C. A. PACIFIC FOREX LTD. v. LEI KUAN IEONG

CACV 126/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 126 OF 1998

(ON APPEAL FROM HCA 1915 OF 1998)

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J U D G M E N T

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Seagroatt, J.:

1. This appeal arises out of an action on two bills of exchange which were dishonoured on presentation. They are identified in the Statement of Claim and the Defence and Counterclaim (served in compliance with an order of the Court but without prejudice to the appeal) as cheques, drawn on the Kwangtung Provincial Bank each in the sum of HK$20,000,000.00. They were presented on the 21st January 1998, having been dated the 16th January 1998.

2. The underlying agreement is dated the 18th July 1997, although the copy exhibited on behalf of the Defendant has no detail on it to confirm the date or other necessary completion. Assuming that it is in the form alleged by the Defendant, it provided for the Plaintiff, a Forex Dealer, to open for the Defendant one or more accounts for the "sale, purchase, investment in, exchange or otherwise disposal of and generally dealing in all kinds of currencies at their market spot rates and to execute the Defendant's order for such FX trading". Clause 27.3 provides that where the terms of the Leverage Foreign Exchange Trading [LFET] so require (and the terms of the Plaintiff's LFET licence did so require) in relation to any dispute between the Dealer and the Client, the Dealer shall, if the Client so requires, agree to refer the dispute to arbitration in accordance with, the LFET (Arbitration) Rules.

3. The Appellant contends that the issue in relation to the cheques is a dispute arising out of this agreement and so is subject to arbitration.

4. When a cheque in payment is dishonoured the payee of the cheque viz. the receiver of the unconditional order or promise to pay can sue either on the cheque, or on the underlying contract for failure of consideration. The former course is always advantageous. The reasoning behind it is simply that commercial life and practice requires that a Bill of Exchange be recognised as a peculiar animal. If persons were allowed to dishonour such vital and fundamental orders of payment under a contract so as to render a promise or order conditional and therefore of uncertain value, such commercial exchange would be fraught with uncertainly.

5. Lord Dilhorne in Nova (Jersey) Knit v. Kammgarn Spinnerei [1977] 1 W.L.R., p.713 (at p.722) stated unequivocally:

"Bearing in mind the intrinsic nature of a bill of exchange 'an unconditional order' which (the beneficiary/receiver) were entitled to regard as a deferred installment of cash, and the fact that cross-claims, unless based upon fraud, invalidity or failure of consideration, are not allowed ... seldom, if ever, can it be right while denying the right to bring a cross-claim, to allow a cross-claim to operate as a bar to execution, and to prevent the holder of a bill of exchange receiving the deferred installment of cash which the parties agreed he should get."

6. Earlier Lord Wilberforce (at page 721) in disagreeing with the Court of Appeal said:

"If it had been allowed to stand [it] would have made a very substantial inroad upon the commercial principle on which bills of exchange have always rested ... I must demur to the view that a result similar to granting a stay under the Arbitration Act can be obtained by any procedural stay of another character. So to hold would seem quite counter to long accepted principles regarding claims on bills of exchange and would represent an undesirable change in the law."

7. Lord Fraser of Tullybelton followed the same line of reasoning (p.730):

"- the question is whether the English proceedings are in respect of a matter agreed to be referred. In my opinion they are not. They are in respect of a claim on bills of exchange and I do not think that the arbitration agreement applies to such a claim."

The issue fell to be considered in the light of German law as well as English law and the Court found there to be no significant difference in the approach to Bills of Exchange. One of the most authoritative German works included:

"In the case of bills given by merchants in payment of the price of goods it cannot, if there is any doubt, be assumed that a clause providing for submission of disputes to arbitration applies to claims under the bills."

The German expert gave as his view on the authorities that

"A very plain manifestation of intention to extend an arbitration clause to claims under bills of exchange is needed to rebut the presumption that businessmen neither wish nor expect bills of exchange to be taken into arbitration."

In the "Nova" case, Lord Fraser held that it was "quite clear that the arbitration clause does not contain a plain manifestation to that effect. Accordingly, unless there is some special reason, arising from the intention of the parties or the circumstances of this case, to make the arbitration clause applicable to claims on the bills, it will not do so."

