RIO-PACK (HONG KONG) LIMITED v. ALFA TUNGWAH INDUSTRIES LIMITED

Bills of exchange - claim by plaintiff supplier of Italian ice cream cone making machines on 2 dishonoured cheques drawn by defendant in payment of 10 machines purchased for re-export to customers in China - plaintiff required postdated cheques in lieu of cash deposit and letter of credit - condition of sale that after delivery of machines, post-dated cheques to be returned to defendant - defendant failed to take delivery of 5 machines - plaintiff presented two post-dated cheques which were dishonoured - defendant denied liability on ground that in terms of the conditions of the specific purpose for which the cheques were delivered, the property in the cheques was not transferred to the plaintiff - alternatively there was no consideration for the cheques - Held: There was consideration for the cheques; 2. The property in the cheques was transferred to the plaintiff; 3. Judgment for the plaintiff in the sum of $733,200 - Sections 21(2)(b), 30 Bills of Exchange Ordinance, Cap. 19.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

H. C. Action No. 7599 of 1985

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JUDGMENT

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1. The plaintiff claims the sum of $850,200 from the defendant being the total sum owing under two cheques drawn by the defendant in favour of the defendant which were dishonoured on presentment. The first cheque dated 15th May 1985 was for $616,200 and the second cheque dated 15th July 1985 was for $234,000.

2. The defendant admitted drawing the cheques and delivering them to the plaintiff but pleaded that the delivery was not for the purpose of transferring the property in the cheques but for other specified purposes. In the alternative the defendant pleaded that the plaintiff had furnished no consideration for the cheques and was therefore not entitled to sue on the same. The defendant had also counterclaimed against the plaintiff for a declaration of indemnity, for the return of the two cheques and other relief. At the beginning of the hearing the defendant discontinued the counterclaim so I am not concerned with those latter issues. At that initial stage Counsel for the plaintiff also submitted that on the pleadings the burden of proof rested on the' defendant and applied for an order that the defendant open. This 'application was opposed. I held that the burden on the pleadings rested on the defendant who was ordered to open.

3. The specific purposes for which the defendant pleaded the cheques were delivered resulting in the property in the cheques not being transferred and alternatively there being an absence of consideration, were mainly set out in paragraph 6 of the defence. Although the claim was simply based on the two dishonoured cheques to understand the basis of the defence it is necessary to go into the negotiations between the parties which led to the issuance of the cheques.

4. The plaintiff is a supplier of ice cream cone manufacturing machinery. The defendant was engaged in the sale of such machinery to China. During November 1984 negotiations were initiated between Mr. Y.T. Chui, Sales Marager of the plaintiff' and Mr. K. C Cheuk, Sales Manager of the defendant, in relation to the supply by the plaintiff of 10 sets of Italian Gabbrielli Ice Cream Cone manufacturing machines. The defendant was interested in two particular models known as Model U3 and Model U65. The defendant had purchased such machines previously from other Hong Kong suppliers for the purpose of reselling them to customers in China.

5. At the trial I heard evidence for the defendant from Mr. Cheuk, Mr. T. C. Wong, a director of the defendant and from Mr. S. C. Chan, the defendant's managing director, Mr. Chui gave evidence for the plaintiff. From that evidence I am satisfied that 2 or 3 days before 25th January 1985 Mr. Chui attended at the office of the defendant's in the presence of Mr Cheuk, Mr. Wong and Mr. Chan by which stage negotiations had reached an advanced stage. I am satisfied at that meeting that the parties orally agreed that the plaintiff would sell to the defendant 10 sets of machines in three separate shipments made up as follows:

6. Two matters relevant to, the ultimate written agreement executed between the parties relate to the steps the plaintiff was then taking to obtain supply of the machines from Italy and the proposals for payment. During November or December 1984 the Manager of the plaintiff was in Italy attempting to obtain the right to a sole agency for the sale of the machines in Hong Kong from the manufacturer Gabbrielli. As to payment, the defendant when purchasing from other suppliers had been obliged to pay a deposit and open letters of credit for the balance. It is common ground that during the negotiation stage Mr. Chui made more attractive payment proposals to the defendant, in the hope of securing the sale. I find that Mr. Chui offered to sell the machines at the standard unit price less 3%; that no deposit would be payable; that no letters of credit were required. I am prepared to infer that the prospects of obtaining this relatively large order from the defendant, would have assisted the plaintiff's negotiations with Gabbrielli in relation to a sole agency.

