XCHRX LUCKY CORPORATION LTD. v. SUNGRAFIC (B.W.) PRINTING CO. LTD.

1996 No. A8388

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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INTRODUCTION

1. This is an action on a dishonoured cheque. The cheque was for $1m. It was drawn by the Defendant in favour of the Plaintiff. It was dated 15th March 1996. When the cheque was duly presented for payment, it was dishonoured. The Plaintiff sought summary judgment under Ord. 14 for the sum of $1m. and interest. Its summons was dismissed. The Plaintiff now appeals against the dismissal of the summons.

THE HEARING BEFORE THE MASTER

2. The master dismissed the summons without considering the merits of the Plaintiff's claim. He was persuaded that the summons had to be dismissed on a technical ground. One of the technical points taken by the Defendant's counsel was that the Statement of Claim had pleaded that notice of dishonour had been given to the Defendant, but that the giving of notice of dishonour had not been verified on affidavit. Mr. Adonis Cheung for the Plaintiff challenges that argument on the basis that the verifying affirmation was in the terms of Form PF10, and it followed the words approved in the Supreme Court Practice 1997, Vol. 1, para. 14/2/5. However, it is important to adapt the language of the prescribed forms to suit the facts of each particular case, and the fact remains that a careful reading of the verifying affirmation shows that the giving of the notice of dishonour had not in fact been verified.

3. Ironically, this was not the technical ground on which the master dismissed the summons. According to his note, he dismissed the summons on the basis of another technical point taken by the Defendant's counsel. That point was that the giving of notice of dishonour had been dispensed with, and yet that had not been specifically pleaded in the Statement of Claim. In my view, that was not a valid ground for dismissing the summons. It was not the Plaintiff's case that the giving of notice of dishonour had been dispensed with. The Plaintiff's case was that notice of dishonour had in fact been given.

4. However, whatever the position may have been before the master, the issue has now been laid to rest. The Statement of Claim has been amended to plead in the alternative that the giving of notice of dishonour had been dispensed with by reason of section 50(2)(c)(iv) of the Bills of Exchange Ordinance (Cap. 19), and a further affirmation has been filed on behalf of the Plaintiff verifying all the facts pleaded in the Amended Statement of Claim.

THE MERITS OF THE CLAIM

5. The Defendant claims that it has a quantifiable counterclaim against the Plaintiff for breach of contract in excess of the Plaintiff's claim of $1m. plus interest, and it claims to be entitled to set off the sums counterclaimed by way of defence to the Plaintiff's claim. In brief, the Defendant's case is that it agreed to buy a printing machine from the Plaintiff for $2m. It paid the Plaintiff sums totalling $1m., and the dishonoured cheque represented the balance of the purchase price. The Defendant intended to sell the machine for a profit. However, the Defendant claims that when the machine was delivered, it proved to be defective in a number of respects. As a result, the Defendant suffered loss under three heads of loss:

(i) it incurred repairing costs of $122,000.00;

(ii) its customer cancelled other contracts which it had with the Defendant, and the Defendant lost the profits of $1m. which it would have earned under those contracts; and

(iii) the Defendant's customer was threatening to sue the Defendant in connection with the printing machine which the Defendant had supplied, and in order to mitigate its loss (which would otherwise have been the sum of $1.05m. representing all the costs of repairing the machine), the Defendant paid its customer sums totalling RMB457,359.00 and delivered $50,000.00 worth of spare parts to its customer free of charge.

6. At first blush, these facts, though providing the Defendant with the basis of a claim against the Plaintiff, cannot be relied on as a defence to the Plaintiff's claim, whether by way of set-off or otherwise:

"In an action on a dishonoured... cheque..., save in exceptional circumstances or upon strong grounds... the defendant will not be allowed to set up a set-off or counterclaim for damages for breach of some other contract..., and the plaintiff is entitled to judgment for the amount of his claim without a stay of execution...: Montebianco Industrie Tessili S.p.A. v. Carlyle Mills (London) Ltd. [1981] 1 Lloyds Rep. 509 (summary judgment on dishonoured bill without a stay pending counterclaim for defective goods)... This practice will obtain whether the counterclaim is connected with or arises out of or is independent of the contract in respect of which the ...cheque... was given, and whether or not the action is between the immediate parties to [it]... The principle is that a... cheque... is given and taken in payment as so much cash, and not as merely giving a right of action for the creditor to litigate a counterclaim" : (The Supreme Court Practice 1997, Vol. 1, para. 14/3-4/14).

7. Mr. Andy Hung for the Defendant relies on an established exception to this principle: the defence of quantified partial failure of consideration. This defence was referred to by Lord Russell of Killowen in Nova (Jersey) Knit Ltd. v. Kammgarn Spinnerei Gmbh [1977] 1 W.L.R. 713 at pp.732G-733A as follows:

"A vendor and purchaser who agree upon payment by acceptance of bills of exchange do so not simply upon the basis that credit is given to the purchaser so that the vendor must in due course sue for the price under the contract of sale. The bill is itself a contract separate from the contract of sale. Its purpose is not merely to serve as a negotiable instrument, it is also to avoid postponement of the purchaser's liability to the vendor himself, a postponement grounded upon some allegation of failure in some respect by the vendor under the underlying contract, unless it be total or quantified partial failure of consideration."

The defence of quantified partial failure of consideration was considered in Suen Ho Sun v. Kamenar International Ltd. [1989] 1 HKC 135. The Court of Appeal thought that there was a good deal of ambiguity as to what had to be proved to establish the defence of quantified partial failure of consideration, and that the defence operated in a grey area of the law. Thus, in Byles on Bills of Exchange, 26th. ed., p.265, note 30, it is said that some authorities "have treated the claim on a bill as indivisible so that partial failure or absence of consideration (even apparently if liquidated) cannot be pleaded by way of defence."

8. However, whatever the scope of the defence of quantified partial failure of consideration, the consideration for which the cheque for $1m. had been drawn had to have been capable of being "split" from the consideration for which the earlier sums totalling $1m. had been paid. That was not so. There is no evidence that the consideration for which the $1m. to which the dishonoured cheque related was in any way different from the consideration for the earlier sums totalling $1m. which had been paid. That is in sharp contrast to Suen Ho Sun. In that case, the sum to which the dishonoured cheque related was alleged to represent that part of the purchase price which it had been agreed could be withheld for such defects in the goods as rendered them sub-standard. No such agreement is alleged to have been made in this case.

CONCLUSION

9. For these reasons, the defence of quantified partial failure of consideration is not open to the Defendant. It follows that the well-established principle summarised in the Supreme Court Practice applies. Accordingly, this appeal must be allowed, the order of the master must be set aside, and there must be summary judgment for the Plaintiff in the sum of $1m. with interest thereon from 15th March 1996 until today, at such rate as I shall invite the parties to address me on, and thereafter at the judgment rate.