YUEN CHAK CONSTRUCTION CO. LTD. v. TAK SON CONTRACTORS LTD.

1996, No. A12996

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. This is an appeal from the Order of Master Chung dated 24th February 1997 whereby he dismissed with costs the Plaintiff's summary judgment application dated 17th January 1997, the Plaintiff's claim being for judgment on a cheque issued by the Defendant to the Plaintiff. After hearing argument, I regret that I find myself in the position of diametrically disagreeing with the learned Master's conclusions, and I set out below my reasons for so doing.

2. The case arises in this way. The Plaintiff was the Defendant's sub-contractor on a construction site at Nos. 161A-161D Pak Tai St., Kowloon. Under this sub-contract, which was dated 21st October 1994, the Plaintiff had been engaged by the Defendant to carry out the design and construction of foundation works, including piling, pile caps and other associated works at the site. The original contract sum was HK$11.5 million. There was a delay in the works, and on 7th September 1996 the Plaintiff and the Defendant agreed to terminate the sub-contract.

3. This was done by means of an Agreement dated 7th September 1996. I reproduce the relevant part hereunder:

"I/We, the Sub-Contractor, hereby confirm the agreement that:

1. The Final Contract Sum is HK$ 10,044,294.47 and that I/we have no further claims against the Main Contractor under this contract other than payment in full of the balance.

2. I/We undertake to discharge all wages outstanding to my/our employees and/or my/our sub-ordinate Sub-Contractor(s) and rectify all defects including latent defects in accordance with the Terms of the Contract.

3. Tak Son Engineering Co Ltd shall release the balance payment of HK$2,404,294.47 (10,044,294.47 - 7,640,000.00) to Yuen Chak Construction Co Ltd on 8-10-96."

4. Pursuant to this Agreement, the Defendant issued to the Plaintiff a cheque for the said balance in the sum of HK$2,404,294.47. The cheque in question was dated 8th October 1996. It has been countermanded, and the Plaintiff's claim thereunder formed the basis of the application for judgment before the learned Master below and the subject of this appeal.

5. As I understand the position, at the hearing below the learned Master dismissed the application solely on a pleading point, namely, the absence of a plea of Notice of Dishonour. With respect, I think he was wrong so to do. He did not, I gather, consider the merits of the application, and it is these which have formed the crux of this appeal.

6. It is trite law that a cheque is as good as cash. It is also trite law that the two defences that will succeed in an action on a dishonoured bill of exchange are fraud and a total failure of consideration. There was a passing suggestion of fraud at an early stage in this case, but this has now been abandoned.

7. Mr. Adrian Bell, who appears for the Plaintiff on this appeal, puts his case shortly. Fraud having been disavowed, he says that total failure of consideration has not been made out. He maintains that the consideration is as set out in the Agreement dated 7th September 1996, and avers that there has been no failure thereof. He goes on to say that even if (which is denied) there has been any failure of consideration, the same was partial only, going to the quality of the works carried out and/or to the non-performance of parts of the works only; in this connection he further points out that, under the Agreement, there had been the specific deletion of a clause therein relating to rectification by the Plaintiff of "all defects" in the works.

8. Mr. Bell accepts that in light of the allegations now made by the Defendant with regard to the alleged defects in the works that there exists a free standing cross-claim by the Defendant against the Plaintiff, but stands foursquare on the principle that a cheque is as good as cash, and that the matters raised by the Defendant are insufficient to escape judgment on the countermanded cheque. He says that the so-called "defences" raised are without merit in terms of an action on a cheque and are unsupported by cogent evidence, and that the reality of the draft Defence which has been placed before the Court is solely that the Defendant has allegedly suffered damage by reason of alleged defects in the works which form the subject matter of the Counterclaim. The existence of such a counterclaim, or indeed a set-off (which is not pleaded as such) does not, he says, entitle the Defendant to have even conditional leave to defend: see Supreme Court Practice 1997, M/N 14/3-4/14. Accordingly, pursuant to the Plaintiff's Notice of Appeal dated 27th February 1997, Mr. Bell asks for judgment in the sum on the face of the said cheque, together with interest and costs, both in this Court and below.

