FORTUNE FOCUS INTERNATIONAL LTD. v. THE (HOLDINGS) CO. LTD.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1997, No. 230
(Civil)

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J U D G M E N T

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Liu, J.A. (delivering judgment of the court):

1. This is an Order 14 appeal from the decision of Sears, J. on a dishonoured cheque. Master Cannon granted the defendant leave to defend conditional upon payment into court of the cheque amount within 28 days. Both parties appealed to the judge. The judge gave the plaintiff leave to sign judgment against the defendant company which now appeals.

2. By a Provisional Sale and Purchase Agreement dated 18 March 1997, the plaintiff agreed to sell and one Brilliant Regent Limited ("Brilliant") agreed to buy 16 Sutherland Street for $168 million. The Provisional Agreement expressly stipulated that it was binding pending the signing of formal contract and that Brilliant should pay an initial deposit of $2 million upon the signing of the Provisional Agreement with a further deposit of $14.8 million to be paid on or before 15 April 1997. Time was made of the essence of the contract.

3. Upon the signing of the Provisional Agreement, Brilliant paid the $2 million initial deposit by a cashier order as it carried no bank account of its own. Brilliant defaulted in paying the further deposit in time or at all. On 5 May 1997, the parties entered into a Supplemental Agreement which reduced the further deposit from $14.8 million to $6 million to be paid forthwith but otherwise affirmed the validity of the other provisions in the Provisional Agreement. On the date of the Supplemental Agreement, 5 May 1997, the defendant drew a cheque in favour of the plaintiff for $6 million. The cheque was countermanded and the plaintiff sued for $6 million.

4. The defendant claims: first, there was no relationship nor any commitment between the defendant and the plaintiff; the defendant did not purchase Brilliant as a shell company to acquire 16 Sutherland Street; the $6 million cheque was not drawn at the request of the plaintiff; the defendant did not request the plaintiff to enter into the Supplemental Agreement with Brilliant; the defendant's cheque was procured by one of its directors, who was himself interested in the purchase of 16 Sutherland Street; the defendant would receive no benefit; the cheque was provided by the defendant's Board as a favour to the interested director; in the foregoing sense, the defendant was described by its interested director as a "go-between" of the plaintiff and Brilliant.

5. The version as given by the plaintiff's director is diagonally opposite: the interested director of the defendant represented to the plaintiff that Brilliant was taken over by the defendant as a shell company to acquire 16 Sutherland Street; the defendant requested the plaintiff to enter into the Supplemental Agreement upon Brilliant's default; the plaintiff specifically sought and insisted on a cheque drawn by the defendant instead of by Brilliant for entering into the Supplemental Agreement; the plaintiff gave consideration for the cheque by forbearing to sue Brilliant for its breach of the Provisional Agreement, reducing the further deposit and entering into the Supplemental Agreement; the plaintiff was never told that the defendant was merely acting as a go-between of the plaintiff and Brilliant.

6. Therefore, issue was joined on the defendant's alleged legal or commercial commitment/involvement in/with the sale and purchase of 16 Sutherland Street. Counsel for the plaintiff invites this court to draw an inference of the defendant's close relationship in the sale and purchase from the defendant's own case viz. that Brilliant was a vehicle for acquiring 16 Sutherland Street without even a bank account of its own; that the interested director had commercial interest in the sale and purchase of 16 Sutherland Street; that he was a director of the defendant; that the interested director procured the cheque from the defendant; that the defendant's Board consented to the issuance of the cheque; that according to the interested director, the defendant acted as a go-between.

7. In this summary judgment application, the court could not even begin to resolve the issues so joined or draw conclusions from primary facts, most of which were disputed. The finding which this court is invited to make at the O. 14 stage is not the only nor a more probable inference from the defendant's case. Sears, J. took the view that the allegations of the defendant were not those of "a shadowy type of defence", but the judge held that there was no defence, apparently, no defence in law.

8. The defence raised in this case is one of want of consideration, which has to be examined on the basis as if the defendant's allegations were true. Broadly speaking, it is a two-pronged defence: first, the cheque was not supported by any consideration, and further there was no sufficient relationship between the defendant and the parties to the Supplemental Agreement to fix the defendant with any liability on the cheque. What then is the law? Arguments of counsel focus on section 27 of the Bills of Exchange Ordinance, Cap. 19, section 27 reads:

"27. Value and holder for value

(1) Valuable consideration for a bill may be constituted by-

(a) any consideration sufficient to support a simple contract;

(b) an antecedent debt or liability. Such a debt or liability is deemed valuable consideration whether the bill is payable on demand or at a future time."

9. Two decisions need be noted: Oliver v. Davis [1949] 2 KB 727 and Hasan v. Willson [1977] 1 LL.L. R 431. It was affirmed in Oliver and Hasan that under section 27(1)(a), a promise to forbear or the act of forbearance to sue was good consideration for a simple contract. Thus, a promise made to the defendant to reduce the further deposit and the very reduction itself at the defendant's request would constitute a consideration sufficient to support the cheque. The defendant has joined issue on these allegations. In its defence, consideration is said to be lacking for the cheque under section 27(1)(a).

10. Turning to s. 27(1)(b), Oliver and Hasan decided that an antecedent debt or liability capable of constituting a good consideration for a bill of exchange must be the antecedent debt or liability of the drawer, but that s. 27(1)(b) would not apply to the case of an antecedent debt or liability of a third party in the absence of, at least, a relationship sufficient to connect the receipt of the cheque with the antecedent debt or liability. In the defence of the defendant, such a relationship is said to be wanting.

