BENLEY LTD. v. WIN WAVE INDUSTRIAL LTD.

HCA6651/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6651 OF 1997

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J U D G M E N T

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1. The plaintiff was the vendor, and the 1st defendant the purchaser, of a residential apartment and its relative car parking space in a building in Conduit Road. The plaintiff dealt through its directors, Madam Chan Mak Ngan Jok, Hilda, and her husband Mr Chan Kwai Bor. The 1st defendant dealt through its shareholder, the 2nd defendant, Madam Lam Mean Soon.

2. The parties entered into a provisional agreement for sale and purchase of the property on 20 March 1997. This required the immediate payment of an initial deposit of $500,000, a further deposit of $560,000 on signing the formal agreement for sale and purchase on 7 April 1997, and completion and payment of the balance of $9,540,000 on 20 June 1997.

3. The dealings between the parties were uncertain from the outset. Madam Lam sought to back out of the provisional agreement shortly after it was signed. She drew a cheque for the initial deposit on her personal account, but on presentation for marking good and later for payment it was twice returned by her bank. It was, however, subsequently honoured on 24 March 1997.

4. The 1st defendant did not enter into the formal agreement for sale and purchase, nor did it pay the further deposit on 7 April 1997 as agreed. It is not in dispute that there were communications between the parties from about this time until mid-May 1997, in which the 1st defendant sought to get the plaintiff to reduce the agreed price, but the plaintiff refused these requests.

5. On 13 May 1997 the plaintiff through its solicitors demanded payment of the further deposit of $560,000 by 20 May. On that date Madam Lam drew a cheque for this sum on her personal account. The defendants' solicitors sent it to the plaintiff's solicitors as stakeholders, with a covering letter a letter which contained the following :

"....we send you our client's cheque for the sum of $560,000 subject to your undertaking to release it to the Vendor only upon signing of the formal Agreement for Sale and Purchase by the parties concerned and to return the cheque to us if the formal Agreement is not signed."

6. On 18 June 1997 the defendants' solicitors sent to the plaintiff's solicitors a copy of the formal agreement for sale and purchase, duly executed on behalf of the 1st defendant, for signature by the plaintiff's directors. It contained the following paragraph :

"The said Agreement is sent to you against your undertaking to return a copy of Agreement for Sale and Purchase duly completed and signed by your client to us within 2 days from the date hereof."

7. On the morning of 19 June 1997, Madam Chan went to her solicitors, signed the formal agreement on behalf of the plaintiff, and received from her solicitors the cheque for $560,000. She took it to her bank, a branch of the Dao Heng Bank, and requested that arrangements be made to have the cheque marked good for payment. Armed with a letter of request from the Dao Heng Bank, she went to the 2nd defendant's bank, a branch of the Hong Kong and Shanghai Banking Corporation. She was informed that the customer had stopped payment of the cheque, and was given an unpaid item memorandum marked "Stop payment pending confirmation".

8. Madam Chan and her husband then consulted their solicitors and were advised that there was a breach of the formal agreement for sale and purchase by the 1st defendant. They decided to accept the breach. The plaintiff's solicitors on the same day sent a letter to the defendants' solicitors enclosing a copy of the formal agreement duly signed by Madam Chan. This letter arrived at the office of the defendants' solicitors at 5 p.m. The plaintiff's solicitors sent another letter notifying them that the plaintiff accepted the 1st defendant's breach of the formal agreement, and exercised its right to terminate the agreement and forfeit the deposits. This arrived after 7 p.m.

9. The plaintiff now claims against the 1st defendant for declarations in respect of the latter's breach of the agreement, and in respect of its own forfeiture of the deposits, and other reliefs. It claimed against the 2nd defendant as drawer of the cheque for $560,000 but I am advised that following the institution of proceedings for summary judgment the 2nd defendant paid this sum and the action against her was discontinued. The 1st defendant counterclaims for a declaration that it is entitled to a lien, a declaration that the plaintiff has wrongfully repudiated the agreement, return of the deposits and other reliefs. The 2nd defendant claims costs.

