XCHRX TOWNEARN INDUSTRIAL LTD. v. GOLDEN GLOBE HOLDINGS LTD.

HCA10357/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.10357 OF 2000

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D E C I S I O N

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1. This is an appeal against a Master's decision. The learned Master had dismissed a summons brought by the plaintiff for orders under O.14, O.14A and O.27 r.3.

2. The application under O.14 relates to a cheque for $287,193.23 which had been issued by the defendant but later dishonoured. The O.27 r.3 application relates to a claim for US$60,959.76 being the price of goods supplied to the defendant which is admitted subject to a counterclaim and set off. The O.14A application seeks a ruling that an assignment of certain choses in action to the defendant is invalid.

3. An outline of the background is as follows. The plaintiff is a Hong Kong garment manufacturer. It sold a consignment of garments to a UK company called Naughty Clothing Co. Ltd ("NC"). It is the plaintiff's case that the defendant, a Hong Kong company, guaranteed NC's obligation to pay for the goods by issuing a post dated cheque (for $287,193.23). The defendant later dishonoured it.

4. By an entirely separate contract the plaintiff sold to the defendant a consignment of samples for US$60,959.76. The defendant admits this claim. However, two days before the defence and counterclaim was served the defendant and NC entered into a deed of assignment which purported to assign to the defendant certain claims that NC had against the plaintiff. It is these assigned claims which form the defendant's counterclaim and set-off against the US$60,969 claim. The plaintiff submits that the assignment is invalid which, if so, leaves the defendant with no answer to the claim.

The O.14 dishonoured cheque issue

5. The first task is to decide the nature of the obligation owed by the defendant to the plaintiff arising out of the issuance of this cheque. All the facts relating to cheque itself are unchallenged. The defendant drew it on its own bank account, delivered it to the plaintiff who accepted it and the defendant later stopped it.

6. The reason for issuing the cheque is clearly stated in contemporary correspondence. Firstly in a letter from the defendant to the plaintiff dated 24 March 2000 :

"After discussing with our buyer and your side, all had compromised that all shipping document will be consigned to 'Ultimate Sin, Golden Globe' will issue post-dated cheque based on your submitted invoice amount on behalf of our buyer as payment guarantee. Our cheque will be effective only in case you cannot receive the payment from the bank. When you have received the payment, our cheque will be void automatically and must be returned to us."

Secondly by a fax, also from the defendant, dated 1 April 2000 :

"GOLDEN GLOBE ISSUE AN POST DATED CHECK TO TOWNEARN, AS A GUARANTEE FOR OUR BUYER IF THEY DO NOT HONOR THEIR L/C AFTER FINAL CLAIMS SETTLEMENT BETWEEN NAUGHTY/SIN AND TOWNEARN.

IF YOU AGREE THE ABOVE TERMS, PLEASE SIGN AND RETURN IMMD.

POST DATED WILL ISSUE TO BE COLLECT ON MONDAY APRIL 3RD 2000 AND PLEASE ARRANGE SHIPMENT IMMD."

7. It is plain and obvious that the reason for issuing the cheque was to provide the plaintiff with a payment guarantee. There are no circumstances in which the plaintiff would have shipped the goods without it. Thus, when it was stopped, the plaintiff was left with no guarantee of payment and the goods had gone.

8. The defendant submits it has a defence or defences.

9. Firstly, it is contended that they have an arguable case that the delivery of the cheque was a "gesture of good faith" and no more, thus creating no legal obligations. The evidence relied on that it was a gesture of good faith comes from the defendant's managing director's 2nd affirmation. His 1st affirmation contains no such contention. It is plainly an afterthought which is inconsistent with the facts and bound to fail.

10. Secondly, it is submitted that they have an arguable case that there was a total failure of consideration and that therefore no liability arises. In my judgment, this defence also is bound to fail. The defence would have to demonstrate a total failure of consideration. It seems to me plain and obvious that the plaintiff can show that there was at least some consideration. The plaintiff can point to inspection certificates for all the purchase orders. The certificates are described as "final" certificates. The defendant made the inspection. Of the 18 certificates, 11 are marked "approved" and 8 are marked "holding". As a result of these inspections it was agreed to ship the goods. The defence cannot point to any cogent evidence that there was any notice of rejection in relation to these goods by the defendant to the plaintiff.