8. The view of the other German expert was that a special reason existed by reason of the fact that the arbitration agreement was part of a partnership agreement:

"Greater importance is to be attached to an arbitration clause agreed by a partnership contract than to an arbitration agreement concluded merely on the occasion of an exchange relationship, as for example, a sale."

This seems to have been the real basis of the dissenting speech of Lord Salmon. In dealing with citations from German authorities he said (page 726):

"I would point out that the citations all relate to arbitration agreements in general or between merchants. None of them touches upon arbitration agreements between partners."

In citing in particular the following passage:

"There will be few, if any, arbitration agreements, which hereafter will be held to be applicable to claims under bills of exchange."

He added:

"In my opinion, amongst the few, there will be arbitration agreements between partners."

Lord Salmon who did not seek to derogate from the general commercial legal principle in relation to bills of exchange stated earlier:

"I naturally recognise that bills are generally regarded as the equivalent of money and the courts do not, save in special circumstances, stay a judgment on a bill even if direct parties to it are the sole parties to an action."

He held however that there were special circumstances in the "Nova" case - quite apart from the partnership position, the arbitration tribunal had already made an interim award and its final award was about to be decided. I do not consider that the special circumstances which Lord Salmon found, assist the appellant in the case before us.

9. Lord Russell (at page 733) gave vent to the essential question:

"It is conceivable in theory that an arbitration clause in an underlying contract of sale should sufficiently clearly embrace liability under a bill of exchange, though it is not easy to envisage a clause so inconsistent with the nature and function of such a bill."

Both Kaplan, J. and Leonard, J. in York Air-conditioning & Refrigeration Inc. v. Lam Kwai-hung [1995] 2 HKLR 256 and Koppen Yan Zimmermann (Inc.) Ltd. v. Mission Hills Holdings Ltd. - (1995 Nos. A2202 and 6626) followed the House of Lords decision in "Nova".

10. The position is not altered by the English Court of Appeal's decision in Halki Shipping Corpn v. Sopex Oils Ltd. [1998] 1 W.L.R. p.726 which distinguished the House of Lords' decision. The Court of Appeal was not concerned with bills of exchange.

11. The approach to be adopted in Hong Kong law is no different from that in English law (and, it seems, German Law). A bill of exchange is not valid if it incorporates an arbitration clause. To hold that an arbitration clause referring to disputes arising from the underlying agreement, applies to bills of exchange would make "a very substantial inroad upon the commercial principle on which bills of exchange have always rested." Accordingly there must be a plain manifestation in the arbitration clause that it is to apply to bills of exchange if the presumption against taking bills of exchange into arbitration is to be rebutted. As Lord Russell indicated, there is an inconsistency between the nature and function of such a bill and an arbitration cause. The weakness, with respect, of Lord Salmon's argument is that he proceeds from a view that for the arbitration clause to be deemed not to apply, it needed to contain a specific exclusion of disputes arising from claims on bills of exchange (p.725). This view is inconsistent with his recognition of the status of bills of exchange as expressed at page 726 E-F and page 727 D-F.

12. It also offends what must in my respectful view be the logical consequence of the commercial principle - there must be an express inclusion of bills of exchange if such an arbitration clause is to bite in this way. Furthermore, as matter of business commonsense and efficacy, no right thinking merchant is going to agree to forego his rights on a dishonoured cheque. They cannot be taken away by implication.

13. The terminology of the arbitration clause relied upon by the Appellants is "in relation to any dispute between the Dealer and the Client." Dispute is defined under rule 2 (Part 1) of the Leveraged Foreign Exchange Trading (Arbitration) Rules as "any dispute relating to or arising out of a client agreement or ... any transaction that is regulated by the Ordinance."

14. Applying the reasoning in all the cases considered and with a regard for the commercial principle governing bills of exchange, I have no doubt that the terminology of the clause is not precise and sufficiently encompassing to include bills of exchange such as the cheques in this case. There is nothing in it to show the manifest intention that any claim by the payee on a dishonoured cheque, drawn as an unconditional order to pay, should be in effect removed from the courts which can provide swift and efficacious remedy, and be subject to an arbitration procedure.