The plaintiff's case

10. The plaintiff's case is that by virtue of the provisional agreement, the formal agreement and the terms of correspondence between solicitors, it was entitled to be paid $560,000 on signing the formal agreement on 19 June 1997. As soon as the agreement was signed it was open to Madam Chan to present the cheque. By virtue of banking custom in Hong Kong, presentment of a cheque to be marked good for payment is equivalent to presentment for payment; and therefore when the 2nd defendant's bank refused to mark good the cheque, the cheque was dishonoured. Alternatively, by reason of being countermanded the cheque required no further presentment, under section 46 of the Bills of Exchange Ordinance, Cap.19 and was deemed dishonoured. In any event, by countermanding the cheque, the 2nd defendant repudiated the agreement. The plaintiff was entitled to accept the repudiation and terminate the agreement, and to keep, or be paid, the agreed deposits.

The defendants' case

11. The defendants' case is firstly that the plaintiff cannot rely on the countermanding of the cheque on the morning of 19 June 1997 as repudiation of the formal sale and purchase agreement, because this had not yet come into being; the plaintiff's acceptance of it was only communicated to the defendants' solicitors at 5 p.m. on that day. Further, the plaintiff cannot rely on it as repudiation of the provisional sale and purchase agreement, as modified by the correspondence, because the deposit had only to be paid when the formal agreement came into being.

12. As to the countermanding of the cheque, the 2nd defendant only caused the cheque to be stopped only because she found that she had lost her cheque book. In confusion and panic, she caused the cheque to be countermanded by mistake. There were funds in her account to meet the cheque. She withdrew the countermand the same morning, and the plaintiff was informed that the cheque could be presented again but refused to do so. The plaintiff by failing to present the cheque for payment itself wrongfully repudiated the agreement.

13. The defendants say that the plaintiff cannot rely on the countermand of the cheque, either as a repudiatory breach of contract, or for the purpose of suing on the cheque. Presentment for marking good for payment is in any event not equivalent to presentment for payment. The cheque was never presented for payment, and was therefore never dishonoured. If it had been presented for payment it would have been honoured.

Evidence

14. The facts of the case are as set out above. There is no real dispute as to what happened. Madam Chan says that she was not told, at her second visit to the bank, that the cheque could be presented again; Madam Lam says that she was but for this she relies on double hearsay of what a teller told the bank officer, Madam Choi. It is in any event not important because Madam Chan knew by the same afternoon, for she had been informed of it through her solicitors, that the cheque could be presented again.

15. Madam Lam gave evidence of her reasons for the countermand. She said that she discovered the loss of her cheque book on the morning of 19 June and became worried lest someone steal her cheques and her funds. She panicked. She telephoned Madam Choi at the bank. She was told that she had to specify what cheques she wanted stopped. In her panic and confusion she gave Madam Choi three cheque numbers which she had written on a piece of paper on her desk. She did this by mistake.

16. In fact these three cheque numbers, as Madam Lam admits, were all for cheques drawn in connection with her purchase of the property. One was in favour of the plaintiff and the other two in favour of the Hong Kong Government. It appears from the evidence of Madam Choi that not only did Madam Lam give the cheque numbers, but also the dates and the names of the payees.

17. Madam Lam's story of panic, confusion and mistake is obviously incredible. She was able to give the payees' names and the amounts, as well as the cheque numbers. These were not cheques which were in danger of being stolen or fraudulently presented. She must have realised what cheques it was that she was countermanding. She must have known, for her solicitors had sent off the formal agreement the day before, that those cheques would be presented very soon. The irresistible inference is that she knowingly countermanded the cheques, and in particular that for $560,000 in favour of the plaintiff because she did not want them to be paid.