7. The payment proposals discussed between Mr. Cheuk and Mr. Chui were that the plaintiff would make delivery to the defendant in exchange for payment; that payment for each shipment would have to be made in full within 1 month of arrival; that the defendant during that month could elect to take delivery of individual machines at different times, in which event a separate payment would be made for each machine on delivery. There was also agreement on incidental terms including the provision by the plaintiff of technicians to travel to China to start up the machines and the free servicing of the machines by the plaintiff for 1 year. I further find that these terms were discussed by all four witnesses and another employee of the defendants in the defendant's office at the meeting 2 or 3 days before 25th January 1985.

8. After that meeting Mr. Chui left the defendant's office and reported back 'to the plaintiff. Clearly the plaintiff was concerned that in the absence of any deposit or letter of credit it would solely be reliant on the defendant's agreement to pay for the machines after their arrival from Italy. The plaintiff sought to protect its position by seeking three cheques for the proposed shipments respectively postdated to the arrival of those shipments in Hong Kong. This proposal was contained in a written sales contract prepared by the plaintiff and taken by Mr. Chui to the defendant on 25th January 1985. The original payment clause in that contract was as follows:

9. Mr. Chui stated that he took this contract, already signed on behalf of the plaintiff, to the defendant's office on 25th January 1985 where he met Mr. Cheuk, Mr. Wong, Mr. Chan and another of its employees. According to Mr. Chui on arrival and before the contract was signed, he told Mr. Cheuk, Mr. Wong, Mr. Chan and another member of the defendant's staff that his boss was concerned about the lack of security and that the terms of payment had therefore being varied. He told them the new terms were now set out in the contract document. He then stated that he handed the contract document over and its English contents were translated by Mr. Wong in Chinese to Mr. Chan. Mr. Chui stated that he now only vaguely remembered the precise form of the translation but he recollected that Mr. long translated the provision relating to post-dated cheques. After the defendant's representatives had considered the written contract, Mr. Chui stated that Mr. Wong sought an amendment to the second paragraph of the payment clause so that the second sentence of that paragraph would read:

"Should delayed delivery be desired by the buyer, a new post-dated cheque is issued payable on the new delivery date in exchange for the post-dated cheque on hand to cover the original delivery. "

This proposed amendment was clearly advantageous to the defendant as it gave it the right to delay taking delivery. Mr. Chui stated that as Mr Wong's English was superior to his own, he asked Mr. Wong to explain the effect of the proposed amendment to him. He accepted the amendment on behalf of the plaintiff. Mr. Wong then had the paragraph amended, after which Mr. Chui and Mr. Chan initialled the amendment and Mr. Chan signed the contract on behalf of the defendant.

10. In relation to the amendment the three defence witnesses substantially agreed with Mr. Chui's recollection of events. However, they gave rather different evidence in relation to the first paragraph of the payment clause. Mr. Cheuk stated that when Mr. Chui arrived on 25th January 1986 as the signing of the contract was Mr. Chan and Mr. Wong's responsibility while present, he did not pay much attention. He pointed out that before 25th January 1985 Mr. Chui had never mentioned any requirement for post-dated cheques. Mr. Chui agreed that was the position and conceded that on 25th Jaruary 1985 he was very embarrassed with the changed requirement. but was emphatic that if the, defendant had not agreed to that new condition the sale would not have proceeded.

11. Mr. Wong stated that because of his better knowledge of English he was the first person to read the contract, when it was handed over by Mr. Chui. He then interpreted its contents to Mr. Chan, who could not read English, but denied that he mentioned the post-dated cheque provision. However, he stated that Mr. Chan did not agree to the contents of the second payment paragraph and Mr. Chan wrote out in Chinese an acceptable alternative. Mr. Wong then translated the Chinese into English; had the alteration typed in English on the contract; and obtained Mr. Chui's agreement to that variation. When cross-examined on why in view of his admission that he had read the post-dated cheque paragraph, he raised no objection before Mr. Chan signed, Mr. Wong replied that at the time he was not feeling very well and relied on Mr. Chui's oral statement that delivery would be made in exchange for payment. Mr. Chan simply denied that he was ever told of the inclusion of the post-dated cheque paragraph before he signed the contract.