9. Mr. Anthony Houghton, for the Defendant, has a more difficult brief. In an attractive submission, he took two basic points. The first was the pleading point which found favour before the learned Master, and which it was clear that Mr. Houghton found difficult to pursue with any real enthusiasm. It is this: that the Plaintiff has not pleaded that Notice of Dishonour of the cheque is to be dispensed with, nor any facts relied on in support of such an allegation, and that this was a defect which the Master was correct to deem to be fatal to the Plaintiff's cause of action. In support of this contention Mr. Houghton cited the Hong Kong Court of Appeal case of Thong Ko Sine v. Wilkinson & Anor [1988] HKC 56. I will revert to this point.

10. Mr. Houghton's second argument formed his main plank in opposition to this application for summary judgment, and it is the failure of consideration point. He puts it in this way. This particular claim arises out of the Agreement between the parties to settle outstanding matters and disputes between them with regard to the construction contract undertaken by the Appellant, as sub-contractor, for the Respondent, as main contractor. There is no dispute as to this primary fact. The Agreement reached on 7th September 1996 provided, he says, for a compromise of the balance sums due under the sub-contract; and further provided that the Appellant would waive further claims against the Respondent. Mr. Houghton emphasises, however, that the Agreement did not provide for the release of the Plaintiff from its liabilities under the sub-contract, and that there have been signal deficiencies in the works such as have been described in the evidence before me and such as have been confirmed by experts retained by the Defendant to look into these defects.

11. Although he took me in some detail to various aspects of these alleged deficiencies, the sum total of his submissions in this regard amounted, I think, to this: that in all the circumstances the Defendant has arguable defences based upon the total failure of consideration having arisen from the Plaintiff's failure to complete the works; to do so satisfactorily in accordance with the contract; to do so in such a way that they were fit for their purpose. And that, further, the Agreement had, in any event, been rescinded by the Defendant consequent upon misrepresentations made by the Plaintiff with regard to the underlying premise of that Agreement, namely, that the sub-contract works were complete when in fact they were not. Ergo, Mr. Houghton submits, the Plaintiff's application should be dismissed with costs to the Defendant; alternatively he says that where triable issues have been raised, unconditional leave to defend ought to be given, and that the rule is no different where the action is one on a bill of exchange: see for example John Maclean & Sons v. Meharban International (unreported), Civil Appeal No. 202 of 1993, judgment of the Court of Appeal dated 23rd February 1994.

12. I confess to a certain lack of interest in Mr. Houghton's persuasive invitation to become involved at this stage (or, perhaps, at all) in the minutiae of a dispute between contractor and sub-contractor about the performance of a construction contract. This is demonstrably not what cheque cases are about, and it is to avoid precisely this sort of investigation that the law on cheques and bills of exchange has developed in the way that it has. The well-known words of Lord Denning in Fielding & Platt Limited v. Selim Najjar [1969] 1 WLR 357 at 361, to the effect that a bill of exchange or promissory note is to be treated as cash, and is to be honoured unless there is some good reason to the contrary, in my view remain as appropriate today as when they were uttered. See also, for example, the words of Lord Bridge in Montecchi v. Shimco (U.K.) Ltd., [1980] 1 Lloyds L.R. 50 at 51:

"... it is elementary that as between the immediate parties to a bill of exchange which is treated in international commerce as the equivalent of cash, the fact that the defendant may have a counterclaim for unliquidated damages arising out of the same transaction forms no sort of defence to an action on a bill of exchange."

13. Accordingly, with perhaps one exception, Mr. Houghton's submissions did not fall upon receptive soil. The exception to which I make reference was the argument as to the failure of consideration arising by reason of the rescission of the Agreement by the Defendant consequent upon the alleged misrepresentations of the Plaintiff; I considered whether, if the Agreement which "spawned" the cheque had indeed been obtained pursuant to such misrepresentations, with rescission thereafter purporting to follow, that this could then be said to have fulfilled the requirement for a total failure of consideration.

