SPORTEX INDUSTRIAL LTD v. NEO-CONCEPT INDUSTRIAL CO LTD

1992 No.A1650

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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1. On the 6th August 1992 pursuant to an order 14 application the plaintiff obtained summary judgment against the defendant in respect of a dishonoured cheque for HK$390,000.00. The defendant now appeals against the master's order.

2. In mid-1991 representatives of the plaintiff and the defendant had discussions relating to the acquisition by the defendant of a half interest in Sportex (St. Lucia) Garment Factory (Sportex St. Lucia) a company incorporated and operated in St. Lucia. On the 13th November 1991 the parties had a meeting at which the plaintiff and the defendant agreed that Sportex St. Lucia would be operated as a joint venture in which the two parties would each hold 50% of the company. The terms of this oral agreement were reduced to writing by the defendant in a document headed "Notes of the meeting regarding the joint venture Sportex (St. Lucia) Garment Factory". The document shows that present at the meeting were Mr Terry Kam and two Mr Lau's (the three shareholders in Sportex St Lucia) representing the plaintiff's and Ms Eva Shui and Ms Judiana Wai representing the defendant. It is the plaintiff's case that the document was prepared and signed on the 13th November 1991 whereas the defendant states that the document was prepared later and not signed until the 27th November 1991. In any event there is no dispute that the document was signed by both of the parties.

3. The document includes inter alia the following terms :-

4. Clause 1.

Both Sportex Industrial Ltd and Neo-Concept Industrial Co Ltd express sincerity in joint operation of the Sportex (St. Lucia) Garment Factory on a basis of 50:50.

5. Clause 2.

Capital equipment and goodwill of the Sportex (St. Lucia) Garment Factory amounts to US$750,000. Please refer to the appendix for the list of the capital eqipment owned by the factory.

6. Clause 4.

Shareholder registration will take place in Hong Kong and St. Lucia.

7. Clause 5.

Sportex Industrial Ltd will provided Neo-Concept Industrial Ltd with:-

5.1 An accounting statement_.of the Sportex (St. Lucia) Garment Factory.

5.2 A certified letter from an approved solicitor in Hong Kong that any liabilities incurred to Sportex (St. Lucia) Garment Factory is solely responsible by Sportex Industrial Ltd.

5.3A list of the assets with model numbers and unit amount for recording of asset value.

8. Clause 7.

Neo-Concept Industrial Co Ltd will inject 50% of the total amount of the capital equipment and goodwill of the Sportex (St. Lucia) Garment Factory according to the following scheduled :-

	Deposit
30th January 1992	50,000
15th March 1992	100,000 + working capital to be decided
15th June 1992	100,000
15th September 1992	125,000
TOTAL	US$375,000
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Clause 8.

Sportex (St. Lucia) Garment Factory will issue invitation letters to the China investors to inspect the factory and take a record of the capital equipment.

9. In his affirmation, Mr Terry Kam, a director and shareholder of the plaintiff states that invitation letters were issued for a visit to St. Lucia by the Mainland Chinese investors of the defendant and that it was agreed the documents set out in Clause 5 of the notes would be provided in St. Lucia at the time of the visit. He had expected the visit to take place in mid-January and was in St. Lucia at that time for that purpose but the visitors did not arrive. Ms Wai in her affirmation claims that Mr Kam was advised that the visit would take place only after the documents had been supplied.

10. It is not in dispute that the defendant handed to the plaintiff a cheque made payable to theplaintiff in the sum of HK$390,000 being the deposit of US$50,000 set out in the agreement. The plaintiff said this was done on the 13th November 1991 and that the plaintiff only agreed to the cheque being post-dated to the 30th January because the defendant's representative said that time was needed to arrange for funds. Ms Wai in her affirmation claims that the cheque was handed over on the 27th November 1991 at which time the parties made an oral agreement contemporaneous with the written agreement that the cheque would be post-dated to enable the plaintiff to supply the documents required to be produced pursuant to Clause 5 of the agreement thereby enabling the defendant to confirm the capital equipment and goodwill of US$750,000. It was further verbally agreed that should the plaintiff fail to supply the documents on or before the 30th January 1992 the defendant would be entitled to stop payment on the cheque and withdraw from the agreement. Following the meeting on the 27th November Ms Wai's affirmation states that she repeatedly pressed Mr Kam to supply the documents but that he failed to do so. on 20th January 1992 a fax message was sent by the defendant to the plaintiff's office in Hong Kong asking for the clarification of certain matters including a request for an accounting statement projecting the monthly overhead expenses. This was followed by a further fax message on the 25th January which stated inter alia :