11. The defence further relies on s.27(1)(b) of the Bills of Exchange Ordinance, Cap.19. That section provides that valuable consideration for a bill may be constituted by "an antecedent debt or liability". The defence argues that, in this case, there is none which could constitute consideration. However, this submission takes no account of s.27(1)(a) which provides that consideration for a bill may be constituted by "any consideration sufficient and support a simple contract".

12. In my judgment, as far as the cheque is concerned, this is as far as one needs to look. The certificates of approval and the shipping of the goods constitutes the consideration. The cheque was a guarantee of payment for goods which were in fact approved and shipped. The defence point out that the final inspection certificates are endorsed with a standard form statement that they are provisional and without prejudice. It may well be that the underlying contract between the plaintiff and NC will in due course be the subject of litigation concerning the quality and fitness of the goods. In such litigation the "provisional" nature of the certificate may well arise as one issue. It does not affect however the issue of consideration in relation to the cheque between the plaintiff and the defendant.

13. Thirdly, the defence rely on its entitlement to set-off its assigned counterclaim. I will deal with the validity of the assignment together with the second application under O.27 r.3. Regardless of my decision concerning the validity of the assignment (infra), this is not a case where there are exceptional circumstances or strong grounds to deprive the plaintiff of judgment because of a counterclaim and set-off against an action on a cheque. I merely recite these familiar judicial statements :

"'We have repeatedly said in this court that a bill of exchange or a promissory note is to be treated as cash. It is to be honoured unless there is some good reason to the contrary' : Fielding & Platt Ltd v Selim Najjar [1969] 1 W.L.R. 357, 361 per Lord Denning MR.

'In an action on a dishonoured bill of exchange by one of the intermediate parties to the bill against the other, a claim for unliquidated damages under a contract for the sale of goods does not afford a defence, nor is it available as a set-off or counterclaim, nor can it afford a ground for a stay of execution : Nova (Juicy) Knit Limited v Kammgarn Spinnerei GmbH [1977] 1 WLR 713.'

'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) Limited [1981] 1 Lloyd's Rep. 509 C.A.'"

14. One issue remains concerning the cheque. It is apparent from the correspondence referred to, of 24 March and 1 April 2000, that the cashing of the cheque was conditional. The 24 March letter states : "Our cheque will be effective only in case ..." and the 1 April fax states : "as a guarantee ... if they do not honour, etc." By stopping the cheque the defendant took away the guarantee. The plaintiff is entitled to its guarantee back but is not necessarily entitled to the proceeds of the cheque. If everything had gone according to plan, the cheque would have been torn up or returned. The appropriate order therefore, in these circumstances, is that there be judgment for the plaintiff plus interest as claimed, and an order that the defendant pay the full sum into court with a stay of execution pending final settlement of proceedings between the plaintiff and NC concerning the goods. The stay shall only operate if the payment in is made within 14 days of the handing down of this judgment.

O.27 r.3 application for judgment for US$60,959.76 and assignment of counterclaim and set-off

15. The defendant in its defence admits the claim for US$60,959.76 but has counterclaimed and pleaded a set-off in a sum of approximately HK$7 million.

16. In its summons the plaintiff also seeks an order under O.14A as follows :

"4. that pursuant to Order 14A rule 1 of the Rules of High Court, the following questions of law may be determined, namely :

(a) whether the purported Assignment is valid;

(b) whether a bare cause of action is assignable; and

(c) whether the Defendant had a valid cause of action against the Plaintiff prior to express notice of the purported Assignment being given by the Defendant to the Plaintiff.

5. should it be determined that any of the questions of law stated in paragraph 4 hereof is in the negative, an order be made against the Defendant in favour of the Plaintiff that the Defendant's Counterclaim be struck out and dismissed;"

17. If the assignment is invalid the plaintiff will succeed under O.27 r.3. If the assignment is valid the plaintiff still contends that this particular counterclaim (validly assigned) can, nevertheless, not be set-off.

The validity of the assignment

18. S.9 of the Law Amendment and Reform Ordinance, Cap.23 is the statutory provision enabling the assignment of a debt or a chose in action. The defendant has taken advantage of s.9 but Mr George Lamplough, who appeared for the plaintiff on appeal, but not before the learned Master, described the purported assignment as a "device". He submits it is a device to avoid liability which was put together after, and presumably, as a result of, being served with a writ. It is dated two days before the service of the defence and counterclaim.

