HO SHUI CHEE v. HU XUAN MING RAYMOND AND ANOTHER

HCA 1559/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1559 OF 2011

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BETWEEN

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J U D G M E N T

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1.  This is an appeal by the 1^st and 2^nd defendants against the order for summary judgment granted by Master De Souza dated 16 December 2011 under Order 14 in favour of the plaintiff for the sum of HK$1 million plus interest and cost.

Background facts

2.  The 1^st and 2^nd defendants are husband and wife.  Together they ran and operated a business of beauty and skin care products.

3.  On 27 July 2007 the plaintiff made a loan of HK$500,000 to the defendants (“the 1^st loan”).

4.  On 23 January 2008 the plaintiff made a further loan to the defendants of HK$250,000 (“the 2^nd loan”).

5.  On 1^st September 2008 the plaintiff made yet a further loan of HK$250,000 to the defendants (“the 3^rd loan”).

6.  Together the said three loans totaled HK$1 million.  As security for the repayment of each of the three loans being made, the 1^st defendant delivered to the plaintiff three undated cheques, each for a similar amount of each of the three loans and each cheque was indorsed at the back thereof respectively by the 2^nd defendant.  On each of the cheque given as security, the name of the payee was left blank.

The plaintiff’s case

7.  It is the plaintiff’s case that the defendants had agreed to pay the said three loans on demand.

8.  Particulars of the cheques given by the 1^st defendant as security and endorsed by the 2^nd defendants were as follows:

(a)  Standard Chartered Bank cheque no. 483722 for HK$500,000;

(b)  Standard Chartered Bank cheque no. 483723 for HK$250,000; and

(c)  Standard Chartered Bank cheque no. 992285 for HK$250,000.

9.  On or about 6 July 2011, the plaintiff demanded repayment of the three loans by dating the above three cheques ‘6 July 2011’ and by filling in the plaintiff’s name as payee.  The said cheques were then presented to the Nanyang Commercial Bank for payment but all three cheques were dishonoured upon presentation on the grounds of “refer to drawer”.

10.  Notice of dishonour was given to the defendants by plaintiff’s solicitor’s letter dated 7 September 2011, alternatively dispensed with under section 50(2)(c)(iv) of the Bills of Exchange Ordinance, but the defendants have failed or refused to repay the $1 million or any part thereof.

11.  The plaintiff now claims for repayment of the three outstanding loans totaling $1 million, alternatively on the three dishonoured cheques.

Defendants’ case

12.  There is no dispute by the defendants that there were three loans made by the plaintiff totaling $1 million.

13.  It is, however, the defendants’ case that the plaintiff, who was already using the defendants’ beauty and skin care products as early as 2005, had expressed an interest in investing in the defendants’ business at the end of 2006.

14.  In January 2007, the 2^nd defendant had acquired the entire shareholding in a shelf company renaming it Casa De Fleur (Far East) Co Ltd (“CDF”).  In August 2007, an allotment of shares of CDF took place after which the 1^st and 2^nd defendants together with the plaintiff and the plaintiff’s son all became shareholders of CDF with 25% shareholding each and all four of them were appointed directors.

15.  On 25 September 2007, the 2^nd defendant transferred the trade mark “BIOFORM” owned by her to CDF.

16.  The main defence put forward by the defendants was that the three loans were advanced by the plaintiff to the 1^st defendant pursuant to an oral agreement made between the plaintiff and the 1^st and 2^nd defendants as part of the terms upon which the plaintiff could invest into the business of the 1^st and 2^nd defendants.

17.  As part of that oral agreement between them, it was agreed that the cheques given as security for the three loans were only repayable by the 1^st and 2^nd defendants’ share in the dividends in CDF, which was a joint venture between the plaintiff on the one hand and the defendants on the other.

18.  At all material times, the three loans were not due and therefore not yet repayable since no dividend has as yet been declared and/or payable by CDF to the defendants.

19.  In the circumstances, the defendants were not liable for the cheques given by way of security since the delivery of those cheques were conditional upon any default in repaying the said three loans but which had not become due and repayable as yet, therefore that condition was never fulfilled.

