SUM WING CREDITS LTD v. SHUN YIP TEXTILES LTD AND OTHERS

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J U D G M E N T

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Cons, V.P.

1. This is an appeal against judgment given by Godfrey J. against the drawer of a cheque for some $330,000 in favour of the holder to whom it had been endorsed by the payee.

2. The relevant facts accepted by the judge can be simply set out: -

3. The cheque in question was

(1) drawn in favour of the payee,

(2) post-dated,

(3) crossed and inscribed with the words "Not Negotiable A/C Payee Only",

(4) issued in consideration of a cheque of similar amount drawn by the payee in favour of the drawer and post-dated for a slightly shorter period, and

(5) delivered to the payee against a promise that it would be used only to show to the younger brother of the recipient and for no other purpose.

4. In breach of that promise the payee endorsed the cheque to a moneylender by way of discount. When the cheque was not returned, the drawer discovered what had happened and presented the payee's cheque when due. Not surprisingly it was discovered. The drawer thereupon countermanded payment of the original cheque.

5. In an action by the indorsee against the drawer in the court below four defences were initially put forward but that which suggested that the cheque had been delivered conditionally, so that the further delivery to the indorsee was ineffectual; was abandoned at the trial.

6. The remaining three defences were

(1) that the inscription "Not Negotiable A/C Payee Only" merely rendered the cheque non-transferable,

(2) that there was a total failure of consideration, and

(3) that the negotiation to the indorsee was in breach of faith, thereby conferring on the indorsee at best a defective title.

7. The judge found no merit in the first two. Although we have not heard from Mr. Woo, who appears for the drawer today, as at present advised I would respectfully agree with the judge.

8. He dismissed the third argument in these words:

"But the breach of faith here was a breach of faith on the part of the payee towards the drawer, with which the indorsee had nothing to do; the breach of faith with which the section is concerned is a breach of faith on the part of the party to whom the bill is negotiated. In the absence of proof that the indorsee was a party to the breach of faith, this defence fails. The breach of faith on the part of the payee did not affect its title to the cheque, although it would have afforded a personal defence to the drawer if the payee had sued the drawer on the drawer's cheque despite the failure by the payee to meet its own cheque. But in fact the position is that, subsequent to the breach of faith on the part of the payee the indorsee, itself acting in good faith and without notice of the payee's breach of faith, gave value for the cheque: the indorsee is therefore protected by section 30(2). If it had been pleaded and proved that the drawer's cheque had been obtained by fraud, the position would have been different. But, very properly, this was not pleaded. The drawer knew what it was doing; it issued its own cheque, the drawer's cheque, with its eyes open, relying for its protection on the delivery to the drawer of the payee's cheque."

9. With every respect to the judge, in my view at this stage of the judgment he overlooked the inscription on the face of the cheque, which is crucial to the whole of this case. By negotiating the bill in breach of faith, i.e. contrary to the promise to the drawer, the payee ipso facto rendered his own title defective by reason of Section 29(2) of the Bills of Exchange Ordinance, Cap. 19, the relevant parts of which read:

"the title of a person who negotiates a bill is defective within the meaning of this Ordinance when he ... negotiates it in breach of faith"

and then, by reason of Section 81 of the same Ordinance, which reads:

"Where a person takes a crossed cheque which bears on it the words 'not negotiable', he shall not have ... a better title to the cheque than that which the person from whom he took it had."

the indorsee obtained no better title than the payee who had, as I have just suggested, destroyed his own title.

10. The judge did not read Section 29(2) in the way in which I do. He confined the breach of faith to circumstances in which the breach of faith was, as he put it, "a breach of faith on the part of the party to whom the bill is negotiated". Mr. Hoo, who appears for the indorsee, does not support that construction. Instead he objects to a construction of the words "in breach of faith" which seems to me to give them their fair and natural meaning. He contends that they must be qualified by Section 30(2) and perhaps other sections, and apply only in circumstances which amount to fraud or illegality. With respect, he seems to me to ask us to take out of the section the words "breach of faith", or at least, the conjunction "or" which appears between "breach of faith" and "in such circumstances as amount to a fraud". For my part I am not prepared to read the section in either of these ways. Nor do I see any reason to do so. In the present circumstances the construction I favour creates no injustice. All that the indorsee had to do, when alerted by the words on the face of the cheque, was to make enquiry from the drawer before he accepted it by way of discount.

11. I turn now to the Respondent's Notice lodged by the indorsee, which raises two points. The first relies upon Section 28 of the Ordinance which relates to accommodation parties. However Mr. Hoo concedes that if the Court takes the view which I have already suggested with regard to Section 29(2), then that point cannot be pursued.

12. The other point attacks the judge's finding of fact that there was a breach of faith. It is said that having regard to the affirmation which the financial officer of the drawer made in Order XIV Proceedings, the only conclusion which could reasonably have been drawn in the circumstances was that she was fully aware that the cheque was indeed to be discounted.

13. It is true that there is some contradiction between what she deposed to in the affirmation, which on its face disclosed no breach of faith, and the evidence which she gave to the judge below. But this matter was well ventilated before the judge by way of cross-examination. Nevertheless he accepted her oral evidence and found as a fact that there had been a breach of faith. Assessment of the evidence is very much a matter for the judge below, and for myself I am not persuaded that no reasonable judge could have come to the conclusion that he did.

14. For these reasons I would propose that the appeal be allowed the judgment below set aside and entered instead for the 1st Defendant, with costs here and below.

Hunter, J.A.:

15. I agree that this appeal should be allowed for the reasons given by My Lord. The trial judge came to a clear finding that the act of discounting this cheque was a breach of faith: a simple act of dishonesty on the part of the person who obtained the cheque on a totally different basis the previous day. I can see no possible grounds for disputing this finding of fact.

16. As far as the construction of Section 29(2) is concerned it is sufficient to say that I agree with everything that has fallen from my Lord. The judge unfortunately misconstrued the section by treating it as applicable to a breach of faith on the part of a party to whom the bill is negotiated rather than the party by whom the bill is being negotiated. Also there is no justification that I see for in effect emasculating the concluding words of the section. It seems to me that the word "fraud" is used in two different senses in the section. Where "fraud" arises on the obtaining of the bill, that plainly means common law frauds but where one finds the words "negotiates it in breach of faith or in such circumstances as amount to a fraud" it is dealing with broader concepts which are principally directed to dishonest dealings.

Mayo, J.:

17. I am also in entire agreement and have nothing to add.