The Agreements

18. By clause 2(b) of the provisional agreement for sale and purchase the parties agreed :

"$560,000 shall be paid on signing of formal agreement for sale and purchase on or before 7-4-97 as balance of deposit"

19. This was not done and, as I have indicated, the 2nd defendant's cheque was delivered on 20 May 1997 against the plaintiff's solicitors' undertaking to release it only upon signing of the formal agreement. Obviously the parties had agreed to put back the date for the signing of the formal agreement to an unspecified date, but one which would in any event have to precede completion.

20. The defendants' argument is that the provisional agreement and the subsequent correspondence must be interpreted as meaning that the further payment was to be made only on the coming into being, rather than the simple signature, of the formal agreement. Such agreement could not, on general principles of contract come into being until the signature (the purchaser's acceptance) had been communicated to the vendor.

21. I do not see that this can be right given that the provisional agreement, the formal agreement and the correspondence all state quite clearly that the further deposit is to be paid on signing. That is obviously what the parties contemplated. The defendants' solicitors must have known that as soon as the formal agreement was signed on behalf of the plaintiff, then even before the ink was dry, the plaintiff's representative would be in a position to set off for the bank and seek to have the cheque paid. Leaving aside questions of imputation of knowledge between solicitor and client, Madam Lam must have realised it too, otherwise why would she have knowingly (on my finding) countermanded the cheque when she did?

22. In any event the principle that a contract does not come into being until acceptance is communicated to the offeror has to be considered in the light of what was actually happening here, and what normally happens in a contract for sale and purchase of property. Here there was a binding preliminary agreement. As is explained in Sihombing & Wilkinson, Hong Kong Conveyancing Law and Practice, [VIII] 1051, generally the formal agreement does not add to or detract from the pre-existing binding agreement. The learned authors continue :

"In the initial correspondence between the solicitors, often the purchaser's solicitor will head his letter "subject to contract". This phrase is not effective in adding a qualification to what follows. The only benefit obtained from the sale and purchase agreement would be that the terms of the contract are spelt out in greater detail. However any variations in the existing terms will not be enforceable unless the parties have mutually agreed (variation) or where one party has agreed (waiver)."

23. In the circumstances it is difficult to see what need there is for communication of acceptance, when the essentials of what is being accepted are already agreed and the terms of the formal agreement have been settled by both solicitors. If however such communication is needed the terms of the letter sending the formal agreement for signature by the plaintiff, with the requirement of the return of a completed and signed copy within two days would in my view constitute waiver of it. Given the proximity of the completion date the return of the agreement could not have been required by the plaintiff as confirmation that it was now binding.

24. It follows that the formal agreement came into being when it was signed. It provided for payment of the further deposit on signing. If this is wrong, the parties were still operating under the provisional agreement which also provided for payment on signing. Either way, the plaintiff was entitled to expect to get $560,000 on signing the document.

25. That the payment was by cheque makes no difference. A cheque is an unconditional order for payment; and the principle is that a cheque is given and taken in payment as so much cash. See Jackson v. Murphy, (1887) TLR 4 92n; Chiu Hon-kay v. Chow Tak-yan, [1995] 2 HKLR 171, 175.

26. By countermanding the cheque Madam Lam breached the agreement a surely as if, having been present with cash when the cheque was signed, she had refused to hand it over. The plaintiff was entitled to accept this repudiatory breach. That Madam Lam changed her mind later makes no difference. I do not think equity would have assisted her, had the countermand been made negligently, for the reasons advanced by Mr Pow and following Union Eagle Ltd v. Golden Achievent Ltd [1997] 1 HKC 173; but in any event on my finding the countermand could only have been deliberate so the question does not arise.

Dishonour

27. On this point the court heard the evidence of a banking expert, Mr Vu Sai Meng, as to the differences, if any, which now exist between the presentment of a cheque for payment and its presentment for marking good. His expertise was not challenged and his evidence was not contradicted.