20.  Alternatively, it was submitted that the cheques given as security were not supported by any consideration as the underlying three loans were not yet repayable.

21.  A further point taken by the defendants relate only to cheque no. 483722.

22.  It is the defence case that the 1^st loan of $500,000 was secured by Standard Chartered Bank cheque no. 483716 and not by cheque no. 483722.  The defence evidence was that at the time of the 2^nd loan, on or about 23 January 2008, the 1^st defendant had requested a further loan of $500,000 from the plaintiff and had accordingly prepared cheque no. 438722 for that amount intending for it to be given as security.  However, at the last moment, the plaintiff was only agreeable to make a loan of $250,000 (ie the 2^nd loan) but not $500,000.  As a result, the 1^st defendant then made out cheque no. 483723 as security for the $250,000 loan and which was handed over to the plaintiff.  That was why the two cheques were consecutively numbered.

23.  It is the defence case that cheque no. 483722 should have been returned to the 1^st defendant for cancellation or destruction.  However, the 1^st defendant is unable to say how cheque no. 483722 ended up with the plaintiff.

24.  On this point, the defence submits that there is here a triable issue of fact and the case should go to trial.

25.  A further defence put forward, but which pertains only to the liability of the 2^nd defendant, is that the 2^nd defendant who had signed on the back of each of the cheques given by way of security, was not a former holder of those cheques such that section 55(2) of the Bills of Exchange Ordinance does not apply.  The 2^nd defendant had only signed on the back of those cheques to indicate her understanding of the change of terms of the oral agreement with the plaintiff, and not as an indorser thereof.

Decision

26.  Insofar as the main defence raised by the defendants is concerned, ie that of conditional delivery, reliance is placed on section 21(2)(b) of the Bills of Exchange Ordinance which reads:

“21. (1)…..

(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.”

27.  In this respect, reliance is also placed by the defendants on the following passage in Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes (Sixteenth edition) at para 2-152 which reads:

“By paragraph (b) it may be shown that the delivery was conditional or for a special purpose only, and not for the purpose of transferring the property in the bill. Thus it may be shown that the delivery was in escrow, i.e. that the instrument was to be delivered so as not to take effect as a bill until a certain condition should have been fulfilled.”

and the following passage at para 2-153 ibid:

“The defect in delivery may be established by oral evidence. The parol evidence rule (see below) does not apply. This is in conformity with the common law which admits oral evidence to show that what purports to be a written contract is no contract at all or to prove an agreement that a written contract is not to come into operation until a certain condition is fulfilled.”

28.  On the other hand, the plaintiff submits that the parole evidence rule applies in the present case such that the defendants cannot rely on extrinsic oral evidence to vary or contradict the terms of the written instrument.

29.  In support of that contention by the plaintiff, the following passage in Chalmers and Guest appear in paragraph 2-155 and reads as follows:

“Admissibility of extrinsic evidence. The contracts of the various parties to a bill of exchange or promissory note are contracts which are required to be in writing. They are, therefore, like any other contract which has been reduced to writing, subject (in England) to what is commonly known as the “parole evidence rule”. This rule has been summarized as follows: “Parol testimony cannot be received to contradict, vary, add to or subtract from the terms of a written contract, or the terms in which the parties have 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 on the bill or note.

The merits of the rule are a matter of dispute. Moreover, the rule is in no sense an absolute one.  The courts are prepared to admit extrinsic evidence of terms additional to those contained in a written document if it is shown that the document was not intended to express the entire agreement between the parties.  However, since the contracts of the parties to a bill or note must be in writing, oral evidence is in principle excluded by the operation of the rule, even as between immediate parties to the instrument.  There is, perhaps, less injustice in this than at first sight appears.  In view of the formal nature of negotiable instruments, it is arguable that to admit such evidence would undermine the certainty and finality which ought to attach to each party’s promise on the instrument.”

30.  At first sight, the above cited passages from Chalmers and Guest seem to be in direct contradiction with each other.  However, the distinction as to when oral evidence will or will not be admitted is elucidated and explained in yet a further passage from Chalmers and Guest at para 2-153 which states:

“In practice, however, it may be difficult to distinguish between situations where it is orally agreed that the bill is not to become operative pending the fulfillment of a condition (in which case oral evidence of the conditional delivery will be admitted) and situations where the bill is delivered operatively but subject to an oral agreement in defeasance of a party’s liability on the bill (in which case oral evidence to qualify the terms of the written instrument will normally not be admitted).”