14. On reflection, however, I do not think that this argument succeeds. Mr. Bell submitted that the circumstances such as those alleged could not result in a total failure of consideration, and further and in any event drew the Court's attention to the quality of the evidence underpinning this argument. So far as the evidence is concerned he is undoubtedly correct: surprisingly, there is no indication whatever on the evidence before me as to the identity of the Mr. K.L. Wong, Mr. Waldron's informant with regard to the circumstances surrounding the signing of the Agreement, or as to whether Mr. Wong was even present at the time the alleged representations were made by a Mr. Ho of the Plaintiff to Messrs. Tang & Kwok of the Defendant with regard to the completion of the works; and certainly if a root-and-branch attack is going to be mounted in the context of the non-payment of a cheque in a case like the present, the Court is entitled to a significantly better quality of evidence than that but faintly put forward to make good such allegation. Nor does it seem to me, given the particular terms of this Agreement and the circumstances in which it came into being, that it can be satisfactorily suggested that the misrepresentation/rescission argument now alleged can be sufficient to get home under the total failure of consideration head, although I confess that it gave me pause for thought and I was disinclined to dismiss the point quite as easily as Mr. Bell. At the end of the day, however, I do not accept this argument as providing any viable defence to the Plaintiff's action upon the non-payment of cheque.

15. This leaves outstanding the "pleading" point. Mr. Bell distinguishes Thong Ko Sine, op. cit., on the facts in that case, which involved a plea based upon a dishonoured cheque, and points out that the Court in Thong there stressed the lack of evidence about notice of dishonour, which he said certainly was not the case here, citing to his instructing solicitor's letter of 12th October 1996 which is in evidence. He also points to the different statutory provision, namely, section 50(2)(c)(iv) of the Bills of Exchange Ordinance, Cap. 19, and also drew my attention to the provisions of section 50(2)(c)(v) of the Ordinance, the applicable provision in this case, whereby as regards the drawer of the bill of exchange notice of dishonour is dispensed with in instances where (as here) the drawer has countermanded payment. The reason for this is clear: in a countermanding situation, there is no reason for such notice since the drawer himself obviously knows precisely what he has done.

16. I agree with Mr. Bell's submission. I decline to give any weight to or otherwise accept this pleading "defence", and in the specific circumstances of this case do not feel bound to follow Thong Ko Sine, op. cit. In my view the pleading before me is good on its face and, with respect to the decision taken below, I do not immediately discern the necessity for the Court unilaterally to have taken a point of this nature in the face of a strong case on the merits. To the contrary. In my judgment, this is a case in which it is right that the Defendant should honour the cheque issued pursuant to the Agreement between the parties of 7th September 1996, by means of which the parties severed relations and by reason of which the Plaintiff left the site, and the Defendant should not now be permitted to resile therefrom, notwithstanding the existence of what is, on its face, a surprisingly large counterclaim in terms of that pleaded in draft. The Defendant may or may not make this counterclaim good, but, as earlier indicated, in my view its existence and apparent dimensions do not constitute a satisfactory reason to avoid or otherwise preclude judgment on the cheque.

17. It follows from the foregoing, therefore, that this appeal will be allowed, and I order that the Order of the learned Master below be quashed, and that judgment be entered for the Plaintiff in the sum of HK$2,404,294.47.

18. As to interest, I make an order nisi that there be interest on the said judgment sum at the rate of 1% over HIBOR from the date of the countermanding of the said cheque to the date of judgment, and at the judgment rate thereafter. As to costs, I make an order nisi that the costs of and occasioned by the hearing below be to the Plaintiff, to be taxed if not agreed, and that the costs of and occasioned by this appeal be to the Plaintiff on the same basis. Should the parties wish to make further submissions, either upon these or upon any consequential matters, I will hear them on a date to be fixed.

19. I am grateful to Counsel for their assistance.