28. Mr Vu said that where presentment for marking good was required, the former practice was for the collecting bank to send the cheque to the drawee bank which would, if it considered that payment could be made, endorse on the back of the cheque the words "good for payment" with a time limit, usually "same day on presentation". For the cheque to be paid out, a second presentation would have to be made. However, the modern practice is different.

29. The current Hong Kong practice is as follows. The collecting bank will stamp the cheque with a special crossing that it will be the one to collect the funds. It will then issue to the drawee bank a letter of request. Normally, nowadays, the request will be for the issue of a cashier's order, though it is possible that the request will simply be for the cheque to be marked good.

30. The letter and the cheque will then be delivered to the drawee bank, often by the payee of the cheque himself. The drawee bank will satisfy itself as to whether or not the cheque can be paid. If it can, the drawee bank will debit the amount of the cheque against it's customer's account (i.e. the drawer's account) and issue a cashier's order for the same amount. This will normally be in favour of the collecting bank, for the credit of the payee of the original cheque, though it may be issued simply in the name of the collecting bank or in the name of the payee. However the first method is the most common and the most preferable.

31. The cashier order will be sent, or taken by the payee, if it is he who has brought the original cheque to the drawee bank, back to the collecting bank. The collecting bank must then clear that cashier's order in the normal way. Before it is cleared, however, the collecting bank may decide to allow its customer, the payee, the use of the funds represented by the uncleared cheque.

32. Where however the drawer and the payee have accounts in the same bank and branch, the procedure is this. If the payee asks for the cheque to be marked good, and it can be, the bank will immediately debit the drawer's account and credit the payee's account with the amount on the cheque.

33. This practice of issuing a cashier order, according to Mr Vu, was recommended by the Hong Kong Association of Bankers to its members by a letter dated 18 December 1992. In fact, he says, it was common practice even before that date.

34. Mr Vu's opinion is that presentment for marking good is proper presentment, i.e. presentment for payment. Therefore the action of the drawee bank in returning the cheque unpaid, with an unpaid item memorandum, would entitle the payee to treat it as dishonoured.

35. The question is, then, can this be accepted as correct? Unfortunately the rules for presentment for payment set out in section 45 of the Bills of Exchange Ordinance, Cap.19 do not assist.

36. The defendants, as I have said, argue that presentment for marking good cannot be equivalent to presentment for payment. I think that must have been so in bygone days. In Bank of Baroda Ltd v. Punjab National Bank Ltd [1944] AC 176, the cheques were marked with the words "Marked good for payment up to 20 June 1939" and the court declined to treat this as an acceptance, though it did not indicate precisely what effect it had. But in any event, in those days, a cheque presented for marking good would not, in practice, have been treated as requiring any more than an assurance from the drawee bank that, if presented for payment on the same day, it would be honoured.

37. However the modern practice, which is also followed by London banks (see Ellinger and Lomnicka, Modern Banking Law, 2nd Edn, 320) seems to be that presentment for marking good is treated as presentment for payment. According to Mr Vu, even where the letter of request does not specifically ask for the issue of a cashier's order to the collecting bank, such an order will be issued. As I have noted, if the same bank is the collecting bank and the drawee bank an immediate payment to the payee's account will be made. In any event, an immediate debit of the drawer's account will be made. So even if this results only in an order which has still to be cleared, money has been paid out of the drawer's account. Payment is not confined to payment in cash; (see Chalmers & Guest on Bills of Exchange, 15th Edn, para. 1517-1518). It may be by the cheque or draft of the person paying or of a third party.

38. Under the modern banking practice, when the collecting bank sends the letter of request to the drawee bank, no matter what the terms of that letter, it expects that it will get back payment in the form of a cashier's order. If the payee is sent with the letter to collect the order, the payee will also know what to expect. It seems to me that it must follow that under this practice, presentment made in this way it is presentment for payment. If it is refused or cannot be obtained then under section 47 of the Ordinance the cheque must be dishonoured. For completeness I set out section 47 :

"47. Dishonour by non-payment

(1) A bill is dishonoured by non-payment -

(a) when it is duly presented for payment and payment is refused or cannot be obtained, or

(b) when presentment is excused and the bill is overdue and unpaid."