31.  In the case of Suen Ho Sun v Kamenar International Ltd [1989]1 HKC 135, where a plaintiff having sold goods to the defendant for which 70% of the price of which was duly paid and a cheque was drawn for the balance of the price.  When the cheque was dishonoured upon presentation and summary judgment sought by the plaintiff upon the dishonoured cheque, the defendant submitted that payment of the cheque was conditional upon the goods being accepted by its Italian buyer as measuring up to a certain standard of quality, it was held by the Court of Appeal on the point of conditional delivery that there was no conditional delivery of the cheque, which was simply delivered as a cheque in part payment of the purchase price and the defendant was attempting to vary the conditions of payment by oral agreement which was inconsistent with the written instrument and not admissible in evidence.

32.  On the undisputed facts of the present case, it is conceded by the defendants (see paragraph 7 of the defendants’ skeleton submission) that three cheques were delivered operatively as security for the three loans totaling $1 million (subject to the second point raised by the defence as to whether cheque no. 483716 or cheque no. 483722 should be one of the three cheques so given as security which will be dealt with later in this judgment).

33.  The fact that the three cheques were undated does not invalidate them (see section 3(4)(a) of the Bills of Exchange Ordinance).

34.  Where no time for payment is expressed on the cheques given as security merely means that the loan is repayable on demand (see section 10(1)(b) of the Bills of Exchange Ordinance).

35.  There can therefore be no doubt that the oral agreement now sought to be raised by the defendants to the effect that the loans were only due or repayable by the defendants’ share in the dividends of CDF is raised in defeasance of the defendants’ liabilities on the three cheques given as security and is therefore inadmissible to contradict or vary the terms of the three cheques given as security.

36.  Quite apart from the inadmissibility of such oral evidence, in respect of the point of conditional delivery, it is wholly inconsistent that on the one hand, security in the form of the three cheques are given as security for the three loans and yet the plaintiff would condescend to agree to the loans should only be repayable by the defendants’ shares in the dividends of CDF.  What happens if the business of CDF turns out to be so unprofitable that no dividend is ever declared.  Would that mean that the defendants will never have to repay the loans despite having delivered three cheques as security for the three loans, in which case it would mean that the cheques delivered as security were wholly worthless.

37.  Put on that footing, the main defence run by the defendants is wholly unbelievable when viewed against all the other circumstances and the documentary evidence in the case.

38.  As for the further point taken by the defendants that the cheques were not supported by consideration, the short answer to that must be that the consideration given for the cheques were the three loans made to the defendants by the plaintiff.

39.  I turn now to deal with the second point raised by the defendants, namely, whether cheque no. 483722 has wrongly ended up with the plaintiff when it should have been returned to the 1^st defendant and whether a triable issue of fact is thereby raised.

40.  All four cheques from the 1^st defendant (including 483716 and 483722) were presented by the plaintiff and dishonoured upon presentation.  All four cheques were dated 6 July 2011.

41.  No claim has been made by the plaintiff in respect of cheque no. 483716 and no explanation has been given by the plaintiff in respect of this cheque.

42.  Given the consecutive numbers of cheque no. 483722 and 483723, and in the light of the evidence from the 1^st defendant in respect of how cheque 483722 was replaced by 483723, there must be a triable issue on this point.

43.  If the only cause of action brought by the plaintiff was on the dishonoured cheques, I would have felt constrained in the circumstances to have given unconditional leave to defend in respect of cheque no. 483722 but at the same time would have given summary judgment in respect of the other two cheques, namely, 483723 and 992285.

44.  However, quite apart from the cause of action brought being only on the dishonoured cheques, the plaintiff’s claim is also brought on the footing of the outstanding loans totaling $1 million.