12. I prefer and accept Mr. Chui's evidence that when he arrived at their office he told all four representatives of the defendant that his boss required security in the form of post-dated cheques and that the terms of payment had been altered. The defendant's stance that the contract was executed without the defendant appreciating the change in payment terms is simply, even on' their own evidence, not credible. Mr. Wong agrees he read the post-dated paragraph yet denies that he told Mr. Chan of its contents. As a director of the defendant he explains his own action in not objecting to its inclusion on the grounds, inter alia, that he was not feeling well. Further, as a result of Mr. Wong's interpretation, Mr. Chan objected to the very next paragraph of the payment clause and that was varied. I reject the possibility that Mr. Wong elected only selectively to interpret parts of the contract to Mr. Chan. In any event Mr. Wong, himself a director, admits he was aware of the full contents of the payment clause before execution yet made no objection. In those circumstances the payment clause was clearly binding on the defendant.

13. From these findings it follows, as a matter of law, that the plaintiff was entitled in contract, to demand that the defendant furnish post-dated cheques in terms of the, payment clause. Converted into Hong Kong currency cheques for the full invoice amounts, before allowance was made for the 3% discount would have amounted to $616,200 dated 15th May, 1985; $234,000 dated 15th July, 1985; and $616,200 dated 15th August' 1985. The due dates are dates after the expiry of 1 month from the arrival dates of the three shipments.

14. All witnesses were agreed that after the contract was signed, Mr. Chui asked the defendant for 3 post-dated cheques. At first Mr. Chan did not agree to give the cheques but eventually the two postdated cheques particulared in the Statement of Claim were given to Mr. Chui After they were signed Mr. Wong photocopied both cheques and obtained an undertaking from Mr. Chui endorsed on the margin to the photo copy of each cheque in these terms:

"This cheque had to be returned to the drawer after delivery of the goods and cannot be used for any other purpose.

Y.T. Chui

25 Jan 1985"

15. Mr. Wong stated that Mr. Chui had said that he only wanted to take both cheques back to show his boss as a formality and as a symbol of sincerity. According to Mr. Wong he made it clear to Mr. Chui that the cheques were not for payment of the machines and were not to be banked. Mr. Wong stated at first, that the main purpose of the cheques was to show sincerity but went on to say that they had no other purpose. But later he said that the cheques had two purposes. First; to enable Mr. Chui to discharge his obligation to his boss. Secondly, to represent the defendant's sincerity.

16. Mr Chan stated that Mr. Chui undertook not to cash the cheques but had to show them to his boss as there had been no deposit made or letter of credit opened. Mr. Chan said that he signed the cheques as letters of confidence and would not have done so if Mr. Chui had not signed the undertaking. He denied that the cheques were to act as security. Yet when asked what would happen if the defendant had not paid for the shipments on delivery, he replied that in that event the plaintiff's would have been entitled to have cashed the cheques. This concession was consistent with his evidence on the subsequent stopping of the two cheques. Mr. Chan explained that the cheques were later stopped by the defendant for three different reasons. Only one of the reasons related to Mr. Chui's undertaking. The other two reasons related to the alleged defectiveness of some of the machines and the failure of the plaintiff to comply with its servicing obligation.

17. Mr. Chui confirmed that he asked for 3 cheques and only, received 2 cheques. He stated that Mr. Chan told him that after the first shipment had been separately paid for, he would on the return of the first cheque, deliver a third cheque for the final shipment. Mr. Chui stated that he decided to accept this proposal as, on his own. calcualtions, if payment was not otherwise made for the first shipment, there would still be time to cancel the final shipment from Italy.

18. On the evidence I accept that at the date of execution of the contract, it was anticipated that the defendant on arrival of a shipment, would during the following month take delivery separately of each machine comprised in that shipment and on delivery separately pay for each machine. After the first shipment arrived, delivery of the 4 sets of machines in that shipment was in fact progressively taken on different days. 'Payment was made by a succession of cheques on 13th May 1985, 7th May 1985, 24th May 1985, 25th May 1985 and 25th June 1985. These four payments totalled $597,714. This represented the gross unit" price sum of $616,200 less the agreed 3 per cent discount.