15. Although there has been some argument and discussion as to the consideration in the underlying contract and the circumstances under which the cheques were given to the Plaintiff, I do not think that is relevant to the construction issue. These bills of exchange are unarguably separate contracts the nature of which is undisputed - unconditional promises to pay. The Defence filed has raised the matter of illegality and fraud. Although strictly we are not concerned to consider the pleading in this appeal it nonetheless strikes me that such allegations are inappropriate for a consideration in an arbitration but should be considered in the context of High Court proceedings.

16. Quite apart from the construction point there is a procedural aspect upon which Miss Teresa Cheng relies on behalf of the Respondents.

17. Rule 5(4) of the LFET (Arbitration) Rules provides:

"Where court proceedings have commenced a party may nevertheless require that the dispute be settled by arbitration, by sending a letter signed by him or on his behalf to the other to that effect within 14 days after the commencement of those proceedings [the proviso does not apply]."

No such letter was sent by the Appellant. Moreover it is apparent from the documents, that the Appellant has on three occasions sought extensions of time for filing its defence to the Plaintiff's claim by way of summonses on the 13th and 26th March, and 8th April respectively. Not until the 15th April did the Appellant take out its summons seeking a stay of the court proceedings; the day before the expiry of the third extension of time. Had it failed to meet that deadline the Plaintiffs had leave to enter judgment in default.

18. This point was not taken before Mr. Justice Findlay because he had already made his decision on the substantial point of construction and did not call upon Miss Cheng. Mr. Geoffrey Ma S.C., points out validly that this point is not the subject of a cross-notice. It was however notified by letter from the Plaintiff's solicitors before this hearing, and we are told it featured in the skeleton argument of the Plaintiff provided at the hearing before Findlay, J. In fact Mr. Ma does not suggest that he is prejudiced in any way by the absence of a cross-notice. He relies as an answer to that point on Rule 40(2) which empowers the arbitrator to "modify the requirements of the rules in relation to the sending of letters and documents or the length of time periods in particular cases where .... it is expedient to do so under interest of justice."

19. I do not think that can apply. No arbitrator had been appointed so there was no power to extend the 14 days period. The requests for extensions of time - and there were three of them - all indicate the Appellant's intention to submit to the court's jurisdiction. Even if it were arguable that no such intention can be imputed but that the Appellant was simply trying to hold the position pending a decision as to which way to go, he is well outside the time limit under the rule, which had not been extended. In my view the Appellant is also barred from seeking a stay by reason of his failure to act in accordance with rule 5(4). The requested extensions of time for filing a Defence constitute sound support for this. In short he acted as if he did not want to have recourse to the arbitration clause. Accordingly he may not have a stay by reason of this. I would dismiss the appeal.

20. The third and final matter is that of costs. The learned Judge granted an indemnity basis for the Plaintiff's costs to be paid by the Defendant. He accepted the Plaintiff's argument that there was so clearly no merit in the Appellant's application for stay that it should be visited by, in effect, a punitive order. Had the matter solely rested on the construction point I may have been persuaded that the order should have been the normal one i.e. party and party.

21. However in the light of the request for extensions of time within which to file and serve a defence and the failure to act under rule 5(4), I am persuaded that the proper order is an indemnity order. The Plaintiff could have had its judgment some time before the stay application was to have been heard. It certainly caused the Plaintiff to consider, until mid-April, when it would have been entitled to enter judgment, that there was no challenge to forum for the proceedings commenced. That was misleading in any event and the Plaintiffs eventually found themselves subject to an attempt to have the issue resolved in, on the face of it and on the authorities' views, an alien way. I would dismiss the appeal on this aspect as well.

22. It follows from the above that that costs of this appeal, to be paid by the Appellants to the Respondents should be likewise, on an indemnity basis.

Rogers, J.A.:

23. I agree.

Godfrey, J.A.:

24. I agree. The appeal will be dismissed and the order we make will provide for the costs of the Respondents here and below to be taxed on the footing of an indemnity and paid by the Appellants to the Respondents.