"Because up-to-now, we do not have all the clear information we need to know about the St. Lucia factory, we consider that until you have our instruction, please do not cash our cheque to be matured end of this month."

11. In neither fax message did the defendant make reference to the oral condition that if the plaintiff did not supply the documents pursuant to Clause 5 of the agreement the defendant was entitled to stop payment of the cheque and withdraw from the agreement. Mr Kam states in his affirmation that at the time of fax messages he was in St. Lucia awaiting the arrival of the defendant's Mainland Chinese representatives and was unaware of those messages. He returned to Hong Kong on the 27th January 1992 and immediately went to the offices of the defendant with the intention of handing over the documents. Before this could be done, Mr Kam was asked by the defendant's representatives. not to present the cheque for payment and to postpone formation of the joint venture because of the defendant's cash flow problems. Mr Kam refused to agree to these proposals and the meeting terminated with a heated argument. The cheque was presented on the due date and was dishonoured.

12. Section 21 of the Bills of Exchange Ordinance Cap.19 provides :-

21(1) Every contract on a bill whether it is the drawers the acceptors or an endorser's, is incomplete and revocable, until delivery of the instrument in order to give effect thereto.

(2) As between immediate parties and as regards a remote party other than a holder in due course, the delivery :-

        (a) ...

(b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill.

13. It is not in dispute that the parties are immediate parties. The defendant relies on s.21(2)(b) to say that the cheque was delivered on the condition agreed to orally between the parties that should the plaintiff tail to deliver the documents set out in Clause 5 of the notes of meeting the defendant could stop payment and withdraw from the agreement.

14. The question is whether the defendant's evidence of such oral agreement is admissible.

15. The parol evidence rule is summarised in Chambers and Guest on Bills of Exchange 14th Edition at p.119 as follows :-

"Parol testimony cannot be received to contradit, vary, add to or subtract from the terms of a written contract, or the terms in which the parties deliberately agreed to record any part of their contract. The effect is to bind a party to his contract as written on the instrument; extrinsic evidence is in general inadmissible to prove that the terms of the contract differed from those expressed in writing in the bill or note."

16. The admission of parol evidence in relation to a bill was considered in New London Credit_ Syndicate Ltd v.Neale [1898] 2 QB 487. The defendant sought to introduce evidence of a contemporaneous oral agreement to the renewal of a bill of exchange. A. L. Smith, L.J. at p.489 stated :

"I do not disagree with the learned judge upon the conflict of evidence with regard to the conversation that took place between the drawees of the bill and the defendant, that there was an agreement by the former that they would not part with the bill and would renew it if the defendant was not in a position to pay it at maturity. The question is whether that evidence was admissible. The bill is a written instrument by which the defendant undertakes to pay 110L at the end of three months. It has been said over and over again that evidence of a contemporaneous agreement is not admissible to vary the effect of such an instrument. If the evidence be to the effect that the document is only delivered as an escrow or that it is not to take effect as a contract until some condition is fulfilled it is admissible. But that is not this case. In other words although the written document states that the bill is to be met upon a day certain the parol evidence is that it is not to be then met. Nothing is more clearly settled than that evidence of such an agreement is not admissible."

In Hitchings and Coulthurst Company v. Northern Leather Company of American and Doushkess [1914] 3KB 907, the plaintiff sued the defendant on a financial note. At the trial the defendant sought to introduce evidence of a contemporaneous oral agreement whereby he was not to be called upon to pay if the goods supplied to the defendant where not up to sample. It was held that the oral agreementnot being an agreement suspending the coming into force of the contract contained in the promissory note but being an agreement in defeasance of that contract evidence in support of it was inadmissible.