19. Mr. Chui stated that these deliveries were made when he was out of Hong Kong in China. On his return he went to Mr. Chan's office with the first cheque for $616,200 intending to return it to the defendant as delivery of the first shipment had been taken in terms of the arrangement including payment of the full net sale price. At the same time, in pursuance of his understanding of the previous arrangement, he intended to take delivery of the post-dated cheque for the third shipment which coincidentally would also have been for the gross sum of $616,200. According to Mr. Chui, when he arrived at Mr. Chan's office the latter suggested that instead of the defendant drawing a further cheque, Mr. Chui should continue to hold the first cheque but in respect of the third shipment. Mr. Chui stated he accepted this proposal and in the event neither handed over the first cheque or obtained the intended third, cheque.

20. Later the second smaller shipment of 2 sets of Model U/3 machines arrived. It was common ground that on 25th June 1985 the defendant took delivery of one of those machines on payment of $113,490 being the gross unit price for that machine less 3 per cent. It is equally common ground that the defendant did not take delivery or make payment for the remaining machines. The evidence adduced on behalf of the defendant was that delivery was not taken because some of the prior delivered machines were defectaive and the plaintiff was in breach of its servicing obligation. The closing 'submission was also made that, in breach of contract, the latter two shipments arrived late and the plaintiff failed' to make delivery of the machines in terms of the contract. The evidence on this issue was minimal. Time was not of the essence of the contract. At no time did the defendant take any steps to make time of the essence of the contract. I reject this submission as to time. Delivery was never taken of the remaining set of Model U/3 in the second shipment nor of any of the 4 sets of the final third shipment. I find that those shipments -arrived and that the plaintiff made them available for delivery to the defendant. I would record that the plaintiff attempted to establish that the reason for the defendant's failure to take delivery was because of the then major reduction in imports by China, due to a changed foreign exchange policy. In view of my other findings and the extent of the pleadings it is unnecessary for me to explore any further the reason why delivery was not taken.

21. Counsel for the defendant submitted that, at common law there was no consideration given for the two post-dated cheques. Further, that the cheques were delivered subject to a condition that they were to be used for the special condition pleaded and not for the purpose of transferring the property in the cheques. The latter submission, as well as the defence pleading, was based on Section 21(2)(b) of the Bills of Exchange Ordinance, Cap. 19.

22. I will first deal with question whether there was consideration given for the two cheques or either of them. Section 30 of the Ordinance creates a presumption in favour of the plaintiff as holder that the cheques were given by the defendant as drawer for value. But the plaintiff's position goes far beyond resting on that prima facie statutory presumption. I have held that the cheques were given pursuant to the contractual obligation necessarily including the essential element of consideration - recorded in the written contract between the parties. Apart from the security value of the cheques which could be exchanged upon payment in full, even if progressively, of each shipment, the defendant's managing director, Mr. Chan, agreed that if payment on delivery was not made in terms of the parties arrangement, the plaintiff was entitled to negotiate the past-dated cheques on due date. I hold that there was consideration for each of the cheques.

23. I also find that after the first shipment was separately paid for in full the first post-dated cheque was at that stage returnable to the defendant. I further find that in terms of the arrangement the defendant was then obliged to furnish the plaintiff with a third cheque for the final shipment. It is common ground that the gross unit price for both those shipments was the same. As to what occurred after payment of the first shipment had been made when Mr. Chui visited Mr. Chan's office, I accept the former's evidence. I find that in consideration of the defendant permitting the plaintiff to retain the first post-dated cheque, for the third shipment, the plaintiff refrained from enforcing its contractual right to obtain a third cheque for that final shipment. The consideration for which the first cheque was given, as subsequently varied by agreement between the parties, remains undischarged. On the consideration question I was referred to a number of authorities but it will suffice to refer to our own Court of Appeal's judgment in Man Sun Finance (International) Corporation Ltd. v. Wong Kwan Man CA 34/82, The defence rejected by the Court of Apeal in that case was not dissimilar in some aspects to the present defence. In that case it may have been, as it was in this case, that the cheques were given for variety of: reasons. The fact that 'some might not as a matter of alw, amount to consideration, does not assist the defendant if there is another or other elements, which amount to consideration. In the instant case I am well satisfied, as a matter of law, that there was consideration for the giving of both cheques.