19. It is, I think, a fair description. As such, the plaintiff is entitled to point to and rely on defects in the assignment, even technical ones, in an attempt to challenge its validity.

20. Mr Lamplough has identified a fatal flaw in the assignment itself. In order to be able to rely on the assignment as a counterclaim, the defendant needs to have assigned to it, contracts upon which he wishes to sue the plaintiff. The pleading (the defence and counterclaim) lists in the appendix the purchase orders, i.e. the contracts, upon which it claims. The assignment however neither assigns nor makes reference to these contracts. The schedules in the assignment merely list various consignments of garments by their description numbers, not by their purchase order or contract numbers. Mr Chua Guan Hock for the defendant (who also did not appear below) submits this is a technicality. Arguably, it is a technicality, but in the factual context of this case, it is a technicality which should not be brushed aside. The defendant created a legal document to avoid liability under the claim and did so imperfectly.

21. Additionally, the plaintiff relies on flaws in the pleadings. Paragraph 10 of the amended defence and counterclaim pleads as follows :

"10. By a Deed of Assignment dated the 7th day of February 2001, Naughty Clothing assigned to the Defendant all right, title, interest, obligation and liabilities that it has whether presently or in the future with regard to its claim against the Plaintiff recited at Paragraph 9 hereof."

22. I agree with the plaintiff, that this pleading is defective in three ways. In an action by an assignee of a chose in action, the rules require that the claim must allege an absolute assignment in writing of the chose in action and notice in writing to the defendant (or plaintiff on a counterclaim) of such assignment. The defects in this pleading are :

(i) there is no plea that the assignment was an absolute assignment;

(ii) there is no plea that notice of the assignment has been given; and

(iii) the assignment itself does not, and could not, assign "obligations and liabilities" as pleaded.

23. The defendant submits that such defects could be amended. That is so. However, once again, in the factual context of this case, the court is entitled to look at the pleading as it presently stands in its unamended form. It is defective.

24. If, as I have determined, the assignment is bad, then there can be no counterclaim and that is the end of the matter. The court having answered question 4(a) in the summons, under Order 14A, in the negative.

25. For the sake of completion, however, I now address the issue of the validity of the set-off of the counterclaim, in the event that the assignment is, in fact, valid.

26. Order 27, rule 3 states :

"27/3 3.Where admissions of fact or of part of a case are made by a party to a cause or matter either by his pleadings or otherwise, any other party to the cause or matter may apply to the Court for such judgment or order as upon those admissions he may be entitled to, without waiting for the determination of any other question between the parties and the Court may give such judgment, or make such order, on the application as it thinks just."

27. Thus, if the counterclaim is of such a nature that it is not permissable to set it off against this particular claim, the court has a discretion to enter judgment based on the admission in the pleadings. I am satisfied that if it is not a permissable counterclaim the discretion should be exercised in the plaintiff's favour.

The validity of the counterclaim

28. Hong Kong Civil Procedure at p.157 lists the four situations which may arise and the appropriate orders which should follow. They are :

"(a) where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to leave to defend to the extent of the set-off and the court had no discretion;

(b) 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;

(c) where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;

(d) where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay; the lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case."

29. When analysing this particular counterclaim the following factors should be considered. Firstly, the original parties to the contracts in dispute were the plaintiff and NC. The underlying parties are thus different. It is only the assignment which brings the claims into the defendant's house. Moreover, there is no connection between the goods in the claim and the goods in the counterclaim. Both are clothing, but otherwise, the subject matter is unconnected. In my judgment the two transactions are plainly separate and distinct. It would be untenable to argue to the contrary.

30. I therefore regard this case as falling squarely within (d) above. Even if it were borderline between (c) and (d), the final phrase above, namely the court's freedom to "respond to the perceived justice of the case", would be a powerful factor to place it into category (d) rather than (c). I allow the appeal and order judgment for the plaintiff without a stay in terms of paragraph 2 of the summons plus interest as claimed in paragraph 3.

31. I further answer question 4(a) in the negative and make an order under paragraph 5. My order in relation to paragraph 1 is as set out on paragraph 14 of this judgment. The costs of the appeal and before the learned Master shall be to the plaintiff on a nisi basis.