11. Under s. 27(1)(b), the principle pertinent to this appeal would seem to be somewhat involved. In Oliver v. Davis supra., Somervell and Denning, LJJ, as they then were, took the view that an antecedent debt or liability of a third party would not likely constitute a good consideration for a bill of exchange under s. 27(1)(b) unless its relationship with the third party's antecedent debt or liability also gave rise to a consideration sufficient to support a simple contract as in s. 27(1)(a). Somervell, LJ observed that "when dealing with a negotiable instrument given in respect of a debt of a third party, consideration has to be found such as is now referred to in s. 27, sub-s. 1(a), namely, consideration sufficient to support a simple contract." See Oliver v. Davis supra p. 742. In the same page, Denning, LJ adopted an identical approach regarding s. 27(1)(b): "In such a case in order that the promise may be enforced there must be shown a consideration which is sufficient to support a simple contract."

12. In Oliver v. Davis, supra, Evershed, MR appeared to partake in the consensus despite his introduction of the concept of a relationship linking the receipt of the cheque to the antecedent debt or liability of a third party. At p. 735, the Master of the Rolls said:

"This at any rate is plain - that if the antecedent debt or liability of a third party is to be relied upon as supplying 'valuable consideration for a bill', there must at least be some relationship between the receipt of the bill and the antecedent debt or liability."

Evershed, MR acknowledged the reality that in the case of a cheque given in respect of an antecedent debt of a third party, a consideration resulting from such a special relationship would not always provide a good consideration for the cheque unless that consideration was also one "sufficient to support a simple contract" under s. 27(1)(a). This is what Lord Evershed said:

"And for practical purposes it is difficult to see how there can be any distinction between a case in which there is a sufficient relationship for this purpose between the bill and the antecedent debt or liability and a case in which, as a result of that relationship, there is in the ordinary sense a consideration passing from the payee to the drawer of the bill."

13. The analysis of Evershed, MR, which would appear to be no different even with the intervention of a special relationship, was highlighted in Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes Fourteenth Edition at pp. 243 &244:

"Antecedent debt or liability of third party: The question has arisen as to whether the words 'an antecedent debt or liability' in sub-section (1)(b) extend to a debt or liability of a third party, i.e. of a person other than the promisor or drawer, maker or negotiator of the instrument. In Oliver v. Davis, A drew a cheque payable to B and forward it to B in respect of a debt owed by C to B. The Court of Appeal held, on the facts, that B had provided no consideration for A's promise, as drawer, to pay the cheque. Somervell and Denning LJJ were of the opinion that section 27(1)(b) did not apply to a promise to pay an antecedent debt or liability of a third party and that, in such a case, in order that the promise might be enforced, there had to be consideration sufficient to support a simple contract. But Evershed MR, while appearing to concur with this view, also stated:

'This at any rate is plain - that if the antecedent debt or liability of a third party is to be relied upon as supplying 'valuable consideration for a bill', there must at least be some relationship between the receipt of the bill and the antecedent debt or liability'

and that in such a case 'you must find something in the transaction sufficient at the very least to connect the receipt of the bill with the antecedent debt or liability'.

It is clear that the Court of Appeal did not intend to cast any doubt on the rule that consideration could consist of a promise to forbear by the holder of the instrument, or by an actual forbearance on his part at the express or implied request of a party to the instrument, in regard to a third party's debt or liability. But the consideration is then the forbearance, and not the antecedent debt or liability of the third party. Oliver v. Davis therefore appears to establish that the antecedent debt or liability referred to in section 27(1)(b) must be an antecedent debt or liability of the promisor or drawer, maker or negotiator of the instrument, and not of a stranger to the instrument, and this was the interpretation put upon the case by Goff J. in Hasan v. Willson. Nevertheless certain problems remain. First, it is difficult to see why the principle in Currie v. Misa, that consideration may be found in conditional payment of a debt, should not equally apply where the debt is that of a third party. Secondly, the wider dicta of Evershed MR in Oliver v. Davis were relied on in a New Zealand case where a cheque drawn by a company was taken by the payee in payment of an antecedent debt due to the payee from a director of the company, with the result that the company was entitled to reduce its indebtedness to the director by debiting his account with the company. It was held that 'there was such a close relationship between payment on behalf of the third party and the affair of [the company] as constitutes consideration'. But the court in this case also found a degree of forbearance by the payee. Unless, however, Oliver v. Davis can be distinguished on its facts, the opinion expressed by Somervell and Denning LJJ must be taken, in England, to be the correct interpretation of the scope of section 27(1)(b). It can be justified on the ground that, as between immediate parties, consideration - whether present or past - must move from the promisee." (emphasis supplied).

14. In this appeal, the defendant denies having ever received any consideration for the cheque. In the defendant's case, it had never requested the reduction of the further deposit or the signing of the Supplemental Agreement. There was no antecedent debt or liability of the defendant as drawer of the cheque. The defendant also denies any legal or commercial relationship with either the plaintiff or Brilliant or the interested director in the sale and purchase of 16 Sutherland Street. Lack of consideration is the mainstay of the defence, and the plaintiff has not identified from the defendant's case any features in the alleged relationship between the defendant's cheque and the obligations of the parties to the Supplemental Agreement, which would constitute "in the ordinary sense a consideration passing from the payee to the drawer of the bill". A triable defence has therefore been raised. In our view, the defendant should be let in to defend the plaintiff's claim on the cheque. We share the view of Sears, J that the defence raised is not a shadowy one. We allow the appeal, set aside the judge's order, grant unconditional leave to defend to the defendant and make an order nisi for costs against the plaintiff here and below.