39. It is argued for the plaintiff that even if the cheque is not presented for payment, and therefore not dishonoured for non-payment under paragraph (a), it is deemed to be dishonoured under paragraph (b), because presentment is excused under section 46(2)(c) which provides that presentment for payment is dispensed with :

"as regards the drawer, where the drawee or acceptor is not bound, as between himself and the drawer, to accept or pay the bill, and the drawer has no reason to believe that the bill would be paid, if presented;"

40. Counsel for the defendants argues that the effect is that if the cheque is countermanded, as here, then the drawee is not bound to pay the cheque and the drawer has no reason to believe that it will be paid if presented. If the countermand is communicated to the payee, then he is excused from presentment. The drawer, if sued on the cheque, cannot rely on failure of presentment as a defence.

41. The defendants, however, rely on section 46(2)(a) which provides that :

"....The fact that the holder has reason to believe that the bill will, on presentment be dishonoured does not dispense with the necessity for presentment."

42. This is all somewhat doubtful. The plaintiff relies on the Canadian case of Trapp v. Prescott (1912) 5 DLR 513 where it was held that communication by the drawer to the payees that he had stopped the cheque was constituted a waiver of the formality of presentment. However, in Hill v. Heap (1823) Dowl. & Ry N.P. 57 it was held that an order by the drawer to the drawee not to pay the bill and to communicate the same to the payee did not dispense the payee from duly presenting the bill for payment though it did dispense them from giving notice of dishonour to the drawers. The Canadian court distinguished Hill on the ground that in the case before it, the countermand had been communicated by the drawer, whereas in Hill it had been communicated voluntarily by the drawees.

43. In the instant case, communication of the countermand was by the drawee bank. It was not a voluntary communication at the instance of the drawee bank but one which was made in the ordinary course of business; in effect one which the drawer must have authorised the bank to make, by the terms of her contract with the bank. But again one has to look at the terms of what was communicated, namely that the cheque was stopped subject to confirmation. It can certainly be argued that what the payee was told was not such as to make it clear that the drawee bank was not bound, as between itself and the drawer, not to pay the cheque, but only that it could not now pay, subject to confirmation. It could therefore be said that the payee had no more than "reason to believe" that the bill would not be paid if presented, and would therefore still have the duty to present it.

44. I am not prepared to say that if the presentment of this cheque was not presentment for payment, and therefore the drawee bank's refusal to pay was not dishonour, further presentment was dispensed with. This is however all rather academic, given my finding that the presentment made was presentment for payment, and the drawee bank's refusal to pay dishonoured the cheque.

Conclusion

45. I am satisfied that the effect of Madam Lam's countermand of her cheque was to put the 1st defendant in breach of its agreement. I am further satisfied that the cheque was presented for payment and dishonoured which would put the 1st defendant in breach of its agreement. The plaintiff was justified in accepting the breach and rescinding the agreement and must therefore have the remedies which it seeks.

Judgment

46. There will be judgment in favour of the plaintiff for :

(1) A declaration that the 1st defendant is in breach of the agreement for sale and purchase and the agreement has been terminated by the plaintiff as at 19 June 1997;

(2) A declaration that the plaintiff is entitled to forfeit the initial deposit of $500,000 and the further deposit of $560,000 under the cheque;

(3) An order that registration of the provisional agreement in the Land Registry by memorial No.7121395 be vacated;

(4) As against the 2nd defendant, interest on the sum of $560,000 from 19 June 1997 until the date of actual payment at the judgment rate.

47. The defendants' counterclaims are dismissed.

48. Costs of the action be nisi to the plaintiff against the 1st and 2nd defendants to be taxed if not agreed.