45.  There is no dispute that loans totaling $1 million was made by the defendants to the plaintiff.

46.  Once the main defence raised by the defendants, namely, that there was an oral agreement to the effect that the loans would only be repayable from the defendants’ shares of dividends in CDF, has been rejected as being wholly unbelievable, it must follow that there can be no triable issue on this cause of action and that summary judgment in the total amount of the loans being $1 million ought to be given.

47.  This does not in any way affect the 1^st defendant from making a counterclaim for the return of cheque no. 483722 and for that counterclaim to go to trial.

48.  I turn now to deal with the point taken on behalf of the 2^nd defendant, namely that she did not sign on the back of the cheques given as security as an indorser of those cheques, but only to signify her understanding of the change in the terms of the oral agreement.

49.  This contention by the 2^nd defendant is wholly unbelievable for two reasons.  Firstly, the oral agreement was made orally and wholly undocumented.  Each of the cheques signed by the 2^nd defendant on it back does not contain any part of the oral agreement or any change thereto.  How therefore does her signature on the backs of these cheques signify her understanding of the change in the terms of the oral agreement is wholly beyond me.

50.  Secondly, on the case of the defendants, there appears to be only one change in the terms of the oral agreement.  Why then was it necessary for the 2^nd defendant to sign on three separate occasions to signify such understanding?

51.  There can therefore be no doubt that the 2^nd defendant signed on each of the cheques as an indorser thereof.

52.  Section 56 of the Bills of Exchange Ordinance provides as follows:

“56. Stranger signing bill liable as indorser

         Where a person signs a bill otherwise as drawer or acceptor, he thereby incurs the liabilities of an indorser to a holder in due course.”

53.  On the undisputed facts of the present case, there can be no doubt that the plaintiff was a holder in due course of the cheques given as security for the three loans, at least of cheques nos. 483723 and 992285 (even if there is a triable issue of fact in respect of cheque no. 483722).

54.  Therefore in so far as the plaintiff’s cause of action being based on the dishonoured bills goes, there can be no defence by the 2^nd defendant in respect of cheques nos. 483723 and 992285.  In like manner to the 1^st defendant, I would have given summary judgment against the 2^nd defendant on cheques nos. 483723 and 992285 and granted unconditional leave to defend in respect of cheque no. 483722.

55.  However, the plaintiff’s claim against the 2^nd defendant is not only on the dishonoured bills but also on the outstanding loans.

56.  In so far as the claim on the outstanding loans are concerned, I have not lost sight of the fact that it is the case of the 2^nd defendant that the three loans were made by the plaintiff only to the 1^st defendant alone.

57.  This assertion is not supported but in fact contradicted by the undisputed facts of this case as follows:-

(a)  The 1^st loan, the 2^nd loan and the 3^rd loan were all made by cheques from the plaintiff to the defendants.  The payee of the cheques for the 1^st loan and the 3^rd loan was the 2^nd defendant while the payee of the cheque for the 2^nd loan was the 1^st defendant.  The names of the payee of the cheques for the 1^st loan, the 2^nd loan and the 3^rd loan were filled in by the defendants themselves;

(b)  The cheques given by the 1^st defendant as security for the three loans were all indorsed on the back thereof by the 2^nd defendant;

(c)  Even on the case of the defendants, it is said that the repayment of the three loans were to come from the 1^st and 2^nd defendants’ shares of dividends in CDF.

58.  Given the above circumstances, it cannot be disputed that the three loans were made by the plaintiff to both defendants jointly despite the assertion of the 2nd defendant that the loans were made to the 1^st defendant only.  That assertion by the 2^nd defendant is again wholly unbelievable.

59.  Once again, for the reasons already given, there is here no defence by the 2^nd defendant to the plaintiff’s claim for repayment of the three outstanding loans and it follows that summary judgment ought to be given against the 2^nd defendant as much as against the 1^st defendant in respect of the claim for the three outstanding loans.

Conclusion

60.  Accordingly, for the reasons given above, the appeal by the defendants from the order of Master De Souza is dismissed and the entirety of the order of Master De Souza (including the costs order) do stand.

Costs

61.  There will be a costs order (nisi) that the defendants do pay the plaintiff’s costs of and occasioned by the appeal including the hearing thereof, to be taxed and paid forthwith if not agreed.