings should operate, without more, qua counterclaim, and thus result in unconditional leave to defend.

17. There remains for consideration the question of an interim stay of execution, which, as I made clear during the hearing, I felt was the most realistic submission which was available to Mr. Chain, and which he had adopted as his fall-back position. However, after fully considering all the circumstances of the case, including the totality of the evidence before me, the course and content of the action to-date, together with the submissions of Counsel, I am not prepared in the exercise of my discretion to grant an interim stay of execution for the 1st Defendant pending publication of the result of the Chinese proceedings. In my view, the 1st Plaintiff has correctly been awarded judgment against the 1st Plaintiff for the unpaid balance by the learned Master below, and it should be in the position now to execute upon the basis of that judgment. Accordingly, I so order.

18. The other issue on this appeal, Mr. Chain having accepted at the outset that nothing arises in terms of the guarantee given by the 2nd Defendant, and further that any question of compromise is no longer relevant, is the issue of whether the 2nd Plaintiff is entitled to succeed in its claim upon the cheques drawn in its favour by the 3rd Defendant. The learned Master came to the conclusion that the 3rd Defendant was indeed liable to the 2nd Plaintiff on the dishonoured cheques. Mr. Chain (who did not appear below) says no, and submits that the issue is covered by the decision of the English Court of Appeal in AEG (UK) Ltd. v. Lewis [1993] 2 Bank LR 119.

19. Mr. Chain's short point is that the Defendant is not liable to be 2nd Plaintiff on the cheques because the 2nd Plaintiff personally has given no consideration therefor, it being clear, by reason, inter alia, of the present Plaintiff's suit for the balance of the payment due under the Agreement, that the Plaintiff had not released the 1st Defendant from the debt due. And it is in this context that AEG enters the argument.

20. In AEG, a gas fitter employed by the Plaintiff had repaired a gas cooker owned by a Mr. Cash, the Defendant's father-in-law, at his express request. Upon completion, the Defendant, Mrs. Lewis, signed to acknowledge the work as having been carried out satisfactorily, and paid the bill by cheque. Mrs. Lewis subsequently stopped payment on the cheque, the issue on appeal being whether there was consideration for the cheque. It was accepted that the repairs could not have been the consideration since the Defendant, Mrs. Lewis, neither requested the repairs nor promised to pay therefor. It was contended that the Plaintiff had released the Defendant's father from liability to pay for the repairs upon acceptance of the cheque, and that such release constituted consideration for the cheque issued by the Defendant. The Court of Appeal held that the Plaintiff did not provide consideration for the cheque because the fitter had no authority to release the liability of the father to pay for the repairs, and that suing the Defendant upon the cheque did not amount to a disclaimer of their entitlement to sue for such repairs. In this connection, Mr. Chain relies upon the following extract from the judgment of McCowan L.J.:

"In my judgment, that does not hold water. The question is whether the giving of the cheque by Mrs Lewis was supported by consideration. Of course if the cheque were met, Mr Cash would be released from liability, because the plaintiffs would have been paid in full and it would not matter to them and cannot matter in law where the money came from. But promising to release a debt upon payment in full is no consideration, because payment in full itself releases the debt. Bet that as it may, there is no evidence, and I am not prepared to assume, that the fitter had any authority to enter into contract with a stranger to release Mr Cash from liability to the plaintiffs, or that he and Mrs Lewis had any intention to enter into legal relations.

My conclusion is that Mrs Lewis was a pure volunteer, whose only intention was to help, that she was entitled to change her mind and stop the cheque and that there is no legal basis for enforcement proceedings which have been taken against her." (emphasis added)

21. Mr. Chain analogises to the present case. The seven cheques in question, totalling HK$1,202,615.00, are pleaded (at paragraph 5 of the Statement of Claim) to be in purported payment of the balance of the purchase price, and were drawn by the 3rd Defendant in favour of the 2nd Plaintiff, one of the directors of the 1st Plaintiff. As I understand Mr. Chain's argument, the 2nd Plaintiff is in the position of Mrs. Lewis in AEG, namely, the 2nd Plaintiff is a stranger to the sale and purchase agreement. Accordingly, the argument continues, absent a release of the primary debt by the 1st Plaintiff herein, the 2nd Plaintiff furnished no consideration for the cheques which were drawn in his favour. Mr. Chain continues that the only basis upon which there can be a valid cause of action upon the cheques at the instance of the 2nd Plaintiff is that if the 1st Plaintiff has abandoned the right to sue on the contract at the time the cheques were received. But the 1st Plaintiff has plainly not done this. Mr. Chain drew my attention to S. 27(1)(b) of the Bills of Exchange Ordinance, Cap. 19, whereby consideration for a bill may be "an antecedent debt or liability"; but, says Mr. Chain, such debt or liability must be between the same parties.

22. Mr. Chan Q.C. opposes this submission. He says that there clearly is consideration, and that the case falls within S. 27(1)(a), Cap. 19: "any consideration sufficient to support a simple contract". Such is present in this case, says Mr. Chan; the agreement of the 2nd Plaintiff to confer a benefit on the third party, the 1st Plaintiff, is sufficient. As to this I would observe that in this instance it would appear that the 2nd Plaintiff would have had a pre-existing duty, qua director of the 1st Plaintiff, to account to the 1st Plaintiff for monies received, and in such circumstances it is not easy to see how such a pre-existing obligation could constitute the required consideration, albeit argument was not directed to this point. Mr. Chan Q.C. further went on to argue that, in any event, there was here no antecedent debt, given the post-dating of the cheques as at the date of issuance.

23. The point is an interesting one; indeed, in the enthusiasm of the debate at the end of the hearing there was a tendency, perhaps, to overlook the fact that this is no more than an Order 14 appeal; in my view it cannot be said too often that unless a point is manifestly unarguable, or is otherwise obviously "moonshine", relief by way of summary judgment will not be attracted. As to the point in question, I do not consider Mr. Chain's stance to be unarguable; to the contrary, I consider it to be respectable and well open to him to take, although I say this with deference to the learned Master below, before whom, I understand, the point was not argued or, at least, developed in this manner. It seems to me that further argument thereon must be within the context of facts to be found at trial, and accordingly on this issue at least a trial there must be.

24. The result of this judgment, therefore, is that the 1st Defendant's appeal against the judgment below is dismissed, but that the 3rd Defendant's appeal against the judgment in favour of the 2nd Plaintiff is allowed, the judgment in this regard is to be set aside, and the 3rd Defendant is to have unconditional leave to defend.

25. As I have earlier observed, whilst he sought to bring the 2nd Defendant within the umbrella of the counterclaim arguments, Mr. Chain did not seek to mount any independent argument on behalf of the 2nd Defendant in terms of the guarantee; accordingly the appeal of the 2nd Defendant is also dismissed.

26. I should add that, in addition to these primary findings, minor complications have arisen with regard to the content of the judgment entered below. For the purposes of the present appeal only, Mr. Chan Q.C. made it clear that he did not wish to maintain the interest elements of the judgment (at paragraphs (c) and (d)), whilst I understand that it is common ground that the figure currently stated in paragraph (b) is factually incorrect and should be amended, although I confess I cannot recall why; further it is not clear to me why the judgment as presently drawn make reference (at paragraphs (e) and (f)) to the 1st Plaintiff. In these particular circumstances it seems to me, having decided the broad issues of principle put before me, that the most appropriate course is to hear the parties on the detailed form of the Order to be made and the Judgment to be entered as the result of this appeal, together with argument, if any, upon the issues of costs and consequential procedural directions.

27. Lastly, I would like to thank both Counsel for their considerable assistance.