24. Turning to the second defence founded on Section 21(2)(b) of the Bills of Exchange Ordinance, I accept that the submission by Counsel for the defendant on the effect of the Section was entirely sound. The difficulty he again faced, was whether the evidence established the necessary facts. c give rise to the application of the Section. The condition endorsed on the photo-copies of the two cheques is not inconsistent with the written contract and the undisputed arrangement that the defendant might take delivery of the machines in each shipment separately. Where that occurred and the full shipment price was paid progressively in instalments by separate cheques, the plaintiff would no longer have any property in the appropriate postdated cheque which would be returnable to the defendant. The endorsed condition is consistent with that arrangement. Once delivery, including payment. had been so made, then the post-dated cheque could not lawfully be used by the plaintiff for any other purpose. If it were the plaintiff would have been paid twice for the same machines. The respective postdated chequeshad to be returned, in those circumstances, to the drawer. If delivery was available to the defendant but not taken, the endorsed condition does not require the cheque to be returned. That is precisely what happened. Delivery was not fully taken. In that event the plaintiff was entitled to exercise its property in the cheque by having it negotiated. That right of the plaintiff was quite properly accepted in evidence by the deferdant's managing director, Mr. Chan. I appreciate that the plaintiff was the original payee and not a holder in due course. The plaintiff as the original payee was on the facts I have heard a holder for value. Accordingly the plaintiff was entitled to exercise its proprietorial right in the cheques by presenting them for payment. I therefore also reject the statutory defence advanced by the defendant.

25. In view of further submissions advanced by the defendant, I should also refer to the form of the written contract. The written terms of the contract were principally typed on a printed form of the plaintiff. Towards the bottom of each page there was a printed entry that payment was to be confirmed and irrevocable letter of credit at sight in the plaintiff's favour to be opened via its bankers. Counsel for the defendant submitted that there was clearly a conflict between that printed term for payment and the typed payment paragraph referring to post-dated cheques. I was referred to 1 'Chitty on Contracts' (25th Edn) page 69, paragraphs 117 and 122 and invited to hold the written document to be so vague and uncertain, that it did not amount to a binding contract. If there is an ambiguity, I have the oral evidence of all the witnesses for both parties that it was deliberately contemplated that payment would not be made by letter of credit. As a matter of construction of the document I am well satisfied that the intention of the parties was that the typed term of payment represented their agreement. On execution the printed form of payment was clearly overlooked by both parties and not deleted. The printed reference to payment by letter of credit is in the circumstances meaningless and may be ignored. It. does 'riot form part of the written agreement between the parties.

26. On the pleadings a minor complication arises in relation to the second cheque for $234,000 which represents the gross unit price of the second shipment. The defendant accepted delivery of half the machines and has paid the net price of $113,490 for those machines. Counsel for the plaintiff indicated that if the plaintiff succeeded in respect of that shipment he was authorised to undertake on its behalf, to refund the $113,490 to the defendant. Counsel for the defendant submitted that if the plaintiff succeeded on the second cheque, it should only be granted judgment for the net amount. The defendant further submitted that the proper deduction was half the gross unit price of $117,000 and not the net amount actually paid of $113,490. I am satisfied that the proper deduction is $117,000. The defendant having discontinued its counterclaim the procedural means by which that result is to be achieved remains. Counsel for the plaintiff while submitting that $113,490 was the proper sum, had no express objection to the sum I finally determined. being set off against the amount of the second cheque. In view of Counsel's helpful attitude I propose to follow that simpler and more convenient course.

27. The plaintiff is entitled to recover the sum expressed in the first cheque of $616,200 and the balance under the second cheque of $117,000. Accordingly there will be judgment for the, plaintiff in the total sum of $733,200. I also record the plaintiff's undertaking that delivery of the remaining 5 sets of machines remains available to the defendant subject to the payment of any godown or other storage charges. There shall be an order nisi, pursuant to Order 42 Rule 5B(6) RSC that the costs of the action shall be paid by the defendant to the plaintiff to be taxed if not agreed. Liberty to apply in relation to any other consequential matters is reserved.