17. In Great Sincere Trading Co Ltd v. Swee Hong & Co (1968) HKLR 660, the.plaintiff sued on a cheque in its favour drawn by the defendant and dishonoured on presentation. The defence was that the cheque had been delivered subject to the express oral condition or agreement that it would be honoured only if a certain 3rd party had put the defendant in funds before the due date.

18. Mills Owen, J. after referring to the judgments in New London Credit Syndicate Ltd v. Neale said at p.664 :

"The question is whether the arrangement referred to in para.14 of the defence affidavit assuming it to be true affords an arguable issue. It is relevant to observe that the arrangement as it is expressed in the affidavit, was not the presentation when funds became available; it is expressed as the issue of the cheque subject to the condition that it would be honoured only if Lam Pong put the defendant in funds before the due date ... Is it a case than of the cheque being delivered as a mere escrow, was it in the terms of s.21(2)(b) delivered conditionally and not for the purpose of passing the property in it? In my view it is not such a case. The evidence of the oral agreement, as I see it, is an attempt to, qualify the nature or tenor of the instrument; an attempt to introduce into the unconditional order for payment expressed by the instrument itself a condition contrary to its terms ...

If the existence of the written contract has to be conceded as it must on the giving of a cheque oral evidence is inadmissible to vary or contradict its terms. It may be said that what the defendants seek to allege is a contemporaneous oral agreement, showing what purported to be a complete contract, the cheque, never came into operative existence. In my view that is not the proper interpretation to be placed on the alleged oral arrangement which, as I see it, sought to qualify the order for payment, to qualify the tenor of the instrument, to operate indefeasance of it, not to suspend the contract embodied in it."

19. There was not in those authorities a written contemporaneous contract as there is in this case. Where there is such a document from which the contract evidenced in the bill emanates it can be considered to see"if there is any vitiating factor which deprives the contract written in the cheque of its binding character.

20. There is nothing stated in the notes of the meeting of the 13th November 1991 which make payment of the deposit cheque conditional upon the plaintiff performing any act. The plaintiff was required under the provisions of Clause 5 to deliver certain documents to the defendant. The document, which was prepared by the defendant, does not state a date by which delivery was to be made nor does it make payment of the cheque conditional upon this being done.

21. Mr than, for the defendant, submits that it is clear from reading the document that it was not a complete record of what the parties had agreed to on the 13th November 1990.I do not agree. The document does lack detail on some points but this in my view does not lead to the conclusion that the document is not an accurate record of all that was agreed to at the time.

22. It is not disputed that at the time the document was signed there was discussion between the parties and that Mr Kam made a handwritten addition to Clause 6 thereby reducing the plaintiff's from having to supply a EUR certificate and ten passports to merely trying its best to do so. This is support for the view that the document is a record of all that was agreed. The document was after all prepared by the defendant and one would expect after the terms had been discussed recorded and then added to in handwriting that all conditions favourable to the defendant would have been set out.

23. Even if it were to be assumed that there was such an oral agreement then, as in the Great Sincere Trading Co Ltd case the proper interpretation to be placed on it is that it is an attempt to operate in defeasance of the unconditional contract evidenced in the cheque, and not in suspension of it.

24. Mr Chan also argues that there is a total absence of consideration for the cheque, that on the face of the notes of meeting the defendant was getting nothing for the payment. In my view, what comes from the notes of the meeting and indeed from the affidavits is that the defendant was acquiring 50% of the shares in Sportex St Lucia. There was never a suggestion that the plaintiff would not be able to supply such shares. The consideration for the payment to be made by the defendant was the acquisition of the shares.

25. I am satisfied that evidence of the alleged oral agreement should not be admitted and that there was consideration for the cheque.

26. The appeal against the master's order fails and is dismissed. Costs to the plaintiff to be taxed if not agreed. Certificate for counsel. Liberty to apply.